SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
Commission File Number 0-19799
PILGRIM AMERICA CAPITAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 86-0670679
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 417-8100
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
5,152,977 Shares of Common Stock outstanding on April 30, 1999
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
(a) Condensed Consolidated Financial Statements............. 3
(b) Notes to Condensed Consolidated Financial Statements.... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.........17
Item 6. Exhibits and Reports on Form 8-K............................17
Signatures...........................................................18
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, September
1999 30, 1998
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 451 $ 763
Investments 21,699 18,808
Accounts receivable 2,511 1,566
Notes receivable 4,139 4,136
Costs assigned to management contracts acquired,
less accumulated amortization of $5,168 and
$4,523 27,095 27,740
Furniture, fixtures and equipment, less accumulated
depreciation of $671 and $536 1,278 879
Deferred acquisition costs, less accumulated
amortization of $114 and $3,442 835 26,562
Incentive management fee receivable 1,965 1,103
Other assets 1,623 1,938
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TOTAL ASSETS $ 61,596 $ 83,495
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current income taxes payable $ 124 $ -
Deferred tax liability 1,445 -
Notes payable 6,975 30,375
Accrued compensation 1,671 2,763
Accounts payable and accrued expenses 3,461 3,793
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Total liabilities 13,676 36,931
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Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares
authorized, 8,085,722 and 8,081,722 shares
issued, with 5,302,877 and 5,588,477 shares
outstanding at March 31, 1999 and September
30, 1998 81 81
Less: Treasury stock of 2,782,845 and 2,493,245
at March 31, 1999 and September 30, 1998 (17,757) (12,530)
Additional paid-in capital 48,804 48,790
Retained earnings 16,801 10,296
Accumulated other comprehensive earnings
Unrealized loss on investments, net of tax (9) (73)
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Total stockholders' equity 47,920 46,564
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,596 $ 83,495
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31, March 31,
1999 1998 1999 1998
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
REVENUES:
Management and administrative fees $ 6,788 $ 5,246 $ 13,538 $ 10,282
Structured finance products management fees 3,102 965 6,315 1,653
Distribution fees 1,263 1,546 2,486 2,680
Commissions 105 554 326 815
Investment and other income 943 994 2,193 1,431
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Total revenues 12,201 9,305 24,858 16,861
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EXPENSES:
General and administrative 3,882 2,737 7,996 4,895
Selling 2,017 2,229 4,620 3,829
Interest expense 168 238 334 392
Amortization and depreciation 429 823 860 1,622
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Total expense 6,496 6,027 13,810 10,738
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Earnings before income taxes 5,705 3,278 11,048 6,123
Income taxes 2,331 1,363 4,543 2,541
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NET EARNINGS $ 3,374 $ 1,915 $ 6,505 $ 3,582
============= ============= ============= ============
Earnings per common and
common equivalent share
Basic:
Net earnings $ 0.63 $ 0.33 $ 1.22 $ 0.62
============= ============= ============= ============
Shares used in per share calculation 5,319,620 5,763,182 5,332,394 5,781,539
============= ============= ============= ============
Diluted:
Net earnings $ 0.55 $ 0.29 $ 1.06 $ 0.54
============= ============= ============= ============
Shares used in per share calculation 6,127,957 6,598,157 6,122,852 6,593,027
============= ============= ============= ============
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $ 3,374 $ 1,915 $6,505 $3,582
Other comprehensive earnings, net of tax
Unrealized holding gains (losses) arising during the period 1 (24) 64 (62)
Less: Reclassification adjustment for gains
included in net earnings - (296) - (425)
---------- --------- ---------- ----------
Comprehensive earnings $ 3,375 $ 1,595 $6,569 $3,095
========== ========= ========== ==========
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months
Ended March 31,
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1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 6,505 $ 3,582
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Amortization and depreciation 815 1,622
Gain on sale of investments - (720)
Gain on sale of deferred acquisition costs (228) -
Increase in accounts receivable (948) (1,270)
Increase in incentive management fee receivable (862) (386)
Increase in deferred acquisition costs due to subscriptions (6,399) (10,924)
Decrease in deferred acquisition costs due to redemptions 6 325
Net change in deferred tax asset/current tax liability 2,304 2,541
Decrease in operating liabilities (1,424) (204)
Increase in other operating assets (462) (248)
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Net cash used in operating activities (693) (5,682)
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CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Pilgrim Funds - 12
Sale of Pilgrim Funds - 2,327
Investments in structured finance products (4,045) (4,750)
Principal distributions from structured finance product investments 1,305 -
Sales of furniture, fixtures and equipment - 7
Purchases of furniture, fixtures and equipment (535) (326)
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Net cash used in investing activities (3,275) (2,730)
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CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (5,227) (753)
Proceeds from exercise of stock options 14 -
Proceeds from sale of deferred acquisition costs 32,269 -
Term debt borrowing (repayment) (23,400) 9,350
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Net cash provided by financing activities 3,656 8,597
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Net increase (decrease) in cash and cash equivalents (312) 185
Cash and cash equivalents, beginning of period 763 219
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 451 $ 404
============= ============
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SUPPLEMENTAL DISCLOSURES
Interest paid $ 778 $ 230
Income taxes paid 2,385 -
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
PRINCIPLES OF CONSOLIDATION. The accompanying condensed consolidated financial
statements of Pilgrim America Capital Corporation and its subsidiaries (the
"Company") were 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 considered necessary for fair presentation have been included.
Operating results for the three and six months ended March 31, 1999 are not
necessarily indicative of the results which may be expected for the fiscal year
ending September 30, 1999. For additional information, refer to the consolidated
financial statements for the fiscal year ended September 30, 1998 which are
included in the Company's Form 10-K/A.
The condensed consolidated financial statements include the Company's wholly
owned subsidiary, Pilgrim Group, Inc. ("PGI") and PGI's wholly owned
subsidiaries, Pilgrim Investments, Inc. ("PII"), a registered investment
advisor, and Pilgrim Securities, Inc. ("PSI"), a registered broker/dealer
(collectively "Pilgrim"). The condensed consolidated financial statements also
include the Company's wholly-owned mortgage banking subsidiaries, Express
America TC, Inc., EAMC Liquidation Corp. ("EAMC"), and EAMC's wholly-owned
subsidiaries, Wesav Investment Corporation and Wesav Investments Inc.-2.
The activities of the Company consist primarily of providing investment
management and related services to various open-end and closed-end investment
companies (each a "Fund" and collectively the "Pilgrim Funds" or the "Funds")
and Structured Finance Products operating under the Pilgrim name. The results of
operations reported in the condensed consolidated financial statements reflect
these investment management activities.
INVESTMENTS. The Company has investments in Structured Finance Products in
addition to other marketable securities.
In recording income from its investments in Structured Finance Products, the
Company evaluates the Structured Finance Products' investments for impairment by
comparing the net present values of projected future cash flows with the
investments' carrying values. The investments' cash flows and timings are a
function of actual and forecasted loan and bond defaults and their related
losses, trading gains and losses, projected interest receipts and expenses, and
net cash flow allocations based on product specific indenture requirements. In
projecting defaults and losses, the Company reviews specific problem credits and
forecasts the anticipated losses. The remaining credits in the portfolios are
forecasted using default assumptions of 2% annually with related recovery rates
of 70% of the defaults. Projected interest receipts and expenses are based on
current portfolio and market interest rates.
COSTS ASSIGNED TO MANAGEMENT CONTRACTS ACQUIRED. Costs assigned to management
contracts acquired represent the fair value of the investment management rights
acquired through the acquisition in April 1995 of such management contracts (the
"Acquisition") and also represent the excess of the purchase price (including
liabilities assumed) over the fair value of net assets acquired and resulting
costs from the Acquisition. These amounts are being amortized on a straight-line
basis over 25 years.
The Company periodically analyzes costs assigned to management contracts
acquired to determine whether any impairment in value has occurred. Based upon
anticipated future cash flows from operations, in the opinion of management
there has been no impairment.
DEFERRED ACQUISITION COSTS. The Company pays commissions of up to 4.00% to
authorized broker-dealers at the time that certain Fund shares are sold. The
commissions are recovered via distribution fees received from the related shares
and contingent deferred sales charges ("CDSC"s) received should the shareholders
redeem shares during a specified period (up to six years). Such commission costs
are capitalized as Deferred Acquisition Costs ("DAC") and amortized over the
period that the CDSC is in effect. On December 11, 1998, the Company sold
without recourse its existing September 30, 1999 DAC asset related to certain of
the Funds' shares (the "B Shares") and has agreed to sell DAC assets generated
on future B Share sales thereafter through November 1999. The Company
7
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
funds the DAC daily and sells the asset monthly. The purchaser of the DAC asset
is entitled to 0.75%, annualized, in distribution fees paid from B Share assets
and all CDSCs received from any redemptions of the related B Shares. Prior to
the sale of the DAC asset, the Company amortized the B Share DAC asset over a
six-year period, which is the period during which the CDSC is in effect for such
Shares.
INCENTIVE MANAGEMENT FEES RECEIVABLE. The Company receives management fees from
the Structured Finance Products as follows: (i) between 0.15% and 0.35% base
management fee which is generally senior to leveraged borrowings in the account,
(ii) between 0.20% and 0.35% secondary management fee which is subordinated to
certain payments on leveraged borrowings and (iii) an additional management fee
on each Structured Finance Product ranging from 0.10% to 0.25% of annual net
assets if specified investment returns are met ("Incentive Management Fees").
Incentive Management Fees are typically expected to be received in future
periods.
Incentive Management Fee revenues represent the increase in the present value of
the Incentive Management Fee Receivable for the period for each Structured
Finance Product.
In determining the present value of the Incentive Management Fee Receivable, the
Company projects the timing of the Incentive Management Fee payments based on
product specific projected returns to the equity investors. Product specific
equity returns and their timings are a function of forecasted loan and bond
defaults and their related losses, trading gains and losses, projected interest
receipts and expenses, and net cash flow allocations based on product specific
indenture requirements. In projecting defaults and losses, the Company reviews
specific problem credits and forecasts the anticipated losses. The remaining
credits in the portfolios are forecasted using default assumptions of 2%
annually with related recovery rates of 70% of the defaults. Projected interest
receipts and expenses are based on current portfolio and market interest rates.
If the projected investor returns are in excess of the minimums defined in the
indentures, the Company uses a 10% discount rate to calculate the present value
of the related Incentive Management Fee. Should the anticipated performance of
the Structured Finance Product result in a present value lower than Incentive
Management Fees accrued, the Company would be required to write down the
receivable to its net present value, to reflect the impairment of the asset.
Additionally, volatility of investment performance may result in lower income
recognition in some periods.
The Incentive Management Fee Receivable is reported separately on the Company's
condensed consolidated balance sheet.
INCOME TAX. Deferred tax assets and liabilities are initially recognized for
temporary differences between the consolidated financial statement carrying
amount and the tax bases of assets and liabilities which will result in future
deductible amounts and operating loss and tax credit carryforwards. A valuation
allowance is then established to reduce the deferred tax asset to the level at
which it is "more likely than not" that the tax benefits will be realized. Based
on management's analysis, it is anticipated that all the deferred tax assets
will be utilized, therefore, no valuation allowance has been established as of
March 31, 1999.
NET EARNINGS PER SHARE. Basic earnings per share ("EPS") is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed by dividing income
available for common shareholders by the weighted average number of common
shares outstanding adjusted for the effect of dilutive common stock equivalents,
including stock options, during the period.
8
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the basic and diluted EPS computations for
the three and six months ended March 31, 1998 and 1999 (amounts in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31 March 31
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net earnings for basic and diluted EPS $3,374 $1,915 $6,505 $3,582
====== ====== ====== ======
Shares of common stock and common stock equivalents:
Average number of common
shares used in basic computation 5,320 5,763 5,332 5,782
Effect of dilutive securities - options 808 835 791 811
------ ------ ------ ------
Average shares used in diluted computation 6,128 6,598 6,123 6,593
====== ====== ====== ======
Net earnings per share:
Basic $ 0.63 $ 0.33 $ 1.22 $ 0.62
====== ====== ====== ======
Diluted $ 0.55 $ 0.29 $ 1.06 $ 0.54
====== ====== ====== ======
</TABLE>
COMPREHENSIVE INCOME. Effective October 1, 1998 the Company has adopted SFAS No.
130 "Reporting Comprehensive Income". Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
to equity during a period except those resulting from investments by owners and
distribution to owners. The SFAS requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The SFAS requires that an enterprise (1) classify
items of other comprehensive income by their nature in a financial statement and
(2) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid in capital in the equity section of
the statement of financial condition. No earnings per share disclosure of the
effect of comprehensive income is required under the SFAS. The SFAS is effective
for fiscal years beginning after December 15, 1997 and reclassification of
financial statements for earlier periods provided for a comparative purpose is
required.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The Company is a holding company that, through its wholly owned subsidiaries,
provides investment management and related services for seven open-end Funds,
one closed-end Fund and six Structured Finance Products.
9
<PAGE>
RESULTS OF OPERATIONS
The following table presents comparative quarterly data regarding assets under
management, Fund share sales and increases in Structured Finance Products assets
for the four quarters ended March 31, 1999:
<TABLE>
<CAPTION>
PILGRIM FUNDS
SELECTED FUND DATA (UNAUDITED)
($000,000)
-------------------------------------------------------
March 31, December 31, September 30, June 30,
1999 1998 1998 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPEN-END FUNDS:
Beginning Assets $ 1,899.9 $ 1,614.3 $ 1,786.3 $ 1,508.1
Direct Sales 105.1 178.7 210.0 359.3
Direct Redemptions (138.3) (85.1) (91.7) (51.9)
Exchanges In (Out)(1) (8.4) 2.1 (8.5) 4.1
Investment Activities (2) (31.2) 189.9 (281.8) (33.3)
---------- ---------- ---------- ----------
Ending Assets 1,827.1 1,899.9 1,614.3 1,786.3
---------- ---------- ---------- ----------
CLOSED-END FUNDS: (5)
Beginning Assets 1,751.3 1,663.4 1,574.6 1,473.2
Direct Sales (4) -- 28.0 71.6 71.5
Investment Activities (2) (18.1) 59.9 17.2 29.9
---------- ---------- ---------- ----------
Ending Assets 1,733.2 1,751.3 1,663.4 1,574.6
---------- ---------- ---------- ----------
STRUCTURED FINANCE PRODUCTS: (6)
Beginning Assets 2,068.3 1,896.0 1,378.5 870.0
Increases (3) 98.4 172.3 517.5 508.5
---------- ---------- ---------- ----------
Ending Assets 2,166.7 2,068.3 1,896.0 1,378.5
---------- ---------- ---------- ----------
Ending Assets Under Management $ 5,727.0 $ 5,719.5 $ 5,173.7 $ 4,739.4
========== ========== ========== ==========
</TABLE>
(1) NET EXCHANGES FROM (TO) THE COMPANY'S SPONSORED MONEY MARKET FUND.
(2) INVESTMENT ACTIVITIES INCLUDE NET INVESTMENT INCOME, REALIZED GAIN/(LOSS),
CHANGE IN APPRECIATION/(DEPRECIATION) AND NET CASH DISTRIBUTIONS TO
SHAREHOLDERS. INVESTMENT ACTIVITIES FOR CLOSED-END FUNDS INCLUDE ASSETS
ACQUIRED USING BORROWED FUNDS.
(3) INCLUDES ASSETS ACCUMULATED IN STRUCTURED FINANCE PRODUCT TRANSACTIONS THAT
HAD NOT CLOSED AS OF THE RELATED QUARTER END DATE. SUCH TRANSACTIONS WERE
IN THE RAMP UP STAGES AT THOSE DATES.
(4) REGISTRATION STATEMENTS COVERING SECURITIES TO BE ISSUED PURSUANT TO A CASH
PURCHASE PLAN AND A SHELF OFFERING FOR PRIME RATE TRUST (THE "PROGRAMS")
WERE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND ARE NOW
EFFECTIVE.
(5) THE COMPANY'S CLOSED-END FUND IS ALLOWED TO BORROW UP TO 33 1/3% OF ASSETS
FOR INVESTMENT PURPOSES.
(6) STRUCTURED FINANCE PRODUCTS ARE CAPITALIZED PRIMARILY THROUGH DEBT
FINANCING.
QUARTER ENDED MARCH 31, 1999 TO QUARTER ENDED MARCH 31, 1998
Net earnings for the March 31, 1999 quarter amounted to $3.4 million or $.55 per
diluted share compared to net earnings of $1.9 million or $.29 per diluted share
for the quarter ended March 31, 1998.
REVENUES. Revenues for the March 31, 1999 quarter were $12.2 million, an
increase of $2.9 million or 31% over revenues for the March 31, 1998 quarter.
Management and administrative fees, the Company's largest revenue source, were
$6.8 million in the current quarter, an increase of $1.6 million or 31% compared
to the March 31, 1998 quarter. These revenues are derived from the Company's
open-end and closed-end Funds, which averaged $3.6 billion in assets under
management
10
<PAGE>
during the current quarter, an increase of $877 million or 32% over Fund assets
under management in the quarter ended March 31, 1998. Structured Finance Product
management fees increased $2.1 million or 210% over the comparable quarter as a
result of the increase of Structured Finance Product month end average assets
under management of $1.3 billion or 177%.
Distribution fees of $1.3 million for the quarter ended March 31, 1999 decreased
$283,000 or 18% compared to the quarter ended March 31, 1998, even though Fund
assets which generate distribution fee income increased $553 million or 43%
during the comparable quarters. The decrease in distribution fee income is
attributable to the fact that the Company sold its DAC asset and the related
rights to receive 0.75% of the 1.00% annualized distribution fees paid by the
Funds' B Share assets effective September 30, 1998. Accordingly, no related B
share distribution fees were recorded during the current quarter.
Investment and other income for the March 31, 1999 quarter was $943,000, a
decrease of $51,000 or 5% over the March 31, 1998 quarter. The components of
investment and other income consist primarily of investment income from
Structured Finance Products and other income consisting primarily of gains from
the sale of certain Company assets. Investment income was $812,000 for the three
months ended March 31, 1999, an increase of $379,000 or 88% over the three
months ended March 31, 1998. Other income of $131,000 for the three month ended
March 31, 1999, decreased $430,000 or 76% compared to the quarter ended March
31, 1998. The decrease in other income is primarily due to a $65,000 gain
recorded for the three months ended March 31, 1999 in connection with the
ongoing sales of the DAC asset compared to a $501,000 gain the Company
recognized in the March 31, 1998 quarter due to the sale of cash investments
made initially in the Pilgrim Funds at the time the Funds were established. The
net effect of the increase in investment income of $379,000 and the decrease in
other income of $430,000 is a $51,000 net decrease in investment and other
income.
EXPENSES. Total expenses, excluding amortization, depreciation and interest
expense, for the current quarter were $5.9 million, an increase of $933,000 or
19% compared to the March 31, 1998 quarter. This net increase in expenses was
primarily a result of a $1.1 million increase in general and administrative
expenses due to an increase in personnel and compensation, a $212,000 decrease
in selling expenses primarily related to a decrease in the Company's costs for
sales of Pilgrim Funds and direct expenses being reimbursed to the Company for
distributing eleven Nicholas-Applegate retail Open-end Funds ("NACM Funds"). The
Company entered into an agreement during January 1999 with Nicholas-Applegate
Capital Management ("NACM") to acquire the right to manage the NACM Funds and as
of February 1, 1999 the Company's broker dealer subsidiary, PSI, began
distributing shares of the NACM Funds. NACM has agreed to reimburse the Company
for the direct costs of selling shares of the NACM funds up to certain limits
based on the expenses incurred. The Company has reduced its selling expenses by
$986,000 for the quarter ended March 31, 1999 for the direct costs attributable
to distributing the NACM Funds. This distribution agreement and the
reimbursement of expenses will remain in place until the Company completes the
purchase of the right to manage the NACM Funds during May 1999 (see "Subsequent
Event" below).
Interest expense decreased to $168,000 in the quarter ended March 31, 1999 a
decrease of $70,000 or 29% compared to the quarter ended March 31, 1998. The
decrease in interest expense between quarters is primarily attributable to the
sale of the DAC asset in December 1998. The funds received in December from the
sale of the DAC asset were used to pay down debt outstanding under the Company's
Credit Agreement (see "Liquidity").
Amortization and depreciation expenses decreased $394,000 primarily as a result
of sale of the DAC asset. The DAC asset consisted of commissions paid on the
sale of certain Funds shares. Prior to the sale of the DAC asset these
commissions were capitalized and amortized over a six-year period.
SIX MONTHS ENDED MARCH 31, 1999 TO SIX MONTHS ENDED MARCH 31, 1998
Net earnings for the six months ended March 31, 1999 were $6.5 million or $1.06
per diluted share compared to $3.6 million or $.54 per diluted share for the six
months ended March 31, 1998.
REVENUES. Revenues for the six months ended March 31, 1999 were $24.9 million,
an increase of $8.0 million or 47% over revenues for the six months ended March
31, 1998.
11
<PAGE>
Management and administrative fees, the Company's largest revenue source, were
$13.5 million in the current six months, an increase of $3.3 million or 32%
compared to the six months ended March 31, 1998. These revenues are derived from
the Company's open-end and closed-end Funds, which averaged $3.5 billion in
assets under management during the first six months of the current fiscal year,
an increase of $928 million or 36% over Fund assets under management in the six
months ended March 31, 1998. Structured Finance Product management fees
increased $4.7 million or 282% over the comparable six months as a result of the
increase of $1.5 billion or 232% in Structured Finance Products month end
average assets under management.
Distribution fees of $2.5 million, for the six months ended March 31, 1999
decreased $194,000 or 7% compared to the six months ended March 31, 1998, even
though fund assets which generate distribution fee income increased $624 million
or 53% during the comparable six months. The decrease in distribution fee income
is attributable to the Company's sale of its DAC asset on December 11, 1998 and
the related rights to receive 0.75% of the 1.00% annualized distribution fees
paid by the Funds' B Share assets. Accordingly, no related distribution fees
were recorded during the current fiscal year.
Investment and other income for the six months ended March 31, 1999 was $2.2
million, an increase of $762,000 or 53% over the six months ended March 31,
1998. The components of investment and other income consist primarily of
investment income from Structured Finance Products and other income consisting
primarily of gains from the sale of certain Company assets. Investment income
was $1.8 million for the six months ended March 31, 1999 an increase of $1.2
million or 171% compared to the six months ended March 31, 1998. Other income
was $352,000 for the six months ended March 31, 1999 a decrease of $ 470,000 or
57% compared to the six months ended March 31, 1998. This decrease is primarily
due to a $228,000 gain recorded for the six months ended March 31, 1999 in
connection with the ongoing sales of the DAC asset compared to a $720,000 gain
the Company recognized during the six months ended March 31, 1998 due to the
sale of cash investments made initially in the Pilgrim Funds at the time the
Funds were established. The net effect of the increase in investment income of
$1.2 million and the decrease in other income of $470,000 is a $762,000 net
increase in investment and other income.
