PROPOSAL 1: APPROVAL OF
AGREEMENT AND PLAN OF REORGANIZATION
The Board of Directors of Institutional Fund Inc., including all of the
Directors who are not "interested persons" of Institutional Fund Inc. (as
defined in the 1940 Act) (the "Non- interested Directors"), approved on August
6, 1997 an Agreement and Plan of Reorganization dated as of September 18, 1997
(the "Reorganization Agreement"). Subject to its approval by the stockholders of
the International Equity Portfolio, the Reorganization Agreement provides for
(a) the transfer of all or substantially all of the assets and all of the
identified and stated liabilities of the International Equity Portfolio to
International Fund, a series of shares of common stock of International Fund
Inc., in exchange solely for Xxxxxxx Shares of the International Fund; (b) the
distribution of such Xxxxxxx Shares to the stockholders of the International
Equity Portfolio in complete liquidation of the International Equity Portfolio;
and (c) the deregistration of Institutional Fund Inc. as an investment company
under the 1940 Act and its termination under state law (the "Reorganization").
As a result of the Reorganization, each stockholder of the International
Equity Portfolio will become a stockholder of the International Fund and will
hold, immediately after the closing of the Reorganization (the "Closing"), that
number of full and fractional Xxxxxxx Shares of the International Fund having an
aggregate net asset value equal to the aggregate net asset value of such
stockholder's shares held in the International Equity Portfolio as of the close
of business on the business day preceding the Closing. The investment objective,
policies and restrictions of the Xxxxxxx Shares class of International Fund will
be substantially similar to those of the International Equity Portfolio at the
time of the Closing.
A copy of the Reorganization Agreement is attached to this Proxy
Statement/Prospectus as Exhibit C, and the description of the Reorganization
Agreement which follows is qualified in its entirety by reference to Exhibit C.
SYNOPSIS
The following is a summary of certain information contained in this Proxy
Statement/Prospectus. This summary is qualified by reference to the more
complete information contained elsewhere in this Proxy Statement/Prospectus, the
Prospectus of the International Fund, the Prospectus of the International Equity
Portfolio and the Reorganization Agreement, which is attached to this Proxy
Statement/Prospectus as Exhibit C. Stockholders should read this entire Proxy
Statement/Prospectus carefully.
The Proposed Reorganization. The Board of Directors of Institutional Fund
Inc., including a majority of the Non- interested Directors, has approved the
Reorganization Agreement pursuant to which all or substantially all of the
assets of the International Equity Portfolio would be acquired by the
International Fund, in exchange solely for Xxxxxxx Shares of the International
Fund and the assumption by the International Fund of all of the identified and
stated liabilities of the International Equity Portfolio. Xxxxxxx Shares of the
International Fund thereby received would then be distributed to the
stockholders of the International Equity Portfolio in liquidation of the
International Equity Portfolio, and Institutional Fund Inc. would then be
deregistered as an investment company under the 1940 Act and terminated under
applicable state law. As a result of the Reorganization, each stockholder of the
International Equity Portfolio would become a stockholder of the International
Fund and would hold, immediately after the Closing, that number of full and
fractional Xxxxxxx Shares of the International Fund having an aggregate net
asset
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value equal to the aggregate net asset value of such stockholder's shares
held in the International Equity Portfolio as of the close of business on the
business day preceding the Closing.
The exchange of all or substantially all of the International Equity
Portfolio's assets for Xxxxxxx Shares of International Fund and the assumption
of all of the identified and stated liabilities of the International Equity
Portfolio by the International Fund are expected to occur on December 15, 1997,
or on such later date as the parties may agree in writing (the "Closing Date").
For the reasons set forth below under "The Proposed Transaction - Reasons
for the Proposed Transaction," the Board of Directors of Institutional Fund
Inc., including the Non- interested Directors, has concluded that the
Reorganization is in the best interests of the International Equity Portfolio
and its stockholders and that the interests of stockholders of the International
Equity Portfolio will not be diluted as a result of the transactions
contemplated by the Reorganization Agreement. Accordingly, the Board of
Directors recommends approval of the Reorganization Agreement. If the
Reorganization Agreement is not approved, the International Equity Portfolio
will continue in existence, unless the Board of Directors advocates other
action, which may include the termination and liquidation of the International
Equity Portfolio.
Approval of the Reorganization Agreement with respect to the International
Equity Portfolio requires the affirmative vote of the holders of a majority of
the shares of stock of the International Equity Portfolio outstanding and
entitled to vote thereon.
Form of Organization. The International Fund is a diversified series of
International Fund Inc., an open-end management investment company registered
under the 1940 Act. International Fund Inc. is a Maryland corporation whose
predecessor was organized in 1953. International Fund Inc. offers five (5) other
existing portfolios, none of which is involved in the Reorganization: Xxxxxxx
Emerging Markets Growth Fund, Xxxxxxx Greater Europe Growth Fund, Xxxxxxx
International Growth and Income Fund, Xxxxxxx Latin America Fund and Xxxxxxx
Pacific Opportunities Fund. The International Equity Portfolio is a diversified
series of Institutional Fund Inc., an open-end management investment company
registered under the 1940 Act. Institutional Fund Inc. was formed as a
corporation on January 2, 1986 under the laws of the State of Maryland.
Investment Objectives and Policies. Each of the International Fund and the
International Equity Portfolio (each also referred to herein as a "Fund" and
collectively the "Funds") seeks long-term growth of capital primarily through a
diversified portfolio of marketable foreign equity securities. These securities
are selected primarily to permit each Fund to participate in non-United States
companies and economies with prospects for growth. Each Fund invests in
companies, wherever organized, which do business primarily outside the United
States. Each Fund intends to diversify investments among several countries and
to have represented in the portfolio, in substantial proportions, business
activities in not less than five different countries in the case of the
International Equity Portfolio, and not less than three different countries in
the case of the International Fund.
The International Fund generally invests in equity securities of
established companies, listed on foreign exchanges, which the Investment Manager
believes have favorable characteristics. When the Investment Manager believes
that it is appropriate to do so in order to achieve the International Fund's
investment objective of long-term capital growth, the International Fund may
invest up to 20% of its total assets in debt securities. The International Fund
may purchase "investment- grade" bonds, which are those rated Aaa, Aa, A or Baa
by Xxxxx'x Investor Services, Inc. ("Xxxxx'x") or AAA, AA, A or BBB by Standard
& Poor's Corporation ("S&P") or, if unrated, judged by the Investment Manager to
be of equivalent quality. The International Fund may also invest up to 5% of its
total assets in debt securities which are rated below investment grade.
The International Equity Portfolio generally invests at least 90% of its
total assets in equity securities of established companies, listed on foreign
exchanges, which the Investment Manager believes have favorable characteristics.
When the Investment Manager believes that it is appropriate to do so in order to
achieve the International Equity Portfolio's investment objective of long-term
capital growth, the International Equity Portfolio may invest up to 10% of its
total assets in debt securities. The International Equity Portfolio may purchase
"investment-grade" bonds, which are those rated Aaa, Aa, A or Baa by Xxxxx'x or
AAA, AA, A or BBB by S&P or, if unrated, judged by
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the Investment Manager to be of equivalent quality. The International
Equity Portfolio may also invest up to 5% of its total assets in debt securities
which are rated below investment grade.
When the Investment Manager determines that exceptional conditions exist
abroad, each Fund may, for temporary defensive purposes, invest all or a portion
of its assets in Canadian or U.S. Government obligations or currencies, or
securities of companies incorporated in and having their principal activities in
Canada or the U.S. See "Special Considerations and Risk Factors" and "Comparison
of Policies and Restrictions" below.
Fees and Expenses. The International Fund retains as its investment manager
the investment management firm of Xxxxxxx, Xxxxxxx & Xxxxx, Inc., a Delaware
corporation located at 000 Xxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000, to manage its
daily investment and business affairs subject to the policies established by the
Directors of International Fund Inc. The management fee payable under the
current Investment Management Agreement for International Fund is equal to an
annual rate of 0.90% on the first $500 million of average daily net assets,
0.85% of such assets in excess of $500 million, 0.80% of such assets in excess
of $1 billion, 0.75% of such assets in excess of $2 billion and 0.70% of such
assets in excess of $3 billion. The International Fund's fee is graduated so
that increases in the Fund's net assets may result in a lower fee rate and
decreases in the Fund's net assets may result in a higher fee rate. The fee is
payable monthly, provided the Fund will make such interim payments as may be
requested by the Investment Manager not to exceed 75% of the amount of the fee
then accrued on the books of the Fund and unpaid. The fee is higher than that
charged to many funds which invest primarily in U.S. securities, but not
necessarily higher than the fees charged to funds with investment objectives
similar to that of the International Fund. As of March 31, 1997, the
International Fund had total net assets of $2,583,030,686. The total fees
incurred by the International Fund to the Investment Manager for the fiscal year
ended March 31, 1997 were $20,989,160, which includes fees paid under the
International Fund's investment management agreement which was in effect prior
to September 5, 1996.
For the fiscal year ended March 31, 1997, the International Fund's total
expense ratio (total annual operating expenses as a percentage of average net
assets) was 1.15%. The Investment Manager projects that after the proposed
Reorganization is effected, the expense ratio of the Xxxxxxx Shares class of the
International Fund will be approximately 1.10%. The actual expense ratio for the
Xxxxxxx Shares class of International Fund for the fiscal years ending March 31,
1998 and March 31, 1999 may be higher or lower than 1.10% depending upon the
International Fund's performance, general stock market and economic conditions,
sales and redemptions of International Fund shares (including redemptions by
former International Equity Portfolio stockholders), and other factors.
