1
Exhibit (h)(5)
FORM OF FINANCIAL GUARANTY AGREEMENT
dated as of [_________, 2001]
among
MBIA INSURANCE CORPORATION,
as Insurer,
ING PILGRIM INVESTMENTS, LLC,
as Adviser,
AELTUS INVESTMENT MANAGEMENT, INC.,
as Sub-Adviser,
and
PILGRIM EQUITY TRUST
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TABLE OF CONTENTS
Page
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ARTICLE I DEFINITIONS ............................................... 1
Section 1.1. General Definitions. ................................ 1
Section 1.2. Generic Terms. ...................................... 15
Section 1.3. Valuation. .......................................... 15
ARTICLE II THE POLICIES .............................................. 15
Section 2.1. Policies. ........................................... 15
Section 2.2. Procedure for Issuance of Policies. ................. 16
Section 2.3. Conditions Precedent to Effectiveness. .............. 16
Section 2.4. Fees................................................. 20
Section 2.5. Reimbursement Obligations. .......................... 20
Section 2.6. Indemnification. .................................... 20
ARTICLE III MANAGEMENT OF PPFs ........................................ 21
Section 3.1. Eligible Investments. ............................... 21
Section 3.2. Investment Limitations. ............................. 22
Section 3.3. Index Equity Selection Guidelines. .................. 23
Section 3.4. Index Equity Diversification and Capitalization
Requirements. ....................................... 23
Section 3.5. Asset Allocation and Rebalancing. ................... 24
ARTICLE IV EVENTS OF DEFAULT ......................................... 25
Section 4.1. Default. ............................................ 25
Section 4.2. Remedies. ........................................... 26
ARTICLE V REPRESENTATIONS AND WARRANTIES ............................ 28
Section 5.1. Representations and Warranties Relating to Pilgrim .. 28
Section 5.2. Representations and Warranties Relating to Aeltus ... 29
Section 5.3. Representations and Warranties Relating to the Fund . 30
ARTICLE VI COVENANTS ................................................. 32
Section 6.1. Covenants of Investment Adviser ..................... 32
Section 6.2. Covenants of Sub-Adviser. ........................... 33
Section 6.3. Covenants of the Fund ............................... 34
Section 6.4. Additional Covenants of the Fund. ................... 35
ARTICLE VII FURTHER AGREEMENTS ........................................ 36
Section 7.1. Obligations Absolute. ............................... 36
Section 7.2. Reinsurance and Assignments. ........................ 37
Section 7.3. Fund Liability. ..................................... 37
Section 7.4. Liability of the Insurer. ........................... 37
Section 7.5. Fees and Expenses. .................................. 37
Section 7.6. Termination or Absence of Sub-Adviser. .............. 37
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ARTICLE VIII MISCELLANEOUS ............................................ 38
Section 8.1. Amendments and Waivers. ............................. 38
Section 8.2. Notices. ............................................ 38
Section 8.3. No Waiver, Remedies and Severability. ............... 39
Section 8.4. Payments. ........................................... 39
Section 8.5. Governing Law. ...................................... 39
Section 8.6. Counterparts. ....................................... 39
Section 8.7. Paragraph Headings, Etc. ............................ 39
Section 8.8. Termination. ........................................ 40
Annex A The Equity Portfolio ("Index Plus LargeCap")
Annex B Sample Calculation of Hypothetical Total Net Assets
Exhibit A Form of Policy - Insurance Policy
Exhibit B Administrative Services Agreement
Exhibit C Declaration of Trust
Exhibit D Establishment and Designation of Series and Classes
Exhibit E Form of Custodian Service and Monitoring Agreement
Exhibit F Form of Registration Statement
Exhibit G-1 Investment Management Agreement
Exhibit G-2 Sub-Adviser Agreement
Exhibit H-1 Form of Preliminary Application
Exhibit H-2 Form of Final Application
Exhibit I-1 Opinion of Counsel to Pilgrim, dated the Effective Date
Exhibit I-2 Opinion of Counsel to Aeltus, dated the Effective Date
Exhibit J Opinion of Counsel to MBIA Insurance Corporation
Exhibit K Opinion of Counsel to the Fund, dated the Effective Date
Exhibit L-1 Opinion of Counsel to Pilgrim, dated the Inception Date
Exhibit L-2 Opinion of Counsel to Aeltus, dated the Inception Date
Exhibit M Opinion of Counsel to State Street Bank and Trust Company,
dated the Inception Date
Exhibit N Opinion of Counsel to the Fund, dated the Inception Date
Exhibit O Form of Monthly Report
Exhibit P Form of Daily Report
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FINANCIAL GUARANTY AGREEMENT
FINANCIAL GUARANTY AGREEMENT, dated as of [___________, ▇▇▇▇] (▇▇▇
"▇▇▇▇▇▇▇▇▇"), ▇▇▇▇▇ ▇▇▇▇ INSURANCE CORPORATION, a New York monoline stock
insurance company (the "Insurer"), ING PILGRIM INVESTMENTS, LLC, a Delaware
limited liability company ("Pilgrim"), AELTUS INVESTMENT MANAGEMENT, INC., a
Connecticut corporation ("Aeltus"), and PILGRIM EQUITY TRUST, a Massachusetts
business trust (the "Fund").
W I T N E S S E T H:
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WHEREAS, the Fund is an open-end diversified, management investment
company registered under the Investment Company Act (as defined herein), that
intends to create one or more series, each to be called a Pilgrim Principal
Protection Fund (each a "PPF") and each to be advised by Pilgrim and sub-advised
by Aeltus, which will include a promise by the Fund on behalf of each PPF (each
a "Repayment Obligation") to repay to the shareholders thereof (each a "PPF
Shareholder") at the Maturity Date (as defined herein) the Aggregate Guarantee
Amount (as defined herein) with respect to each PPF; and
WHEREAS, the Insurer is authorized to transact a financial guaranty
insurance business in all 50 States and the Fund has requested the Insurer, and
the Insurer has agreed, to issue a financial guaranty in connection with each
PPF, substantially in the form of Exhibit A hereto (each a "Policy"), in the
aggregate amount of $750,000,000, to assure the timely payment by the Fund of
the Repayment Obligation with respect to such PPF; and
WHEREAS, the parties hereto, among other things, desire to specify
the conditions precedent to the issuance by the Insurer of each Policy, the
payment of the premium and other amounts in respect thereof, the reimbursement
obligations of Pilgrim, the investment adviser to the Fund, to the Insurer, and
to provide for certain other matters related thereto;
NOW, THEREFORE, in consideration of the promises and of the
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. General Definitions. The terms defined in this Article
I shall have the meanings provided herein for all purposes of this Agreement,
unless the context clearly requires otherwise, in both singular and plural form,
as appropriate.
"Acts" shall mean the Investment Company Act and the Securities Act.
"Adjusted Total Net Assets" shall have the meaning set forth in
Section 3.5(a).
"Administrative Services Agreement" shall mean the Administrative
Services Agreement, dated August 1, 1998, and restated on April 30, 2000,
between the Fund and ING Pilgrim Group, LLC, substantially in the form of
Exhibit B hereto, as the same may be amended, supplemented or otherwise
modified from time to time.
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"Aggregate Guarantee Amount" shall mean, with respect to any PPF, on
any date of determination, the aggregate Guarantee Amounts with respect to
such PPF and all PPF Shareholders in such PPF on such date of
determination.
"Asset Allocation Test" shall have the meaning set forth in Section
3.5(a).
"Asset Allocation Threshold" shall mean, with respect to any PPF, on
any Valuation Date, an amount equal to 98% of the sum of (i) the Present
Value of the Aggregate Guarantee Amount with respect to such PPF plus (ii)
the Present Value of Covered Expenses with respect to such PPF on such
Valuation Date; provided, however, that if the Total Net Assets with
respect to such PPF on such Valuation Date is less than or equal to the
sum of (i) the Present Value of the Aggregate Guarantee Amount with
respect to such PPF plus (ii) the Present Value of Covered Expenses with
respect to such PPF, the Asset Allocation Threshold shall be an amount
equal to 100% of the sum of (i) the Present Value of the Aggregate
Guarantee Amount with respect to such PPF plus (ii) the Present Value of
Covered Expenses with respect to such PPF on such Valuation Date.
"Asset Reallocation" shall mean, with respect to any PPF, (i) the
sale of Index Equities or Index Futures held by such PPF and the
reinvestment of all or a portion of the proceeds therefrom in Fixed Income
Securities or (ii) the sale of Fixed Income Securities held by such PPF
and the reinvestment of all or a portion of the proceeds therefrom in
Index Equities or Index Futures.
"Business Day" shall mean any day that the New York Stock Exchange
is open.
"Cash Associated with Futures" shall mean, with respect to any Index
Future, on any Valuation Date, an amount of cash or Cash Equivalents equal
to the Market Value thereof on such Valuation Date.
"Cash Equivalents" shall mean the Eligible PPF Investments described
in Section 3.1(b)(i).
"Cash Margin" shall mean, with respect to the U.S. Treasury Futures
held by a PPF, on any Valuation Date, the Market Value of the Cash
Equivalents held by the Custodian in a segregated account of such PPF in
order to satisfy the margin requirements with respect to such U.S.
Treasury Futures on such Valuation Date.
"Cheapest-to-Deliver Bond" shall mean, with respect to any U.S.
Treasury Future, on any Valuation Date, the U.S. Treasury Note eligible
for delivery under such U.S. Treasury Future whose price on such Valuation
Date is closest to the product of the settlement price of such U.S.
Treasury Future and the price of such U.S. Treasury Note as of the
delivery date of such U.S. Treasury Future that would cause such U.S.
Treasury Note to yield 6%, as published by Bloomberg, L.P.
"Class of Shares" shall mean, with respect to any PPF, each class of
shares of capital stock designated in the Establishment and Designation of
Series and Classes with respect to such PPF.
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"Class Percentage" shall mean, with respect to any Class of Shares
of a PPF, on any Valuation Date, the percentage equivalent of a fraction,
the numerator of which is the product of the NAV with respect to such
Class of Shares of such PPF multiplied by the number of shares of such
Class of Shares of such PPF outstanding, and the denominator of which is
the sum with respect to each Class of Shares with respect to such PPF of
the product of (i) the NAV with respect to such Class of Shares of such
PPF multiplied by the number of shares of such Class of Shares with
respect to such PPF outstanding.
"Commission" shall mean the Securities and Exchange Commission.
"Contractual Obligation" shall mean, as to any Person, any provision
of any security issued by such Person or any agreement, instrument or
other undertaking to which such Person is a party or by which it or any of
its property is bound.
"Corporate Bond" shall have the meaning set forth in Section
3.1(b)(iii).
"Covered Expenses" shall mean, for any Class of Shares of any PPF,
the annual fund operating expenses enumerated in the Final Prospectus for
such Class of Shares.
"Covered Expense Ratio" shall mean, with respect to any PPF, on any
Valuation Date, the higher of (a) the expense ratio utilized by the
Sub-Adviser in its proprietary asset allocation computer model and (b) the
Lower Covered Expense Ratio with respect to such PPF; provided, however,
that if the percentage of the Total Net Assets of such PPF on such date
allocable to Index Equities and Index Futures according to the Asset
Allocation Test would be less than 30% using the Lower Covered Expense
Ratio in calculating the Present Value of Covered Expenses with respect to
such PPF on such Valuation Date, the Covered Expense Ratio will equal the
Higher Covered Expense Ratio with respect to such PPF; and provided,
further that the Covered Expense Ratio with respect to any PPF having an
Aggregate Guarantee Amount on the Inception Date with respect to such PPF
of less than $25,000,000 will equal the Higher Covered Expense Ratio with
respect to such PPF on any Valuation Date.
"Custodian" shall mean State Street Bank and Trust Company or any
successor or assigns under the Custodian Agreement.
"Custodian Agreement" shall mean the custodial agreement by and
between the Fund and the Custodian with respect to the custody of the
assets of certain series of the Fund, including the PPFs, as the same may
be amended, supplemented or modified from time to time.
"Custodian Service and Monitoring Agreement" shall mean, with
respect to each PPF, the custodian service and monitoring agreement among
the Fund, the Insurer and the Custodian, substantially in the form of
Exhibit E hereto, as the same may be amended, supplemented or otherwise
modified from time to time, and any other agreement substantially in the
form of Exhibit E hereto with a successor Custodian or any affiliate
thereof.
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"Declaration of Trust" shall mean the Declaration of Trust, dated
June 12, 1998, as amended, creating the Fund duly filed with the Secretary
of The Commonwealth of Massachusetts and delivered to the Insurer pursuant
to Section 2.3(a), substantially in the form of Exhibit C hereto.
"Default" shall mean any of the events specified in Section 4.1,
whether or not any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
"Default Period" shall have the meaning set forth in Section 4.2(a).
"Discount Rate" shall mean, with respect to any PPF, on any
Valuation Date, the quotient of (a) the sum of (i) the product of the
aggregate Market Value of the Fixed Income Portfolio with respect to such
PPF multiplied by the Fixed Income Portfolio Yield with respect to such
PPF on such Valuation Date plus (ii) the U.S. Treasury Futures Spread for
such PPF, divided by (b) the aggregate Market Value of the Fixed Income
Portfolio with respect to such PPF; provided, however, that if such PPF
does not have a Fixed Income Portfolio on such Valuation Date, the
Discount Rate with respect to such PPF shall equal the Imputed Discount
Rate with respect to such PPF on such Valuation Date.
"Distribution Per Share" shall mean, with respect to any PPF and any
Class of Shares of such PPF, an amount equal to the quotient of the amount
of any distribution or payment by the Fund in respect of, or allocated to,
such Class of Shares that is not a Covered Expense or a transaction
related brokerage expense, and shall include, without limitation, any
distribution of income, dividends, capital gains or principal to the PPF
Shareholders of such Class of Shares and any payment of income taxes or
excise taxes allocated to such Class of Shares divided by the number of
shares of such Class of Shares outstanding on the date of such
distribution or payment.
"Effective Date" shall mean the date on which the conditions set
forth in Section 2.3(a) are satisfied.
"Eligible PPF Investments" shall have the meaning set forth in
Section 3.1(b).
"Establishment and Designation of Series and Classes" shall mean,
with respect to any PPF, the Establishment and Designation of Series and
Classes creating such PPF duly filed with the Secretary of The
Commonwealth of Massachusetts and delivered to the Insurer pursuant to
Section 2.3(b), substantially in the form of Exhibit D hereto.
"Equity Portfolio" shall mean, with respect to any PPF, all
investments of such PPF which are Eligible PPF Investments defined in
Sections 3.1(b)(v) or (vi).
"Event of Default" shall have the meaning set forth in Section 4.1.
