EXHIBIT h.12
FORM OF
FINANCIAL GUARANTY AGREEMENT
1
FORM OF
FINANCIAL GUARANTY AGREEMENT
FINANCIAL GUARANTY AGREEMENT, dated as of , 1999
(the "Agreement"), among MBIA Insurance Corporation, a New York monoline stock
insurance company (the "Insurer"), AELTUS INVESTMENT MANAGEMENT, INC., a
Connecticut company ("Aeltus"), and AETNA SERIES FUND, INC., an open-end
management investment company (the "Fund").
W I T N E S S E T H:
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WHEREAS, the Fund is a series fund and intends to create one
or more additional series, each called Aetna Principal Protection Fund (each a
"PPF") and each advised by Aeltus, which will include a promise by the Fund on
behalf of each PPF (each a "Repayment Obligation") to repay to each shareholder
thereof (a "PPF Shareholder") at maturity his or her Guarantee Amount (as
defined herein); and
WHEREAS, the Insurer is authorized to transact a financial
guaranty insurance business in the State of Connecticut and the Fund has
requested the Insurer, and the Insurer has agreed, to issue a financial guaranty
in connection with each PPF substantially in the form of Exhibit A hereto (each
a "Policy"), in the aggregate amount of $250,000,000, to assure the timely
payment by the Fund of the Repayment Obligations with respect to such PPFs; and
WHEREAS, the parties hereto, among other things, desire to
specify the conditions precedent to the issuance by the Insurer of the Policies,
the payment of the premium and other amounts in respect thereof, the
reimbursement obligations of Aeltus, the investment adviser to the Fund, to the
Insurer, and to provide for certain other matters related thereto;
NOW, THEREFORE, in consideration of the promises and of the
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 General Definitions. The terms defined in this
Article I shall have the meanings provided herein for all purposes of this
Agreement, unless the context clearly requires otherwise, in both singular and
plural form, as appropriate.
"Adjusted Total Asset Value" shall have the meaning set forth
in Section 3.5.
"Aggregate Guarantee Amount" shall mean, with respect to any
PPF, on any date of determination, the aggregate Guarantee Amounts with
respect to all PPF Shareholders in such PPF on such date of
determination.
"Application" shall have the meaning set forth in Section 2.2.
"Asset Allocation Test" shall have the meaning set forth in
Section 3.5.
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"Asset Allocation Threshold" shall mean, with respect to any
PPF, on any Valuation Date, an amount equal to 99% of the sum of (i)
the Present Value of the Aggregate Guarantee Amount and (ii) the
Present Value of Covered Expenses.
"Business Day" shall mean a day that is a Trading Day and is
not a Saturday or Sunday, and is not a legal holiday or a day on which
banking institutions generally are authorized or obligated by law or
regulation to close in New York, New York or in Hartford, Connecticut.
"Cash Associated with Futures" shall mean, with respect to any
Index Future, on any Valuation Date, an amount of cash or Cash
Equivalents equal to the Market Value thereof on such Valuation Date.
"Cash Equivalents" shall mean the Eligible PPF Investments
described in Section 3.1(b)(i).
"Cash Margin" shall mean, with respect to any U.S. Treasury
Future, on any Valuation Date, the xxxx to Market Value of the Cash
Equivalents held as margin for such security on such Valuation Date.
"Class B Percentage" shall mean, with respect to any PPF, on
any Valuation Date, the percentage equivalent of a fraction, the
numerator of which is the product of the NAV of the Class B shares of
such PPF multiplied by the number of Class B shares of such PPF
outstanding, and the denominator of which is the sum of (i) the product
of the NAV of the Class A shares of such PPF multiplied by the number
of Class A shares of such PPF outstanding and (ii) the product of the
NAV of the Class B shares of such PPF multiplied by the number of the
Class B shares of such PPF outstanding.
"Contractual Obligation" shall mean, as to any Person, any
provision of any security issued by such Person or any agreement,
instrument or other undertaking to which such Person is a party or by
which it or any of its property is bound.
"Corporate Bond" shall mean, on any Valuation Date, the
debentures of any corporation as described in Section 3.1(b)(iii).
"Covered Expenses" shall mean, for any class of shares of any
PPF, the annual fund operating expenses enumerated in the final
prospectus for such PPF.
"Covered Expense Ratio" shall mean, with respect to any PPF,
on any Valuation Date, the higher of (a) the expense ratio utilized by
Aeltus in its asset allocation model and (b) the Lower Covered Expense
Ratio, provided, however, that if the percentage of the Total Asset
Value of such PPF on such date allocable to equities according to the
Asset Allocation Test is less than 30% using the Lower Covered Expense
Ratio, the Covered Expense Ratio will equal the Higher Covered Expense
Ratio.
"Custodian" shall mean Mellon Bank, N.A. or any successor or
assigns under the Custodian Agreement.
"Custodian Agreement" shall mean the Custodial Services
Agreement by and between the Fund and the Custodian with respect to the
custody of the assets of certain series of the Fund including the PPFs,
as the same may be amended, supplemented or modified from time to time.
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"Custodian Service Agreement" shall mean the Service
Agreement, dated , 1999, among the Fund, the Insurer and the
Custodian, substantially in the form of Exhibit B hereto, as the same
may be amended, supplemented or otherwise modified from time to time,
and any other agreement substantially in the form of Exhibit B hereto
with a successor Custodian.
"Default" shall mean any of the events specified in Section
4.1, whether or not any requirement for the giving of notice, the lapse
of time, or both, or any other condition, has been satisfied.
"Default Period" shall have the meaning set forth in Section
4.2(a).
"Discount Rate" shall mean, with respect to any PPF, on any
Valuation Date, the quotient of (a) the sum of (i) the aggregate Market
Value of the Fixed Income Portfolio multiplied by the Fixed Income
Portfolio Yield with respect to such PPF plus (ii) the U.S. Treasury
Futures Spread for such PPF, divided by (b) the aggregate Market Value
of the Fixed Income Portfolio; provided, however if such PPF does not
hold any securities in its Fixed Income Portfolio on such Valuation
Date, the Discount Rate shall equal the interest rate derived by
calculating the internal rate of return for a proxy U.S. Treasury Zero
maturing on the date closest to the Maturity Date with respect to such
PPF, but in no event later than such Maturity Date. The internal rate
of return for such proxy U.S. Treasury Zero shall be calculated based
on the actual days to maturity, compounded on an annual basis, and
shall be based on the Market Value for such U.S. Treasury Zero as of
such Valuation Date compared with the par value for such U.S. Treasury
Zero at maturity.
"Distribution" shall mean any payment by a PPF that is not a
Covered Expense or a transaction related brokerage expense, and shall
include without limitation, any distribution of income, dividends,
capital gains or principal to its shareholders and any payment of
income taxes or excise taxes.
"Effective Date" shall mean the date on which the conditions
set forth in Section 2.3 are satisfied.
"Eligible PPF Investments" shall have the meaning set forth in
Section 3.1(b).
"Equity Portfolio" shall mean, with respect to any PPF, all
holdings which are Eligible PPF Investments defined in Sections
3.1(b)(v) and (vi).
"Event of Default" shall have the meaning set forth in Section
4.1.
"Fee Payment Date" shall have the meaning set forth in Section
2.4.
"Fixed Income Portfolio" shall mean, with respect to any PPF,
all holdings which are Eligible PPF Investments defined in Sections
3.1(b)(ii), (iii) and (iv).
"Fixed Income Portfolio Yield" shall mean, with respect to any
PPF on any Valuation Date, the sum of (a) the weighted average spread
over the U.S. Treasury zero maturing on the date closest to the Maturity
Date with respect to such PPF, but in no event later than such Maturity
Date, of such PPF's Fixed Income Portfolio (excluding U.S. Treasury
Futures) and Cash Margin,
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as calculated using Xxxxxx Brothers analytics or another widely
recognized, reputable source, as of the close of business on the
Business Day prior to such Valuation Date based on the Market Value for
each Fixed Income Portfolio security on such Business Day plus (b) the
yield to maturity of the U.S. Treasury zero maturing on the date
closest to the Maturity Date with respect to such PPF, but in no event
later than such Maturity Date, calculated based on the actual days to
maturity compounded on a semi-annual basis based on the Market Value
for such U.S. Treasury zero as of such Valuation Date compared with the
par value for such U.S. Treasury zero at maturity.
"Fund Sector Weight" shall mean, with respect to any PPF, for
any Sector, on any Valuation Date, the percentage equivalent of a
fraction, the numerator of which is the aggregate Market Value of all
Index Equities belonging to such Sector held by such PPF on such
Valuation Date and the denominator of which is the aggregate Market
Value of all Index Equities held by such PPF on such Valuation Date.
