Exhibit 10.4
INVESTMENT MANAGEMENT AGREEMENT
This INVESTMENT MANAGEMENT AGREEMENT (this "Agreement"), dated as of
the 24th day of April, 1998, is made by and among 312 CERTIFICATE COMPANY, a
Delaware corporation (the "Issuer"), INTEGRITY CAPITAL ADVISORS, INC., a
Delaware corporation (the "Portfolio Manager"), and THE FIRST NATIONAL BANK
OF CHICAGO, as Agent for the Certificateholders (as such term is defined
below). Capitalized terms used herein which are not otherwise defined herein
shall have the meanings assigned to such terms in the Face Amount Certificate
Agreement (as such term is defined below).
WHEREAS,
A. Pursuant to the Face Amount Certificate Agreement of even date
herewith (as the same may be amended, restated, supplemented or otherwise
modified from time to time, the "Face Amount Certificate Agreement"), among
the Issuer, International Securitization Corporation, a Delaware corporation
("ISC"), and the Agent, the Agent has acquired a $500,000,000 Installment
Face Amount Certificate of even date herewith (as amended, substituted or
replaced from time to time, the "Face Amount Certificate") issued by the
Issuer in favor of the Agent for the benefit of ISC and certain financial
institutions ("Liquidity Banks") from time to time party to that certain
Liquidity Agreement dated as of even date herewith, among The First National
Bank of Chicago, as the "Liquidity Agent" thereunder, ISC and such Liquidity
Banks (ISC and such Liquidity Banks being referred to herein collectively as
the "Certificateholders").
B. The proceeds of the sale of the Face Amount Certificate will be
deposited in an account (the "Custodial Account") held with an independent,
third-party custodian mutually agreed upon by the parties hereto in order to
maintain such proceeds as security for the Face Amount Certificate by
investing in a pool of fixed-income securities which will be actively managed
pursuant to a set of investment guidelines attached hereto as Exhibit A (the
"Investment Guidelines") and agreed upon between the Issuer and the
Certificateholders.
C. The Issuer desires to appoint the Portfolio Manager to manage the
securities and other investments now or hereafter owned by the Issuer
including, without limitation, those held in the Custodial Account (the
"Portfolio"), and has directed the Custodian to respond to the investment
instructions of the Portfolio Manager. the Portfolio Manager desires to serve
as investment manager with respect to the Portfolio, and the
Certificateholders desire to ensure that the Portfolio is managed pursuant to
the investment guidelines agreed upon between the Issuer and the
Certificateholders.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Issuer, the Portfolio
Manager and the Agent do hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings set forth below:
"Defaulted Security" means a Security: (i) as to which the Obligor
thereof has taken any action, or suffered any event to occur, of the type
constituting an Insolvency Event, or (ii) as to which any other event has
occurred and is continuing which has caused, the acceleration of the maturity
of all or a portion of the principal of such Security, or which otherwise
entitles, or with the giving of notice or the passage of time or both could
entitle, the holder or holders of such Security to take actions for the
enforcement of such Security or any collateral or security therefor.
"Eligible Security" means a Security:
(i) which is payable only in the United States (except for Eurodollar
Perpetual Floating Rate Securities), and is denominated only in U.S.
Dollars;
(ii) with respect to which (x) no Obligor thereunder is an Obligor on a
Defaulted Security; (y) no Obligor thereunder is an affiliate of the
Parent or any Transaction-Related Party; and (z) each Obligor thereunder
is incorporated or organized under the laws of the United States or any
state thereof or under the laws of an Organization for Economic
Cooperation and Development country;
(iii) which is scheduled to be paid in full on or prior to the 30th
anniversary of its issuance or is a Eurodollar Perpetual Floating Rate
Security rated NAIC 1 by the National Association of Insurance
Commissioners whose base level index resets at least semiannually;
(iv) which is rated by any of Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or the National Association of Insurance
Commissioners;
(v) with respect to which any payments of interest made to the Issuer
thereon are not subject to any taxes, levies, imposts, deductions,
charges or withholdings imposed by any governmental authority of any
jurisdiction (other than taxes imposed on or measured by the net income or
overall gross receipts, capital and franchise taxes attributable to the
Issuer);
(vi) which is not a Security (a) with respect to which any related
Obligor is primarily engaged in the building, real estate, land
development or real estate investment trust industries, or except as
otherwise permitted in the Investment Guidelines, (b) which is
principally secured by a lien upon real estate, and either (x) does not
provide for recourse to the general assets of the related Obligor for the
repayment of such Security, or (y) such real estate constitutes all or
substantially all of the assets of the related Obligor;
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(vii) which, at the time of the Issuer's acquisition of such Security, is
not being redeemed pursuant to its terms;
(viii) which is not by its terms convertible into or exchangeable for, or
secured by, any capital stock, equity security or interest in the equity of
an entity, or any warrant, option, right or other agreement pursuant to which
any such capital stock, equity security or interest can be acquired, whether
or not actually evidenced by a security;
(ix) as to which, at the time of the Issuer's acquisition of such
Security, the Issuer will have good and marketable title to such Security,
free and clear from liens except as created under the Pledge Agreement, and
which has been the subject of the grant under the Pledge Agreement of a first
priority perfected "security interest" (within the meaning of the Uniform
Commercial Code of the jurisdiction the law of which governs the perfection
of the security interest in such Security created by the Pledge Agreement)
therein (and in the proceeds thereof);
(x) which is not a Defaulted Security;
(xi) which will at all times be the bona fide, legal and assignable
payment obligation of the Obligor of such Security, and with respect to which
each instrument, document or agreement evidencing such Security will at all
times be the bona fide, legal and assignable obligation of the Obligor
(including any guarantor of the primary Obligor) of such Security, in each
case enforceable against such Obligor in accordance with its terms except as
such enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting creditors' rights generally,
and except as such enforceability may be limited by general principles of
equity (whether considered in a suit at law or in equity);
(xii) which complies in all material respects with all material
requirements of the Investment Guidelines;
(xiii) which is either an "instrument", a "certificated security" or a
"security entitlement" (in each case within the meaning of Sections 9-105,
9-106 and/or 9-115 of the Uniform Commercial Code; and if an instrument or a
certificated security, only one original thereof exists, which has been or
will be delivered to the Custodian pursuant to the Pledge Agreement;
(xiv) which is not subject to any enforceable provision prohibiting the
transfer, sale or assignment to, or by, the Issuer of such payment obligation;
(xv) as to which the Agent has not notified the Portfolio Manager that the
Agent has determined that such Security is not acceptable in its reasonable
judgment as an Eligible Security;
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(xvi) if such Security bears interest at a fixed per annum rate, as to
which, at the time of the Issuer's acquisition of such Security, will not
cause the aggregate Fair Market Value of all Securities owned by the Issuer
which bear interest at a fixed per annum rate to exceed 60.0% of the
aggregate Fair Market Value of all Securities owned by the Issuer; and
(xvii) which is not a leveraged future or other leveraged/speculative
derivative.
"Eurodollar Perpetual Floating Rate Security" means a security which pays
interest and principal in U.S. Dollars held in banks outside the U.S. and
which either has not stated maturity or a maturity date so distant in the
future such that it effectively pays interest indefinitely and with respect
to which the coupon payments reset periodically typically as specified by a
short-term interest index plus a spread.
"Fair Market Value" means, with respect to any Security or Short-Term
Investment, at any date, (i) if quotations are then available, the price of
such Security or Short-Term Investment on the preceding Business Day, as
calculated based on any regularly published reporting or quotation service,
or (ii) if quotations are not then available, the market value of such
Security or Short-Term Investment, as determined by the Portfolio Manager in
good faith, based on its standard valuation procedures acceptable to the
Agent in its reasonable discretion, but exclusive of the portion of such
price or valuation attributable to the accrued interest or discount with
respect to such Security or Short-Term Investment as of such date.