"FactSet" shall mean FactSet Data Systems, Inc. or any
successor thereto.
"Fee Payment Date" shall have the meaning set forth in Section 2.4.
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"Final Application" shall have the meaning set forth in Section 2.2.
"Final Prospectus" shall mean for any Class of Shares of a PPF the
prospectus pursuant to which the shares of such Class of Shares were
offered for sale, including the Statement of Additional Information with
respect to such Class of Shares, delivered to the Insurer pursuant to
Section 2.3(b) and filed with the Commission pursuant to Rule 497 under
the Securities Act, substantially in the form of Exhibit F.
"Fixed Income Portfolio" shall mean, with respect to any PPF, all
investments of such PPF which are Eligible PPF Investments defined in
Sections 3.1(b)(ii), (iii) or (iv).
"Fixed Income Portfolio Yield" shall mean, with respect to any PPF,
on any Valuation Date, the sum of (a) the weighted average spread over the
Imputed Discount Rate with respect to such PPF, of the Fixed Income
Portfolio with respect to such PPF (excluding any U.S. Treasury Futures),
as calculated by the Sub-Adviser of such PPF using the ▇▇▇▇▇▇ Brothers
Analytics Model or a Substitute Valuation Source, as of the close of
business on the Business Day immediately preceding such Valuation Date,
based on the Market Value for each investment in such Fixed Income
Portfolio on such Valuation Date, plus (b) the Imputed Discount Rate with
respect to such PPF on such Valuation Date.
"Fixed Income Security' shall mean any investment of a PPF which is
an Eligible PPF Investment defined in Section 3.1(b)(ii), (iii) or (iv).
"Fund Sector Weight" shall mean, with respect to any PPF, for any
Sector, on any Valuation Date, the percentage equivalent of a fraction,
the numerator of which is the aggregate Market Value of all Index Equities
belonging to such Sector held by such PPF on such Valuation Date and the
denominator of which is the aggregate Market Value of all Index Equities
held by such PPF on such Valuation Date.
"Fund Weight" shall mean, with respect to any PPF and an Index
Equity, on any Valuation Date, the percentage equivalent of a fraction,
the numerator of which is the Market Value of such Index Equity held by
such PPF on such Valuation Date and the denominator of which is the
aggregate Market Value of all Index Equities held by such PPF on such
Valuation Date.
"Government Authority" shall mean any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions
of or pertaining to government.
"Guarantee Amount" shall mean, with respect to any PPF Shareholder
of any Class of Shares, on any date of determination, an amount equal to
the product of (i) the Guarantee per Share for such Class of Shares held
by such PPF Shareholder on such date and (ii) the total number of such
shares held by such PPF Shareholder on such date.
"Guarantee per Share" shall mean, with respect to any Class of
Shares of any PPF on any Valuation Date, (i) on the Inception Date with
respect to such PPF, the NAV for such Class of Shares at the close of
business on the last day of the Offering Period for
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such PPF; and (ii) thereafter on any Valuation Date, the Guarantee per
Share for such Class of Shares on the immediately preceding Valuation Date
divided by the sum of one plus the quotient of (i) the amount of any
Distribution Per Share with respect to such Class of Shares and such PPF,
effective since the immediately preceding Valuation Date, divided by (ii)
the NAV for such Class of Shares at the close of business on the day on
which such Distribution Per Share was effective.
"Guarantee Period" shall mean, with respect to any PPF, the period
commencing on and including the Inception Date to and including the
Maturity Date with respect to such PPF.
"High Ranked Equities" shall mean, on any date of determination, the
Index Equities listed by the Investment Adviser of each PPF as "High
Ranked Stocks" in the report most recently delivered by such Investment
Adviser to the Insurer pursuant to Section 3.4.
"Higher Covered Expense Ratio" shall mean, with respect to any PPF,
on any Valuation Date, the sum with respect to each Class of Shares with
respect to such PPF of the product of the Net Expense Percentage with
respect to such Class of Shares and the Class Percentage with respect to
such Class of Shares on such Valuation Date.
"Hypothetical Total Net Assets" shall mean, with respect to any PPF,
an amount equal to the Total Net Assets on the Business Day on which a
Permanent Deficit Event shall have occurred with respect to such PPF,
recalculated as follows: (a) the aggregate Market Value of the Equity
Portfolio with respect to such PPF on the Valuation Date for such Business
Day shall (i) first be reduced to an amount such that the Adjusted Total
Net Assets with respect to such PPF would have equaled the sum of the
Present Value of the Aggregate Guarantee Amount with respect to such PPF
plus the Present Value of Covered Expenses with respect to such PPF
(calculated using the Higher Covered Expense Ratio with respect to such
PPF) on the Business Day immediately preceding such Valuation Date and
(ii) second, be reduced by the percentage decline in the Market Value of
the Equity Portfolio with respect to such PPF on such Valuation Date and
(b) the aggregate Market Value of the Fixed Income Portfolio with respect
to such PPF on such Valuation Date shall (i) first, be increased in an
amount equal to the reduction in the aggregate Market Value of the Equity
Portfolio with respect to such PPF determined in clause (a)(i) above and
(ii) second, be increased or reduced by the percentage increase or
reduction in the aggregate Market Value of the Fixed Income Portfolio with
respect to such PPF on such Valuation Date. A sample calculation is set
forth in Annex B.
"Imputed Discount Rate" shall mean, with respect to any PPF on any
Valuation Date, a rate per annum equal to the interest rate derived by
calculating the internal rate of return for the Proxy U.S. Treasury Zero
with respect to such PPF, calculated based on the actual number of days to
maturity compounded on a semi-annual basis based on the Market Value for
such Proxy U.S. Treasury Zero as of such Valuation Date compared with the
dollar value for such Proxy U.S. Treasury Zero at maturity.
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"Inception Date" shall mean, with respect to a PPF, the Business Day
immediately following the last day of the Offering Period with respect to
such PPF.
"Indemnitee" shall have the meaning set forth in Section 2.6.
"Indemnified Liabilities" shall have the meaning set forth in
Section 2.6.
"Index Equity" shall mean, on any Valuation Date, the equity
securities of any company included in the S&P 500 Index on such Valuation
Date, as published by FactSet or a Substitute Valuation Source.
"Index Equity Capitalization" shall mean, for any Index Equity, on
any Valuation Date, the product of the number of shares outstanding of
such Index Equity, as published by FactSet or a Substitute Valuation
Source, multiplied by the price per share of such Index Equity, as
published in Reuters America or any Substitute Valuation Source.
"Index Future" shall mean a futures contract on the S&P 500 Index,
as traded on the Chicago Mercantile Exchange.
"Index Weight" shall mean, for any Index Equity, on any Valuation
Date, the percentage equivalent of a fraction, the numerator of which is
the Index Equity Capitalization of such Index Equity on such Valuation
Date and the denominator of which is the Total Index Capitalization on
such Valuation Date.
"Interactive Data" shall mean FT Interactive Data published by
Interactive Data Corporation or any successor thereto.
"Investment Adviser" shall mean, with respect to each PPF, Pilgrim
or any successor thereto appointed by the Board of Trustees of the Fund as
adviser to such PPF.
"Investment Advisers Act" shall mean the Investment Advisers Act of
1940, as amended.
"Investment Management Agreement" shall mean, with respect to each
PPF, the Investment Management Agreement, between the Fund on behalf of
such PPF, and Pilgrim or any successor Investment Adviser, substantially
in the form of Exhibit G-1 hereto, as the same may be amended,
supplemented or otherwise modified from time to time.
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"▇▇▇▇▇▇ Brothers Analytics Model" shall mean the ▇▇▇▇▇▇ Brothers PC
Product published by ▇▇▇▇▇▇ Brothers Inc. or an affiliate thereof or
successor thereto.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), other charge
or security interest, or
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any preference, priority or other agreement or preferential arrangement of
any kind or nature whatsoever.
"Low Ranked Equities" shall mean, on any date of determination, the
Index Equities listed by the Investment Adviser of each PPF as "Low Ranked
Stocks" in the report most recently delivered by such Investment Adviser
to the Insurer pursuant to Section 3.4.
"Lower Covered Expense Ratio" shall mean, with respect to any PPF,
on any Valuation Date, 1.75%.
"Market Value" shall mean on any date of determination:
(i) with respect to any Index Equity held by a PPF, the product of
(A) the price per share of such Index Equity at the close of trading on
such date, as published in Reuters America or in a Substitute Valuation
Source, times the number of shares of such Index Equity held by such PPF;
(ii) with respect to any Corporate Bond held by a PPF, the market
value thereof at the close of trading on such date obtained from
Interactive Data or a Substitute Valuation Source plus the aggregate
amount of accrued and unpaid interest thereon as of such date;
(iii) with respect to Cash Equivalents held by a PPF having a
maturity date 60 days or less from such date, the value of such security
determined in accordance with the "amortized cost" method of valuation
which method values an instrument at its cost and assumes a constant
amortization of premium or discount;
(iv) with respect to Cash Equivalents held by a PPF having a
maturity date more than 60 days from such date, the market value thereof
at the close of trading on such date obtained from Interactive Data or a
Substitute Valuation Source plus the aggregate amount of accrued and
unpaid interest thereon as of such date;
(v) with respect to any Index Future held by a PPF, the product of
(A) 500 (or such other index dollar multiplier designated by the Chicago
Mercantile Exchange as being in effect on such date) times (B) the price
of such Index Future at the close of trading on such date, as published in
Reuters America or a Substitute Valuation Source times (C) the number of
such Index Futures held by such PPF;
(vi) with respect to the U.S. Treasury Futures held by a PPF, the
aggregate Cash Margin with respect to such U.S. Treasury Futures;
(vii) with respect to any U.S. Treasury Zero or U.S. Agency Zero
held by a PPF, the market value thereof at the close of trading on such
date obtained from Interactive Data or a Substitute Valuation Source; and
(viii) with respect to any U.S. Treasury Note or U.S. Agency Note
held by a PPF, the market value thereof at the close of trading on such
date obtained from
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Interactive Data or a Substitute Valuation Source plus the aggregate
amount of accrued and unpaid interest thereon as of such date;
provided, however, that if on any date of determination the price or value
of any investment held by a PPF is not determinable as set forth above,
the Market Value thereof shall be determined on such date in such manner
as is determined in good faith by, or under the authority of, the Board of
Trustees of the Fund.
"Maturity Date" shall have the meaning set forth in Section 2.1.
"▇▇▇▇▇▇▇ ▇▇▇▇▇ Pricing Product" shall mean the ▇▇▇▇▇▇▇ ▇▇▇▇▇
Securities Pricing Product published by ▇▇▇▇▇▇▇ Lynch, Pierce, ▇▇▇▇▇▇ &
▇▇▇▇▇ Incorporated or an affiliate thereof or successor thereto.
"Modified Duration" shall mean, with respect to any Corporate Bond,
U.S. Treasury Note, U.S. Treasury Zero, U.S. Agency Note, U.S. Agency Zero
or U.S. Treasury Future on any Valuation Date, the quotient of (a) the
weighted average term to maturity of the cash flows generated by such
security (or, in the case of a U.S. Treasury Future, by the
Cheapest-to-Deliver Bond with respect to such U.S. Treasury Future on such
Valuation Date) divided by (b) the sum of (i) one plus (ii) the quotient
of (x) the yield to maturity of such security (or, in the case of a U.S.
Treasury Future, of the Cheapest-to-Deliver Bond with respect to such U.S.
Treasury Future) divided by (y) the number of interest payments on such
security per year (or in the case of a U.S. Treasury Future, on the
Cheapest-to-Deliver Bond with respect to such U.S. Treasury Future). For
the purposes of this calculation, the number of interest payments on any
U.S. Treasury Zero is assumed to be two per year.
"Moody's" shall mean ▇▇▇▇▇'▇ Investors Service, Inc. and its
successors and assigns.
"NAV" shall mean, with respect to any Class of Shares of a PPF, (a)
on the commencement date of such PPF, the net asset value per share of
such Class of Shares established by the Fund for such date and (b) on any
date of determination thereafter the quotient of (i) the excess of (x) the
market value of the assets allocated to that Class of Shares determined as
of the close of regular trading on the NYSE by the Fund in the manner
described in the Final Prospectus with respect to such Class of Shares
over (y) the market value of any liabilities allocated to and/or
associated with such Class of Shares determined as of the close of regular
trading on the NYSE by the Fund in the manner described in the Final
Prospectus with respect to such Class of Shares divided by (ii) the number
of outstanding shares of that Class of Shares at such time. The assets,
income, gain, loss and liabilities (other than those liabilities relating
specifically to a Class of Shares) of each PPF shall be allocated to each
Class of Shares of such PPF on each date of determination on a pro rata
basis based on the NAV of such Class of Shares on the preceding date of
determination.
"Net Expense Percentage" shall mean, with respect to any Class of
Shares of a PPF, the maximum percentage of such PPF's average daily net
assets enumerated in the
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13
Final Prospectus for such Class of Shares as the Net Expenses of such
Class which maximum percentage shall not exceed 2.50% without the prior
written consent of the Insurer.
"Notional Value" shall mean, with respect to any U.S. Treasury
Future, the trading unit of such U.S. Treasury Future designated by the
Chicago Board of Trade.
"NYSE" shall mean the New York Stock Exchange.
"Offering Period" shall mean, with respect to any PPF, the period
during which the shares of such PPF are offered for sale to investors
described in the Final Prospectus with respect to each Class of Shares of
such PPF.
"Permanent Deficit Event" shall have the meaning set forth in
Section 2.5.
"Permanent Fee Deficit Amount" shall mean, with respect to any PPF
as to which a Permanent Deficit Event shall have occurred, on any
Valuation Date, the product of (A) the quotient of (i) the Permanent Total
Deficit Amount with respect to such PPF on the Business Day on which such
Permanent Deficit Event shall have occurred minus the Permanent Principal
Deficit Amount with respect to such PPF divided by (ii) the Permanent
Total Deficit Amount with respect to such PPF on the Business Day on which
such Permanent Deficit Event shall have occurred times (B) the Permanent
Total Deficit Amount with respect to such PPF on such Valuation Date.
"Permanent Principal Deficit Amount" shall mean, with respect to any
PPF as to which a Permanent Deficit Event shall have occurred, the excess,
if any, of (a) the sum of the Present Value of the Aggregate Guarantee
Amount with respect to such PPF plus the Present Value of Covered Expenses
with respect to such PPF (calculated using the Higher Covered Expense
Ratio with respect to such PPF) on the Business Day on which such
Permanent Deficit Event shall have occurred over (b) the Hypothetical
Total Net Assets with respect to such PPF.
