The Charles Stark Draper Laboratory, Inc. Taxable Bonds, Series 2018
This is a Preliminary Offering Memorandum subject to completion and amendment or supplement and is not yet fully adopted. Under no circumstances will the Preliminary Offering Memorandum constitute an offer to sell or the solicitation of an offer to buy the Bonds, nor will there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. expected thattheBondswillbeavailablefordelivery toDTCinNewYork,YorkonoraboutMarch27,2018. is It Massachusetts. Boston, LLP, English, & McCarter counsel, their by Underwriters the for upon passed be Procter LLP,Boston,Massachusetts,counseltothe Institution.Inaddition,certainotherlegalmatterswill Goodwin by legality of approval the conditions, closing customary other among to, subject Underwriters, the information essentialtothemakingofaninformed investmentdecision. to beasummaryofthisissue.Investorsmust readtheentireOfferingMemorandumtoobtain payment ontheBonds.See“SECURITYFOR THE BONDS”herein. indebtedness, ifissued,maybeeithersecuredorunsecuredandentitledtopayment prior to restricted bytheIndentureorotherwisefromincurringadditionalindebtedness.Such gross incomeforfederalorstatetaxpurposes.See“TAXMATTERS”herein. maturity asdescribedherein.See“THEBONDS–Redemption” “BOOK-ENTRY in ONLY SYSTEM”herein. described fully more as Bonds, the of Owners Beneficial the to disbursement subsequent defined is requiredtoremitsuchprincipalorapplicableRedemptionPriceandinteresttheDTCParticipants for (as Price Redemption or principal the DTC, by held herein) of,ifapplicable,andinterestontheBondswillbepayablebywiretransfertoDTC,which inturn are Bonds the as long So 2018. 1, September purchased. under certaincircumstancesdescribedintheIndenture)representingtheirownershipinterests Bonds $1,000 and any integral multiple thereof. Purchasers of the Bonds will not receive physical certificates (except depository fortheBonds.Individualpurchaseswillbemadeinbook-entryformonly,principalamounts of as nomineeofTheDepositoryTrustCompany,NewYork,York(“DTC”).DTCwillactsecurities thereof and,whenissued,willberegisteredunderaglobalbook-entrysysteminthenameofCede&Co., general corporatepurposesandtopaycertaincostsofissuance. other for and Institution the of projects capital certain refinance and finance to Institution the by used be will N.A., astrustee(the“Trustee”).TheproceedsfromthesaleofBonds,togetherwithotheravailablefunds, Charles StarkDraperLaboratory,Inc.(the“Institution”)andTheBankofNewYorkMellonTrustCompany, pursuant tothetermsofanIndentureTrust,datedasMarch1,2018(the“Indenture”),byandbetweenThe * † ______, 2018 Dated: DateofDelivery NEW ISSUE–BOOK-ENTRYONLY
scrte rtn i nt rcmedto t by sl o hl scrte ad a b sbet o eiin or revision Preliminary, subject tochange. to subject be may and securities hold or sell withdrawal at anytime. buy, to recommendation a not is rating securities A The BondsareofferedbytheUnderwriters,when, asandifissuedbytheInstitutionaccepted This coverpagecontainscertaininformation forquickreferenceonly.Itisnotintended The BondsconstituteunsecuredgeneralobligationsoftheInstitution.Institutionisnot Interest, Redemption Price and profit, if any, on the sale of the Bonds, are not excludable from The Bondsaresubjecttooptionalandmandatorysinkingfundredemptionpriortheirstated Interest ontheBondswillbepayableMarch1andSeptemberofeachyear,commencing on The Bondswillbeissuedinfullyregisteredformdenominationsof$1,000andanyintegralmultiple The CharlesStarkDraperLaboratory,Inc.TaxableBonds,Series2018(the“Bonds”),willbeissued PRELIMINARY OFFERING MEMORANDUM DATED MARCH 15, 2018 J.P. Morgan T he
C harles
Taxable Bonds,Series2018
S tark $65,000,000* D raper
L aboratory Due: Asshownontheinsidecoverhereof BofA MerrillLynch , I nc Rating: Moody’s:Aa3 . †
$65,000,000* The Charles Stark Draper Laboratory, Inc. Taxable Bonds, Series 2018
MATURITIES, AMOUNTS, RATES AND YIELDS/PRICES
Dated: Date of Delivery Due: September 1, in the years shown below
Maturity Principal Amount Interest Rate Yield or Price CUSIP No.†
20__ $ % % 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__ 20__
* Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association (“ABA”). CUSIP-based identifiers are assigned by CUSIP Global Services. CUSIP Global Services is managed on behalf of the ABA by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. The CUSIP numbers have been assigned by an organization not affiliated with the Institution, the Underwriters or the Trustee, and such parties are not responsible for the selection or use of the CUSIP numbers. The CUSIP numbers are included solely for the convenience of holders and no representation is made as to the correctness of the CUSIP numbers printed on the cover hereof. CUSIP numbers assigned to securities may be changed during the term of such securities based on a number of factors including but not limited to the refunding or defeasance of such issue or the use of secondary market financial products. None of the Institution, the Underwriters or the Trustee has agreed to, nor is there any duty or obligation to, update this Offering Memorandum to reflect any change or correction in the CUSIP numbers printed on the inside cover hereof.
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TABLE OF CONTENTS Page GENERAL INFORMATION ...... iii SUMMARY OF THE OFFERING ...... v INTRODUCTION ...... 1 Purpose of the Bonds and the Plan of Finance ...... 1 The Institution ...... 1 The Bonds ...... 1 Security for the Bonds ...... 1 Additional Bonds ...... 1 Outstanding Indebtedness ...... 2 Redemption ...... 2 Certain Information Related to this Offering Memorandum ...... 2 PLAN OF FINANCE ...... 2 THE BONDS ...... 3 Description of the Bonds ...... 3 Book-Entry Only System ...... 3 Optional Redemption ...... 4 Mandatory Sinking Fund Redemption...... 5 Partial Redemption of Bonds ...... 5 Notice of Redemption ...... 5 Effect of Redemption ...... 6 Selection of Bonds for Redemption ...... 6 Purchase of Bonds in Lieu of Redemption ...... 6 SECURITY FOR THE BONDS ...... 7 General ...... 7 Certain Funds and Accounts Established by the Indenture ...... 7 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS ...... 8 General ...... 8 U.S. Federal Income Taxation of U.S. Holders ...... 9 U.S. Federal Income Taxation of Non-U.S. Holders ...... 10 RISK FACTORS ...... 12 UNDERWRITING ...... 13 CONTINUING DISCLOSURE ...... 14 APPROVAL OF LEGALITY ...... 14 FINANCIAL STATEMENTS ...... 15 INDEPENDENT ACCOUNTANTS ...... 15 RATING ...... 15 MISCELLANEOUS ...... 15
Appendix A – Certain Information Regarding the Institution ...... A-1 Appendix B – Financial Statements of the Institution ...... B-1 Appendix C – Summary of Certain Provisions of the Indenture ...... C-1 Appendix D – Form of Opinion of Counsel to the Institution ...... D-1 Appendix E – DTC Book-Entry Only System and Global Clearance Procedures ...... E-1
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GENERAL INFORMATION
This Offering Memorandum does not constitute an offer to sell the Bonds in any jurisdiction in which or to any person to whom it is unlawful to make such an offer. No dealer, salesperson or other person has been authorized by J.P. Morgan Securities LLC or Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Underwriters”) or the Institution to give any information or to make any representations, other than those contained herein, in connection with the offering of the Bonds and, if given or made, such information or representations must not be relied upon.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Bonds, or determined that this Offering Memorandum is accurate or complete. Any representation to the contrary is a criminal offense. The Bonds have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and are being issued in reliance on an exemption under Section 3(a)(4) of the Securities Act. The Bonds are not exempt in every jurisdiction in the United States.
The distribution of this Offering Memorandum and the offer or sale of Bonds may be restricted by law in certain jurisdictions. Neither the Institution nor the Underwriters represent that this Offering Memorandum may be lawfully distributed, or that any Bonds may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Institution or the Underwriters which would permit a public offering of any of the Bonds or distribution of this Offering Memorandum in any jurisdiction where action for that purpose is required. To be clear, action may be required to secure exemptions from the blue sky registration requirements either for the primary distributions or any secondary sales that may occur. Accordingly, none of the Bonds may be offered or sold, directly or indirectly, and neither this Offering Memorandum nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations.
All information set forth herein has been obtained from the Institution and other sources. Estimates and opinions included herein should not be interpreted as statements of fact. Summaries of documents do not purport to be complete statements of their provisions. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Offering Memorandum nor any sale made hereunder will, under any circumstances, create any implication that there has been no change in the affairs of the Institution since the date hereof.
Certain statements included in this Offering Memorandum constitute “forward-looking statements.” Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget,” “intend,” “projection” or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the information in APPENDIX A – “Certain Information Regarding the Institution.” A number of important factors, including factors affecting the Institution’s financial condition and factors which are otherwise unrelated thereto, could cause actual results to differ materially from those stated in such forward-looking statements. THE INSTITUTION DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS CHANGE, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR.
The Underwriters have provided the following sentence for inclusion in this Offering Memorandum. The Underwriters have reviewed the information in this Offering Memorandum in accordance with, and as part of, their responsibility to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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Each purchaser of the Bonds, by its acceptance thereof, will be deemed to have acknowledged, represented and warranted to, and agreed with, each Underwriter and the Institution as follows:
(1) It understands and acknowledges that the Bonds have not been and will not be registered under the Securities Act or any other applicable securities laws, are being offered for resale in transactions not requiring registration under the Securities Act or any other applicable securities laws and may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act and any other applicable securities laws or pursuant to an exemption therefrom.
(2) It acknowledges that neither the Institution nor any Underwriter, nor any person representing the Institution or any Underwriter, has made any representations to it with respect to the Institution or the offer or sale of any Bonds, other than in this Offering Memorandum, which has been delivered to it and upon which it is relying in making its investment decision with respect to the Bonds. Accordingly, it acknowledges that neither the Institution nor any Underwriter makes any representation or warranty as to the accuracy or completeness of any materials other than this Offering Memorandum. It also acknowledges that it has had access to such financial and other information concerning the Institution and the Bonds as it has deemed necessary in connection with its decision to purchase Bonds, including an opportunity to ask questions of and request information from each Underwriter and the Institution.
(3) Either (i) it is not acquiring or holding such note or an interest therein with the assets of (A) an ‘‘employee benefit plan’’ (as defined in Section 3(3) of The Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) that is subject to ERISA, (B) a ‘‘plan’’ described in Section 4975 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), (C) any entity deemed to hold ‘‘plan assets’’ of any of the foregoing by reason of an employee benefit plan’s or plan’s investment in such entity or (D) a governmental plan or church plan subject to such provisions that are similar to such provisions of ERISA or the Code (collectively, ‘‘Similar Laws’’); or (ii) the acquisition and holding of such Bonds by it, throughout the period that it holds such Bonds and the disposition of such Bonds or an interest therein will not constitute or result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code, a breach of fiduciary duty under ERISA, or a violation of any provisions of any applicable Similar Laws.
It acknowledges that the Institution, the Underwriters and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations, warranties and agreements and agrees that, if any acknowledgements, representations, warranties and agreements deemed to have been made by it are no longer accurate, it shall promptly notify the Institution and each Underwriter. If it is acquiring any of the Bonds as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgements, representations, warranties and agreements on behalf of each such account.
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SUMMARY OF THE OFFERING
Issuer The Charles Stark Draper Laboratory, Inc.
Securities Offered $65,000,000* Taxable Bonds, Series 2018, due September __, 20__ through September __, 20__; price ___%.
Interest Accrual Dates Interest will accrue from Date of Issuance
Interest Payment Dates September 1 and March 1 of each year, commencing September 1, 2018
Redemption The Bonds are subject to optional redemption and mandatory sinking fund redemption as discussed more fully herein. See “THE BONDS – Redemption”.
Date of Issuance March __, 2018
Authorized Denominations $1,000 and any integral multiple thereof
Form and Depository The Bonds will be delivered solely in registered form under a global book- entry system through the facilities of DTC.
Use of Proceeds The Institution will use the net proceeds from the sale of the Bonds to finance and refinance certain capital projects of the Institution and for other general corporate purposes and to pay ceratin costs of issuance. See “PLAN OF FINANCE” herein.
Rating Moody’s: Aa3†
* Preliminary, subject to change. † A securities rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.
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OFFERING MEMORANDUM
Relating to
$65,000,000* THE CHARLES STARK DRAPER LABORATORY, INC. TAXABLE BONDS, SERIES 2018
INTRODUCTION
The purpose of this Offering Memorandum, which includes the cover page, the table of contents and appendices, is to provide certain information concerning the sale and delivery by The Charles Stark Draper Laboratory, Inc. (the “Institution”) of $65,000,000* aggregate principal amount of its The Charles Stark Draper Laboratory, Inc. Taxable Bonds, Series 2018 (the “Bonds”). This Introduction contains only a brief summary of certain of the terms of the Bonds being offered and a brief description of the Offering Memorandum. All statements contained in this Introduction are qualified in their entirety by reference to the entire Offering Memorandum.
Purpose of the Bonds and the Plan of Finance
The Institution will use the proceeds from the sale of the Bonds to finance and refinance certain capital projects of the Institution and for other general corporate purposes (the “Project”) and to pay certain costs of issuance of the Bonds. See “PLAN OF FINANCE” herein.
The Institution
The Institution is an independent research and development organization that serves government and commercial clients in applied research, engineering development, education and technology transfer, and is headquartered in Cambridge, Massachusetts. Important information on the financial condition of the Institution is set forth in APPENDIX A –“Certain Information Regarding the Institution” and APPENDIX B -”Financial Statements of the Institution” attached hereto, both of which should be read in their entirety.
The Bonds
The Bonds will be issued pursuant to an Indenture of Trust, dated as of March 1, 2018 (the “Indenture”), by and between the Institution and The Bank of New York Mellon Trust Company, N .A., as trustee (the “Trustee”). Pursuant to the Indenture, on each Payment Date, until the principal of and interest on the Bonds shall have been paid or provision for such payment shall have been made as provided in the Indenture, the Institution will pay the Trustee a sum equal to the amount payable on such Payment Date as principal of or interest on the Bonds. See “THE BONDS” herein.
Security for the Bonds
The Bonds will constitute unsecured general obligations of the Institution. The Institution will not be restricted by the Indenture from incurring additional indebtedness. Such additional indebtedness, if issued, may be either secured or unsecured and may be entitled to payment prior to payment on the Bonds. See “SECURITY FOR THE BONDS” herein.
Additional Bonds
The Institution may, from time to time, without the consent of the holders of the Bonds, issue additional bonds under the Indenture in addition to the Bonds (the “Additional Bonds”). If issued, the Additional Bonds will become part of the same series as the Bonds being offered by this Offering Memorandum and will have the same interest rate, redemption provisions and maturity date, but may have a different CUSIP number from the Bonds.
* Preliminary, subject to change.
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Outstanding Indebtedness
Substantially concurrent with the issuance of the Bonds, the Institution expects to enter into a medium-term capital financing with an affiliate of Bank of America to finance certain equipment in an amount not to exceed $15,000,000. See APPENDIX A – “Certain Information Regarding the Institution – OTHER MATTERS – Future Financing Plans” for more information.
As of June 30, 2017, the outstanding par amount of long-term indebtedness of the Institution totaled $45,600,000. In addition, the Institution has a line of credit, dated January 31, 2014, with Bank of America, N.A. (the “Bank of America Line of Credit”). The Institution has drawn $22.0 million from its $25.0 million Bank of America Line of Credit. A portion of the Bond proceeds will be used to payoff the Bank of America Line of Credit. The Bank of America Line of Credit is scheduled to expire on January 30, 2019, subject to indefinite one year renewals at Bank of America, N.A.’s option. The Institution also has $15.0 million of availability under its $15.0 million secured business demand line of credit note, dated February 1, 2011, with BNY Mellon, National Association (the “BNY Line of Credit”). The BNY Line of Credit may be closed at any time by either the Institution or BNY Mellon. Future borrowings, if any, under the BNY Line of Credit will be secured by a significant portion of the Institution’s investment portfolio.
For additional information regarding the outstanding indebtedness of the Institution, see APPENDIX B – “Financial Statements of the Institution” attached hereto. For additional information about the Project, see “PLAN OF FINANCE.”
Redemption
The Bonds are subject to optional redemption by the Institution prior to maturity as described herein. The Bonds are subject to mandatory sinking fund redemption as described herein. See “THE BONDS–Redemption” herein.
Certain Information Related to this Offering Memorandum
The descriptions herein of the Indenture and other documents relating to the Bonds do not purport to be complete and are qualified in their entirety by reference to such documents, and the description herein of the Bonds is qualified in its entirety by the form thereof and the information with respect thereto included in such documents. See APPENDIX C –“Summary of Certain Provisions of the Indenture” attached hereto for a brief summary of the Indenture, including descriptions of certain duties of the Trustee, rights and remedies of the Trustee and the Bondholders upon an Event of Default, and provisions relating to amendments of the Indenture and procedures for defeasance of the Bonds.
All capitalized terms used in this Offering Memorandum and not otherwise defined herein have the same meanings as in the Indenture. See APPENDIX C –“Summary of Certain Provisions of the Indenture” attached hereto for definitions of certain words and terms used but not otherwise defined herein.
The information and expressions of opinion herein speak only as of their date and are subject to change without notice. Neither delivery of this Offering Memorandum nor any sale made hereunder nor any future use of this Offering Memorandum will, under any circumstances, create any implication that there has been no change in the affairs of the Institution.
PLAN OF FINANCE
The proceeds from the sale of the Bonds will be: (i) transferred to the Institution and used to pay the costs of the Project; and (ii) applied to pay certain costs of issuance of the Bonds.
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THE BONDS
Description of the Bonds
The Bonds will be dated as of the date of their original issuance and will bear interest and mature (subject to prior redemption) as shown on the inside front cover page hereof.
Interest on the Bonds will be payable on March 1 and September 1 of each year (each, an “Interest Payment Date”), commencing on September 1, 2018, and will be calculated on the basis of a three hundred sixty (360) day year consisting of twelve (12) thirty (30) day months.
The principal and Redemption Price of the Bonds, if applicable, will be payable by check or by wire transfer of immediately available funds in lawful money of the United States of America at the Designated Office of the Trustee.
Interest on the Bonds will be payable from the later of (i) the date of issuance and (ii) the most recent Interest Payment Date to which interest has been paid or duly provided for. Payment of the interest on each Interest Payment Date will be made to the Person whose name appears on the bond registration books of the Trustee as the Holder thereof as of the close of business on the Record Date for each Interest Payment Date, such interest to be paid by check mailed by first class mail to such Holder at its address as it appears on such registration books, or, upon the written request of any Holder of at least $1,000,000 in aggregate principal amount of Bonds, submitted to the Trustee at least one (1) Business Day prior to the Record Date, by wire transfer in immediately available funds to an account within the United States designated by such Holder. The Record Date is the fifteenth day of the month immediately preceding each Interest Payment Date. Notwithstanding the foregoing, as long as Cede & Co. is the Holder of all or part of the Bonds in Book-Entry Form, said principal, Redemption Price, if applicable, and interest payments will be made to Cede & Co. by wire transfer in immediately available funds.
Book-Entry Only System
The Bonds will be issued in fully registered form and, when issued, will be held by DTC through Cede & Co., as its nominee, as securities depository with respect to the Bonds. Individual purchases of interests in the Bonds will be made in book-entry form only, in the principal amount of $1,000 or any integral multiple thereof. Individual purchasers will not receive physical delivery of bond certificates. So long as Cede & Co. is the registered owner of the Bonds as nominee of DTC, references herein to the holders or registered owners of the Bonds will mean Cede & Co. and will not mean the beneficial owners of the Bonds. Beneficial interests in the Bonds will be held through DTC directly as a participant in such system. See APPENDIX E –“DTC Book-Entry Only System and Global Clearance Procedures.”
As long as the Bonds are held by DTC or its nominee, interest will be paid to Cede & Co., as nominee of DTC, in same-day funds on each Interest Payment Date. If the book-entry only system is discontinued, bond certificates will be delivered as described in the Bond Indenture, and Beneficial Owners (as defined herein) will become registered owners of the Bonds (the “Bondholders”). If the book-entry only system is discontinued, interest on the Bonds will be payable on each Interest Payment Date by check or draft mailed to the registered owner at the address that appears on the Bond Register as of the 15th day of the month preceding an Interest Payment Date.
None of the Institution, the Trustee or the Underwriters will have any responsibility or obligation to the Participants, DTC or the persons for whom they act with respect to (i) the accuracy of any records maintained by DTC or by any Direct or Indirect Participant of DTC, (ii) payments or the providing of notice to Direct Participants, the Indirect Participants or the beneficial owners, (iii) the selection by DTC or by any Direct or Indirect Participant of any beneficial owner to receive payment in the event of a partial redemption of the Bonds or the manner in which DTC will administer a partial redemption of the Bonds or (iv) any other action taken by DTC or its nominee as owner of the Bonds. For more information on DTC and the book entry only system. See APPENDIX E –“DTC Book-Entry Only System and Global Clearance Procedures.”
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Optional Redemption
The Bonds are subject to optional redemption at any time, in whole or in part, on any Redemption Date, at the Redemption Price, which includes interest accrued to, but not including, the applicable Redemption Date, on the Bonds, or portions thereof, being redeemed.
“Make-Whole Redemption Price” means an amount equal to the greater of:
(1) 100% of the principal amount of any Bonds, or portion thereof, being redeemed; and
(2) the sum of the present values of the remaining scheduled payments of principal of and interest on the Bonds, or portion thereof, being redeemed (exclusive of interest accrued and unpaid as of the Redemption Date), discounted to the Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus (a) 10 basis points for the Bonds due September 1, 20__ through September 1, 20__; (b) 20 basis points for the Bonds due September 1, 20__ through September 1, 20__; and (c) 25 basis points for the Bonds due September 1, 20__ through September 1, 20__, inclusive,
plus, in each case accrued and unpaid interest on such Bonds to be redeemed on the Redemption Date.
“Business Day” means any day other than (A) a Saturday or Sunday or legal holiday or a day on which banking institutions in the city or cities in which the Designated Office of the Trustee is located are authorized by law or executive order to close or (B) a day on which the New York Stock Exchange is closed.
“Comparable Treasury Issue” means, with respect to the Bonds of a particular maturity, the United States Treasury security selected by a Designated Investment Banker as having an actual maturity comparable to the remaining average life of the Bonds of such maturity to be optionally redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable remaining average life of such Bond to be redeemed.
“Comparable Treasury Price” means, with respect to any such Redemption Date, with respect to the Bonds of a particular maturity, (A) the average of Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (B) if the Designated Investment Banker obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations.
“Designated Investment Banker” means one of the Reference Treasury Dealers appointed by the Institution.
“Redemption Date” means with respect to any optional redemption of Bonds, any Business Day selected as the date of redemption for such Bonds as set forth in the notice of redemption.
“Redemption Price” means with respect to the Bonds that are begin optionally redeemed (a) prior to March __, 2028, the Make-Whole Redemption Price, and (b) on or after March __, 2028, the principal amount thereof.
“Reference Treasury Dealer” means J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and three additional firms, as designated by the Institution, and the respective affiliates of each that are primary U.S. Government securities dealers (each a “Primary Treasury Dealer”), together with the respective successors of each of the foregoing; provided that, if any of them ceases to be a Primary Treasury Dealer, the Institution shall substitute therefore another Primary Treasury Dealer.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Designated Investment Banker, of the bid and asked prices for the applicable Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Designated Investment Banker and communicated to the Trustee by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third Business Day preceding such Redemption Date.
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“Treasury Rate” means, with respect to any Redemption Date, with respect to the Bonds of a particular maturity, the rate per annum equal to the semiannual equivalent yield to maturity (on a day count basis) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
Mandatory Sinking Fund Redemption.
The Bonds maturing on September 1, 20__ are subject to mandatory sinking fund redemption at their principal amounts without premium on September 1 of each of the years and in the amounts as follows:
Year Principal Amount
†Maturity
There will be credited against and in satisfaction of the sinking fund installment payable on any date the principal amount of Bonds entitled to such sinking fund installment purchased by the Trustee with money in the Bond Fund and the principal amount of Bonds so purchased will be applied against and in fulfillment of the sinking fund installment due on the succeeding September 1. In addition, there will be credited against and in satisfaction of the Bonds maturing ____, Bonds scheduled to mature on such date that are (i) redeemed by the Institution pursuant to the Indenture, (ii) purchased by the Institution and delivered to the Trustee for cancellation or (iii) defeased in accordance with the Indenture, and the principal amount of such Bonds redeemed, purchased or defeased will be applied against and in fulfillment of the required sinking fund installments thereafter payable, as nearly as practicable pro rata, taking into consideration the Authorized Denominations. For the purpose of clarity, accrued and unpaid interest on the principal amount of Bonds redeemed on a Mandatory Sinking Fund Redemption Date shall be paid to the Holders of such Bonds as of the close of business on the Record Date immediately preceding such Mandatory Sinking Fund Redemption Date. Registration of Bonds in the Book-Entry System.
Partial Redemption of Bonds
Upon surrender of any Bond redeemed in part only, the Institution will execute (but need not prepare) and the Trustee will prepare or cause to be prepared, authenticate and deliver to the Holder thereof, at the expense of the Institution, a new Bond or Bonds of Authorized Denominations, equal in aggregate principal amount to the unredeemed portion of the Bond surrendered.
Notice of Redemption
Notice of redemption shall be mailed by the Trustee by first class mail, not less than twenty (20) days, nor more than sixty (60) days prior to the redemption date, to the respective Holders of any Bonds designated for redemption at their addresses appearing on the bond registration books of the Trustee. If the Bonds are no longer held by the Securities Depository or its successor or substitute, the Trustee shall also give notice of redemption by overnight mail to such securities depositories and/or securities information services as shall be designated in a certificate of the Institution. Each notice of redemption shall state the date of such notice, the date of issue of the Bonds, the redemption date, the Redemption Price, the place or places of redemption (including the name and appropriate address or addresses of the Trustee), the maturity (including CUSIP number, if any), and, in the case of Bonds to be redeemed in part only, the portion of the principal amount thereof to be redeemed. Each such notice shall also state that on the Redemption Date there will become due and payable on each of said Bonds the redemption price thereof or of said specified portion of the principal amount thereof in the case of a Bond to be redeemed in part only and that from and after such redemption date interest thereon shall cease to accrue on the Bonds subject to redemption, and shall require that such Bonds be then surrendered.