"Insolvency Event" shall mean, with respect to a specified person or
entity, the occurrence of any of the following events: (a) such person or
entity is wound up or dissolved or there is appointed over it or a
substantial part of its assets a receiver, administrator, administrative
receiver, trustee, or similar officer; or (b) such person or entity (i)
ceases to be able to, or admits in writing its inability to, pay its debts as
they become due and payable, or makes a general assignment for the benefit
of, or enters into any legal composition or arrangement with, its creditors
generally; (ii) applies for or consents (by admission of material allegations
of a petition or otherwise) to the appointment of a receiver, trustee,
assignee (other than the Agent), custodian (other than the Custodian),
liquidator or sequestrator (or other similar official) of such person or
entity of any substantial part of its properties or assets, or authorizes
such an application or consent, or proceedings seeking such appointment are
commenced without such authorization, consent or application against such
person or entity and continue undismissed for 60 days or any such appointment
is ordered by a court or regulatory body having jurisdiction; (iii)
authorizes or files a voluntary petition in bankruptcy, or applies for or
consents (by admission of material allegations of a petition or otherwise) to
the application of any bankruptcy, insolvency or similar law, or authorizes
such application or consent, or proceedings to such end are instituted
against such person or entity without such authorization, application or
consent and remain undismissed for 60 days or result in adjudication of
bankruptcy or insolvency or the issuance of an order for relief; or (iv)
permits or suffers all or any substantial part of its properties or assets to
be
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sequestered or attached by court order and the order (if contested in good
faith) remains undismissed for 60 days.
"Instrument" means an instrument (including, without limitation, a
promissory note) or certificated security, as each such term is defined in
the Uniform Commercial Code of any applicable jurisdiction.
"Obligor" shall mean, with respect to any Security, each person or
entity which is obligated to make payments with respect to such Security,
including any guarantor of such person or entity's obligations.
"Security" means indebtedness constituting a debenture, bond,
note, security entitlement, certified security or other Instrument or
evidence of indebtedness issued by an Obligor or Obligors, other than a line
of credit or a loan.
"Short-Term Investments" means the short-term interest bearing and
short-term discount obligations held by the Issuer form time to time in the
Custodial Account pursuant to Section 6 of the Custodial Agreement.
"Shortfall Amount" means, on any date, the positive difference, if
any, of (i) the outstanding Invested Amount on such date, minus (ii) the sum
of the aggregate Fair Market Value of all Securities and Short-Term
Investments owned by the Issuer on such date on deposit in the Custodial
Account plus any free cash balance in the Custodial Account on such date.
"Surplus Amount" means, on any date, the positive difference, if
any, of (i) the sum of the aggregate Fair Market Value of all Securities and
Short-Term Investments owned by the Issuer on such date on deposit in the
Custodial Account plus any free cash balance in the Custodial Account on such
date, minus (ii) the outstanding Invested Amount on such date.
"Swap Event" means the occurrence of any one or more of the
following: (a) the Swap Provider shall have voluntarily commenced any
proceeding or filed any petition under any bankruptcy, insolvency or similar
law seeking the dissolutions, liquidation or reorganization of the Swap
Provider, (b) involuntary proceedings or an involuntary petition shall have
been commenced or filed against the Swap Provider by any person or entity
under any bankruptcy, insolvency or similar law seeking the dissolution,
liquidation or reorganization of the Swap Provider or an order of relief
shall have been entered or such proceeding or petition shall not have been
dismissed within sixty (60) days, or (c) the Swap Provider (i) shall fail to
make any payment or deposit when due under the Swap Agreement or (ii) shall
fail to perform or shall breach any covenant or any other agreement under the
Swap Agreement and such failure to perform or breach is not cured within five
Business Days, such period to begin at the time at which the Swap Provider
knew, or reasonably should have known, of such breach or failure to perform.
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2. Appointment and Authority of the Portfolio Manager.
(a) Appointment. The Issuer hereby appoints the Portfolio Manager,
the Agent hereby acknowledges and consents to such appointment, and the
Portfolio Manager hereby accepts its appointment as the exclusive investment
manager with respect to the Portfolio. The Portfolio Manager shall at all
times manage the Portfolio in accordance with the Investment Guidelines.
Except as provided in Section 4 hereof, the Issuer represents and warrants
that it has appointed no other investment advisor or manager with respect to
the Portfolio. The Issuer agrees to provide (or to direct the Custodian to
provide) the Portfolio Manager with such additional information as may be
requested by the Portfolio Manager from time to time to assist it in managing
the Portfolio. The Portfolio Manager's appointment under this Agreement shall
remain in effect until changed or terminated by the Issuer and/or the Agent
as provided herein.
(b) Acquisition of Securities. Except as otherwise provided
herein, the Portfolio Manager is authorized, on behalf of the Issuer, to
subscribe for and purchase Securities of issuers offered to the Issuer from
time to time. The Issuer represents and warrants to the Portfolio Manager
that at the time of any such purchase it will be an "accredited investor"
as such term is defined in Regulation D under the Securities Act of 1933, as
amended, and a "qualified institutional buyer" as that term is defined in
Rule 144A under the Securities Act and that the Issuer shall promptly inform
the Portfolio Manager in writing should its status as such change in the
future. In connection with any purchase of Securities eligible for purchase
hereunder and deemed acceptable by the Portfolio Manager in accordance with
the terms hereof, the Issuer authorizes the Portfolio Manager to:
(i) commit to purchase such Securities for the account of the
Issuer on the terms and conditions under which Securities are offered and are
deemed acceptable to the Portfolio Manager in accordance with the terms
hereof, and
(ii) on behalf of the Issuer, execute such agreements, instruments
and documents, and make such commitments, as may be required by the issuer
and/or the seller of such securities, including, but not limited to, a
representation that the Issuer is an "accredited investor" and/or a
"qualified institutional buyer", and a commitment that such securities will
not be offered or sold by the Issuer except in compliance with the
registration requirements of the Securities Act or an exemption therefrom, if
so required in connection with the acquisition thereof.
The Issuer understands and agrees to be bound by the terms of any commitment
entered into in connection with the purchase of securities on behalf of the
Issuer pursuant to the authority granted to the Portfolio Manager by this
Agreement, notwithstanding a subsequent termination of this Agreement as
provided herein. Notwithstanding the foregoing, the Portfolio Manager shall
not under any circumstances make any commitment on behalf of the Issuer to
acquire or make payment under any Security in excess of the Issuer's ability
to pay such committed amounts from time to time.
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(c) General Duties. In addition, and not in limitation of, any
other obligations of the Portfolio Manager, the duties and responsibilities
of the Portfolio Manager shall include the following:
(i) monitoring and enforcing on behalf of the Issuer compliance
with the terms of the Issuer's Securities by the Obligors thereunder, and
compliance with the terms of the Swap Agreement by the Swap Provider
thereunder.
(ii) recording, accounting for and enforcing payment of amounts
distributable or payable to the Issuer in connection with each of the Swap
Agreement and any Security or Short-Term Investment acquired or held on
behalf and for the account of the Issuer, and arranging for payments on the
Swap Agreement from the Swap Provider and on Securities to be collected from
the Obligors in respect thereof on behalf of and for the account of the
Issuer in accordance with the terms of the Transaction Documents;
(iii) on the request of the Issuer, arranging for the sale or other
divestment of any Security in accordance with this Agreement and the other
Transaction Documents or for the termination, cancellation, offsetting or
assignment of the Swap Agreement;
(iv) holding, maintaining and preserving records with respect to
acquisitions of, or investments in, sales or divestitures of, and
distributions and payments in connection with, Securities and Short-Term
Investments and with respect to the Swap Agreement; and
(v) taking such other steps as may be necessary or appropriate to
enable the Issuer to perform its duties or exercise its rights under or in
connection with any Security, any Short-Term Investments or the Swap
Agreement.
(d) Calculations: Notice. The Portfolio Manager shall make all
calculations and determinations (which calculations and determinations shall
be conclusive and binding absent manifest error) and give all notices or
other information required of it or the Issuer under any Transaction Document
to which it and/or the Issuer is a party.
(e) Books: Records. The Portfolio Manager shall maintain proper
books of account and complete records of all transactions undertaken or
performed by it and shall render statements or copies thereof to the Issuer,
prepare the tax returns of the Issuer and shall cooperate in all audits of
the Issuer (including any audits required by the Agent or the
Certificateholders under the Face Amount Certificate Agreement).
(f) Cash Management. The Portfolio Manager shall direct any
acquisition and sale of Securities and Short-Term Investments under the
Custodial Agreement such that the Issuer has, or is likely to have, available
funds to pay any costs, fees, expenses, taxes and other amounts due under the
Transaction Documents when due.