The International Equity Portfolio also retains the Investment Manager to
manage its daily investment and business affairs subject to the policies
established by the Directors of Institutional Fund Inc. The management fee
payable under the current Investment Management Agreement for International
Equity Portfolio is equal to an annual rate of .90% of the Fund's average daily
net assets. The fee is payable monthly, provided the Fund will make such interim
payments as may be requested by the Investment Manager not to exceed 75% of the
amount of the fee then accrued on the books of the Fund and unpaid. The fee is
higher than that charged to many funds which invest primarily in U.S.
securities, but not necessarily higher than the fees charged to funds with
investment objectives similar to that of the International Equity Portfolio. As
of March 31, 1997, the International Equity Portfolio had total net assets of
$18,323,531. For the period April 3, 1996 (commencement of operations) to
December 31, 1996, the Investment Manager did not impose any of its fee
amounting to $104,861.
For the fiscal year ended December 31, 1996, the International Equity
Portfolio's total expense ratio (total annual operating expenses as a percentage
of average net assets) was 0.95%, including waivers and reimbursements. The
International Equity Portfolio's estimated total expense ratio for the fiscal
year ended December 31, 1997 includes an investment management fee of 0.00%,
Rule 12b-1 fees of 0.00% and other expenses of 1.04%, including waivers and
reimbursements.
Until July 31, 1997, the Investment Manager had agreed to waive its
investment management fee and reimburse other expenses to the extent necessary
so that the total annualized expenses of the International Equity Portfolio did
not exceed 0.95% of average daily net assets. Effective August 1, 1997 through
December 31, 1997, the Investment Manager has agreed to waive its
17
management fee and reimburse other expenses to the extent necessary so that the
total annualized expenses of the International Equity Portfolio do not exceed
1.15% of average daily net assets. If the Investment Manager had not agreed to
waive its fee and reimburse other expenses, it is estimated that the annualized
expenses of the International Equity Portfolio would be: investment management
fee 0.90%, other expenses 1.36% and total operating expenses 2.26% for the
fiscal year ended December 31, 1997. Estimated expenses for the fiscal year
ended December 31, 1997 include the effect of a new transfer agency fee which
took effect July 1, 1997. The Investment Manager is not obligated to continue
its fee waivers and expense reimbursements after December 31, 1997. As
demonstrated by the table below, stockholders of the International Equity
Portfolio may experience an increase in expenses with respect to the Xxxxxxx
Class of shares of International Fund received pursuant to the Reorganization.
The current expenses of each Fund and pro forma expenses following the
proposed restructuring are outlined below:
Annual Fund Operating Expenses (as a percentage of average net assets)1
International International Pro Forma
Equity Fund (Xxxxxxx
Portfolio Shares)
Investment Management 0.00% 0.82% 0.82%
Fee
12b-1 Fees NONE NONE NONE
Other Expenses 0.95% 0.33% 0.28%
---- ---- ----
Total Fund Operating 0.95% 2 1.15% 1.10%
Expenses
1 The percentages in the above table expressing annual fund operating
expenses for the International Equity Portfolio and the International Fund
are based on amounts incurred during the year ended March 31, 1997,
International Fund's most recent fiscal year end.
2 Until July 31, 1997, the Investment Manager had agreed to waive its
investment management fee and reimburse other expenses to the extent
necessary so that the total annualized expenses of the International Equity
Portfolio did not exceed 0.95% of average daily net assets. If the
Investment Manager had not agreed to waive its fee and reimburse other
expenses for the period ended March 31, 1997, annualized expenses of the
International Equity Portfolio would be: investment management fee 0.90%,
other expenses 1.54% and total operating expenses 2.44%.
Example. Based on the level of total operating expenses for each of the
Funds listed in the table above for the year ended March 31, 1997, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to stockholders. Actual expenses may be greater or less than
those shown. Federal regulations require the example to assume a 5% annual
return, but actual annual return will vary.
International International Pro Forma
Equity Portfolio Fund
1 Year $10 $12 $11
3 Years $30 $37 $35
5 Years $53 $63 $61
10 Years $117 $140 $134
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Purchase, Redemption, and Exchange Information. The purchase, redemption
and exchange procedures and privileges for the International Equity Portfolio
and the Xxxxxxx Shares class of the International Fund are substantially
similar, except as discussed below. For example:
There is a $1,000 minimum initial investment requirement in the
International Equity Portfolio and a minimum account size requirement of $1,000.
The minimum investment requirement may be waived or lowered. The minimum
subsequent investment required for the International Equity Portfolio is $1,000.
The Xxxxxxx Shares class of the International Fund will have a $25,000
minimum initial investment requirement and a $1,000 minimum subsequent
investment requirement, which may be changed by the Board of Directors.
Shareholders of the International Equity Portfolio receiving shares of stock of
the Xxxxxxx Shares class of the International Fund in connection with the
proposed Reorganization will not be subject to the $25,000 minimum initial
investment requirement.
The Xxxxxxx Shares of the International Fund will not be exchangeable with
other funds within the Xxxxxxx Family of Funds. Shares of the International
Equity Portfolio currently are not exchangeable with other funds within the
Xxxxxxx Family of Funds.
Dividends and Other Distributions. Each of the Funds intends to distribute
dividends from its net investment income and any net realized capital gains
after utilization of capital loss carryforwards, if any, in December to prevent
application of a federal excise tax. An additional distribution may be made if
necessary. Any dividends or capital gains distributions declared in October,
November or December with a record date in such a month and paid during the
following January will be treated by stockholders for federal income tax
purposes as if received on December 31 of the calendar year in which it is
declared. Dividends and distributions of each Fund will be invested in
additional shares of the Fund at net asset value and credited to the
stockholder's account on the payment date or, at the stockholder's election,
paid in cash.
If the Reorganization Agreement is approved by the International Equity
Portfolio's stockholders, then as soon as practicable before the Closing Date
the International Equity Portfolio will pay its stockholders a cash distribution
of all undistributed 1997 net investment income and undistributed realized net
capital gains.
Federal Income Tax Consequences of the Reorganization. The International
Fund and the International Equity Portfolio will have received an opinion of
Dechert Price & Xxxxxx, counsel to the International Equity Portfolio, to the
effect that the Reorganization will constitute a tax-free reorganization within
the meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). If the Reorganization constitutes a tax-free
reorganization, no gain or loss will be recognized by the International Equity
Portfolio or its stockholders as a result of the Reorganization. See "The
Proposed Transaction - Tax Considerations."
SPECIAL CONSIDERATIONS AND RISK FACTORS
The principal investment risk of an investment in either the International
Equity Portfolio or the International Fund is fluctuations in the net asset
value of the Fund's shares. Portfolio management, market conditions, use of
investment policies, and other factors affect such fluctuations. Although the
investment objectives, policies and restrictions of the International Equity
Portfolio and the International Fund are substantially similar, there are
differences between them, which differences are outlined below. There can be no
assurance that either Fund will achieve its stated objective.
Comparison of Objectives. The principal investment objective of each of the
International Fund and the International Equity Portfolio is long-term growth of
capital primarily through a diversified portfolio of marketable foreign equity
securities.
Comparison of Policies and Restrictions. The securities in which the Funds
invest are selected primarily to permit each Fund to participate in non-United
States companies and economies with prospects for growth. Each Fund invests in
companies, wherever
19
organized, which do business primarily outside the United States. Each Fund
intends to diversify investments among several countries and to have represented
in the portfolio, in substantial proportions, business activities in not less
than five different countries in the case of the International Equity Portfolio,
and not less than three different countries in the case of the International
Fund.
The International Fund generally invests in equity securities of
established companies, listed on foreign exchanges, which the Investment Manager
believes have favorable characteristics. When the Investment Manager believes
that it is appropriate to do so in order to achieve the International Fund's
investment objective of long-term capital growth, the International Fund may
invest up to 20% of its total assets in debt securities. The International Fund
may purchase "investment- grade" bonds, which are those rated Aaa, Aa, A or Baa
by Xxxxx'x or AAA, AA, A or BBB by S&P or, if unrated, judged by the Investment
Manager to be of equivalent quality. The International Fund may also invest up
to 5% of its total assets in debt securities which are rated below investment
grade.
The International Equity Portfolio generally invests at least 90% of its
total assets in equity securities of established companies, listed on foreign
exchanges, which the Investment Manager believes have favorable characteristics.
When the Investment Manager believes that it is appropriate to do so in order to
achieve the International Equity Portfolio's investment objective of long-term
capital growth, the International Equity Portfolio may invest up to 10% of its
total assets in debt securities. The International Equity Portfolio may purchase
"investment-grade" bonds, which are those rated Aaa, Aa, A or Baa by Xxxxx'x or
AAA, AA, A or BBB by S&P or, if unrated, judged by the Investment Manager to be
of equivalent quality. The International Equity Portfolio may also invest up to
5% of its total assets in debt securities which are rated below investment
grade.
When the Investment Manager determines that exceptional conditions exist
abroad, each of the International Fund and the International Equity Portfolio
may, for temporary defensive purposes, invest all or a portion of its assets in
Canadian or U.S. Government obligations or currencies, or securities of
companies incorporated in and having their principal activities in Canada or the
U.S.
Primary Investments:
Foreign Securities. Each of the Funds invests primarily in foreign
securities. Investments in foreign securities involve special considerations due
to limited information, higher brokerage costs, different accounting standards,
thinner trading markets as compared to domestic markets and the likely impact of
foreign taxes on the income from securities. Such investments may also entail
other risks, such as the possibility of one or more of the following; imposition
of dividend or interest withholding or confiscatory taxes; currency blockages or
transfer restrictions; expropriation, nationalization or other adverse political
or economic developments; less governmental supervision and regulation of
securities exchanges, brokers and listed companies; and the difficulty of
enforcing obligations in other countries. Purchases of foreign securities are
usually made in foreign currencies and, as a result, the Fund may incur currency
conversion costs and may be affected favorably or unfavorably by changes in the
value of foreign currencies against the U.S. dollar. Further, it may be more
difficult for a Fund's agents to keep currently informed about corporate actions
which may affect the prices of portfolio securities. Communications between the
U.S. and foreign countries may be less reliable than within the U.S., increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. A Fund's ability and decisions to
purchase and sell portfolio securities may be affected by laws or regulations
relating to the convertibility and repatriation of assets.