"Fund Weight" shall mean, with respect to any PPF and an Index
Equity, on any Valuation Date, the percentage equivalent of a fraction,
the numerator of which is the Market Value of such Index Equity held by
such PPF on such Valuation Date and the denominator of which is the
aggregate Market Value of all Index Equities held by such PPF on such
Valuation Date.
"Government Authority" shall mean any nation or government,
any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Guarantee Amount" shall mean, with respect to any PPF
Shareholder, on any date of determination, an amount equal to the
product of (i) the Guarantee per Share for the class of shares of such
PPF held by such PPF Shareholder on such date and (ii) the total number
of such shares held by such PPF Shareholder on such date.
"Guarantee per Share" shall mean, with respect to any class of
shares of any PPF, on any Valuation Date, (i) on the Inception Date,
the NAV for such class at the close of business on the last day of the
Offering Period for such PPF; and (ii) thereafter, the Guarantee per
Share for such class of shares of any PPF on the immediately preceding
Valuation Date divided by one plus the quotient of (i) the amount of
any Distribution made by such PPF calculated on a per share basis for
such class of shares effective since the immediately preceding
Valuation Date divided by (ii) the NAV per share for such class of
shares prior to any such Distribution minus the amount of such
Distribution calculated on a per share basis for such class of shares.
"Guarantee Period" shall mean, with respect to any PPF, the
period commencing on and including the Inception Date to and including
the Maturity Date.
"High Ranked Equities" shall mean, on any date of
determination, the Index Equities listed by Aeltus as "High Ranked
Stocks" in the report most recently delivered by Aeltus to the Insurer
pursuant to Section 3.4.
"Higher Covered Expense Ratio" shall mean, with respect to any
PPF, on any Valuation Date, the sum of (a) 1.50% times the excess, if
any, of (i) one over (ii) the Class B Percentage with respect to such
PPF plus (b) 2.25% times the Class B Percentage with respect to such
PPF.
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"Hypothetical Total Asset Value" shall mean, with respect to
any PPF, an amount equal to the Total Asset Value on the date on which
a Permanent Deficit Event shall have occurred with respect to such PPF,
recalculated as follows: (a) the value of the Equity Portfolio of such
PPF on the Valuation Date immediately preceding such Permanent Deficit
Event shall (i) first, be reduced to an amount such that the Adjusted
Total Asset Value would have equaled the sum of the Present Value of
the Aggregate Guarantee Amount plus the Present Value of Covered
Expenses calculated using the Higher Covered Expense Ratio for such PPF
on such Valuation Date and (ii) second, be reduced to reflect the
change in the value of the Equity Portfolio from such Valuation Date to
the date on which the Permanent Deficit Event shall have occurred and
(b) the value of the Fixed Income Portfolio of such PPF on such
Valuation Date shall (i) first, be increased in an amount equal to the
dollar decrease in the amount of the Equity Portfolio determined in
clause (a)(i) above and (ii) second, be increased or reduced to reflect
the change in the value of the Fixed Income Portfolio from such
Valuation Date to the date on which the Permanent Deficit Event shall
have occurred. A sample calculation is set forth in Annex C.
"Inception Date" shall mean, with respect to a PPF, the
Business Day immediately following the last day of the Offering Period.
"Indemnitee" shall have the meaning set forth in Section 2.6.
"Indemnified Liabilities" shall have the meaning set forth in
Section 2.6.
"Index Equity" shall mean, on any Valuation Date, the equity
securities of any company included in the S&P 500 Index on such
Valuation Date, as published by FactSet Data Systems, Inc. ("FactSet").
"Index Equity Capitalization" shall mean, for any Index
Equity, on any Valuation Date, the product of the number of shares
outstanding of such Index Equity, as published by FactSet multiplied by
the price per share of such Index Equity, as published by Bridge Data
Company ("Bridge").
"Index Future" shall mean a forward contract on the S&P 500
Index, as traded on the Chicago Mercantile Exchange.
"Index Weight" shall mean, for any Index Equity, on any
Valuation Date, the percentage equivalent of a fraction, the numerator
of which is the Index Equity Capitalization of such Index Equity on
such Valuation Date and the denominator of which is the Total Index
Capitalization on such Valuation Date.
"Lien" shall mean any mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or
other), other charge or security interest, or any preference, priority
or other agreement or preferential arrangement of any kind or nature
whatsoever.
"Low Ranked Equities" shall mean, on any date of
determination, the Index Equities listed by Aeltus as "Low Ranked
Stocks" in the report most recently delivered by Aeltus to the Insurer
pursuant to Section 3.4.
"Lower Covered Expense Ratio" shall mean, with respect to any
PPF, on any Valuation Date, 1.50% minus, for such PPF, the lesser of
(i) 0.5% and (ii) the percentage equivalent of an
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amount equal to the excess, if any, of 1.015 over the product of (x)
0.96109 times (y) one plus the Discount Rate with respect to such PPF
on the last day of the Offering Period for such PPF.
"Market Value" shall mean, with respect to any PPF, securities
which are generally valued by independent pricing services which have
been approved by the Fund's Board of Directors. The values for each
Index Equity traded on registered securities exchanges are based on the
last sale price or, if there has been no sale that day, at the mean of
the last bid and asked price on the exchange where the security is
principally traded. Index Equities traded over the counter are valued
at the mean of the last bid and asked price or, if there has been no
sale that day, at the mean of the last bid and asked price. Short-term
debt securities that have a maturity date of more than sixty days and
long-term debt securities are valued at the mean of the last bid and
asked price of such securities obtained from a broker-dealer that is a
market-maker in the securities or a service providing quotations based
upon the assessment of market-makers in those securities. Short-term
debt securities maturing in sixty days or less as of the date of
purchase will be valued using the "amortized cost" method of valuation.
This involves valuing an instrument at its cost and thereafter assuming
a constant amortization of premium or increase of discount. Futures
contracts are valued daily at a settlement price based on rules of the
exchange where the futures contract is primarily traded. Securities for
which market quotations are not readily available are valued at their
fair value in such manner as may be determined, from time to time, in
good faith, by or under the authority of, the Fund's Board of
Directors. The NAV of each PPF is determined as of the close of regular
trading on The New York Stock Exchange (normally 4:00 p.m. eastern
time).
"Maturity Date" shall have the meaning set forth in Section
2.1.
"Modified Duration" shall mean, with respect to any fixed
income security, the quotient of (a) the weighted average term to
maturity of such security's cash flows divided by (b) the sum of (i)
one plus (ii) one half of the security's current bond equivalent yield
to maturity.
"Moody's" shall mean Xxxxx'x Investors Service, Inc. and its
successors and assigns.
"NAV" shall mean the net asset value of the PPF, which is
equal to the Market Value of all assets held in the PPF less any
accrued and unpaid expenses of such PPF.
"Notional Value" shall mean the pre-determined dollar
principal amount on which the contract is based.
"NYSE" shall mean The New York Stock Exchange.
"Offering Period" shall have the meaning set forth in each
PPF's prospectus. Generally, this will be the period preceding the
Inception Date during which a PPF permits sales of shares to investors.
"Permanent Deficit Event" shall have the meaning set forth in
Section 2.5(a).
"Permanent Deficit Reimbursement Ratio" shall be calculated
and fixed on the date on which a Permanent Deficit Event shall have
occurred with respect to any PPF and shall mean, with respect to such
PPF, (A) if the Covered Expense Ratio for such PPF on the Business Day
preceding the date of such Permanent Deficit Event was greater than or
equal to 1.50%, 100%; (B)
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if the Covered Expense Ratio for such PPF on the Business Day preceding
the date of such Permanent Deficit Event was less than 1.50% and
greater than or equal to 1.17%, the quotient of (i) 0.75% divided by
(ii) the sum of (a) 0.75% plus (b) 1.50% minus the Covered Expense
Ratio on the Business Day preceding the date of such Permanent Deficit
Event; or (C) if the Covered Expense Ratio for such PPF on the Business
Day preceding the date of such Permanent Deficit Event was less than
1.17%, the quotient of (i) the sum of (a) 0.75% plus (b)1.17% minus the
Covered Expense Ratio on the Business Day preceding the date of such
Permanent Deficit Event divided by (ii) the sum of (a) 1.08% plus (b)
1.17% minus the Covered Expense Ratio on the Business Day preceding the
date of such Permanent Deficit Event.
"Permanent Fee Deficit Amount" shall mean, with respect to any
PPF, on any Valuation Date, the product of (A) the quotient of (i) the
Permanent Total Deficit Amount with respect to such PPF on the date on
which a Permanent Deficit Event shall have occurred minus the Permanent
Principal Deficit Amount with respect to such PPF divided by (ii) the
Permanent Total Deficit Amount with respect to such PPF on the date on
which a Permanent Deficit Event shall have occurred times (B) the
Permanent Total Deficit Amount with respect to such PPF on such
Valuation Date.