(g) Direction by the Issuer: Conformity with Law and Covenants.
Notwithstanding anything herein to the contrary, the Portfolio Manager shall
perform its duties hereunder subject to the direction of the Issuer and in a
manner consistent with the Issuer's Certificate of Incorporation and Bylaws,
with any applicable resolutions of the board of directors of the Issuer in
effect from time to time and in accordance with the terms of the Transaction
Documents, with respect to which, in each case, the Portfolio Manager has
received a copy. The Portfolio Manager will not, in performing its
obligations hereunder, (a) take any action that would cause the Issuer to be
in violation of (i) and law, rule or regulation applicable to it or (ii) any
provision of the Certificate of Incorporation or Bylaws of the Issuer, (b)
take any action that would cause the Issuer to become subject to registration
as an ""investment company'' under the Investment Company Act of 1940, as
amended, (c) cause the Issuer to violate any of the Transaction Documents, or
(d) cause the Issuer to incur any obligation or to become bound by any
agreement which, in the reasonable judgment of the Portfolio Manager, the
Issuer would not reasonably be able to satisfy or perform.
(h) Attorney-in-Fact: Limitations on Authority of the Portfolio
Manager as Attorney-in-Fact: Authority with Respect to Bank Accounts: Nature
of Services. (i) Subject to clause (ii) of this clause (h), the Issuer
hereby irrevocably appoints the Portfolio Manager as the Issuer's
attorney-in-fact, with full authority in the place and stead of the Issuer
and in the name of the Issuer or otherwise, from time to time in the
Portfolio Manager's discretion, but subject to the direction of the Issuer,
to take such actions on behalf of the Issuer as may be necessary or advisable
for purposes of the administration and management of the operations of the
Issuer, and the right to ask, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become due in
connection therewith and to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper in connection therewith, and to file
any claims or take any action or institute any proceedings which may be
necessary or desirable for the collection thereof or to enforce compliance
with the terms and conditions of any of such documents, instruments, and
agreements.
(ii) Anything in clause (i) of this clause (h) or elsewhere in this
Agreement to the contrary notwithstanding, the Portfolio Manager is not
hereby authorized to execute on behalf of or as attorney-in-fact for the
Issuer any Transaction Document, or any amendment, modification or waiver to
or under any Transaction Document.
(iii) The Issuer authorizes the Portfolio Manager to transfer and
deposit funds of the Issuer to and in such bank accounts including, without
limitation, the Custodial Account, as may be established in the name of the
Issuer.
3. Custody. All transactions with respect to assets in the
Portfolio shall be carried out through the Custodian or such other
custodian(s) as the Issuer and the Agent shall jointly appoint and inform the
Portfolio Manager of in writing. The Issuer shall be solely responsible for
paying all fees or charges of the Custodian and the Portfolio Manager and the
Agent shall have no responsibilities or liabilities with respect to custody
arrangements made by the Issuer, or with respect to any act, decision or
other conduct of any custodian or of any other person or entity having
possession of the Issuer's funds or other assets. The Issuer authorizes the
Portfolio Manager to give the Custodian instructions (and directs the
Custodian to follow any such instructions when given) for the purchase, sale,
conversion, redemption, exchange, retention or other transactions relating to
any security, cash or cash equivalent or other investment for the Portfolio.
The Issuer also authorizes the Portfolio Manager to instruct the Custodian
(and directs the Custodian to follow any such instructions when given) to
provide the Portfolio Manager with copies of all periodic statements and
other reports relating to the Portfolio, including, without limitation, any
reports that the Custodian typically sends to the Issuer.
4. Delegation: Appointment of ARM Capital Advisors, LLC. The Portfolio
Manager shall be permitted to perform its services hereunder through any of
its officers or through any agents selected by it, provided, that such agents
shall be approved in writing by the Agent from time to time. The services of
the Portfolio Manager to the Issuer under this Agreement are not to be deemed
exclusive, and the Portfolio Manager shall be free to render similar services
to others. The Agent hereby consents to the appointment of ARM Capital
Advisors, LLC, a Delaware limited liability company ("ARM Capital"), as
exclusive investment sub-Portfolio Manager to the Portfolio pursuant to the
terms of that certain Investment Portfolio Manager Agreement between the
Portfolio Manager and ARM Capital dated as of April 21, 1998, a copy of which
is attached hereto as Exhibit B. Notwithstanding any such delegation of its
obligations hereunder by the Portfolio Manager, the Portfolio Manager's
rights and obligations under this Agreement shall remain unchanged, and the
Portfolio Manager shall remain solely responsible for the performance of its
obligations hereunder.
5. Priority of Payments
(a) Daily Allocation of Cashflow. On each Business Day, the Portfolio
Manager shall apply, or instruct the Custodian in writing to apply, Cashflow
received on the immediately preceding Business Day in the following order of
priority:
(1) first, to the extent that any amounts payable under clauses (1)
through (4) of clause (b) below remain unpaid with respect to any
Settlement Date prior to such Business Day, such Cashflow shall be paid to
the persons or entities entitled thereto in the order of priority set forth
in clauses (1) through (4) of clause (b) below; and
(2) second, all remaining Cashflow shall be retained in the
Custodial Account and, at the election of the Portfolio Manager, be applied
to the purchase of Eligible Securities or Short-Term Investments to the
extent permitted by and in accordance with the terms of this Agreement, the
Face Amount Certificate
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Agreement and the other Transaction Documents, unless such Business Day is
a Settlement Date, in which case such Cashflow shall be applied in
accordance with clause (b) below, provided, however, that if such Business
Day occurs after the occurrence of (i) an Amortization Event or (ii) the
first anniversary of the commencement of the Amortization Period, then upon
the written request of the Agent, all remaining Cashflow shall be applied
as if such Business Day is a Settlement Date in accordance with the terms
of clause (b) below.
(b) Allocation of Payments on Settlement Dates. On each Settlement Date
after application of Cashflow pursuant to clause (a) above, the Portfolio
Manager shall apply, or instruct the Custodian in writing to apply, all free
cash balances or other available cash in the Custodial Account in the
following order of priority:
(1) to the Issuer, for application by the Issuer against the
payment of accrued and unpaid franchise taxes payable by the Issuer;
(2) If Integrity Capital Advisors, Inc., the Parent or an affiliate
thereof is no longer the Portfolio Manager hereunder, to the Portfolio
Manager in payment of the accrued and unpaid Portfolio Manager Fee due on
such Settlement Date or any prior Settlement Date;
(3) to the Custodian, for the payment of accrued and unpaid fees
and expenses payable under the Custodial Agreement;
(4) to the Agent, for distribution to or for the account of the
Certificateholders and Letter of Credit Banks for the payment of the
accrued and unpaid Certificate Yield due on such Settlement Date or any
prior Settlement Date;
(5) if such Settlement Date shall occur during the Amortization
Period or following the Agent's receipt of a Partial Amortization Notice,
to the Agent, for distribution to or for the account of the
Certificateholders for the repayment of the Invested Amount with respect
to the Face Amount Certificate until, in the case of the Amortization
Period, the Invested Amount is repaid in full, and in the case of such
period following the receipt of a Partial Amortization Notice, the
Invested Amount is reduced by the amount indicated on the applicable
Partial Amortization Notice;
(6) to the Agent, for distribution to or for the account of the
Certificateholders with respect to the payment of any other accrued and
unpaid fees, expenses, indemnities, reimbursements and other amounts
(other than principal) not paid pursuant to clause (4) above and payable
to any
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Certificateholder under the Face Amount Certificate Agreement
or the Face Amount Certificate;
(7) [Intentionally Omitted];
(8) to the payment of any other accrued and unpaid
out-of-pocket operating expenses of the Issuer (including, but not
limited to, a management fee equal to the product of (i) 0.075%
per annum times (ii) the average daily outstanding Invested Amount
during the most recently ended Settlement Period);
(9) to the Portfolio Manager in payment of accrued and
unpaid Portfolio Manager Fee due on such Settlement Date or any
prior Settlement Date, but only to the extent not paid in full
after application of all available cash in the Custodial Account
on such Settlement Date as specified above in this clause (b)
(and on each previous Settlement Date);
(10) if no Swap Event has occurred and is continuing,
to the Swap Provider, in payment of accrued and unpaid amounts
owing by the Issuer under the Swap Agreement; and
(11) if on such Settlement Date, the Surplus Amount
following the application of funds as provided herein is greater
than zero, then at the election of the Issuer, an amount not
greater than the Surplus Amount may be withdrawn from the
Custodial Account and deposited in such account as the Issuer
may direct and any remaining available cash in the Custodial
Account following such withdrawal shall be retained therein.