"Permanent Total Deficit Amount" shall mean, with respect to any
PPF, on any Valuation Date, the excess, if any, of (a) the sum of the
Present Value of the Aggregate Guarantee Amount with respect to such PPF
plus the Present Value of Covered Expenses with respect to such PPF
(calculated using the Higher Covered Expense Ratio with respect to such
PPF) over (b) the Total Net Assets with respect to such PPF on such
Valuation Date.
"Person" shall mean an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association,
limited liability company, joint venture, Government Authority or other
entity of whatever nature.
"Policy" shall have the meaning set forth in the recitals.
"Policy Fee" shall have the meaning set forth in Section 2.4.
- 10 -
14
"Portfolio Duration" shall mean, with respect to more than one type
of Fixed Income Securities held by any PPF on any Valuation Date, an
amount equal to the average of the Modified Duration of each such Fixed
Income Security, weighted on the basis of the Market Values thereof,
calculated using the ▇▇▇▇▇▇ Brothers Analytics Model or a Substitute
Valuation Source, as of the close of business on such Valuation Date.
"Preliminary Application" shall have the meaning set forth in
Section 2.2.
"Present Value of the Aggregate Guarantee Amount" shall mean, with
respect to any PPF, on any Valuation Date, the quotient of (a) the
Aggregate Guarantee Amount with respect to such PPF divided by (b) the
sum, compounded over two times the time remaining to the Maturity Date of
such PPF, of one plus one half of the Discount Rate with respect to such
PPF on such Valuation Date.
"Present Value of Covered Expenses" shall mean, with respect to any
PPF, on say Valuation Date, the product of (a) the Present Value of the
Aggregate Guarantee Amount with respect to such PPF on such Valuation Date
times (b) the excess of (i) the sum of one plus the Covered Expense Ratio
with respect to such PPF on such date, compounded over the time remaining
to the Maturity Date of such PPF, over (ii) one.
"Proxy U.S. Treasury Zero" shall mean, with respect to any PPF on
any Valuation Date, the U.S. Treasury Zero maturing on the date closest to
the Maturity Date with respect to such PPF, but in no event later than
such Maturity Date.
"Rebalancing" shall mean any divestiture of investments and
reinvestment of proceeds thereof required pursuant to Section 3.5(a) or
(b).
"Registration Statement" shall have the meaning set forth in Section
2.3(b).
"Reimbursement Amount" shall mean, with respect to any PPF, on any
Valuation Date, the excess, if any, of (a) the aggregate amount of
reimbursement payments received as of such date by the Insurer from the
Investment Adviser of such PPF with respect to such PPF pursuant to
Section 2.5, plus interest on each such payment from the date such payment
was received by the Insurer to, but excluding, such Valuation Date at the
Discount Rate prevailing with respect to such PPF on the date such payment
was received by the Insurer, over (b) the sum of the aggregate amount of
any refunds made by the Insurer to the Investment Adviser of such PPF with
respect to such PPF pursuant to Section 2.5, plus interest on each such
refund from the date of such refund to, but excluding, such Valuation Date
at the Discount Rate prevailing with respect to such PPF on the date of
such refund.
"Repayment Obligation" shall have the meaning set forth in the
recitals.
"Requirements of Law" shall mean, as to any Person, the certificate
of incorporation and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule, or regulation or
determination of an arbitrator or a court
- 11 -
15
or other Government Authority, in each case applicable to or binding upon
such Person or any of its property or to which such Person or any of its
property is subject.
"Reuters America" shall mean Reuters America published by Reuters
America Inc. or any successor thereto.
"Sector" shall mean one of the economic sectors into which S&P
divides the Index, as amended from time to time by S&P. Each Index Equity
shall belong to the Sector designated by S&P.
"Sector Index Weight" shall mean, on any Valuation Date, for each
Sector, the percentage equivalent of a fraction, the numerator of which is
the sum of the Index Equity Capitalizations for all Index Equities
belonging to such Sector on such Valuation Date and the denominator of
which is the Total Index Capitalization on such Valuation Date.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Selection Guidelines" shall mean the investment guidelines
described in Annex A.
"S&P" shall mean Standard and Poor's Ratings Service, a division of
McGraw Hill Companies, Inc.
"S&P 500 Index" shall mean the index of 500 equity securities known
as the Standard and Poor's 500 Composite Index as compiled by S&P and
published by FactSet or a Substitute Valuation Source.
"Sub-Adviser" shall mean, with respect to each PPF, Aeltus or any
successor thereto appointed by the Board of Trustees of the Fund as
sub-adviser to such PPF.
"Sub-Adviser Agreement" shall mean, with respect to each PPF, the
Sub-Adviser Agreement between the Investment Adviser with respect to such
PPF and the Sub-Adviser, substantially in the form of Exhibit G-2 hereto,
as the same may be amended, supplemented or otherwise modified from time
to time.
"Substitute Valuation Source" shall mean any widely recognized,
reputable source of valuation approved by the Board of Trustees of the
Fund or a committee thereof and used by a Sub-Adviser of a PPF to value
investments held by such PPF.
"Targeted Fed Funds Rate" shall mean, on any Valuation Date, the
rate on overnight federal funds set by the Federal Open Market Committee
of the Federal Reserve System in effect on such Valuation Date, as
published by Bloomberg, L.P.
"Theoretical Zero Modified Duration" shall mean, with respect to any
PPF on any Valuation Date, the Modified Duration of the U.S. Treasury Zero
maturing on the Maturity Date with respect to such PPF or, if no such U.S.
Treasury Zero exists, the Modified Duration of a hypothetical U.S.
Treasury Zero, maturing on such Maturity Date
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16
and having a yield to maturity equal to the interpolated yield to maturity
on the two U.S. Treasury Zeroes which mature immediately before and
immediately after such Maturity Date on such Valuation Date.
"Total Net Assets" shall mean, with respect to any PPF, on any
Valuation Date, an amount equal to the excess of (a) the sum of:
(i) the aggregate Market Value of all Index
Equities held by such PPF on such Valuation
Date;
(ii) the aggregate Market Value of all Cash Equivalents held
by such PPF (less Cash Associated with Futures and Cash
Margin with respect to such PPF) on such Valuation Date;
(iii) the aggregate Market Value of all U.S. Treasury
Zeroes and U.S. Agency Zeroes held by such PPF
on such Valuation Date;
(iv) the aggregate Market Value of all Corporate
Bonds held by such PPF on such Valuation Date;
(v) the Market Value of all U.S. Treasury Futures
held by such PPF;
(vi) the Market Value of all U.S. Treasury Notes and
U.S. Agency Notes held by such PPF;
(vii) the aggregate Market Value of all Index Futures
held by such PPF on such Valuation Date;
(viii) to the extent not included in the Market Value of the
Equity Portfolio, Fixed Income Portfolio or the Cash
Equivalents of such PPF, an amount equal to the
aggregate amount of interest and dividend receivables
and receivables for securities sold payable to such
PPF;
(ix) an amount equal to the aggregate amount payable to such
PPF on such Valuation Date on account of a decrease in
the margin requirements with respect to the U.S.
Treasury Futures held by such PPF; and
(x) an amount equal to the aggregate amount payable to such
PPF by the Investment Adviser with respect to such PPF
pursuant to the Investment Management Agreement with
respect to such PPF on account of expenses incurred by
such PPF that are subject to reimbursement by such
Investment Adviser;
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17
over (b) an amount equal to the aggregate amount of the liabilities
allocated to such PPF, including all amounts payable by such PPF in
respect of securities purchased.
"Total Index Capitalization" shall mean, on any Valuation Date, the
sum of the Index Equity Capitalizations on such Valuation Date for all
Index Equities.
"Transaction Documents" shall mean, with respect to a PPF, this
Agreement, the Final Prospectus with respect to each Class of Shares of
such PPF, the Declaration of Trust, the Establishment and Designation of
Series and Classes with respect to such PPF, the Investment Management
Agreement with respect to such PPF, the Sub-Adviser Agreement with respect
to such PPF, the Expense Limitation Agreement with respect to such PPF,
the Administrative Services Agreement and the Custodian Service and
Monitoring Agreement with respect to such PPF, as each may be amended,
supplemented or otherwise modified from time to time.
"U.S. Agency Notes" shall mean non-callable interest bearing general
obligations of any one of the following agencies of the Federal Government
of the United States of America: Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation, Federal Home Loan Bank, Resolution
Funding Corporation, Financing Corporation and Tennessee Valley Authority;
provided, however, that any such obligations that are rated less than AAA
by S&P or less than Aaa by Moody's shall not be U.S. Agency Notes.
"U.S. Agency Zeroes" shall mean non-callable non-interest bearing
obligations of any one of the following agencies of the Federal Government
of the United States of America: Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation, Federal Home Loan Bank, Resolution
Funding Corporation, Financing Corporation and Tennessee Valley Authority;
provided, however, that any such obligations that are rated less than AAA
by S&P or less than Aaa by Moody's shall not be U.S. Agency Zeroes.
"U.S. Treasury Future" shall mean a futures contract on a U.S.
Treasury Note, having a maturity of no less than 2 and no more than 10
years, as traded on the Chicago Board of Trade.
"U.S. Treasury Futures Spread" shall mean, for any PPF, on any
Valuation Date, the sum of the product for each U.S. Treasury Future held
by such PPF of (a) the Notional Value of such U.S. Treasury Future times
(b) the excess of (i) the yield on the Cheapest-to-Deliver Bond with
respect to such U.S. Treasury Future over (ii) the Targeted Fed Funds Rate
on such Valuation Date.
"U.S. Treasury Notes" shall mean non-callable interest bearing
general obligations of the United States Treasury backed by the full faith
and credit of the United States of America."
"U.S. Treasury Zeroes" shall mean non-callable non-interest bearing
obligations of the United States Treasury backed by the full faith and
credit of the United States of America, including, without limitation:
Certificates of Accrual on Treasury Securities
- 14 -
18
(CATS); Treasury Investment Growth Receipts (TIGRs); Generic Treasury
Receipts (TRs); and Separate Trading of Registered Interest and Principal
of Securities (STRIPS).
"Valuation Date" shall mean, for any Business Day, as of the close
of trading on the immediately preceding Business Day.
Section 1.2. Generic Terms. All words used herein shall be construed
to be of such gender or number as the circumstances require. The words "herein,"
"hereby," "hereof." "hereto," "hereinbefore" and "hereinafter," and words of
similar import, refer to this Agreement in its entirety and not to any
particular paragraph, clause or other subdivision, unless otherwise specified,
and Section, subsection, Schedule and Exhibit references are to this Agreement
unless otherwise specified.
Section 1.3. Valuation. All calculations and valuations to be made
herein shall be made on a basis that assumes that all acquisitions and
dispositions of securities are accounted for on the trade date plus one (T+l);
provided, however that (i) any acquisition or disposition of a security which
settles on the trade date will be accounted for on that day, (ii) any
acquisition or disposition of a security on a trade date which relates to an
Asset Reallocation with respect to a PPF will be accounted for on that trade
date and (iii) all acquisitions and dispositions of securities on a trade date
on which the S&P 500 Index declines 5% or more will be accounted for on that
trade date.
ARTICLE II
THE POLICIES
Section 2.1. Policies. The Insurer agrees, subject to the conditions
hereinafter set forth, to issue up to ten Policies to the Fund during the period
commencing on the Effective Date and ending on December 31, 2003 in an aggregate
amount up to $750,000,000. Each Policy shall (i) be issued on an Inception Date
with respect to a PPF, (ii) guarantee the Aggregate Guarantee Amount with
respect to such PPF on the date which is five years from the issuance date of
such Policy (the "Maturity Date"), (iii) be in an amount equal to the Aggregate
Guarantee Amount on the Inception Date with respect to such PPF, (iv) be in an
amount not less than $10,000,000 and (v) terminate by its terms on the latest of
(A) the second Business Day immediately succeeding the Maturity Date with
respect to such PPF, (B) any date on which the Aggregate Guarantee Amount with
respect to such PPF equals zero or (C) the payment by the Insurer of all amounts
owing under such Policy.
Section 2.2. Procedure for Issuance of Policies. The Fund may from
time to time request that the Insurer issue a Policy by delivering to the
Insurer at its address for notices specified herein a preliminary application
therefor substantially in the form of Exhibit H-1(each a "Preliminary
Application"), completed to the satisfaction of the Insurer, and such other
information or written documentation relating to the PPF as the Insurer may
reasonably request. Upon (i) receipt of any Preliminary Application, (ii)
receipt prior to 10 a.m. (New York City time) on the Inception Date of a final
application substantially in the form of Exhibit H-2 (each a "Final
Application") and (iii) satisfaction of the conditions precedent therefor set
forth in Section 2.3(b), the Insurer shall promptly issue and deliver to the
Fund at its address for notices specified herein the Policy requested thereby
duly authorized and executed by the Insurer (but in no event
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19
shall the Insurer send any Policy to the Fund later than five Business Days
after its receipt of the Preliminary Application therefor or be required to send
any Policy to the Fund earlier than two Business Days after its receipt of the
Preliminary Application therefor).