EXPENSES. Total expenses, excluding amortization, depreciation and interest
expense, for the six months ended March 31, 1999 were $12.6 million an increase
of $3.9 million or 45% compared to the six months ended March 31, 1998. This
increase was primarily a result of a $3.1 million increase in general and
administrative expenses due to an increase in personnel and compensation, a
$791,000 increase in selling expenses primarily related to a increase in the
Company's costs for sales and marketing in the quarter ended December 31, 1998
reduced by expense reimbursements due to the Company for distributing shares of
the NACM Funds in the quarter ended March 31, 1999. The Company entered into an
agreement during January 1999 with NACM to acquire the right to manage the NACM
Funds and as of February 1, 1999 the Company's broker dealer subsidiary, PSI,
began distributing shares of the NACM Funds. NACM has agreed to reimburse the
Company for the direct costs of selling shares of the NACM funds up to certain
limits based on the expenses incurred. The Company has reduced its selling
expenses for the quarter ended March 31, 1999 by $986,000 for the direct costs
of distributing the NACM funds. This distribution agreement and the
reimbursement of expenses will remain in place until the Company completes the
purchase of right to manage the NACM Funds during May 1999 (see "Subsequent
Event" below).
Interest expense decreased to $334,000 for the six months ended March 31, 1999 a
decrease of $58,000 or 15% compared to the six months ended March 31, 1998. The
decrease in interest expense between the comparable periods is primarily
attributable to the sale of the DAC asset in December 1998. The Company was
reimbursed by the purchaser of the DAC asset for the interest expense that the
Company incurred related to borrowings between the effective date of the sale,
September 30, 1998, and the date the funds were received at the closing of the
transaction in December 1998. The funds received in December from the sale of
the DAC asset were used to pay down debt outstanding under the Company's Credit
Agreement (see "Liquidity" below).
Amortization and depreciation expenses decreased $762,000 primarily as a result
of the sale of the DAC asset. The DAC asset consisted of commissions paid on the
sale of certain Funds' shares. Prior to the sale of the DAC asset these
commissions were capitalized and amortized over a six-year period.
SUBSEQUENT EVENT
On January 28, 1999, the Company entered into an agreement ("Agreement Date")
with Nicholas-Applegate Capital Management ("NACM"), an investment management
firm in San Diego, California to acquire the rights to
12
<PAGE>
manage and distribute eleven open-end retail NACM Funds with net assets totaling
$1.4 billion. The agreement was approved by the Fund's trustees and is subject
to the approval of the Fund's shareholders and review by regulatory agencies.
The transaction is expected to close May 21, 1999. The purchase price to be paid
at closing is approximately $23.5 million, adjusted for sales, redemptions and
changes in market value of the funds between the Agreement Date and the close.
As of February 1, 1999, the Company became the distributor of the
Nicholas-Applegate open-end retail mutual funds.
LIQUIDITY
The Company's principal liquidity needs arise in connection with general and
administrative expenses, selling expenses, including commissions paid by the
Company in connection with the sale of Fund shares, and investments made by the
Company in connection with the management of Structured Finance Products. The
Company also purchases shares of its common stock pursuant to an authorization
by its board of directors. The Company's principal sources of liquidity and
capital resources include cash flow from operations and borrowings available
under a $43.3 million credit agreement ("the Credit Agreement"). During the
first six months of fiscal 1999, the Company's operations used net cash of
$693,000 and the Company used $3.3 million of net cash in its investing
activities including $4.0 million used for the Company's equity investment in a
new Structured Finance Product asset which was partially offset by $1.3 million
in principal distributions received by the Company from these investments. The
Company had a net increase in cash from financing activity due to the $32.3
million received from the ongoing sales of the DAC asset offset by $5.2 million
in purchases of the Company's stock and a decrease in borrowings of $23.4
million.
One of the Company's principal uses of cash is the payment of commissions in
connection with the sale of B Shares. Such costs are capitalized as DAC assets
and are recovered through distribution fees and CDSC fees received from the B
Share assets. On December 11, 1998, the Company sold its September 30, 1998 DAC
asset for $26.5 million and agreed to sell any DAC assets generated through B
Share sales through November 1999, (B Share Sales Agreement") with a right of
first refusal on a two-year extension thereafter. The purchaser of the DAC asset
is entitled to 0.75%, annualized, in distribution fees paid from B Share assets
and all CDSCs received from any redemptions of the related B Shares. If the
Company's B Shares Sales Agreement expires and the Company is unable to sell its
DAC assets or to borrow to fund commissions, the Company's ability to finance
the continued sale of open-end Fund B Shares could be adversely effected.
The Company uses a significant portion of its cash to invest in Structured
Finance Products that it manages. The Company may be required to invest an
agreed upon percentage in each new Structured Finance Product on the date the
transaction closes. If the Company was unable to generate funds from operations
or to borrow funds needed to invest in new Structured Finance Products this
could have an adverse effect on the Company's ability to continue to close and
manage additional Structured Finance Product assets. As of March 31, 1999 the
Company had $20.1 million invested in Structured Finance Products.
The Company intends to continue funding its investment management operations
with cash provided by operations and with borrowings obtained under the Credit
Agreement. The Company's Credit Agreement was amended and restated on December
22, 1998, and allows the Company or the Company's wholly owned subsidiary
Pilgrim Group, Inc. ("PGI") to borrow up to $43.3 million. The borrowings can be
used for various purposes including (i) general corporate working capital; (ii)
acquisition of investment management contracts; (iii) financing of commissions
paid by the Company in connection with sales of Fund shares subject to a
contingent deferred sales charge, (iv) financing Structured Finance Product
investments and (v) repurchasing Company stock. The agreement contains
restrictive covenants which require PGI and the Company to maintain certain
financial ratios and prohibits certain "restricted payments" including dividends
by the Company to its shareholders. Borrowings under the Credit Agreement are
collateralized by a pledge by the Company of the stock of PGI, by a pledge of
PGI of the stock of its wholly owned subsidiaries, by a security interest in the
assets of the Company, PGI and PGI's wholly owned subsidiaries, Pilgrim
Investments, Inc. ("PII") and Pilgrim Securities, Inc., and by a guarantee by
PGI's wholly owned subsidiary, PII.
The Company will need approximately $25 million for the acquisition of the NACM
Funds including related expenses and is negotiating with its current lenders as
well as others to expand its existing credit agreement. The Company anticipates
the increase in the credit agreement will be by an amount sufficient to fund
this acquisition and the borrowing facility will be in place prior to closing
the NACM acquisition.
13
<PAGE>
At March 31, 1999 the Company had borrowings of approximately $7.0 million
outstanding under the Credit Agreement and had approximately $36.3 million
additional borrowings available.
On August 5, 1997, the Company's Board of Directors approved purchasing up to
750,000 shares of its common stock from time to time in open market
transactions. The Company may use cash generated from operations or borrowings
obtained under the Credit Agreement to purchase the shares. As of April 30,
1999, the Company had purchased 659,150 shares pursuant to this authorization.
In August 1998, the Company's Board of Directors approved the purchase from time
to time of an additional 500,000 shares of common stock.
YEAR 2000
Many existing computer programs only use two digits to identify a year in the
date field. The change from 1999 to 2000 may cause many computer applications to
fail or create erroneous results. The endeavor to correct this year 2000 problem
has commonly become known as Y2K and affects virtually all companies.
The Company is working to ensure that its information technology systems
("systems") will, along with those of its third party service providers ("third
parties" or "third party"), continue to function properly upon the arrival of
the year 2000. The Company has developed and is implementing a comprehensive Y2K
plan (the "plan") to complete all internal system upgrades or conversions by the
fourth quarter of fiscal 1999. A significant part of the plan involves upgrading
hardware and software to newer versions that have been certified to be Y2K
compliant. To date, most of the Company's current hardware and software systems
have been certified, by the manufacturers, as Y2K compliant. Based on the
Company's plan, it is estimated that incremental expenses for the Y2K project
will not have a material impact on the Company's operations or financial
results. To date, the Company has spent approximately $817,000 on upgrading its
hardware and software systems to those that are Y2K compliant and to accommodate
the Company's growth. The Company estimates that the remaining cost to complete
the implementation of the plan will be between $200,000 and $500,000. The
Company will use its own cash or to the extent available borrow from its line of
credit for any Y2K expenditure. It is the Company's policy to capitalize all
costs for hardware and software that have a useful life of over one-year. The
cost of these assets will be depreciated based on the estimated useful life.
Costs for remediation and testing are expensed as incurred.
The Company is measuring its progress by following the three action phases
outlined in its plan: Assessment, Remediation/Implementation and Testing. The
Assessment phase included completing an inventory of all-internal and external
systems, office equipment, third party dependencies, physical facilities,
business issues and creating a budget and strategy to address the Y2K issue. The
Remediation/Implementation phase includes upgrading or replacing hardware and
software systems, issuance of Company statements of Y2K readiness, compliance
with regulatory disclosure requirements, development of a Y2K contingency plan
and contacting and monitoring third parties. The Testing phase includes several
levels of testing some of which rely upon the third parties. The Company must
test internal systems on a stand-alone basis and also complete point-to-point
testing with some of its third parties. Additionally, the Company will obtain
the results of certain third party testing that will be conducted on behalf of
the Company and its affiliates on an industry wide basis. The table below
summarizes the status of the Company's Y2K readiness.
- --------------------------------------------------------------------------------
Status of Y2K Readiness
- --------------------------------------------------------------------------------
Y2k Plan Phase % Completed Completion Target Date
As of April 1, 1999
- --------------------------------------------------------------------------------
Assessment 100% 01/31/99
- --------------------------------------------------------------------------------
Remediation/Implementation 95% 09/30/99
- --------------------------------------------------------------------------------
Testing 90% 10/31/99
- --------------------------------------------------------------------------------
The Company's core business activities are highly dependent upon certain third
parties that are classified as Y2K "mission critical". A failure of any single
mission critical third party or combination of parties could likely have a
material negative impact to the Company' ability to conduct its business. As
part of its plan, the Company has been monitoring the Y2K progress of such
mission critical third parties. To date based upon written disclosures provided
by such third parties, the Company has not received any significant indication
that a mission critical third party will likely experience a Y2K failure.
14
<PAGE>
Below is a summary table that sets forth the most current Y2K status as
disclosed by certain of the Company's mission critical third parties:
<TABLE>
<CAPTION>
Mission Critical Third Party - Y2K Status
-----------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Third Party Current Status Last Update
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fund Transfer Agent The five major systems of the Transfer Agent system 4/99
are Y2K ready. Testing will continue through the second quarter of 1999.
- --------------------------------------------------------------------------------------------------------------------
Fund Custodian The information technology (IT) applications: 2/99
Correction 99% complete
Testing & Implementation 94% complete
Level 2 Testing 86% Complete
Level 3 Testing 67% Complete
- --------------------------------------------------------------------------------------------------------------------
The Custodian has distributed questionnaires on readiness, testing, 2/99
and market evaluation to subcustodians. We will be obtaining a
report of the progress.
- --------------------------------------------------------------------------------------------------------------------
Fund Accounting Agent Achieved goal of Y2K readiness production 4/99
environment by 12/98. Testing will continue throughout 1999.
- --------------------------------------------------------------------------------------------------------------------
Communication Vendors Both vendors have remediation and renovation well under way. 4/99
- --------------------------------------------------------------------------------------------------------------------
Electrical Vendor All IT and non IT systems have been inventoried. All renovations 4/99
are scheduled for completion by mid 1999.
- --------------------------------------------------------------------------------------------------------------------
Corporate Banker Systems are compliant. Testing continues through mid-1999 4/99
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company is developing a contingency plan with the objective of providing
reasonable alternatives to systems, third party vendors, facilities and
procedures enabling the Company to conduct its core business operations if
confronted with a Y2K failure. The scope of the contingency plan includes
mission critical systems, physical facilities and the Company's communication
systems. The contingency plan will provide the Company guidance should it or any
of the Company's primary third party providers fail to meet its goals and be
Year 2000 compliant and includes an alternate vendor list for its third party
mission critical providers. The Company has determined that even though it has a
list of alternative vendors selected, it cannot ensure that these alternates
will be Y2K ready or have the wherewithal to accept the Company business. The
Company has also determined that there are some third party mission critical
vendors that do not have an alternate source. The Company relies heavily on its
third party mission critical systems to conduct its day to day business
operations and to the extent that its contingency plan fails, the Company's
financial condition may be adversely effected.
The Company's ability to manage the Y2K issue is subject to uncertainties beyond
its control and actual results could differ materially from what has been
discussed above. There are several factors that could effect the Y2K issue for
the Company, including; the success of the Company in identifying systems and
programs that are affected by Y2K; the amount and nature of testing on internal
and external systems that is required: the installation, programming, and
systems work related to upgrading or replacing each of the affected programs;
the cost, magnitude and availability of labor and consulting to complete the
required Y2K projects and the success of the Company's external third party
providers and other industry or governmental entities in addressing their Y2K
issues and assessing their risks.
The failure of the Company, the Company's mission critical third party providers
or other industry or governmental entities to resolve Y2K issues could have a
material adverse affect on the Company's business, financial condition, and
results of operations. The Company could become the subject of legal claims
regarding its inability to operate its business due to Y2K failures by it or any
of its mission critical third party vendors. The Company is also regulated by
several governmental agencies that may decide to impose fines or sanctions that
could adversely effect the Company's ability to do business or in some cases
require the Company to cease operations. The Company could also experience a
decline in assets under management if investors in its Funds become concerned
about the
15
<PAGE>
Y2K problem and withdraw their investments. A decline in assets under management
would have an adverse effect upon the Company's business, financial condition
and results of operations.
FORWARD LOOKING STATEMENT
When used in this Form 10-Q and in future filings by the Company with the
Securities and Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases, "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", or similar expressions are intended to
identify "forward looking" statements, within the meaning of the Private
Securities Litigation Reform Act of 1995. All assumptions, anticipations,
expectations and forecasts contained herein are forward looking statements that
involve risks and uncertainties. Discussions in Management's Discussion and
Analysis about the Company's estimated completion dates for phases of the
Company's Year 2000 plan, related cost estimates, statements about possible
effects of the year 2000 problem and related contingency plans are also "forward
looking" statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date, made, and should be read in
conjunction with the risk disclosures. The Company wishes to advise readers that
the factors in the Year 2000 discussed above could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The Company will not undertake and specifically declines any obligation to
release publicly the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
16
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1 THROUGH 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on February 24, 1999, for
the purpose of electing two directors to the Company's Board of Directors, each
to serve a three-year term and for the purpose of approving a stock option
program for the board of directors of the Company. At the meeting, a quorum
being present, votes cast in the election of the directors were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Against Votes Withheld Broker Non Votes
- -------------------- --------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Robert W. Stallings 4,784,567 - 2,949 -
John M. Holliman III 4,782,967 - 4,549 -
</TABLE>
At the meeting, a quorum being present, votes cast in the proposal to approve
the directors' stock option plan were as follows:
<TABLE>
<CAPTION>
Agenda Votes For Votes Against Votes Withheld Broker Non Votes
- --------------------------- --------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Directors Stock Option Plan 4,149,419 627,314 10,783 -
</TABLE>
Both nominees were elected and the director's stock option plan were approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Nicholas-Applegate Capital Management Purchase Agreement Dated
January 28, 1999
10.2 Employment Agreement of Howard Tiffen
27.0 Financial Data Schedules
(b) Reports on Form 8-K.
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
PILGRIM AMERICA CAPITAL CORPORATION
Date: May 10, 1999 /s/ James R. Reis
------------------------------------------
James R. Reis
Vice-Chairman and Chief Financial Officer
(Principal Accounting Officer)
18
Exhibit 10.1
ASSET PURCHASE AGREEMENT
by and among
PILGRIM AMERICA CAPITAL CORPORATION,
PILGRIM INVESTMENTS, INC.,
PILGRIM SECURITIES, INC.,
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
and
NICHOLAS-APPLEGATE SECURITIES
Dated January 28, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I THE SALE ..................................................3
1.1 Sale of Assets.............................................3
1.2 No Liabilities Assumed.....................................4
1.3 The Closing................................................5
1.4 Purchase Price.............................................5
1.5 Deferred Purchase Price....................................8
1.6 Material Adverse Effect....................................9
1.7 Allocation of Purchase Price..............................10
1.8 Calculation of The Purchase Price.........................10
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PURCHASER, PILGRIM INVESTMENTS, INC.
AND PILGRIM SECURITIES, INC. ................................................11
2.1 Organization and Authority................................11
2.2 Authorization.............................................12
2.3 Accuracy of Representations and Documents.................13
2.4 Brokers and Finders.......................................13
2.5 Litigation and Other Proceedings..........................13
2.6 Certain Information Provided by Purchaser.................13
2.7 Registration of PII under the Advisers Act................14
2.8 Registration of PSI as a Broker-Dealer....................14
2.9 Code of Ethics............................................14
2.10 Disqualifications..........................................14
2.11 Financial Statements.......................................15
2.12 Absence of Changes.........................................16
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER AND DISTRIBUTOR.........16
3.1 Organization and Authority................................16
3.2 Authorization.............................................16
3.3 Title to Assets...........................................17
3.4 Accuracy of Representations and Documents.................18
3.5 Certain Information provided by Seller, Distributor and
the Trust.................................................18
3.6 Brokers and Finders.......................................18
3.7 Contracts.................................................18
3.8 No Defaults under Contracts or Agreements.................19
3.9 Additional Representations and Warranties relating to
Seller, Distributor and the Trust.........................20
3.10 Absence of Certain Changes.................................26
3.11 Insurance..................................................27
-i-
<PAGE>
3.12 Trust Records; Copies of Documents.........................28
ARTICLE IV CONDUCT OF BUSINESS PRIOR TO THE CLOSING..........................28
4.1 Conduct Prior to Closing..................................28
4.2 Redemption of Institutional Assets of Nicholas-Applegate
Funds.....................................................30
4.3 Consents and Approvals....................................31
ARTICLE V COMPLIANCE WITH FEDERAL SECURITIES LAWS............................32
5.1 Cooperation in Obtaining Necessary Approvals to
Consummate Intentions of Parties..........................32
5.2 Required Fund Actions.....................................35
5.3 Section 15(f).............................................35
ARTICLE VI ADDITIONAL AGREEMENTS.............................................37
6.1 Current Information.......................................37
6.2 Access. .................................................38
6.3 Information...............................................39
6.4 Qualification of the Nicholas-Applegate Funds.............39
6.5 Press Releases, Etc.......................................40
6.6 Administrative Fees and Other Expenses of the Nicholas-
Applegate Funds...........................................40
6.7 Rule 12b-1 Fees...........................................41
6.8 Performance Records of Sub-Advised Series.................43
6.9 Resale Penalty............................................44
6.10 Employees.................................................44
6.11 Road Shows................................................44
6.12 Transferred Series........................................45
ARTICLE VII CONDITIONS ......................................................45
7.1 Conditions to Each Party's Obligations to Consummate......45
7.2 Conditions to Obligation of Purchaser to Consummate.......46
7.3 Conditions to Obligation of Seller and Distributor to
Consummate................................................49
ARTICLE VIII INDEMNIFICATION.................................................51
8.1 Indemnification...........................................51
8.2 Claims Procedures.........................................53
8.3 Indemnification Limits....................................56
ARTICLE IX TERMINATION ......................................................56
9.1 Termination...............................................56
9.2 Effect of Termination and Abandonment.....................57
ARTICLE X GENERAL PROVISIONS.................................................57
10.1 Notices. .................................................57
10.2 Counterparts...............................................58
-ii-
<PAGE>
10.3 Governing Law..............................................59
10.4 Expenses. 59
10.5 Waiver, Amendment..........................................59
10.6 Entire Agreement; No Third-Party Beneficiaries.............60
10.7 Assignment.................................................60
10.8 Captions and Gender........................................60
10.9 Consent to Jurisdiction....................................60
10.10 Waiver of Jury Trial......................................60
ARTICLE XI
11.1 Certain Defined Terms......................................60
-iii-
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Schedule A - Sub-Advised Series
Schedule B - Transferred Series
Schedule C - Stand-Alone Series
Schedule 1.4 - Example of Purchase Price
Schedule 3.7 - Contracts
Schedule 3.9(l) - Affiliated Brokerage Transactions
Schedule 3.9(m) - Code of Ethics
Schedule 3.11 Insurance
Schedule 6.6(c) - Expense Limits
Schedule 6.7 - 12b-1 Fees
Schedule 6.10 - Non-Competition
Exhibit 5.1(a)(i) - Form of New Advisory Agreement
Exhibit 5.1(a)(ii) - Form of Sub-Advisory Agreement
Exhibit 5.1(a)(v) - Form of Expense Limitation Agreement
Exhibit 5.2(a) - Form of Interim Distribution Agreement
Exhibit 5.2(b) Form of New Distribution Agreement
Exhibit 7.2(c) - Form of Opinion of Counsel to Seller and
Distributor
Exhibit 7.2(d) - Form of Opinion of Counsel to Trust and
Nicholas-Applegate Funds
Exhibit 7.3(d) - Form of Opinion of Counsel to Purchaser,
PII and PSI
-iv-
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT, made this __ day of January, 1999, by and among Pilgrim
America Capital Corporation, a Delaware corporation ("Purchaser" or "PACC"),
Pilgrim Investments, Inc., a Delaware corporation ("PII"), Pilgrim Securities,
Inc., a Delaware corporation ("PSI"), Nicholas-Applegate Capital Management, a
California limited partnership ("Seller" or "NACM") and Nicholas-Applegate
Securities, a California limited partnership (the "Distributor").