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Failure by the Trustee to give notice as described above to anyone or more of the securities information services or depositories designated by the Institution, or the insufficiency of any such notice will not affect the sufficiency of the proceedings for redemption. Failure by the Trustee to mail notice of redemption to anyone or more of the respective Holders of any Bonds designated for redemption will not affect the sufficiency of the proceedings for redemption with respect to the Holders to whom such notice was mailed.
With respect to the optional redemption of some or all of the Bonds, the Institution may instruct the Trustee to provide conditional notice of redemption, which may be conditioned upon the receipt of moneys or any other event. Additionally, any such notice may be rescinded by written notice given to the Trustee by the Institution no later than five (5) Business Days prior to the Redemption Date. The Trustee will give notice of such rescission, as soon thereafter as practicable, in the same manner, to the same Persons, as notice of such redemption was given.
Effect of Redemption
Notice of redemption having been duly given as provided in the Indenture and as described above, and moneys for payment of the Redemption Price of the Bonds (or portion thereof) so called for redemption being held by the Trustee, on the date fixed for redemption designated in such notice, the Bonds (or portion thereof) so called for redemption shall become due and payable at the applicable Redemption Price described in such notice, interest on the Bonds so called for redemption shall cease to accrue, said Bonds (or portion thereof) will cease to be entitled to any benefit or security under the Indenture, and the Holders of said Bonds will have no rights in respect thereof except to receive payment of the applicable Redemption Price from funds held by the Trustee for such payment.
Selection of Bonds for Redemption
Subject to the provisions of the two immediately succeeding paragraphs, whenever provision is made in the Indenture for the redemption of less than all of the Bonds of any maturity or any given portion thereof, the Trustee shall select the Bonds of such maturity to be redeemed, from all Bonds of such maturity subject to redemption or such given portion thereof not previously called for redemption, by lot or in any other manner which the Trustee in its sole discretion shall deem appropriate.
Notwithstanding the foregoing, with respect to Bonds Outstanding that are registered in book-entry only form and so long as DTC or a successor securities depository is the sole registered owner of the Bonds, if less than all of such Bonds of any maturity are to be redeemed upon any redemption of Bonds hereunder, the particular Bonds of such maturity or portions of Bonds such maturity to be redeemed shall be selected on a pro rata pass through distribution of principal basis in accordance with the applicable securities depository procedures; provided that, so long as the Bonds are held in book-entry form, the selection for redemption of Bonds of such maturity shall be made in accordance with the operational arrangements of the securities depository then in effect.
It is the Institution’s intent that redemption allocations made by the securities depository be made on a pro rata pass through distribution of principal basis as described above. However, neither the Institution nor the Underwriters can provide any assurance that the securities depository, the securities depository’s direct and indirect participants or any other intermediary will allocate the redemption of Bonds on such basis. If the securities depository operational arrangements do not allow for the redemption of the Bonds of any maturity on a pro rata pass through distribution of principal basis as discussed above, then the Bonds will be selected for redemption, in accordance with the securities depository procedures, which may be by lot.
If DTC or its nominee or a successor securities depository is no longer the sole registered owner of the Bonds, if less than all of the Bonds are called for redemption, the Trustee shall select the Bonds of such maturity to be redeemed, from all Bonds of such maturity subject to redemption or such given portion thereof not previously called for redemption, by lot or in any other manner which the Trustee in its sole discretion shall deem appropriate.
Purchase of Bonds in Lieu of Redemption
When Bonds are called for optional redemption pursuant to the Indenture, the Institution may purchase some or all of the Bonds called for redemption if it gives written notice to the Trustee not later than the close of
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business on the Business Day immediately preceding a Redemption Date that it wishes to purchase the principal amount of Bonds specified in the notice, at a purchase price no greater than the Redemption Price. On the date specified as the Redemption Date under the Indenture, the Institution is required to furnish the Trustee sufficient funds in sufficient time for the Trustee to make the purchase on the Redemption Date.
SECURITY FOR THE BONDS
General
The Indenture provides that, on or before each Payment Date, the Institution will pay the Trustee a sum equal to the amount payable on such Payment Date as principal of and interest on the Bonds. In addition, the Indenture provides that each such payment made will at all times be sufficient to pay the total amount of interest and principal (whether at maturity or upon acceleration) becoming due and payable on the Bonds on such Payment Date. If on any Payment Date, the amounts held by the Trustee in the accounts within the Bond Fund (as described below) are insufficient to make any required payments of principal of (whether at maturity or upon acceleration) and interest on the Bonds as such payments become due, the Institution is required to pay such deficiency to the Trustee. Upon the receipt thereof, the Trustee will deposit all payments received from the Institution into certain funds and accounts established pursuant to the Indenture. See “Certain Funds and Accounts Established by the Indenture” below.
The Bonds constitute unsecured general obligations of the Institution. The Bonds are not secured by a reserve fund, mortgage lien or security interest on or in any funds or other assets of the Institution, except for funds held from time to time by the Trustee for the benefit of the Holders of the Bonds under the Indenture. Pursuant to the Indenture and as described above, the Institution is not required to deposit with the Trustee amounts necessary to pay the principal of and interest on the Bonds until the Payment Date on which such amounts become due and payable; therefore, the funds held from time to time by the Trustee for the benefit of the Holders of the Bonds under the Indenture are expected to be minimal.
The Indenture does not contain any financial or other covenants limiting the ability of the Institution to incur indebtedness, encumber or dispose of its property or merge with any other entity, or any other restrictive covenants. Further, the Institution is not required by the Indenture to produce revenues at any specified level or to obtain any insurance with respect to its property or operations. The Institution is not restricted by the Indenture from incurring additional indebtedness or creating any liens on its assets. Such additional indebtedness, if issued, may be either secured or unsecured and may be entitled to payment prior to payment on the Bonds.
Certain Funds and Accounts Established by the Indenture
Under the Indenture, the Trustee has established for the sole benefit of the Bondholders, a master fund referred to as the “Indenture Fund,” containing the Bond Fund and the Redemption Fund and each of the funds and accounts contained therein. The Institution has pledged, assigned and transferred the Indenture Fund and all amounts held therein to the Trustee for the benefit of the Bondholders to secure the full payment of the principal or applicable Redemption Price of and interest on the Bonds in accordance with their terms and the provisions of the Indenture. The Indenture Fund and all amounts on deposit therein constitute collateral security to secure the full payment of the principal or applicable Redemption Price of and interest on the Bonds in accordance with their terms and provisions of the Indenture. Due to the timing of payments by the Institution to the Trustee, in general there is not expected to be any money in the Indenture Fund.
For information on other funds and accounts established by the Indenture, see APPENDIX C –“Summary of Certain Provisions of the Indenture” attached hereto.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain U.S. federal income tax considerations with respect to the acquisition, ownership and disposition of the Bonds by U.S. Holders (as defined below) and Non-U.S. Holders (as defined below), but does not purport to be a complete analysis of all potential tax considerations. This summary is based upon the Code, the Treasury Regulations (the “Regulations”) promulgated thereunder, and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change, possibly on a retroactive basis, and to differing interpretations, which could result in U.S. federal income tax considerations different from those described below. This summary is limited to the tax considerations with respect to Bonds that are purchased by an initial holder at their original issue price for cash and that are held as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). This summary does not address the tax consequences to subsequent purchasers of the Bonds.
This summary does not purport to deal with all aspects of U.S. federal income taxation that might be relevant to particular holders in light of their circumstances or status, nor does it address specific tax consequences that may be relevant to particular holders that may be subject to special tax rules, such as, for example:
• banks, insurance companies or other financial institutions;
• brokers and dealers in securities;
• traders in securities that elect mark-to-market method of accounting for their securities;
• insurance companies;
• partnerships or other pass-through entities;
• persons who are investors in a pass-through entity holding Bonds;
• tax-exempt organizations;
• regulated investment companies;
• real estate investment trusts;
• “controlled foreign corporations”;
• “passive foreign investment companies”;
• certain U.S. expatriates;
• U.S. Holders that have a functional currency other than the U.S. dollar; or
• persons who hold Bonds as part of a straddle, hedge, conversion or other integrated financial transaction or are deemed to sell Bonds under the constructive sale provisions of the Code.
In addition, this summary does not address U.S. federal alternative minimum, estate and gift tax consequences or consequences under the tax laws of any state, local or foreign jurisdiction. The Institution has not sought, and will not seek, any ruling from the Internal Revenue Service (the “IRS”) with respect to the statements made and the conclusions reached in this summary, and there is no assurance that the IRS will agree with such statements and conclusions.
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THIS SUMMARY IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE PURCHASERS OF THE BONDS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAXATION AND OTHER TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF THE BONDS, AS WELL AS THE APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
For purposes of the following summary, a “U.S. Holder” is a beneficial owner of Bonds that is, for U.S. federal income tax purposes, (i) a citizen or individual resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia; (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust, if a court within the United States is able to exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all of its substantial decisions or if a valid election to be treated as a U.S. person is in effect with respect to such trust. A “Non-U.S. Holder” is a beneficial owner of Bonds that is (i) a foreign corporation, (ii) a nonresident alien individual, or (iii) a foreign estate or trust that in either case is not subject to U.S. federal income tax on a net- income basis on income or gain from a Bond.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds Bonds, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership holding Bonds should consult its tax advisor.
U.S. Federal Income Taxation of U.S. Holders
Payments of Stated Interest
Stated interest on a Bond will generally be taxable to a U.S. Holder as ordinary income at the time such interest is received or accrued, depending on the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes.
Sale, Exchange, Redemption, Retirement or Other Taxable Disposition of Bonds
Upon the sale, exchange, redemption, retirement or other taxable disposition of a Bond, a U.S. Holder generally will recognize gain or loss equal to the difference between the amount realized upon the sale, exchange, redemption, retirement or other disposition (less an amount equal to any accrued but unpaid interest, which will be taxable as interest income as discussed above to the extent not previously included in income by the U.S. Holder) and the U.S. Holder’s adjusted U.S. federal income tax basis in the Bond. A U.S. Holder’s adjusted U.S. federal income tax basis in a Bond generally will be its cost for the Bond. Any such gain or loss generally will be capital gain or loss. Capital gains of non-corporate U.S. Holders (including individuals) derived in respect of capital assets held for more than one year currently are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
Tax on Net Investment Income
In addition any payments of interest on or capital gains earned from the sale, exchange, or other taxable disposition of the Bonds may be subject to the 3.8% tax on net investment income for certain U.S. Holders who are individuals, estates, or trusts. U.S. Holders should consult their own tax advisors regarding the implications of the net investment income tax in their particular circumstances.
Information Reporting and Backup Withholding
For each calendar year in which the Bonds are outstanding, the IRS must be provided with certain information, including the beneficial owner’s name, address and taxpayer identification number, the aggregate amount of interest paid to that beneficial owner during the calendar year and the amount of tax withheld, if any. This obligation, however, does not apply with respect to payments to certain types of U.S. Holders, including corporations and tax-exempt organizations, provided that they establish entitlement to an exemption.
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In the event that a U.S. Holder subject to the reporting requirements described above fails to provide its correct taxpayer identification number in the manner required by applicable law, or underreports its tax liability, the Institution, its agent or paying agents, or a broker may be required to “backup” withhold at the applicable statutory rate on each payment on the Bonds and on the proceeds from a sale of the Bonds. The backup withholding obligation, however, does not apply with respect to payments to certain types of U.S. Holders, including corporations and tax-exempt organizations, provided that they establish entitlement to an exemption.
Backup withholding is not an additional tax and may generally be refunded or credited against the U.S. Holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS.
U.S. Holders should consult their own tax advisors regarding their qualifications for an exemption from backup withholding, and the procedure for establishing such exemption, if applicable.
U.S. Federal Income Taxation of Non-U.S. Holders
Payments of Interest
The gross amount of interest payments to a Non-U.S. Holder of interest that does not qualify for the portfolio interest exemption and that is not effectively connected with the conduct by such Non-U.S. Holder of a trade or business within the U.S. (or, if required by an applicable income tax treaty, is not attributable to a permanent establishment of such Non-U.S. Holder in the United States) will be subject to U.S. withholding tax at the rate of 30% unless a U.S. income tax treaty applies to reduce or eliminate such withholding tax. The 30% U.S. federal withholding tax will not apply to any payment to a Non-U.S. Holder of interest on a Bond under the “portfolio interest exemption” provided that:
• the Non-U.S. Holder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Institution entitled to vote;
• the Non-U.S. Holder is not a “controlled foreign corporation” that, for U.S. federal income tax purposes, is related (within the meaning of Section 864(d)(4) of the Code) to the Institution; and
• either (a) the beneficial owner of the Bonds certifies on IRS Form W-8BEN or W-8BEN-E, as applicable (or other applicable or successor form), under penalties of perjury, that it is not a “U.S. person” (as defined in the Code) and provides its name and address, or (b) a securities clearing organization, bank or other financial institution that holds customers’ securities in the ordinary course of its trade or business (a “financial institution”) and holds the Bonds on behalf of the beneficial owner certifies to the Institution or its agent, under penalties of perjury, that a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable (or other applicable or successor form) has been received from the beneficial owner by it or by a financial institution between it and the beneficial owner and furnishes the Institution with a copy thereof.
If a Non-U.S. Holder is engaged in a trade or business in the United States and interest paid on the Bond constitutes income that is effectively connected with the conduct of that trade or business (and, if required by an applicable income tax treaty, is attributable to a permanent establishment of that Non-U.S. Holder), or U.S. trade or business income, such interest will be taxed on a net basis at regular graduated U.S. income tax rates rather than 30% gross rate. In the case of a Non-U.S. Holder that is a corporation, such U.S. trade or business Income may also be subject to the branch profits tax at a 30% rate (or lower applicable income tax treaty rate).
To claim the benefit of a tax treaty exemption from or reduction in withholding, or to claim exemption from withholding because the income is U.S. trade or business Income, a Non-U.S. Holder must provide a properly executed IRS Form W-8BEN, W-8BEN-E or W-8ECI (or such successor forms as the IRS designates), as applicable. The Non-U.S. Holder must provide the form to its withholding agent. These forms must be periodically updated. A Non-U.S. Holder who is claiming the benefits of an income tax treaty may be required in certain instances to obtain a U.S. taxpayer identification number and to provide certain documentary evidence issued by foreign governmental authorities to prove residence in the foreign country.
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Sale, Exchange, Redemption, Retirement or Other Taxable Disposition of Bonds
No withholding of U.S. federal income tax will generally be required with respect to any gain or income realized by a Non-U.S. Holder upon the sale, exchange or other disposition of a Bond (except to the extent such income is attributable to accrued but unpaid interest, which will be treated as interest as described above under “— U.S. federal income taxation of Non-U.S. Holders—Payments of interest”).
Except with respect to accrued and unpaid interest, a Non-U.S. Holder will not be subject to U.S. federal income tax on gain realized on the sale, exchange, redemption, retirement or other disposition of a Bond unless the Non-U.S. Holder is an individual who is present in the United States for a period or periods aggregating 183 or more days in the taxable year of the disposition and certain other conditions are met, or such gain or income is effectively connected with a U.S. trade or business (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base of the beneficial owner maintained in the United States). Accrued and unpaid interest realized on a sale, exchange or other disposition of a Bond will be treated as discussed under “—U.S. federal income taxation of Non-U.S. Holders—Payments of interest.”
Backup Withholding and Information Reporting
U.S. backup withholding will not apply to payments of interest on a Bond or proceeds from the sale or other disposition of a Bond payable to a Non-U.S. Holder if the certification described in “—U.S. federal income taxation of Non-U.S. Holders—Payments of interest” is duly provided by such Non-U.S. Holder or the Non-U.S. Holder otherwise establishes an exemption, provided that the payor does not have actual knowledge that such holder is a U.S. person or that the conditions of any claimed exemption are not satisfied. Certain information reporting still may apply to interest payments even if an exemption from backup withholding is established. Copies of any information returns reporting interest payments and any withholding also may be made available to the tax authorities in the country in which a Non-U.S. Holder resides under the provisions of an applicable income tax treaty.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding tax rules from a payment to a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S. Holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS.
Non-U.S. Holders should consult their own tax advisors regarding their particular circumstances and the availability of and procedure for establishing an exemption from backup withholding.
Withholding on Foreign Accounts
Legislation known as the Foreign Account Tax Compliance Act (“FATCA”) and guidance issued thereunder imposes a withholding tax at a rate of 30% on U.S.-source interest and on sales or redemption proceeds paid to (i) “foreign financial institutions” (as defined for this purpose) unless the institution (a) is located in a jurisdiction that has entered into an intergovernmental agreement with the United States, (b) enters into an agreement with the U.S. government to collect and provide to the U.S. tax authorities information regarding U.S. account holders of such institution (which would include certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or (c) meets other exemptions or (ii) a foreign entity that is not a financial institution, unless the entity (x) is located in a jurisdiction that has entered into an intergovernmental agreement with the United States, (y) provides the withholding agent with a certification identifying the substantial U.S. owners of the entity (as defined for this purpose) or (z) meets other exemptions. If FATCA withholding is imposed, a beneficial owner that is not a foreign financial institution may under certain circumstances be eligible for a refund or credit of any amounts withheld by filing a U.S. federal income tax return (which may entail significant administrative burden). Prospective investors should consult their tax advisers regarding the effects of FATCA on their investment in the Bonds.
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RISK FACTORS
Purchase of the Bonds involves a degree of risk. In order to identify risk factors and make an informed investment decision, potential investors should be thoroughly familiar with this entire Offering Memorandum (including the Appendices hereto) in order to make a judgment as to whether the Bonds are an appropriate investment. Certain of the risks associated with the purchase of the Bonds are described below. The following list of possible factors, while not setting forth all the factors which must be considered, contains some of the factors which should be considered prior to purchasing the Bonds. This discussion of risk factors is not, and is not intended to be, comprehensive or exhaustive. Prospective purchasers of the Bonds should give careful consideration to the matters referred to in the following summary. Such summary should not be considered exhaustive, but rather informational only.
Decrease in Contracts
The Institution’s ability to retain research staff and meet budgetary forecasts is substantially dependent on receiving contracts from the Department of Defense and other U.S. government and commercial sponsors. There are also other organizations that compete with the Institution for these contracts. There can be no assurance that the Institution will continue to receive such contracts in the future.
Termination Rights
The Institution’s contracts with the Department of Defense and other U.S. government sponsors contain termination and change provisions that give the counterparties rights and remedies not typically found in commercial contracts, including rights that empower such counterparties to terminate existing contracts for convenience (i.e. without cause), reduce or modify contracts or subcontracts if requirements or budgetary constraints change, and terminate multi-year contracts and related orders if funds for performance for any subsequent year are not available.
Adequacy of Revenues
No representation or assurance can be given that the Institution will generate sufficient revenue to pay the Bonds and to make other payments required by the Indenture. The ability of the Institution to make payments under the Indenture depends, among other things, upon the capabilities of management of the Institution, economic conditions including the demand for the services offered by the Institution, changes in federal funding, the ability of the Institution to realize an adequate return on its investments and other factors. In addition, funding of contracts by the Department of Defense and other U.S. government sponsors can be subject to significant delays. No assurances can be given that the revenues available to the Institution from its operations will be available in amounts sufficient to make the required payments under the Indenture. For a discussion of the financial condition of the Institution, see APPENDIX A – “Certain Information Regarding the Institution” and also see the audited financial statements of the Institution as of June 30, 2017 and July 1, 2016 included in APPENDIX B hereto.
Default by the Institution
No representations or assurances can be given that the Institution will not default in performing its obligations under the Indenture. If an Event of Default occurs under the Indenture, the Trustee may accelerate the maturity of the Bonds. In addition, no premium will be received upon an acceleration of the Bonds due to a default. No assurance can be given that the Institution will have the funds necessary to pay the principal and interest due on the Bonds in connection with any acceleration thereof.
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No Mortgage or Other Security Interest
The Bonds are not secured by a mortgage, lien or security interest in any real or personal property of the Institution except for a pledge by the Institution of its interest in any funds established under the Indenture. Due to the timing of payments by the Institution to the Trustee, in general there is not expected to be any money in the funds established under the Indenture.
Economic Factors Beyond the Institution’s Control
Apart from competition and other business risks facing the Institution, the financial performance of the Institution will depend to some degree upon factors beyond the control of its management, including general national and local economic conditions (e.g., inflation, unemployment, population growth and distribution trends) and federal, state and local taxation and laws and regulations affecting the Institution.
Enforceability of Remedies
The remedies available to the Trustee and the Bondholders upon an Event of Default under the Indenture are in many respects dependent upon judicial actions which are, in turn, often subject to discretion and delay. Under existing constitutional and statutory laws and judicial decisions, including specifically the Federal Bankruptcy Code, a particular remedy specified by the Indenture may not be readily available or, if available, may be limited or subject to substantial delay. The various legal opinions to be delivered concurrently with the issuance and delivery of the Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by principles of equity and by bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the rights of creditors generally.
Market Factors
The financial condition of the Institution as well as the market for the Bonds could be affected by a variety of factors, some of which are beyond the Institution’s control. There can be no assurance that an adverse event will not occur which might affect the market price of and the market for the Bonds. If a significant event should occur in the affairs of the Institution, the market for and market value of the Bonds could be adversely affected.
Miscellaneous
The Institution may be impacted by the cost and the limited availability and sufficiency of insurance for risks such as property damage and general liability.
The occurrence of natural disasters, including earthquakes and hurricanes, may damage the facilities of the Institution, interrupt utility service to the facilities, or otherwise impair the operations of the Institution and the generation of revenues from its facilities. The facilities of the Institution are covered by general property insurance in an amount which its management considers to be sufficient to provide for the replacement of such facilities in the event of a natural disaster.
UNDERWRITING
The Institution has entered into a purchase contract with the Underwriters listed on the cover hereof for whom J.P. Morgan Securities LLC is acting as representative, and the Underwriters have agreed to purchase the Bonds from the Institution at an aggregate discount of $______from the public offering price set forth on the cover page hereof.
The purchase contract pursuant to which the Bonds are being sold provides that the Underwriters will purchase not less than all of the Bonds. The Underwriters’ obligation to make such purchase is subject to certain terms and conditions set forth in the purchase contract, the approval of certain legal matters by counsel and certain other conditions.
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The Underwriters may offer and sell the Bonds to certain dealers and others at a price lower than the initial offering price. The offering price of Bonds may be changed from time to time by the Underwriters.
The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Such activities may involve or relate to assets, securities and/or instruments of the Institution (whether directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with the Institution. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various investment banking services for the Institution, for which they received or will receive customary fees and expenses. Under certain circumstances, certain of the Underwriters and their respective affiliates may have certain creditor and/or other rights against the Institution and any affiliates thereof in connection with such transactions and/or services. In addition, certain of the Underwriters and their respective affiliates may currently have and may in the future have investment and commercial banking, trust and other relationships with parties that may relate to assets of, or be involved in the issuance of securities and/or instruments by the Institution or any affiliates thereof. The Underwriters and their respective affiliates also may communicate independent research views in respect of such assets, securities or instruments and at any time may hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.
In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the Institution.
J.P. Morgan Securities LLC has entered into negotiated dealer agreements (each a “Dealer Agreement”) with each of Charles Schwab & Co., Inc. (“CS&Co.”) and LPL Financial LLC (“LPL”) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to each Dealer Agreement, each of CS&Co. and LPL may purchase Bonds from J.P. Morgan Securities LLC at the original issue price less a negotiated portion of the selling concession applicable to any Bonds that such firm sells.
In addition, certain of the Underwriters have entered into distribution agreements with other broker-dealers (that have not been designated by the Institution as Underwriters) for the distribution of the Bonds at the original issue prices. Such agreements generally provide that the relevant Underwriter will share a portion of its underwriting compensation or selling concession with such broker-dealers.
CONTINUING DISCLOSURE
The Institution covenants in the Indenture that unless otherwise available on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system (“EMMA”) or any successor thereto or to functions thereof, copies of the Institution’s audited financial statements will be posted on the Institution’s website at http://www.draper.com/Series_2018_Bonds.html (or such other website as the Institution shall direct the Bondholders) no later than 180 days after the end of the fiscal year.
APPROVAL OF LEGALITY
Legal matters incident to validity of the Bonds and certain other matters are subject to the approving opinion of Goodwin Procter LLP, counsel to the Institution. The proposed form of opinion of counsel to the Institution relating to the validity of the issuance of the Bonds and certain other matters is attached hereto as APPENDIX D. In addition, certain other legal matters will be passed upon for the Underwriters by their counsel, McCarter & English, LLP.
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FINANCIAL STATEMENTS
The financial statements of the Institution presented in APPENDIX B present the financial position, changes in net assets and cash flows as of June 30, 2017. These financial statements should be read in their entirety.
INDEPENDENT ACCOUNTANTS
The financial statements of the Institution as of June 30, 2017 and July 1, 2016 and for each of the two years in the period ended June 30, 2017, included in APPENDIX B of this Offering Memorandum, have been audited by PricewaterhouseCoopers LLP, independent accountants, as stated in their report appearing herein.
RATING
Moody’s has assigned a rating of “Aa3” with a stable outlook on the Bonds. Any explanation of the significance of such rating may only be obtained from Moody’s. Generally, rating agencies base their ratings on information and materials furnished and on investigation, studies, and assumptions by the rating agencies. There is no assurance that the rating mentioned above will remain in effect for any given period of time or that a rating might not be lowered or withdrawn entirely, if in the judgment of the rating agency originally establishing the rating, circumstances so warrant. Any such downward change in or withdrawal of a rating might have an adverse effect on the market price or marketability of the Bonds. A securities rating is not a recommendation to buy, sell or hold securities.
MISCELLANEOUS
All quotations from and summaries and explanations of the Indenture and of other statutes and documents contained herein do not purport to be complete, and reference is made to said documents and statutes for full and complete statements of their provisions. Copies in reasonable quantity of the Indenture may be obtained upon request directed to the Underwriters or the Institution.
Any statements in this Offering Memorandum involving matters of opinion are intended as such and not as representations of fact. This Offering Memorandum is not to be construed as a contract or agreement between the Institution and Holders of any of the Bonds.
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The execution and delivery of this Offering Memorandum has been duly authorized by the Institution.
THE CHARLES STARK DRAPER LABORATORY, INC.
By: Kaigham J. Gabriel President and Chief Executive Officer
By: Elizabeth Mora Chief Administrative Officer and Treasurer
16 16 ME1 26584356v.5
APPENDIX A
March xx, 2018
In connection with issuance of its Taxable Bonds, Series 2018 (the “Bonds”), we are pleased to present information pertaining to The Charles Stark Draper Laboratory, Inc. (“Draper” or the “Company”) for inclusion in the Offering Memorandum.
Introduction
At Draper, we believe exciting things happen when new capabilities are not just imagined — but actually created.
