-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQ2nloj6nsqT7xN/7dWpELj0ugUtA7hIC+zCzKI18ZeurHzbc002T9EagWmPDPi/ qveFzSNTyPVG87ZYxsHIVg== 0000931763-01-000575.txt : 20010329 0000931763-01-000575.hdr.sgml : 20010329 ACCESSION NUMBER: 0000931763-01-000575 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNUMPROVIDENT CORP CENTRAL INDEX KEY: 0000005513 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 621598430 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11834 FILM NUMBER: 1582756 BUSINESS ADDRESS: STREET 1: 1 FOUNTAIN SQUARE CITY: CHATTANOOGA STATE: TN ZIP: 37402 BUSINESS PHONE: 2077702211 MAIL ADDRESS: STREET 1: 1 FOUNTAIN SQUARE CITY: CHATTANOOGA STATE: TN ZIP: 37402 FORMER COMPANY: FORMER CONFORMED NAME: PROVIDENT COMPANIES INC /DE/ DATE OF NAME CHANGE: 19961204 FORMER COMPANY: FORMER CONFORMED NAME: PROVIDENT LIFE & ACCIDENT INSURANCE CO OF AMERICA DATE OF NAME CHANGE: 19950407 10-K 1 0001.txt FORM 10K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000. Commission file number 1-11834 UnumProvident Corporation (Exact name of registrant as specified in its charter) Delaware 62-1598430 (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1 FOUNTAIN SQUARE 2211 CONGRESS STREET CHATTANOOGA, TENNESSEE 37402 PORTLAND, MAINE 04122 (Address of principal executive offices) 423.755.1011 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common stock, $0.10 par value New York Stock Exchange 8.8% Junior Subordinated Deferrable Interest New York Stock Exchange Debentures, Series A, due 2025 6.75% Notes, due 2028 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of March 12, 2001, there were 241,400,120 shares of the registrant's common stock outstanding. The aggregate market value of the shares of common stock, based on the closing price of those shares on the New York Stock Exchange, Inc., held by non-affiliates was approximately $6.0 billion. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the annual meeting of shareholders to be held May 10, 2001 are incorporated by reference into Part III. TABLE OF CONTENTS PART I
Page Cautionary Statement Regarding Forward-Looking Statements...................................... 1 1. Business ..................................................................................... 2 A. General .................................................................................. 2 B. Business Strategies........................................................................ 4 C. Reporting Segments......................................................................... 6 D. Reinsurance................................................................................ 9 E. Reserves................................................................................... 10 F. Competition................................................................................ 11 G. Regulation................................................................................. 12 H. Risk Factors............................................................................... 12 I. Selected Data of Segments.................................................................. 14 J. Employees.................................................................................. 14 2. Properties..................................................................................... 15 3. Legal Proceedings.............................................................................. 15 4. Submission of Matters to a Vote of Security Holders............................................ 15 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 16 6. Selected Financial Data........................................................................ 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 18 7A. Quantitative and Qualitative Information about Market Risk..................................... 38 8. Financial Statements and Supplementary Data.................................................... 39 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 93 PART III 10. Directors and Executive Officers of the Registrant............................................. 94 11. Executive and Director Compensation............................................................ 95 12. Security Ownership of Certain Beneficial Owners and Management................................. 95 13. Certain Relationships and Related Transactions................................................. 95 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 96 Signatures..................................................................................... 97 Index to Exhibits.............................................................................. 108
PART I Cautionary Statement Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the Act) provides a "safe- harbor" for forward-looking statements which are identified as such and are accompanied by the identification of important factors which could cause actual results to differ materially from the forward-looking statements. UnumProvident Corporation (the Company) claims the protection afforded by the safe harbor in the Act. Certain information contained in this discussion, or in any other written or oral statements made by the Company, is or may be considered as forward-looking. Examples of disclosures that contain such information include, among others, sales estimates, income projections, and reserves and related assumptions. Forward-looking statements are those not based on historical information, but rather relate to future operations, strategies, financial results, or other developments. These statements may be made directly in this document or may be made part of this document by reference to other documents filed with the Securities and Exchange Commission by the Company, which is known as "incorporation by reference." You can find many of these statements by looking for words such as "may," "should," "believes," "expects," "anticipates," "estimates," "intends," "projects," "goals," "objectives," or similar expressions in this document or in documents incorporated herein. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following possibilities: . Insurance reserve liabilities can fluctuate as a result of changes in numerous factors, and such fluctuations can have material positive or negative effects on net income. . Actual persistency may be lower than projected persistency, resulting in lower than expected revenue and higher than expected amortization of deferred policy acquisition costs. . Incidence and recovery rates may be influenced by, among other factors, the emergence of new diseases, new trends and developments in medical treatments, and the effectiveness of risk management programs. . Retained risks in the Company's reinsurance operations are influenced by many factors and can fluctuate as a result of changes in these factors, and such fluctuations can have material positive or negative effects on net income. . Field force effectiveness in supporting new product offerings and providing customer service may not meet expectations. . Sales growth may be less than planned, which will impact revenue and profitability. . Competitive pressures in the insurance industry may increase significantly through industry consolidation, competitor demutualization, or otherwise. . General economic or business conditions, both domestic and foreign, whether relating to the economy as a whole or to particular sectors, may be less favorable than expected, resulting in, among other things, lower than expected revenue, and the Company could experience higher than expected claims or claims with longer duration than expected. . Legislative or regulatory changes may adversely affect the businesses in which the Company is engaged. . Adverse changes may occur in the securities market. . Changes in the interest rate environment may adversely affect profit margins and the Company's investment portfolio. . The rate of customer bankruptcies may increase. For further discussion of risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" contained herein in Item 1. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The Company does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. 1 ITEM 1. BUSINESS General The Company, a Delaware general business corporation, is the parent holding company for a group of insurance and non-insurance companies that collectively operate throughout North America and in the United Kingdom, Japan, and Argentina. The Company's principal operating subsidiaries are Unum Life Insurance Company of America (Unum America), Provident Life and Accident Insurance Company (Accident), The Paul Revere Life Insurance Company (Paul Revere Life), and Colonial Life & Accident Insurance Company (Colonial). The Company, through its subsidiaries, is the largest provider of group and individual disability insurance in North America and the United Kingdom. It also provides a complementary portfolio of other insurance products, including long- term care insurance, life insurance, employer- and employee-paid group benefits, and related services. The Company is the surviving corporation in the merger on June 30, 1999 of Provident Companies Inc. (Provident), the leading individual disability insurance provider in North America, with Unum Corporation (Unum), the leading group disability insurance provider. In the merger, Provident shareholders received 0.73 shares of the Company's common stock for each Provident share, and Unum shareholders received one share of the Company's common stock for each Unum share. During the years preceding the merger, both Provident and Unum pursued strategies of divesting non-core businesses and leveraging their respective disability insurance expertise. In Provident's case, this strategy was the continuation of a new business focus initiated by J. Harold Chandler after joining Provident in 1993. Provident successfully undertook a number of major initiatives in pursuing this strategy prior to the merger with Unum. Specifically, Provident (i) sold its group medical business for $231.0 million in cash and stock, (ii) began winding down its guaranteed investment contracts (GICs) business which carried high capital requirements, (iii) reduced the annual dividend on the common stock to preserve capital to fund future growth, (iv) simplified the corporate legal structure and eliminated a dual class of common stock that had special voting rights in order to present a more conventional corporate structure profile to the investing market, (v) sold in six transactions $1.5 billion in commercial mortgage loans as part of repositioning its investment portfolio, (vi) restructured its marketing and distribution channels, along with the support areas of product development, underwriting, and claims, to better reach and serve individual and employee benefits customers, (vii) strengthened its claims management procedures in the disability income insurance business, and (viii) began restructuring its disability income products to discontinue over a reasonable period the sale of policies which combined noncancelable contracts with long-term own-occupation provisions and to offer in their place an income replacement contract with more reasonable limits and better pricing for elective provisions. In addition, Provident acquired The Paul Revere Corporation (Paul Revere) and GENEX Services, Inc. (GENEX) in early 1997 and disposed of certain non-core lines of business. These actions strengthened Provident's disability insurance capabilities and enabled Provident to offer a comprehensive and well-focused portfolio of products and services to its customers. From 1989 through 1997 Paul Revere was the largest provider of individual disability insurance in North America on the basis of in-force premiums. By combining Paul Revere's operations with those of Provident, Provident realized significant operating efficiencies, including leveraging both companies' knowledge of disability risks, specialized claims and underwriting skills, and sales expertise. Provident also realized cost savings as a result of combining the corporate, administrative, and financial operations of the two companies. GENEX provides specialized skills in disability case management and vocational rehabilitation that advance the goal of providing products that enable disabled policyholders to return to work. As it continued to assess acquisition opportunities that could complement its core business, Provident also continued to assess and exit non-core lines. In 1997, Provident transferred its dental business to another insurer. During 1998, Provident reinsured, on a 100 percent coinsurance basis, substantially all of its in-force medical stop-loss insurance business. Also during 1998, Provident sold its in-force individual and tax-sheltered annuity business. The transaction did not include Provident's block of GICs or group single premium annuities (SPAs), which continued in a run-off mode. 2 In the years prior to the merger Unum also pursued a strategy it had adopted after its demutualization in 1986 of focusing on its core disability businesses. In 1993, Unum merged with Colonial Companies, Inc., the parent company of Colonial, a leader in payroll marketing of supplemental insurance, focused on accident, cancer, and a range of life insurance products. In 1996, Unum sold its group tax-sheltered annuity (TSA) business. The contracts were initially reinsured on an indemnity basis. Upon consent of the TSA contractholders and participants, the contracts were reinsured on an assumption basis, legally releasing Unum from future contractual obligation. Consents for assumption reinsurance were received for substantially all assets under management. Through the continued development of Unum Japan Accident Insurance Company Limited (Unum Japan) and the purchase in 1997 of Boston Compania Argentina de Seguros, SA in Argentina, Unum also furthered its expansion into foreign disability markets that began with the acquisition in 1990 of Unum Limited, the leading disability insurer in the United Kingdom. In April 1999, Unum decided to exit its reinsurance operations, including the reinsurance management operations of Duncanson & Holt, Inc. (D&H) and the risk assumption by Unum America, including reinsurance pool participation; direct reinsurance which includes accident and health (A&H), long-term care (LTC), and long-term disability coverages; and Lloyd's of London (Lloyd's) syndicate participations. On December 31, 1999 the Company completed the sale of certain divisions of the North American reinsurance management operations of D&H and the reinsurance of the Company's risk participation in these facilities. The Company also decided to discontinue its accident reinsurance business in London beginning in year 2000. With respect to Lloyd's, the Company implemented a strategy which limited participation in year 2000 underwriting risks, ceased participation in Lloyd's underwriting risks after year 2000, and managed the run-off of its risk participation in open years of account of Lloyd's reinsurance syndicates. During the first quarter of 2001, the Company entered into an agreement in principle to limit its liabilities pertaining to the Lloyd's syndicate participations. See Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of the reinsurance operations. During 2000, the Company completed a series of strategic transactions designed to more closely focus its operations on its core businesses, increase its financial flexibility, support its present credit and claims-paying ratings, increase the risk-based capital ratios of the insurance subsidiaries involved, and lower its leverage ratios. The primary transaction involved agreements under which Reassure America Life Insurance Company (Reassure America), an affiliate of Swiss Re Life & Health America Inc. (Swiss Re), reinsured on a 100 percent indemnity coinsurance basis substantially all of the individual life insurance and corporate-owned life insurance policies written by the Company's insurance subsidiaries, as well as a small block of individually underwritten group life insurance. Reassure America is also assuming responsibility for the administration of the policies on a phased-in basis over the course of the next year. The reinsurance agreements were effective as of July 1, 2000. Separately, Paul Revere Life and Max Re Ltd. entered into an agreement whereby Max Re Ltd. reinsured on a 100 percent indemnity coinsurance basis the future claim payments on long duration group long-term disability claims which were incurred prior to January 1, 1996. The agreement was effective January 1, 2000. During 2000, Unum America entered into a reinsurance agreement with Manulife Reinsurance Limited and SCOR Reinsurance Company under which Unum America will cede through a net quota share reinsurance agreement 50 percent of the group life volume above Unum America's aggregate retention limit. The treaties are five-year quota share treaties ceding 25 percent of premium, life volume, and paid claims to each reinsurer. The reinsurance agreements were effective as of October 1, 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Items 7 and 8 for further discussion of these 2000 reinsurance transactions. Also in 2000, the Company purchased a single premium annuity for its retirees. The pension plan transaction allowed the Company to provide a higher level of administrative service for its retirees while also locking in favorable pension plan performance. The proceeds from the transaction were partially offset by actions to further strengthen the Company's financial position. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 of the "Notes to Consolidated Financial Statements" contained herein in Items 7 and 8 for further discussion of this transaction. 3 The Company also sold Provident National Assurance Company, an inactive insurance subsidiary, to Allstate Life Insurance Company. Provident National Assurance Company's general account liabilities were reinsured by another subsidiary of the Company, and the excess capital and surplus was transferred to the parent to reduce short-term borrowings. This transaction closed during the first quarter of 2001. In the first quarter of 2001, the Company entered into a definitive agreement to acquire the assets of EmployeeLife.com, an Internet Capital Group partner company. This new subsidiary will enhance customer service by providing Internet business solutions to help employers efficiently manage and administer employee benefits. Subject to the approval of the shareholders of EmployeeLife.com and other customary closing conditions, the transaction is expected to close during the first half of 2001. Business Strategies The Company's objective is to grow its business and improve its profitability by following the three strategies set forth below. Provide Integrated Product Choices The Company offers a comprehensive portfolio of income protection products and services. These coverage choices, available in the employee benefit, individual, and voluntary market segments, seek to meet the diverse needs of the marketplace. The Company seeks to achieve a competitive advantage by offering group, individual, and voluntary workplace products that can combine with other coverages to provide integrated product solutions for customers. Employees are increasingly turning to the workplace for access to quality insurance protection. Through return-to-work expertise and a comprehensive portfolio of basic employee benefits, as well as supplemental, voluntary, and executive product offerings, the Company offers businesses of all sizes highly competitive benefits to protect the incomes and lifestyles of employees and their families. Income protection solutions include integrated short-term and long-term disability income protection plans with flexible coverage and funding options. The Company's broad portfolio also includes individual income protection products that help protect individual customers and their families from the financial effects of accidents or illnesses. The products feature choices suited to different ages, incomes, family needs, and lifestyles. Also offered is long- term care insurance as a lifestyle protection solution product. In order to give the appropriate focus to these three primary business markets, the Company has established national practice groups to focus on large employers, executive benefits, and voluntary benefits. These national practice groups partner with the Company's sales force as well as representatives from claims, customer service, and underwriting to present coverage solutions to potential customers and to manage existing customer accounts. Provide Benefits Emphasizing Returning People to Work and to an Independent Lifestyle For corporate and individual customers, the Company offers expert resources to help claimants recover their ability to earn an income and regain an independent lifestyle. These resources include the following: Benefits Management and Client Care The Company's benefits organization is focused on helping customers who have suffered an accident or illness to return to work and to an independent lifestyle. The Company's extensive resources reflect the significant investments which have been made in this area. This coordinated effort focuses centralized home office knowledge and local case management and support specialists across North America on making the best resources available for each customer's specific situation. 4 Specialized Support Once a customer submits a claim, it's immediately assigned to an expert for handling based on the severity and type of condition. Specialized claims representatives, rehabilitation specialists, nurse case managers, and physicians work directly with each claimant and, where appropriate, with the claimant's medical providers and employer. These specialized resources may also be able to assist a claimant's medical provider in developing treatment plans or return-to-work goals for the claimant. When a claimant is ready to return to work, the Company offers reimbursement to employers for eligible workplace accommodations to enable an employee's transition back to work. If a claimant is unable to return to work, the Company can provide employment counseling, vocational assessment, analysis of skills, and assistance with education or retraining to help the claimant find a new career. Social Security Disability Income Assistance For those claimants who are not able to return to work for a considerable time, the Company can help initiate the social security application process by working with the claimants in the application and appeals process to help seek benefits for which the claimant might be eligible. Returning to an Independent Lifestyle For customers who experience accidents or illnesses and are not able to return to work, the Company offers resources to enable a transition back to the most independent lifestyle possible. The Company provides information resources for customers and family members of those living with disabilities and provides the assistance of claims specialists who fully understand the dynamics of adjusting to life with longer-term impairments. Integrated Information Services and Pre-Disability Planning The Company helps employers identify disability patterns and provides insight into how to better manage the total cost of disability, including worker's compensation and other lost time expenses. The Company's managed disability planning process and return-to-work dividend program can help employers reduce absenteeism, increase the number of employees who return to work following a disability, lower employee replacement and retraining costs, reduce premiums for medical benefits, increase productivity, and improve employee morale. Provide Highly Responsive Service for Customers and their Advisors The Company is committed to providing customers with easy access to the Company's resources through increased use of technology, such as on-line employee self-service and automated benefits eligibility and enrollment, and through a broad and multi-channel distribution network. The Company also offers workplace enrollment and marketing capabilities and provides advanced sales support to brokers, agents, and other business partners. For corporate customers, the Company offers programs to help companies better understand the causes, cost, and impacts of disability; creative return-to-work solutions; research initiatives and ongoing studies in the scientific and human aspects of disability; claims professionals trained in the disabling condition affecting the employee, with coordinated resources and information focused on helping the individual return to work; local case management; reimbursement for qualified workplace accommodations; information, support, assistance, and referrals for living with a disabling condition; independent financial counseling to assist family members after the death of an employee; no-cost cash management services for life insurance beneficiaries immediately on payment of a policy benefit; 24 hour access for employees to counselors trained to help with personal problems; and assistance for people who suffer accidents or illnesses away from home. For individual customers, the Company offers personalized claim service from professionals trained in the disabling condition affecting the claimant; information, support, assistance, and referrals for living with a disabling condition; 24 hour access to information on aging and long-term care; no-cost cash management services for life insurance 5 beneficiaries immediately on payment of a policy benefit; and research initiatives and ongoing studies in the scientific and human aspects of disability. Reporting Segments The Company is organized around its customers, with reporting segments that reflect its major market segments: Employee Benefits, Individual, and Voluntary Benefits. The Other segment includes products that the Company no longer actively markets. The Corporate segment includes investment income on corporate assets not specifically allocated to a line of business, corporate interest expense, amortization of goodwill, and certain corporate expenses not allocated to a line of business. The Employee Benefits segment includes group long-term and short-term disability insurance, group life insurance, group long-term care, accidental death and dismemberment coverages, and the results of managed disability. The Company's Individual reporting segment includes individual disability and individual long-term care. The Voluntary Benefits segment includes products sold to employees through payroll deduction at the workplace. These products include life insurance and health products, primarily disability, accident and sickness, and cancer. The Other operating segment includes results from products no longer actively marketed, including individual life (previously reported in the Individual segment) and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and individual annuities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7 for further discussion of the Company's reporting segments. Employee Benefits The Employee Benefits segment includes the results of group products sold to employers for the benefit of employees and the results of managed disability, primarily GENEX. Group long-term and short-term disability comprises the majority of the segment, with $2,597.1 million of premium income in 2000. Group life generated $1,194.8 million of premium income in 2000. Group long-term disability insurance provides employees with insurance coverage for loss of income in the event of extended work absences due to sickness or injury. Services are offered to employers and insureds to encourage and facilitate rehabilitation, retraining, and re-employment. Most policies begin providing benefits following 90 or 180 day waiting periods and continue providing benefits until the employee reaches a certain age between 65 and 70. The benefits are limited to specified maximums as a percentage of income. Group short-term disability insurance provides coverage from loss of income due to injury or sickness, effective immediately for accidents and after one week for sickness, for up to 26 weeks, limited to specified maximums as a percentage of income. Short-term disability is sold primarily on a basis permitting periodic repricing to address the underlying claims experience. Premiums for group disability insurance are generally based on expected claims of a pool of similar risks plus provisions for administrative expenses and profit. Some cases carry experience rating provisions. Premiums for experience rated group disability business are based on the expected experience of the client given their industry group, adjusted for the credibility of the specific claim experience of the client. A few accounts are handled on an administrative services only basis with responsibility for funding claim payments remaining with the customer. Profitability of group disability insurance is affected by deviations of actual claims experience from expected claims experience, investment returns, persistency, and the ability of the Company to control its administrative expenses. Morbidity is an important factor in disability claims experience. Also important is the general state of the economy; for example, during a recession the incidence of claims tends to increase under this type of insurance. In general, experience rated disability coverage for large groups has narrower profit margins and represents less risk to the Company than business of this type sold to small employers. This is because the Company must bear all of the risk of adverse claims experience in small case coverages while larger employers often bear much of this risk themselves. For disability coverages, case management and rehabilitation activities with regard to claims, along with appropriate pricing and expense control, are important factors contributing to profitability. 6 Group life insurance consists primarily of renewable term life insurance with the coverages frequently linked to employees' wages. Premiums for group life are generally based on expected claims of a pool of similar risks plus provisions for administrative expenses and profit. Profitability is affected by deviations of actual claims experience from expected claims experience, investment returns, persistency, and the ability of the Company to control administrative expenses. The Company also markets several group benefits products and services including accident and sickness indemnity and accidental death and dismemberment policies. Group long-term care insurance pays a benefit upon the loss of two or more "activities of daily living" (e.g. bathing, dressing, feeding) and the insured's requirement of standby assistance or cognitive impairment. Payment is made on an indemnity basis, regardless of expenses incurred, up to a lifetime maximum. Benefits start after an elimination period, generally 90 days or less. Long-term care insurance is marketed on a guaranteed renewable basis wherein the Company maintains the right to reprice in-force policies, subject to regulatory approval. Profitability is affected by deviations of actual claims experience from expected claims experience, investment returns, persistency, and the ability of the Company to control administrative expenses. GENEX provides specialized skills in disability case management and vocational rehabilitation to assist disabled claimants to return to work. GENEX provides a full range of disability management services, including workplace injury management, telephonic early intervention services for injured workers, medical case management, vocational rehabilitation, and disability cost analysis, to third party administrators, corporate clients, and insurance companies. In addition to its historical focus on the worker's compensation market, GENEX and the Company are working together to offer customized disability programs for the employee benefits market that are intended to integrate and simplify coverages, control costs, and improve efficiency for employers with significant disability and related claims. GENEX plays an increasingly significant role in helping the Company to manage its own exposure to individual and group disability claims. Individual Individual disability comprises the majority of the Individual segment, with $1,643.5 million of premium income in 2000. Individual long-term care premium income totaled $133.7 million in 2000. Individual disability income insurance provides the insured with a portion of earned income lost as a result of sickness or injury. Under an individual disability income policy, monthly benefits generally are fixed at the time the policy is written. The benefits typically range from 30 percent to 75 percent of the insured's monthly earned income. Various options with respect to length of benefit periods and waiting periods before payment begins are available and permit tailoring of the policy to a specific policyholder's needs. The Company also markets individual disability income policies which include payments for transfer of business ownership and business overhead expenses. Individual disability income products do not provide for the accumulation of cash values. Premium rates for these products are varied by age, sex, and occupation based on assumptions concerning morbidity, persistency, policy related expenses, and investment income. The Company develops its assumptions based on its own claims experience and published industry tables. The Company's underwriters evaluate the medical and financial condition of prospective policyholders prior to the issuance of a policy. The majority of the Company's in-force individual disability income insurance was written on a noncancelable basis. Under a noncancelable policy, as long as the insured continues to pay the fixed annual premium for the policy's duration, the policy cannot be canceled by the Company nor can the premium be raised. Due to the noncancelable, fixed premium nature of the policies marketed in the past, profitability of this part of the business is largely dependent upon achieving the pricing assumptions for morbidity, persistency, interest earned rates, and expense levels. 7 In 1994, the Company began introducing products that insured loss of earnings as opposed to occupations, and these products generally contained more limited benefit periods and longer elimination periods. In contrast to traditional noncancelable own-occupation policies, for which benefits are determined based on whether the insured can work in his or her original occupation, the loss of earnings policy requires the policyholder to satisfy two conditions for benefits to begin: reduced ability to work due to accident or sickness and earnings loss of at least 20 percent. These policies are aimed at repositioning the individual disability income product by making it more attractive to a broader market of individual consumers, including middle to upper income individuals and corporate benefit buyers. The Company also offers lifelong disability coverage for loss of income due to injury or sickness on a guaranteed renewable basis, with the right to reprice in-force policies subject to regulatory approval. Lifelong disability coverage provides benefits and transitional support for moderate disabilities, with richer benefits for severe disabilities. Common options include additional coverage for catastrophic injury or illness and an option to convert to a long- term care policy at retirement age. The Company developed a new individual disability product portfolio that was released for sale in approved states early in the fourth quarter of 2000. This product line consolidates the current offerings of the Company's insurance subsidiaries into one new simplified product portfolio. The new portfolio utilizes a modular approach offering customers a range of product options and features. This portfolio was designed to combine the best features from prior Company offerings and includes return-to-work incentives and optional long-term care conversion benefits and/or benefits for catastrophic disabilities. Individual long-term care is offered on a single customer basis and to smaller employer groups and is marketed on a guaranteed renewable basis. Individual long-term care insurance pays a benefit upon the loss of two or more "activities of daily living" and the insured's requirement of standby assistance or cognitive impairment. Payment is made on an indemnity basis, regardless of expenses incurred, up to a lifetime maximum. Benefits start after an elimination period, generally 90 days or less. Profitability is affected by deviations of actual claims experience from expected claims experience, investment returns, persistency, and the ability of the Company to control administrative expenses. Voluntary Benefits The Voluntary Benefits segment includes a broad line of products sold to groups of employees through payroll deduction at the workplace. These products include life insurance and health products. Premium income for this segment totaled $739.6 million in 2000. The life insurance products principally include universal life, interest- sensitive life, and whole life insurance. The Company markets accident and sickness policies that provide benefit payments for disability income, death, dismemberment, or major injury and are designed to supplement social security, worker's compensation, and other insurance plans. The Company markets cancer insurance policies designed to provide payments for hospitalization and scheduled medical benefits. The accident and health products qualify as fringe benefits that can be purchased with pre-tax employee dollars as part of a flexible benefits program pursuant to Section 125 of the Internal Revenue Code. Flexible benefits programs assist employers in managing benefit and compensation packages and provide policyholders the ability to choose benefits that best meet their needs. Congress could change the laws to limit or eliminate fringe benefits available on a pre-tax basis, eliminating the Company's ability to continue marketing its products this way. However, the Company believes its products provide value to its policyholders, which will remain even if the tax advantages offered by flexible benefit programs are eliminated. Profitability of voluntary benefits products is affected by the level of employee participation, persistency, deviations of actual morbidity and mortality experience from expected experience, investment returns, and the ability of the Company to control administrative expenses. 8 Other The Other operating segment includes results from products no longer actively marketed, including individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and individual annuities. During 1999, the Company concluded that the reinsurance pools and management operations were not solidly aligned with the Company's strength in the disability insurance market. The Company decided to exit these operations through a combination of a sale, reinsurance, and/or placing certain components in run-off. In 1999, the Company sold the reinsurance management operations of its A&H and LTC reinsurance facilities and reinsured the Company's risk participation in these facilities. The Company also decided to discontinue its accident reinsurance business in London beginning in year 2000. With respect to Lloyd's, the Company implemented a strategy which limited participation in year 2000 underwriting risks, ceased participation in Lloyd's underwriting risks after year 2000, and managed the run-off of its risk participation in open years of account of Lloyd's reinsurance syndicates. During the first quarter of 2001, the Company entered into an agreement in principle to limit its liabilities pertaining to the Lloyd's syndicate participations. See Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of the reinsurance operations. The Company no longer markets group pension products, but continues to service its block of existing business. The Company previously marketed GICs for use in corporate tax-qualified retirement plans and group SPAs, used primarily as funding vehicles when defined benefit pension plans are terminated. Under SPAs, the Company received a one-time premium payment and in turn agreed to pay a fixed monthly retirement benefit to specified employees. As previously discussed, the Company reinsured its individual life and corporate-owned life insurance during 2000, its in-force individual and tax- sheltered annuity business during 1998, and its group tax-sheltered annuity business during 1996. Corporate The Corporate segment consists of revenue earned on corporate assets, interest expense on corporate debt, amortization of goodwill, and certain corporate expenses not allocated to a line of business. Reinsurance The Company routinely reinsures portions of its business with other insurance companies. In a reinsurance transaction a reinsurer agrees to indemnify another insurer for part or all of its liability under a policy or policies it has issued for an agreed upon premium. The maximum amount of risk retained by the Company and not reinsured is $500,000 on any group or individual life policy and $500,000 on group and individual accidental death insurance. The amount of risk retained by the Company on individual disability income products varies by policy type and year of issue. The Company does not reinsure group or individual disability policies issued subsequent to 1999. For ceded reinsurance agreements wherein the Company is not relieved of its primary liability to the policyholder, the Company has control procedures to evaluate the financial condition of reinsurers and monitor concentration of credit risk to minimize this exposure. These procedures include the exchange and review of financial statements filed with regulatory authorities, exchange of Insurance Regulatory Information System results, review of ratings by A.M. Best Company, determination of states in which the reinsurer is licensed to do business, on-site visits to assess the operations and management of the reinsurer, consideration of the need for collateral, such as letters of credit, and audits of the Company's reinsurance activities by its Internal Audit staff. The Company also assumes reinsurance from other insurers. The reinsurance receivable at December 31, 2000, relates to over 140 reinsurance relationships. Of the five major relationships which account for approximately 75 percent of the reinsurance receivable amount at December 31, 2000, all are with companies rated A or better by A.M. Best Company or are fully securitized by investment- grade fixed maturity securities held in trust. See Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of the Company's reinsurance activities. 9 Reserves The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their outstanding policies. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality and morbidity tables, interest rates, and methods of valuation. The reserves reported in the Company's financial statements contained herein are calculated based on generally accepted accounting principles followed in the United States (GAAP) and differ from those specified by the laws of the various states and carried in the statutory financial statements of the life insurance subsidiaries. These differences arise from the use of mortality and morbidity tables and interest assumptions which are believed to be more representative of the actual business than those required for statutory accounting purposes and from differences in actuarial reserving methods. The consolidated statements of operations include the annual change in reserves for future policy and contract benefits. The change reflects a normal accretion for premium payments and interest buildup and decreases for policy terminations such as lapses, deaths, and benefit payments. Prior to the merger, Unum's process and assumptions used to calculate the discount rate for claim reserves of certain disability businesses differed from that used by Provident. While Unum's and Provident's methods were both in accordance with GAAP, management believed that the combined entity should have consistent discount rate accounting policies and methods for applying those policies for similar products. Unum's former methodology used the same investment strategy for assets backing both liabilities and surplus. Provident's methodology, which allows for different investment strategies for assets backing surplus than those backing product liabilities, was determined by management to be the more appropriate approach for the Company. Accordingly, at June 30, 1999 the Company adopted Provident's method of calculating the discount rate for claim reserves. The unpaid claim reserves for these disability lines as of June 30, 1999 were $5,318.3 million using the former method for determining reserve discount rates and $5,559.0 million using the current method. The impact on 1999 earnings related to the change in method of calculating the discount rate for claim reserves was $240.7 million before tax and $156.5 million after tax. Subsequent to the merger date, the Company began to integrate the valuation procedures of the two organizations to provide for a more effective linking of pricing and reserving assumptions and to facilitate a more efficient process for adjusting liabilities to emerging trends. Included in this integration activity were a review and an update of assumptions that underlie policy and contract benefit liabilities. The purpose of the study was to confirm or update the assumptions which were viewed as likely to affect the ultimate liability for contract benefits. Accordingly, as a result of the merger, the Company accelerated the performance of its normal reviews of the assumptions underlying reserves to determine the assumptions that the newly merged Company will use in the future for pricing, performance management, and reserving. The review resulted in an increase in the benefits and reserves for future benefits for the Company's domestic and Canadian group long-term disability unpaid claim liabilities. As a result of the review, the Company increased its policy and contract benefit liabilities $359.2 million, which reduced 1999 earnings $359.2 million before tax and $233.5 million after tax. The increase in policy and contract benefit liabilities primarily resulted from revisions to assumptions in the following three key components: claim termination rates, incurred but not reported factors, and discount rates. See Note 2 of the "Notes to Consolidated Financial Statements" for further discussion of these reserve changes. 10 During the fourth quarter of 1998, the Company recorded a $153.0 million increase in the reserve for individual and group disability claims incurred as of December 31, 1998. Incurred claims include claims known as of that date and an estimate of those claims that have been incurred but not yet reported. Claims that have been incurred but not yet reported are considered liabilities of the Company. These claims were expected to be reported during 1999 and were expected to be affected by the claims operations integration activities. The $153.0 million claim reserve increase represented the estimated value of cash payments to be made to these claimants over the life of the claims as a result of the claims operations integration activities. Management believed the reserve adjustment was required based upon the integration plans it had in place and to which it had committed and based upon its ability to develop a reasonable estimate of the financial impact of the expected disruption to the claims management process. Claims management is an integral part of the disability operations. Disruptions in that process can create material, short-term increases in claim costs. The merger had a near-term adverse impact on the efficiency and effectiveness of the Company's claims management function resulting in some delay in claim resolutions and additional claim payments to policyholders. Claims personnel were distracted from normal claims management activities as a result of planning and implementing the integration of the two companies' claims organizations. In addition, employee turnover and additional training reduced resources and productivity. An important part of the claims management process is assisting disabled policyholders with rehabilitation efforts. This complex activity is important to the policyholders because it can assist them in returning to productive work and lifestyles more quickly, and it is important to the Company because it shortens the duration of claim payments and thereby reduces the ultimate cost of settling claims. The reserving process begins with the assumptions indicated by past experience and modifies these assumptions for current trends and other known factors. The Company anticipated the merger-related developments discussed above would generate a significant change in claims department productivity, reducing claim resolution rates, a key assumption when establishing reserves. Management developed actions to mitigate the impact of the merger on claims department productivity, and where feasible, management also planned to obtain additional claims management resources through outsourcing. All such costs were expensed in the period incurred and were not material in relation to results of operations. Management reviewed its integration plans and the actions intended to mitigate the impact of the integration with claims managers to determine the extent of disruption in normal activities. The effect of integration activities on new claim resolution rates was not material after December 31, 1999. See Note 7 of the "Notes to Consolidated Financial Statements" for a complete discussion of the claim disruption reserve. Competition There is intense competition among insurance companies for the individual and group insurance products of the types sold by the Company. At the end of 2000, there were over 2,000 legal reserve life insurance companies in the United States, many offering one or more insurance products similar to those marketed by the Company. In the individual and group disability markets, the Company competes in the United States and Canada with a limited number of major companies and regionally with other companies offering specialty products. The Company's principal competitors in the voluntary benefits market and in the employee benefits market for group life and long-term care products include the largest insurance companies in the United States. All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of the products and the large number of insurance companies offering products in this market. The Company competes with other companies in attracting and retaining independent agents and brokers to actively market its products. The principal competitive factors affecting the Company's business are integrated product choices, price, and quality of customer service and claims management. 11 Regulation The Company's insurance subsidiaries are subject to regulation and supervision in jurisdictions in which they do business, primarily for the protection of policyholders. Although the extent of such regulation varies, insurance laws generally establish supervisory agencies with broad administrative powers including: granting and revocation of licenses to transact business; establishing reserve requirements; setting the form, content, and frequency of required financial statements; the licensing of agents; the approval of policy forms; prescribing the type and amount of investments permitted; and, in general, the conduct of all insurance activities. The Company's insurance subsidiaries must meet the standards and tests for investments promulgated by insurance laws and regulations of the jurisdictions in which they are domiciled. Insurance subsidiaries operate under insurance laws which require they establish and carry, as liabilities, statutory reserves to meet obligations on their disability, life, accident and health policies, and annuities. These reserves are verified periodically by various regulators. The Company's domestic insurance subsidiaries are examined periodically by examiners from their states of domicile and by other states in which they are licensed to conduct business. See Note 16 of the "Notes to Consolidated Financial Statements" for a discussion of permitted statutory accounting practices. The laws of the states of Maine, Tennessee, Massachusetts, South Carolina, New York, and Delaware require the registration of and periodic reporting by insurance companies domiciled within their jurisdiction which control or are controlled by other corporations or persons so as to constitute a holding company system. The Company is registered as a holding company system in Maine, Tennessee, Massachusetts, South Carolina, New York, and Delaware. The holding company statutes require periodic disclosure concerning stock ownership and prior approval of certain intercompany transactions within the holding company system. The Company may from time to time be subject to regulation under the insurance and insurance holding company statutes of one or more additional states. The risk-based capital (RBC) standards for life insurance companies, as prescribed by the National Association of Insurance Commissioners (NAIC), establish an RBC ratio comparing adjusted surplus to required surplus for United States domiciled insurance companies. If the RBC ratio falls within certain ranges, regulatory action may be taken ranging from increased information requirements to mandatory control by the domiciliary insurance department. The RBC ratios for the Company's insurance subsidiaries, measured at December 31, 2000, were above the ranges that would require regulatory action. See further discussion under "Risk Factors - Capital Adequacy." Risk Factors Any one or more of the following factors may cause the Company's actual results for various financial reporting periods to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. See "Cautionary Statement Regarding Forward-Looking Statements" contained herein on page 1. Reserves The Company maintains reserves for future policy benefits and unpaid claims expenses which include policy reserves and claim reserves established for its individual disability insurance, group insurance, and individual life insurance products. Policy reserves represent the portion of premiums received which are reserved to provide for future claims. Claim reserves are established for future payments not yet due on claims already incurred, primarily relating to individual disability and group disability insurance products. Reserves, whether calculated under GAAP or statutory accounting practices, do not represent an exact calculation of future benefit liabilities but are instead estimates made by the Company using actuarial and statistical procedures. There can be no assurance that any such reserves would be sufficient to fund future liabilities of the Company in all circumstances. Future loss development could require reserves to be increased, which would adversely affect earnings in current and future periods. Adjustments to reserve amounts may be required in the event of changes from the assumptions regarding future morbidity (the incidence of claims and the rate of recovery, including the effects thereon of inflation and other societal and economic factors), persistency, mortality, and interest rates used in calculating the reserve amounts. 12 Capital Adequacy The capacity for an insurance company's growth in premiums is in part a function of its statutory surplus. Maintaining appropriate levels of statutory surplus, as measured by state insurance regulators, is considered important by state insurance regulatory authorities and the private agencies that rate insurers' claims-paying abilities and financial strength. Failure to maintain certain levels of statutory surplus could result in increased regulatory scrutiny, action by state regulatory authorities, or a downgrade by the private rating agencies. Effective in 1993, the NAIC adopted an RBC formula, which prescribes a system for assessing the adequacy of statutory capital and surplus for all life and health insurers. The basis of the system is a risk-based formula that applies prescribed factors to the various risk elements in a life and health insurer's business to report a minimum capital requirement proportional to the amount of risk assumed by the insurer. The life and health RBC formula is designed to measure annually (i) the risk of loss from asset defaults and asset value fluctuation, (ii) the risk of loss from adverse mortality and morbidity experience, (iii) the risk of loss from mismatching of asset and liability cash flow due to changing interest rates, and (iv) business risks. The formula is to be used as an early warning tool to identify companies that are potentially inadequately capitalized. The formula is intended to be used as a regulatory tool only and is not intended as a means to rank insurers generally. Disability Insurance Disability insurance may be affected by a number of social, economic, governmental, competitive, and other factors. Changes in societal attitudes, work ethics, motivation, stability, and mores can significantly affect the demand for and underwriting results from disability products. Economic conditions affect not only the market for disability products, but also significantly affect the claims rates and length of claims. The climate and the nature of competition in disability insurance have also been markedly affected by the growth of social security, worker's compensation, and other governmental programs in the workplace. The nature of that portion of the Company's outstanding insurance business that consists of noncancelable disability policies, whereby the policy is guaranteed to be renewable through the life of the policy at a fixed premium, does not permit the Company to adjust its premiums on business in-force on account of changes resulting from such factors. Disability insurance products are important products for the Company. To the extent that disability products are adversely affected in the future as to sales or claims, the business or results of operations of the Company could be materially adversely affected. Industry Factors All of the Company's businesses are highly regulated and competitive. The Company's profitability is affected by a number of factors, including rate competition, frequency and severity of claims, lapse rates, government regulation, interest rates, and general business considerations. There are many insurance companies which actively compete with the Company in its lines of business, some of which are larger and have greater financial resources than the Company, and there is no assurance that the Company will be able to compete effectively against such companies in the future. The modernization of the financial services industry as a result of the Gramm- Leach-Bliley Act of 1999 is also likely to affect the future prospects of the Company. This legislation eliminates many federal and state barriers to affiliation among banks and securities firms, insurers, and their financial service providers. At the same time, the legislation increases the separation between financial service providers and other non-financial companies. The major impacts, other than the potential for increased competition, include new federal privacy rules, a requirement that states enact uniform laws and regulations governing the licensure of individuals and entities authorized to solicit the purchase of insurance within and outside a state, and authority given to promulgate regulations granted to numerous federal agencies. 13 Selected Data of Segments For information regarding the operations of segments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7. Employees At December 31, 2000, the Company had approximately 12,400 full-time employees, including those in its foreign operations. Some employees in Argentina, comprising less than 1 percent of the Company's total workforce, are members of a union. 14 ITEM 2. PROPERTIES The Company occupies over 3,000,000 square feet of space at four principal operating centers in Chattanooga, Tennessee; Portland, Maine; Worcester, Massachusetts; and Columbia, South Carolina. The Company occupies two connected buildings totaling 840,000 square feet in Chattanooga, Tennessee. The office building and substantially all of the surrounding 25 acres of land used for employee parking are owned by the Company in fee along with a 27-unit apartment building for corporate use. In addition, approximately 35,000 square feet of office space is leased and occupied in a nearby office building. The Company occupies facilities in Portland, Maine, which are comprised of eight owned facilities totaling 968,000 square feet of office space and 250 acres of land, a portion of which has been developed for employee parking. In addition, approximately 127,000 square feet of office space is leased and occupied in three buildings with rents totaling $1.5 million per year. The Company occupies facilities totaling 341,000 square feet in Worcester, Massachusetts, with approximately 5.6 acres of surrounding property used primarily for parking. In addition, the Company leases 15,000 square feet in Springfield, Massachusetts, and 13,000 square feet in Auburn, Massachusetts. The Company occupies approximately 547,000 square feet of office space in Columbia, South Carolina. The buildings are located on approximately 47 acres with a portion developed for employee parking. The Company also owns office buildings in the United Kingdom and Argentina, which serve as the home offices of Unum Limited and Boston Compania Argentina de Seguros SA, respectively. Additionally, the Company leases office space, for periods principally from five to ten years, for use by its affiliates and sales forces. ITEM 3. LEGAL PROCEEDINGS Refer to Item 8 Note 15 of the "Notes to Consolidated Financial Statements" for information on legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common stock of UnumProvident Corporation is traded on the New York Stock Exchange. The stock symbol is UNM. Dividends in the following table have been restated to reflect the merger of Unum Corporation and Provident Companies, Inc. as if it had been completed at the beginning of the earliest period presented. Market Price ----------------------------------- High Low Dividend ----------------- ---------------- --------------- 2000 1/st/ Quarter $31.9375 $11.9375 $0.1475 2/nd/ Quarter 24.6250 14.8125 0.1475 3/rd/ Quarter 27.6875 19.2500 0.1475 4/th/ Quarter 29.7500 25.4375 0.1475 1999 1/st/ Quarter $62.5000 $43.8125 $0.1428 2/nd/ Quarter 59.5000 42.4375 0.1428 3/rd/ Quarter 56.8750 28.3750 0.1475 4/th/ Quarter 36.1875 26.0000 0.1475 As of March 12, 2001 there were 22,086 registered holders of common stock. The Company's dividend reinvestment plan offers shareholders of Company common stock a convenient way to purchase additional shares of common stock without paying brokerage fees, commissions, or other bank service fees. More information and an authorization form may be obtained by writing or calling the Company's transfer agent, First Chicago Trust Company of New York. The toll-free customer service number is 1-800-446-2617. For information on restrictions relating to the Company's insurance subsidiaries' ability to pay dividends to the Company see "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7 and Item 8 Note 16 of the "Notes to Consolidated Financial Statements." 16 ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (in millions, except share data) Statement of Operations Data Premium Income $ 7,057.0 $ 6,843.2 $ 6,129.0 $ 5,293.1 $ 4,288.8 Net Investment Income 2,060.4 2,059.7 2,035.4 2,015.7 1,893.4 Net Realized Investment Gains (Losses) (14.6) 87.1 55.0 11.5 (5.2) Other Income 329.5 339.6 299.9 357.0 148.2 ----------- ----------- ----------- ----------- ----------- Total Revenue 9,432.3 9,329.6 8,519.3 7,677.3 6,325.2 Benefits and Expenses 8,566.7 9,495.1 7,599.1 6,760.6 5,757.4 ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Federal Income Taxes 865.6 (165.5) 920.2 916.7 567.8 Federal Income Taxes 301.4 17.4 302.8 299.1 184.2 ----------- ----------- ----------- ----------- ----------- Net Income (Loss) $ 564.2 $ (182.9) $ 617.4 $ 617.6 $ 383.6 =========== =========== =========== =========== =========== Per Common Share Information Net Income (Loss) - Basic $ 2.34 $ (0.77) $ 2.60 $ 2.62 $ 1.75 Net Income (Loss) - Assuming Dilution $ 2.33 $ (0.77) $ 2.54 $ 2.57 $ 1.72 Common Stockholders' Equity at End of Year $ 23.12 $ 20.73 $ 25.89 $ 23.46 $ 18.29 Cash Dividends $ 0.59 $ 0.58 $ 0.57 $ 0.55 $ 0.53 Weighted Average Common Shares Outstanding (000s) - Basic 240,880.4 239,080.6 236,975.2 230,741.2 212,401.5 - Assuming Dilution 242,061.0 239,080.6 242,348.9 235,818.2 215,301.1 Financial Position (at End of Year) Assets $ 40,363.9 $ 38,447.5 $ 38,602.2 $ 37,040.1 $ 30,813.8 Long-term Debt, Subordinated Debt Securities, and Preferred Stock $ 1,915.5 $ 1,466.5 $ 1,525.2 $ 1,396.2 $ 927.0 Stockholders' Equity $ 5,575.5 $ 4,982.2 $ 6,146.2 $ 5,714.1 $ 4,001.7
17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction On June 30, 1999, Unum Corporation (Unum) merged with and into Provident Companies, Inc. (Provident) under the name UnumProvident Corporation. The merger was accounted for as a pooling of interests. The historical financial results discussed herein give effect to the merger as if it had been completed at the beginning of the earliest period presented. See Notes 1 and 2 of the "Notes to Consolidated Financial Statements" for further discussion. The following should be read in conjunction with the consolidated financial statements and notes thereto contained herein in Item 8. This discussion of consolidated operating results and operating results by segment excludes net realized investment gains and losses from revenue and income (loss) before taxes. The Company's investment focus has been on investment income to support its insurance liabilities as opposed to the generation of realized investment gains. Due to the nature of the Company's business, a long-term focus is necessary to maintain profitability over the life of the business. The realization of investment gains and losses will impact future earnings levels as the underlying business is long-term in nature and requires that the Company be able to sustain the assumed interest rates in its liabilities. However, income excluding realized investment gains and losses does not replace net income as a measure of the Company's profitability. The trends in new annualized sales in the Employee Benefits, Individual, and Voluntary Benefits segments are indicators of the Company's potential for growth in its respective markets and the level of market acceptance of price changes and new products. The Company has closely linked its various incentive compensation programs to the achievement of its goals for new sales. Results of Operations 2000 Significant Transactions and Events During 2000, the Company completed a series of strategic transactions designed to more closely focus its operations on its core businesses, increase its financial flexibility, support its present credit and claims-paying ratings, increase the risk-based capital ratios of the insurance subsidiaries involved, and lower its leverage ratios. The primary transaction involved agreements under which Reassure America Life Insurance Company (Reassure America), an affiliate of Swiss Re Life & Health America Inc. (Swiss Re), reinsured on a 100 percent indemnity coinsurance basis substantially all of the individual life insurance and corporate-owned life insurance policies written by the Company's insurance subsidiaries, as well as a small block of individually underwritten group life insurance. The reinsurance agreements were effective as of July 1, 2000. Separately, the Company and Max Re Ltd. entered into an agreement whereby Max Re Ltd. reinsured on a 100 percent indemnity coinsurance basis the future claim payments on one of the Company's insurance subsidiaries' long duration group long-term disability claims which were incurred prior to January 1, 1996. The agreement was effective January 1, 2000. During 2000, the Company entered into a reinsurance agreement with Manulife Reinsurance Limited and SCOR Reinsurance Company under which one of the Company's insurance subsidiaries will cede through a net quota share reinsurance agreement 50 percent of the group life volume above the aggregate retention limit. The treaties are five-year quota share treaties ceding 25 percent of premium, life volume, and paid claims to each reinsurer. The reinsurance agreements were effective as of October 1, 2000. 18 Also in 2000, the Company purchased a single premium annuity for its retirees. The pension plan transaction allowed the Company to provide a higher level of administrative service for its retirees while also locking in favorable pension plan performance. The proceeds from the transaction were partially offset by actions to further strengthen the Company's financial position, namely reserve adjustments of $65.6 million in the Company's long-term disability business and $21.9 million in the reinsurance operations, asset write-offs and loss provisions of $15.5 million in the reinsurance operations, and consolidation and benefit accruals of $9.4 million. See the discussions of segment operating results contained herein for further information. During 2000, tax legislation was enacted in the United Kingdom that allowed additional group tax relief among companies with common ownership. The Company expects to realize foreign tax benefits as a result of this legislation. 1999 Significant Transactions and Events As a result of the aforementioned merger at June 30, 1999, certain accounting policy changes were made during 1999. The following summarizes these changes as well as the expenses related to the merger and the early retirement offer to employees. Generally, because of the effort and time involved, reviews and updates of assumptions related to benefit liabilities are periodically undertaken over time and are reflected in the calculation of benefit liabilities as completed. Many factors influence assumptions underlying reserves, and considerable judgment is required to interpret current and historical experience underlying all of the assumptions and to assess the future factors that are likely to influence the ultimate cost of settling existing claims. Prior to the June 30, 1999 merger, Unum's process and assumptions used to calculate the discount rate for claim reserves of certain disability businesses differed from that used by Provident. While Unum's and Provident's methods for calculating the discount rate for disability claim reserves were both in accordance with generally accepted accounting principles, management believed that the combined entity should have consistent discount rate accounting policies and methods for applying these policies for similar products. The previous Unum methodology used the same investment strategy for assets backing both liabilities and surplus. Provident's methodology, which allows for different investment strategies for assets backing surplus than those backing product liabilities, was determined by management to be the more appropriate approach for the combined entity. Accordingly, at June 30, 1999, the Company adopted Provident's method of calculating the discount rate for claim reserves. The impact on 1999 earnings related to the change in method of calculating the discount rate for claim reserves was $240.7 million before tax and $156.5 million after tax. The charge was reflected in the Employee Benefits, Individual, and Other segments as an increase in benefits to policyholders of $191.7 million, $38.9 million, and $10.1 million, respectively. Subsequent to the merger date, the Company began to integrate the valuation procedures of the two organizations to provide for a more effective linking of pricing and reserving assumptions and to facilitate a more efficient process for adjusting liabilities to emerging trends. Included in this integration activity were a review and an update of assumptions that underlie policy and contract benefit liabilities. The purpose of the study was to confirm or update the assumptions which were viewed as likely to affect the ultimate liability for contract benefits. Accordingly, as a result of the merger, the Company accelerated the performance of its normal reviews of the assumptions underlying reserves to determine the assumptions that the newly merged Company will use in the future for pricing, performance management, and reserving. The review resulted in an increase in the benefits and reserves for future benefits for the Company's domestic group long-term disability unpaid claim liabilities. As a result of the review, the Company increased its policy and contract benefit liabilities $359.2 million in the third quarter of 1999, which reduced 1999 results $359.2 million before tax and $233.5 million after tax. 19 During 1999, the Company recorded before-tax expenses related to the merger of approximately $184.7 million ($139.6 million after tax) for severance and related costs, exit costs for duplicate facilities and asset abandonments, and investment banking, legal, and accounting fees. The Company also recorded in 1999 a before-tax expense of approximately $125.9 million ($81.8 million after tax) related to the early retirement offer to the Company's employees. These expenses are reported in the Corporate segment as other operating expenses and are further discussed in the section "Corporate Segment Operating Results." Additionally, in 1999 the Company expensed $24.7 million ($16.1 million after tax) of incremental costs associated with the merger. These incremental costs consist primarily of compensation, training, integration, and licensing costs. See Note 2 of the "Notes to Consolidated Financial Statements" for further discussion of these charges and "Liquidity and Capital Resources" for a discussion of capital and financing needs. During 1999 the Company also recognized $327.8 million of before-tax charges related to its reinsurance operations. These charges were as follows (in millions): North American Reinsurance Operations Loss on Sale of A&H and LTC Reinsurance Management Operations (includes $ 12.9 write-off of $6.0 million of goodwill) Loss on Reinsurance of A&H and LTC Risk Participations 12.7 Provision for Losses on Retained Business 42.1 International Reinsurance Operations Provision for Losses on Lloyd's of London Syndicate Participations 186.5 Provision for Losses on Reinsurance Pool Participations Other than Lloyd's 21.9 Goodwill Impairment Excluding Amount Recognized on Sale 51.7 ------ Total Before-tax Charge $327.8 ======
See "Other Segment Operating Results" and Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of these charges and the Company's reinsurance operations. A portion of the losses recognized in 1999 relating to the Company's reinsurance operations does not receive a tax benefit, which unfavorably impacted the effective tax rate. Additionally, a portion of the 1999 expenses related to the merger was non-deductible for federal income tax purposes, resulting in a 1999 tax rate that was less than the U.S. federal statutory tax rate of 35 percent. In 1999, the Company recorded refunds from the Internal Revenue Service relating to the final settlement of remaining issues for the 1986 through 1992 tax years. The refund of taxes was $30.4 million, and interest on the refunds was $35.4 million. Overall, including interest and the tax provision thereon, 1999 results increased $36.8 million due to settlements of prior year tax issues. 20 Consolidated Operating Results
(in millions of dollars) Year Ended December 31 ------------------------------------------------------------------ 2000 % Change 1999 % Change 1998 ---------- ----------- ---------- Revenue Premium Income $ 7,057.0 3.1 % $ 6,843.2 11.7 % $ 6,129.0 Net Investment Income 2,060.4 - 2,059.7 1.2 2,035.4 Other Income 329.5 (3.0) 339.6 13.2 299.9 ----------- ----------- ----------- Total Revenue 9,446.9 2.2 9,242.5 9.2 8,464.3 ----------- ----------- ----------- Benefits and Expenses Benefits and Change in Reserves for Future Benefits 6,407.5 (5.6) 6,787.6 24.5 5,449.7 Commissions 754.1 (17.5) 913.6 10.5 826.5 Interest and Debt Expense 181.8 31.9 137.8 14.9 119.9 Deferral of Policy Acquisition Costs (595.7) (26.4) (809.3) 15.1 (703.3) Amortization of Deferred Policy Acquisition Costs 456.5 (3.9) 474.8 25.8 377.5 Amortization of Value of Business Acquired and Goodwill 67.3 (44.3) 120.9 81.5 66.6 Operating Expenses 1,295.2 (30.7) 1,869.7 27.9 1,462.2 ----------- ----------- ----------- Total Benefits and Expenses 8,566.7 (9.8) 9,495.1 25.0 7,599.1 ----------- ----------- ----------- Income (Loss) Before Federal Income Taxes and Net Realized Investment Gains and Losses 880.2 N.M. (252.6) N.M. 865.2 Federal Income Taxes (Credit) 307.1 N.M. (12.9) N.M. 283.9 ----------- ----------- ----------- Income (Loss) Before Net Realized Investment Gains and Losses 573.1 N.M. (239.7) N.M. 581.3 Net Realized Investment Gains (Losses) (8.9) N.M. 56.8 57.3 36.1 ----------- ----------- ----------- Net Income (Loss) $ 564.2 N.M. $ (182.9) N.M. $ 617.4 =========== =========== ===========
N.M. = not a meaningful percentage In the following discussions of operating results by segment, "revenue" includes premium income, net investment income, and other income. "Income" or "loss" excludes net realized investment gains and losses and federal income taxes. 21 Employee Benefits Segment Operating Results
(in millions of dollars) Year Ended December 31 -------------------------------------------------------------- 2000 % Change 1999 % Change 1998 ----------- ---------- ----------- Revenue Premium Income Group Long-term Disability $ 2,082.7 2.4 % $ 2,034.7 13.0 % $ 1,800.7 Group Short-term Disability 514.4 8.6 473.7 28.9 367.4 Group Life 1,194.8 3.2 1,158.2 17.8 983.5 Accidental Death & Dismemberment 187.3 (1.8) 190.7 3.6 184.1 Group Long-term Care 63.3 47.6 42.9 49.5 28.7 ---------- --------- ---------- Total Premium Income 4,042.5 3.6 3,900.2 15.9 3,364.4 Net Investment Income 701.8 16.0 604.9 11.6 541.8 Other Income 151.3 7.9 140.2 17.6 119.2 ---------- --------- ---------- Total Revenue 4,895.6 5.4 4,645.3 15.4 4,025.4 ---------- --------- ---------- Benefits and Expenses Benefits and Change in Reserves for Future Benefits 3,426.2 (6.5) 3,663.9 38.6 2,642.6 Commissions 322.5 (2.0) 329.0 21.0 271.9 Deferral of Policy Acquisition Costs (231.4) (7.1) (249.2) 17.2 (212.6) Amortization of Deferred Policy Acquisition Costs 147.2 38.1 106.6 29.1 82.6 Amortization of Value of Business Acquired 2.4 (4.0) 2.5 (3.8) 2.6 Operating Expenses 794.4 2.8 773.1 10.1 702.0 ---------- --------- ---------- Total Benefits and Expenses 4,461.3 (3.6) 4,625.9 32.6 3,489.1 ---------- --------- ---------- Income Before Federal Income Taxes and Net Realized Investment Gains and Losses $ 434.3 N.M. $ 19.4 N.M. $ 536.3 ========== ========= ==========