RECITALS:
WHEREAS, Nicholas-Applegate Small Cap Growth Fund, Nicholas-Applegate
Mid-Cap Growth Fund, Nicholas-Applegate Emerging Countries Fund,
Nicholas-Applegate Worldwide Growth Fund, Nicholas-Applegate International Small
Cap Growth Fund, Nicholas-Applegate International Core Growth Fund,
Nicholas-Applegate High Yield Fund, Nicholas-Applegate Large Cap Growth Fund,
Nicholas-Applegate Convertible Fund, Nicholas-Applegate High Quality Bond Fund,
and Nicholas-Applegate Balanced Growth Fund (each a "Series" and collectively,
the "Nicholas-Applegate Funds") are series of the Nicholas-Applegate Mutual
Funds, a business trust organized under the laws of Delaware and registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), as an open-end management investment company (the "Trust"); and
WHEREAS, Seller serves as an investment adviser to the
Nicholas-Applegate Funds pursuant to an investment advisory agreement dated
September 7, 1997, as amended from time to time, between Seller and the Trust on
behalf of each Series (the "Advisory Agreement"); and
WHEREAS, Distributor serves as principal underwriter to the
Nicholas-Applegate Funds pursuant to a distribution agreement between
Distributor and the Trust, on behalf
<PAGE>
of each Series, dated April 19, 1993, as amended from time to time (the
"Distribution Agreement"); and
WHEREAS, PII, an indirect subsidiary of Purchaser, is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended (the
"Investment Advisers Act"), and serves as investment adviser to certain
investment companies registered under the Investment Company Act; and
WHEREAS, PSI, an indirect subsidiary of Purchaser, is registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and serves as distributor to certain investment companies
registered under the Investment Company Act; and
WHEREAS, Seller desires, in accordance with the terms and conditions of
this Agreement, to sell certain assets as hereinafter set forth and Purchaser
desires, in accordance with the terms and conditions of this Agreement, to
purchase such assets; and
WHEREAS, Purchaser and Seller desire that PII act as investment adviser
to the Nicholas-Applegate Funds; and
WHEREAS, Purchaser and Seller desire that Seller act as sub-adviser to
certain of the Series of the Nicholas-Applegate Funds as set forth on Schedule A
hereto (the "Sub-Advised Series"); and
WHEREAS, Purchaser and Seller desire that the Nicholas-Applegate High
Yield Fund, as set forth on Schedule B (the "Transferred Series"), transfer all
of its assets (held immediately before the transfer) and liabilities to another
investment company or series thereof for which PII serves as investment adviser
solely in exchange for voting stock of such acquiring company or a series (the
"Transfer"); and
WHEREAS, Purchaser and Seller desire that all Series other than the
Transferred Series and Sub-Advised Series as set forth on Schedule C will
receive all their investment advisory services from PII (the "Stand-Alone
Series"); and
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<PAGE>
WHEREAS, Seller and Distributor intend that the Advisory Agreement and
Distribution Agreement will be terminated on or about the Closing Date (as that
term is defined herein) of this Agreement, and Purchaser and Seller intend that
on or about the Closing Date (as that term is defined herein) of this Agreement,
PII will, subject to approval by the Trustees of the Trust and the shareholders
of each Series, enter into a new advisory agreement relating to each Series and
that PSI will, subject to approval by the Board of Trustees of the Trust, enter
into a new distribution agreement relating to each Series; and
WHEREAS, Purchaser and Seller intend that on or about the Closing Date
(as defined herein) of this Agreement, Seller will, subject to approval by the
Trustees of the Trust and the shareholders of each of the Sub-Advised Series,
enter into a sub-advisory agreement with PII relating to each of the Sub-Advised
Series;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth and intending to be legally bound, the receipt
and adequacy of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I
THE SALE
1.1 Sale of Assets. Subject to the terms and conditions set forth in
this Agreement, at the closing of the transaction contemplated by this Agreement
(the "Closing"), Seller agrees to sell and deliver to Purchaser all of the
right, title and interest in and to that portion of its business relating to the
management by Seller of the Retail Assets of the Nicholas-Applegate Funds, which
shall include, but shall not be limited to:
(a) duly certified copies of all books and records relating to the
investment advisory services provided by Seller to the Trust that are in
Seller's possession (including, but not limited to, all sales literature,
promotional literature, catalogs and
-3-
<PAGE>
similar materials, investment advisory materials and prospectuses, annual
reports and any other information base pertaining to the Nicholas-Applegate
Funds); and
(b) duly certified copies of all books and records relating to the
distribution services provided by Distributor to the Nicholas-Applegate Funds
with respect to the Retail Assets that are in Seller's possession as the same
may exist on the Closing Date (as defined herein) (collectively the items
referred to in this Section 1.1, the "Assets"). Such sale and transfer shall be
made to Purchaser free and clear of any liens, charges, liabilities,
obligations, claims, licenses, security interests, encumbrances, restrictions
and rights of others of any kind ("Encumbrances") in existence or arising in
connection with events occurring prior to the Closing Date, provided that
Purchaser shall have the right to assign any part or all of such Assets to PII,
PSI or any direct or indirect subsidiary of Purchaser.
1.2 No Liabilities Assumed. Seller represents, warrants and covenants
with and to Purchaser, PSI, and PII that Purchaser, PSI, and PII shall not
assume any debts, obligations or liabilities, direct or indirect, contingent or
otherwise, known or unknown, of any nature whatsoever of Seller or in connection
with any of the Assets or the business of Seller or the management and
distribution of the Nicholas-Applegate Funds which exist or may arise as a
result of events occurring or circumstances in existence prior to the Closing,
except as otherwise provided in Section 6.7, Section 7.3(g), Article VIII and
Section 10.4. Without limiting the generality of the foregoing, Purchaser, PSI
and PII shall not be responsible for any business, occupation, withholding,
income or similar tax, or any other taxes of any kind, of Seller. Purchaser, PSI
and PII represent, warrant and covenant with and to Seller and Distributor that
Seller and Distributor shall not assume any debts, obligations or liabilities,
direct or indirect, contingent or otherwise, known or unknown, of any nature
whatsoever relating to or in connection with the Transfer; except as otherwise
provided in Section 5.1(c). Seller represents, warrants and covenants with and
to Purchaser, PSI and PII that Purchaser, PSI and PII shall not assume any
debts, obligations or liabilities, direct or indirect, contingent or otherwise,
known or unknown, of any nature whatsoever in connection with the class of
shares designated as
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"Institutional Shares" or with the transactions contemplated by Section 4.2 of
this Agreement.
1.3 The Closing.
(a) Subject to and upon the terms and conditions of this Agreement, at
the Closing (i) Seller shall sell and deliver the Assets to Purchaser, including
such bills of sale, endorsements, assignments, documents of title, and other
instruments of transfer and conveyance necessary to transfer the Assets to
Purchaser, free and clear of all Encumbrances and sufficient to vest in
Purchaser all right, title and interest of Seller in the Assets; (ii) Purchaser
shall deliver to Seller the Purchase Price, as set forth in Section 1.8, and
(iii) the documents to be executed and delivered pursuant to Article VII hereof
shall be so executed and delivered.
(b) The Closing shall take place at the offices of Dechert Price &
Rhoads, 1775 Eye Street, NW, Washington, DC at 10:00 a.m., Eastern time, on
April 30, 1999, or as soon as practicable thereafter on such other date and time
as Purchaser and Seller may agree (the "Closing Date"). The obligations of the
parties to consummate the transactions contemplated by this Agreement shall be
subject to the fulfillment or waiver of the other conditions set forth in
Article VII hereof.
1.4 Purchase Price.
(a) Subject to the terms and conditions of this Agreement, as payment
for the Assets, Purchaser hereby agrees to pay to Seller a purchase price (the
"Purchase Price"), which shall be calculated as follows:
(i) for the Sub-Advised Series, 200% of the Net Annual
Management Fee (as described below) of each Sub-Advised Series as of the date of
this Agreement (the "Measurement Date"); plus
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(ii) for each Transferred Series, 400% of the Gross Annual
Management Fee (as described below) of each Transferred Series as of the
Measurement Date; plus
(iii) for each Stand Alone Series, 400% of the Net Annual
Management Fee of each Stand Alone Series as of the Measurement Date; less
(iv) $240,000.
The "Gross Annual Management Fee" is equal to the product of (1) the
net assets of the pertinent Series as of the close of business on the applicable
date, and (2) the effective annual advisory fee rate payable to Seller by the
Series under the Advisory Agreement. The "Net Annual Management Fee" is equal to
the product of (1) the net assets of the pertinent Series as of the close of
business on the applicable date, and (2) the effective annual advisory fee
payable to Seller by the Series under the Advisory Agreement, less the
annualized expense reimbursements and fee waivers accruing to the Retail Assets
of the related Series for the three months ending December 31, 1998, calculated
in the manner illustrated on Schedule 1.4.
(b) For the following transactions involving Series' shares, the
Purchase Price will be adjusted as follows:
(i) for redemptions of shares, exchanges out of a Series and
dividends and distributions made to shareholders whether reinvested in shares of
the Series or not, after the Measurement Date through the Closing Date, which
shares existed at the Measurement Date ("Redeemed Shares"), the Purchase Price
will be reduced by the portion of the Purchase Price as calculated under Section
1.4(a)(i), (ii), or (iii) allocable to such Redeemed Shares;
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(ii) for purchases of shares, exchanges into a Series from
another Series and reinvested dividends, after the Measurement Date through the
Closing Date, which shares remain outstanding at Closing Date ("Purchased
Shares"), the Purchase Price will be increased by the value attributable to such
shares calculated in accordance with Section 1.4(a)(i), (ii), or (iii) above, as
applicable, except that the net asset value of the Purchased Shares shall be
based on the actual net asset value paid for such shares (without regard to any
sales load thereon) on that date such shares were issued ("Purchase Date"). For
purposes of this Section 1.4(b)(ii) annualized expense reimbursements and fee
waivers calculated pursuant to Section 1.4(a) shall be applied pro rata to the
net assets of the Purchased Shares for the Sub-Advised Series.
(c) For all shares that were outstanding at the Measurement Date and
remain outstanding at the Closing Date ("Continuing Shares") and for Purchased
Shares that remain outstanding at the Closing Date, the Purchase Price will be
further increased or decreased as follows:
(i) A hypothetical purchase price attributable to the
Continuing Shares shall be determined as provided in Section 1.4(a)(i), (ii),
(iii), and (iv) above, and a hypothetical adjustment to the purchase price for
the Purchased Shares shall be determined as provided in Section 1.4(b)(ii),
above, based on the net asset values of such Continuing and Purchased Shares as
of the dates and times provided in those subsections.
(ii) A hypothetical purchase price attributable to the
Continuing Shares shall be determined as provided in Section 1.4(a)(i), (ii),
(iii), and (iv) above, and a
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hypothetical adjustment for the Purchased Shares shall be determined as provided
in Section 1.4(b)(ii), above, except that such price shall be based on the net
asset values of such Continuing and Purchased Shares as of the close of business
on the Closing Date.
(iii) The Purchase Price will be increased or decreased by 50%
of the amount that the total value calculated in Section 1.4(c)(ii) exceeds or
is less than, respectively, the total value calculated in Section 1.4(c)(i).
(d) All calculations of the net asset value of a Series or Redeemed
Shares, Purchased Shares, and Continuing Shares shall be based on the shares
outstanding in the classes of each Series designated as classes "A," "B," "C,"
and "Advisory Shares" (or "Q") (collectively, "Retail Assets"), and shall not
take into account any shares outstanding in the class designated as
"Institutional Shares" (or "I"). An example of the calculation of the Purchase
Price based upon several assumptions as stated therein is in Schedule 1.4.
(e) The Purchase Price shall be paid in full on the Closing Date by
wire transfer of immediately available federal funds to an account or accounts
designated by Seller.
1.5 Deferred Purchase Price.
With respect to each Sub-Advised Series for so long as a Sub-Advisory
Agreement (as defined herein) with Seller is in effect, Purchaser shall also pay
to Seller a deferred purchase price ("Deferred Purchase Price") in the event
that:
(a) the Sub-Advisory Agreement is terminated (which shall not include
an assignment of a Sub-Advisory Agreement that does not terminate such agreement
pursuant to Rule 2a-6 under the Investment Company Act) for any reason, so that
neither Seller nor an Affiliate of Seller serves as sub-adviser to a Sub-Advised
Series, or
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(b) upon the organization or the entering into of an investment
advisory agreement by Purchaser or an Affiliate respecting a registered
investment company or series thereof with investment objective(s), policies,
restrictions, and strategies that are substantially the same as those of a
Sub-Advised Series and that is intended to be offered in the retail market.
The Deferred Purchase Price shall equal 400% of the product of (A) the
effective annual sub-advisory fee rate payable to Seller by PII based upon the
net assets existing at the close of business on the business day immediately
prior to the Effective Date, as adjusted to take into account any waiver of its
fees by Seller or absorption of the Series' operating expenses by Seller as of
the Effective Date (which shall be based on the annualized expense
reimbursements and fee waivers accruing to the Series for the three complete
calendar months prior to the Effective Date); and (B) the net asset value of the
Sub-Advised Series as of the close of the business day immediately prior to the
Effective Date. The Effective Date shall, in the case of (a) above, be the
earlier of the effective date of the termination of the Sub-Advisory Agreement
or 60 days after notice of termination of the Sub-Advisory Agreement is received
by any party to that Agreement, and, in the case of (b) above, be the date that
the newly organized investment company or series thereof commences operations or
the date the Purchaser or its Affiliate begins serving under the investment
advisory agreement referred to therein. The Deferred Purchase Price shall be
paid to Seller in immediately available funds no later than 45 days after the
Effective Date.
1.6 Material Adverse Effect. When used in this Agreement the term
"Material Adverse Effect" (i) with respect to Seller, Distributor or the Trust
(a "Seller Material Adverse Effect") shall mean (A) a material adverse effect
(whether taken individually or in the aggregate with all other such effects)
other than as provided in (C) below, on the financial condition, business or
results of operations as they relate to the Retail Assets, of (i) Seller and
Distributor, taken as a whole or (ii) the Nicholas-Applegate Funds; (B) any
event, circumstance or condition affecting any such entity which would prevent
or materially delay the consummation of the transactions contemplated by this
Agreement;
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or (C) an adjustment in the Preliminary Purchase Price as calculated pursuant to
Section 1.4(b) and 1.4(c) that would result in a reduction that is greater than
twenty-five percent (25%) of the Purchase Price calculated pursuant to Section
1.4(a) as of the Measurement Date; and (ii) with respect to Purchaser (a
"Purchaser Material Adverse Effect") shall mean any event, circumstance or
condition affecting Purchaser which (A) would prevent or materially delay the
consummation of the transactions contemplated by this Agreement; (B) an event
that would materially affect the ability to pay the Purchase Price and Deferred
Purchase Price; or (C) a material adverse effect (whether taken individually or
in the aggregate with all other such effects) on the financial condition,
business, or results of operations of (i) Purchaser, or (ii) PII and PSI, taken
as a whole.
1.7 Allocation of Purchase Price. The parties shall cooperate in
determining the allocation of the Purchase Price for all purposes (including tax
and financial accounting) amongst the Assets prior to Closing. The Purchaser
will cooperate (at no additional out of pocket expense to Purchaser) with Seller
to structure the Deferred Purchase Price in a manner that will cause it to be
characterized as capital gain rather than ordinary income for federal income tax
and financial accounting purposes to the extent permissible.
1.8 Calculation of the Purchase Price.
(a) At least two business days prior to the Closing, Seller
shall deliver to Purchaser a reasonably detailed calculation of the Preliminary
Purchase Price (as defined below) based on the Retail Assets in the
Nicholas-Applegate Funds as of the close of business on a business day not more
than seven business days prior to the Closing (the "Preliminary Purchase
Price"). At the Closing, Purchaser shall pay such amount to Seller in accordance
with Section 1.4(e). Within five business days following the Closing, Seller
shall deliver to Purchaser a reasonably detailed calculation of the actual
Purchase Price based on the Retail Assets in the Nicholas-Applegate Funds as of
the close of business on the business day immediately prior to the Closing Date.
Unless Purchaser objects to the calculation of such actual Purchase Price in
accordance with Section 1.8(b), Purchaser shall pay to Seller or Seller shall
reimburse Purchaser, as appropriate,
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the difference (without interest) between the Preliminary Purchase Price paid at
Closing and the actual Purchase Price so calculated. Any such payment or
reimbursement shall be paid by wire transfer of immediately available funds
within three business days of the delivery of the calculation of the actual
Purchase Price by Seller to Purchaser.
(b) In the event that Purchaser disagrees with the calculation
of the actual Purchase Price provided in accordance with Section 1.8(a) it shall
so notify Seller in writing within two business days of the receipt of such
calculation from Seller. Following such notification the parties shall work
together in good faith to come to an agreement on the calculation of the actual
Purchase Price over the next ten business days. To the extent that the parties
cannot reach an agreement on the actual Purchase Price within such time period,
the parties agree to use their collective best efforts to retain
PricewaterhouseCoopers LLP for the purpose of conducting an independent third
party review of the actual Purchase Price determination. All costs related to
retention of PricewaterhouseCoopers LLP shall be borne equally by Purchaser and
Seller.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PURCHASER,
PILGRIM SECURITIES, INC., AND PILGRIM INVESTMENTS, INC.
Purchaser, PSI and PII represent and warrant to Seller and Distributor
as follows:
2.1 Organization and Authority.
Each of Purchaser, PII and PSI are duly organized and in good standing
in the jurisdiction of its incorporation, and have (i) full corporate power,
right and authority to enter into and carry out each of its obligations under
this Agreement, to own each of its properties and assets, and to carry on each
of its business as it is now being and is proposed to be conducted; and (ii) all
necessary governmental authorizations to own or lease each of its properties and
assets and to conduct each of its business.
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2.2 Authorization.
(a) This Agreement and each document, agreement and instrument to be
executed by it pursuant to or as contemplated by this Agreement, has been duly
authorized, executed and delivered by Purchaser, PII and PSI, and no further
proceedings on the part of Purchaser, PII or PSI are necessary to authorize this
Agreement and the transactions contemplated hereby. This Agreement and each
document, agreement and instrument to be executed by Purchaser, PII and PSI (as
the case may be) is the legal valid and binding obligation of Purchaser, PSI and
PII (as the case may be), enforceable in accordance with its terms, subject to
bankruptcy, insolvency, moratorium, reorganization and other similar laws
affecting creditor's rights generally and to general equity principles.
(b) Neither the execution, delivery and performance of this Agreement
and each document, agreement and instrument to be executed by Purchaser, PII or
PSI (as the case may be) pursuant to or as contemplated by this Agreement nor
the consummation by Purchaser, PSI or PII of the transactions contemplated
hereby and thereby, will (i) violate, conflict with, or result in a breach of
any provisions of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a right
of termination or acceleration under, or the creation of any Encumbrance upon
any of the properties or assets of Purchaser, PII or PSI under any of the terms,
conditions or provisions of (x) the organizational documents or Bylaws of
Purchaser, PII or PSI or (y) any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Purchaser,
PII or PSI may be bound, or to which Purchaser, PII or PSI or the properties or
assets of Purchaser, PII or PSI may be subject, or (ii) violate any judgment,
ruling, order, writ, injunction, decree, statute, rule or regulation applicable
to Purchaser, PSI or PII or to any of the properties or assets of Purchaser, PSI
or PII.
(c) Except as provided in Article V, no material notice to, filing
with, authorization of, exemption by, or consent or approval of, any regulatory
authority is
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necessary for the consummation by Purchaser, PII or PSI of the transactions
contemplated by this Agreement.
2.3 Accuracy of Representations and Documents. No representation,
warranty or certification made by Purchaser, PII or PSI or any officer thereof
in this Agreement, schedules (if any) or any certificate provided for under this
Agreement is false or misleading in any material respect or contains any
material misstatement of fact.
2.4 Brokers and Finders. None of Purchaser, PII or PSI nor any of their
officers, directors or employees has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted, directly or indirectly, for
Purchaser, PII or PSI (or any of its officers, directors or employees), in
connection with this Agreement or the transactions contemplated hereby.
2.5 Litigation and Other Proceedings. There is no litigation or legal
(or other) action, suit, proceeding, investigation or audit, pending, or to the
best knowledge of Purchaser, PII and PSI, threatened at law or in equity, or
before any federal, state, municipal or other governmental department,
commission, bureau, board, agency or instrumentality, domestic or foreign, or
before any arbitrator, by or against Purchaser, PII or PSI or any of their
respective officers of directors relating to their activities, or any event
which would (i) have a Purchaser Material Adverse Effect or (ii) prevent or
prohibit PII or PSI from acting as investment adviser or as principal
underwriter, respectively, to the Nicholas-Applegate Funds. There are no
judgments, injunctions, orders or other judicial or administrative mandates
outstanding against or affecting Purchaser, PII or PSI.
2.6 Certain Information Provided by Purchaser. The information supplied
by Purchaser, PII or PSI that is included in the materials provided to the Trust
in connection with any filings required under the federal securities laws to
obtain the approvals described in Article V hereof, is complete in all material
respects and does not at the time provided contain (at the time it is
distributed, filed or provided, as the case may be) any statement which, at the
time and in light of the circumstances under which it is made, is
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false or misleading with respect to any material fact, and will not omit to
state any material fact necessary in order to make the statements therein not
false or misleading or (with respect to information supplied by Purchaser, PII
or PSI and included in proxy statements) necessary to correct any statement or
any earlier communication with respect to the solicitation of a proxy for the
same meeting or subject matter which has become false or misleading.
2.7 Registration of PII under the Advisers Act. On the Closing Date,
PII will be duly registered under the Advisers Act as an investment adviser with
the SEC and will be in compliance in all material respects with the Advisers Act
and the rules and regulations thereunder.
2.8 Registration of PSI as a Broker-Dealer. On the Closing Date, PSI
will be duly registered under the Exchange Act as a broker-dealer with the SEC
and will be in compliance in all material respects with the Exchange Act and the
rules and regulations thereunder, including, but not limited to, the net capital
requirements thereof. On the Closing Date, PSI will be a member in good standing
of the NASD and will be in compliance in all material respects with all
applicable rules and regulations of the NASD, including, without limitation, the
Conduct Rules. PSI is registered as a broker-dealer in each state in which it is
required to be registered in connection with the offering of shares of the
Nicholas-Applegate Funds and, to the knowledge of PSI, is in compliance in all
material respects with all applicable state securities laws.
2.9 Code of Ethics. PII has adopted a formal code of ethics and a
written policy regarding personal trading. Such code and policy comply in all
materials respects with Section 17(j) of the Investment Company Act, Rule 17j-1
thereunder and Section 204A of the Advisers Act, respectively. To the knowledge
of PII, there has been no violation of its code of ethics and personal trading
policy which would constitute a fraud upon the investment companies managed by
PII.
2.10 Disqualifications. To the knowledge of PII and PSI, no person
"associated" (as defined under the Advisers Act) with PII or PSI has for a
period of five
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years prior to the date hereof been convicted of any crime or is or has been
subject to any disqualification that would be a basis for denial, suspension or
revocation of registration of an investment adviser under Section 203(e) of the
Advisers Act or Rule 206(4)-4(b) thereunder or of a broker-dealer under Section
15 of the Exchange Act, and no "affiliated person" (as defined under the
Investment Company Act) of PII or PSI has during a period of five years prior to
the date hereof been convicted of any crime or is or has been subject to any
disqualification that would be a basis for disqualification as an investment
adviser for any investment company pursuant to Section 9(a) of the Investment
Company Act; and to PII's knowledge, there is no basis for, or proceeding or
investigation that is reasonably likely to become the basis for, any such
disqualification, denial, suspension or revocation.