Draper is a Massachusetts not-for-profit engineering solutions company, focused on the design, development and deployment of advanced technological solutions for the most challenging and important problems facing the nation and the world. Whether formulating a system concept and developing each component to achieve a field-ready prototype or combining existing technologies in new ways, Draper’s multidisciplinary science and engineering teams deliver new capabilities to government and commercial customers.
Draper’s roots date to the 1930s, when Dr. Charles Stark Draper created a teaching laboratory at the Massachusetts Institute of Technology (“MIT”) to develop the instrumentation needed to make precise measurements of angular and linear motion to improve airplane navigation. Draper was known for most of its first 40 years as the MIT Instrumentation Laboratory. It was renamed for its founder in 1970 and remained a part of MIT until 1973 when it became an independent, not-for-profit engineering research and development corporation.
From its early days, Draper established itself as a global leader in the development and early application of advanced guidance, navigation and control (“GN&C”) technologies to meet the needs of the U.S. Department of Defense (“DoD”) and the National Aeronautics and Space Administration (“NASA”). Draper’s record of achievements for the DoD and NASA include the design and development of the world’s most accurate and reliable guidance systems for undersea-launched ballistic missiles, intercontinental ballistic missiles, and the GN&C systems developed for the Apollo Space Program.
Draper technology guided U.S. astronauts during the Apollo program for all 17 missions, including nine missions to the moon and back. Since then, Draper technology has been a part of every crewed U.S. space mission. Draper’s pioneering work contributed substantially to the development of today’s complement of precise inertial sensors, software, and ultra-reliable systems —including digital fly by wire technology—that are critical for precision GN&C of commercial and military aircraft, submarines, strategic and tactical missiles, spacecraft, and un-crewed vehicles.
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Autonomous systems are another area of expertise at Draper. The Company has more than 60 years of experience in designing, testing and delivering fault-tolerant autonomy in high- stakes arenas, from space to undersea. For example, the Draper-developed Timeliner™ automation software is used aboard the International Space Station and the Company’s autonomous mission management software demonstrations have included a number of autonomy firsts.
Draper has made numerous contributions to the Microelectromechanical System (“MEMS”) field and has developed applications for both military and commercial needs. Draper’s pioneering work and contributions to MEMS technology began in 1984. Draper engineers were the first to demonstrate measurement of angular rate with a silicon MEMS double-gimbal gyro. MEMS-based guidance systems designed subsequently by Draper have been demonstrated successfully in a number of guided munitions programs and onboard an Air Force spacecraft, which represented the first practical application of a MEMS gyro in space.
Draper Today
In 2015, then new President and CEO of Draper, Dr. Kaigham J. Gabriel, realigned the Company’s strategy to broaden the impact of Draper’s people, resources and work by: (i) investing in the organization to support changes in DoD and national security funding and needs; (ii) leveraging the Company’s non-profit mission to find new sponsorship to solve global challenges; and (iii) increasing engagement with commercial innovation.
Draper continues to expand its capabilities to solve problems of national importance in the areas of defense, space, biomedical, energy and transport systems. Draper’s success in adapting to the evolving needs of its customers has been foundational to the pioneering achievements of its past. This approach continues to enable Draper to contribute to and envision new solutions for its customers, including in its work:
applying sensors, modeling and simulation, radiation hardening, and survivability to precision targeting and missile avionics development for the Missile Defense Agency; designing flight control hardware and software for the Dream Chaser® Cargo System spacecraft; increasing perception and dexterous functionality for robots; developing Human Organ Systems platforms for testing drugs safely on a proxy for female reproductive system that uses human organ tissue for accurate results; enabling faster and less costly biomanufacturing of CAR-T cell therapies and a breath-analysis tool to detect invasive aspergillosis rapidly (now in human testing); and creating a chip-scale LiDAR sensor that can image obstacles at a greater distance with higher resolution than existing commercial LiDARs—a capability critical to improving the safety and performance of autonomous motor vehicles.
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Draper employs approximately 1,100 technical staff; more than half of whom possess graduate degrees in engineering and science and more than 90% of whom work at the Company’s principal facility in Cambridge, Massachusetts. Key to Draper's innovation culture are the multidisciplinary engineering and scientific teams executing on customer and internal projects; the extensive and diverse laboratory facilities and equipment; and the breadth of experience and expertise within one organization.
In fiscal year 2017, Draper had $571.8 million in total revenue across three major program areas: Strategic Systems; National Security & Space (“NS&S”); and Commercial Programs. Internal revenue, which excludes subcontractor pass-through amounts, was $381.7 million:
Strategic Systems accounted for approximately 48% of internal revenue, with the bulk from work Draper delivers as the prime contractor on guidance, navigation and control for the Navy’s Fleet Ballistic Missile Program (a program Draper has supported on a sole-source basis since 1963). Another 48% of internal revenue was from NS&S programs, representing a mix of contracts from DoD, NASA, the intelligence community, the defense industry and the Defense Advanced Research Projects Agency (“DARPA”). As space exploration and operation has become commercialized, NS&S also supports start- up space companies, such as BridgeSat, with its system architecture optimization, and more established companies, such as Sierra Nevada Corporation, with large- mission activities including Cargo ReSupply (“CRS”) to the International Space Station. The final 4% of revenue is from Commercial programs, primarily from research and development contract work from private-sector companies (such as Colgate- Palmolive, Pfizer, and Autoliv) focused in two major areas: (i) biomedical solutions and pharmaceuticals research and testing; and (ii) transport systems and energy infrastructure.
GOVERNANCE AND MANAGEMENT
Board of Directors and Members
Draper is governed by a Board of 12 Directors (the “Board”). The Members of the Corporation elect the Directors at the annual meeting of the Company. The Board of Directors, in turn, elects its Chairman and the Officers. New Members are elected for up to three-year terms by existing Members at an annual meeting. Membership in the Company consisted of 45 persons as of October 3, 2017. A maximum age limit of 72 applies to both Members and Directors. Director terms are limited to nine consecutive one- year terms, however, a Director may be reelected following a hiatus of at least one year. The only Director who is also an employee is Draper’s President and CEO. The Company’s Officers manage its day-to-day operations.
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The Board holds regular meetings four times per fiscal year, provides compliance oversight of Draper’s programs and services, sets broad governance policies and objectives, and formally evaluates Draper’s overall performance each year through functional committees. This governance helps ensure that resources are managed effectively and in a fiscally responsible way.
Draper’s Directors and their principal business or professional affiliations as of January 31, 2018 are as follows: DIRECTOR DIRECTOR SINCE PRINCIPAL AFFILIATION
Franklin C. Miller, Chairman 2009 Independent Consultant and Principal, the Scowcroft of the Board Group; Former Special Assistant to the President
Kaigham (Ken) J. Gabriel 2014 President & CEO, The Charles Stark Draper Laboratory, Inc.
David B. Aronoff 2015 General Partner, Flybridge Capital Partners
Lena G. Goldberg 2013 James M. Collins Senior Lecturer, Harvard Business School; Retired, Executive Vice President & General Counsel, Fidelity Investments
Daniel E. Hastings 2010 CEO and Director, Singapore MIT Alliance for Research & Technology; Cecil and Ida Green Education Professor of Aeronautics and Astronautics and Engineering Systems, MIT
Francis H. Kearney 2015 Lieutenant General, United States Army (Retired); President, Inside-Solution-LLC; Senior Advisor, Faculty and Board Member, Thayer Leader Development Group
Joanne M. Maguire 2013 Retired Executive Vice President, Lockheed Martin Space Systems Company
Gary S. May 2017 Chancellor, University of California – Davis; Former Dean, College of Engineering, Georgia Institute of Technology
John T. Mitchell 2017 Rear Admiral, United States Navy (Retired)
David R. Shedd 2015 Former Acting Director of the National Intelligence Agency; Consultant, Faith Without Borders
D. Richard Williams 2017 Chairman, Primerica, Inc.
M. Elizabeth Young 2017 Rear Admiral, United States Navy (Retired)
The Board of Directors has five committees: Audit, Budget, Finance, Human Resources and Compensation Policy (each consisting of five Directors); and Nominating and Governance (consisting of four Directors). Draper’s President and CEO serves on the Nominating and Governance Committee (ex officio).
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Executive Management
The day-to-day operations of Draper are the responsibility of the President and CEO and his or her staff. The staff includes the corporate officers who are responsible for developing and executing Draper’s business and strategic plans and fulfilling programs for their respective business areas.
Draper’s principal officers are:
Dr. Kaigham (Ken) J. Gabriel, President and CEO. Since October 2014, Dr. Gabriel has been the President and CEO of The Charles Stark Draper Laboratory, Inc. and has served since October 2017 as Interim Vice President of NS&S following the retirement of the prior VP.
The President’s staff also includes the General Counsel, the Principal Director of Strategic Communication & Government Affairs and the Director of Strategic Technical Opportunities.
Dr. Gabriel was most recently co-founder of the Advanced Technology and Projects group at Google, after he joined the organization in 2012 as Corporate Vice President of Google/Motorola Mobility. From 2009 to 2012, Dr. Gabriel was Deputy and Acting Director of the Defense Advanced Research Projects Agency (“DARPA”) of DoD where he led an agency with an annual budget of $3 billion charged with managing the DoD’s most cutting-edge projects.
Between 2002 and 2009, Dr. Gabriel, widely regarded as the architect of the MEMS industry, was the Co-Founder, Chairman and Chief Technology Officer of Akustica, a semiconductor company that commercialized MEMS audio devices and sensors. Akustica pioneered the use of digital silicon microphones and shipped more than six million units to the consumer electronics industry prior to being acquired in 2009.
Dr. Gabriel was a tenured professor in both the Robotics Institute and the Department of Electrical and Computer Engineering at Carnegie Mellon University. He also served as a program manager and office director at DARPA, where he conceived and led projects that took MEMS into practical applications. Earlier in his career, he was a visiting professor at the University of Tokyo, a research scientist at the Naval Research Laboratory, and a Research Principal Investigator at AT&T Bell Laboratories. Dr. Gabriel’s honors include being named a Technology Pioneer by the World Economic Forum at Davos, named to the Senior Executive Service, a position classification in the United States government civil service, and awarded the Carlton Tucker Prize for Excellence in Teaching from MIT.
Dr. Gabriel holds SM and ScD degrees in Electrical Engineering and Computer Science from MIT.
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Steven J. DiTullio, Vice President, Strategic Systems. Mr. DiTullio became Vice President for Strategic Systems at Draper in October 2012. In this capacity, Mr. DiTullio has responsibility for life-cycle support for the U.S. Navy’s Trident Missile guidance and reentry systems, Air Force Minuteman III instrument sustainment, and strategic IR&D programs. Mr. DiTullio was previously promoted to Principal Director for Strategic Systems in 2008 where he was responsible for all technical and programmatic oversight of the Trident II Life Extension Program.
Mr. DiTullio joined Draper following a five-year career with the U.S. Navy. In 1979, he was assigned to the U.S. Navy’s Nuclear Power program. While assigned to the USS George Bancroft SSBN 643 (G), Mr. DiTullio served in several Division Officer billets as well as being the Ship’s Communicator and Damage Control Assistant. Mr. DiTullio qualified as an Engineering Officer and retired from the Naval Reserves in 1992 as a Commander.
Upon joining Draper in 1984, Mr. DiTullio was assigned as a Systems Engineer working on the design of the Navy’s MK6 Mod 0 guidance system for the Trident II missile. In this role, Mr. DiTullio was responsible for coordination and checkout of the guidance system with the other Strategic Weapon System subsystems as well as the integration of the Trident II into the UK fleet. Mr. DiTullio was promoted to Program Manager in 1988 responsible for the planning and execution of the Technical Engineering Support for the MK6 Mod 0 guidance system. Upon being promoted to Associate Director for Strategic Programs in 2001, Mr. DiTullio lead Draper’s transition to becoming the prime contractor to Strategic Systems Programs for all aspects of the Guidance program.
Mr. DiTullio earned an MBA from Northeastern University and has a Bachelor of Science in Electrical Engineering from The Citadel.
Tara Clark, Vice President, Commercial Programs. Ms. Clark joined Draper in January 2016, bringing to Draper more than 25 years of experience in the commercialization of biomedical products. Prior to joining Draper, she was the North American General Manager for Miltenyi Biotec where she initiated and secured FDA approval for various medical devices, and established commercial launch strategies. Her successful navigation of the clinical and regulatory landscape enabled the advancement of one medical device from concept to FDA approval and drove double-digit revenue growth for each of 12 years.
Over the course of her career, she has served as a Director with Baxter Healthcare Corporation, where she launched novel medical devices and immune-therapeutics within the field of hematology/oncology. She was elected as the first Industry Representative to the International Society for Cellular Therapy Advisory Board, and is an active Member of the American Society for Blood and Marrow Transplantation. Recently, she was recognized by the Boston Business Journal as a “Woman to Watch in Science and Technology, 2017.”
Ms. Clark holds a degree in Microbiology from the University of Missouri-Columbia.
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Richard J. Russell, Vice President of Engineering. Mr. Russell became Vice President of Engineering at Draper in February 2018. His appointment as a corporate officer is pending approval at the March 20, 2018 board meeting. His primary responsibilities include maintaining a world-class staff of engineers and scientists, developing technology and business strategies for advancing Draper’s capabilities and ensuring exemplary performance of customer projects. Prior to his present position, he held the position of Director of Materials Science and Microfabrication, a division which he founded. Mr. Russell was responsible for strategic and operational plan development, program execution oversight, technology investment and supervision of the Materials Science and Microfabrication organization at Draper. Prior to that, Mr. Russell was Director of Special Technology Solutions, which is responsible for advancing Draper’s Intelligence Community activities in sensors and communication systems, navigation, and advanced technical solutions.
Mr. Russell has been at Draper for more than 30 years, where he has held line management positions in Engineering and Program Management. His positions covered a variety of technical domains including all aspects of hardware design including Radio Frequency Communication Systems and Tags, Autonomous Undersea Mapping and Mine Hunting, Unattended Ground Sensors, Advanced Packaging Techniques and Fault Tolerant Computing. He was the former Director of Draper IR&D which gives him a view of all of Draper’s technology. He has worked in many domains from undersea manned and unmanned vehicles, space craft main computer control to tracking, tagging and locating devices for harsh environments.
Mr. Russell holds a MBA from Boston University and a Bachelor of Science in Electrical Engineering from Tufts University.
Elizabeth Mora, Chief Administrative Officer (CAO), Chief Financial Officer and Treasurer. Ms. Mora manages Draper’s investment portfolio, currently more than $240 million, with an outside investment advisor. She also manages Draper’s real estate portfolio in Kendall Square, Cambridge, Massachusetts with multiple tenants. She oversees the administrative and financial functions of the Company including Finance, Human Resources, Contracts, Facilities, Real Estate, Information Technology and Internal Audit. Along with the CEO, she initiated a diversity effort at Draper and is responsible for spearheading a number of the Draper’s Employee Resource Groups that foster diversity and inclusion as a key element of recruitment and retention.
Ms. Mora is the former CFO of Harvard University where she was responsible for its large endowment, annual operating budget, and 15,000 employees. As CFO of Harvard University, she was responsible for overseeing risk management for the University, leading the financial analysis supporting Harvard’s development of its Allston, Massachusetts property, and serving on the University’s Management Company Board. She led the search for a new CEO of the Harvard Management Company in 2008. Prior to that, Ms. Mora spent nine years in public accounting and consulting at PricewaterhouseCoopers (“PwC”), serving over 40 different university, research institute, and nonprofit clients as a manager in PwC’s National Regulatory Consulting Practice. In addition, she has extensive
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experience serving on boards of directors. Currently she serves as Compensation Committee Chair and as an Audit Committee member for MKS Instruments (NASDAQ: MKSI). She has been a director of MKS since 2012. She also serves as Corporate Responsibility Chair for GCP Applied Technologies (NYSE: GCP) where she has been a director since 2016.
Ms. Mora holds a Bachelor of Arts from the University of California, Berkeley and an MBA from the Simmons Graduate School of Management. She is also a CPA in the Commonwealth of Massachusetts.
STAFF
As of June 30, 2017, Draper had a total of 1,673 employees, including 1,096 technical staff and 223 technical support staff that predominantly charge their time directly to customer programs, and 354 finance and administration staff that are typically charged to projects through an overhead rate.
As of June 30, 2017, there were 157 members of The Research, Development and Technical Employees' Union (RDTEU) employed by Draper. The current contract with the union commenced June 24, 2017 and will end on June 26, 2020. Draper considers its relationship with its employees to be good.
To meet its staffing needs, Draper competes effectively within the regional labor market and uses third-party compensation experts to develop a competitive compensation structure. In addition to competitive salaries, the Company also maintains a generous benefits program including a defined contribution retirement plan in which Draper contributes 10% of base pay and the employee is required to contribute 5% of base pay. Effective December 31, 2017, Draper froze its defined benefit plan which exclusively served the non-exempt, union population. These employees were moved into the defined contribution plan, achieving a uniform retirement benefit offering for all non-officer employees.
Draper reports a defined benefit obligation on its annual financial statement on three separate plans: Retirement Plan for Employees (frozen as of 12/31/2017), Retirement Plan for Staff Members (frozen as of 12/31/2008) and the Supplemental Retirement Plan for Corporate Officers (open). As of June 30, 2017, the benefit obligations owed under the three defined benefit pension plans, calculated under generally accepted accounting
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principles, was approximately $135.1 million, with $107.5 million funded. There were no pension funding requirements for the 2016 and 2017 fiscal years. While the amount of any future contributions cannot yet be determined, management does not anticipate a material adverse effect on Draper’s financial position or results of operations from any future funding requirements.
Retiree medical benefit obligations totaled, as of June 30, 2017, approximately $24.3 million, of which approximately $19.0 million was funded. The funding of the medical plan is expected to continue on an as-incurred basis.
BUSINESS AREAS
To capitalize on Draper’s diversified wealth of multidisciplinary engineering and scientific expertise, the following business areas have been created to best steward the Company’s more than 80-year relationship with government sponsors and to promote new business opportunities by aligning Draper’s technology solutions with its customer’s ever shifting problem-solving needs.
Strategic Systems
Draper is the prime contractor for the guidance systems used on the U.S Navy’s submarine- launched ballistic missiles (“SLBM”). Draper is also responsible for the sustainment of the inertial accelerometers used in the guidance system in the Air Force’s Minuteman III (“MMIII”) intercontinental ballistic missiles (“ICBM”). Additional programs related to missile GN&C, submarine navigation, nuclear weapon security, miniature inertial measuring units, and radiation-hard technologies are outgrowths of the Company’s long history with these sponsors. Strategic Systems generated approximately 48% of Draper’s internal revenue (total revenue less subcontracted expenses) in fiscal 2017.
Modernizing the Nation’s Strategic Missile Guidance Systems. Draper has been the U.S. Air Force’s and U.S. Navy’s design agent for land-based and SLBM guidance since the
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1950s. As the prime contractor for the Navy’s current Trident D5 missile guidance system, Draper manages the MK6 (Mark 6) guidance system Life Extension, or MK6 MOD1, development and production team of more than 650 engineers from Draper and its major subcontractors as it modernizes the missile’s inertial guidance system. The goal is to upgrade 575 systems through 2024, which will extend the guidance system service life to 2042 while lowering the Navy’s future maintenance and support costs. Production work for this contract is completed at a Government Owned, Contractor Operated (“GOCO”) facility in Pittsfield, MA, in which Draper is the sole Contractor-operator. The MK6 MOD1 utilizes a modular architecture that will allow for future modifications required to support the Ohio Replacement Submarine service life of 2080. Draper continues to maintain the MK6 guidance system currently deployed in the Trident submarine fleet.
Advancing GN&C: Technology for Reentry Vehicles and Interceptors. In addition to maintaining deployed strategic systems and modernizing existing systems, Draper is expanding into other government needs by developing the GN&C technology needed for shipboard navigation and to enable Conventional Prompt Strike (“CPS”) capability to deliver non-nuclear payloads with high accuracy to virtually anywhere on the globe in less than one hour. Draper is also supporting several Missile Defense Agency (“MDA”) initiatives, developing another major customer area for the Strategic Systems directorate, primarily in the area of radiation hardened GN&C to enable advanced interceptors.
Defense Systems
The Defense Systems program office develops new solutions and builds on emerging commercial products and technology to develop, and ensure operational deployment, of next generation solutions that provide military advantage. The emphasis is to address the national security needs of U.S. military forces in the Army, Navy, Air Force, and Marine Corps. Defense Systems is a portfolio of four businesses; three sponsor-focused businesses and an Advanced Technology business centered on DoD Science and Technology markets. Revenues generated by the Defense Systems business area were approximately 20% of internal revenue (total revenue less subcontracted expense) in fiscal year 2017.
Defense Systems’ multi-domain areas address critical shortfalls of capability within defense acquisition markets:
Combat Solutions: advances the combat effectiveness of land forces in overmatch situations, addressing physical and cognitive resources of the small military unit; Mission Systems: develops sensors, processing, and electronics solutions to counter an adversary’s air, sea, and spectrum anti-access, area-denial strategy; Secure Systems: protects the critical technology in the embedded processing of military systems from compromise and exploitation. Draper’s solutions in these areas help meet the urgent needs of U.S. national security and defense; and Advanced Technology: develops promising capabilities to enable generation-after- next solutions. Advanced technologies are being developed in the areas of atomic
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physics enabled instrumentation, sensing and robotics, GPS-denied navigation, air vehicle autonomy, cybersecurity, and secure processing.
Space Systems
Draper’s space programs focus on the need for advanced development of high-performance and highly reliable flight systems. Draper Space Systems business area leverages expertise in GN&C to address the future needs of human space exploration, space science, and commercial space applications. Future vehicles and missions will require combinations of advanced GN&C technologies, including high performance, high reliability, significant autonomy, and low-weight, low-power avionics. Revenues generated by the Space Systems business area were approximately 9% of total internal revenue (total revenue less subcontracted expenses) in fiscal year 2017.
Human Space Exploration and Operations. Continuing its long history with the U.S. human space program, Draper plays a key role in the operation of the International Space Station (“ISS”). The Company’s Timeliner™ automation software operates on the ISS. Additionally, as part of NASA’s developing human space program that will return humans to the Moon, and eventually to send them to Mars, Draper is supporting the development of the next generation of human exploration vehicles and programs aimed at developing technology to support deep space missions (biomedical, extravehicular activity, and advanced GN&C). Space Science. Draper works with scientists to develop advanced systems for astrophysics, Earth, planetary and helio-physics missions. Draper is a key member of the Osiris REX, Parker Solar Probe, and CYGNSS funded programs. Commercial Space. Draper is developing critical technology to enable new commercial space systems. The Robotic Servicing of GEO Spacecraft is a public/private partnership with DARPA that will establish a first of a kind repair capability of GEO spacecraft. Draper is leveraging technology developed from previous government and Draper IR&D funding to provide rendezvous and proximity operations GN&C as well as autonomous mission management.
Special Programs
Draper’s Special Programs Directorate develops new technology and prototype systems for U.S. Government Intelligence, Counter Terrorism, and Homeland Security customers. Draper provides early stage concept development, proof-of-principal demonstration prototypes, first manufacturing articles, and manufacturing documentation for transitioning these systems to full operation. Draper also provides low-rate production and field support for systems whose quantity, technology, or security restrictions are not amenable to large volume production. The Company’s systems address its customers’ most difficult operational needs in communications, navigation, miniature electronics, precision sensors, robotics, cyber security, and data analytics. Revenues generated by the Special Programs
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business area were approximately 19% of internal revenue (total revenue less subcontracted expenses) in fiscal year 2017.
Communications, Navigation, and Miniaturization. Draper’s radio frequency, vision-based, and inertial navigation systems push the limits of small size and operational capability in highly challenging environments. The Company’s advanced packaging and efficient algorithm technologies and its end-to-end system-level approach to miniaturization enable these ultra-dense systems to provide ever increasingly complex functionality without burdening users with increased size, power, and weight. The special purpose communications protocols developed by Draper enable new modes of operation for customers, and significantly extend the limits of current state of technology in this area. Sensor Systems. Draper researches, develops, and produces low-rate quantities of compact sensors and sensitive instrumentation systems to provide superior capabilities for military operations. The Company’s advanced technology portfolio results in system capabilities that are superior in size, weight, power, and performance to capabilities developed using commercially-available technologies. Draper also develops robotic systems to precisely deliver sensors to dangerous environments. Using autonomous, multimodal navigation technologies and precision guidance algorithms, these systems extend the reach of Draper’s sensors while keeping operators at a safe distance. Small Electronics and Mechanisms. Draper maintains a leading role in developing ultra-miniature electronics, electro-mechanical and mechanical systems with a broad range of applications. Draper continues to pioneer multichip module technology for compact electronics packaging, including developing novel methods for employing heterogeneous technology components and demonstrating unprecedented levels of system integration. These technologies provide performance advantages for Draper’s larger scale integrated systems. Data Analytics. Draper develops advanced technology capabilities for intelligence personnel to make decisions quickly and effectively in situations where the quantity and complexity of the data to be analyzed is overwhelming for human operators. Combining big-data analytic tools with machine learning algorithms and human- centered engineering, these innovative methods are approaching technology readiness levels for operational transition and deployment. Cyber Vulnerability Assessment. Special Programs is developing next-generation analysis tools that help to ensure the security of embedded systems by finding and fixing subtle software defects, safeguarding personal electronics and infrastructure from attack. Draper is also developing fundamentally new approaches to cyber protection for the Internet of Things (systems that are connected to the internet other than through networked computers, such as wireless sensors). Draper’s technology, called the Inherently Secure Processor, protects systems from entire classes of exploits at the hardware processer level. Draper recently licensed this technology to a start-up entity that had been incubated at Draper.
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Biomedical Systems
Draper’s Biomedical Systems Office (“BSO”) exploits the synergy between engineering and the life sciences to design, develop and test innovative solutions to many pressing healthcare issues. Draper partners with leading medical research, device and pharmaceutical organizations such as Massachusetts General Hospital, Brigham and Women’s Hospital, and Pfizer to develop innovative microfluidic platforms and medical devices for both medical research and clinical markets. The BSO leverages Draper’s nearly 90 years of experience in instrumentation, sensors and microfluidics to develop devices that are ideally suited for the manufacture of emerging therapies, including those targeted at the cellular and molecular level. The goal of Draper’s work is to reduce the cost of health care and improve patient outcomes through providing better drug discovery R&D tools, faster, less costly, and safer personalized medicine and more rapid diagnostics and treatments. Revenues generated by the Biomedical Systems business area were approximately 3% of total internal revenue (total revenue less subcontracted expenses) in fiscal year 2017.