"Permanent Principal Deficit Amount" shall mean, with respect
to any PPF, the excess, if any, of (a) the sum of the Present Value of
the Aggregate Guarantee Amount plus the Present Value of Covered
Expenses calculated using the Higher Covered Expense Ratio as the
Covered Expense Ratio with respect to such PPF on the date on which a
Permanent Deficit Event shall have occurred with respect to such PPF
over (b) the Hypothetical Total Asset Value with respect to such PPF.
"Permanent Total Deficit Amount" shall mean, with respect to
any PPF, on any Valuation Date, the excess, if any, of (a) the sum of
the Present Value of the Aggregate Guarantee Amount plus the Present
Value of Covered Expenses calculated using the Higher Covered Expense
Ratio as the Covered Expense Ratio with respect to such PPF over (b)
the Total Asset Value with respect to such PPF on such Valuation Date.
"Person" shall mean an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association,
joint venture, Government Authority or other entity of whatever nature.
"Policy" shall have the meaning set forth in the recitals.
"Policy Fee" shall have the meaning set forth in Section 2.4.
"Portfolio Duration" shall mean, with respect to any group of
securities, the Market Value weighted average Modified Duration of such
securities as calculated using Xxxxxx Brothers analytics or another
widely recognized, reputable source as of the close of business on the
Business Day preceding the relevant Valuation Date, based on the Market
Value for each such security on such Business Day.
"Present Value of the Aggregate Guarantee Amount" shall mean,
with respect to any PPF, on any Valuation Date, the quotient of (a) the
Aggregate Guarantee Amount with respect to such PPF divided by (b)(i)
the sum of one plus one half the Discount Rate with respect to such PPF
on
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such Valuation Date (ii) compounded over twice the time remaining to
the Maturity Date of such PPF.
"Present Value of Covered Expenses" shall mean, with respect
to any PPF, on any Valuation Date, the product of (a) the Present Value
of the Aggregate Guarantee Amount with respect to such PPF on such date
times (b) the excess of (i) the sum of one plus the Covered Expense
Ratio with respect to such PPF on such date, compounded over the time
remaining to the Maturity Date of such PPF, over (ii) one.
"Rebalancing" shall have the meaning set forth in Section 3.5.
"Reimbursement Amount" shall mean, with respect to any PPF, on
any Valuation Date, the excess, if any, of (a) the aggregate amount of
reimbursement payments received as of such date by the Insurer from
Aeltus with respect to such PPF pursuant to Section 2.5(a), plus
interest on each such payment from the date such payment was received
by the Insurer to, but excluding, such Valuation Date at the Discount
Rate prevailing with respect to such PPF on the date such payment was
received by the Insurer, over (b) the sum of the aggregate amount of
any refunds made by the Insurer to Aeltus pursuant to Section 2.5(a)
plus interest on each such refund from the date of such refund to, but
excluding, such Valuation Date at the Discount Rate prevailing with
respect to such PPF on the date of such refund.
"Repayment Obligation" shall have the meaning set forth in the
recitals.
"Requirements of Law" shall mean, as to any Person, the
certificate of incorporation and by-laws or other organizational or
governing documents of such Person, and any law, treaty, rule, or
regulation or determination of an arbitrator or a court or other
Government Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its
property is subject.
"Sector" shall mean one of the Sectors set forth in Annex B
hereto, as amended from time to time in accordance with Section 6.1
(g).
"Sector Index Weight" shall mean, on any Valuation Date, for
each Sector, the percentage equivalent of a fraction, the numerator of
which is the sum of the Index Equity Capitalizations for all Index
Equities belonging to such Sector on such Valuation Date and the
denominator of which is the Total Index Capitalization on such
Valuation Date.
"Selection Guidelines" shall mean the investment guidelines
described in Annex A.
"S&P" shall mean Standard and Poor's Ratings Service, a
division of McGraw Hill Companies, Inc.
"S&P 500 Index" shall mean the index of 500 equity securities
known as the Standard and Poor's 500 Composite Index of 500 Stocks and
as compiled by S&P and published by FactSet Data Systems, Inc. or
another widely recognized, reputable source.
"Theoretical Zero Modified Duration" shall mean, with respect
to any PPF on any Valuation Date, the Modified Duration of the U.S.
Treasury zero coupon bond whose maturity date exactly matches the
Maturity Date of such PPF or, if no such U.S. Treasury zero coupon
9
bond exists, the Modified Duration of a proxy U.S. Treasury zero coupon
bond whose maturity date exactly matches the Maturity Date of such PPF
and whose current yield to maturity is based on the interpolated yield
to maturity of the two U.S. Treasury zero coupon bonds which mature
immediately preceding and immediately following the Maturity Date of
such PPF.
"Total Asset Value" shall mean, with respect to any PPF, on
any Valuation Date, an amount equal to the excess of (a) the sum of:
(i) the aggregate Market Value of all Index Equities
held by such PPF on such Valuation Date;
(ii) the aggregate Market Value of all Cash Equivalents
held by such PPF (less Cash Associated with Futures and Cash
Margin with respect to such PPF) on such Valuation Date;
(iii) the aggregate Market Value of all U.S. Treasury
and Agency Zeroes held by such PPF on such Valuation Date;
(iv) the aggregate Market Value of all Corporate Bonds
held by such PPF on such Valuation Date;
(v) the aggregate Market Value of all Cash Margin held
by such PPF; and
(vi) the aggregate Market Value of all Index Futures
held by such PPF on such Valuation Date,
over (b) an amount equal to the aggregate amount of accrued and unpaid
expenses and other liabilities of such PPF.
"Total Index Capitalization" shall mean, on any Valuation
Date, the sum of the Index Equity Capitalizations on such Valuation
Date for all Index Equities (other than Aetna Inc.).
"Trading Day" shall mean each day on which the NYSE is open
for regular trading for at least two hours.
"Transaction Documents" shall mean, with respect to a PPF,
this Agreement, the PPF's prospectus and statement of additional
information, the investment advisory agreement between Aeltus and the
Fund, on behalf of the PPF and the Custodian Service Agreement, as each
may be amended, supplemented or otherwise modified from time to time.
"U.S. Treasury Futures" shall mean futures contracts on U.S.
Treasury securities.
"U.S. Treasury Futures Spread" shall mean, for any PPF, on any
Valuation Date, the sum of the product for each U.S. Treasury Future
held by such PPF of (a) the Notional Value of such U.S. Treasury Future
times (b) the excess of (i) the yield on such U.S. Treasury Future's
cheapest-to-deliver bond as published by Bloomberg, L.P. over (ii) the
Federal Reserve's targeted Fed Funds rate on such date as published by
Bloomberg, L.P. (this rate may be found on Bloomberg by typing in FDTR
[less than symbol]Index[greater than symbol] [less than
symbol]Go[greater than symbol]).
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"U.S. Treasury or Agency Zeroes" shall mean non-callable
non-interest bearing obligations of (A) the United States of America
and (B) the following U.S. Government Agencies: Xxxxxx Xxx, Xxxxxxx
Mac, Federal Home Loan Bank, Resolution Funding Corporation, Financing
Corporation and Tennessee Valley Authority; these obligations may
include, without limitation: Certificates of Accrual on Treasury
Securities (CATS); Treasury Investment Growth Receipts (TIGRs); Generic
Treasury Receipts (TRs); and Separate Trading of Registered Interest
and Principal of Securities (STRIPS).
"Valuation Date" shall mean, for any Trading Day, as of the
close of trading on the immediately preceding Trading Day.
Section 1.2 Generic Terms. All words used herein shall be
construed to be of such gender or number as the circumstances require. The words
"herein," "hereby," "hereof," "hereto," "hereinbefore" and "hereinafter," and
words of similar import, refer to this Agreement in its entirety and not to any
particular paragraph, clause or other subdivision, unless otherwise specified,
and Section, subsection, Schedule and Exhibit references are to this Agreement
unless otherwise specified.
Section 1.3 Valuation Calculations. All calculations to be
made herein shall be made on a basis that assumes that all acquisitions and
dispositions of assets are settled as of the related trade date, not the
settlement date.
ARTICLE II
THE POLICIES
Section 2.1 Policies. The Insurer agrees, subject to the
conditions hereinafter set forth, to issue up to six Policies to the Fund during
the period commencing on the Effective Date and ending on December 31, 2000 in
an aggregate amount up to $250,000,000. Each Policy shall (i) be issued on an
Inception Date with respect to a PPF, (ii) guarantee the Aggregate Guarantee
Amount with respect to such PPF on the date which is five years from the
issuance date of such Policy (the "Maturity Date"), (iii) be in an amount equal
to the Aggregate Guarantee Amount on the Inception Date with respect to such
PPF, (iv) be in an amount not less than $25,000,000 and (v) terminate by its
terms on the earlier of (A) the second Business Day immediately succeeding the
Maturity Date with respect to such PPF or (B) any date on which the Aggregate
Guarantee Amount with respect to such PPF equals zero.