2.11 Financial Statements. The Purchaser has made or will make
available to the Seller copies of (a) the consolidated balance sheets of the
Purchaser and its subsidiaries as of September 30, 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year ended September 30, 1998, all as reported in the Purchaser's
Annual Reports on Form 10-K for September 30, 1998 filed with the SEC under the
Exchange Act, in each case accompanied by the audit report of KPMG LLP,
independent auditors for the Purchaser, and (b) the unaudited consolidated
balance sheets of the Purchaser and its subsidiaries as of December 31, 1998,
all as reported in Purchaser's Quarterly Report on Form 10-Q filed with the SEC
under the Exchange Act. The financial statements fairly present the consolidated
financial position and results of consolidated operations and cash flows and
changes in stockholders' equity of the Purchaser and its subsidiaries for the
respective fiscal periods or as of the respective dates set forth therein, and
each of such statements (including the related notes, when applicable) has been
prepared in accordance with GAAP consistently applied during the periods
involved, except as otherwise set forth in the notes thereto (subject, in the
case of unaudited interim statements, to normal year-end adjustments).
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2.12 Absence of Changes. Since September 30, 1998, no event or
development has occurred that has had or could reasonably be expected to have
any Purchaser Material Adverse Effect.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND DISTRIBUTOR
Seller and Distributor represent and warrant to Purchaser, PII and PSI
as follows:
3.1 Organization and Authority.
Each of Seller and Distributor is duly organized as a limited
partnership in good standing under the laws of its state of organization, and
has (i) full power, right and authority to enter into and carry out its
obligations under this Agreement, to own its properties and assets and to
conduct its business; and (ii) all necessary governmental authorizations to own
or lease its properties and assets. Neither Seller nor Distributor is required
to qualify to do business in any state or foreign jurisdiction where not already
so qualified and where failure to qualify would constitute a Seller Material
Adverse Effect.
3.2 Authorization.
(a) This Agreement and each document, agreement and instrument to be
executed by Seller and Distributor pursuant to or as contemplated by this
Agreement, has been duly authorized, executed and delivered by Seller and
Distributor, and no further proceedings on the part of Seller or Distributor are
necessary to authorize this Agreement and the transactions contemplated hereby.
This Agreement and each document, agreement and instrument to be executed by
Seller and Distributor (as the case may be) is the legal, valid and binding
obligation of Seller or Distributor, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, moratorium, reorganization and other similar
laws affecting creditors' rights generally and to general equity principles.
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(b) Neither the execution, delivery and performance of this Agreement
and each document, agreement and instrument to be executed by Seller and
Distributor pursuant to or as contemplated by this Agreement nor the
consummation by Seller and Distributor of the transactions contemplated hereby
and thereby, will (i) violate, conflict with, or result in a breach of any
provisions of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or the creation of any Encumbrance upon any
of the properties or assets of Seller, Distributor or the Trust under any of the
terms, conditions or provisions of (X) the organizational documents or Bylaws of
Seller, Distributor or the Trust, or (Y) any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which Seller, Distributor or the Trust are a party or by which Seller,
Distributor or the Trust may be bound, or to which Seller, Distributor or the
Trust, or the properties or assets of Seller, Distributor or the Trust, may be
subject; or (ii) violate any judgment, ruling, order, writ, injunction, decree,
statute, rule or regulation of any governmental, regulatory or self-regulatory
authority applicable to Seller, Distributor or the Trust or to any of the
properties or assets of Seller, Distributor or the Trust.
(c) Except as contemplated by Article V, no notice to, filing with,
authorization of, exemption by, or consent or approval of, any regulatory
authority or other person is necessary for the consummation by Seller,
Distributor or the Trust of the transactions contemplated by this Agreement.
(d) Except as contemplated by Article V hereof, no action of the
partners of the Seller or the shareholders of the Trust is required in
connection with the transactions contemplated by this Agreement.
3.3 Title to Assets. Seller or its Affiliates own, and on the Closing
Date Purchaser will acquire, good and marketable title to the Assets, free and
clear of all Encumbrances.
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3.4 Accuracy of Representations and Documents. No representation,
warranty or certification made by Seller, Distributor or any officer thereof in
this Agreement, the Schedules hereto, or any certificate provided for under this
Agreement is false or misleading or contains any material misstatement of fact.
3.5 Certain Information provided by Seller, Distributor and the Trust.
The information supplied by Seller, Distributor and the Trust that is included
in (i) the materials provided to the Board of Trustees of the Trust in
connection with the approvals described in Article V hereof, and (ii) the proxy
solicitation materials to be distributed to the shareholders of the
Nicholas-Applegate Funds in connection with the approvals described in Article V
hereof, is complete in all material aspects and does not contain (at the time it
is distributed, filed or provided as the case may be) any statement which, at
the time and in the light of the circumstances under which it is made, is false
or misleading with respect to any material fact, and will not omit to state any
material fact necessary in order to make the statements therein not false or
misleading or (with respect to information provided by Seller, Distributor, or
the Trust included in proxy statements) necessary to correct any statement or
any earlier communication with respect to the solicitation of a proxy for the
same meeting or subject matter which has become false or misleading.
3.6 Brokers and Finders. Seller will pay any financial advisory fees,
brokerage fees, commissions or finder's fees incurred with respect to the use of
any broker or finder which has acted, directly or indirectly, for Seller (or any
of Seller's officers, directors or employees), in connection with this Agreement
or the transactions contemplated hereby.
3.7 Contracts. Except as set forth on Schedule 3.7, or as set forth in
any other schedule hereto, none of the Trust or Series is a party or subject to:
(a) any contract or agreement not fully performed for the purchase for
its own account or sale of any asset, property, commodity, material, services or
equipment, including without limitation fixed assets, but excluding portfolio
securities acquired in
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the ordinary course of business consistent with past practice or which was not
entered into in the ordinary course of business consistent with past practice;
(b) any contract containing covenants limiting the freedom of the Trust
or the Nicholas-Applegate Funds to compete either in any line of business or
with any person or entity;
(c) any license agreement (as licensor or licensee);
(d) any indenture, mortgage, promissory note, loan agreement, guaranty
or other agreement or commitment for the borrowing of money;
(e) any contract or agreement not referred to in another clause of this
Section 3.7 (all of which are listed on Schedule 3.7) which by its terms does
not terminate and is not terminable without penalty by the Trust upon notice of
60 days or less;
(f) any contract or agreement relating to the provision of investment
advisory, subadvisory, administrative, distribution, brokerage, transfer agency
or custody services;
(g) any employment, consulting, retirement or severance agreement; or
(h) any other contract, agreement, arrangement or understanding,
whether written or oral, that was not entered into in the ordinary course of
business consistent with past practice.
3.8 No Defaults under Contracts or Agreements.
(a) None of the Series is in default in any material respect under any
lease, contract, mortgage, promissory note, deed of trust, loan, guaranty or
other commitment or arrangement to which the Series is a party or by which it is
bound, and to the knowledge of Seller, no event has occurred or condition exists
that with notice or the passage of time would constitute such a default.
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(b) Seller is not in default under any material contract or other
agreement relating to or affecting its management of the Retail Assets of the
Nicholas-Applegate Funds nor, to the knowledge of Seller, does any condition
exist which with notice or lapse of time or both would constitute such a
default, and each such contract or other agreement is in full force and effect.
3.9 Additional Representations and Warranties relating to Seller,
Distributor and the Trust.
(a) Since inception, the Trust (and any predecessor investment company
from which assets were transferred to the Trust) has been a duly registered
investment company in compliance in all material respects with the Investment
Company Act and the rules and regulations promulgated thereunder, and duly
registered or licensed and in good standing under the laws of each jurisdiction
in which failure to be so registered or licensed would have a material adverse
effect on the Trust. The Trust (and any predecessor investment company from
which assets were transferred to the Trust) is or was (as applicable), and has
been since inception, in material compliance with all applicable federal and
state laws, rules, regulations and orders. Since their initial offering, shares
of each of the Series have been duly qualified for sale under the securities
laws of each jurisdiction in which they have been sold or offered for sale at
such time or times during which such qualification was required. The offering
and sale of shares of each of the Series have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), during such period or
periods for which such registration was required, the related registration
statement has become effective under the Securities Act, no stop order
suspending the effectiveness of such registration statement has been issued and
no proceedings for that purpose have been instituted or, to the best knowledge
of the Seller, are contemplated. Such registration statement under the
Investment Company Act and/or the Securities Act has, at all times when such
registration statement was effective, complied in all material respects with the
requirements of the Investment Company Act and the Securities Act then in effect
and neither such registration statement nor any amendments thereto contained at
the time such registration statement became effective
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and during which time that the registration statement was in use, an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Copies of the current
registration statement of the Trust under the Investment Company Act and/or the
Securities Act have been made available to Purchaser. All shares of each of the
Series were sold pursuant to an effective registration statement and have been
duly authorized and are validly issued, fully-paid and non-assessable. The
Distributor has sold the shares of the Series in accordance with applicable
federal securities laws and any sales literature or advertisements utilized by
Distributor to promote each of the Series have been prepared in material
compliance with federal securities laws; and no such sales literature or
advertisements have contained an untrue statement of material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. Each of the Trust's (and any predecessor investment
company from which assets were transferred to the Trust) investments made since
inception have been made in accordance in all material respects with its
investment objectives, policies and restrictions set forth in the registration
statement in effect at the time the investments were made and have been held in
accordance in all material respects with its respective investment objectives,
policies and restrictions, to the extent applicable and in effect at the time
such investments were held.
(b) Correct and complete copies of all of the current investment
advisory agreements and distribution or underwriting contracts, plans adopted
pursuant to Rule 12b-1 under the Investment Company Act or arrangements for the
payment of service fees (as such term is defined in Rule 2830 of the NASD
Conduct Rules), and all administrative services and other services agreements,
if any (collectively, the "Mutual Fund Agreements"), pertaining to the Trust and
in effect on the date of this Agreement (i) have been made available to
Purchaser prior to the date hereof and (ii) are in full force and effect. As to
the Trust (and any predecessor investment company from which assets were
transferred to the Trust), there has been in full force and effect an investment
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advisory, sub-advisory, distribution or underwriting agreement (as applicable)
at all times since the inception of the Trust (and any predecessor investment
company from which assets were transferred to the Trust), and each Mutual Fund
Agreement pursuant to which Seller has received compensation respecting its
activities in connection with the Trust was duly approved in accordance with the
applicable provisions of the Investment Company Act.
(c) There are no special restrictions, consent judgments or Securities
and Exchange Commission ("SEC") or judicial orders on or with regard to the
Trust currently in effect.
(d) Each of the Series has qualified and elected to be treated as a
regulated investment company under Subchapter M of the Code and has so qualified
and elected in each year since such Series was treated as a corporation for
federal income tax purposes, including until the Closing occurs. No Series has
received assets from an entity treated as a corporation (other than a
corporation treated as a regulated investment company) for federal or state
income tax purposes in a transaction in which no gain or loss was recognized by
the corporation. Neither Seller, nor to the knowledge of Seller, any Series, has
received any notice of communication affecting the federal or state income tax
status of any Series or any predecessor investment company from which assets
were transferred to a Series.
(e) The Trust (and any predecessor investment company from which assets
were transferred to the Trust), as pertains to each Series, has paid or caused
to be paid all federal, state, local, foreign and other taxes, government fees
or the like, including, but not limited to, income taxes, excise taxes,
estimated taxes, alternative minimum taxes, franchise taxes, capital stock
taxes, sales taxes, use taxes, ad valorem or value added taxes, employment and
payroll-related taxes, withholding taxes, and transfer 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 owed by them (collectively,
"Taxes" and, each individually, a "Tax"), required to be paid by the Trust or
such Series, whether
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disputed or not. The Trust, as pertains to each Series, has, in accordance with
applicable law, timely filed all federal, state, local and foreign tax returns
(including information returns) required to be filed by them, and all such
returns correctly and accurately set forth in all material respects the amount
of any Taxes or reportable income, as the case may be, relating to the
applicable period. For each taxable period of the Trust in the last five fiscal
years, the Trust has made available to Purchaser correct and complete copies of
all the Trust's federal, state, local and foreign income tax returns (including
information returns), examination reports and statements of deficiencies
assessed against or agreed to by the Trust.
(f) Neither the Internal Revenue Service nor any other governmental
authority responsible for the imposition or collection of any Tax (a "Taxing
Authority") is now asserting or, to the knowledge of the Seller, threatening to
assert against the Trust any deficiency or claim for additional Taxes. To the
knowledge of Seller, no claim has ever been made by a Taxing Authority in a
jurisdiction where the Trust does not file reports and returns that the Trust is
or may be subject to taxation by, or may be liable to file information returns
in, that jurisdiction. There are no security interests on any assets of the
Trust that arose in connection with any failure to pay any Taxes. The Trust has
never entered into a closing agreement pursuant to Section 7121 of the Code.
There has not been any audit by any Taxing Authority of any tax period of the
Trust, and to the knowledge of Seller, no such audit is in progress, and the
Trust has not been notified by any Taxing Authority that any such audit is
contemplated or pending. No extension of time with respect to any date on which
a tax return was or is to be filed by the Trust is in force, and no waiver or
agreement by the Trust is in force for the extension of time for the assessment
or payment of any Taxes.
(g) Neither Seller, any person who is an "affiliated person" (as
defined in the Investment Company Act) or any other "interested person" (as
defined in the Investment Company Act), receives or is entitled to receive any
compensation directly or indirectly (i) from any person in connection with the
purchase or sale of securities or other property to, from or on behalf of the
Trust, other than the bona fide ordinary compensation as
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principal underwriter for the Trust or as broker in connection with the purchase
or sale of securities in compliance with Section 17(e) of the Investment Company
Act, or (ii) from the Trust or its security holders for other than bona fide
investment advisory or administrative services. Accurate and complete disclosure
of all such compensation arrangements has been made in the registration
statement of the Trust filed under the federal securities laws.
(h) Seller has made available to Purchaser correct and complete copies
of the audited financial statements, prepared in accordance with GAAP, of the
Trust for the past five fiscal years, and unaudited financial statements,
prepared in accordance with GAAP, of the Trust for the six-month period ending
September 30, 1998 and the eight-month period ending November 30, 1998 (each
hereinafter referred to as a "Mutual Fund Financial Statement"). Each of the
Mutual Fund Financial Statements fairly presents the consolidated financial
position and the results of operations and cash flows for the respective periods
indicated or as of the respective dates set forth herein of the Trust, and each
of such statements (including the related notes, when applicable) has been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved, except as otherwise set forth in the notes thereto (subject,
in the case of unaudited interim statements, to normal year-end adjustments).
(i) There is no litigation or legal (or other) action, suit, proceeding
or investigation at law or in equity pending or, to the best knowledge of Seller
and Distributor, threatened in any court or before or by any governmental agency
or instrumentality, department, commission, board, bureau or agency, or before
any arbitrator, by or against the Trust, or any of the Nicholas-Applegate Funds
or, to Seller's and Distributor's knowledge, any officer or director thereof or
Seller or Distributor relating to the activities of the Trust or any of the
Nicholas-Applegate Funds, any disqualification of Seller under Section 9(a) of
the Investment Company Act, or any event which would require Seller to give an
affirmative response to any of the questions in Item 11 of Seller's Form ADV (or
any similar or successor form) or require the Distributor to give an affirmative
response to any of the questions under Item 7 of Distributor's Form
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BD (or any similar or successor form). There are no judgments, injunctions,
orders or other judicial or administrative mandates outstanding against or
affecting the Seller, Distributor, Trust, any of the Nicholas-Applegate Funds
or, to the knowledge of Seller and Distributor, any officer or director thereof
relating to the activities of or affecting the Trust or any of the
Nicholas-Applegate Funds.
(j) The exhibit list in the current registration statement of the Trust
includes all of the documents that would be required to be included thereon if
such registration statement were being refiled.
(k) Seller has furnished Purchaser or provided access to, with respect
to each of the Nicholas-Applegate Funds, complete and correct copies of (i)
Annual and Semi-Annual Reports and proxy statements of the Trust and Series
pertaining to the last five years of the Trust and Series, each in the form
delivered to the Trust and Series' shareholders, as well as any additional
report or other material generally delivered to such shareholders since the
delivery of such Annual Report or Semi-Annual Report, as the case may be; (ii)
all Prospectuses, together with Statements of Additional Information of the
Trust, filed with the SEC in the last five years and (iii) all Annual Reports of
the Trust (on Form N-SAR) together with any and all exhibits annexed thereto
from the last five years of the Trust; each in the form filed with the SEC (all
of the foregoing documents referred to in (i), (ii) and (iii) being collectively
referred to herein as the "Trust Statements"). The information contained in the
Trust Statements does not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make any material statement made therein, in light of the circumstances
under which they were made, not misleading. The financial statements, including,
without limitation, the Statement of Assets and Liabilities, the Statement of
Operations and the Statement of Changes in Net Assets, and the notes thereto set
forth in any such Annual or Semi-Annual Report fairly present the financial
position of the Trust and the Series as at the dates of such statements and the
results of its operations for the periods covered thereby in accordance with
GAAP consistently applied (except as noted therein). Since the end of the period
covered by the most recent Annual or Semi-Annual
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Report, there has occurred no event or condition which would (i) require the
Trust to file an additional amendment, registration statement, prospectus,
prospectus supplement, report or other document with the SEC, which document has
not been so filed with the SEC and delivered to Purchaser or (ii) require the
Trust to conduct a meeting of its stockholders.
(l) The Trust has adopted procedures relating to brokerage transactions
on a securities exchange through an affiliated broker which meet the
requirements of Rule 17e-1 under the Investment Company Act and, except as
indicated in Schedule 3.9(l), the Trust has been in compliance with such
procedures since its inception.
(m) The Trust has adopted a Code of Ethics which meets the requirements
of Rule 17j-1 under the Investment Company Act and, to the knowledge of Seller,
except as indicated on Schedule 3.9(m), there has been no violation of such Code
of Ethics which would constitute a fraud upon the Trust.
(n) Where the Trust has issued and offered for sale multiple classes of
shares of a Series, such classes have been issued and sold in compliance with
Rule 18f-3 under the Investment Company Act and in conformity with the
applicable requirements of Revenue Procedure 96-47.
(o) The reorganization of the Nicholas-Applegate Funds from a
master-feeder structure to a multi-class structure on July 24, 1998 (the
"Reorganization") resulted in the recognition of no gain or loss for the Trust
or any Series as set forth in the tax opinion dated July 24, 1998 from Paul,
Hastings, Janofsky & Walker LLP. The Reorganization was consummated in
compliance with applicable federal securities law.
(p) Since the date of the last effective registration statement of the
Trust, there have been no changes made to any expense limitations or fee waivers
pertaining to the Nicholas-Applegate Funds.
3.10 Absence of Certain Changes. Since the dates of the most recent
audited financial statements for the Trust, no event or development has occurred
that has had or
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would reasonably be expected to have a Seller Material Adverse Effect on the
Trust. Since the dates of the most recent audited financial statements referred
to in Section 3.9 hereof, except as permitted by Section 4.2 herein, with
respect to each of the Series, the Trust has not:
(a) declared, set aside, made or paid any dividend or other
distribution in respect of its capital stock or other equity interests or
otherwise purchased or redeemed, directly or indirectly, any shares of its
capital stock or other equity interests, except in the ordinary course of its
business consistent with past practice;
(b) adopted, or amended in any material respect, any employment,
collective bargaining, bonus, profit-sharing, compensation, stock option,
pension, retirement, deferred compensation or other plan, agreement, trust, fund
or arrangement for the benefit of any Trustees of the Trust;
(c) amended its Certificate of Trust or By-laws or any other
organizational documents;
(d) changed in any significant respect its accounting practices,
policies or principles, except as may be required under applicable law or
generally accepted accounting principles;
(e) operated its business in any manner other than in the ordinary
course of business consistent with past practice;
(f) changed the investment objective, policies or restrictions; or
(g) taken any action or omitted to take any action that is reasonably
likely to result in the occurrence of, or agreed or committed to do, any of the
foregoing.
3.11 Insurance. The Trust has in full force and effect such insurance
as is required by the Investment Company Act, and has directors' and officers'
and errors and omissions' insurance in amounts believed by Seller to be adequate
and appropriate. The
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Trust is not in material default under any such insurance policy and all claims
made under such policies in the last ten years are listed on Schedule 3.11
hereto. True, correct and complete copies of all Trust insurance policies
pertaining to the operation of the Trust have been made available to Purchaser
and all premiums that are due and payable have been paid.
3.12 Trust Records; Copies of Documents. The record books of the Trust
accurately record all material corporate action taken by its respective
shareholders and Board of Trustees and committees and, originals or true,
correct and complete copies of such documents have been made available to
Purchaser for review.
ARTICLE IV
CONDUCT OF BUSINESS PRIOR TO THE CLOSING
4.1 Conduct Prior to Closing. Each of Seller and Distributor hereby
covenant and agree with Purchaser that, prior to the Closing, unless the prior
written consent of Purchaser shall have been obtained (which consent shall not
be unreasonably withheld or delayed) and except as otherwise provided in Section
4.2 of this Agreement and as expressly contemplated in this Agreement, each of
Seller and Distributor shall, to the extent pertaining to the Nicholas-Applegate
Funds, use reasonable best efforts to cause the Trust to operate their business
only in the usual, regular and ordinary course and in accordance with past
practice and, in the case of Seller and Distributor, to the extent pertaining to
the Nicholas-Applegate Funds, conduct its business in a manner comporting with
the standards of portfolio management and service quality heretofore met by it,
and shall to the extent pertaining to the Nicholas-Applegate Funds use its
reasonable best efforts to preserve intact its business organization and assets
and maintain its rights, franchises and business and customer relations
necessary to run such portion of its business as currently run. Subject to the
authority of the Trustees of the Trust, from the date hereof until the Closing,
Seller hereby covenants and agrees to use its reasonable best efforts to ensure
that, without the prior written consent of Purchaser (which consent
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shall not be unreasonably withheld or delayed), except in connection with the
transactions contemplated by this Agreement:
(a) the Nicholas-Applegate Funds shall not incur any indebtedness for
borrowed money, or issue or sell any debt securities or prepay any debt, except
in the ordinary course of business consistent with prior practice;
(b) the Nicholas-Applegate Funds shall not pledge or hypothecate any of
their properties or assets, tangible or intangible, except in the ordinary
course of business consistent with past practice;
(c) the Nicholas-Applegate Funds shall not, except where required in
the exercise of their fiduciary obligations, have any action (other than in
connection with the transactions contemplated hereby) taken by them, other than
actions in the ordinary course of business, including, but not limited to,
making any changes to the investment policies of any of the Series;
(d) the Nicholas-Applegate Funds shall not forgive or cancel any debts
or claims, or waive any rights except in the ordinary cause of business
consistent with prior practice;
(e) the Nicholas-Applegate Funds shall not enter into any agreement,
commitment or other transaction, other than agreements entered into in the
ordinary course of business consistent with prior practice;
(f) the Trust shall not, except as may be required by applicable law
and after notice to Purchaser, adopt, or amend in any material respect, any
employment, collective bargaining, bonus, profit-sharing, compensation, stock
option, pension, retirement, deferred compensation or other plan, agreement,
trust, fund or arrangement for the benefit of trustees of the Nicholas-Applegate
Funds;
(g) the Trust shall not, except such changes as may be proposed by
Purchaser or as may be required by applicable law and after written notice to
Purchaser, amend its Certificate of Trust or By-laws or any other organizational
documents;
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(h) the Trust shall not change in any material respect its accounting
practices, policies or principles, except as may be required by applicable law
or generally accepted accounting principles and after notice to Purchaser;
(i) the Nicholas-Applegate Funds shall not incur any liability or
obligation (whether absolute, accrued, contingent or otherwise and whether
direct or as guarantor or otherwise with respect to the obligations of others),
except in the ordinary course of business consistent with past practice or as
otherwise permitted hereunder;
(j) Seller, the Distributor and Nicholas-Applegate Funds shall not make
any material changes in policies or practices relating to selling practices or
other terms of sale or accounting therefor or in policies of employment unless
required by applicable law or generally accepted accounting principles and after
notice to Purchaser;
(k) the Nicholas-Applegate Funds shall not enter into any type of
business not conducted as of the date of this Agreement or create or organize
any subsidiary or enter into or participate in any joint venture or partnership;
(l) the Nicholas-Applegate Funds shall not enter into any agreement or
transactions or make any amendment or modification to any existing agreement
outside of the ordinary course of business, unless required by applicable law or
generally accepted accounting principles and after notice to Purchaser; or agree
or commit to do any of the foregoing.