Draper is a device, or technology “enabler” for researchers within the academic research institutions, hospitals and commercial ecosystems. Draper’s approach is to identify emerging market needs, and apply its broad engineering expertise to translate ideas to working proof-of-concept prototypes that can be tested by collaborators. Draper has developed deep expertise in novel:
engineered biological systems including human organ systems, and gene editing platforms; fluidics and micro fluidics, including blood perfusion systems; specialized physical and biological sensors; real-time data acquisition, processing, and data fusion into decisions; design and fabrication of clinical-grade medical device prototypes; and hermetic packaging methods, including those that enable implantable bioelectronics.
Under contract with Pfizer and other leading commercial companies, Draper is developing technologies to address rapid diagnosis of infectious pathogens, human organ systems, cell processing and gene editing systems for precision medicine, medical devices for dialysis and lung assist, and implantable devices to treat brain injury and other neurological disorders.
Transport and Energy Systems
Draper’s Transport and Energy Office leverages Draper’s capability in sensors, position, navigation and timing controls and highly reliable systems to develop innovative solutions. Draper is heavily involved with key automotive stakeholders. Using its heritage and expertise in autonomous navigation in the advancement of self-driving cars, Draper works side-by-side with its customers’ engineers and scientists to design and prototype
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autonomous components and systems that are then integrated into commercially marketed vehicles for its customer’s evaluation. Often, Draper engineers take these solutions to the field for further integration and testing. Draper’s success is measured by the advancement of innovative technology toward commercialization.
Within the Energy sector, Draper has worked with leading utility and oil and gas companies to design and deploy a system for measuring corrosion in the miles of distribution pipelines in the United States. The first commercial product to be deployed within the industry is Draper’s WiSense Magnetometry System, which continually monitors the erosion of iron- based pipes in regions that are known to be at high risk, without shutting down the pipeline as is required with other systems. This product is expected to be deployed worldwide in 2019 by a leading oil and gas service provider. Draper is also working with these customers to develop protective devices to prevent blow-outs within refinery operations. Revenues generated by the Transport and Energy business areas were approximately 1% of Draper’s total internal revenue (total revenue less subcontracted expenses) in fiscal year 2017.
TECHNOLOGY TRANSFER
A distinguishing feature of Draper is its ability to bring the full-spectrum of engineering resources to solve customer problems. The Company can take a problem from concept to development and oversee the technology transfer and license the technology, if appropriate. Draper has nurtured a highly skilled and motivated work force supported by a network of exceptional design, fabrication, and test facilities. This combination of highly trained technical talent and state-of-the-art facilities enables Draper not only to deliver the design and development of first-of-a-kind systems incorporating innovative technology, but also to offer high-value-added engineering services to a broad range of government and commercial customers. Draper transfers its technology developments to both government and commercial customers, depending on the source, purpose, and contractual agreements governing the original development.
Typically for a government customer, Draper assists the customer in transferring its technology to industry for production. In the case of its work as the design agent for the U.S. Navy’s strategic missile guidance, for example, Draper, with active participation from partners, transitions a proven design package to an industrial team and oversees the successful manufacturing, deployment, and fleet support of the systems. In other cases, Draper licenses its designs to a partner.
Draper also enables the public to benefit from its intellectual property (“IP”) by licensing it to companies that commit to make products incorporating that IP available to the public. Draper has successfully licensed its IP to both large, established companies and startups.
Another way Draper contributes to the innovation economy is by spinning out technologies when they mature to a point where their continued development and sustainment can be funded commercially. Last August, Draper assisted with the formation of, and licensed
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technology to, Dover Microsystems, Inc. Dover had been incubated at Draper and will provide the commercial sector with access to novel hardware-based cyber security, while Draper continues to focus on the defense and national security market.
INTERNAL RESEARCH, EDUCATION AND OTHER ACTIVITIES
Draper's internal research and development (“IR&D”) philosophy is to approach big problems in which radically different approaches from the mainstream can produce exponential improvements over current technology, or even solutions where none existed previously. In each of the last three fiscal years, the Company has spent $20-25 million on IR&D at Draper and through an active collaboration philosophy to bring in expertise in areas outside of the Company’s own focus. More broadly, Draper regularly teams with academic researchers around the country, having worked with more than 40 colleges and universities in lead and subcontractor roles over this time period. Draper’s IR&D program is committed to accelerating the growth of critical technologies that management anticipates will meet the near- and long-term requirements of Draper’s customers while allowing the Company to continuously refresh its core competencies.
As a not-for-profit, one of Draper's core commitments is giving back, through a variety of mechanisms. Draper’s investment in IR&D is but one example of this. In another, Draper's Sembler initiative supports regional technology start-ups by providing access to a variety of resources, including fabrication and prototyping, testing and characterization, and mentoring and guidance from advanced technical experts. These partnerships position Draper and the technology startups to take on larger challenges together than either company could take on alone.
Advanced technical education has remained a key component of Draper's mission since Draper became independent from MIT in 1973. In the last 44 years, the flagship Draper Fellow Program has supported over 1,000 graduate students pursuing advanced degrees in technical areas of interest to Draper. Draper Fellows work closely with Draper technical staff to develop state-of-the-art technologies in world-class laboratories, and their scholarly outputs often go beyond top-tier journal papers and conference presentations to include prototypes, testbeds, and field implementations.
In the 2017-2018 academic year, Draper is supporting more than 60 Fellows in graduate programs at multiple universities in the Draper Fellow Program and two graduate students in the inaugural joint Hertz-Draper Fellowship, part of the prestigious Hertz Foundation Fellowship Program, a not-for-profit organization dedicated to empowering America’s most brilliant scientific minds. Draper also supports undergraduate and high school students through various internship and co-op programs.
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The Draper Prize for Engineering
The Charles Stark Draper Prize for Engineering was established and endowed by Draper Laboratory in 1988 in tribute to its founder, Dr. Charles Stark Draper, who pioneered the development of inertial navigation and was the founder of Draper (as the MIT Instrumentation Laboratory). The Prize is intended to honor those who have contributed to the advancement of engineering and to improve public understanding of the importance of engineering and technology.
Administered by the National Academy of Engineering, the international prize, one of the world’s preeminent awards for engineering achievement, honors an engineer whose accomplishment has “significantly impacted society by improving the quality of life, providing the ability to live freely and comfortably, and/or permitting the access to information.” The $500,000 prize is awarded biennially and recognizes achievements in all engineering disciplines.
Fifty-four engineers have been honored with the prize over the 29 years since its founding. Collectively, they have contributed to the invention and application of 22 technologies, including the development of the integrated circuit, world-wide web, the internet, satellite communications, drug-delivery systems, cellular telephone systems and networks.
Engineering Impact
Draper’s Engineering Impact is the Company’s newest undertaking to expand its history of service, by applying its substantial engineering capabilities to the world’s pressing social and humanitarian challenges. As an example, through Engineering Impact, The Canary Foundation has enabled Draper to apply its expertise in computer vision techniques, developed for intelligence gathering from satellite imaging, to address fundamental limitations of today’s cancer detection tools.
Engineering Impact’s approach is to identify, develop, and execute projects in conjunction with partners working in specific challenge domains, ensuring that the Company is providing solutions with impact to meaningful problems. Draper and its partners work together from project ideation through implementation and release to ensure that the ultimate solution will be both deployable and sustainable. Approaches to sustainability range from including impacted populations as end users during development to open- source release of system designs. Areas in which the Company’s expertise is exceptionally well suited include measurement, evaluation, and decision systems supporting challenges in the environment and in education. Draper’s biotechnology capabilities enable both innovative medical devices and public and population health initiatives. The Company has a long history of innovative uses of big data analytics which is applicable across a wide range of problem spaces. Working in conjunction with its partners, Draper forms a unique resource to positively impact social and humanitarian challenges.
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Outreach Programming
Draper Sponsorships. As Draper continues to grow its offerings within the commercial market, it has honed its corporate sponsorships over the past year to achieve two national goals: (i) to raise visibility of Draper and its offerings among potential partners and customers; and (ii) to increase Draper’s visibility among premier scientists and engineers who could contribute to advancing the development of capabilities in the national interest by joining Draper.
To that end, Draper entered sponsorship, or underwriting, agreements with PBS/NOVA and National Public Radio/Science Friday. These corporate sponsorships have been referenced by multiple recruits and new hires as well as new and potential customers, business partners, and potential major donors.
Draper Volunteers. Draper employees have a long history of service to the communities in which they work and live, and participate in group and individual volunteer opportunities in both community and civic organizations. The Company grants each employee eight hours of paid leave for volunteer activities each calendar year, and contributed almost 700 hours to local charitable organizations through this program in 2017.
Employee Giving. Draper’s charitable giving portal provides its employees with information and tools to make informed decisions to donate to the causes they care about. Employees receive a company match of up to $1,000 per calendar year and the Company runs an annual competition to bring attention to the program. Employees contributed $287,000 across 500 charitable organizations and disaster relief funds in 2017, to which Draper added $230,000 in matching funds.
Community Collaborations. Draper is a founding member of the Kendall Community Group, a collaboration of businesses and human services agencies designed to support local youth programs. A member of the Cambridge Chamber of Commerce, Draper was also a founding member of the Chamber’s Community Outreach Committee.
FACILITIES AND EQUIPMENT
Facilities
Draper owns and occupies 555 Technology Square, Cambridge, Massachusetts (the Duffy Building), which is a concrete and glass structure with varying heights of four, six and eight floors, constituting 18 cores of engineering laboratories and office space. This approximately 493,000 square foot building and adjacent 950-car garage are situated on approximately five acres and were constructed in the mid-1970s. The building and a portion of the garage were acquired by Draper in 2000. The building is located in the Kendall Square area of Cambridge, Massachusetts, which is an international center of
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engineering, biomedical and pharmaceutical research, and is within walking distance of the MIT campus.
Over the last two years, Draper built a 32,000 square foot atrium and renovated approximately 104,000 square feet of office and laboratory spaces in the Duffy building, increasing employee capacity and improving workflows in the renovated spaces. The sleek architecture, ergo-dynamic furniture, visually appealing design and collaborative workspace configuration have greatly impacted the work environment in a positive way.
Draper also owns seven condominium units at One Hampshire at Kendall Square, a 371,000 square foot, seven story, concrete and glass laboratory and office complex on approximately 2.5 acres in Cambridge, Massachusetts. This building is connected to the Duffy Building via an enclosed pedestrian bridge. Currently, Draper-owned units constitute approximately 172,000 square feet of this complex, of which 94,000 square feet is leased to third parties and the remaining area is occupied by Draper. The south wing of this complex was constructed by Draper in 1984 and the addition of a north wing was completed in 2007. The entire building was converted to a condominium in conjunction with the north wing addition.
In St. Petersburg, Florida, Draper owns a 41,000 square foot laboratory facility for microelectronic fabrication. This free standing concrete and steel facility is a 50/50 mix of state-of-the-art Class 100 clean rooms and office space that were constructed in 2002 and purchased by Draper in 2008. This facility, and the equipment therein, is currently leased, in a lease-to-own arrangement, to a subcontractor engaged in manufacturing for Draper’s defense systems business.
Committed to providing best-in-class service to its customers across the country, Draper leases office space, or is granted space in close proximity to strategic customers. Current satellite offices include, but are not limited to: a Government Owned/Contractor Operated facility in Pittsfield, MA (Navy), St. Petersburg, FL (Special Operation Forces), Houston, TX (NASA), Huntsville, AL (MDA/NASA) and offices in the Washington D.C. area to foster and grow many partnerships serving the national interest. As of January 2018, Draper maintained a total of thirteen leased office spaces with a combined office space of approximately 211,000 square feet. Draper satellite offices are staffed with approximately 130 employees in both technical and administrative capacities.
Equipment
Draper is a full-spectrum engineering solutions company and therefore requires dedicated facilities and equipment to support activities encompassing basic research through prototype development and small batch production. The four components of this capability are: (i) systems engineering; (ii) hardware design and development; (iii) materials science; and (iv) algorithms and software. These capabilities are supported by state-of-the-art tools to maintain the Company’s position at the cutting edge of innovation.
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FINANCIAL OPERATIONS
Contracts with government sponsors are Draper’s primary source of revenues. Draper also derives revenue from rent from real estate assets and IP licensing income. Unlike many research institutions in the higher education field, Draper does not generally rely on its entirely unrestricted investment portfolio to support operations.
Contracts
In fiscal 2017, Draper executed on approximately 337 active contracts totaling more than $3 billion in cumulative contract value. Committed, unexpended funding remaining on these contracts totaled $564 million as of June 30, 2017. This number represents remaining funds committed by sponsors to Draper for work on specific programs that will be performed in future periods.
Draper primarily performs research and development efforts under cost-type contracts for its various sponsors. Under these contracts, reimbursement is received for direct and indirect contract costs plus a fixed or incentive fee. Cost plus fixed fee contracts remained consistent on average from previous years, as a percentage of internal revenue, at approximately 50%, and cost plus incentive fee contracts at approximately 26% in fiscal 2017. Contract fees have averaged 5% - 6% of total revenue. Other contract types, such as cost reimbursable, cost plus award fee, fixed price, and time and material contracts comprise the remaining contract awards over the past five years. Draper’s fixed price contracts are predominately funded by long-standing customers, the Navy Strategic Systems Programs Office and NASA, and represent production efforts for technology developed over decades of research and development efforts. Other fixed price contracts and time and material contracts generally represent low risk programs requiring delivery of a final report, prototype demonstration, or hours of work, respectively. In fiscal 2017, fixed price and time and materials contracts represented approximately 22% of internal revenue.
Internal revenue by sponsor, as of the dates specified, is as follows:
Total Internal Revenue (excludes subcontracts) June 28, June 27, June 26, July 1, June 30, 2013 2014 2015 2016 2017 Navy 49% 47% 49% 54% 50% Air Force / Army 12% 11% 21% 15% 13% Other National Security 23% 24% 12% 11% 10% NASA 5% 4% 4% 4% 7% Other DOD 6%4%6%9%12% Other Non-DOD 5% 10% 8% 8% 9% Total: 100% 100% 100% 100% 100% Note: numbers presented in the above table may not add precisely to 100% due to rounding.
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The period of performance on any given contract can vary depending on the customer and work being performed. Average contract tenor as of June 30, 2017 was 2.2 years. Additionally, contract option years can be utilized to streamline the renewal of multi-year programs. This is especially prevalent with the Navy Strategic Systems Program.
Due to the specialized nature of Draper’s work, approximately half of the Company’s total revenue is sole source, that is, awarded without competition. Pursuant to Federal Acquisition Regulations 6.302, government sponsors are permitted to source suppliers without full and open competition in certain circumstances. Such circumstances applicable to Draper include when only one responsible source, and no other supplies or services, will satisfy agency requirements, or when disclosure of an agency’s needs would compromise national security unless the agency is permitted to limit the number of sources from which it solicits bids or proposals. Draper also benefits, as a non-profit, from the exemption that allows contracting without competition to establish or maintain an essential engineering, research or development capability provided by an educational or other non-profit institution.
Draper’s focus in a number of its programs is on high-impact, one-of-a-kind systems that are nationally important. Most of Draper’s sole source work has been granted on a non- competitive basis since the 1960s. Any follow-on work to sole-source contracts may also be granted without competition.
All payments to Draper for work performed on contracts with agencies of the U.S. Government are provisional payments which are subject to adjustment upon audit by the Defense Contract Audit Agency (“DCAA”). Draper has final audited rates through its fiscal year 2015. Draper’s fiscal year 2016 rates are not yet finalized and for fiscal year 2016, DCAA questioned costs of $9.5 million with penalties of $6.5 million for a maximum exposure of $16.0 million. Draper has provided additional support for the claimed costs, which Management believes are reimbursable in accordance with Federal acquisition regulations. The Defense Contract Management Agency has conducted fact finding diligence on the results of DCAA’s audit and has a five-year statute of limitations to conclude this matter.
Draper’s subcontract revenue results from work performed by third parties in support of Draper’s contracts with its sponsors. Over 90% of subcontracts are associated with Draper’s Fleet Ballistic Missile Program for the U.S. Navy, which includes the MK6 MOD1 program and ongoing maintenance of the deployed fleet, where the production activities are performed by other entities under subcontracts from Draper. Fees attributable to subcontracting activity are reflected in Draper’s internal revenue.
The production phase of the MK MOD1 program caps a 10-year development program and is expected to extend beyond 2024. Draper is the prime contractor for this program and the ongoing repair and maintenance of the deployed guidance systems, which represent the largest sources of annual revenue for the program. Although the program is funded through annual contracts, which include one-to-two option years for certain elements of the work,
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management expects it to continue as a sole-source program for the foreseeable future. Mandatory mission success, plus unique skills and facilities offered by Draper, create a high market entry barrier to other potential competitors.
Other Income
Draper’s other sources of income include IP licensing and leases of laboratory and office space in its One Hampshire Street condominium in Cambridge, Massachusetts.
Approximately 70,300 square feet of the One Hampshire Street facility is leased to a single entity through 2019, excluding renewal options. In addition, approximately 23,400 square feet is leased to another tenant under terms expiring in September 2019. The terms of these arrangements are planned out by Draper in anticipation of future space needs of its own.
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FINANCIAL INFORMATION
The following summary of financial information for Draper is derived from its financial statements for the fiscal years ended 2013 through 2017, inclusive.
Statement of Activities The following table is a summary statement of activities for each of the fiscal years in the five year period ended June 30, 2017.
Fiscal Years Ended (in thousands) June 28, June 27, June 26, July 1, June 30, 2013 2014 2015 2016 2017 Operating revenues Reimbursement of contract costs $ 504,046 502,644$ 543,518$ 598,546$ $ 546,459 Contract fees and capital facilities allowances 22,124 17,865 21,129 24,004 25,027 Other income 1,469 1,540 1,212 646 340 Total operating revenues 527,639 522,049 565,859 623,196 571,826
Operating expenses Direct costs Subcontracts 216,792 220,849 260,477 280,445 190,119 Salaries and wages 95,527 93,640 94,138 104,610 113,973 Employee benefits 27,545 27,340 27,808 28,977 33,774 Materials, services and rentals 21,474 18,136 21,928 29,441 31,459 Other, principally travel and equipment 29,205 28,896 26,828 34,611 43,807 Total direct costs 390,543 388,861 431,179 478,084 413,132
Indirect costs Salaries and wages 58,538 62,917 65,941 73,977 84,508 Employee benefits and vacations 29,420 31,515 31,892 32,845 37,097 Materials, services and rentals 16,662 16,662 21,014 28,947 28,928 Depreciation and amortization 18,480 18,565 17,398 15,195 15,346 Facilities, communications, unallowables, and other 9,498 11,781 24,626 9,070 29,988 Total indirect costs 132,598 141,440 160,871 160,034 195,867 Interest expense and fees 4,473 4,476 3,179 1,356 1,333 Total operating expenses 527,614 534,777 595,229 639,474 610,332 Increase (decrease) in unrestricted net assets from operations 25 (12,728) (29,370) (16,278) (38,506)
Non-operating gains (losses) Investment income, realized and unrealized gains (losses) 22,579 34,793 13,504 (5,597) 35,194 Gain on sale of building, net - - - 58,224 - Other non-operating income, net 7,706 7,236 6,072 1,118 (609) Other changes in pension and post retirement benefits 21,405 (1,028) 12,599 (23,191) 27,450 Total non-operating gains (losses), net 51,690 41,001 32,175 30,554 62,035 Increase (decrease) in unrestricted net assets 51,715 28,273 2,805 14,276 23,529 Unrestricted net assets, beginning of year 282,069 333,784 362,057 364,862 379,138 Unrestricted net assets, end of year 333,784$ 362,057$ 364,862$ 379,138$ $ 402,667
Note: Internal revenue (total revenue, less subcontractor costs) $ 310,847 $ 301,200 $ 305,382 $ 342,751 $ 381,707 Internal revenue growth 3.1% -3.1% 1.4% 12.2% 11.4%
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Balance Sheet
The following table shows the balance sheet as of year-end for each of the fiscal years in the five-year period ended June 30, 2017.
Fiscal Years Ended (in thousands) June 28, June 27, June 26, July 1, June 30, 2013 2014 2015 2016 2017
Assets Current assets Cash and cash equivalents 52,111$ $ 74,476 56,203$ 51,678$ 21,398$ Accounts receivable, net 39,572 29,867 38,222 33,807 52,840 Unbilled contract costs and fees, net 47,147 48,415 57,279 69,554 56,018 Other current assets 6,775 9,543 9,343 9,766 11,350 Total current assets 145,605 162,301 161,047 164,805 141,606
Long-term investments 202,173 236,694 216,679 270,628 248,708 Long-term accounts receivable ----4,538 Note receivable - - - 2,014 455 Capital Leases (net of allowance) - - - 12,167 3,500 Deferred charges and other assets 8,381 7,944 8,182 2,874 2,037 Deferred financing costs, net 539 508 481 - - Prepaid pension benefits 5,406 6,857 7,409 7,641 9,328 Property and equipment, net 185,751 181,363 176,738 152,207 203,003 Total Assets $ 547,855 595,667$ 570,536$ 612,336$ 613,175$
Liabilities and Unrestricted Net Assets Current liabilities Accounts payable and accrued contract costs $ 35,775 $ 31,120 43,217$ 54,606$ 38,777$ Accrued compensation and related expenses 23,851 25,697 25,455 26,268 30,883 Current portion of bond payable - - - 2,770 2,790 Other accrued expenses 9,335 9,976 9,687 9,283 9,873 Total current liabilities 68,961 66,793 78,359 92,927 82,323
Accrued post retirement benefits 38,944 43,012 35,850 61,468 42,248 Bonds payable, net 79,240 79,301 48,370 45,150 42,392 Deferred revenue and other long term liabilities 26,926 44,504 43,095 33,653 43,545 Total Liabilities 214,071 233,610 205,674 233,198 210,508
Unrestricted Net Assets 333,784 362,057 364,862 379,138 402,667 Total Liabilities and Unrestricted Net Assets $ 547,855 595,667$ 570,536$ 612,336$ 613,175$
MANAGEMENT DISCUSSION AND ANALYSIS
Statement of Activities
Fiscal Year 2017 Compared to Fiscal Year 2016 – Total operating revenues ended FY17 at $571.8 million, a $51.4 million, or 8.2%, decrease from FY16. This decrease was driven by an anticipated decline in subcontractor cost on Navy support and production work, partially offset by an increase in internal revenue, calculated by taking gross revenue less subcontractor cost, of $39.0 million, or 11.4%. The increase in internal revenue was primarily driven by NS&S’ growth in space and defense systems.
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An increase in other indirect cost of $20.9 million, compared to prior year, was due, in part, to a one-time capital lease impairment, incremental advertising expenses, and higher legal expenses.
Investment income, realized and unrealized gains, as reported in the financial statements, showed a significant increase of $40.8 million from FY16 due to market gains. Other non- operating income, net, includes tenant income, corpus advisory fees paid and gain/loss on sale of assets.
Non-operating income gains from change in pension and post-retirement benefits, increased by $50.6 million driven by an increase in the actuarial discount rate and greater- than-expected asset growth.
Fiscal Year 2016 Compared to Fiscal Year 2015 – In FY16, Draper recognized total revenue of $623.2 million, an increase of $57.3 million, or 10.1%, over FY15. This increase was primarily driven by subcontractor activity on Navy support and production work increasing revenue $20.0 million from FY15. Internal revenue, calculated by taking gross revenue less subcontractor cost, was $342.8 million at fiscal year-end, a $37.4 million, or 12.2% increase from FY15. An increase in headcount produced chargeable cost in salaries and wages, employee benefits, and other direct cost. The increase was attributed to the NS&S area with work on several programs for the Air Force and Army and work for Strategic Systems with DARPA. In addition, Draper’s Commercial programs achieved revenue of $18.2 million for the year. This work was with customers such as Shell, DARPA and AutoLiv and some mid-sized commercial pharmaceutical companies.
At the beginning of FY16, Draper recognized a $58.2 million net gain on sale of an ownership position in condominium units at its One Hampshire Street facility in Cambridge, Massachusetts. Total sale price was $89.5 million. This transaction also contributed to a reduction in rental income affecting other non-operating income, net.
The non-operating gains driven by the change in pension and post-retirement benefits decreased $35.8 million, driven by a decrease in the discount rate partially offset by net asset growth.
Balance Sheet
Fiscal Year 2017 Compared to Fiscal Year 2016 – Cash decreased $30.3 million in FY17 due to investment in capital projects. The related investment is shown in the $50.8 million increase in property and equipment, net. Long-term investments decreased $21.9 million compared to FY16 due, in part, to $55.9 million utilized to pay for the capital projects. Accounts payable decreased $15.8 million due, in part, to a reduction in subcontractor volume. Accrued post-retirement benefits decreased $19.2 million driven by an increase in the discount rate, growth of the plan assets, and settlement of the Retirement Plan for Employees (“RPE”) plan freeze. Capital leases (net of allowance) decreased by $8.7
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million due to impairment of a contractual obligation with the former subcontractor who leased the St. Petersburg, FL manufacturing facility.
Fiscal Year 2016 Compared to Fiscal Year 2015 – Long-term investments increased $53.9 million in FY16 from reinvestment of a portion of the proceeds from the sale of the One Hampshire Street condominium units. The reduction to property and equipment, net, of $24.5 million also reflects the impact of the condominium sale. In FY16, capital leases (net of allowance) increased by $12.2 million due, in part, to the recognition of Draper’s contractual obligation with the former subcontractor leasing the Company’s Florida facility. Accounts payable increased $11.4 million driven by increased subcontractor volumes. Accrued post-retirement benefits increased $25.6 million due to a decrease in the discount rate and net growth in the plan assets.
Corpus: Investment in Securities
Draper’s Investment Portfolio (the “Corpus”) was established to effectively manage any surplus Draper experienced in operating income and proceeds of rental income into a consolidated investment portfolio whose purpose was primarily to provide financial flexibility to the Company.
In 2015, the purpose of the Corpus was expanded as Draper began to use part of the proceeds from returns for the initial funding of strategic investment programs. Draper does not have a formal spending policy but determines its discretionary withdrawals from the Corpus based on the strength of the annual returns. In 2015, management also undertook an investment advisor search with the intension of building a more sophisticated portfolio beyond the equities and fixed income allocation then provided by the Company’s manager. Draper hired Perella Weinberg Partners Agility (“PWP Agility”) in May 2015 as its outsourced chief investment officer. Over the next year Draper: (i) rewrote its Investment Policy Statement to encompass a fully diversified portfolio among several asset classes and (ii) used comingled vehicles provided by PWP Agility to establish positions in hedge funds, real assets and private capital with over 30 asset managers, significantly reducing the expected volatility of the portfolio.
Draper’s Board of Directors, the ultimate fiduciary of the Corpus, has delegated responsibility for the investment management process to the Company’s senior staff and the Finance Committee, who are charged with taking appropriate action if investment objectives are not met or if policy and guidelines are not followed. The Finance Committee generally meets three times per fiscal year.