Section 2.2 Procedure for Issuance of Policies. The Fund may
from time to time request that the Insurer issue a Policy by delivering to the
Insurer at its address for notices specified herein an application therefor
substantially in the form of Exhibit C (each an "Application"), completed to the
satisfaction of the Insurer, and such other information with respect to the
related PPF as the Insurer may reasonably request. Upon receipt of any
Application and satisfaction of the conditions precedent therefor set forth in
Section 2.3(b), the Insurer shall promptly issue and deliver to the Fund at its
address for notices specified herein the Policy requested thereby duly
authorized and executed by the Insurer (but in no event shall the Insurer send
any Policy to the Fund later than five Business Days after its receipt of the
Application therefor or be required to send any Policy to the Fund earlier than
two Business Days after its receipt of the Application therefor).
Section 2.3 Conditions Precedent to Effectiveness. (a) The
effectiveness of this Agreement is subject to the satisfaction of the following
conditions:
11
(i) The Transaction Documents and the Custodian Agreement
shall be in full force and effect and the Transaction Documents shall
be in form and substance satisfactory to the Insurer and each
Transaction Document shall have been delivered to the Insurer;
(ii) The Insurer and the Fund shall have received a
certificate of the Secretary or Assistant Secretary of Aeltus, as to
the incumbency and signature of the officers or other employees of
Aeltus authorized to sign this Agreement and the other Transaction
Document to which it is a party on behalf of Aeltus, together with
evidence of the incumbency of such Secretary or Assistant Secretary,
certified by the Secretary or Assistant Secretary of Aeltus;
(iii) The Insurer and Aeltus shall have received a certificate
of the Secretary or Assistant Secretary of the Fund as to the
incumbency and signature of the officers or other employees of the Fund
authorized to sign this Agreement and the Transaction Documents to
which it is a party on behalf of the Fund, together with evidence of
the incumbency of such Secretary or Assistant Secretary, certified by
the Secretary or Assistant Secretary of the Fund;
(iv) Aeltus and the Fund shall have received a certificate of
the Secretary or Assistant Secretary of the Insurer as to the
incumbency and signature of the officers or other employees of the
Insurer authorized to sign this Agreement on behalf of the Insurer,
together with evidence of the incumbency of such Secretary or Assistant
Secretary, certified by the Secretary or Assistant Secretary of the
Insurer;
(v) The Insurer shall have received certificates of the
Secretary or Assistant Secretary of Aeltus certifying that attached
thereto are true, complete and correct copies of the resolutions duly
adopted by the Board of Directors of Aeltus authorizing the execution
of this Agreement and all Transaction Documents to which Aeltus is a
party;
(vi) The Insurer shall have received certificates of the
Secretary or Assistant Secretary of the Fund certifying that attached
thereto are true, complete and correct copies of resolutions duly
adopted by the Board of Directors of the Fund authorizing the execution
of this Agreement and all Transaction Documents to which it is a party;
(vii) Each party to this Agreement shall have received the
following executed legal opinions, in form and substance satisfactory
to each of the parties hereto:
(A) the opinion of Xxx X. Doberman, Esq., counsel to
Aeltus, substantially to the effect set forth in
Exhibit D.
(B) the opinion of ____________________,
__________________ of the Custodian, substantially
to the effect set forth in Exhibit E.
(C) the opinion of _____________________, Associate
General Counsel and Vice President of the Insurer,
substantially to the effect set forth in Exhibit
F.
(D) the opinion of Xxx X. Doberman, Esq., Counsel to
the Fund, substantially to the effect set forth in
Exhibit G.
12
(viii) All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by this Agreement and the other Transaction Documents
shall be satisfactory in form and substance to the Insurer, and the
Insurer shall have received such other documents and legal opinions in
respect of any aspect or consequence of the transactions contemplated
hereby or thereby as it shall reasonably request.
(b) The obligation of the Insurer to issue each Policy is
subject to the satisfaction of the following conditions on the
Inception Date with respect to the related PPF:
(i) The registration statement with respect to such PPF shall
have been filed with and declared effective by the U.S. Securities and
Exchange Commission, and a copy of each prospectus and statement of
additional information shall have been delivered to the Insurer;
(ii) The Insurer shall have received a certificate of the
Secretary or Assistant Secretary of the Fund dated as of such Inception
Date certifying that attached thereto are true, complete and correct
copies of the resolutions duly adopted by the Board of Directors
authorizing the creation of such PPF;
(iii) Each of the representations and warranties made by
Aeltus and the Fund in or pursuant to the Transaction Documents shall
be true and correct in all material respects on and as of such date;
(iv) No Default or Event of Default shall have occurred and be
continuing on such date;
(v) No statute, rule, regulation or order shall have been
enacted, entered or deemed applicable by any Government Authority which
would make the transactions contemplated by any of the Transaction
Documents illegal or otherwise prevent the consummation thereof; and
(vi) All proceedings, and all documents, instruments and other
legal matters in connection with the creation of such PPF shall be
satisfactory in form and substance to the Insurer.
Section 2.4 Premiums. In consideration of the issuance by the
Insurer of each Policy with respect to a PPF, the Fund shall pay to the Insurer
a fee in an amount equal to 0.33% per annum of the average daily NAV of such PPF
during the Guarantee Period (the "Policy Fee") payable monthly in arrears (each
a "Fee Payment Date"). Policy Fees payable on each Fee Payment Date shall be
calculated based on a 365- or 366-day year and the actual number of days
elapsed.
Section 2.5 Reimbursement Obligations. If, after any
Rebalancing on any Trading Day pursuant to Section 3.5 with respect to any PPF,
(x) all of the assets of such PPF are, or are required to be, invested solely in
U.S. Treasury and Agency Zeroes and Cash Equivalents, and (y) the Covered
Expense Ratio was less than the Higher Covered Expense Ratio on the Valuation
Date for such Trading Day, a "Permanent Deficit Event" shall be deemed to have
occurred. After the occurrence of a Permanent Deficit Event with respect to any
PPF, Aeltus hereby agrees to pay to the Insurer from time to time an amount
equal to each payment of any amount made for any reason by such PPF to Aeltus,
within two Business Days of the date of Aeltus' receipt of such payment, until
the first Valuation Date on which the Reimbursement Amount with respect to such
PPF equals or exceeds the product of the Permanent Deficit Reimbursement Ratio
and the Permanent Fee Deficit Amount for such PPF on such Valuation Date.
Thereafter, the Insurer hereby agrees to pay to Aeltus, on a quarterly basis, on
the last Business Day of
13
each calendar quarter and on the Maturity Date of such PPF, the excess, if any,
of the Reimbursement Amount with respect to such PPF over the product of the
Permanent Deficit Reimbursement Ratio for such PPF times the Permanent Fee
Deficit Amount for such PPF as of the last Valuation Date of such calendar
quarter or such Maturity Date, as the case may be.
Section 2.6 Indemnification. (a) In addition to any and all
rights of reimbursement or any other rights pursuant hereto or under law or
equity, Aeltus agrees (i) to pay, or reimburse, the Insurer for all of its
reasonable out-of-pocket costs and expenses (including, without limitation as
provided in Section 7.4, the reasonable fees and disbursements of its counsel)
incurred in connection with the negotiation, preparation, execution and delivery
of this Agreement, the other Transaction Documents and any amendment, supplement
or modification thereof, or waiver or consent thereunder, (ii) to pay, or
reimburse, the Insurer for all of its reasonable out-of-pocket costs and
expenses (including, without limitation, the reasonable fees and disbursements
of its counsel) incurred in connection with the enforcement or preservation of
any rights under the Transaction Documents, (iii) to pay, indemnify, and hold
the Insurer harmless from any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes (excluding income taxes), if any, that may be payable or
determined to be payable in connection with the execution and delivery of, or
consummation or administration of any of the transactions contemplated by, or
any amendment, supplement or modification of, or any waiver or consent under or
in respect of the Transaction Documents and (iv) to pay, indemnify and hold the
Insurer and its officers, directors and employees (each an "Indemnitee")
harmless from and against any and all out-of-pocket liabilities (including
penalties), obligations, losses, damages, actions, suits, demands, claims,
judgments, costs, expenses or disbursements of any kind or nature whatsoever
that arise out of, or in any way relate to or result from or out of (A) the
transactions contemplated by the Transaction Documents or (B) any investigation
or defense of, or participation in, any legal proceeding relating to the
execution, delivery, enforcement, performance or administration of the
Transaction Documents (whether or not such Indemnitee is a party thereto) (all
the foregoing in clauses (i) through (iv) above, collectively, the "Indemnified
Liabilities"); provided that Aeltus shall have no obligation hereunder to any
Indemnitee with respect to Indemnified Liabilities arising from the gross
negligence, bad faith or willful misconduct of any Indemnitee. Any payments
required to be made by Aeltus under this Section 2.6 shall be due and payable by
Aeltus on the 30th day after demand therefor.