The Employee Benefits segment includes group long-term and short-term disability insurance, group life insurance, accidental death and dismemberment coverages, group long-term care, and the results of managed disability. Employee Benefits new annualized sales, on a submitted date basis, decreased 9.4 percent to $862.7 million in 2000 from $952.5 million in 1999 and $981.1 million in 1998. On an effective date basis, sales decreased 32.1 percent to $744.9 million in 2000 from $1,097.7 million in 1999 and $926.3 million in 1998. Although total year over year comparisons show a decrease, submitted sales during the last half of 2000 increased $93.3 million over sales submitted during the last half of 1999. Sales that combine long-term disability, short-term disability, and group life products also increased from prior year, showing continued strong integrated sales and collaboration in the field. During 2000, 32 percent of all new sales were with long-term disability, short-term disability, and group life combined coverage, compared to 26 percent in 1999. Sales related to employee benefits can fluctuate significantly due to large case size and timing of sales submissions. Several factors contributed to the decrease in 2000 sales compared to 1999 and 1998, including rate increases and turnover in the field sales force during the first half of 2000. The Company has a number of initiatives underway to help maintain the sales momentum achieved during the last half of 2000, including targeted incentive plans, organizational changes to create a greater focus on the customer, and enhanced communication with producers. In order to give the appropriate focus to the Company's primary business markets, the Company has established national practice groups to focus on large employers, executive benefits, and voluntary benefits. These national practice groups partner with the Company's sales force and representatives from claims, customer service, and underwriting to present coverage solutions to potential customers and to manage existing customer accounts. The 22 Company expects that these actions will continue to favorably impact sales growth, but management intends to maintain pricing discipline to balance sales growth and profitability, which may slow the rate of long-term sales growth. The Company monitors persistency and reflects adverse changes in persistency in the current period's amortization of deferred policy acquisition costs. Actual persistency experienced during 2000 for group disability, group life, and accidental death and dismemberment products compared unfavorably to the persistency expected, resulting in additional amortization of $34.1 million during 2000. The adverse persistency during 2000 relates primarily to large case terminations and an aggressive 2000 renewal program that was heavily concentrated in the first half of the year. It is expected that persistency for the foreseeable future will continue to be lower than historical levels for group disability as well as group life. The Company's 2000 renewal program was generally successful at retaining business that is relatively more profitable than business that terminated. It is expected that the additional premium and related profits associated with this renewal activity will emerge throughout 2001. The Company intends to maintain a disciplined approach in the re-pricing of renewal business, while balancing the need to maximize persistency and retain producer relationships. This approach may lead to lower profit margins on affected cases than originally planned. Revenue from the managed disability line of business, which includes GENEX Services, Inc. and Options and Choices, Inc., totaled $126.1 million in 2000 compared to $107.8 million in 1999 and $96.2 million in 1998. Group Disability Group disability revenue was $3,200.4 million in 2000 compared to $3,029.0 million in 1999. New annualized sales for group long-term disability on a submitted date basis were $333.8 million in 2000 and $385.2 million in 1999. New annualized sales for group short-term disability were $148.5 million in 2000 compared to $172.0 million in 1999. On an effective date basis, new annualized sales for long-term disability and short-term disability were $318.0 million and $125.4 million in 2000 and $466.9 million and $203.1 million in 1999. A critical part of the Company's strategy for group disability during 2000 involved executing its renewal program and managing persistency, both of which management expects will have a positive impact on future premium growth and profitability. However, the high terminations and slow sales have decreased the earned premium growth compared to that experienced during 1999 and 1998. The Company is implementing pricing changes in the group disability line. Prices will increase or decrease by market segment, as appropriate, to respond to current claim experience and other factors and assumptions. Net investment income is expected to continue to increase due to the increase in the level of invested assets allocated to this line of business and the increased duration on new investments. Group disability reported income of $211.0 million for 2000 compared to a loss of $225.7 million for 1999. Included in the income for 2000 was an increase of $65.6 million in group long-term disability claim reserves, which represents approximately 1.2 percent of total group long-term disability claim reserves. The increase, which resulted from lengthening the projected average claim duration for certain of the Company's group long-term disability claims, was not a result of deteriorating experience but was believed appropriate based on the Company's assessment of the ultimate settlement of these claims. The 1999 loss of $225.7 million was the result of the $191.7 million charge resulting from lowering the discount rate used to calculate certain of Unum's disability claim reserves to conform with Provident's process and assumptions and the $359.2 million charge resulting from the revision in the underlying assumptions used to estimate the ultimate cost of unpaid group long-term disability claims, as discussed in the preceding "Results of Operations." Excluding the adjustments to the disability claim liabilities discussed in the preceding paragraph, the benefit ratio for group disability was 83.5 percent in 1999 compared to 87.1 percent in 2000. For long-term disability, the ratio for 2000 compared unfavorably to 1999, but showed slight improvement throughout 2000. The paid claim incidence for long-term disability compares favorably to 1999 due to lower claim acceptance rates, and claim resolution experience continued to improve during 2000. The 2000 submitted claim incidence rate for long-term disability was higher than the rate for 1999. The benefit ratio for short-term disability decreased marginally from the 1999 ratio. The incidence of submitted claims for short-term disability remained relatively constant throughout 2000 and 1999, declining slightly in 2000 compared to the 1999 rate. Negative impacts on the benefit ratio in 2000 were the average claim duration, which increased to its highest level in recent periods during 2000, and an increase in the average weekly indemnity. 23 Additionally, the increase in the amortization of deferred policy acquisition costs had a negative impact on 2000 income. This increase resulted from $25.8 million of additional amortization necessitated by the higher level of group long-term and short-term disability terminations experienced during 2000 relative to that which was expected at the time the business was written. However, the disability business retained is relatively more profitable than the business that terminated. The additional amortization during 1999 was $4.2 million. Income in 2000 was positively impacted by a 5.7 percent revenue increase and an improvement in both the commission and operating expense ratios. As previously discussed under "Results of Operations," during 2000 the Company entered into a 100 percent indemnity coinsurance agreement to cede the future claim payments on one of its insurance subsidiaries' long duration group long-term disability claims which were incurred prior to January 1, 1996. The agreement was effective January 1, 2000. Group disability revenue increased to $3,029.0 million in 1999 compared to $2,632.1 million in 1998. Premium income growth was driven primarily by prior period sales. As previously discussed, the rate of growth in new sales declined during 1999. New annualized sales, on a submitted date basis, for group long-term disability were $385.2 million in 1999 compared to $441.7 million in 1998. New annualized sales for group short-term disability were $172.0 million in 1999 as compared to $176.2 million in 1998. On an effective date basis, new annualized sales for long-term disability and short-term disability were $466.9 million and $203.1 million in 1999 and $426.4 million and $159.7 million in 1998. Net investment income increased during 1999 due to the increase in the level of invested assets allocated to this line of business and also due to the portfolio restructuring which occurred subsequent to the merger. Group disability reported a loss of $225.7 million for 1999, as compared with $334.4 million of income for 1998. The loss was the result of the $191.7 million second quarter 1999 charge and the $359.2 million third quarter 1999 charge as previously discussed. Excluding the effect of these two charges, this line reported an 83.5 percent benefit ratio for 1999. The benefit ratio for 1998 was 79.4 percent, excluding the effect of the fourth quarter of 1998 claims disruption charge discussed in the following paragraphs. The incidence rates for new claims submitted for long-term disability increased during 1999 over the level experienced in 1998, but new claim incidence rates in the third and fourth quarters of 1999 improved relative to levels experienced in the first half of 1999 and the last half of 1998. Small case business continues to perform well, and large case and mid-size business showed improvement in 1999. The incidence rates for new claims submitted for short-term disability improved during 1999 as compared to 1998. As explained in more detail below, the actual increase in claims durations during 1999 was greater than the increase assumed in the fourth quarter of 1998 claims disruption charge, resulting in a negative impact on the 1999 benefit ratio. Additionally, the 1998 benefit ratio was positively impacted by the updated factors used in calculating social security offset amounts. The amortization of deferred policy acquisition costs for 1999 includes $4.2 million of additional amortization due to the higher than expected level of terminations for long-term and short-term disability experienced during the fourth quarter of 1999. Also included in 1999 is $3.3 million of amortization related to the write-off of the unamortized balance of deferred costs related to certain discontinued products in the foreign operations. In the fourth quarter of 1998, the Company recorded a $50.3 million charge for the group long-term disability line of business in the Employee Benefits segment for the expected increase in claims durations due to management's expectation that productivity in the claims organization would be impacted as a result of planning, consolidation, and integration efforts related to the merger. Management expected the claims integration efforts to have some benefits, primarily related to claims incurred in future periods, as well as the potential for improved customer satisfaction and lower ultimate claim costs as best practices in return-to-work and claims management were implemented. As benefits related to the integration become known, reserve assumptions will be revised, if appropriate. Insurance policies that are impacted by the temporary change in claim resolution rates will not perform as anticipated when priced. Since the cause of the additional claim cost is of a temporary nature, it is not anticipated to have an effect on future policy pricing. 24 During 1999, the claim operations integration activities progressed as assumed. At December 31, 1998, management assumed the revised group disability claim resolution rates for the first, second, third, and fourth quarters of 1999 to be 90, 90, 81, and 86 percent of assumptions, respectively, before adjusting for the impact of the claim operations integration activities. The actual experience was 89 percent for the first quarter of 1999, 90 percent for the second quarter, 67 percent for the third quarter, and 81 percent for the fourth quarter. If the impact of merger-related claim operations integration activities on claim durations had not been anticipated at December 31, 1998, the 1999 loss for the group long-term disability line of business would have been negatively impacted by $50.3 million. However, the shortfall of the actual 1999 experience below that assumed resulted in a negative effect on 1999 results of $18.1 million. As discussed in Note 2 of the "Notes to Consolidated Financial Statements," claim resolution assumptions underlying existing claim reserves were revised in the third quarter of 1999, resulting in an increase in benefit liabilities of $194.8 million. In selecting the revised claim resolution assumptions, consideration was given to claims operations integration activities referenced here as well as other factors expected to impact the future effectiveness of the claims operations. See Notes 2 and 7 of the "Notes to Consolidated Financial Statements" for further discussion. As discussed under "Cautionary Statement Regarding Forward-Looking Statements," certain risks and uncertainties are inherent in the Company's business. Components of claims experience, including but not limited to, incidence levels and claims duration, may be worse than expected. Management monitors claims experience in group disability and responds to changes by periodically adjusting prices, refining underwriting guidelines, changing product features, and strengthening risk management policies and procedures. The Company expects to price new business and re-price existing business, at contract renewal dates, in an attempt to mitigate the effect of these and other factors, including interest rates, on new claim liabilities. Given the competitive market conditions for the Company's disability products, it is uncertain whether pricing actions can entirely mitigate the effect. The Company, similar to all financial institutions, has some exposure if a severe and prolonged recession occurs, but management believes that the Company is well positioned if a weaker economy were to occur. Many of the Company's products can be repriced, which would allow the Company to reflect in its pricing any fundamental change which might occur in the risk associated with a particular industry or company within an industry. The Company has a well diversified book of insurance exposure, with no unusual concentrations of risk in any one industry. Because of improvements made in the claims organization in recent years, the Company believes it can respond to increased levels of submitted claims which might result from a slowing economy. Group Life, Accidental Death and Dismemberment, and Long-term Care Group life, accidental death and dismemberment, and long-term care reported income of $214.0 million in 2000 compared to $239.5 million in 1999. New annualized sales on a submitted date basis decreased to $380.4 million in 2000 as compared to $395.3 million in 1999. On an effective date basis, new annualized sales were $301.5 million in 2000 compared to $427.7 million for 1999. Group life and long-term care both reported an increase in revenue for 2000 compared to 1999 due to increases in premium income and net investment income. Offsetting the revenue increase was an increase in the benefit ratio when compared to 1999. Group life reported an unfavorable benefit ratio in 2000 compared to the prior year due to an increase in the average paid claim size and waiver incidence, partially offset by favorable paid mortality incidence. The 2000 benefit ratio for accidental death and dismemberment compares unfavorably with 1999. The increase in the average paid claim size contributed to the unfavorable comparison. Submitted incidence for accidental death and dismemberment has improved relative to 1999. The reinsurance transaction with Reassure America, discussed under Item 1 contained herein, reduced 2000 group life and accidental death and dismemberment premium income and benefits approximately $15.4 million and $11.7 million, respectively. 25 The reinsurance transaction with Manulife Reinsurance Limited and SCOR Reinsurance Company, under which an insurance subsidiary of the Company cedes through a net quota share reinsurance agreement 50 percent of the group life volume above the aggregate retention limit, does not meet the conditions for reinsurance accounting and is therefore accounted for as a deposit. As such, there is no effect on reported premium income or benefits. The only impact on the income statement is the risk charge paid to the reinsurers. See Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of the 2000 reinsurance transactions. Group long-term care reported a higher benefit ratio for 2000 compared to 1999. The long-term care net claim resolution rate for 2000 is below the average rate for 1999, primarily due to a decrease in claim recoveries. The 2000 incidence rates for both submitted and paid claims improved over the prior year. The amortization of deferred policy acquisition costs for 2000 includes $8.3 million of additional amortization due to the higher level of terminations for group life and accidental death and dismemberment products experienced during 2000 relative to that which was expected at the time the policies were written. Positively impacting 2000 income was an improvement in the commission and operating expense ratios. Group life, accidental death and dismemberment, and long-term care reported income of $239.5 million in 1999 compared to $197.5 million in 1998. The increase resulted from the growth in premium income, which was driven by strong prior period sales, and a lower operating expense ratio. The results also benefited from higher net investment income and a higher volume of business. There was a slight increase in the benefit ratio, from 72.7 percent in 1998 to 73.3 percent in 1999, primarily due to an increase in the average claim size in the group life line of business. New annualized sales on a submitted date basis increased to $395.3 million in 1999 compared to $363.2 million in 1998. On an effective date basis, sales were $427.7 million in 1999 and $340.2 million in 1998. Premium persistency for group life in 1999 was lower than historical levels, and subsequently the amortization of deferred policy acquisition costs for 1999 includes $1.0 million of additional amortization due to the higher than expected level of terminations. 26 Individual Segment Operating Results (in millions of dollars)
Year Ended December 31 -------------------------------------------------------- 2000 % Change 1999 % Change 1998 ------------ ----------- ------------ Revenue Premium Income Individual Disability $ 1,643.5 5.8 % $ 1,553.5 1.6 % $ 1,528.7 Individual Long-term Care 133.7 45.3 92.0 50.3 61.2 ----------- ---------- ----------- Total Premium Income 1,777.2 8.0 1,645.5 3.5 1,589.9 Net Investment Income 840.3 9.0 771.1 6.7 722.6 Other Income 122.0 100.7 60.8 7.6 56.5 ----------- ---------- ----------- Total Revenue 2,739.5 10.6 2,477.4 4.6 2,369.0 ----------- ---------- ----------- Benefits and Expenses Benefits and Change in Reserves for Future Benefits 1,858.4 15.8 1,604.2 2.9 1,559.0 Commissions 254.3 (7.4) 274.5 4.3 263.3 Deferral of Policy Acquisition Costs (208.4) 4.8 (198.8) 16.7 (170.4) Amortization of Deferred Policy Acquisition Costs 91.1 17.2 77.7 19.2 65.2 Amortization of Value of Business Acquired 40.7 30.9 31.1 (1.0) 31.4 Operating Expenses 405.3 (6.7) 434.6 0.3 433.2 ----------- ---------- ----------- Total Benefits and Expenses 2,441.4 9.8 2,223.3 1.9 2,181.7 ----------- ---------- ----------- Income Before Federal Income Taxes and Net Realized Investment Gains and Losses $ 298.1 17.3 $ 254.1 35.7 $ 187.3 =========== ========== ===========
The Individual segment includes results from the individual disability and individual long-term care lines of business. Individual life, which was previously included in the Individual segment, is no longer actively marketed and is now reported in the Other segment. Historical by segment results have been reclassified. See "Other Segment Operating Results" for further discussion of the individual life line of business. Individual Disability New annualized sales in the individual disability line of business were $116.1 million in 2000 compared to $124.1 million in 1999 and $136.6 million in 1998. As discussed in the "Employee Benefits Segment Operating Results," several factors have contributed to the decrease in sales. However, persistency of existing individual disability income business remained high during 1999 and 2000. The Company has developed a new individual disability product portfolio which was released for sale in approved states early in the fourth quarter of 2000. This product line consolidates the current offerings of the Company's insurance subsidiaries into one new simplified product portfolio. The new portfolio utilizes a modular approach offering customers a range of product options and features. This portfolio was designed to combine the best features from prior Company offerings and includes return-to-work incentives and optional long-term care conversion benefits and/or benefits for catastrophic disabilities. Management expects that premium income in the individual disability line will grow on a year-over-year basis, contingent on further state approvals of the new product portfolio, as the portfolio transition produces increasing levels of new sales of individual disability products and as a result of an increased focus on integrated disability sales in group and individual, as well as other sales initiatives discussed under "Employee Benefits Segment Operating Results." 27 Revenue was $2,585.6 million in 2000 compared to $2,371.9 million in 1999. The growth in 2000 revenue was driven primarily by the growth in premium income as well as net investment income and other income. Premium income in 2000 included $96.6 million from an inforce block of individual disability business reinsured effective January 1, 2000. Other income benefited from the income on assets held in trust under this reinsurance arrangement. Net investment income for individual disability increased due to the increase in the level of invested assets allocated to this line of business. Income in the individual disability line of business was $285.3 million in 2000, an increase of $28.6 million from the prior year. As discussed in the preceding "Results of Operations," in the second quarter of 1999 the Company lowered the discount rate used to calculate certain of Unum's disability claim reserves to conform with Provident's process and assumptions, which decreased individual disability income by $38.9 million in 1999. Excluding this 1999 adjustment, individual disability income decreased $10.3 million in 2000 compared to 1999. This line reported an increase in the benefit ratio for 2000 compared to last year's ratio, excluding the 1999 discount rate change. Submitted incidence for 2000 is slightly higher than the average for the year 1999, while paid incidence has improved relative to the prior year. The claim acceptance rate has been declining throughout 1999 and 2000, and the net claim resolution rate for 2000 compares favorably with 1999. Offsetting these favorable trends was an increase in reserves for existing claims and claims in dispute. Individual disability benefited from improved commission and operating expense ratios for 2000 as compared to 1999. The amortization of value of business acquired increased in 2000 primarily as a result of the amortization on the block of inforce business reinsured effective January 1, 2000. Income in the individual disability income line of business increased to $256.7 million in 1999 from $190.0 million in 1998. Excluding the 1999 discount rate change of $38.9 million, this line reported an increase in the benefit ratio in 1999 compared to 1998. The 1999 claim resolution rate compared unfavorably with 1998, but showed improvement throughout 1999. New claims for 1999 were fairly level with 1998. This line benefited from higher net investment income and a favorable operating expense ratio for 1999 as compared to 1998. As noted in the "Employee Benefits Segment Operating Results," claim resolution rates were revised downward in the fourth quarter of 1998 for claim operations integration activities related to the merger. The Company recorded a $100.3 million charge in the fourth quarter of 1998 in the Individual segment related to the revised claim resolution rates for individual disability. At December 31, 1998, management assumed the revised individual disability claim resolution rates for the first, second, third, and fourth quarters of 1999 to be 90, 90, 85, and 90 percent of assumptions, before adjusting for the impact of the claim operations integration activities. The actual experience for the Company was 89 percent in the first quarter, 90 percent in the second quarter, 93 percent in the third quarter, and 95 percent in the fourth quarter of 1999. If the impact of merger-related claim operations integration activities on claim durations had not been anticipated at December 31, 1998, income for the individual disability line of business would have been negatively impacted by $100.3 million in 1999. In addition, the excess of the actual 1999 experience over that assumed resulted in a positive effect on income of $25.6 million. See Note 7 of the "Notes to Consolidated Financial Statements" for further discussion. Individual Long-term Care The individual long-term care line of business reported increased premium income for both 2000 and 1999 as compared to the previous years, primarily due to continued new sales growth. New annualized sales were $47.7 million in 2000, $40.0 million in 1999, and $23.5 million in 1998. The Company expects the strong sales momentum in individual long-term care to continue. Net investment income continues to increase due to the growth in this line of business. Income for 2000 was $12.8 million, compared to losses of $2.6 million in 1999 and $2.7 million in 1998. The increase in revenue, as well as improvements in both the benefit ratio and operating expense ratios, contributed to the year over year increases. 28 Voluntary Benefits Segment Operating Results (in millions of dollars)
Year Ended December 31 ---------------------------------------------------------- 2000 % Change 1999 % Change 1998 ----------- ----------- ------------ Revenue Premium Income $ 739.6 6.9 % $ 691.6 3.7 % $ 666.7 Net Investment Income 113.4 6.4 106.6 12.4 94.8 Other Income 6.3 - 6.3 (29.2) 8.9 ----------- ----------- ------------ Total Revenue 859.3 6.8 804.5 4.4 770.4 ----------- ----------- ------------ Benefits and Expenses Benefits and Change in Reserves for Future Benefits 447.2 13.9 392.7 6.3 369.4 Commissions 151.8 9.4 138.7 (7.0) 149.1 Deferral of Policy Acquisition Costs (151.9) 2.8 (147.8) 1.4 (145.7) Amortization of Deferred Policy Acquisition Costs 112.3 (0.6) 113.0 13.7 99.4 Amortization of Value of Business Acquired 2.3 (4.2) 2.4 9.1 2.2 Operating Expenses 143.6 (14.8) 168.5 2.2 164.9 ----------- ----------- ------------ Total Benefits and Expenses 705.3 5.7 667.5 4.4 639.3 ----------- ----------- ------------ Income Before Federal Income Taxes and Net Realized Investment Gains and Losses $ 154.0 12.4 $ 137.0 4.5 $ 131.1 =========== =========== ============
The Voluntary Benefits segment includes the results of products sold to employees through payroll deduction at the workplace. These products include life insurance and health products, primarily disability, accident and sickness, and cancer. Revenue in the Voluntary Benefits segment increased to $859.3 million in 2000 from $804.5 million in 1999 and $770.4 million in 1998. Sales growth and continued favorable persistency were the primary factors contributing to the increase in premium income. New annualized sales in this segment were $265.0 million in 2000, $245.3 million in 1999, and $233.8 million in 1998. Management continues its efforts to increase sales through the sales initiatives discussed under "Employee Benefits Segment Operating Results." The investment income growth in 2000 as compared to 1999 was due to the repositioning of the investment portfolio subsequent to the merger. Income for 2000 increased 12.4 percent over 1999, primarily due to revenue growth of $54.8 million. An additional positive impact on 2000 income was a favorable operating expense ratio attributable to costs savings resulting from the merger. The 2000 benefit ratio was unfavorable compared to 1999. The primary drivers were unfavorable results in the life product line and an increase in the incurred and paid loss ratios for the cancer product line. Income in the Voluntary Benefits segment in 1999 was $137.0 million versus $131.1 million in 1998. The increase in income for 1999 was primarily due to the increase in premium income in all of the product lines and an increase in investment income, partially offset by a slightly higher benefit ratio in the life, accident and sickness, and disability product lines. 29 Other Segment Operating Results
Year Ended December 31 ---------------------------------------------------------- 2000 % Change 1999 % Change 1998 ----------- ----------- ----------- Revenue Premium Income $ 497.7 (17.9)% $ 605.9 19.3 % $ 508.0 Net Investment Income 377.2 (31.4) 549.5 (14.8) 645.2 Other Income 29.5 (68.0) 92.2 (19.5) 114.6 ---------- ----------- ----------- Total Revenue 904.4 (27.5) 1,247.6 (1.6) 1,267.8 ---------- ----------- ----------- Benefits and Expenses Benefits and Change in Reserves for Future Benefits 675.7 (40.0) 1,126.8 28.2 878.7 Other Expenses 185.4 (38.1) 299.3 18.3 253.1 ---------- ----------- ----------- Total Benefits and Expenses 861.1 (39.6) 1,426.1 26.0 1,131.8 ---------- ----------- ----------- Income (Loss) Before Federal Income Taxes and Net Realized Investment Gains and Losses $ 43.3 N.M. $ (178.5) N.M. $ 136.0 ========== =========== ===========
The Other operating segment includes results from products no longer actively marketed, including individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and individual annuities. It is expected that revenue and income in this segment will decline over time as these business lines wind down. Management expects to reinvest the capital supporting these lines of business in the future growth of the Employee Benefits, Individual, and Voluntary Benefits segments. The closed blocks of business have been segregated for reporting and monitoring purposes. Individual Life and Corporate-Owned Life As previously discussed, during 2000 the Company reinsured substantially all of the individual life and corporate-owned life insurance blocks of business. The Company ceded approximately $3.3 billion of reserves to the reinsurer. The $388.2 million before-tax and $252.3 million after-tax gain on these transactions was deferred and is being amortized into income based upon expected future premium income on the traditional insurance policies ceded and estimated future gross profits on the interest-sensitive insurance policies ceded. The Company recognized a 2000 before-tax realized investment loss of $25.9 million on the fixed maturity securities transferred to the reinsurer. In connection with this realized loss, the Company retrospectively adjusted deferred policy acquisition costs and value of business acquired related to interest-sensitive individual life policies with credits to current period amortization of $9.4 million and $1.5 million, respectively, to reflect investment experience. See "Investments" for further discussion of the realized investment loss. Total revenue and income for individual life and corporate-owned life insurance was $236.1 million and $49.6 million, respectively, in 2000 compared to $435.0 million in revenue and $65.6 million in income for 1999. Reinsurance Pools and Management The Company's reinsurance operations include the reinsurance management operations of Duncanson & Holt, Inc. (D&H) and the risk assumption, which includes reinsurance pool participation; direct reinsurance which includes accident and health (A&H), long-term care (LTC), and long-term disability coverages; and Lloyd's of London (Lloyd's) syndicate participations. During 1999, the Company concluded that these operations were not solidly aligned with the Company's strength in the disability insurance market and decided to exit these operations through a combination of a sale, reinsurance, and/or placing certain components in run-off. In 1999, the Company sold the reinsurance management operations of its A&H and LTC reinsurance facilities and reinsured the Company's risk participation in these facilities. The Company also decided to discontinue its London accident reinsurance pool participation beginning in year 2000. With respect to Lloyd's, the Company implemented a strategy which limited participation in year 2000 underwriting risks, ceased participation in Lloyd's underwriting risks after year 2000, and 30 managed the run-off of its risk participation in open years of account of Lloyd's reinsurance syndicates. During the first quarter of 2001, the Company entered into an agreement in principle to limit its liabilities pertaining to the Lloyd's syndicate participations. See Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of the reinsurance operations. During 2000, the reinsurance pools and management operations reported a loss of $32.7 million compared to a loss of $279.7 million in 1999. Included in the 2000 results were $37.4 million of charges related to the Company's London accident reinsurance pool participation. During 1999, the Company recorded charges resulting from its decision to exit these pools, but at that time there was insufficient information to fully evaluate all of the exposures. Working with the pool managers in London, the Company now has a clearer view of the potential cost to fund these exposures and provide for the run-off of its participation. The 2000 charges included a claim reserve adjustment of $21.9 million and uncollectible receivables and loss provisions of $15.5 million. The reinsurance pools and management reported a loss of $279.7 million in 1999 compared to income of $10.0 million in 1998. The 1999 loss was the result of charges related to the decision to exit the reinsurance operations, as discussed in the preceding paragraphs. These charges totaled $270.1 million in 1999, with an additional $57.7 million recorded in the Corporate segment related to the write-off of goodwill. See "Results of Operations" contained herein in Item 7 and Note 13 of the "Notes to Consolidated Financial Statements" in Item 8 for further discussion of the 1999 charges related to the reinsurance operations. Also, as previously discussed in the preceding "Results of Operations," during 1999 the Company lowered the discount rate used to calculate certain of Unum's disability claim reserves to conform with Provident's process and assumptions, which decreased the group long-term disability reinsurance income reported in this line of business by $10.1 million in 1999. In the fourth quarter of 1998, the Company recorded a $2.4 million charge related to the revised claim resolution rates for group long-term disability reinsurance. If the impact of merger-related claim operations integration activities on claim duration had not been anticipated at December 31, 1998, 1999 income for the reinsurance pools and management line of business would have been negatively impacted by $2.4 million. See Note 7 of the "Notes to Consolidated Financial Statements" for further discussion. Individual Annuities In 1998, the Company closed the sale of Provident's in-force individual and tax-sheltered annuity business to affiliates of American General Corporation (American General). The sale was effected by reinsurance in the form of 100 percent coinsurance agreements. The in-force business sold consisted primarily of individual fixed annuities and tax-sheltered annuities. In addition, American General acquired a number of miscellaneous group pension lines of business sold in the 1970s and 1980s which were no longer actively marketed. The sale did not include Provident's block of guaranteed investment contracts or group single premium annuities, which will continue in a run-off mode. In consideration for the transfer of the approximately $2.4 billion of statutory reserves, American General paid the Company a ceding commission of approximately $58.0 million. The before-tax gain included in other income for 1998 was $12.2 million. Other Effective January 1, 1998, the Company entered into an agreement with Connecticut General Life Insurance Company (Connecticut General) for Connecticut General to reinsure, on a 100 percent coinsurance basis, its in-force medical stop-loss insurance coverages sold to clients of CIGNA Healthcare and its affiliates (CIGNA). This reinsured block constitutes substantially all of the Company's medical stop-loss insurance business. The small portion remaining consists of medical stop-loss coverages sold to clients other than those of CIGNA. The medical stop-loss business produced revenue of $14.1 million in 1998. 31 Corporate Segment Operating Results The Corporate segment includes investment income on corporate assets not specifically allocated to a line of business, corporate interest expense, amortization of goodwill, and certain corporate expenses not allocated to a line of business. Revenue in the Corporate segment was $48.1 million in 2000, $67.7 million in 1999, and $31.7 million in 1998. As previously discussed under "Results of Operations," during 1999 the Company recorded refunds from the Internal Revenue Service relating to the final settlement of remaining issues for the 1986 through 1992 tax years. The interest on the refunds was $35.4 million and is included in 1999 revenue. The Corporate segment reported losses of $49.5 million in 2000, $484.6 million in 1999, and $125.5 million in 1998. Interest and debt expense was $181.8 million in 2000, $137.8 million in 1999, and $112.0 million in 1998 due to increased corporate borrowings. The amortization of goodwill was $22.3 million in 2000, $82.6 million in 1999, and $28.0 million in 1998. The Company recorded write-downs of goodwill of $57.7 million during 1999 related to its reinsurance operations. See previous discussion under "Other Segment Operating Results" and Note 13 of the "Notes to Consolidated Financial Statements." Results for 2000 were positively impacted by the gain of $116.1 million on the pension plan transaction, partially offset by consolidation and benefit accruals of $9.4 million. See previous discussion contained herein in "Results of Operations" and Note 10 of the "Notes to Consolidated Financial Statements." As previously discussed, during 1999 the Company recognized $310.6 million of before-tax expenses related to the merger and the early retirement offer to employees. These expenses are as follows (in millions): Employee related expense $ 77.7 Exit activities related to duplicate facilities/asset abandonments 67.4 Investment banking, legal, and accounting fees 39.6 ------ Subtotal 184.7 Expense related to the early retirement offer to employees 125.9 ------ Subtotal 310.6 Income tax benefit 89.2 ------ Total $221.4 ======
Employee related expense consists of employee severance costs, change in control costs, restricted stock costs which fully vested upon stockholder adoption of the merger agreement or upon completion of the merger, and outplacement costs to assist employees who are involuntarily terminated. Severance benefits and change in control costs were $60.2 million, and costs associated with the vesting of restricted stock were $17.5 million. Exit activities related to duplicate facilities/asset abandonments consist of closing of duplicate offices and write-off of redundant computer hardware and software. The cost associated with these office closures was approximately $25.6 million, which represents the cost of future minimum lease payments less any estimated amounts recovered under subleases. Also, certain physical assets, primarily computer equipment, redundant systems, and systems incapable of supporting the combined entity, were abandoned as a result of the merger, resulting in a write-down of the assets' book values by approximately $41.8 million. The exit plan was complete as of June 30, 2000. In addition to the expenses described above, in 1999 the Company expensed $24.7 million of other incremental costs associated with the merger, $21.8 million of which are included in the Corporate segment. These expenses consist primarily of compensation, training, integration, and licensing costs. 32 Investments Investment activities are an integral part of the Company's business, and profitability is significantly affected by investment results. Invested assets are segmented into portfolios, which support the various product lines. Generally, the investment strategy for the portfolios is to match the effective asset durations with related expected liability durations and to maximize investment returns, subject to constraints of quality, liquidity, diversification, and regulatory considerations. See Note 4 of the "Notes to Consolidated Financial Statements" for further discussion of the Company's investments. Subsequent to the June 30, 1999 merger and continuing through the first half of 2000, the Company actively pursued its strategy of extending the duration of its investments and shifting the mix of assets for approximately $2.1 billion of its investments in order to reduce vulnerability to interest rate risk in the future and increase investment income. Excluding net investment income attributable to the individual life and corporate-owned life insurance blocks of business ceded effective as of July 1, 2000, net investment income for 2000 increased 8.6 percent over 1999 due to increased yields and growth in the asset base. During 2000, the Company reported net realized investment losses before tax of $14.6 million, including the realized investment loss of $25.9 million on the investment-grade fixed maturity securities transferred to the reinsurer in connection with the individual life and corporate-owned life reinsurance transactions. The loss on these transferred securities was driven by a change in market interest rates and was not attributable to any credit deterioration. Excluding the reinsurance transaction related loss, the Company reported 2000 net gains of $51.0 million from the sale of fixed maturity and equity securities. Offsetting these gains was a $94.0 million realized investment loss recognized as a result of management's determination that the value of certain fixed maturity investments had other than temporarily declined. The following table provides the distribution of invested assets for the years indicated. Policy loans are reported on a gross basis in the consolidated statements of financial condition and in the table below. As of December 31, 2000, $2.2 billion of policy loans were ceded, and the investment income thereon is no longer included in income. December 31 ------------------- 2000 1999 ---- ---- Investment-Grade Fixed Maturity Securities 78.3% 76.1% Below-Investment-Grade Fixed Maturity Securities 6.6 8.1 Equity Securities 0.1 0.2 Mortgage Loans 4.3 4.8 Real Estate 0.4 0.8 Policy Loans 9.1 8.7 Other Invested Assets 1.2 1.3 ----- ----- Total 100.0% 100.0% ===== ===== Fixed Maturity Securities The Company's investment in mortgage-backed securities was approximately $3.5 billion and $3.1 billion on an amortized cost basis at December 31, 2000 and 1999, respectively. At December 31, 2000, the mortgage-backed securities had an average life of 12.6 years and effective duration of 11.2 years. The mortgage-backed securities are valued on a monthly basis using valuations supplied by the brokerage firms that are dealers in these securities. The primary risk involved in investing in mortgage-backed securities is the uncertainty of the timing of cash flows from the underlying loans due to prepayment of principal. The Company uses models which incorporate economic variables and possible future interest rate scenarios to predict future prepayment rates. The Company has not invested in mortgage-backed derivatives, such as interest-only, principal-only or residuals, where market values can be highly volatile relative to changes in interest rates. The Company's exposure to below-investment-grade fixed maturity securities at December 31, 2000, was $1,760.8 million, representing 7.2 percent of invested assets excluding ceded policy loans, below the Company's internal limit of 10.0 percent of invested assets for this type of investment. The Company's exposure to below-investment-grade fixed maturities totaled $2,147.4 million at December 31, 1999, representing 8.1 percent of invested assets. 33 Below-investment-grade bonds are inherently more risky than investment-grade bonds since the risk of default by the issuer, by definition and as exhibited by bond rating, is higher. Also, the secondary market for certain below-investment- grade issues can be highly illiquid. Management does not anticipate any liquidity problem caused by the investments in below-investment-grade securities, nor does it expect these investments to adversely affect its ability to hold its other investments to maturity. Mortgage Loans and Real Estate The Company's mortgage loan portfolio was $1,135.6 million and $1,278.1 million at December 31, 2000 and 1999, respectively. The Company uses a comprehensive rating system to evaluate the investment and credit risk of each mortgage loan and to identify specific properties for inspection and reevaluation. The Company establishes an investment valuation allowance for mortgage loans based on a review of individual loans and the overall loan portfolio, considering the value of the underlying collateral. The mortgage loan portfolio is well diversified geographically and among property types. The incidence of new problem mortgage loans and foreclosure activity has remained low in 2000 and 1999, reflecting improvements in overall economic activity and improving real estate markets in the geographic areas where the Company has mortgage loans. Management expects the level of delinquencies and problem loans to remain low in the future. No new mortgage loans were added to the Company's investment portfolio during 2000 other than one purchase money mortgage for $14.8 million associated with the sale of real estate. At December 31, 2000 and 1999, impaired loans totaled $17.7 million and $18.1 million, respectively. Included in the impaired loans at December 31, 2000 were $6.5 million of loans which had a related, specific investment valuation allowance of $2.4 million and $11.2 million of loans which had no related, specific allowance. Impaired mortgage loans are not expected to have a material impact on the Company's liquidity, financial position, or results of operations. Restructured mortgage loans totaled $8.5 million and $8.7 million at December 31, 2000 and 1999, respectively, and represent loans that have been refinanced with terms more favorable to the borrower. Interest lost on restructured loans was immaterial for 2000 and 1999. Real estate was $116.7 million and $211.2 million at December 31, 2000 and 1999. Investment real estate is carried at cost less accumulated depreciation. Real estate acquired through foreclosure is valued at fair value at the date of foreclosure and may be classified as investment real estate if it meets the Company's investment criteria. If investment real estate is determined to be permanently impaired, the carrying amount of the asset is reduced to fair value. Occasionally, investment real estate is reclassified to real estate held for sale when it no longer meets the Company's investment criteria. Real estate held for sale, which is valued net of a valuation allowance that reduces the carrying value to the lower of cost or fair value less estimated cost to sell, amounted to $18.3 million at December 31, 2000, and $79.4 million at December 31, 1999. Investment valuation allowances for mortgage loans and real estate held for sale are established based on a review of specific assets as well as on an overall portfolio basis, considering the value of the underlying assets and collateral. If a decline in value is considered to be other than temporary or if the asset is deemed permanently impaired, the investment is reduced to estimated net realizable value, and the reduction is recorded as a realized investment loss. Management monitors the risk associated with the invested asset portfolio and regularly reviews and adjusts the investment valuation allowance. As a result of management's most recent review of the overall mortgage loan portfolio and based on management's expectation that delinquencies and problem loans will remain low, the valuation allowance on mortgage loans was reduced $20.0 million during 2000. At December 31, 2000, the balance in the valuation allowance for mortgage loans and real estate was $12.9 million and $25.6 million, respectively. Other The Company's exposure to non-current investments totaled $45.0 million at December 31, 2000, or 0.2 percent of invested assets. These non-current investments are foreclosed real estate held for sale and fixed income securities and mortgage loans that became more than thirty days past due in principal and interest payments. 34 The Company utilizes interest rate futures contracts, current and forward interest rate swaps, interest rate forward contracts, and options on forward interest rate swaps, forward treasuries, or specific fixed income securities to manage duration and increase yield on cash flows expected from current holdings and products. All transactions are hedging in nature and not speculative. Almost all transactions are associated with the individual and group disability product portfolios. All other product portfolios are periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes. See Note 5 of the "Notes to Consolidated Financial Statements" for further discussion of the Company's derivative financial instruments. Liquidity and Capital Resources The Company's liquidity requirements are met primarily by cash flows provided from operations, principally in its insurance subsidiaries. Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Cash is applied to the payment of policy benefits, costs of acquiring new business (principally commissions), and operating expenses as well as purchases of new investments. The Company has established an investment strategy that management believes will provide for adequate cash flows from operations. Cash flows from operations were $1,211.5 million for the year ended December 31, 2000, as compared to $1,566.7 million and $1,719.3 million for the comparable periods of 1999 and 1998, respectively. The Company believes the cash flows from its operations will be sufficient to meet its operating and financial cash flow requirements, excluding the strain placed on capital as a result of the charges recorded in connection with the merger. As a result of the effect on capital during 1999 of the merger related charges, the Company raised approximately $500 million through the debt markets during the fourth quarter of 1999 by securing $200 million of one-year bank debt and by issuing commercial paper. The Company is dependent upon payments from its subsidiaries to pay dividends to its stockholders and to pay its expenses. These payments by the Company's insurance and non-insurance subsidiaries may take the form of interest payments on amounts loaned to such subsidiaries by the Company, operating and investment management fees, and/or dividends. At December 31, 2000, the Company had outstanding from its insurance subsidiaries a $150.0 million surplus debenture due in 2006 with a weighted average interest rate during 2000 of 8.20 percent and a $100.0 million surplus debenture due in 2027 with a weighted average interest rate during 2000 of 8.25 percent. Semi-annual interest payments are conditional upon the approval by the insurance department of the state of domicile. Restrictions under applicable insurance laws limit the amount of dividends that can be paid to the Company from its insurance subsidiaries without prior approval by regulatory authorities. Generally, for life insurance subsidiaries domiciled or commercially domiciled in the United States, that limitation equals the greater of: (i) ten percent of an insurer's statutory surplus with respect to policyholders as of the preceding year end; or (ii) the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year. The payment of dividends to the Company from its insurance subsidiaries is further limited to the amount of statutory unassigned surplus. The Company also has the ability to draw a dividend from its United Kingdom-based affiliate, Unum Limited. Such dividends are limited in amount, based on insurance company law in the United Kingdom, which requires a minimum solvency margin. Based on these restrictions under current law: . in 2000, $267.6 million was available for the payment of dividends to the Company from its domestic insurance subsidiaries, and approximately $24.9 million was available for the payment of dividends from Unum Limited, and . in 2001, $359.9 million will be available for the payment of dividends to the Company from its domestic insurance subsidiaries, and approximately $20.9 million will be available for the payment of dividends from Unum Limited. 35 The ability of the Company to continue to receive dividends from its insurance subsidiaries without regulatory approval will be dependent upon the level of earnings of its insurance subsidiaries as calculated under law. In addition to regulatory restrictions, the amount of dividends that will be paid by insurance subsidiaries will depend on additional factors, such as risk-based capital ratios, funding growth objectives at an affiliate level, and maintaining appropriate capital adequacy ratios to support the ratings desired by the Company. Regulatory restrictions do not limit the amount of dividends available for distribution to the Company from its non-insurance subsidiaries. At December 31, 2000, the Company had short-term and long-term debt totaling $402.2 million and $1,615.5 million, respectively. At December 31, 2000, approximately $551.0 million was available for additional financing under the Company's revolving credit facilities. Contingent upon market conditions and corporate needs, management may refinance short-term notes payable for longer-term securities. In October 2000, the Company entered into $1.0 billion senior revolving credit facilities with a group of banks. The facilities, which are split into five-year revolver and 364-day portions, replaced a 364-day revolver which expired in October 2000 and a five-year revolver which has been canceled. The new facilities are available for general corporate purposes, including support of the Company's $1.0 billion commercial paper program, and contain certain covenants that, among other provisions, include a minimum tangible net worth requirement, a maximum leverage ratio restriction, and a limitation on debt relative to the consolidated statutory earnings of the Company's insurance subsidiaries. During the third quarter of 2000, the Company filed with the Securities and Exchange Commission a shelf registration on Form S-3 covering the issuance of up to $1.0 billion of securities in order to provide funding alternatives for its maturing debt. The shelf registration became effective in September 2000. In March 2001, the Company completed a long-term debt offering, issuing $575.0 million of 7.625% senior notes due March 1, 2011. Contingent upon market conditions and corporate needs, funding will be used to refinance short-term debt on a long-term basis and to fund other corporate needs. In April 2000, the Company issued $200.0 million of variable rate notes, due in April 2001, in a privately negotiated transaction. The notes were used to refinance other short-term debt and had a weighted average interest rate of 7.33 percent during 2000. The current interest rate on these notes is 6.49 percent. In March 1998, the Company completed a public offering of $200.0 million of 7.25% senior notes due March 15, 2028. In March 1998, Provident Financing Trust I, a wholly-owned subsidiary trust of the Company, issued $300.0 million of 7.405% capital securities in a public offering. These capital securities, which mature on March 15, 2038, are fully and unconditionally guaranteed by the Company, have a liquidation value of $1,000 per capital security, and have a mandatory redemption feature under certain circumstances. The Company issued $300.0 million of 7.405% junior subordinated deferrable interest debentures, which mature on March 15, 2038, to the subsidiary trust in connection with the capital securities offering. The sole assets of the subsidiary trust are the junior subordinated debt securities. In July 1998, the Company completed a public offering of $200.0 million of 6.375% senior notes due July 15, 2005, and $200.0 million of 7.0% senior notes due July 15, 2018. In December 1998, the Company issued $250.0 million of 6.75 % senior notes, which mature in 2028. In the fourth quarter of 1998, the Company rescinded its stock repurchase program as a result of the pending merger. During 1998, the Company acquired approximately 1.4 million shares of its common stock in the open market at an aggregate cost of $72.7 million. 36 Ratings Standard & Poor's Corporation (S&P), Moody's Investors Service (Moody's), Fitch, Inc. (Fitch), formerly Fitch/Duff & Phelps, and A.M. Best Company (AM Best) are among the third parties that provide the Company assessments of its overall financial position. Ratings from these agencies for financial strength are available for the individual U.S. domiciled insurance company subsidiaries. Financial strength ratings are based primarily on U.S. statutory financial information for the individual U.S. domiciled insurance companies. Debt ratings for the Company are based primarily on consolidated financial information prepared using generally accepted accounting principles. Both financial strength ratings and debt ratings incorporate qualitative analyses by rating agencies on an ongoing basis. On August 23, 2000, Moody's lowered the senior debt rating of the Company to Baa1 from A3, lowered the financial strength ratings of the Company's insurance subsidiaries to A2 from A1, and confirmed the short-term rating at Prime-2. The Company has not experienced a material impact on its new sales or persistency of existing business as a result of these ratings changes. In March 2001, in connection with the Company's issuance of $575.0 million of 7.625% senior notes due March 1, 2011, S&P, Moody's, and Fitch affirmed the senior debt and financial strength ratings at the existing levels. The table below reflects the most recent debt ratings for the Company and the financial strength ratings for the U.S. domiciled insurance company subsidiaries.
- ---------------------------------------------------------------------------------------------------------------------- S&P Moody's Fitch AM Best - ---------------------------------------------------------------------------------------------------------------------- UnumProvident Corporation - ---------------------------------------------------------------------------------------------------------------------- Senior Debt A (Strong) Baa1 (Medium Grade) A- (High Not Rated Credit Quality) - ---------------------------------------------------------------------------------------------------------------------- Junior Subordinated Debt BBB (Good) Baa2 (Medium Grade) BBB+ (Good Not Rated Credit Quality) - ---------------------------------------------------------------------------------------------------------------------- Commercial Paper A-2 (Good) Prime-2 (Strong F2 (Good Not Rated Ability) Credit Quality) - ---------------------------------------------------------------------------------------------------------------------- U.S. Insurance Subsidiaries - ---------------------------------------------------------------------------------------------------------------------- Provident Life & Accident AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior) Security) - ---------------------------------------------------------------------------------------------------------------------- Provident Life & Casualty Not Rated Not Rated Not Rated A+ (Superior) - ---------------------------------------------------------------------------------------------------------------------- Unum Life of America AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior) Security) - ---------------------------------------------------------------------------------------------------------------------- First Unum Life AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior) Security) - ---------------------------------------------------------------------------------------------------------------------- Colonial Life & Accident AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior) Security) - ---------------------------------------------------------------------------------------------------------------------- Paul Revere Life AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior) Security) - ---------------------------------------------------------------------------------------------------------------------- Paul Revere Variable AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior) Security) - ---------------------------------------------------------------------------------------------------------------------- Paul Revere Protective AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior) Security) - ----------------------------------------------------------------------------------------------------------------------
37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is subject to various market risk exposures including interest rate risk and foreign exchange rate risk. The following discussion regarding the Company's risk management activities includes forward-looking statements that involve risk and uncertainties. Estimates of future performance and economic conditions are reflected assuming certain changes in market rates and prices were to occur (sensitivity analysis). Caution should be used in evaluating the Company's overall market risk from the information presented below, as actual results may differ. The Company employs various derivative programs to manage these material market risks. See Notes 4 and 5 of the "Notes to Consolidated Financial Statements" for further discussions of the qualitative aspects of market risk, including derivative financial instrument activity. Interest Rate Risk The operations of the Company are subject to risk resulting from interest rate fluctuations, primarily long-term U.S. interest rates. Changes in interest rates and individuals' behavior affect the amount and timing of asset and liability cash flows. Management continually models and tests asset and liability portfolios to improve interest rate risk management and net yields. Testing the asset and liability portfolios under various interest rate and economic scenarios allows management to choose the most appropriate investment strategy, as well as to prepare for disadvantageous outcomes. This analysis is the precursor to the Company's activities in derivative financial instruments. The Company uses interest rate swaps, interest rate forward contracts, exchange-traded interest rate futures contracts, and options to hedge interest rate risks and to match asset durations and cash flows with corresponding liabilities. Assuming an immediate increase of 100 basis points in interest rates from year end levels, the net hypothetical decrease in stockholders' equity related to financial and derivative instruments was estimated to be $0.8 billion and $0.7 billion at December 31, 2000 and 1999, respectively. The fair values of mortgage loans and held-to-maturity securities, which are reported in the consolidated statements of financial condition at amortized cost, would decrease by approximately $70 million and $40 million, respectively, at December 31, 2000 and by approximately $80 million and $40 million, respectively, at December 31, 1999. The fair values of policy loans, which are also reported at amortized cost, would decrease approximately $200 million at December 31, 1999, assuming an immediate increase of 100 basis points in interest rates. During 2000, over 90 percent of the policy loan portfolio was ceded to a reinsurer on a 100 percent indemnity coinsurance basis (see Notes 1 and 13 of the "Notes to Consolidated Financial Statements"). The impact from interest rate risk on the fair values of policy loans net of ceding was immaterial at December 31, 2000. At December 31, 2000 and 1999, assuming a 100 basis point decrease in long-term interest rates from year end levels, the fair values of the Company's long-term debt and company-obligated mandatorily redeemable preferred securities would increase approximately $100 million and $30 million, respectively. The effect of a change in interest rates on asset prices was determined using a matrix pricing system whereby all securities are priced with the resulting market rates and spreads assuming a change of 100 basis points. These hypothetical prices were compared to the actual prices for the period to compute the overall change in market value. The changes in the fair values of long-term debt and company-obligated mandatorily redeemable preferred securities were determined using discounted cash flows analyses. Because the Company actively manages its investments and liabilities, actual changes could be less than those estimated above. Foreign Currency Risk The Company is also subject to foreign exchange risk arising from its foreign operations and certain investment securities dominated in those local currencies. Foreign operations represented 7.7 percent and 8.9 percent of total assets at December 31, 2000 and 1999, respectively, and 9.7 percent and 9.4 percent of total revenue for 2000 and 1999, respectively. Assuming foreign exchange rates decreased 10 percent from the December 31, 2000 and 1999 levels, year end 2000 and 1999 stockholders' equity would not be materially affected. 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders UnumProvident Corporation and Subsidiaries We have audited the accompanying consolidated statements of financial condition of UnumProvident Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. The consolidated financial statements give retroactive effect to the merger of Unum Corporation and Provident Companies, Inc. on June 30, 1999, which has been accounted for using the pooling of interests method as described in the notes to the consolidated financial statements. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements and schedules of the former Unum Corporation which statements reflect total revenues constituting 54% of the related consolidated totals for the year ended December 31, 1998. Those statements and schedules were audited by other auditors whose report has been furnished to us, and our opinion, in so far as it relates to data included for the former Unum Corporation, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UnumProvident Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 after giving retroactive effect to the merger of Unum Corporation, as described in the notes to the consolidated financial statements, in conformity with accounting principles generally accepted in the United States. Also in our opinion, based on our audits and the report of other auditors, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Chattanooga, Tennessee February 12, 2001, except for Notes 13 and 15, for which the date is February 27, 2001 39 REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders UnumProvident Corporation and Subsidiaries In our opinion, the consolidated statements of income, comprehensive income, stockholders' equity and cash flows of Unum Corporation and its subsidiaries (not presented separately herein) present fairly, in all material respects, the results of their operations and their cash flows for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited any financial statements of the Unum Corporation subsequent to December 31, 1998. /s/ PRICEWATERHOUSECOOPERS LLP Portland, Maine February 2, 1999 40 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION UnumProvident Corporation and Subsidiaries
December 31 2000 1999 (in millions of dollars) -------------------------------------- Assets Investments Fixed Maturity Securities Available-for-Sale - at fair value (amortized cost: $21,931.2; $22,142.4) $22,242.3 $22,033.2 Held-to-Maturity - at amortized cost (fair value: $369.8; $318.8) 346.6 323.5 Equity Securities - at fair value (cost: $23.2; $15.9) 24.5 38.4 Mortgage Loans 1,135.6 1,278.1 Real Estate 116.7 211.2 Policy Loans 2,426.7 2,316.9 Other Long-term Investments 32.3 26.5 Short-term Investments 279.4 321.5 --------- --------- Total Investments 26,604.1 26,549.3 Other Assets Cash and Bank Deposits 107.1 292.4 Accounts and Premiums Receivable 1,851.3 1,144.3 Reinsurance Receivable 6,046.5 4,741.2 Accrued Investment Income 532.2 543.6 Deferred Policy Acquisition Costs 2,424.0 2,391.2 Value of Business Acquired 591.6 534.1 Goodwill 683.3 706.4 Property and Equipment - at cost less accumulated depreciation 387.5 399.7 Miscellaneous 1,068.7 686.2 Separate Account Assets 67.6 459.1 --------- --------- Total Assets $40,363.9 $38,447.5 ========= =========
See notes to consolidated financial statements. 41 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - Continued UnumProvident Corporation and Subsidiaries
December 31 2000 1999 (in millions of dollars) ----------------------------------- Liabilities and Stockholders' Equity Liabilities Policy and Contract Benefits $ 1,796.8 $ 1,722.1 Reserves for Future Policy and Contract Benefits 25,633.9 23,339.1 Unearned Premiums 332.8 380.6 Other Policyholders' Funds 2,645.1 3,521.8 Federal Income Tax Current 68.4 33.3 Deferred 430.8 238.3 Short-term Debt 402.2 1,075.0 Long-term Debt 1,615.5 1,166.5 Other Liabilities 1,495.3 1,229.5 Separate Account Liabilities 67.6 459.1 --------- --------- Total Liabilities 34,488.4 33,165.3 --------- --------- Commitments and Contingent Liabilities--Note 15 Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debt Securities of the Company 300.0 300.0 --------- --------- Stockholders' Equity--Note 11 Common Stock, $0.10 par Authorized: 725,000,000 shares Issued: 241,310,917 and 240,515,180 shares 24.1 24.1 Additional Paid-in Capital 1,040.2 1,028.6 Accumulated Other Comprehensive Income (Loss) Net Unrealized Gains on Securities 212.8 19.8 Foreign Currency Translation Adjustment (72.1) (38.7) Retained Earnings 4,379.7 3,957.6 Treasury Stock - at cost: 176,295 shares (9.2) (9.2) --------- ---------- Total Stockholders' Equity 5,575.5 4,982.2 --------- --------- Total Liabilities and Stockholders' Equity $40,363.9 $38,447.5 ========= =========
See notes to consolidated financial statements. 42 CONSOLIDATED STATEMENTS OF OPERATIONS UnumProvident Corporation and Subsidiaries
Year Ended December 31 2000 1999 1998 (in millions of dollars, except share data) --------------------------------------------- Revenue Premium Income $ 7,057.0 $6,843.2 $ 6,129.0 Net Investment Income 2,060.4 2,059.7 2,035.4 Net Realized Investment Gains (Losses) (14.6) 87.1 55.0 Other Income 329.5 339.6 299.9 --------- -------- --------- Total Revenue 9,432.3 9,329.6 8,519.3 --------- -------- --------- Benefits and Expenses Policyholder Benefits 6,407.5 6,787.6 5,449.7 Commissions 754.1 913.6 826.5 Interest and Debt Expense 181.8 137.8 119.9 Deferral of Policy Acquisition Costs (595.7) (809.3) (703.3) Amortization of Deferred Policy Acquisition Costs 456.5 474.8 377.5 Amortization of Value of Business Acquired and Goodwill 67.3 120.9 66.6 Other Operating Expenses 1,295.2 1,869.7 1,462.2 --------- -------- --------- Total Benefits and Expenses 8,566.7 9,495.1 7,599.1 --------- -------- --------- Income (Loss) Before Federal Income Taxes 865.6 (165.5) 920.2 Federal Income Taxes (Credit) Current 195.7 141.2 128.3 Deferred 105.7 (123.8) 174.5 --------- -------- --------- Total Federal Income Taxes 301.4 17.4 302.8 --------- -------- --------- Net Income (Loss) $ 564.2 $ (182.9) $ 617.4 ========= ======== ========= Net Income (Loss) Per Common Share Basic $ 2.34 $ (0.77) $ 2.60 Assuming Dilution $ 2.33 $ (0.77) $ 2.54
See notes to consolidated financial statements. 43 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY UnumProvident Corporation and Subsidiaries
Accumulated Additional Other Preferred Common Paid-in Comprehensive Retained Treasury Deferred Stock Stock Capital Income (Loss) Earnings Stock Compensation Total (in millions of dollars) ---------------------------------------------------------------------------------------------- Balance at December 31, 1997 $ 156.2 $23.7 $ 954.8 $ 799.0 $3,797.7 $ (1.5) $ (15.8) $ 5,714.1 Comprehensive Income Net Income 617.4 617.4 Change in Net Unrealized Gains on Securities (net of tax expense of $67.2) 133.7 133.7 Change in Foreign Currency Translation Adjustment (net of tax credit of $7.8) (18.0) (18.0) --------- Total Comprehensive Income 733.1 --------- Preferred Stock Redeemed (156.2) (156.2) Common Stock Activity 0.1 4.4 (5.7) (1.2) Treasury Stock Acquired (7.7) (7.7) Dividends to Stockholders (135.9) (135.9) ------- ----- -------- -------- -------- -------- -------- --------- Balance at December 31, 1998 - 23.8 959.2 914.7 4,279.2 (9.2) (21.5) 6,146.2 Comprehensive Loss Net Loss (182.9) (182.9) Change in Net Unrealized Gains on Securities (net of tax credit of $519.5) (949.6) (949.6) Change in Foreign Currency Translation Adjustment (net of tax expense of $11.6) 16.0 16.0 --------- Total Comprehensive Loss (1,116.5) --------- Common Stock Activity 0.3 69.4 21.5 91.2 Dividends to Stockholders (138.7) (138.7) ------- ----- -------- -------- -------- -------- -------- --------- Balance at December 31, 1999 - 24.1 1,028.6 (18.9) 3,957.6 (9.2) - 4,982.2 Comprehensive Income Net Income 564.2 564.2 Change in Net Unrealized Gains on Securities (net of tax expense of $96.5) 193.0 193.0 Change in Foreign Currency Translation Adjustment (net of tax credit of $7.5) (33.4) (33.4) --------- Total Comprehensive Income 723.8 --------- Common Stock Activity 11.6 11.6 Dividends to Stockholders (142.1) (142.1) ------- ----- -------- -------- -------- -------- -------- --------- Balance at December 31, 2000 $ - $24.1 $1,040.2 $ 140.7 $4,379.7 $ (9.2) $ - $ 5,575.5 ======= ===== ======== ======== ======== ======== ======== =========
See notes to consolidated financial statements. 44 CONSOLIDATED STATEMENTS OF CASH FLOWS UnumProvident Corporation and Subsidiaries
Year Ended December 31 2000 1999 1998 (in millions of dollars) --------------------------------------- Cash Flows from Operating Activities Net Income (Loss) $ 564.2 $ (182.9) $ 617.4 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities Policy Acquisition Costs Capitalized (595.7) (809.3) (703.3) Amortization of Policy Acquisition Costs 456.5 474.8 377.5 Amortization of Value of Business Acquired and Goodwill 67.3 120.9 66.6 Depreciation 71.1 58.0 47.9 Net Realized Investment (Gains) Losses 14.6 (87.1) (55.0) Reinsurance Receivable 386.7 130.1 (48.9) Insurance Reserves and Liabilities 781.0 2,391.1 1,475.4 Federal Income Taxes 127.6 (189.9) 211.5 Other (661.8) (339.0) (269.8) --------- --------- --------- Net Cash Provided by Operating Activities 1,211.5 1,566.7 1,719.3 --------- --------- --------- Cash Flows from Investing Activities Proceeds from Sales of Investments Available-for-Sale Securities 1,711.3 3,773.9 2,117.3 Proceeds from Maturities of Investments Available-for-Sale Securities 805.0 1,023.8 1,513.1 Held-to-Maturity Securities 1.3 0.3 0.5 Proceeds from Sales and Maturities of Other Investments 362.8 268.3 217.7 Purchase of Investments Available-for-Sale Securities (3,149.3) (6,237.5) (3,849.2) Held-to-Maturity Securities (23.0) (22.2) (1.9) Other Investments (385.2) (209.1) (532.7) Net Sales (Purchases) of Short-term Investments 41.4 (76.8) (67.9) Acquisition of Business (94.2) -- -- Disposition of Business (78.2) -- 58.0 Other (57.6) (75.3) (73.3) --------- --------- --------- Net Cash Used by Investing Activities $ (865.7) $(1,554.6) $ (618.4) --------- --------- ---------
See notes to consolidated financial statements. 45 CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued UnumProvident Corporation and Subsidiaries
Year Ended December 31 2000 1999 1998 (in millions of dollars) ---------------------------------------- Cash Flows from Financing Activities Deposits to Policyholder Accounts $ 33.8 $ 175.1 $ 184.3 Maturities and Benefit Payments from Policyholder Accounts (209.5) (613.0) (1,250.7) Net Short-term Debt and Commercial Paper (Repayments) Borrowings (223.8) 692.6 (74.5) Issuance of Long-term Debt - - 900.0 Long-term Debt Repayments - - (793.1) Issuance of Company-Obligated Mandatorily Redeemable Preferred Securities - - 300.0 Redemption of Preferred Stock - - (156.2) Issuance of Common Stock 11.6 69.7 11.9 Dividends Paid to Stockholders (142.1) (138.9) (139.1) Repurchase of Common Stock - - (72.7) Other - (18.6) 4.6 --------- -------- ---------- Net Cash (Used) Provided by Financing Activities (530.0) 166.9 (1,085.5) --------- -------- ---------- Effect of Foreign Exchange Rate Changes on Cash (1.1) 2.2 1.3 --------- -------- ---------- Net (Decrease) Increase in Cash and Bank Deposits (185.3) 181.2 16.7 Cash and Bank Deposits at Beginning of Year 292.4 111.2 94.5 --------- -------- ---------- Cash and Bank Deposits at End of Year $ 107.1 $ 292.4 $ 111.2 ========= ======== ==========