Section 2.3. Conditions Precedent to Effectiveness. (a) The
effectiveness of this Agreement is subject to the satisfaction of the following
conditions:
(i) This Agreement, the Administrative Services Agreement and the
Custodian Agreement shall be in full force and effect and shall be in form
and substance satisfactory to the Insurer and an executed counterpart of
each such agreement shall have been delivered to the Insurer,
(ii) The Insurer and the Fund shall have received (1) a certificate
of the Secretary or Assistant Secretary of Pilgrim, dated as of the
Effective Date, as to the incumbency and signature of the officers or
other employees of Pilgrim authorized to sign this Agreement and the
Administrative Services Agreement on behalf of Pilgrim, together with
evidence of the incumbency of such Secretary or Assistant Secretary,
certified by the Secretary or Assistant Secretary of Pilgrim, and (2) a
certificate of the Secretary or Assistant Secretary of Aeltus, dated as of
the Effective Date, as to the incumbency and signature of the officers or
other employees of Aeltus authorized to sign this Agreement on behalf of
Aeltus, together with evidence of the incumbency of such Secretary or
Assistant Secretary, certified by the Secretary or Assistant Secretary of
Aeltus;
(iii) The Insurer, Pilgrim and Aeltus shall have received a
certificate of the Secretary or Assistant Secretary of the Fund, dated as
of the Effective Date, as to the incumbency and signature of the officers
or other employees of the Fund authorized to sign this Agreement, the
Administrative Services Agreement and the Custodian Agreement on behalf of
the Fund, together with evidence of the incumbency of such Secretary or
Assistant Secretary, certified by the Secretary or Assistant Secretary of
the Fund;
(iv) Pilgrim, Aeltus and the Fund shall have received a certificate
of the Secretary or Assistant Secretary of the Insurer, dated as of the
Effective Date, as to the incumbency and signature of the officers or
other employees of the Insurer authorized to sign this Agreement on behalf
of the Insurer, together with evidence of the incumbency of such Secretary
or Assistant Secretary, certified by the Secretary or Assistant Secretary
of the Insurer;
(v) The Insurer shall have received (1) a certificate of the
Secretary or Assistant Secretary of Pilgrim, dated as of the Effective
Date, certifying that attached thereto are true, complete and correct
copies of the resolutions duly adopted by the Board of Directors of
Pilgrim authorizing the execution of this Agreement and all other
Transaction Documents entered into on or prior to the Effective Date to
which Pilgrim is a party, and (2) a certificate of the Secretary or
Assistant Secretary of Aeltus, dated as of the Effective Date, certifying
that attached thereto are true, complete and correct copies of the
resolutions duly adopted by the Board of Directors of Aeltus authorizing
the
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20
execution of this Agreement and all other Transaction Documents entered
into on or prior to the Effective Date to which Aeltus is a party;
(vi) The Insurer shall have received certificates of the Secretary
or Assistant Secretary of the Fund, dated as of the Effective Date,
certifying that attached thereto are true, complete and correct copies of
resolutions duly adopted by the Board of Trustees of the Fund authorizing
the execution of this Agreement and all Transaction Documents entered into
on or prior to the Effective Date to which it is a party and of the
Declaration of Trust;
(vii) Each party to this Agreement shall have received the following
executed legal opinions, in form and substance satisfactory to each of the
parties hereto, dated the Effective Date:
(A) the opinion of Dechert, as counsel to Pilgrim,
substantially to the effect set forth in Exhibit I-1;
(B) the opinion of ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq., as counsel to
Aeltus, substantially to the effect set forth in Exhibit I-2;
(C) the opinion of an Associate General Counsel and Vice
President of the Insurer, substantially to the effect set forth in
Exhibit J; and
(D) the opinion of Dechert, as counsel to the Fund,
substantially to the effect set forth in Exhibit K;
(viii) The Insurer shall have received a copy of the Declaration of
Trust, certified by the Secretary of The Commonwealth of Massachusetts;
and
(ix) All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by this Agreement and the other Transaction Documents shall
be satisfactory in form and substance to the Insurer, and the Insurer
shall have received such other documents and legal opinions in respect of
any aspect or consequence of the transactions contemplated hereby or
thereby as it shall reasonably request.
(b) The obligation of the Insurer to issue each Policy is subject to
the satisfaction of the following conditions on the Inception Date with respect
to the related PPF:
(i) The Insurer shall have received a certificate of the Secretary
or Assistant Secretary of Pilgrim dated as of such Inception Date
certifying that (A) a registration statement on Form N-1A with respect to
each Class of Shares with respect to such PPF (1) has been prepared by the
Fund in conformity with the requirements of the Acts and the rules and
regulations of the Commission thereunder, (2) has been filed with the
Commission under the Acts, (3) has become effective under the Acts, (B) if
any post-effective amendment to such registration statement has been filed
prior to the Inception Date, the most recent such amendment has been
declared effective by the Commission, (C) true and complete copies of such
registration statement as amended to the Inception
- 17 -
21
Date are attached thereto (the "Registration Statement"), excluding any
exhibits thereto, (D) the Commission has not issued any order preventing
or suspending the use of any preliminary prospectus relating to any Class
of Shares with respect to such PPF and the Fund has not received any
notice from the Commission pursuant to Section 8(e) of the Investment
Company Act with respect to the Registration Statement, (E) the
Registration Statement and the Final Prospectus with respect to each Class
of Shares of such PPF contain, all statements which are required by the
Acts and the rules and regulations thereunder; (F) the Registration
Statement and the Final Prospectus with respect to each Class of Shares of
such PPF do not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading and (G) the shares of each Class of
Shares of such PPF conform in all material respects to the description
thereof contained in the Registration Statement and the Final Prospectus
with respect to such Class of Shares.
(ii) The Investment Management Agreement with Pilgrim, the
Sub-Adviser Agreement with Aeltus, the Expense Limitation Agreement, and
the Custodian Service and Monitoring Agreement with respect to such PPF
shall be in full force and effect and an executed counterpart of each such
agreement shall have been delivered to the Insurer;
(iii) A copy of the Establishment and Designation of Series and
Classes with respect to such PPF, certified by the Secretary of The
Commonwealth of Massachusetts, shall have been delivered to the Insurer;
(iv) A copy of the Final Prospectus with respect to each Class of
Shares of such PPF shall have been delivered to the Insurer;
(v) Each party to this Agreement shall have received the following
executed legal opinions, in form and substance satisfactory to each of the
parties hereto, dated the Inception Date:
(A) the opinion of Dechert, as counsel to Pilgrim,
substantially to the effect set forth in Exhibit L-1;
(B) the opinion of ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq., as counsel to
Aeltus, substantially to the effect set forth in Exhibit L-2;
(C) the opinion of an Assistant General Counsel of State
Street Bank and Trust Company, substantially to the effect set forth
in Exhibit M; and
(D) the opinion of Dechert, as counsel to the Fund,
substantially to the effect set forth in Exhibit N.
(vi) The Insurer shall have received a certificate of the Secretary
or Assistant Secretary of the Fund certifying that attached thereto are
true, complete and correct copies of the resolutions duly adopted by the
Board of Trustees of the Fund authorizing the creation of such PPF and the
execution by the Fund of the Investment Management Agreement and the
Custodian Service and Monitoring Agreement with respect to such
- 18 -
22
PPF and of the Establishment and Designation of Series and Classes with
respect to such PPF in the form filed with the Secretary of The
Commonwealth of Massachusetts;
(vii) The Insurer shall have received a certificate of the Secretary
or Assistant Secretary of Pilgrim certifying that attached thereto are
true, complete and correct copies of the resolutions duly adopted by the
Board of Directors of Pilgrim authorizing the execution by Pilgrim of the
Investment Management Agreement and the Sub-Adviser Agreement with respect
to such PPF;
(viii) The Insurer shall have received a certificate of the
Secretary or Assistant Secretary of Aeltus certifying that attached
thereto are true, complete and correct copies of the resolutions duly
adopted by the Board of Directors of Aeltus authorizing the execution by
Aeltus of the Sub-Adviser Agreement with respect to such PPF;
(ix) The Insurer and the Fund shall have received a certificate of
the Secretary or Assistant Secretary of Pilgrim as to the incumbency and
signature of the officers or other employees of Pilgrim authorized to sign
the Investment Management Agreement and the Sub-Adviser Agreement with
respect to such PPF on behalf of Pilgrim, together with evidence of the
incumbency of such Secretary or Assistant Secretary, certified by the
Secretary or Assistant Secretary of Pilgrim;
(x) The Insurer and the Fund shall have received a certificate of
the Secretary or Assistant Secretary of Aeltus as to the incumbency and
signature of the officers or other employees of Aeltus authorized to sign
the Sub-Adviser Agreement with respect to such PPF on behalf of Aeltus,
together with evidence of the incumbency of such Secretary or Assistant
Secretary, certified by the Secretary or Assistant Secretary of Aeltus;
(xi) The Insurer and Pilgrim shall have received a certificate of
the Secretary or Assistant Secretary of the Fund as to the incumbency and
signature of the officers or other employees of the Fund authorized to
sign the Investment Management Agreement and the Custodian Service and
Monitoring Agreement with respect to such PPF on behalf of the Fund,
together with evidence of the incumbency of such Secretary or Assistant
Secretary, certified by the Secretary or Assistant Secretary of the Fund;
(xii) Each of the representations and warranties made by Pilgrim,
Aeltus and the Fund in or pursuant to the Transaction Documents shall be
true and correct in all material respects on and as of such date;
(xiii) No Default or Event of Default shall have occurred and be
continuing on such date;
(xiv) No statute, rule, regulation or order shall have been enacted,
entered or deemed applicable by any Government Authority which would make
the transactions contemplated by any of the Transaction Documents illegal
or otherwise prevent the consummation thereof; and
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23
(xv) All proceedings, and all documents, instruments and other legal
matters in connection with the creation of such PPF shall be satisfactory
in form and substance to the Insurer.
Section 2.4. Fees. In consideration of the issuance by the Insurer
of each Policy with respect to a PPF, the Fund, on behalf of such PPF, shall pay
to the Insurer a fee in an amount equal to 0.33% per annum of the average daily
Total Net Assets of such PPF during each calendar month in the Guarantee Period
with respect to such PPF (the "Policy Fee") payable monthly in arrears on the
first Business Day of the following calendar month (each a "Fee Payment Date").
Policy Fees payable on each Fee Payment Date will be calculated based on a
365-or 366-day year for the actual number of days elapsed and any calendar month
ending during a weekend will include the days during such weekend falling in the
next calendar month (which days will not be included in the next calendar
month). The Policy Fee includes certain fees payable to consultants for which
the Insurer acts as a pass-through entity.
Section 2.5. Reimbursement Obligations. (a) If, after any
Rebalancing on any Business Day pursuant to Section 3.5 with respect to any PPF,
(x) all of the assets of such PPF are, or are required to be, invested solely in
U.S. Treasury Zeroes, U.S. Agency Zeroes and Cash Equivalents, and (y) the
Covered Expense Ratio used to calculate the Present Value of Covered Expenses
with respect to such PPF was less than the Higher Covered Expense Ratio with
respect to such PPF on the Valuation Date for such Business Day, a "Permanent
Deficit Event" shall be deemed to have occurred with respect to such PPF.
(b) After the occurrence of a Permanent Deficit Event with respect
to any PPF, the Investment Adviser of such PPF hereby agrees to pay to the
Insurer from time to time an amount equal to each payment of any amount made for
any reason by such PPF to such Investment Adviser, within two Business Days of
the date of such Investment Adviser's receipt of such payment, until the first
Valuation Date on which the Reimbursement Amount with respect to such PPF equals
or exceeds the Permanent Fee Deficit Amount with respect to such PPF on such
Valuation Date. Thereafter, the Insurer hereby agrees to pay to the Investment
Adviser of such PPF, on a quarterly basis, on the last Business Day of each
calendar quarter and on the Maturity Date of such PPF, the excess, if any, of
(a) the Reimbursement Amount with respect to such PPF over (b) the Permanent Fee
Deficit Amount with respect to such PPF as of the last Valuation Date of such
calendar quarter or such Maturity Date, as the case may be.
Section 2.6. Indemnification. (a) In addition to any and all rights
of reimbursement or any other rights pursuant hereto or under law or equity,
Pilgrim agrees (i) to pay, or reimburse, the Insurer for all of its reasonable
out-of-pocket costs and expenses (including, without limitation as provided in
Section 7.5, the reasonable fees and disbursements of its counsel) incurred in
connection with the negotiation, preparation, execution and delivery of this
Agreement, the other Transaction Documents and any amendment, supplement or
modification thereof, or waiver or consent thereunder, (ii) to pay, or
reimburse, the Insurer for all of its reasonable out-of-pocket costs and
expenses (including, without limitation, the reasonable fees and disbursements
of its counsel) incurred in connection with the enforcement or preservation of
any rights under the Transaction Documents, (iii) to pay, indemnify, and hold
the Insurer harmless from any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes, if any, that may be
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payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of the Transaction Documents and (iv) to pay,
indemnify and hold the Insurer and its officers, directors, employees and agents
(each an "Indemnitee") harmless from and against any and all out-of-pocket
liabilities (including penalties), obligations, losses, damages, actions, suits,
demands, claims, judgments, costs, expenses or disbursements of any kind or
nature whatsoever that arise out of, or in any way relate to or result from or
out of (A) the transactions contemplated by the Transaction Documents or (B) any
investigation or defense of, or participation in, any legal proceeding relating
to the execution, delivery, enforcement, performance or administration of the
Transaction Documents (whether or not such Indemnitee is a party thereto) (all
the foregoing in clauses (i) through (iv) above, collectively, the "Indemnified
Liabilities"); provided that Pilgrim shall have no obligation hereunder to any
Indemnitee with respect to Indemnified Liabilities arising from the gross
negligence, bad faith or willful misconduct of any Indemnitee. Any payments
required to be made by Pilgrim under this Section 2.6 shall be due and payable
by Pilgrim on the 30th day after demand therefor.
(b) The indemnity provisions of this Section 2.6, as well as the
reimbursement provisions set forth in Section 2.5, shall survive the termination
of this Agreement.
ARTICLE III
MANAGEMENT OF PPFs
Section 3.1. Eligible Investments. (a) The Investment Adviser of
each PPF shall segregate the assets of such PPF from all other series of the
Fund and ensure that the investment of the assets of each PPF independently
satisfies the requirements of this Article III. The requirements of this Article
III apply to each PPF only through the Maturity Date of such PPF.
(b) The Investment Adviser and the Sub-Adviser of each PPF shall,
subject to the restrictions of Sections 3.2, 3.3, 3.4 and 3.5, invest the assets
of such PPF only in the following types of investments ("Eligible PPF
Investments"):
(i) cash and the following short-term securities with remaining
maturities of 180 days or less: (1) direct obligations of, and obligations
fully guaranteed as to full and timely payment by the full faith and
credit of, the United States of America, excluding U.S. Treasury Zeroes
and U.S. Agency Zeroes; (2) demand deposits, time deposits or certificates
of deposit of any depository institution or trust company incorporated
under the laws of the United States of America or any state thereof;
provided that at the time of investment therein the commercial paper or
other short-term unsecured debt obligations thereof shall be rated at
least A-1 by S&P or P-1 by ▇▇▇▇▇'▇; (3) bankers acceptances issued by any
depository institution or trust company referred to in clause (2) above;
and (4) commercial paper having at the time of the investment therein a
rating of at least A-1 by S&P or P-1 by ▇▇▇▇▇'▇;
(ii) U.S. Treasury Notes, U.S. Treasury Zeroes, U.S. Agency Notes or
U.S. Agency Zeroes; and
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25
(iii) Non-callable interest bearing debt obligations of a
corporation having a rating of least AA- by S&P or Aa3 by ▇▇▇▇▇'▇;
provided that if both ▇▇▇▇▇'▇ and S&P have issued a rating thereon, such
rating shall be no less than AA-/Aa3 ("Corporate Bonds");".
(iv) U. S. Treasury Futures;
(v) Index Equities; and
(vi) Index Futures.