(b) The indemnity provisions of this Section 2.6, as well as
the reimbursement provisions set forth in Section 2.5, shall survive the
termination of this Agreement.
ARTICLE III
MANAGEMENT OF PPFs
Section 3.1 Eligible Investments. (a) Aeltus shall segregate
the assets of each such PPF from all other series of the Fund and ensure that
the investment of the assets of each independently satisfies the requirements of
this Article III.
(b) Aeltus shall, subject to the restrictions of Sections 3.2,
3.3, 3.4 and 3.5, invest the assets of each PPF only in the following types of
investments ("Eligible PPF Investments"):
(i) cash and the following short-term securities with
remaining maturities of 180 days or less: (1) direct obligations of,
and obligations fully guaranteed as to full and timely payment by the
full faith and credit of, the United States of America, excluding U.S.
Treasury and Agency Zeroes; (2) demand deposits, time deposits or
certificates of deposit of any depository institution or trust company
incorporated under the laws of the United States of America or any
state thereof;
14
provided that at the time of investment therein the commercial paper or
other short-term unsecured debt obligations thereof shall be rated at
least A-1 by S&P or P-1 by Moody's; (3) bankers acceptances issued by
any depository institution or trust company referred to in clause (2)
above; and (4) commercial paper having at the time of the investment
therein a rating of at least A-1 by S&P or P-1 by Moody's;
(ii) U.S. Treasury or Agency Zeroes maturing on, or within the
90 days preceding, the Maturity Date with respect to such PPF;
(iii) Non-callable corporate debt securities maturing within
the three years preceding or the three years following the Maturity
Date with respect to such PPF and having a rating of at least AA- by
S&P or Aa3 by Moody's; provided that if both Moody's and S&P have
issued a rating thereon, such rating shall be no less than Aa3/AA-;
(iv) U.S. Treasury Futures;
(v) Index Equities; and
(vi) Index Futures.
Section 3.2 Investment Limitations. Aeltus shall invest the
assets of each PPF subject to the following limitations:
(a) all Cash Associated with Futures shall be invested in Cash
Equivalents;
(b) each PPF shall hold Cash Equivalents having Market Value
at all times at least equal to Cash Associated with Futures with respect to such
PPF;
(c) the Market Value of all Cash Equivalents held by such PPF
(less Cash Associated with Futures and Cash Margin with respect to such PPF) on
any Valuation Date shall not exceed 4% of the Total Asset Value with respect to
such PPF on such Valuation Date;
(d) no Cash Equivalent or U.S. Treasury or Agency Zero held by
any PPF shall mature after the Maturity Date with respect to such PPF;
(e) at the time of any investment in Corporate Bonds by a PPF,
no more than 2% of the Total Asset Value of such PPF shall be invested in
Corporate Bonds issued by a particular issuer or its affiliates;
(f) the Notional Value of all U.S. Treasury Futures held by a
PPF shall not exceed 50% of the Market Value of all Corporate Bonds held by such
PPF on any Valuation Date;
(g) on any Valuation Date, the Portfolio Duration of the
Corporate Bonds and U.S. Treasury Futures held by a PPF shall not be greater
than the Theoretical Zero Modified Duration of such PPF nor less than the
Theoretical Zero Modified Duration of such PPF minus 0.25;
(h) the aggregate Market Value of all Index Futures held by a
PPF on any Valuation Date shall not exceed 20% of the sum of (i) the aggregate
Market Value of all such Index Futures and (ii) the aggregate Market Value of
all Index Equities held by such PPF on such Valuation Date;
15
(i) any Corporate Bond held by a PPF rated less than AA- by
S&P or less than Aa3 by Moody's shall be sold by such PPF with 15 Business Days
following the public announcement of such rating, and
(j) no investment shall be made in securities issued by Aetna
Inc.
Section 3.3 Index Equity Selection Guidelines. Aeltus shall
make each investment in Index Equities in any PPF in accordance with the
Selection Guidelines. Aeltus shall not make any material change in the Selection
Guidelines, including without limitation, the investment selection methodology
described therein, without the prior written consent of the Insurer.
Section 3.4 Index Equity Diversification and Capitalization
Requirements. Aeltus shall invest the assets of each PPF, to the extent such PPF
holds any Index Equities, such that the following requirements are satisfied as
of each Valuation Date:
(a) each PPF shall be invested in at least 400 of the 500
Index Equities; provided that no investment in an Index Equity will be included
for the purposes of satisfying the requirements set forth in this paragraph (a)
unless the Fund Weight with respect to such PPF and such Index Equity equals or
exceeds 40% of the Index Weight for such Index Equity;
(b) the aggregate of the Index Weights with respect to each of
the Index Equities which are held by such PPF and which satisfy the requirements
of paragraph (a) above shall not be less than 85%;
(c) the Fund Weight with respect to such PPF and each Index
Equity held by such PPF shall not exceed 200% of the Index Weight for such Index
Equity; and
(d) the Fund Sector Weight with respect to such PPF for each
Sector shall not: (i) exceed 135% of the Sector Index Weight for such Sector or
(ii) be less than 65% of the Sector Index Weight for such Sector.
Aeltus shall demonstrate its compliance with the requirements
and limitations set forth in this Section 3.4 by providing to the Insurer,
within 10 calendar days of the end of each month, a report for each PPF as of
such month end, substantially in the form attached hereto as Exhibit H.
Section 3.5 Asset Allocation and Rebalancing. (a) If, with
respect to any PPF, prior to the open of trading on the NYSE on any Trading Day,
the excess of (1) the sum of:
(i) 70% of the aggregate Market Value of all Index Equities
held by such PPF on the Valuation Date for such Trading Day,
(ii) the aggregate Market Value of all Cash Equivalents held
in such PPF (less Cash Associated with Futures and Cash Margin with
respect to such PPF) on the Valuation Date for such Trading Day,
(iii) the aggregate Market Value of all U.S. Treasury and
Agency Zeroes held by such PPF on the Valuation Date for such Trading
Day,
16
(iv) the aggregate Market Value of all Corporate Bonds held by
such PPF on the Valuation Date for such Trading Day,
(v) the aggregate Market Value of all Cash Margin held by such
PPF on the Valuation Date for such Trading Day, and
(vi) 70% of the aggregate Market Value of all Index Futures
held by such PPF on such Trading Day,
over (2) an amount equal to the aggregate amount of accrued and unpaid expenses
and other liabilities of such PPF (the "Adjusted Total Asset Value") is less
than the Asset Allocation Threshold, Aeltus shall sell a portion of the Index
Equities held by such PPF and reinvest the proceeds of such sale in U.S.
Treasury or Agency Zeroes, Corporate Bonds and/or Cash Equivalents such that,
after giving effect to such sale and reinvestment of proceeds, the Adjusted
Total Asset Value would equal or exceed the sum of the Present Value of the
Aggregate Guarantee Amount plus the Present Value of Covered Expenses with
respect to such PPF (each such divestiture and reinvestment, a "Rebalancing").
The foregoing determination (an "Asset Allocation Test") shall be performed by
Aeltus with respect to each PPF prior to the open of trading on the NYSE on each
Trading Day. If, on any Trading Day, Aeltus fails to effect a Rebalancing
required by this Section 3.5, Aeltus shall provide the Insurer and the Custodian
with written notice of such failure prior to the next succeeding Trading Day.
(b) If, on any Trading Day, with respect to any PPF, the
aggregate Market Value of all Index Equities permitted to be held by such PPF in
accordance with the Asset Allocation Test is less than 40% of the Total Asset
Value of such PPF, Aeltus shall seek to sell all Corporate Bonds held by such
PPF on such Trading Day and reinvest the proceeds thereof in U.S. Treasury or
Agency Zeroes or Cash Equivalents.
(c) Aeltus shall report the results of each Asset Allocation
Test with respect to each PPF for each Trading Day in a report substantially in
the form attached hereto as Exhibit I, and shall deliver each such report to the
Insurer prior to the opening of business on the next succeeding Trading Day.