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Market Value of Investments Held in the Corpus as of June 30, 2017 ($ in thousands) Asset Class Market Value % of Total Portfolio Global Equities $ 129,351 52.7% Global Fixed Income 43,438 17.7% Hedge Funds (Absolute Returns) 43,788 17.8% Real Assets 24,614 10.0% Private Capital 2,419 1.0% Cash 1,867 0.8% Total Corpus $ 245,477 100.0% Other miscellaneous investments 3,231 Total Investments $ 248,708
Annual Performance of Corpus By Fiscal Year 2013 2014 2015 2016 2017 14.36% 19.18% 4.39% -4.31% 13.71%
OTHER MATTERS
Liquidity
As detailed above, Draper’s Corpus, which has been generated by cumulative profits and investment return and is, therefore, not subject to any third-party restrictions reflected a significant source of liquidity for the Company. Of the $245 million balance at June 30, 2017, $121 million was convertible to cash within one week, $41 million was convertible to cash within one quarter, $51 million was convertible to cash within one year and $32 million was not convertible to cash within one year. In addition to the substantially liquid Corpus, Draper has short term lines of credit which are renewed annually. Draper has a line of credit for $15 million with Bank of New York Mellon, secured by the investments in the Corpus, and an unsecured line of credit for $25 million with Bank of America. Additionally, Draper has substantial value in its real estate holdings that could be monetized through additional condominium sales or other financial transactions.
Future Financing Plans
Substantially concurrent with the issuance of the Bonds, Draper expects to enter into a medium-term capital financing arrangement, in an amount not to exceed $15 million, with an affiliate of Bank of America. The facility, or facilities, will provide financing for certain fixed asset purchases of the Company for tenors of three-to-ten years, depending on the nature of each asset financed, and will be secured by liens in the underlying assets. Otherwise, Draper has no current plans to borrow additional funds for facilities or other capital expenditures after the issuance of the Bonds. Management believes that capital
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requirements will be satisfied through annual cash flow and periodic use of investment balances to support facility improvements and other corporate purposes.
Litigation
Draper is a party to certain administrative actions, claims and litigation arising from the ordinary course of its business activities. In the opinion of management, if any such action were to be decided adversely to Draper’s interests, any liability that might result would not have a material adverse effect on Draper and would not affect the ability of Draper to meet its obligations with respect to the Bonds.
Very truly yours,
THE CHARLES STARK DRAPER LABORATORY, INC.
By: Kaigham J. Gabriel President and CEO
By: Elizabeth Mora Chief Administrative Officer and Treasurer
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The Charles Stark Draper Laboratory, Inc. Financial Statements June 30, 2017 and July 1, 2016 The Charles Stark Draper Laboratory, Inc. Index June 30, 2017 and July 1, 2016
Page(s)
Report of Independent Auditors...... 1
Financial Statements
Statements of Financial Position...... 2
Statement of Activities...... 3
Statements of Cash Flows...... 4
Notes to Financial Statements...... 5-32
Report of Independent Auditors
To the Board of Directors of The Charles Stark Draper Laboratory, Inc.:
We have audited the accompanying financial statements of The Charles Stark Draper Laboratory, Inc., which comprise the statements of financial position as of June 30, 2017 and July 1, 2016, and the related statements of activities and changes in net assets and of cash flows for the years then ended.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Charles Stark Draper Laboratory, Inc. as of June 30, 2017 and July 1, 2016, and the results of their operations and there cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
PricewaterhouseCoopers LLP September 21, 2017
PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, MA 02210 T: (617) 530-5000, F: (617) 530-5001, www.pwc.com/us The Charles Stark Draper Laboratory, Inc. Statements of Financial Position June 30, 2017 and July 1, 2016
2017 2016
Assets Current assets Cash and cash equivalents $ 21,397,856 $ 51,678,056 Accounts receivable - net of allowance of $518,047 and $848,843 in 2017 and 2016 respectively 52,840,029 33,806,997 Unbilled contract costs and fees, net of allowance of $2,396,184 and $1,994,834 in 2017 and 2016, respectively 56,017,657 69,553,743 Other current assets 11,349,799 9,767,097 Total current assets 141,605,341 164,805,893 Long-term investments 248,707,569 270,627,728 Long-term accounts receivable 4,537,961 - Notes receivable - net of allowance of $2,000,000 and $0 for 2017 and 2016, respectively 455,307 2,013,903 Capital leases - net of allowance of $6,500,000 and $0 for 2017 and 2016, respectively 3,500,000 12,166,668 Deferred charges and other assets 2,037,424 2,874,446 Prepaid pension benefits 9,327,859 7,640,832 Property and equipment, net 203,003,323 152,206,939 Total assets $ 613,174,784 $ 612,336,408 Liabilities and Net Assets Current liabilities Accounts payable and accrued contract costs $ 38,777,382 $ 54,606,106 Accrued compensation and related expenses 30,882,744 26,268,385 Current portion of bonds payable 2,790,000 2,770,000 Other accrued expenses 9,872,523 9,283,012 Total current liabilities 82,322,649 92,927,503 Accrued post-retirement benefits 42,248,184 61,467,587 Bonds payable, net 42,392,050 45,150,307 Deferred revenue and other long-term liabilities 43,545,182 33,653,443 Total liabilities 210,508,065 233,198,840 Unrestricted net assets 402,666,719 379,137,569 Total liabilities and net assets $ 613,174,784 $ 612,336,408
The accompanying notes are an integral part of these financial statements.
2 The Charles Stark Draper Laboratory, Inc. Statement of Activities and Changes in Net Assets June 30, 2017 and July 1, 2016
2017 2016
Operating revenues Net revenue $ 571,485,600 $ 622,549,815 Other income 340,050 646,027 Total operating revenues 571,825,650 623,195,842 Operating expenses Direct costs Subcontracts 190,118,941 280,445,322 Salaries and wages 113,972,761 104,609,594 Employee benefits 33,773,693 28,976,814 Materials, services and rentals 31,459,044 29,440,609 Other, principally travel and equipment 43,808,015 34,611,330 Total direct costs 413,132,454 478,083,669 Indirect costs Salaries and wages 84,507,553 73,977,439 Employee benefits and vacations 37,096,552 32,845,119 Materials, services and rentals 28,927,639 28,947,276 Depreciation and amortization 15,345,524 15,195,181 Facilities, communications, unallowables, and other 29,988,989 9,070,700 Total indirect costs 195,866,257 160,035,715 Interest expense and fees 1,332,956 1,356,445 Total operating expenses 610,331,667 639,475,829 Increase/(decrease) in unrestricted net assets from operations (38,506,017) (16,279,987) Non-operating gains/(losses) Dividend and interest income 3,841,098 7,418,363 Realized and change in net unrealized gains on long-term investments 31,353,358 (13,014,708) Other non-operating income, net (609,424) 1,118,418 Gain on sale of condo units - 58,223,701 Other changes in pension and post-retirement benefits 27,450,135 (23,190,562) Total non-operating gains/(losses), net 62,035,167 30,555,212 Increase/(decrease) in unrestricted net assets 23,529,150 14,275,225 Unrestricted net assets, beginning of year 379,137,569 364,862,344 Unrestricted net assets, end of year $ 402,666,719 $ 379,137,569
The accompanying notes are an integral part of these financial statements.
3 The Charles Stark Draper Laboratory, Inc. Statements of Cash Flows June 30, 2017 and July 1, 2016
2017 2016 Cash flows from operating activities Increase/(decrease) in unrestricted net assets $ 23,529,150 $ 14,275,225 Adjustments to reconcile change in unrestricted net assets to net cash provided by operating activities Depreciation and amortization 15,345,524 15,195,181 Realized and net change in unrealized gains on long-term investments (31,353,358) 13,014,708 Other changes in pension and post-retirement benefits (27,450,135) 23,190,562 (Gain)/loss on disposal of property and equipment 2,682,874 (59,442,775) Other non-cash adjustments 85,579 17,586,596 Changes in operating assets and liabilities Accounts receivable (19,033,033) 4,415,368 Long term accounts recievable (4,537,961) - Note receivable 1,858,596 (13,903) Capital lease 8,666,667 (12,166,667) Prepaid Pension (1,687,027) (232,098) Unbilled contract costs and fees 13,536,086 (12,274,852) Other current assets (1,582,703) (424,530) Deferred charges and other assets 749,230 2,984,440 Accounts payable and accrued contract costs (10,987,202) 2,983,654 Accrued compensation and related expenses 12,479,308 4,797,047 Deferred revenue 9,863,418 (9,790,474) Other accrued expenses (1,601,984) (5,936,414) Net cash used by operating activities $ (9,436,971) $ (1,838,932) Cash flows from investing activities Additions to property and equipment (73,654,324) (27,910,228) Proceeds from sale of property and equipment 21,979 88,677,010 Contributions and withdrawals, net 28,613,807 - Purchase of investment securities (76,282,691) (168,687,172) Loan to Dover Microsystems/Aurora Semiconductor LLC (300,000) (2,000,000) Proceeds from sale of investment securities 103,528,000 108,863,938 Net cash used in investing activities $ (18,073,229) $ (1,056,452) Cash flows from financing activities Proceeds from line of credit 55,000,000 - Payments on line of credit (55,000,000) - Repayment of debt (2,770,000) (1,630,000) Net cash used by financing activities (2,770,000) (1,630,000) Net decrease in cash and cash equivalents (30,280,200) (4,525,384) Cash and cash equivalents, beginning of year 51,678,056 56,203,440 Cash and cash equivalents, end of year $ 21,397,856 $ 51,678,056 Supplemental disclosure of cash flow information
Interest paid $ 1,295,095 $ 1,424,958 Fixed Assets purchases in accounts payable and in accruals $ 3,564,082 $ 8,405,603 The accompanying notes are an integral part of these financial statements.
4 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
1. Background and Summary of Significant Accounting Policies
Corporate Organization and Purpose The Charles Stark Draper Laboratory, Inc. (Draper) is a membership (nonstock), nonprofit Massachusetts Corporation. Draper engages in activities that contribute to the support and advancement of scientific research, technology and development and in educational activities in the sciences and related subjects. Draper’s customers are primarily agencies of the U.S. Government.
Draper intends to continue to be exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. In the event of either liquidation or dissolution of Draper its net assets would be distributed to one or more charitable tax-exempt organizations or governmental agencies.
Basis of Presentation The accompanying financial statements have been prepared on the accrual basis and in accordance with accounting principles generally accepted in the United States of America.
Fiscal Calendar Draper’s fiscal calendar (FY) ends on the Friday closest to June 30th. Due to this policy, the fiscal calendar may result in the last day of a fiscal year falling on a date other than on June 30. Approximately every fifth year, Draper's fiscal year will contain 53 weeks. There are 52 weeks in FY2017 and 53 weeks in FY2016.
Prior Year Comparability In FY2017, certain financial statement lines on the Statements of Financial Position and Statements of Cash Flows were added to better reflect certain transactions. FY2016 was updated to add these financial statement lines and the balances were adjusted to reflect the changes for comparability purposes. There were no changes in the FY2016 overall amounts or classification due to the changes noted.
Capitalized Software Certain costs as they relate to purchased hardware, software, and implementation activities have been capitalized in accordance with ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software.
Revenue Recognition Draper performs research under a variety of contract types for its various customers. Costs are reimbursed and recognized as revenue as they are incurred. Contract fees are recognized in proportion to costs incurred as the contracts are performed or otherwise as specified in the contract.
Some contracts are long term, meaning that the projects will continue for one year or more. For long- term contracts, GAAP allows revenue to be recognized on a percentage-of-completion basis if circumstances are such that total profit can be estimated with reasonable accuracy and ultimate realization is reasonably assured.
Current income recognized under the percentage-of-completion method is based upon (a) the total income projected for the contract at the time of completion and (b) the expenses incurred to date. The percentage-of-completion can be measured using the proportion of costs incurred versus the total 5 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
estimated cost to complete the contract. Draper receives advances and performance-based payments from customers that may exceed costs incurred on certain contracts. Draper classifies advance payments and billings in excess of costs incurred as deferred revenue and other long-term liabilities. Costs incurred in excess of billings are classified as unbilled contract costs and fees, net.
Draper receives royalty payments in accordance with the terms of technology agreements. Royalty payments are recorded as other income in the statements of activities and changes in net assets.
Net Assets The net assets of Draper primarily consist of the excess of operating revenues over operating expenses since commencement of operations, the changes in gains and losses on investments and other non- operating income. All net assets are unrestricted in nature.
Use of Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Deferred Financing Costs The costs of securing financing are capitalized and amortized, on the straight-line method, over the life of the associated indebtedness. This method approximates the expense that would have been recognized using the effective interest method.
Deferred Charges Draper recovers overhead costs associated with projects under construction in accordance with Cost Accounting Standards (CAS). As permitted under CAS, overhead costs associated with the development of software systems are recorded as deferred charges and amortized, on the straight-line method, over five years. The Supplemental Retirement Plan for Corporate Officers (SRPCO) will expense any paid charge in the year of retirement.
Property and Equipment Depreciation of owned equipment (including data processing equipment and software) is computed on the straight-line method using three to five year lives. Leasehold improvements are amortized on the straight-line method over the shorter of the useful lives of the assets or the lease term. Building costs are depreciated on the straight-line method over lives of thirty-nine to forty-two-years.
When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in the statements of activities and changes in net assets.
In addition to the equipment and buildings acquired by Draper and investments it makes in leasehold improvements, all of which are reflected in the accompanying statements of financial position, Draper also uses certain government-furnished equipment for which it is accountable to the U.S. Government. Equipment purchased with government funds is not reflected in our statements of financial position as we do not hold title to those assets. 6 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Independent Research Draper engages in independent research programs authorized by its Board of Directors. The expenses of such programs are charged to operations as incurred.
Cash and Cash Equivalents Cash and cash equivalents consist of amounts on hand and highly liquid investments with maturities of three months or less when purchased. Draper maintains the majority of its cash and cash equivalents at two institutions.
Long-Term Investments Investments are in equity securities and mutual funds with readily determinable fair values based on quoted market prices. Insurance contracts utilize unobservable data points for fair market value. The fair value of the comingled funds are based on net asset value (NAV) as a practical expedient. The investment goal for the various portfolios is capital preservation while generating returns sufficient to offset the impact of inflation. Realized gains and losses on investment securities are determined by the specific identification method. Dividends are recorded on the ex-dividend date and interest income is recorded on the accrual basis.
Accounts Receivable Generally, Draper’s payment terms with its customer is between thirty and forty-five days. All receivables older than 150 days are fully reserved. However, there are certain contracts that contain contractual arrangements that delay payment beyond one fiscal year and those delayed payments are classified as long-term accounts receivable.
New Accounting Pronouncement On July 1, 2016, Draper Adopted FASB ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Value per Share. This ASU removes the requirement of categorizing investments that are measured at net asset value (NAV) in the fair value hierarchy. Draper had adopted the guidance listed above in the current fiscal year.
On June 30, 2017, Draper Adopted FASB ASU 2015-03, Interest – Imputation of Interest. The amendments in this update require deferred financing costs previously presented as a deferred charge in the Statement of Position to be now presented as a reduction from the face amount of the bond payable to which these costs relate. Draper has reflected this adoption retrospectively in the statements of financial position.
In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). The amendments in this update increase comparability and transparency among organizations by recognizing most lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for annual reporting periods beginning after December 2018. Draper is evaluating the impact that the ASU may have on its financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers; a principles-based standard to recognize revenue from customer contracts. ASU 2014-09 is effective for annual reporting periods beginning after December 2017. Draper is evaluating the impact that the ASU may have on its financial statements.
7 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
In August 2016, the FASB issued ASU 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities. This update is the result of the FASB’s efforts in the first of two phases of its project. The project is designed to improve the current net asset classification requirements and the information presented in the financial statements and notes of not-for-profit entities. The main provisions of this Update require a not-for-profit entity to present on the face of the statements two classes of net assets instead of three; no longer require the presentation or disclosure of the indirect method (reconciliation) if using the direct method to report operating cash flows; report investment return net of external and direct internal investment expenses, and enhanced liquidity and expense disclosures. ASU 2016-14 is effective for annual reporting periods beginning after December 2017. Draper is evaluating the impact the ASU may have on its financial statements.
In January 2016, the FASB issued ASU 2016-01 (Subtopic 825-10) Financial Instruments- Overall. The amendments address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments in this update are effective for annual reporting periods beginning after December 2017 with early adoption permitted for certain aspects of the update. Draper has adopted the elimination of the requirement to disclose the fair value of debt for the year ended June 30, 2017.
2. Long-Term Investments
Draper’s investment portfolio is managed by Perella Weinberg Partners (PWP) Agility, acting as Draper’s outsourced-chief investment officer. In this capacity, PWP Agility invests with full discretion on Draper’s behalf, adhering to the investment guidelines set forth in the investment policy statement approved by the Finance Committee. Investments in global equity and global fixed income holdings are held in a PWP Agility separately managed account (SMA) with Bank of New York Mellon (BNYM) acting as Draper’s custodian. There are comingled global equity and fixed income investments also held in SMAs which have their own individual custodian. Additional investments in private capital, real assets, absolute return, and global equities are held in a comingled account managed by Agility Comprehensive Solutions Feeder Fund LP (ACS) with periodic reporting by fund administrator, HedgeServ Limited.
As of June 30, 2017 and July 1, 2016 there were commitments to private equity of $12,541,188, and $4,392,245, respectively, which are funded from the existing long term investment assets.
8 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Draper's long-term investment portfolio consists of the following at June 30, 2017 and July 1, 2016:
2017 2016 Investment securities Cash and money market mutual funds $ 1,767,795 $ 28,161,783 Global equity funds 77,222,503 105,349,856 Global fixed income 28,177,794 27,816,116 Comingled funds 68,532,370 39,762,942 Comingled fund of funds 71,036,859 67,646,913 Insurance contracts and other 382,763 343,516 Total investment securities at fair value $ 247,120,084 $ 269,081,126
Other investments 1,587,485 1,546,602 Total investment securities at amortized cost $ 1,587,485 $ 1,546,602
Total long-term investments $ 248,707,569 $ 270,627,728
9 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
The following tables present information about the assets that are measured at fair value on a recurring basis as of June 30, 2017 and July 1, 2016 and indicate the fair value hierarchy of valuation techniques we utilized to determine such fair value. Draper had no transfers between levels in the current year.
NAV as Level 1 Level 2 Level 3 Practical June 30, 2017 Assets Assets Assets Expedient
Investment securities Cash and money market mutual funds $ 1,767,795 $-1,767,795 $-$-$ Global equity funds 77,222,503 9,589,995 67,632,508 - - Global fixed income 28,177,794 - 28,177,794 - - Comingled funds 68,532,370 - - - 68,532,370 Comingled fund of funds 71,036,859 - - - 71,036,859 Insurance contracts and other 382,763 - 118,437 264,326 - $ 247,120,084 $ 11,357,790 $ 95,928,740 $ 264,326 $ 139,569,229
NAV as Level 1 Level 2 Level 3 Practical July 1, 2016 Assets Assets Assets Expedient
Investment securities Cash and money market mutual funds $ 28,161,783 $-28,161,783 $-$-$ Global equity funds 105,349,856 28,658,468 76,691,388 - - Global fixed income 27,816,116 - 27,816,116 - - Comingled funds 39,762,942 - - - 39,762,942 Comingled fund of funds 67,646,913 - - - 67,646,913 Insurance contracts and other 343,516 - 110,379 233,137 - $ 269,081,126 $ 56,820,251 $ 104,617,883 $ 233,137 $ 107,409,855
10 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement data. In determining fair value, the use of various valuation approaches, including market, income and cost approaches, are permitted.
A fair value hierarchy has been established based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Draper’s Level 1 assets consist of equity holdings and money market funds. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Draper’s Level 2 investments consist of global equities and global fixed income measured at the NAV provided by the investment company. The NAVs provided by the investment companies are published and are readily available, but not activity traded. The comingled funds are recorded at the net asset value (NAV) as a practical expedient.
Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability, and include situations where there is little, if any, observable market activity for the asset or liability. Draper’s Level 3 assets as of June 30, 2017 consist of insurance contracts associated with the deferred compensation plan. There are no liquidity restrictions associated with any of Draper’s investments recorded at fair value.
11 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
The change in the fair value of Draper’s investments with unobservable data points is shown below:
Fair Value Measurements Using Significant Unobservable Inputs
Insurance Contracts
June 30, 2017 Balance at beginning of year$ 233,137 Transfers to Level 2 - Unrealized appreciation of deferred compensation 31,189 Balance at end of year $ 264,326
Fair Value Measurements Using Significant Unobservable Inputs
Insurance Contracts
July 1, 2016 Balance at beginning of year$ 207,258 Transfers to Level 2 - Unrealized appreciation of deferred compensation 25,879 Balance at end of year $ 233,137
12 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
The below tables represent the redemption terms and restrictions on Draper’s investments measured at the NAV as a practical expedient as of June 30, 2017 and July 1, 2016, respectively.
Redemptions as of June 30, 2017 Assets Fair Value Redemption Terms Redemption Restrictions Daily, Monthly, Quarterly, and Annual liquidity Comingled Funds $ 68,532,370 depending on the fund
The Fund has quarterly liquidity with 90 days Fund includes private capital investment of Comingled Funds of Funds 71,036,859 notice up to 25% of the liquid balance $2,419,267 that is designated as illiquid. $ 139,569,229
Redemptions as of July 1, 2016 Assets Fair Value Redemption Terms Redemption Restrictions
Daily, Monthly, Quarterly, and Annual liquidity Comingled Funds $ 39,762,943 depending on the fund
The Fund has quarterly liquidity with 90 days Fund includes private capital investment of Comingled Funds of Funds 67,646,912 notice up to 25% of the liquid balance $579,841 that is designated as illiquid. $ 107,409,855
13 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
3. Property and Equipment
Property and equipment are stated at cost. The following is a summary of property, plant and equipment, at cost less accumulated depreciation at June 30, 2017 and July 1, 2016:
2017 2016
Data processing equipment $ 30,532,481 $ 29,344,928 Other equipment 122,482,201 109,712,156 Building and leasehold improvements 75,793,579 67,707,733 Building 73,133,205 77,783,480 Land 32,495,864 32,495,864 Construction in progress 59,790,929 15,719,696 394,228,259 332,763,857 Less: Accumulated depreciation 191,224,936 180,556,918 Property and equipment, net $ 203,003,323 $ 152,206,939
Depreciation expense was $15,225,988 and $15,019,123 for the years ending June 30, 2017 and July 1, 2016 respectively, while amortization expense was $119,536 and $176,057 for the years ending June 30, 2017 and July 1, 2016, respectively. Draper capitalizes interest cost incurred during the period of construction of capital assets. Interest costs capitalized during the years ended June 30, 2017 and July 1, 2016 were $163,828 and $138,848, respectively.
Construction in progress contains costs for facility renovations including $46.5M for the Atrium.
In December 2006, Draper completed an addition to the Hill Building at a total cost of $64,383,119. The Hill Building and addition together comprise the One Hampshire at Kendall Square Condominium. In January 2016, Draper sold the basement and floors one through four of the north building of the condominium to Schlumberger for $89,500,000 cash. Draper derecognized the assets and recognized $58,223,701 gain on the sale. In FY2016, Draper’s ownership of the condominium was reduced to 48% due to the sale to Schlumberger. In total, 27% of Draper’s share is leased to third parties and Draper occupies the remaining space available in the combined Hill Building and addition. Rental income, including parking revenue, included within other non-operating income in the statement of activities and changes in net assets was $3,536,591 and $5,469,245 for the years ended June 30, 2017 and July 1, 2016, respectively. In addition, Draper incurred $1,216,403 and $1,415,021 for its share of common area maintenance costs for the year ended June 30, 2017 and July 1, 2016, respectively. Generally accepted accounting principles require lease income to be recognized on a straight-line basis, which differs from the timing of rental payments in certain of Draper’s lease agreements. Revenue recorded in advance of rental payments was $384,876 as of June 30, 2017 and is included in deferred charges and other assets in the accompanying statements of financial position.
14 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Minimum future rental payments on noncancelable leases to be received as of June 30, 2017 are as follows:
Ye ar
2018 $ 4,482,578 2019 3,482,577 2020 1,504,343 Thereafter - $ 9,469,498
4. Capital Facilities Allowances and Unreimbursable Expenses
Capital facilities allowances of $2,512,737 in FY2017 and $2,471,588 in FY2016 are included in the statements of activities and changes in net assets.
In FY2017 and FY2016, certain expenses were either subsidized by Draper or were not reimbursed under the terms of Draper's contracts with its various customers. Total unreimbursed expenses included in indirect costs were $19,797,073 and $24,392,037 for FY2017 and FY2016, respectively, and consist principally of otherwise allowable overhead costs as well as unallowable personnel related and administrative expenses and charges incurred in excess of funded contract amounts. Total Draper funded projects and cost sharing were approximately $37,954,071 and $13,263,880 in FY2017 and FY2016, respectively.
15 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
5. Commitments and Contingencies
Draper leases office space, laboratory facilities and certain equipment. Such leases expire at various dates through FY2023, with options to extend for additional periods. The office space and laboratory facility lease payments are subject to escalation for increases in real estate taxes and operating expenses. Certain equipment is also rented on a short-term basis and charged to contracts. Total rent paid (exclusive of certain equipment rentals which are charged directly to contracts) was $2,869,338 and $2,130,291 in FY2017 and FY2016, respectively.
Minimum annual rental commitments under such leases (subject to certain escalation provisions) are as follows:
Year Building Equipment Total
2018 $ 3,283,735 $ 238,816 $ 3,522,551 2019 2,395,484 238,816 2,634,300 2020 1,331,110 238,816 1,569,926 2021 922,575 - 922,575 2022 517,340 - 517,340 Thereafter 552,575 - 552,575 $ 9,002,819 $ 716,448 $ 9,719,267
All payments to Draper for work performed on contracts with agencies of the U.S. Government are provisional payments which are subject to adjustment upon audit by the Defense Contract Audit Agency (DCAA). Draper has final audited rates through FY2015. Our FY2016 rates are not yet finalized. DCAA questioned costs of $9.5 million with penalties of $6.5 million for a maximum exposure of $16 million. DCMA has conducted fact finding diligence on the results of DCAA’s findings and has until March 2018 to complete settlement discussions with Draper on these questioned costs.
In our assessment, we believe we have submitted the costs in accordance with the FAR regulations. Draper and DCMA have not started negotiations to determine a resolution at this time.
Draper is subject to routine legal proceedings incidental to its business. While the ultimate liability from the proceedings is difficult to determine, in the opinion of management, the results of these proceedings will not have a material adverse effect on Draper's financial position or results of operations.