(m) no Nicholas-Applegate Fund shall take any action that could be
reasonably expected to affect its ability to qualify as a "regulated investment
company" under Subchapter M of the Code. The Transferred Series shall not
knowingly take any action that could reasonably be expected to affect the
tax-free status of the Transfer, except as necessary to meet its obligations
under Section 4.2.
4.2 Redemption of Institutional Assets of Nicholas-Applegate Funds.
Seller and Distributor agree to take all lawful steps necessary so that no
shares of the class of any series designated as "Institutional Shares" (or "I")
are outstanding as of the Closing
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Date. Towards this end, Seller and Distributor shall have the right to (a)
solicit shareholders of the I shares of the series between this date and the
date of the Closing to redeem their I shares and invest the proceeds in
portfolios organized by Seller other than the Nicholas-Applegate Funds, or in
other accounts managed by Seller; (b) to reorganize the I shares so that they
are no longer a class of any series of the Trust; or (c) to merge the I shares
into series of another trust advised by Seller. As between Seller and Purchaser,
Seller shall be responsible and liable for all expenses, losses, and costs
related to such solicitation or other means utilized by Seller and Distributor
to effectuate the removal of the Institutional Shares. Seller and Distributor
covenant and agree that any solicitation efforts shall be conducted in
compliance with reasonable industry practices and in compliance with applicable
laws.
4.3 Consents and Approvals. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to cooperate with the other and use
its reasonable 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 all
applicable laws, regulations and contractual arrangements to consummate and make
effective the transactions contemplated by this Agreement. The parties hereto
covenant and agree to take no action, and Seller hereby covenants and agrees to
use its reasonable best efforts to prevent the Trust, subject to the authority
of the Board of Trustees of the Trust, from taking any action (i) which would
render any of the representations and warranties contained herein untrue in any
material respect at and as of the Closing Date, or (ii) which would materially
and adversely affect the ability of the parties to satisfy any of the conditions
set forth in Article VII hereof.
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ARTICLE V
COMPLIANCE WITH FEDERAL SECURITIES LAWS
5.1 Cooperation in Obtaining Necessary Approvals to Consummate
Intentions of Parties.
(a) In anticipation of the Closing, and thereafter as necessary, the
parties hereto shall cooperate, in a manner in compliance with the Investment
Company Act, with one another to obtain the following approvals:
(i) for the Nicholas-Applegate Funds to enter into an
investment management agreement with PII in substantially the form attached
hereto as Exhibit 5.1(a)(i) (the "New Advisory Agreement"). Seller agrees, in a
manner in compliance with the Investment Company Act, to use its best efforts to
induce the Trust to call a meeting of its Board of Trustees and a meeting of the
shareholders of each of the Series to consider and approve the New Advisory
Agreement.
(ii) for PII to enter into a sub-advisory agreement with
Seller in substantially the form attached hereto as Exhibit 5.1(a)(ii) (the
"Sub-Advisory Agreement"). Seller agrees, in a manner in compliance with the
Investment Company Act, to use its best efforts to induce the Trust to call a
meeting of its Board of Trustees and a meeting of its shareholders of the
Sub-Advised Series to consider and approve the entering by the Sub-Advised
Series into the Sub-Advisory Agreement. Purchaser agrees, in respect of each
Series, that after Closing and until payment of the Deferred Purchase Price for
that Series, Purchaser will, in a manner in compliance with the Investment
Company Act, to use its reasonable best efforts to cause Seller to be paid a
subadvisory fee for each Sub-Advised Series equal to 50% of its then effective
annual advisory fee for each such Series (after fee waivers and expense
limitations are accounted for);
(iii) subject to Section 6.12, for each of the Transferred
Series to approve a transfer of all their assets and liabilities to an
investment company or
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series thereof for which PII serves as investment adviser and that has
investment policies that are compatible with those of the Transferred Series
(such investment company or series the "PII Acquiring Fund" and such
transaction, referred to previously as the "Transfer"). Subject to Section 6.12,
Seller agrees, in a manner in compliance with the Investment Company Act, to use
its best efforts to induce the Trust to call a meeting of its Board of Trustees
and a meeting of the shareholders of the Transferred Series to consider and
approve the Mergers.
(iv) for the Nicholas-Applegate Funds to take such actions as
may be necessary to cause the Board of Trustees of the Trust to be reconstituted
consistent with the agreement of the parties. Seller covenants and agrees in a
manner in compliance with the Investment Company Act to use its best efforts to
induce the Trust to call a meeting of its Board of Trustees and a meeting of the
shareholders of the Trust for the purpose of appointing and electing the
trustees selected by the parties.
(v) for the Nicholas-Applegate Funds to enter into a Expense
Limitation Agreement with PII and Seller in substantially the form attached
hereto as Exhibit 5.1(a)(v).
(b) If the Board of Trustees of the Trust approves the items specified
in Section 5.1(a)(i) and (ii), above, Seller shall assist the Trust to prepare
and file with the SEC as soon as is reasonably practicable any proxy materials
relating to the transactions contemplated by this Agreement that are required to
be prepared and filed (the "Proxy Statement"). Seller covenants and agrees that
any material provided by Seller or the Trust that is included in the Proxy
Statement shall comply as to form in all material respects with all applicable
requirements of federal securities laws and shall be accurate and complete and
not contain any untrue statement of material fact, or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances in which they were made, not misleading.
Seller shall assist, in a manner in compliance with the federal securities laws
and other applicable
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law, in the solicitation of proxies for the required shareholder meetings and
shall use its reasonable best efforts to obtain approval from the shareholders
and the Board of Trustees of the Trust of the matters referred to herein.
Purchaser covenants and agrees that any material provided by Purchaser, PII or
PSI that is included in the Proxy Statement shall comply as to form in all
material respects with all applicable requirements of federal securities laws
and shall be accurate and complete and not contain any untrue statement of
material fact, or omit to state any material fact required to be stated therein
or necessary to make the statements therein in the light of the circumstances in
which they were made, not misleading.
(c) If the Board of Trustees of the Trust approves the items specified
in Section 5.1(a)(iii) above, Seller shall assist the Trust and Purchaser shall
assist the PII Acquiring Fund to prepare and file with the SEC as soon as is
reasonably practicable any proxy/prospectus materials relating to the Transfers
contemplated by this Agreement that are required to be prepared and filed (the
"Proxy/Prospectus"). Seller covenants and agrees that any material provided by
Seller or the Trust that is included in the Proxy/Prospectus shall comply as to
form in all material respects with all applicable requirements of federal
securities laws and shall be accurate and complete and not contain any untrue
statement of material fact, or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading. Purchaser covenants and
agrees that any material provided by Purchaser or the PII Acquiring Fund that is
included in the Proxy/Prospectus shall comply as to form in all material
respects with all applicable requirements of federal securities laws and shall
be accurate and complete and not contain any untrue statement of material fact,
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances in which they
were made, not misleading. Seller shall assist, in a manner in compliance with
the federal securities laws and other applicable law, in the solicitation of
proxies for the required shareholder meetings to approve the Transfers and shall
use its reasonable best efforts to obtain approval from the shareholders and the
Board of Trustees
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of the Trust of the matters referred to herein. Purchaser shall be responsible
and liable for all expenses, losses and costs related to the consummation of the
Transfers except those expenses, losses and costs incurred by Seller in
providing information for the Proxy/Prospectus and otherwise complying with this
Section 5.1.
5.2 Required Fund Actions. Seller shall use its reasonable best
efforts, in a manner in compliance with the Investment Company Act, to induce
the Board of Trustees of the Trust, to approve, with respect to each of the
Series:
(a) entering into an Interim Distribution Agreement (as complies with
the Investment Company Act) with PSI in substantially the form attached hereto
as Exhibit 5.2(a) (the "Interim Distribution Agreement"), to commence upon the
date of this Agreement or as provided in its terms.
(b) entering into a written distribution agreement (as complies with
the Investment Company Act) with PSI in substantially the form attached hereto
as Exhibit 5.2(b) (the "New Distribution Agreement") with respect to each of the
Series other than the Transferred Series, to commence upon termination of the
Interim Distribution Agreement; and in connection therewith, changing the names
of the Nicholas-Applegate Funds to such names as may be requested by Purchaser;
and
(c) entering into such written fund service agreements (as comply with
the Investment Company Act) as may be necessary to replace fund service
agreements in existence prior to Closing, provided, however, that the terms of
the replacement fund service agreements shall not be any more burdensome to the
Nicholas-Applegate Funds in any material respect than the current agreements
unless otherwise agreed to by Seller.
5.3 Section 15(f).
(a) Seller and Purchaser intend to structure and complete the
transactions contemplated by this Agreement, and Purchaser intends thereafter to
conduct the affairs of the Nicholas-Applegate Funds, in such a manner as to
obtain the benefits and protections of Section 15(f) of the Investment Company
Act.
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(b) Purchaser, PII and PSI covenant and agree to:
(i) use best efforts to comply with, and use best efforts to
cause the Nicholas-Applegate Funds to comply with, the
provisions contained in Section 15(f)(1)(A) of the Investment
Company Act for the period specified therein. For this
purpose, "best efforts" shall mean Purchaser, PII and PSI:
(A) causing to be distributed to the Trustees of
the Nicholas-Applegate Funds on at least an
annual basis, a questionnaire containing
questions reasonably designed to elicit
information pertaining to the status of such
Trustees as "interested persons" (for
purposes of Section 15(f)(1)(A) of the
Investment Company Act) of PII or its
Affiliates, or of the predecessor investment
adviser to the Series (including "interested
persons" of Seller or its Affiliates)
(collectively, the "Relevant Entities");
(B) requesting Trustees to promptly notify PII
of any change in their status under Section
15(f)(1)(A) of the Investment Company Act;
(C) at such time as they learn of a change in
the status of a Trustee that would cause
more than 25% of the members of the Board of
Trustees of Nicholas-Applegate Funds to be
"interested persons" of Relevant Entities,
taking reasonable steps to correct such
situation as promptly as practicable,
including causing any Trustees affiliated
with PII or any of its Affiliates to resign
from the Board to the extent required to
correct such situation;
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(D) obtaining the agreement of any transferee of
all or a portion of the business of PII to
comply with provisions substantially
identical to the provisions of this Section
5.3(b); and
(E) taking such additional steps (which shall
not require the incurrence of any
out-of-pocket expenses by Purchaser or its
Affiliates) as Seller may from time to time
reasonably request in writing in connection
with compliance with Section 15(f)(1)(A) of
the Investment Company Act.
(c) Purchaser, PII and PSI covenant and agree to use best efforts to
comply with, and use best efforts to cause each Series to comply with, the
provisions contained in Section 15(f)(1)(B) of the Investment Company Act for
the period specified therein. In connection therewith, Purchaser, PII and PSI
will obtain the agreement of any transferee of all or a portion of the business
of PII to comply with provisions substantially identical to the provisions of
this Section 5.3(c).
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Current Information.
(a) Seller or Distributor (as the case may be) will promptly notify
Purchaser of any material change in the normal course of the business of the
Nicholas-Applegate Funds or of any complaints from a governmental or regulatory
authority or a self-regulatory body, investigations or hearings (or
communications indicating that the same may be contemplated), or the institution
or the threat of any litigation that comes to its attention which would, in any
manner, challenge, prevent, alter or materially delay any of the transactions
contemplated hereby, and Seller or Distributor (as the case may be) will
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keep Purchaser fully informed with respect to any event which would cause or
constitute a breach or default, or would have caused or constituted a breach or
default had such event occurred or been known to Seller or Distributor prior to
the date hereof, of any of the representations, warranties or covenants of
Seller or Distributor contained in or referred to in this Agreement or any
Schedule or Exhibit referred to in this Agreement, in which case Seller or
Distributor (as the case may be) shall give detailed written notice thereof to
Purchaser and Seller or Distributor (as the case may be) shall use its
reasonable best efforts to prevent or promptly remedy the same. Seller will also
notify Purchaser of the status of regulatory applications, third party consents,
shareholder approvals and registration amendments required pursuant to Article V
hereof.
(b) Purchaser will promptly notify Seller and Distributor of (i) any
complaints from a governmental or regulatory authority or a self-regulatory
body, investigations or hearings (or communications indicating that the same may
be contemplated), or the institution or the threat of any litigation that comes
to its attention with respect to Purchaser which would, in any manner,
challenge, prevent, alter or materially delay any of the transactions
contemplated hereby, and Purchaser will keep Seller and Distributor fully
informed with respect to such events; (ii) any event which would cause or
constitute a breach or default, or would have caused or constituted a breach or
default had such event occurred or been known to Purchaser prior to the date
hereof, of any of the representations, warranties or covenants of Purchaser
contained in or referred to in this Agreement or any Schedule or Exhibit
referred to in this Agreement, in which case Purchaser shall give detailed
written notice thereof to Seller and Distributor and Purchaser shall use its
reasonable best efforts to prevent or promptly remedy the same; and (iii) the
status of regulatory applications, third party consents, shareholder approvals
and registration amendments required pursuant to Article V hereof.
6.2 Access. Seller shall upon reasonable notice afford to Purchaser and
its representatives such access during normal business hours throughout the
period prior to the Closing Date to counsel and the accountants to the Trust,
any books and records included in the Assets and the Trust's books, records,
properties, and to such other
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information as Purchaser may reasonably request, provided such access does not
unreasonably interfere with the business of Seller and the Trust.
6.3 Information. Purchaser shall hold, and shall cause its respective
partners, officers, employees, agents, consultants and advisors to hold, in
strict confidence, unless disclosure to a regulatory authority is necessary in
connection with any necessary regulatory approval or unless compelled to
disclose by judicial or administrative process or by other requirement of law or
the applicable requirements of any regulatory agency or relevant stock exchange,
all nonpublic records, books, contracts, instruments, computer data and other
data and information (collectively, the "Information") concerning Seller and
Distributor or, during the period from the date hereof until the Closing Date,
the Trust (or, if required under a contract with a third party, such third
party) furnished to Purchaser by Seller, Distributor or the Trust or their
respective representatives pursuant to this Agreement (except to the extent that
such information can be shown to have been (a) previously known by such party on
a non-confidential basis, (b) in the public domain through no fault of Purchaser
or its employees or agents or (c) later lawfully acquired from other sources by
the party to which it was furnished), and Purchaser shall not release or
disclose such Information to any other person, except its auditors, attorneys,
financial advisors, other consultants and advisors and, to the extent permitted
above, regulatory authorities. In the event of the termination of this
Agreement, Purchaser shall return or destroy all information furnished to it and
its representatives and all analyses, compilations, data, studies or other
documents prepared by them or their representatives containing or based in whole
or in part on any such furnished information or reflecting Purchaser's review of
the Nicholas-Applegate Funds.
6.4 Qualification of the Nicholas-Applegate Funds. Subject to the
authority of the Board of Trustees of the Trust, up to and until the Closing
Date Seller will use its reasonable best efforts to cause the Nicholas-Applegate
Funds to take no action (i) that would prevent each Series from qualifying as a
"regulated investment company", within the meaning of Section 851 of the Code,
or (ii) that would be inconsistent with each
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Series' prospectus and other offering, advertising and marketing materials. The
provisions of this Section 6.4 shall not apply to the Transfer.
6.5 Press Releases, Etc.. Up to and until the Closing Date, Purchaser,
Seller and Distributor will consult with each other as to the form, substance
and timing of any press release or other public disclosure of matters related to
this Agreement or any of the transactions contemplated hereby and no such press
release or other public disclosure shall be made without the consent of the
other party, which shall not be unreasonably withheld or delayed; provided,
however, that the parties may make such disclosures as are required by law after
making reasonable best efforts in the circumstances to consult in advance with
the other parties.
6.6 Administrative Fees and Other Expenses of the Nicholas-Applegate
Funds.
(a) For a period of two years from the Closing Date, Purchaser
covenants and agrees that neither it nor its Affiliates (as defined herein) will
directly or indirectly charge the Nicholas-Applegate Funds fees for the
provision of administrative services.
(b) For a period of two years from the Closing Date, Purchaser
covenants and agrees that neither it nor its Affiliates (as defined herein) will
increase any fees charged to the Nicholas-Applegate Funds, except to the extent
not prohibited by Section 15(f) of the Investment Company Act. Purchaser may
increase sales charges on any class to the extent necessary to conform with
sales charges on the same class of other mutual funds managed by PII.
(c) For a period of two years from the Closing Date, Purchaser
covenants and agrees that its Affiliates (as defined herein) and it will
maintain the limits on operating expenses shown on Schedule 6.6(c) hereto.
(d) To the extent Purchaser or an Affiliate enters into agreement with
a Sub-Advised Series to seek recoupment of expenses that are waived or
reimbursed, Purchaser and Seller will share equally any recoupment of such fee
waivers, fund subsidies or
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expense reimbursements collected from the Sub-Advised Series after the Closing
Date through the date of termination of the Sub-Advisory Agreement. Purchaser
will promptly pay Seller its share of such reimbursements. Purchaser does not
presently intend to collect reimbursements related to fee waivers incurred prior
to Closing.
"Affiliate" shall mean with respect to any person or entity (the "first
party"), any other person or entity that directly or indirectly controls, or is
controlled by, or is under common control with, such first party. The term
"control" means the possession, directly or indirectly, of the power to (a) vote
twenty-five percent (25%) or more of the outstanding voting securities of such
person or entity, or (b) otherwise direct the management or policies of such
person or entity by contract or otherwise.
6.7 Rule 12b-1 Fees.
(a) Purchaser, PII and PSI agree:
(i) to use reasonable best efforts so long as any Class B
shares of the Series outstanding at the Closing remain outstanding, including
Other Shares (as defined herein), to cause there to be no decrease in the rate
of 12b-1 fees, as listed on Schedule 6.7 hereto, paid by any Series with respect
to assets attributable to Class B shares of such Series outstanding at the
Closing;
(ii) so long as any Class B shares of the Series outstanding
at the Closing remain outstanding, including Other Shares, to pay to Seller or,
in Seller's discretion, its assignee, the 12b-1 fees paid by any Series with
respect to assets attributable to Class B shares of such Series outstanding at
the Closing;
(iii) that Seller or, in Seller's discretion, its assignee,
shall be entitled to receive all contingent deferred sales charges paid at any
time after the Closing with respect to Class B shares of the Series outstanding
at the Closing and that, except as otherwise permitted in accordance with
arrangements described in the prospectus, such sales charges shall not be waived
without the consent of Seller;
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(iv) that Seller acknowledges that the obligations of
Purchaser, PII and PSI with respect to 12b-1 fees pursuant to this Section 6.7
are subject to the existence of a plan pursuant to Rule 12b-1 of the Investment
Company Act, and no payments of 12b-1 fees would be required upon termination of
a plan pursuant to Rule 12b-1 of the Investment Company Act by the Board of
Trustees of Nicholas-Applegate Funds or termination of the New Distribution
Agreement by the Trust. Seller acknowledges that the obligations of Purchaser,
PII and PSI pursuant to this Section 6.7(a) are subject to the receipt of such
fees by PSI or its assignee from a Series.
(v) that Seller and its Affiliates will not be responsible for
providing any financing for Purchaser or its Affiliates with respect to sales of
any class of shares of the Series following the Closing. Seller and Purchaser
intend to coordinate and cooperate to approach a third party to investigate:
(A) the availability and pricing of a financing facility with
such third party for Purchaser with respect to sales of Class B shares of the
Series to be made following the Closing; and
(B) the possible assignment by the Seller to such third party
of the right to receive (I) the 12b-1 fees paid following the Closing with
respect to assets attributable to Class B shares of the Series outstanding at
the Closing, and (II) the contingent deferred sales charges paid following the
Closing with respect to Class B shares of the Series outstanding at the Closing;
in the event the Seller assigns the rights described in this clause (B) to such
a third party, Purchaser agrees to promptly remit to the Seller the portion of
the proceeds of such assignment received by Purchaser or its Affiliates (if any)
attributable to the Seller's rights assigned to such third party.
(vi) Purchaser and its Affiliates agree to cooperate with the Seller in
all reasonable respects in connection with the Seller's assignment to a third
party or retention of its rights to receive the 12b-1 fees and the contingent
deferred sales charges described in this Section 6.7(a), including without
limitation providing representations, warrants
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and covenants customarily provided in connection with such an assignment or
retention of such rights.
(b) PSI and Purchaser agree that so long as any Class B shares of the
Funds outstanding at the Closing remain outstanding, including Other Shares, to
use reasonable best efforts to cause brokers receiving trail commissions with
respect to assets attributable to shares of the Nicholas-Applegate Funds
outstanding at the Closing to continue receiving such commissions at the same
rates as in effect at the Closing (as described in the prospectus) for so long
as such assets remain invested in the Nicholas-Applegate Funds but only to the
extent the shareholder services fees under the 12b-1 plan received by PSI are
sufficient to pay such 12b-1 trail commissions.