ARTICLE IV
EVENTS OF DEFAULT
Section 4.1 Default. If any of the following events (each, an
"Event of Default") shall occur and be continuing:
(a) Aeltus shall default in its observance or performance of
any agreement or obligation contained in Section 3.1 or 3.5(b) and such default
shall continue unremedied for a period of three Trading Days;
(b) Aeltus shall default in its observance or performance of
any agreement or obligation contained in Section 3.2, 3.3 or 3.4 and such
default shall continue unremedied for a period of three Trading Days;
provided, however that Aeltus shall not be in default of its obligations
contained in Section 3.2(c) on any Trading Day on which the market for
Treasury obligations of the U.S. Government is closed;
17
(c) Aeltus shall default in its observance or performance of
any agreement or obligation contained in Section 3.5(a) or 3.5(c) and such
default shall continue unremedied for a period of one Trading Day;
(d) Aeltus or the Fund shall default in the observance or
performance of any agreement or obligation contained in this Agreement (other
than any obligation or agreement referred to in paragraphs (a) through (c)
above) and such default remains unremedied for a period of 15 Trading Days after
the date on which written notice thereof shall have been given by the Insurer to
Aeltus; or
(e) Any representation or warranty made or deemed made by
Aeltus or the Fund in this Agreement or which is contained in any certificate,
document or financial or other statement furnished at any time under or in
connection with this Agreement shall prove to have been incorrect in any
material respect on or as of the date made or deemed made and such breach
remains unremedied for a period of 15 Trading Days after the date on which
written notice thereof shall have been given by the Insurer to Aeltus or the
Fund;
then and only then the Insurer shall have the right to direct the investment of
funds in the particular PPF or PPFs pursuant to Section 3 of the Custodian
Service Agreement in the manner and to the extent provided in Section 4.2.
Section 4.2 Remedies. (a) After the occurrence and during the
continuance of an Event of Default with respect to a PPF or an Event of Default
not relating to a particular PPF, the Insurer shall have the right to deliver to
Aeltus and the Custodian an Event of Default Notice (as defined in the Custodian
Service Agreement). During the period (the "Default Period") from and including
the date on which the Custodian receives an Event of Default Notice from the
Insurer to and excluding the Business Day following the date on which the
Insurer gives the Custodian a Cure Notice (as defined in the Custodian Service
Agreement), the Insurer shall have the right to direct the investment of the PPF
as to which such Event of Default shall have occurred or all PPF's, as the case
may be, by delivering to the Custodian, pursuant to Section 3 of the Custodian
Service Agreement, as described below. In the event that during the Default
Period the Insurer receives written investment instructions from Aeltus, the
Insurer shall promptly forward such instructions to the Custodian unless the
Insurer determines that the execution of such instructions would result in the
occurrence of another Default or, after the occurrence and during the
continuance of an Event of Default specified in Section 4.1 (a), (b) or (c),
that the execution of such instructions would not result in the cure of the
breach causing such Event of Default.
(b) In the event that during a Default Period and after the
occurrence and during the continuance of an Event of Default with respect to a
PPF specified in Section 4.1 (a), (b) or (c) herein, the Insurer shall not have
received written investment instructions from Aeltus with respect to such PPF in
the format set forth in the Custodian Service Agreement, the execution of which
would result in the cure of the breach causing such Event of Default, without
resulting in the occurrence of another Default, by 10:00 a.m., New York City
time, on the later of the first day of such Default Period and the Trading Day
after the occurrence of such Event of Default, the Insurer shall have the right
to provide the Custodian with its own investment instructions pursuant to
Section 3 of the Custodian Service Agreement, subject to the following
conditions:
(i) after giving effect to any changes to the investments of
such PPF at the direction of the Insurer, the investments of such PPF
shall be consistent with Article III;
18
(ii) any changes made to the investments of such PPF at the
direction of the Insurer shall be limited to those that are reasonably
necessary to cure the breach causing such Event of Default;
(iii) if such Event of Default is specified in Section 4.1(a)
or (b), the Insurer shall direct the sale of the specific securities
necessary to cure the breach causing such Event of Default; further, if
the securities which the Insurer directs to be sold are equity
securities, then the Insurer shall reinvest the proceeds therefrom in
Index Equities by directing the purchase, to the extent practicable, of
a pro rata portion of the Index Equities held by the PPF as to which
such Event of Default shall have occurred, unless doing so would result
in another Event of Default pursuant to Section 4.1(c), in which case
the Insurer shall reinvest the proceeds in U.S. Treasury or Agency
Zeroes; if the securities which the Insurer must cause to be sold are
fixed income securities, then the Insurer shall reinvest the proceeds
therefrom in eligible U.S. Treasury or Agency Zeroes; and
(iv) if such Event of Default is specified in Section 4.1(c),
the minimum amount of Index Equities or Index Futures as is reasonably
necessary, after giving effect to the reinvestment of the proceeds
thereof in U.S. Treasury or Agency Zeroes or Cash Equivalents, to cause
the Adjusted Total Asset Value with respect to the PPF as to which such
Event of Default shall have occurred to equal the sum of the Present
Value of the Aggregate Guarantee Amount plus the Present Value of
Covered Expenses with respect to such PPF, shall be sold; further, to
the extent practicable, a pro rata portion of the Index Equities and
the Index Futures held by the PPF as to which such Event of Default
shall have occurred shall be sold.
(c) In the event that, after the occurrence and during the
continuance of an Event of Default specified in Section 4.1(d) or (e), the
Insurer shall not have received written instructions from Aeltus or the written
instructions received from Aeltus would result in the occurrence of a Default,
then the Insurer shall have no right to direct the investment of the PPF as to
which such Event of Default shall have occurred pursuant to Section 3 of the
Custodian Service Agreement or otherwise, provided no Event of Default specified
in Section 4.1(a), (b) or (c) shall have occurred and be continuing. If an Event
of Default specified in Section 4.1(d) or (e) shall occur and be continuing, it
shall be deemed to have occurred with respect to all PPFs.
(d) After the occurrence and during the continuance of an
Event of Default, Aeltus shall deliver trade instructions only through the
Insurer in accordance with this Section 4.2 with respect to the PPF as to which
the Event of Default has occurred.
(e) Upon the cure of an Event of Default, the Insurer shall
give prompt written notice of such cure to Aeltus and, unless another Event of
Default shall have occurred and be continuing, shall promptly give a Cure Notice
to the Custodian pursuant to the Custodian Service Agreement. Other than after
the occurrence and during the continuance of an Event of Default, the Insurer
shall have no right to direct the investment of funds in the PPFs.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1 Representations and Warranties of Aeltus. To
induce the Insurer to enter into this Agreement and to issue the Policies,
Aeltus hereby represents and warrants to the Insurer that:
19
(a) Aeltus (i) is a Connecticut corporation duly organized,
validly existing and in good standing under the laws of the State of
Connecticut, (ii) has the corporate power and authority, and the legal right, to
own its assets and to transact the business in which it is engaged, (iii) is
duly qualified to do business and is in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification except where the failure to so qualify
would not have a material adverse effect on Aeltus' ability to perform its
obligations under the Transaction Documents and (iv) is in compliance with all
Requirements of Law except where non-compliance would not have a material
adverse effect on Aeltus' ability to perform its obligations under the
Transaction Documents or the validity or enforceability of the Transaction
Documents.
(b) Aeltus has the corporate power and authority, and the
legal right, to execute, deliver and perform the Transaction Documents to which
it is a party and has taken all necessary action required by applicable
Requirements of Law to authorize the execution, delivery and performance of the
Transaction Documents to which it is a party. Except as has been obtained, no
consent or authorization of, filing with, or other act by or in respect of, any
Government Authority or any other Person is required in connection with the
execution, delivery, performance, validity or enforceability by or against
Aeltus of the Transaction Documents to which it is a party. This Agreement has
been, and each other Transaction Document to which Aeltus is a party will be,
duly executed and delivered on behalf of Aeltus. This Agreement constitutes, and
each other Transaction Document to which Aeltus is a party, when executed and
delivered, will constitute, a legal, valid and binding obligation of Aeltus
enforceable against Aeltus in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(c) The execution, delivery and performance of the Transaction
Documents to which Aeltus is a party will not violate any Requirement of Law or
Contractual Obligation of Aeltus and will not result in, or require, the
creation or imposition of any Lien on any of its property, assets or revenues
pursuant to any such Requirement of Law or Contractual Obligation except where
such violation would not have a material adverse effect on Aeltus' ability to
perform its obligations under the Transaction Documents or the validity or
enforceability of the Transaction Documents.
(d) No litigation, proceeding or investigation of or before
any arbitrator or Governmental Authority is pending or threatened by or against
Aeltus or against any of its properties or revenues (i) asserting the invalidity
or unenforceability of any of the Transaction Documents, (ii) seeking to prevent
the consummation of any of the transactions contemplated by the Transaction
Documents or (iii) seeking any determination or ruling that might materially and
adversely affect (A) Aeltus' ability to perform its obligations under the
Transaction Documents, (B) the validity or enforceability of the Transaction
Documents or (C) the Insurer.