16 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
6. Pension and Other Post-retirement Benefit Plans
Draper has three defined benefit pension plans and one post-retirement benefit plan providing health care benefits to retired employees. The current period cost of administering these benefit plans is included within operating activities as an indirect cost. The remaining changes to the benefit obligations are recorded in other changes in pension and post-retirement benefits as a part of non- operating activities in the statement of activities and change in net assets.
The following schedules provide summary information concerning Draper's benefit plans for the years ended June 30, 2017 and July 1, 2016:
Pension Benefits Medical Benefits 2017 2016 2017 2016 Benefit obligation at end of year $ 135,091,339 $ 172,586,760 $ 24,329,604 $ 25,118,127 Fair value of plan assets at end of year 107,482,482 127,251,327 19,007,053 16,615,722 Unfunded status of the plans $ (27,608,857) $ (45,335,433) $ (5,322,551) $ (8,502,405)
Consolidated balance sheets Current liabilities $-- $-$-$ Noncurrent assets 9,327,859 7,640,832 - - Noncurrent liabilities (36,936,716) (52,976,265) (5,322,551) (8,502,405) Unfunded status of the plans $ (27,608,857) $ (45,335,433) $ (5,322,551) $ (8,502,405)
Net period benefit cost $ 8,026,037 $ 2,560,254 $ (477,239) $ 612,533
Amounts not yet reflected in net periodic benefit cost and included in unrestricted net assets: Accumulated actuarial loss (gain) $ 17,956,642 $ 43,601,144 $ (3,676,509) $ (943,566) Prior service costs (benefits) 618 3,705 1,035,421 (8,490,449) Transition Obligation 315,071 420,095 - - $ 18,272,331 $ 44,024,944 $ (2,641,088) $ (9,434,015)
Pension RPE RPSM SRPCO Benefits At June 30, 2017 Benefit obligation at end of year $116,289,350 $ 15,770,769 $ 3,031,220 $135,091,339 Fair value of plan assets at end of year 82,383,854 25,098,628 - 107,482,482 Unfunded status of the plans$ (33,905,496) $ 9,327,859 $ (3,031,220) $ (27,608,857)
17 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Pension RPE RPSM SRPCO Benefits At July 1, 2016 Benefit obligation at end of year $154,831,866 $ 14,814,968 $ 2,939,926 $172,586,760 Fair value of plan assets at end of year 104,795,527 22,455,800 - 127,251,327 Unfunded status of the plans$ (50,036,339) $ 7,640,832 $ (2,939,926) $ (45,335,433)
The Retirement Plan for Employees (RPE) provides retirement benefits paid from the net assets available in the plan for plan benefits. Retirement benefits are paid to participants in equal monthly payments beginning in the month following retirement and continue until death. Payments to a surviving spouse are made at a reduced level. This plan comprises approximately 86% of Draper’s pension benefit obligations as of June 30, 2017.
In January 2017, Draper’s Board of Directors (BOD) approved the implementation of a risk transfer initiative related to the Retirement Plan for Employees (RPE) due to underfunded status. The risk transfer was to occur in two parts: (1) offer a lump sum or immediate annuity to terminated vested employees, and (2) sell a portion of retirees’ annuitized benefit to an insurance company. During this same meeting, the BOD also approved the proposed freezing of the RPE and the transfer of active RPE participants to Draper’s defined contribution plan, the Retirement Plan for Staff Members (RPSM). In March 2017, employees were informed of the change. The freeze date of the RPE was later established as December 31, 2017.
In June 2017, the plan made lump sum payouts totaling $10,398,879 to 149 vested terminated participants, and purchased annuities in the amount of $19,168,800 for 391 retired participants. Draper recognized $1,851 prior service cost related to the curtailment and a $4,450,616 loss on the settlement in FY2017. The gain of $228,102 related to the curtailment eliminated future salary increases after December 2017 thereby reducing the under-funded status. The curtailment and the settlement reduced the under-funded status from $50,036,339 in FY2016 to an under-funded status of $33,905,496 in FY2017.
The Retirement Plan for Staff Members (RPSM) provides a Surviving Spouse's Benefit, which provides a supplement for married participants who transferred to Draper from the Massachusetts Institute of Technology prior to July 2, 1976, and a Minimum Pension Benefit, which provides a minimum level of retirement benefits based upon years of service and final average salary, through a group annuity; the plan was frozen during 2009. This plan, together with the Supplemental Retirement Plan for Corporate Officers (SRPCO) and the Retiree Medical Benefit Plan, comprises the remainder of Draper’s benefit obligations and plan assets.
The Retiree Medical Benefit Plan provides post-retirement Medicare supplemental health insurance and prescription drug benefits. Draper will continue to provide the same (capped) level of contribution for each participant in the post-retirement medical plan.
18 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Benefit Obligations The components of the change in total benefit obligation and the applicable assumptions for determining benefit obligations are shown below:
Pension Benefits Medical Benefits 2017 2016 2017 2016 Benefit obligation at beginning of year$ 172,586,760 $ 143,463,697 $ 25,118,127 $ 33,365,223 Actuarial loss/(gain) 17,612 9,924,630 - - Service cost 2,765,615 2,443,944 886,056 1,085,394 Interest cost 5,473,975 5,910,915 835,227 1,183,548 Plan participants' contributions - - 292,303 2,202,641 Change in assumptions (11,278,661) 15,574,971 (1,504,713) (9,548,938) Settlements (29,567,679) - - - Benefits paid (4,906,283) (4,731,397) (1,297,396) (3,169,741) Benefit obligation at end of year$ 135,091,339 $ 172,586,760 $ 24,329,604 $ 25,118,127
Accumulated benefit obligation$ 134,166,584 $ 171,326,100
Weighted-average assumptions Discount rate 3.64% 3.34% 3.70% 3.40%
19 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Benefit Cost The components of the net periodic benefit cost recognized in the statements of activities and changes in net assets, and the applicable assumptions for determining benefit costs, are shown below:
Pension Benefits Medical Benefits 2017 2016 2017 2016 Service cost $ 2,765,615 $ 2,443,944 $ 886,056 $ 1,085,394 Interest cost 5,473,975 5,910,915 835,227 1,183,548 Expected return on plan assets (7,764,621) (7,664,868) (1,163,101) (1,138,698) Loss on Settlement 4,450,616 - - - Loss on Curtailment 1,851 - - - Amortization of prior service cost 1,236 1,236 (1,035,421) (517,711) Amortization of transition obligation 105,024 105,024 - - Amortization of net actuarial loss 2,992,341 1,764,003 - - Net periodic benefit cost $ 8,026,037 $ 2,560,254 $ (477,239) $ 612,533
Changes in plan assets and benefit obligations recognized in unrestricted net assets Net loss (gain) $ (18,201,545) $ 33,090,619 $ (2,732,943) $ (8,547,505) Amortizations: RPE (7,342,078) (1,696,535) - - RPSM ---- SRCPCO (208,990) (173,728) - - RMP - - 1,035,421 517,711 Total Amortizations (7,551,068) (1,870,263) 1,035,421 517,711 Total recognized in unrestricted net assets$ (25,752,613) $ 31,220,356 $ (1,697,522) $ (8,029,794) Total recognized in net periodic benefit Cost and unrestricted net assets $ (17,726,576) $ 33,780,610 $ (2,174,761) $ (7,417,261)
Weighted-average assumptions Discount rate 3.34% 4.09% 3.40% 4.10% Expected long-term return on plan assets 7.00% 7.00% 7.00% 7.00% Rate of compensation increase 3.00% 3.00% N/A N/A
Amortizations of pension benefit prior service costs, transition obligations and actuarial gains and losses in FY2018 are expected to be $618, $105,024, and $1,389,413, respectively. Amortization of medical prior service costs and gains and losses in FY2018 is expected to be $1,035,421 and $101,102, respectively.
20 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Assumptions The discount rate is determined annually based on census information, the timing of future benefit payments and yield curve data from the Citigroup Yield Curve, as this is used for Retiree Plan for Employees, Retirement Plan for Staff Employees, and Supplemental Retirement Plan for Corporate Officers. The Retirement Medical discount rate is estimated comparing the single equivalent rate such that the present value of the plan’s cash flows using the single rate equals the present value of those cash flows using both the Mercer Yield Curve and the Citigroup Pension Discount Curve, averaging those single equivalent rates and rounding to 5 basis points.
The expected long-term rate of return assumption represents the expected average rate of return on current and future funds invested to provide for benefit obligations. This assumption is determined based on a number of factors, including historical market index returns, historical plan return data, anticipated long-term asset allocation of the plans and plan expenses. Draper recognizes differences between the expected return on assets and the actual return over the remaining service life of the applicable participants. This amount is included in net periodic pension cost as a component of the amortization of actuarial gains and losses and is expected to be $1,342,413 in FY2018.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (providing Medicare Part D – Prescription Drug benefits) was reflected in Draper’s accounting results assuming that Draper will continue to provide the same (capped) level of contributions for each participant of the post- retirement medical plan. However, any federal subsidy received will be applied to reduce the retiree participants’ share of the cost.
Effective January 1, 2016, the post-65 retirees were moved to the private Medicare exchange. Draper also increased its contributions for pre-65 retirees. As a result of the change, Draper will no longer receive Medicare Prescription Drug subsidies for this plan.
21 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Plan Assets The components of the change in total plan assets are shown below:
Pension Benefits Medical Benefits 2017 2016 2017 2016 Fair value of plan assets at beginning of year$ 127,251,327 $ 131,908,874 $ 16,615,722 $ 16,478,457 Actual return on plan assets 14,223,874 13,310 2,391,331 137,265 Employer contributions - - 1,005,093 967,100 Plan participants' contributions - - 292,303 2,202,641 Benefits paid (34,473,962) (4,731,397) (1,297,396) (3,169,741) Fair value adjustments 481,243 60,540 - - Fair value of plan assets at end of year$ 107,482,482 $ 127,251,327 $ 19,007,053 $ 16,615,722
The investment objectives for the assets of the plan are to meet or exceed current and future benefit payments while minimizing employer contributions. Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within the constraints of a prudent level of portfolio risk and diversification. Risk management practices include the use of investment managers and maintenance of a portfolio diversified by asset class, investment approach and securities holdings, and the maintenance of sufficient liquidity to meet benefit obligations as they come due.
22 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Draper’s pension plans weighted-average asset allocations by asset category are as follows:
RPE RPSM Total Pension Asset Allocation Asset Allocation Fair Value Range Actual Fair Value Range Actual June 30, 2017 U.S. fixed income$ 21,662,045 16-30% 26% -$ - 0%$ 21,662,045 Global equity funds 46,073,950 45-60% 56% 13,265,274 40-60% 53% 59,339,224 U.S. real estate fund 8,061,628 5-10% 10% - - 0% 8,061,628 Insurance contracts 6,586,231 15-30% 8% 11,833,354 40-60% 47% 18,419,585 $ 82,383,854 25,098,628$ $ 107,482,482
July 1, 2016 U.S. fixed income$ 19,568,625 16-30% 18% -$ -- $ 19,568,625 Global equity funds 54,147,563 45-60% 52% 11,129,635 40-60% 50% 65,277,198 U.S. real estate fund 10,355,673 5-10% 10% --- 10,355,673 Insurance contracts 20,723,666 15-30% 20% 11,326,165 40-60% 50% 32,049,831 $ 104,795,527 22,455,800$ $ 127,251,327
23 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
The disclosure provisions of ASC 820, Fair Value Measurements and Disclosure, were adopted as of fiscal year 2010 for benefit plan assets. The following tables present information about the assets that are measured at fair value on a recurring basis as of June 30, 2017 and July 1, 2016 respectively, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value.
June 30, 2017 Level 1 Assets Level 2 Assets Level 3 Assets Investment securities U.S. fixed income $ 21,662,045 $ - $ 21,662,045 $ - Global equity fund 59,339,224 - 59,339,224 - U.S. real estate fund 8,061,628 - 8,061,628 - Insurance contracts 18,419,585 - - 18,419,585 $ 107,482,482 $ - $ 89,062,897 $ 18,419,585
July 1, 2016 Level 1 Assets Level 2 Assets Level 3 Assets Investment securities U.S. fixed income $ 19,568,625 $ - $ 19,568,625 $ - Global equity fund 65,277,198 - 65,277,198 - U.S. real estate fund 10,355,673 - 10,355,673 - Insurance contracts 32,049,831 - - 32,049,831 $ 127,251,327 $ - $ 95,201,496 $ 32,049,831
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Draper’s Level 2 assets consist of variable annuities, all of which are measured at the NAV provided by the investment company. The NAV provided by the investment company is published and readily available, but not actively traded which supports Draper’s Level 2 assessment.
Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability and include situations where there is little, if any, observable market activity for the asset or liability. Draper’s Level 3 assets as of June 30, 2017 consist of insurance contracts, the value of which was provided by the insurance company and reviewed for reasonableness by Draper. There are no liquidity restrictions associated with any of Draper’s plan assets measured at fair value.
24 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
The change in the fair value of Draper’s benefit plan assets with unobservable data points is shown below:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Insurance Contracts July 30, 2017 Balance at beginning of year $ 32,049,831 Purchases 382 Total gains 1,674,534 Benefits paid (15,305,162) Balance at end of year $ 18,419,585
July 1, 2016 Balance at beginning of year $ 33,908,927 Purchases 1,505,462 Total gains 1,366,839 Benefits paid (4,731,397) Balance at end of year $ 32,049,831
25 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Draper’s Retiree Medical Benefit Plan weighted-average asset allocations by asset categories are as follows:
Asset Allocation Fair Value Range Actual
June 30, 2017 Investment-grade fixed income fund$ 3,490,166 12-26% 18% High-yield bond fund 1,313,690 3-11% 7% Domestic equity funds 10,159,924 33-73% 53% International equity funds 2,814,033 3-24% 15% Real estate securities fund 1,229,240 5-11% 7% $ 19,007,053
Asset Allocation Fair Value Range Actual July 1, 2016 Investment-grade fixed income fund$ 3,128,111 12-26% 19% High-yield bond fund 1,173,881 3-11% 7% Domestic equity funds 8,820,588 33-73% 53% International equity funds 2,294,377 3-24% 14% Real estate securities fund 1,198,765 5-11% 7% $ 16,615,722
All of the Retiree Medical Benefit Plan assets are mutual funds traded in active markets for identical assets (Level 1 assets).
26 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Contributions and Benefits Draper does not anticipate making any contributions to the RPSM, SRPCO or the RPE in FY2018. The Retiree Medical Plan was funded on a “pay as you go” basis in FY2017 and FY2016.
Estimated future benefit payments, which reflect future service as appropriate, are as follows:
Pension Medical Benefits Benefits
FY2018 20,294,000$ $ 1,174,496 FY2019 3,998,200 1,240,211 FY2020 4,128,000 1,298,953 FY2021 5,751,000 1,354,422 FY2022 4,343,000 1,398,027 FY2023-FY2027 29,974,000 7,568,198
7. Line of Credit
In FY2017, Draper did make withdrawals and payments under its short-term line of credit arrangements. At June 30, 2017 and July 1, 2016, there were no balances outstanding under the credit facilities. Draper has short term lines of credit with Bank of America and BNY Mellon. The lines of credit may be renewed annually. Draper has a line of credit for $15 million with Bank of New York Mellon secured by investments. Draper also has an unsecured line of credit for $15 million with Bank of America that increases to $25 million between the October-March time frame for a total limit on the lines of credit of $40 million.
27 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
8. Bonds Payable
The bonds payable have no restrictive covenants of a financial nature. The bonds have been issued in sixteen groups with varying maturity dates and interest rates, as follows:
The following is a summary of Draper's bonds payable at June 30, 2017 and July 1, 2016:
2017 2016
Outstanding bonds $ 45,600,000 $ 48,370,000 Less: Deferred Financing Costs (417,950) (449,693) Total bonds payable $ 45,182,050 $ 47,920,307
Interest Maturity Maturity Date Rate Amount
September, 2017 1.12%$ 2,790,000 September, 2018 1.65% 2,820,000 September, 2019 1.98% 2,870,000 September, 2020 2.28% 2,925,000 September, 2021 2.49% 2,990,000 September, 2022 2.69% 3,065,000 September, 2023 2.89% 3,150,000 September, 2024 3.04% 3,240,000 September, 2025 3.14% 3,340,000 September, 2026 3.24% 3,445,000 September, 2027 3.34% 3,555,000 September, 2028 3.44% 3,675,000 September, 2029 3.54% 3,800,000 September, 2030 3.59% 3,935,000 $ 45,600,000
28 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
9. Asset Retirement and Environmental Remediation Obligations
In FY2017 and FY2016, Draper recognized the following changes to the fair value of its conditional asset retirement obligations (ARO):
2017 2016
Fair value of liability at beginning of year $ 7,378,493 $ 7,177,478 Liabilities settled (82,225) (247,577) Accretion of fair value 461,156 448,592 Fair value of liability at end of year $ 7,757,424 $ 7,378,493
In FY2017, there were no changes in the assumptions used to develop the ARO liability. Due to the construction work, Draper will re-examine the assumptions in FY2018.
In 2007, Draper established a liability for environmental cleanup costs associated with soil contamination at the Bedford test facility under the requirements of ASC 410-30, Asset Retirement and Environmental Obligations – Environmental Obligations. Draper has compiled estimates of the cleanup costs under various scenarios and will update those estimates as conditions change in future periods. Due to the long-term nature of the remediation activities, Draper has discounted the expected future expenditures to the current period, using a rate of 7.04%. At June 30, 2017, Draper’s recorded liability was $703,814.
29 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
10. Florida and Aurora Semiconductor LLC
On June 30, 2008, Draper entered into agreements with the State of Florida Office of Tourism, Trade and Economic Development (State of Florida) as well as the counties of Pinellas and Hillsborough, the Florida High Tech Corridor Counsel (FHTCC) and the University of Florida Research Foundation (USF). The State of Florida agreed to provide $15,000,000 all of which was substantially received by the close of FY2012. Another $15,000,000 of matching awards was received from the various other parties. The matching awards were in the form of equipment, donated facilities, and rent incentives over the next ten years as follows:
1. Pinellas County provided $2,000,000 to be used by Draper for the purchase of equipment;
2. FHTCC provided $985,873 worth of equipment to Draper;
3. USF provided $2,000,000 to Draper to be used for the purchase of leasehold improvements;
4. Hillsborough County agreed to fund $976,000 of rent obligation as well as $2,920,398 for the purchase of equipment and an additional $2,000,000 for leasehold improvements
5. The State of Florida has a security interest in approximately $4,400,000 of equipment purchased in FY2009. This is the original cost of the equipment. Draper is in discussion with the State of Florida concerning how to relieve the security interest in the equipment. In FY2016, Draper reserved $1.8M as Draper has deemed this amount as the most probable and reasonably estimable amount. There has been no further communication with the State of Florida since FY2016.
In FY2015, Draper commenced restructuring of its Florida operations and concurrently entered into negotiations with all of the interested parties. As part of this restructuring, Draper paid the County of Hillsborough $3,000,000 in amounts due under the contract.
In FY2016 Draper and Pinellas County determined that the equipment security interest had expired, and no amendment was needed. The final headcount measurement was determined in August 2016 and a payment was made. The FHTCC granted Draper the option of purchasing 4 of the 5 pieces of MCM process equipment funded by their $1,000,000 grant in 2009. The agreed upon purchase price was $270,000, which was paid this year and completes the FHTCC transaction. Draper terminated its lease with USF by paying a $968,981 termination fee. Draper derecognized $402,309 in outstanding rent liability and recognized a $566,672 loss on the transaction. Draper retired the leasehold improvement assets granted by USF and Hillsborough County for loss of $1,881,448 which was offset by the reversal of $1,796,240 from related deferred revenue, resulting in a net loss of $85,208. The Hillsborough granted assets were retired for a loss of $860,210 which was offset by a gain of $860,210 from derecognizing the related deferred revenue, resulting in no loss. Draper does not believe there are any material amounts due under the remaining contracts.
30 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
Aurora Semiconductor LLC (Aurora) is an independent, for-profit company comprised of a team of experienced semiconductor professionals.
In January 2016, Draper loaned Aurora Semiconductor LLC (Aurora) $2,000,000. This is a two year, 2.75% interest bearing note with interest payments due to Draper on a quarterly basis.
In January 2016, Draper leased to Aurora the land, building, and equipment at its St. Petersburg, Florida location. At the end of the lease term, Aurora has the option to purchase the aforementioned assets provided an event of default has not occurred. Draper accounted for the transaction as a Sales Type lease using classification criteria under ASC 842-10-25-2. Under ASC 842-30-40-1 and ASC 842-30-25-1 guidance, Draper derecognized the leased assets and recognized a $4,934,454 gain.
There is a potential for future license revenue streams of up to $14,500,000 with Aurora. Draper also entered into a licensing agreement with Aurora granting Aurora the use of Draper’s Integrated Ultra High Density (iUHD) technology. Royalties are based on revenue generated from the use of the technology and is a percentage of that revenue. This percentage starts at 8% in 2016 and decreases to 5% in 2019 and continues through 2023, after which no royalties will be due to Draper.
In FY2017, Aurora’s financial condition deteriorated significantly. Title III is a program to expand domestic supplier production capabilities to produce 3D iUHD microelectronics modules for use in Critical Program Information protection applications. The award of Title III was significantly delayed. It was finally awarded on July 28, 2017. The delay in Title III coupled with the lack of revenue from other customers have deteriorated Aurora’s financial position. On August 7, 2017, Draper sent notice of default to Aurora with respect to multiple deficiencies under the agreements related to the original 2016 transaction.
Draper has not restructured the agreements. However, Draper recorded a reserve of $4.3 million related to the capital lease of the equipment, $2.2 million related to the capital lease of the building, and $2.0 million for an allowance for doubtful accounts related to the loan in accordance with ASC 310 Receivable and ASC 450-20 Loss contingencies. As a result, Draper has recorded total reserves for $8.5 million in FY2017 reflected in the Facilities, communications, unallowables, and other section on the Statement of Activities.
11. Results of Operations
Total operating revenue is $571,825,651 in FY2017 and $623,195,842 in FY2016. The majority of our revenue is with the U.S. Government and related agencies. A contract change order is included in the operating revenue total. There are pending change orders that total approximately $2,029,411 at the end of FY2017 compared to $922,553 at the end of FY2016.
Direct expenses are $413,132,454 in FY2017 compared to $478,083,668 in FY2016. Indirect costs are $195,866,256 in FY2017 and $160,035,715 in FY2016.
31 The Charles Stark Draper Laboratory, Inc. Notes to Financial Statements
June 30, 2017 and July 1, 2016
12. Subsequent Events
Draper has performed an evaluation of subsequent events through September 21, 2017, which is the date the financial statements were available to be issued. There are no events, other than those related to Aurora and recorded here, that occurred after June 30, 2017, that have a material impact on Draper’s financial statements.
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APPENDIX C
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
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The following is a summary of certain provisions of the Indenture that are not described elsewhere in this Offering Memorandum. The Bonds are issued and secured pursuant to the Indenture. References to the Indenture or a fund or account refer to the related document, fund or account with respect to the Bonds, as described in the Offering Memorandum. Unless otherwise specified to the contrary in this Appendix C, all definitions and provisions summarized refer to the Indenture. This summary does not purport to be comprehensive and reference should be made to the Indenture for a full and complete statement of its provisions.
Definitions
Unless the context otherwise requires, the following terms shall have the meanings specified below:
“Additional Bonds” has the meaning ascribed in Section 3.04 of the Indenture.
“Authorized Denomination” means $1,000 or any multiple integral thereof.
“Authorized Representative” of the Institution means the Institution’s Chairperson, President, Chief Executive Officer, Chief Financial Officer, Chief Administrative Officer, Principal Director of Finance or General Counsel, or any other Person designated as an Authorized Representative of the Institution by a Certificate of the Institution signed by the Institution’s Chairperson, President, Chief Executive Officer, Chief Financial Officer, Chief Administrative Officer, Principal Director of Finance or General Counsel, and filed with the Trustee.
“Beneficial Owner” means any Person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any of the Bonds (including any Person holding Bonds through nominees, depositories or other intermediaries) established to the reasonable satisfaction of the Trustee or the Institution.
“Bond Fund” means the fund by that name established pursuant to Section 5.02 of the Indenture.
“Bonds” means The Charles Stark Draper Laboratory, Inc.’s Taxable Bonds, Series 2018, authorized by, and at any time Outstanding pursuant to, the Indenture, and, to the extent issued under the Indenture, Additional Bonds.
“Book-Entry Form” or “Book-Entry System” means a form or system, as applicable, under which physical bond certificates in fully registered form are registered only in the name of a Securities Depository or its nominee as Bondholder, with the physical bond certificates held by and “immobilized” in the custody of the Securities Depository and the book-entry system maintained by and the responsibility of others than the Institution or the Trustee is the record that identifies and records the transfer of the interests of the owners of book-entry interests in those Bonds.
“Business Day” means any day other than (a) a Saturday or Sunday or legal holiday or a day on which banking institutions in the city or cities in which the Designated Office of the
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Trustee is located are authorized by law or executive order to close or (b) a day on which the New York Stock Exchange is closed.
“Certificate,” “Statement,” “Request” and “Requisition” of the Institution mean, respectively, a written certificate, statement, request or requisition signed in the name of the Institution by an Authorized Representative. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. If and to the extent required by Section 1.02 of the Indenture, each such instrument shall include the statements provided for in Section 1.02 of the Indenture.
“Close of Business” means 5:00 p.m. (Eastern Standard Time).
“Code” means the Internal Revenue Code of 1986, as amended, or any successor statute thereto and any regulations promulgated thereunder.
“Comparable Treasury Issue” means, with respect to the Bonds of a particular maturity, the United States Treasury security selected by a Designated Investment Banker as having an actual maturity comparable to the remaining average life of the Bonds of such maturity to be optionally redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable remaining average life of such Bond to be redeemed.
“Comparable Treasury Price” means, with respect to any Redemption Date, with respect to the Bonds of a particular maturity, (a) the average of Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (b) if the Designated Investment Banker obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations.
“Default” means any event which is or after notice or lapse of time or both would become an Event of Default.
“Designated Investment Banker” means one of the Reference Treasury Dealers appointed by the Institution.
“Designated Office” means the Designated Office of the Trustee, which as of the date of the Indenture is located at 135 Santilli Highway, AIM 026-0018, Everett, Massachusetts 02149 Attention: Corporate Trust Department, and such other offices as the Trustee may designate from time to time by written notice to the Institution and the Holders.
“DTC” means the Depository Trust Company, a New York corporation.
“DTC Custodian” means the Trustee as a custodian for DTC.
“Electronic Means” shall mean the following communications methods: e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes,
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passwords and/or authentication keys issued by the Trustee, or another method or system specified by the Trustee as available for use in connection with its services hereunder.