(c) In the event that any of the Funds are merged into other funds, or
otherwise recognized such that any such Fund is not the survivor of such merger
or reorganization, the provisions of Section 6.7(a) and 6.7(b) shall be deemed
to apply to such successor fund.
Each of the parties shall be responsible for all expenses, losses and
costs incurred by it in accordance with Section 6.7(a)(v) and (vi); provided,
however, that Seller shall pay any reasonable attorneys' fees incurred by
Purchaser and its Affiliates not to exceed a maximum amount of $50,000. For
purposes of this Section 6.7, "Other Shares" shall be defined as shares into
which such outstanding Class B shares are exchanged and shares issued upon
reinvestment of any dividends declared on Class B shares outstanding on the
Closing Date, as reasonably estimable. To the extent the 12b-1 plan and/or
shareholder servicing agreement is amended, the parties agree to construe this
Section 6.7 in the same manner as intended to be applied to the current plans.
6.8 Performance Records of Sub-Advised Series. Purchaser and PII agree
that Seller may, to the extent permissible under applicable law, use after the
Closing Date the performance records of any Sub-Advised Series following the
Closing Date but only with respect to performance during the period that the
Sub-Advisory Agreement remains in effect for such Series. Seller agrees that
Purchaser or its Affiliates may, to the extent
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permissible under applicable law, use after the Closing Date the performance
records of any Sub-Advised Series earned prior to the Closing Date for so long
as the Sub-Advisory Agreement remains in effect for such Series.
6.9 Resale Penalty. If, within one year following the Closing Date,
Purchaser enters into an agreement requiring it to seek shareholder consent to
assign to a third party the right to advise or distribute any Sub-Advised
Series, whether or not still sub-advised by Seller at that time, Purchaser shall
promptly pay a fee to Seller in immediately available funds of $4,000,000.
6.10 Non-Competition. Except for any existing advisory and sub-advisory
relationships to the series of investment companies as set forth on Schedule
6.10, until the second anniversary of the Closing, neither Seller nor any of its
Affiliates will serve or act as an investment adviser or sub-adviser to any
open-end investment company registered under the Investment Company Act or
series thereof (i) having investment objectives substantially similar to those
of any of the Sub-Advised Series for which Seller then serves as sub-adviser and
(ii) whose shares are offered through distribution channels directed primarily
to U.S. retail investors. Notwithstanding the foregoing, Seller may distribute
on a non-retail basis and/or act as adviser or sub-adviser to open-end mutual
funds in the institutional 401(k) market, so long as all classes of shares of
such funds carry no 12b-1 fees, loads or shareholder service fees in excess of
0.25%. "Institutional 401(k) market" shall mean the market comprised of
institutions which desire to utilize one or more of Seller's funds as a 401(k)
investment option, as well as the 401(k) "Taft Hartley" market covered by the
agreement between Seller and Trust Fund Advisors.
6.11 Road Shows. For a total of not more than four days in any calendar
year, the Seller will make available in Phoenix, Arizona one or more of its
senior investment personnel sufficiently conversant with matters pertaining to
each of the Sub-Advised Series for the purpose of either attending a meeting of
the Board of Trustees of the Trust or making such presentations to dealers and
potential dealers as may regard matters pertaining to each Sub-Advised Series.
It is understood that Seller shall not be required
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to make available more than one representative for each Sub-Advised Series and
that one person may act as a representative for one or more than one Sub-Advised
Series so long as such representative is sufficiently conversant with matters
pertaining to the relevant Series for which he or she is acting as
representative. The Purchaser or PSI shall reimburse the Seller for the
reasonable out-of-pocket expenses incurred by the Seller in making such senior
representatives available and shall provide reasonable advance notice to the
Seller of each meeting or presentation.
6.12 Transferred Series. Purchaser agrees to use its reasonable best
efforts to induce the investment company managed by PII that plans to assume the
assets of the Transferred Series to obtain an opinion of counsel to the
investment company that the Transfer constitutes a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code, dated as of
the closing of the Transfer. In the event that such opinion cannot be obtained,
Purchaser agrees to treat the Transferred Series as a Stand-Alone Series
hereunder.
ARTICLE VII
CONDITIONS
7.1 Conditions to Each Party's Obligations to Consummate. The
respective obligations of each party to consummate the transactions contemplated
by this Agreement shall be subject to the fulfillment or waiver at or prior to
the Closing of the following conditions:
(a) Regulatory Approvals. The transactions contemplated by this
Agreement shall have been approved by all federal, state, foreign or local
governmental or regulatory authorities or self-regulatory bodies, the approval
of which is required to permit consummation thereof, without the imposition of
any condition or requirement of any commitment which is reasonably likely to
have a Purchaser Material Adverse Effect or Seller Material Adverse Effect (as
the case may be) with respect to any of the parties
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hereto; and all waiting periods arising under applicable law shall have duly
lapsed or been terminated.
(b) No Orders. None of Purchaser, PII, PSI, Seller, Distributor or any
Series shall be subject to any order, decree or injunction of a court or agency
of competent jurisdiction which enjoins or prohibits the consummation of any of
the transactions contemplated by this Agreement.
(c) Litigation. No action or proceeding shall have been instituted or
threatened by any court, governmental body, self-regulatory body or other person
or entity and remain pending before any court, governmental body or
self-regulatory body or be threatened, to restrain or prohibit or to recover
damages in respect of any or all of the transactions contemplated by this
Agreement; nor shall any governmental body or other person or entity have
notified any party to this Agreement or any of its affiliates that consummation
of any or all of the transactions contemplated by this Agreement would
constitute a violation of the laws of any jurisdiction or that it intends to
commence any action or proceeding to restrain or prohibit or to recover damages
in respect of any or all of the transactions contemplated by this Agreement,
unless such governmental body or other person or entity shall have withdrawn
such notice and abandoned such action or proceeding.
(d) Consents. All consents or approvals of the Boards of Trustees of
the Trust and the shareholders of the Nicholas-Applegate Funds that are required
to be obtained in connection with the transactions contemplated hereby,
including those specified in Article V, shall have been obtained.
7.2 Conditions to Obligation of Purchaser to Consummate. The obligation
of Purchaser to consummate the transactions contemplated hereby shall be subject
to the fulfillment or waiver at or prior to the Closing of the following
additional conditions:
(a) Representations and Warranties. Each of the representation and
warranties of Seller and Distributor contained in this Agreement and in any
Schedule or Exhibit
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attached hereto shall be true and correct in all material respects as of the
Closing Date as though made at and as of the Closing Date (it being understood
that representations and warranties that speak as of a specified date shall
continue to speak as of the date specified), and Purchaser shall have received a
signed certificate of each of Seller and Distributor to that effect.
(b) Performance of Obligations. Seller shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and Purchaser shall have received a
signed certificate of Seller to that effect.
(c) Opinion of Counsel to Seller and Distributor. Purchaser shall have
received the opinion of Paul Hastings Janofsky & Walker LLP, counsel to Seller
and Distributor, or other counsel reasonably acceptable to Purchaser, dated the
Closing Date, addressed to Purchaser substantially in the form set forth in
Exhibit 7.2(c).
(d) Opinion of Counsel to the Trust and the Nicholas-Applegate Funds.
Purchaser shall have received the favorable opinion of Paul Hastings Janofsky &
Walker LLP, counsel to the Trust and the Nicholas-Applegate Funds, dated the
Closing Date, addressed to Purchaser substantially in the form set forth in
Exhibit 7.2(d).
(e) Nicholas-Applegate Funds Trustees. All of the persons recommended
by Purchaser to serve as Trustees of the Nicholas-Applegate Funds shall have
been elected by the stockholders of each respective Series.
(f) Delivery. Seller and/or Distributor (as the case may be) shall have
executed and delivered to Purchaser the following:
(i) certified copies of resolutions of the partners of Seller
and Distributor authorizing the execution of this Agreement and each of the
agreements, documents and instruments contemplated hereby to which Seller and/or
Distributor is a party;
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(ii) a copy of the Certificate of Limited Partnership of
Seller and Distributor;
(iii) true, correct and complete copies of each of the
agreements, documents and instruments contemplated hereby to which Seller and/or
Distributor is a party, and all agreements, documents, instruments and
certificates delivered or to be delivered in connection therewith by Seller
and/or Distributor, including evidence of termination of such agreements between
Seller and/or Distributor and the Trust, with respect to the Nicholas-Applegate
Funds, where applicable to consummate the transactions contemplated by this
Agreement;
(iv) a certificate of the Secretary of Seller on behalf of
Seller certifying that the resolutions and Certificate of Limited Partnership
provided for in paragraphs (i) and (ii) above pertaining to Seller are in full
force and effect and have not been amended or modified, and that the officers of
Seller are those persons named in the certificate;
(v) a certificate of the Secretary of Distributor on behalf of
Distributor certifying that the resolutions and Certificate of Limited
Partnership provided for in paragraphs (i) and (ii) above pertaining to
Distributor are in full force and effect and have not been amended or modified,
and that the officers of Distributor are those persons named in the certificate;
(vi) all bills of sale, deeds, assignments and other
instruments of transfer referenced herein which are necessary to transfer the
Assets; and
(vii) such other certificates and documents as are required
hereby or are reasonably requested by Purchaser.
(g) Material Adverse Change. Since the date of this Agreement, there
shall have been no event or condition or events or conditions which, either
individually or in the aggregate, has had or could reasonably be expected to
have a Seller Material Adverse Effect, and Purchaser shall be provided with a
certificate from the President of each of Seller and Distributor to that effect
at the Closing.
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(h) Further Assurances. Purchaser shall have received such other
certificates and instruments signed by Seller and/or Distributor as Purchaser
may reasonably request to consummate the transactions contemplated hereby.
7.3 Conditions to Obligation of Seller and Distributor to Consummate.
The obligation of Seller and Distributor to consummate the transactions
contemplated hereby shall be subject to the fulfillment or waiver at or prior to
the Closing of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of Purchaser, PII and PSI contained in this Agreement and in any
Schedule or Exhibit attached hereto, shall be true and correct in all material
respects as of the Closing as though made at and as of the Closing (it being
understood that representations and warranties that speak as of a specified date
shall continue to speak as of the date so specified), and Seller and Distributor
shall have received a signed certificate of Purchaser to that effect.
(b) Performance of Obligations. Purchaser, PII and PSI shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Closing, and Seller and Distributor
shall have received a signed certificate of Purchaser to that effect.
(c) Delivery. Purchaser shall have executed and delivered to Seller the
following:
(i) certified copies of resolutions of the board of directors
and, to the extent necessary, stockholders of Purchaser, PII and PSI authorizing
the execution of this Agreement, and each of the agreements, documents and
instruments contemplated hereby to which Purchaser is a party;
(ii) a copy of the Amended and Restated Certificate of
Incorporation of Purchaser, and the Amended and Restated Certificate of
Incorporation of each of PII and PSI, each of which is certified as of a recent
date by the Secretary of State of the State of Delaware;
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(iii) true, correct and complete copies of each of the
agreements, documents and instruments contemplated hereby to which Purchaser,
PII or PSI is a party, and all agreements, documents, instruments and
certificates delivered or to be delivered in connection therewith by Purchaser,
PII or PSI;
(iv) a certificate of the Secretary of each of Purchaser, PII
and PSI on behalf of Purchaser, PII or PSI (as the case may be) certifying that
the resolutions, Amended and Restated Certificates of Incorporation, and By-laws
provided in paragraphs (i) and (ii) above are in full force and effect had have
not been amended or modified, and that the officers of each entity are those
persons named in the certificate;
(v) the Purchase Price to be delivered as consideration at the
Closing Date pursuant to Section 1.4 hereof; and
(vi) such other certificates and documents as are required
hereby or are reasonably requested by Seller.
(d) Opinion of Counsel to Purchaser, PII and PSI. Seller shall have
received the opinion of Bryan Cave LLP, counsel to Purchaser, PII and PSI, dated
the Closing Date, addressed to Seller, Distributor and the Trust, substantially
in the form set forth in Exhibit 7.3(d).
(e) Material Adverse Change. Since the date of this Agreement, there
shall have been no event or condition, or events or conditions, which, either
individually or in the aggregate, has had or could reasonably be expected to
have a Purchaser Material Adverse Effect, and Seller and Distributor shall be
provided with a certificate from the President of Purchaser to that effect at
the Closing.
(f) Further Assurances. Seller and Distributor shall have received such
other certificates and instruments signed by Purchaser as Seller and Distributor
shall reasonably request.
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(g) Schwab Contract. PSI shall have assumed the obligations of the
Distributor pursuant to the terms of the Services Agreement dated as of
September 14, 1995 among Charles Schwab & Co., Inc., Distributor and the Trust
and the Operating Agreement dated as of the same date between the same parties.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification. (a) Seller and Distributor shall indemnify and
hold Purchaser, PII and PSI and their respective subsidiaries and Affiliates
(including persons serving as directors, officers, registered representatives,
members, employees or controlling persons thereof, and their respective
successors and assigns, each a "Purchaser Indemnified Party" and collectively,
the "Purchaser Indemnified Parties"), harmless from and against all liabilities,
demands, claims, actions or causes of action, assessments, losses (including,
but not limited to, diminution in value), fines, penalties, costs (including,
but not limited to, reasonable attorneys' and expert witness fees), taxes,
damages and expenses, including, without limitation, those asserted by any
federal, state, local or foreign governmental entity, third party, or former or
present employee of any kind or nature whatsoever (any and all of the foregoing
being referred to as "Losses" or individually a "Loss"), sustained by Purchaser,
PII, PSI, any such director, trustee, officer or controlling person or their
respective successors or assigns to the extent any such Loss arises out of or by
virtue of (i) any breach of a representation or warranty made by Seller and
Distributor herein; (ii) any liability incurred by PSI pursuant to distribution
services provided to the Nicholas-Applegate Funds or Distributor in respect of
the Nicholas-Applegate Funds as of the date of this Agreement through and
including the Closing Date arising in connection with the use of any materials
prepared by Seller or Distributor, or written information provided by such
parties, or arising from an untrue statement of a material fact in the
prospectus or registration statement for any of the Nicholas-Applegate Funds or
an omission to state a material fact required to be stated therein or necessary
to make a statement therein, in light of the circumstances under which it was
made, not
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misleading, except insofar as such untrue statements or omissions were made in
reliance upon information furnished by Purchaser, PII or PSI in writing for use
in such documents; or (iii) any failure to perform any covenant or agreement of
Seller herein; provided, however, that except as set forth below, such
indemnification shall not apply to any Claim (as defined below) for which notice
pursuant to Section 8.2 has not been received by an indemnifying party on or
before the date (W) on which the applicable statute of limitations expires with
respect to Losses that arise out of or by virtue of (i), (ii) or (iii) of this
Section 8.1 and relate to Taxes; (X) on which the applicable statute of
limitations expires with respect to Losses that arise out of or by virtue of
(i), (ii), or (iii) of this Section 8.1 and relate to Section 15(f) of the
Investment Company Act; (Y) six months following the date on which the covenants
specified in Sections 6.6, 6.7 and 6.9 expire for any Losses pertaining to any
failure to perform such covenants; provided, however that Losses incurred
following the second anniversary of the Closing Date pertaining to this section
(Y) shall not include any consequential damages; and (Z) that is the second
anniversary of the Closing Date for all other Losses except Losses pertaining to
any failure to perform any covenant specified in Section 6.6, 6.7 and 6.9, (each
an "Indemnification Cut-Off Date"). In the event Seller and Distributor or any
of their respective successors or assigns (X) reorganizes or consolidates with
or merges into or enters into another business combination transaction with any
other person or entity and is not the resulting, continuing or surviving
corporation or entity of such consolidation, merger or transaction, or (Y)
liquidates, dissolves or transfers all or substantially all of its properties
and assets to any person or entity, then, and in each such case, proper
provisions shall be made so that the successors and assigns of Seller and
Distributor as the case may be assume the obligations set forth in this Section
8.1(a).
(b) Purchaser, PII and PSI shall indemnify and hold Seller,
Distributor, the Trust and their respective Affiliates and subsidiaries
(including persons serving as directors, officers, registered representatives,
members, employees or controlling persons thereof, and their respective
successors and assigns, each a "Seller Indemnified Party" and collectively, the
"Seller Indemnified Parties"), harmless from and against all Losses
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sustained or incurred by Seller, Distributor or by the Trust, any such director,
trustee officer or controlling person or their respective successors or assigns
to the extent any such Loss arises out of or by virtue of (i) any breach of a
representation or warranty made by Purchaser herein; (ii) any failure to perform
any covenant or agreement of Purchaser herein; and (iii) any misleading
statements or representations concerning the Nicholas-Applegate Funds (other
than statements or representations contained in the Nicholas-Applegate Funds'
current Prospectuses and Statements of Additional Information or any other
written material Seller or Distributor has provided to Purchaser, PII or PSI
relating to the Nicholas-Applegate Funds) made by PSI or its employees or the
wrongful conduct of PSI in connection with services rendered under the Interim
Distribution Agreement provided, however, that except as set forth below, such
indemnification shall not apply to any Claim (as defined below) for which notice
pursuant to Section 8.2 has not been received by Purchaser on or before the
respective Indemnification Cut-Off Date to which the Losses pertain.
In the event Purchaser or any of its successors or assigns (i)
reorganizes or consolidates with or merges into or enters into another business
combination transaction with any other person or entity and is not the
resulting, continuing or surviving corporation or entity of such consolidation,
merger or transaction, or (ii) liquidates, dissolves or transfers all or
substantially all of its properties and assets to any person or entity, then,
and in each such case, proper provisions shall be made so that the successors
and assigns of Purchaser assume the obligations set forth in this Section
8.1(b).
8.2 Claims Procedures.
(a) An indemnified party may make claims for indemnification hereunder
by giving written notice thereof to the indemnifying party within the period in
which indemnification claims can be made hereunder (a "Claim"). If
indemnification is sought for a claim or liability asserted by a third party,
the indemnified party shall also give written notice thereto to the indemnifying
party promptly after it receives notice of the claim or liability being
asserted, but the failure to do so shall not relieve the indemnifying
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party from any liability except to the extent that it is prejudiced by the
failure or delay in giving such notice. Such notice shall summarize the bases
for the claim for indemnification and any claim or liability being asserted by a
third party. Within twenty (20) business days after receiving such notice the
indemnifying party shall give written notice to the indemnified party stating
whether it disputes the claim for indemnification and whether it will defend
against any third party claim or liability at its own cost and expense.
(b) The indemnifying party shall be entitled to direct the defense
against a third party claim or liability with counsel selected by it (subject to
the consent of each indemnified party, which consent shall not be unreasonably
withheld or delayed) as long as the indemnifying party is conducting a good
faith and diligent defense. Each indemnified party shall at all times have the
right to participate fully in the defense of a third party claim or liability at
its own expense directly or through counsel; provided, however, that if the
named parties to the action or proceeding include either both the indemnifying
party and/or one or more indemnified parties and an indemnified party is
reasonably advised by a third party lawyer that representation of both parties
by the same counsel would be inappropriate under applicable standards of
professional conduct, an indemnified party may engage separate counsel. If no
such timely notice of intent to defend a third party claim or liability is given
by the indemnifying party, or if such good faith and diligent defense is not
being or ceases to be conducted by the indemnifying party, the indemnified party
shall have the right, at the expense of the indemnifying party, to undertake the
defense of such claim or liability (with counsel selected by the indemnified
party with the consent of the indemnifying party which consent shall not be
unreasonably withheld or delayed). In no circumstances shall the indemnifying
party be required to pay the expenses of more than one counsel for the
indemnified party. The indemnified party shall obtain the written consent of the
indemnifying party (which consent shall not be unreasonably withheld or delayed)
prior to compromising or settling such claim or liability. If the third party
claim or liability is one that by its nature cannot be defended solely by the
indemnifying party, then the indemnified party shall make
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available such information and assistance as the indemnifying party may
reasonably request and shall cooperate with the indemnifying party in such
defense, at the expense of the indemnifying party.
(c) The indemnified party shall take all reasonable steps to mitigate
all Losses, including, but not limited to, availing itself of any defenses,
limitations, rights of contribution, claims against third parties and other
rights at law (it being understood that any out of pocket costs reasonably paid
to third parties in connection with such mitigation shall constitute Losses),
and shall provide such evidence and documentation of the nature and extent of
any Loss as may be reasonably requested by the indemnifying party.
(d) An indemnifying party shall not, without the written consent (which
shall not be unreasonably withheld or delayed) of the indemnified party or
parties, settle or compromise any indemnifiable Losses or permit a default or
consent to entry of any judgment unless the claimant and the indemnifying party
provide to the indemnified party or parties an unqualified release from all
liability in respect of the claim. Notwithstanding the foregoing, if a
settlement offer solely for money damages is made by the applicable third party
claimant, and the indemnifying party notifies the indemnified party in writing
of the indemnifying party's willingness to accept the settlement offer and make
the entire payment required, and the indemnified party declines to accept such
offer, the indemnified party may continue to defend such claim at its own
expense, free of any participation by the indemnifying party, and the amount of
any ultimate liability with respect to such indemnifiable claim that the
indemnifying party has an obligation to pay hereunder shall be limited to the
lesser of (i) the amount of the settlement offer that the indemnified party
declined to accept or (ii) the aggregate Losses of the indemnified party with
respect to such claim. If the indemnifying party makes any payment on any claim,
the indemnifying party shall be subrogated, to the extent of such payment, to
all rights and remedies of the indemnified party to any insurance benefits or
other claims of the indemnified party with respect to such claim.
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(e) Absent fraud or criminal activity, the remedies provided for in
this Article VIII shall constitute the sole and exclusive remedy for any claims
made for breach of the representations and warranties contained herein.
8.3 Indemnification Limits. Except as otherwise provided in Section
8.2(e) and this Section 8.3, the parties shall not be liable for indemnification
under this Article VIII for any Losses (i) unless and until the Claims (as
defined herein) of the indemnified party exceed $250,000, at which time the
indemnified party shall only be entitled to receive indemnification for all
Losses in excess of $250,000 or (ii) for any amounts in the aggregate greater
than $7,500,000; provided, however that such deductible and cap shall not apply
to any Losses (W) that relate to Taxes, (X) that relate to Section 8.1(a)(ii)
and (b)(iii), (Y) specified under Section 8.1(Y) or (Z) that relate to Section
15(f) of the Investment Company Act. Notwithstanding the foregoing, the maximum
amount of indemnification payable by Purchaser, PII and PSI on the one hand, and
Seller and Distributor on the other hand under the terms of this Article VIII
shall not exceed the Purchase Price.
