Exhibit (h)(2)
CATERPILLAR INC.
CATERPILLAR INVESTMENT MANAGEMENT LTD.
000 X.X. XXXXX XX.
XXXXXX, XX 00000-0000
October 12, 2005
The Preferred Group of Mutual Funds (the "Trust")
000 Xxxxxxxx Xxxx.
Xxxxxx, XX 00000
Re: Fee Waiver/Expense Reimbursement and Indemnification Agreement
Ladies and Gentlemen:
In connection with the potential sale or other disposition of Caterpillar
Investment Management Ltd. ("CIML") by Caterpillar Inc. ("Caterpillar," and
together with CIML, "CAT") (such potential sale or other disposition of CIML,
the "CAT Exit"), and as an inducement to the Trust to continue its management
contracts with CIML, CAT hereby agrees as follows:
1. From October 1, 2005 through September 30, 2006 (or such longer period
as may be agreed to by the parties) (the "Term"), CIML will waive its
compensation (and, to the extent necessary, CAT shall bear other expenses of a
series of the Trust (each, a "Fund")) to the extent that total annualized fund
operating expenses1 of a Fund during the Term exceed the following annual rates:
Fund Rate
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Preferred International Growth Fund 1.54%
Preferred International Value Fund 0.99%
Preferred Small Cap Growth Fund 1.28%
Preferred Mid Cap Growth Fund 1.28%
Preferred Large Cap Growth Fund 0.94%
Preferred Value Fund 1.12%
Preferred Asset Allocation Fund 0.98%
Preferred Fixed Income Fund 0.68%
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1 For the purposes of this Agreement, any expenses incurred in connection
with the termination/liquidation of the Trust or any Fund and any expenses
incurred in connection with determining Brokerage Costs (as defined below) shall
not be deemed an "extraordinary expense" as described in Item 3, Instruction
3(c)(ii) of Form N-1A.
Preferred Short-Term Government Securities Fund 0.50%
Preferred Money Market Fund 0.50%
For purposes of determining any such waiver or expense reimbursement,
expenses of a Fund shall not reflect the application of custodial, transfer
agency or other credits or expense offset arrangements that may reduce the
Fund's expenses.
If for any month during which CIML is the investment manager to a Fund the
estimated total annualized fund operating expenses of that Fund for that month
are less than the total annual fund operating expense limit described above,
CIML shall be entitled to reimbursement by such Fund of the investment
management fees waived or reduced and other payments remitted by CAT on behalf
of such Fund pursuant to this expense limitation undertaking (the "Reimbursement
Amount") during any of the previous thirty-six (36) months, to the extent that
the Fund's estimated total annualized fund operating expenses plus the amount so
reimbursed is less than or equals, for such month, the total annual fund
operating expense limit provided for that Fund in the schedule above, provided
that such amount paid to CIML will in no event exceed the total Reimbursement
Amount and will not include any amounts previously reimbursed.
CAT understands and intends that the Trust will rely on this Section 1 in
preparing and filing (or determining not to file) amendments to the Trust's
Registration Statement on Form N-1A (and/or the Prospectuses and statements of
additional information contained therein) with the Securities and Exchange
Commission, in accruing the Trust's expenses for purposes of calculating its net
asset value per share and for other purposes.
2. Except to the extent that a cost described in this paragraph 2 is
included in a Fund's total annualized fund operating expenses for purposes of
paragraph 1 hereof, CAT will indemnify and hold harmless the Trust from, against
and in respect of (i) all reasonable costs of any agent(s) retained to assist in
any termination/liquidation of the Trust or any Fund, and any reasonable fees of
counsel incurred in connection with any such termination/liquidation, as a
result of, arising out of or directly or indirectly relating to the CAT Exit and
(ii) all Brokerage Costs associated with redemptions in excess of the average
monthly redemptions of each Fund, if any, over the twelve calendar months prior
to October 1, 2005, as calculated below. The Trust agrees that, to the extent
permissible under applicable law and reasonably practicable, all redemptions
that may be effected in-kind shall be so effected and, for purposes of this
Section 2, shall not be considered "redemptions."
"Brokerage Costs" shall equal the [total trading cost determined by an
independent third party (or, in the case of derivative instruments, determined
by CIML) using the methodology described in Schedule A hereto of gross monthly
portfolio securities sales] times (([gross monthly portfolio securities sales]
minus [gross monthly portfolio securities purchases] minus ([the average of
[redemptions for each calendar month in the year ending September 30, 2005
divided by net assets as of the end of each such month]] times [net assets as of
the end of the current month])) divided by [gross monthly portfolio securities
sales]).