Section 5.2 Representations and Warranties of the Fund. The
Fund hereby represents and warrants to the Insurer that:
(a) The Fund (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland; (ii) has
the corporate power and authority, and the legal right, to own its assets and to
transact the business in which it is engaged; (iii) is duly qualified to do
business and is in good standing under the laws of each jurisdiction where its
ownership or lease of property or the conduct of its business requires such
qualification except where the failure to so qualify would not have a material
adverse effect on the Fund's ability to perform its obligations under the
Transaction Documents; and (iv) is in compliance with all Requirements of Law
except where non-compliance would not have a material
20
adverse effect on the Fund's ability to perform its obligations under the
Transaction Documents or the validity or enforceability of the Transaction
Documents.
(b) The Fund has the corporate power and authority, and the
legal right, to execute, deliver and perform this Agreement and has taken all
necessary action required by applicable Requirements of Law to authorize the
execution, delivery and performance of this Agreement. No consent or
authorization of, filing with, or other act by or in respect of, any Government
Authority or any other Person is required in connection with the execution,
delivery, performance, validity or enforceability by or against the Fund of the
Transaction Documents to which it is a party, other than a filing made under the
Securities Act of 1933 and the Investment Company Act of 1940. This Agreement
has been duly executed and delivered on behalf of the Fund and constitutes a
legal, valid and binding obligation of the Fund enforceable against the Fund in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles
(whether enforcement is sought by proceedings in equity or at law).
(c) The execution, delivery and performance of the Transaction
Documents to which it is a party will not violate any Requirement of Law or
Contractual Obligation of the Fund and will not result in, or require, the
creation or imposition of any Lien on any of its property, assets or revenues
pursuant to any such Requirement of Law or Contractual Obligation except where
such violation would not have a material adverse effect on the Fund's ability to
perform its obligations under the Transaction Documents to which it is a party
or the validity or enforceability of the Transaction Documents to which it is a
party.
(d) No litigation, proceeding or investigation of or before
any arbitrator or Governmental Authority is pending or threatened by or against
the Fund or against any of its properties or revenues (i) asserting the
invalidity or unenforceability of this Agreement, (ii) seeking to prevent the
consummation of any of the transactions contemplated by the Transaction
Documents to which it is a party or (iii) seeking any determination or ruling
that might materially and adversely affect (A) the Fund's ability to perform its
obligations under this Agreement, (B) the validity or enforceability of this
Agreement or (C) the Insurer.
ARTICLE VI
COVENANTS
Section 6.1 Covenants of Aeltus. Aeltus hereby covenants and
agrees that during the term of this Agreement:
(a) it shall comply in all material respects with the terms
and conditions of the Transaction Documents to which it is a party and shall
provide the Insurer with written notice immediately upon becoming aware of any
material breach by it of the provisions of any such agreements;
(b) it shall not amend, supplement or otherwise modify, or
agree to any waiver with respect to any provision of the Custodian Service
Agreement without the prior written consent of the Insurer;
(c) it shall promptly notify the Insurer of any information or
event, to the knowledge of Aeltus, that would be reasonably likely to result,
through passage of time or otherwise, in the occurrence of an Event of Default;
21
(d) it shall provide to the Insurer copies of the prospectus
provided to potential PPF Shareholders and such additional information with
respect to the PPFs as the Insurer may from time to time reasonably request;
(e) it shall not amend or otherwise modify the Sectors as set
forth on Annex B, without the prior written consent of the Insurer; and
(f) it shall not terminate any PPF during the Guarantee Period
prior to the Maturity Date.
Section 6.2 Covenants of the Fund.
(a) in the event that either it or the Custodian shall
terminate the Custodian Agreement or the Custodial Services Agreement, it shall
enter into a custodian agreement and a Custodian Service Agreement with a
successor Custodian prior to the effective date of such termination;
(b) within 90 days of the end of each PPF's fiscal year, it
shall provide to the Insurer the financial statements for each PPF with respect
to such fiscal year, audited by independent public accountants;
(c) other than in connection with a Distribution to PPF
Shareholders, it shall not divide the shares of any PPF into a greater number of
shares of lesser value or combine them into a lesser number of shares of greater
value; and
(d) it shall not replace Aeltus as investment adviser to any
PPF unless the successor adviser is subject to terms and conditions
substantially similar to those contained in this Agreement.
ARTICLE VII
FURTHER AGREEMENTS
Section 7.1 Obligations Absolute. The obligations of Aeltus
and the Fund pursuant to this Agreement are absolute and unconditional and will
be paid or performed strictly in accordance with the respective terms thereof,
irrespective of:
(a) any lack of validity or enforceability of, or any
amendment or other modification of, or waiver with respect to, the Transaction
Documents;
(b) any amendment or waiver of, or consent to departure from,
the Policies or any Transaction Document;
(c) the existence of any claim, set-off, defense or other
rights either may have at any time against the other, any beneficiary or any
transferee of the Policies (or any persons or entities for whom any such
beneficiary or any such transferee may be acting), the Insurer or any other
person or entity whether in connection with the Policies, this Agreement or any
unrelated transactions;
(d) any statement or any other document presented under the
Policies (including any Notice for Payment (as defined in the Policies)) proving
to be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect whatsoever;
22
(e) the inaccuracy or alleged inaccuracy of any Notice for
Payment upon which any drawing under a Policy is based;
(f) payment by the Insurer under a Policy against presentation
of a draft of certificate which does not comply with the terms of such Policy,
provided that such payment shall not have constituted gross negligence or
willful misconduct or bad faith of the Insurer;
(g) any default or alleged default of the Insurer under a
Policy other than a default with respect to payment thereunder; or
(h) any other circumstance or happening whatsoever, provided
that the same shall not have constituted gross negligence, willful misconduct or
bad faith of the Insurer and to the extent that such do not result in a default
with respect to payments under the Policies.
Section 7.2 Reinsurance and Assignments. The Insurer shall
have the right to give participation in its rights under this Agreement and to
enter into contracts of reinsurance with respect to the Policies, provided that
the Insurer agrees that any such disposition will not alter or affect in any way
whatsoever the Insurer's direct obligations hereunder and under the Policies.
Neither Aeltus nor the Fund may assign its obligations under this Agreement
without the prior written consent of the Insurer.
Section 7.3 Fund Liability. Any other provision to the
contrary notwithstanding, any liability of the Fund under this Agreement with
respect to a PPF, or in connection with the transactions contemplated herein
with respect to a PPF, shall be discharged only out of the assets of that PPF,
and no other portfolio of the Fund shall be liable with respect thereto.
Section 7.4 Liability of the Insurer. Aeltus and the Fund
agree that neither the Insurer, nor any of its officers, directors or employees
shall be liable or responsible for (except to the extent of its own or their
gross negligence, willful misconduct or bad faith) (a) the use which may be made
of any Policy by any Person or for any acts or omissions of another Person in
connection therewith or (b) the validity, sufficiency, accuracy or genuineness
of any documents delivered to the Insurer, or of any endorsement(s) thereon,
even if such documents should in fact prove to be in any or all respects
invalid, insufficient, fraudulent or forged. In furtherance and not in
limitation of the foregoing, the Insurer may accept documents that appear on
their face to be in order, without responsibility for further investigation
(except to the extent that the Insurer acted with gross negligence, willful
misconduct or bad faith).
Section 7.5 Fees and Expenses. Aeltus agrees to pay all
reasonable costs and expenses in connection with the preparation, execution and
delivery of the Transaction Documents and all other documents delivered with
respect thereto, including, without limitation, the fees of Moody's and S&P
incurred by the Insurer in connection with this Agreement and the transactions
contemplated hereby and by the other Transaction Documents and the fees of
Xxxxxxx Xxxxxxx & Xxxxxxxx, counsel to the Insurer. All such fees, costs and
expenses shall be payable on or prior to the date which is 30 days from the date
on which an invoice for any such fees, costs and expenses shall have been
presented to Aeltus.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Amendments and Waivers. No amendment or waiver of
any provision of this Agreement nor consent to any departure therefrom, shall in
any event be effective unless in writing and
23
signed by all of the parties hereto; provided that any waiver so granted shall
extend only to the specific event or occurrence so waived and not to any other
similar event or occurrence which occurs subsequent to the date of such waiver.
Aeltus shall provide Moody's with written notice of any amendment or waiver of
the provisions of this Agreement.
Section 8.2 Notices. Except to the extent otherwise expressly
provided herein, all notices, requests and demands to or upon the respective
parties hereto and Moody's to be effective shall be in writing (and if, sent by
mail, certified or registered, return receipt requested) or confirmed facsimile
transmission and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when delivered by hand, or three Business Days
after being deposited in the mail, postage prepaid, or, in the case of facsimile
transmission, when sent, addressed as follows:
If to Aeltus:
-------------
Aeltus Investment Management, Inc.