6. Representations and Warranties of the Portfolio Manager.
The Portfolio Manager, hereby represents and warrants that:
(a) Organization and Good Standing. The Portfolio Manager
is a corporation duly organized, validly existing and in good standing under
the applicable laws of the jurisdiction of its incorporation and has full
corporate power and authority to own its properties and conduct its business,
as such properties are presently owned and as such business is presently
conducted and as is proposed to be conducted under this Agreement, and to
execute, deliver and perform its obligations under this Agreement.
(b) Due Qualification. The Portfolio Manager is duly
qualified to do business and is good standing as a foreign corporation or
enterprise (or is exempt from such requirements), and has obtained all
necessary licenses and approvals, in each jurisdiction in which the
investment, management and servicing of the Securities in accordance with the
terms of this Agreement requires such qualification.
(c) Due Authorization. The Portfolio Manager's execution,
delivery and performance of this Agreement and the other agreements and
instruments executed by the Portfolio Manager as contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Portfolio Manager.
(d) Enforceability. This Agreement constitutes a legal,
valid and binding obligation of the Portfolio Manager enforceable against
it in accordance with its terms except as such enforceability may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or other
similar laws now and hereafter in effect affecting creditors' rights
generally, and except as such enforceability may be limited by general
principles of equity (whether considered in a suit at law or in equity).
(e) No Conflict. The Portfolio Manager's execution and
delivery of this Agreement and performance of its obligations under this
Agreement do not (i) conflict with or violate in any material respects any
law or regulation applicable to the Portfolio Manager, or (ii) conflict
with, result in any breach of any of the terms and provisions of, or
constitute (with or without notice or lapse of time or both) a default under,
any material indenture, contract, agreement, mortgage, deed of trust or other
instrument to which such Portfolio Manager is a party or by which it or its
properties are bound in any manner which, in either case, would have a
material adverse effect on the Portfolio Manager's financial condition or
operations or the Pledged Collateral or the Portfolio Manager's ability to
perform its obligations hereunder.
(f) No Proceedings. There are no proceedings or
investigations pending or, to the best knowledge of the Portfolio Manager,
threatened against it before any governmental agency (i) asserting the
illegality, invalidity or unenforceability or seeking any determination or
ruling that would affect the legality, binding effect, validity or
enforceability, of this Agreement, or (ii) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement, or
(iii) seeking any determination or ruling that is likely to have a material
and adverse effect on the performance by the Portfolio Manager of its
obligations under this Agreement.
(g) Consents. No authorization, consent, license, order or
approval of or registration or declaration with any governmental agency or
other person or entity is required to be obtained, effected or given by the
Portfolio Manager in connection with the execution and delivery of this
Agreement by such Portfolio Manager or the performance of its obligations
hereunder.
(h) Amortization Event. To the best of its knowledge, no
Amortization Event has occurred or is continuing.
(i) Year 2000 Compliance. The Portfolio Manager has
reviewed and assessed all computer applications which are material to the
Portfolio Manager's, and its affiliates performing any of its duties
hereunder, businesses with respect to the ability of such applications
to correctly recognize references to, and abbreviations of, the year 2000
(including without limitation, references to "00" as the year 2000 and not
the year 1900). The Portfolio Manager reasonably believes, as a result of
such reviews, assessments and inquiries, that to the extent one or more of
such computer applications of the Portfolio Manager or its affiliates
performing any of its duties hereunder is unable to correctly recognize such
references to, or abbreviations of, the year 2000, that such deficiencies
would not materially and adversely affect its ability to perform its
obligations hereunder.
The representations and warranties set forth in this Section 6 shall
survive the issuance of the Certificates and any liability of the Portfolio
Manager in respect of such representations and warranties as and when made
shall cease and be of no effect only upon repayment in full of the Certificate
and all other obligations of the Issuer under the Face Amount Certificate
Agreement. Upon a discovery by the Issuer, the Portfolio Manager or the Agent
of a breach of any of the foregoing representations and warranties, the party
discovering such breach shall give prompt written notice to the other parties.
7. Covenants of the Portfolio Manager. The Portfolio Manager hereby
covenants that, until the Termination Date:
(a) Preservation of Existence. The Portfolio Manager will preserve and
maintain its existence, rights, franchises and privileges in the jurisdiction
of its formation, and qualify and remain qualified in good standing as a
foreign enterprise in each jurisdiction where the failure to maintain such
qualification would materially and adversely affect (i) the collectibility of
the Securities or (ii) the ability of the Portfolio Manager to perform its
obligations hereunder.
(b) Collections; Custodial Account. On each Business Day that the
Portfolio Manager receives any collections, payments or other amounts
required pursuant to the terms of any Transaction Document to be deposited in
the Custodial Account, the Portfolio Manager agrees to hold all such
collections, payments and other amounts in trust and to deposit such
collections, payments and other amounts, in kind and in the form received, to
the Custodial Account as soon as practicable, but in no event later than the
next succeeding Business Day.
(c) Requirements of Law. The Portfolio Manager will maintain in effect
all licenses, qualifications and franchises required under law or regulation
in order to direct the investment in, manage and service each Security and
will comply in all material respects with all other laws or regulations in
connection with investing in, managing and servicing each Security, in each
case except where the failure to perform such obligations or maintain such
qualifications would not be likely to have a material and adverse effect on
(i) the collectibility of any Security or (ii) the ability of the Portfolio
Manager to perform its obligations hereunder.
13
(d) Defaulted Securities. Upon the Portfolio Manager becoming aware
that any Security is no longer an Eligible Security hereunder, the Portfolio
Manager shall within 30 days of such date, sell, assign or otherwise transfer
the Issuer's interest in such Security in accordance with its customary
procedures for the sale of such Securities.
(e) Protection of Agent's Rights. The Portfolio Manager will take no
action pursuant hereto which would materially impair the rights of the Issuer
or the Agent in any Security or other Pledged Collateral. The Portfolio
Manager shall, on behalf of the Issuer prosecute and/or defend all claims,
suits and causes of actions which arise for or against the Issuer in
connection with its (or the Portfolio Manager's) performance of its
obligations under this Agreement.
(f) Reporting Requirements. The Portfolio Manager will furnish to the
Issuer and the Agent:
(i) within three Business Days after its knowledge of the
occurrence of any Amortization Event, notification of such occurrence;
(ii) within ten Business Days after its receipt thereof, copies of
any documents relating to any litigation, claim, counterclaim or
proceeding commenced against the Issuer, the Portfolio Manager or the
Swap Provider which could have a material adverse effect on (i) the
financial condition, business or operations of the Issuer, the Portfolio
Manager or the Swap Provider, (ii) the ability of each of the Issuer,
the Portfolio Manager or the Swap Provider to perform its respective
obligation under any Transaction Document, (iii) the legality, validity or
enforceability of this Agreement or any other Transaction Document, or
(iv) the Issuer's interest in the Pledged Collateral, or (v) the
collectibility of the Pledged Collateral generally or of any material
portion of the Pledged Collateral;
(iii) as soon as practicable and in any event within 60 days after
the end of each first three fiscal quarters of each fiscal year of the
Issuer, a balance sheet of the Issuer as of the end of such quarter, and
the related revenue and expense statements for the period commencing at
the end of the previous fiscal year and ending with the end of such
quarter, all of the foregoing to be certified by an officer of the
Portfolio Manager and prepared in accordance with generally accepted
accounting principles;
(iv) as soon as practicable and in any event within 20 days after
the end of each fiscal year of the Issuer and the Parent, the audited
financial statements of the Parent which include the Parent's
consolidated subsidiaries (including, without limitation, the Issuer and
the Swap Provider) prepared in accordance with generally accepted
accounting principles by certified public accountants of national
standing reasonably satisfactory to the Agent;
14
(v) on the third Business Day of each calendar week, a "Weekly
Report" with respect to the Portfolio as of the last Business Day of the
preceding calendar week substantially in the form attached hereto as
Exhibit C, which report shall include a calculation of the Shortfall
Amount, if any, as of such date;
(vi) not less than two Business Days prior to each Settlement Date, a
"Settlement Report" with respect to the Portfolio for the most recently
ended calendar month substantially in the form attached hereto as
Exhibit D, which report shall include a calculation of the Shortfall
Amount, if any, as of the last Business Day of such calendar month;
(vii) on each Settlement Date, a "Monthly Compliance Report" with
respect to the Portfolio for the most recently ended calendar month
substantially in the form attached hereto as Exhibit E, which report
shall demonstrate the Issuer's and the Portfolio Manager's compliance
with the Investment Guidelines and certain other restrictions set forth
herein, as of the last Business Day of such calendar month;
(viii) within three Business Days after the placement on watchlist for
downgrade, or the withdrawal or reduction of the ratings of any claims
paying ability or debt obligations of any of the Parent, or any of its
affiliates, including, without limitation, the Swap Provider, notice of
such placement on the watchlist, withdrawal or reduction; and
(ix) promptly, from time to time, such other information, documents,
records or reports respecting the Pledged Collateral or the condition or
operations, financial or otherwise, of the Issuer or the Portfolio
Manager and its affiliates performing services hereunder as the Agent
may reasonably request.