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3. CAT will indemnify the Trust and its Trustees against any and all
Expenses actually and reasonably incurred by the Trust or a Trustee in any
Proceeding in which the Trust or a Trustee may be or may have been involved as a
party or otherwise or with which the Trust or a Trustee may be or may have been
threatened (with respect to a Trustee, while in office or thereafter) as a
result of, arising out of or directly or indirectly relating to the CAT Exit;
provided, however, that CAT shall have no obligation to indemnify a Trustee for
any Expenses incurred in any Proceeding to the extent the same has been finally
determined to have arisen from such Trustee's willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office; and provided, further, that this indemnity shall extend only to
claims brought before the passage of the statute of limitations applicable to
claims in any such Proceedings. Without limiting the generality of the
foregoing, the Trust or the relevant Trustee will take such commercially
reasonable actions as may be requested by CAT from time to time to mitigate any
Expenses. For purposes of this Section 3:
"Trustee" shall include the Trustee Emeritus of the Trust.
"Expenses" shall include without limitation all judgments, penalties,
fines, amounts paid or to be paid in settlement, liabilities, losses, interest,
expenses of investigation, reasonable attorneys' fees, retainers, court costs,
transcript costs, fees of experts and witnesses, expenses of preparing for and
attending depositions and other proceedings, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery service fees,
and all other costs, disbursements or expenses of the type customarily incurred
in connection with prosecuting, defending, preparing to prosecute or defend,
investigating, or acting as a witness in a Proceeding.
The term "Proceeding" shall include without limitation any threatened,
pending or completed claim, demand, threat, discovery request, request for
testimony or information, action, suit, arbitration, alternative dispute
mechanism, investigation, hearing or other proceeding, including any appeal from
any of the foregoing, whether civil, criminal, administrative or investigative.
4. CIML represents and warrants to the Trust that as of the date of this
Letter Agreement:
a. CIML is a corporation duly organized, validly existing, and in
good standing under the laws of Delaware.
b. CIML has full power and authority to execute and deliver this
Letter Agreement and to perform its obligations hereunder. The
execution and delivery of this Letter Agreement by CIML and the
performance by CIML of its obligations hereunder have been duly
and validly authorized by all necessary corporate action on the
part of CIML. This Letter Agreement constitutes the valid and
legally binding obligation of CIML, enforceable in accordance
with its terms and conditions.
c. Neither the execution and delivery of this Letter Agreement, nor
the performance of its obligations hereunder, will (i) violate
any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or
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other restriction of any government, governmental agency, or
court to which CIML is subject or any provision of CIML's charter
or bylaws or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create
in any party the right to accelerate, terminate, modify, or
cancel, or require any notice under any agreement, contract,
lease, license, instrument, or other arrangement to which CIML is
a party or by which it is bound or to which any of its assets is
subject.
5. Caterpillar represents and warrants to the Trust that as of the date of
this Letter Agreement:
a. Caterpillar is a corporation duly organized, validly existing,
and in good standing under the laws of Delaware.
b. Caterpillar has full power and authority to execute and deliver
this Letter Agreement and to perform its obligations hereunder.
The execution and delivery of this Letter Agreement by
Caterpillar and the performance by Caterpillar of its obligations
hereunder have been duly and validly authorized by all necessary
corporate action on the part of Caterpillar. This Letter
Agreement constitutes the valid and legally binding obligation of
Caterpillar, enforceable in accordance with its terms and
conditions.
c. Neither the execution and delivery of this Letter Agreement, nor
the performance of its obligations hereunder, will (i) violate
any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of
any government, governmental agency, or court to which
Caterpillar is subject or any provision of Caterpillar's charter
or bylaws or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create
in any party the right to accelerate, terminate, modify, or
cancel, or require any notice under any agreement, contract,
lease, license, instrument, or other arrangement to which
Caterpillar is a party or by which it is bound or to which any of
its assets is subject.
6. If a third party shall notify the Trust with respect to any matter which
may give rise to a claim for indemnification under this Letter Agreement, then
the Trust shall promptly notify CAT thereof in writing. The Trust shall provide
CAT with a reasonable opportunity to assess, defend and negotiate any such claim
by a third party, including the opportunity to participate in discussions with
the Trust and the third party with respect to resolution of any such claim. In
no event will the Trust pay or agree to pay any amount, consent to any judgment
or enter into any settlement with respect to any such matter giving rise to
CAT's obligations hereunder, without the prior written consent of CAT, which
consent will not be unreasonably withheld, conditioned or delayed.