Section 3.2. Investment Limitations. The Investment Adviser and the
Sub-Adviser of each PPF shall invest the assets of such PPF subject to the
following limitations:
(a) all Cash Associated with Futures shall be invested in Cash
Equivalents;
(b) such PPF shall hold Cash Equivalents (excluding Cash Margin)
plus receivables for securities sold less payables for securities purchased
having an aggregate Market Value at all times at least equal to Cash Associated
with Futures with respect to such PPF;
(c) the aggregate Market Value of all Cash Equivalents held by such
PPF (less Cash Associated with Futures and Cash Margin with respect to such PPF)
on any Valuation Date shall not exceed 4% of the Total Net Assets with respect
to such PPF on such Valuation Date;
(d) no Cash Equivalent or U.S. Treasury Zero or U.S. Agency Zero
held by such PPF shall mature after the Maturity Date with respect to such PPF;
(e) at the time of any investment in Corporate Bonds by such PPF, no
more than 2% of the Total Net Assets of such PPF shall be invested in Corporate
Bonds issued by a particular issuer or group of affiliated issuers;
(f) the aggregate net Notional Value of all U.S. Treasury Futures
held by such PPF on any Valuation Date shall not exceed an amount equal to 50%
of the aggregate Market Value of all Corporate Bonds, U.S. Treasury Notes and
U.S. Agency Notes held by such PPF on such Valuation Date;
(g) US. Treasury Futures shall be acquired or sold by a PPF only in
order to shorten or lengthen the Portfolio Duration with respect to the
Corporate Bonds, U.S. Treasury Notes and U.S. Agency Notes held by such PPF;
(h) on any Valuation Date, the Portfolio Duration with respect to
the Corporate Bonds, the U.S. Treasury Notes, the U.S. Treasury Zeroes, the U.S.
Agency Notes, the U.S. Agency Zeroes and U.S. Treasury Futures held by such PPF
shall not be greater than the Theoretical Zero Modified Duration with respect to
such PPF nor less than the Theoretical Zero Modified Duration with respect to
such PPF minus 0.25;
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26
(i) the aggregate Market Value of all Index Futures held by such PPF
on any Valuation Date shall not exceed 25% of the aggregate Market Value of all
Index Equities held by such PPF on such Valuation Date;
(j) any Corporate Bond held by such PPF that is rated less than AA-
by S&P or less than Aa3 by ▇▇▇▇▇'▇ shall be sold by such PPF within 15 Business
Days following the public announcement of such rating;
(k) the aggregate Market Value of the Corporate Bonds held by such
PPF shall not exceed 45% of the aggregate Market Value of the Fixed Income
Portfolio with respell to such PPF;
(l) all U.S. Treasury Zeroes or U.S. Agency Zeroes held by such PPF
shall mature on, or within the 90 days preceding, the Maturity Date with respect
to such PPF; and
(m) all Corporate Bonds, U.S. Treasury Notes and U.S. Agency Notes
held by such PPF shall mature within the three years preceding or the three
years following the Maturity Date with respect to such PPF.
Section 3.3. Index Equity Selection Guidelines. The Investment
Adviser and the Sub-Adviser of each PPF shall make each investment in Index
Equities in such PPF in accordance with the Selection Guidelines. Each
Investment Adviser and each Sub-Adviser shall not make any material change in
the Selection Guidelines, including without limitation, the investment selection
methodology described therein, without the prior written consent of the Insurer.
Section 3.4. Index Equity Diversification and Capitalization
Requirements. The Investment Adviser and the Sub-Adviser of each PPF shall
invest the assets of such PPF, to the extent such PPF holds any Index Equities,
such that the following requirements are satisfied as of each Valuation Date:
(a) each PPF shall be invested in at least 400 of the 500 Index
Equities; provided that no investment in an Index Equity will be included for
the purposes of satisfying the requirements set forth in this paragraph (a)
unless the Fund Weight with respect to such PPF and such Index Equity equals or
exceeds 40% of the Index Weight for such Index Equity,
(b) the aggregate of the Index Weights with respect to each of the
Index Equities which are held by such PPF and which satisfy the requirements of
paragraph (a) above shall not be less than 85%;
(c) the Fund Weight with respect to such PPF and each Index Equity
held by such PPF shall not exceed 200% of the Index Weight for such Index
Equity, and
(d) the Fund Sector Weight with respect to such PPF for each Sector
shall not: (i) exceed 135% of the Sector Index Weight for such Sector or (ii) be
less than 65% of the Sector Index Weight for such Sector.
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The Investment Adviser of each PPF shall demonstrate compliance with
the requirements and limitations set forth in this Section 3.4 by providing to
the Insurer, within 10 calendar days of the end of each month, a report for such
PPF as of such month end, substantially in the form attached hereto as Exhibit O
hereto.
Section 3.5. Asset Allocation and Rebalancing. (a) If, with respect
to any PPF, prior to the open of trading on the NYSE on any Business Day, the
excess of (1) the sum of:
(i) 70% of the aggregate Market Value of all Index Equities held by
such PPF on the Valuation Date for such Business Day,
(ii) the aggregate Market Value of all Cash Equivalents held by such
PPF (less Cash Associated with Futures and Cash Margin with respect to
such PPF) on the Valuation Date for such Business Day,
(iii) the aggregate Market Value of all U.S. Treasury Notes, U. S.
Agency Notes, U.S. Treasury Zeroes and U.S. Agency Zeroes held by such PPF
on the Valuation Date for such Business Day,
(iv) the aggregate Market Value of all Corporate Bonds held by such
PPF on the Valuation Date for such Business Day,
(v) the aggregate Market Value of all U.S. Treasury Futures held by
such PPF on the Valuation Date for such Business Day,
(vi) 70% of the aggregate Market Value of all Index Futures held by
such PPF on the Valuation Date for such Business Day,
(vii) to the extent not included in the Market Value of the Equity
Portfolio, Fixed Income Portfolio or the Cash Equivalents of such PPF, an
amount equal to the aggregate amount of interest and dividend receivables
and receivables for securities sold payable to such PPF on the Valuation
Date for such Business Day,
(viii) an amount equal to the aggregate amount payable to such PPF
on such Valuation Date on account of a decrease in the margin requirements
with respect to the U.S. Treasury Futures held by such PPF, and
(ix) an amount equal to the aggregate amount payable to such PPF by
the Investment Adviser with respect to such PPF pursuant to the Investment
Management Agreement with respect to such PPF on account of expenses
incurred by such PPF that are subject to reimbursement by such Investment
Adviser,
over (2) an amount equal to the aggregate amount of the liabilities allocated to
such PPF, including all amounts payable by such PPF in respect of securities
purchased (the "Adjusted Total Net Assets"), is less than the Asset Allocation
Threshold with respect to such PPF on such Business Day (the foregoing
determination an "Asset Allocation Test"), either the Investment Adviser or the
Sub-Adviser of such PPF shall sell a portion of the Index Equities and/or Index
Futures held by such PPF and reinvest the proceeds of such sale in U.S. Treasury
Zeroes, U.S.
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Agency Zeroes, U.S. Treasury Notes, U.S. Agency Notes, Corporate Bonds and/or
Cash Equivalents such that, after giving effect to such sale and reinvestment of
proceeds, the Adjusted Total Net Assets with respect to such PPF would equal or
exceed the sum of the Present Value of the Aggregate Guarantee Amount with
respect to such PPF plus the Present Value of Covered Expenses with respect to
such PPF. An Asset Allocation Test shall be performed with respect to each PPF
by the Sub-Adviser of such PPF prior to the open of trading on the NYSE on each
Business Day.
(b) If, with respect to any PPF, prior to the open of trading on the
NYSE on any Business Day, the Adjusted Total Net Assets of such PPF is equal to
or greater than the Asset Allocation Threshold with respect to such PPF and, on
such Business Day, the Investment Adviser or the Sub-Adviser of such PPF effects
an Asset Reallocation with respect to such PPF, such Investment Adviser or
Sub-Adviser of such PPF shall reallocate the investments held by such PPF such
that, after giving effect to such change in investments, the Adjusted Total Net
Assets with respect to such PPF would equal or exceed the sum of the Present
Value of the Aggregate Guarantee Amount with respect to such PPF plus the
Present Value of Covered Expenses with respect to such PPF.
(c) If, on any Business Day, either the Investment Adviser or the
Sub-Adviser of any PPF shall fail to effect a Rebalancing required by this
Section 3.5, such Investment Adviser or Sub-Adviser shall provide the Insurer,
the Custodian and the Investment Adviser with written notice of such failure
prior to the next succeeding Business Day.
(d) If, on any Business Day, with respect to any PPF, the aggregate
Market Value of all Index Equities permitted to be held by such PPF in
accordance with the Asset Allocation Test is less than 40% of the Total Net
Assets of such PPF, either the Investment Adviser or the Sub- Adviser of such
PPF shall sell all Corporate Bonds[, U.S. TREASURY NOTES AND U.S. AGENCY NOTES]
held by such PPF on such Business Day and reinvest the proceeds thereof in U.S.
Treasury Zeroes or U.S. Agency Zeroes or Cash Equivalents.
(e) Each Sub-Adviser of a PPF shall report the results of each Asset
Allocation Test with respect to such PPF for each Business Day in a report
substantially in the form attached hereto as Exhibit P hereto, and shall deliver
each such report to the Insurer and to the Investment Adviser prior to the
opening of business on the next succeeding Business Day.
ARTICLE IV
EVENTS OF DEFAULT
Section 4.1. Default. If any of the following events (each, an
"Event of Default") shall occur and be continuing:
(a) Any Investment Adviser or Sub-Adviser of a PPF shall default in
its observance or performance of any agreement or obligation contained in
Section 3.1, 3.2, 3.3, 3.4 or 3.5(d) and such default shall continue unremedied
for a period of three Business Days; provided, however that such Investment
Adviser or Sub-Adviser shall not be in default of its obligations contained in
Section 3.2(c) on any Business Day on which the market for Treasury obligations
of the U.S. Government is closed;
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(b) Any Investment Adviser or Sub-Adviser of a PPF shall default in
its observance or performance of any agreement or obligation contained in
Section 3.5(a), (b), (c) or 3.5(e) and such default shall continue unremedied
for a period of one Business Day;
(c) Any Investment Adviser or Sub-Adviser of a PPF or the Fund shall
default in the observance or performance of any agreement or obligation
contained in this Agreement (other than any obligation or agreement referred to
in paragraphs (a) or (b) above) and such default remains unremedied for a period
of 15 Business Days after the date on which written notice thereof shall have
been given by the Insurer to such Investment Adviser or Sub-Adviser or the Fund;
or
(d) Any representation or warranty made or deemed made by any
Investment Adviser or Sub-Adviser of a PPF or the Fund in this Agreement or
which is contained in any certificate, document or financial or other statement
furnished at any time under or in connection with this Agreement shall prove to
have been incorrect in any material respect on or as of the date made or deemed
made and such breach remains unremedied for a period of 15 Business Days after
the date on which written notice thereof shall have been given by the Insurer to
such Investment Adviser, such Sub-Adviser or the Fund;
then and only then the Insurer shall have the right to direct the investment of
funds in the particular PPF or PPFs pursuant to Section 3 of the Custodian
Service and Monitoring Agreement in the manner and to the extent provided in
Section 4.2.
Section 4.2. Remedies. (a) After the occurrence and during the
continuance of an Event of Default with respect to a PPF or an Event of Default
not relating to a particular PPF, the Insurer shall have the right to deliver to
the Investment Adviser of such PPF and the Custodian an Event of Default Notice
(as defined in the Custodian Service and Monitoring Agreement). During the
period (the "Default Period") from and including the date on which the Custodian
receives an Event of Default Notice from the Insurer to and excluding the
Business Day following the date on which the Insurer gives the Custodian a Cure
Notice (as defined in the Custodian Service and Monitoring Agreement), the
Insurer shall have the right to direct the investment of the PPF as to which
such Event of Default shall have occurred or all PPFs, as the case may be, by
delivering to the Custodian, pursuant to Section 3 of the Custodian Service and
Monitoring Agreement, written investment instructions from the Investment
Adviser of such PPF as described in the next sentence of this Section 4.2(a) or,
under the circumstances described in Section 4.2(b), its own instructions in
accordance with Section 4.2(b). In the event that during the Default Period the
Insurer receives written investment instructions from the Investment Adviser of
the PPF as to which such Event of Default shall have occurred, the Insurer shall
promptly forward such instructions to the Custodian unless the Insurer
determines that the execution of such instructions would result in the
occurrence of another Default or, after the occurrence and during the
continuance of an Event of Default specified in Section 4.1 (a) or (b), that the
execution of such instructions would not result in the cure of the breach
causing such Event of Default.
(b) In the event that during a Default Period and after the
occurrence and during the continuance of an Event of Default with respect to a
PPF specified in Section 4.1 (a) or (b) herein, the Insurer shall not have
received written investment instructions from the
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Investment Adviser of such PPF with respect to such PPF in the format set forth
in the Custodian Service and Monitoring Agreement, the execution of which would
result in the cure of the breach causing such Event of Default, without
resulting in the occurrence of another Default, by 10:00 a.m., New York City
time, on the later of the first day of such Default Period and the Business Day
after the occurrence of such Event of Default, the Insurer shall have the right
to provide the Custodian with its own investment instructions pursuant to
Section 3 of the Custodian Service and Monitoring Agreement, subject to the
following conditions:
(i) after giving effect to any changes to the investments of such
PPF at the direction of the Insurer, the investments of such PPF shall be
consistent with Article III;
(ii) any changes made to the investments of such PPF at the
direction of the Insurer shall be limited to those that are reasonably
necessary to cure the breach causing such Event of Default;
(iii) if such Event of Default is specified in Section 4.1(a), the
specific investments causing such Event of Default shall be sold;
(iv) if such Event of Default is specified in Section 4.1(a) and
Index Equities are required to be sold in order to cure the breach causing
such Event of Default, the proceeds of such sale shall be reinvested, to
the extent practicable, in a pro rata portion of the Index Equities then
held by the PPF as to which such Event of Default shall have occurred,
unless doing so would result in another Event of Default pursuant to
Section 4.1(b) or not result in the cure of the existing Event of Default,
in which case the proceeds thereof shall be reinvested in U.S. Treasury
Zeroes or U.S. Agency Zeroes;
(v) if such Event of Default is specified in Section 4.1(a) and
Corporate Bonds, U.S. Treasury Futures, U.S. Treasury Zeroes, U.S. Agency
Zeroes or Cash Equivalents are required to be sold in order to cure the
breach causing such Event of Default, the proceeds of such sale shall be
reinvested, to the extent practicable, in U.S. Treasury Zeroes or U.S.