Repurchase Agreements. Each of the Funds may enter into repurchase
agreements. If the seller under a repurchase agreement becomes insolvent, a
Fund's right to dispose of the securities may be restricted, or the value of the
securities may decline before the Fund is able to dispose of them. In the event
of the commencement of bankruptcy or insolvency proceedings with respect to the
seller of the securities before repurchase of the securities under a repurchase
agreement, a Fund may encounter delay and incur costs, including a decline in
the value of the securities, before being able to sell the securities.
Securities Lending. From time to time, International Fund may lend its
portfolio securities to registered broker/dealers as described above. The risks
of lending portfolio securities, as with other extensions of secured credit,
consist of possible
20
delays in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. Loans will be made to registered broker/dealers deemed by the
Investment Manager to be in good standing and will not be made unless, in the
judgment of the Investment Manager, the consideration to be received in exchange
for such loans would justify the risk.
Debt Securities. Each of the Funds may, as described above, invest to a
limited extent in debt securities rated below investment grade, i.e. below Baa
by Xxxxx'x and below BBB by S&P. (commonly referred to as "junk bonds"). The
lower the ratings of such debt securities, the greater their risks render them
like equity securities. Xxxxx'x considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics. Each of the Funds may
invest in securities which are rated D by S&P or, if unrated, are of equivalent
quality. Securities rated D may be in default with respect to payment of
principal or interest. The International Fund may invest up to 20% of its total
assets in debt securities. The International Equity Portfolio may invest up to
10% of total assets in debt securities. Each Fund may invest up to 5% of its
total assets in debt securities which are rated below investment grade ("junk
bonds").
Illiquid and Restricted Securities. Each of the Funds may invest in
illiquid and restricted securities. The absence of a trading market can make it
difficult to ascertain a market value for illiquid and restricted securities.
Disposing of illiquid and restricted securities may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for a Fund
to sell them promptly at an acceptable price. The risk factors involved in the
use of illiquid and restricted securities is substantially the same for each of
the Funds.
Strategic Transactions and Derivatives. From time to time, each of the
Funds may engage in strategic transactions and derivatives. Strategic
Transactions, including derivative contracts, have risks associated with them
including possible default by the other party to the transaction, illiquidity
and, to the extent the Investment Manager's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to a Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation a Fund can realize on its investments or cause
the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in a Fund's incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of settlements
or the inability to deliver or receive a specified currency. The use of options
and futures transaction entails certain other risks. In particular, the variable
degree of correlation between price movements in the related portfolio position
of a Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in the value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The risk factors involved in the use of
strategic transactions and derivatives is substantially the same for each of the
Funds.
Fundamental Policies. Each Fund has "fundamental" investment policies which
may be changed only with stockholder approval and "nonfundamental" investment
policies which may be changed only with the approval of a Fund's Board of
Directors. Following is a description of certain of the Funds' current
fundamental investment policies which are substantially similar:
Neither Fund may, with respect to 75% of its total assets taken at market
value, purchase more than 10% of the voting securities of any one issuer or
invest more than 5% of the value of its total assets in the securities of any
one issuer, except obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and except securities of other investment
companies.
Neither Fund may borrow money except as a temporary measure for
extraordinary or emergency purposes or except in connection with reverse
repurchase agreements; provided that the Fund maintains asset coverage of 300%
for all borrowings.
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Neither Fund may act as an underwriter of securities issued by others,
except to the extent that the Fund may be deemed an underwriter in connection
with the disposition of its portfolio securities.
Neither Fund may make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent that the entry into repurchase agreements and
the purchase of debt securities in accordance with the Fund's investment
objectives and investment policies may be deemed to be loans.
Neither Fund may purchase or sell real estate (except that each Fund may
invest in (i) securities of companies which deal in real estate or mortgages,
and (ii) securities secured by real estate or interests therein, and reserves
freedom of action to hold and to sell real estate acquired as a result of the
Fund's ownership of securities).
Neither Fund may purchase or sell physical commodities or contracts
relating to physical commodities.
Stockholders of the International Fund are being asked at a Special Meeting
of Stockholders on October 27, 1997 to approve certain changes to the
International Fund's fundamental investment restrictions. Except for the policy
on borrowing, none of the proposed policies differs from the International
Fund's current comparable policy in a material way. The current policy of
International Fund prohibits borrowing money, except as a temporary measure for
extraordinary or emergency purposes and except in connection with reverse
repurchase agreements; provided that the Fund maintains asset coverage of 300%
for all borrowings. Under its proposed borrowing policy, International Fund
would not be limited to borrowing for temporary or emergency purposes; however,
if the International Fund Inc. Directors determine with respect to International
Fund to permit borrowing for other purposes, which they currently do not intend
to do, the Fund's disclosure documents would be amended to disclose that fact.
Although the International Fund Inc. directors do not currently intend to permit
International Fund to borrow for investment leverage purposes, such borrowings
would increase the Fund's volatility and the risk of loss in a declining market.
Borrowings under reverse repurchase agreements are now permitted, and would be
permitted under the proposed policy. The 1940 Act requires borrowings to have
300% asset coverage, which requirement would, therefore, remain unchanged under
the proposed policy, except to the extent that reverse repurchase agreements
would not be subject, under the proposed policy, to the 300% asset coverage
requirement. Consequently, the proposed policy would permit International Fund
to engage in reverse repurchase agreements to a greater extent than under the
current policy. If approved, International Fund's foregoing policies would be
revised as follows.
International Fund will not:
(a) concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended and interpreted
by regulatory authority having jurisdiction from time to time;
(b) borrow money, except as permitted under the Investment Company Act of
1940, as amended and interpreted by regulatory authority having
jurisdiction from time to time;
(c) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended and interpreted by regulatory
authority having jurisdiction from time to time;
(d) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
(e) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired as
a result of the Fund's ownership of securities;
(f) make loans to other persons, except (i) loans of portfolio securities,
and (ii) to the extent that entry into repurchase agreements and the
purchase of debt instruments or interests in indebtedness in
accordance with the Fund's investment objective and policies may be
deemed to be loans; or
(g) purchase physical commodities or contracts relating to physical
commodities.
In addition, International Fund will continue to be classified as a
diversified series of an open-end management investment company.
The nonfundamental investment restrictions of the International Equity
Portfolio and the International Fund are substantially similar, except as
described herein.
Description of the Reorganization Agreement. As stated above, the
Reorganization Agreement provides for the transfer of all or substantially all
of the assets of the International Equity Portfolio to the International Fund in
exchange for that number of full and fractional Xxxxxxx Shares in the
International Fund having an aggregate net asset value equal to the aggregate
22
net asset value of each International Equity Portfolio stockholder's stock
held in the International Equity Portfolio as of the close of business on the
business day preceding the Closing. International Fund will assume all of the
identified and stated liabilities of the International Equity Portfolio. In
connection with the Closing, Institutional Fund Inc., on behalf of the
International Equity Portfolio, will distribute the shares of the International
Fund received in the exchange to the stockholders of the International Equity
Portfolio in complete liquidation of the International Equity Portfolio.
Institutional Fund Inc. will subsequently be deregistered as an investment
company under the 1940 Act and terminated under Maryland law.
Upon completion of the Reorganization, each stockholder of the
International Equity Portfolio will own that number of full and fractional
Xxxxxxx Shares in the International Fund having an aggregate net asset value
equal to the aggregate net asset value of such stockholder's stock held in the
International Equity Portfolio immediately as of the close of business on the
business day preceding the Closing. Each stockholder's account with Intenational
Fund Inc. will be identical in all material respects to the accounts currently
maintained by Institutional Fund Inc. for each stockholder. In the interest of
economy and convenience, shares of the International Equity Portfolio generally
are not represented by physical certificates, and shares of the International
Fund similarly generally will be in uncertificated form.
Until the closing, stockholders of the International Equity Portfolio will,
of course, continue to be able to redeem their shares at the net asset value
next determined after receipt by the International Equity Portfolio's Transfer
Agent of a redemption request in proper form. Redemption requests received by
Institutional Fund Inc. thereafter will be treated as requests received by
International Fund Inc. for the redemption of shares of the International Fund
received by the stockholder in the Reorganization.
The obligations of Institutional Fund Inc. and International Fund Inc.
under the Reorganization Agreement are subject to various conditions, as stated
therein. Among other things, the Reorganization requires that all filings be
made with, and all authority be received from, the SEC and state securities
commissions as may be necessary in the opinion of counsel to permit the parties
to carry out the transactions contemplated by the Reorganization Agreement.
Institutional Fund Inc. and International Fund Inc. are in the process of making
the necessary filings. To provide against unforeseen events, the Reorganization
Agreement may be terminated or amended at any time prior to the Closing by
action of the Directors of Institutional Fund Inc. and the Directors of
International Fund Inc., notwithstanding the approval of the Reorganization
Agreement by the stockholders of the International Equity Portfolio. However, no
amendment may be made that materially adversely affects the interests of the
stockholders of the International Equity Portfolio. Institutional Fund Inc. and
International Fund Inc. may at any time waive compliance with any of the
covenants and conditions contained in the Reorganization Agreement. For a
complete description of the terms and conditions of the Reorganization, see the
Reorganization Agreement at Exhibit C.
Reasons for the Reorganization. The proposed Reorganization was presented
to the Board of Directors of Institutional Fund Inc. for consideration and
approval at a special meeting on August 6, 1997. All of the Directors were
present at the meeting. For the reasons discussed below, the Board of Directors
of Institutional Fund Inc., including all of the Non-interested Directors, has
determined that the interests of the stockholders of the International Equity
Portfolio will not be diluted as a result of the proposed Reorganization, and
that the proposed Reorganization is in the best interests of the International
Equity Portfolio and its stockholders.