7. The obligations and duties of Caterpillar and CIML pursuant to this
Letter Agreement are joint and several.
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8. Neither CIML, Caterpillar nor the Trust may assign its rights nor
delegate its obligations and duties under this Letter Agreement without the
prior written consent of the other party. This Letter Agreement shall be binding
upon and inure to the benefit of the parties named herein and their respective
successors and permitted assigns.
9. This Letter Agreement may be executed in one or more original or
facsimile counterparts, each of which shall be deemed an original and all of
which together will constitute one and the same instrument.
10. This Letter Agreement shall be governed by and construed in accordance
with the domestic substantive laws of The Commonwealth of Massachusetts without
giving effect to any conflict of laws provisions thereof that would result in
the application of the law of any other jurisdiction.
11. No amendment of any provision of this Letter Agreement shall be valid
unless the same shall be in writing and signed by all of the parties. No waiver
by any party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
Please acknowledge your agreement to the foregoing by countersigning this
letter in the space provided below.
Very truly yours,
CATERPILLAR INC.
By:
---------------------------------
Name:
Title:
CATERPILLAR INVESTMENT MANAGEMENT LTD.
By:
---------------------------------
Name:
Title:
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Accepted and Agreed:
THE PREFERRED GROUP OF MUTUAL FUNDS*
By:
-----------------------------------
Name:
Title:
* A copy of the Agreement and Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trust by an
officer or Trustee of the Trust in his or her capacity as an officer or
Trustee of the Trust and not individually and that the obligations of or
arising out of this instrument are not binding upon any of the Trustees,
officers, or shareholders individually but are binding only upon the assets
and property of the Trust.
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Schedule A
METHODOLOGY FOR DETERMINING TOTAL TRADING COSTS
Equity Securities
Total trading costs of monthly portfolio equity securities sales for each Fund,
as applicable, shall be calculated in the following manner:
o For each Fund that invests in equity securities, CIML and the
Trust shall mutually agree upon an Exchange Traded Fund ("ETF")
to serve as a proxy for market movement associated with general
equity market activity.
o An independent third-party shall analyze each Fund's equity
securities sales on a monthly basis to determine for each sale
the extent to which the price of the security changed between
order placement time and execution.
o On a monthly basis, the independent third-party shall calculate
the market impact for each of a Fund's equity securities sales by
netting out the effect that general equity market activity--as
determined by movement in the price of the applicable ETF--had on
the price of each security between order placement time and
execution. Total market impact of a Fund's equity securities
sales for a given month shall equal the aggregate market
impact--netting out positive and negative impacts determined
pursuant to the foregoing--of all of the Fund's equity securities
sales for the month.
o The total market impact of a Fund's equity securities sales for a
given month shall be added to any commissions incurred by such
Fund for all equity securities sales during the applicable month
to arrive at the Fund's total trading costs of portfolio equity
securities sales for the month.
Fixed Income Securities
Total trading costs of monthly portfolio fixed income securities sales for each
Fund, as applicable, shall be calculated in the following manner:
o An independent third-party shall analyze each Fund's fixed income
securities sales on a monthly basis to determine market impact
for each sale. The market impact for each fixed income securities
sale shall equal the difference between the execution price of
the sale and the average market price of the security on that
day. Total market impact of a Fund's fixed income securities
sales for a given month shall equal the aggregate market
impact--netting out positive and negative impacts--of all of the
Fund's fixed income securities sales for the month.
o The total market impact of a Fund's fixed income securities sales
for a given month shall be added to any commissions incurred by
such Fund for all fixed income securities sales during the
applicable month to arrive at the Fund's total trading costs of
portfolio fixed income securities sales for the month.
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The parties understand that the independent third party analyzing fixed income
trades may determine that it is not reasonably practicable to obtain an average
market price for each fixed income security sale. Market impact costs for any
such fixed income securities sales for a Fund in a given month will be deemed to
be the same as the average market impact costs for all other fixed income
securities trades for that Fund in that month.
Derivative Instruments
Total trading costs of closing out portfolio derivative instruments for each
Fund for a month shall be calculated in the following manner:
o The total trading costs of a Fund's futures contracts for a given
month shall equal the total commissions incurred by such Fund for
closing out all futures contracts during the applicable month.
o For all other derivative instruments, the parties agree to
negotiate in good faith with respect to the methodology for
determining the total trading costs of closing out such
instruments.
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