ARTICLE IX
TERMINATION
9.1 Termination. At any time prior to the Closing Date, this Agreement
may be terminated as follows:
(a) by mutual written consent of Seller and Purchaser;
(b) by either Seller or Purchaser at any time after August 31, 1999 if
the Closing shall not theretofore have occurred;
(c) by either Seller or Purchaser in the event of the breach by the
other party of (i) any representation or warranty contained herein or in any
schedule or document delivered herewith which has resulted or is reasonably
likely to result in a Material Adverse Effect with respect to the non-breaching
party; or (ii) any agreement contained herein, which
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breach cannot be or has not been cured within 30 days after written notice to
the party committing such breach;
(d) by Purchaser or Seller, pursuant to written notice to the other
party, if the conditions and approvals required under Article V and Article VII
shall not have been satisfied at or prior to August 31, 1999; or if it has
become reasonably certain that any of such approvals or conditions will not be
satisfied at or prior to August 31, 1999;
(e) by either Seller or Purchaser if any permanent injunction or action
by any court or other governmental agency or body of competent jurisdiction
enjoining, denying approval of or otherwise prohibiting consummation of any of
the transactions contemplated by this Agreement shall become final and
nonappealable;
(f) at the election of Purchaser or Seller, if any litigation or
judicial, governmental, administrative or arbitration or any investigation or
governmental inquiry (collectively, "Action") shall have been instituted, or is
known to be contemplated, or is threatened in writing: which is related to and
could reasonably be expected to have a Purchaser Material Adverse Effect or
Seller Material Adverse Effect, as applicable.
9.2 Effect of Termination and Abandonment. In the event of termination
of this Agreement and abandonment of the transactions contemplated hereby
pursuant to this Article IX, no party hereto (or any of its directors or
officers) shall have any liability or further obligation to any other party to
this Agreement, provided that nothing herein will relieve any party from
liability for any breach of this Agreement covered by Section 9.1(c) above or
the provisions of Sections 6.3, 6.5 and 10.4.
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be
in writing and shall be given and deemed to have been duly received (i) on the
date given if delivered personally or by telex or telecopy or (ii) on the date
received if mailed by
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registered or certified mail (return receipt requested), to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Purchaser, to:
Mr. James M. Hennessy
Executive Vice President
Pilgrim America Capital Corporation
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Telecopy: 602-417-8301
Copy to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20005
Telecopy: (202) 261-3333
(b) if to Seller, to:
Nicholas-Applegate Capital Management
600 West Broadway, 29th Floor
San Diego, California 92101
Attn: E. Blake Moore
Telecopy: 619-687-8138
Copy to:
Raj Marphatia, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Telecopy: 617-951-7050
10.2 Counterparts. This Agreement may be executed in counterparts
(including executed counterparts delivered and exchanged by facsimile
transmission) each of which
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shall be deemed to constitute an original, but all of which together shall
constitute one and the same instrument.
10.3 Governing Law. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of California without
regard to its conflict of law principles, except to the extent federal law may
apply.
10.4 Expenses.
(a) Except as specifically provided herein, each party hereto will bear
all expenses incurred by it in connection with this Agreement and the
transactions contemplated hereby, including attorney's fees.
(b) Seller and Purchaser shall bear equally the costs and expenses
pertaining to the printing, distribution and solicitation of all Proxy
Statements for the Nicholas-Applegate Funds other than the Transferred Series,
including attorneys' fees; provided, however, that Purchaser shall not bear any
expenses pertaining to the redemption of the Institutional Class of shares and
other activities described in Section 4.2 herein.
(c) Purchaser shall bear the costs and expenses pertaining to the
printing, distribution, and solicitation of all Proxy/Prospectuses for the
Transferred Series, including attorney's fees.
10.5 Waiver, Amendment. Any provision of this Agreement may be (i)
waived by the party benefited by the provision, or (ii) amended or modified at
any time (including the structure of the transactions contemplated hereby, or
any part thereof), by an agreement in writing among the parties hereto and
executed in the same manner as this Agreement. Any waiver of any terms or
conditions or of the breach of any covenant, representation or warranty of this
Agreement in one instance shall not operate as or be deemed or construed as a
further or continuing waiver of any other breach of such term, condition,
covenant, representation or warranty, nor shall any failure or delay at any time
or times to enforce or require performance of any provision hereof operate as a
waiver of or affect in any manner such party's right at a later time to enforce
or require performance
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of such provision or of any provision hereof; provided, however, that no such
waiver, unless it, by its own terms, explicitly provides to the contrary, shall
be construed to effect a continuing waiver of the provision being waived and no
such waiver in any instance shall constitute a waiver in any other instance or
for any other purpose or impair the right of the party against whom such waiver
is claimed in all other instances or for all other purposes to require full
compliance.
10.6 Entire Agreement; No Third-Party Beneficiaries. This Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made. All terms and provisions of this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective personal representatives, heirs, successors and permitted
assigns. Nothing in this Agreement, other than Section 8.1 hereof, is intended
to confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
10.7 Assignment. This Agreement may not be assigned by any party hereto
without the written consent of the other parties. This Agreement shall be
binding upon and enforceable by, and shall inure to the benefit of, the parties
hereto and their respective successors, heirs, executors, administrators and
permitted assigns.
10.8 Captions and Gender. The captions in this Agreement are for
convenience only and shall not affect the construction or interpretation of any
term or provision hereof. The use in this Agreement of the masculine pronoun in
reference to a party hereto shall be deemed to include the feminine or neuter,
as the context may require.
10.9 Waiver of Jury Trial. Each of the parties hereto hereby
irrevocably and unconditionally waives trial by jury in any legal action or
proceeding relating to this agreement and for any counterclaim therein.
10.10 License to Use Nicholas-Applegate Name. It is understood that
Seller and its Affiliates own all right, title and interest in and to the name
"Nicholas-Applegate
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Capital Management," "Nicholas-Applegate" or any derivative thereof or logo
associated with that name (the "Nicholas-Applegate marks"). Seller hereby grants
to PII and its Affiliates and the Nicholas-Applegate Funds a non-exclusive and
non-assignable license to use the Nicholas-Applegate marks in offering materials
of the Nicholas-Applegate Funds, or in promotional, sales or other marketing
materials with respect to the Nicholas-Applegate Funds. Purchaser, PII or PSI,
on behalf of its Affiliates and the Nicholas-Applegate Funds, shall obtain the
prior approval of Seller for the public release of any materials bearing the
Nicholas-Applegate marks. The grant of license by Seller shall terminate
automatically with respect to a particular Series upon termination of the
Sub-Advisory Agreement with respect to such Series. Upon termination of such
Agreement, PII and its Affiliates shall immediately cease to use the
Nicholas-Applegate marks with respect to that Series.
ARTICLE XI
11.1 Certain Defined Terms. The following terms used in this Agreement
will have the meanings specified below (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Action" has the meaning specified in Section 9.1(f).
"Advisory Agreement" has the meaning specified in the Recitals to this
Agreement.
"Affiliate" has the meaning specified in Section 6.6(d).
"Assets" has the meaning specified in Section 1.1(b).
"Claim" has the meaning specified in Section 8.2(a).
"Closing" has the meaning specified in Section 1.1.
"Closing Date" has the meaning specified in Section 1.3(b).
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"Continuing Shares" has the meaning specified in Section 1.4(c).
"Deferred Purchase Price" has the meaning specified in Section 1.5.
"Distributor" has the meaning specified in the Preamble to this
Agreement.
"Distribution Agreement" has the meaning specified in the Recitals to
this Agreement.
"Encumbrances" has the meaning specified in Section 1.1(b).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Gross Annual Management Fee" has the meaning specified in Section
1.4(a).
"Indemnification Cut-Off Date" has the meaning specified in Section
8.1(a).
"Information" has the meaning specified in Section 6.3.
"Interim Distribution Agreement" has the meaning specified in Section
5.2(a).
"Investment Advisers Act" shall mean the Investment Advisers Act of
1940, as amended.
"Investment Company Act" shall mean the Investment Company Act of 1940,
as amended.
"Loss" has the meaning specified in Section 8.1(a).
"Measurement Date" has the meaning specified in Section 1.4(a)(i).
"Mutual Fund Agreements" has the meaning specified in Section 3.9(b).
"Mutual Fund Financial Statement" has the meaning specified in Section
3.9(h).
"NACM" shall mean Nicholas-Applegate Capital Management or Seller.
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"Net Annual Management Fee" has the meaning specified in Section
1.4(a).
"New Advisory Agreement" has the meaning specified in Section
5.1(a)(i).
"New Distribution Agreement" has the meaning specified in Section
5.2(b).
"Nicholas-Applegate Funds" has the meaning specified in the Recitals to
this Agreement.
"Nicholas-Applegate marks" has the meaning specified in Section 10.10.
"Other Shares" has the meaning specified in Section 6.7.
"PACC" shall mean Pilgrim America Capital Corporation or Purchaser.
"PII" shall mean Pilgrim Investments, Inc.
"PII Acquiring Fund" has the meaning specified in Section 5.1(a)(iii).
"Preliminary Purchase Price" has the meaning specified in Section
1.8(a).
"Proxy/Prospectus" has the meaning specified in Section 5.1(c).
"Proxy Statement" has the meaning specified in Section 5.1(b).
"PSI" shall mean Pilgrim Securities, Inc.
"Purchase Date" has the meaning specified in Section 1.4(b)(ii).
"Purchase Price" has the meaning specified in Section 1.4(a).
"Purchased Shares" has the meaning specified in Section 1.4(b)(ii).
"Purchaser" has the meaning specified in the Preamble to this
Agreement.
"Purchaser Indemnified Party" has the meaning specified in Section
8.1(a).
"Purchaser Material Adverse Effect" has the meaning specified in
Section 1.6.
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"Redeemed Shares" has the meaning specified in Section 1.4(b)(i).
"Reorganization" has the meaning specified in Section 3.9(o).
"Retail Assets" has the meaning specified in Section 1.4(d).
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Seller" shall mean Nicholas-Applegate Capital Management.
"Seller Material Adverse Effect" has the meaning specified in Section
1.6.
"Seller Indemnified Party" has the meaning specified in Section 8.1(b).
"Series" has the meaning specified in the Recitals to this Agreement.
"Stand-Alone Series" has the meaning specified in the Recitals to this
Agreement.
"Sub-Advised Series" has the meaning specified in the Recitals to this
Agreement.
"Sub-Advisory Agreement" has the meaning specified in Section
5.1(a)(ii).
"Taxes" has the meaning specified in Section 3.9(e).
"Taxing Authority" has the meaning specified in Section 3.9(f).
"Transfer" has the meaning specified in the Recitals and Section
5.1(a)(iii).
"Transferred Series" has the meaning specified in the Recitals to this
Agreement.
[CONTINUED ON NEXT PAGE]
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"Trust" has the meaning specified in the Recitals to this Agreement.
"Trust Statements" has the meaning specified in Section 3.9(k).
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
PILGRIM AMERICA CAPITAL CORPORATION
By: _____________________________________
Name:
Title:
PILGRIM INVESTMENTS, INC.
By: _____________________________________
Name:
Title:
PILGRIM SECURITIES, INC.
By: _____________________________________
Name:
Title:
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
By: _____________________________________
Name:
Title:
NICHOLAS-APPLEGATE SECURITIES
By: _____________________________________
Name:
Title:
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SCHEDULE A
Nicholas-Applegate Small Cap Growth
Nicholas-Applegate Mid Cap Growth
Nicholas-Applegate Large Cap Growth
Nicholas-Applegate Emerging Countries
Nicholas-Applegate Worldwide Growth
Nicholas-Applegate International Small Cap Growth
Nicholas-Applegate International Core Growth
Nicholas-Applegate Convertible Fund
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SCHEDULE B
Nicholas-Applegate High Yield Fund
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SCHEDULE C
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate High Quality Bond Fund
.0.
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Exhibit 10.2
EMPLOYMENT AGREEMENT
DATED FEBRUARY 1, 1998
BY AND BETWEEN
PILGRIM AMERICA INVESTMENTS, INC.
AND
HOWARD C. TIFFEN
1
<PAGE>
TABLE OF CONTENTS
ARTICLE I DUTIES AND TERM...........................................1
1.1 Employment................................................1
1.2 Position and Responsibilities.............................1
1.3 Term......................................................2
1.4 Location..................................................2
ARTICLE II COMPENSATION..............................................2
2.1 Base Salary...............................................2
2.2 Bonus Payment.............................................2
2.3 Additional Benefits.......................................3
ARTICLE III TERMINATION OF EMPLOYMENT.................................4
3.1 Death or Retirement of Executive..........................4
3.2 By Executive..............................................4
3.3 By Company................................................4
ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT...............5
4.1 Upon Termination for Death or Disability..................5
4.2 Upon Termination by Company for Cause or by Executive
Without Good Reason.......................................6
4.3 Upon Termination by the Company Without Cause or
by Executive for Good Reason..............................6
ARTICLE V RESTRICTIVE COVENANTS.....................................8
5.1 Non-Competition...........................................8
5.2 Non-Disparagement.........................................9
5.3 Remedies..................................................9
5.4 Scope of Article.........................................10
ARTICLE VI MISCELLANEOUS............................................10
6.1 Definitions..............................................10
6.2 Key Man Insurance........................................12
6.3 Mitigation of Damages; Set-Off; Dispute Resolution.......12
6.4 Successors; Binding Agreement............................13
6.5 Modification; No Waiver..................................13
6.6 Severability.............................................13
6.7 Notices..................................................14
2
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6.8 Assignment...............................................14
6.9 Entire Understanding.....................................14
6.10 Executive's Representations..............................14
6.11 Governing Law............................................14
EXHIBIT A DISPUTE RESOLUTION PROCEDURES............................16
* * *
3
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") made and entered into as
of this 1st day of February, 1998, by and between PILGRIM AMERICA INVESTMENTS,
INC. a Delaware corporation (the "Company"), and HOWARD C. TIFFEN ("Executive").
R E C I T A L S:
- - - - - - - -
WHEREAS, the Company believes continued employment of the Executive is
important for the continued success of the Company, and the Board of Directors
has directed the Company to enter into an Employment Agreement with the
Executive to assure the Executive's continued service; and
WHEREAS, the Executive has agreed to continue to serve the Company as
Senior Vice President and Senior Portfolio Manager of the Company and as an
officer of Pilgrim America Prime Rate Trust (the "Fund") on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises, and of the mutual
covenants and agreements herein contained, the parties hereby agree as follows:
A G R E E M E N T:
- - - - - - - - -
ARTICLE I
DUTIES AND TERM
1.1 Employment. In consideration of their mutual covenants and other
good and valuable consideration, the receipt, adequacy and sufficiency of which
is hereby acknowledged, the Company agrees to retain Executive in its employ,
and Executive agrees to remain in the employ of the Company, upon the terms and
conditions herein provided.
1.2 Position and Responsibilities.
(a) Executive shall serve as Senior Vice President and Senior
Portfolio Manager of the Company and as President and Senior Portfolio Manager
of the Fund (or in a capacity and with a title of at least substantially
equivalent quality). In the foregoing roles, the Executive shall render
investment advisory and other management services to the Company and the Fund of
the type customarily performed by persons situated in a similar capacity.
Executive agrees to perform services not inconsistent with his position as shall
from time to time be assigned to him by the Chairman of the Company.
1
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(b) During the period of his employment hereunder, Executive shall
devote substantially all of his business time, attention, skill and efforts to
the faithful performance of his duties hereunder.
1.3 Term. The term of Executive's employment under this Agreement shall
commence on the date first above written and shall continue, unless sooner
terminated, until January 31, 1999. Upon the expiration of the initial or any
subsequent term of this Agreement, this Agreement shall be automatically renewed
for an additional one (1) year term, unless either party has, at least sixty
(60) days prior to the expiration of the then current term, provided the other
party with written notice of its or his intention not to renew this Agreement.
1.4 Location. During the period of his employment under this Agreement,
Executive shall not be required, except with his prior written consent, to
relocate his principal place of employment outside Maricopa County, Arizona.
Required travel on the Company's business shall not be deemed a relocation.
ARTICLE II
COMPENSATION
For all services rendered by Executive in any capacity during his
employment under this Agreement, including, without limitation, services as an
officer or member of any committee of the Company, the Company shall compensate
Executive as follows:
2.1 Base Salary. The Company shall pay to Executive an annual base
salary of not less that $200,000 (such amount is hereinafter referred to as the
"Base Salary") during the term hereof; provided, however, that in the event the
Company institutes a salary reduction program which affects the aggregate
compensation and benefits of all of the Company's executive personnel by at
least the same percentage, then Executive's Base Salary may be reduced by such
percentage (and the term "Base Salary" as used in this Agreement shall refer to
Base Salary as so adjusted). Executive's Base Salary shall be paid in equal
semi-monthly installments. The Base Salary shall be reviewed annually by the
Board or a committee designated by the Board and the Board or such committee
may, in its discretion, increase the Base Salary.
2.2 Bonus Payment. During the period of Executive's employment under
this Agreement, Executive shall be entitled to bonus payments, if any shall be
due, as authorized by the Chairman of the Company. Such cash or other bonuses
shall be in addition to, and shall not be deemed to be a substitute for, the
Executive's right to the annual Base Salary described above.
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2.3 Additional Benefits. Executive shall be entitled to participate in
all employee benefit and welfare programs, plans and arrangements (including,
without limitation, pension, profit sharing, supplemental pension and other
retirement plans, insurance, hospitalization, medical and group disability
benefits, travel or accident insurance plans) and to receive fringe benefits,
such as dues and fees of professional organizations and associations, which are
from time to time available to the Company's executive personnel; provided,
however, there shall be no duplication of termination or severance benefits, and
to the extent that such benefits are specifically provided by the Company to
Executive under other provisions of this Agreement, the benefits available under
the foregoing plans and programs shall be reduced by any benefit amounts paid
under such other provisions. Executive shall during the period of his employment
hereunder continue to be provided with benefits at a level which shall in no
event be less in any material respect than the benefits made available to
Executive by the Company as of the date of this Agreement. Notwithstanding the
foregoing, the Company may terminate or reduce benefits under any benefit plans
and programs to the extent such reductions apply uniformly to all key executives
of the Company entitled to participate therein, and Executive's benefits shall
be reduced or terminated accordingly. Specifically, without limitation,
Executive shall receive the following benefits:
(a) Short-Term Disability Benefits. In the event of
Executive's failure substantially to perform his duties hereunder on a full-time
basis as a result of incapacity due to physical or mental illness, the Company
shall continue to pay the Base Salary to Executive during the period of such
incapacity for a period not exceeding 90 consecutive days or for periods
aggregating not more than 90 days during any twelve-month period, but only in
the amounts and to the extent that disability benefits payable to Executive
under Company-sponsored insurance policies are less than Executive's Base Salary
as of the date the incapacity began. In addition, if Executive's incapacity
continues through the end of the year and if, based on the criteria utilized by
the Company to determine Annual Bonuses for its executive personnel and on
Executive's performance prior to his incapacity, Executive would have been
entitled to an Annual Bonus for that year had he continued in active employment
until the end of the year, the Company shall pay Executive a prorated Annual
Bonus for the year in which his incapacity commenced equal to the product of the
Annual Bonus which Executive would have received for that year had he continued
active employment to the end of the year, multiplied by a fraction, the
numerator of which is the number of months during the year prior to Executive's
incapacity, and the denominator of which is twelve (12).
(b) Relocation Expenses. In the event Executive's principal
place of employment is relocated by mutual consent of the parties outside
Maricopa County, Arizona, the Company shall reimburse Executive for all usual
relocation expenses reasonably incurred by Executive and his household in moving
to the new location, including, without limitation, moving expenses and rental
payments for temporary living quarters in the area of relocation for a period
not to exceed six months.
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(c) Reimbursement of Business Expenses. The Company shall, in
accordance with standard Company policies, pay, or reimburse Executive for, all
reasonable travel and other expenses incurred by Executive in performing his
obligations under this Agreement such expenses shall include, but not be limited
to, any seminars, courses or other educational materials or arrangements
required in order for Executive to retain his National Association Securities
Dealer ("NASD") license.
(d) Vacations. The Executive shall be entitled to paid
vacations in accordance with policies generally applicable to executive officers
of the Company in effect from time to time. The timing of such vacations shall
be scheduled in a reasonable manner by the Executive, consistent with his duties
and responsibilities to the Company.
ARTICLE III
TERMINATION OF EMPLOYMENT
3.1 Death or Retirement of Executive. Executive's employment under this
Agreement shall automatically terminate upon the death or Retirement (as defined
in Section 6.1) of Executive.
3.2 By Executive. Executive shall be entitled to terminate his
employment under this Agreement by giving Notice of Termination (as defined in
Section 6.1) to the Company:
(a) for Good Reason (as defined in Section 6.1);
(b) at any time without Good Reason.
3.3 By Company. The Company shall be entitled to terminate Executive's
employment under this Agreement by giving Notice of Termination to Executive:
(a) in the event of Executive's Total Disability (as
defined in Section 6.1);
(b) for Cause (as defined in Section 6.1); and
(c) at any time without Cause.
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ARTICLE IV
COMPENSATION UPON TERMINATION OF EMPLOYMENT
If Executive's employment hereunder is terminated in accordance with
the provisions of Article III hereof, except for any other rights or benefits
specifically provided for herein following his period of employment, the Company
shall be obligated to provide compensation and benefits to Executive only as
follows, subject to the provisions of Section 5.3 hereof:
4.1 Upon Termination for Death, Retirement or Disability. If
Executive's employment hereunder is terminated by reason of his death,
Retirement or Total Disability, the Company shall:
(a) pay Executive (or his estate) or beneficiaries any Base
Salary which has accrued but not been paid as of the termination date (the
"Accrued Base Salary");
(b) pay Executive (or his estate) or beneficiaries for unused
vacation days accrued as of the termination date in an amount equal to his Base
Salary multiplied by a fraction the numerator of which is the number of accrued
unused vacation days and the denominator of which is 260 (the "Accrued Vacation
Payment");
(c) reimburse Executive (or his estate) or beneficiaries for
expenses incurred by him prior to the date of termination which are subject to
reimbursement pursuant to this Agreement (the "Accrued Reimbursable Expenses");
(d) provide to Executive (or his estate) or beneficiaries any
accrued and vested benefits required to be provided by the terms of any
Company-sponsored benefit plans or programs (the "Accrued Benefits"), together
with any benefits required to be paid or provided in the event of Executive's
death or Total Disability under applicable law;
(e) pay Executive (or his estate) or beneficiaries a prorated
Annual Bonus for the year in which Executive died, retired or became totally
disabled equal to the product of the Annual Bonus which Executive would have
received for that year had he continued his active employment until the end of
the year, based on the criteria utilized by the Company to determine Annual
Bonuses for its executive personnel and on his performance for the year prior to
his death, retirement or total disability, multiplied by a fraction, the
numerator of which is the number of months during the year prior to Executive's
death, retirement or total disability, and the denominator of which is twelve
(12) ("Accrued Bonus");
(f) Executive (or his estate) or beneficiaries shall have the
right to exercise all vested unexercised stock options outstanding at the
termination date in
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accordance with terms of the plans and agreements pursuant to which such options
or warrants were issued.