The proposed combination of the International Equity Portfolio and the
International Fund will allow the International Equity Portfolio's stockholders
to continue to participate in a professionally-managed portfolio consisting
primarily of foreign equity investments. The Directors of the International
Equity Portfolio believe that International Equity Portfolio stockholders will
benefit from the proposed Reorganization because the International Fund, while
guided by substantially similar investment objectives and policies, offers the
following benefits:
Increased Investment Opportunities: The International Fund is currently
approximately more than 100 times larger than the International Equity
Portfolio. Because of its much larger asset base, the International Fund can
acquire and dispose of securities on more favorable terms than the International
Equity Portfolio. Also, because of its larger size, the International Fund can
obtain a wider variety of investments. Moreover, it is
23
anticipated that combining the International Equity Portfolio and the
International Fund will further enhance trading efficiency and investment
flexibility.
Lower Fund Expenses Over Time: While total fund expenses of the
International Fund will be higher than those currently paid by stockholders of
the International Equity Portfolio on account of expense limitations currently
in place, if the proposed transaction is approved, such stockholders may benefit
from lower total fund expenses over the long-term. There can be no assurance
that the Investment Manager will continue its expense limitation arrangement
currently in effect for the International Equity Portfolio once such expense
limitation expires after December 31, 1997.
Due to the small size of the International Equity Portfolio, the Directors
and management of such Fund believe that the Fund cannot grow to a sufficient
size through the sale of additional stock to provide investors with significant
economies of scale. Accordingly, the Directors of Institutional Fund Inc.
recommend that the International Equity Portfolio's stockholders approve the
Reorganization with the International Fund.
The Board of Directors of the International Equity Portfolio, in
recommending the proposed transaction, considered a number of factors, including
the following:
(1) the capabilities and resources of the Investment Manager and its
affiliates in the areas of investment management and stockholder
servicing;
(2) expense ratios and information regarding fees and expenses of the
International Equity Portfolio and the International Fund;
(3) the terms and conditions of the Reorganization and whether it would
result in dilution of the interests of the International Equity
Portfolio's stockholders;
(4) the compatibility of the International Fund, its investment
objectives, policies and restrictions with those of the International
Equity Portfolio;
(5) the growth opportunities afforded by the proposed consolidation with
the International Fund; and
(6) the tax consequences to the International Equity Portfolio and its
stockholders.
Description of Securities To Be Issued. The authorized capital stock of
International Fund Inc. consists of 700,000,000 shares, $0.01 par value per
share. The Directors of International Fund Inc. are authorized to divide the
shares into separate series, of which the International Fund is one. Shares of
International Fund Inc. entitle their holders to one vote per share; however,
separate votes will be taken by each series on matters affecting an individual
series. Shares have noncumulative voting rights and no preemptive or
subscription rights. International Fund Inc. is not required to hold stockholder
meetings annually, although stockholder meetings may be called for purposes such
as electing or removing Directors, changing fundamental policies or approving an
investment management agreement.
The Directors of International Fund Inc., in their discretion, may
authorize the division of shares of International Fund Inc. (or shares of a
series) into different classes permitting shares of different classes to be
distributed by different methods. Although stockholders of different classes of
a series would have an interest in the same portfolio of assets, stockholders of
different classes may bear different expenses in connection with different
methods of distribution, which may affect performance. Consistent with the
Directors' authority, the Directors of International Fund Inc. have authorized
the creation of the Xxxxxxx Shares class of the International Fund. It is
anticipated that the Xxxxxxx Shares class of the International Fund will be
created prior to the Closing Date. If the Barret shares class of the
International FUnd is not so created, the Reorganization will not be
consummated.
International Fund Inc.'s By-Laws provide that meetings of stockholders may
be called at any time by the President, and shall be called by the President or
Secretary at the request, in writing or by resolution, of a majority of
Directors, or at the
24
written request of the holder or holders of twenty-five percent (25%) or more of
the total number of shares of International Fund Inc. then issued and
outstanding and entitled to vote at such meeting. Any such request shall state
the purpose of the proposed meeting. In the event that stockholders of
International Fund Inc. wish to communicate with other stockholders concerning
the removal of any Director of International Fund Inc., such stockholders shall
be assisted in communicating with other stockholders for the purpose of
obtaining signatures to request a meeting of stockholders, all in the manner
provided in Section 16(c) of the 1940 Act as if that section were applicable.
Tax Considerations. The Reorganization is conditioned upon the receipt by
Institutional Fund Inc. and International Fund Inc. of an opinion from Dechert
Price & Xxxxxx, substantially to the effect that, based upon the facts,
assumptions and representations of the parties, for federal income tax purposes:
(i) the transfer to International Fund of all of the assets of the International
Equity Portfolio in exchange solely for International Fund Xxxxxxx Shares and
the assumption by the International Fund of all of the identified and stated
liabilities of the International Equity Portfolio, followed by the distribution
of such Xxxxxxx Shares to the International Equity Portfolio stockholders in
exchange for their shares of the International Equity Portfolio in complete
liquidation of the International Equity Portfolio, will constitute a
"reorganization" within the meaning of Section 368(a)(1) of the Code, and the
International Fund and the International Equity Portfolio will each be "a party
to a reorganization" within the meaning of Section 368(b) of the Code; (ii) no
gain or loss will be recognized by the International Equity Portfolio upon the
transfer of all of its assets to the International Fund in exchange solely for
International Fund Xxxxxxx Shares and the assumption by the International Fund
of the identified and stated liabilities of the International Equity Portfolio;
(iii) the basis of the assets of the International Equity Portfolio in the hands
of the International Fund will be the same as the basis of such assets of the
International Equity Portfolio immediately prior to the transfer; (iv) the
holding period of the assets of the International Equity Portfolio in the hands
of the International Fund will include the period during which such assets were
held by the International Equity Portfolio; (v) no gain or loss will be
recognized by the International Fund upon the receipt of the assets of the
International Equity Portfolio in exchange for International Fund Xxxxxxx Shares
and the assumption by the International Fund of the identified and stated
liabilities of the International Equity Portfolio; (vi) no gain or loss will be
recognized by the stockholders of the International Equity Portfolio upon the
receipt of International Fund Xxxxxxx Shares solely in exchange for their shares
of the International Equity Portfolio as part of the transaction; (vii) the
basis of the International Fund Xxxxxxx Shares received by the stockholders of
the International Equity Portfolio will be the same as the basis of the shares
of the International Equity Portfolio exchanged therefor; and (viii) the holding
period of the International Fund Xxxxxxx Shares received by the stockholders of
the International Equity Portfolio will include the holding period during which
the shares of the International Equity Portfolio exchanged therefor were held,
provided that at the time of the exchange the shares of the International Equity
Portfolio were held as capital assets in the hands of the stockholders of the
International Equity Portfolio.
While Institutional Fund Inc. is not aware of any adverse state or local
tax consequences of the proposed Reorganization, it has not requested any ruling
or opinion with respect to such consequences and stockholders may wish to
consult their own tax advisers with respect to such matters.
Comparative Information on Stockholder Rights. Each of International Fund
Inc. and Institutional Fund Inc. is a Maryland corporation governed by its
Articles of Incorporation dated June 23, 1975 and January 2, 1986, respectively,
each as amended and restated, its By-Laws and applicable Maryland law. The
business and affairs of each of the Funds are managed under the direction of a
Board of Directors.
The number of shares of common stock of each of International Fund Inc. and
Institutional Fund Inc. authorized is 700,000,000 and 25,000,000,000,
respectively. Under the Articles of Incorporation of each of Institutional Fund
Inc. and International Fund Inc., the Board of Directors is authorized to create
new classes or series of shares without a vote of stockholders.
Interests in the International Fund and the International Equity Portfolio
are represented by transferable shares of common stock having $0.01 par value
and $0.001 par value, respectively. The Directors of each of International Fund
Inc. and Institutional Fund Inc. may from time to time divide or combine the
shares into a greater or lesser number without thereby
25
changing the proportionate common stocks in that portfolio. The Directors of
International Fund Inc. and Institutional Fund Inc. each have the power to
create separate classes of shares for each portfolio and to create additional
classes in the future without a vote of stockholders.
Liquidation Expenses of The Fund. If the Reorganization is effected, the
International Equity Portfolio will liquidate, cease to operate as a business,
and dissolve its corporate existence. In this connection, the International
Equity Portfolio will incur certain expenditures, obligations, and liabilities
to be paid or discharged on and after the Closing Date ("Liquidation Expenses"),
for which it will retain a portion of its cash and cash equivalents as the
Expense Reserve.
Interest of Certain Persons. The Investment Manager has a financial
interest in the Reorganization, arising from the fact that its management fee
under its Investment Management Agreement with the International Fund will
increase as the amount of the International Fund's assets increases: the amount
of those assets will increase by virtue of the Reorganization. See "Synopsis -
Fees and Expenses." Similarly, Xxxxxxx Service Corporation, a subsidiary of the
Investment Manager, is the transfer, stockholder servicing and dividend-paying
agent for the International Fund, and its fees from the International Fund will
increase from the addition to the International Fund of new accounts.
Portfolio Turnover. The average annual portfolio turnover rate for the
International Fund, i.e. the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio (excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of one
year or less), for the fiscal year ended March 31, 1996 and March 31, 1997, was
45.2% and 35.8%, respectively. The average annual portfolio turnover rate for
the International Equity Portfolio for the period April 3, 1996 (commencement of
operations) to December 31, 1996 was 10.1% (annualized).
Capitalization and Performance. The following table shows on an unaudited
basis the capitalization of the International Equity Portfolio and the Xxxxxxx
Shares class of the International Fund as of March 31, 1997 and on a pro forma
basis as of March 31, 1997 giving effect to the Reorganization:
(In thousands, except per share values)
International International Pro Forma Pro Forma
Fund Equity Adjustments* for
Portfolio Reorganization*
Net Assets $2,583,031 $ 18,324 0 $2,601,355
Net Asset Value
per share $ 48.07 $ 12.68 0 $ 48.07
Shares outstanding 53,734 1,446 (1,064) 54,116
* The pro forma relates to the International Fund as a whole; the pro forma
for the Xxxxxxx Shares class of the International Fund (in thousands,
except per share value) is as follows: net assets of $18,324, net asset
value per share of $48.07 and shares outstanding of 382.