See notes to consolidated financial statements. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UnumProvident Corporation and Subsidiaries Note 1--Significant Accounting Policies Basis of Presentation: The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). Such accounting principles differ from statutory accounting practices prescribed or permitted by state regulatory authorities (see Note 16). The consolidated financial statements include the accounts of UnumProvident Corporation and its subsidiaries (the Company). Material intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation. On June 30, 1999, Unum Corporation (Unum) merged with and into Provident Companies, Inc. (Provident) under the name UnumProvident Corporation. The merger was accounted for as a pooling of interests. The historical financial results presented herein give effect to the merger as if it had been completed at the beginning of the earliest period presented. Operations: The Company does business primarily in North America and operates principally in the life and health insurance business. The Employee Benefits segment includes group long-term and short-term disability insurance, group life insurance, accidental death and dismemberment coverages, group long-term care, and the results of managed disability. The Individual segment includes results from the individual disability and individual long-term care lines of business. The Voluntary Benefits segment includes the results of products sold to employees through payroll deduction at the work site. These products include life insurance and health products, primarily disability, accident and sickness, and cancer. The Other operating segment includes results from products no longer actively marketed, including individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and individual annuities. The Corporate segment includes investment earnings on corporate assets not specifically allocated to a line of business, corporate interest expense, amortization of goodwill, and certain corporate expenses not allocated to a line of business. See Note 14 for further information on the operating segments. Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. Investments: Investments are reported in the consolidated statements of financial condition as follows: Available-for-Sale Fixed Maturity Securities are reported at fair value. Held-to-Maturity Fixed Maturity Securities are generally reported at amortized cost. Equity Securities are reported at fair value. Mortgage Loans are generally carried at amortized cost less an allowance for probable losses. Real Estate classified as investment real estate is carried at cost less accumulated depreciation. Real estate acquired through foreclosure is valued at fair value at the date of foreclosure. If investment real estate is determined to be permanently impaired, the carrying amount of the asset is reduced to fair value. Occasionally, investment real estate is reclassified to real estate held for sale when it no longer meets the Company's investment criteria. Real estate held for sale is valued net of a valuation allowance that reduces the carrying value to the lower of cost less accumulated depreciation or fair value less estimated cost to sell. Accumulated depreciation on real estate was $31.0 million and $42.8 million as of December 31, 2000 and 1999, respectively. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 1--Significant Accounting Policies - Continued Policy Loans are presented at unpaid balances directly related to policyholders. Included in policy loans are $2,237.6 million and $35.6 million of policy loans ceded to reinsurers at December 31, 2000 and 1999, respectively. See Note 13. Other Long-term Investments are carried at cost plus the Company's equity in undistributed net earnings since acquisition. Short-term Investments are carried at cost. Fixed maturity securities include bonds and redeemable preferred stocks. Equity securities include common stocks and nonredeemable preferred stocks. Fixed maturity and equity securities not bought and held for the purpose of selling in the near term but for which the Company does not have the positive intent and ability to hold to maturity are classified as available-for-sale. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity. The Company determines the appropriate classification of fixed maturity securities at the time of purchase. Changes in the fair value of available-for-sale fixed maturity securities and equity securities are reported as other comprehensive income (loss). These amounts are net of federal income taxes and valuation adjustments to reserves for future policy and contract benefits which would have been recorded had the related unrealized gains or losses on these securities been realized. Realized investment gains and losses, which are reported as a component of revenue in the consolidated statements of operations, are based upon specific identification of the investments sold and do not include amounts allocable to separate accounts. At the time a decline in the value of an investment is determined to be other than temporary, a loss is recorded which is included in realized investment gains and losses. The Company discontinues the accrual of investment income on invested assets when it is determined that collectability is doubtful. The Company recognizes investment income on impaired loans when the income is received. Derivative Financial Instruments: Interest Rate Swap Agreements are agreements in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon notional principal amount. The underlying notional principal is not exchanged between the parties for agreements other than foreign currency swaps. The Company has certain forward interest rate swap agreements where the exchange of interest payments does not begin until a specified future date. The Company intends to settle the forward interest rate swap agreements prior to the commencement of the exchange of interest payment streams. The fair values of interest rate swap agreements which hedge available-for-sale securities are reported in the consolidated statements of financial condition as a component of fixed maturity securities. The fair values of interest rate swap agreements which hedge liabilities are not reported in the consolidated statements of financial condition. Amounts to be paid or received pursuant to interest rate swap agreements are accrued and recognized in the consolidated statements of operations as an adjustment to net investment income for asset hedges or as an adjustment to policyholder benefits for liability hedges. The Company accounts for all of its interest rate swap agreements as hedges. Accordingly, for anticipated transaction hedges, any gains or losses realized on closed or terminated interest rate swap agreements are deferred and amortized to net investment income for asset hedges or policyholder benefits for liability hedges over the expected remaining life of the hedged item. The Company also uses interest rate swap agreements to hedge existing assets. The income payment streams generated by these swaps are recorded in the same manner as the hedged asset income payment streams. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 1--Significant Accounting Policies - Continued If the hedged item matures or terminates earlier than anticipated, the remaining unamortized gain or loss is amortized to net investment income or policyholder benefits in the current period. If the hedged asset is disposed, the remaining unamortized gain or loss is recognized as an adjustment to net realized investment gains and losses. Gains or losses realized on interest rate swap agreements which are terminated when the hedged assets are sold or which are terminated because the hedged anticipated transaction is no longer likely to occur are reported in the consolidated statements of operations as a component of net realized investment gains and losses. The Company regularly monitors the effectiveness of its hedging programs. In the event a hedge becomes ineffective, it is marked-to-market, resulting in a charge or credit to net investment income or policyholder benefits. Futures and Forwards Contracts are commitments to either purchase or sell a financial instrument at a specific future date for a specified price. Changes in the market value of contracts are generally settled on a daily basis. The notional amounts of futures and forwards contracts represent the extent of the Company's involvement but not the future cash requirements, as the Company intends to close out open positions prior to settlement. All of the Company's futures and forwards contracts are accounted for as hedges. The fair values of futures and forwards which hedge available-for-sale securities are reported in the consolidated statements of financial condition as a component of fixed maturity securities. The fair values of open futures and forwards which hedge liabilities are reported in the consolidated statements of financial condition as a component of other liabilities. Gains or losses realized on the termination of futures and forwards contracts are accounted for in the same manner as interest rate swap agreements. Option Contracts give the owner the right, but not the obligation, to buy or sell a financial instrument at an agreed-upon price on or before a specific date. The purchasing counterparty pays a premium to the selling counterparty for this right. The notional amounts of contracts represent the Company's involvement but not the future cash requirements, as the Company intends to close out contracts prior to the expiration date when the market price of the underlying financial instrument exceeds the option price or allow contracts to expire if the option price exceeds the market price. All of the Company's options contracts are accounted for as hedges. The book and fair values of options contracts are reported in the consolidated statements of financial condition in a manner similar to the underlying hedged item. Gains or losses on the termination of options contracts are accounted for in the same manner as interest rate swap agreements. Reinsurance Receivable: The Company routinely cedes reinsurance to other insurance companies. For ceded reinsurance agreements wherein the Company is not relieved of its legal liability to its policyholders, the Company reports assets and liabilities on a gross basis. Reinsurance receivables include the balances due from reinsurers under the terms of these reinsurance agreements for ceded policy and contract benefits, ceded future policy and contract benefits, and ceded unearned premiums, less ceded policy loans. Deferred Policy Acquisition Costs: Certain costs of acquiring new business which vary with and are primarily related to the production of new business have been deferred. Such costs include commissions, other agency compensation, certain selection and policy issue expenses, and certain field expenses. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and loss recognition testing subsequent to the year of issue. Deferred policy acquisition costs related to traditional policies are amortized over the premium paying period of the related policies in proportion to the ratio of the present value of annual expected premium income to the present value of total expected premium income. Adjustments are made each year to recognize actual persistency experience as compared to assumed experience. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 1--Significant Accounting Policies - Continued Deferred policy acquisition costs related to interest-sensitive policies are amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and mortality, investment, and expense margins. Adjustments are made each year to reflect actual experience for assumptions which deviate significantly compared to assumed experience. Loss recognition is performed when, in the judgment of management, adverse deviations from original assumptions have occurred and may be likely to continue such that recoverability of deferred policy acquisition costs on a line of business is questionable. Insurance contracts are grouped on a basis consistent with the Company's manner of acquiring, servicing, and measuring profitability of the contracts. If loss recognition testing indicates that deferred policy acquisition costs are not recoverable, the deficiency is charged to expense. Once a loss recognition adjustment is required, loss recognition testing is generally performed on an annual basis using then current assumptions until the line of business becomes immaterial or results improve significantly. The assumptions used in loss recognition testing represent management's best estimates of future experience. Value of Business Acquired: Value of business acquired represents the present value of future profits recorded in connection with the acquisition of a block of insurance policies. The asset is amortized based upon expected future premium income for traditional insurance policies and estimated future gross profits for interest-sensitive insurance policies, with the accrual of interest added to the unamortized balance at interest rates principally ranging from 5.55 percent to 8.13 percent. The accumulated amortization for value of business acquired was $168.7 million and $133.2 million as of December 31, 2000 and 1999, respectively. The Company periodically reviews the carrying amount of value of business acquired using the same methods used to evaluate deferred policy acquisition costs. Goodwill: Goodwill is the excess of the amount paid to acquire a business over the fair value of the net assets acquired. Goodwill is amortized on a straight- line basis over a period not to exceed 40 years. The accumulated amortization for goodwill was $85.9 million and $64.1 million as of December 31, 2000 and 1999, respectively. The carrying amount of goodwill is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. If estimated future undiscounted net cash flows expected to be generated from the operations to which the goodwill relates are less than the carrying amount of the unamortized goodwill, the carrying amount is reduced with a corresponding charge to expense. Property and Equipment: Property and equipment is depreciated on the straight- line method over its estimated useful life. The accumulated depreciation for property and equipment was $350.1 million and $376.1 million as of December 31, 2000 and 1999, respectively. Revenue Recognition: Traditional life and accident and health products are long duration contracts, and premium income is recognized as revenue when due from policyholders. If the contracts are experience rated, the estimated ultimate premium is recognized as revenue over the period of the contract. The estimated ultimate premium, which is revised to reflect current experience, is based on estimated claim costs, expenses, and profit margins. For interest-sensitive products, the amounts collected from policyholders are considered deposits, and only the deductions during the period for cost of insurance, policy administration, and surrenders are included in revenue. Policyholders' funds represent funds deposited by contract holders and are not included in revenue. The Company follows the periodic method of accounting for its Lloyd's of London (Lloyd's) business in which premiums are recognized as revenue over the policy term, and claims, including an estimate of claims incurred but not reported, are recognized as they occur. Premiums for the Lloyd's business are based on participation in the individual syndicate underwriting years that generate premiums over a three year period of time. The Company uses its historical experience and information obtained from its managing agents to estimate revenues, losses, expenses, and the related assets and liabilities. See Note 13. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 1--Significant Accounting Policies - Continued Policy and Contract Benefits: Policy and contract benefits, principally related to accident and health insurance policies, are based on reported losses and estimates of incurred but not reported losses for traditional life and accident and health products. For interest-sensitive products, benefits are the amounts paid and expected to be paid on insured claims in excess of the policyholders' policy fund balances. Policy and Contract Benefits Liabilities: Active life reserves for future policy and contract benefits on traditional life and accident and health products have been provided on the net level premium method. The reserves are calculated based upon assumptions as to interest, withdrawal, morbidity, and mortality that were appropriate at the date of issue. Withdrawal assumptions are based on actual Company experience. Morbidity and mortality assumptions are based upon industry standards adjusted as appropriate to reflect actual Company experience. The assumptions vary by plan, year of issue, and policy duration and include a provision for adverse deviation. Disabled lives reserves for future policy and contract benefits on disability policies are calculated based upon assumptions as to interest and claim termination rates that are currently appropriate. Claim termination rate assumptions are based upon industry standards adjusted as appropriate to reflect actual Company experience. The assumptions vary by year of claim incurral and may include a provision for adverse deviation. The interest rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults and investment expenses, for the assets supporting the liabilities for the various product lines. The assets for each product line are selected according to the specific investment strategy for that product line to produce asset cash flows that follow similar timing and amount patterns to those of the anticipated liability payments. Reserves for future policy and contract benefits on group single premium annuities have been provided on a net single premium method. The reserves are calculated based upon assumptions as to interest, mortality, and retirement that were appropriate at the date of issue. Mortality assumptions are based upon industry standards adjusted as appropriate to reflect actual Company experience. The assumptions vary by year of issue and include a provision for adverse deviation. The interest rate assumptions used to calculate reserves for future policy and contract benefits are as follows:
December 31 2000 1999 ------------------------------------------ Active Life Reserves - Current Year Issues Traditional Life 6.00% to 7.25% 6.75% to 8.75% Individual Disability 6.18% to 9.00% 5.50% to 9.00% Disabled Lives Reserves - Current Year Claims Individual Disability 6.65% to 8.00% 6.65% to 8.00% Group Disability 7.35% 7.35% to 7.60% Disabled Lives Reserves - Prior Year Claims Individual Disability 6.65% to 8.00% 6.65% to 8.00% Group Disability 7.35% 7.35% to 7.60%
Interest assumptions for active life reserves are generally graded downward over a period of years. Reserves for future policy and contract benefits on interest- sensitive products are principally policyholder account values determined on the retrospective deposit method. Policyholders' Funds: Policyholders' funds represent customer deposits plus interest credited at contract rates. The Company controls its interest rate risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 1--Significant Accounting Policies - Continued Liabilities for Restructuring Activities: Liabilities for restructuring activities are recorded when management, prior to the balance sheet date, commits to execute an exit plan that will result in the incurral of costs that have no future economic benefit or approves a plan of termination and communicates sufficient detail of the plan to employees. Liabilities for restructuring activities are included in other liabilities in the consolidated statements of financial condition. Federal Income Taxes: Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Deferred taxes have been measured using enacted statutory income tax rates and laws that are currently in effect. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. Separate Accounts: The separate account amounts shown in the accompanying consolidated financial statements represent contributions by contract holders to variable-benefits and fixed-benefits pension plans. The contract purchase payments and the assets of the separate accounts are segregated from other Company funds for both investment and administrative purposes. Contract purchase payments received under variable annuity contracts are subject to deductions for sales and administrative fees. Also, the sponsoring companies of the separate accounts receive management fees which are based on the net asset values of the separate accounts. Translation of Foreign Currency: Revenues and expenses of the Company's foreign operations, principally Canada and the United Kingdom, are translated at average exchange rates. Assets and liabilities are translated at the rate of exchange on the balance sheet date. The translation gain or loss is generally reported in accumulated other comprehensive income (loss), net of deferred tax. Accounting for Participating Individual Life Insurance: Participating policies issued by one of the Company's subsidiaries prior to its 1986 conversion from a mutual to a stock life insurance company will remain participating as long as the policies remain in force. A Participation Fund Account (PFA) was established for the benefit of all of such individual participating life and annuity policies and contracts. The assets of the PFA provide for the benefit, dividend, and certain expense obligations of the participating individual life insurance policies and annuity contracts. The experience of the PFA and its operations have been excluded from the consolidated statements of operations. The PFA was $361.6 million and $362.2 million at December 31, 2000, and 1999, respectively, and represented approximately 0.9 percent of consolidated assets for both years and 1.0 percent and 1.1 percent of consolidated liabilities for December 31, 2000 and 1999, respectively. Accounting for Stock-Based Compensation: The Company measures compensation cost for stock-based compensation under the expense recognition provisions of Accounting Principles Board Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees and related interpretations. Under this method, compensation cost is the excess, if any, of the quoted market price at grant date or other measurement date over the amount an employee must pay to acquire the stock. Changes in Accounting Principles: Statement of Position 98-7 (SOP 98-7), Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk Effective January 1, 2000, the Company adopted the provisions of SOP 98-7 which provide guidance on applying the deposit method of accounting to insurance and reinsurance contracts that do not transfer insurance risk. The effect of the adoption of SOP 98-7 on the Company's financial position and results of operations was immaterial. Financial Accounting Standards Board Interpretation No. 44 (Interpretation 44), Accounting for Certain Transactions Involving Stock Compensation Effective July 1, 2000, the Company adopted the provisions of Interpretation 44 which clarify the application of Opinion 25. The adoption of the Interpretation had no effect on the Company's financial position or results of operations. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 1--Significant Accounting Policies - Continued Accounting Pronouncements Outstanding: Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, and Statement of Financial Accounting Standards No. 138 (SFAS 138), Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133 In 1998, the FASB issued SFAS 133 which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. SFAS 133 specifies a special method of accounting for certain hedging transactions, prescribes the type of items and transactions that may be hedged, and provides the criteria which must be met in order to qualify for hedge accounting. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation as follows: Fair value hedge. Changes in the fair value of both the derivative and the hedged item attributable to the risk being hedged are recognized in operating earnings. Cash flow hedge. To the extent it is effective, changes in the fair value of the derivative are recognized as a component of accumulated other comprehensive income in stockholders' equity until the hedged item affects earnings. Any ineffective portion must be recognized in operating earnings at the same time the change in fair value is recognized on the statement of financial condition. Foreign currency exposures hedge. In a hedge of foreign currency exposures in a net investment in a foreign operation, to the extent the hedge is effective, the change in the fair value of the derivative is treated as a translation gain or loss and recognized in accumulated other comprehensive income offsetting other translation gains and losses arising in consolidation. Any ineffective portion must be recognized in operating earnings at the same time the change in fair value of the derivative is recognized on the statement of financial condition. For a derivative not designated as a hedging instrument, the gain or loss is recognized in operating earnings in the period of change. SFAS 138, issued in 2000, addresses several issues that apply to derivative instruments and hedging activities and amends certain accounting and reporting standards of SFAS 133. The Company will adopt the provisions of SFAS 133 and SFAS 138 effective January 1, 2001. The adoptions of these pronouncements are not expected to have a material impact on the Company's financial position or results of operations. Statement of Financial Accounting Standards No. 140 (SFAS 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities SFAS 140 was issued in September 2000 and replaces Statement of Financial Accounting Standards No. 125. SFAS 140 revises the standards for accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 is effective for transfers occurring after March 31, 2001. The adoption of SFAS 140 is not expected to have a material impact on the Company's financial position or results of operations. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 2--Merger On June 30, 1999, prior to the completion of the merger, each outstanding share of Provident common stock was reclassified and converted into 0.73 of a share of Provident common stock. Immediately after this reclassification, the merger was completed, and each share of Unum common stock issued and outstanding immediately prior to the merger was converted into one share of the Company's common stock, and the par value was reduced from $1.00 to $0.10 per share. In the merger, the shares of Provident common stock were not further affected, but thereafter became shares of the Company's common stock. Unum common stock held in treasury was retired. Stockholders' equity and per share amounts have been adjusted to reflect these items. Merger Expenses During 1999, the Company recognized expenses related to the merger and the early retirement offer to employees as follows (in millions): Employee related expense $ 77.7 Exit activities related to duplicate facilities/asset abandonments 67.4 Investment banking, legal, and accounting fees 39.6 ------ Subtotal 184.7 Expense related to the early retirement offer to employees 125.9 ------ Subtotal 310.6 Income tax benefit 89.2 ------ Total $221.4 ======
Employee related expense consists of employee severance costs, change in control costs, restricted stock costs which fully vested upon stockholder adoption of the merger agreement or upon completion of the merger, and outplacement costs to assist employees who have been involuntarily terminated. Severance benefits and change in control costs were $60.2 million, and costs associated with the vesting of restricted stock were $17.5 million. Exit activities related to duplicate facilities/asset abandonments consisted of closing of duplicate offices and the write-off of redundant computer hardware and software. The cost associated with these office closures was approximately $25.6 million, which represents the cost of future minimum lease payments less any estimated amounts recovered under subleases. Also, certain physical assets, primarily computer equipment, redundant systems, and systems incapable of supporting the combined entity, were abandoned as a result of the merger, resulting in a write-down of the assets' book values by approximately $41.8 million. The exit plan was complete as of June 30, 2000. The expenses related to the merger reduced 1999 earnings $184.7 million before tax and $139.6 million after tax. The expense related to the early retirement offer reduced earnings $125.9 million before tax and $81.8 million after tax. Additionally during 1999, 0.5 million shares of outstanding restricted stock became unrestricted and stock options on 5.3 million shares became immediately exercisable effective with the merger, in accordance with Unum's and Provident's restricted stock and stock option plan provisions concerning a change in control. The expense related to restricted stock vesting has been included in merger related expenses. The Company applies Opinion 25 and related interpretations in accounting for the stock option plans. Accordingly, no compensation cost was recognized for stock option vesting. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 2--Merger - Continued Accounting Policy Changes Generally, because of the effort and time involved, reviews and updates of assumptions related to benefit liabilities are periodically undertaken over time and are reflected in the calculation of benefit liabilities as completed. Many factors influence assumptions underlying reserves, and considerable judgment is required to interpret current and historical experience underlying all of the assumptions and to assess the future factors that are likely to influence the ultimate cost of settling existing claims. Prior to the merger, Unum's process and assumptions used to calculate the discount rate for claim reserves of certain disability businesses differed from that used by Provident. While Unum's and Provident's methods were both in accordance with GAAP, management believed that the combined entity should have consistent discount rate accounting policies and methods for applying those policies for similar products. Unum's former methodology used the same investment strategy for assets backing both liabilities and surplus. Provident's methodology, which allows for different investment strategies for assets backing surplus than those backing product liabilities, was determined by management to be the more appropriate approach for the Company. Accordingly, at June 30, 1999 the Company adopted Provident's method of calculating the discount rate for claim reserves. The discount rates affected by this change in Unum's methodology were as follows:
June 30, 1999 --------------------------------------- Current Rates Former Rates --------------------------------------- Group Long-term Disability (North America) 6.75% 7.74% Group Long-term Disability and Individual Disability (United Kingdom) 7.45% 8.80% Individual Disability (North America) 6.88% 7.37%
The unpaid claim reserves for these disability lines as of June 30, 1999 were $5,318.3 million using the former method for determining reserve discount rates and $5,559.0 million using the current method. The impact on 1999 earnings related to the change in method of calculating the discount rate for claim reserves was $240.7 million before tax and $156.5 million after tax during the second quarter. Subsequent to the merger date, the Company began to integrate the valuation procedures of the two organizations to provide for a more effective linking of pricing and reserving assumptions and to facilitate a more efficient process for adjusting liabilities to emerging trends. Included in this integration activity were a review and an update of assumptions that underlie policy and contract benefit liabilities. The purpose of the study was to confirm or update the assumptions which were viewed as likely to affect the ultimate liability for contract benefits. Accordingly, as a result of the merger, the Company accelerated the performance of its normal reviews of the assumptions underlying reserves to determine the assumptions that the newly merged Company will use in the future for pricing, performance management, and reserving. The review resulted in an increase in the benefits and reserves for future benefits for the Company's domestic and Canadian group long-term disability unpaid claim liabilities. As a result of the review, the Company increased its policy and contract benefit liabilities $359.2 million, which reduced 1999 earnings $359.2 million before tax and $233.5 million after tax. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 2--Merger - Continued The increase in policy and contract benefit liabilities primarily resulted from revisions to assumptions in the following three key components: claim termination rates, incurred but not reported (IBNR) factors, and discount rates. These components and their effect on the reserve increase are summarized and discussed below (in millions). Claim termination rates $ 372.6 Incurred but not reported factors 101.4 Discount rates (114.8) ------- Net change $ 359.2 ======= The assumptions concerning claim termination rates relate to changes in the estimated average length of time a claim is open (duration) and the ultimate cost of settling claims. Recent trends indicate the duration of a disability claim is increasing. Claim termination rates are based on industry experience adjusted for Company historical and anticipated experience, which considers emerging trends and Company actions that would have a material effect on claim termination rates. The increase in policy and contract benefit liabilities that results from the revised claim termination rates is attributable to two elements. The first element is the claim resolution assumption, which is the portion of claim terminations related to the disabled returning to work or the expiration of the benefit period. The second element is the mortality assumption, which is the portion of claim terminations that result from death of the disabled. The effect of these two elements on the increase in policy and contract benefit liabilities is discussed below. Claim resolution assumptions have been determined considering both external trends and the Company's current and planned actions which would have a material effect on claim resolution rates. Due to the high variability in claim resolution rates, considerable judgment is required in setting claim resolution assumptions. Revised claim resolution assumptions have been determined after consideration of the merger integration plans, including the short-term disruption of the claims management process from integration activities. Other factors considered included emerging external trends, such as the developing trend for some claimants to remain on claim longer, current and historical claim resolution experience, industry claim resolution experience, and changes in planned actions, as well as the anticipated future effectiveness of the claims operations in settling existing claims. The revised assumptions for claim resolution rates resulted in an increase in benefit liabilities of approximately $194.8 million. These estimates rely on the Company's ability to complete integration and claims processing changes as planned and those changes having the anticipated impact on claim recovery rates. The review also examined assumptions for mortality. Revision of mortality assumptions resulted in an increase in benefit liabilities of approximately $177.8 million. Mortality is a critical factor influencing the length of time a claimant receives monthly disability benefits. Mortality has been improving for the general population, and this improvement is now considered permanent. Life expectancy has been extended dramatically for individuals suffering from acquired immune deficiency syndrome (AIDS). Early observations of this trend and related medical literature raised questions concerning the long-term sustainability of the mortality improvements. The Company also assumed that, if the trend did continue, many of the individuals responding positively to treatment could be returned to productive employment. The previous review of mortality performed by the Company did not indicate a need to change mortality assumptions. However, recent analysis indicates that the improved mortality trend is sustainable and that rehabilitation of afflicted individuals to return to work has been minimally successful to date. AIDS related disabilities are approximately 2 percent of the Company's total disability claims. In addition to the AIDS mortality trend, the recent review demonstrates that survival from other frequently fatal diseases such as cancer and heart disease has improved over recent periods and is now judged to be more permanent due to advances in medical sciences and treatments. While the treatment advances have lengthened life expectancies, they do not always result in the claimant being able to return to work; thus, the ultimate level of payments to be made on a disability claim increases. Of the total increase in benefit liabilities for revised mortality assumptions, $85.4 million is related to AIDS related disabilities and $92.4 million to cancer and other disabilities. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 2--Merger - Continued The second component of the increase in benefit liabilities is the provision for claims incurred but not yet reported, which resulted in an increase in benefit liabilities of $101.4 million. This provision is an estimate of the outstanding liability related to claims that have been incurred by individual insureds as of the valuation date, but the claims have not yet been reported to the Company. This liability is affected by the estimate of the number of outstanding claims. Because of the long elimination periods, generally 90 to 180 days or longer, the development of the factors must cover a period of sufficient length to mitigate the effects of random fluctuations and to establish the presence of trends. Recent trends indicate an increase in new claim rates which results in an increase in the estimate of outstanding claims. Another item affecting this liability is the estimate of the average cost of each outstanding claim. The lengthening of time a claimant receives monthly benefits resulting from the factors noted above also results in an increase in the estimate of the average cost of each claim. The third component of the change in benefit liabilities is the change in the rate used to discount claim reserves, including IBNR reserves, which resulted in a decrease of $114.8 million in benefit liabilities. Subsequent to the merger, the Company significantly restructured the investment portfolio backing these liabilities with the objective of improving asset and liability management and improving yield. As part of this strategy, during the third quarter of 1999, the Company sold $426.1 million of assets with a book yield of 5.98 percent and purchased $546.6 million of assets with a yield of 8.87 percent, improving the overall yield on the assets backing liabilities. As a result of this investment restructuring and consistent with its policy, the Company increased the rate used to discount claim reserves to 7.35 percent, resulting in a decrease of $114.8 million in benefit liabilities. Results of Operations The results of operations for the separate companies and the combined amounts for the periods prior to the merger were as follows:
Six Months Ended Year Ended June 30, 1999 December 31, 1998 (in millions of dollars) ------------------------------------------------------ Revenue Unum $ 2,557.8 $ 4,581.3 Provident 1,988.9 3,938.0 --------- --------- Combined Revenue $ 4,546.7 $ 8,519.3 ========= ========= Net Income (Loss) Unum $ (189.7) $ 363.4 Provident 87.8 254.0 --------- --------- Combined Net Income (Loss) $ (101.9) $ 617.4 ========= =========
Included in Unum's net loss for the six months ended June 30, 1999, is $131.8 million after tax for expenses related to the merger and the early retirement offer to employees and $156.5 million after tax for the reserve discount rate change. Unum's net loss for the six months ended June 30, 1999 also includes an after-tax first quarter charge of $88.0 million related to its reinsurance businesses. Included in Provident's net income for the six months ended June 30, 1999, is $62.0 million after tax for expenses related to the merger and the early retirement offer to employees. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 3--Fair Values of Financial Instruments The carrying amounts and fair values of the Company's financial instruments are as follows:
December 31 (in millions of dollars) ------------------------------------------------------------------- 2000 1999 Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------- Assets Fixed Maturity Securities: Available-for-Sale $22,110.4 $22,110.4 $22,035.7 $22,035.7 Derivatives Hedging Available-for-Sale 131.9 131.9 (2.5) (2.5) Held-to-Maturity 346.6 369.8 323.5 318.8 Equity Securities 24.5 24.5 38.4 38.4 Mortgage Loans 1,135.6 1,183.0 1,278.1 1,281.2 Policy Loans 2,426.7 2,426.7 2,316.9 2,211.1 Short-term Investments 279.4 279.4 321.5 321.5 Cash and Bank Deposits 107.1 107.1 292.4 292.4 Deposit Assets 658.5 658.5 616.6 616.6 Liabilities Policyholders' Funds: Deferred Annuity Products 1,665.3 1,665.3 2,014.6 2,014.6 Other 386.7 396.6 538.7 551.3 Short-term Debt 402.2 402.2 1,075.0 1,075.0 Long-term Debt 1,615.5 1,465.8 1,166.5 1,061.6 Company-Obligated Mandatorily Redeemable Preferred Securities 300.0 245.9 300.0 268.5 Derivatives Hedging Liabilities (4.3) (4.3) (5.9) (5.9)
The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments: Fixed Maturity Securities: Fair values are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. See Note 4 for the amortized cost and fair values of securities by security type and by maturity date. Equity Securities: Fair values are based on quoted market prices. Mortgage Loans: Fair values are estimated using discounted cash flow analyses, using interest rates currently being offered for similar mortgage loans to borrowers with similar credit ratings and maturities. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 3--Fair Values of Financial Instruments - Continued Policy Loans: At December 31, 2000, the carrying amounts approximate fair value. At December 31, 1999, fair values were estimated using discounted cash flow analyses based on interest rates current at that time. Short-term Investments, Cash and Bank Deposits, and Deposit Assets: Carrying amounts approximate fair value. Policyholders' Funds: The carrying amount for deferred annuity products approximate fair value. Other policyholders' funds include guaranteed investment contacts (GICs) and supplementary contracts without life contingencies. Fair values for GICs are estimated using discounted cash flow calculations, based on current market interest rates available for similar contracts with maturities consistent with those remaining for the contracts being valued. The carrying amount for supplementary contracts without life contingencies approximates fair value. Fair values for insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Short-term Debt: The carrying amounts approximate fair value. Long-term Debt and Company-Obligated Mandatorily Redeemable Preferred Securities: Fair values were obtained from independent pricing services or discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements. Derivatives: Fair values are based on market quotes or pricing models and represent the net amount of cash the Company would have received or paid if the contracts had been settled or closed on December 31. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 4--Investments Securities The amortized cost and fair values of securities by security type are as follows:
December 31, 2000 (in millions of dollars) ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------------------------- Available-for-Sale Securities United States Government and Government Agencies and Authorities $ 76.9 $ 14.9 $ - $ 91.8 States, Municipalities, and Political Subdivisions 155.0 3.5 0.2 158.3 Foreign Governments 752.1 131.7 0.8 883.0 Public Utilities 3,138.1 141.4 47.3 3,232.2 Mortgage-backed Securities 3,159.8 162.9 5.9 3,316.8 All Other Corporate Bonds 14,536.4 772.1 844.0 14,464.5 Redeemable Preferred Stocks 112.9 2.4 19.6 95.7 --------- -------- ------ --------- Total Fixed Maturity Securities 21,931.2 1,228.9 917.8 22,242.3 Equity Securities 23.2 4.0 2.7 24.5 --------- -------- ------ --------- $21,954.4 $1,232.9 $920.5 $22,266.8 ========= ======== ====== ========= Held-to-Maturity Securities United States Government and Government Agencies and Authorities $ 6.9 $ 1.6 $ - $ 8.5 States, Municipalities, and Political Subdivisions 1.5 0.1 - 1.6 Mortgage-backed Securities 320.7 20.6 - 341.3 All Other Corporate Bonds 17.5 0.9 - 18.4 --------- -------- ------ ---------- $ 346.6 $ 23.2 $ - $ 369.8 ========= ======== ====== =========
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 4--Investments - Continued
December 31, 1999 (in millions of dollars) ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------------------------- Available-for-Sale Securities United States Government and Government Agencies and Authorities $ 73.8 $ 2.8 $ 1.0 $ 75.6 States, Municipalities, and Political Subdivisions 418.0 4.6 5.3 417.3 Foreign Governments 833.6 95.7 1.0 928.3 Public Utilities 3,593.0 107.2 80.8 3,619.4 Mortgage-backed Securities 2,831.4 30.3 97.0 2,764.7 All Other Corporate Bonds 14,265.3 411.2 607.6 14,068.9 Redeemable Preferred Stocks 127.3 47.8 16.1 159.0 --------- -------- ------ --------- Total Fixed Maturity Securities 22,142.4 699.6 808.8 22,033.2 Equity Securities 15.9 23.4 0.9 38.4 --------- -------- ------ --------- $22,158.3 $ 723.0 $809.7 $22,071.6 ========= ======== ====== ========= Held-to-Maturity Securities United States Government and Government Agencies and Authorities $ 7.2 $ 0.6 $ - $ 7.8 States, Municipalities, and Political Subdivisions 2.1 0.1 - 2.2 Mortgage-backed Securities 298.0 2.7 7.5 293.2 All Other Corporate Bonds 16.2 - 0.6 15.6 --------- -------- ------ --------- $ 323.5 $ 3.4 $ 8.1 $ 318.8 ========= ======== ====== =========
61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 4--Investments - Continued The amortized cost and fair values of fixed maturity securities by maturity date are shown below. The maturity dates have not been adjusted for possible calls or prepayments.
December 31, 2000 (in millions of dollars) -------------------------------------- Amortized Fair Cost Value -------------------------------------- Available-for-Sale Securities 1 year or less $ 265.3 $ 332.2 Over 1 year through 5 years 2,222.3 2,305.5 Over 5 years through 10 years 4,914.6 4,797.5 Over 10 years 11,369.2 11,490.3 ----------- ----------- 18,771.4 18,925.5 Mortgage-backed Securities 3,159.8 3,316.8 ----------- ----------- $ 21,931.2 $ 22,242.3 =========== =========== Held-to-Maturity Securities 1 year or less $ 0.5 $ 0.5 Over 1 year through 5 years 0.2 0.2 Over 10 years 25.2 27.8 ----------- ----------- 25.9 28.5 Mortgage-backed Securities 320.7 341.3 ----------- ----------- $ 346.6 $ 369.8 =========== ===========
At December 31, 2000, the total investment in below-investment-grade fixed maturity securities (securities rated below Baa3 by Moody's Investors Service or an equivalent internal rating) was $1,760.8 million or 6.6 percent of invested assets. The amortized cost of these securities was $2,161.1 million. Deposit assets in the form of marketable securities held in trust are reported in miscellaneous assets in the consolidated statements of financial condition. Unrealized gains (losses) on these securities were $23.6 million and $(25.9) million, respectively, at December 31, 2000 and 1999. Adjustments to reserves for future policy and contract benefits that would have been necessary if the unrealized investment gains and losses related to the available-for-sale securities had been realized as of December 31, 2000 and 1999, were $36.0 million and $(123.1) million, respectively. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 4--Investments - Continued The components of the change in net unrealized gains on securities included in other comprehensive income (loss) are as follows:
Year Ended December 31 2000 1999 1998 (in millions of dollars) -------------------------------------------------------- Change in Net Unrealized Gains Before Reclassification Adjustment $ 384.5 $(2,159.3) $244.6 Reclassification Adjustment for Net Realized Investment (Gains) Losses 14.6 (87.1) (55.0) Change in Unrealized Gains on Deposit Assets 49.5 (237.5) 83.9 Change in the Adjustment to Reserves for Future Policy and Contract Benefits (159.1) 1,014.8 (72.6) Change in Tax Liability (96.5) 519.5 (67.2) -------- ----------- -------- Change in Net Unrealized Gains $ 193.0 $ (949.6) $133.7 ======= ========== ======
Mortgage Loans Mortgage loans are impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The reported investment in mortgage loans considered to be impaired was $17.7 million and $18.1 million, respectively, at December 31, 2000 and 1999. Included in the impaired loans at December 31, 2000 were loans of $6.5 million which had a related allowance for losses of $2.4 million and loans of $11.2 million which had no related allowance for losses. Included in the impaired loans at December 31, 1999 were loans of $6.6 million which had a related allowance for losses of $2.4 million and loans of $11.5 million which had no related allowance for losses. Investment Valuation Allowances Additions to the investment valuation allowances represent realized investment losses, and deductions represent the allowance released upon disposal or restructuring of the related asset. Changes are as follows:
Balance at Balance Beginning at End of Year Additions Deductions Of Year (in millions of dollars) ----------------------------------------------------------- Year Ended December 31, 1998 Mortgage Loans $34.9 $ 2.3 $ 4.4 $32.8 Real Estate 40.7 10.5 - 51.2 ----- ------ ----- ----- Total $75.6 $ 12.8 $ 4.4 $84.0 ===== ====== ===== ===== Year Ended December 31, 1999 Mortgage Loans $32.8 $ 0.1 $ - $32.9 Real Estate 51.2 - 13.4 37.8 ----- ------ ----- ----- Total $84.0 $ 0.1 $13.4 $70.7 ===== ====== ===== ===== Year Ended December 31, 2000 Mortgage Loans $32.9 $ - $20.0 $12.9 Real Estate 37.8 - 12.2 25.6 ----- ------ ----- ----- Total $70.7 $ - $32.2 $38.5 ===== ====== ===== =====
63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 4--Investments - Continued Net Investment Income Sources for net investment income are as follows:
Year Ended December 31 2000 1999 1998 (in millions of dollars) ----------------------------------------------------- Fixed Maturity Securities $1,824.1 $1,712.7 $1,708.4 Equity Securities 0.1 0.1 0.4 Mortgage Loans 100.7 111.2 106.4 Real Estate 24.7 37.0 32.5 Policy Loans 120.3 222.3 206.5 Other Long-term Investments 11.2 6.8 9.8 Short-term Investments 27.1 56.0 59.8 -------- -------- -------- Gross Investment Income 2,108.2 2,146.1 2,123.8 Less Investment Expenses 24.7 63.0 64.3 Less Investment Income on PFA Assets 23.1 23.4 24.1 -------- -------- -------- Net Investment Income $2,060.4 $2,059.7 $2,035.4 ======== ======== ======== Realized Investment Gains and Losses Realized investment gains (losses) are as follows: Year Ended December 31 2000 1999 1998 (in millions of dollars) --------------------------------------------------- Fixed Maturity Securities Gross Gains $ 93.4 $ 82.6 $ 69.6 Gross Losses (197.6) (99.9) (16.1) Equity Securities 9.8 25.8 4.2 Mortgage Loans, Real Estate, and Other Invested Assets 42.9 17.1 (4.5) Deposit Assets 25.5 61.4 1.4 Derivatives 11.4 0.1 0.4 ------- ------ ------- $ (14.6) $ 87.1 $ 55.0 ======= ====== =======
Note 5--Derivative Financial Instruments The Company uses swaps, forwards, futures, and options to hedge interest rate and currency risks and to match assets with its insurance liabilities. Derivative Risks The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted by changes in the market, primarily the change in interest and exchange rates) and credit risk (that the counterparty will not perform according to the terms of the contract). The market risk of the derivatives should generally offset the market risk associated with the hedged financial instrument or liability. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 5--Derivative Financial Instruments - Continued To help limit the credit exposure of the derivatives, the Company has entered into master netting agreements with its counterparties whereby contracts in a gain position can be offset against contracts in a loss position. The Company also typically enters into bilateral, cross-collateralization agreements with its counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount. The Company's current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, was $73.8 million at December 31, 2000. Hedging Activity The table below summarizes by notional amounts the activity for each category of derivatives.
Swaps ------------------------------------ Receive Receive Receive Variable/ Fixed/Pay Fixed/Pay Pay Fixed Fixed Variable Forwards Futures Options Total (in millions of dollars) ----------------------------------------------------------------------------------- Balance at December 31, 1997 $ - $ 168.3 $1,112.4 $140.0 $ 443.5 $ 409.5 $2,273.7 Additions - - 90.0 - 356.0 207.8 653.8 Terminations - - 122.4 140.0 688.5 405.0 1,355.9 ----- ------- -------- ------ ------- ------- -------- Balance at December 31, 1998 - 168.3 1,080.0 - 111.0 212.3 1,571.6 Additions 8.2 12.3 406.0 82.9 325.0 459.0 1,293.4 Terminations - 168.3 320.0 - 436.0 370.0 1,294.3 ----- ------- -------- ------ ------- ------- -------- Balance at December 31, 1999 8.2 12.3 1,166.0 82.9 - 301.3 1,570.7 Additions - 15.8 569.0 40.0 283.3 - 908.1 Terminations 8.2 - 600.0 122.9 283.3 294.0 1,308.4 ----- ------- -------- ------ ------- ------- -------- Balance at December 31, 2000 $ - $ 28.1 $1,135.0 $ - $ - $ 7.3 $1,170.4 ===== ======= ======== ====== ======= ======= ========
Additions and terminations reported above for futures and options include roll activity, which is the closing out of an old contract and initiation of a new one when a contract is about to mature but the need for it still exists. The following table summarizes the timing of anticipated settlements of interest rate swaps outstanding at December 31, 2000, whereby the Company receives a fixed rate and pays a variable rate. The weighted average interest rates assume current market conditions.
2001 2002 2003 2007 Total (in millions of dollars) ------------------------------------------------------------ Receive Fixed/Pay Variable: Notional Value $620.0 $329.0 $126.0 $ 60.0 $1,135.0 Weighted Average Receive Rate 7.51% 7.55% 7.65% 13.37% 7.85% Weighted Average Pay Rate 6.40% 6.40% 6.40% 12.64% 6.73%
65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 5--Derivative Financial Instruments - Continued Hedging programs for derivative activity are as follows: Program 1 The Company has executed a series of cash flow hedges in the group disability, individual disability, and group single premium annuities portfolios using interest rate swaps, forwards, futures, and options. The purpose of these hedges is to lock in the reinvestment rates on future cash flows and protect the Company from the potential adverse impact of declining interest rates on the associated policy reserves. The Company uses futures contracts to partially offset hedges on fixed maturity securities purchased prior to the termination date of interest rate swaps and forwards. The Company also uses futures contracts to replace terminated forwards and interest rate swaps in order to maintain hedges until the fixed maturity securities are purchased. The notional amount outstanding for these cash flow hedges was $1,075.0 million, $1,482.9 million, and $1,285.0 million at December 31, 2000, 1999, and 1998, respectively. The deferred gain on these contracts was $82.3 million, $94.0 million, and $63.7 million, at December 31, 2000, 1999, and 1998, respectively. In 2000, 1999, and 1998, the Company amortized into net investment income $3.5 million, $3.1 million, and $1.9 million, respectively, of the deferred gains from this program. Realized investment gains from this program during 2000 were $6.3 million. Realized investment gains and losses from this program during 1999 and 1998 were immaterial. At December 31, 2000 and 1999, the Company had an unrealized gain of $123.1 million and $0.3 million, respectively, on the open interest rate swaps, forwards, and futures. These derivatives are scheduled to be terminated in the years 2000 through 2003 as assets are purchased with the future anticipated cash flows. Future contracts to hedge anticipated cash flows have also been utilized for other product portfolios. At December 31, 2000, the Company had no open contracts for other product portfolios. Program 2 In 1998 and 1997, the Company sold indexed annuity products whereby a portion of the crediting rate on the annuity was based on the performance of the S&P 500 stock index. In order to hedge this fluctuating credit rate, the Company purchased options with the S&P 500 stock index as the underlying item. These options will be settled with a net cash payment to the Company at the expiration date if the S&P 500 index moves above the option contract's strike price; otherwise, no cash payment will take place at expiration. At December 31, 2000 and 1999, the outstanding notional amount of these options was $7.3 million for both years, and the fair values and carrying amounts were $4.3 million and $5.9 million, respectively. Program 3 In 1999, the Company entered into a foreign currency interest rate swap to hedge its currency risk in Japan. The notional amount of this swap was $8.2 million and terminated as scheduled in 2000. Additionally, the Company entered into several foreign currency interest rate swaps to hedge the currency risk of certain foreign currency denominated fixed income securities purchased in 1999 and 2000. The notional amount outstanding for these currency hedges was $28.1 million and $12.3 million, at December 31, 2000 and 1999, respectively. The derivatives are scheduled for termination in the years 2006 through 2010. The unrealized gain on these swaps at December 31, 2000 and 1999 was $4.1 million and $0.2 million, respectively. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 5--Derivative Financial Instruments - Continued Program 3 - Continued In 1997, the Company borrowed $168.3 million through a private placement with an investor in the United Kingdom. Upon issuance of the borrowing, the Company entered into foreign currency and interest rate swap agreements that converted the principal amount to U.S. dollars and the interest obligation on the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate. The private placement issue was settled in 1999, and the hedging arrangement was terminated. Program 4 In 1999, the Company entered into an interest rate swap to convert a variable rate security into a fixed rate security. The notional amount for this interest rate swap is $60.0 million and is scheduled for termination in 2007. Income from settlements of payment streams on this interest rate swap agreement was $0.2 million and $0.8 million for 2000 and 1999, respectively. At December 31, 2000 and 1999, the Company had an unrealized gain of $4.7 million and an unrealized loss of $2.9 million, respectively, on this swap. Program 5 In 1998 and 1997, the Company opened interest rate futures contracts and wrote options on interest rate futures in order to hedge the borrowing rate on the anticipated refinancing of long-term debt. The Company realized a $10.3 million before-tax investment loss when these contracts were terminated. The loss on these contracts was deferred and is being amortized as an adjustment to interest and debt expense. At December 31, 2000, the Company had no open contracts under this program. Program 6 The Company routinely uses forwards and futures to protect margins by reducing the risk of changes in interest rates between the time of asset purchase and the associated sale of an asset or sale of new business. Gains or losses on termination of these forwards and futures are deferred and reported as an adjustment of the carrying amount of the hedged asset or liability and amortized into earnings over the lives of the hedged items. The net deferred gain associated with this activity was $25.4 million and $26.7 million at December 31, 2000 and 1999, respectively. The deferred gain amortized into earnings was $1.3 million for each of the years ended December 31, 2000, 1999, and 1998. At December 31, 2000, the Company had no open contracts under this program. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 6--Value of Business Acquired A reconciliation of value of business acquired is as follows:
2000 1999 1998 (in millions of dollars) ------------------------------------------------ Balance at January 1 $534.1 $570.5 $699.0 Acquisition of Business 138.4 - 5.0 Disposition of Business (31.2) - (90.6) Interest Accrued 43.8 40.4 43.2 Amortization (88.8) (78.7) (81.8) Change in Foreign Currency Translation Adjustment (4.7) 1.9 (4.3) ------ ------ ------ Balance at December 31 $591.6 $534.1 $570.5 ====== ====== ======
The estimated net amortization of value of business acquired for each of the next five years is $45.6 million in 2001, $44.2 million in 2002, $42.8 million in 2003, $41.2 million in 2004, and $39.8 million in 2005. Acquisition and disposition activity relates to certain reinsurance transactions. See Note 13. Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses Changes in the liability for unpaid claims and claim adjustment expenses are as follows:
2000 1999 1998 (in millions of dollars) ---------------------------------------------------------- Balance at January 1 $15,344.5 $13,159.1 $11,979.3 Less Reinsurance Recoverables 2,087.9 1,614.8 1,494.3 --------- --------- --------- Net Balance at January 1 13,256.6 11,544.3 10,485.0 Acquisition of Business - Note 13 602.5 - - Incurred Related to: Current Year 4,565.0 4,853.8 4,220.9 Prior Years Interest 872.1 705.4 646.6 Incurred 19.6 757.5 40.8 --------- --------- --------- Total Incurred 5,456.7 6,316.7 4,908.3 --------- --------- --------- Paid Related to: Current Year 1,496.1 1,538.2 1,266.7 Prior Years 3,087.5 3,066.2 2,582.3 --------- --------- --------- Total Paid 4,583.6 4,604.4 3,849.0 --------- --------- --------- Net Balance at December 31 14,732.2 13,256.6 11,544.3 Plus Reinsurance Recoverables 3,964.6 2,087.9 1,614.8 --------- --------- --------- Balance at December 31 $18,696.8 $15,344.5 $13,159.1 ========= ========= =========
68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses - Continued The majority of the net balances are related to disabled lives claims with long- tail payouts on which interest earned on assets backing liabilities is an integral part of pricing and reserving. Interest accrued on prior year reserves has been calculated on the opening reserve balance less one-half year's cash payments at the average reserve discount rate used by the Company during 2000, 1999, and 1998. During 1999, unpaid claims incurred for prior years increased primarily due to changes in reserves as disclosed in Notes 2 and 13. It is the Company's policy to estimate the ultimate cost of settling claims in each reporting period based upon the information available to management at the time. Actual claim resolution results are monitored and compared to those anticipated in claim reserve assumptions. Claim resolution rate assumptions are based upon industry standards adjusted as appropriate to reflect actual Company experience as well as Company actions which would have a material impact on claim resolutions. Company actions for which plans have been established and committed to by management are factors which would modify past experience in establishing claim reserves. Adjustments to the reserve assumptions will be made if expectations change. Given that insurance products contain inherent risks and uncertainties, the ultimate liability may be more or less than such estimates indicate. During the fourth quarter of 1998, the Company recorded a $153.0 million increase in the reserve for individual and group disability claims incurred as of December 31, 1998. Incurred claims include claims known as of that date and an estimate of those claims that have been incurred but not yet reported. Claims that have been incurred but not yet reported are considered liabilities of the Company. These claims were expected to be reported during 1999 and were expected to be affected by the claims operations integration activities. The $153.0 million claim reserve increase represented the estimated value of cash payments to be made to these claimants over the life of the claims as a result of the claims operations integration activities. Management believed the reserve adjustment was required based upon the integration plans it had in place and to which it had committed and based upon its ability to develop a reasonable estimate of the financial impact of the expected disruption to the claims management process. Claims management is an integral part of the disability operations. Disruptions in that process can create material, short-term increases in claim costs. The merger had a near-term adverse impact on the efficiency and effectiveness of the Company's claims management function resulting in some delay in claim resolutions and additional claim payments to policyholders. Claims personnel were distracted from normal claims management activities as a result of planning and implementing the integration of the two companies' claims organizations. In addition, employee turnover and additional training reduced resources and productivity. An important part of the claims management process is assisting disabled policyholders with rehabilitation efforts. This complex activity is important to the policyholders because it can assist them in returning to productive work and lifestyles more quickly, and it is important to the Company because it shortens the duration of claim payments and thereby reduces the ultimate cost of settling claims. Immediately following the announcement of the merger and continuing into December of 1998, senior management of the Company worked to develop the strategic direction of the Company's claims organization. As part of the strategic direction, senior management committed claims management personnel to be involved in developing the detailed integration plans and implementing the plans during 1999. Knowing that those involved in the claims operations integration activities would not be available full time to perform their normal claims management functions, management deemed it necessary to anticipate this effect on the claim reserves at December 31, 1998. Prior to the merger, during the first six months of 1999 approximately 90 claims managers and benefit specialists spent nearly 40 percent of their time developing the detailed integration plans. Effective with the merger, virtually all claims personnel were involved in the process of implementing the new work processes and required training. Implementation and related systems conversions continued into the second quarter of 2000. However, due to actions taken by management to mitigate effects on resolution rates, the effect on new claim resolution rates was not material after the end of 1999. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses - Continued Actions by management to mitigate the effect on resolution rates included aggressive hiring of new claims staff, restrictions on early retirement elections, selective use of personnel for integration planning, and significant communications with staff members. The reserving process begins with the assumptions indicated by past experience and is modified for current trends and other known factors. The Company anticipated the merger-related developments discussed above would generate a significant change in claims department productivity, reducing claim resolution rates, a key assumption when establishing reserves. Management developed actions to mitigate the impact of the merger on claims department productivity, including the hiring of additional claims staff and the restriction of early retirement elections by claims personnel. Where feasible, management also planned to obtain additional claims management resources through outsourcing. All such costs were expensed in the period incurred and were not material in relation to results of operations. Management reviewed its integration plans and the actions intended to mitigate the impact of the integration with claims managers to determine the extent of disruption in normal activities. Considering all of the above, the revised claim resolution rates, as a percentage of original assumptions (i.e., before adjusting for the effect of the claims operations integration activities), were 90 percent for the first and second quarters of 1999, 84 percent for the third quarter, and 89 percent for the fourth quarter of 1999. The revised claim resolution rates for the third quarter and fourth quarter were lower than the first and second quarters because all claims personnel were expected to be involved in the implementation and training efforts. The effect of integration activities on new claim resolution rates was not material after December 31, 1999. In order to validate these assumptions, the Company also examined the historical level and pattern of claims management effectiveness as reflected in claim resolution rates for the insurance subsidiaries of The Paul Revere Corporation (Paul Revere) which was acquired in 1997. Subsequent to the Paul Revere acquisition and integration, management has been able to develop experience studies for the Paul Revere business. These studies are prepared for pricing purposes and to identify trends or changes in the business. These studies, which were not available for the Paul Revere business at the time of the acquisition, allowed management to gain a greater understanding of the impact of the claims integration activities on the claim resolution rates of the Paul Revere business. These studies showed that the Paul Revere business experienced a decline in its claim resolution rates from a base in 1995 of 100 percent to 90.4 percent in 1996 and 80.3 percent in 1997. Changes in morbidity and other factors were considered and reviewed to determine that a primary cause of the reduced claim resolution rates was the disruption caused by the change in the claims management process. Although the circumstances of the merger were very different from the Paul Revere acquisition, the claims integration activities were similar, and the Paul Revere experience was relevant. The primary circumstances that created claims disruption for Paul Revere were the initial lack of clarity of the organization, process, and structure, the need to plan for a significant transition to new claims processes, and the training and implementation related to those changes. All of those elements impacted the Company as a result of the merger. One primary difference was that the duration of the potential disruption in the merger was not expected to be as long as was the case with the Paul Revere acquisition. The Company's revised claim resolution rates assumed for the first two quarters of 1999 were compared to the Paul Revere experience in 1996, the period preceding the acquisition. It was determined that the revised assumptions appeared to be reasonable. During the third and fourth quarters of 1999, the claims integration plans provided for increased activity due to training and implementation of new processes. The Company's revised claim resolution rates for the third and fourth quarters of 1999 were compared to the Paul Revere experience in 1997 during the implementation and training phase of the Paul Revere claims organization when claims resolution rates declined to 80.3 percent of prior levels. Management judged that it was reasonable to assume that the impact to the Company would be less than it was to Paul Revere since some of the Company's claims management practices would not change. The historical experience of Paul Revere provided a statistical reference for the expected experience for the Company when adjusted for the projected effects of the claims integration plans. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses - Continued In order to evaluate the financial effect of merger-related integration activities, the Company projected the ultimate cost of settling all claims incurred as of December 31, 1998, using the revised claim resolution rates. This projection was compared to the projection excluding the adjustment to the claim resolution rates to obtain the amount of the charge. The Company reviewed its estimates of the financial impact of the claims operations integration activities with its actuaries and independent auditors. Claim reserves at December 31, 1998 included $153.0 million as the estimated value of projected additional claim payments resulting from these claims operations integration activities. This 1998 reserve increase was reflected as a $142.6 million increase in benefits and reserves for future benefits and a $10.4 million reduction in other income. Quarterly information concerning the estimated and actual impact of the claims operations integration activities is shown below. The $7.5 million favorable variance from assumptions for the year was reflected in 1999 earnings.
1999 -------------------------------------------------------- 1/st/ 2/nd/ 3/rd/ 4/th/ (in millions of dollars) -------------------------------------------------------- Revised Claim Resolution Rates at December 31, 1998 90% 90% 84% 89% Actual Claim Resolution Rates for the Period 89% 90% 84% 90% Estimated Effect of Lower Claim Resolution Rates at December 31, 1998 $ 36.2 $ 36.2 $ 47.6 $ 33.0 Actual Effect of Lower Claim Resolution Rates for the Period $ 39.2 $ 36.2 $ 43.0 $ 27.1 Liability Remaining for Claims Operation Integration Activities at End of Period $ 116.8 $ 80.6 $ 33.0 $ -
Note 8--Federal Income Taxes A reconciliation of the income tax (benefit) attributable to continuing operations computed at U.S. federal statutory tax rates to the income tax expense (credit) as included in the consolidated statements of operations follows:
Year Ended December 31 2000 % 1999 % 1998 % (in millions of dollars) -------------------------------------------------------------------------------- Statutory Income Tax (Credit) $303.0 35.0% $(57.9) 35.0% $322.1 35.0% Tax-exempt Investment Income (13.5) (1.6) (22.0) 13.3 (28.9) (3.1) Income Tax Settlements - - (14.2) 8.6 - - Business Restructuring Charges - - 17.2 (10.4) - - Tax Basis in Foreign Subsidiary (44.5) (5.1) - - - - Change in Valuation Allowance 42.5 4.9 65.7 (39.7) 1.2 0.1 Goodwill 6.9 0.8 25.9 (15.7) 14.9 1.6 Other Items, Net 7.0 0.8 2.7 (1.6) (6.5) (0.7) ------ ----- ------ ----- ------ ----- Effective Tax $301.4 34.8% $ 17.4 (10.5)% $302.8 32.9% ====== ===== ====== ===== ====== =====
71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 8--Federal Income Taxes - Continued Deferred income tax liabilities consist of the following:
December 31 2000 1999 (in millions of dollars) ----------------------------------------- Deferred Tax Liability Deferred Policy Acquisition Costs $527.1 $433.4 Net Unrealized Gains on Securities 105.1 0.9 Value of Business Acquired 210.2 184.6 Policy Reserve Adjustments 49.7 4.3 Property and Equipment 18.5 22.0 Other Employee Benefits 19.8 - Other 24.5 20.9 ------ ------ Gross Deferred Tax Liability 954.9 666.1 ------ ------ Deferred Tax Asset Net Operating Losses 226.4 255.0 Reinsurance Gains 131.9 - Alternative Minimum Tax Credits 11.7 28.2 Accrued Liabilities 24.7 30.6 Tax Basis in Foreign Subsidiary 44.5 - Realized Investment Gains and Losses 88.2 34.0 Postretirement Benefits 68.2 59.9 Other Employee Benefits - 72.8 Foreign Currency Translation 22.8 15.0 Other 21.2 6.2 ------ ------ Gross Deferred Tax Asset 639.6 501.7 Less Valuation Allowance 115.5 73.9 ------ ------ Net Deferred Tax Asset 524.1 427.8 ------ ------ Net Deferred Tax Liability $430.8 $238.3 ====== ======
Under the Life Insurance Company Tax Act of 1959, life companies were required to maintain a policyholders' surplus account containing the accumulated portion of current income which had not been subjected to income tax in the year earned. The Deficit Reduction Act of 1984 requires that no future amounts be added after 1983 to the policyholders' surplus account. Further, any future distributions from the account would become subject to federal income taxes at the general corporate federal income tax rate then in effect. The amount of the policyholders' surplus account at December 31, 2000, is approximately $233.4 million. Future distributions from the policyholders' surplus account are deemed to occur if a statutorily prescribed maximum for the account is less than the value of the account or if dividend distributions exceed the total amount accumulated as currently taxable income in the year earned. If the entire policyholders' surplus account were deemed distributed in 2001, this would result in a tax of approximately $81.7 million. No current or deferred federal income taxes have been provided on these amounts because management considers the conditions under which such taxes would be paid to be remote. 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 8--Federal Income Taxes - Continued The Company's consolidated statements of operations include the following amounts of income (loss) subject to foreign taxation and the related foreign income tax expense (credit):
Year Ended December 31 2000 1999 1998 (in millions of dollars) ------------------------------------------------------ Income (Loss) Before Tax Subject to Foreign Taxation $ 109.5 $(213.5) $ 76.5 ======= ======= ======= Foreign Income Tax Expense (Credit): Current $ 54.3 $ 38.0 $ 26.8 Deferred (23.6) (40.9) 0.3 ------- ------- ------- Total $ 30.7 $ (2.9) $ 27.1 ======= ======= =======
For most of the Company's subsidiaries, tax years through 1995 are closed to further assessment by the Internal Revenue Service (IRS). During 2000, the IRS continued its examination of subsequent years. Management believes any future adjustments that may result from IRS examinations of tax returns will not have a material impact on the financial position, liquidity, or results of operations of the Company. During 1999, the Company reached a settlement with the IRS relating to its federal income tax liability for the 1986 through 1992 tax years. Results for the year ended December 31, 1999 increased $36.8 million due to settlements of these prior year tax issues. The Company's subsidiaries had net operating loss carryforwards of approximately $641.7 million, alternative minimum tax credit carryforwards of approximately $11.7 million, and capital loss carryforwards of $1.9 million as of December 31, 2000. The majority of the net operating loss carryforwards will begin to expire, if not utilized, in 2015; the alternative minimum tax credits do not expire; the capital loss carryforwards begin expiring in 2005. Federal income taxes paid during 2000, 1999, and 1998 were $165.6 million, $77.8 million, and $104.8 million, respectively. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 9--Debt and Company-Obligated Mandatorily Redeemable Preferred Securities Debt Short-term debt consists of the following at December 31 (in millions):
2000 1999 ------------------------------------------------ Weighted Weighted Average Average Interest Interest Balance Rate Balance Rate ------------------------------------------------ Commercial Paper $ - -% $ 597.8 6.3% Current Portion of Medium-term Notes Payable - - 260.0 6.6 Private Placements 400.0 7.2 200.0 7.0 Other Short-term Debt 2.2 4.8 17.2 2.9 ------- -------- Total $ 402.2 $1,075.0 ======= ========
In April 2000, the Company issued $200.0 million of variable rate notes in a privately negotiated transaction. The notes are due in April 2001 and were used to refinance other short-term debt and had a weighted average interest rate of 7.33 percent during 2000. Long-term debt consists of the following:
December 31 2000 1999 (in millions of dollars) ------------------------------ Commercial Paper, average interest rate of 7.743% $ 449.0 $ - Notes @ 6.75% due 2028, callable at or above par 250.0 250.0 Notes @ 7.25% due 2028, callable at or above par 200.0 200.0 Notes @ 7.0% due 2018, non-callable 200.0 200.0 Notes @ 6.375% due 2005, non-callable 200.0 200.0 Monthly Income Debt Securities @ 8.8% due 2025, callable in 2000 at par 172.5 172.5 Medium-term Notes @ 5.9% to 7.5% due 2002 to 2028, non-callable 144.0 144.0 --------- -------- Total $ 1,615.5 $1,166.5 ========= ========
In October 2000, the Company entered into $1.0 billion senior revolving credit facilities with a group of banks. The facilities, which are split into five-year revolver and 364-day portions, replaced a 364-day revolver which expired in October 2000 and a five-year revolver which has been canceled. Interest is variable based upon a London Interbank Offered Rate (LIBOR) plus a margin or an alternate base rate. At December 31, 2000, approximately $551.0 million was available for additional financing under the Company's revolving credit facilities. In August 2000, the Company filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 covering the issuance of up to $1.0 billion of securities in order to provide funding alternatives for its maturing debt. The shelf registration became effective in September 2000, but as of December 31, 2000, no securities had been issued. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 9--Debt and Company-Obligated Mandatorily Redeemable Preferred Securities - Continued Commercial paper debt is due within one year, but has been classified as long- term at December 31, 2000 because the Company has the ability through the new senior revolving credit facilities to convert this obligation into longer-term debt. The Company intends to refinance the commercial paper either by issuing additional commercial paper or by replacing commercial paper debt with long-term debt issued under the currently effective shelf registration statement. Of the $1,615.5 million of long-term debt at December 31, 2000, $449.0 million will mature in 2001, $35.0 million will mature in 2002, $20.0 million will mature in 2003, and $1,111.5 million will mature in 2005 and thereafter. Interest paid on short-term and long-term debt during 2000, 1999, and 1998 was $156.9 million, $115.2 million, and $100.5 million, respectively. Company-Obligated Mandatorily Redeemable Preferred Securities In March 1998, Provident Financing Trust I, a wholly-owned subsidiary trust of the Company, issued $300.0 million of 7.405% capital securities in a public offering. These capital securities, which mature on March 15, 2038, are fully and unconditionally guaranteed by the Company, have a liquidation value of $1,000 per capital security, and have a mandatory redemption feature under certain circumstances. The Company issued $300.0 million of 7.405% junior subordinated deferrable interest debentures which mature on March 15, 2038, to the subsidiary trust in connection with the capital securities offering. The sole assets of the subsidiary trust are the junior subordinated debt securities. Interest costs related to these securities are reported in the consolidated statements of operations as a component of interest and debt expense. Interest paid on these securities during 2000, 1999, and 1998 was $22.2 million, $22.2 million, and $11.1 million, respectively. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 10--Pensions and Other Postretirement Benefits The Company sponsors several defined benefit pension and postretirement plans for its employees, including non-qualified pension plans. The following tables provide the changes in the benefit obligation and fair value of plan assets and statements of the funded status of the plans.
Pension Benefits Postretirement Benefits ----------------------------------------------------------- 2000 1999 2000 1999 (in millions of dollars) ----------------------------------------------------------- Change in Benefit Obligation Balance at January 1 $ 651.5 $ 648.8 $ 165.5 $ 152.1 Service Cost 12.0 22.7 4.9 5.7 Interest Cost 45.4 46.2 13.2 11.4 Plan Amendments (12.4) - 16.0 (13.2) Actuarial (Gain) Loss (6.3) (117.3) 4.1 (6.2) Early Retirement - Note 2 - 95.2 - 30.7 Benefits Paid (36.4) (44.1) (11.9) (15.0) Settlement (343.1) - - - --------- -------- ------- -------- Balance at December 31 310.7 651.5 191.8 165.5 --------- -------- ------- -------- Change in Fair Value of Plan Assets Balance at January 1 927.3 809.4 11.2 10.0 Actual Return on Plan Assets (33.1) 159.8 - 1.7 Contributions 6.8 2.2 11.6 14.5 Benefits Paid (36.4) (44.1) (11.9) (15.0) Settlement (343.1) - - - --------- --------- ------- -------- Balance at December 31 521.5 927.3 10.9 11.2 --------- -------- ------- -------- Funded (Underfunded) Status of the Plans at December 31 210.8 275.8 (180.9) (154.3) Unrecognized Net Actuarial (Gain) Loss (99.4) (346.7) 0.8 (7.0) Unrecognized Prior Service Cost (25.2) (14.7) (8.0) (26.0) Unrecognized Net Transition Obligation 0.9 1.3 - - --------- -------- -------- -------- Prepaid (Accrued) Benefit Cost $ 87.1 $ (84.3) $(188.1) $ (187.3) ========= ======== ======= ========
During the fourth quarter of 2000, the Company, through its defined benefit pension plan, purchased a single premium annuity to fund the Company's retirement benefit obligation for approximately 3,000 retirees. This transaction resulted in a gain of $116.1 million before tax, or $75.5 million after tax. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 10--Pensions and Other Postretirement Benefits - Continued At December 31, 2000, the plan assets include 448,784 shares of the Company's common stock with a fair value of $12.1 million. The amount of dividends paid during 2000 was not material. The weighted average assumptions used in the measurement of the Company's benefit obligation are as follows:
Pension Benefits Postretirement Benefits ------------------------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------- Discount Rate 7.60% 7.75% 7.60% 7.75% Expected Return on Plan Assets 9.00% 8.50 to 10.00% 6.00% 8.50% Rate of Compensation Increase 4.50% 4.00% - -
For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits assumed for 2001 was 7.5 percent. The rate range was assumed to change gradually to a rate of 5.5 percent for 2004 and remain at that level thereafter. A one percent increase or decrease in the assumed health care cost trend rate at December 31, 2000 and 1999 would have an insignificant impact on the net periodic postretirement benefit cost and postretirement benefit obligation. The following table provides the components of the net periodic benefit cost (credit) and early retirement cost for the plans described above.