The amounts specified in Section 4.1(a), (b) and (c) shall be paid by the
Company as soon as practical after Executive's death, retirement or total
disability but in no event later than required by law. The benefits specified in
Section 4.1(d) shall be paid or provided at the time specified in the governing
plan documents and/or under applicable law. The amount specified in Section
4.1(e) shall be paid no later than the date on which Annual Bonuses for the year
in which the Executive died, retired or become totally disabled would be paid to
the Company's executive personnel in the ordinary course of business.
4.2 Upon Termination by Company for Cause or by Executive Without Good
Reason. If Executive's employment hereunder is terminated by the Company for
Cause, or if Executive terminates his employment with the Company other than (x)
upon Executive's death or Total Disability or (y) for Good Reason, the Company
shall:
(a) pay Executive the Accrued Base Salary;
(b) pay Executive the Accrued Vacation Payment;
(c) pay Executive the Accrued Reimbursable Expenses;
(d) pay Executive the Accrued Benefits, together with any
benefits required to be paid or provided under applicable law;
(e) pay Executive any Annual Bonus with respect to a prior
fiscal year which has accrued but has not been paid; and
(f) if Executive's employment is terminated by the Company for
Cause, he shall forfeit the right to exercise any vested options not exercised
prior to his termination, but if Executive terminates his employment without
Good Reason, Executive shall have the right to exercise all vested unexercised
stock options outstanding at the termination date in accordance with terms of
the plans and agreements pursuant to which such options or warrants were issued.
The amount specified in Section 4.2(e) shall be paid no later than the date on
which Annual Bonuses for the year in which the Executive is terminated would be
paid to the Company's executive personnel in the ordinary course of business.
4.3 Upon Termination by the Company Without Cause or by Executive for
Good Reason. If Executive's employment hereunder is terminated by the Company
without Cause or by Executive for Good Reason, the Company shall:
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(a) pay Executive the Accrued Base Salary;
(b) pay Executive the Accrued Vacation Payment;
(c) pay Executive the Accrued Reimbursable Expenses;
(d) the Executive and his dependants shall continue to be
covered for twelve (12) months, under the same terms and conditions, by the
medical, dental, vision and group life insurance plans maintained by the Company
which covered that Executive and his dependants prior to the Executive's
termination date. The Executive and the Company shall share the cost of such
continued coverage in the same proportions as they shared the cost of such
coverage prior to the Executive's termination date. To the extent allowed by
applicable law for purposes of satisfying the Company's obligation under the
Consolidated Omnibus Budget Reconciliation Act ("COBRA") to continue group
health care coverage to the Executive and his dependents as a result of the
Executive's termination of employment, the period during which the Executive is
permitted to continue to participate in the Company's medical, dental and/or
vision plans under this Section 4.3(c) shall not be treated as part of the
period during which the Executive and his dependants are entitled to continued
coverage under the Company's group health plans under COBRA. Following the end
of the continuation period specified in this Section 4.3(c), the Executive and
his dependants shall be covered under the Company's medical, dental and/or
vision plans as required under the provisions of COBRA;
(e) pay Executive the Accrued Benefits, together with any
benefits required to be paid or provided under applicable law;
(f) pay Executive any Annual Bonus with respect to a prior
fiscal year which has accrued but has not been paid; and
(g) pay Executive a lump sum cash payment as liquidated
damages an amount equal to 1.5 times the sum of Executive's annual rate of Base
Salary as in effect at the time of Executive's termination of employment, plus
an amount equal to 1.5 times the average Annual Bonus paid to Executive with
respect to the three (3) years (or the number of years of Executive's employment
if less than three (3) years) preceding Executive's termination date, which
amount shall be determined by dividing the total dollar amount paid to Executive
as Annual Bonuses during such period of years by three (3) (or the number of
years of Executive's employment if less than three (3) years). Such payment to
the Executive shall be made within fifteen (15) days after the Executive's last
day of employment with the Company. The liquidated damages amount shall not be
reduced by any compensation which the Executive may receive for other employment
with another employer after termination of his employment with the Company or
otherwise; and in addition;
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(h) Executive shall have the right to exercise all vested
unexercised stock options outstanding at the termination date in accordance with
terms of the plans and agreements pursuant to which such options or warrants
were issued.
ARTICLE V
RESTRICTIVE COVENANTS
5.1 Non-Competition.
(a) By execution of this Agreement, Executive agrees that
during his employment with the Company and for a period of 18 months following
the date of termination of his employment hereunder for Cause by the Company or
for other than Good Reason by the Executive (the "Non-Competition Period"),
Executive will not, within the United States (in which territory Executive
acknowledges that the Company has sold or marketed its products or services and
conducted its Business, as defined in Section 5.1(d) as of the date hereof),
directly or indirectly, compete with the Company by carrying on a business that
is substantially similar to the management of senior loans conducted by the
Company and Executive. Executive agrees that the 18 month period referred to in
the preceding sentence shall be extended by the number of days included in any
period of time during which he is or was engaged in activities constituting a
breach of this Section 5.1.
(b) Definition of "Compete". For the purposes of this Section
5.1, the term "compete" shall mean with respect to the Business: (i) managing,
supervising, or otherwise participating in a management or sales capacity; (ii)
calling on, soliciting, taking away, accepting as a client or customer, or
attempting to call on, solicit, take away, or accept as a client or customer,
any individual, partnership, corporation, company, association, or other entity
that was a client or customer of the Company as of immediately prior to the date
hereof; (iii) hiring, soliciting, taking away, or attempting to hire, solicit,
or take away, either on Executive's behalf or on behalf of any other person or
entity, any person serving immediately prior to the date hereof or during the
term hereof as an employee in connection with the Business; or (iv) entering
into or attempting to enter into any business substantially similar to the
Business, either alone or with any individual, partnership, corporation,
company, association, or other entity.
(c) Direct or Indirect Competition. For the purposes of this
Section 5.1, the words "directly or indirectly" as they modify the word
"compete" shall mean (i) acting as an agent, representative, consultant, fund
manager, officer, director, member, independent contractor, or employee of any
entity or enterprise that is competing (as defined in Section 5.1(b) hereof)
with the Business, (ii) participating in any such competing entity or enterprise
as an owner, partner, limited partner, joint venturer,
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member, creditor, or stockholder (except as a stockholder holding less than a
five percent (5%) interest in a corporation whose shares are actively traded on
a regional or national securities exchange or in the over-the-counter market),
and (iii) communicating to any such competing entity or enterprise the names or
addresses or any other information concerning any past, present, or identified
prospective client or customer of the Company or any entity having title to the
goodwill of the Company with respect to the Business.
(d) Business. For purposes of this Agreement, the term
"Business" shall mean the Fund and any business the Company is engaged in as of
the date that this Agreement is executed or may subsequently engage in while
this Agreement is in effect.
(e) Executive expressly agrees and acknowledges that this
covenant not to compete is reasonable as to time and geographical area and does
not place any unreasonable burden upon him;
5.2 Non-Disparagement. During the term of this Agreement and the
Non-Competition Period, neither Executive nor the Company shall disparage the
other, and neither shall disclose to any third party the conditions of
Executive's employment with the Company except as may be required (i) pursuant
to applicable law or regulations, including the rules and regulations of the
Securities and Exchange Commission, (ii) to effectuate the provisions of
employee plans or programs and insurance policies, or (iii) as may be otherwise
contemplated herein or unless such information becomes publicly available
without fault of the party making such disclosure.
5.3 Remedies. Executive expressly agrees and acknowledges that the
covenants set forth in Sections 5.1 and 5.2 are necessary for the protection of
the interests of the Company and its affiliates because of the nature and scope
of their business and his position with the Company. Further, Executive
acknowledges that any breach of such covenants would result in irreparable
damage to the Company, and that money damages will not sufficiently compensate
the Company for its injury caused thereby, and that the remedy at law for any
breach or threatened breach of any of such covenants will be inadequate and,
accordingly agrees, that the Company shall, in addition to all other available
remedies (including without limitation, seeking such damages as it can show it
has sustained by reason of such breach but excluding punitive damages), be
entitled to injunctive relief or specific performance and that in addition to
such money damages he may be restrained and enjoined from any continuing breach
of this covenant not to compete without any bond or other security being
required of any court. Executive further acknowledges and agrees that if such
covenants, or any of them, are deemed to be unenforceable and/or the Executive
fails to comply with this Article V, the Company has no obligation to provide
any compensation or other benefits described in Article IV hereof. The remedies
set forth in this Section 5.3 shall be included in any award in favor of the
Company under Exhibit A hereto.
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5.4 Scope of Article. For purposes of this Article V, unless the
context otherwise requires, the term "Company" includes Pilgrim America Capital
Corporation and its direct and indirect subsidiaries.
ARTICLE VI
MISCELLANEOUS
6.1 Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) "Accrued Base Salary" - as defined in Section 4.1(a);
(b) "Accrued Benefits" - as defined in Section 4.1(d);
(c) "Accrued Bonus" - as defined in Section 4.1(e);
(d) "Accrued Reimbursable Expenses" - as defined in
Section 4.1(c);
(e) "Accrued Vacation Payment" - as defined in Section
4.1(b);
(f) "Annual Bonus" - as defined in Section 2.2;
(g) "Base Salary" - as defined in Section 2.1;
(h) "Board" - shall mean the Board of Directors of the
Company;
(i) "Cause" shall mean the occurrence of any of the following:
(i) Executive's gross and willful misconduct which
causes demonstrable and serious INJURY to the Company;
(ii) Executive's engaging in conduct of a criminal
nature that may have an adverse impact on the Company's standing and
reputation (including a conviction of a crime for violating applicable
securities laws);
(iii) the continued and unjustified failure or
refusal by Executive to perform the duties required of him by this
Agreement which failure or refusal shall not be cured within thirty
(30) days following receipt by Executive of written notice from the
Board specifying the factors or events constituting such failure or
refusal; or
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(iv) Executive's breach of his obligation under
Section 1.2(b) hereof which shall not be cured within thirty (30) days
after written notice thereof to Executive.
(j) "Expiration" shall mean the expiration of Executive's
employment hereunder in accordance with Section 1.3;
(k) "Good Reason" shall mean the occurrence of any of the
following:
(i) Material change by the Company in Executive's
positions, function, duties, staff support or responsibilities which
would cause Executive's position with the Company to become of less
dignity, responsibility and importance than those associated with his
functions, duties or responsibilities as of January 31, 1998;
(ii) Executive's Base Salary as the same may be
increased from time to time is significantly reduced by the Company
(unless such reduction is pursuant to a salary reduction program as
described in Section 2.1 hereof) or there is a material reduction in
the benefits that are in effect for the Executive on January 31, 1998
in accordance with Section 2.3 (unless such reduction is pursuant to a
uniform reduction in benefits for all key executives participating in
such benefit plans);
(iii) Except with Executive's prior written consent,
relocation of Executive's principal place of employment to a location
outside of Maricopa County, Arizona; or
(iv) Other material breach of this Agreement by the
Company, which breach is not cured within thirty (30) days after
written notice thereof is received by the Company.
(l) "Non-Competition Period" - as defined in Section 5.1(a);
(m) "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision of this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated. Each Notice of Termination shall be delivered at least thirty (30)
days prior to the effective date of termination;
(n) "Retirement" shall mean normal retirement on or after age
65;
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(o) "Termination" shall mean the termination of Executive's
employment hereunder other than upon expiration of the term of such employment
in accordance with Section 1.3;
(p) "Total Disability" shall mean Executive's failure
substantially to perform his duties hereunder on a full-time basis for a period
exceeding 90 consecutive days or for periods aggregating more than 90 days
during any twelve-month period as a result of incapacity due to physical or
mental illness. If there is a dispute as to whether Executive is or was
physically or mentally unable to perform his duties under this Agreement, such
dispute shall be submitted for resolution to a licensed physician agreed upon by
the Board and Executive, or if an agreement cannot be promptly reached, the
Board and Executive shall promptly select a physician, and if these physicians
cannot agree, the physicians shall promptly select a third physician whose
decision shall be binding on all parties. If such a dispute arises, Executive
shall submit to such examinations and shall provide such information as such
physician(s) may request, and the determination of the physician(s) as to
Executive's physical or mental condition shall be binding and conclusive.
Notwithstanding the foregoing, if Executive participates in any group disability
plan provided by the Company which offers long-term disability benefits, "Total
Disability" shall mean total disability as defined therein.
6.2 Key Man Insurance. The Company shall have the right, in its sole
discretion, to purchase "key man" insurance on the life of Executive. The
Company shall be the owner and beneficiary of any such policy. If the Company
elects to purchase such a policy, Executive shall take such physical
examinations and supply such information as may be reasonably requested by the
insurer. To the extent allowed by law, the Company shall direct the insurer to
treat such information provided by Executive as confidential information which
shall not be disclosed to the Company, its employees or agents.
6.3 Mitigation of Damages; Set-Off; Dispute Resolution.
(a) Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment.
(b) If there shall be any dispute between the Company and
Executive (i) in the event of any termination of Executive's employment by the
Company, whether such termination was for Cause, or (ii) in the event of any
termination of employment by Executive, whether Good Reason existed, or (iii)
otherwise arising out of this Agreement, the dispute shall be resolved in
accordance with the dispute resolution procedures set forth in Exhibit A hereto,
the provisions of which are incorporated as a part hereof, and the parties
hereto hereby agree that (a) such dispute resolution procedures shall be the
exclusive method for resolution of disputes under this Agreement and (b) to the
extent allowed by law the NASD arbitration provisions shall not apply to
disputes arising under this Agreement; provided, however, that (1) either party
may seek preliminary judicial
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relief if, in its judgment, such action is necessary to avoid irreparable injury
during the tendency of such procedures, and (2) nothing in Exhibit A shall
prevent either party from exercising the rights of termination set forth in this
Agreement. In the event of a dispute hereunder as to whether a termination by
the Company was for Cause or by the Executive for Good Reason, until there is a
resolution and award as provided in Exhibit A, the Company shall pay all
amounts, and provide all benefits, to Executive and/or Executive's family or
other beneficiaries, as the case may be, that the Company would be required to
pay or provide hereunder as though such termination were by the Company without
Cause or by Executive for Good Reason; provided, however, that the Company shall
not be required to pay any disputed amounts, except upon receipt of a written
undertaking by or on behalf of Executive (and/or Executive's family or other
beneficiaries, as the case may be) to repay, without interest or penalty, as
soon as practicable after completion of the dispute resolution all such amounts
to which Executive (or Executive's family or other beneficiaries, as the case
may be) is ultimately adjudged not to be entitled with respect to the payment of
such disputed amount(s). IT IS EXPRESSLY UNDERSTOOD THAT BY SIGNING THIS
AGREEMENT, WHICH INCORPORATES BINDING ARBITRATION, THE COMPANY AND EXECUTIVE
AGREE, EXCEPT AS SPECIFICALLY PROVIDED OTHERWISE IN SECTION 5.3 AND THIS SECTION
6.3(B), TO WAIVE COURT OR JURY TRIAL AND TO WAIVE PUNITIVE, STATUTORY,
CONSEQUENTIAL AND ANY DAMAGES, OTHER THAN COMPENSATORY DAMAGES.
6.4 Successors; Binding Agreement. This Agreement shall be binding upon
any successor to the Company and shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, beneficiaries,
designees, executors, administrators, heirs, distributees, devisees and
legatees.
6.5 Modification; No Waiver. This Agreement may not be modified or
amended except by an instrument in writing signed by the parties hereto. No term
or condition of this Agreement shall be deemed to have been waived, nor shall
there be any estoppel against the enforcement of any provision of this
Agreement, except by written instrument by the party charged with such waiver or
estoppel. No such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any other term or condition.
6.6 Severability. The covenants and agreements contained herein are
separate and severable and the invalidity or unenforceability of any one or more
of such covenants or agreements, if not material to the employment arrangement
that is the basis for this Agreement, shall not affect the validity or
enforceability of any other covenant or agreement contained herein. If, in any
judicial proceeding, a court shall refuse to enforce one or more of the
covenants or agreements contained herein because the duration thereof is too
long, or the scope thereof is too broad, it is expressly agreed between the
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parties hereto that such duration or scope shall be deemed reduced to the extent
necessary to permit the enforcement of such covenants or agreements.
6.7 Notices. All the notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally or
sent by registered or certified mail, return receipt requested, to the parties
hereto at the following addresses:
If to the Company, to it at:
Pilgrim America Investments, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Attn: Chairman
If Executive, to him at:
Howard C. Tiffen (At his personal residence as noted
In the Company records).
6.8 Assignment. This Agreement and any rights hereunder shall not be
assignable by either party without the prior written consent of the other party
except as otherwise specifically provided for herein.
6.9 Entire Understanding. This Agreement (together with the Exhibit
incorporated as a part hereof) constitutes the entire understanding between the
parties hereto and no agreement, representation, warranty or covenant has been
made by either party except as expressly set forth herein.
6.10 Executive's Representations. Executive represents and warrants
that neither the execution and delivery of this Agreement nor the performance of
his duties hereunder violates the provisions of any other agreement to which he
is a party or by which he is bound.
6.11 Governing Law. This Agreement shall be construed in accordance
with and governed for all purposes by the laws of the State of Arizona
applicable to contracts executed and wholly performed within such state.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
Company:
PILGRIM AMERICA INVESTMENTS, INC.
By:
----------------------------------
Robert W. Stallings
Executive:
HOWARD C. TIFFEN
--------------------------------------
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EXHIBIT A
DISPUTE RESOLUTION PROCEDURES
-----------------------------
A. If a controversy should arise which is covered by Section 6.3 of
Article VI, then not later than three (3) months from the date of the event
which is the subject of dispute either party may serve on the other a written
notice specifying the existence of such controversy and setting forth in
reasonably specific detail the grounds thereof ("Notice of Controversy");
provided that, in any event, the other party shall have at least thirty (30)
days from and after the date of the Notice of Controversy to serve a written
notice of any counterclaim ("Notice of Counterclaim"). The Notice of
Counterclaim shall specify the claim or claims in reasonably specific detail. If
the Notice of Controversy or the Notice of Counterclaim, as the case may be, is
not served within the applicable period, the claim set forth therein will be
deemed to have been waived, abandoned and rendered unenforceable.
B. Following receipt of the Notice of Controversy (or the Notice of
Counterclaim, as the case may be), there shall be a three week period during
which the parties will make a good faith effort to resolve the dispute through
negotiation ("Period of Negotiation"). Neither party shall take any action
during the Period of Negotiation to initiate arbitration proceedings.
C. If the parties should agree during the Period of Negotiation to
mediate the dispute, then the Period of Negotiation shall be extended by an
amount of time to be agreed upon by the parties to permit such mediation. In no
event, however, may the Period of Negotiation be extended by more than five
weeks or, stated differently, in no event may the Period of Negotiation be
extended to encompass more than a total of eight weeks.
D. If the parties agree to mediate the dispute but are thereafter
unable to agree within a week on the format and procedures for the mediation,
then the effort to mediate shall cease, and the Period of Negotiation shall
terminate four weeks from the Notice of Controversy (or the Notice of
Counterclaim, as the case may be).
E. Following the termination of the Period of Negotiation, the dispute
(including the main claim and counterclaim, if any) shall be settled by
arbitration, governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq.
("FAA"), and judgment upon the award may be entered in any court having
jurisdiction thereof. The format and procedures of the arbitration are set forth
below (referred to below as the "Arbitration Agreement").
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F. A notice of intention to arbitrate ("Notice of Arbitration") shall
be served within 45 days of the termination of the Period of Negotiation. If the
Notice of Arbitration is not served within this period, the claim set forth in
the Notice of Controversy (or the Notice of Counterclaim, as the case may be)
will be deemed to have been waived, abandoned and rendered unenforceable.
G. The arbitration, including the Notice of Arbitration, will be
governed by the Commercial Rules of the America Arbitration Association ("AAA")
in effect on the date of the Notice of Arbitration, except that the terms of
this Arbitration Agreement shall control in the event of any difference or
conflict between such Rules and the terms of this Arbitration Agreement.
H. The arbitrator shall reach a decision on the merits on the basis of
applicable legal principles as embodied in the law of the State of Arizona. The
arbitration hearing shall take place in Phoenix, Arizona.
I. There shall be one arbitrator, regardless of the amount in
controversy. The arbitrator selected, in order to be eligible to serve, shall be
a lawyer in Phoenix, Arizona with at least 15 years specializing in either
general commercial litigation or general corporate and commercial matters. In
the event the parties cannot agree on a mutually acceptable single arbitrator
from the list submitted by the AAA, the AAA shall appoint the arbitrator who
shall meet the foregoing criteria.
J. At the time of appointment and as a condition thereto, the
arbitrator will be apprised of the time limitations and other provisions of this
Arbitration Agreement and shall indicate such dispute resolver's agreement to
comply with such provisions and time limitations.
K. During the 30 day period following appointment of the arbitrator,
either party may serve on the other a request for limited numbers of documents
directly related to the dispute. Such documents will be produced within seven
days of the request.
L. Following the thirty-day period of document production, there will
be a forty-five day period during which limited depositions will be permissible.
Neither party will take more than 5 depositions, and no deposition will exceed
three hours of direct testimony.
M. Disputes as to discovery or prehearing matters of a procedural
nature shall be promptly submitted to the arbitrator pursuant to telephone
conference call or otherwise. The arbitrator shall make every effort to render a
ruling on such interim matters at the time of the hearing (or conference call)
or within five business days thereafter.
17
<PAGE>
N. Following the period of depositions, the arbitration hearing shall
promptly commence. The arbitrator will make every effort to commence the hearing
within thirty days of the conclusion of the deposition period and, in addition,
will make every effort to conduct the hearing on consecutive business days to
conclusion.
O. An award will be rendered, at the latest, within nine months of the
date of the Notice of Arbitration and within thirty days of the close of the
arbitration hearing. The award shall set forth the grounds for the decision
(findings of fact and conclusions of law) in reasonably specific detail. The
award shall be final and nonappealable except as provided in the FAA and except
that a court of competent jurisdiction shall have the power to review whether,
as a matter of law, based upon the findings of fact by the arbitrator, the award
should be confirmed or should be modified or vacated in order to correct any
errors of law made by the arbitrator. Such judicial review shall be limited to
issues of law, and the parties agree that the findings of fact made by the
arbitrator shall be final and binding on the parties and shall serve as the
facts to be relied upon by the court in determining the extent to which the
award should be confirmed, modified or vacated.
The award may only be made for compensatory damages, and if any other
damages (whether exemplary, punitive, consequential, statutory or other) are
included, the award shall be vacated and remanded, or modified or corrected, as
appropriate to promote this damage limitation.
18
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