Total return is a measure of the change in value of an investment in a fund
over the period covered, which assumes that any dividends or capital gains
distributions are automatically reinvested in shares of the same class of that
fund rather than paid to the investor in cash. The formula for total return used
by a fund is prescribed by the SEC and includes three steps: (1) adding to the
total number of shares of the particular class that would be purchased by a
hypothetical $1,000 investment in the fund all additional shares that would have
been purchased if all dividends and distributions paid or distributed during the
period had been automatically reinvested; (2) calculating the redeemable value
of the hypothetical initial investment as of the end of the period by
multiplying the total number of shares owned at the end of the period by the net
asset value per share of the relevant class on the last trading day of the
period; and (3) dividing this account value for the hypothetical investor by the
amount of the initial investment, and annualizing the result for periods of less
than one year. Total return may be stated with or without giving effect to any
expense limitations in effect for a fund.
26
Average Annual Total Return. The following table reflects average annual
total returns for the one, five and ten year periods ending July 31, 1997 for
shares of the International Equity Portfolio and the International Fund:
Average Annual Total Return:
Period International Fund* International Equity Portfolio
------ ------------------- ------------------------------
One Year 29.21% 26.93%
Five Years 14.84% n/a
Ten Years 9.30% n/a
Since Inception n/a 17.66%
___________________________________
* Xxxxxxx Shares of International Fund were not offered during the period
covered. Performance shown is for shares of the International Fund in
existence during the periods covered.
Investment Manager. Xxxxxxx, Xxxxxxx & Xxxxx, Inc., 000 Xxxx Xxxxxx, Xxx
Xxxx, Xxx Xxxx 00000 is the investment manager to the International Fund
pursuant to an Investment Management Agreement with International Fund Inc., on
behalf of the International Fund, substantially similar in all material respects
to that currently in place for the International Equity Portfolio.
Stockholders of the International Fund are being asked to approve a new
investment management agreement with Xxxxxxx Xxxxxx in connection with the
transactions pursuant to the Xxxxxxx- Zurich alliance described more fully in
Proposal 2 below. If approved, the new investment management agreement between
the International Fund and Xxxxxxx Xxxxxx is not expected to have a material
effect on the operations of the International Fund or on its stockholders. No
material change in the International Fund's investment philosophy, objectives or
strategies is currently envisioned.
The Directors and Executive Officers of International Fund Inc., their
business addresses and principal occupations during the past five years are:
Present Office with International Fund
Inc. (Date Became Director), Principal Occupation or
Name (Age) Employment and Directorships
---------- ----------------------------
Xxxx Xxxxxxxx XXX Director, Xxxxxxx International Fund, Inc.
(67) (1982). Venture Capitalist and Consultant
(1988 to present); Retired President,
Chief Executive Officer and Director,
Bessemer Securities Corp. (private
investment company); Director, Western
Atlas, Inc. (diversified oil services and
industrial automation company). Former
Director: Albany International, Inc.
(paper machine belt manufacturer); and
Measurex Corp. (process control systems
company). Xx. Xxxxxxxx serves on the
Boards of an additional 5 Trusts or
Corporations whose Funds are advised by
Xxxxxxx.
Xxxxxxxx Xxxxx* President and Director, Xxxxxxx
(49) International Fund, Inc. (1982). Managing
Director of Xxxxxxx, Xxxxxxx & Xxxxx, Inc.
Xx. Xxxxx serves on the Boards of an
additional 14 Trusts or Corporations whose
Funds are advised by Xxxxxxx.
27
Present Office with International Fund
Inc. (Date Became Director), Principal Occupation or
Name (Age) Employment and Directorships
---------- ----------------------------
Xxxxxx X. Xxxxxx Director, Xxxxxxx International Fund, Inc.
(70) (1978). Consultant. Xx. Xxxxxx serves on
the Boards of an additional 6 Trusts or
Corporations whose Funds are advised by
Xxxxxxx.
Xxxxx X. Xxx (43) Director, Xxxxxxx International Fund, Inc.
(1996). President, Exeter Capital
Management Corporation (private equity
investment firm). Xx. Xxx serves on the
Boards of an additional 3 Trusts or
Corporations whose Funds are advised by
Xxxxxxx.
Xxxxxxx X. Xxxxxxxx, Xxxxxxx International Fund, Inc.
Xxxxxxxxx, Xx. (71) (1990). Consultant; Guest Scholar,
Brookings Institute; Former President, The
Japan Society, Inc. (until 1996). Xx.
Xxxxxxxxx serves on the Boards of an
additional 4 Trusts or Corporations whose
Funds are advised by Xxxxxxx.
Xxxxx X. Xxx* (63) Vice President, Assistant Treasurer and
Director, Xxxxxxx International Fund, Inc.
(1997). Managing Director, Xxxxxxx,
Xxxxxxx & Xxxxx, Inc.; Trustee Emeritus,
New England Medical Center. Xx. Xxx
serves on the Boards of an additional 38
Trusts or Corporations whose Funds are
advised by Xxxxxxx.
Xxxxxxx X. Xxxxx Director, Xxxxxxx International Fund, Inc.
(68) (1990). President, The Metropolitan
Museum of Art; Director: IDEX Corporation
(liquid handling equipment manufacturer)
and Wickes Lumber Company (building
materials for contractors); Former
Director: Transco Energy Company (natural
gas transmission company) (until 1995) and
The Discount Corporation of New York (bond
trading) (until 1993). Xx. Xxxxx serves
on the Boards of an additional 3 Trusts or
Corporations whose Funds are advised by
Xxxxxxx.
Xxxxxx Xxxxx (70) Director, Xxxxxxx International Fund, Inc.
(1975). Consultant; Trustee: Cultural
Institutions Retirement Fund, Inc., New
York Botanical Garden, Skowhegan School of
Painting and Sculpture; and Former
Director, Ecohealth, Inc. (biotechnology
company) (until 1996). Xx. Xxxxx serves
on the Boards of an additional 9 Trusts or
Corporations whose Funds are advised by
Xxxxxxx.
Xxxxxx Xxxxxx* (63) Chairman of the Board and Director,
Xxxxxxx International Fund, Inc. (1986).
Chairman of the Board and Managing
Director of Xxxxxxx, Xxxxxxx & Xxxxx, Inc.
Director, Fiduciary Trust Company (bank
and trust company) and Fiduciary Company
Incorporated (bank and trust company).
Xx. Xxxxxx serves on the Boards of an
additional 25 Trusts or Corporations whose
Funds are advised by Xxxxxxx.
Xxxxxxx X. Xxxxx* Vice President, Assistant Secretary and
(44) Director, Xxxxxxx International Fund, Inc.
(1996). Managing Director of Xxxxxxx,
Xxxxxxx & Xxxxx, Inc. Xx. Xxxxx serves on
the Boards of an additional 34 Trusts or
Corporations whose Funds are advised by
Xxxxxxx.
Xx. Xxxxxx Director, Xxxxxxx International Fund, Inc.
Xxxxxxxxxxx (72) (1982). Professor Emeritus of Accounting,
Columbia University Graduate School of
Business. Xx. Xxxxxxxxxxx serves on the
Boards of an additional 8 Trusts or
Corporations whose Funds are advised by
Xxxxxxx.
28
________________
* Directors considered by International Fund Inc. and its
counsel to be "interested persons" (as defined in the 1940
Act) of International Fund Inc. or of its investment
manager.
Stockholders of the International Fund are being asked to elect a new slate
of Directors in connection with the Xxxxxxx- Zurich alliance for reasons
substantially similar to those set forth in Proposal 3 below.
Expenses of the Reorganization. The expenses relating to the proposed
Reorganization will be borne by Xxxxxxx.
ADDITIONAL INFORMATION
As of June 30, 1997, 3,476,331 shares in the aggregate, 6.48% of the
outstanding shares of International Fund were held in the name of Xxxxxxx Xxxxxx
& Co., 000 Xxxxxxxxxx Xxxxxx, Xxx Xxxxxxxxx, XX 00000, who may be deemed to be
the beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein. As of June 30, 1997 the Directors and Officers of
International Fund Inc. as a group beneficially owned less than 1% of each class
of shares of the International Fund outstanding. As of June 30, 1997, the
Directors and Officers of Institutional Fund Inc. as a group beneficially owned
less than 1% of the outstanding shares of the International Equity Portfolio. No
persons own beneficially, as of June 30, 1997, 5% or more of the outstanding
shares of the International Equity Portfolio.
Required Vote
Approval of the Reorganization Agreement requires the affirmative vote of a
majority of the International Equity Portfolio's shares outstanding and entitled
to vote thereon. Subject to such approval, the reorganization is currently
scheduled to become effective as of the close of business on December 15, 1997,
but may be postponed by mutual agreement of Institutional Fund Inc. and
International Fund Inc. The Directors unanimously recommend that the
stockholders of the Fund vote in favor of this Proposal 1.
PROPOSAL 2: APPROVAL OF NEW
INVESTMENT MANAGEMENT AGREEMENT
Introduction. Xxxxxxx acts as the investment manager to the International
Equity Portfolio (also referred to in Proposals 2, 3 and 4 as the "Fund")
pursuant to an investment management agreement entered into by the Fund and
Xxxxxxx (the "Current Investment Management Agreement"). On June 26, 1997,
Xxxxxxx entered into a Transaction Agreement (the "Transaction Agreement") with
Zurich Insurance Company ("Zurich") pursuant to which Xxxxxxx and Zurich have
agreed to form an alliance. Under the terms of the Transaction Agreement, Zurich
will acquire a majority interest in Xxxxxxx, and Zurich Xxxxxx Investments, Inc.