Agency Zeroes; and
(vi) if such Event of Default is specified in Section 4.1(b), the
minimum amount of Index Equities or Index Futures as is reasonably
necessary in the manner described in Section 4.2(b)(vii), after giving
effect to the reinvestment of the proceeds thereof in U.S. Treasury
Zeroes, U.S. Agency Zeroes or Cash Equivalents, to cause the Adjusted
Total Net Assets with respect to the PPF as to which such Event of Default
shall have occurred to equal the sum of the Present Value of the Aggregate
Guarantee Amount with respect to such PPF plus the Present Value of
Covered Expenses with respect to such PPF, shall be sold;
(vii) if such Event of Default is specified in Section 4.1(b), Index
Futures and Index Equities will be sold, to the extent practicable, in the
following order of priority and manner, to the extent reasonably necessary
to satisfy Section 4.2(b)(vi):
(A) a pro rata portion of all Index Futures held by such PPF
shall be sold;
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31
(B) all Index Futures held by such PPF shall be sold;
(C) a pro rata portion of all Index Equities shall be sold;
and
(D) all Index Equities shall be sold.
(c) In the event that, after the occurrence and during the
continuance of an Event of Default specified in Section 4.1(c) or (d), the
Insurer shall not have received written instructions from the Investment Adviser
of each PPF or the written instructions received from the Investment Adviser
would not result in the occurrence of a Default, then the Insurer shall have no
right to direct the investment of such PPF pursuant to Section 3 of the
Custodian Service and Monitoring Agreement or otherwise, provided no Event of
Default specified in Section 4.1(a) or (b) shall have occurred and be
continuing. If an Event of Default specified in Section 4.1(c) or (d) shall
occur and be continuing, it shall be deemed to have occurred with respect to all
PPFs.
(d) After the occurrence and during the continuance of an Event of
Default, the Investment Adviser of the PPF as to which such Event of Default
shall have occurred (in case of an Event of Default with respect to a PPF) or
the Investment Adviser of each PPF (in the case of an Event of Default not
relating to a particular PPF) shall deliver trade instructions only through the
Insurer in accordance with this Section 4.2 with respect to such PPF.
(e) Upon the cure of an Event of Default, the Insurer shall give
prompt written notice of such cure to each Investment Adviser and, unless
another Event of Default shall have occurred and be continuing, shall promptly
give a Cure Notice to the Custodian pursuant to the Custodian Service and
Monitoring Agreement. Other than after the occurrence and during the continuance
of an Event of Default, the Insurer shall have no right to direct the investment
of funds in the PPFs.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1. Representations and Warranties Relating to Pilgrim. To
induce the Insurer to enter into this Agreement and to issue the Policies,
Pilgrim hereby represents and warrants to the Insurer that:
(a) Pilgrim (i) is a Delaware limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Delaware, (ii) has the corporate power and authority, and the legal right, to
own its assets and to transact the business in which it is engaged, (iii) is
duly qualified to do business and is in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification except where the failure to so qualify
would not have a material adverse effect on Pilgrim's ability to perform its
obligations under the Transaction Documents and (iv) is in compliance with all
Requirements of Law except where non-compliance would not have a material
adverse effect on Pilgrim's ability to perform its obligations under the
Transaction Documents or the validity or enforceability of the Transaction
Documents.
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32
(b) Pilgrim has the corporate power and authority, and the legal
right, to execute, deliver and perform the Transaction Documents to which it is
a party and has taken all necessary action required by applicable Requirements
of Law to authorize the execution, delivery and performance of the Transaction
Documents to which it is a party. Except as has been obtained, no consent or
authorization of, filing with, or other act by or in respect of, any Government
Authority or any other Person is required in connection with the execution,
delivery, performance, validity or enforceability by or against Pilgrim of the
Transaction Documents to which it is a party. This Agreement has been, and each
other Transaction Document to which Pilgrim is a party will be, duly executed
and delivered on behalf of Pilgrim. This Agreement constitutes, and each other
Transaction Document to which Pilgrim is a party, when executed and delivered,
will constitute, a legal, valid and binding obligation of Pilgrim enforceable
against Pilgrim in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
(c) The execution, delivery and performance of the Transaction
Documents to which Pilgrim is a party will not violate any Requirement of Law or
Contractual Obligation of Pilgrim and will not result in, or require, the
creation or imposition of any Lien on any of its property, assets or revenues
pursuant to any such Requirement of Law or Contractual Obligation except where
such violation would not have a material adverse effect on Pilgrim's ability to
perform its obligations under the Transaction Documents or the validity or
enforceability of the Transaction Documents.
(d) No litigation, proceeding or investigation of or before any
arbitrator or Governmental Authority is pending or threatened by or against
Pilgrim or against any of its properties or revenues (i) asserting the
invalidity or unenforceability of any of the Transaction Documents, (ii) seeking
to prevent the consummation of any of the transactions contemplated by the
Transaction Documents or (iii) seeking any determination or ruling that might
materially and adversely affect (A) Pilgrim's ability to perform its obligations
under the Transaction Documents, (B) the validity or enforceability of the
Transaction Documents or (C) the Insurer.
(e) Pilgrim is duly registered and in good standing with the
Commission as an investment adviser under the Investment Advisers Act, and there
does not exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which could adversely affect the registration
or good standing of Pilgrim with the Commission; Pilgrim is not prohibited by
any provision of the Investment Advisers Act or the Investment Company Act, or
the respective rules and regulations thereunder, from acting as an investment
adviser of the Fund as contemplated hereunder.
Section 5.2. Representations and Warranties Relating to Aeltus. To
induce the Insurer to enter into this Agreement and to issue the Policies,
Aeltus hereby represents and warrants to the Insurer that:
(a) Aeltus (i) is a Connecticut corporation duly organized, validly
existing and in good standing under the laws of the State of Connecticut, (ii)
has the corporate power and authority, and the legal right, to own its assets
and to transact the business in which it is engaged,
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33
(iii) is duly qualified to do business and is in good standing under the laws of
each jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification except where the failure to so qualify
would not have a material adverse effect on Aeltus' ability to perform its
obligations under the Transaction Documents and (iv) is in compliance with all
Requirements of Law except where non-compliance would not have a material
adverse effect on Aeltus' ability to perform its obligations under the
Transaction Documents or the validity or enforceability of the Transaction
Documents.
(b) Aeltus has the corporate power and authority, and the legal
right, to execute, deliver and perform the Transaction Documents to which it is
a party and has taken all necessary action required by applicable Requirements
of Law to authorize the execution, delivery and performance of the Transaction
Documents to which it is a party. Except as has been obtained, no consent or
authorization of, filing with, or other act by or in respect of, any Government
Authority or any other Person is required in connection with the execution,
delivery, performance, validity or enforceability by or against Aeltus of the
Transaction Documents to which it is a party. This Agreement has been, and each
other Transaction Document to which Aeltus is a party will be, duly executed and
delivered on behalf of Aeltus. This Agreement constitutes, and each other
Transaction Document to which Aeltus is a party, when executed and delivered,
will constitute, a legal, valid and binding obligation of Aeltus enforceable
against Aeltus in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
(c) The execution, delivery and performance of the Transaction
Documents to which Aeltus is a party will not violate any Requirement of Law or
Contractual Obligation of Aeltus and will not result in, or require, the
creation or imposition of any Lien on any of its property, assets or revenues
pursuant to any such Requirement of Law or Contractual Obligation except where
such violation would not have a material adverse effect on Aeltus' ability to
perform its obligations under the Transaction Documents or the validity or
enforceability of the Transaction Documents.
(d) No litigation, proceeding or investigation of or before any
arbitrator or Governmental Authority is pending or threatened by or against
Aeltus or against any of its properties or revenues (i) asserting the invalidity
or unenforceability of any of the Transaction Documents, (ii) seeking to prevent
the consummation of any of the transactions contemplated by the Transaction
Documents or (iii) seeking any determination or ruling that might materially and
adversely affect (A) Aeltus' ability to perform its obligations under the
Transaction Documents, (B) the validity or enforceability of the Transaction
Documents or (C) the Insurer.
(e) Aeltus is duly registered and in good standing with the
Commission as an investment adviser under the Investment Advisers Act, and there
does not exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which could adversely affect the registration
or good standing of Aeltus with the Commission; Aeltus is not prohibited by any
provision of the Investment Advisers Act or the Investment Company Act, or the
respective rules and regulations thereunder, from acting as a sub-adviser of the
Fund as contemplated hereunder.
- 30 -
34
Section 5.3. Representations and Warranties Relating to the Fund.
Pilgrim and the Fund hereby, jointly and severally, represent and warrant to the
Insurer that:
(a) The Fund (i) is a business trust duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts; (ii) has the power and authority, and the legal right, to own its
assets and to transact the business in which it is engaged; (iii) is duly
qualified to do business and is in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification except where the failure to so qualify
would not have a material adverse effect on the Fund's ability to perform its
obligations under the Transaction Documents; and (iv) is in compliance with all
Requirements of Law except where non-compliance would not have a material
adverse effect on the Fund's ability to perform its obligations under the
Transaction Documents or the validity or enforceability of the Transaction
Documents.
(b) The Fund has the power and authority, and the legal right, to
execute, deliver and perform this Agreement and has taken all necessary action
required by applicable Requirements of Law to authorize the execution, delivery
and performance of this Agreement. No consent or authorization of, filing with,
or other act by or in respect of, any Government Authority or any other Person
is required in connection with the execution, delivery, performance, validity or
enforceability by or against the Fund of the Transaction Documents to which it
is a party, other than a filing made under the Securities Act of 1933 and the
Investment Company Act of 1940. This Agreement has been duly executed and
delivered on behalf of the Fund and constitutes a legal, valid and binding
obligation of the Fund enforceable against the Fund in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(c) The execution, delivery and performance of the Transaction
Documents to which it is a party will not violate any Requirement of Law or
Contractual Obligation of the Fund and will not result in, or require, the
creation or imposition of any Lien on any of its property, assets or revenues
pursuant to any such Requirement of Law or Contractual Obligation except where
such violation would not have a material adverse effect on the Fund's ability to
perform its obligations under the Transaction Documents to which it is a party
or the validity or enforceability of the Transaction Documents to which it is a
party.
(d) No litigation, proceeding or investigation of or before any
arbitrator or Governmental Authority is pending or threatened by or against the
Fund or against any of its properties or revenues (i) asserting the invalidity
or unenforceability of this Agreement, (ii) seeking to prevent the consummation
of any of the transactions contemplated by the Transaction Documents to which it
is a party or (iii) seeking any determination or ruling that might materially
and adversely affect (A) the Fund's ability to perform its obligations under
this Agreement, (B) the validity or enforceability of this Agreement or (C) the
Insurer.
(e) The Fund is duly registered with the Commission as an open-end,
diversified management investment company under the Investment Company Act and
the Fund
- 31 -
35
has been operated in compliance in all material respects with the Investment
Company Act and the rules and regulations thereunder.
ARTICLE VI
COVENANTS
Section 6.1. Covenants of Investment Adviser. The Investment Adviser
of each PPF hereby covenants and agrees that through the Maturity Date with
respect to such PPF:
(a) it shall comply in all material respects with the terms and
conditions of the Transaction Documents to which it is a party and shall provide
the Insurer with written notice immediately upon becoming aware of any material
breach by it of the provisions of any such agreements;
(b) it shall not amend, supplement or otherwise modify, or agree to
any waiver with respect to any provision of the Administrative Services
Agreement, the Expense Limitation Agreement, the Sub-Adviser Agreement or the
Investment Management Agreement with respect to such PPF if such amendment,
supplement or modification would be reasonably likely to have a material impact
on the Insurer, any PPF Shareholder or any PPF, without the prior written
consent of the Insurer, which consent shall not be unreasonably withheld;
(c) it shall not elect to terminate the Expense Limitation
Agreement, the Investment Management Agreement [OR THE SUB-ADVISER AGREEMENT
WITH AELTUS OR RECOMMEND TO THE BOARD OF TRUSTEES OF THE FUND THE TERMINATION OF
THE SUB-ADVISER AGREEMENT WITH AELTUS] with respect to such PPF, without the
prior written consent of the Insurer, which consent shall not be unreasonably
withheld;
(d) other than the Sub-Adviser Agreement dated May 9, 2001 it has
entered into with Aeltus, it shall not enter into a sub-adviser agreement
pursuant to Section 2 of the Investment Management Agreement to which it is a
party, without the prior written consent of the Insurer;
(e) other than in connection with the reinvestment of dividends, it
shall not allow the offering or sale of the shares of such PPF after the
Offering Period with respect to such PPF;
(f) it shall promptly notify the Insurer of any information or
event, to the knowledge of such Investment Adviser, that would be reasonably
likely to result, through passage of time or otherwise, in the occurrence of an
Event of Default;
(g) it shall notify the Insurer in the monthly report delivered to
the Insurer pursuant to Section 3.4 of the use of any Substitute Valuation
Source during the preceding month;
(h) it shall provide to the Insurer copies of the Final Prospectus
(including the Statement of Additional Information) with respect to each Class
of Shares of such PPF and such additional information with respect to any PPF as
the Insurer may from time to time reasonably request, and, after the occurrence
of an Event of Default with respect to such PPF, at the expense
- 32 -
36
of the Investment Adviser of such PPF, during normal business hours with
reasonable prior notice allow the Insurer to inspect, audit and make copies of
and abstracts from the Fund's records regarding such PPF and to visit the
offices of the Investment Adviser of such PPF for the purpose of examining such
records, internal controls and procedures maintained by such Investment Adviser;
(i) prior to filing with the Commission any amendment to the
Registration Statement with respect to any Class of Shares of such PPF or
supplement to the Final Prospectus with respect to any Class of Shares of such
PPF, it shall furnish a copy thereof to the Insurer and shall obtain the consent
of the Insurer to any such filing that would be reasonably likely to have a
material impact on the Insurer or, on or before the Maturity Date with respect
to such PPF, on such PPF or any PPF Shareholder of such PPF, which consent shall
not be unreasonably withheld;
(j) it shall notify the Insurer promptly (i) of any request or
proposed request by the Commission for an amendment to the Registration
Statement with respect to any Class of Shares of such PPF or a supplement to the
Final Prospectus with respect to any Class of Shares of such PPF, (ii) of the
issuance by the Commission of any stop-order suspending the effectiveness of the
Registration Statement with respect to any Class of Shares of such PPF or the
initiation or threat of any such stop-order proceeding or (iii) of receipt by
the Fund of a notice from or order of the Commission pursuant to Section 8(e) of
the Investment Company Act with respect to any Registration Statement with
respect to such PPF;
(k) it shall comply in all material respects with the terms and
provisions of the Acts and the Investment Adviser Act with respect to such PPF;
and
(l) it shall not terminate such PPF during the Guarantee Period
prior to the Maturity Date.