Without limiting the obligations of the Portfolio Manager and the Issuer
under clause (j) below, the Portfolio Manager shall provide to the Agent
access to the documentation in its possession or under its control regarding
the Securities and other Pledged Collateral serviced by it under or pursuant
to this agreement.
(g) Compliance with Investment Guidelines. The Portfolio Manager will
comply with and perform its obligations in all material respects with respect
to the Investment Guidelines in accordance with terms thereof.
(h) Acquisition of Securities. The Portfolio Manager shall not arrange
for the Issuer acquire any Security, and the Issuer shall not enter into, or
become bound to acquire any Security (i) during the Amortization Period or
(ii) if such Security does not constitute an Eligible Security or a
Short-Term Investment.
15
(i) Other Agreements. The Portfolio Manager (acting on the Issuer's
behalf) will, subject to compliance with all laws and regulations, enforce
the Issuer's rights under each Security in accordance with its respective
terms, and make to any Obligor, such reasonable demands and requests for
information and reports or for action as the Issuer is entitled to make
thereunder.
(j) Delivery of Pledged Collateral. The Portfolio Manager shall instruct
the appropriate persons or entities to deliver each physical instrument,
chattel paper or certificated security evidencing any Pledged Collateral
(other than the Swap Agreement which, pursuant to the Pledge Agreement, has
been delivered, or will be delivered, to the Agent) to the Custodian
immediately upon the acquisition of the related Security, but in no case
later than ten (10) days after the receipt thereof.
(k) Payment Instructions. The Portfolio Manager (on behalf of the
Issuer) will instruct (or cause to be instructed) all obligors and the Swap
Provider, to make all payments with respect to the Pledged Collateral to the
Custodial Account.
(l) Reporting. Each Weekly Report and Monthly Report, and each other
report or certification, delivered by the Portfolio Manager pursuant to this
Agreement shall be true and correct in all material respects as of the date
of such report or certificate.
(m) Marking of Records. The Portfolio Manager shall either indicate in
its computer records or otherwise segregate the records related to any
Securities, Short-Term Investments or other Pledged Collateral in its
possession and mark the files containing the same with a legend, that a
security interest in the Securities and other Pledged Collateral has been
granted to the Agent, pursuant to the Pledge Agreement for the benefit of the
Certificateholders.
8. Execution of Transactions. The Portfolio Manager shall arrange for
the execution of securities transactions for Issuer through brokers or
dealers that the Portfolio Manager reasonably believes will provide the best
execution. In selecting a broker or dealer, the Portfolio Manager may
consider, among other things, the broker or dealer's execution capabilities,
financial circumstances, reputation, access to the markets for the securities
being traded, as well as the experience and skill of the firm's securities
traders. The Portfolio Manager shall not be responsible for any acts or
omissions by any broker(s) or dealer(s) selected by the Portfolio Manager,
provided that the Portfolio Manager is not negligent in the selection of such
broker(s) or dealer(s). Transactions for each of the Portfolio Manager's
other accounts will be effected independently of those related to the
Portfolio, unless the Portfolio Manager decides to purchase or sell the same
securities for several persons or entities at approximately the same time.
Nonetheless, the Portfolio Manager may (but is not obligated to) combine such
orders to take advantage of economies of scale and/or to provide better
execution. The Issuer authorizes the Portfolio Manager to instruct all
brokers and/or dealers executing orders for the Issuer's account
16
to forward duplicate confirmations of those transactions to the Portfolio
Manager at such place and in such manner as may be designated from time to
time by the Portfolio Manager (and directs any such brokers and/or dealers to
follow such instructions when given) and the Issuer shall provide to the
Portfolio Manager such evidence as the Portfolio Manager may require to
confirm its authority to act on behalf of the Issuer with respect to
investment or reinvestment of the Portfolio.
9. Allocation of Investment Opportunities. The Issuer understands and
agrees that the Portfolio Manager performs investment management services
for various persons and entities and may take action with respect to any of
such persons or entities which may differ from any actions taken (or from the
timing or nature of actions taken) with respect to, or on behalf of, the
Issuer. The Portfolio Manager shall not be obligated to purchase or sell for
the Issuer securities which the Portfolio Manager may purchase or sell for
itself or for the portfolios of other persons and entities, if the Portfolio
Manager in its sole discretion deems that such investment or transaction
appears unsuitable, impractical, improper, ill-advised, or undesirable for
the Issuer.
10. Investment Information. The Portfolio Manager, its affiliates, and
any of their respective officers directors, employees, agents and
representatives (the "Affiliated Persons"), may from time to time come into
possession of material, non-public or other confidential information that, if
disclosed, might affect an investor's decision to buy, sell or hold a
Security. Under applicable law, the Affiliated Persons cannot improperly
disclose or use this information for their personal benefit or for the
benefit of any person or entity, including the Portfolio Manager's other
customers. If any Affiliated Person obtains non-public or other confidential
material information about any issuer, the Issuer and the Agent acknowledges
and agrees that such Affiliated Person will have no obligation to disclose
the information to the Issuer or the Agent or use it for the Issuer or the
Agent's benefit.
11. Liability and Indemnification. (a) The Portfolio Manager cannot and
does not guarantee the future performance of the Portfolio, the success of
any investment decision or strategy that the Portfolio Manager may utilize
with respect to the Portfolio, or the success of the Portfolio Manager's
overall management of the Portfolio. The Issuer understands that the
investment decisions made by the Portfolio Manager with respect to the
Portfolio are potentially subject to various market, currency, economic,
political and business risks, and that such investment decisions may not
always be profitable. Except as may otherwise be provided by law, none of the
Affiliated Persons shall be liable to the Issuer or any other party in
connection with, or for: (i) any loss that the Issuer may suffer by reason of
any investment decision made or other action taken or omitted in good faith
by the Portfolio Manager with that degree of care, skill, prudence, and
diligence under the circumstances that a prudent person acting in a similar
capacity would use; (ii) any loss arising from the Portfolio Manager's
adherence to the Issuer's instructions; or (iii) any act or failure to act by
the Custodian, any broker(s) or dealer(s) engaging in
17
transactions for the Issuer's, or any other third party (other than its
delegees appointed in accordance with the terms of Section 4). The federal
and state securities laws impose liabilities under certain circumstances on
persons who act in good faith, and therefore nothing in this Agreement will
waive or limit any rights that the Issuer may have under those laws.