("ZKI"), a Zurich subsidiary, will become part of Xxxxxxx. Xxxxxxx'x name will
be changed to Xxxxxxx Xxxxxx Investments, Inc. ("Xxxxxxx Xxxxxx"). The foregoing
are referred to as the "Transactions." XXX, a Chicago-based investment adviser
and the adviser to the Xxxxxx funds, has approximately $80 billion under
management. The headquarters of Xxxxxxx Xxxxxx will be in New York. Xxxxxx X.
Xxxxxxx, Xxxxxxx'x Chief Executive Officer, will continue as Chief Executive
Officer of Xxxxxxx Xxxxxx and will become a member of Zurich's Corporate
Executive Board.
Consummation of the Transactions would constitute an "assignment," as that
term is defined in the 1940 Act, of the Fund's Current Investment Management
Agreement with Xxxxxxx. As required by the 1940 Act, the Current Investment
Management Agreement provides for its automatic termination in the event of its
assignment. In anticipation of the Transactions, a new
29
investment management agreement (the "New Investment Management Agreement,"
together with the Current Investment Management Agreement, the "Investment
Management Agreements") between the Fund and Xxxxxxx Xxxxxx is being proposed
for approval by stockholders of the Fund. A copy of the form of the New
Investment Management Agreement is attached hereto as Exhibit A. THE NEW
INVESTMENT MANAGEMENT AGREEMENT IS IN ALL MATERIAL RESPECTS ON THE SAME TERMS AS
THE CURRENT INVESTMENT MANAGEMENT AGREEMENT. Conforming changes are being
recommended to the New Investment Management Agreement in order to promote
consistency among all of the funds currently advised by Xxxxxxx and to permit
ease of administration. The material terms of the Current Investment Management
Agreement are described under "Description of the Current Investment Management
Agreement" below.
Stockholders are being asked to approve this Proposal 2 in the event that
the Reorganization, as described in Proposal 1 above, is not consummated.
Board of Directors' Recommendation. On August 6, 1997, the Board of
Institutional Fund Inc. (also referred to in Proposals 2, 3 and 4 as the
"Corporation"), including Non-interested Directors, voted to approve the New
Investment Management Agreement and to recommend its approval to stockholders.
For information about the Board's deliberations and the reasons for its
recommendation, please see "Board of Directors' Evaluation" below.
The Board of the Corporation recommends that its stockholders vote in favor
of the approval of the New Investment Management Agreement for the Fund.
Board of Directors' Evaluation. On June 26, 1997, representatives of
Xxxxxxx advised the Non-interested Directors of the Corporation by means of a
telephone conference call that Xxxxxxx had entered into the Transaction
Agreement. At that time, Xxxxxxx representatives described the general terms of
the proposed Transactions and the perceived benefits for the Xxxxxxx
organization and for its investment advisory clients.
Xxxxxxx subsequently furnished the Non-interested Directors with additional
information regarding the proposed Transactions, including information regarding
the terms of the proposed Transactions, and information regarding the Zurich and
ZKI organizations. In a series of subsequent telephone conference calls and
in-person meetings, the Non-interested Directors discussed this information
among themselves and with representatives of Xxxxxxx and Zurich. They were
assisted in their review of this information by their independent legal counsel
and also consulted with a representative of the Fund's independent auditors and
with an independent consultant knowledgeable in mutual fund industry matters.
In the course of these discussions, Xxxxxxx advised the Non- interested
Directors that it did not expect that the proposed Transactions would have a
material effect on the operations of the Fund or its stockholders. Xxxxxxx has
advised the Non- interested Directors that the Transaction Agreement, by its
terms, does not contemplate any changes in the structure or operations of the
Fund. Xxxxxxx representatives have informed the Directors that Xxxxxxx currently
intends to maintain the separate existence of the funds that Xxxxxxx and ZKI
manage in their respective distribution channels. Xxxxxxx has also advised the
Non-interested Directors that although it currently expects that various
portions of the ZKI organization would be combined with Xxxxxxx'x operations,
the senior executives of Xxxxxxx overseeing those operations will remain largely
unchanged. It is possible, however, that changes in certain personnel currently
involved in providing services to the Fund may result from future efforts to
combine the strengths and efficiencies of both firms. In their discussions with
the Directors, Xxxxxxx representatives also emphasized the strengths of the
Zurich organization and its commitment to provide the new Xxxxxxx Xxxxxx
organization with the resources necessary to continue to provide high quality
services to the Fund and the other investment advisory clients of the new
Xxxxxxx Xxxxxx organization.
The Board of the Corporation was advised that Xxxxxxx intends to rely on
Section 15(f) of the 1940 Act, which provides a non-exclusive safe harbor for an
investment adviser to an investment company or any of the investment adviser's
affiliated persons (as defined under the 1940 Act) to receive any amount or
benefit in connection with a change in control of the investment
30
adviser so long as two conditions are met. First, for a period of three years
after the transaction, at least 75% of the board members of the investment
company must not be "interested persons" of the investment company's investment
adviser or its predecessor adviser. On or prior to the consummation of the
Transactions, the Board, assuming the election of the nominees that you are
being asked to elect in "Proposal 3: Election of Directors," would be in
compliance with this provision of Section 15(f). (See "Proposal 3: Election of
Directors"). Second, an "unfair burden" must not be imposed upon the investment
company as a result of such transaction or any express or implied terms,
conditions or understandings applicable thereto. The term "unfair burden" is
defined in Section 15(f) to include any arrangement during the two-year period
after the transaction whereby the investment adviser, or any interested person
of any such adviser, receives or is entitled to receive any compensation,
directly or indirectly, from the investment company or its shareholders (other
than fees for bona fide investment advisory or other services) or from any
person in connection with the purchase or sale of securities or other property
to, from or on behalf of the investment company (other than bona fide ordinary
compensation as principal underwriter for such investment company). No such
compensation agreements are contemplated in connection with the Transactions.
Xxxxxxx has undertaken to pay the costs of preparing and distributing proxy
materials to, and of holding the meeting of, the Fund's stockholders as well as
other fees and expenses in connection with the Transactions, including the fees
and expenses of legal counsel and consultants to the Fund and the Non-interested
Directors.
During the course of their deliberations, the Non-interested Directors
considered a variety of factors, including the nature, quality and extent of the
services furnished by Xxxxxxx to the Fund; the necessity of Xxxxxxx'x
maintaining and enhancing its ability to retain and attract capable personnel to
serve the Fund; the investment record of Xxxxxxx in managing the Fund; the
increased complexity of the domestic and international securities markets;
Xxxxxxx'x profitability from advising the Fund; possible economies of scale;
comparative data as to investment performance, advisory fees and other fees,
including administrative fees, and expense ratios; the risks assumed by Xxxxxxx;
the advantages and possible disadvantages to the Fund of having an adviser of
the Fund which also serves other investment companies as well as other accounts;
possible benefits to Xxxxxxx from serving as manager to the Fund and from
affiliates of Xxxxxxx serving the Fund in various other capacities; current and
developing conditions in the financial services industry, including the entry
into the industry of large and well capitalized companies which are spending and
appear to be prepared to continue to spend substantial sums to engage personnel
and to provide services to competing investment companies; and the financial
resources of Xxxxxxx and the continuance of appropriate incentives to assure
that Xxxxxxx will continue to furnish high quality services to the Fund.
In addition to the foregoing factors, the Non-interested Directors gave
careful consideration to the likely impact of the Transactions on the Xxxxxxx
organization. In this regard, the Non-interested Directors considered, among
other things, the structure of the Transactions which affords Xxxxxxx executives
substantial autonomy over Xxxxxxx'x operations and provides substantial equity
participation and incentives for many Xxxxxxx employees; Xxxxxxx'x and Zurich's
commitment to Xxxxxxx'x paying compensation adequate to attract and retain top
quality personnel; Zurich's strategy for the development of its asset management
business through Xxxxxxx; information regarding the financial resources and
business reputation of Zurich; and the complementary nature of various aspects
of the business of Xxxxxxx and the Zurich Xxxxxx organization and the intention
to maintain separate Xxxxxxx and Xxxxxx brands in the mutual fund business.
Based on the foregoing, the Non-interested Directors concluded that the
Transactions should cause no reduction in the quality of services provided to
the Fund and believe that the Transactions should enhance Xxxxxxx'x ability to
provide such services. The Non-interested Directors considered the foregoing
factors with respect to the Fund.
On August 6, 1997, the Directors of the Corporation, including the
Non-interested Directors of the Corporation, approved the New Investment
Management Agreement.
Information Concerning the Transactions and Zurich. Under the Transaction
Agreement, Zurich will pay $866.7 million in cash to acquire two-thirds of
Xxxxxxx'x outstanding shares and will contribute ZKI to Xxxxxxx for additional
shares, following which Zurich will have a 79.1% fully diluted equity interest
in the combined business. Zurich will then transfer a 9.6% fully diluted equity
interest in Xxxxxxx Xxxxxx to a defined contribution plan for the benefit of
Xxxxxxx and ZKI employees, as well as cash and warrants on Zurich shares for
award to Xxxxxxx employees, in each
31
case subject to five-year vesting schedules. After giving effect to the
Transactions, current Xxxxxxx stockholders will have a 29.6% fully diluted
equity interest in Xxxxxxx Xxxxxx and Zurich will have a 69.5% fully diluted
interest in Xxxxxxx Xxxxxx. Xxxxxxx'x name will be changed to Xxxxxxx Xxxxxx
Investments, Inc.
The purchase price for Xxxxxxx or for ZKI in the Transactions is subject to
adjustment based on the impact to revenues of non-consenting clients, and will
be reduced if the annualized investment management fee revenues (excluding the
effect of market changes, but taking into account new assets under management)
from clients at the time of closing, as a percentage of such revenues as of June
30, 1997 (the "Revenue Run Rate Percentage"), is less than 90%.