Section 6.2. Covenants of Sub-Adviser. The Sub-Adviser of each PPF
hereby covenants and agrees that through the Maturity Date with respect to such
PPF:
(a) it shall comply in all material respects with the terms and
conditions of the Transaction Documents to which it is a party and shall provide
the Insurer with written notice immediately upon becoming aware of any material
breach by it of the provisions of any such agreements;
(b) it shall not amend, supplement or otherwise modify, or agree to
any waiver with respect to any provision of the Expense Limitation Agreement or
the Sub-Adviser Agreement with respect to such PPF if such amendment, supplement
or modification would be reasonably likely to have a material impact on the
Insurer, any PPF Shareholder or any PPF, without the prior written consent of
the Insurer;
(c) it shall not elect to terminate the Sub-Adviser Agreement with
respect to such PPF, without the prior written consent of the Insurer;
- 33 -
37
(d) it shall promptly notify the Investment Adviser of any
information or event, to the knowledge of such Sub-Adviser, that would be
reasonably likely to result, through passage of time or otherwise, in the
occurrence of an Event of Default;
(e) it shall comply in all material respects with the terms and
provisions of the Acts and the Investment Advisers Act with respect to such PPF;
and
(f) it shall provide to the Insurer such additional information with
respect to any PPF as the Insurer may from time to time reasonably request, and,
after the occurrence of an Event of Default with respect to such PPF, at the
expense of the Sub-Adviser of such PPF, during normal business hours with
reasonable prior notice allow the Insurer to inspect, audit and make copies of
and abstracts from the Fund's records regarding such PPF and to visit the
offices of the Sub-Adviser of such PPF for the purpose of examining such
records, internal controls and procedures maintained by such Sub-Adviser
Section 6.3. Covenants of the Fund. The Fund hereby covenants and
agrees that through the Maturity Date with respect to each PPF:
(a) it shall comply in all material respects with the terms and
conditions of the Transaction Documents with respect to such PPF to which it is
a party and shall provide the Insurer with written notice immediately upon
becoming aware of any material breach by it of the provisions of any such
agreements;
(b) it shall not amend, supplement or otherwise modify, or agree to
any waiver with respect to any provision of the Expense Limitation Agreement or
the Custodian Service and Monitoring Agreement with respect to such PPF, without
the prior written consent of the Insurer;
(c) it shall not amend, supplement or otherwise modify, or agree to
any waiver with respect to any provision of the Investment Management Agreement
or the Sub-Adviser Agreement with respect to such PPF if such amendment,
supplement or modification would be reasonably likely to have a material impact
on the Insurer, any PPF Shareholder of such PPF or such PPF, without the prior
written consent of the Insurer;
(d) it shall not amend, supplement or otherwise modify any provision
of the Declaration of Trust or Establishment and Designation of Series and
Classes with respect to such PPF if such amendment, supplement or modification
would be reasonably likely to have a material impact on the Insurer, any PPF
Shareholder of such PPF or such PPF, without the prior written consent of the
Insurer;
(e) it shall not change the manner in which the general liabilities
of the Fund are allocated to such PPF or the assets of such PPF are allocated to
any Class of Shares of-such PPF if such change would be reasonably likely to
have a material impact on the Insurer, any PPF Shareholder of such PPF or such
PPF, without the prior written consent of the Insurer;
(f) promptly after any amendment or waiver of any provision of the
Investment Management Agreement or the Sub-Adviser Agreement with respect to
such PPF or the filing of any amendment to the Declaration of Trust or
Establishment and Designation of
- 34 -
38
Series and Classes with respect to such PPF, it shall provide the Insurer with a
copy of any such amendment or waiver;
(g) in the event that it elects to terminate the Investment
Management Agreement with Pilgrim or any other Investment Adviser or to
terminate the Sub-Adviser Agreement with Aeltus or any successor Sub-Adviser
with respect to such PPF or the Investment Management Agreement or the
Sub-Adviser Agreement with respect to any PPF terminates in accordance with its
terms, it shall cause the successor investment advisor or sub-adviser with
respect to such PPF to enter into an Investment Management Agreement or
Sub-Adviser Agreement with respect to such PPF and this Agreement prior to the
effective date of such termination;
(h) in the event that either it or the Custodian shall terminate the
Custodian Service and Monitoring Agreement with respect to such PPF, it shall
enter into a Custodian Service and Monitoring Agreement with respect to such
PPF, as the case may be, with a successor Custodian or an affiliate thereof
prior to the effective date of such termination;
(i) within 90 days of the end of such PPF's fiscal year, it shall
provide to the Insurer the financial statements for such PPF with respect to
such fiscal year, audited by independent public accountants;
(j) it shall comply in all material respects with the terms and
provisions of the Acts with respect to such PPF;
(k) other than in connection with the redemption of shares by a PPF
Shareholder of such PPF or the reinvestment of dividends, it shall not change
the number of outstanding shares of such PPF; and
(l) it shall provide to the Insurer such additional information with
respect to any PPF as the Insurer may from time to time reasonably request, and,
after the occurrence of an Event of Default with respect to such PPF, at the
expense of the Investment Adviser of such PPF, during normal business hours with
reasonable prior notice allow the Insurer to inspect, audit and make copies of
and abstracts from the Fund's records regarding such PPF and to visit the
offices of the Fund for the purpose of examining such records, internal controls
and procedures maintained by the Fund.
Section 6.4. Additional Covenants of the Fund. The Fund hereby
covenants and agrees that during the term of this Agreement:
(a) it shall not amend, supplement or otherwise modify, or agree to
any waiver with respect to any provision of the Administrative Services
Agreement if such amendment, supplement or modification would be reasonably
likely to have a material impact on the Insurer or, on or before the Maturity
Date with respect to any PPF, any PPF Shareholder of such PPF or such PPF,
without the prior written consent of the Insurer;
(b) it shall not amend, supplement or otherwise modify any provision
of its Declaration of Trust if such amendment, supplement or modification would
be reasonably likely to have a material impact on the Insurer or, on or before
the Maturity Date with respect to any
- 35 -
39
PPF, any PPF Shareholder of such PPF or such PPF, without the prior written
consent of the Insurer;
(c) promptly after any amendment or waiver of any provision of the
Administrative Services Agreement or the filing of any amendment to its
Declaration of Trust, it shall provide the Insurer with a copy of any such
amendment or waiver,
(d) in the event that either it or the Custodian shall terminate the
Custodian Agreement, it shall enter into a custodian agreement with a successor
Custodian or an affiliate thereof prior to the effective date of such
termination; and
(e) it shall maintain insurance policies covering its liabilities to
its officers, trustees, employees and agents under Article IV of its Declaration
of Trust of the types and in the amounts as is customary for funds similar to
the Fund.
ARTICLE VII
FURTHER AGREEMENTS
Section 7.1. Obligations Absolute. The obligations of Pilgrim,
Aeltus, each Investment Adviser and each Sub-Adviser and the Fund pursuant to
this Agreement are absolute and unconditional and will be paid or performed
strictly in accordance with the respective terms thereof, irrespective of:
(a) any lack of validity or enforceability of, or any amendment or
other modification of, or waiver with respect to, the Transaction Documents;
(b) any amendment or waiver of, or consent to departure from, the
Policies or any Transaction Document;
(c) the existence of any claim, set-off, defense or other rights
either may have at any time against the other, any beneficiary or any transferee
of the Policies (or any persons or entities for whom any such beneficiary or any
such transferee may be acting), the Insurer or any other person or entity
whether in connection with the Policies, this Agreement or any unrelated
transactions;
(d) any statement or any other document presented under the Policies
(including any Notice for Payment (as defined in the Policies)) proving to be
forged, fraudulent, invalid or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect whatsoever;
(e) the inaccuracy or alleged inaccuracy of any Notice for Payment
upon which any drawing under a Policy is based;
(f) payment by the Insurer under a Policy against presentation of a
draft of certificate which does not comply with the terms of such Policy,
provided that such payment shall not have constituted gross negligence or
willful misconduct or bad faith of the Insurer;
- 36 -
40
(g) any default or alleged default of the Insurer under a Policy
other than a default with respect to payment thereunder; or
(h) any other circumstance or happening whatsoever, provided that
the same shall not have constituted gross negligence, willful misconduct or bad
faith of the Insurer and to the extent that such do not result in a default with
respect to payments under the Policies.
Section 7.2. Reinsurance and Assignments. The Insurer shall have the
right to give participation in its rights under this Agreement and to enter into
contracts of reinsurance with respect to the Policies, provided that the Insurer
agrees that any such disposition will not alter or affect in any way whatsoever
the Insurer's direct obligations hereunder and under the Policies. The
Investment Adviser, the Sub-Adviser, or the Fund may not assign its obligations
under this Agreement without the prior written consent of the Insurer.
Section 7.3. Fund Liability. Any other provision to the contrary
notwithstanding, any liability of the Fund under this Agreement with respect to
a PPF, or in connection with the transactions contemplated herein with respect
to a PPF, shall be discharged only out of the assets of that PPF, and no other
portfolio of the Fund shall be liable with respect thereto.
Section 7.4. Liability of the Insurer. Pilgrim, Aeltus, each
Investment Adviser and any Sub-Adviser and the Fund agree that neither the
Insurer, nor any of its officers, trustees/directors or employees shall be
liable or responsible for (except to the extent of its own or their gross
negligence, willful misconduct or bad faith) (a) the use which may be made of
any Policy by any Person or for any acts or omissions of another Person in
connection therewith or (b) the validity, sufficiency, accuracy or genuineness
of any documents delivered to the Insurer, or of any endorsement(s) thereon,
even if such documents should in fact prove to be in any or all respects
invalid, insufficient, fraudulent or forged. In furtherance and not in
limitation of the foregoing, the Insurer may accept documents that appear on
their face to be in order, without responsibility for further investigation
(except to the extent that the Insurer acted with gross negligence, willful
misconduct or bad faith).
Section 7.5. Fees and Expenses. Pilgrim agrees to pay all reasonable
costs and expenses in connection with the preparation, execution and delivery of
the Transaction Documents and all other documents delivered with respect
thereto, including, without limitation, the fees of ▇▇▇▇▇'▇ and S&P incurred by
the Insurer in connection with this Agreement and the transactions contemplated
hereby and by the other Transaction Documents and the fees of ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ &
▇▇▇▇▇▇▇▇, counsel to the Insurer. All such fees, costs and expenses shall be
payable on or prior to the date which is 30 days from the date on which an
invoice for any such fees, costs and expenses shall have been presented to
Pilgrim.
Section 7.6. Termination or Absence of Sub-Adviser. If at any time a
PPF does not have a Sub-Adviser acting pursuant to a Sub-Adviser Agreement, the
Investment Adviser for such PPF shall perform the obligations of the Sub-Adviser
of such PPF set forth herein.
- 37 -
41
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Amendments and Waivers. No amendment or waiver of any
provision of this Agreement nor consent to any departure therefrom, shall in any
event be effective unless in writing and signed by all of the parties hereto;
provided that any waiver so granted shall extend only to the specific event or
occurrence so waived and not to any other similar event or occurrence which
occurs subsequent to the date of such waiver.
Section 8.2. Notices. Except to the extent otherwise expressly
provided herein, all notices, requests and demands to or upon the respective
parties hereto to be effective shall be in writing (and if, sent by mail,
certified or registered, return receipt requested) or confirmed facsimile
transmission and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when delivered by hand, or three Business Days
after being deposited in the mail, postage prepaid, or, in the case of facsimile
transmission, when sent, addressed as follows:
If to Pilgrim:
ING Pilgrim Investments, LLC
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ III, Senior Vice
President and Secretary
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to Aeltus:
Aeltus Investment Management, Inc.
▇▇ ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: Senior Vice President & Counsel
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Fund:
Pilgrim Equity Trust
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Vice President and Secretary
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
- 38 -
42
If to the Insurer:
MBIA Insurance Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇. ▇▇▇▇▇ ▇. ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Section 8.3. No Waiver, Remedies and Severability. No failure on the
part of the Insurer to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right preclude any other or further exercise thereof or the exercise of
any other right. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law. The parties further agree that the holding by
any court of competent jurisdiction that any remedy pursued by the Insurer
hereunder is unavailable or unenforceable shall not affect in any way the
ability of the Insurer to pursue any other remedy available to it. In the event
any provision of this Agreement shall be held invalid or unenforceable by any
court of competent jurisdiction, the parties hereto agree that such holding
shall not invalidate or render unenforceable any other provision hereof.
Section 8.4. Payments. All payments to the Insurer hereunder shall
be made in lawful currency of the United States in immediately available funds
and shall be made prior to 2:00 p.m. (New York City time) on the date such
payment is due by wire transfer to The Chase Manhattan Bank, ABA #021-000021,
MBIA Insurance Corporation Account Number 910-2-721-728 or to such other office
or account as the Insurer may direct. All payments to Pilgrim hereunder shall be
made in lawful currency of the United States and in immediately available funds
on the date such payment is due by wire transfer to US Bank, ABA # ▇▇▇▇▇▇▇▇▇,
ING Pilgrim Investments, LLC, Account Number 1702-2514-4048, or to such other
office or account as Pilgrim may direct.
Whenever any payment under this Agreement shall be stated to be due
on a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such cases be
included in computing interest or fees, if any, in connection with such payment.
Section 8.5. Governing Law. This Agreement shall be construed, and
the obligations, rights and remedies of the parties hereunder shall be
determined, in accordance with the laws of the State of New York.
Section 8.6. Counterparts. This Agreement may be executed in
counterparts of the parties hereto, and each such counterpart shall be
considered an original and all such counterparts shall constitute one and the
same instrument.
Section 8.7. Paragraph Headings, Etc. The headings of paragraphs
contained in this Agreement are provided for convenience only. They form no part
of this Agreement and shall not affect its construction or interpretation.
- 39 -
43
Section 8.8. Termination. Agreement shall terminate on the earlier
of: (a) the first date as of which the final outstanding Policy has terminated
in accordance with the provisions thereof and the Insurer has recovered all
amounts owing to it hereunder or (b) the date on which the Aggregate Guarantee
Amount with respect to each PPF equals zero. Any termination of this Agreement
will be effective only upon the delivery to the Insurer of all Policies,
whereupon the Policies will be cancelled and the Insurer's liabilities
thereunder will cease.
- 40 -
44
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
all as of the day and year first above mentioned.
MBIA INSURANCE CORPORATION,
as Insurer
By:
--------------------------------
Name:
Title:
ING PILGRIM INVESTMENTS, LLC.
By:
--------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Senior Vice President
AELTUS INVESTMENT MANAGEMENT, INC.