“Event of Default” means any of the events specified in Section 7.01 of the Indenture.
“Holder” or “Bondholder,” whenever used herein with respect to a Bond, means the Person in whose name such Bond is registered.
“Global Bond” means any Bond registered in the name of the Securities Depository or its nominee, beneficial interests of which are reflected on the books of the Securities Depository or on the books of a Person maintaining any account with such Securities Depository (directly or as an indirect participant in accordance with the rules of such Securities Depository).
“Indenture” means the Indenture of Trust, as originally executed or as it may from time to time be supplemented, modified or amended by any Supplemental Indenture.
“Indenture Fund” means the fund by that name established pursuant to Section 5.01 of the Indenture.
“Institution” means The Charles Stark Draper Laboratory, Inc., a non-profit corporation existing under the laws of The Commonwealth of Massachusetts, and shall include its successor or successors.
“Interest Account” means the account by that name in the Bond Fund established pursuant to Section 5.02 of the Indenture.
“Interest Payment Date” means March 1 and September 1 of each year, commencing September 1, 2018.
“Investment Securities” means either of the following: (a) direct nonprepayable, noncallable obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America) or direct nonprepayable, noncallable obligations, the timely payment of the principal of and interest on which are fully guaranteed by the United States of America (including instruments evidencing a direct ownership interest in securities described in this clause such as CATS, TIGRs, and Stripped Treasury Coupons rated or assessed in the two highest Rating Categories by S&P and Moody’s and held by a custodian for safekeeping on behalf of holders of such securities) and (b) money market funds registered under the Investment Company Act of 1940, the shares in which are registered under the Securities Act of 1933 and that have a rating by S&P or Moody’s in such Rating Agency’s two highest Rating Categories, including such funds for which the Trustee or its affiliates provide investment advisory or other management services.
“Make Whole Redemption Price,” with respect to Bonds being redeemed at the option of the Institution, means an amount equal to the greater of:
(1) 100% of the principal amount of any Bonds, or portion thereof, being redeemed; and
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(2) the sum of the present values of the remaining scheduled payments of principal of and interest on the Bonds, or portion thereof, being redeemed (exclusive of interest accrued and unpaid as of the Redemption Date), discounted to the Redemption Date on a semiannual basis (assuming a 360 day year consisting of twelve 30 day months) at the Treasury Rate plus (a) 10 basis points for the Bonds due September 1, 20[ ]; through September 1, 20[_]; (b) 20 basis points for the Bonds due September 1, 20[_] through September 1, 20[_]; and (c) 25 basis points for the Bonds due September 1, 20[_] through September 1, 20[_],
plus, in each case accrued and unpaid interest on such Bonds to be redeemed on the Redemption Date.
“Moody’s” means Moody’s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Institution upon notice to the Trustee.
“Offering Memorandum” means the final offering memorandum dated March [___], 2018, relating to the Bonds.
“Opinion of Counsel” means a written opinion of counsel (who may be counsel for the Institution) satisfactory to the Trustee.
“Outstanding” when used as of any particular time with reference to Bonds, means (subject to the provisions of Section 11.08 of the Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except (a) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (b) Bonds with respect to which all liability of the Institution shall have been discharged in accordance with Section 10.02 of the Indenture, including Bonds (or portions of Bonds) referred to in Section 11.08 of the Indenture; and (c) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.
“Payment Date” means an Interest Payment Date or a Principal Payment Date.
“Person” means an individual, corporation, firm, association, partnership, trust, limited liability company or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.
“Principal Account” means the account by that name in the Bond Fund established pursuant to Section 5.01 of the Indenture.
“Principal Payment Date” means September 1 of 2031 through 2048.
“Rating Agency” means Moody’s.
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“Rating Category” means a generic securities rating category, without regard to any refinement or gradation of such rating category by a numerical modifier or otherwise.
“Record Date” means the fifteenth day (whether or not a Business Day) of the month immediately preceding each Interest Payment Date.
“Redemption Date,” with respect to any optional redemption of Bonds, means any Business Day selected as the date of redemption for such Bonds as set forth in the notice of redemption described in Section 4.04 of the Indenture.
“Redemption Fund” means the fund by that name established pursuant to Section 5.05 of the Indenture.
“Redemption Price” means with respect to Bonds that are being optionally redeemed pursuant to Section 4.01 of the Indenture, (a) prior to March __, 2028, the Make-Whole Redemption Price, and (b) on or after March __, 2028, the principal amount thereof.
“Reference Treasury Dealer” means J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and three additional firms, as designated by the Institution, and the respective affiliates of each that are primary U.S. Government securities dealers (each a “Primary Treasury Dealer”), together with the respective successors of each of the foregoing; provided that, if any of them ceases to be a Primary Treasury Dealer, the Institution shall substitute therefore another Primary Treasury Dealer.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Designated Investment Banker, of the bid and asked prices for the applicable Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Designated Investment Banker and communicated to the Trustee by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third Business Day preceding such Redemption Date.
“Responsible Officer” means any officer of the Trustee assigned to administer its duties hereunder.
“S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, a corporation organized and existing under the laws of the State of New York, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Institution upon notice to the Trustee.
“Securities Depository” means DTC and its successors and assigns, or any other securities depository selected as set forth in Section 2.10 of the Indenture, which agrees to follow the procedures required to be followed by such securities depository in connection with the Bonds.
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“Special Record Date” means the date established by the Trustee pursuant to Section 2.02 of the Indenture as the record date for the payment of defaulted interest on the Bonds.
“Substitute Depository” shall have the meaning ascribed to it in Section 2.10 of the Indenture.
“Supplemental Indenture” means any indenture hereafter duly authorized and entered into between the Institution and the Trustee, supplementing, modifying or amending the Indenture.
“Treasury Rate” means, with respect to any Redemption Date, with respect to the Bonds of a particular maturity, the rate per annum equal to the semiannual equivalent yield to maturity (on a day count basis) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“Trustee” means The Bank of New York Mellon Trust Company, N.A., a national banking association duly organized and existing under and by virtue of the laws of the United States of America, or its successor or successors, as Trustee hereunder as provided in Section 8.01 of the Indenture.
“Underwriters” means J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
“Uniform Commercial Code” means the Uniform Commercial Code as in effect in The Commonwealth of Massachusetts from time to time.
Establishment and Pledge of Indenture Fund
Subject only to the provisions of the Indenture permitting or requiring the application thereof for the purposes and on the terms and conditions set forth therein, the Indenture Fund and all amounts held therein are pledged, assigned and transferred by the Institution to the Trustee for the benefit of the Bondholders to secure the full payment of the principal or Redemption Price of and interest on the Bonds in accordance with their terms and the provisions of the Indenture. The Institution hereby grants to the Trustee a security interest in and acknowledges and agrees that the Indenture Fund and all amounts on deposit therein shall constitute collateral security to secure the full payment of the principal or Redemption Price of and interest on the Bonds in accordance with their terms and the provisions of the Indenture. For purposes of creating, perfecting and maintaining the security interest of the Trustee on behalf of the Bondholders in and to the Indenture Fund and all amounts on deposit therein, the parties to the Indenture agree as follows: (1) the Indenture shall constitute a “security agreement” for purposes of the Uniform Commercial Code; (2) the Trustee shall maintain on its books records reflecting the interest, as set forth in the Indenture, of the Bondholders in the Indenture Fund and/or the amounts on deposit therein; and (3) the Indenture Fund and the amounts on deposit therein and any proceeds thereof shall be held by the Trustee acting in its capacity as an agent of the Bondholders, and the holding of such items by the Trustee (including the transfer of any items among the funds and
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accounts in the Indenture Fund) is deemed possession of such items on behalf of the Bondholders.
Nothing in the Indenture or in the Bonds, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or otherwise in the assets of the Institution other than in any interest of the Institution in the Indenture Fund and/or the amounts on deposit therein. No recourse for the payment of the principal or Redemption Price of or interest on any Bond, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Institution in the Indenture or in any Supplemental Indenture or in any Bond, or because of the creation of any indebtedness represented thereby, shall be had against any employee, agent, or officer, as such, past, present or future, of the Institution or of any successor entity, either directly or through any successor entity, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of the and the issue of the Bonds. No officer or agent of the Institution, nor any Person executing the Bonds, shall in any event be subject to any personal liability or accountability by reason of the issuance of the Bonds.
Funds and Accounts
The Indenture creates an Indenture Fund (and a Bond Fund and a Redemption Fund thereunder). The Indenture also creates an Interest Account and Principal Account under the Bond Fund. All of the funds and accounts are to be held by the Trustee.
Application of Proceeds of Bonds. The proceeds from the sale of the Bonds (net of underwriters discount and original issue discount, if any), exclusive of Additional Bonds, shall be remitted to the Institution as provided in the Purchase Contract between the Institution and the representative of the Underwriters for the Bonds.
Indenture Fund. The Trustee establishes for the sole benefit of the Bondholders, a master fund referred to in the Indenture as the “Indenture Fund” containing the Bond Fund and the Redemption Fund and each of the accounts contained therein. The Indenture Fund and each of the funds and accounts in the Indenture Fund shall be identified on the books of the Trustee with reference hereto and shall be maintained by the Trustee and held in trust apart from all other moneys and securities held under the Indenture or otherwise, and the Trustee shall have the exclusive and sole right of withdrawal therefrom in accordance with the terms of the Indenture. All amounts deposited with the Trustee pursuant to the Indenture shall be held, disbursed, allocated and applied by the Trustee only as provided in the Indenture.
Bond Fund. Upon the receipt thereof, the Trustee shall deposit all payments received from the Institution (other than proceeds from the sale of the Bonds which are to be applied pursuant to Section 3.02 of the Indenture, amounts which are to be deposited in the Redemption Fund or income or profit from investments which are to be applied pursuant to the Indenture) in a special fund designated as The Charles Stark Draper Laboratory, Inc. Series 2018 “Bond Fund” which the Trustee shall establish and maintain and hold in trust and which shall be disbursed and applied only as authorized in the Indenture.
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At the times specified below, the Trustee shall allocate within the Bond Fund in the following order of priority the following amounts to the following accounts or funds, each of which the Trustee shall establish and maintain and hold in trust and each of which shall be disbursed and applied only as hereinafter authorized: (1) On each Interest Payment Date, the Trustee shall deposit in the Series 2018 “Interest Account” the aggregate amount of interest becoming due and payable on such Interest Payment Date, until the balance in said account is equal to said aggregate amount of interest; and (2) On each Principal Payment Date, the Trustee shall deposit in the Series 2105 “Principal Account” the aggregate amount of principal becoming due and payable on such Principal Payment Date, until the balance in said account is equal to said aggregate amount of such principal.
Interest Account. All amounts in the Interest Account of the Bond Fund shall be used and withdrawn by the Trustee solely for the purpose of paying interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds redeemed prior to maturity pursuant to the Indenture).
Principal Account. All amounts in the Principal Account of the Bond Fund shall be used and withdrawn by the Trustee solely to pay principal on the Bonds as it shall become due and payable.
Redemption Fund. Upon the receipt thereof, the Trustee shall deposit the following amounts in a special fund designated as The Charles Stark Draper Laboratory, Inc. Series 2018 “Redemption Fund” which the Trustee shall establish and maintain and hold in trust: (1) all moneys deposited by the Institution with the Trustee directed to be deposited in the Redemption Fund; and (2) all interest, profits and other income received from the investment of moneys in the Redemption Fund.
All amounts deposited in the Redemption Fund shall be used and withdrawn by the Trustee solely for the purpose of redeeming Bonds, in the manner and upon the terms and conditions specified in the Indenture, at the next succeeding Redemption Date; provided that the Institution may purchase some or all of the Bonds called for redemption if it gives written notice to the Trustee not later than the Close of Business on the Business Day immediately preceding a Redemption Date, and the Trustee shall apply such amounts to the purchase of Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as the Institution may direct, except that the purchase price may not exceed the Redemption Price for optional redemption then applicable to such Bonds; and provided further that in lieu of redemption at such next succeeding Redemption Date, or in combination therewith, amounts in such account may be transferred to the Principal Account as set forth in a Request by the Institution.
(A) Payments by the Institution; Allocation of Funds. On or before 11:00 AM on each Payment Date, until the principal of and interest on the Bonds shall have been fully paid or provision for such payment shall have been made as provided in the Indenture, the Institution shall pay to the Trustee a sum equal to the amount payable on such Payment Date as principal of and interest on the Bonds. On or before 11:00 a.m. on each Redemption Date, until the principal of and interest on the Bonds shall have been fully paid or provision for such payment shall have been made as provided in the Indenture, the Institution shall pay to the Trustee a sum equal to the
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applicable Redemption Price. Each payment made pursuant to this paragraph shall at all times be sufficient to pay the total amount of interest and principal (whether at maturity or upon acceleration) becoming due and payable on the Bonds on such Payment Date or the Redemption Price becoming due and payable on the Bonds on such Redemption Date. If on any Payment Date the amounts held by the Trustee in the accounts within the Bond Fund are insufficient to make any required payments of principal of (whether at maturity or upon acceleration) and interest on the Bonds as such payments become due, the Institution shall forthwith pay such deficiency to the Trustee. If on any Redemption Date the amounts held by the Trustee in the accounts within the Bond Fund are insufficient to pay the applicable Redemption Price on such date, the Institution shall forthwith pay such deficiency to the Trustee.
The obligations of the Institution to make the payments required by the immediately preceding paragraph and to perform and observe the other agreements on its part contained in the Indenture shall be general unsecured obligations of the Institution, absolute and unconditional, irrespective of any defense or any rights of set-off, recoupment or counterclaim it might otherwise have against the Trustee, and during the term of the Indenture, the Institution shall pay all payments required to be made by the immediately preceding paragraph (which payments shall be net of any other obligations of the Institution) as prescribed therein and all other payments required under the indenture, free of any deductions and without abatement, diminution or set-off. Until such time as the principal of and interest on, the Bonds shall have been fully paid, or provision for the payment thereof shall have been made as required by the Indenture, the Institution (i) will not suspend or discontinue any payments provided for in the immediately preceding paragraph; (ii) will perform and observe all of its other covenants contained in the Indenture; and (iii) except as provided in the Indenture, will not terminate the Indenture for any cause, in each case, except to the extent permitted by the Indenture.
Validity of Bonds
Other than with respect to any Additional Bonds that may be issued under the Indenture, the recital contained in the Bonds that the same are issued pursuant to the Indenture shall be conclusive evidence of their validity and of compliance with the provisions of the Indenture in their issuance.
Additional Bonds
The Institution may, from time to time, without the consent of the Bondholders, issue additional bonds under the Indenture in addition to the Bonds (“Additional Bonds”). If issued, the Additional Bonds will become part of the same Series as the Bonds and will have the same interest rate, redemption provisions and maturity date as the Bonds, but may have a different CUSIP number if the Additional Bonds are not fungible for tax or securities law purposes with the Bonds issued on the date of the Indenture. The proceeds from any sale of Additional Bonds shall be distributed to the Institution in accordance with a Request from the Institution.
Use of Securities Depository
The Bonds will be issued as Global Bonds.
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Notwithstanding any provision of the Indenture to the contrary:
The Bonds shall be issued as fully registered Bonds, registered under a global book-entry system initially in the name of “Cede & Co.,” as nominee of the Securities Depository. Registered ownership of the Bonds, or any portion thereof, may not thereafter be transferred except: (1) to any successor of the Securities Depository or its nominee, or to any substitute depository designated pursuant to clause (2) of this paragraph (“Substitute Depository”); provided that any successor of the Securities Depository or Substitute Depository shall be qualified under any applicable laws to provide the service proposed to be provided by it; (2) to any Substitute Depository designated by the Institution and not objected to by the Trustee, upon (i) the resignation of the Securities Depository or its successor (or any Substitute Depository or its successor) from its functions as depository or (ii) a determination by the Institution that the Securities Depository or its successor (or any Substitute Depository or its successor) is no longer able to carry out its functions as depository; provided that any such Substitute Depository shall be qualified under any applicable laws to provide the services proposed to be provided by it; or (3) to any Person as provided below, upon (i) the resignation of the Securities Depository or its successor (or Substitute Depository or its successor) from its functions as depository; provided that no Substitute Depository which is not objected to by the Trustee can be obtained or (ii) a determination by the Institution that it is in the best interests of the Institution to remove the Securities Depository or its successor (or any Substitute Depository or its successor) from its functions as depository.
In the case of any transfer pursuant to clause (1) or clause (2) of the immediately preceding paragraph, upon receipt of the Outstanding Bonds by the Trustee, together with a Certificate of the Institution to the Trustee, a single new Bond shall be executed and delivered in the aggregate principal amount of the Bonds then Outstanding, registered in the name of such successor or such Substitute Depository, or their nominees, as the case may be, all as specified in such Certificate of the Institution. In the case of any transfer pursuant to clause (3) of the immediately preceding paragraph, upon receipt of the Outstanding Bonds by the Trustee together with a Certificate of the Institution to the Trustee, new Bonds shall be executed and delivered in such denominations and registered in the names of such persons as are requested in such a Certificate of the Institution, subject to the limitations of the Indenture, provided the Trustee shall not be required to deliver such new Bonds within a period less than sixty (60) days from the date of receipt of such a Certificate of the Institution.
In the case of partial redemption or an advance refunding of the Bonds evidencing all or a portion of the principal amount Outstanding, the Securities Depository shall make an appropriate notation on the Bonds indicating the date and amounts of such reduction in principal, in form acceptable to the Trustee.
The Institution and the Trustee shall be entitled to treat the Person in whose name any Bond is registered as the Bondholder thereof for all purposes of the Indenture and any applicable laws, notwithstanding any notice to the contrary received by the Institution or the Trustee. With respect to Bonds registered in the registry books kept by the Trustee in the name of Cede & Co., as nominee of the Securities Depository, the Institution and the Trustee shall have no responsibility or obligation to any Participant (which means securities brokers and dealers, banks, trust companies, clearing corporations and various other entities, some of whom or their
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representatives own the Securities Depository) or to any Beneficial Owner (which means, when used with reference to the Book Entry System, the Person who is considered the Beneficial Owner of the Bonds pursuant to the arrangements for book entry determination of ownership applicable to the Securities Depository) with respect to the following: (i) the accuracy of the records of the Securities Depository, Cede & Co. or any Participant with respect to any ownership interest in the Bonds, (ii) the delivery to any Participant, any Beneficial Owner or any other Person, other than the Securities Depository, of any notice with respect to the Bonds, including any notice of redemption, or (iii) the payment to any Participant, any Beneficial Owner or any other Person, other than the Securities Depository, of any amount with respect to the principal or Redemption Price of and interest on the Bonds only to or upon the order of the Securities Depository, and all such payments shall be valid and effective fully to satisfy and discharge the Institution’s obligations with respect to the principal or Redemption Price of and interest on the Bonds to the extent of the sum or sums so paid.
Particular Covenants
Punctual Payment. The Trustee shall from funds provided by the Institution punctually pay the principal or Redemption Price and interest to become due in respect of all the Bonds, in strict conformity with the terms of the Bonds and of the Indenture, according to the true intent and meaning thereof, from funds made available by the Institution. When and as paid in full, all Bonds shall be delivered to the Trustee and shall forthwith be cancelled by the Trustee and delivered to, or upon the order of, the Institution.
Compliance with Indenture. The Institution covenants not to issue, or permit to be issued, any Bonds in any manner other than in accordance with the provisions of the Indenture, and shall not suffer or permit any Default (within its power to prevent) to occur under the Indenture, but shall faithfully observe and perform all the covenants, conditions and requirements of the Indenture.
Against Encumbrances. The Institution shall not create or suffer to be created any pledge, lien, charge or other encumbrance upon all or any part of the Indenture Fund or any of the amounts held therein pledged or assigned under the Indenture while any of the Bonds are Outstanding, except the pledge and assignment created by the Indenture and any statutory liens or other liens arising by operation of law. The Institution will assist the Trustee in contesting any pledge, lien, charge or other encumbrance that does not comply with the provisions of the Indenture.
Power to Issue Bonds and Make Pledge and Assignment. The Institution is duly authorized to issue the Bonds and to enter into the Indenture and to pledge and assign the funds and accounts purported to be pledged and assigned under the Indenture in the manner and to the extent provided in the Indenture. The Bonds are and will be legal, valid and binding obligations of the Institution in accordance with their terms, and the Institution and the Trustee shall at all times, to the extent permitted by law, defend, preserve and protect said pledge and assignment of funds and accounts and all the rights of the Bondholders under the Indenture against all claims and demands of all Persons whomsoever, subject to the limitations set forth in the Indenture relating to the Trustee.
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Accounting Records and Financial Statements. With respect to each fund or account established and maintained by the Trustee pursuant to the Indenture, the Trustee shall at all times keep, or cause to be kept, proper books of record and account prepared in accordance with corporate trust accounting standards, in which complete and accurate entries shall be made of all transactions relating to the receipt, investment, disbursement, allocation and application of payments received from the Institution and the proceeds of the Bonds. Such books of record and account shall be available for inspection by the Institution and any Bondholder, or his or her agent or representative duly authorized in writing, at reasonable hours and under reasonable circumstances.
The Trustee shall file and furnish to each Bondholder who shall have filed his or her name and address with the Trustee for such purpose, within thirty (30) days after the end of each month, a complete financial statement (which need not be audited and may be its regular account statements) covering receipts, disbursements, allocation and application of any moneys (including proceeds of Bonds) in any of the funds and accounts established pursuant to the Indenture for such month; provided that the Trustee shall not be obligated to deliver an accounting for any fund or account that has a balance of $0.00 and has not had any activity since the last reporting. The Trustee shall also furnish a copy of its monthly statement to the Institution.
Continuing Disclosure. Unless otherwise available on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system or any successor thereto or to the functions thereof, copies of the audited financial statements described in the Indenture will be [posted on the Institution’s web site][made available to any Holder upon request].
Events of Default and Remedies of Bondholders
Events of Default. The following events shall be “Events of Default”: (a) default in the due and punctual payment of the principal or Redemption Price of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by acceleration or otherwise; (b) default in the due and punctual payment of any interest on any Bond when and as such interest shall become due and payable; (c) default by the Institution in the performance or observance of any of the other covenants, agreements or obligations on its part contained in the Indenture or in the Bonds (other than a covenant, agreement or condition a Default in performance or observance of which is elsewhere in Section 7.01 of the Indenture specifically addressed), if such Default shall have continued for a period of sixty (60) days after written notice thereof, specifying such Default and requiring the same to be remedied and stating that such notice is a “Notice of Default” under the Indenture, shall have been given to the Institution by the Trustee, or to the Institution and the Trustee by the Holders of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding; (d) the commencement by the Institution of a voluntary case under the federal bankruptcy laws, or if the Institution shall become insolvent or unable to pay its debts as they become due, or shall make an assignment for the benefit of creditors, or shall apply for, consent to or acquiesce in the appointment of, or taking possession by, a trustee, receiver, custodian or similar official or agent for itself or any substantial part of its property; (e) the appointment of a trustee, receiver, custodian or similar official or agent for the Institution or for any substantial part of its property and such trustee or receiver shall not be discharged within sixty (60) days; or (f) an order or
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decree for relief in an involuntary case under the federal bankruptcy laws shall be entered against the Institution, or a petition seeking reorganization, readjustment, arrangement, composition, or other similar relief as to it under the federal bankruptcy laws or any similar law for the relief of debtors shall be brought against it and shall be consented to by it or shall remain undismissed for sixty (60) days.
Acceleration of Maturity. If an Event of Default shall occur, then, and in each and every such case during the continuance of such Event of Default, the Trustee may, upon notice in writing to the Institution, declare the principal of all the Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration by the Trustee the same shall become and shall be immediately due and payable, anything in the Indenture or in the Bonds contained to the contrary notwithstanding.
Any such declaration, however, is subject to the condition that if, at any time after such declaration and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, there shall be deposited with the Trustee a sum sufficient to pay all the principal or Redemption Price of and interest on the Bonds payment of which is overdue, with interest on such overdue principal at the rate borne by the Bonds, and the reasonable charges and expenses of the Trustee, and any and all other Defaults known to the Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, the Trustee shall, on behalf of the Holders of all of the Bonds, by written notice to the institution, rescind and annul such declaration and its consequences and waive such Default and Event of Default; but no such rescission and annulment shall extend to or shall affect any subsequent Default or Event of Default, or shall impair or exhaust any right or power consequent thereon.
Rights as a Secured Party. After an acceleration and prior to the rescindment and annulment of such acceleration, in each case, as described in the two immediately preceding paragraphs, the Trustee, as appropriate, may exercise all of the rights and remedies of a secured party under the Uniform Commercial Code with respect to securities in the Indenture Fund, including without limitation the Bond Fund and the Redemption Fund, including the right to sell or redeem such securities and the right to retain the securities in satisfaction of any obligation of the Institution under the Indenture. Notice sent by registered or certified mail, postage prepaid, or delivered during business hours, to the Institution at least seven (7) days before an event under Uniform Commercial Code Sections 9-610 and 9—611, or any successor provision of law shall constitute reasonable notification of such event.
Application of Moneys Collected by the Trustee. If an Event of Default shall occur and be continuing, all moneys then held or thereafter received by the Trustee under any of the provisions of the Indenture (subject to provisions of the Indenture requiring moneys to be held for payment of particular Bonds) shall be applied by the Trustee as follows and in the following order:
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1. To the payment of reasonable fees and expenses of the Trustee (including reasonable fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Indenture;
2. To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Holders of the Bonds; and
3. To the payment of the principal or Redemption Price of and interest then due on the Bonds (upon presentation of the Bonds to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid) subject to the provisions of the Indenture, as follows:
(a) Unless the principal of all of the Bonds shall have become or have been declared due and payable,
First: To the payment to the Persons entitled thereto of all installments of interest then due in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments due on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the Persons entitled thereto, without any discrimination or preference; and
Second: To the payment to the Persons entitled thereto of the unpaid principal or Redemption Price of any Bonds which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, with interest on the overdue principal at the rate borne by the Bonds, and, if the amount available shall not be sufficient to pay in full all the Bonds due on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal or Redemption Price due on such date to the Persons entitled thereto, without any discrimination or preference.
(b) If the principal of all of the Bonds shall have become or have been declared due and payable, to the payment of the principal and interest then due and unpaid upon the Bonds, with interest on the overdue principal at the rate borne by the Bonds, and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, according to the amounts due respectively for principal and interest, to the Persons entitled thereto without any discrimination or preference.