Pension Benefits Postretirement Benefits ----------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 (in millions of dollars) ----------------------------------------------------------------------- Service Cost $ 12.0 $ 22.7 $ 25.9 $ 4.9 $ 5.7 $ 5.5 Interest Cost 45.4 46.2 40.5 13.2 11.4 9.5 Expected Return on Plan Assets (82.6) (79.9) (62.8) (0.7) (0.9) (0.8) Net Amortization and Deferral (23.3) (12.5) (8.5) (1.9) 2.4 (4.0) Early Retirement - Note 2 - 95.2 - - 30.7 - Settlement (116.1) - - - - - ------- ------- ------- ------- ------- ------ $(164.6) $ 71.7 $ (4.9) $ 15.5 $ 49.3 $ 10.2 ======= ======= ======= ======= ======= ======
77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 11--Stockholders' Equity and Earnings Per Share Preferred Stock In accordance with the restated certificate of incorporation, the Company has 25,000,000 shares of preferred stock authorized with a par value of $0.10 per share. No preferred shares have been issued to date. During February 1998, the Company redeemed its 8.10% cumulative preferred stock outstanding of $156.2 million. Earnings Per Common Share The computations of earnings per common share and earnings per common share assuming dilution are as follows:
Year Ended December 31 2000 1999 1998 (in millions, except share data) ------------------------------------------------ Numerator Net Income (Loss) $ 564.2 $ (182.9) $ 617.4 Preferred Stock Dividends - - 1.9 ---------- ----------- ---------- Available to Common Stockholders $ 564.2 $ (182.9) $ 615.5 ========== =========== ========== Denominator (000s) Weighted Average Common Shares - Basic 240,880.4 239,080.6 236,975.2 Dilution for Assumed Exercise of Stock Options 1,180.6 - 5,373.7 --------- ----------- ---------- Weighted Average Common Shares - Assuming Dilution 242,061.0 239,080.6 242,348.9 ========= =========== ========== Net Income (Loss) Per Common Share Basic $ 2.34 $ (0.77) $ 2.60 Assuming Dilution $ 2.33 $ (0.77) $ 2.54
In computing earnings per share assuming dilution, only potential common shares that are dilutive (those that reduce earnings per share) are included. Potential common shares are not used when computing earnings per share assuming dilution if the results would be antidilutive, such as when a net loss is reported or if options are out of the money. Approximately 10.7 million, 3.7 million, and 2.4 million options for the years ended December 31, 2000, 1999 and 1998, respectively, were not considered dilutive due to the options being out of the money. In-the-money options to purchase approximately 3.1 million common shares for the year ended December 31, 1999, were not considered dilutive due to net losses being reported for the period. 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 12--Incentive Compensation and Stock Purchase Plans Annual Incentive Compensation The Company has several annual incentive plans for certain employees and executive officers that are designed to encourage achievement of certain goals. Compensation cost recognized in the consolidated statements of operations for annual incentive plans is $28.8 million, $6.6 million, and $38.1 million for 2000, 1999, and 1998, respectively. Stock Plans Under the Stock Plan of 1999 (Stock Plan), the Company has available up to 7,500,000 shares of common stock for awards to its employees, officers, producers, and directors. Awards may be in the form of stock options, stock appreciation rights, restricted stock awards, dividend equivalent awards, or any other right or interest relating to stock. The number of shares available to be issued as restricted stock or unrestricted stock awards is limited to 2,250,000 shares. The exercise price for stock options issued under the Stock Plan shall not be less than the fair market value of the Company's stock as of the grant date. The options have a maximum term of ten years after the date of grant. Prior to the Stock Plan, the Company had various stock option and stock award programs. For all stock option plans the exercise price of each option was not less than the fair market value of the Company's stock at the date of grant. In accordance with stock plan provisions, outstanding stock options and restricted stock became immediately exercisable as a result of a change in control (see Note 2). Summaries of the Company's stock options issued under the various plans are as follows:
2000 1999 1998 -------------------------- -------------------------- ------------------------- Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price -------------- -------------- -------------- (000s) (000s) (000s) ------ ------ ------ Outstanding at January 1 14,299 $36.04 15,023 $30.43 15,516 $26.01 Granted 5,299 15.71 3,795 48.15 2,406 51.68 Exercised (612) 16.04 (3,460) 22.38 (2,402) 22.45 Forfeited or Expired (2,786) 33.66 (1,059) 44.43 (497) 34.89 ------ ------ ------ Outstanding at December 31 16,200 30.53 14,299 36.04 15,023 30.43 ====== ====== ====== December 31, 2000 ------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ---------------------------------------------------------- ------------------------------------- Weighted Average Range of Shares Remaining Years Weighted Average Shares Weighted Average Exercise Prices (000s) in Contractual Life Exercise Price (000s) Exercise Price --------------- ------ ------------------- ---------------- ------ ---------------- $ 10 to 19 5,059 7.7 $14.74 1,159 $18.09 20 to 29 3,661 5.2 25.42 2,840 25.41 30 to 39 3,404 5.5 34.92 3,380 34.94 40 to 49 1,400 7.8 45.52 661 45.98 50 to 59 2,676 7.8 53.99 2,071 53.62 ------ ------ 10 to 59 16,200 6.7 30.53 10,111 34.88 ====== ======
79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 12--Incentive Compensation and Stock Purchase Plans - Continued Employee Stock Purchase Plan (ESPP) Substantially all of the Company's employees are eligible to participate in an ESPP. Under the plan, up to 1,460,000 shares of the Company's common stock are authorized for issuance. Stock may be purchased at the end of each financial quarter at a purchase price of 85 percent of the lower of its beginning or end of quarter market prices. The Company sold 201,626; 86,497; and 75,575 shares to employees with a weighted average exercise price of $16.73, $31.71, and $39.00 in 2000, 1999, and 1998, respectively. Compensation Cost Under the Fair Value Approach (SFAS 123) The Company applies Opinion 25 and related interpretations in accounting for the stock option plans and ESPP. Accordingly, no compensation cost has been recognized for these plans. Compensation cost for the Company's stock option plans and ESPP under the fair value approach was estimated as of the grant date using Black-Scholes option pricing models. The weighted average assumptions used in estimating compensation cost for the Company during 2000 and 1999 and for the Provident plans in 1998 are as follows:
Year Ended December 31 2000 1999 1998 -------------- ------------- -------------- Volatility 24.2% 24.0% 17.9% Risk-free Rate of Return 6.6% 5.5% 5.6% Dividend Payout Rate Per Share $0.590 $0.590 $0.548 Time of Exercise Stock Option Plan 6.0 years 5.7 years 7.0 years ESPP 3 months 3 months 3 months Weighted Average Fair Value of Awards Granted During the Year Stock Option Plan $2.73 $14.33 $14.59 ESPP $5.20 $10.77 $ 9.51
Assumptions used in estimating compensation cost for Unum plans in 1998 are as follows: Volatility 23.8% to 26.4% Risk-free Rate of Return 4.2% to 5.3% Dividend Payout Rate 1.0% Time of Exercise 4 to 8 years Weighted Average Fair Value of Options Granted During the Year $12.88 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 12--Incentive Compensation and Stock Purchase Plans - Continued Had compensation cost for these plans been determined in accordance with the provisions of SFAS 123, the Company's net income (loss) and net income (loss) per common share would have been as follows:
Year Ended December 31 2000 1999 1998 (in millions of dollars, except share data) ----------------------------------------------------- Net Income (Loss) $ 556.0 $ (223.6) $ 608.5 Net Income (Loss) Per Common Share Basic 2.31 (0.94) 2.56 Assuming Dilution 2.30 (0.94) 2.51
Note 13--Reinsurance In the normal course of business, the Company assumes reinsurance from and cedes reinsurance to other insurance companies. The primary purpose of ceded reinsurance is to limit losses from large exposures; however, if the assuming reinsurer is unable to meet its obligations, the Company remains contingently liable. The Company evaluates the financial condition of reinsurers and monitors concentration of credit risk to minimize this exposure. The reinsurance receivable at December 31, 2000, relates to over 140 reinsurance relationships. Of the five major relationships which account for approximately 75 percent of the reinsurance receivable amount at December 31, 2000, all are with companies rated A or better by A.M. Best Company or are fully securitized by investment-grade fixed maturity securities held in trust. Reinsurance activity is accounted for on a basis consistent with the terms of the reinsurance contracts and the accounting used for the original policies issued. Premium income and policyholder benefits are presented in the consolidated statements of operations net of reinsurance ceded. The total amounts deducted for reinsurance ceded are as follows: Year Ended December 31 2000 1999 1998 (in millions of dollars) ----------------------------------------- Premium Income $665.3 $508.3 $544.5 Policyholder Benefits 820.8 695.5 575.2 Premium income assumed was $618.1 million, $576.7 million, and $489.0 million during 2000, 1999, and 1998, respectively. 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 13--Reinsurance - Continued Effective January 1, 2000, an insurance subsidiary of the Company reinsured the inforce individual disability income block of business of the New York Life Insurance Company through a 100 percent indemnity modified coinsurance agreement. The Company paid a ceding commission of $88.0 million which is being amortized as earnings emerge from the business assumed. During 2000 the Company entered into a 100 percent indemnity coinsurance agreement to cede the future claim payments on one of its insurance subsidiaries' long duration group long-term disability claims which were incurred prior to January 1, 1996. Total policy reserves ceded were approximately $177.9 million. The agreement was effective January 1, 2000. The gain on the transaction was immaterial. Effective July 1, 2000, the Company entered into various reinsurance agreements with Reassure America Life Insurance Company (Reassure America), an affiliate of Swiss Re Life & Health America Inc., under which Reassure America reinsured on a 100 percent indemnity coinsurance basis substantially all of the individual life insurance and corporate-owned life insurance policies written by the Company's insurance subsidiaries, as well as a small block of individually underwritten group life insurance. Reassure America has a current A.M. Best rating of A++ (superior). In consideration of the transfer of reserves, the Company received a ceding commission of $601.0 million. Total liabilities of $3,346.8 million and policy loans of $2,040.9 million were assumed by Reassure America. The $388.2 million before-tax and $252.3 million after-tax gain on these transactions was deferred and is being amortized into income based upon expected future premium income on the traditional insurance policies ceded and estimated future gross profits on the interest-sensitive insurance policies ceded. Centre Life Reinsurance Limited In 1996, the Company executed a definitive reinsurance agreement with Centre Life Reinsurance Limited (Centre Re), a Bermuda-based reinsurance specialist, for reinsurance coverage of the existing United States non-cancellable individual disability active life reserves of one of the Company's insurance subsidiaries, Unum Life Insurance Company of America. This agreement reinsures all claims incurred on or after January 1, 1996. The Company has the right, but no obligation, to recapture the business after six years without penalty. Under the agreement, Centre Re has an obligation to absorb losses within a defined risk layer. The Company retains the risk for all experience up to Centre Re's defined risk layer, or attachment point. Once the attachment point is reached, Centre Re assumes the risk for all experience up to a contractually defined risk limit. Any experience above Centre Re's defined risk limit reverts back to the Company. As of December 31, 2000, the attachment point had not been reached. The following discloses the various layers in the agreement at December 31, 2000 (in millions): Net GAAP Reserves $ 713.2 Experience Layer 385.0 ---------- Attachment Point 1,098.2 Centre Re's Defined Risk Layer 145.4 ---------- Defined Risk Limit $1,243.6 ========= 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 13--Reinsurance - Continued Under this agreement, the Company funds a trust account equal to the amount of the Company's exposure. This trust account provides security for amounts due by the Company prior to reaching the attachment point. The Company controls the management of the business, including premium collection and claims management, under this agreement. All premiums, less amounts for management expenses and claim payments, are transferred to the trust account on a quarterly basis. The Company also acts as the investment manager for 80 percent of the assets in the trust with Centre Re managing the remaining 20 percent. This reinsurance agreement transfers risk and is accounted for as a long-duration reinsurance contract in accordance with the provisions of Statement of Financial Accounting Standard No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The underlying operating results of this contract are reflected in other income, and any realized gains or losses from sales of assets are reflected as realized investment gains and losses in the Company's consolidated statements of operations. Included in miscellaneous assets in the consolidated statements of financial condition at December 31, 2000, is a deposit asset for this reinsurance arrangement of approximately $410.6 million. The deposit asset is comprised of the Company's experience layer and unrealized gains or losses on the marketable securities held in the trust. Unrealized gains or losses on marketable securities held in the trust and the related effects on claim reserves are included in other comprehensive income (loss) in the equity section of the Company's consolidated statements of financial condition. Other Reinsurance Operations The Company's reinsurance operations include the reinsurance management operations of Duncanson & Holt, Inc. (D&H) and the risk assumption, which includes reinsurance pool participation; direct reinsurance which includes accident and health (A&H), long-term care (LTC), and long-term disability coverages; and Lloyd's syndicate participations. During 1999, the Company concluded that these operations were not solidly aligned with the Company's strength in the disability insurance market. The Company decided to exit these operations through a combination of a sale, reinsurance, and/or placing certain components in run-off. In 1999, the Company sold the reinsurance management operations of its A&H and LTC reinsurance facilities and reinsured the Company's risk participation in these facilities. The Company also decided to discontinue its London accident reinsurance pool participation beginning in year 2000. With respect to Lloyd's, the Company implemented a strategy which limited participation in year 2000 underwriting risks, ceased participation in Lloyd's underwriting risks after year 2000, and managed the run-off of its risk participation in open years of account of Lloyd's reinsurance syndicates. During the first quarter of 2001, the Company entered into an agreement in principle to limit its liabilities pertaining to the Lloyd's syndicate participations. The table below summarizes the charges recognized by the Company during 2000 and 1999 related to the reinsurance operations (in millions).
2000 1999 ---------- ---------- North American Reinsurance Operations Loss on Sale of A&H and LTC Reinsurance Management Operations (includes write-off of $6.0 million of goodwill) $ - $ 12.9 Loss on Reinsurance of A&H and LTC Risk Participations - 12.7 Provision for Losses on Retained Business - 42.1 International Reinsurance Operations Provision for Losses on Lloyd's of London Syndicate Participations - 186.5 Provision for Losses on Reinsurance Pool Participations Other than Lloyd's 37.4 21.9 Goodwill Impairment Excluding Amount Recognized on Sale - 51.7 -------- -------- Total Before-Tax Charge $37.4 $327.8 ======== ========
83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 13--Reinsurance - Continued A discussion of these charges is as follows: North American Reinsurance Operations Loss on Sale of A&H and LTC Reinsurance Management Operations In 1999 the Company sold the reinsurance management operations of its A&H and LTC reinsurance facilities to American United Life Insurance Company (AUL) and also reinsured the Company's risk participation in these facilities with AUL (see below). Certain risks related to prior operations were not assumed by AUL. The terms of the sale required the Company to continue to participate in certain of the reinsurance facilities in year 2000, thereby assuming underwriting risks. A before-tax loss of $12.9 million, including the write-off of $6.0 million of goodwill related to this portion of the operations, was recognized during 1999. Loss on Reinsurance of A&H and LTC Risk Participations The Company entered into a separate indemnity reinsurance agreement with AUL whereby AUL would assume the Company's existing risk participation in the A&H and LTC reinsurance facilities. As a result, the Company recognized a 1999 before-tax loss of $12.7 million. Provision for Losses on Retained Business The reinsurance pool business consists of more than 20 different pool facilities, the majority of which are managed by D&H and a few pools which are managed by third parties. Reserve assumptions are periodically reviewed to support the determination of the ultimate cost of settling claims for certain reinsurance pools. During the first quarter of 1999, the Company reviewed the actuarial assumptions used to set reserves for certain reinsurance facilities based on the most current information available from the reinsurance pool managers. The Company also received new information pertaining to a reinsurance pool managed by a third party that indicated a reserve increase was required. The Company relied primarily on the third party pool manager's judgement and recorded its portion of the reserve as reflected in the reinsurance pool statement from the third party pool manager. The new information received from the managed facilities and the third party facility indicated deterioration in loss experience, primarily related to a longer duration of claims and increased incidence of new claims in certain facilities. The result of these reviews was an increase to claim reserves of $39.1 million during 1999. The Company determined that the increase to reserves was needed based on revised actuarial assumptions to reflect current and expected trends in claims experience and expenses. Also included in the 1999 charge was $3.0 million to recognize the estimated cost of potential uncollectible reinsurance recoveries for two reinsurers who reinsure certain of the Company's reinsurance facilities and who, as the losses have increased, have experienced financial difficulties. International Reinsurance Operations Provision for Losses on Lloyd's of London Syndicate Participations The periodic method of accounting is followed for Lloyd's syndicate participation, which requires premiums to be recognized as revenue over the policy term and claims, including the estimate of claims incurred but not reported, to be recognized as incurred. Throughout 1999, the Company received updated estimates and information about the Lloyd's market from various sources, including managing agents and underwriters of syndicates and published information from Moody's Investors Service. Consistent with overall market trends, the information and loss estimates received indicated significant deterioration in the 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 13--Reinsurance - Continued loss experience of open years of account. The deterioration in loss experience related primarily to significant losses in certain syndicates (space and aviation, accident and health, and other non-marine classes of business) and continued pressure on the pricing of insurance coverage provided by the Lloyd's market. The Company also discussed projected results of the Lloyd's market with the underwriters of the syndicates that are managed through a subsidiary of the Company. These projected results also indicated future deterioration of the open years of account. Market conditions were not expected to improve dramatically in the near term. Using this information and recent experience with prior revisions of estimated losses in this business, the Company performed a review of its claim reserve liabilities related to its open years of account. The review of estimates related to open years of account was performed based on a periodic review of these estimates as information was received from the Lloyd's syndicates. The review resulted in revised best estimates of the expected ultimate profit or loss for each open year of account, which were significantly below the levels estimated in 1998. The resulting charge to earnings in the amount of $185.0 million was reflected in the Company's income during 1999 for the open years of account 1996 through 1999. In addition to the risk participation charge, during 1999 the Company recorded a charge of $1.5 million, which represented the reduction of previously recognized profit commissions related to the Lloyd's management company operations. As previously stated, during the first quarter of 2001, the Company entered into an agreement in principle to limit its liabilities pertaining to the Lloyd's syndicate participations. Provision for Losses on Reinsurance Pool Participations Other than Lloyd's In connection with the development of the cost of exiting the reinsurance operations, during 1999 the Company updated its review of reserves related to non-Lloyd's reinsurance operations as well as future costs associated with managing the run-off of the retained reinsurance pools liabilities. Based upon this review, the Company increased reserves related to its participation in certain managed and non-managed reinsurance facilities by $21.9 million in 1999. During 2000, the Company recognized $37.4 million of additional charges related to the run-off of the Company's London accident reinsurance pool participation. During 1999, the Company recorded charges resulting from its decision to exit these pools, but at that time there was insufficient information to fully evaluate all of the exposures. Working with the pool managers in London, the Company revised its estimates to reflect current and expected trends in claims experience and expenses. The 2000 charge included an increase of $21.9 million in claim reserves for certain of the reinsurance pools and $15.5 million related to uncollectible receivables and loss provisions. Goodwill Impairment When an event or change in circumstance occurs that indicates the recoverability of an asset should be assessed for impairment, a recoverability test is performed to determine if impairment has occurred. Following the poor results of the reinsurance operations in the first quarter of 1999, the Company updated the goodwill recoverability test using the most current results and forecasts. The goodwill recoverability test used the held-for-use model that compares the undiscounted cash flows of these operations to determine whether those cash flows can recover the unamortized goodwill. After factoring in the first quarter 1999 results and the revised forecasts current at that time, future undiscounted cash flows were insufficient to recover the entire goodwill amount, indicating that the goodwill was impaired. Goodwill recoverability testing of these operations performed prior to March 31, 1999 had indicated that the goodwill was not impaired. 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 13--Reinsurance - Continued As a result of the impairment, the Company calculated the estimated fair value of these operations. In estimating the fair value, two valuation techniques were utilized, a discount free cash flow model and a multiple of earnings model. The Company believed that these valuation techniques were appropriate for this type of business as these techniques were what the Company would use in evaluating a potential acquisition of this type of business. The results of the two valuation techniques created a range of fair values from $47.0 million to $64.0 million. The Company evaluated the range of values produced by the valuation techniques and using internal management judgement of the potential liquidation value, the Company determined its best estimate of fair value of its investment to be the midpoint of the range. The estimated fair value was compared to the book value for the investment, resulting in a write-down of goodwill in the amount of $27.0 million in the first quarter of 1999. In the second quarter of 1999, the Company stated its intent to sell its reinsurance management operations, assuming the transaction would achieve the Company's financial objectives. The Company estimated the fair value of the management operations using the held-for-sale model, which compares the carrying value of the asset with the fair value less costs to sell. This resulted in an additional write-down of goodwill in the amount of $2.0 million. Following the write-downs of $27.0 million and $2.0 million, the Company's remaining unamortized goodwill related to its reinsurance operations was $53.7 million. Of the $31.0 million unamortized balance attributable to the A&H and LTC business being sold, $6.0 million was determined to be unrecoverable and was written off and included in the $12.9 million loss on the sale reported above. The balance of $25.0 million was recovered through the sales proceeds when the sale closed. The remaining unamortized balance of $22.7 million was determined to be unrecoverable based on revised earnings forecasts for the reinsurance operations and was written off during the third quarter of 1999. The total write-down of goodwill was $51.7 million during 1999, exclusive of the $6.0 million included in the loss on the sale. Retained Risks The Company has provided its best estimate of the cost of known losses. Under this exit strategy, the Company retained certain risks, including the exposure associated with disputes arising from reinsurance pools disclosed in Note 15. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 14--Segment Information Selected data by segment is as follows:
Year Ended December 31 2000 1999 1998 (in millions of dollars) -------------------------------------------- Premium Income Employee Benefits $ 4,042.5 $ 3,900.2 $ 3,364.4 Individual 1,777.2 1,645.5 1,589.9 Voluntary Benefits 739.6 691.6 666.7 Other 497.7 605.9 508.0 ---------- ---------- ----------- 7,057.0 6,843.2 6,129.0 Net Investment Income and Other Income Employee Benefits 853.1 745.1 661.0 Individual 962.3 831.9 779.1 Voluntary Benefits 119.7 112.9 103.7 Other 406.7 641.7 759.8 Corporate 48.1 67.7 31.7 ---------- ---------- ----------- 2,389.9 2,399.3 2,335.3 Total Revenue (Excluding Net Realized Investment Gains and Losses) Employee Benefits 4,895.6 4,645.3 4,025.4 Individual 2,739.5 2,477.4 2,369.0 Voluntary Benefits 859.3 804.5 770.4 Other 904.4 1,247.6 1,267.8 Corporate 48.1 67.7 31.7 ---------- ---------- ----------- 9,446.9 9,242.5 8,464.3 Benefits and Expenses Employee Benefits 4,461.3 4,625.9 3,489.1 Individual 2,441.4 2,223.3 2,181.7 Voluntary Benefits 705.3 667.5 639.3 Other 861.1 1,426.1 1,131.8 Corporate 97.6 552.3 157.2 ---------- ---------- ----------- 8,566.7 9,495.1 7,599.1 Income (Loss) Before Net Realized Investment Gains and Losses and Federal Income Taxes Employee Benefits 434.3 19.4 536.3 Individual 298.1 254.1 187.3 Voluntary Benefits 154.0 137.0 131.1 Other 43.3 (178.5) 136.0 Corporate (49.5) (484.6) (125.5) ---------- ---------- ----------- 880.2 (252.6) 865.2 Net Realized Investment Gains (Losses) (14.6) 87.1 55.0 ---------- ---------- ----------- Income (Loss) Before Federal Income Taxes 865.6 (165.5) 920.2 Federal Income Taxes 301.4 17.4 302.8 ---------- ---------- ----------- Net Income (Loss) $ 564.2 $ (182.9) $ 617.4 ========== ========== ===========
87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 14--Segment Information - Continued Included in benefits and expenses above is amortization of deferred policy acquisition costs, value of business acquired, and goodwill. Amortization of these items by segment is as follows:
Year Ended December 31 2000 1999 1998 (in millions of dollars) ------------------------------------------- Employee Benefits $ 149.6 $ 109.1 $ 85.2 Individual 131.8 108.8 96.6 Voluntary Benefits 114.6 115.4 101.6 Other 105.5 179.8 132.7 Corporate 22.3 82.6 28.0 --------- -------- -------- $ 523.8 $ 595.7 $ 444.1 ========= ======== ========
December 31 2000 1999 Assets (in millions of dollars) ---------------------------------------- Employee Benefits $ 11,282.8 $ 9,984.0 Individual 16,162.6 13,831.3 Voluntary Benefits 2,210.4 2,103.8 Other 9,864.8 10,838.2 Corporate 843.3 1,690.2 ------------ ----------- $ 40,363.9 $ 38,447.5 ============ ===========
Note 15--Commitments and Contingent Liabilities Commitments During 2000, the Company entered into an agreement to sell Provident National Assurance Company, an inactive subsidiary of the Company. The transaction, which was subject to regulatory approval, closed in the first quarter of 2001. Contingent Liabilities In 1997 two alleged class action lawsuits were filed in Superior Court in Worcester, Massachusetts (Superior Court) against UnumProvident and several of its subsidiaries, The Paul Revere Corporation, The Paul Revere Life Insurance Company, The Paul Revere Variable Annuity Insurance Company, The Paul Revere Protective Life Insurance Company, and the Company. One of the lawsuits purports to represent all career agents of subsidiaries of The Paul Revere Corporation (Paul Revere) whose employment relationships ended on June 30, 1997 and were offered contracts to sell insurance policies as independent producers. The other purports to represent independent brokers who sold certain Paul Revere individual disability income policies with benefit riders. Motions filed by UnumProvident and affiliates to dismiss most of the counts in the complaints, which allege various breach of contract and statutory claims, have been denied. A hearing to determine class certification was heard on December 20, 1999 in Superior Court. The court certified a class for the independent brokers and has denied class certification for the career agents. UnumProvident and affiliates appealed the class certification for the independent brokers, but the appeal was denied. Summary judgment motions were heard on November 10, 2000, and all motions from plaintiffs and defendants were denied. A trial date for the class action is set for March 26, 2001. UnumProvident and affiliates have filed a conditional counterclaim in the class action which requests a substantial return of commissions should the Superior Court agree with the plaintiffs' interpretation of the contracts. The career agent plaintiffs have re-filed, but not served, their complaint seeking class 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 15--Commitments and Contingent Liabilities - Continued action status by limiting the issues to those in the certified broker class action. UnumProvident and affiliates believe that they have strong defenses to both lawsuits and plans to vigorously defend their position. In addition, the same plaintiffs' attorney who had initially filed the class action lawsuits has filed 50 individual lawsuits on behalf of current and former Paul Revere sales managers alleging various breach of contract claims. UnumProvident and affiliates filed a motion in federal court to compel arbitration for 17 of the plaintiffs who are licensed by the National Association of Securities Dealers and have executed the Uniform Application for Registration or Transfer in the Securities Industry (Form U-4). The federal court denied 15 of those motions and granted two. UnumProvident and affiliates appealed the denial of the 15 motions before the First Circuit Court of Appeals, but the District Court decision was affirmed. The two cases set for arbitration should be heard in 2001, but plaintiffs have appealed the arbitration ruling to the First Circuit Court of Appeals. Oral argument has been set for March 7, 2001. Eight of the other cases are tentatively set to begin trials in 2002. UnumProvident and affiliates believe that they have strong defenses and plans to vigorously defend their position in these cases. Although the individual lawsuits described above are in the early stages, management does not currently expect these suits to materially affect the financial position or results of operations of the Company. During September and October 1999, the Company and several of its officers were named as defendants in five class action lawsuits filed in the United States District Court for the District of Maine. On January 3, 2000, the Maine district court appointed a lead class action plaintiff and ordered plaintiffs to file a consolidated amended complaint. On January 27, 2000, a sixth complaint against the same defendants was filed in the Southern District of New York. On March 7, 2000, the sixth action was transferred to the District of Maine, and that action was voluntarily dismissed by the plaintiff on June 12, 2000. On February 23, 2000, two consolidated amended class action complaints were filed against the same defendants. The first amended class action complaint asserts a variety of claims under the Securities Exchange Act of 1934, as amended, on behalf of a putative class of shareholders who purchased or otherwise acquired stock in the Company or Unum between February 4, 1998 and February 9, 2000. The second amended complaint asserts a variety of claims under the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, on behalf of a putative class of shareholders who exchanged the common stock of Unum or Provident for the Company's stock pursuant to the joint proxy/registration statement issued in connection with the merger between Unum and Provident. The complaints allege that the defendants made false and misleading public statements concerning, among other things, Unum's and the Company's reserves for disability insurance and pricing policies, the Company's merger costs, and the adequacy of the due diligence reviews performed in connection with the merger. The complaints seek money damages on behalf of all persons who purchased or otherwise acquired Company or Unum stock in the class period or who were issued Company stock pursuant to the merger. On April 10, 2000, the defendants filed a motion to dismiss the complaints. On January 8, 2001, the district court affirmed a Recommended Decision by the Magistrate Judge, entered November 8, 2000, that granted in part, and denied in part, the motion. The district court granted the motion to dismiss plaintiff's claims (i) under Section 10(b) of the Securities Exchange Act of 1934, (ii) under Section 14(a) of the Securities Exchange Act of 1934 on behalf of the former shareholders of Unum Corporation, and (iii) under Section 12(a) of the Securities Act of 1933 on behalf of purchasers of UnumProvident stock after the merger. The district court also dismissed plaintiff's claims relating to disclosures regarding the costs associated with Unum's exit from its reinsurance business, but otherwise denied defendants' motion to dismiss plaintiff's claims under Sections 11 and 12(a) (2) of the Securities Act of 1933 and the claim under Section 14(a) of the Securities Exchange Act of 1934. On February 16, 2001, each defendant answered the complaint by denying generally the material allegations of the complaint. On January 30, 2001, the district court issued an Amended Scheduling Order that, among other things, ordered all discovery to be complete by July 10, 2001, and directed that the case be prepared for trial in November 2001. Pre-trial discovery is now underway. The Company disputes the claims alleged in the complaint and plans to vigorously contest them. 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 15--Commitments and Contingent Liabilities - Continued In certain reinsurance pools associated with the Company's reinsurance businesses there are disputes among the pool members and reinsurance participants concerning the scope of their obligations and liabilities within the complex pool arrangements, including pools for which subsidiaries of the Company acted either as pool managers or underwriting agents, as pool members or as reinsurers. The Company or the Company's subsidiaries either have been or may in the future be brought into disputes, arbitration proceedings, or litigation with other pool members or reinsurers of the pools in the process of resolving the various claims. See Note 13 for further discussion regarding reinsurance pool participation. Various other lawsuits against the Company have arisen in the normal course of its business. Contingent liabilities that might arise from such other litigation are not deemed likely to materially affect the financial position or results of operations of the Company. Note 16--Statutory Financial Information Statutory Net Income (Loss), Capital and Surplus, and Dividends The Company's insurance subsidiaries' statutory net income (loss), as reported in conformity with statutory accounting practices prescribed by state regulatory authorities, for the years ended December 31, 2000, 1999, and 1998, was $353.5 million, $(233.7) million, and $227.0 million, respectively. Statutory net gain (loss) from operations was $414.8 million, $(220.7) million, and $266.2 million for the years ended December 31, 2000, 1999, and 1998, respectively. Excluding the expenses related to the merger and early retirement offer and the changes in reserves as discussed in Note 2, the federal income tax refund activity, and the reinsurance operations charges, the Company's insurance subsidiaries' statutory net gain from operations was $21.0 million for the year ended 1999. Statutory capital and surplus at December 31, 2000 and 1999, was $3,263.0 million and $2,718.1 million, respectively. Regulatory restrictions limit the amount of dividends available for distribution to the Company from its insurance subsidiaries without prior approval by regulatory authorities. Generally, that limitation equals the greater of ten percent of an insurer's statutory surplus as regards policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year. Based on the applicable restrictions, $359.9 million will be available for the payment of dividends to the Company from its top-tier domestic insurance subsidiaries during 2001. The Company also has the ability to draw a dividend from its United Kingdom subsidiary, Unum Limited. Such dividends are limited based on insurance company legislation in the United Kingdom, which requires a minimum solvency margin. The amount available under current law for payment of dividends to the Company from Unum Limited during 2001 is approximately $20.9 million. Regulatory restrictions do not limit the amount of dividends available for distribution to the Company from its non-insurance subsidiaries. Permitted Statutory Accounting Practices The Company's insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (NAIC) and the applicable state regulatory authorities. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the NAIC. Currently, permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. At December 31, 2000, the Company had not applied any permitted accounting practices that differed from prescribed statutory accounting practices that had a material impact on the financial position or results of operations of the insurance subsidiaries. 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 16--Statutory Financial Information - Continued The NAIC and the insurance subsidiaries' states of domicile have approved a codification of statutory accounting practices effective January 1, 2001, which will serve as a comprehensive and standardized guide to statutory accounting principles. The codification changes, to some extent, the accounting practices that the Company's insurance subsidiaries use to prepare their statutory financial statements. The cumulative effect of changes in accounting principles adopted to conform to the codification of statutory accounting principles will be reported as an adjustment to statutory surplus as of January 1, 2001. Based on preliminary estimates, the Company believes that these accounting changes will have a positive impact on consolidated statutory surplus for the Company's insurance subsidiaries. Deposits At December 31, 2000, the Company's insurance subsidiaries had on deposit with regulatory authorities securities with a book value of $1,407.6 million held for the protection of policyholders. Note 17--Quarterly Results of Operations (Unaudited) The following is a summary of unaudited quarterly results of operations for 2000 and 1999:
2000 ---------------------------------------------------------------- 4/th/ 3/rd/ 2/nd/ 1/st/ ---------------------------------------------------------------- (in millions of dollars, except share data) ---------------------------------------------------------------- Premium Income $1,731.7 $1,754.6 $1,789.9 $1,780.8 Net Investment Income 482.9 482.4 543.0 552.1 Net Realized Investment Gains (Losses) (2.2) (14.0) 1.8 (0.2) Total Revenue 2,302.8 2,311.7 2,423.7 2,394.1 Income Before Federal Income Taxes 231.1 208.5 219.6 206.4 Net Income 149.6 137.0 143.1 134.5 Net Income Per Common Share Basic .62 .57 .59 .56 Assuming Dilution .62 .57 .59 .56 1999 ---------------------------------------------------------------- 4/th/ 3/rd/ 2/nd/ 1/st/ ---------------------------------------------------------------- (in millions of dollars, except share data) ---------------------------------------------------------------- Premium Income $1,738.1 $1,736.2 $1,687.4 $1,681.5 Net Investment Income 528.7 513.4 518.0 499.6 Net Realized Investment Gains (Losses) (2.2) 77.9 4.2 7.2 Total Revenue 2,349.8 2,433.1 2,277.6 2,269.1 Income (Loss) Before Federal Income Taxes 208.7 (262.8) (274.6) 163.2 Net Income (Loss) 136.0 (217.0) (191.2) 89.3 Net Income (Loss) Per Common Share Basic .57 (.91) (.80) .38 Assuming Dilution .56 (.91) (.80) .37
During the third quarter of 1999, the Company incurred net charges of $592.2 million before tax ($436.2 million after tax) related to reserve increases, reinsurance operation activities, and merger costs, partially offset by interest income on a federal income tax refund. During the second quarter of 1999, the Company incurred net charges of $508.8 million before tax ($350.3 million after tax) related to reserve increases and merger and early retirement 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued UnumProvident Corporation and Subsidiaries Note 17--Quarterly Results of Operations (Unaudited) - Continued costs. During the first quarter of 1999, the Company incurred net charges of $101.1 million before tax ($88.0 million after tax) related to reserve increases and reinsurance operation activities. See notes preceding for further discussion. 92 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 93 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The information required by this Item with respect to directors is included under the caption "Information Concerning the Nominees" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 10, 2001, and is incorporated herein by reference. Executive Officers of the Registrant The executive officers of the Company, all of whom are also executive officers of certain principal subsidiaries, were elected to serve for one year or until their successors are chosen and qualified.
Name Age Position ---- --- -------- J. Harold Chandler 51 Chairman, President, Chief Executive Officer, and Director Thomas R. Watjen 46 Executive Vice President, Finance and Risk Management F. Dean Copeland 61 Executive Vice President, Legal and Administrative Affairs, and General Counsel Robert O. Best 51 Senior Vice President, Customer Service, and Chief Information Officer Robert C. Greving 49 Senior Vice President, Finance, and Chief Actuary Ralph W. Mohney 49 Senior Vice President, Customer Care John S. Roberts 45 Senior Vice President, Underwriting
Mr. Chandler originally became Chairman of the Company on April 28, 1996, and President and Chief Executive Officer of the Company's predecessor, Provident Life and Accident Insurance Company of America, effective November 8, 1993. On June 30, 1999, in connection with the merger with Unum, he became President and Chief Operating Officer of the Company, relinquishing the offices of Chairman and CEO. He reassumed the offices of Chairman and CEO of the Company on November 1, 1999 following the retirement of James F. Orr, III. Mr. Watjen became Executive Vice President, Finance, of the Company on June 30, 1999 and assumed the additional Risk Management responsibilities on November 1, 1999. Prior to the merger with Unum, he was Vice Chairman and Chief Financial Officer of the Company, positions he assumed on March 26, 1997. He became Executive Vice President and Chief Financial Officer on July 1, 1994. Prior to joining the Company, he served as a Managing Director of the insurance practice of the investment banking firm, Morgan Stanley & Co., which he joined in 1987. Mr. Copeland became Executive Vice President and General Counsel of the Company on May 12, 1997 and assumed the additional responsibilities of Executive Vice President, Legal and Administrative Affairs, on June 30, 1999. Prior to joining the Company in May 1997, he was a partner since 1972 in the law firm of Alston & Bird, where he concentrated primarily on matters related to consolidation within the financial services industry. Mr. Best became Senior Vice President, Customer Service, and Chief Information Officer in March 2000. Following the merger with Unum he became Senior Vice President, Customer Service in June 1999. Prior to the merger he served as Executive Vice President, Customer Service, and Chief Information Officer of the Company beginning in May 1997. He joined the Company as Senior Vice President and Chief Information Officer in July 1994. Mr. Greving became Senior Vice President, Finance, and Chief Actuary in August 2000. He joined the Company as Senior Vice President and Chief Actuary in April 1997. Prior to joining the Company, he was Executive Vice President and Chief Actuary of Southwestern Financial Services, Corp. from June 1990 until March 1997. 94 Mr. Mohney became Senior Vice President, Customer Care in December 1999. He had served as Senior Vice President, Claims from June 1997, and Vice President, Claims from October 1994. Mr. Mohney originally joined Accident in 1974. Mr. Roberts was named Senior Vice President, Underwriting following the merger with Unum. He had served as Executive Vice President of Unum America since 1998. In 1997 he was named Senior Vice President of Unum America's Product Center Group. Prior to that time he had served as Senior Vice President of Long- term Disability for Unum America since 1994. He originally joined Unum America in 1977. ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION The information required by this Item is included under the captions "Compensation of Directors" and "Executive Compensation" of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 2001, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included under the caption "Beneficial Ownership of Company Securities" and under the caption "Security Ownership of Directors and Officers" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 10, 2001, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included under the caption "Certain Transactions" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 10, 2001, and is incorporated herein by reference. 95 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this report: Page (1) Financial Statements The following report and consolidated financial statements of UnumProvident Corporation and Subsidiaries are included in Item 8. Report of Ernst & Young LLP, Independent Auditors ......................................... 39 Report of PriceWaterhouseCoopers LLP, Independent Auditors ................................ 40 Consolidated Statements of Financial Condition at December 31, 2000 and 1999 .............. 41 Consolidated Statements of Operations for the three years ended December 31, 2000........... 43 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2000 ....................................................................... 44 Consolidated Statements of Cash Flows for the three years ended December 31, 2000........... 45 Notes to Consolidated Financial Statements ................................................ 47 (2) Schedules Supporting Financial Statements I. Summary of Investments - Other than Investments in Related Parties .................. 99 II. Condensed Financial Information of Registrant ....................................... 100 III. Supplementary Insurance Information ................................................ 104 IV. Reinsurance ......................................................................... 106 V. Valuation and Qualifying Accounts ................................................... 107
Schedules not referred to have been omitted as inapplicable or because they are not required by Regulation S-X. (3) Exhibits See Index to Exhibits on page 108 of this report. (b) Reports on Form 8-K: Form 8-K filed on January 3, 2001, reporting changing role for Elaine D. Rosen. Form 8-K filed on February 12 2001, reporting fourth quarter 2000 financial results. Form 8-K filed on March 2, 2001, reporting issuance of 7.625% senior notes. 96 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 28, 2001. UnumProvident Corporation (Registrant) /s/ J.Harold Chandler ----------------------------------- J. Harold Chandler Chairman, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date - ------------------------------- --------------------------------------- ----------------- /s/ J. Harold Chandler Chairman, President, and Chief - ------------------------------- Executive Officer and a Director March 28, 2001 J. Harold Chandler /s/ Thomas R. Watjen Executive Vice President, Finance and - ------------------------------- Risk Management March 28, 2001 Thomas R. Watjen /s/ Robert C. Greving Senior Vice President, Finance, and - ------------------------------- Chief Actuary Robert C. Greving March 28, 2001 * Director - ------------------------------- William L. Armstrong March 28, 2001 * Director - ------------------------------- Ronald E. Goldsberry March 28, 2001 * Director - ------------------------------- Hugh O. Maclellan, Jr. March 28, 2001 * Director - ------------------------------- A. S. MacMillan March 28, 2001 * Director - ------------------------------- George J. Mitchell March 28, 2001 * Director - ------------------------------- Cynthia A. Montgomery March 28, 2001 * Director - ------------------------------- James L. Moody, Jr. March 28, 2001
97
Name Title Date - ------------------------------------------ ------------------------------- --------------- * Director - ------------------------------------------ C. William Pollard March 28, 2001 * Director - ------------------------------------------ Lawrence R. Pugh March 28, 2001 * Director - ------------------------------------------ Lois D. Rice March 28, 2001 * Director - ------------------------------------------ John W. Rowe March 28, 2001 * Director - ------------------------------------------ Burton E. Sorensen March 28, 2001 * By: /s/ Susan N. Roth For all of the Directors - ------------------------------------------ Susan N. Roth March 28, 2001 Attorney-in-Fact
98 SCHEDULE I--SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES UnumProvident Corporation and Subsidiaries December 31, 2000
Amount at which shown in the Fair statement Type of Investment Cost Value of financial position (in millions of dollars) - --------------------------------------------------------------------------------------------------------------------------------- Available-for-Sale Fixed Maturity Securities: Bonds United States Government and Government Agencies and Authorities $ 76.9 $ 91.8 $ 91.8 States, Municipalities, and Political Subdivisions 155.0 158.3 158.3 Foreign Governments 752.1 883.0 883.0 Public Utilities 3,131.8 3,226.1 3,226.1 Mortgage-backed Securities 3,159.8 3,316.8 3,316.8 Convertible Bonds 65.3 48.6 48.6 All Other Corporate Bonds 14,477.4 14,422.0 14,422.0 Redeemable Preferred Stocks 112.9 95.7 95.7 ------------ ------------ ------------ Total 21,931.2 $ 22,242.3 22,242.3 ------------ ------------ ------------ Held-to-Maturity Fixed Maturity Securities: Bonds United States Government and Government Agencies and Authorities 6.9 $ 8.5 6.9 States, Municipalities, and Political Subdivisions 1.5 1.6 1.5 Mortgage-backed Securities 320.7 341.3 320.7 All Other Corporate Bonds 17.5 18.4 17.5 ------------ ------------ ------------ Total 346.6 $ 369.8 346.6 ------------ ============ ------------ Equity Securities: Common Stocks 22.0 $ 23.6 23.6 Nonredeemable Preferred Stocks 1.2 0.9 0.9 ------------ ------------ ------------ Total 23.2 $ 24.5 24.5 ------------ ============ ------------ Mortgage Loans 1,148.5 1,135.6 * Real Estate Acquired in Satisfaction of Debt 24.3 18.2 * Other Real Estate 149.1 98.5 * Policy Loans 2,426.7 2,426.7 Other Long-term Investments 32.3 32.3 Short-term Investments 279.4 279.4 ------------ ------------ $ 26,361.3 $ 26,604.1 ============ ============
*Difference between cost and carrying value results from certain valuation allowances and other temporary declines in value. 99 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT UnumProvident Corporation (Parent Company) STATEMENTS OF FINANCIAL CONDITION
December 31 2000 1999 (in millions of dollars) ------------------------------------- ASSETS Fixed Maturity Securities Available-for-Sale--at fair value (cost: $10.1; $9.6) $ 10.4 $ 10.0 Investment in Subsidiaries 7,835.1 7,060.8 Short-term Notes Receivable from Subsidiaries 183.6 214.8 Surplus Notes of Subsidiaries 250.0 250.0 Other Assets 472.1 177.6 ---------- ---------- Total Assets $ 8,751.2 $ 7,713.2 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Short-term Debt from Subsidiaries $ 491.9 $ 26.6 Short-term Debt 400.0 1,059.4 Long-term Debt 1,615.5 1,166.5 Other Liabilities 368.3 178.5 ----------- ---------- Total Liabilities 2,875.7 2,431.0 ----------- ---------- Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debt Securities of the Company 300.0 300.0 ----------- ---------- STOCKHOLDERS' EQUITY Common Stock 24.1 24.1 Additional Paid-in Capital 1,040.2 1,028.6 Accumulated Other Comprehensive Income (Loss) 140.7 (18.9) Retained Earnings 4,379.7 3,957.6 Treasury Stock (9.2) (9.2) ----------- ---------- Total Stockholders' Equity 5,575.5 4,982.2 ----------- ---------- Total Liabilities and Stockholders' Equity $ 8,751.2 $ 7,713.2 =========== ==========
See notes to condensed financial information. 100 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) UnumProvident Corporation (Parent Company) STATEMENTS OF OPERATIONS
Year Ended December 31 2000 1999 1998 (in millions of dollars) ------------------------------------------------------- Dividends from Subsidiaries $ 138.8 $ 97.0 $ 77.9 Interest from Subsidiaries 20.8 24.9 21.3 Other Income 22.8 12.8 10.4 --------- ---------- --------- Total Revenue 182.4 134.7 109.6 --------- ---------- --------- Interest and Debt Expense 204.3 110.3 62.7 Other Expenses (Credit) (101.3) 49.6 2.6 --------- ---------- --------- Total Expenses 103.0 159.9 65.3 --------- ---------- --------- Income (Loss) Before Federal Income Taxes and Equity in Undistributed Earnings (Losses) of Subsidiaries 79.4 (25.2) 44.3 Federal Income Taxes (Credit) (10.7) (38.5) 8.1 --------- ---------- --------- Income Before Equity in Undistributed Earnings (Losses) of Subsidiaries 90.1 13.3 36.2 Equity in Undistributed Earnings (Losses) of Subsidiaries 474.1 (196.2) 581.2 --------- ---------- --------- Net Income (Loss) $ 564.2 $ (182.9) $ 617.4 ========= ========== =========
See notes to condensed financial information. 101 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) UnumProvident Corporation (Parent Company) STATEMENTS OF CASH FLOWS
Year Ended December 31 2000 1999 1998 (in millions of dollars) -------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES $ 78.3 $ 26.0 $ 11.6 ----------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Net Sales of Short-term Investments 2.6 2.8 13.3 Acquisition of Business and Business Combinations - - 146.0 Cash Distributions (to) from Subsidiaries (224.0) (492.3) 13.3 Short-term Notes Receivable from Subsidiaries 31.2 (14.3) 20.5 Other (22.5) (15.9) (24.2) ----------- ----------- ---------- CASH PROVIDED (USED) BY INVESTING ACTIVITIES (212.7) (519.7) 168.9 ----------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net Short-term Borrowings from Subsidiaries 465.3 (27.8) 7.7 Net Short-term Debt and Commerical Paper (Repayments) Borrowings (210.4) 602.4 - Issuance of Long-term Debt - - 600.0 Long-term Debt Repayments - - (725.0) Issuance of Company-Obligated Mandatorily Redeemable Preferred Securities - - 300.0 Redemption of Preferred Stock - - (156.2) Issuance of Common Stock 11.6 69.7 11.9 Dividends Paid to Stockholders (142.1) (138.9) (139.1) Repurchase of Common Stock - - (72.7) Other - - (6.6) ----------- ----------- ---------- CASH PROVIDED (USED) BY FINANCING ACTIVITIES 124.4 505.4 (180.0) ----------- ----------- ---------- INCREASE (DECREASE) IN CASH $ (10.0) $ 11.7 $ 0.5 ========== =========== ==========
See notes to condensed financial information. 102 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) UnumProvident Corporation (Parent Company) NOTES TO CONDENSED FINANCIAL INFORMATION Note 1--Basis of Presentation The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of UnumProvident Corporation and Subsidiaries. Note 2--Surplus Notes of Subsidiaries At December 31, 2000 and 1999, UnumProvident Corporation (Parent Company) held from its insurance subsidiaries a $150.0 million surplus debenture due in 2006 and a $100.0 million surplus debenture due in 2027. Semi-annual interest payments are conditional upon the approval by the insurance departments of the subsidiaries' states of domicile. The weighted average interest rate for surplus notes of subsidiaries was 8.2 percent in 2000 and 1999, and 8.1 percent in 1998. Note 3--Other Expenses (Credit) As reported in Note 10 of the consolidated financial statements of UnumProvident Corporation and Subsidiaries, during 2000 UnumProvident Corporation, through its defined benefit pension plan, purchased a single premium annuity to fund its retirement benefit obligation. This transaction resulted in a gain of $116.1 million and is reported in other expenses (credit). 103 SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION UnumProvident Corporation and Subsidiaries
Future Policy Deferred Benefits, Other Policy Policy Losses, Claims and Acquisition Claims, and Unearned Benefits Segment Costs Loss Expenses Premiums Payable (in millions of dollars) - ----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 Employee Benefits $ 907.8 $ 6,197.4 $ 17.5 $1,020.4 Individual 1,006.0 11,624.0 274.8 356.2 Voluntary Benefits 477.6 1,302.9 14.8 107.3 Other 32.6 6,509.6 25.7 312.9 --------- ---------- -------- --------- Total $ 2,424.0 $ 25,633.9 $ 332.8 $ 1,796.8 ========= ========== ======== ========= Year Ended December 31, 1999 Employee Benefits $ 826.3 $ 5,558.6 $ 15.1 $ 949.7 Individual 891.2 10,182.5 267.9 355.3 Voluntary Benefits 438.0 868.0 16.4 99.7 Other 235.7 6,730.0 81.2 317.4 --------- ---------- -------- --------- Total $ 2,391.2 $ 23,339.1 $ 380.6 $ 1,722.1 ========= ========== ======== =========
(Continued on following page) 104 SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION UnumProvident Corporation and Subsidiaries (continued from preceding page)
Benefits, Amortization Claims, of Deferred Net Losses and Policy Other Premium Investment Settlement Acquisition Operating Premiums Segment Revenue Income (1) Expenses Costs Expenses (2) Written (3) (in millions of dollars) - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 Employee Benefits $4,042.5 $ 701.8 $3,426.2 $147.2 $ 887.9 $2,850.5 Individual 1,777.2 840.3 1,858.4 91.1 491.9 1,780.1 Voluntary Benefits 739.6 113.4 447.2 112.3 145.8 544.7 Other 497.7 377.2 675.7 105.9 79.5 424.6 Corporate - 27.7 - - 97.6 -------- -------- -------- ------ -------- Total $7,057.0 $2,060.4 $6,407.5 $456.5 $1,702.7 ======== ======== ======== ====== ======== Year Ended December 31, 1999 Employee Benefits $3,900.2 $ 604.9 $3,663.9 $106.6 $ 855.4 $2,783.6 Individual 1,645.5 771.1 1,604.2 77.7 541.4 1,660.2 Voluntary Benefits 691.6 106.6 392.7 113.0 161.8 514.3 Other 605.9 549.5 1,126.8 177.5 121.8 495.0 Corporate - 27.6 - - 552.3 -------- -------- -------- ------ -------- Total $6,843.2 $2,059.7 $6,787.6 $474.8 $2,232.7 ======== ======== ======== ====== ======== Year Ended December 31, 1998 Employee Benefits $3,364.4 $ 541.8 $2,642.6 $ 82.6 $ 763.9 $2,353.7 Individual 1,589.9 722.6 1,559.0 65.2 557.5 1,595.9 Voluntary Benefits 666.7 94.8 369.4 99.4 170.5 499.4 Other 508.0 645.2 878.7 130.3 122.8 410.9 Corporate - 31.0 - - 157.2 -------- -------- -------- ------ -------- Total $6,129.0 $2,035.4 $5,449.7 $377.5 $1,771.9 ======== ======== ======== ====== ========
(1) Net investment income is allocated based upon segmentation. Each segment has its own specifically identified assets and receives the investment income generated by those assets. (2) Other operating expenses are allocated to each segment based on activity levels, time information, and usage statistics. (3) Excludes life insurance. (4) The individual life line of business, which was previously reported in the Individual segment, is now reported in the Other segment. Prior period results have been reclassified to conform to current reporting. 105 SCHEDULE IV--REINSURANCE UnumProvident Corporation and Subsidiaries
Percentage Ceded Assumed Amount Gross to Other from Other Net Assumed Amount Companies Companies Amount to Net (in millions of dollars) - ---------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 Life Insurance in Force $581,765.8 $62,312.3 $2,081.7 $521,535.2 0.4% ========== ========= ======== ========== Premium Income: Life Insurance $ 1,642.6 $ 209.5 $ 15.7 $ 1,448.8 1.1% Accident and Health Insurance 5,461.6 455.8 602.4 5,608.2 10.7% ---------- --------- -------- --------- Total $ 7,104.2 $ 665.3 $ 618.1 $ 7,057.0 8.8% ========== ========= ======== ========== Year Ended December 31, 1999 Life Insurance in Force $564,730.4 $24,936.0 $2,484.5 $542,278.9 0.5% ========== ========= ======== ========== Premium Income: Life Insurance $ 1,505.4 $ 69.9 $ 16.9 $ 1,452.4 1.2% Accident and Health Insurance 5,269.4 438.4 559.8 5,390.8 10.4% ---------- --------- -------- ---------- Total $ 6,774.8 $ 508.3 $ 576.7 $ 6,843.2 8.4% ========== ========= ======== ========== Year Ended December 31, 1998 Life Insurance in Force $471,209.2 $21,235.0 $2,562.1 $452,536.3 0.6% ========== ========= ======== ========== Premium Income: Life Insurance $ 1,318.3 $ 66.6 $ 18.6 $ 1,270.3 1.5% Accident and Health Insurance 4,866.2 477.9 470.4 4,858.7 9.7% ---------- --------- -------- ---------- Total $ 6,184.5 $ 544.5 $ 489.0 $ 6,129.0 8.0% ========== ========= ======== ==========
106 SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS UnumProvident Corporation and Subsidiaries
Deductions for Additions Additions Amounts Applied Balance at Charged to Charged to to Specific Loan Deductions for Balance at Beginning Costs and Other at Time of Sale/ Amounts Deemed End of Description of Period Expenses Accounts Foreclosure Uncollectible Period (in millions of dollars) - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2000 Mortgage loan loss reserve $32.9 $ - $ - $20.0 $ - $12.9 Real estate reserve $37.8 $ - $ - $12.2 $ - $25.6 Allowance for doubtful accounts (deducted from premiums receivable and miscellaneous assets) $ 3.8 $ 11.7 $ - $ - $ 7.0 $ 8.5 Year Ended December 31, 1999 Mortgage loan loss reserve (1) $32.8 $ 0.1 $ - $ - $ - $32.9 Real estate reserve $51.2 $ - $ - $13.4 $ - $37.8 Allowance for doubtful accounts (deducted from premiums receivable and miscellaneous assets) $ 2.9 $ 0.9 $ - $ - $ - $ 3.8 Year Ended December 31, 1998 Mortgage loan loss reserve (1) $34.9 $ 2.3 $ - $ 4.4 $ - $32.8 Real estate reserve (1) $40.7 $ 10.5 $ - $ - $ - $51.2 Allowance for doubtful accounts (deducted from premiums receivable and miscellaneous assets) $ 2.7 $ 0.2 $ - $ - $ - $ 2.9
(1) Amounts shown in additions charged to cost and expenses represent realized investment losses. 107 UnumProvident Corporation and Subsidiaries INDEX TO EXHIBITS (2.1) Agreement and Plan of Share Exchange between Provident Companies, Inc. (Provident) and Provident Life and Accident Insurance Company of America (America) (incorporated by reference to Exhibit 2.1 of Provident's Form 10-K filed for fiscal year ended December 31, 1995). (2.2) Amended and Restated Agreement and Plan of Merger dated as of April 29, 1996 by and among Patriot Acquisition Corporation, The Paul Revere Corporation, and Provident (including exhibits thereto), (incorporated by reference to Exhibit 2.1 of Provident's Form 10-Q and Form 10-Q/A filed for fiscal quarter ended September 30, 1996). (2.3) Agreement and Plan of Merger, dated as of November 22, 1998, between Unum Corporation (Unum) and Provident (incorporated by reference to Exhibit 1 of Provident's Form 8-K filed November 24, 1998). (3.1) Restated Certificate of Incorporation of UnumProvident Corporation. (3.2) Amended and Restated Bylaws of the Company. (4.1) Articles of Share Exchange (incorporated by reference to Provident's Form 10-K for fiscal year ended December 31, 1995). (10.1) Asset and Stock Purchase Agreement by and between Healthsource and America and its subsidiaries dated December 21, 1994. (incorporated by reference to Exhibit 10.3 of Provident's Form 10-K for fiscal year ended December 31, 1995). (10.2) Annual Management Incentive Compensation Plan (MICP), adopted by stockholders May 4, 1994, as amended by stockholders May 1, 1996 and May 7, 1997, as restated and amended by stockholders May 6, 1998, and as amended by the Compensation Committee on February 8, 2001.* (10.3) Stock Option Plan, adopted by stockholders May 3, 1989, as amended by the Compensation Committee on January 10, 1990, and October 29, 1991 (incorporated by reference to Exhibit 10.6 of America's Form 10-K for fiscal year ended December 31, 1991); and as amended by the Compensation Committee on March 17, 1992 and by the stockholders on May 6, 1992 (incorporated by reference to the registrant's Form 10-K filed for the fiscal year ended December 31, 1992). Terminated effective December 31, 1993. (10.4) Provident Life and Accident Insurance Company (Accident) and Subsidiaries Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.8 of Provident Life Capital Corporation (Capital's) Registration Statement on Form S-1, Registration No. 33-17017). * (10.5) Form of Surplus Note, dated December 1, 1996, in the amount of $150.0 million executed by Accident in favor of Provident (incorporated by reference to Exhibit 10.7 of Provident's Form 10-K filed for fiscal year ended December 31, 1996). (10.6) Description of Compensation Plan for Non-Employee Directors Plan (incorporated by reference to Amendment No. 1 to registrant's Form 10-K filed January 27, 1993 on Form 8), and amended by the Board of Directors on February 8, 1994 (incorporated by reference to Exhibit 10.15 of America's Form 10-K filed for fiscal year ended December 31, 1993). Discontinued May 1998. 108 (10.7) Stock Plan of 1994, originally adopted by stockholders May 5, 1993, as amended by stockholders on May 1, 1996 and on May 7, 1997 and as amended by the Compensation Committee on February 8, 2001. * (10.8) Employee Stock Purchase Plan (of 1995) adopted by stockholders June 13, 1995 (incorporated by reference to Provident's Form 10-K for fiscal year ended December 31, 1995). * (10.9) Amended and Restated common stock Purchase Agreement between Provident and Zurich Insurance Company dated as of May 31, 1996 Plan (incorporated by reference to Exhibit 10.15 of Provident's Form 10-K for fiscal year ended December 31, 1996). (10.10) Amended and Restated Relationship Agreement between Provident and Zurich Insurance Company dated as of May 31, 1996 Plan (incorporated by reference to Exhibit 10.16 of Provident's Form 10-K for fiscal year ended December 31, 1996). (10.11) Amended and Restated Registration Rights Agreement between Provident and Zurich Insurance Company dated as of May 31, 1996 (incorporated by reference to Exhibit 10.17 of Provident's Form 10-K for fiscal year ended December 31, 1996.) (10.12) UnumProvident Stock Plan of 1999, adopted by stockholders May 6, 1998, as amended by stockholders June 30, 1999 and as amended by the Compensation Committee on February 8, 2001. * (10.13) UnumProvident Non-Employee Director Compensation Plan of 1998, adopted by stockholders May 6, 1998 and as amended by the Compensation Committee on February 8, 2001. * (10.14) Agreement between Provident and certain subsidiaries and American General Corporation and certain subsidiaries dated as of December 8, 1997 (incorporated by reference to Exhibit 3.2 of Provident's Form 10-Q for fiscal quarter ended September 30, 1998). (10.15) Employment Agreement between the Company and J. Harold Chandler as amended by the Agreement dated November 10, 2000. * (10.16) Employment Agreement between the Company and F. Dean Copeland (incorporated by reference to Exhibit 10.3 of the Company's Form 10-Q for fiscal quarter ended June 30, 1999). * (10.17) Employment Agreement between the Company and Elaine D. Rosen as amended by the Agreement dated December 12, 2000. * (10.18) Employment Agreement between the Company and Thomas R. Watjen (incorporated by reference to Exhibit 10.5 of the Company's Form 10-Q for fiscal quarter ended June 30, 1999). * (10.19) Employment Agreement between the Company and James F. Orr, III (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for fiscal quarter ended June 30, 1999) as amended by the Agreement dated November 1, 1999 between the Company and Mr. Orr (incorporated by reference to the Company's Form 10-K for fiscal year ended December 31, 1999). * (10.20) Form of Change in Control Severance Agreement (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for fiscal quarter ended September 30, 1999). * (10.21) Unum Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 of Unum's Form 10-K for fiscal year ended December 31, 1995). * (10.22) Incentive Compensation Plan for Designated Executive Officers (incorporated by reference to Exhibit 10.2 of Unum's Form 10-K for fiscal year ended December 31, 1996). * (10.23) 1990 Unum Long Term Stock Incentive Plan as amended by the Compensation Committee February 8, 2001. * (10.24) 1996 Long Term Stock Incentive Plan as amended by the Compensation Committee February 8, 2001. * (10.25) Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.4 to Unum's Registration Statement on Form S-1 dated June 18, 1986). * (10.26) UnumProvident Supplemental Pension Plan. * 109 (10.27) $500 million Five Year Credit Agreement dated as of October 31, 2000 among the Company, Bank of America, N.A. as Administrative Agent, Citicorp, USA, Inc. and Wachovia Bank, N.A. as Co-Syndication Agents, Fleet National Bank as Documentation Agent and the Banks listed therein. (10.28) $500 million 364-Day Credit Agreement dated as of October 31, 2000 among the Company, Bank of America, N.A. as Administrative Agent, Citicorp, USA, Inc. and Wachovia Bank, N.A. as Co-Syndication Agents, Fleet National Bank as Documentation Agent and the Banks listed therein. (10.29) Administrative Reinsurance Agreement between Provident Life and Accident Insurance Company and Reassure America Life Insurance Company dated to be effective July1, 2000 (incorporated by reference to the Company's Form 8-K filed March 2, 2001). (10.30) Augmenting Agreement dated November 6, 2000 among the Company, Bank of America, N.A. as Administrative Agent, and the Royal Bank of Canada relating to $500 million Five Year Credit Agreement. (10.31) Augmenting Agreement dated November 6, 2000 among the Company, Bank of America, N.A. as Administrative Agent, and the Royal Bank of Canada relating to $364-Day Credit Agreement. (10.32) 2000 Annual Incentive Plan.* (11) Statement re computation of per share earnings (incorporated herein by reference to "Note 11 of the Notes to Consolidated Financial Statements"). (12.1) Statement Regarding Computation of Ratio of Earnings to Fixed Charges. (12.2) Statement Regarding Computation on Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (21) Subsidiaries of the Company. (23.1) Consent of Independent Auditors. (23.2) Consent of Independent Auditors. (24) Powers of Attorney - -------------------------- * Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K. The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10 percent of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Securities and Exchange Commission upon request. 110 EX-3.1 2 0002.txt RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION of UNUMPROVIDENT CORPORATION FIRST: The name of the Corporation is UNUMProvident Corporation. SECOND: The address of the registered office of the Corporation in the state of Delaware is 1209 Orange Street, in the city of Wilmington, county of New Castle. The name of the Corporation's registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware as set forth in Title 8 of the Delaware Code (the "GCL"). FOURTH: A. The total number of shares of capital stock which the Corporation shall have authority to issue is 750,000,000 shares, consisting of 725,000,000 shares of Common Stock par value $.10 per share (the "Common Stock") and 25,000,000 shares of Preferred Stock, par value $.10 per share (the "Preferred Stock"). B. Shares of Preferred Stock may be issued from time to time in one or more classes or series as may be determined from time to time by the Board of Directors of the Corporation (the "Board of Directors"), each such class or series to be distinctly designated. Except in respect of the particulars fixed by the Board of Directors for classes or series provided for by the Board of Directors as permitted hereby, all shares of Preferred Stock shall be of equal rank and shall be identical. All shares of any one series of Preferred Stock so designated by the Board of Directors shall be alike in every particular, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative. The voting rights, if any, of each such class or series and the preferences and relative, participating, optional and other special rights of each such class or series and the qualifications, limitations and restrictions thereof, if any, may differ from those of any and all other classes or series at any time outstanding, and the Board of Directors of the Corporation is hereby expressly granted authority to fix, by resolutions duly adopted prior to the issuance of any shares of a particular class or series of Preferred Stock so designated by the Board of Directors, the voting powers of stock of such class or series, if any, and the designations, preferences and relative, participating, optional or other special rights and the qualifications, limitations and restrictions of such class or series, including, but without limiting the generality of the foregoing, the following: (1) The distinctive designation of, and the number of shares of Preferred Stock which shall constitute such class or series, and such number may be increased (except where otherwise provided by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (2) The rate and time at which, and the terms and conditions upon which, dividends, if any, on Preferred Stock of such class or series shall be paid, the extent of the preference or relations, if any, of such dividends to the dividends payable on any other class or classes, or series of the same or other class or classes of stock and whether such dividends shall be cumulative or non-cumulative; (3) The right, if any, of the holders of Preferred Stock of such class or series to convert the same into, or exchange the same for, shares of any other class or classes or of any series of the same or any other class or classes of stock and the terms and conditions of such conversion or exchange; (4) Whether or not Preferred Stock of such class or series shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions upon which, Preferred Stock of such class or series may be redeemed; (5) The rights, if any, of the holders of Preferred Stock of such class or series upon the voluntary or involuntary liquidation of the Corporation; (6) The terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of such class or series; and (7) The voting powers, if any, of the holders of such class or series of Preferred Stock. C. Except as otherwise provided in this Certificate of Incorporation, the Board of Directors shall have authority to authorize the issuance from time to time without any vote or other action by the Stockholders, of any or all shares of stock of the Corporation of any class or series at any time authorized, and any securities convertible into or exchangeable for any such shares, and any options, rights or warrants to purchase or acquire any such shares, in each case to such persons and on such terms (including as a dividend or distribution on or with respect to, or in connection with a split or combination of, the outstanding shares of stock of the same or any other class) as the Board of Directors from time to time at its discretion lawfully may determine; provided, however, that this consideration for the issuance of shares of stock of the Corporation having par value (unless issued as such a dividend or distribution or in connection with such a split or combination) shall not be less than such par value. Shares so issued shall be fully paid stock, and the holders of such stock shall not be liable to any further call or assessments thereon. D. Except as provided in this Certificate of Incorporation, each holder of Common Stock shall be entitled to one vote for each share of Common Stock held by him. FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of the Board of Directors and stockholders: (1) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. (2) The Board of Directors shall consist of not less than three nor more than fifteen directors. The exact number of directors shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the Board of Directors, subject to Article III, Section 11 of the By-Laws of the Corporation. The Directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of Directors constituting the entire Board of Directors. (3) Upon, or as soon as practicable following the filing of the Certificate of Merger to which this Certificate of Incorporation is attached, Class I Directors shall be elected for a one-year term, Class II Directors for a two-year term and Class III Directors for a three-year term. At each succeeding annual meeting of stockholders, successors to the class of Directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of Directors is changed in accordance with the terms of this Certificate of Incorporation or the By-Laws, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible, and any additional Director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of Directors shorten the term of any incumbent Director. A Director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to the Director's prior death, resignation, disqualification or removal from office. The stockholders shall not have the right to remove any one or all of the Directors except for cause and in that event only by the affirmative vote of the holders of eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock (as hereinafter defined) voting together as a single class. Any vacancy on the Board of Directors that results from a newly created Directorship shall only be filled by the affirmative vote of a majority of the Board of Directors then in office, and any other vacancy occurring on the Board of Directors shall only be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director. Any Director elected to fill a vacancy 2 not resulting from an increase in the number of Directors shall have the same remaining term as that of his predecessor. (4) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect Directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such Directorships shall be governed by the terms of this Certificate of Incorporation applicable thereto (including the resolutions adopted by the Board of Directors pursuant to Section B of Article FOURTH), and such Directors so elected shall not be divided into classes pursuant to Paragraph (2) of this Article FIFTH unless expressly provided by such terms. Election of Directors need not be by written ballot unless the By-Laws so provide. (5) The Board of Directors may from time to time determine whether, to what extent, at what times and places and under what conditions and regulations the accounts, books and papers of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account, book or document of the Corporation, except at and to the extent expressly provided by law with reference to the right of stockholders to examine the original or duplicate stock ledger, or otherwise expressly provided by law, or except as expressly authorized by resolution of the Board of Directors. (6) In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the Directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the statutes of Delaware, this Certificate of Incorporation, and the By-Laws. (7) Except as may be otherwise determined by the Board of Directors in fixing the terms of any class or series of Preferred Stock pursuant to Article FOURTH hereof, no action shall be taken by stockholders of the Corporation except at an annual or special meeting of stockholders of the Corporation and the right of stockholders to act by written consent in lieu of a meeting is specifically denied. SIXTH: A. The Board of Directors shall have concurrent power with the stockholders as set forth in this Certificate of Incorporation to make, alter, amend, change, add to or repeal the By-Laws of the Corporation. B. Subject to Article III, Section 11 of the By-Laws, the Board of Directors may amend the By-Laws of the Corporation upon the affirmative vote of the number of directors which shall constitute, under the terms of the By-Laws, the action of the Board of Directors. Stockholders may not amend the By-Laws of the Corporation except upon the affirmative vote of at least eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock voting together as a single class. SEVENTH: A. In addition to any affirmative vote required by law, this Certificate of Incorporation, the By-Laws of the Corporation or otherwise, except as otherwise expressly provided in Section B of this Article SEVENTH, the Corporation shall not engage, directly or indirectly, in any Business Combination (as hereinafter defined) with an Interested Stockholder (as hereinafter defined) without the affirmative vote of (i) not less than eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock voting together as a single class, and (ii) not less than a majority of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock which are beneficially owned by persons other than such Interested Stockholder voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of Section A of this Article SEVENTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law, this Certificate of Incorporation, the By-Laws or the Corporation, or otherwise, if such Business Combination shall have been approved by a majority (whether such approval is made prior to or 3 subsequent to the acquisition of beneficial ownership of Voting Stock that caused the Interested Stockholder to become an Interested Stockholder) of the Continuing Directors (as hereinafter defined). C. For the purposes of this Certificate of Incorporation: 1. The term "Business Combination" shall mean: (a) any merger or consolidation of this Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Stockholder or (ii) any other corporation (whether or not itself an Interested Stockholder) which is or after such merger or consolidation would be an Affiliate or Associate of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) between the Corporation or any Subsidiary and any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder involving any assets or securities of the Corporation, any Subsidiary or any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder the value of which would constitute, immediately prior to such transaction, a Substantial Part (as hereinafter defined) of the assets of the Corporation; or (c) the adoption of any plan or proposal for the liquidation or dissolution of, or similar transaction involving, the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (d) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or otherwise involving an Interested Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or late equity securities of any Subsidiary, that is beneficially owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (e) any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (a) to (d). (2) The term "Capital Stock" shall mean all capital stock of the Corporation authorized to be issued from time to time under Article FOURTH of this Certificate of Incorporation, and the term "Voting Stock" shall mean all Capital Stock which by its terms may be voted on all matters submitted to stockholders of the Corporation generally. (3) The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Capital Stock. (4) The term "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary and other than any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan or any trust or any other entity formed for the purposes of holding Voting Stock for the purpose of funding any such plan or funding other employee benefits for employees of the Corporation or any Subsidiary, in each case when acting in such capacity) who (a) is the beneficial owner of Voting Stock representing fifteen percent (15%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (b) is an Affiliate or Associate of the Corporation and any time within the two-year period immediately prior to the date in question was the beneficial owner of Voting Stock representing fifteen percent (15%) or more of the votes entitled to be cast by the holders of all then outstanding share of Voting Stock. (5) A person shall be a "beneficial owner" of any Capital Stock (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (b) which such person or 4 any of its Affiliates or Associates has, directly or indirectly, (i) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Capital Stock. For the purposes of determining whether a person is an Interested Stockholder pursuant to Paragraph 4 of this Section C, the number of shares of Capital Stock deemed to be outstanding shall include shares deemed beneficially owned by such person through application of Paragraph 5 of this Section C, but shall not include any other shares of Capital Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (6) The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Act"), (the term "registrant" in Rule 12b-2 meaning in this case the Corporation). (7) The term "Subsidiary" means any corporation of which a majority of any class of equity security is beneficially owned by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 4 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is beneficially owned by the Corporation. (8) The term "Continuing Director" means any member of the Board of Directors, while such person is a member of the Board of Directors, who is not an Affiliate or Associate or representative of the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director, while such successor is a member of the Board of Directors, who is not an Affiliate or Associate or representative of the Interested Stockholder and is recommended or elected to succeed the Continuing Director by a majority of Continuing Directors. In order for a Business Combination or other action to be approved, or a fact or other matter to be determined, "by a majority of the Continuing Directors" hereunder, there must be one or more Continuing Directors then serving on the Board of Directors. (9) The term "Substantial Part" means assets having an aggregate Fair Market Value (as hereinafter defined) in excess of ten percent (10%) of the book value of the total consolidated assets of the Corporation and its Subsidiaries as of the end of the Corporation's most recent fiscal year ending prior to the time the stockholders of the Corporation would be required to approve or authorize the Business Combination involving assets constituting any such Substantial Part. (10) The term "Fair Market Value" means (a) in the case of cash, the amount of such cash; (b) in the case of stock, the highest closing sale price, during that 30-day period immediately preceding the date in question, of a share of such stock on the Composite Tape for New York Stock Exchange, Inc. Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, Inc., or , if such stock is not listed on such exchange, on the principal United States securities exchange registered under the Act on which such stock is listed, or if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock, during the 30-day period preceding the date in question, on the National Association of Securities Dealers, Inc. Automated Quotation System or any similar system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. 5 D. A majority of the Continuing Directors shall have the power and duty to determine for the purposes of this Article SEVENTH, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Stockholder, (b) the number of shares of Capital Stock or other securities beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another and (d) whether the assets that are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by this Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value in excess of the amount set forth in Paragraph 1(b) of Section C of this Article SEVENTH. Any such determination made in good faith shall be binding and conclusive on all parties. E. Nothing contained in this Article SEVENTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. EIGHTH: When considering a merger, consolidation, Business Combination or similar transaction, the Board of Directors, committees of the Board, individual directors and individual officers may, in considering the best interests of the Corporation and its stockholders, consider the effects of any such transaction upon the employees, customers and suppliers of the Corporation, and upon communities in which offices of the Corporation are located. NINTH: Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Certificate of Incorporation or the By-Laws of the Corporation), (i) the affirmative vote of the holders of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, Articles FIFTH and SIXTH, and (ii) the affirmative vote of the holders of (x) not less than eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock voting together as a single class, and (y) not less than a majority of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock which are beneficially owned by persons other than Interested Stockholders, if any, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with Articles SEVENTH and NINTH; provided, however, that, with respect to Articles FIFTH, SIXTH, SEVENTH, and NINTH such special voting requirements shall not apply to, and such special votes shall not be required for, any amendment, request or adoption recommended by the Board if a majority of the directors then in office are persons who would be eligible to serve as Continuing Directors. TENTH: No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty or loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a know violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal of modification of this Article TENTH by the stockholders of the Corporation shall not adversely affect any right of protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. ELEVENTH: Subject to the provisions of this Certificate of Incorporation, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or thereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 6 EX-3.2 3 0003.txt AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF UNUMPROVIDENT CORPORATION (hereinafter called the "Corporation") ARTICLE I OFFICES SECTION 1. Registered Office. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. Place of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2. Annual Meetings. The Annual Meetings of Stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meetings, at which meetings the stockholders shall elect by a plurality vote the directors to be elected at such meetings, and transact such other business as may properly be brought before the meetings. Written notice of the Annual Meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. SECTION 3. Special Meetings. Unless otherwise prescribed by law or by the Certificate of Incorporation, Special Meetings of Stockholders, for any purpose or purposes, may be called by either (i) the Chairman, if there be one, (ii) the Chief Executive Officer or (iii) the President, and shall be called by any such officer at the request in writing of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting. Written notice of a Special Meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. SECTION 4. Quorum. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. The foregoing provisions shall be subject to the voting rights of holders of any Preferred Stock of the Corporation and any quorum requirements relating thereto. SECTION 5. Voting. Unless otherwise required by law, applicable stock exchange rules or regulations, the Certificate of Incorporation or these By-Laws, any question brought before any meeting of stockholders shall be decided by a majority of the votes entitled to be cast by the holders of stock represented and entitled to vote thereat and each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. SECTION 6. Proper Business at Annual Meetings. At any annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before such meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, or otherwise properly brought before the meeting by or at the direction of the Board of Directors, or otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, must be a stockholder of the Corporation of record at the time of the delivery of said notice and must be entitled to vote at the meeting. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation, not less than 60 days nor more than 90 days prior to the annual meeting; provided, however, that in the event that less than 75 days' notice or prior public disclosure of the date of such meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was first made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, including the complete text of any resolutions to be presented at the meeting with respect to such business, and the reasons for conducting such business at the annual meeting, (ii) the name and address of record of the stockholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder and such beneficial owner, (iv) any material interest of the stockholder and such beneficial owner in such business and (v) a representation that the stockholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that such business was not properly brought before the meeting in accordance with these provisions, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. SECTION 7. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. SECTION 8. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 7 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 9. (a) Organization. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the Chief Executive Officer, or in his absence by the President, or in his absence by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. (b) Conduct of Meetings. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the 2 person presiding over the meeting. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. ARTICLE III DIRECTORS SECTION 1. Number and Election of Directors. The number of directors constituting the Board of Directors shall be fixed from time to time by the Board of Directors in the manner prescribed in the Certificate of Incorporation. Except as provided in Section 3 of this Article, the directors to be elected at each Annual Meeting of Stockholders shall be elected by a plurality of the votes cast at such Annual Meeting of Stockholders, and each director so elected shall hold office until the third Annual Meeting following such election and until his successor is duly elected and qualified, or until his earlier resignation, retirement or removal. No person elected or re-elected a director shall, after such person's seventieth birthday, serve as a director of the Corporation beyond the date of the Corporation's annual meeting immediately following such birthday; provided, that any person to which this provision applies for the annual meeting in 2001 shall, if such director's regular term does not end in 2001, serve until the annual meeting in 2002. Directors need not be stockholders. SECTION 2. Nomination Procedures. Only persons who are nominated in accordance with the following procedures shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation by a stockholder of the Corporation of record at the time of the delivery of said notice who is entitled to vote at the meeting. To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the Corporation which are beneficially owned by the person, (iv) a description of all arrangements, understandings or relationships between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder and (v) any other information relating to the person that is required to be disclosed in solicitations of proxies for election of Directors pursuant to Rule 14(a) under the Securities Exchange Act of 1934, as amended (the "Act"), and any other applicable laws or rules or regulations of any governmental authority or of any national securities exchange or similar body overseeing any trading market on which shares of the Corporation are traded, and (b) as to the stockholder giving the notice (i) the name and address of record of the stockholder and the beneficial owner, if any, on whose behalf the nomination is made, and (ii) the class and number of shares of the 3 Corporation which are beneficially owned by the stockholder and such beneficial owner and (iii) a representation that the stockholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth herein. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 3. Vacancies. Subject to the provisions of the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors, shall only be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier resignation or removal. SECTION 4. Duties and Powers. The business of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. SECTION 5. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the state of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there be one, the Chief Executive Officer, the President, or any three directors. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or telegram on twenty-four (24) hours' notice, or on much shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. SECTION 6. Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these By-Laws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 7. Actions of Board. Unless otherwise provided by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 8. Meetings by Means of Conference Telephone or Similar Communications Equipment. Unless otherwise provided by the Certificate of Incorporation or these By-Laws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 8 shall constitute presence in person at such meeting. SECTION 9. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a 4 designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. SECTION 10. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. SECTION 11. [Section 11 was deleted by action of the Board of Directors on December 17, 1999] ARTICLE IV OFFICERS SECTION 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer, a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors (who must be a director) and one or more Vice-Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these By-Laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. SECTION 2. Election. The Board of Directors shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office 5 until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. SECTION 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chief Executive Officer, the President or any Vice-President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. SECTION 4. Chairman of the Board of Directors. The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. Except where by law the signature of the Chief Executive Officer or the President is required, the Chairman of the Board of Directors shall possess the same power as the Chief Executive Officer or the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the Chief Executive Officer and the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the Chief Executive Officer or the President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. SECTION 5. Chief Executive Officer. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors, the Chief Executive Officer or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the Chief Executive Officer shall preside at all meetings of the stockholders and the Board of Directors. The Chief Executive Officer shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. SECTION 6. President. The President shall, subject to the control of the Board of Directors and the Chief Executive Officer (provided that until July 1, 2000, the President and the Chief Executive Officer will participate equally in setting the overall strategic direction of the Corporation), have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors, the Chief Executive Officer or the President. In the absence or disability of the Chairman of the Board of Directors and the Chief Executive Officer, or if neither shall exist, the President shall preside at all meetings of the stockholders and the Board of Directors. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. From the Effective Time until July 1, 2000, the President initially serving the Corporation shall also be the Chief Operating Officer. SECTION 7. Vice-Presidents. At the request of the Chief Executive Officer or the President or in the event of either of their absences or inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice-President or the Vice-Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the Chief Executive Officer and President, and when so 6 acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer and President. Each Vice-President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice-President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the Chief Executive Officer and President or in the event of the inability or refusal of the Chief Executive Officer and President to act, shall perform the duties of the Chief Executive Officer and President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer and President. SECTION 8. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chief Executive Officer or President, under whose supervision he shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors, the Chief Executive Officer or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. SECTION 9. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer, the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. SECTION 10. Assistant Secretaries. Except as may be otherwise provided in these By-Laws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, the President, any Vice-President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. SECTION 11. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, the President, any Vice-President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. 7 SECTION 12. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. SECTION 13. [Section 13 was deleted by action of the Board of Directors on December 17, 1999] ARTICLE V STOCK SECTION 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board of Directors, the Chief Executive Officer, the President or a Vice-President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. SECTION 2. Signatures. Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee, or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. SECTION 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 6. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 8 ARTICLE VI NOTICES SECTION 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex, cable, facsimile or overnight courier. SECTION 2. Waivers of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VII GENERAL PROVISIONS SECTION 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. SECTION 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SECTION 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII INDEMNIFICATION SECTION 1. Indemnification in Actions, Suits, or Proceedings Other Than Those by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify each person who is or was, or is threatened to be made, a party to or witness in any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative (other than one by or in the right of the Corporation), by reason of the fact that he is or was a director, officer or employee of the Corporation or of Union Mutual Life Insurance Company, a Maine mutual insurance company (the "Mutual Company"), or is or was serving at the request of the Corporation or the Mutual Company as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney's fees and expenses), judgments, fines, penalties, and amounts paid in settlement, incurred by him in connection with defending, investigating, preparing to defend, or being or preparing to be a witness in, such action, suit, proceeding or claim, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. SECTION 2. Indemnification in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify each person who is or was, or is 9 threatened to be made, a party to or witness in any threatened, pending or completed action, suit, proceeding or claim by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer or employee of the Corporation or of the Mutual Company or is or was serving at the request of the Corporation or the Mutual Company as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney's fees and expenses), and, if and to the extent permitted by applicable law, judgments, penalties and amounts paid in settlement, incurred by him in connection with defending, investigating, preparing to defend, or being or preparing to be a witness in, such action, suit, proceeding or claim, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; provided, however, that no indemnification shall be made in respect of any such claim or any issue or matter in any such action, suit or proceeding as to which such person shall have been adjudged to be liable to the Corporation unless (and only to the extent that) the Court of Chancery or the court in which such claim, action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses and amounts which the Court of Chancery or such other court shall deem proper. SECTION 3. Authorization of Indemnification. (a) Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the person seeking indemnification is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be. Such determination (and determinations under Sections 5 and 6 of this Article VIII) shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit, proceeding or claim with respect to which indemnification is sought ("disinterested directors"), or (ii) if such a quorum is not obtainable, or if a quorum of disinterested directors so directs, in a written opinion of independent legal counsel chosen by the Board of Directors, or (iii) by the stockholders; provided, however, that if a Change in Control (as defined in this Section 3) has occurred and the person seeking indemnification so requests, such determination (and determination under Sections 5 and 6 of this Article VIII) shall be made in a written opinion rendered by independent legal counsel chosen by the person seeking indemnification and not reasonably objected to by the Board of Directors (whose fees and expenses shall be paid by the Corporation). To the extent, however, that a director, officer, employee or trustee or former director, officer, employee or trustee has been successful on the merits or otherwise in defense of any action, suit, proceeding or claim described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorney's fees and expenses) incurred by him in connection therewith, without the necessity of authorization in the specific case. (b) For purposes of the proviso to the second sentence of Section 3(a), "independent legal counsel" shall mean legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Corporation, the Mutual Company or the person seeking indemnification within the previous three years. (c) A "Change in Control" shall mean a change in control of the Corporation of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Act, whether or not the Corporation is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 35% or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such acquisition, or (ii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter, or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period) cease for any reason to constitute at least a majority of the Board of Directors. 10 SECTION 4. Good Faith Defined, Etc. (a) For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if such person relied on the records or books of account of the Corporation, the Mutual Company or another enterprise, or on information supplied to him by the officers of the Corporation, the Mutual Company or another enterprise, or on information or records given or reports made to the Corporation, the Mutual Company or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation, the Mutual Company or another enterprise. The term "another enterprise" as used in this Section 4(a) shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation or the Mutual Company as a director, officer, employee or trustee. (b) The termination of any action, suit, proceeding or claim by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, that he had no reasonable cause to believe that his conduct was unlawful. (c) References in this Article VIII to "penalties" include any excise taxes assessed on a person with respect to an employee benefit plan; references in this Article VIII to "serving at the request of the Corporation or the Mutual Company" include any service as a director, officer or employee or former director, officer or employee of the Corporation or the Mutual Company which imposes duties on, or involves services by, such person with respect to an employee benefit plan or its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the participants or beneficiaries of such an employee benefit plan shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation. (d) The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be. SECTION 5. Right to Indemnification Upon Application; Procedure Upon Application; Etc. Except as otherwise provided in the proviso to Section 2 of this Article VIII: (a) Any indemnification under Section 1 or 2 of this Article VIII shall be made no later than 45 days after receipt by the Corporation of the written request of the director, officer, employee or trustee or former director, officer, employee or trustee unless a determination is made within said 45-day period in accordance with Section 3 of this Article VIII that such person has not met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII. (b) The right to indemnification under Section 1 or 2 of this Article VIII or advances under Section 6 of this Article VIII shall be enforceable by the director, officer, employee or trustee or former director, officer, employee or trustee in any court of competent jurisdiction. Following a Change in Control, the burden of proving that indemnification is not appropriate shall be on the Corporation. Neither the absence of any prior determination that indemnification is proper in the circumstances, nor a prior determination that indemnification is not proper in the circumstances, shall be a defense to the action or create a presumption that the director, officer, employee or trustee or former director, officer, employee or trustee has not met the applicable standard of conduct. The expenses (including attorney's fees and expenses) incurred by the director, officer, employee or trustee or former director, officer, employee or trustee in connection with successfully establishing his right to indemnification, in whole or in part, in any such action (or in any action or claim brought by him to recover under any insurance policy or policies referred to in Section 9 of this Article VIII) shall also be indemnified by the Corporation. (c) If any person is entitled under any provision of this Article VIII to indemnification by the Corporation for some or a portion of expenses, judgments, fines, penalties or amounts paid in settlement incurred by 11 him, but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify such person for the portion of such expenses, judgments, fines, penalties and amounts to which he is entitled. SECTION 6. Expenses Payable in Advance. Expenses (including attorney's fees and expenses) incurred by a director, officer, employee or trustee or a former director, officer, employee or trustee in defending, investigating, preparing to defend, or being or preparing to be a witness in, a threatened or pending action, suit, proceeding or claim against him, whether civil or criminal, may be paid by the Corporation in advance of the final disposition of such action, suit, proceeding or claim upon receipt by the Corporation of a written request therefor and a written undertaking by or on behalf of the director, officer, employee or trustee or former director, officer, employee or trustee to repay such amounts if it shall be determined in accordance with Section 3 of this Article VIII that he is not entitled to be indemnified by the Corporation; provided, however, that if he seeks to enforce his rights in a court of competent jurisdiction pursuant to Section 5(b) of this Article VIII, said undertaking to repay shall not be applicable or enforceable unless and until there is a final court determination that he is not entitled to indemnification as to which all rights of approval have been exhausted or have expired. SECTION 7. Certain Persons Not Entitled to Indemnification. Notwithstanding any other provision of this Article VIII, no person shall be entitled to indemnification under this Article VIII or to advances under Section 6 of this Article VIII with respect to any action, suit, proceeding or claim brought or made by him against the Corporation or the Mutual Company, other than an action, suit, proceeding or claim seeking, or defending such person's right to, indemnification and/or expense advances pursuant to this Article VIII or otherwise. SECTION 8. Non-Exclusivity and Survival of Indemnification. The provisions of this Article VIII shall not be deemed exclusive of any other rights to which the person seeking indemnification or expense advances may be entitled under any agreement, contract, or vote of stockholders or disinterested directors, or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Except as otherwise provided in Section 7 of this Article VIII, but notwithstanding any other provision of this Article VIII, it is the policy of the Corporation that indemnification of and expense advances to the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law, and, accordingly, in the event of any change in law, by legislation or otherwise, permitting greater indemnification of and/or expense advances to any such person, the provisions of this Article VIII shall be construed so as to require such greater indemnification and/or expense advances. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section I or 2 of this Article VIII but whom the Corporation has the power to indemnify under the provisions of the General Corporation Law of the State of Delaware or otherwise. The provisions of this Article VIII shall continue as to a person who has ceased to be a director, officer, employee or trustee and shall inure to the benefit of the heirs, executors and administrators of such person. SECTION 9. Insurance. The Corporation may purchase and maintain at its expense insurance on behalf of any person who is or was a director, officer or employee of the Corporation or the Mutual Company or is or was serving at the request of the Corporation or the Mutual Company as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability or expense asserted against or incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability or expense under the provisions of this Article VIII or the provisions of Section 145 of the General Corporation Law of the State of Delaware. The Company shall not be obligated under this Article VIII to make any payment in connection with any claim made against any person if and to the extent that such person has actually received payment therefor under any insurance policy or policies. SECTION 10. Successors; Meaning of "Corporation". This Article VIII shall be binding upon and enforceable against any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation. For purposes of this Article VIII, but subject to the provisions of any agreement relating to any merger or consolidation of the kind referred to in clause (i) below or of any agreement relating to the acquisition of any corporation of the kind referred to in clause (ii) below, references to "the Corporation" shall include (i) any constituent corporation (including any 12 constituent of a constituent) absorbed in a consolidation or merger with the Corporation which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees, so that any person who is or was a director, officer or employee of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the Corporation as he would have with respect to such constituent corporation if its separate existence had continued; and (ii) any corporation of which at least a majority of the voting power (as represented by its outstanding stock having voting power generally in the election of directors) is owned directly or indirectly by the Corporation. SECTION 11. Severability. The provisions of this Article VIII shall be severable in the event that any provision hereof (including any provision within a single section, subsection, clause, paragraph or sentence) is held invalid, void or otherwise unenforceable on any ground by any court of competent jurisdiction. In the event of any such holding, the remaining provisions of this Article VIII shall continue in effect and be enforceable to the fullest extent permitted by law. ARTICLE IX AMENDMENTS SECTION 1. Power to Amend. The Board of Directors shall have concurrent power with the stockholders as set forth in the By-Laws and the Certificate of Incorporation to make, alter, amend, change, add to or repeal the By-Laws. SECTION 2. Required Vote. The Board of Directors may amend the By-Laws upon the affirmative vote of the number of directors which shall constitute, under the terms of the By-Laws, the action of the Board of Directors. Stockholders may not amend the By-Laws except upon the affirmative vote of at least eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock (as such term is defined in the Certificate of Incorporation) voting together as a single class. 13 EX-10.2 4 0004.txt ANNUAL MGT INCENTIVE COMP PLAN EXHIBIT 10.2 AMENDED AND RESTATED ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN OF 1994 (as amended 2/08/2001) ARTICLE 1 Purpose The purpose of this Amended and Restated Annual Management Incentive Compensation Plan ("MICP") is to motivate the participants to perform in a way that will enable UnumProvident Corporation and its subsidiaries ("the Company"), to reach its short-term and long-term goals. ARTICLE 2 Administration of the Plan The Compensation Committee of the Board of Directors ("the Committee"), will administer, construe, and interpret the MICP. No member of the Committee, the Board of Directors, or any delegatee as the case may be, shall be liable for any act done in good faith. The construction and interpretation by the Committee of any provision of the MICP shall be final and conclusive. The Committee must approve, subject to the provisions of the MICP, the amount, if any, due a participant. The Committee, may, in its discretion, delegate its general administrative duties to an officer or employee or committee composed of officers or employees of the Company, but may not delegate its authority to construe and interpret the MICP or approve awards. The Committee, subject to approval by the Board of Directors, may, at any time or from time to time amend the MICP in any respect without restriction and without the consent of any participant. However, any modification of the MICP which would increase materially the benefits accruing to participants, modify materially the requirements as to eligibility for participation, materially increase the cost of the MICP to the Company, or permit any member of the Committee to receive an award, must be approved by the stockholders of the Company. ARTICLE 3 Elements of the MICP The MICP consists of two subparts: (i) the Annual Incentive Plan, under which annual incentive awards are based upon the achievement of one-year goals; and (ii) the Performance Share Plan, pursuant to which participants are granted deferred compensation units in the form of performance shares which are payable in cash or shares of common stock upon a subsequent payment date. Each of the subparts of the MICP is described below. ARTICLE 4 Participation in the Plan Participation in the MICP shall be based on recommendation by Company management and subject to approval by the Committee. Participation in all portions of the MICP except the Performance Share Plan (as described below) will be limited to officers and other key employees of the Company and its subsidiaries whose judgments, decisions and actions can have a discernible impact on the profitability of the Company. The Committee will establish participation criteria and make decisions on eligibility based on such criteria. ARTICLE 5 Stock To Be Awarded Stock awards will be for shares of Company common stock. Stock subject to the Plan may be unissued shares, reacquired shares or shares bought on the open market for purposes of the Plan. The total number of shares of common stock that may be awarded to all participants under the Plan may not exceed 1,095,000 shares. No more than 100,000 shares may be awarded to a participant in a calendar year. ARTICLE 6 Annual Incentive Plan 6.1 General. The Annual Incentive Plan portion of the MICP shall include the Corporate Performance Subplan and the Individual Performance Subplan, as more specifically described below. Awards under the Annual Incentive Plan will be based entirely upon achievement of one-year goals. Each plan year runs from January 1 to December 31. 6.2 Corporate Performance Subplan. The Corporate Performance Subplan will be based solely on the achievement of objective corporate performance goals. The awards under this Subplan may be determined on the basis of one or more of the following measures of corporate performance, alone or in combination, for the Company as a whole or for any division or business unit: (a) return on equity, (b) overall or selected premium or sales growth, (c) stock performance, (d) expense efficiency ratios (ratio of expenses to premium income), (e) earnings per share, (f) market share, (g) revenue, (h) customer service measures or indices (i) underwriting efficiency and/or quality, and (j) persistency factors. Measurement of performance against such goals established by the Committee shall be objectively determinable, and to the extent such goals are expressed in standard accounting terms, performance shall be measured in accordance with generally accepted accounting principles. The Committee shall have the right for any reason to reduce or eliminate (but not increase) any such award, notwithstanding the achievement of a specified goal. The maximum annual award under the Corporate Performance Subplan to any participant will be $2.5 million. At the beginning of each plan year, the Committee will establish performance goals under the Corporate Performance Subplan based on one or more of the above corporate performance criteria, and establish target awards and any formula for payouts in excess of target based on the achievement of measurable goals. Target awards under the Corporate Performance Subplan are to be set by the Committee as percentages of base salary, which percentages may differ from participant to participant and from year to year. 6.3 Individual Performance Subplan. Awards under the Individual Performance Subplan will be based on an individual's contribution to the business of the Company, as determined by the Committee. This contribution may be assessed on nonobjective as well as objective measures. The Committee will establish target awards under the Individual Performance Subplan and limits on payouts in excess of targets, if any. Target awards under the Individual Performance Subplan are set at percentages of base salary to be established by the Committee which may differ from participant to participant and from year to year. Awards under the Individual Performance Subplan will not be contingent on the failure to attain the performance goals under the Corporate Performance Subplan. 6.4 Form and Payment of Awards. Awards under the Annual Incentive Plan will be approved by the Committee after the end of each plan year. No awards will be payable to any employee under any measure if thresholds established by the Committee are not reached. Awards will be paid partly in cash and partly in Performance Shares, as described below under Article 7. 6.5 Vesting. Any award under the Annual Incentive Plan will be vested (considered the participant's property) at the time the Committee approves the award; except that, if a participant dies or becomes disabled after the close of the plan year for which the award was earned and prior to approval of the award, the award will be vested as of the date of death or disability. 6.6 Change in Control. In the event of a Change in Control, the Committee will determine the Annual Incentive Plan awards for each participant that would have been earned if the plan year had ended on the date of the Change in Control, based on actual performance through the date of the Change in Control (the "Vested Awards"). Thereafter: (a) Each participant who is in active employment at the end of the plan year shall be entitled to the greater of his or her Vested Award and an award based on actual performance for the entire plan year. (b) If the MICP is terminated during a plan year after the date a Change in Control occurs, each participant who is in active employment at the time of such termination shall be entitled to the greater of his or her Vested Award and an award based on actual performance through the date of termination of the plan. (c) If a participant's employment is terminated without Cause by the Company during a plan year after the Change in Control occurs, such participant shall be entitled to the greater of his or her Vested Award and an award based on actual performance through the date of termination of employment. 6.7 Definitions. For purposes of the MICP, the following terms have the following meanings. (a) "Cause" shall mean the occurrence of one of the following : (1) A conviction of the participant of (x) a felony or (y) any lesser crime or offense involving the property of the Company or one of its subsidiaries. (2) The willful engaging by the participant in conduct which has caused demonstrable and serious injury to the Company, monetary or otherwise, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative. (3) Willful gross dereliction of duty or other willful grave misconduct by the participant and failure to cure such situation within thirty (30) days after receipt of notice thereof from the Chairman of the Committee. No act or failure to act on the part of the participant shall be deemed willful if done, or omitted to be done, by the participant in good faith and with a reasonable belief that his action or omission was in the best interests of the Company or a subsidiary. The participant shall not be deemed to have been terminated for "Cause" unless and until there shall have been delivered to the participant a copy of a resolution duly adopted by the Committee (or another committee of the Board hereafter succeeding the responsibilities performed on the effective date of the MICP by the Committee) finding that in the good faith opinion of the Committee the participant has committed an act set forth in clause (1), (2) or (3) of this definition and specifying the particulars thereof in detail. (b) "Change in Control" means and includes any of the following events: (1) during any period of two consecutive years, individuals who, at the beginning or such period, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director and whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest (as described in Rule 14a-11 under the Act) ("Election Contest") or other actual or threatened solicitation of proxies or consents by or on behalf of any "person" (as such term is defined in Section 3(a)(9) of the Act and as used in Sections 13(d)(3) and 14(d)(2) of the Act) other than the Board ("Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election or Contest or Proxy Contest, shall be deemed an Incumbent Director; (2) any person is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control of the Company by virtue of any of the following acquisitions: (A) by the Company of any subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (C) by an underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii), or (E) a transaction (other than one described in (iii) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (E) does not constitute a Change in Control of the Company under this paragraph (ii); (3) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Reorganization"), or sale or other disposition of all or substantially all of the Company's assets to an entity that is not an affiliate of the Company (a "Sale"), unless immediately following such Reorganization or Sale: (A) more than 50% of the total voting power of (x) the corporation resulting from such Reorganization or the corporation which has acquired all or substantially all of the assets of the Company (in either case, the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by the Company Voting Securities that were outstanding immediately prior to such Reorganization or Sale (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Reorganization or Sale), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Reorganization or Sale, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Reorganization or Sale were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Reorganization or Sale (any Reorganization or Sale which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (4) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. ARTICLE 7 Performance Share Plan 7.1 General. A Performance Share Plan is also included in the MICP, the specific terms and conditions of which shall be set forth in one or more separate subplan documents approved and amended from time to time by the Committee consistent with the terms of the MICP. One such subplan ("Performance Share Plan I") shall be applicable to senior officers, and producers of insurance business for the benefit of the Company or its subsidiaries, selected by the Committee upon the recommendation of the Chief Executive Officer ("CEO"), who are in a position to contribute materially to the Company's continued growth and development and to its long term financial success. For purposes of this Plan, producers shall be deemed to be consultants of the Company or its subsidiaries. Another such subplan ("Performance Share Plan II") is for all persons who receive MICP annual incentive awards who are not otherwise participating in such year in Performance Share Plan I. 7.2 Performance Share Plan I. Participants in Performance Share Plan I are the CEO, President, Vice Chairman, Executive Vice Presidents and such other senior officers selected by the Committee upon the recommendation of the CEO to participate in Performance Share Plan I for a given year. Producers for the Company who achieve certain performance sales goals may also be selected to participate in Performance Share Plan I as described below. Approximately 15-35 officers may participate in any one year. The officers, all of whom have company stock ownership requirements, are required to receive a portion of their MICP annual incentive awards in "Performance Shares" based on the following table: Percent Paid in Performance MICP Incentive Earned Shares Less than $100,000..... 25.0% $100,000--$249,999..... 37.5% $250,000 or more....... 50.0% Participants in Performance Share Plan I may elect to receive any portion of their MICP awards above the required percentage in Performance Shares. A "Performance Share" is a unit of deferred compensation, equal in value to one share of Company common stock. The number of Performance Shares to be awarded to any participant in Performance Share Plan I is determined by: (1) Dividing the amount of MICP award being paid in Performance Shares (both mandatory and voluntary) by the market price for a share of Company common stock on the date the amount of the MICP award is determined, and (2) "Grossing-up" the number of Performance Shares on a 30% basis, to reflect the increased risk of the volatility of stock price, particularly during the deferral period, as well as lack of liquidity and marketability. The number will be calculated by multiplying the number of Performance Shares by 1.30. Performance Shares granted under Performance Share Plan I are subject to the following: (1) The shares attributable to the "gross-up" factor are subject to forfeiture during a three-year period following the award. The remaining Performance Shares are not subject to forfeiture. (2) Participants may elect to extend the deferral period for payment of Performance Shares beyond the required period of three years, but not beyond the earliest of retirement, death, or disability. Any such election must be made prior to the date such shares are credited to the participant. (3) Generally, Performance Shares will be paid in Company common stock; however, the Committee has the authority to direct that the value of such shares be paid in part or entirely in cash. (4) Participant accounts under Performance Share Plan I will be credited with dividend equivalents in an amount equal to the cash dividends paid on Company common stock during the period of deferral. The dividend may be paid in cash or applied to accumulate additional Performance Shares, at the election of the participant. (5) Performance Shares will be counted in the calculation of participants' total ownership of Company stock for purposes of determining the extent to which stock ownership requirements have been met. (6) In the event of death, normal retirement, termination without cause, or Change in Control of the Company, any shares attributable to the "gross-up" factor, which otherwise would be subject to forfeiture during a three year period, will automatically cease to be subject to such forfeiture. In the event of termination for Cause or voluntary resignation, any shares subject to the "gross-up" factor will be forfeited. The Committee has the authority to review such forfeiture on a case by case basis. Certain producers who achieve performance sales goals may also be selected to participate Performance Share Plan I. The goals required and the terms of the producers' participation will be approved by the Committee. However, there is no "gross-up" of the number of shares to be awarded under Performance Share Plan I to the producers, and the terms of such participation would be no more favorable than those applicable to the officers. Management estimates that approximately ten to thirty-five producers would participate in Performance Share Plan I each year. 7.3 Performance Share Plan II. Each person who receives an annual incentive award under the MICP and is not otherwise participating in such year in Performance Share Plan I, shall automatically be a participant in Performance Share Plan II. Participants in Performance Share Plan II are required to receive a portion of the MICP annual incentive awards in "Performance Shares" based on the following table: Percent Paid in Performance MICP Incentive Earned Shares Less than $20,000..... 15.0% (minimum of 100 shares) --- $20,000 or more....... 25.0% The number of Performance Shares to be awarded to any participant in Performance Share Plan II is determined by dividing the amount of MICP award being paid in Performance Shares by the market price for a share of Company common stock on the date the amount of the MICP award is determined. Performance Shares granted under Performance Share Plan II are subject to the following: (1) Participants may elect to extend the deferral period for payment of Performance Shares for up to two years beyond the required period of three years, but not beyond the earliest of retirement, death, or disability. Any such election must be made prior to the date such shares are credited to the participant. (2) Generally, Performance Shares will be paid in Company common stock; however, the Committee has the authority to direct that the value of such Performance Shares be paid in part or entirely in cash. Participant accounts under Performance Share Plan II will be credited with dividend equivalents in an amount equal to the cash dividends paid on Company common stock during the period of deferral. The dividend will be applied to accumulate additional Performance Shares in the participant's account. Performance Shares will be counted in the calculation of participants' total ownership of Company stock for purposes of determining the extent to which any stock ownership requirements have been met. ARTICLE 8 General Provisions 8.1 Non-Assignability. No grants or awards under the MICP shall be subject in any manner to alienation, anticipation, sale, transfer, assignment, pledge or encumbrance. 8.2 No Right to Continued Employment. Participation in the MICP shall not give any employee any right to remain in the employ of the Company. The MICP is not to be construed as a contract of employment for any period and does not alter the at-will status of any participant. 8.3 Source of Benefits. Awards under the MICP will not be prefunded but will be paid by the Company as and when they become due as provided herein, and the participant's interest in the award shall be only that of an unsecured creditor of the Company. 8.4 Income Tax Withholding. The Company shall have the authority and the right to deduct or withhold, or require a participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the award shares of stock having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. 8.5 Governing Law. This MICP, and the rights and obligations of the parties thereunder, will be construed in accordance with the laws of the State of Tennessee. The foregoing is hereby acknowledged as being the Provident Companies, Inc., Amended and Restated Annual Management Incentive Compensation Plan of 1994 as adopted by the Board of Directors of the Company on March 26, 1998, and approved by the Stockholders of the Company on May 6, 1998. PROVIDENT COMPANIES, INC. By: Its: EX-10.7 5 0005.txt STOCK PLAN OF 1994 EXHIBIT 10.7 STOCK PLAN OF 1994 Purpose The purpose of this Stock Plan of 1994 ("the Plan") is to advance the interests of Provident Life and Accident Insurance Company ("the Company") and its affiliates, subsidiaries of Provident Companies, Inc. ("Provident"), by encouraging and enabling the acquisition of a financial interest in Provident by key employees, non-employee Directors and non-employee producers of business for the Company and its affiliates. Forms of Stock Awards The following forms of stock awards are permitted by the Plan: Stock Options - All forms of stock options, including incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended from time to time; non-qualified stock options or any other type of options encompassed by the Code. Stock Appreciation Rights - Rights to receive a payment from the Company equal to the excess of the fair market value (as defined below) of a share of common stock at the date of exercise over the fair market value at the date of grant. Restricted Stock - Stock issued or transferred under the Plan which is subject to restrictions on the vesting, sale or other disposition thereof. Administration of the Plan The Compensation Committee ("the Committee"), designated by the Board of Directors, will administer, construe, and interpret the Plan. No member of the Committee, or of the Board of Directors, or any delegatee as the case may be, shall be liable for any act done in good faith. The Committee shall be constituted so as to permit the Plan to comply with Rule 16b-3 promulgated by the Securities Exchange Commission under the Securities Exchange Act of 1934 or under any successor rule. The construction and interpretation of the Committee of any provision of the Plan shall be final and conclusive. The Committee shall have full and complete authority in its discretion to determine, among other things, the key persons to whom, and the time or times in which, stock awards shall be granted, the form of stock to be granted, the number of shares to be covered by each award and the period of time and requisite conditions for each; and to determine the terms and provisions of the award agreements (which agreements need not be identical). The Committee may, in its discretion, delegate its general administrative duties to an officer or employee or committee composed of officers or employees of the Company, but may not delegate its authority to construe and interpret the plan or approve the granting of stock awards. The Committee may at any time or from time to time amend the Plan in any respect without restriction and without the consent of any participant. However, any modification of the Plan which would result in a substantial change in the number of participants or the number of stock awards granted, or termination of the Plan, must be approved by the Board of Directors. The Plan shall terminate on the earlier of December 31, 1998, or the issuance of all stock awards authorized for the Plan, unless earlier terminated by the Committee with the approval of the Board of Directors. This Plan, and the rights and obligations of the parties thereunder, will be construed in accordance with the laws of the State of Tennessee. Participation in the Plan Participation in the Plan shall be based on recommendations by Company management and subject to approval by the Committee. Participation in the Plan shall be limited to the following: (1) Key employees (2) Non-employee Directors (3) Certain non-employee producers of the Company or its affiliates Stock to be Awarded Stock awards will be for shares of Common Stock of Provident. The stock to be received by participants may be purchased on the open market or issued out of authorized but unissued stock of Provident. The total number of shares that may be awarded to all participants under the Plan may not exceed 3,500,000 shares. The total number of shares that may be awarded to all non-employee Directors may not exceed in the aggregate 100,000 shares (20,000 annually). No more than 650,000 shares may be awarded to an employee in a calendar year. Awards of Stock Options Except as otherwise specifically provided herein, stock options granted pursuant to the Plan shall be subject to the following terms and conditions: (a) Option Price. The option price shall be 100% of the fair market value of the stock on the date of grant. The fair market value of a share of stock shall be the average of the high and low market prices reported in The Wall Street Journal at which a share of stock shall have been ----------------------- sold on the day before the option is granted or on the next preceding trading day if such date was not a trading day. 2 (b) Payment. The Committee shall determine the methods by which the exercise price of an option may be paid, the form of payment, including, without limitation, cash, shares of stock, or other property (including "cashless exercise" arrangements), and the methods by which shares of stock shall be delivered or deemed to be delivered to participants; provided, however, that if shares of stock are used to pay the exercise price of an option, such shares must have been held by the participant for at least six months. When shares of stock are delivered, such delivery may be by attestation of ownership or actual delivery of one or more certificates. Failure by the Committee to specify methods by which the exercise price of an option may be paid or the form of payment shall be deemed to express the Committee's determination that all methods and forms of payment presented under the Plan are permitted under the grant. (c) Duration of Options. The duration of options shall be determined by the Committee, but in no event shall the duration of an option exceed ten (10) years from the date of its grant. (d) Stock Performance Price. For all options granted to participants other than those granted to the CEO, the price per share of common stock must reach a specified level before half of the options in any grant can be exercised. Options subject to this requirement will become exercisable subject to the vesting and termination provisions of the Plan when the price of the stock reaches the stipulated price per share during any three trading days occurring within a period of ninety (90) days. For options granted during 1994, this stipulated price was $40 per share. For options granted after 1994, the stipulated price is determined by adding to the grant price an amount equal to the risk free rate of return on capital at the time of grant, compounded for the number of years determined to be an appropriate performance period in the sole discretion of the Committee. The Committee will retain discretion to establish similar terms and conditions applicable to any options which may be granted to the CEO. (e) "Reload" Feature. To encourage increased ownership, the Plan includes what is commonly referred to as a "reload" feature. Under this arrangement, when options are exercised, payment for the option shares by delivery of shares already owned by the optionee (which were acquired either (i) by direct purchase outside the option process, or (ii) through exercise of options more than six (6) months prior to the date of the current exercise) would entitle the optionee to a new stock option grant equal to the number of shares delivered. The new option grant would acquire the remaining exercise period with respect to the options exercised and the option price would be the then current fair market value as defined by the Plan. This feature applies to all options under the Plan subject to the discretion of the Compensation Committee based on then applicable tax and/or accounting rules. 3 (f) Other Terms and Conditions. Options may contain such other provisions, not inconsistent with the provisions of the Plan, as the Committee shall determine appropriate from time to time; provided, however, that no option shall be exercisable in whole or in part for a period of twelve (12) months from the date on which the option is granted, except as provided in the section below headed Change in Control. ----------------- Number of Stock Awards The Committee shall determine the number of stock awards granted to each participant in the Plan. Non-Transferability No stock award granted pursuant to the Plan shall be transferable otherwise than by will or by the laws of descent and distribution. During the lifetime of an optionee, a stock award shall be exercisable only by the optionee personally or by the optionee's legal representative. Termination of Employment If a participant's active employment terminates for any reason other than retirement, disability, or death, all non-vested stock awards, and all unexercised rights under options held by the participant, shall expire on the date of such termination. Rights in the Event of Retirement Upon retirement of a participant in the Plan, all outstanding stock options will become immediately exercisable for a period of five years (but in no event more than 10 years from date of grant). For purposes of this provision, "retirement" shall mean normal retirement or early retirement with Committee approval. Rights in Event of Disability or Death If a participant to whom stock options have been granted terminates active employment with the Company because of total disability or death, such options may be exercised within the period provided in the option agreement but in no event more than three years after the date of onset of disability or death. For purposes of this provision, "disability" shall mean total disability due to injury or illness. A participant will be considered totally disabled if not able to perform all the duties of the participant's position with the Company at the time of termination of active employment. 4 Change in Control In the event of a change in control of Provident, all outstanding options would become immediately exercisable by all option holders, and all other forms of stock awards would immediately become vested. The Committee also would have the right to cash out any unvested stock options on the date of a change in control at an amount for each option equal to the spread between the fair market value on the date of change in control and the option price. The fair market value shall be the average of the high and low market prices reported in The Wall -------- Street Journal at which a share of stock shall have been sold on the day before - -------------- the date of change in control or on the next preceding trading day if such date was not a trading day. Change in Control shall be deemed to have occurred if any time or from time to - ----------------- time after the date of this Agreement: (1) any "person" or "group" [as those terms are used in Sections 13(d) and 14(d), respectively, of the Securities Exchange Act of 1934 ("Exchange Act")], other than the Maclellan family or a trustee or other fiduciary holding securities under an employee benefit plan of Provident, or a corporation owned, directly or indirectly, by the stockholders of Provident in substantially the same proportions as their ownership of stock of Provident, is or becomes the "beneficial owner," (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of Provident representing thirty percent (30%) or more of the combined voting power of Provident's then outstanding securities and (ii) the "group" comprised of the Maclellan family does not then beneficially own, directly or indirectly, securities of Provident representing more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities; or (2) the stockholders of Provident approve a merger or consolidation of Provident with any other corporation, other than a merger or consolidation which would result in the voting securities of Provident outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of Provident or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of Provident approve a plan of complete liquidation of Provident or an agreement for the sale or disposition by Provident of all or substantially all Provident's assets. Rights as a Stockholder A participant shall have no right as a stockholder with respect to any stock award until the participant shall have become the holder of record of such stock, and no adjustment shall be made for dividends in cash or other property or other distributions or rights in respect to such stock for which the record date is prior to the date on which the participant shall have in fact become the holder of record of the shares of stock acquired pursuant to the Plan. 5 Adjustment in the Number of Shares and in Option Price In the event there is any change in the shares of stock through the declaration of stock dividends, or stock splits or through recapitalization or merger or consolidation or combination or shares or otherwise, the Committee shall make such adjustment, if any, as it may deem appropriate in the number of shares of stock covered by each outstanding award. Any such adjustment may provide for the elimination of any fractional shares which might otherwise become subject to any option or right without payment therefor. Taxation The Company shall have the authority and the right to deduct or withhold, or require a participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the award shares of stock having a fair market value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. Designation of Beneficiaries A participant may designate a beneficiary or beneficiaries to receive any unvested stock awards, or to exercise stock options previously granted to the participant under the Plan, in case of death. A designation of beneficiary may be replaced by a new designation or may be revoked by the participant at any time. A designation or revocation shall be on a form to be provided for the purpose and shall be signed by the participant and delivered to the Company prior to the participant's death. If there shall be any question as to the legal right of any beneficiary to exercise any rights under the Plan, the rights to the award in question may be exercised by the estate of the participant, in which event the Company shall have no further liability to anyone with respect to such stock award. No Right to Continued Employment Participation in the Plan shall not give any employee any right to remain in the employ of the Company. The Plan is not to be construed as a contract of employment for any period and does not alter the at-will status of any participant. 6 EX-10.12 6 0006.txt STOCK PLAN EXHIBIT 10.12 UNUMPROVIDENT CORPORATION STOCK PLAN OF 1999 (as approved by Committee 2/8/01) ARTICLE I Purpose 1.1 General. The purpose of the UnumProvident Stock Plan of 1999 (the "Plan") is to promote the success, and enhance the value, of UnumProvident Corporation (the "Corporation"), by linking the personal interests of its employees, officers, producers and directors to those of Corporation stockholders and by providing such persons with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Corporation in its ability to motivate, attract, and retain the services of employees, officers, producers and directors upon whose judgment, interest, and special effort the successful conduct of the Corporation's operation is largely dependent. Accordingly, the Plan permits the grant of incentive awards from time to time to selected employees, officers, producers and directors. ARTICLE 2 Effective Date 2.1 Effective Date. The Plan was effective as of January 1, 1999, and has most recently been amended by the Board on February 8, 2001. ARTICLE 3 Definitions 3.1 Definitions. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Section 1.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings: (a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, or Dividend Equivalent Award, or any other right or interest relating to Stock or cash, granted to a Participant under the Plan. (b) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award. (c) "Board" means the Board of Directors of the Corporation. (d) "Change in Control" means and includes the occurrence of any of the following events: "Change in Control" means and includes any of the following events: (i) during any period of two consecutive years, individuals who, at the beginning or such period, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director and whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or ----------------- nominated as a director of the Company as a result of an actual or threatened election contest (as described in Rule 14a-11 under the Act) ("Election Contest") or other actual or threatened solicitation of proxies or consents by or on behalf of any "person" (as such term is defined in Section 3(a)(9) of the Act and as used in Sections 13(d)(3) and 14(d)(2) of the Act) other than the Board ("Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election or Contest or Proxy Contest, shall be deemed an Incumbent Director; (ii) any person is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, --------- however, that the event described in this paragraph (ii) shall not ------- be deemed to be a Change in Control of the Company by virtue of any of the following acquisitions: (A) by the Company of any subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (C) by an underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii), or (E) a transaction (other than one described in (iii) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (E) does not constitute a Change in Control of the Company under this paragraph (ii); (iii) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Reorganization"), or sale or other disposition of all or substantially all of the Company's assets to an entity that is not an affiliate of the Company (a "Sale"), unless immediately following such Reorganization or Sale: (A) more than 50% of the total voting power of (x) the corporation resulting from such Reorganization or the corporation which has acquired all or substantially all of the assets of the Company (in either case, the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by the Company Voting Securities that were outstanding immediately prior to such Reorganization or Sale (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Reorganization or Sale), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Reorganization or Sale, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Reorganization or Sale were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Reorganization or Sale (any Reorganization or Sale which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the committee of the Board described in Article 4. (g) "Corporation" means UnumProvident Corporation , a Delaware corporation. (h) "Covered Employee" means a covered employee as defined in Code Section 162(m)(3). (i) "Disability" means any illness or other physical or mental condition of a Participant that renders the Participant incapable of performing his customary and usual duties for the Corporation, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which, in the judgment of the Committee, is permanent and continuous in nature. The Committee may require such medical or other evidence as it deems necessary to judge the nature and permanency of the Participant's condition. Notwithstanding the above, with respect to an Incentive Stock Option, Disability shall mean Permanent and Total Disability as defined in Section 22(e)(3) of the Code. (j) "Dividend Equivalent" means a right granted to a Participant under Article 11. (k) "Effective Date" has the meaning assigned such term in Section 2.1. (l) "Fair Market Value", on any date, means (i) if the Common Stock is listed on a securities exchange or traded over the Nasdaq National Market, the average of the high and low market prices reported in The Wall Street Journal at which a Share of Common Stock shall have been sold on such day or on the next preceding trading day if such date was not a trading day, or (ii) if the Common Stock is not listed on a securities exchange or traded over the Nasdaq National Market, the mean between the bid and offered prices as quoted by Nasdaq for such date, provided that if it is determined that the fair market value is not properly reflected by such Nasdaq quotations, Fair Market Value will be determined by such other method as the Committee determines in good faith to be reasonable. (m) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (n) "Non-Qualified Stock Option" means an Option that is not an Incentive Stock Option. (o) "Option" means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option. (p) "Parent" means a corporation which owns or beneficially owns a majority of the outstanding voting stock or voting power of the Corporation. Notwithstanding the above, with respect to Incentive Stock Options, the term shall have the same meaning as set forth in Section 424(e) of the Code. (q) "Participant" means a person who, as an employee, officer, Producer or director of the Corporation or any Parent or Subsidiary, has been granted an Award under the Plan. (r) "Plan" means the UnumProvident Corporation Stock Plan of 1999, as amended from time to time. (s) "Producer" means a producer of insurance business for the benefit of the Corporation or its subsidiaries. For purposes of this Plan, Producers are deemed to be consultants of the Corporation or its Parent or Subsidiaries. (t) "Restricted Stock Award" means Stock granted to a Participant under Article 10 that is subject to certain restrictions and to risk of forfeiture. (u) "Retirement" means a Participant's voluntary termination of employment with the Corporation , Parent or Subsidiary at or after age 65 or after attaining age 55 with at least 15 years of service with the Corporation or a Parent or Subsidiary or with an entity that has been acquired by the Corporation or a Parent or Subsidiary, or with the approval of the Committee. (v) "Stock" means the $.10 par value common stock of the Corporation and such other securities of the Corporation as may be substituted for Stock pursuant to Article 12. (w) "Stock Appreciation Right" or "SAR" means a right granted to a Participant under Article 8 to receive a payment equal to the difference between the Fair Market Value of a share of Stock as of the date of exercise of the SAR over the grant price of the SAR, all as determined pursuant to Article 8. (x) "Subsidiary" means any corporation, limited liability company, partnership or other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. Notwithstanding the above, with respect to Incentive Stock Options, the term shall have the meaning set forth in Section 424(f) of the Code. (y) "1933 Act" means the Securities Act of 1933, as amended from time to time. (z) "1934 Act" means the Securities Exchange Act of 1934, as amended from time to time. ARTICLE 4 Administration 4.1 Committee. The Plan shall be administered by a committee (the "Committee") appointed by the Board (which Committee shall consist of two or more directors) or, at the discretion of the Board from time to time, the Plan may be administered by the Board. It is intended that the directors appointed to serve on the Committee shall be "non-employee directors" (within the meaning of Rule 16b-3 promulgated under the 1934 Act) and "outside directors" (within the meaning of Code Section 162(m) and the regulations thereunder) to the extent that Rule 16b-3 and, if necessary for relief from the limitation under Code Section 162(m) and such relief is sought by the Corporation, Code Section 162(m), respectively, are applicable. However, the mere fact that a Committee member shall fail to qualify under either of the foregoing requirements shall not invalidate any Award made by the Committee which Award is otherwise validly made under the Plan. The members of the Committee shall be appointed by, and may be changed at any time and from time to time in the discretion of, the Board. During any time that the Board is acting as administrator of the Plan, it shall have all the powers of the Committee hereunder, and any reference herein to the Committee (other than in this Section 4.1) shall include the Board. 4.2 Action By The Committee. For purposes of administering the Plan, the following rules of procedure shall govern the Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved unanimously in writing by the members of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Corporation or any Parent or Subsidiary, the Corporation's independent certified public accountants, or any executive compensation consultant or other professional retained by the Corporation to assist in the administration of the Plan. 4.3 Authority Of Committee. Except as provided below the Committee has the exclusive power, authority and discretion to: (a) Designate Participants; (b) Determine the type or types of Awards to be granted to each Participant; (c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate; (d) Determine the terms and conditions of any Award granted under the Plan, including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines; (e) Accelerate the vesting or lapse of restrictions of any outstanding Award, based in each case on such considerations as the Committee in its sole discretion determines; (f) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered; (g) Prescribe the form of each Award Agreement, which need not be identical for each Participant; (h) Decide all other matters that must be determined in connection with an Award; (i) Establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; (j) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan; (k) Amend the Plan or any Award Agreement as provided herein; and (l) Adopt such modifications, procedures, and subplans as may be necessary or desirable to comply with provisions of the laws of non-U.S. jurisdictions in which the Corporation or any Parent or Subsidiary may operate, in order to assure the viability of the benefits of Awards granted to Participants located in such other jurisdiction and to meet the objectives of the Plan. Notwithstanding the above, the Board or the Committee may expressly delegate to a special committee consisting of one or more directors who are also officers of the Corporation some or all of the Committee's authority under subsections (a) through (g) above with respect to those eligible Participants who, at the time of the grant are not, and are not anticipated to become, either (I) Covered Employees or (ii) persons subject to the insider trading rules of Section 16 of the 1934 Act. Further, the Committee may delegate its general administrative duties under the Plan to an officer or employee or committee of officers or employees of the Company. 4.4. Decisions Binding. The Committee's interpretation of the Plan, any Awards granted under the Plan, any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. No member of the Committee shall be liable for any act done in good faith. ARTICLE 5 Shares Subject To The Plan 5.1. Number Of Shares. The aggregate number of shares of Stock reserved and available for Awards or which may be used to provide a basis of measurement for or to determine the value of an Award (such as with a Stock Appreciation Right) shall be 7,500,000 of which not more than twenty percent (20% may be granted as Awards of Restricted Stock or unrestricted Stock Awards, and not more than ten percent (10%) shares of Stock shall be granted in the form of Incentive Stock Options. 5.2. Lapsed Awards and Shares Withheld or Tendered. To the extent that an Award is canceled, terminates, expires or lapses for any reason, any shares of Stock subject to the Award will again be available for the grant of Awards under the Plan. Shares subject to SARs or other Awards settled in cash will be available for the grant of an Award under the Plan. Shares of Stock that are surrendered or withheld from any Award to satisfy a Participant's income tax withholding obligations, or shares of Stock owned by a Participant that are tendered to pay the exercise price of Options granted under the Plan will be available for the grant of Awards under the Plan. Stock delivered by the Corporation, any shares of stock with respect to which Awards are made by the Corporation and any shares of Common Stock with respect to which the Corporation becomes obligated to make Awards, through the assumption of, or in substitution for, the outstanding awards previously granted by a acquired entity, shall not be counted against the shares available for Awards under this Plan. 5.3. Stock Distributed. Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market. 5.4. Limitation On Awards. Notwithstanding any provision in the Plan to the contrary, but subject to adjustment as provided in Section 12.4the maximum number of shares of Stock with respect to one or more Options and/or SARs that may be granted during any one calendar year under the Plan to any one Participant shall be 1,000,000. The maximum Fair Market Value (measured as of the date of grant) of any Awards other than Options and SARs that may be received by any one Participant (less any consideration paid by the Participant for such Award) during any one calendar year under the Plan shall be $10,000,000. ARTICLE 6 Eligibility 6.1. General. Awards may be granted only to individuals who are employees, officers, Producers or directors of the Corporation or a Parent or Subsidiary. ARTICLE 7 Stock Options 7.1. General. The Committee is authorized to grant Options to Participants on the following terms and conditions: (a) Exercise Price. The exercise price per share of Stock under an Option shall be determined by the Committee, provided that the exercise price for any Option shall not be less than the Fair Market Value as of the date of the grant. (b) Time And Conditions Of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part. The Committee also shall determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. The Committee may waive any exercise provisions at any time in whole or in part based upon factors as the Committee may determine in its sole discretion so that the Option becomes exercisable or vested at an earlier date. (c) Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of Stock, or other property (including "cashless exercise" arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants; provided, however, that if shares of Stock are used to pay the exercise price of an Option, such shares must have been held by the Participant for at least six months. When shares of Stock are delivered , such delivery may be by attestation of ownership or actual delivery of one or more certificates. Failure by the Committee to specify methods by which the exercise price of an Option may be paid or the form of payment shall be deemed to express the Committee's determination that all methods and forms of payment under the Plan are permitted for that Option. (d) Evidence Of Grant. All Options shall be evidenced by a written Award Agreement between the Corporation and the Participant. The Award Agreement shall include such provisions, not inconsistent with the Plan, as may be specified by the Committee. (e) Additional Options Upon Exercise. The Committee may, in its sole discretion, provide in an Award Agreement, or in an amendment thereto, for the automatic grant of a new Option to any Participant who delivers shares of Stock as full or partial payment of the exercise price of the original Option. Any new Option granted in such a case (i) shall be for the same number of shares of Stock as the Participant delivered in exercising the original Option, (ii) shall have an exercise price of 100% of the Fair Market Value of the surrendered shares of Stock on the date of exercise of the original Option (the grant date for the new Option), and (iii) shall have a term equal to the unexpired term of the original Option. (f) Exercise Term. In no event may an Option be exercisable for more than ten years from the date of its grant. 7.2. Incentive Stock Options. The terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules: (a) Exercise Price. The exercise price per share of Stock shall be set by the Committee, provided that the exercise price for any Incentive Stock Option shall not be less than the Fair Market Value as of the date of the grant. (b) Exercise. In no event may any Incentive Stock Option be exercisable for more than ten years from the date of its grant. (c) Lapse Of Option. An Incentive Stock Option shall lapse under the earliest of the following circumstances; provided, however, that the Committee may, prior to the lapse of the Incentive Stock Option under the circumstances described in paragraphs (3), (4) and (5) below, provide in writing that the Option will extend until a later date, but if Option is exercised after the dates specified in paragraphs (3), (4) and (5) below, it will automatically become a Non-Qualified Stock Option: (1) The Incentive Stock Option shall lapse as of the option expiration date set forth in the Award Agreement. (2) The Incentive Stock Option shall lapse ten years after it is granted, unless an earlier time is set in the Award Agreement. (3) If the Participant terminates employment for any reason other than as provided in paragraph (4) or (5) below, the Incentive Stock Option shall lapse, unless it is previously exercised, three months after the Participant's termination of employment; provided, however, that if the Participant's employment is terminated by the Corporation for cause (as determined by the Corporation ), the Incentive Stock Option shall (to the extent not previously exercised) lapse immediately. (4) If the Participant terminates employment by reason of his Disability, the Incentive Stock Option shall lapse, unless it is previously exercised, one year after the Participant's termination of employment. (5) If the Participant dies while employed, or during the three-month period described in paragraph (3) or during the one- year period described in paragraph (4) and before the Option otherwise lapses, the Option shall lapse one year after the Participant's death. Upon the Participant's death, any exercisable Incentive Stock Options may be exercised by the Participant's beneficiary, determined in accordance with Section 11.6. Unless the exercisability of the Incentive Stock Option is accelerated as provided in Article 11, if a Participant exercises an Option after termination of employment, the Option may be exercised only with respect to the shares that were otherwise vested on the Participant's termination of employment. (d) Individual Dollar Limitation. The aggregate Fair Market Value (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000.00. (e) Ten Percent Owners. No Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Corporation or any Parent or Subsidiary unless the exercise price per share of such Option is at least 110% of the Fair Market Value per share of Stock at the date of grant and the Option expires no later than five years after the date of grant. (f) Expiration Of Incentive Stock Options. No Award of an Incentive Stock Option may be made pursuant to the Plan after the day immediately prior to the tenth anniversary of the Effective Date. (g) Right To Exercise. During a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant or, in the case of the Participant's Disability, by the Participant's guardian or legal representative. (h) Directors. The Committee may not grant an Incentive Stock Option to a non-employee director. The Committee may grant an Incentive Stock Option to a director who is also an employee of the Corporation or Parent or Subsidiary but only in that individual's position as an employee and not as a director. ARTICLE 8 Stock Appreciation Rights 8.1. Grant of SARs. The Committee is authorized to grant SARs to Participants on the following terms and conditions: (a) Right To Payment. Upon the exercise of a Stock Appreciation Right, the Participant to whom it is granted has the right to receive the excess, if any, of: (1) The Fair Market Value of one share of Stock on the date of exercise; over (2) The grant price of the Stock Appreciation Right as determined by the Committee, which shall not be less than the Fair Market Value of one share of Stock on the date of grant. (b) Other Terms. All awards of Stock Appreciation Rights shall be evidenced by an Award Agreement. The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Committee at the time of the grant of the Award and shall be reflected in the Award Agreement. ARTICLE 9 Restricted Stock Awards 9.1. Grant Of Restricted Stock. The Committee is authorized to make Awards of Restricted Stock to Participants in such amounts and subject to such terms and conditions as may be selected by the Committee. All Awards of Restricted Stock shall be evidenced by a Restricted Stock Award Agreement. 9.2. Issuance And Restrictions. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, upon the satisfaction of performance goals or otherwise, as the Committee determines at the time of the grant of the Award or thereafter. 9.3. Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period or upon failure to satisfy a performance goal during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Corporation; provided, however, that the Committee may provide in any Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock. 9.4. Certificates For Restricted Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock. ARTICLE 10 Dividend Equivalents 10.1 Grant Of Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to Participants subject to such terms and conditions as may be selected by the Committee. Dividend Equivalents shall entitle the Participant to receive payments equal to dividends with respect to all or a portion of the number of shares of Stock subject to an Award, as determined by the Committee. The Committee may provide that Dividend Equivalents be paid or distributed when accrued or be deemed to have been reinvested in additional shares of Stock, or otherwise reinvested. ARTICLE 11 Provisions Applicable To Awards 11.1. Stand-alone, Tandem, And Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for, any other Award granted under the Plan. If an Award is granted in substitution for another Award, the Committee may require the surrender of such other Award in consideration of the grant of the new Award. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards. 11.2. Term Of Award. The term of each Award shall be for the period as determined by the Committee, provided that in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the Incentive Stock Option exceed a period of ten years from the date of its grant (or, if Section 7.2(e) applies, five years from the date of its grant). 11.3. Form Of Payment For Awards. Subject to the terms of the Plan and any applicable law or Award Agreement, payments or transfers to be made by the Corporation or a Parent or Subsidiary on the grant or exercise of an Award may be made in such form as the Committee determines at or after the time of grant, including without limitation, cash, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Committee. 