(b) Notwithstanding anything to the contrary set forth in clause (a)
above, the Portfolio Manager shall indemnify and hold harmless each
Indemnified Party and the Issuer from and against Indemnified Amounts arising
out of or resulting from (i) any breach by the Portfolio Manager of its
representations and warranties made in this Agreement, or otherwise made by
an officer of the Portfolio Manager pursuant to the terms hereof or thereof,
(ii) the failure by the Portfolio Manager to perform any of the duties
specifically undertaken by it under this Agreement, (iii) any lender
liability claim, suit or action or other similar claim or action arising out
of or resulting from any action or omission by the Portfolio Manager with
respect to the Securities or the other Pledged Collateral, (iv) any equitable
subordination claim, suit or action or other similar claim or action arising
out of or resulting from any action or omission by the Portfolio Manager, (v)
any failure by the Portfolio Manager to deliver, or cause the Issuer to
deliver, in accordance with the Pledge Agreement, any instrument, chattel
paper or certificated security evidencing any Pledged Collateral owned by the
Issuer within ten(10) days of the acquisition thereof, or (vi) the Portfolio
Manager's gross negligence or willful misconduct, excluding, however, in each
case, (1) Indemnified Amounts to the extent arising out of or resulting from
the willful misconduct or gross negligence by such Indemnified Party or the
Issuer of any of his, her or its obligations and duties or (2) resource for
uncollectible Securities (unless such Securities are uncollectible as a
result of any breach, failure or claim described in clause (i), (ii), (iii),
(iv), (v) or (vi) above) or, (3) indemnification of the Issuer or Indemnified
Party for lost profits or for consequential, special or punitive damages or
(4) any income or franchise taxes (or any interest or penalties with respect
thereto) or other taxes on or measured by the gross or net income or receipts
of such Indemnified Party or the Issuer or any withholding taxes. The
agreements contained in this Section 11(b) shall survive the Termination Date
and the payment of all amounts due under any Transaction Document.
12. Termination or Assignment. This Agreement shall be effective as of
the date that the Issuer transfers immediately available funds into the
Custodial Account for management hereunder. It shall remain in full force and
effect until such time that the Issuer's obligations under the Face Amount
Certificate have been paid in full and control over any remaining Securities
in the Portfolio has been transferred to the Issuer, or any successor
thereto. No assignment (as such term is defined in the Investment Company Act
of 1940, as amended) of this Agreement shall be made by the Portfolio Manager
without the prior written consent of the other parties to this Agreement or
as otherwise provided in Section 13 below.
13. Assignment, Resignation and Removal of Portfolio Manager.
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(a) Resignation of Portfolio Manager. The Portfolio Manager may at any
time resign from the obligations and duties imposed on it hereunder upon not
less than 180 days' written notice to the Agent and the Issuer. No such
resignation shall become effective until the Agent or a Successor Portfolio
Manager shall have assumed the responsibilities and obligations of the
resigning Portfolio Manager in accordance with this Section 13.
(b) Removal of Portfolio Manager. The Portfolio Manager may be removed
by the Agent upon the occurrence of (i) a Liquidation Event or (ii) the first
anniversary of the commencement of the Amortization Period. Any notice
delivered pursuant to the preceding sentence is referred to as a "Removal
Notice". No such removal shall become effective until the Agent or a
Successor Portfolio Manager shall have assumed the responsibilities and
obligations of the resigning Portfolio Manager in accordance with this
Section 13.
(c) Successor Portfolio Manager. (i) On and after the receipt by the
Portfolio Manager of a Removal Notice pursuant to clause (b) above or upon a
resignation by the Portfolio Manager pursuant to clause (a) above, the
Portfolio Manager shall continue to perform all advisory, servicing and
administrative functions applicable to the Portfolio Manager under this
Agreement and be entitled to receipt of all compensation payable to the
Portfolio Manager until (i) in the case of the receipt of a Removal Notice,
the date specified in such Removal Notice or otherwise specified by the Agent
in writing or, if no such date is specified in such Removal Notice or
otherwise specified by the Agent, until the earlier of a date agreed upon by
the Portfolio Manager and the Agent or a date specified by the Agent in a
written notice to the Portfolio Manager, and (ii) in the case of the
resignation of the Portfolio Manager, until the Agent or a Successor
Portfolio Manager shall have assumed the responsibilities and obligations of
the Portfolio Manager pursuant to this Section 13. The Agent shall as
promptly as practicable after the giving of a Removal Notice or such a
resignation appoint another person or entity (which may be the Agent, at its
option, or such other person or entity as it may appoint) as a successor
Portfolio Manager (the "Successor Portfolio Manager"). Such Successor
Portfolio Manager shall accept its appointment by a written assumption in a
form acceptable to the Agent. In the event that a Successor Portfolio Manager
has not been appointed or has not accepted its appointment or the appicable
consents have not been received by the Agent by the earlier of 30 days after
the date of such Removal Notice or at the time when the Portfolio Manager
ceases to act, the Agent without further action shall automatically be
appointed the Successor Portfolio Manager. At any time after such
appointment, the Agent may (x) delegate any of its administrative or other
obligations as Successor Portfolio Manager to an affiliate or agent in
accordance with the terms of this Agreement (all compensation to such
affiliate or agent being paid by, and being the sole responsibility of, the
Agent), or (y) resign as Portfolio Manager upon its appointment of, and the
acceptance of such appointment by, a Successor Portfolio Manager pursuant to
the terms hereof. Notwithstanding the foregoing, the Agent shall, if it is
legally unable so to act as Successor Portfolio Manager, petition a court of
competent jurisdiction to appoint any established institution (other than the
Agent) as the Successor Portfolio Manager hereunder. The Portfolio Manager
shall be entitled to be paid all amounts accrued and unpaid hereunder at the
time such removal or
19
resignation becomes effective pursuant hereto in accordance with the
priorities set forth in Section 5.
(d) Portfolio Managery Transfer. After receipt by the Portfolio Manager
of a Removal Notice, and on the date that a Successor Portfolio Manager shall
have accepted its appointment and all related consents shall have been
received by the Agent pursuant to clause (a) above, all authority and power
of the predecessor Portfolio Manager under this Agreement shall pass to and
be vested in such Successor Portfolio Manager (a "Portfolio Managery
Transfer"), and thereupon (I) such Successor Portfolio Manager shall be
subject to all the responsibilities, duties and liabilities relating thereto
placed on the Portfolio Manager by the terms and provisions hereof (excluding
any liabilities incurred by the predecessor Portfolio Manager or which arose
from the actions or omissions of the predecessor Portfolio Manager), (II) all
references in this Agreement to the Portfolio Manager shall be deemed to
refer to such Successor Portfolio Manager, and (III) such Successor Portfolio
Manager (including, to the extent applicable, the Agent) shall be entitled to
receive such fees and other compensation to which the Portfolio Manager is
entitled hereunder. The predecessor Portfolio Manager agrees to cooperate, at
its expense, with the Agent and such Successor Portfolio Manager in (i)
effecting the termination of the responsibilities and rights of the Portfolio
Manager hereunder, including, without limitation, the transfer to such
Successor Portfolio Manager of all authority of the Portfolio Manager to
administer the Securities as provided under this Agreement, including all
authority over all Cashflow which shall on the date of such Portfolio
Managery Transfer be held by the Portfolio Manager for deposit to the
Custodial Account, or which have been deposited by the Portfolio Manager to
the Custodial Account, or which shall thereafter be received with respect to
the Securities, and (ii) assisting the Successor Portfolio Manager until all
management and administrative activities have been transferred to such
Successor Portfolio Manager, such assistance to include, without limitation,
(x) assisting any accountants selected by the Successor Portfolio Manager to
verify collection records and reports made prior to the Portfolio Managery
Transfer and (y) assisting the Successor Portfolio Manager in making the
computer systems of the Portfolio Manager and the Successor Portfolio Manager
compatible to the extent necessary to effect the Portfolio Managery Transfer.
The Portfolio Manager shall, at its expense, within five Business Days of
such Portfolio Managery Transfer, assemble each of the documents, instruments
and other records (including computer tapes and discs) available to it or in
its possession, which evidence the Securities and other Pledged Collateral,
and which are necessary or desirable to collect the Securities and the other
Pledged Collateral and shall make the same available to the Successor
Portfolio Manager or the Agent or its designee at a place selected by the
Successor Portfolio Manager and in such form as the Successor Portfolio
Manager or the Agent may reasonably request.