At the closing, Zurich and the other stockholders of Xxxxxxx Xxxxxx will
enter into a Second Amended and Restated Security Holders Agreement (the "New
SHA"). Under the New SHA, Xxxxxxx stockholders will be entitled to designate
three of the seven members of the Xxxxxxx Xxxxxx board of directors and two of
the four members of an Executive Committee, which will be the primary
management-level committee of Xxxxxxx Xxxxxx. Zurich will be entitled to
designate the other four members of the Xxxxxxx Xxxxxx board and the other two
members of the Executive Committee.
The names, addresses and principal occupations of the initial
Xxxxxxx-designated directors of Xxxxxxx Xxxxxx are as follows: Xxxx X. Xxxxxxxx,
000 Xxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx, Managing Director of Xxxxxxx; Xxxxxxxx X.
Xxxxx, 000 Xxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx, Managing Director of Xxxxxxx; and
Xxxxxx X. Xxxxxxx, 000 Xxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx, President, Chief
Executive Officer and Managing Director of Xxxxxxx.
The names, addresses and principal occupations of the initial
Zurich-designated directors of Xxxxxxx Xxxxxx are as follows: Xxxxxxxx X. Xxxxx,
Mythenquai 2, Zurich, Switzerland, Chief Investment Officer for Investments and
Institutional Asset Management and the corporate functions of Securities and
Real Estate for Zurich; Xxxxxx X. Xxxxxxxxxx, Mythenquai 2, Zurich, Switzerland,
responsible for Reinsurance, Structured Finance, Capital Market Products and
Strategic Investments, and a member of the Corporate Executive Board of Zurich;
Xxxx Xxxxxx, Mythenquai 2, Zurich, Switzerland, Chairman of the Board and Chief
Executive Officer of Zurich; and Xxxxxx Xxxxxxxxxx, Mythenquai 2, Zurich,
Switzerland, Chief Financial Officer and member of the Corporate Executive Board
of Zurich.
The initial Xxxxxxx-designated Executive Committee members will be Messrs.
Xxxxxxxx and Xxxxxxx (Chairman). The initial Zurich-designated Executive
Committee members will be Messrs. Xxxxx and Rohrbasser.
The New SHA requires the approval of a majority of the Xxxxxxx-designated
directors for certain decisions, including changing the name of Xxxxxxx Xxxxxx,
effecting an initial public offering before April 15, 2005, causing Xxxxxxx
Xxxxxx to engage substantially in non-investment management and related
business, making material acquisitions or divestitures, making material changes
in Xxxxxxx Xxxxxx'x capital structure, dissolving or liquidating Xxxxxxx Xxxxxx,
or entering into certain affiliated transactions with Zurich. The New SHA also
provides for various put and call rights with respect to Xxxxxxx Xxxxxx stock
held by current Xxxxxxx employees, limitations on Zurich's ability to purchase
other asset management companies outside of Xxxxxxx Xxxxxx, rights of Zurich to
repurchase Xxxxxxx Xxxxxx stock upon termination of employment of Xxxxxxx Xxxxxx
personnel, and registration rights for stock held by continuing Xxxxxxx
stockholders.
The Transactions are subject to a number of conditions, including approval
by Xxxxxxx stockholders; the Revenue Run Rate Percentages of Xxxxxxx and ZKI
being at least 75%; Xxxxxxx and ZKI having obtained director and stockholder
approvals from U.S.- registered funds representing 90% of assets of such funds
under management as of June 26, 1997; the absence of any restraining order or
injunction preventing the Transactions, or any litigation challenging the
Transactions that is reasonably likely to result in an injunction or
invalidation of the Transactions, and the continued accuracy of the
representations and warranties contained in the Transaction Agreement. The
Transactions are expected to close during the fourth quarter of 1997.
32
The information set forth above concerning the Transactions has been
provided to the Corporation by Xxxxxxx, and the information set forth below
concerning Zurich has been provided to the Corporation by Zurich.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Xxxxxxxxxx 0, 0000
Xxxxxx, Xxxxxxxxxxx. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services,
and have branch offices and subsidiaries in more than 40 countries throughout
the world. Zurich Insurance Group is particularly strong in the insurance of
international companies and organizations. Over the past few years, Zurich's
global presence, particularly in the United States, has been strengthened by
means of selective acquisitions.
Description of the Current Investment Management Agreement. Under the
Current Investment Management Agreement, Xxxxxxx provides the Fund with
continuing investment management services. The Investment Manager also
determines which securities shall be purchased, held, or sold, and what portion
of the Fund's assets shall be held uninvested, subject to the Corporation's
Articles of Incorporation, By-Laws, investment policies and restrictions, the
provisions of the 1940 Act, and such policies and instructions as the Directors
may determine.
The Current Investment Management Agreement provides that the Investment
Manager will provide portfolio management services and that the Investment
Manager will place portfolio transactions in accordance with policies expressed
in the Fund's registration statement, pay the Fund's office rent, render
significant administrative services on behalf of the Fund (not otherwise
provided by third parties) necessary for the Fund's operating as an open-end
investment company including, but not limited to, preparing reports to and
meeting materials for the Corporation's Board of Directors and reports and
notices to Fund stockholders; supervising, negotiating contractual arrangements
with, to the extent appropriate, and monitoring the performance of various
third-party service providers to the Fund (such as the Fund's transfer and
pricing agents, fund accounting agent, custodian, accountants and others) and
other persons in any capacity deemed necessary or desirable to Fund operations;
preparing and making filings with the Securities and Exchange Commission (the
"SEC" or the "Commission") and other regulatory and self-regulatory
organizations, including but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; assisting in
the preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax returns pursuant to Section
4982 of the Internal Revenue Code of 1986, as amended; providing assistance with
investor and public relations matters; monitoring the valuation of portfolio
securities and the calculation of net asset value; monitoring the registration
of shares of the Fund under applicable federal and state securities laws;
maintaining or causing to be maintained for the Fund all books, records and
reports and any other information required under the 1940 Act, to the extent
such books, records and reports and other information are not maintained by the
Fund's custodian or other agents of the Fund; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting
issues that may arise with respect to the Fund's operations and consulting with
the Fund's independent accountants, legal counsel and the Fund's other agents as
necessary in connection therewith; establishing and monitoring the Fund's
operating expense budgets; reviewing the Fund's bills; processing the payment of
bills that have been approved by an authorized person; assisting the Fund in
determining the amount of dividends and distributions available to be paid by
the Fund to its stockholders, preparing and arranging for the printing of
dividend notices to stockholders, and providing the transfer and dividend paying
agent, the custodian, and the accounting agent with such information as is
required for such parties to effect the payment of dividends and distributions;
and otherwise assisting the Fund in the conduct of its business, subject to the
direction and control of the Corporation's Board of Directors.
Under the Current Investment Management Agreement, the Fund is responsible
for other expenses, including organizational expenses (including out-of-pocket
expenses, but not including the Investment Manager's overhead or employee
costs); brokers' commissions or other costs of acquiring or disposing of any
portfolio securities of the Fund; legal, auditing and accounting expenses;
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; taxes and governmental fees;
the fees and expenses of the
33
Fund's transfer agent; expenses of preparing share certificates and any other
expenses, including clerical expenses, of issuance, offering, distribution,
sale, redemption or repurchase of shares; the expenses of and fees for
registering or qualifying securities for sale; the fees and expenses of
Non-interested Directors; the cost of printing and distributing reports, notices
and dividends to current stockholders; and the fees and expenses of the Fund's
custodians, subcustodians, accounting agent, dividend disbursing agents and
registrars. The Fund may arrange to have third parties assume all or part of the
expenses of sale, underwriting and distribution of shares of the Fund. The Fund
is also responsible for expenses of stockholders' and other meetings, the cost
of responding to stockholders' inquiries, and its expenses incurred in
connection with litigation, proceedings and claims and the legal obligation it
may have to indemnify officers and Directors of the Corporation with respect
thereto. The Fund is also responsible for the maintenance of books and records
which are required to be maintained by the Fund's custodian or other agents of
the Corporation; telephone, telex, facsimile, postage and other communications
expenses; any fees, dues and expenses incurred by the Fund in connection with
membership in investment company trade organizations; expenses of printing and
mailing prospectuses and statements of additional information of the Fund and
supplements thereto to current stockholders; costs of stationery; fees payable
to the Investment Manager and to any other Fund advisors or consultants;
expenses relating to investor and public relations; interest charges, bond
premiums and other insurance expense; freight, insurance and other charges in
connection with the shipment of the Fund's portfolio securities; and other
expenses.
The Investment Manager is responsible for the payment of the compensation
and expenses of all Directors, officers and executive employees of the Fund
(including the Fund's share of payroll taxes) affiliated with the Investment
Manager and making available, without expense to the Fund, the services of such
Directors, officers and employees as may duly be elected officers of the
Corporation, subject to their individual consent to serve and to any limitations
imposed by law. The Fund is responsible for the fees and expenses (specifically
including travel expenses relating to Fund business) of Directors not affiliated
with the Investment Manager. Under each Current Investment Management Agreement,
the Investment Manager also pays the Fund's share of payroll taxes, as well as
expenses, such as travel expenses (or an appropriate portion thereof), of
Directors and officers of the Corporation who are Directors, officers or
employees of the Investment Manager, to the extent that such expenses relate to
attendance at meetings of the Board of Directors of the Corporation, or any
committees thereof or advisers thereto, held outside Boston, Massachusetts or
New York, New York. During the Fund's most recent fiscal year, no compensation,
direct or otherwise (other than through fees paid to the Investment Manager),
was paid or became payable by the Corporation to any of its officers or
Directors who were affiliated with the Investment Manager.
In return for the services provided by the Investment Manager as investment
manager, and the expenses it assumes under the Current Investment Management
Agreement, the Fund pays the Investment Manager a management fee at a rate of
0.90% of average daily net assets which is accrued daily and payable monthly. As
of December 31, 1996, the end of the Fund's last fiscal year, the Fund had net
assets of $17,897,508 and paid an aggregate management fee to the Investment
Manager of $0 during such period.