By:
--------------------------------
Name:
Title:
PILGRIM EQUITY TRUST
By:
--------------------------------
Name: ▇▇▇▇▇▇ ▇. Naka
Title: Senior Vice President
- 41 -
45
ANNEX A
THE EQUITY PORTFOLIO ("INDEX PLUS LARGECAP")
Investment The investment philosophy of the equity portfolio, a
philosophy quantitative "Index LargeCap" strategy, is based on the
following principles:
- Rigorous quantitative analysis can identify those
securities having the greatest likelihood of
underperformance.
- A portfolio that avoids the underperforming securities in
the S&P 500 will outperform the Index.
Quantitative The process begins with output from an internally developed
ranking quantitative model that ranks every issue in the S&P 500 using
factors which Aeltus has identified as being predictors of
relative performance. The model produces a weighted aggregate
score, and ranks the universe.
Portfolio Screening and Weighting
construction
After the quantitative evaluation, well ranked stocks are
overweighted and poorly ranked stocks are underweighted. Bottom
decile stocks are not owned at all. If the data needed for such
quantitative evaluation is not available for a particular
company, the company will be held in the equity portfolio at
its index weight.
Final Construction
Finally, the screened and weighted portfolio is tested to
assure appropriate representation in each of the S&P 500
industry sectors. If any sector of the Portfolio is less than
65% of the S&P 500 weight, Aeltus will increase its investment
in that sector sufficiently to meet this criterion. Similarly,
if any sector is greater than 135% of the S&P weight, Aeltus
will decrease its investment in that sector sufficiently to
meet this criterion. The portfolio is generally rebalanced
monthly to reflect changes in rank and/or weighting components.
Use of Futures Transaction efficiency is improved by using S&P 500 futures.
They will represent no more than 20% of the equity portfolio,
and will not be leveraged or used for speculative purposes.
46
ANNEX B
SAMPLE CALCULATION OF HYPOTHETICAL TOTAL NET ASSETS
If Actual Data Based on Then Hypothetical Data
Actual Expense Ratio in if Higher Covered
Asset Allocation Model Expense Ratio had been
were: used would be:
----------------------- -----------------------
Business Day Preceding Permanent Deficit Event:
- Equity Percentage 30.0% 19.7% (a)
- Discount Rate 5.50% 5.50%
- Remaining Time to Maturity (in Years) 4.00 4.00
- Actual Expense Ratio in Asset Allocation 1.40% 1.40%
Model
-Higher Covered Expense Ratio 2.50% 2.50%
- Gross Principal Guarantee $ 100,000,000 $ 100,000,000
- Present Value of Aggregate Guarantee Amount plus Present $ 85,093,654 $ 85,093,654
Value of Covered Expenses using Actual Expense Ratio
- Present Value of Aggregate Guarantee Amount plus Present $ 87,982,971 $ 87,982,971
Value of Covered Expenses using Higher Covered Expense Ratio
- Cash Equivalent Value* $ 0 $ 0
- Equity Portfolio Value $ 28,052,853 $ 18,421,799(b)
- Fixed Income Portfolio Value $ 65,456,657 $ 75,087,712(c)
- Total Net Assets $ 93,509,510 $ 93,509,510(d)
- Adjusted Total Net Assets $ 85,093,654 $ 87,982,971
Date on Which Permanent Deficit Event Occurs
- Change in Equity Portfolio Value -40.00% -40.00%(e)
- Change in Disc. Rate -0.50% - -0.50%
- Change in Fixed Income Portfolio Value 2.00% 2.00%(f)
- Cash Equivalent Value $ 0 $ 0
- Equity Portfolio Value $ 16,831,712 $ 11,053,079(g)
- Fixed Income Portfolio Value $ 66,765,790 $ 76,589,466(h)
- Total Net Assets $ 83,597,502 $ 87,642,544(I)
* Excludes Cash Associated with Futures and Cash Margin.
(a) Amount of equity allowed in order for the Present Value of the
Aggregate Guarantee Amount plus the Present Value of Covered Expenses
using the Higher Covered Expense Ratio to exactly equal the Adjusted Total
Net Assets.
(b) The Total Net Assets times the equity percentage, or (a) times
(d).
(c) Total Net Assets minus the Equity Portfolio Value, or (d) minus
(b).
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(d) Equals the actual Total Net Assets as of this date.
(e) Equals the actual change in the value of the actual Equity
Portfolio.
(f) Equals the actual change in the value of the actual Fixed Income
Portfolio.
(g) Equals the adjusted hypothetical Equity Portfolio Value, or (b)
times one plus (e).
(h) Equals the adjusted hypothetical Fixed Income Portfolio Value, or (c)
times one plus (f).
(i) Equals the sum of the adjusted hypothetical Equity and Fixed Income
Portfolio Values, or (g) plus (h).
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EXHIBIT A
FORM OF POLICY
INSURANCE POLICY
MBIA Insurance Corporation
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Policy No. ____-____-___
MBIA Insurance Corporation (the "Insurer"), in consideration of the
payment of the premium and subject to the terms of this Policy, hereby
unconditionally and irrevocably guarantees to the Pilgrim Equity Trust (the
"Fund"), on behalf of the shareholders (the "PPPF Shareholders") of the capital
stock of the Fund designated the [Pilgrim Principal Protection Fund] [___] (the
"PPPF"), the payment by the Fund of the Deficit (as defined below) on
_____________, ______ (the "Maturity Date") in an amount up to $__________ (the
"Initial Aggregate Guarantee Amount"), for which a Demand for Payment in the
form attached hereto as Attachment 1 and made a part of this Policy (the "Demand
for Payment") has been presented to State Street Bank and Trust Company, N.A.
(the "Fiscal Agent") in accordance with the terms of this Policy. As used
herein, the term "Deficit" refers to the sum of the product with respect to each
Class of Shares (as defined below) of (a) the number of shares of such Class of
Shares on the Maturity Date times (b) amount, if any, by which the Guarantee Per
Share (as defined below) with respect to such Class of Shares on the Maturity
Date exceeds (ii) the NAV (as defined below) for such Class of Shares on the
Maturity Date. Payments under this Policy shall be made only at the time set
forth in this Policy, and no accelerated payments shall be made.
1. One (1) Business Day (as defined below) after receipt by the Fiscal
Agent of a Demand for Payment, duly executed by the Fund, the Insurer will make
a deposit of funds immediately available in an account with the Fiscal Agent, in
New York, New York, or its successor, sufficient for the payment to the Fund of
the Deficit.
2. Demand for Payment hereunder may be made by telecopy, telex or telegram
of the executed Demand for Payment in care of the Fiscal Agent. If a Demand for
Payment made hereunder does not, in any instance, conform to the terms and
conditions of this Policy, the Insurer shall give notice to the Fund, as
promptly as reasonably practicable, that such Demand for Payment was not
effected in accordance with the terms and conditions of this Policy and briefly
state the reason(s) therefor. Upon being notified that such Demand for Payment
was not effected in accordance with this Policy, the Fund may attempt to correct
any such nonconforming Demand for Payment if, and to the extent that, the Fund
is entitled and able to do so.
3. The amount payable by the Insurer under this Policy shall be limited to
the Initial Aggregate Guarantee Amount.
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4. Any service of process on the Insurer or notice to the Insurer may be
made to the Insurer at its offices located at ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇
▇▇▇▇▇, and such service of process shall be valid and binding.
5. The term of this Policy shall expire upon the earliest to occur of (a)
the second Business Day immediately succeeding the Maturity Date, (b) the
payment by the Insurer of the Deficit and (c) the date on which the Aggregate
Guarantee Amount (as defined herein) equals zero (the "Expiration Date").
6. This Policy shall be governed by and interpreted under the laws of the
State of New York. Any suit hereunder in connection with any payment may be
brought only by the Fund within three years after (i) a Demand for Payment, with
respect to such payment, is made pursuant to the terms of this Policy and the
Insurer has failed to make such payment or (ii) payment would otherwise have
been due hereunder but for the failure on the part of the Fund to deliver to the
Insurer a Demand for Payment pursuant to the terms of this Policy.
7. This Policy, including Attachments 1 and 2 hereto, sets forth in full
the terms of the obligations of the Insurer. Reference in this Policy to other
documents or instruments is for identification purposes, and such reference
shall not modify or affect the terms hereof or cause such documents or
instruments to be deemed incorporated herein.
8. This Policy is noncancelable.
9. This Policy is neither transferable nor assignable.
10. This Policy shall be returned to the Insurer by the Fund on the
Expiration Date together with a notice substantially in the form of Attachment 2
hereto.
11. The terms defined in this paragraph shall have the meanings provided
herein for all purposes of this Policy:
"Aeltus" means Aeltus Investment Management, Inc. a Connecticut
corporation.
"Aggregate Guarantee Amount" means, on any date of determination,
the aggregate Guarantee Amounts with respect to all PPPF Shareholders on
such date.
"Business Day" means any day other than a day on which banks located
in the City of New York, New York are authorized by law to close or on
which the New York Stock Exchange is closed for business.
"Class of Shares" means each class of shares of capital stock
designated in the Articles Supplementary creating the PPPF.
"Covered Expenses" means, for any Class of Shares, the annual fund
operating expenses enumerated in the Final Prospectus relating to such
Class of Shares as of the last day of the Offering Period.
2
50
"Distribution Per Share" means, with respect to any Class of Shares,
an amount equal to the quotient of the amount of any distribution or
payment by the Fund in respect of, or allocated to, such Class of Shares
that is not a Covered Expense or a transaction related brokerage expense,
and shall include, without limitation, any distribution of income,
dividends, capital gains or principal to the PPPF Shareholders of such
Class of Shares and any payment of income taxes or excise taxes allocated
to such Class of Shares divided by the number of shares of such Class of
Shares outstanding on the date of such distribution or payment.
"Final Prospectus" means for any Class of Shares the prospectus
pursuant to which the shares of such Class of Shares were offered for
sale, including the Statement of Additional Information with respect to
such Class of Shares filed with the Securities and Exchange Commission
pursuant to Rule 497 under the Securities Act.
"Guarantee Amount" means, with respect to any PPPF Shareholder of
any Class of Shares, on any date of determination, an amount equal to the
product of (i) the Guarantee per Share for such Class of Shares held by
such PPPF Shareholder on such date and (ii) the total number of such
shares held by such PPPF Shareholder.
"Guarantee per Share" means, with respect to any Class of Shares (i)
the NAV for such Class of Shares at the close of business on the last day
of the Offering Period and (ii) thereafter on any Business Day, the
Guarantee per Share for such Class of Shares on the immediately preceding
Business Day divided by the sum of one plus the quotient of (A) the amount
of any Distribution Per Share with respect to such Class of Shares
effective since the immediately preceding Business Day divided by (B) the
NAV for such Class of Shares at the close of business on the day such
Distribution Per Share was effective.
"NAV" means, with respect to any Class of Shares of a PPPF, (a) on
the commencement date of such PPPF, the net asset value per share of such
Class of Shares established by the Fund for such date and (b) on any date
of determination thereafter the quotient of (i) the excess of (x) the
market value of the assets allocated to that Class of Shares determined as
of the close of regular trading on the NYSE by the Fund in the manner
described in the Final Prospectus with respect to such Class of Shares
over (y) the market value of any liabilities allocated to and/or
associated with such Class of Shares determined as of the close of regular
trading on the NYSE by the Fund in the manner described in the Final
Prospectus with respect to such Class of Shares divided by (ii) the number
of outstanding shares of that Class of Shares at such time. The assets,
income, gain, loss and liabilities (other than those liabilities relating
specifically to a Class of Shares) of each PPPF shall be allocated to each
Class of Shares of such PPPF on each date of determination on a pro rata
basis based on the NAV of such Class of Shares on the preceding date of
determination.
"Offering Period" means the period during which the shares of the
PPPF were offered for sale to investors described in the Final Prospectus
with respect to each Class of Shares.
3
51
"Pilgrim" means ING Pilgrim Investments, LLC, a Delaware limited
liability company.
THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE FUND
SPECIFIED IN ARTICLE SEVENTY-SIX OF THE NEW YORK STATE INSURANCE LAW.
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed in
facsimile on its behalf by its duly authorized officers this ____ day of
_______, 2001.
MBIA INSURANCE CORPORATION
By___________________________________
President
By___________________________________
Assistant Secretary
4
52
DEMAND FOR PAYMENT
[State Street Bank and Trust Company, N.A.]
as Fiscal Agent for MBIA Insurance
Corporation
[address]
Attention: [Municipal Registrar and
Paying Agency]
MBIA Insurance Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: President
Reference is made to the Insurance Policy No. ____-____-___ (the "Policy")
issued by MBIA Insurance Corporation (the "Insurer"). The terms which are
capitalized herein and not otherwise defined have the meanings specified in the
Policy unless the context otherwise requires.
Pilgrim Equity Trust (the "Fund") hereby certifies that: [Choose one
of the following]
(a) The Fund, on behalf of the shareholders (the "PPPF
Shareholders") of the capital stock of the Fund designated the [Pilgrim
Principal Protection Fund] [___](the "PPPF"), is the beneficiary under the
Policy.
The Fund, on behalf of the PPPF Shareholders, demands payment of
$_________, the amount by which (i) the Aggregate Guarantee Amount exceeds (ii)
the Total Net Assets as of the Maturity Date, and directs that payment under the
Policy be made to the following account by bank wire transfer of federal or
other immediately available funds one (1) Business Day after receipt by the
Fiscal Agent of this Demand for Payment in accordance with the terms of the
Policy: ____________.
Any Person Who Knowingly And With Intent To Defraud Any Insurance Company Or
Other Person Files An Application for Insurance Or Statement Of Claim Containing
Any Materially False Information, Or Conceals For The Purpose Of Misleading
Information Concerning Any Fact Material Thereto, Commits A Fraudulent Insurance
Act, Which Is A Crime, And Shall Also Be Subject To A Civil Penalty Not To
Exceed Five Thousand Dollars And The Stated Value Of The Claim For Each Such
Violation.
5
53
PILGRIM EQUITY TRUST
By:__________________________________
Name:
Title:
6
54
EXPIRATION DATE
MBIA Insurance Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: President
Reference is made to the Insurance Policy No. ____-____-___ (the "Policy")
issued by MBIA Insurance Corporation (the "Insurer"). The terms which are
capitalized herein and not otherwise defined have the meanings specified in the
Policy unless the context otherwise requires.
[The undersigned hereby certifies and confirms that on the Maturity Date
the Aggregate Guarantee Amount was equal to or less than the Total Net Assets as
of the Maturity Date.] [The Insurer has paid $________, the Deficit, under the
Policy.] [The undersigned hereby certifies and confirms that the Aggregate
Guarantee Amount equals zero.]
The original of the Policy is enclosed herewith.
PILGRIM EQUITY TRUST
By:____________________________
Name:
Title:
7