(e) Release. In no event shall the appointment and acceptance of a
Successor Portfolio Manager (including the succession of the Agent to the
role of the Portfolio Manager pursuant to clause (c) above) release the
predecessor Portfolio Manager from any liabilities (including without
limitation, any indemnification obligation arising under Section 11) incurred
by it or otherwise arising prior to, or arising from acts or omissions on it
part occurring prior to, the
20
effective date of the resignation or removal of such predecessor Portfolio
Manager, or otherwise relating to the basis for any such removal. Except to
the extent arising from a failure to perform its own obligations under the
Transaction Documents, the Agent shall not be liable for any acts or
omissions of any Portfolio Manager (including, without limitation, any
Successor Portfolio Manager appointed by the Agent pursuant to this Section
11) other than acts or omissions of the Agent to the extent acting as
Portfolio Manager hereunder.
14. Compensation of Portfolio Manager. The Portfolio Manager shall be
entitled to receive as compensation for services rendered hereunder a fee
equal to the product of (i) 0.25% per annum, times (ii) the average of the
outstanding Invested Amount on the first and last day of the most recently
ended Settlement Period assuming an actual over 360 day year. Such fee shall
be paid in arrears on each Settlement Date with respect to the Settlement
Period most recently ended. The Issuer acknowledges its understanding and
agreement that any amounts invested in Short-Term Investments will be
included in calculating the value of the Portfolio for purposes of computing
the Portfolio Manager's fees as described above, and that such assets may
also be subject to separate advisory and other fees and expenses charged by
the Portfolio Manager hereunder. Except as (a) set forth above or otherwise
agreed upon by the parties and (b) permissible under applicable law, the
Portfolio Manager shall not be compensated on the basis of a share of the
capital gains on, or the capital appreciation of, the Securities in the
Issuer's account or any portion thereof.
15. Issuer Brochure. The Issuer and the Agent acknowledge receipt of the
Portfolio Manager's current disclosure brochure, Form ADV Part II.
16. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws applicable to contracts made
and to be performed entirely within the State of Illinois.
(b) Notices. All communications and notices provided for hereunder shall
be in writing (including bank wire, telecopy or electronic facsimile
transmission or similar writing) and shall be given to the other parties
hereto at their respective addresses or telecopy numbers set forth on the
signature pages hereof. All such communications and notices shall, when
mailed, telecopied, telegraphed, telexed or cabled, be effective when
received through the mails, transmitted by telecopy, delivered to the
telegraph company, confirmed by telex answerback or delivered to the cable
company, respectively.
(c) Separability. In case one or more of the provisions contained in
this Agreement shall be found to be invalid, illegal or unenforceable in any
respect, the validity,
21
legality and enforceability of the remaining provision contained herein shall
not in any way be affected or impaired thereby.
(d) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
(e) Integration; Amendment. This Agreement and the other Transaction
Documents referenced to herein is the entire agreement between the parties
hereto and supersedes and replaces any previous discussions or agreements,
written or oral, between the parties hereto. No term or provision of this
Agreement may be amended, supplemented, waived or modified, except pursuant
to an instrument in writing signed by the party or other person against whom
enforcement of such amendment, supplement, waiver or modifications sought.
(f) Remedies Cumulative; No Waiver. No right, power or remedy granted
or reserved herein is intended to be exclusive of any other right, power or
remedy, but each and every such right, power and remedy shall be cumulative
and concurrent and in addition to any other right, remedy or power hereunder
or under law. No delay or omission by either party to exercise any right,
power or remedy in connection with a default shall exhaust or impair any such
right, power or remedy or shall be construed to be a waiver of such default or
acquiescence therein. The Issuer or the Agent's forbearance in any particular
case shall not be a waiver as to action that may be taken by the Issuer or
the Agent with regard to any future non-compliance.
(g) Confidentiality. (i) The Portfolio Manager shall maintain and shall
cause each of its employees and officers to maintain the confidentiality of
this Agreement and the other confidential proprietary information with
respect to the Agent and ISC and their respective businesses obtained by it
or them in connection with the structuring, negotiating and execution of the
transactions contemplated herein, except that the Portfolio Manager and its
officers and employees may disclose such information to the Portfolio
Manager's external accountants and attorneys and required by any applicable
law or order of any judicial or administrative proceeding. In addition, the
Portfolio Manager may disclose any such nonpublic information pursuant to any
law, rule, regulation, direction, request or order of any judicial,
administrative or regulatory authority or proceedings (whether or not having
the force or effect of law) and in connection with any publication permitted
under Section 14(i) of the Face Amount Certificate Agreement.
(ii) Anything herein to the contrary notwithstanding, the Portfolio
Manager hereby consents to the disclosure of any nonpublic information with
respect to it (x) to the Agent or the Certificateholders by each other, (y)
by the Agent or the Certificateholders to any prospective or actual assignee
or participant of any of them or (z) by the Agent to any rating agency,
commercial paper dealer or provider of a surety, guaranty or credit or
liquidity enhancement to ISC or any entity organized for the purpose of
purchasing, or making loans secured by, financial assets for which FNBC acts
as the administrative agent and to any officers,
22
directors, employees, outside accountants and attorneys of any of the
foregoing, provided each such Person is informed of the confidential nature
of such information in a manner consistent with the practice of the Agent for
the making of such disclosures generally to persons of such type. In
addition, the Certificateholders and the Agent may disclose any such
nonpublic information pursuant to any law, rule, regulation, direction,
request or order of any judicial, administrative or regulatory authority or
proceedings (whether or not having the force or effect of law) and to any
person or entity in connection with the enforcement of this Agreement, the
other Transaction Documents and the other documents delivered in connection
therewith and in connection with any restructuring or workout related to the
Face Amount Certificate Agreement, the Transaction Documents or such other
documents following an Amortization Event.
(h) Bankruptcy Petition. (i) The Portfolio Manager hereby covenants and
agrees that, prior to the date which is one year and one day after the
payment in full of all outstanding senior indebtedness of ISC, it will not
institute against, or join any other person or entity in instituting against,
ISC any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings or other similar proceeding under the laws of the United States
or any state of the United States.
(ii) The Portfolio Manager hereby covenants and agrees that, prior to
the date which is one year and one day after the Termination Date, it will
not institute against, or join any other person or entity in instituting
against, the Issuer any bankruptcy, reorganization, arrangement, insolvency
or liquidation proceedings or other similar proceeding under the laws of the
United States or any state of the United States.
(i) JURISDICTION. THE PORTFOLIO MANAGER HEREBY CONSENTS AND AGREES THAT
THE STATE OR FEDERAL COURTS LOCATED IN COOK COUNTY, CITY OF CHICAGO,
ILLINOIS, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS
OR DISPUTES BETWEEN THE ISSUER, THE PORTFOLIO MANAGER AND THE AGENT
PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS OR TO
ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER
TRANSACTION DOCUMENTS, PROVIDED, THAT THE ISSUER, THE PORTFOLIO MANAGER AND
THE AGENT ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD
BY A COURT LOCATED OUTSIDE OF COOK COUNTY, CITY OF CHICAGO, ILLINOIS, AND,
PROVIDED, FURTHER, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE
TO PRECLUDE THE AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY
OTHER JURISDICTION TO REALIZE ON THE PLEDGED COLLATERAL OR ANY OTHER SECURITY
FOR THE OBLIGATIONS OF THE ISSUER, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF THE AGENT. THE PORTFOLIO MANAGER EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND THE PORTFOLIO MANAGER HEREBY WAIVES ANY OBJECTION WHICH
IT MAY
23
HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT THE PORTFOLIO MANAGER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS
AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO
THE PORTFOLIO MANAGER AT THE ADDRESS SET FORTH IN SECTION 15(D) AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.
(j) WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY
AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND
FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE
THAT DISPUTES ARISING HEREUNDER OR RELATING HERETO BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN
THE AGENT AND THE PORTFOLIO MANAGER ARISING OUT OF, CONNECTED WITH, RELATED
TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED IN CONNECTION WITH, THIS
AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO.
(k) Headings. The headings and subheadings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the
meaning hereof.
(l) Authorization. Each party hereto represents and warrants that this
Agreement and its execution has been duly authorized by any necessary and
appropriate corporate or other action. In addition, the Issuer shall inform
the Portfolio Manager of any event or occurrence that might affect the
authority or the propriety of this Agreement.