00 Xxxxx Xxxxx Xxxxxx, XX00
Xxxxxxxx, Xxxxxxxxxxx 00000-0000
Attention: Vice President & General Counsel
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
If to the Fund:
---------------
00 Xxxxx Xxxxx Xxxxxx, XX00
Xxxxxxxx, Xxxxxxxxxxx 00000-0000
Attn: President
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
If to the Insurer:
------------------
MBIA Insurance Corporation
000 Xxxx Xxxxxx
Xxxxxx, Xxx Xxxx 00000
Attention: Xx. Xxxxx Xxxxxxxx
Telephone: 914/000-0000
Facsimile: 914/765-3161
If to Moody's:
--------------
Xxxxx'x Investors Service
00 Xxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx
Attention:
Telephone: (212)
Facsimile: (212)
Section 8.3 No Waiver, Remedies and Severability. No failure on the
part of the Insurer to exercise, and no delay in exercising, any right
hereunder shall operate as a waiver thereof, nor shall any
24
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law. The
parties further agree that the holding by any court of competent jurisdiction
that any remedy pursued by the Insurer hereunder is unavailable or unenforceable
shall not affect in any way the ability of the Insurer to pursue any other
remedy available to it. In the event any provision of this Agreement shall be
held invalid or unenforceable by any court of competent jurisdiction, the
parties hereto agree that such holding shall not invalidate or render
unenforceable any other provision hereof.
Section 8.4 Payments. All payments to the Insurer hereunder shall be
made in lawful currency of the United States in immediately available funds and
shall be made prior to 2:00 p.m. (New York City time) on the date such payment
is due by wire transfer to The Chase Manhattan Bank, ABA #021-000021, MBIA
Insurance Corporation Account Number 910-2-721-728 or to such other office or
account as the Insurer may direct. All payments to Aeltus hereunder shall be
made in lawful currency of the United States and in immediately available funds
on the date such payment is due by wire transfer to , or to
such other office or account as the Fund may direct.
Whenever any payment under this Agreement shall be stated to
be due on a day which is not a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such cases be
included in computing interest or fees, if any, in connection with such payment.
Section 8.5 Governing Law. This Agreement shall be construed,
and the obligations, rights and remedies of the parties hereunder shall be
determined, in accordance with the laws of the State of New York.
Section 8.6 Counterparts. This Agreement may be executed in
counterparts of the parties hereto, and each such counterpart shall be
considered an original and all such counterparts shall constitute one and the
same instrument.
Section 8.7 Paragraph Headings, Etc. The headings of
paragraphs contained in this Agreement are provided for convenience only. They
form no part of this Agreement and shall not affect its construction or
interpretation.
Section 8.8 Termination. This Agreement shall terminate on the
earlier of: (a) the first date as of which the final outstanding Policy has
terminated in accordance with the provisions thereof and the Insurer has
recovered all amounts owing to it hereunder or (b) the date on which the
Aggregate Guarantee Amount with respect to each PPF equals zero. Any termination
of this Agreement will be effective only upon the delivery to the Insurer of all
Policies, whereupon the Policies will be cancelled and the Insurer's liabilities
thereunder will cease.
25
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, all as of the day and year first above mentioned.
MBIA INSURANCE CORPORATION,
as Insurer
By: ___________________________________________
Name:
Title:
AELTUS INVESTMENT MANAGEMENT, INC.
By: ___________________________________________
Name:
Title:
AETNA SERIES FUND, INC.
By: ___________________________________________
Name:
Title:
ANNEX A
THE EQUITY PORTFOLIO ("INDEX PLUS LARGE CAP")
Investment The investment philosophy of the equity
philosophy portfolio, a quantitative "Index Plus Large Cap"
strategy, is based on the following principles:
[bullet] Rigorous quantitative analysis can identify
those securities having the greatest
likelihood of underperformance.
[bullet] A portfolio that avoids the underperforming
securities in the S&P 500 will outperform
the Index.
Quantitative The process begins with output from an internally
ranking developed quantitative model that ranks every issue
in the S&P 500 using factors which Aeltus has
identified as being predictors of relative
performance. The model produces a weighted aggregate
score, and ranks the universe.
Portfolio Screening and Weighting
construction
After the quantitative evaluation, well ranked stocks
are overweighted and poorly ranked stocks are
underweighted. Bottom decile stocks and Aetna Inc.
are not owned at all. If the data needed for such
quantitative evaluation is not available for a
particular company, the company will be held in the
equity portfolio at its index weight.
Final Construction
Finally, the screened and weighted portfolio is
tested to assure appropriate representation in each
of the 12 S&P 500 industry sectors (as set forth in
Annex B). If any sector of the Portfolio is less than
65% of the S&P 500 weight, Aeltus will increase its
investment in that sector sufficiently to meet this
criterion. Similarly, if any sector is greater than
135% of the S&P weight, Aeltus will decrease its
investment in that sector sufficiently to meet this
criterion. The portfolio is generally rebalanced
monthly to reflect changes in rank and/or weighting
components.
Use of Futures Transaction efficiency is improved by using S&P 500
futures. They will represent no more than 20% of the
equity portfolio, and will not be leveraged or used
for speculative purposes.
ANNEX B
SECTOR LIST
Sector Abbreviation Sector Name
------------------- -----------
CAPG CAPITAL GOODS
TECH TECHNOLOGY
CONC CONSUMER CYCLICALS
CONN CONSUMER NON-CYCLICALS
XXXX HEALTH CARE
RETL RETAILERS
RAWM RAW MATERIALS
XXXX TRANSPORTATION
ENGY ENERGY
XXXX FINANCIAL
TELF TELEPHONE UTILITIES
ELUT ELECTRIC UTILITIES
ANNEX C
SAMPLE CALCULATION OF HYPOTHETICAL TOTAL ASSET VALUE
If Actual Data Based Then Hypothetical
on Actual Expense Data if Higher
Ratio in Asset Covered Expense
Allocation Model Ratio had been used
were: would be:
---------------------- ----------------------
Business Day Preceding Permanent Deficit Event:
- Equity Percentage 30.0% 19.7% (a)
- Discount Rate 5.50% 5.50%
- Remaining Time to Maturity (in Years) 4.00 4.00
- Actual Expense Ratio in Asset Allocation Model 1.40% 1.40%
- Higher Covered Expense Ratio 2.25% 2.25%
- Gross Principal Guarantee $ 100,000,000 $ 100,000,000
- Present Value of Aggregate Guarantee Amount plus $ 85,093,654 $ 85,093,654
Present Value of Covered Expenses using Actual Expense
Ratio
- Present Value of Aggregate Guarantee Amount plus $ 87,982,971 $ 87,982,971
Present Value of Covered Expenses using Higher Covered
Expense Ratio
- Cash Equivalent Value $ 0 $ 0
- Equity Portfolio Value $ 28,052,853 $ 18,421,799 (b)
- Fixed Income Portfolio Value $ 65,456,657 $ 75,087,712 (c)
- Total Asset Value $ 93,509,510 $ 93,509,510 (d)
- Adjusted Total Asset Value $ 85,093,654 $ 87,982,971
Date on Which Permanent Deficit Event Occurs
- Change in Equity Portfolio Value -40.00% -40.00% (e)
- Change in Disc. Rate -0.50% -0.50%
- Change in Fixed Income Portfolio Value 2.00% 2.00% (f)
- Cash Equivalent Value $ 0 $ 0
- Equity Portfolio Value $ 16,831,712 $ 11,053,079 (g)
- Fixed Income Portfolio Value $ 66,765,790 $ 76,589,466 (h)
------------------
- Total Asset Value $ 83,597,502 $ 87,642,544 (i)
------------------
(a) Amount of equity allowed in order for the Present Value of the Aggregate
Guarantee Amount plus the Present Value of Covered Expenses using the
Higher Covered Expense Ratio to exactly equal the Adjusted Total Asset
Value.
(b) The Total Asset Value times the equity percentage, or (a) times (d).
(c) The Total Asset Value minus the Equity Portfolio Value, or (d) minus (b).
(d) Equals the actual Total Asset Value as of this date.
(e) Equals the actual change in the value of the actual Equity Portfolio.
(f) Equals the actual change in the value of the actual Fixed Income Portfolio.
(g) Equals the adjusted hypothetical Equity Portfolio Value, or (b) times one
plus (e).
(h) Equals the adjusted hypothetical Fixed Income Portfolio Value, or (c) times
one plus (f).
(i) Equals the sum of the adjusted hypothetical Equity and Fixed Income
Portfolio Values, or (g) plus (h).