Trustee to Represent Bondholders. The Trustee is hereby irrevocably appointed (and the successive respective Holders of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) as trustee and true and lawful attorney-in-fact of the Holders of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Holders under the provisions of the Bonds, the Indenture and applicable provisions of any law. Upon the occurrence and
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continuance of an Event of Default or other occasion giving rise to a right in the Trustee to represent the Bondholders, the Trustee in its discretion may, and upon the written request of the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding, and upon being indemnified to its satisfaction therefor, shall proceed to protect or enforce its rights or the rights of such Holders by such appropriate action, suit, mandamus or other proceedings as it shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained in the Indenture, or in aid of the execution of any power granted in the Indenture, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Trustee, or in such Holders under the Bonds, the Indenture or any applicable law; and upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the amounts pledged under the Indenture, pending such proceedings. If more than one such request is received by the Trustee from the Holders, the Trustee shall follow the written request executed by the Holders of the greatest percentage (which percentage shall be, in any case, not less than a majority in aggregate principal amount) of the Bonds then Outstanding. All rights of action under the Indenture or the Bonds or otherwise may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in the name of the Trustee for the benefit and protection of all the Holders of such Bonds, subject to the provisions of the Indenture.
Bondholders’ Direction of Proceedings. The Holders of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, and upon indemnifying the Trustee to its satisfaction therefor, to direct the time, method and place of conducting all remedial proceedings taken by the Trustee under the Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Indenture, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would be unjustly prejudicial to Bondholders not parties to such direction.
Limitation on Bondholders’ Right to Sue. No Holder of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Indenture, any Bond or any applicable law with respect to such Indenture or Bond, unless (1) such Holder shall have given to the Trustee written notice of the occurrence of an Event of Default; (2) the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers granted in the Indenture or to institute such suit, action or proceeding in its own name; (3) such Holder or said Holders shall have tendered to the Trustee indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee.
Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Holder of Bonds of any remedy under the Indenture or under law; it being understood and intended that no one or more Holders of Bonds shall have any right in any manner whatsoever by his or their action to affect,
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disturb or prejudice the security of the Indenture or the rights of any other Holders of Bonds, or to enforce any right under the Indenture or applicable law with respect to the Bonds, except in the manner provided in the Indenture, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner provided in the Indenture and for the benefit and protection of all Holders of the Outstanding Bonds, subject to the provisions of the Indenture.
Absolute Obligation of Institution. Notwithstanding any other provision of the Indenture, or in the Bonds, nothing shall affect or impair the obligation of the Institution, which is absolute and unconditional, to pay the principal or Redemption Price of and interest on the Bonds to the respective Holders of the Bonds at their respective dates of maturity, or upon call for redemption, as provided in the Indenture, or, subject to the provisions of the Indenture regarding limitation on Bondholders’ right to sue, affect or impair the right of such Holders to enforce such payment by virtue of the contract embodied in the Bonds.
Termination of Proceedings. In case any proceedings taken by the Trustee or any one or more Bondholders on account of any Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee or the Bondholders, then in every such case the Institution, the Trustee and the Bondholders, subject to any determination in such proceedings, shall be restored to their former positions and rights under the Indenture, severally and respectively, and all rights, remedies, powers and duties of the Institution, the Trustee and the Bondholders shall continue as though no such proceedings had been taken.
Remedies Not Exclusive. No remedy conferred in the Indenture upon or reserved to the Trustee or to the Holders of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given under the Indenture or now or hereafter existing at law or in equity or otherwise.
Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of the Bonds to exercise any right or power arising upon the occurrence of any Default shall impair any such right or power or shall be construed to be a waiver of any such Default or an acquiescence therein; and every power and remedy given by the Indenture to the Trustee or to the Holders of the Bonds may be exercised from time to time and as often as may be deemed expedient.
Waiver of Past Defaults. The Trustee may, and upon request of the Holders of not less than a majority in aggregate principal amount of the Outstanding Bonds shall, on behalf of the Holders of all the Bonds waive any past Default or Event of Default under the Indenture and its consequences, except a Default: (A) in the payment of the principal or Redemption Price of or interest on any Bond, or (B) in respect of a covenant or other provision of the Indenture which, pursuant to the Indenture, cannot be modified or amended without the consent of the Holder of each Outstanding Bond affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of the Indenture, but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon.
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Undertaking for Costs. Subject to the provisions of the Indenture, the parties to the Indenture agree, and each Holder of any Bond by such Person’s acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under the Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this paragraph shall not apply to any suit instituted by the Trustee or to any suit instituted by any Bondholder or group of Bondholders holding in the aggregate more than a majority in aggregate principal amount of the Outstanding Bonds.
Notice of Default. Upon a Responsible Officer’s actual knowledge of the existence of any Default under the Indenture, the Trustee shall notify the Institution in writing as soon as practicable, but in any event within five (5) Business Days.
Upon a Responsible Officer’s actual knowledge of the existence of any Default under the Indenture, the Trustee shall transmit by mail to all Bondholders, as their names and addresses appear in the bond register, notice of such Default under the Indenture within ninety (90) days, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal or Redemption Price of or interest on any Bond, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Bondholders; and provided, further, that in the case of any Default of the character specified in (c) under “Events of Default” above, no such notice to Bondholders shall be given until at least thirty (30) days after the occurrence thereof.
Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Institution or any other obligor upon the Bonds or the property of the Institution or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Bonds shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Institution for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise: (1) to file and prove a claim for the whole amount of principal (or Redemption Price) and interest owed and unpaid in respect of the Bonds and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel including expenses and fees of outside counsel and allocated costs of internal legal counsel) and of the Bondholders allowed in such judicial proceeding; and (2) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, liquidator or sequestrator (or other similar official) in any such judicial proceeding is hereby authorized by each Bondholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Bondholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and
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advances of the Trustee, its agents and counsel including expenses and fees of outside counsel and allocated costs of internal legal counsel, and any other amounts due the Trustee under the Indenture.
Nothing contained in the Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Bondholder any plan of reorganization, arrangement, adjustment or composition affecting the Bonds or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Bondholder in any such proceeding.
The Trustee
Duties, Immunities and Liabilities of Trustee. The Trustee shall, prior to an Event of Default, and after the curing or waiver of all Events of Default which may have occurred, perform such duties and only such duties as are specifically set forth in the Indenture, and, except to the extent required by law, no implied covenants or obligations shall be read into the Indenture against the Trustee. The Trustee shall, during the existence of any Event of Default (which has not been cured or waived), exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.
The Institution may remove the Trustee at any time with thirty (30) days’ written notice unless an Event of Default shall have occurred and then be continuing, and shall remove the Trustee if at any time requested to do so by an instrument or concurrent instruments in writing signed by the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing) or if at any time the Trustee shall cease to be eligible in accordance with the Indenture, or shall become incapable of acting, or shall be adjudged as bankrupt or insolvent, or a receiver of the Trustee or its property shall be appointed, or any public officer shall take control or charge of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Trustee, and thereupon shall appoint a successor Trustee by an instrument in writing.
The Trustee may at any time resign by giving written notice of such resignation to the Institution and by giving the Bondholders notice of such resignation by mail at the addresses shown on the registration books maintained by the Trustee. Upon receiving such notice of resignation, the Institution shall promptly appoint a successor Trustee by an instrument in writing. The Trustee shall not be relieved of its duties until such successor Trustee has accepted appointment.
Any removal or resignation of the Trustee and appointment of a successor Trustee shall become effective upon acceptance of appointment by the successor Trustee. If no successor Trustee shall have been appointed and have accepted appointment within thirty (30) days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee or any Bondholder (on behalf of itself and all other Bondholders) may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Any successor Trustee
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appointed under the Indenture shall signify its acceptance of such appointment by executing and delivering to the Institution and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee in the Indenture; but, nevertheless at the request of the successor Trustee, such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under the Indenture and shall pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions set forth in the Indenture. Upon request of the successor Trustee, the Institution shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Trustee as provided in this paragraph, the Institution shall mail or cause to be mailed (at the expense of the Institution) a notice of the succession of such Trustee to the trusts under the Indenture to the Bondholders at the addresses shown on the registration books maintained by the Trustee. If the Institution fails to mail such notice within fifteen (15) days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Institution.
Any successor Trustee shall be a trust company or bank having trust powers in The Commonwealth of Massachusetts, having a combined capital and surplus of (or if such trust company or bank is a member of a bank holding system, its bank holding company shall have a combined capital and surplus of) at least fifty million dollars ($50,000,000), and subject to supervision or examination by federal or Commonwealth of Massachusetts authority. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this paragraph, the Trustee shall resign immediately in the manner and with the effect specified in the Indenture.
Modification or Amendment of the Indenture
Amendments Permitted. The Indenture and the rights and obligations of the Institution and of the Holders of the Bonds and of the Trustee may be modified or amended from time to time and at any time by an indenture or indentures supplemental hereto, which the Institution and the Trustee may enter into when the written consent of the Holders of a majority in aggregate principal amount of the Bonds then Outstanding shall have been obtained by the Institution. No such modification or amendment shall (1) extend the fixed maturity of any Bond, or reduce the amount of principal thereof, or reduce the rate of interest thereon, or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the Holder of each Bond so affected, or (2) reduce the aforesaid percentage of Bonds the consent of the Holders of which is required to effect any such modification or amendment, or permit the creation of any lien on the Indenture Fund or the amounts pledged under the Indenture prior to or on a parity with the lien created by the Indenture, or deprive the Holders of the Bonds of the lien created by the Indenture on the Indenture Fund and such amounts (except as expressly provided in the Indenture), without the consent of the Holders of all Bonds then Outstanding. It
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shall not be necessary for the consent of the Bondholders to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Institution and the Trustee of any Supplemental Indenture pursuant to this paragraph, the Trustee shall mail a notice, setting forth in general terms the substance of such Supplemental Indenture, to the Bondholders at the addresses shown on the registration books maintained by the Trustee. Any failure to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Indenture.
The Indenture and the rights and obligations of the Institution, of the Trustee and of the Holders of the Bonds may also be modified or amended from time to time and at any time by an indenture or indentures supplemental hereto, which the Institution and the Trustee may enter into without the necessity of obtaining the consent of any Bondholders, but only to the extent permitted by law and only for any one or more of the following purposes: (1) to add to the covenants and agreements of the Institution contained in the Indenture other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved in the Indenture to or conferred upon the Institution, provided that such covenant, agreement, pledge, assignment or surrender shall not materially adversely affect the interests of the Holders of the Bonds; (2) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Indenture, or in regard to matters or questions arising under the Indenture, as the Institution or the Trustee may deem necessary or desirable and not inconsistent with the Indenture; (3) to modify, amend or supplement the Indenture or any Supplemental Indenture in such manner as to permit the qualification hereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute, and which shall not materially adversely affect the interests of the Holders of the Bonds (provided, however, that such modifications, amendments, supplements and additions shall be permitted under this paragraph only if qualification under said act or similar federal statute is required by applicable law now or hereafter in effect); (4) to provide for the assumption by a successor of the obligations of the Institution under the Indenture and the Bonds to the extent applicable and as contemplated by Section 6.06(e) of the Indenture; (5) to provide for the issuance of Additional Bonds; (6) to provide for the acceptance of appointment of a successor trustee pursuant to Article VIII of the Indenture or facilitate the administration of the trusts under the Indenture by more than one trustee; or (7) to provide for the procedures required to permit any Bondholder, at its option, to utilize an uncertificated system of registration of its Bond or to facilitate the registration of the Bonds in the name of a nominee of the Securities Depository.
The Trustee may in its discretion, but shall not be obligated to, enter into any such Supplemental Indenture authorized by either the two preceding paragraphs which materially adversely affects the Trustee’s own rights, duties or immunities under the Indenture or otherwise.
The Trustee shall not be obligated to enter into any such Supplemental Indenture without first receiving an Opinion of Counsel to the effect that such Supplemental Indenture is authorized and permitted by the terms of the Indenture and in compliance with all conditions precedent.
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Effect of Supplemental Indenture. Upon the execution of any Supplemental Indenture pursuant to the Indenture, the Indenture shall be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Indenture of the Institution, the Trustee and all Holders of Bonds Outstanding shall thereafter be determined, exercised and enforced under the Indenture subject in all respects to such modification and amendment, and all the terms and conditions of any such Supplemental Indenture shall be deemed to be part of the terms and conditions of the Indenture for any and all purposes.
Amendment of Particular Bonds. The provisions of the Indenture shall not prevent any Bondholder from accepting any amendment as to the particular Bonds held by such Bondholder, provided that due notation thereof is made on such Bonds.
Defeasance
Discharge of Indenture. The Bonds may be paid or discharged by the Institution or the Trustee on behalf of the Institution in any of the following ways: (A) by paying or causing to be paid the principal or Redemption Price of and interest on all Bonds Outstanding, as and when the same become due and payable; (B) by depositing with the Trustee, in trust, at or before maturity, moneys or securities in the necessary amount (as provided in the Indenture) to pay when due or redeem all Bonds then Outstanding; or (C) by delivering to the Trustee, for cancellation by it, all Bonds then Outstanding.
If the Institution shall also pay or cause to be paid all other sums payable under the Indenture by the Institution, then and in that case at the election of the Institution (evidenced by a Certificate of the Institution filed with the Trustee signifying the intention of the Institution to discharge all such indebtedness under the Indenture and upon receipt by the Trustee of an Opinion of Counsel to the effect that all conditions precedent to defeasance have been complied with and the Bonds have been discharged), and notwithstanding that any Bonds shall not have been surrendered for payment, the Indenture and the pledge of the Indenture Fund and all amounts held therein made under the Indenture and all covenants, agreements and other obligations of the Institution under the Indenture (except as otherwise provided in the Indenture) shall cease, terminate, become void and be completely discharged and satisfied and the Bonds shall be deemed paid.
Discharge of Liability on Bonds. Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount (as provided in the Indenture) to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the Redemption Date); provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the Institution in respect of such Bond shall cease, terminate and be completely discharged, and the Bonds shall be deemed paid, except only that thereafter the Holder thereof shall be entitled to payment of the principal or Redemption Price of and interest on such Bond by the Institution, and the Institution shall remain liable for such payments, but only out of such money or securities deposited with the Trustee as aforesaid for their payment, subject, however, to the provisions of the Indenture regarding payment of Bonds after discharge of the Indenture.
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The Institution may at any time surrender to the Trustee for cancellation by it any Bonds previously issued and delivered, which the Institution may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired.
Payment of Bonds After Discharge of Indenture. Notwithstanding any provisions of the Indenture, any moneys or securities held by the Trustee in trust for the payment of the principal or Redemption Price of, or interest on, any Bonds and remaining unclaimed for three years (or, if shorter, one day before such moneys would escheat to The Commonwealth of Massachusetts under then applicable Massachusetts law) after such principal, Redemption Price or interest, as the case may be, has become due and payable (whether at maturity or upon call for redemption), shall be repaid to the Institution free from the trusts created by the Indenture upon receipt of an indemnification agreement acceptable to the Institution and the Trustee indemnifying the Trustee with respect to claims of Holders of Bonds which have not yet been paid, and all liability of the Trustee and the Institution with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the Institution as aforesaid, the Trustee may (at the cost of the Institution) first mail to the Holders of Bonds which have not yet been paid, at the addresses shown on the registration books maintained by the Trustee, a notice, in such form as may be deemed appropriate by the Trustee with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Institution of the moneys held for the payment thereof.
Litigation of Rights to Parties and Bondholders
Nothing in the Indenture or in the Bonds expressed or implied is intended or shall be construed to give to any Person other than the Institution, the Trustee and the Holders of the Bonds, any legal or equitable right, remedy or claim under or in respect of the Indenture or any covenant, condition or provision therein contained; and all such covenants, conditions and provisions are and shall be held to be for the sole and exclusive benefit of the Institution, the Trustee and the Holders of the Bonds.
Evidence of Rights of Bondholders
Any request, consent or other instrument required or permitted by the Indenture to be signed and executed by Bondholders may be in any number of concurrent instruments of substantially similar tenor and shall be signed or executed by such Bondholders in Person or by an agent or agents duly appointed in writing.
The fact and date of the execution by any Person of any such request, consent or other instrument or writing may be proved by the certificate of any notary public or other officer of any jurisdiction, authorized by the laws thereof to take acknowledgments of deeds, certifying that the Person signing such request, consent or other instrument acknowledged to him the execution thereof, or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer.
The ownership of Bonds shall be proved by the registration books for the Bonds held by the Trustee.
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Any request, consent, or other instrument or writing of the Holder of any Bond shall bind every future Holder of the same Bond and the Holder of every Bond issued in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or the Institution in accordance therewith or reliance thereon.
Waiver of Personal Liability
No recourse for the payment of the principal of or accrued and unpaid interest on any Bond, nor for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Institution in the Indenture or in any supplemental indenture or in any Bond, nor because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer or director or subsidiary of the Institution, as such, past, present or future, of the Institution or of any successor corporation, either directly or through the Institution or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that the obligations issued in the Indenture or in any supplemental indenture are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors as such, of the Institution, of any such predecessor or successor company or any such issuer, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in the Indenture or in any supplemental indenture or in any Bond or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in the Indenture or in any supplemental indenture or in any Bond or implied therefrom is hereby expressly waived and released as a condition of, and as a consideration for, the execution of the Indenture and the issue of the Bonds.
Governing Law; Venue
The Indenture shall be construed in accordance with and governed by the Constitution and the laws of The Commonwealth of Massachusetts applicable to contracts made and performed in The Commonwealth of Massachusetts. The Indenture shall be enforceable in The Commonwealth of Massachusetts, and any action arising under the Indenture shall (unless waived by the Institution) be filed and maintained in The Commonwealth of Massachusetts.
CUSIP Numbers
Neither the Trustee nor the Institution shall be liable for any defect or inaccuracy in the CUSP number that appears on any Bond or in any redemption notice.
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FORM OF OPINION OF COUNSEL TO THE INSTITUTION
March __, 2018
The Bank of New York Mellon Trust Company, N.A., as Trustee 135 Santilli Highway Everett, MA 02149
J.P. Morgan Securities LLC, as representative of the Underwriters
c/o J.P. Morgan Securities LLC 383 Madison Avenue New York, NY 10179
Ladies and Gentlemen:
We have acted as counsel for The Charles Stark Draper Laboratory, Inc. (the “Institution”) in connection with the issuance of $[ • ] aggregate principal amount of The Charles Stark Draper Laboratory, Inc., Taxable Bonds, Series 2018 (the “Bonds”). The Bonds are being issued pursuant to the Indenture of Trust dated as of March 1, 2018 (the “Indenture”) between the Institution and The Bank of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”). All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Indenture.
In connection with the issuance of the Bonds, we have examined executed counterparts of the following documents (collectively, the “Financing Documents”):
(a) The Indenture; and
(b) The Purchase Contract dated March __, 2018 (the “Purchase Contract”) between the Institution and J.P. Morgan Securities LLC, as representative of the underwriters named therein (the “Underwriters”).
We have reviewed such documents and made such examination of law as we have deemed appropriate to give the opinions set forth below. We have relied, without independent verification, on certificates of public officials and, as to matters of fact material to the opinions set forth below, on representations in the Financing Documents and certificates and other inquiries of officers of the Institution.
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The Bank of New York Mellon Trust Company, N.A., as Trustee J.P. Morgan Securities LLC, as representative of the Underwriters March __, 2018 Page 2
Our opinions regarding valid existence of the Institution in numbered paragraph 1 are based solely on certificates of the Massachusetts Secretary of State and a review of the Institution’s charter documents and officers’ certificates confirming that the Institution has taken no action looking to its dissolution.
The opinions set forth below are limited to Massachusetts law and the federal law of the United States. Without limiting the generality of the foregoing, we express no opinion with respect to (i) state securities or “Blue Sky” laws, or (ii) state or federal antifraud laws.
Based on the foregoing, and subject to the additional qualifications set forth below, we are of the opinion that:
1. The Institution is validly existing as a corporation under Massachusetts law and has the corporate power to execute and deliver the Financing Documents and to perform its obligations thereunder and to issue and sell the Bonds.
2. The Institution has duly authorized, executed and delivered the Purchase Contract.
3. The Institution has duly authorized, executed and delivered the Indenture, and the Indenture constitutes its valid and binding obligation enforceable against it in accordance with its terms.
4. The Bonds have been duly authorized and executed by the Institution and, assuming due authentication in accordance with the terms of the Indenture and when issued and delivered to and paid for by the Underwriters as contemplated by the Purchase Contract, will constitute valid and binding obligations of the Institution, enforceable against the Institution in accordance with their terms.
5. The execution and delivery by the Institution of the Financing Documents and the Institution’s issuance and sale of the Bonds do not and the performance by the Institution of its obligations under the Financing Documents will not (i) violate any Massachusetts or federal statute or any rule or regulation thereunder or (ii) violate its charter or by-laws or (iii) require any consent, approval, license or exemption by, order or authorization of, or filing, recording or registration by the Institution with any Massachusetts or federal governmental authority.
6. Assuming the accuracy of the representations and warranties and compliance with the covenants and agreements of the Company in the Purchase Contract and the Indenture and the Underwriters in the Purchase Contract, the sale of the Bonds in the manner contemplated by the Purchase Agreement and the Offering Memorandum does not require registration under the
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The Bank of New York Mellon Trust Company, N.A., as Trustee J.P. Morgan Securities LLC, as representative of the Underwriters March __, 2018 Page 3
Securities Act, nor is it necessary to qualify the Indenture under the Trust Indenture Act of 1939, as amended, in connection with such sale.
Our opinions above are subject to and limited by the effect of any applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar laws of general application affecting the rights and remedies of creditors and to general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith, fair dealing and unconscionability), regardless of whether considered in a proceeding in equity or law.
We express no opinion on any provision of the Financing Documents (1) relating to non- reliance, exculpation, disclaimer, limitation of liability, indemnification, contribution waiver, or limitation or exclusion of remedies to the extent that such provisions may be held to be unenforceable or in violation of public policy; (2) the waiver of the right to trial by jury or of usury, stay, extension and similar laws to the extent that such waiver may be held to be unenforceable or in violation of public policy; (3) rights or remedies not being exclusive, not preventing the concurrent assertion of any other right or remedy, being cumulative and exercisable in addition to any other right and remedy, or any delay or omission to exercise any right or remedy not impairing any right or remedy or not constituting a waiver thereof; (4) any obligation or agreement to use best efforts; (5) the requirement that a party take further action or enter into a further agreements or instruments or provide further assurances; (6) the requirement that amendments or waivers be in writing insofar as they suggest that oral or other modifications, amendments or waivers could not be effectively agreed upon by the parties or that the doctrine of promissory estoppel might not apply; (7) relating to arbitration or the choice of forum for resolving disputes or (8) to the extent it violates any applicable statute of limitations.
This opinion letter and the opinions it contains shall be interpreted in accordance with the Legal Opinion Principles issued by the Committee on Legal Opinions of the American Bar Association’s Business Law Section as published in 53 Business Lawyer 831 (May 1998).
This opinion letter is being furnished by us solely for the benefit of the Trustee under the Indenture and the several Underwriters as underwriters in connection with the sale of the Bonds to the Underwriters pursuant to the Purchase Contract, and it may not be relied on for any other purpose or by anyone else.
Very truly yours,
GOODWIN PROCTER LLP
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APPENDIX E
DTC BOOK-ENTRY ONLY SYSTEM AND GLOBAL CLEARANCE PROCEDURES
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The information set out below is subject to any change in or reinterpretation of the rules, regulations and procedures of DTC. The information in this section concerning DTC has been obtained from sources that the Institution believes to be reliable, but neither the Institution nor the Underwriters take any responsibility for the accuracy of this section. Investors wishing to use the facilities of DTC are advised to confirm the continued applicability of the rules, regulations and procedures of DTC. The Institution will not have any responsibility or liability for any aspect of the records relating to, or payments made on account of beneficial ownership interests in the Bonds held through the facilities of DTC or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
DTC
The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for each stated maturity of each Series of the Bonds, in the aggregate principal amount of the applicable stated maturity, and will be deposited with DTC.
DTC has advised the Institution that it is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds securities that its participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants” and, together with Direct Participants, “Participants”).
Under the rules, regulations and procedures creating and affecting DTC and its operations (the “DTC Rules”), DTC makes book-entry transfers of beneficial interests in registered bonds among Direct Participants on whose behalf it acts with respect to bonds accepted into DTC’s book-entry settlement system as described below and receives and transmits distributions of principal and interest on the Bonds. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.
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Purchases of beneficial interests in the Bonds under the DTC system must be made by or through Direct Participants, which will receive a book-entry credit for their beneficial interests in the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.
To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of the Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds. DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the Bonds are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such Bonds to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s Money Market Instrument Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Institution as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Principal, redemption premium, if any, and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Institution or Trustee on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee or the
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Institution, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Institution or Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered.
The Institution may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC.
THE INFORMATION IN THIS SECTION CONCERNING DTC AND DTC’S BOOK- ENTRY SYSTEM HAS BEEN OBTAINED FROM SOURCES THAT THE INSTITUTION BELIEVES TO BE RELIABLE, BUT THE INSTITUTION TAKES NO RESPONSIBILITY FOR THE ACCURACY THEREOF.
No Responsibility of the Institution or the Trustee NEITHER THE INSTITUTION NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO DIRECT PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE PAYMENTS TO OR THE PROVIDING OF NOTICE FOR DIRECT PARTICIPANTS, INDIRECT PARTICIPANTS, OR BENEFICIAL OWNERS.
SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE BONDS, AS NOMINEE OF DTC, REFERENCES HEREIN TO THE HOLDERS OR REGISTERED OWNERS OF THE BONDS SHALL MEAN CEDE & CO. AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE BONDS.
Certificated Bonds DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Institution and the Trustee. In addition, the Institution may determine that continuation of the system of book-entry transfers through DTC (or a successor securities depository) is not in the best interests of the Beneficial Owners of the Bonds. If for either reason the Book-Entry Only system is discontinued, Bond certificates will be delivered as described in the Indenture and the Beneficial Owner, upon registration of certificates held in the Beneficial Owner’s name, will become the holder of such Bond. Thereafter, the Bonds may be exchanged for an equal aggregate principal amount of the Bonds in other authorized denominations and of the same maturity, upon surrender thereof at the principal corporate trust office of the Trustee.
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Transfer
The transfer of the Bonds may be registered on the books maintained by the Trustee for such purpose only upon the assignment in the form satisfactory to the Trustee. For every exchange or registration of transfer of the Bonds, the Institution and the Trustee may make a charge sufficient to reimburse them for any tax or other governmental charge required to be paid with respect to such exchange or registration of transfer, but no other charge may be made to the holder of such Bond for any exchange or registration of transfer of the Bonds. The Trustee will not be required to transfer or exchange the Bonds during the notice period preceding any redemption if such Bonds (or any part thereof) are eligible to be selected or have been selected for redemption.
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THE CHARLES STARK DRAPER LABORATORY, INC. • Taxable Bonds, Series 2018