11.4. Limits On Transfer. No right or interest of a Participant in any unexercised or restricted Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Corporation or a Parent or Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Corporation or a Parent or Subsidiary. No unexercised or restricted Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution or, except in the case of an Incentive Stock Option, pursuant to a domestic relations order that would satisfy Section 414(p)(1)(A) of the Code if such Section applied to an Award under the Plan; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, (ii) does not cause any Option intended to be an Incentive Stock Option to fail to be described in Code Section 422(b), and (iii) is otherwise appropriate and desirable, taking into account any factors deemed relevant, including without limitation, state or federal tax or securities laws applicable to transferable Awards. 11.5 Beneficiaries. Notwithstanding Section 11.4, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Participant, payment shall be made to the Participant's estate. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee. 11.6. Stock Certificates. All Stock issuable under the Plan is subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate or issue instructions to the transfer agent to reference restrictions applicable to the Stock. 11.7 Acceleration Upon Death, Disability Or Retirement. Notwithstanding any other provision in the Plan or any Participant's Award Agreement to the contrary, upon the Participant's death or Disability during his employment or service as a producer or director or upon the Participant's Retirement, all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully exercisable and all restrictions on outstanding Awards shall lapse. Any Option or Stock Appreciation Rights Awards shall thereafter continue or lapse in accordance with the other provisions of the Plan and the Award Agreement. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. 11.8. Acceleration Upon A Change In Control. Except as otherwise provided in the Award Agreement, upon the occurrence of a Change in Control, all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully exercisable and all restrictions on outstanding Awards shall lapse; provided, however that such acceleration will not occur if, in the opinion of the Corporation's accountants, such acceleration would preclude the use of "pooling of interest" accounting treatment for a Change in Control transaction that (a) would otherwise qualify for such accounting treatment, and (b) is contingent upon qualifying for such accounting treatment. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. 11.9. Acceleration Upon Certain Events Not Constituting A Change In Control. In the event of the occurrence of any circumstance, transaction or event not constituting a Change in Control (as defined in Section 3.1) but which the Board of Directors deems to be, or to be reasonably likely to lead to, an effective change in control of the Corporation of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of the 1934 Act, the Committee may in its sole discretion declare all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised to be fully exercisable, and/or all restrictions on all outstanding Awards to have lapsed, in each case, as of such date as the Committee may, in its sole discretion, declare, which may be on or before the consummation of such transaction or event. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. 11.10. Acceleration For Any Other Reason. Regardless of whether an event has occurred as described in Section 11.8 or 11.9 above, the Committee may in its sole discretion at any time determine that all or a portion of a Participant's Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully or partially exercisable, and/or that all or a part of the restrictions on all or a portion of the outstanding Awards shall lapse, in each case, as of such date as the Committee may, in its sole discretion, declare. The Committee may discriminate among Participants and among Awards granted to a Participant in exercising its discretion pursuant to this Section 11.10. 11.11 Effect Of Acceleration. If an Award is accelerated under Section 11.8 or 11.9, the Committee may, in its sole discretion, provide (i) that the Award will expire after a designated period of time after such acceleration to the extent not then exercised, (ii) that the Award will be settled in cash rather than Stock, (iii) that the Award will be assumed by another party to the transaction giving rise to the acceleration or otherwise be equitably converted in connection with such transaction, or (iv) any combination of the foregoing. The Committee's determination need not be uniform and may be different for different Participants whether or not such Participants are similarly situated. 11.12. Performance Goals. The Committee may determine that any Award granted pursuant to this Plan to a Participant (including, but not limited to, Participants who are Covered Employees) shall be determined solely on the basis of (a) the achievement by the Corporation , or an individual or a business unit of the Corporation or a Parent or Subsidiary, of a specified target with respect to, or target growth in, any of the following areas: (i) return on equity or on assets, (ii) overall or selected premium or sales growth, (iii) revenues, net income or earnings per share, (iv) expense efficiency ratios (ratio of expenses to premium income), (v) customer service measures or indices, (vi) underwriting efficiency and/or quality, (vii) market share, or (vii) persistency factors, or (b) the Corporation's s or a Parent's or Subsidiary's stock performance, or (c) any combination of the goals set forth in any of (a) or (b) above. If an Award is made on such basis, the Committee shall establish goals prior to the beginning of the period for which such performance goal relates (or such later date as may be permitted under Code Section 162(m) or the regulations thereunder) and the Committee has the right for any reason to reduce (but not increase) the Award, notwithstanding the achievement of a specified goal. Any payment of an Award granted with performance goals shall be conditioned on the written certification of the Committee in each case that the performance goals and any other material conditions were satisfied. 11.13. Termination Of Employment. Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur in a circumstance in which a Participant transfers from the Corporation to one of its Parents or Subsidiaries, transfers from a Parent or Subsidiary to the Corporation, or transfers from one Parent or Subsidiary to another Parent or Subsidiary or in the discretion of the Committee as specified at or prior to such occurrence, in the case of a spin-off, sale or disposition of the Participant's employer from the Corporation or any Parent or Subsidiary. To the extent that this provision causes the Incentive Stock Options to extend beyond three months from the date a Participant is deemed to be an employee of the Corporation, a Parent or Subsidiary for purposes of Section 424(f) of the Code, the Options held by such Participant shall be deemed to be Non-Qualified Stock Options. ARTICLE 12 Changes In Capital Structure 12.1. General. In the event of a corporate transaction involving the Corporation (including without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization , reorganization, merger, consolidation split-up, spin-off, combination or exchange of shares) the authorization limits under Section 5.1 and 5.4 shall be adjusted proportionately, and the Committee may adjust Awards to preserve the benefits or potential benefits of the Awards. Action by the Committee may include: (I) adjustment of the number and kind of shares which may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards, adjustment of the exercise price of outstanding Awards; and (iv) any other adjustments that the Committee determines to be equitable. Without limiting the foregoing, in the event a stock dividend or stock split is declared upon the Stock, the authorization limits under Section 5.1 and 5.4 shall be increased proportionately, and the shares of Stock then subject to each Award shall be increased proportionately without any change in the aggregate purchase price therefor. ARTICLE 13 Amendment, Modification And Termination 13.1. Amendment, Modification And Termination. The Board or the Committee may, at any time and from time to time, amend, modify or terminate the Plan without stockholder approval; provided, however, that the Board or Committee may condition any amendment or modification on the approval of stockholders of the Corporation if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations. 13.2 Awards Previously Granted. At any time and from time to time, the Committee may amend, modify or terminate any outstanding Award without approval of the Participant; provided, however, that subject to the terms of the applicable Award Agreement such amendment, modification or termination shall not, without the Participant's consent, reduce or diminish the value of such Award determined as if the Award had been exercised, vested, cashed in or otherwise settled on the date of such amendment or termination; and provided further that, the original term of any Option may not be extended and, except as otherwise provided in the anti-dilution provision of the Plan, the exercise price of any Option may not be reduced. No termination, amendment, or modification of the Plan shall adversely affect any Award previously granted under the Plan, without the written consent of the Participant. ARTICLE 14 General Provisions 14.1. No Rights To Awards. No Participant or employee, officer, producer or director shall have any claim to be granted any Award under the Plan, and neither the Corporation nor the Committee is obligated to treat Participants or eligible participants uniformly. 14.2. No Stockholder Rights. No Award gives the Participant any of the rights of a stockholder of the Corporation unless and until shares of Stock are in fact issued to such person in connection with such Award. 14.3. Withholding. The Corporation or any Parent or Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Corporation, an amount sufficient to satisfy federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the Award shares of Stock having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. 14.4. No Right To Continued Service. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Corporation or any Parent or Subsidiary to terminate any Participant's employment or status as an officer, Producer or director at any time, nor confer upon any Participant any right to continue as an employee, officer, Producer or director of the Corporation or any Parent or Subsidiary. 14.5. Unfunded Status Of Awards. The Plan is intended to be an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Corporation or any Parent or Subsidiary. 14.6. Relationship To Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or benefit plan of the Corporation or any Parent or Subsidiary unless provided otherwise in such other plan. 14.7. Expenses. The expenses of administering the Plan shall be borne by the Corporation and its Parents or Subsidiaries. 14.8. Titles And Headings. The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 14.9. Gender And Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 14.10. Fractional Shares. No fractional shares of Stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up. 14.11. Government and other Regulations. The obligation of the Corporation to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Corporation shall be under no obligation to register under the 1933 Act, or any state securities act, any of the shares of Stock issued in connection with the Plan. The shares issued in connection with the Plan may in certain circumstances be exempt from registration under the 1933 Act, and the Corporation may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. 14.12. Governing Law. To the extent not governed by federal law, the Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Tennessee. 14.13. Additional Provisions. Each Award Agreement may contain such other terms and conditions as the Committee may determine; provided that such other terms and conditions are not inconsistent with the provisions of this Plan. The foregoing is hereby acknowledged as being the Provident Companies, Inc. 1999 Stock Plan as adopted and amended by the Compensation Committee of the Board of Directors of the Corporation on February 8, 20001, and approved by the stockholders of the Corporation on May 10, 2001. UNUMPROVIDENT CORPORATION. By: Its: EX-10.13 7 0007.txt NON-EMPLOYEE DIRECTOR COMP PLAN EXHIBIT 10.13 UNUMPROVIDENT CORPORATION NON-EMPLOYEE DIRECTOR COMPENSATION PLAN OF 1998 1. Establishment of Plan. (a) Purpose. The purpose of the UnumProvident Corporation Non-Employee Director Compensation Plan of 1998 is to attract, retain and compensate highly-qualified individuals who are not employees of UnumProvident Corporation or any of its subsidiaries or affiliates for service as members of the Board by providing them with an opportunity to increase their ownership interest in the Common Stock of the Company. The Company intends that the Plan will benefit the Company and its stockholders by allowing Non-Employee Directors to have a personal financial stake in the Company through an ownership interest in the Common Stock and will closely associate the interests of Non-Employee Directors with that of the Company's stockholders. (b) Status of Plan. The Plan is intended, in part, to be a nonqualified, unfunded plan of deferred compensation under the Internal Revenue Code of 1986, as amended. Although the plan is unfunded for tax purposes, the Company may establish a trust under Revenue Procedure 92-64 to provide benefits under the Plan. (c) Establishment of Trust. As noted above, the Company may establish a trust to fund benefits provided under the terms of the Plan ("Trust"). It is intended that a transfer of assets into the Trust will not generate taxable income (for federal income tax purposes) to the Participants until such assets are actually distributed or otherwise made available to the Participants. 2. Defined Terms. Unless the context clearly indicates otherwise, the following terms shall have the following meanings: "Annual Retainer" means the annual retainer payable by the Company at the beginning of each Plan Year to a Non-Employee Director for service as a director of the Company, as such amount may be changed from time to time. Until changed by the Board, the Annual Retainer will be $80,000. "Board" means the Board of Directors of the Company. "Change in Control" means the occurrence of any of the following after the Effective Date: (i) during any period of two consecutive years, individuals who, at the beginning or such period, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director and whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest (as described in Rule 14a-11 under the Act) ("Election Contest") or other actual or threatened solicitation of proxies or consents by or on behalf of any "person" (as such term is defined in Section 3(a)(9) of the Act and as used in Sections 13(d)(3) and 14(d)(2) of the Act) other than the Board ("Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election or Contest or Proxy Contest, shall be deemed an Incumbent Director; (ii) any person is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control of the Company by virtue of any of the following acquisitions: (A) by the Company of any subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (C) by an underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii), or (E) a transaction (other than one described in (iii) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (E) does not constitute a Change in Control of the Company under this paragraph (ii); (iii) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Reorganization"), or sale or other disposition of all or substantially all of the Company's assets to an entity that is not an affiliate of the Company (a "Sale"), unless immediately following such Reorganization or Sale: (A) more than 50% of the total voting power of (x) the corporation resulting from such Reorganization or the corporation which has acquired all or substantially all of the assets of the Company (in either case, the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by the Company Voting Securities that were outstanding immediately prior to such Reorganization or Sale (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Reorganization or Sale), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Reorganization or Sale, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Reorganization or Sale were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Reorganization or Sale (any Reorganization or Sale which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. "Company" means Provident Companies, Inc., a Delaware corporation. "Committee" has the meaning assigned such term in Section 3. "Common Stock" means the common stock, par value $.10 per share, of the Company. "Deferred Share Right" means a right, granted under Section 7, to receive one share of Common Stock on the Payment Date. "Deferral Period" has the meaning set forth in Section 7(f) of the Plan. "Deferral Termination Date" has the meaning set forth in Section 7(e) of the Plan. "Disability" means any illness or other physical or mental condition of a Participant that renders the Participant incapable of performing his customary and usual duties for the Corporation, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which, in the judgment of the Committee, is permanent and continuous in nature. The Committee may require such medical or other evidence as it deems necessary to judge the nature and permanency of the Participant's condition. "Payment Date" has the meaning set forth in Section 7(e) of the Plan. "Director Retirement Program" means the Company's program which provides certain retirement benefits to directors elected for the first time prior to May 4, 1994. "Distributions" has the meaning set forth in Section 7(f) of the Plan. "Election Form" means a form approved by the Committee pursuant to which a Non-Employee Director elects a method of payment of Annual Retainer and the payment terms for Deferred Share Rights, if applicable. "Election Period" means the period designated by the Committee each year during which Non-Employee Directors may elect to receive Options or Deferred Share Rights as payment of some or all of their Annual Retainer. The Election Period shall end on or before April 30 of each year for the following Plan Year. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value", on any date, means (i) if the Common Stock is listed on a securities exchange or traded over the Nasdaq National Market, the average of the high and low market prices reported in The Wall Street Journal at which a Share of Common Stock shall have been sold on such day or on the next preceding trading day if such date was not a trading day, or (ii) if the Common Stock is not listed on a securities exchange or traded over the Nasdaq National Market, the mean between the bid and offered prices as quoted by Nasdaq for such date, provided that if it is determined that the fair market value is not properly reflected by such Nasdaq quotations, Fair Market Value will be determined by such other method as the Committee determines in good faith to be reasonable. "Grant Date" means the date on which Options are granted pursuant to Section 6 or Deferred Share Rights are granted pursuant to Section 7, which, in each case, shall be the date on which the Annual Retainer is payable in each Plan Year. "Hardship" has the meaning set forth in Section 7(h) of the Plan. "Non-Employee Director" means a director of the Company who is not an employee of the Company or of any of its subsidiaries or affiliates. "Option" means an option to purchase Shares granted under Section 6. Options granted under the Plan are not incentive stock options within the meaning of Section 422 of the Internal Revenue Code. "Optionee" means a Non-Employee Director of the Company to whom an Option has been granted or, in the event of such Non-Employee Director's death prior to the expiration of an Option, such Non-Employee Director's estate or other designated beneficiary. "Option Notice" means a written notice, agreement or certificate with a Non-Employee Director from the Company evidencing an Option. "Option Valuation Percentage" means the percentage determined by the Committee on or before the Election Date in each Plan Year as being the approximate fair value of an Option relative to a share of Common Stock on the date of the grant of the Option. The Option Valuation Percentage may not be less than 30%. Until changed by the Committee, the Option Valuation Percentage shall be 33%. "Participant" means any Non-Employee Director who is participating in the Plan. "Permitted Transferee" of an Optionee means (i) one or more of the following family members of the Optionee: spouse, former spouse, child (whether natural or adopted), stepchild, any other lineal descendent of the Optionee; (ii) a trust, partnership or other entity established and existing for the sole benefit of, or under the sole control of, one or more of the above family members of the Optionee, or (iii) any other transferee specifically approved by the Committee after taking into account any state or federal tax, securities or other laws applicable to transferable options. "Plan" means the Provident Companies, Inc. Non-Employee Director Compensation Plan of 1998, as amended from time to time. "Plan Year" means the approximately twelve-month period beginning on the date of the annual meeting of the stockholders of the Company ("annual meeting") in any year and ending on the date of the following annual meeting, which, for purposes of the Plan, is the period for which Annual Retainers are earned. "Retirement" means a Participant's termination of service as a director after attaining mandatory retirement age, or, in the event there is no mandatory retirement age for directors, as determined by the Committee in its reasonable judgment. "Rule 16b-3" means Rule 16b-3, as amended from time to time, of the Securities and Exchange Commission as promulgated under the Exchange Act. "Securities Act" means the Securities Act of 1933, as amended. "Shares" means shares of Common Stock. 3. Administration. The Plan shall be administered by the Compensation Committee of the Board (the "Committee"). Subject to the provisions of the Plan, the Committee shall be authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan; provided, however, that the Committee shall have no discretion with respect to the eligibility or selection of Non-Employee Directors to receive awards under the Plan, the number of Shares subject to any such awards or the time at which any such awards are to be granted. The Committee's interpretation of the Plan, and all actions taken and determinations made by the Committee pursuant to the powers vested in it hereunder, shall be conclusive and binding upon all parties concerned including the Company, its stockholders and persons granted awards under the Plan. The Committee may appoint a plan administrator to carry out the ministerial functions of the Plan, but the administrator shall have no other authority or powers of the Committee. Notwithstanding the foregoing, the Board shall exercise any and all rights, duties and powers of the Committee under the Plan to the extent required by the applicable exemptive conditions of Rule 16b-3, as determined by the Board its sole discretion. 4. Shares Subject to Plan. The Shares issued under the Plan shall not exceed in the aggregate 365,000 Shares of Common Stock. Such Shares may be acquired on the open market or issued out of authorized and unissued Shares or treasury Shares. 5. Participation. (a) Eligibility. All active Non-Employee Directors shall be eligible to participate in the Plan. (b) Annual Retainer Elections. A Participant may elect on or before the Election Date for a Plan Year to receive up to 100% of his or her Annual Retainer in the form of Options or Deferred Share Rights in accordance with the terms of the Plan and the Election Form. A Participant may not elect to receive both Options and Deferred Share Rights in any one Plan Year. Any amount of the Annual Retainer not elected to be received in the form of Options of Deferred Share Rights shall be paid to the Participant in cash. (c) Accrued Balances under Director Retirement Program. Each Non-Employee Director having an accrued account balance in the Director Retirement Program as of the Effective Date shall be required to convert the net present value of such account either 100% to Options in accordance with the procedures described in Section 6 below with respect to Annual Retainer, or 100% to Deferred Share Rights, in accordance with the procedures described in Section 7 below with respect to Annual Retainer. The election as to which form of payment shall be made on an Election Form filed during the Election Period. (d) Deferral Accounts. For bookkeeping purposes, any amounts which the Participant elects to receive in the form of Deferred Share Rights, and any Distributions credited in accordance with Section 7(f), shall be transferred to and held in individual deferral accounts. 6. Stock Option Awards. (a) Election to Receive Options. A Non-Employee Director may elect each year to receive up to 100% of his or her Annual Retainer in the form of Options in accordance with this Section 6. A Non-Employee Director who wishes to receive some or all of his or her Annual Retainer for a Plan Year in the form of Options must irrevocably elect to do so during the Election Period for such Plan Year, by delivering a valid Election Form to the Committee or the plan administrator. A Non-Employee Director's participation in Section 6 of the Plan will be effective with respect to the Annual Retainer to be earned in the first Plan Year beginning after the Committee or the plan administrator receives the Non-Employee Director's Election Form. (b) Irrevocable, Annual Election. Elections to receive Options as payment of Annual Retainer are irrevocable and shall be valid only for one Plan Year. New elections must be made for participation in Section 6 of the Plan for subsequent Plan Years. (c) Time of Grant. Options shall be granted to each Non-Employee Director who, during the applicable Election Period, filed with the Committee or the plan administrator a written irrevocable election to receive Options as payment of some or all of such Non-Employee Director's Annual Retainer payable in the following Plan Year. Such Options will be granted on the date the Annual Retainer for such Plan Year is otherwise payable (the "Grant Date"). (d) Number of Options. The number of Shares subject to an Option granted pursuant to this Section 6 shall be the number of whole Shares equal to (i) the dollar amount of the Annual Retainer that the Non-Employee Director elects shall be payable in the form of Options, divided by (ii) the Option Valuation Percentage times the Fair Market Value per Share on the Grant Date. In determining the number of Shares subject to an Option, Shares will be rounded to the nearest 100 Shares. For example: Assume that a Non-Employee Director has elected to receive $50,000 of his or her Annual Retainer in the form of Options, that the Option Valuation Percentage is 33%, and that the Fair Market Value per Share on the Grant Date is $36. The Non-Employee Director would be granted 4,200 Options as payment of the $50,000 compensation. $50,000 divided by 33% of $36 FMV = 4,200 Options granted (rounded to the nearest 100 Shares). (e) Exercise Price. The total price paid per Share under each Option granted under this Section 6 shall be the Fair Market Value per Share on the Grant Date. (f) Exercise of Options. An Option, or portion thereof, may be exercised in whole or in part only with respect to whole Shares. Each Option shall be fully exercisable on the first anniversary of the date of grant or upon the earlier death, Disability or Retirement of the Optionee or the occurrence of a Change in Control. Each Option will remain exercisable for 10 years from the Grant Date; provided, however, that: (i) if a Participant terminates his or her service as a director for any reason after four years of service on the Board, or due to Retirement, death or Disability, his or her unexercised Options shall expire on the earlier of (A) the original expiration date of the Option or (B) the fifth anniversary of such termination of service; and (ii) if a Participant has served as a director for fewer than four years and terminates his or her service as a director for any reason other than Retirement, death or Disability, his or her unexercised Options shall expire on the date of such termination of service. (g) Payment of Exercise Price. The Committee shall determine the methods by which the exercise price of an option may be paid, the form of payment, including, without limitation, cash, shares of stock, or other property (including "cashless exercise" arrangements), and the methods by which shares of stock shall be delivered or deemed to be delivered to participants; provided, however, that if shares of stock are used to pay the exercise price of an option, such shares must have been held by the participant for at least six months. When shares of stock are delivered, such delivery may be by attestation of ownership or actual delivery of one or more certificates. Failure by the Committee to specify methods by which the exercise price of an option may be paid or the form of payment shall be deemed to express the Committee's determination that all methods and forms of payment presented under the Plan are permitted under the grant. (h) Option Notice. Each Option granted under the Plan shall be evidenced by an Option Notice which shall be executed by an authorized officer of the Company. Such Option Notice shall contain provisions regarding (a) the number of Shares that may be issued upon exercise of the Option, (b) the exercise price per Share of the Option and the means of payment therefor, (c) the term of the Option, and (d) such other terms and conditions not inconsistent with the Plan as may be determined from time to time by the Committee. (i) Transferability of Options. No Option shall be assignable or transferable by the Optionee other than by will or the laws of descent and distribution or to a Permitted Transferee. Any transfer to a Permitted Transferee shall be subject to the following terms and conditions: (i) An Option transferred to a Permitted Transferee shall not be assignable or transferable by the Permitted Transferee other than by will or the laws of descent and distribution. (ii) Transferred Options shall continue to be subject to all the terms and conditions of the Option as applicable to the original Optionee (other than the ability to further transfer the Option). (iii) The Optionee and the Permitted Transferee shall execute any and all documents reasonably requested by the Committee or the plan administrator, including without limitation documents (A) to confirm the status of the transferee as a Permitted Transferee, (B) to satisfy any requirements for an exemption for the transfer under applicable federal and state securities laws, and (C) to evidence the transfer. (iv) Shares acquired by a Permitted Transferee through exercise of an Option may not be transferred, nor will any assignee or transferee thereof be recognized as an owner of such Shares by the Company for any purpose, unless a registration statement under the Securities Act and any applicable state securities act with respect to such Shares shall then be in effect or unless the availability of an exemption from registration with respect to any proposed transfer or disposition of such Shares shall be established to the satisfaction of counsel for the Company. 7. Deferred Share Rights. (a) Election to Receive Deferred Share Rights. A Non-Employee Director may elect each year to receive up to 100% of his or her Annual Retainer in the form of Deferred Share Rights in accordance with this Section 7. A Non-Employee Director who wishes to receive some or all of his or her Annual Retainer for a Plan Year in the form of Deferred Share Rights must irrevocably elect to do so during the Election Period for such Plan Year, by delivering a valid Election Form to the Committee or the plan administrator. A Non-Employee Director's participation in Section 7 of the Plan will be effective with respect to the Annual Retainer to be earned in the first Plan Year beginning after the Committee or the plan administrator receives the Non-Employee Director's Election Form. (b) Irrevocable, Annual Election. Elections to receive Deferred Share Rights as payment of Annual Retainer shall be valid only for one Plan Year. New elections must be made for participation in Section 7 of the Plan for subsequent Plan Years. The deferral Election Form signed by the Participant prior to the Plan Year will be irrevocable except in case of Hardship (as defined in Section 7(h)) as determined in good faith by the Board pursuant to Section 7(h); provided, however, that the Participant may, at least one year in advance of the original Deferral Termination Date, designate a later Deferral Termination Date. (c) Time of Grant. Deferred Share Rights shall be granted to each Non-Employee Director who, during the applicable Election Period, filed with the Committee or the plan administrator a written irrevocable election to receive Deferred Share Rights as payment of some or all of such Non-Employee Director's Annual Retainer payable in the following Plan Year. Such Deferred Share Rights will be granted on the date the Annual Retainer for such Plan Year is otherwise payable (the "Grant Date"). (d) Number of Deferred Share Rights. The number of Deferred Share Rights granted pursuant to this Section 7 shall be the number of whole Shares equal to (i) the dollar amount of the Annual Retainer that the Non-Employee Director elects shall be payable in the form of Deferred Share Rights, divided by (ii) 90% of the Fair Market Value per Share on the Grant Date. In determining the number of Deferred Share Rights, any fraction of a Deferred Share Right will be rounded to the next highest whole number of Deferred Share Rights. For example: Assume that a Non-Employee Director has elected to defer $50,000 of his or her Annual Retainer and that the Fair Market Value per Share on the Grant Date is $36. The Non-Employee Director would be granted 1,544 Deferred Share Rights as payment of the $50,000 compensation. $50,000 divided by (90% of $36 FMV) = 1,544 Deferred Share Rights granted (rounded to the next highest whole number). (e) Nature of Deferred Share Rights. Each Deferred Share Right constitutes the right to receive one Share of Common Stock on the earlier of (i) the Participant's termination of service as a director or (ii) another designated date at least three years after the date of such deferral election (in either case, the "Deferral Termination Date"). Pursuant to the Election Form, the Participant will elect whether the Shares will be (a) granted within 30 days after the Deferral Termination Date or (b) granted in approximately equal annual installments of Shares over a period of three, five or seven years (as the Participant may elect) after the Deferral Termination Date, each such annual grant to be made within 30 days after the anniversary of the Deferral Termination Date. No Shares will be issued until the payment date(s) (the "Payment Date") at which time the Company agrees to issue Shares of Common Stock to the Participant. The Participant will have no rights as a stockholder with respect to the Deferred Share Rights, and the Deferred Share Rights will be unsecured. (f) Deferred Dividend Account. If any dividends or other rights or distributions of any kind ("Distributions") are distributed to holders of Common Stock during the period from the applicable Grant Date until the Deferral Termination Date (the "Deferral Period") but prior to the Participant's termination of service, an amount equal to the cash value of such Distributions on their distribution date, as such value is determined by the Committee, will be credited to a deferred dividend account for the Participant as follows: the account will be credited with the right to receive Shares having a Fair Market Value as of the date of the Distribution equal to the cash value of the Distribution. The Company will issue Shares equal to the cumulative total of rights to Shares in such account within 30 days after the Participant's Deferral Termination Date. If a Distribution is distributed to holders of Common Stock after the Participant's Deferral Termination Date but prior to the settlement in full of the Participant's Deferred Share Rights, an amount equal to the cash value of such Distributions pertaining to the Participant's outstanding Deferred Share Rights shall be converted into Shares equivalent in value to the Distribution (based on the Fair Market Value as of the date of Distribution) and such Shares will be issued to the Participant as soon as practical after the date of the Distribution. (g) Transferability of Deferred Share Rights. No Deferred Share Rights shall be assignable or transferable by the Participant other than by will or the laws of descent and distribution. No right or interest in the Deferred Share Rights or in the deferred dividend account shall be subject to liability for the debts, contracts or engagements of the Participant or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 7(g) shall prevent transfers by will or by the applicable laws of descent and distribution. (h) Hardship. The Board may accelerate the payment in Shares of all or a portion of a Participant's Deferred Share Rights on account of his or her Hardship, subject to the following requirements: (i) the value of such accelerated distribution shall not exceed the amount necessary to satisfy the Hardship, less the amount which can be satisfied from other resources which are reasonably available to the Participant, (ii) the denial of the Participant's request for a Hardship acceleration would result in severe financial hardship to the Participant, and (iii) the Participant has not received an accelerated distribution on account of Hardship within the 12-month period preceding the acceleration. For purposes of this Plan, "Hardship" of a Participant, as determined by the Board in its discretion on the basis of all relevant facts and circumstances and in accordance with the following nondiscriminatory and objective standards uniformly interpreted and consistently applied, shall mean a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of his or her dependent, loss of the Participant's property due to casualty, or other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. A financial need shall not constitute a Hardship unless it is for at least $1,000,000 or the entire value of the principal amount of the Participant's Deferred Share Rights. (i) Funding. Deferred Share Rights shall be paid from the general assets of the Company or as otherwise directed by the Company. To the extent that any Participant acquires the right to receive Deferred Share Rights under the Plan, such right shall be no greater than that of an unsecured general creditor of the Company. Participants and their Beneficiaries shall not have any preference or security interest in the assets of the Company other than as a general unsecured creditor. (j) Designation of Beneficiary. Each Participant from time to time may designate any person or persons (who may be designated contingently or successively and who may be an entity other than a natural person) as his or her beneficiary or beneficiaries to whom the Participant's Deferred Share Rights are to be paid if the Participant dies before receipt of Shares. Each beneficiary designation shall be on the form prescribed by the Committee and will be effective only when filed with the Committee during the Participant's lifetime. Each beneficiary designation filed with the Committee will cancel all beneficiary designations previously filed with the Committee. The revocation of a beneficiary designation, no matter how effected, shall not require the consent of any designated beneficiary. 8. Prorated Grants. If on any date, Shares of Common Stock are not available under the Plan to grant to Non-Employee Directors the full amount of a grant (Options or Deferred Share Rights) contemplated by the Plan, then each such director shall receive an award of Options or Deferred Share Rights, as the case may be, equal to the number of Shares of Common Stock then available under the Plan divided by the number of Non-Employee Directors entitled to a grant of Options or Deferred Share Rights on such date. Fractional Shares shall be ignored and not granted. Any shortfall resulting from such proration shall be paid in the form of cash. 9. Income Tax Withholding. The Company shall have the authority and the right to deduct or withhold, or require a participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the award shares of stock having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. 10. Adjustments. (a) Notwithstanding any other term of this Plan, in the event that the Committee determines that any Distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Committee's sole discretion, affects the Common Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an award or awards hereunder, then the Committee shall, in such manner as it may deem equitable, adjust the number and type of shares (or other securities or property) which may be granted under the Plan (including, but not limited to, adjustments of the maximum number and kind of securities which may be issued). (b) Notwithstanding any other term of this Plan, in the event of any corporate transaction or event described in paragraph (a) which results in Shares being exchanged for or converted into cash, securities or other property (including securities of another corporation), all Deferred Share Rights granted under Section 7 shall become the right to receive such cash, securities or other property, and there shall be substituted on an equitable basis for each Share of Common Stock then subject to an Option granted pursuant to Section 6 the consideration payable with respect to the outstanding Shares of Common Stock in connection with such corporate transaction or event, all without any change in the aggregate purchase price for the Shares then subject to the Option. (c) The number of Shares finally granted under this Plan shall always be rounded to the next highest whole Share. (d) Any decision of the Committee pursuant to the terms of this Section 10 shall be final, binding and conclusive upon the Participants, the Company and all other interested parties. 11. Amendment. The Committee may terminate or suspend the Plan at any time, without stockholder approval. The Committee may amend the Plan at any time and for any reason without stockholder approval; provided, however, that the Committee may condition any amendment on the approval of stockholders of the Company if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations. No termination, modification or amendment of the Plan may, without the consent of a Participant, adversely affect a Participant's rights under an award granted prior thereto. 12. Responsibility for Investment Choices. Each Participant is solely responsible for any decision to receive Annual Retainer in the form of Options or Deferred Share Rights and accepts all investment risks entailed by such decision, including the risk of loss and a decrease in the value of the amounts he or she elects to receive in the form of Options or Deferred Share Rights. 13. Indemnification. Each person who is or has been a member of the Committee or who otherwise participates in the administration or operation of this Plan shall be indemnified by the Company against, and held harmless from, any loss, cost, liability or expense that may be imposed upon or incurred by him or her in connection with or resulting from any claim, action, suit or proceeding in which such person may be involved by reason of any action taken or failure to act under the Plan and shall be fully reimbursed by the Company for any and all amounts paid by such person in satisfaction of judgment against him or her in any such action, suit or proceeding, provided he or she will give the Company an opportunity, by written notice to the Committee, to defend the same at the Company's own expense before he or she undertakes to defend it on his or her own behalf. This right of indemnification shall not be exclusive of any other rights of indemnification. The Committee and the Board may rely upon any information furnished by the Company, its public accountants and other experts. No individual will have personal liability by reason of anything done or omitted to be done by the Company, the Committee or the Board in connection with the Plan. 14. Duration of the Plan. The Plan shall remain in effect until the fifth anniversary of the Effective Date, unless terminated earlier by the Committee. 15. Expenses of the Plan. The expenses of administering the Plan shall be borne by the Company. The foregoing is hereby acknowledged as being the UnumProvident Corporation Non-Employee Director Compensation Plan of 1998 as adopted by the Board of Directors of the Company on March 26, 1998, approved by the stockholders of the Company on May 6, 1998, and amended by the Compensation Committee on February 8, 2001. UNUMPROVIDENT CORPORATION By: Its: EX-10.15 8 0008.txt EMPLOYMENT AGREEMENT EXHIBIT 10.15 EMPLOYMENT AGREEMENT (As Amended and Restated) AGREEMENT by and between UnumProvident Corporation, a Delaware corporation having its principal executive offices in Chattanooga, Tennessee, and Portland, Maine, (the "Company") and J. Harold Chandler (the "Executive") dated as of the 10th day of November, 2000 (the "Agreement"). The Company has determined that it is in the best interests of its shareholders to assure that the Company will have the continued dedication of the Executive. Therefore, in order to accomplish this objective, the Executive and the Company entered into an employment agreement dated November 22, 1998, which was amended on May 25, 1999, and the parties desire to amend and restate such agreement by entering into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean June 30, 1999 and as of such date the prior Employment Agreement effective November 8, 1993 ("Former Employment Agreement") between the Executive and Provident Companies, Inc. was terminated and became null and void. 2. Employment Period. The Company hereby agrees to continue to employ the Executive, and the Executive hereby agrees to continue in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on June 30, 2005 (the "Employment Period"). Beginning on June 30, 2005, the Employment Period shall be automatically extended for one year terms unless either the Company or the Executive shall give the other party not less than ninety (90) days prior written notice of the intention to terminate this Agreement. 3. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, the Executive shall serve as Chairman, President and Chief Executive Officer of the Company with the appropriate authority, duties and responsibilities attendant to such positions -1- including, when requested, serving in a comparable position with respect to any subsidiary of the Company. The Executive shall serve on the Company's Board of Directors (the "Board") during the Employment Period and shall be a member of committees as he shall be appointed to by the Board. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and its subsidiaries and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve, with prior approval of the Board, on corporate, civic or charitable boards or committees (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Stock Ownership Goal. It is intended that the Executive have the opportunity to attain an ownership goal of approximately 1.25% of the outstanding voting common stock of the Company. The Executive currently owns .42% of outstanding voting common stock of the Company. The Board of Directors is supportive of the Executive's stock ownership goal as being an appropriate alignment of commitment and interest to that of the Company's stockholders in increasing stockholder value. In furtherance of this goal, the Compensation Committee of the Company's Board of Directors ("Compensation Committee") shall consider as a guideline for long-term incentive awards the granting of options annually over a ten- year period following 2000 which when added to the Executive's existing ownership, would facilitate the Executive's attaining the stock ownership goal. The Committee's consideration of any such award would take into account strategic performance objectives which will have been established for the Company and approved by the Board of Directors and progress toward meeting such objectives at the time an award is considered. It is understood that in any given year, the performance of the Executive in the context of the Company's performance shall be the principal consideration in determining the number of options to be granted. It is also -2- understood that performance may warrant a lower or higher long-term incentive award than suggested by the guideline referenced above and may warrant a different form of award payment, including other equity instruments or cash. Similarly, other incentive programs available to the Executive, such as the annual incentive plan, may enable him to make an election as to the form of award payment that will facilitate the Executive's attaining his stock ownership goal. (c) Compensation (i) Annual Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") of at least $900,000. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. (ii) Annual Bonus. During the Employment Period, the Executive shall be eligible to receive an annual bonus ("Annual Bonus") with a target level of not less than 100% of Annual Base Salary, or such greater amount as determined by the Compensation Committee. The Annual Bonus shall be paid in cash or in such other form of consideration as agreed to by Executive and the Compensation Committee from time to time. (iii) Incentive Awards. Immediately after the Effective Date, the Company granted the Executive options to purchase 500,000 shares of the Company's common stock (the "Initial Option Grant") pursuant to the terms of the Company's Stock Plan of 1999. Except as otherwise provided herein, the Initial Option Grant shall vest in four equal installments, on the first, second, third, and fourth anniversaries of the date of grant. Subsequent to the Initial Option Grant annual long-term incentive awards, generally in the form of equity grants but also using other forms of payment on occasion, will be made by the Compensation Committee based upon competitive market analyses and such other factors it may deem appropriate, including taking into account the stock ownership goal set forth in Section 3 (b). (iv) Other Employee Benefit Plans. During the Employment Period, except as otherwise expressly provided herein, the Executive shall be entitled to participate in all employee benefit, welfare and other plans, practices, policies and programs (collectively, "Employee Benefit Plans") applicable to senior executive officers of the Company. -3- The Executive shall also be reimbursed for all reasonable costs associated with the purchase or rental of an additional residence in Portland, Maine, and all reasonable expenses for the Executive and his family in connection with locating and occupying such additional residence, but such reimbursement shall not include the principal costs of purchase or furnishing. Except for excluding principal costs of purchase and furnishing, these residence expenses shall include, but not be limited to: all costs of the physical move; use by Executive of Company owned or leased accommodations in Portland until a residence is located and occupied but no longer than December 31, 2001; closing costs and real estate commissions incurred in the purchase of a replacement residence in Chattanooga, Tennessee and in the purchase of a residence in the Portland, Maine area; an additional amount to cover federal, state and local income taxes incurred as a result of the relocation expenses paid hereunder; and any other expenses covered pursuant to the Company's normal relocation policy. During the period that Executive is seeking a replacement residence in Chattanooga, Tennessee, the Company agrees to rent to Executive his former Chattanooga residence on fair market terms established by a third party appraiser. (v) Retirement Benefit. Upon the Executive's termination of employment before June 30, 2001, without Cause (as hereinafter defined) or for Good Reason (as hereinafter defined), or for any reason after June 30, 2001, subject to the conditions set forth in Section 5(c) of this Agreement in the event of termination for Cause, the Executive shall be entitled to an annual retirement benefit payable monthly (the "Retirement Benefit") equal to (a) 50% (the "Replacement Percentage") of the average of his Base Salary and Annual Bonus for the five years in which such amounts were highest within the last ten years of employment less (b) any benefit payable pursuant to the Company's or any of its affiliated company's tax-qualified defined benefit retirement plan and any benefit to which he might be entitled under any nonqualified defined benefit retirement plan maintained by the Company or its affiliated companies. In calculating the Retirement Benefit, the Replacement Percentage shall increase by 1% for each full year the Executive is employed by the Company after his 55th birthday up to a maximum Replacement Percentage of 60%. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. The Retirement Benefit shall be payable for the life of the Executive commencing the first of the month following the later of Executive's fifty-fifth birthday and Executive's termination of employment. Upon the Executive's death (whether prior to or after commencement of the Retirement Benefit), his surviving spouse shall be paid an annual benefit of 75% of the Retirement Benefit for her life provided that if such benefit commences before the Executive's 55th birthday, it shall be actuarially reduced. -4- 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death or Disability during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 business days during any consecutive twelve month period as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to -5- act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than 75% through 2001, and thereafter two thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a)(i) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 3(c) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement, or any failure to renew this Agreement; (iv) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement; or (v) failure of the Company to appoint the Executive to any of the positions as specified in Section 3(a)(i) as of the date specified therein. -6- (d) Notice of Termination. Any termination by the Company or by the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means if the Executive's employment is terminated by the Company other than for Disability, or by the Executive, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, and if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability, or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination: A. the greater of the following amounts: (x) the product of three (3) times the sum of (1) the highest annual bonus paid to the Executive for any of the three years prior to the Date of Termination (the "Recent Annual Bonus") and (2) the Executive's Annual Base Salary; and (y) the amount equal to the product of (1) the number of months and portions thereof from the Date of Termination until the end of the Employment Period divided by twelve and (2) the sum of the Executive's Annual Base Salary and the Recent Annual Bonus; -7- B. the sum of (x) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (y) the product of (1) the Recent Annual Bonus and (2) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is 365, to the extent not theretofore paid (the sum of the amounts described in clauses (x) and (y) shall be hereinafter referred to as the "Accrued Obligations"); and C. the actuarial present value of the Retirement Benefit determined using the actuarial assumptions prescribed under the tax-qualified defined benefit plan under which the Executive was eligible for participation at the time of termination of employment, assuming the Executive had accumulated the greater of (x) three additional years of employment and (y) the number of years and portions thereof of employment from the Date of Termination until the end of the Employment Period. If any portion of the Retirement Benefit in excess of the amount payable under any tax qualified defined benefit plan maintained by the Company or its affiliated companies is not payable in one lump sum, then the Executive shall not receive a benefit under such plan but shall instead receive payment pursuant to this paragraph C. The intent of this provision is to preclude any duplication of benefits. (ii) for the remainder of the Executive's life and that of his spouse, the Company shall continue to provide medical and dental benefits to the Executive and his spouse on substantially the same basis as such benefits are provided other senior executive officers of the Company from time to time ("Medical Benefits"); provided that such Medical Benefits shall be secondary to any other coverage obtained by the Executive and further provided that the aggregate amount of premium payments for such coverage shall not exceed $1,000,000; (iii) the Initial Option Grant shall vest and remain exercisable for the remainder of its term and all other stock options, restricted stock awards and other equity-based awards shall vest (and such other options shall remain exercisable for a period of, at least three years or the earlier expiration of their initial term); and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the -8- Company and its affiliated companies through the Date of Termination (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death or Disability. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives or to the Executive, as the case may be, under this Agreement, other than for payment of Accrued Obligations, the timely payment or provision of Other Benefits and Medical Benefits, and the Retirement Benefit. In addition, the Initial Option Grant shall vest immediately and remain exercisable for a period of at least three years or the earlier expiration of their initial term. Accrued Obligations shall be paid to the Executive, the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (c) Cause; Other than for Good Reason. (i) If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination to the extent theretofore unpaid, (y) the Other Benefits through the Date of Termination, and (z) if the Date of Termination is after June 30, 2001, the Retirement Benefit; provided, however, if the reason for the Cause termination is the circumstances covered under either Section 4(b) (ii) or (iii), the Retirement Benefit in Section 3(c)(v) shall not be applicable. (ii) If the Executive terminates his employment other than for Good Reason during the Employment Term, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to Executive (x) his Annual Base Salary through the Date of Termination to the extent theretofore unpaid, (y) the Other Benefits through the Date of Termination, and (z) if the Date of Termination is after June 30, 2001, the Retirement Benefit; provided, however that the Medical Benefits shall be paid if the Executive's employment is terminated other than for Cause after he attains age 55. 6. Non-exclusivity of Rights. Except as specifically provided, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the -9- Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement; provided that the Executive shall not be eligible for severance benefits under any other program or policy of the Company. 7. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) pursued or defended against in good faith by the Executive regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 8. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed -10- 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent auditors or such other certified public accounting firm reasonably acceptable to the Executive as may be designated by the Company (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of the later of (i) the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: -11- (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly pay to -12- the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. Covenant Not to Compete; Confidential Information. (a) During the term of this Agreement, and for a one year period after the Date of Termination, the Executive shall not directly or indirectly, own, manage, operate, join, control, or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with, any competing business, whether for compensation or otherwise, without the prior written consent of the Company. For the purposes of this Agreement, a "competing business" shall be any business which is a significant competitor of the Company, or which the Company reasonably determines may become a significant competitor, unless the Executive's primary duties and responsibilities with respect to such business are not related to the management or operation of disability insurance or complementary special risk products and services in any country where the Company is conducting business. Should the Executive, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with, any competing business, all payments under this Agreement shall cease. (b) The Executive hereby acknowledges that, as an employee of the Company, he will be making use of, acquiring and adding to confidential information of a special and unique nature and value relating to the Company and its strategic plan and financial operations. The Executive further recognizes and acknowledges that all confidential information is the exclusive property of the Company, is material and confidential, and is critical to the successful conduct of the business of the Company. Accordingly, the Executive hereby covenants and agrees that he will use confidential information for the benefit of the Company only and shall not at any time, directly or indirectly, during the term of this Agreement, and thereafter for all periods during which severance or other amount is paid, divulge, reveal or communicate any confidential information to any person, firm, corporation or entity whatsoever, or use any confidential information for his own benefit or for the benefit of others. In no event shall an asserted violation of the provisions of this Section 9(b) constitute a basis for deferring or -13- withholding any amounts otherwise payable to the Executive under this Agreement. (c) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. (d) In addition to the cessation of payments set forth in Section 9(a), the Executive acknowledges and agrees that the Company will have no adequate remedy at law, and could be irreparably harmed, if the Executive breaches or threatens to breach any of the provisions of this Section 9. The Executive agrees that the Company shall be entitled to equitable and/or injunctive relief to prevent any breach or threatened breach of this Section 9, and to specific performance of each of the terms hereof in addition to any other legal or equitable remedies that the Company may have. The Executive further agrees that he shall not, in any equity proceeding relating to the enforcement of the terms of this Section 9, raise the defense that the Company has an adequate remedy at law. (e) The terms and provisions of this Section 9 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. The parties hereto acknowledge that the potential restrictions on the Executive's future employment imposed by this Section 9 are reasonable in both duration and geographic scope and in all other respects. If for any reason any court of competent jurisdiction shall find any provisions of this Section 9 unreasonable in duration or geographic scope or otherwise, the Executive and the Company agree that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction. (f) The parties acknowledge that this Agreement would not have been entered into and the benefits described in Sections 3 or 5 would not have been promised in the absence of the Executive's promises under this Section 9. 10. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. -14- (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: J. Harold Chandler UnumProvident Corporation 1 Fountain Square 2211 Congress Street Chattanooga, Tennessee 37402 Portland, Maine 04122 If to the Company: UnumProvident Corporation 1 Fountain Square 2211 Congress Street Chattanooga, Tennessee 37402 Portland, Maine 04122 Telecopy Number: (423) 755-5036 or (207) 575-4377 Attention: F. Dean Copeland, EVP- Legal and Administrative Affairs -15- or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(c)(i)-(iv) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ J. Harold Chandler ------------------------------- J. Harold Chandler UnumProvident Corporation By /s/ F. Dean Copeland ------------------------------- F. Dean Copeland EVP, Legal and Administrative Affairs 58587 -16- EX-10.17 9 0009.txt EMPLOYMENT AGREEMENT EXHIBIT 10.17 EMPLOYMENT AGREEMENT AGREEMENT by and between UnumProvident Corporation, a Delaware corporation having its principal executive offices in Chattanooga, Tennessee and Portland, Maine (the "Company"), and Elaine D. Rosen (the "Special Advisor") dated as of the 12th day of December, 2000. The Company has determined that it is in the best interests of their shareholders to assure that the Company will have the continued dedication of the Special Advisor under the terms of this amended and restated employment agreement which amends the employment agreement between Unum Corporation and the Special Advisor dated June 30, 1999 (the "Agreement" and the "Original Agreement," respectively) to insure a smooth transition in preparation for the Special Advisor's planned departure effective March 1, 2002, to pursue other interests. Therefore, in order to accomplish these objectives, the Special Advisor and the Company desire to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean the effective date of this Agreement which shall be January 1, 2001. 2. Term of Agreement. The Company hereby agrees to continue to employ the Special Advisor, and the Special Advisor hereby agrees to continue in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on January 1, 2001 and ending on March 1, 2002 (the "Term"). 3. Terms of Employment. (a) Position and Duties. (i) The Special Advisor shall serve as special advisor to the Chairman and Chief Executive Officer of the Company ("CEO") reporting solely to the CEO with the appropriate duties and responsibilities attendant to such position as described below, it being understood that from time to time the scope of such duties and responsibilities will vary depending upon organizational structures and needs of the Company. Specifically, the Special Advisor will have the following duties as an employee: (1) assisting with the development and delivery of a curriculum for Company employees relating to disability insurance trends and products, (2) assisting with development and delivery of a management and leadership program, particularly as part of the sales force training program, (3) participating in selected policy advocacy and expert testimony assignments, (4) maintaining selected identified relationships with producers or customers, (5) participating in selected finalist renewal presentations, and (6) engaging in such other similar duties as may be determined by the CEO and agreed to by the Special Advisor. The Special Advisor's duties may be refined or changed from time to time by letter agreement between the CEO and the Special Advisor. The Special Advisor will not, however, have reporting or continuing management function duties with the field force. 1 (ii) Excluding any periods of vacation and sick leave to which the Special Advisor is entitled, the Special Advisor agrees to devote substantially all of her attention and time during normal business hours for four days a week through June 30, 2001, for three days a week through December 31, 2001, and for two days a week through February 28, 2002, to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Special Advisor hereunder, to use the Special Advisor's reasonable best efforts to perform faithfully and efficiently such responsibilities. It shall not be a violation of this Agreement for the Special Advisor to (A) serve, with prior approval of the Board of Directors of the Company (the "Board") or the CEO, on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Special Advisor's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Compensation. The Special Advisor shall receive base compensation for the Term of $366,666 (the "Base Compensation"). Any increase in Base Compensation shall not serve to limit or reduce any other obligation to the Special Advisor under this Agreement. Base Compensation shall be payable in equal installments during the Term in accordance with the Company's regular payroll practices. (ii) Bonus. The Special Advisor shall be eligible to receive a bonus for 2000 with a target level of 75% of annual base compensation of $500,000 for 2000 (equal to $375,000) (the "Target Bonus Amount") under the Company's 2000 Annual Cash Incentive Plan subject to the achievement of the performance targets as determined by the Compensation Committee of the Board. (iii) Incentive Awards. No long term incentive awards in 2001 or 2002 are contemplated by this Agreement. (iv) Other Employee Benefit Plans. Except as otherwise expressly provided herein, the Special Advisor shall be entitled to participate in all employee benefit, welfare and other plans, practices, policies and programs (collectively, "Employee Benefit Plans") applicable to executive vice presidents of the Company. (v) Retirement Benefit. The Special Advisor shall be entitled to an annual retirement benefit payable monthly (the "Retirement Benefit") pursuant to the terms of and under the current formula contained in the Senior Executive Retirement Plan (the "Plan"); provided, however, in no event shall the Special Advisor's accrued Retirement Benefit be 2 retroactively reduced. In calculating this Retirement Benefit, the Special Advisor shall receive full credit for all of her years of service with the Company for all purposes. 4. Termination of Employment. (a) Death or Disability. The Special Advisor's employment shall terminate automatically upon the Special Advisor's death. If the Company determines in good faith that the Disability of the Special Advisor has occurred (pursuant to the definition of Disability set forth below), it may give to the Special Advisor written notice in accordance with Section 11(b) of this Agreement of its intention to terminate the Special Advisor's employment. In such event, the Special Advisor's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Special Advisor (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Special Advisor shall not have returned to full-time performance of the Special Advisor's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Special Advisor from the Special Advisor's duties with the Company on a full-time basis for any twelve month period as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Special Advisor or the Special Advisor's legal representative. (b) Cause. The Company may terminate the Special Advisor's employment for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Special Advisor to perform substantially the Special Advisor's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Special Advisor by the CEO which specifically identifies the manner in which the CEO believes that the Special Advisor has not substantially performed the Special Advisor's duties, or (ii) the willful engaging by the Special Advisor in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) conviction of a felony or guilty or nolo contendere plea by the Special Advisor with respect thereto. For purposes of this provision, no act or failure to act, on the part of the Special Advisor, shall be considered "willful" unless it is done, or omitted to be done, by the Special Advisor in bad faith or without reasonable belief that the Special Advisor's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the CEO or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Special Advisor in good faith and in the best interests of the Company. The cessation of employment of the Special Advisor shall not be deemed to be for Cause unless and until there shall have been delivered to the Special Advisor a copy of a resolution duly adopted 3 by the affirmative vote of not less than two thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Special Advisor and the Special Advisor is given an opportunity, together with counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Special Advisor is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Special Advisor's employment may be terminated by the Special Advisor for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the following events, provided, however, that clauses (i) through (v) shall constitute Good Reason only in the absence of the written consent of the Special Advisor: (i) the assignment to the Special Advisor of any duties materially inconsistent with the Special Advisor's duties set forth in Section 3(a)(i), excluding for this purpose an action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Special Advisor to the CEO; (ii) any failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Special Advisor; (iii) any purported termination by the Company of the Special Advisor's employment otherwise than as expressly permitted by this Agreement; (iv) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement; or (v) any required relocation of the Special Advisor. (d) Notice of Termination. Any termination by the Company or by the Special Advisor shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Special Advisor's employment under the provision so indicated and (iii) specifies the Date of Termination (as defined below). The failure by the Special Advisor or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Special Advisor or the Company, respectively, hereunder or preclude the Special Advisor or the Company, respectively, from asserting such fact or circumstance in enforcing the Special Advisor's or the Company's rights hereunder. 4 (e) Date of Termination. "Date of Termination" means (i) if the Special Advisor's employment is terminated by the Company other than for Disability, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, (ii) if the Special Advisor's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Special Advisor or the Disability Effective Date, as the case may be, and (iii) if the Special Advisor's employment is terminated by the Special Advisor the Date of Termination shall be thirty days after the giving of such notice by the Special Advisor provided that the Company may elect to place the Special Advisor on paid leave for all or any part of such 30-day period, and (iv) if the Special Advisor shall remain in the employ of the Company until the end of the Term, then February 28, 2002. 5. Obligations of the Company upon Termination (a) Termination at the end of the Term; termination by the Company other than for Cause or Disability prior to the end of the Term; termination by Special Advisor for Good Reason. If the Special Advisor remains in the employ of the Company until the end of the Term or is terminated by the Company other than for Cause or Disability prior to the end of the Term, or the Special Advisor terminates for Good Reason, (i) the Company shall pay to the Special Advisor in a lump sum in cash within 10 days after the Date of Termination the sum of $756,000 plus 1.5 times the Target Bonus Amount (the "Severance Lump Sum"), (ii) the Company shall pay to the Special Advisor the sum of $1,150,000 ("the Covenant Payment"), payable ratably during the Covenant Period specified in Section 9(a) provided the Special Advisor is in compliance with Section 9, (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Special Advisor any other amounts or benefits required to be paid or provided or which the Special Advisor is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies through the Date of Termination (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"), (iv) all outstanding stock options and other equity-based awards shall be governed by their respective terms and, unless expressly provided otherwise, all such options and awards shall terminate on March 1, 2002 or the Special Advisor's earlier Date of Termination, (b) Death or Disability. If the Special Advisor's employment is terminated by reason of the Special Advisor's death or Disability, this Agreement shall terminate without further obligations to the Special Advisor's legal representatives or to the Special Advisor, as the case may be, under this Agreement, other than the payment of the Severance Lump Sum and the timely payment or provision of Other Benefits and the Retirement Benefit. Payments shall be made to the Special Advisor, the Special Advisor's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. 5 (c) Cause; Other than for Good Reason. If the Special Advisor's employment shall be terminated for Cause or the Special Advisor terminates her employment without Good Reason, this Agreement shall terminate without further obligations to the Special Advisor other than the obligation to pay to the Special Advisor (i) her Base Compensation, as applicable, through the Date of Termination to the extent theretofore unpaid and, (ii) the Other Benefits. 6. Non-exclusivity of Rights. Except as specifically provided, nothing in this Agreement shall prevent or limit the Special Advisor's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Special Advisor may qualify, nor, subject to Sections 1 and 11(f), shall anything herein limit or otherwise affect such rights as the Special Advisor may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Special Advisor is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement; provided that the Special Advisor shall not be eligible for severance benefits under any other program or policy of the Company. 7. Full Settlement. Except as provided in Section 9, the Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Special Advisor or others. In no event shall the Special Advisor be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Special Advisor under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Special Advisor obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Special Advisor may reasonably incur as a result of any contest (regardless of the outcome thereof) pursued or defended against in good faith by the Special Advisor regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Special Advisor about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 8. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Special Advisor (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by 6 the Special Advisor with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Special Advisor shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Special Advisor of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Special Advisor retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Special Advisor is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Special Advisor such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Special Advisor and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent auditors or such other certified public accounting firm reasonably acceptable to the Special Advisor as may be designated by the Company (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Special Advisor within 15 business days of the receipt of notice from the Special Advisor that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Special Advisor within five days of the later of (i) the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Special Advisor. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Special Advisor thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Special Advisor. (c) The Special Advisor shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Special Advisor is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Special Advisor shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the 7 Company notifies the Special Advisor in writing prior to the expiration of such period that it desires to contest such claim, the Special Advisor shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Special Advisor harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Special Advisor to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Special Advisor agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Special Advisor to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Special Advisor, on an interest-free basis and shall indemnify and hold the Special Advisor harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Special Advisor with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Special Advisor shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Special Advisor of an amount advanced by the Company pursuant to Section 8(c), the Special Advisor becomes entitled to receive any refund with respect to such claim, the Special Advisor shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable 8 thereto). If, after the receipt by the Special Advisor of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Special Advisor shall not be entitled to any refund with respect to such claim and the Company does not notify the Special Advisor in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. Covenant Not to Compete; Confidential Information. (a) Through the period ending September 1, 2003 or, if earlier, the period ending eighteen (18) months after either (i) the Special Advisor is terminated by the Company other than for Cause or Disability or (ii) the Special Advisor terminates for Good Reason (the applicable period herein referred to as the "Covenant Period"), the Special Advisor shall not directly or indirectly, own, manage, operate, join, control, or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with, or solicit any employee of the Company to apply for or accept employment with any competing business, whether for compensation or otherwise, without the prior written consent of the Company. Notwithstanding the preceding sentence, the Special Advisor shall not be prohibited from owning less than one (1%) percent of any publicly traded corporation, whether or not such corporation is deemed to be a competing business. For the purposes of this Agreement, a "competing business" shall be any business which is a significant competitor of the Company, or which the Company reasonably determines may become a significant competitor, unless the Special Advisor's primary duties and responsibilities with respect to such business are not related to the management or operation of disability insurance or complementary special risk products and services in any country where the Company is conducting business. For purposes of this Agreement, the term "solicit" means any communication, regardless of by whom initiated, inviting, advising, encouraging or requesting any person to take or refrain from taking any action. Should the Special Advisor violate the foregoing provisions of this Section 9(a), all payments under this Agreement shall cease. (b) The Special Advisor hereby acknowledges that, as an employee of the Company, she will be making use of, acquiring and adding to confidential information of a special and unique nature and value relating to the Company and its strategic plan and financial operations. The Special Advisor further recognizes and acknowledges that all confidential information is the exclusive property of the Company, is material and confidential, and is critical to the successful conduct of the business of the Company. Accordingly, the Special Advisor hereby covenants and agrees that she will use confidential information for the benefit of the Company only and shall not at any time, directly or indirectly, during the Covenant Period, divulge, reveal or communicate any confidential information to any person, firm, corporation or entity whatsoever, or use any confidential information for her own benefit or for the benefit of others. In no event shall an asserted violation of the provisions of this Section 9(b) constitute a basis for deferring or withholding any amounts otherwise payable to the Special Advisor under this Agreement except for cessation of the Covenant Payment. 9 (c) Any termination of the Special Advisor's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. (d) In addition to the cessation of payments as set forth in this Section 9, the Special Advisor acknowledges and agrees that the Company will have no adequate remedy at law, and could be irreparably harmed, if the Special Advisor breaches or threatens to breach any of the provisions of this Section 9. The Special Advisor agrees that the Company shall be entitled to equitable and/or injunctive relief to prevent any breach or threatened breach of this Section 9, and to specific performance of each of the terms hereof in addition to any other legal or equitable remedies that the Company may have. Prior to bringing any such action or ceasing payments as set forth in this Section 9, the Company shall provide the Special Advisor with a ten (10) day opportunity to cure a breach of this Section 9 which, in the CEO's good faith judgment, is susceptible of being cured. The Special Advisor further agrees that she shall not, in any equity proceeding relating to the enforcement of the terms of this Section 9, raise the defense that the Company has an adequate remedy at law. (e) The terms and provisions of this Section 9 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. The parties hereto acknowledge that the potential restrictions on the Special Advisor's future employment imposed by this Section 9 are reasonable in both duration and geographic scope and in all other respects. If for any reason any court of competent jurisdiction shall find any provisions of this Section 9 unreasonable in duration or geographic scope or otherwise, the Special Advisor and the Company agree that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction. (f) The parties acknowledge that this Agreement would not have been entered into and the benefits described in Sections 3 or 5 would not have been promised in the absence of the Special Advisor's promises under this Section 9. 10. Successors. (a) This Agreement is personal to the Special Advisor and without the prior written consent of the Company shall not be assignable by the Special Advisor otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Special Advisor's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if 10 no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Special Advisor: with a copy to: One Hoylake Circle Robert I. Bodian Falmouth, Maine 04105 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 666 Third Avenue, 25th floor If to the Company: New York, New York 10017 2211 Congress Street Portland, Maine 04122 Telecopy Number: (207) 575-4377 Attention: Chief Executive Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Special Advisor's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Special Advisor or the Company may have hereunder, including, without limitation, the right of 11 the Special Advisor to terminate employment for Good Reason pursuant to Section 4(c)(i)-(iv) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof. 12. General Release. All payments under this Agreement to be made in connection with the Special Advisor's termination of employment will be conditioned on the Special Advisor signing a general form of release, provided that in no event shall the Special Advisor be required to release claims relating to her rights under this Agreement. IN WITNESS WHEREOF, the Special Advisor has hereunto set the Special Advisor's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. SPECIAL ADVISOR /s/ Elaine D. Rosen ----------------------------------- Elaine D. Rosen UNUMPROVIDENT CORPORATION /s/ F. Dean Copeland ----------------------------------- Name: F. Dean Copeland Title: Executive Vice President Legal & Administration Affairs 12 EX-10.23 10 0010.txt 1990 LONG-TERM INCENTIVE PLAN EXHIBIT 10.23 UNUM CORPORATION 1990 LONG-TERM STOCK INCENTIVE PLAN SECTION 1. Purpose. ------- The purpose of the UNUM Corporation 1990 Long-Term Stock Incentive Plan (the "Plan") is to promote the interests of UNUM Corporation and its stockholders by (i) attracting and retaining executive officers, other key employees and corporation directors of outstanding ability; (ii) motivating such individuals, by means of performance-related incentives, to achieve longer-range performance goals; and (iii) enabling such individuals to participate in the long-term growth and financial success of UNUM Corporation. SECTION 2. Definitions. ----------- "Affiliate" shall mean any corporation or other entity which is not a Subsidiary but as to which the Corporation possesses a direct or indirect ownership interest and has representation on the board of directors or any similar governing body. "Award" shall mean a grant or award under Sections 6 through 10, inclusive, of the Plan, as evidenced in a written document delivered to a Participant. "Board" shall mean the Board of Directors of the Corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Compensation Committee of the Board. "Common Stock" or "Stock" shall mean the common stock, $.10 par value, of the Corporation. "Corporation" shall mean UNUM Corporation. "Employee" shall mean any employee of the Employer. "Employer" shall mean the Corporation and any Subsidiary or Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Fair Market Value" shall mean the average of the highest and lowest sales prices reported for consolidated trading of the Stock on the New York Stock Exchange on the date in question, or, if the Stock shall not have been traded on such date, the average of such highest and lowest sales prices on the first day prior thereto on which the Stock was so traded. "Fiscal Year" shall mean the fiscal year of the Corporation. "Incentive Stock Option" shall mean a stock option granted under Section 6 which is intended to meet the requirements of Section 422A of the Code. "Limited Right" shall mean a limited stock appreciation right granted under Section 8. 