The Current Investment Management Agreement further provides that the
Investment Manager shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with matters to which
such agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Investment Manager in the
performance of its duties or from reckless disregard by the Investment Manager
of its obligations and duties under such agreement.
The Current Investment Management Agreement may be terminated without
penalty upon sixty (60) days' written notice by either party. The Fund may agree
to terminate its Current Investment Management Agreement either by the vote of a
majority of the outstanding voting securities of the Fund, or by the Board of
Directors. As stated above, the Current Investment Management Agreement
automatically terminates in the event of its assignment.
Xxxxxxx has acted as the Investment Manager for the Fund since the Fund
commenced operations on April 3, 1996. The Current Investment Management
Agreement is dated April 3, 1996, and was last approved by the Directors on July
27, 1997 and by the stockholders of the Fund on April 2, 1996 and continues in
34
effect until July 31, 1998. The Current Investment Management Agreement was last
submitted to stockholders prior to its becoming effective, as required by the
1940 Act.
The New Investment Management Agreement. The New Investment Management
Agreement for the Fund will be dated as of the date of the consummation of the
Transactions, which is expected to occur in the fourth quarter of 1997, but in
no event later than February 28, 1998. The New Investment Management Agreement
will be in effect for an initial term ending on the same date as would the
Current Investment Management Agreement but for the Transactions, and may
continue thereafter from year to year only if specifically approved at least
annually by the vote of "a majority of the outstanding voting securities" of the
Fund, or by the Board and, in either event, the vote of a majority of the Non-
interested Directors, cast in person at a meeting called for such purpose. In
the event that stockholders of the Fund do not approve the New Investment
Management Agreement, the Current Investment Management Agreement will remain in
effect until the closing of the Transactions at which time it would terminate.
In such event, the Board of the Corporation will take such action as it deems to
be in the best interests of the Fund and its stockholders. In the event the
Transactions are not consummated, Xxxxxxx will continue to provide services to
the Fund in accordance with the terms of the Current Investment Management
Agreement for such periods as may be approved at least annually by the Board,
including a majority of the Non-interested Directors.
Differences Between the Current and New Investment Management Agreements.
The New Investment Management Agreement is substantially the same as the Current
Investment Management Agreement in all material respects. The principal changes
that have been made are summarized below. The New Investment Management
Agreement reflects conforming changes that have been made in order to promote
consistency among all funds currently advised by Xxxxxxx and to permit ease of
administration. For example, in the New Investment Management Agreement, the
term "accounting agents" would be added to the list of service providers to
which the Investment Manager must provide information in connection with the
payment of dividends and distributions.
In addition, the New Investment Management Agreement would clarify that
purchase and sale opportunities which are suitable for more than one client of
the Investment Manager will be allocated by the Investment Manager in an
equitable manner.
Further, the New Investment Management Agreement would clarify the scope of
the licensing provisions governing the use of the Xxxxxxx name. Specifically,
the New Investment Management Agreement identifies Xxxxxxx Xxxxxx as the
exclusive licensee of the rights to use and sublicense the names "Xxxxxxx,"
"Xxxxxxx Xxxxxx Investments, Inc.," and "Xxxxxxx, Xxxxxxx & Xxxxx, Inc."
(together the "Xxxxxxx Marks"). Under this license, the Corporation, with
respect to the Fund, has the nonexclusive right to use and sublicense the
Xxxxxxx name and marks as part of its name, and to use the Xxxxxxx Marks in the
Corporation's investment products and services. This license continues only as
long as the New Investment Management Agreement is in place, and only as long as
Xxxxxxx Xxxxxx continues to be a licensee of the Xxxxxxx Marks from Xxxxxxx
Trust Company, which is the owner and licensor of the Xxxxxxx Marks. As a
condition of the license, the Corporation, on behalf of the Fund, undertakes
certain responsibilities and agrees to certain restrictions, such as agreeing
not to challenge the validity of the Xxxxxxx Marks or ownership by Xxxxxxx Trust
Company and the obligation to use the name within commercially reasonable
standards of quality. In the event the agreement is terminated, the Corporation,
on behalf of the Fund, must not use a name likely to be confused with those
associated with the Xxxxxxx Marks.
The New Investment Management Agreement adds conforming language that
describes in greater detail the portfolio management services provided by the
Investment Manager and adds a new section that describes the administrative
responsibilities and duties of the Investment Manager. For example, the section
entitled Portfolio Management Services specifies that the Fund will have the
benefit of the Investment Manager's analysis and research, and that the
Investment Manager will undertake responsibilities such as making records
available to regulators and providing periodic reports to the Board. The section
entitled Administrative Services is new and describes the types of
administrative services that the Investment Manager has been customarily
providing to the Fund. For a xxxxxx explanation of the types of administrative
services, please refer to the second paragraph under "Description of the Current
Investment Management Agreement" in these proxy materials.
35
Other conforming changes include: deletion of the Investment Manager's
potential responsibility for monitoring the calculation and payment of
distributions to stockholders; addition of a provision clarifying that the New
Investment Management Agreement supersedes all prior agreements; and addition of
a provision replacing New York with Massachusetts as the jurisdiction whose laws
will govern the New Investment Management Agreement.
Investment Manager. Xxxxxxx is one of the most experienced investment
counsel firms in the United States. It was established in 1919 as a partnership
and was restructured as a Delaware corporation in 1985. The principal source of
Xxxxxxx'x income is professional fees received from providing continuing
investment advice. Xxxxxxx provides investment counsel for many individuals and
institutions, including insurance companies, endowments, industrial corporations
and financial and banking organizations.
As stated above, Xxxxxxx is a Delaware corporation. Xxxxxx Xxxxxx* is the
Chairman of the Board of Xxxxxxx, Xxxxxx X. Xxxxxxx# is President and Chief
Executive Officer of Xxxxxxx, Xxxxxxx X. Xxxxxxxx#, Xxxx X. Xxxxxxxx#, Xxxxxxxx
Xxxxx#, X. Xxxxxxx Xxxxx*, Xxxx X. Xxxxxx*, Xxxxx X. Xxxxxxxx*, Xxxxxxxx X.
Xxxxxxx*, Xxxxxx X. Xxxxxxx#, Xxxxxxx X. Xxxx@, Xxxx X. Xxxxxxxx, Xxxxxxx X.
Xxxxx#, Xxxxxxxx X. Xxxxx# and Xxxxxxx X. Xxxxxx* are the other members of the
Board of Directors of Xxxxxxx (see footnote for symbol key).. The principal
occupation of each of the above named individuals is serving as a Managing
Director of Xxxxxxx.
All of the outstanding voting and nonvoting securities of Xxxxxxx are held
of record by Xxxxxxx X. Xxxxxxxx, Xxxxx Xxxxxx#, Xxxxxx Xxxxxx and Xxxxxx X.
Xxxxxxx in their capacity as the representatives of the beneficial owners of
such securities (the "Representatives"), pursuant to a Security Holders'
Agreement among Xxxxxxx, the beneficial owners of securities of Xxxxxxx and such
Representatives. Pursuant to the Security Holders' Agreement, the
Representatives have the right to reallocate shares among the beneficial owners
from time to time. Such reallocations will be at net book value in cash
transactions. All Managing Directors of Xxxxxxx own voting and nonvoting stock
and all Principals of Xxxxxxx own nonvoting stock.
Directors, officers and employees of Xxxxxxx from time to time may enter
into transactions with various banks, including the Fund's custodian bank. It is
Xxxxxxx'x opinion that the terms and conditions of those transactions will not
be influenced by existing or potential custodial or other Fund relationships.
Xxxxxxx Fund Accounting Corporation ("SFAC"), a subsidiary of Xxxxxxx,
computes net asset value and provides fund accounting services for the Fund.
Xxxxxxx Service Corporation ("SSC"), also a subsidiary of Xxxxxxx, is the
transfer, shareholder servicing and dividend-paying agent for the Fund. Xxxxxxx
Trust Company ("STC"), an affiliate of Xxxxxxx, provides subaccounting and
recordkeeping services for stockholder accounts in certain retirement and
employee benefit plans. For the fiscal year ended December 31, 1997, the fees
paid to SFAC, SSC and STC by the Fund were $0, $15,431 and $0, respectively.
SFAC, SSC and STC will continue to provide fund accounting, transfer
agency, subaccounting and recordkeeping services to the Fund under the current
arrangements if the New Investment Management Agreement is approved, unless the
proposed reorganization is approved.
Exhibit B sets forth the fees and other information regarding other
investment companies advised by Xxxxxxx.
Brokerage Commissions on Portfolio Transactions. To the maximum extent
feasible, Xxxxxxx places orders for portfolio transactions through Xxxxxxx
Investor Services, Inc., Two International Place, Boston, Massachusetts 02110
(the "Distributor") (a corporation registered as a broker/dealer and a
subsidiary of Xxxxxxx), which in turn places orders on behalf of
_______________________________
* Two International Place, Boston, Massachusetts
# 000 Xxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx
x 000 Xxxxxxxxxx Xxxxxx, Xxx Xxxxxxxxx, California
@ Two Prudential Plaza, 000 Xxxxx Xxxxxxx, Xxxxx 0000,
Xxxxxxx, Xxxxxxxx
36
the Fund with issuers, underwriters or other brokers and dealers. In selecting
brokers and dealers with which to place portfolio transactions for the Fund,
Xxxxxxx will not consider sales of shares of funds currently advised by XXX,
although it may place such transactions with brokers and dealers that sell
shares of funds currently advised by XXX. The Distributor receives no
commissions, fees or other remuneration from the Fund for this service.
Allocation of portfolio transactions is supervised by Xxxxxxx.
Required Vote. Approval of this Proposal by the Fund requires the
affirmative vote of a "majority of the outstanding voting securities", as
defined above, of the Fund. The Directors of the Corporation recommend that the
stockholders vote in favor of this Proposal 2.