24
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
entered into on the day and year first above written.
INTEGRITY CAPITAL ADVISORS, INC.
By /s/ R H Scott
-------------------------------------
Title: General Counsel and Secretary
515 West Market Street, 4th Floor
Louisville, Kentucky 40202
Facsimile: (502) 582-7995
Attention: Robert H Scott
312 CERTIFICATE COMPANY
by /s/ William D. Morris CEO
-----------------------------------
Title: Chief Executive Officer
515 West Market Street, 8th Floor
Louisville, Kentucky 40202
Facsimile: (502) 582-7903
Attention: Robert Maddox, President
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent
By /s/ Eleanor C. Nadbielny
-----------------------------------
Title: Authorized Agent
One First National Plaza
Mail Suite 0594
Chicago, Illinois 60670-0594
Attention: Anne Marie Somers
Facsimile No.: (312) 732-4487
ARM Financial Group
SHORT-TERM PORTFOLIO GUIDELINES
Min./Max/ Max. Per Max. Per
Asset Class Exp. Issue Issuer
- ----------------------------------- --------- -------- --------
U.S. Government & Agencies 0/100% unlimited unlimited
Mortgage-backed Securities
Agency CMOs 0/50% 5% 9.5%
Non-agency CMOs (residential) 0/50% 5% 9.5%
Non-agency CMOs (commercial)(1) 0/10% 5% 9.5%
Agency Pass Throughs 0/50% 5% 9.5%
Support Tranches 0/10% 5% 9.5%
Asset-backed Securities 0/30% 5% 9.5%
Auto Loans
Credit Card Receivables
Home Equity
Manufactured Housing
Corporate Debt (2) 0/60% 5% 5%
Industrials
Telecommunications
Utilities
Banks
Finance Companies
144A Private Placements (3) 0/30% 2.5% 2.5%
Foreign Debt 0/20% 2.5% 2.5%
(U.S. Dollar Denominated only)
Non-Investment Grade Securities (4) 0/5% 1% 1%
(No lower than BB/NAIC "3" rated)
Cash and Cash Equivalents (6) 0/100% 5% 5%
Non-Speculative Hedging Instruments (5) 0/3% 1% 1%
(1) Investment grade securities only.
(2) No industry can exceed 35% of the portfolio.
(3) There cannot be any prohibition of sale on any Private Placement
security purchased.
(4) Can also include non-investment grade, U.S. dollar denominated
foreign debt. Foreign debt must be issued by OECD countries.
(5) Caps, floors, swaps only. Counterparties must be AA rated. Caps &
Floors: the lesser of purchase cost or market value. Swaps:
Absolute Value of the Market Value. Any derivative position must be
used for hedging only, and must result in the portfolio still being
in compliance with all other investment guidelines.
(6) 10% Maximum Issue/Issuer during 90 day ramp up period for AI/PI
Securities or better.
Short-term Portfolio Guidelines
Page Two
General
1. The average effective duration of the portfolio cannot exceed 1.75 years.
2. The average credit quality of the portfolio cannot be less than AA/NAIC
"1".
3. The portfolio cannot contain investments in real estate, direct commercial
mortgages, common stocks, leveraged futures or other leveraged/speculative
derivatives.
4. Any derivative position must be used for hedging only and must result in
the portfolio still being in compliance with all other investment
guidelines.
Portfolio Objective
Maintain a high quality, liquid, short duration portfolio which generates a
consistent and stable return in excess of the liability cost of funds.
Aggregate Portfolio Risk Parameters
The average effective duration of the portfolio cannot exceed 1.75 years. The
average effective duration is calculated as the weighted average of the
effective duration of the individual securities within the portfolio weighted
by their respective market values. Effective duration measures the price
sensitivity of a security for a given change in interest rates, incorporating
any projected variability in the security's cashflows for the stated change
in interest rates.
The average credit quality of the portfolio cannot be less than AA/NAIC "1".
The average credit quality is calculated as the weighted average of the
credit quality of the individual securities within the portfolio weighted by
either their respective book values, or market values as appropriate per the
custodial arrangement. The individual security credit quality will be as
currently evaluated by either Moody's or Standard & Poor's.
The average credit quality is calculated by assigning a numeric value of each
rating. For example, the highest quality category of Governments is assigned
a value of 2, Agency securities receive a value of 3, Aaa/AAA 4, Aa1/AA+5,
Aa2/AA6, Aa3/AA-7 and so on. If an individual security is evaluated by both
Moody's and Standard & Poor's, the lower rating will be used in computing the
average. The weighted average numerical value is rounded and translated back
to an average credit quality rating, i.e. an average rating of 6.4 would
translate into an AA rating, and an average rating of 6.6 would equate to
AA-. Based on the above, the average numerical value must be less than or
equal to 6.5 to be in compliance with the stated investment guidelines.
Permitted Asset Classes
U.S. Government and Agency Securities
A debt security issued by the United States Treasury Department or an agency
created and sponsored by the United States government.
Mortgage-backed Securities
Ownership claim in a pool of mortgages or an obligation that is secured by
such a pool.
Agency CMOs
Securitization of a pool of first liens on residential properties
backed by GNMA, FNMA or FHLMC into at least two classes or tranches.
Non-agency CMOs
Securitization of a pool of first liens on residential mortgages
which do not conform to agency (GNMA, FNMA or FHLMC) underwriting
guidelines, or a pool of commercial loans into at least two classes
or tranches.
Agency Pass Throughs
Securitization of a pool of first liens on residential properties
backed by GNMA, FNMA
or FHMLC into one class, which pays monthly interest and principal
passed directly from the debtor to the investor through an
intermediary.
Support Tranches
CMO classes that receive principal payments only after scheduled
payments have been made on specified PAC, TAC and/or Scheduled
bonds for each payment date.
Asset-backed Securities
Securitization of a pool of collateral into at least two classes or tranches.
Acceptable collateral includes auto loans, credit card receivables,
home-equity loans or manufactured housing loans.
Corporate Debt
Debt which is registered with the SEC and issued by either a corporation or a
public utility.
144A Private Placements
Private unregistered security issued under SEC Rule 144A.
Private Placements
Privately negotiated debt transactions between an issuer and buyer. Not
permitted.
Foreign Debt
Debt issued by a legal entity incorporated outside of the United States. Only
U.S. dollar denominated securities are permitted.
Non-investment Grade Securities
A security with a credit quality rating of BB+ or lower. Only securities
currently rated at least BB/NAIC "3" are permitted.
Cash and Cash Equivalents
Short-term debt such as listed below, with a stated maturity within 270 days
from date of purchase, rated at least A-1/P-1 or the equivalent:
- U.S. Government or agency securities
- Certificates of deposit
- Commercial paper
- Bankers acceptances
- Repurchase agreements
- Corporate debt rated AA or better
- Money market funds
- Loan participation notes; provided the notes are issued by A1/P1
companies and administered through A1/P1 banks.
- Bank One Money Market Deposit Account
During the 90 day ramp up period after closing, these investments can be made
in A2/P2 securities as long as the overall portfolio credit quality and
duration requirements are met.
Non-speculative Hedging Instruments
Caps, floors or swaps may only be used as part of a hedging program to
explicitly manage the risk profile of the portfolio, and will only be written
against specified securities (i.e. caps/floors at lifetime maximums/minimums
for ARMs). They may not be used for speculative purposes. This does not imply
that all such security structures in the portfolio will be hedged at all
times. Credit quality of acceptable counterparties will be AA or better. Caps
and floors exposure will be calculated as the lesser of cost or market value.
Swap exposure for determining compliance with investment guideline
limitations will be calculated as the absolute value of the swap market
value. Any such derivative position will be included in the portfolio when
determining compliance with all other investment guidelines.
Additional Definitions
Newly issued and TBA securities as well as extended settlement on purchases
of permitted securities are explicitly allowed as long as the securities
involved otherwise comply with these stated investment guidelines. Such
transactions are not considered to be forward contacts.
Prohibited Asset Classes
The following asset classes are prohibited investments:
Interest only CMO class
Principal only CMO class
Inverse floater CMO class
Forwards*
Futures*
Options*
*Except as explicitly discussed under Permitted Asset Classes.