1 "Non-Qualified Stock Option" shall mean a stock option granted under Section 6 which is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. "Restricted Period" shall mean the period of years selected by the Committee during which a grant of Restricted Stock or Restricted Stock Unit Award may be forfeited to the Corporation. "Restricted Stock" shall mean shares of Common Stock contingently granted to a Participant under Section 9 of the Plan. "Restricted Stock Unit" shall have the meaning provided in 10(a). "Subsidiary" shall mean any business entity in which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power. SECTION 3. Administration. -------------- Except as provided in Section 10, the Committee shall have full power to interpret and administer the Plan and full authority to select the individuals to whom Awards will be granted and to determine the type and amount of Award(s) to be granted to each Participant, the terms and conditions of Awards granted under the Plan and the terms and conditions of the agreements which will be entered into with Participants. As to the selection and grant of Awards to Participants who are not subject to Sections 16(a) and 16(b) of the Exchange Act, or any successor sections, the Committee may delegate its responsibilities to members of the Company's management consistent with applicable law. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); to direct employees of the Corporation and its subsidiaries or other advisors to prepare such materials or perform such analysis as the Committee deems necessary or appropriate; and otherwise to supervise the administration of the Plan. Any interpretation and administration of the Plan by the Committee, and all actions of the Committee, shall be final, binding and conclusive on the Corporation, its stockholders, Subsidiaries, Affiliates, all Participants, their respective legal representatives, successors and assigns and upon all persons claiming under or through any of them. No member of the Board or of the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith in connection with the Plan. SECTION 4. Eligibility. ----------- Participation in the Plan shall be limited to those key employees of the Corporation and any Subsidiary and Affiliate selected at the sole discretion of the Committee. SECTION 5. Maximum Amount Available for Awards. ----------------------------------- Subject to adjustment as provided in Section 12(j), the maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be a total of 13,600,000 shares of Common Stock. 2 Shares of Common Stock may be made available from the authorized but unissued shares of the Corporation or from shares reacquired by the Corporation, including shares purchased in the open market. In the event that (i) an Option, or Stock Appreciation Right, or Limited Right expires or is cancelled unexercised as to any shares of Common Stock covered thereby, or (ii) any Award in respect of shares is forfeited for any reason under the Plan, such shares shall thereafter be again available for award pursuant to the Plan. SECTION 6. Stock Options. ------------- (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole ----- and complete authority to determine the Employees to whom Options shall be granted, the number of shares to be covered by each Option, the Option Price, as defined below, therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of Options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422A of the Code and any regulations implementing Section 422A. (b) Option Price. The Committee shall establish the exercise price of the ------------ Option (the "Option Price") at the time each Option is granted, which Option Price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. (c) Exercise. -------- (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award or thereafter; provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of ten years from the date of grant. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (2) The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of stock or other property (including "cashless exercise" arrangements), and the methods by which shares of stock shall be delivered or deemed to be delivered to Participants; provided, however, that if shares of stock are used to pay the exercise price of an option, such shares must have been held by the Participant for at least six months. When shares of stock are delivered, such delivery may be by attestation of ownership or actual delivery of one or more certificates. Failure by the Committee to specify methods by which the exercise price of an Option may be paid or the form of payment shall be deemed to express the Committee's determination that all methods and forms of payment presented under the Plan are permitted under the grant. (d) Termination of Employment. ------------------------- (1) Except as provided below, if a Participant ceases to be an Employee other than by reason of death, retirement or disability, any then outstanding Options may be exercised any time before their expiration date or within three months after the date of termination, whichever is earlier, but only to the extent that such Options were exercisable when employment ceased, absent a determination by the Committee to the contrary; provided, however, that a 3 Participant is terminated for cause the Committee may determine that no Option may be exercised at any time after the termination date. (2) If a Participant's employment terminates because of death or disability, all then outstanding Options previously granted to the Participant will become exercisable. In the case of death of the Participant, such Options may be exercised at any time before their expiration date or within three years after the date of termination, whichever is earlier. In the case of permanent disability, such Options may be exercised at any time before their expiration date. (3) If a Participant's employment terminates because of retirement prior to January 1, 1995, any then outstanding Options may be exercised any time before their expiration date or within three years after the date of termination, whichever is earlier, but only to the extent that such Options were exercisable when employment ceased absent a determination by the Committee to the contrary. If a Participant's employment terminates because of retirement on or after January 1, 1995, any then outstanding Options may be exercised any time before their expiration date or within five years after the date of termination, whichever is earlier, but only to the extent that such Options were exercisable when employment ceased absent a determination by the Committee to the contrary. SECTION 7. Stock Appreciation Rights. ------------------------- (a) The Committee shall have the authority to grant Stock Appreciation Rights in tandem with the grant of an Option or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem with an Option may be granted either at or after the time of the grant of such Option. Stock Appreciation Rights or any applicable portion thereof granted in tandem with a given Option shall only be exercisable to the extent that the related Option is exercisable and shall terminate and no longer be exercisable upon the expiration or cancellation of the related Option. The exercise of an Option shall result in an immediate forfeiture of any Stock Appreciation Right granted in tandem with that Option, and the exercise of such Stock Appreciation Right shall cause an immediate forfeiture of its related Option. Stock Appreciation Rights shall not be exercisable after the expiration of ten years from date of grant. A Stock Appreciation Right granted in tandem with an Option may be exercised by an optionee, in accordance with this Section 7, by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 7. (b) A Stock Appreciation Right shall entitle the Participant to receive from the Corporation an amount equal to the excess of the Fair Market Value of a share of Common Stock on the date of the exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, for any Stock Appreciation Right which is not related to an Incentive Stock Option and can only be exercised during limited periods of time in order to satisfy the conditions of certain rules of the Securities and Exchange Commission, the exercise of any such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Stock is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. 4 The Committee shall determine whether Stock Appreciation Rights shall be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock. SECTION 8. Limited Rights. -------------- (a) The Committee shall have the authority to grant Limited Rights in tandem with the grant of an Option or freestanding and unrelated to an Option. Limited Rights granted in tandem with an Option may be granted either at or after the time of the grant of such Option. Limited Rights or any applicable portion thereof granted in tandem with a given Option shall terminate and no longer be exercisable upon the expiration or cancellation of the related Option. The exercise of an Option shall result in an immediate forfeiture of any Limited Right granted in tandem with that Option, and the exercise of such Limited Right shall cause an immediate forfeiture of its related Option. A Limited Right granted in tandem with an Option may be exercised by an optionee, in accordance with this Section 8, by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 8. (b) Limited Rights shall only be exercisable during the 30 day period following a Change in Control as defined in Section 11 and shall not be exercisable after the expiration of ten years from the date of grant. (c) Upon the exercise of a Limited Right, an optionee shall be entitled to receive from the Corporation an amount in cash equal in value to the excess of (i) the higher of (A) the highest price per share paid in connection with the Change in Control or (B) the highest Fair Market Value per share as reported in the Wall Street Journal at any time during the 60 day period preceding the Change in Control over (ii) in the case of a Limited Right granted in tandem with an Option, the Option Price per share specified in the related Option and in the case of all other Limited Rights, the price per share established in the grant of the Limited Right, such excess to be multiplied by the number of shares in respect of which the Limited Right shall have been exercised; provided, however, that upon the exercise of a Limited Right granted in tandem with an Incentive Stock Option, the amount set forth in clause (i) shall not exceed the Fair Market Value of a share on the date of exercise of the Limited Right. (d) Limited Rights shall be subject to such other terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee. This Section 8 shall be interpreted in accordance and consistent with the principles set forth in Rule 16b-3 of the Exchange Act. SECTION 9. Restricted Stock. ---------------- (a) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom shares of Restricted Stock shall be granted, the number of shares of Restricted Stock to be granted to each Participant, the duration of the Restricted Period during which, and the conditions under which, the Restricted Stock may be forfeited to the Corporation, and the other terms and conditions of such Awards. The Committee may determine that the Restricted Period applicable to a particular grant may vary depending upon the attainment of particular conditions, such as corporate earnings, share price or other targets set by the Committee. 5 (b) Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the Restricted Period. Certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Corporation. At the expiration of the Restricted Period, the Corporation shall deliver such certificates to the Participant or the Participant's legal representative. (c) If a Participant's employment terminates by reasons of disability or death, any Restricted Stock held by such Participant shall thereafter vest and any restriction lapse, to the extent such Restricted Stock would have become vested and no longer subject to such restrictions within one year from the time of termination had the Participant continued to fulfill all of the conditions of the Restricted Stock during such period (or on such accelerated basis as the Committee may determine at or after grant). Unless otherwise determined by the Committee, if a Participant's employment terminates for any reasons other than permanent disability or death, any Restricted Stock which is unvested or subject to restriction shall thereupon be forfeited. SECTION 10. Restricted Stock Units. ---------------------- (a) The Committee may, in its discretion, grant Restricted Stock Units to such eligible Participants as it may select. Restricted Stock Units shall entitle the Participant to receive one share of Common Stock per Unit at the times and subject to the conditions determined by the Committee. The Committee shall determine the number of Units to be granted to each Participant, whether or not the Restricted Stock Units are designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, the duration of the Restricted Period (if any) during which, and the conditions under which, the Restricted Stock Units may be forfeited to the Corporation, the schedule for settlement, and any other terms and conditions relating to each grant, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. The Committee may provide that the holder of a Restricted Stock Unit Award shall receive cash or Common Stock equal in value to the dividends paid with respect to a specified number of shares of the Common Stock, as such dividends accrue or upon settlement of the Restricted Stock Unit Award, in which case dividends may be deemed to have been reinvested in additional Common Stock or such other investment vehicles as the Committee may specify. (b) Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered. (c) Subject to the renumbered Section 12 of this Plan, all of the provisions governing the satisfaction of Performance Measures and the termination of the Restriction Period relating to a Restricted Stock Unit Award, or any cancellation or forfeiture of shares of Restricted Stock Units upon termination of employment of the Participant, whether by reason of death, permanent disability, retirement, or otherwise, shall be set forth in the Agreement relating to such Restricted Stock Unit Award, or in guidelines established by the Committee and made applicable to such Restricted Stock Unit Award. SECTION 11. Non-Employee Director Options. ----------------------------- Notwithstanding any of the other provisions of the Plan to the contrary, the provisions of this Section 10 shall only apply to a non-employee member of the Board. The other provisions of the Plan shall apply to grants of Options under this Section 10 to the extent not inconsistent with the provisions of this Section. (a) This Section 11 shall be administered by the Board. 6 (b) Each non-employee member of the Board shall receive Non-Qualified Stock Options in accordance with the provisions of this Section 11. (c) (i) Recipients of Options under this Section 11 shall enter into a stock option agreement with the Corporation, which agreement shall set forth, among other things, the exercise price of the Option, the term of the Option and provisions regarding exercisability of the Option granted thereunder. (ii) On the Effective Date (as defined below) each non-employee member of the Board of the Corporation shall receive Options to purchase 2,000 shares of Common Stock. Beginning in 1997, on the date after each annual stockholders meeting of the Corporation each continuing non- employee member of the Board shall be granted an Option to purchase 4,000 shares of Common Stock and, beginning in 1990, each newly elected non-employee director shall be granted an Option to purchase 6,000 shares of Common Stock. The Option Price per share of Common Stock purchasable under such Options shall be equal to the Fair Market Value of the Common Stock on the date of grant. Such Option shall remain exercisable until the earlier of ten years from the date of grant or the termination of any post-directorship consultancy agreement with the Corporation; provided, however, that if such -------- ------- consultancy agreement terminates by reason of death or disability any then outstanding Options may be exercised (x) at any time before their expiration date or (y), if such termination is by reason of death, within three years of the date of death, whichever is earlier. Such Options shall be exercisable one year from the date of grant by payment in full in cash or in shares of Common Stock having a Fair Market Value equal to the Option Price or in a combination of cash and such shares. (d) The Board may not amend, alter, or discontinue this Section 11 without the approval of the stockholders of the Corporation. SECTION 12. Change of Control. ----------------- Notwithstanding anything to the contrary contained herein, and notwithstanding any contrary waiting period or installment period in any agreement relating to an Award or in the Plan, each outstanding Option, Stock Appreciation Right and Limited Right granted under the Plan shall become exercisable in full for the aggregate number of shares covered thereby, and any restriction or deferral limitation applicable to any Restricted Stock or Restricted Stock Units shall lapse and such shares and Awards shall be deemed fully vested, in the event of a Change in Control (as hereinafter defined). For purposes of this Plan, a Change in Control shall be deemed to have occurred upon the first to occur of the following events: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Corporation or any corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 40% of the number of the Corporation's then outstanding securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction 7 described in Subsection 12(i), (iii) or (iv) of this Section 12) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation, other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) more than 60% of the number of outstanding securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. SECTION 13. General Provisions. ------------------ (a) Income Tax Withholding. The Corporation shall have the authority and the ---------------------- right to deduct or withhold, or require a Participant to remit to the Corporation, an amount sufficient to satisfy federal, state, and local taxes (including the participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the award shares of stock having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. (b) Nontransferability. No Award shall be assignable or transferable, and no ------------------ right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution. (c) No Right to Employment. No person shall have any claim or right to be ---------------------- granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Employer. Further, the Employer expressly reserves the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (d) No Rights as Stockholder. Subject to the provisions of the applicable ------------------------ Award, no Participant or transferee of an Option or Restricted Stock Units shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (e) Construction of the Plan. The validity, construction, interpretation, ------------------------ administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of Delaware. 8 (f) Effective Date. Subject to the approval of the stockholders of the -------------- Corporation, the Plan shall be effective on February 9, 1990 (the "Effective Date"). No Options or Awards may be granted under the Plan after February 9, 2000. (g) Amendment of Plan. The Board may amend, suspend or terminate the Plan or ----------------- any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief under Section 16(b) of the Exchange Act. Notwithstanding anything to the contrary contained herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations. The Chief Executive Officer shall be authorized to make minor or administrative modifications to the Plan as well as modification to the Plan which may be dictated by requirements of federal or state statutes applicable to the Corporation or authorized or made desirable by such statutes. No modification or termination of the Plan shall, without the optionee's consent, alter or impair any of his or her rights or obligations under any Option, Stock Appreciation Right or Limited Right theretofore granted to him or her under the Plan. (h) Amendment of Award. The Committee may amend, modify or terminate any ------------------ outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without limitation, (i) to change the date or dates as of which (A) an Option, Stock Appreciation Right or Limited Right becomes exercisable; (B) Restricted Stock or Restricted Stock Units becomes nonforfeitable; or (ii) to cancel and reissue an Award under such different terms and conditions as it determines appropriate. (i) Hardship Distributions. In no event shall any Option granted under this ---------------------- Plan be exercisable through payment of the Option Price in cash during the period of one year following a hardship distribution under the UNUM Employees Retirement Savings Plan and Trust, as defined therein. Adjustments and Assumption. In the event of a reorganization, -------------------------- recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Corporation, the Committee shall make such adjustments as it deems appropriate in the number and kind of shares authorized by the Plan, in the number and kind of shares covered by the Awards granted, and in the purchase price of outstanding Options. In the event of any merger, consolidation or other reorganization in which the Corporation is not the surviving or continuing corporation, all Awards granted hereunder and outstanding on the date of such event shall be assumed by the surviving or continuing corporation with appropriate adjustment as to the number and kind of shares and purchase price of the shares. (k) In addition to the purposes set forth in Section 1, the Committee may grant Awards to eligible Participants in order to compensate such Participants to surrender existing rights to receive benefits from the Employer under this or any other benefit plan or arrangement. 9 EX-10.24 11 0011.txt 1996 LONG-TERM STOCK PLAN EXHIBIT 10.24 UNUM CORPORATION 1996 LONG-TERM STOCK INCENTIVE PLAN SECTION 1. Purpose. ------- The purpose of the UNUM Corporation 1996 Long-Term Stock Incentive Plan (the "Plan") is to promote the interests of UNUM Corporation and its stockholders by (i) attracting and retaining executive officers and other key employees of outstanding ability; (ii) motivating such individuals, by means of performance- related incentives, to achieve longer-range performance goals; and (iii) enabling such individuals to participate in the long-term growth and financial success of UNUM Corporation. SECTION 2. Definitions. ----------- "Affiliate" shall mean any corporation or other entity which is not a Subsidiary but as to which the Corporation possesses a direct or indirect ownership interest and has representation on the board of directors or any similar governing body. "Award" shall mean a grant or award under Sections 6 through 10, inclusive, of the Plan, as evidenced in a written document delivered to a Participant. "Board" shall mean the Board of Directors of the Corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Compensation Committee of the Board, or, to the extent necessary to satisfy the requirements of Section 162(m) of the Code, a subcommittee thereof. "Common Stock" or "Stock" shall mean the common stock, $.10 par value, of the Corporation. "Corporation" shall mean UNUM Corporation. "Employee" shall mean any employee of the Employer. "Employer" shall mean the Corporation and any Subsidiary or Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Fair Market Value" shall mean the average of the highest and lowest sales prices reported for consolidated trading of the Stock on the New York Stock Exchange on the date in question, or, if the Stock shall not have been traded on such date, the average of such highest and lowest sales prices on the first day prior thereto on which the Stock was so traded. "Fiscal Year" shall mean the fiscal year of the Corporation. "Incentive Stock Option" shall mean a stock option granted under Section 6 which is intended to meet the requirements of Section 422 of the Code. "Limited Right" shall mean a limited stock appreciation right granted under Section 8. 1 "Non-Qualified Stock Option" shall mean a stock option granted under Section 6 which is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. "Performance Measures" shall mean the criteria and objectives, established by the Committee, which shall be satisfied as a condition to the receipt of shares by a Participant under a Restricted Stock Award, or to the payment or receipt of shares or cash under a Restricted Stock Unit or Performance Share Award. With respect to any Restricted Stock, Restricted Stock Unit or Performance Share Award which the Committee designates as being intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, such criteria and objectives shall be based on one or more of the following: the market price of a share of the Common Stock; earnings per share, return to stockholders (including dividends), return on equity, earnings of the Corporation on a GAAP or statutory accounting basis, revenues, market share, cash flow or cost reduction goals, underwriting margin, or any combination of the foregoing. Such criteria and objectives may be expressed on either an absolute basis or relative to the performance of a peer group selected by the Committee. In the case of any Restricted Stock or Performance Share Award which the Committee does not designate as being intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, such criteria and objectives, if any, may include one or more of the criteria and objectives referred to above or such other criteria and objectives as the Committee may determine. "Performance Period" shall mean a period designated by the Committee during which the Performance Measures applicable to a Performance Share Award shall be measured. "Performance Share" shall mean a right, granted to a Participant under Section 10 of this Plan, contingent upon the attainment of specified Performance Measures within a specified Performance Period, to receive one share of Common Stock, which may be Restricted Stock, or in lieu thereof, the Fair Market Value of such Performance Share in cash. "Restricted Stock" shall mean shares of Common Stock contingently granted to a Participant under Section 9 of this Plan. "Restricted Stock Unit" shall have the meaning provided in Section 10(a). "Restriction Period" shall mean a period designated by the Committee during which the Performance Measures and other conditions applicable to a Restricted Stock Award, Restricted Stock Unit Award or Performance Share Award shall be measured. "Stock Appreciation Right" shall mean an Award granted under Section 7 of the Plan. "Subsidiary" shall mean any business entity in which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power. "Voting Securities" shall mean securities which are entitled to cast votes as to general corporate matters, including the election of directors. 2 SECTION 3. Administration. -------------- The Committee shall have full power to interpret and administer the Plan and full authority to select the individuals to whom Awards will be granted and to determine the type and amount of Award(s) to be granted to each Participant, the terms and conditions of Awards granted under the Plan and the terms and conditions of the agreements which will be entered into with Participants. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); to direct employees of the Corporation and its subsidiaries or other advisors to prepare such materials or perform such analysis as the Committee deems necessary or appropriate; and otherwise to supervise the administration of the Plan. The Committee may delegate such of its responsibilities set forth above to members of the Corporation's management as the Committee may determine, with regard to the grant, amendment, interpretation and administration of Awards to Participants who are not subject to Sections 16(a) and 16(b) of the Exchange Act, and except with respect to Awards which are designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder. Any interpretation and action under this Plan by the Committee, or members of the Corporation's management acting under authority delegated by the Committee, shall be final, binding and conclusive on the Corporation, its stockholders, Subsidiaries, Affiliates, all Participants, their respective legal representatives, successors and assigns and upon all persons claiming under or through any of them. Neither any member of the Board of Directors or of the Committee nor any member of the Corporation's management acting under authority delegated by the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith in connection with the Plan. SECTION 4. Eligibility. ----------- Participation in the Plan shall be limited to those key employees of the Corporation and any Subsidiary and Affiliate selected at the sole discretion of the Committee. SECTION 5. Maximum Amount Available for Awards. ----------------------------------- Subject to adjustment as provided in Section 12(j), the maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be a total of 7,000,000 shares of Common Stock, provided that during any single calendar year (i) Options shall not be granted to any individual Participant to purchase more than 400,000 shares of the Common Stock, and (ii) the sum of all shares of Restricted Stock plus all Restricted Stock Units plus all Performance Shares granted to any individual Participant shall not exceed 200,000. Common Stock may be made available from the authorized but unissued shares of the Corporation or from shares reacquired by the Corporation, including shares purchased in the open market. In the event that (i) an Option, or Stock Appreciation Right, or Limited Right expires, terminates, or is canceled, surrendered or exchanged unexercised as to any shares of Common Stock covered thereby, or (ii) any other Award in respect of shares is forfeited for any reason under the Plan, such shares shall thereafter be again available for award pursuant to the Plan. SECTION 6. Stock Options. -------------- (a) Grant. The Committee may, in its discretion, grant Options to such ----- eligible Participants as it may select. The Committee shall determine the number of shares to be covered by each Option, the 3 Option Price, as defined below, therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of Options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code and any regulations implementing Section 422. (b) Option Price. The Committee shall establish the exercise price of the ------------ Option (the "Option Price") at the time each Option is granted, which Option Price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. (c) Exercise. -------- (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award or thereafter; provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of ten years from the date of grant. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (2) The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of stock, or other property (including "cashless exercise" arrangements), and the methods by which shares of stock shall be delivered or deemed to be delivered to Participants; provided, however, that if shares of stock are used to pay the exercise price of an option, such shares must have been held by the Participant for at least six months. When shares of stock are delivered, such delivery may be by attestation of ownership or actual delivery of one or more certificates. Failure by the Committee to specify methods by which the exercise price of an Option may be paid or the form of payment shall be deemed to express the Committee's determination that all methods and forms of payment presented under the Plan are permitted under the grant. (d) Termination of Employment. ------------------------- (1) If a Participant ceases to be an Employee other than by reason of death, retirement or permanent disability, any then outstanding Options may be exercised at any time before their expiration date or within three months after the date of termination, whichever is earlier, but only (unless otherwise determined by the Committee) to the extent that such Options were exercisable when employment ceased, and to the extent not so exercisable, the Option shall terminate on the date employment ceases; provided, however, that if a Participant is terminated for cause the Committee may determine that no Option may be exercised at any time after the termination date. (2) If a Participant's employment terminates because of death or permanent disability, all then outstanding Options previously granted to the Participant will become exercisable. In the case of death of the Participant, such Options may be exercised at any time before their expiration date or within three years after the date of termination, whichever is earlier. In the case of permanent disability, such Options may be exercised at any time before their expiration date. 4 (3) If a Participant's employment terminates because of retirement, any then outstanding Options may be exercised at any time before their expiration date or within five years after the date of termination, whichever is earlier, but only (unless otherwise determined by the Committee) to the extent that such Options were exercisable when employment ceased, and to the extent not so exercisable, the Option shall terminate on the date employment ceases. SECTION 7. Stock Appreciation Right. ------------------------ (a) The Committee shall have the authority to grant Stock Appreciation Rights in tandem with the grant of an Option or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem with an Option may be granted either at or after the time of the grant of such Option. Stock Appreciation Rights or any applicable portion thereof granted in tandem with a given Option shall only be exercisable to the extent that the related Option is exercisable and shall terminate and no longer be exercisable upon the expiration, termination, or cancellation of the related Option. The exercise of an Option shall result in an immediate forfeiture of any Stock Appreciation Right granted in tandem with that Option, and the exercise of such Stock Appreciation Right shall cause an immediate forfeiture of its related Option. Stock Appreciation Rights shall not be exercisable after the expiration of ten years from date of grant. A Stock Appreciation Right granted in tandem with an Option may be exercised by an optionee, in accordance with this Section 7, by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 7. (b) A Stock Appreciation Right shall entitle the Participant to receive from the Corporation an amount equal to the excess of the Fair Market Value of a share of Common Stock on the date of the exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, for any Stock Appreciation Right which is not related to an Incentive Stock Option and can only be exercised during limited periods of time in order to satisfy the conditions of certain rules of the Securities and Exchange Commission, the exercise of any such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Stock is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine whether Stock Appreciation Rights shall be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock. SECTION 8. Limited Rights. -------------- (a) The Committee shall have the authority to grant Limited Rights in tandem with the grant of an Option or freestanding and unrelated to an Option. Limited Rights granted in tandem with an Option may be granted either at or after the time of the grant of such Option. Limited Rights or any applicable portion thereof granted in tandem with a given Option shall terminate and no longer be exercisable upon the expiration, termination or cancellation of the 5 related Option. The exercise of an Option shall result in an immediate forfeiture of any Limited Right granted in tandem with that Option, and the exercise of such Limited Right shall cause an immediate forfeiture of its related Option. A Limited Right granted in tandem with an Option may be exercised by an optionee, in accordance with this Section 8, by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 8. (b) Limited Rights shall only be exercisable during the 30 day period following a Change in Control as defined in Section 11 and shall not be exercisable after the expiration of ten years from the date of grant. (c) Upon the exercise of a Limited Right, an optionee shall be entitled to receive from the Corporation an amount in cash equal in value to the excess of (i) the higher of (A) the highest price per share paid in connection with the Change in Control or (B) the highest Fair Market Value per share as reported in the Wall Street Journal at any time during the 60 day period preceding the Change in Control over (ii) in the case of a Limited Right granted in tandem with an Option, the Option Price per share specified in the related Option and in the case of all other Limited Rights, the price per share established in the grant of the Limited Right (which shall not be less than the Fair Market Value of a share of Common Stock on the date of grant), such excess to be multiplied by the number of shares in respect of which the Limited Right shall have been exercised; provided, however, that upon the exercise of a Limited Right granted in tandem with an Incentive Stock Option, the amount set forth in clause (i) shall not exceed the Fair Market Value of a share on the date of exercise of the Limited Right. (d) Limited Rights shall be subject to such other terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee. This Section 8 shall be interpreted in accordance and consistent with the principles set forth in Rule 16b-3 of the Exchange Act. SECTION 9. Restricted Stock. ---------------- (a) Grant. The Committee may, in its discretion, grant shares of Restricted ----- Stock to such eligible Participants as it may select. The Committee shall determine the number of shares of Restricted Stock to be granted to each Participant, whether or not the Restricted Stock Award is designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, the duration of the Restriction Period (if any) during which, and the conditions under which, the Restricted Stock may be forfeited to the Corporation, and the other terms and conditions of such Awards. The Committee may condition the vesting of shares of Restricted Stock on Performance Measures to be attained by the Corporation and/or the Participant over a stated Performance Period. (b) Assignability. Shares of Restricted Stock may not be sold, assigned, ------------- transferred, pledged or otherwise encumbered, except as herein provided, during the Restriction Period. (c) Dividends. The Committee shall determine whether dividends payable on --------- shares of Restricted Stock shall be paid to the Participant during the Restriction Period or held in a suspense account for payment (with or without interest) to the Participant only in the event of the vesting of the underlying shares of Restricted Stock. 6 (d) Termination of Employment. Subject to Section 11 of this Plan, all of the ------------------------- provisions governing the satisfaction of Performance Measures and the termination of the Restriction Period relating to a Restricted Stock Award, or any cancellation or forfeiture of shares of Restricted Stock upon termination of employment of the Participant, whether by reason of death, permanent disability, retirement, or otherwise, shall be set forth in the Agreement relating to such Restricted Stock Award, or in guidelines established by the Committee and made applicable to such Restricted Stock Award. SECTION 10. Restricted Stock Units. ----------------------- (a) Grant. The Committee may, in its discretion, grant Restricted Stock Units ----- to such eligible Participants as it may select. Restricted Stock Units shall entitle the Participant to receive one share of Common Stock per Unit at the times and subject to the conditions determined by the Committee. The Committee shall determine the number of Units to be granted to each Participant, whether or not the Restricted Stock Units are designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, the duration of the Restricted Period (if any) during which, and the conditions under which, the Restricted Stock Units may be forfeited to the Corporation, the schedule for settlement, and any other terms and conditions relating to each grant, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. The Committee may provide that the holder of a Restricted Stock Unit Award shall receive cash or Common Stock equal in value to the dividends paid with respect to a specified number of shares of the Common Stock, as such dividends accrue or upon settlement of the Restricted Stock Unit Award, in which case dividends may be deemed to have been reinvested in additional Common Stock or such other investment vehicles as the Committee may specify. (b) Assignability. Restricted Stock Units may not be sold, assigned, ------------- transferred, pledged or otherwise encumbered. (c) Termination of Employment. Subject to the renumbered Section 12 of this ------------------------- Plan, all of the provisions governing the satisfaction of Performance Measures and the termination of the Restriction Period relating to a Restricted Stock Unit Award, or any cancellation or forfeiture of shares of Restricted Stock Units upon termination of employment of the Participant, whether by reason of death, permanent disability, retirement, or otherwise, shall be set forth in the Agreement relating to such Restricted Stock Unit Award, or in guidelines established by the Committee and made applicable to such Restricted Stock Unit Award. SECTION 11. Performance Share Awards. ------------------------ (a) Grant. The Committee may, in its discretion, grant Performance Share Awards ----- to such eligible Participants as it may select. The Committee shall determine the number of Performance Shares to be granted to each Participant, whether or not the Performance Share Award is designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, the Performance Measures and Performance Period applicable to each grant, and any other terms and conditions relating to each grant, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (b) Settlement. The Agreement relating to a Performance Share Award (i) shall ---------- specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof; and (ii) may specify whether the holder thereof shall be entitled to receive, 7 on a current or deferred basis, dividend equivalents, and if determined by the Committee, interest on any deferred dividend equivalents with respect to the number of shares of Common Stock subject to such Award. Prior to the settlement of a Performance Share Award in shares of Common Stock, including Restricted Stock, the holders of such award shall have no rights as a stockholder of the Corporation with respect to the shares of Common Stock subject to such Award. (c) Termination of Employment. Subject to Section 12 of this Plan, all of the ------------------------- terms relating the satisfaction of Performance Measures and the termination of the Performance Period relating to a Performance Share Award, or any cancellation or forfeiture of such Performance Share Award upon a termination of employment, whether by reason of death, disability, retirement, or otherwise, shall be set forth in the Agreement relating to such Performance Share Award, or in guidelines established by the Committee and made applicable to such Performance Share Award. SECTION 12. Change of Control. ----------------- Notwithstanding anything to the contrary contained herein, and notwithstanding any contrary waiting period or installment period in any agreement relating to an Award or in the Plan, in the event of a Change in Control (as hereinafter defined), (i) each outstanding Option, Stock Appreciation Right and Limited Right granted under the Plan shall become exercisable in full for the aggregate number of shares covered thereby; (ii) any Performance Measure relating to any Restricted Stock, Restricted Stock Units or Performance Share Award (including any Restricted Stock already granted or to be granted in satisfaction of a Performance Share Award) shall be deemed to be satisfied at the maximum level; and (iii) any Restriction Period and/or Performance Period relating to any Restricted Stock, Restricted Stock Units or Performance Share Award (including any Restricted Stock already granted or to be granted in satisfaction of a Performance Share Award) shall lapse (and any other conditions pertaining to the vesting of any such Award shall be waived) and such shares and Awards shall be deemed fully vested. For purposes of this Plan, a Change in Control shall be deemed to have occurred upon the first to occur of the following events: any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Corporation, a trustee or other fiduciary holding Voting Securities under an employee benefit plan of the Corporation, or any corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 40% of the number of the Corporation's then outstanding Voting Securities, excluding any "person" who becomes such a beneficial owner in connection with an Excluded Transaction described in clause (iii) below; (ii) the following individuals cease for any reason to constitute a majority of the directors then serving: individuals who on January 1, 1996, constitute the Board, and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors on January 1, 1996 or whose appointment or election or nomination for election was previously so approved; 8 (iii) there is consummated a merger or consolidation of the Corporation (or any direct or indirect wholly-owned Subsidiary of the Corporation) with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity or any parent thereof) more than 60% of the combined voting power of the Voting Securities of the Corporation (or the voting securities of such surviving entity or any parent thereof) outstanding immediately after such merger or consolidation (an "Excluded Transaction"); or (iv) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. SECTION 13. General Provisions. ------------------ (a) Income Tax Withholding. The Corporation shall have the authority and the ---------------------- right to deduct or withhold, or require a Participant to remit to the Corporation, an amount sufficient to satisfy federal, state, and local taxes (including the participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the award shares of stock having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. (b) Nontransferability. Unless so provided in the Agreement with respect to ------------------ such Award, no Award shall be assignable or transferable, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution. (c) No Right to Employment. No person shall have any claim or right to be ---------------------- granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Employer. Further, the Employer expressly reserves the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (d) No Rights as Stockholder. Subject to the provisions of the applicable ------------------------ Award, no Participant or transferee of an Option or Restricted Stock Unit shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (e) Construction of the Plan. The validity, construction, interpretation, ------------------------ administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of Delaware. 9 (f) Effective Date. Subject to the approval of the stockholders of the -------------- Corporation, the Plan shall be effective on March 8, 1996 (the "Effective Date"). No Options or Awards may be granted under the Plan after March 7, 2006. (g) Amendment of Plan. The Board may amend, suspend or terminate the Plan or ----------------- any portion thereof at any time. The Chief Executive Officer shall be authorized to make minor or administrative modifications to the Plan as well as modifications to the Plan which may be dictated by requirements of federal or state statutes applicable to the Corporation or authorized or made desirable by such statutes. No modification or termination of the Plan shall, without the optionee's consent, alter or impair any of his or her rights or obligations under any Award theretofore granted to him or her under the Plan. (h) Amendment of Award. The Committee may amend, modify or terminate any ------------------ outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without limitation, (i) to change the date or dates as of which (A) an Option, Stock Appreciation Right or Limited Right becomes exercisable, or (B) shares of Restricted Stock, Restricted Stock Units or Performance Share Awards become nonforfeitable; or (ii) to cancel and reissue an Award under such different terms and conditions as it determines appropriate. Hardship Distributions. In no event shall any Option granted under this Plan be - ---------------------- exercisable through payment of the Option Price in cash during the period of one year following a hardship distribution under the UNUM Employees Retirement Savings Plan and Trust, as defined therein. Adjustments and Assumption. In the event of a reorganization, recapitalization, - -------------------------- stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Corporation, the Committee shall make such adjustments as it deems appropriate in the number and kind of shares authorized by the Plan, in the number and kind of shares or Performance Shares covered by the Awards granted, in the maximum number of Options, Restricted Stock, Restricted Stock Units and Performance Shares which may be granted to any individual Participant in a single calendar year, and in the purchase price of outstanding Options. In the event of any merger, consolidation or other reorganization in which the Corporation is not the surviving or continuing corporation, unless otherwise provided for in the documents governing such merger, consolidation or other reorganization, all Awards granted hereunder and outstanding on the date of such event shall be assumed by the surviving or continuing corporation with appropriate adjustment as to the number and kind of shares and purchase price of the shares. 10 EX-10.26 12 0012.txt SUPPLEMENTAL PENSION PLAN EXHIBIT 10.26 UNUMPROVIDENT CORPORATION SUPPLEMENTAL PENSION PLAN As Amended and Restated Effective January 1, 2000 TABLE OF CONTENTS Page ---- ARTICLE I Definitions.................................................. 1 ARTICLE II Supplemental Plan Benefits................................... 3 2.1 Eligibility.................................................. 3 2.2 Amount of Benefit............................................ 3 2.3 Pre-Retirement Death Benefit................................. 3 ARTICLE III Distributions................................................ 3 3.1 Form and Time................................................ 3 3.2 Distributions Upon Death..................................... 3 3.3 Limitations Upon Distributions............................... 4 3.4 Consent of Committee......................................... 4 ARTICLE IV Administration............................................... 4 4.1 Administrative Committee..................................... 4 4.2 Action By Committee.......................................... 4 4.3 Delegation................................................... 4 4.4 Claims Procedures............................................ 5 4.5 Indemnification.............................................. 5 ARTICLE V Miscellaneous................................................ 6 5.1 Amendment and Termination of Plan............................ 6 5.2 Employee Status.............................................. 6 5.3 Funding...................................................... 6 5.4 Actuarial Equivalence........................................ 6 5.5 Assignment................................................... 6 5.6 Taxes........................................................ 6 5.7 Plan Documents............................................... 6 5.8 Governing Law................................................ 6 UNUMPROVIDENT CORPORATION SUPPLEMENTAL PENSION PLAN Preamble The UnumProvident Corporation Supplemental Pension Plan (the "Plan") set forth herein is effective generally January 1, 2000. The Plan is a continuation of the UNUM Corporation Supplemental Lifecycle Plan, which was originally adopted effective January 1, 1983, and was last amended and restated effective January 1, 1997. The primary purpose of the Plan is to establish a competitive level of retirement income for designated executives of UnumProvident Corporation and its affiliated companies, by providing pension benefits that may not be provided under the UnumProvident Corporation Pension Equity Plan by reason of limitations imposed by the Internal Revenue Code of 1986, as amended. Participation in the Plan is limited to a select group of management or highly compensated employees within the meaning of the Employee Retirement Income Security Act of 1974, as amended. ARTICLE I Definitions 1.1 "Affiliate" means any corporation that is an affiliate of the Company as defined in the Qualified Plan. 1.2 "Board" or "Board of Directors" means the Board of Directors of the Company, or any person or persons to whom the Board delegates all or part of its authority under this Plan. 1.3 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.4 "Committee" means the Compensation Committee of the Board of Directors, or any other committee which shall be appointed by and serve at the discretion of the Board to administer the Plan. 1.5 "Company" means UnumProvident Corporation. 1.6 "Earnings" means a Participant's earnings as defined in the Qualified Plan, except that Earnings shall be determined without regard to the limit on the amount of compensation that may be taken into account under Code Section 401(a)(17), plus amounts deferred by the Participant under any nonqualified deferred compensation plan of the Company or a Participating Affiliate. 1.7 "Effective Date" means January 1, 2000, except as may be otherwise indicated herein. The rights and benefits, if any, of a Participant who terminated employment before January 1, 2000, shall be determined in accordance with the provisions of the Plan in effect on the date his or her employment terminated. 1.8 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.9 "Participant" for a Plan Year means a participant in the Qualified Plan who either: (a) has Earnings for the Plan Year that exceed the amount of compensation that may be taken into account under Code Section 401(a)(17); (b) accrues a benefit for the Plan Year that is limited by Code Section 415 or 416; (c) is a participant in any other nonqualified deferred compensation plan of the Company or a Participating Affiliate for the Plan Year and is (i) an employee who is a director or above with an annual base salary of $100,000 or more, or (ii) a field employee who is a manager, assistant manager or regional vice president and who has an annual draw of $100,000 or more. The dollar limit in the preceding sentence shall be adjusted at the same time and in the same manner as the dollar limit under Code Section 415(d). Each Participant shall remain an active Participant under the Plan until the earliest of the following dates: (a) the date of his or her retirement under the Qualified Plan, death, or other termination of employment; or (b) the date on which he or she ceases to be a Participant described in the first sentence of this Section or otherwise ceases to be a member of a select group of highly compensated and management employees within the meaning of ERISA. 1.10 "Participating Affiliate" means each Affiliate of the Company except an Affiliate that has elected by appropriate corporate action not to participate in the Plan. 1.11 "Plan" means the UnumProvident Corporation Supplemental Pension Equity Plan as set forth herein and as amended from time to time hereafter. 1.12 "Qualified Plan" means the UnumProvident Corporation Pension Equity Plan, as amended and restated effective January 1, 2000, and as amended from time to time thereafter. 1.13 "Qualified Plan Benefit" means a Participant's accrued retirement benefit under the Qualified Plan. 1.14 "Supplemental Plan Benefit" means the benefit payable to or on account of a Participant from this Plan under Article II. 2 ARTICLE II Supplemental Plan Benefits 2.1 Eligibility. (a) A Participant shall become eligible to receive a Supplemental Plan Benefit as of the same date on which he or she receives or begins to receive payment of his or her Qualified Plan Benefit, provided that the Participant is then fully vested in the Qualified Plan Benefit. The amount of such benefit shall be determined in accordance with Section 2.2. (b) If a Participant who is fully vested in his or her Qualified Plan Benefit dies prior to the termination of his or her employment with the Company and its Affiliates, and is survived by a spouse, then a death benefit shall be payable with respect to the Participant in accordance with Section 2.3. If a Participant dies after retirement benefits commence, then a death benefit shall be payable with respect to such Participant only to the extent provided by the form in which such benefit is being paid. 2.2 Amount of Benefit. The amount of a Participant's Supplemental Plan Benefit shall be equal to the difference between (a) the amount that would be the Participant's Qualified Plan Benefit if such benefit were determined on the basis of Earnings under this Plan and without regard to any Qualified Plan provisions incorporating the limits of Code Sections 415 or 416, and (b) the amount of the Qualified Plan Benefit actually payable to the Participant. 2.3 Pre-Retirement Death Benefit. The amount of the monthly pre- retirement death benefit payable to a Participant's surviving spouse shall be determined in the same manner in which the Participant's pre-retirement survivor annuity, if any, is determined under the Qualified Plan, based on the amount of retirement benefit that would have been payable to the Participant under Section 2.2 if the Participant survived to retirement. ARTICLE III Distributions 3.1 Form and Time. Subject at all times to the consent of the Committee, a Participant's Supplemental Plan Benefit shall be or shall commence to be distributed to the Participant (or to the Participant's surviving spouse or designated beneficiary, as the case may be) at the same time, in the same manner, and in the same normal or optional form as the Participant shall elect with respect to the payment of his or her Qualified Plan Benefit. 3.2 Distributions Upon Death. In the event of a Participant's death before payment or commencement of payment of his or her Supplemental Plan Benefit, the pre-retirement death benefit, if any, payable with respect to the Participant's Supplemental Plan Benefit shall be or shall commence to be distributed to the Participant's surviving spouse at the same time, in the same manner, and in the same normal or optional form as the surviving spouse shall elect with respect to the payment of the pre-retirement survivor annuity under the Qualified Plan. 3 3.3 Limitations Upon Distributions. (a) In the event that a Participant, or his or her surviving spouse or designated beneficiary, as the case may be, elects that the Participant's Qualified Plan Benefit shall be paid in the form of a "direct rollover distribution" within the meaning of Code Section 401(a)(31), the Participant's Supplemental Plan Benefit shall be distributed to the Participant (or surviving spouse or designated beneficiary) in a lump sum. (b) In the event that the monthly amount of the Qualified Plan Benefit actually payable to or on account of a Participant is subject to adjustment from time to time under the terms of such plan, the monthly amount of the Supplemental Plan Benefit payable to or on account of such Participant shall be adjusted correspondingly pursuant to Section 2.2. (c) Under no circumstances shall a Supplemental Plan Benefit be paid except on account of a Participant's retirement, death, disability, or other termination of employment under the Qualified Plan. 3.4 Consent of Committee. Notwithstanding any other provision of the Plan to the contrary, every distribution under the Plan shall be subject at all times to the consent of the Committee. The Committee may require a claimant for a distribution hereunder to furnish such information as it may reasonably request, and may delay the commencement of a distribution, if necessary, until such information is made available. ARTICLE IV Administration 4.1 Administrative Committee. The Committee shall have complete discretionary authority to control and manage the operation and administration of the Plan and to construe Plan provisions. Subject to the provisions of the Plan, the Committee from time to time may establish rules for the administration and interpretation of the Plan. The final determination of the Committee as to any disputed questions shall be conclusive and binding upon all parties. All actions, decisions and interpretations of the Committee in administering the Plan shall be made in a uniform and nondiscriminatory manner. 4.2 Action By Committee. A majority of the Committee shall constitute a quorum, and an action of the majority present at any meeting shall be deemed the action of the Committee. Any member of the Committee may participate in a meeting of the Committee through conference telephone or similar communications equipment by means of which all individuals participating in the meeting can hear each other. Any action of the Committee may be taken without a meeting if all members of the Committee sign written consents setting forth the action taken or to be taken, at any time before or after the intended effective date of such action. 4.3 Delegation. The Committee may authorize one or more of its members to execute or deliver any instrument, make any payment or perform any other act which the Plan authorizes or requires the Committee to do. The Committee may employ counsel and other agents, may 4 delegate ministerial duties to such agents or to employees of the Company and may procure such clerical, accounting, actuarial, consulting and other services as it may require in carrying out the provisions of the Plan. 4.4 Claims Procedure. If an application for a benefit ("claim") is denied by the Committee, the Committee shall give written notice of such denial to the applicant, by certified or registered mail, within ninety (90) days after the claim was filed with the Committee; provided, however, that such 90-day period may be extended to one hundred eighty (180) days by the Committee if it determines that special circumstances exist which require an extension of the time required for processing the claim. Such denial shall set forth: (a) the specific reason or reasons for the denial; (b) the specific Plan provisions on which the denial is based; (c) any additional material or information necessary for the applicant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the Plan's claim review procedure. Following receipt of such denial, the applicant or his or her duly authorized representative may: (aa) request a review of the denial by filing a written application for review with the Committee within sixty (60) days after receipt by the applicant of such denial; (bb) review documents pertinent to the claim at such reasonable time and location as shall be mutually agreeable to the applicant and the Committee; and (cc) submit issues and comments in writing to the Committee relating to its review of the claim. The Committee shall, after consideration of the application for review, render a decision and shall give written notice thereof to the applicant, by certified or registered mail, within sixty (60) days after receipt by the Committee of the application for review; provided, however, that such 60-day period may be extended to one hundred twenty (120) days by the Committee if it determines that special circumstances exist which require an extension of the time required for processing the application for review. Such notice shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. 4.5 Indemnification. The Company and the Participating Affiliates shall indemnify and hold harmless each member of the Committee against all expenses and liabilities arising out of his or her acts or omissions with respect to the Plan, provided such member would be entitled to indemnification pursuant to the bylaws of the Company or the affected Participating Affiliate, as the case may be. 5 ARTICLE V Miscellaneous 5.1 Amendment and Termination of Plan. The Board may at any time, in its sole discretion, terminate this Plan or amend the Plan in whole or in part. No such termination or amendment shall affect the right of any Participant or his or her spouse or designated beneficiary to receive a benefit under the terms of this Plan on the date immediately preceding such termination or amendment. 5.2 Employee Status. Nothing contained herein shall confer upon any Participant the right to be retained in the service of the Company and its Affiliates or any other right not expressly provided for herein, nor shall the existence of this Plan impair the right of the Company and its Affiliates to discharge or otherwise deal with a Participant. 5.3 Funding. This Plan is unfunded for purposes of the Code and Title I of ERISA and is not intended to meet the requirements of Code Section 401(a). The Plan constitutes a mere promise by the Company and the Participating Affiliates to pay benefits in the future, and a Participant hereunder shall have no greater rights than a general, unsecured creditor of the Company and the Participating Affiliates. The Company and each Participating Affiliate shall be solely responsible for the payment of benefits with respect to its own employees who are Participants in the Plan. 5.4 Actuarial Equivalence. Actuarial equivalence of the aggregate amounts expected to be received under different forms of benefit payment shall be determined in accordance with the actuarial assumptions specified in the Qualified Plan. 5.5 Assignment. To the maximum extent permitted by law, no benefit under this Plan shall be assignable or subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, attachment, or encumbrance of any kind. 5.6 Taxes. Any and all taxes that may be due and owing with respect to any payment under the Plan shall be the sole responsibility of the persons to whom and for whose benefit such payment is made, provided, however, that the Company shall withhold from any amount payable under the Plan all amounts that are required by law to be withheld. 5.7 Plan Documents. Each Participant shall receive a copy of this Plan or a summary of its material provisions, and the Committee shall make available for inspection by the Participant a copy of any rules and regulations adopted by the Committee in administering the Plan. 5.8 Governing Law. This Plan is established under and shall be construed according to the laws of the State of Tennessee, except to the extent such laws may be preempted by ERISA. 6 IN WITNESS WHEREOF, UnumProvident Corporation has caused this document to be executed by its duly authorized officer on this 28th day of March 2001, to be effective as of January 1, 2000. WITNESS: UNUMPROVIDENT CORPORATION - -------------------------------- --------------------------------- By: F. Dean Copeland Its: Executive Vice President, and General Counsel 7 EX-10.27 13 0013.txt 5 YEAR CREDIT AGREEMENT Exhibit 10.27 ================================================================================ FIVE-YEAR CREDIT AGREEMENT Dated as of October 31, 2000 among UNUMPROVIDENT CORPORATION BANK OF AMERICA, N.A., as Administrative Agent, CITICORP, USA, INC. and WACHOVIA BANK, N.A., as Co-Syndication Agents FLEET NATIONAL BANK, as Documentation Agent and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO BANC OF AMERICA SECURITIES, LLC as Sole Lead Arranger and Sole Book Manager ================================================================================ TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS ............................................................ 1 1.1 Certain Defined Terms ......................................... 1 1.2 Other Interpretive Provisions ................................. 21 1.3 Accounting Principles ......................................... 22 ARTICLE II THE CREDITS ............................................................ 22 2.1 Amounts and Terms of Commitments .............................. 22 2.2 Loan Accounts ................................................. 22 2.3 Procedure for Borrowing ....................................... 23 2.4 Conversion and Continuation Elections ......................... 24 2.5 Voluntary Termination or Reduction of Commitments ............. 25 2.6 Optional Prepayments .......................................... 25 2.7 Repayment ..................................................... 25 2.8 Interest ...................................................... 26 2.9 Fees .......................................................... 26 2.10 Computation of Fees and Interest .............................. 27 2.11 Payments by the Company ....................................... 27 2.12 Payments by the Banks to the Agent ............................ 28 2.13 Sharing of Payments, Etc. ..................................... 28 ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY ................................. 30 3.1 Taxes ......................................................... 30 3.2 Illegality .................................................... 31 3.3 Increased Costs and Reduction of Return ....................... 31 3.4 Funding Losses ................................................ 32 3.5 Inability to Determine Rates .................................. 33 3.6 Certificates of Banks ......................................... 33 3.7 Substitution of Banks ......................................... 33 3.8 Survival ...................................................... 33 ARTICLE IV CONDITIONS PRECEDENT ................................................... 34 4.1 Conditions of Initial Loans ................................... 34 Section Page 4.2 Conditions to All Borrowings .................................. 35 ARTICLE V REPRESENTATIONS AND WARRANTIES ......................................... 36 5.1 Corporate Existence and Power ................................. 36 5.2 Corporate Authorization; No Contravention ..................... 36 5.3 Governmental Authorization .................................... 36 5.4 Binding Effect ................................................ 37 5.5 Litigation .................................................... 37 5.6 No Default .................................................... 37 5.7 ERISA Compliance 37 5.8 Use of Proceeds; Margin Regulations ........................... 38 5.9 Title to Properties ........................................... 38 5.10 Taxes ......................................................... 38 5.11 Financial Condition 39 5.12 Regulated Entities ............................................ 39 5.13 No Burdensome Restrictions .................................... 39 5.14 Subsidiaries .................................................. 40 5.15 Environmental Compliance ...................................... 40 5.16 Insurance ..................................................... 40 5.17 Full Disclosure ............................................... 40 ARTICLE VI AFFIRMATIVE COVENANTS .................................................. 40 6.1 Financial Statements .......................................... 40 6.2 Certificates, Notices and Other Information ................... 41 6.3 Payment of Taxes .............................................. 43 6.4 Preservation of Existence ..................................... 44 6.5 Maintenance of Properties ..................................... 44 6.6 Maintenance of Insurance ...................................... 44 6.7 Compliance With Laws .......................................... 44 6.8 Inspection Rights ............................................. 44 6.9 Keeping of Records and Books of Account ....................... 44 6.10 Compliance with ERISA ......................................... 45 6.11 Compliance With Agreements .................................... 45 6.12 Use of Proceeds ............................................... 45 ARTICLE VII NEGATIVE COVENANTS ..................................................... 45 -ii- Section Page 7.1 Indebtedness .................................................. 45 7.2 Liens and Negative Pledges .................................... 46 7.3 Consolidations and Mergers; Sales of Assets ................... 47 7.4 Loans, Acquisitions and Investments ........................... 48 7.5 Restricted Payments ........................................... 49 7.6 ERISA ......................................................... 49 7.7 Change in Nature of Business .................................. 49 7.8 Transactions with Affiliates .................................. 49 7.9 Hostile Acquisitions .......................................... 49 7.10 Financial Covenants ........................................... 49 ARTICLE VIII EVENTS OF DEFAULT ...................................................... 50 8.1 Event of Default .............................................. 50 8.2 Remedies ...................................................... 52 8.3 Rights Not Exclusive .......................................... 52 ARTICLE IX THE AGENT .............................................................. 53 9.1 Appointment and Authorization ................................. 53 9.2 Delegation of Duties .......................................... 53 9.3 Liability of Agent ............................................ 53 9.4 Reliance by Agent ............................................. 53 9.5 Notice of Default ............................................. 54 9.6 Credit Decision ............................................... 54 9.7 Indemnification ............................................... 54 9.8 Agent in Individual Capacity .................................. 55 9.9 Successor Agent ............................................... 55 9.10 Withholding Tax ............................................... 55 9.11 Documentation Agent; Syndication Agent ........................ 57 ARTICLE X MISCELLANEOUS .......................................................... 58 10.1 Amendments and Waivers ........................................ 58 10.2 Notices ....................................................... 58 10.3 No Waiver; Cumulative Remedies ................................ 59 10.4 Costs and Expenses ............................................ 59 10.5 Indemnity ..................................................... 60 10.6 Payments Set Aside ............................................ 60 -iii- Section Page 10.7 Binding Effect; Assignment .................................... 60 10.8 Confidentiality ............................................... 62 10.9 Set-off ....................................................... 62 10.10 Notification of Addresses, Lending Offices, Etc. .............. 63 10.11 Counterparts .................................................. 63 10.12 Severability .................................................. 63 10.13 No Third Parties Benefitted ................................... 63 10.14 Governing Law and Jurisdiction ................................ 63 10.15 Waiver of Jury Trial .......................................... 64 10.16 Entire Agreement .............................................. 64 SCHEDULES Schedule 1.1 Subordinated Debt Schedule 2.1 Commitments Schedule 5.5 Litigation Schedule 5.12 Regulated Entities Schedule 5.14 Subsidiaries Schedule 7.1 Indebtedness Schedule 7.2 Liens and Negative Pledges Schedule 10.2 Lending Offices; Addresses for Notices -iv- EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Compliance Certificate Exhibit D Form of Legal Opinion of Company's Counsel Exhibit E Form of Notice of Assignment and Acceptance Exhibit F Form of Promissory Note -v- FIVE-YEAR CREDIT AGREEMENT This FIVE-YEAR CREDIT AGREEMENT is entered into as of October 31, 2000, among UnumProvident Corporation, a Delaware corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), Citicorp USA Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent for the Banks. WHEREAS, the Banks have agreed to make available to the Company a credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 Certain Defined Terms. The following terms have the following meanings: "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract, or otherwise. "Agent" means Bank of America in its capacity as administrative agent for the Banks hereunder, and any successor agent arising under Section 9.9. "Agent-Related Persons" means Bank of America and any successor agent arising under Section 9.9, together with their respective Affiliates (including, in the case of Bank of America, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on Schedule 10.2 or such other address as the Agent may from time to time specify. "Agreement" means this Credit Agreement. "Annual Statement" means the annual financial statement of any insurance company as required to be filed with the Department, together with all exhibits or schedules filed therewith, prepared in conformity with SAP. References to amounts on particular exhibits, schedules, lines, pages and columns of such Annual Statements are based on the formats promulgated by the NAIC for 1999 Annual Statements for the applicable type of insurance company. If such format is changed in future years so that different information is contained in such items or they no longer exist, it is understood that the reference is to information consistent with that recorded in the referenced item in the 1999 Annual Statement of the insurance company. "Applicable Amount" means the following amounts per annum, based upon the Debt Ratings: Applicable Amount (in basis points per annum) Pricing Debt Ratings Facility Utilization Offshore Level S&P/Moody's Fee Fee Rate 1 A/A2 or higher 9.0 12.5 28.5 2 A-/A3 10.0 12.5 40.0 3 BBB+/Baa1 12.5 12.5 50.0 4 BBB/Baa2 17.5 12.5 70.0 5 Below BBB/Baa2 22.5 25.0 90.0 At the date hereof, Level 3 shall be applicable. "Debt Ratings" means, as of any date of determination, the rating as determined by either S&P or Moody's of the Company's senior unsecured long-term debt; provided that if Debt Ratings are issued by both of the foregoing Rating Agencies, then the less creditworthy of such credit ratings shall apply, unless there is a split in credit ratings of more than one level, in which case the level one level lower than the more creditworthy rating shall apply. The Debt Ratings shall be determined from the most recent public announcement of any changes in the Debt Ratings. Any change in the Applicable Amount shall become effective on and as of the date of any public announcement of any Debt Ratings that indicates a different Applicable Amount in accordance with this definition and the above chart. "Applicable Debt" means obligations described in clauses (a), (d) or (f) of the definition of Indebtedness contained herein. 2 "Arranger" means Banc of America Securities LLC, a Delaware limited liability company, as sole lead arranger and book manager. "Attorney Costs" means and includes all reasonable fees and disbursements of any law firm or other external counsel and the nonduplicative allocated cost of internal legal services and disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. "Bank of America" means Bank of America, N.A., a national banking association. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. ss.101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, as its "prime rate." (The "prime rate" is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the prime rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to the Company on the same day by the Banks under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.3. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina or New York, New York are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capitalized Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are classified and accounted for as a capital lease under Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board. 3 "Cash Equivalents" means: (a) securities issued or unconditionally guaranteed by the United States government or any agency or instrumentality thereof, in each case having maturities of not more than 12 months from the date of acquisition thereof; (b) securities issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof having maturities of not more than 12 months from the date of acquisition thereof and, at the time of acquisition, having a rating of at least A-2 or P-2 from either Rating Agency, or, with respect to municipal bonds, a rating of at least MIG 2 or VMIG 2 from Moody's; (c) commercial paper issued by any Bank or any bank holding company owning any Bank; (d) commercial paper maturing not more than 12 months after the date of creation thereof, and at the time of acquisition, having a rating of A-1 or P-1 from either Rating Agency; (e) commercial paper maturing not more than 6 months after the date of creation thereof and, at the time of acquisition, having a rating of A-2 or P-2 from either Rating Agency; (f) domestic and eurodollar certificates of deposit or bankers' acceptances maturing no more than one year after the date of acquisition thereof which are either issued by any Bank or any other banks having combined capital and surplus of not less than $100,000,000 (or in the case of foreign banks, the dollar equivalent thereof) or are insured by the Federal Deposit Insurance Corporation for the full amount thereof; and (g) repurchase agreements (including securities lending agreements and dollar rolls), with a term of not more than 6 months secured by the underlying securities and entered into with securities dealers of recognized national standing. "Change of Control" means, and shall be deemed to have occurred if: (a) at any time Continuing Directors shall not constitute a majority of the Board of Directors of the Company; or (b) any Person or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act), shall at any time have acquired direct or indirect beneficial ownership of a percentage equal to or more than 25% of the outstanding Voting Stock of the Company. "Closing Date" means the date on which all conditions precedent set forth in Section 4.1 are satisfied or waived by all Banks (or, in the case of Section 4.1(e), waived by the Person entitled to receive such payment). 4 "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Commitment", as to each Bank, has the meaning specified in Section 2.1. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person, with or without recourse, guaranteeing or intended to guarantee any Indebtedness, lease, dividend or other monetary obligation (the "primary obligations") of another Person (the "primary obligor") in any manner, including any obligation of that Person (a) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (b) to advance or provide funds for the payment or discharge of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder), as determined by such Person in good faith. Notwithstanding the foregoing, the term "Contingent Obligation" shall not include (a) endorsements of instruments for deposit or collection in the ordinary course of business, and (b) obligations of any Insurance Subsidiary under Insurance Contracts, Reinsurance Agreements and Retrocession Agreements (but not including any of the foregoing that constitutes financial reinsurance). "Continuing Director" means, at any date, an individual (a) who is a member of the Board of Directors of the Company on the date hereof, (b) who, as at such date, has been a member of such Board of Directors for at least the 12 preceding months (or, for the period comprising the first 12 months after the date hereof, has been a member of the Board of Directors at least since the date hereof), or (c) who has been nominated to be a member of such Board of Directors by a majority of the other Continuing Directors then in office. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section 2.4, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the 5 same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "D&H" means, collectively, Duncanson & Holt Europe Ltd., a United Kingdom company, Duncanson & Holt Asia PTE Ltd., a Singapore company, Duncanson & Holt Underwriters Ltd., a United Kingdom company, Duncanson & Holt Syndicate Management Ltd., a United Kingdom company and their respective Subsidiaries. "Debt Ratings" has the meaning set forth in the definition of "Applicable Amount". "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Department" means the applicable Governmental Authority of the state of domicile of an insurance company responsible for the regulation of said insurance company. "Dollars", "dollars" and "$" each mean lawful money of the United States. "Eligible Assignee" means (a) a financial institution organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary; (d) another Bank; (e) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act of 1933, as amended) which extends credit or buys loans as one of its businesses, including but not limited to, insurance companies, mutual funds and lease financing companies, and acceptable to the Agent; (f) a Person that is engaged in the making, purchasing or investing in commercial loans in the ordinary course of business, and acceptable to the Agent; or (g) other lenders or institutional investors consented to in writing in advance by the Agent and, so long as no Default or Event of Default has occurred and is continuing, the Company (such consents not to be unreasonably withheld or delayed). Neither the Company nor any Affiliate of the Company shall be an Eligible Assignee. "Environmental Laws" means all Laws relating to environmental, health, safety and land use matters applicable to any property. "Equity Interests" means, with respect to any Person, all shares, interests (including membership and partnership interests), participations or other equivalent (however 6 designated, whether voting or non-voting) of such Person's capital, whether now outstanding or issued after the date hereof. "ERISA" means the Employee Retirement Income Security Act of 1974 and any regulations issued pursuant thereto, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 8.1. "Exchange Act" means the Securities and Exchange Act of 1934, and regulations promulgated thereunder. "FAS 113" means Statement of Accounting Standards No. 113 and regulations promulgated thereunder. "FAS 115" means Statement of Accounting Standards No. 115 and regulations promulgated thereunder. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds 7 brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Bank of America on such day on such transactions as determined by Agent. "Fee Letter" has the meaning specified in Section 2.9. "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "GAAP" means generally accepted accounting principles in the United States as in effect and set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the United States accounting profession); provided that if there occurs after the date hereof any change in GAAP that affects in any respect the calculation of any covenant contained in Section 7.10, the Banks and the Company shall negotiate in good faith amendments to the provisions of this Agreement that relate to the calculation of such covenant with the intent of having the respective positions of the Banks and the Company after such change in GAAP conform as nearly as possible to their respective positions as of the date of this Agreement and, until any such amendments have been agreed upon, the covenants in Section 7.10 shall be calculated as if no such change in GAAP has occurred. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables (including reinsurance payables) entered into in the ordinary course of business on ordinary terms) that in accordance with GAAP would be shown on the liability side of the balance sheet of such Person; (c) the face amount of all letters of credit or surety bonds issued for the account of such Person and, without duplication, all drafts drawn thereunder; (d) all obligations evidenced by notes, bonds, debentures or similar instruments or incurred in connection with bankers' acceptances, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement that in accordance with GAAP would be shown on the 8 liability side of the balance sheet of such Person; (f) all obligations with respect to Capitalized Lease Obligations; (g) all Indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; (h) all obligations of such Person under Swap Contracts; (i) obligations under synthetic leases; and (j) without duplication, all Contingent Obligations of such Person; provided that Indebtedness shall not include obligations of any Insurance Subsidiary under or pursuant to Insurance Contracts, Reinsurance Agreements and Retrocession Agreements, trade payables and accrued expenses, in each case arising in the ordinary course of business but shall include any Reinsurance Agreement or Retrocession Agreement that would be disallowed under FAS 113. For all purposes of this Agreement, the Indebtedness of any Person shall include all recourse Indebtedness of any partnership, joint venture or limited liability company in which such Person is a general partner, a joint venturer or a member and for which such Person has liability. "Indemnified Liabilities" has the meaning specified in Section 10.5. "Indemnified Person" has the meaning specified in Section 10.5. "Insolvency Proceeding" means (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Insurance Code" means, with respect to any insurance company, the insurance code of its state of domicile and any successor statute of similar import, together with the regulations thereunder, as amended or otherwise modified and in effect from time to time. References to sections of the Insurance Code shall be construed to also refer to successor sections. "Insurance Contract" means any insurance contract or policy issued by an Insurance Subsidiary but shall not include any Reinsurance Agreement or Retrocession Agreement. "Insurance Subsidiary" means each Subsidiary of the Company identified as an Insurance Subsidiary (including Subsidiaries of such Subsidiary) on Schedule 5.14 and each other Subsidiary (including Subsidiaries of such Subsidiary) from time to time in the insurance business as certified by the Company in writing to the Agent. 9 "Interest Payment Date" means, as to any Offshore Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter and each date such Loan is converted into another Type of Loan, provided, however, that if any Interest Period exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter. provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period shall extend beyond the Revolving Termination Date. "Interim Statements" means the quarterly financial statement of any insurance company as required to be filed with the Department, together with all exhibits or schedules filed therewith, prepared in conformity with SAP. References to amounts on particular exhibits, schedules, lines, pages and columns of such interim statements are based on the formats promulgated by the NAIC for 1999 interim statements for the applicable type of insurance company. If such format is changed in future years so that different information is contained in such terms or they no longer exist, it is understood that the reference is to information consistent with that recorded in the referenced item in the 1999 interim statement of the insurance company. "Investment" has the meaning specified in Section 7.4. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. 10 "Laws" or "Law" means all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permit of, and agreements with, any Government Authority, in each case whether or not having the force of law. "Legal Requirements" means all applicable laws, rules, orders and regulations made by any governmental body or regulatory authority (including any Department) having jurisdiction over the Company or a Subsidiary of the Company. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.2, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement (in the nature of compensating balances, cash collateral accounts or security interests), encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction), including the interest of a purchaser of accounts receivable. "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, any Notes, the Fee Letter and all other documents delivered to the Agent or any Bank in connection herewith. "Margin Stock" means "margin stock" as such term is defined in Regulation T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Company or the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform under any Loan Document and to avoid any Event of Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company of any Loan Document. "Material Insurance Subsidiary" means a Material Subsidiary that is also an Insurance Subsidiary. 11 "Material Subsidiary" means, at any time, (a) each of Unum Life Insurance Company of America, First Unum Life Insurance Company, Provident Life & Accident Insurance Company, The Paul Revere Life Insurance Company and Colonial Life & Accident Insurance Company and each other Subsidiary from time to time identified by the Company as a Material Subsidiary, and (b) each other Subsidiary having (on a consolidated basis with its Subsidiaries) at such time either (i) total (gross) revenues for any four fiscal quarter period in excess of 10% of the total (gross) revenues of the Company and its Subsidiaries for such four fiscal quarter period or (ii) total assets, as of the last day of the preceding fiscal quarter, having a net book value in excess of 10% of the total assets of the Company and its Subsidiaries as of such day, in each case, based upon the Company's most recent annual or quarterly financial statements delivered to the Agent under Section 6.1. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA. "NAIC" means the National Association of Insurance Commissioners or any successor thereto. "Negative Pledge" means a Contractual Obligation limiting the ability to create a Lien. "Net Income" means, for any period, the net income of the Company and its Subsidiaries on a consolidated basis in accordance with GAAP. "Net Worth" means, at any time, the sum of all amounts (without duplication) which, in accordance with GAAP, would be included in the Company's stockholders' equity (excluding unrealized gains or losses recorded pursuant to FAS 115) as required to be reported in the Company's then most recent consolidated balance sheet required to be delivered to the Agent pursuant to this Agreement. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to Section 2.2(b), in substantially the form of Exhibit F. "Notice of Assignment and Acceptance" means a notice substantially in the form of Exhibit E. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. 12 "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means for any Interest Period with respect to any Offshore Rate Loan, a rate per annum determined by Agent pursuant to the following formula: Offshore Rate = LIBOR -------------------------------------------- 1.00 - Eurodollar Reserve Percentage Where, "LIBOR" means, for such Interest Period: (a) the rate per annum (carried out to the fifth decimal place) equal to the rate determined by the Agent to be the offered rate that appears on the page of the Telerate Screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum (carried out to the fifth decimal place) equal to the rate determined by the Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by the Agent as the rate of interest at which Dollar deposits (for delivery on the first day of such Interest Period) in same day funds in the approximate amount of the applicable Offshore Rate Loan and with a term equivalent to such Interest Period would be offered by its London Branch to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Reserve Percentage" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to any Bank, under regulations issued from time to time by the Board of Governors of the Federal 13 Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Offshore Rate for each outstanding Offshore Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. The determination of the Eurodollar Reserve Percentage and LIBOR by the Agent shall be conclusive in the absence of manifest error. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Ordinary Course Indebtedness" means: (a) Indebtedness under the Loan Documents; (b) intercompany Indebtedness (i.e., Indebtedness of the Company or any of its Subsidiaries to the Company or any of its Subsidiaries); (c) Indebtedness arising from the honoring of a check, draft or similar instrument against insufficient funds; and (d) Ordinary Course Swap Obligations. "Ordinary Course Liens" means: (a) Liens pursuant to any Loan Document; (b) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP; (c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person; (d) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (e) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, 14 performance bonds and other obligations of a like nature incurred in the ordinary course of business; and (f) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of any Person. "Ordinary Course Swap Obligations" means all obligations (contingent or otherwise) of Company or any Subsidiary existing or arising under any Swap Contract, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or property held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view", and (b) such Swap Contracts do not contain (i) any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party, or (ii) any provision creating or permitting the declaration of an event of default, termination event or similar event upon the occurrence of an Event of Default hereunder. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "Other Credit Agreement" means the 364-Day Credit Agreement dated October 31, 2000 among the Company, certain banks, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and the Bank of America, as Administrative Agent. "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Company or any ERISA Affiliate or to which the Company or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years. 15 "Permitted Acquisition" means, at any time of determination, any Acquisition by the Company or any of its Subsidiaries with respect to which each of the following requirements are met: (a) such Acquisition has been approved and recommended by the board of directors or general partner (or similar entity) of the Person to be acquired or which owns the assets of the Person be acquired; (b) in respect of any Acquisition the total purchase price for which equals or exceeds $50,000,000, the Company shall have furnished to the Agent (which shall promptly distribute the same to the Bank), prior to the consummation of such Acquisition, pro forma projections and other details (with reasonable assumptions and in form and detail reasonably satisfactory to the Agent) with respect to the Person or Persons or assets to be acquired and the Company after giving effect to such Acquisition demonstrating compliance with the terms of this Agreement; (c) prior to and after giving effect to such Acquisition, no Default or Event of Default (including without limitation under the provisions of Section 7.10) shall have occurred and be continuing, or would result therefrom, as confirmed in the pro forma projections referred to in clause (b) above if required to be delivered in accordance with such clause or, if not so required, in a certificate of a Responsible Officer delivered to the Agent; (d) the business of the Person or assets to be acquired (including blocks of directly related insurance business in the ordinary course of business) comprises the insurance business (of the types currently carried on by the Company and its respective Subsidiaries on the date hereof), and/or is compatible with, and related to, existing businesses (it being agreed that finance companies are not so related); and (e) the total consideration payable in cash in respect of any one Acquisition constituting a Permitted Acquisition does not exceed $50,000,000 and the total consideration payable in cash in respect of all Acquisitions constituting Permitted Acquisitions in any Fiscal Year does not exceed $75,000,000 in the aggregate; provided, however, that if the Total Debt to Total Capitalization Ratio as of the last fiscal quarter on a pro forma basis shall be equal to or less than 0.300 to 1.0 after giving effect to a proposed Acquisition and the Company shall deliver to the Agent a certificate demonstrating such ratio, an Acquisition may be a Permitted Acquisition without meeting the requirements of clauses (b) or (e) of this definition. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. 16 "Plan" means any employee benefit plan maintained or contributed to by the Company or by any trade or business (whether or not incorporated) under common control with the Company as defined in Section 4001(b) of ERISA and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "Pounds Sterling" means lawful money of the United Kingdom. "Primary Investments" means portfolio investments in the ordinary course of business by the Company or any of its Subsidiaries in any of the following: (a) operating deposit accounts maintained in the Company's name with FDIC member institutions; (b) Cash Equivalents; (c) fixed income securities with an investment grade rating from either Rating Agency; and (d) shares of investment companies that (i) are registered under the Investment Company Act of 1940, (ii) invest solely in one or more of the types without regard to maturity of securities described in clauses (a) through (g) of the definition of "Cash Equivalents" and in securities described in clause (c) of this definition and are not leveraged. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Rating Agency" means S&P or Moody's; collectively, the "Rating Agencies". "Register" means a register maintained by the Agent of the holders of the Commitments. "Regulatory Change" shall mean, with respect to any Bank, any change after the date hereof in Federal, state or foreign law or regulations or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Bank of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reinsurance Agreement" means any agreement, contract, treaty or other arrangement whereby one or more insurers, as reinsurers, assume liabilities of one or more insurance or reinsurance companies. 17 "Replacement Bank" has the meaning specified in Section 3.7. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4062(e) of ERISA. "Required Banks" means at any time Banks then holding in excess of 50% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Banks then having in excess of 50% of the Commitments. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer, the president, the principal financial officer, principal accounting officer, the treasurer or controller of the Company, or any other officer having substantially the same authority and responsibility. "Restricted Payment" means: (a) the declaration or payment of any dividend or distribution by the Company or any of its Subsidiaries, either in cash or property, on any shares of the capital stock of any class of the Company or any of its Subsidiaries (except dividends or other distributions payable solely in shares of capital stock of the Company or any of its Subsidiaries or payable by a Subsidiary to the Company or another wholly-owned Subsidiary of the Company); (b) the purchase, redemption or retirement by the Company or any of its Subsidiaries of any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock, whether directly or indirectly; (c) any other payment or distribution by the Company or any of its Subsidiaries in respect of its capital stock, either directly or indirectly; and (d) the prepayment, repayment, redemption, defeasance or other acquisition or retirement for value prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, of any Indebtedness not otherwise permitted under any Loan Document to be so paid. "Retrocession Agreement" means any agreement, contract, treaty or other arrangement whereby one or more insurers or reinsures, as retrocessionaires, assume 18 liabilities of reinsurers under a Reinsurance Agreement or other retrocessionaires under another Retrocession Agreement. "Revolving Termination Date" means the earlier to occur of: (a) October 30, 2005; and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "SAP" means, as to any insurance company, the statutory accounting practices prescribed or permitted by the Department, or in the event that the Department fails to prescribe or address such practices, NAIC guidelines; provided that if there occurs after the date hereof any change in SAP that affects in any respect the calculation of any covenant contained in Section 7.10, the Banks and the Company shall negotiate in good faith amendments to the provisions of this Agreement that relate to the calculation of such covenant with the intent of having the respective positions of the Banks and the Company after such change in SAP conform as nearly as possible to their respective positions as of the date of this Agreement and, until any such amendments have been agreed upon, the covenants in Section 7.10 shall be calculated as if no such change in SAP has occurred. "S&P" means Standard & Poor's Ratings Group. "Secondary Investments" means Investments by the Company or any of its Subsidiaries in the ordinary course of business not constituting Primary Investments or Acquisitions. "Senior Debt to Statutory EBIT Ratio" means at any fiscal quarter end the ratio of the Senior Debt of the Company and its Subsidiaries on a consolidated basis at such fiscal quarter end to the Statutory EBIT of the Insurance Subsidiaries on a combined basis for the four fiscal quarter period then ending. "Senior Debt" means Total Debt minus Subordinated Debt, on a consolidated basis. "Statutory EBIT" means, net earnings before interest expense and tax expense calculated in accordance with SAP as set forth in column 1, line 29, page 4 in the 1999 Annual Statement. "Subordinated Debt" means the debt on Schedule 1.1 (the "Existing Subordinated Debt") and any portion of Total Debt subordinated to the Obligations with covenants and subordination provisions no less favorable (as reasonably determined by the Administrative Agent) to the Banks than the Existing Subordinated Debt. The 8.80% monthly income debt securities due 2025 shall not be considered "Subordinated Debt" for the purpose of this Agreement. 19 "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the Voting Stock or other Equity Interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. For the purpose of (A) the definitions of "Contingent Obligation" and "Indebtedness" and any calculations using such definitions and (B) Sections 5.2, 5.5, 5.6, 5.9, 5.13, 5.15, 5.16, 6.11 8.1(f), 8.1(g) and 8.1(i), D & H shall not be considered a Subsidiary of the Company. "Swap Contract" means any agreement relating to any transaction that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap or option, bond, note or bill option, interest rate option, forward foreign exchange transaction, cap, collar or floor transaction, currency swap, cross-currency rate swap, swap option, currency option or any other, similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, and, unless the context otherwise clearly requires, any master agreement relating to or governing any or all of the foregoing. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determinated as the mark-to-market value(s) for such Swap Contract, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Bank). "Tangible Net Worth" means, at any time, Net Worth minus intangible assets, including without limitation, goodwill, the value of business acquired and deferred acquisition costs. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Total Capitalization" means, at any time, the sum of Net Worth and Total Debt. "Total Debt" means, at any time, with respect to the Company and its Subsidiaries, the sum, without duplication, of (a) Applicable Debt at such time, and (b) non-contingent reimbursement or payment obligations in respect of the items referred to in clause (c) of the definition of Indebtedness contained in this Agreement at such time. "Total Debt to Total Capitalization Ratio" means, at any time, the ratio of Total Debt to Total Capitalization at such time. 20 "Type" has the meaning specified in the definition of "Loan." "Unfunded Pension Liability" means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. "Voting Stock" means, at any date, the capital stock of any class or classes of a corporation having general voting power under ordinary circumstances to elect the board of directors of such corporation (irrespective of whether or not at the time stock or other securities of any other class or classes shall have or might have special voting power or rights by reason of the happening of any contingency). "Wholly-Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one or more of the other Wholly-Owned Subsidiaries, or both. 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, 21 and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 1.3 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. ARTICLE II THE CREDITS 2.1 Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to make Loans to the Company from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth on Schedule 2.1 (as the same may be reduced under Section 2.5, increased under Section 2.14, or reduced or increased as a result of one or more assignments under Section 10.7, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing, the aggregate principal amount of all outstanding Loans shall not at any time exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.1, prepay under Section 2.6 and reborrow under this Section 2.1. 2.2 Loan Accounts. (a) The Loans made by each Bank shall be evidenced by one or more loan accounts or records maintained by such Bank in the ordinary course of business. The loan accounts or records maintained by the Agent and each Bank shall be conclusive absent manifest 22 error of the amount of the Loans made by the Banks to the Company and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. (b) Upon the request of any Bank made through the Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.3 Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to (i) 10:00 a.m. (Charlotte time) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans; and (ii) prior to 10:00 a.m. one Business Day in advance of the requested Borrowing Date, in the case of Base Rate Loans, specifying: (A) the amount of the Borrowing, which shall be in an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; and (D) the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be three months. (b) The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office by 11:00 a.m. (Charlotte time) on the Borrowing Date requested by the Company in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of Bank of America with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. 23 (d) After giving effect to any Borrowing, there may not be more than five (5) different Interest Periods in effect. 2.4 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with Section 2.4(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans, to convert any such Loans (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Loans of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $5,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans, shall terminate. (b) The Company shall deliver a Notice of Conversion/ Continuation to be received by the Agent not later than (i) 10:00 a.m. (Charlotte time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans; and (ii) one Business Day in advance of the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or renewed; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of Offshore Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans, the Company has failed to select timely a new Interest Period to be applicable to such or Offshore Rate Loans or if any Default or Event of Default then exists, the Company shall 24 be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Required Banks otherwise agree, during the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Loan. (f) After giving effect to any conversion or continuation of Loans, there may not be more than five (5) different Interest Periods in effect. 2.5 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than three Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of the Loans would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.6 Optional Prepayments. Subject to Section 3.4, the Company may, at any time or from time to time, upon not less than three (3) Business Days' irrevocable notice to the Agent, ratably prepay Loans in whole or in part, in minimum amounts of $5,000,000 or any multiple of $1,000,000 in excess thereof. Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.4. 2.7 Repayment. The Company shall repay the Loans on the Revolving Termination Date. 2.8 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to (i) the Offshore Rate plus the Applicable Amount or (ii) the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.4). 25 (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.6 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Required Banks. (c) Notwithstanding subsection (a) of this Section, while any Event of Default exists or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Loans, at a rate per annum which is determined by adding 2% per annum to the rate otherwise applicable to such Loans; provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus 2%. (d) Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.9 Fees. (a) Arrangement, Agency Fees. The Company shall pay fees to the Arranger for the Arranger's own account and to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company and the Arranger and Agent dated August 31, 2000. (b) Facility Fees. The Company shall pay to the Agent for the account of each Bank a facility fee on the average amount of such Bank's Commitment (irrespective of usage), computed on a quarterly basis in arrears on the last Business Day of each calendar quarter, equal to the Applicable Amount per annum. Such facility fee shall accrue from the date hereof to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December commencing on December 31, 2000 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.5, the accrued facility fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The facility fees provided in this subsection shall accrue at all times after the above-mentioned 26 commencement date, including at any time during which one or more conditions in Article IV are not met. (c) Utilization Fees. The Company shall pay to the Agent for the account of each Bank a utilization fee on the amount of such Bank's Loans, during any period in which the aggregate outstanding Loans plus the outstanding "Loans" under the Other Credit Agreement exceed 50% of the aggregate amount of the Commitments plus the "Commitments" under the Other Credit Agreement, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent, equal to the Applicable Amount per annum. Such utilization fee shall accrue from the date hereof to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December commencing on December 31, 2000 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date. The utilization fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at anytime during which one or more conditions in Article IV are not met. 2.10 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans when the Base Rate is determined by Bank of America's "prime rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.11 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 10:00 a.m. (Charlotte time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 10:00 a.m. (Charlotte time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. 27 (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. 2.12 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 2.13 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that 28 extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.9) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. 2.14 Increase of Commitments. The Company may from time to time, by notice to the Agent, request that the aggregate Commitments be increased by an amount that will not result in the aggregate Commitments under this Agreement plus the "Commitments" under the Other Credit Agreement to exceed $1,000,000,000. Each such notice shall set forth the requested amount of the increase in the Commitments and the date on which such increase is to become effective. The Company shall have the right, but not the obligation, to arrange for one or more commercial banks or other financial institutions (any such bank or other financial institution being called an "Augmenting Bank"), which may include any Bank, to extend Commitments or increase their existing Commitments in an aggregate amount up to, but not greater than, the requested increase, provided that each Augmenting Bank, if not already a Bank hereunder (i) shall extend a new Commitment of not less than $10,000,000, (ii) shall execute all such documentation as the Agent shall specify to evidence its status as a Bank hereunder and (iii) shall be consented to by the Agent. If (and only if) Banks (including Augmenting Banks) shall have agreed to increase their aggregate Commitments or to extend new Commitments in an aggregate amount not less than $10,000,000 in the aggregate, such increases and such new Commitments shall become effective on the date agreed to by the Company, the Augmenting Banks and the Agent. Notwithstanding the foregoing, no increase in the aggregate Commitments (or in the Commitment of any Bank) shall become effective under this paragraph unless, on the date of such increase, the conditions set forth in Section 4.2 shall be satisfied (with all references in such paragraphs to a Loan being deemed to be references to such increase) and the Agent shall have received a certificate to that effect dated such date and executed by a Responsible Officer of the Company. Upon the effectiveness of any increase pursuant to this Section 2.14 of the aggregate Commitments and any resulting adjustment in the Pro Rata Share, the Banks and the Augmenting Banks will purchase from each other and sell to each other outstanding Loans sufficient to cause the outstanding Loans of each Bank and Augmenting Bank to equal its Pro Rata Share (as so adjusted) of the aggregate outstanding Loans. Such purchase and sale shall be made pursuant to Section 10.7 except that no minimum amount shall be required, no processing fee shall be charged and, if any Bank shall suffer a loss or incur an expense as a result of the effectiveness of such purchase or sale being during an Interest Period, the Company shall reimburse such Bank the amount of such loss or expense. Each such Bank shall furnish the Company with a certificate setting forth the basis for determining the amount to be paid to it hereunder. 29 ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 3.1 Taxes. (a) Any and all payments by the Company to or for the account of Agent or any Bank under any Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of Agent and any Bank, taxes imposed on or measured by its net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which Agent or such Bank, as the case may be, is organized or maintains a lending office (all such non-excluded taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as "Taxes"). If the Company shall be required by any Laws to deduct any Taxes from or in respect of any sum payable under any Loan Document to Agent or any Bank, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), Agent and such Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions, (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Laws, and (iv) within 30 days after the date of such payment, the Company shall furnish to Agent (who shall forward the same to such Bank) the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Company agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Loan Document (hereinafter referred to as "Other Taxes"). (c) If the Company shall be required by the Laws of any jurisdiction outside the United States to deduct any Taxes from or in respect of any sum payable under any Loan Document to Agent or any Bank, the Company shall also pay to such Bank or Agent (for the account of such Bank), at the time interest is paid, such additional amount that the respective Bank specifies as necessary to preserve the after-tax yield (after factoring in United States (federal and state) taxes imposed on or measured by net income) such Bank would have received if such deductions (including deductions applicable to additional sums payable under this Section) had not been made. 30 (d) The Company agrees to indemnify Agent and each Bank for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by Agent and such Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. 3.2 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans, then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 3.4, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Company shall borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. (c) If the obligation of any Bank to make or maintain Offshore Rate Loans has been so terminated or suspended, the Company may elect, by giving notice to the Bank through the Agent that all Loans which would otherwise be made by the Bank as Offshore Rate Loans shall be instead Base Rate Loans. (d) Before giving any notice to the Agent under this Section, the affected Bank shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 3.3 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate) in or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. 31 (b) Without limiting the effect of the foregoing provisions of this Section 3.3 (but without duplication), the Company shall pay directly to each Bank from time to time on request such amounts as such Bank may determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it determines are attributable to the maintenance by such Bank (or any applicable lending office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) heretofore or hereafter issued by any government or governmental or supervisory authority implementing at the national or supra-national level the Basle Accord (including, without limitation, the Final Risk-Based Capital Guidelines of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix A; 12 C.F.R. Park 225, Appendix A) and the Final Risk-based Capital Guidelines of the Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix A)), of capital in respect of its Commitment or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any applicable lending office or such bank holding company) to a level below that which such Bank (or any applicable lending office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). 3.4 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/ Continuation; (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.6; (d) the prepayment (including pursuant to Section 2.7) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.4 of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; 32 including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Company to the Banks under this Section and under Section 3.3(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the Offshore Base Rate used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 3.5 Inability to Determine Rates. If the Agent determines that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate Loan applicable pursuant to Section 2.8(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to any Bank of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. 3.6 Certificates of Banks. Any Bank claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. 3.7 Substitution of Banks. Upon the receipt by the Company from any Bank (an "Affected Bank") of a claim for compensation under Section 3.3, the Company may: (i) request the Affected Bank to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Company to acquire and assume all or a ratable part of all of such Affected Bank's Loans and Commitment (a "Replacement Bank"); (ii) request one more of the other Banks to acquire and assume all or part of such Affected Bank's Loans and Commitment; or (iii) designate a Replacement Bank. Any such designation of a Replacement Bank under clause (i) or (iii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld); provided, in any case, that all amounts due under this Agreement to any such Affected Bank shall be paid in full by the Replacement Bank in respect of outstanding principal and by the Company in respect of other amounts on or prior to the substitution therefor of any Replacement Bank. 3.8 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. 33 ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions of Initial Loans. The obligation of each Bank to make its initial Loan hereunder is subject to the condition that the Agent shall have received on or before the initial borrowing date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement and Notes. This Agreement and the Notes executed by each party thereto; (b) Resolutions; Incumbency. (i) Copies of the resolutions of the board of directors of the Company authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Company; and (ii) A certificate of the Secretary or Assistant Secretary of the Company, certifying the names and true signatures of the officers of the Company authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder; (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws of the Company as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Company as of the Closing Date; and (ii) a good standing certificate for the Company from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation; (d) Legal Opinion. An opinion of F. Dean Copeland, Executive Vice President and General Counsel to the Company and addressed to the Agent and the Banks, substantially in the form of Exhibit D. (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees (including up-front fees), costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of Bank of America to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute Bank of America's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and Bank of America); 34 including any such costs, fees and expenses arising under or referenced in Sections 2.9 and 10.4; (f) Certificate. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article V are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Borrowing; (iii) there has occurred since June 30, 2000, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; and (iv) the Credit Agreement dated as of October 29, 1996 among Unum Corporation, certain banks and Morgan Guaranty Trust Company of New York has been repaid in full and notice of termination delivered. (g) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may request. 4.2 Conditions to All Borrowings. The obligation of each Bank to make any Loan to be made by it (including its initial Loan) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date: (a) Notice of Borrowing. The Agent shall have received (with, in the case of the initial Loan only, a copy for each Bank) a Notice of Borrowing; (b) Continuation of Representations and Warranties. The representations and warranties in Article V shall be true and correct on and as of such Borrowing Date with the same effect as if made on and as of such Borrowing Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing. Each Notice of Borrowing submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the date of each such notice and as of each Borrowing Date, that the conditions in Section 4.2 are satisfied. 35 ARTICLE V REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Bank that: 5.1 Corporate Existence and Power. The Company and each of its Subsidiaries: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified as a foreign corporation and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except, in each case referred to in this Section 5.1, to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.2 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and each other Loan Document to which the Company is party, have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of the Company's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which the Company is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or its property is subject; or (c) violate any Requirement of Law. 5.3 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company of the Agreement or any other Loan Document. 36 5.4 Binding Effect. This Agreement and each other Loan Document to which the Company is a party constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by the application of equitable principles relating to enforceability (regardless of whether considered in a proceeding in equity or at law) including, without limitation (i) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (ii) concepts of materiality, reasonableness, good faith and fair dealing. 5.5 Litigation. Except as in Schedule 5.5, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Company, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) if adversely determined, could reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 5.6 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Company. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under Section 8.1(e). 5.7 ERISA Compliance. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state Laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of the Company, nothing has occurred which would prevent, or cause the loss of, such qualification. The Company and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. 37 (b) There are no pending or, to the best knowledge of the Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that has a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. 5.8 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 6.12. Neither the Company nor any Subsidiary is generally engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No part of the proceeds of any Loan will be used for purchasing or carrying Margin Stock or for any purpose which violates, or which would be inconsistent with, the provisions of Regulations U or X of the FRB. 5.9 Title to Properties. (a) Each of the Company and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, subject only to Liens permitted by Section 7.2 and except for minor defects in title that could not reasonably be expected to have a Material Adverse Effect. (b) Each of the Company and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Company and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 5.10 Taxes. The Company and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP or immaterial taxes; provided, however, that in each case no material item or portion of property of the Company or any of its Subsidiaries is in jeopardy of being seized, levied upon or forfeited. 38 5.11 Financial Condition. (a) The audited consolidated financial statements of the Company and its Subsidiaries dated December 31, 1999 and the unaudited consolidated financial statements of the Company and its Subsidiaries dated June 30, 2000, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal periods ended on such dates: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, subject in the case of the June 30, 2000 statements to ordinary, good faith year end audit adjustments; (ii) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Company and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Contingent Obligations. (b) The financial statements of the Material Insurance Subsidiaries of the Company, dated December 31, 1999 and June 30, 2000: (i) were prepared in accordance with SAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (ii) fairly present in all material respects in accordance with SAP the financial condition of the Insurance Subsidiaries as of the date thereof and results of operations for the period covered thereby. (c) Since December 31, 1999, there has been no Material Adverse Effect. 5.12 Regulated Entities. Except as listed on Schedule 5.12 hereto, none of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 5.13 No Burdensome Restrictions. Neither the Company nor any Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 39 5.14 Subsidiaries. As of the Closing Date, the Company has no Subsidiaries other than those specifically disclosed in Schedule 5.14 hereto. 5.15 Environmental Compliance. The Company and its Subsidiaries conduct in the ordinary course of business a review of claims alleging potential liability or responsibility for violation of any Environmental Law on their respective businesses, operations and properties, and as a result thereof the Company has reasonably concluded that such Environmental Laws and claims do not, individually or in the aggregate, have a Material Adverse Effect. 5.16 Insurance. The properties of the Company and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or such Subsidiary operates. 5.17 Full Disclosure. None of the representations or warranties made by the Company or any Subsidiary in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company or any Subsidiary in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of the Company to the Banks prior to the Closing Date), contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Banks waive compliance in writing: 6.1 Financial Statements. The Company shall deliver to each of the Banks: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, audited and accompanied by a report and opinion of an independent certified public accountant of nationally recognized standing, which report and opinion shall be prepared in accordance with GAAP and shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualification which is of a "going concern" or similar nature; and 40 (b) as soon as available, but in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal quarter, and the related consolidated statement of income and cash flows for such fiscal quarter and for the portion of the Company's fiscal year then ended, setting forth in each case in comparative form the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year then ended, all in reasonable detail and certified by the principal financial officer or principal accounting officer of the Company as fairly presenting the financial condition, results of operations and cash flows of the Company and its Subsidiaries in accordance with GAAP, subject only to normal year-end adjustments and the absence of footnotes; (c) as soon as available, but not later than 60 days after the end of each fiscal year, a copy of the Annual Statement of each Material Insurance Subsidiary for such fiscal year prepared in accordance with SAP and accompanied by the certification of the principal financial officer or principal accounting officer of such Material Insurance Subsidiary that such Annual Statement presents fairly in accordance with SAP the financial position of such Material Insurance Subsidiary for the period then ended; (d) as soon as possible, but no later than 45 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the Interim Statement of each Material Insurance Subsidiary for each such fiscal quarter, all prepared in accordance with SAP and accompanied by the certification of the principal financial officer or principal accounting officer of such Insurance Subsidiary that all such quarterly statements present fairly in accordance with SAP the financial position of such Insurance Subsidiary for the period then ended; (e) within 75 days after the close of each fiscal year, a copy of each Material Insurance Subsidiary's "Statement of Actuarial Opinion" which is provided to the Department (or equivalent information should the Department no longer require such a statement) as to the adequacy of loss reserves of such Material Insurance Subsidiary, which opinion shall be in the format prescribed by the Insurance Code; and (f) as soon as available, a copy of the Management Discussion and Analysis filed with the Department with respect to any of the foregoing financial statements and such other information. 6.2 Certificates, Notices and Other Information. The Company shall deliver to each of the Banks in form and detail reasonably satisfactory to the Agent: (a) concurrently with the delivery of the financial statements referred to in Section 6.1(a), a certificate of its independent certified public accountants certifying such financial statement and stating that in making the examination necessary therefor no 41 knowledge was obtained of any Default or Event of Default hereunder or, if any such Default or Event of Default shall exist, stating the nature and status of such event; (b) concurrently with the delivery of the financial statements referred to in Sections 6.1(a) and (b), a duly completed Compliance Certificate signed by a Responsible Officer of the Company; (c) promptly after request by Agent or any Bank, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors (or the audit committee of the board of directors) of the Company by independent accountants in connection with the accounts or books of the Company or any of its Material Subsidiaries, or any audit of any of them; (d) promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Company, and copies of all annual, regular, periodic and special reports and registration statements which the Company may file or be required to file with the Securities and Exchange Commission under Sections 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to Agent pursuant hereto; (e) promptly after the occurrence thereof, notice of any Default or Event of Default; (f) notice of any material change in accounting policies or financial reporting practices by the Company or any of its Subsidiaries; (g) promptly after the commencement thereof, notice of any litigation, investigation or proceeding affecting the Company any of its Subsidiaries which may reasonably be expected to have a Material Adverse Effect; (h) promptly after the occurrence thereof, notice of any Reportable Event with respect to any Plan or the intent to terminate any Plan, or the institution of proceedings or the taking or expected taking of any other action to terminate any Plan or withdraw from any Plan; (i) promptly after the occurrence thereof, notice of any Material Adverse Effect; (j) promptly, notice of any announcement by any rating agency of any change or possible change in the Debt Rating by either Rating Agency or in the "financial strength" rating by either Rating Agency of any Material Insurance Subsidiary; (k) the following certificates and other information: 42 (i) not later than 60 days after received, a copy of any final financial examination reports or market conduct examination reports issued by a Governmental Authority with respect to any Material Insurance Subsidiary of the Company (and the Company, should it at any time engage or become involved in the business of insurance), relating to the insurance business of each Material Insurance Subsidiary or, if applicable, the Company (when, and if, prepared) and of any and all interim reports;provided that such Material Insurance Subsidiary or, if applicable, the Company shall not have to deliver any interim report hereunder if (A) the items described in such report could not reasonably have a Material Adverse Effect or (B) a final report is issued and delivered to the Agent within 90 days of such interim report; (ii) within two Business Days of the receipt of such notice, notice of the actual suspension, termination or revocation of any material license of the Company or any of its Material Subsidiaries by any Governmental Authority or notice from any Governmental Authority notifying the Company or any of its Material Subsidiaries of a hearing relating to such a suspension, termination or revocation, including any request by a Governmental Authority which commits the Company or any of its Material Subsidiaries to take, or refrain from taking, any action or which otherwise materially and adversely affects the authority of the Company or any of its Material Subsidiaries to conduct its business; (iii) within two Business Days of the receipt of such notice, notice of any material pending or threatened investigation or regulatory proceeding (other than routine periodic investigations or reviews or routine market conduct reviews) by any Governmental Authority concerning the business practices or operations of the Company or any of its Material Subsidiaries; and (iv) promptly upon the receipt of such notice, notice of any actual material changes in the Insurance Code governing the investment or dividend practices of insurance companies domiciled in any of the states in which any Insurance Subsidiary is domiciled; (l) promptly upon occurrence, notice of (i) the acquisition by the Company or any of its Subsidiaries of any Person which engages in any material respect in an insurance business or (ii) any Subsidiary of the Company or any of its Subsidiaries becoming engaged in any material respect in an insurance business; and (m) promptly, such other data and information as from time to time may be reasonably requested by Agent, or, through Agent by the Required Banks. 6.3 Payment of Taxes. The Company shall, and shall cause each of its Subsidiaries to, pay and discharge when due all taxes, assessments, and governmental charges, Ordinary Course Liens or levies imposed on any Company or any 43 of its Subsidiaries or on its income or profits or any of its property, except for any such tax, assessment, charge, or levy which is an Ordinary Course Lien under subsection (b) of the definition of such term. 6.4 Preservation of Existence. The Company shall, and shall cause each of its Subsidiaries to, preserve and maintain its existence, licenses, permits, rights, franchises and privileges necessary or desirable in the normal conduct of its business, except where failure to do so does not have a Material Adverse Effect and except as permitted under Section 7.3. 6.5 Maintenance of Properties. The Company shall, and shall cause each of its Subsidiaries to, maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good order and condition, subject to wear and tear in the ordinary course of business, and not permit any waste of its properties and, except where failure to do so does not have a Material Adverse Effect. 6.6 Maintenance of Insurance. The Company shall, and shall cause each of its Subsidiaries to, maintain liability and casualty insurance with responsible insurance companies in such amounts and against such risks as is customary for similarly situated businesses; provided, that the Company may in its reasonable discretion, choose not to have certain Subsidiaries, other than Material Subsidiaries, carry certain insurance, so long as the failure to carry such insurance does not have a Material Adverse Effect. 6.7 Compliance With Laws. (a) The Company shall, and shall cause each of its Subsidiaries to, comply with the requirements of all applicable Laws and orders of any Governmental Authority, noncompliance with which has a Material Adverse Effect. (b) The Company shall, and shall cause each of its Subsidiaries to, conduct its operations and keep and maintain its property in compliance with all Environmental Laws. 6.8 Inspection Rights. At any time during regular business hours and as often as reasonably requested, the Company shall, and shall cause each of its Subsidiaries to, permit the Agent or any Bank, or any employee, agent or representative thereof, to examine, audit and make copies and abstracts from the records and books of account of the Company and its Subsidiaries and to visit and inspect their properties and to discuss their affairs, finances and accounts with any of their officers and key employees, and, upon request, furnish promptly to Agent or any Bank true copies of all financial information, provided that, when a Default or Event of Default exists, the Agent or any Bank may do any of the foregoing at the expense of the Company at any time during normal business hours and without advance notice. 6.9 Keeping of Records and Books of Account. The Company shall, and shall cause each of its Subsidiaries to, keep adequate records and books of account reflecting all financial transactions in conformity with GAAP, consistently applied, and in material conformity with all applicable requirements of any Governmental Authority having regulatory jurisdiction over the Company or any of its Subsidiaries. 44 6.10 Compliance with ERISA. The Company shall and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 6.11 Compliance With Agreements. The Company shall, and shall cause each of its Subsidiaries to, promptly and fully comply with all Contractual Obligations to which any one or more of them is a party, except for any such Contractual Obligations (a) the nonperformance of which would not cause a Default or Event of Default, (b) then being contested by any of them in good faith by appropriate proceedings, or (c) if the failure to comply therewith does not have a Material Adverse Effect. 6.12 Use of Proceeds. The Company shall use proceeds of the Loans for general corporate purposes, including commercial paper back up, not otherwise in contravention of this Agreement. ARTICLE VII NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Banks waive compliance in writing: 7.1 Indebtedness. The Company shall not, and shall not permit any Subsidiary to, create, incur, assume or suffer to exist any Indebtedness, except: (a) Commercial paper, Obligations and "Obligations" under the Other Credit Agreement aggregating an amount not in excess of $1,000,000,000 at any time outstanding; and (b) Indebtedness outstanding on the date hereof and listed on Schedule 7.1 and any refinancings, refundings, renewals or extensions thereof, provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to the premium or other amount paid, and fees and expenses incurred, in connection with such refinancing and by an amount equal to any utilized commitments thereunder; and provided, further, that the terms of such refinancing, renewal or refunding shall have covenants, defaults or other terms and conditions (other than interest rates) no more restrictive than those contained in this Agreement and, if the Indebtedness being refinanced is Subordinated Debt, the refinancing Indebtedness shall be Subordinated Debt with subordination terms at least as favorable to the Banks as such terms in the refinanced Indebtedness; and (c) Ordinary Course Indebtedness; and 45 (d) Indebtedness in respect of repurchase obligations (including securities lending and dollar rolls) described in clause(g) of the definition of "Cash Equivalents" in amounts not in excess of $500,000,000 at any time outstanding; and (e) Contingent Obligations of the Company with respect to letters of credit in an amount not in excess of 33,300,000 Pounds Sterling with respect to which D & H is the account party; and (f) Additional Contingent Obligations in amounts not in excess of $50,000,000 at any time outstanding; provided, that notwithstanding the foregoing the Subsidiaries shall have no Indebtedness except Indebtedness described in clauses (c) and (d), Indebtedness payable to the Company and other Wholly-Owned Subsidiaries and other Indebtedness not to exceed $5,000,000 at any time outstanding; and provided, further, that no Subsidiary shall have any Contingent Obligations in respect of Indebtedness of the Company. 7.2 Liens and Negative Pledges. The Company shall not, and shall not permit any Subsidiary to, incur, assume or suffer to exist, any Lien or Negative Pledge upon any of its property, assets or revenues, whether now owned or hereafter acquired, except: (a) Liens and Negative Pledges existing on the date hereof and listed on Schedule 7.2 and any renewals or extensions thereof, provided that the property covered thereby is not increased and any renewal or extension of the obligations secured or benefitted thereby is permitted by Section 7.1(a); (b) Ordinary Course Liens; (c) Liens consisting of pledges or deposits of cash or securities made by any Insurance Subsidiary as a condition to obtaining or maintaining any licenses issued to it by, or to satisfy the requirements of, any Department; (d) Liens consisting of judgment or judicial attachment Liens (other than arising as a result of claims under or related to Insurance Contracts, Retrocession Agreements or Reinsurance Agreements); provided that the enforcement of such Liens is effectively stayed or fully covered by insurance and all such liens in the aggregate at any time outstanding for the Company and its Subsidiaries do not exceed $35,000,000; (e) Liens arising as a result of claims under or related to Insurance Contracts, Reinsurance Agreements or Retrocession Agreements in the ordinary course of business, or securing Indebtedness of Insurance Subsidiaries incurred or assumed in connection with the settlement of claim losses in the ordinary course of business of such Insurance Subsidiaries; 46 (f) Liens securing Ordinary Course Swap Obligations with Swap Termination Values not at any time exceeding $200,000,000 in the aggregate; (g) Liens on securities securing repurchase agreements (including securities lending and dollar rolls) with a term of not more than 6 months and an aggregate purchase price not in excess of $500,000,000; (h) any extension, renewal or replacement of the foregoing; provided that the Liens permitted hereby shall not be spread to cover any additional Indebtedness or property (other than a substitution of like property); and (i) Additional Liens on property having a value not in excess of $50,000,000 and securing Indebtedness not in excess of $50,000,000. Notwithstanding the foregoing, no Liens shall be permitted on the Equity Interests of any Subsidiary. 7.3 Consolidations and Mergers; Sales of Assets. The Company shall not, and shall not allow any of its Subsidiaries to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or any part of its assets (including receivables and Equity Interests, and in all cases whether now owned or hereafter acquired) to or in favor of any Person, except: (a) any Subsidiary may merge with the Company (provided that the Company shall be the continuing or surviving Person), or with any one or more Subsidiaries (provided that, if a Wholly-Owned Subsidiary is a party to said merger, a Wholly-Owned Subsidiary shall be the continuing or surviving Person and if neither Subsidiary party to said merger is a Wholly-Owned Subsidiary, the Subsidiary of which the Company owns directly or indirectly the highest percentage shall be the continuing or surviving Person); (b) any Subsidiary may sell all or any part of its assets (upon voluntary liquidation or otherwise) to the Company or another Subsidiary that is a direct or indirect Wholly-Owned Subsidiary; (c) the Company or any Subsidiary may sell, lease, convey or otherwise dispose of assets if such sale, lease, conveyance or other disposition is (i) of portfolio Investments in the ordinary course of its business at fair market value, (ii) of obsolete, worn-out or surplus property, and (iii) a sale of property to the extent such property is exchanged for credit against the purchase price of similar replacement property or the net proceeds thereof are applied to the purchase of such replacement property within 180 days or the Commitments shall be reduced within 180 days by the amount of such net proceeds and any outstanding Loans in excess of such reduced Commitments shall be simultaneously repaid. 47 (d) the Company or any Subsidiary may merge with another Person, if the Company or such Subsidiary shall be the surviving Person, to accomplish a Permitted Acquisition; (e) the Company or any Insurance Subsidiary may enter into Reinsurance Agreements in the ordinary course of business, so long as the net proceeds of any Reinsurance Agreements are reinvested in the business of the Company and its Subsidiaries within 180 days; (f) Subsidiaries, other than Material Subsidiaries, may be dissolved or liquidated; and (g) other sales of assets at fair market value the proceeds of which shall not exceed $50,000,000 in any fiscal year so long as the net proceeds of such sale are reinvested in the business of the Company and its Subsidiaries within 180 days or the Commitments shall be reduced within 180 days by the amount of such net proceeds and any outstanding Loans in excess of such reduced Commitments shall be simultaneously repaid. 7.4 Loans, Acquisitions and Investments. The Company shall not purchase or acquire, and shall not allow any of its Subsidiaries to purchase or acquire, or make any commitment to purchase or acquire, any Equity Interest in, any Person, or make or commit to make any Acquisitions, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in any Person including any Affiliate of the Company (together, "Investments"), except for: (a) Investments held by the Company or any of its Subsidiaries in the form of (i) Primary Investments and (ii) so long as no Default or Event of Default has occurred and is continuing at the time of the making of such Investment, and after giving effect thereto, Secondary Investments; provided that, (A) such Investments comply with all Legal Requirements, and (B) the aggregate amount of Secondary Investments shall not exceed 30% of the aggregate amount of the Company's aggregate Investments (with all valuations for purposes of compliance with this clause (ii) being on a cost basis); (b) extensions of credit and capital contributions by the Company to any of its Wholly-Owned Subsidiaries existing on the date hereof or to new Wholly-Owned Subsidiaries created after the date hereof in accordance with this Agreement or by any of its Wholly-Owned Subsidiaries to another of its Wholly-Owned Subsidiaries existing on the date hereof or to new Wholly-Owned Subsidiaries created after the date hereof in accordance with this Agreement; provided that additional investments, capital contributions or extensions of credit made after the date hereof in D&H shall not exceed $50,000,000 and shall be applied to increase reserves at D&H; (c) extensions of credit in the nature of accounts receivable, notes receivable, lease obligations and similar obligations arising in the ordinary course of business; 48 (d) Investments constituting Permitted Acquisitions; and (e) Investments consisting of non-cash proceeds from dispositions permitted under Section 7.3. 7.5 Restricted Payments. (a) The Company shall not, and shall not permit any Subsidiary to, make any Restricted Payments, if before or after giving effect to any such Restricted Payment a Default or Event of Default shall have occurred and be continuing. (b) No payments shall be made on the principal of the $300,000,000 Junior Subordinated Deferrable Interest Debentures, Series A due 2038 (the "Junior Subordinated Deferrable Interest Debentures") or on the Company's guaranty of the $300,000,000 Provident Financing Trust I Capital Securities due 2038 except from proceeds of Indebtedness issued concurrently with said payments, subordinated to the Obligations in a form at least as favorable to the Banks as the Junior Subordinated Deferrable Interest Debentures and with a term no shorter than the terms of the Junior Subordinated Deferrable Interest Debentures and a lower cost to the Company. 7.6 ERISA. The Company shall not, and shall not permit any Subsidiary to, at any time engage in a transaction which could be subject to Sections 4069 or 4212(c) of ERISA, or permit any Pension Plan to (a) engage in any non-exempt "prohibited transaction" (as defined in Section 4975 of the Code); (b) fail to comply with ERISA or any other applicable Laws; or (c) incur any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), which, with respect to each event listed above, has a Material Adverse Effect. 7.7 Change in Nature of Business. The Company shall not, and shall not permit any Subsidiary to, make any change in the nature of the business of the Company and its Subsidiaries taken as a whole as conducted and as proposed to be conducted as of the date hereof. 7.8 Transactions with Affiliates. The Company shall not, and shall not allow any of its Subsidiaries to, enter into any transaction with any Affiliate of the Company, except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary; 7.9 Hostile Acquisitions. The Company shall not use the proceeds of any Loan in connection with the acquisition of a voting interest of five percent or more in any Person if such acquisition is opposed by the board of directors or management of such Person. 7.10 Financial Covenants. (a) The Company shall not permit its Tangible Net Worth at any time to be less than (i) $1,325,000,000 plus (ii) 25% of consolidated Net Income (in excess of zero) for any fiscal quarter ending on or after September 30, 2000. 49 (b) The Company shall not permit its Total Debt to Total Capitalization Ratio at any time to be greater than 0.35 to 1.0. (c) The Company shall not permit its Senior Debt to Statutory EBIT Ratio to be greater than: 6.0 to 1.0 at any fiscal quarter end from March 31, 2001 through December 31, 2001 4.75 to 1.0 at any fiscal quarter end from March 31, 2002 through December 31, 2002 4.25 to 1.0 at any fiscal quarter end from March 31, 2003 through December 31, 2003 4.0 to 1.0 at fiscal quarter end thereafter ARTICLE VIII EVENTS OF DEFAULT 8.1 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within three days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by the Company made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The Company fails to perform or observe any term, covenant or agreement contained in Sections 6.1 or 6.2 or in Article VII; or (d) Other Defaults. The Company fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall 50 continue unremedied for a period of 30 days after the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Default. The Company or any Subsidiary (i) fails to make any payment in respect of any Indebtedness having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or any Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (f) Insolvency; Voluntary Proceedings. The Company or any Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Company under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the $10,000,000; (ii) the aggregate amount of 51 Unfunded Pension Liability among all Pension Plans at any time exceeds the $10,000,000; or (iii) the Company or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the $10,000,000; or (i) Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $10,000,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 30 days after the entry thereof; or (j) Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against the Company or any Subsidiary which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (k) Change of Control. There occurs any Change of Control. 8.2 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Required Banks, (a) declare the Commitment of each Bank to make Loans to be terminated, whereupon such Commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. 52 8.3 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE IX THE AGENT 9.1 Appointment and Authorization. Each Bank hereby irrevocably (subject to Section 9.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 9.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 9.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, 53 facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. 9.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Banks in accordance with Article VIII; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 9.6 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, 54 financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 9.7 Indemnification. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities to the extent resulting from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 9.8 Agent in Individual Capacity. Bank of America and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though Bank of America were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, Bank of America shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include Bank of America in its individual capacity. 9.9 Successor Agent. The Agent may, and at the request of the Required Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Required Banks shall appoint from among the Banks a successor agent for the Banks. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX and Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the 55 Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Banks appoint a successor agent as provided for above. 9.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-BEN before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form W-8ECI before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; (iii) if such Bank is a foreign partnership or other intermediary and its partners claim an exemption from, or a reduction of, withholding tax under a United States tax treaty or if its partners claim that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with the conduct with a United States trade or business, two properly completed and executed copies of IRS Form W-8IMY on or before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; and (iv) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent 56 of such percentage amount, the Agent will treat such Bank's IRS Form W-8BEN as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form W-8ECI with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any bank is a foreign partnership or other intermediary and its partners claim exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN or its partners claim exemption from United States withholding tax by filing IRS Form W-8ECI, and any of its partners sell, assign, grant a participation in, or otherwise transfer all or part of the Obligations to such Bank, such Bank agrees to notify the Agent of the percentage amount in which the partner is no longer the beneficial owner of Obligations to such Bank. To the extent of such percentage amount, the Administrative Agent will treat such partner's IRS Form W-8BEN or W-8ECI as no longer valid. (e) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (f) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered, was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. 9.11 Documentation Agent; Syndication Agent. None of the Banks identified on the facing page or signature pages of this Agreement as a "Documentation Agent" or "Syndication Agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Banks so identified as a "Documentation Agent" or "Syndication Agent" shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will 57 not rely, on any of the Banks so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE X MISCELLANEOUS 10.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Required Banks (or by the Agent at the written request of the Required Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 8.2); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document, it being understood that a mandatory prepayment date shall not be deemed a date fixed for payment; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section, or Section 2.13, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letters may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 10.2 Notices. (a) All notices, requests and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that 58 any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.2, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.2; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or IX shall not be effective until actually received by the Agent. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any Person identifying himself or herself as a Person who has been identified by the Company to the Agent as a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.4 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse Bank of America (including in its capacity as Agent) within five Business Days after demand (subject to Section 4.1(e)) for all costs and expenses incurred by Bank of America (including in its capacity as Agent) in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable 59 Attorney Costs incurred by Bank of America (including in its capacity as Agent) with respect thereto; and (b) pay or reimburse the Agent, the Arranger and each Bank within five Business Days after demand (subject to Section 4.1(e)) for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). 10.5 Indemnity. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Indemnified Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Indemnified Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. 10.6 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 10.7 Binding Effect; Assignment. 60 (a) This Agreement and the other Loan Documents to which the Company is a party will be binding upon and inure to the benefit of the Company, the Agent, the Banks and their respective successors and assigns, except that, the Company may not assign its rights hereunder or thereunder or any interest herein or therein without the prior written consent of all the Banks and any such attempted assignment shall be void. Any Bank may at any time pledge its Note or any other instrument evidencing its rights as a Bank under this Agreement to a Federal Reserve Bank (without the consent of, or notice to the Agent or the Company), but no such pledge shall release that Bank from its obligations hereunder or grant to such Federal Reserve Bank the rights of a Bank hereunder absent foreclosure of such pledge. (b) From time to time following the Closing Date, each Bank may assign to one or more Eligible Assignees all or any portion of its Pro Rata Share of its Commitment and/or Loans; provided that (i) such assignment, if not to a Bank or an Affiliate of the assigning Bank, requires the consent in advance of the Company at all times other than during the existence of a Default or Event of Default and the Agent (which approval of the Company and the Agent shall not be unreasonably withheld or delayed), (ii) a copy of a duly signed and completed Notice of Assignment and Acceptance shall be delivered to Agent, (iii) except in the case of an assignment to an Affiliate of the assigning Bank, to another Bank or of the entire remaining Commitment of the assigning Bank, the assignment shall not assign a Pro Rata Share equivalent to less than the $1,000,000, and (iv) the effective date of any such assignment shall be as specified in the Notice of Assignment and Acceptance, but not earlier than the date which is five Business Days after the date the Agent has received the Notice of Assignment and Acceptance. Upon acceptance by the Agent of such Notice of Assignment and Acceptance and consent thereto by Agent and the Company, if required, and payment of the requisite fee described below, the Eligible Assignee named therein shall be a Bank for all purposes of this Agreement, with the Pro Rata Share therein set forth and, to the extent of such Pro Rata Share, the assigning Bank shall be released from its further obligations under this Agreement. The Company agrees that it shall execute and deliver upon request (against delivery by the assigning Bank to the Company of any Note) to such assignee Bank, one or more Notes evidencing that assignee Bank's Pro Rata Share, and to the assigning Bank if requested, one or more Notes evidencing the remaining balance Pro Rata Share retained by the assigning Bank. The Agent's consent to and acceptance of any assignment shall not be deemed to constitute any representation or warranty by any Agent-Related Person as to any matter. The Agent shall record the information contained in the Notice of Assignment and Acceptance in the Register. (c) After receipt of a completed Notice of Assignment and Acceptance, and receipt of an assignment fee of $3,500 from the assigning Bank (including Affiliates of assigning Banks), Agent shall, promptly following the effective date thereof, provide to the Company and the Banks a revised Schedule 10.2 giving effect thereto. (d) Each Bank may from time to time, without the consent of any other Person, grant participations to one or more other Person (including another Bank) all or any portion of its Pro Rata Share of its Commitment and/or Loans; provided, however, that (i) such Bank's obligations under this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other financial 61 institutions shall not be a Bank hereunder for any purpose except, if the participation agreement so provides, for the purposes of Article III (but only to the extent that the cost of such benefits to the Company does not exceed the cost which the Company would have incurred in respect of such Bank absent the participation) and subject to Sections 2.13 and 10.9, (iv) the Company, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, (v) the participation shall not restrict an increase in the Commitment or in granting Bank's Pro Rata Share, so long as the amount of the participation interest is not affected thereby, and (vi) the consent of the holder of such participation interest shall not be required for amendments or waivers of provisions of the Loan Documents; provided, however, that the assigning Bank may, in any agreement with a participant, give such participant the right to consent to any matter which (A) extends the Revolving Termination Date as to such participant or any other date upon which any payment of money is due to such participant, (B) reduces the rate of interest owing to such participant, any fee or any other monetary amount owing to such participant, or (C) reduces the amount of any installment of principal owing to such participant. 10.8 Confidentiality. Each Bank agrees to maintain the confidentiality of information provided to it by the Company or any Subsidiary, or by the Agent on such Company's or Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Bank's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (H) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I) to its Affiliates. 10.9 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice or demand to the Company, any such notice or demand being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other 62 indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.10 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.11 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.12 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.13 No Third Parties Benefitted. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 10.14 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN 63 RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW. 10.15 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10.16 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. 64 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. UNUMPROVIDENT CORPORATION By:___________________________________ Title:________________________________ S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. BANK OF AMERICA, N.A., as Administrative Agent and as a Bank By:___________________________________ Title:________________________________ S-2 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. CITICORP USA, INC. By:___________________________________ Title:________________________________ S-3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. WACHOVIA BANK, N.A. By:___________________________________ Title:________________________________ S-4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. FLEET NATIONAL BANK By:___________________________________ Title:________________________________ S-5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. BANK ONE, NA By:___________________________________ Title:________________________________ S-6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. THE CHASE MANHATTAN BANK By:___________________________________ Title:________________________________ S-7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By:___________________________________ Title:________________________________ S-8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. AMSOUTH BANK By:___________________________________ Title:________________________________ S-9 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. BANK OF TOKYO - MITSUBISHI TRUST COMPANY By:___________________________________ Title:________________________________ S-10 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. THE DAI - ICHI KANGYO BANK, LTD By:___________________________________ Title:________________________________ S-11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. LLOYDS TBS BANK PLC By:___________________________________ Title:________________________________ S-12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. STATE STREET BANK AND TRUST COMPANY By:___________________________________ Title:________________________________ S-13 SCHEDULE 2.1 5-YEAR CREDIT AGREEMENT COMMITMENTS AND PRO RATA SHARES Pro Rata Bank Commitment Share - ---- ------------------------ BANK OF AMERICA, N.A. $62,500,000 13.5135135% CITICORP USA, Inc. $62,500,000 13.5135135% WACHOVIA BANK, N.A. $62,500,000 13.5135135% FLEET NATIONAL BANK, N.A. $50,000,000 10.8108108% BANK ONE, NA $37,500,000 8.1081081% THE CHASE MANHATTAN BANK $37,500,000 8.1081081% MORGAN GUARANTY TRUST COMPANY OF NEW YORK $37,500,000 8.1081081% AMSOUTH BANK $25,000,000 5.4054054% BANK OF TOKYO - MITSUBISHI TRUST COMPANY $25,000,000 5.4054054% THE DAI-ICHI KANGYO BANK, LTD $25,000,000 5.4054054% LLOYDS TBS BANK PLC $25,000,000 5.4054054% STATE STREET BANK AND TRUST COMPANY $12,500,000 2.7027027% TOTAL $462,500,000 100% S-14 SCHEDULE 5.5 ------------ In 1997 two alleged class action lawsuits were filed in September Court in Worcester, Massachusetts (Superior Court) against the Company - one purporting to represent all career agents of subsidiaries of The Paul Revere Corporation (Paul Revere) whose employment relationships ended on June 30, 1997 and were offered contracts to sell insurance policies as independent producers and the other purporting to represent independent brokers who sold certain Paul Revere individuals disability income policies with benefit riders. Motions filed by the Company to dismiss most of the counts in the complaints, which allege various breach of contract and statutory claims, have been denied, but these cases remain at a preliminary stage. A hearing to determine class certification was heard on December 20, 1999 in Massachusetts state court. The court certified a class for the independent brokers and has denied class certification for the career agents. The Company appealed the class certification for the independent brokers, but the appeal was denied. A tentative trial date of January 2001 has been set. The Company has filed a conditional counterclaim in each action which requests a substantial return on commissions should the Superior Court agree with the plaintiffs' interpretation of the contracts. The Company has received notice that career agent plaintiffs plat to re-file their class action and limit it solely to the issues in the certified broker class action. The Company believes that it has strong defenses both lawsuits and plans to vigorously defend its position. In addition, the same plaintiffs' attorney who has filed the purported class action lawsuits has filed 47 individual lawsuits on behalf of current and former Paul Revere sales managers alleging various breach of contract claims. The Company has filed a motion in federal court to compel arbitration for 17 of the plaintiffs who are licensed by the National Association of Securities Dealers and have executed the Uniform Application for Registration or Transfer in the Securities Industry (Form U-4). The federal court has denied 15 of those motions and granted two. The Company is appealing the denial of the 15 motions, and a hearing before the First Circuit Court of Appeals was held on August 1, 2000. The Company believes that it has strong defenses and plans to vigorously defend its position in these cases. Although the alleged class action lawsuits and individual lawsuits described above are in the early stages, management does not currently expect these suits to materially affect the financial position or results of operations of the Company. During September and October 1999, the company and several of its officers were named as defendants in five class action lawsuits filed in the United States District Court for the District of Maine. On January 3, 2000, the Maine district court appointed a lead class action plaintiff and ordered plaintiffs to file a consolidated amended complaint. On January 27, 2000, a sixth complaint against the same defendants was filed in the Southern District of New York. On March 7, 2000, the sixth action was transferred to the District of Maine, and that action was voluntarily dismissed by the plaintiff on June 12, 2000. On February 23, 2000, two consolidated amended class action complaints asserts a variety of claims under the Securities Exchange Act of 1934, as amended on behalf of a putative class of shareholders who purchased or otherwise acquired stock in the Company or Unum between February 4, 1998 and February 9, 2000. The second amended complaint asserts a variety of claims under the Securities Act of 1933 and the Schedule 5.5, Page 1 Securities Exchange Act of 1934, as amended, on behalf of a putative class of shareholders who exchanged the common stock of Unum or Provident for the Company's stock pursuant to the joint proxy/registration statement issued in connection with the merger between Unum and Provident. The complaints allege that the defendants made false and misleading public statements concerning, among other things, Unum's and the Company's reserves for disability insurance and pricing policies, the Company's merger costs, and the adequacy of the due diligence reviews performed in connection with the merger. The complaints seek money damages on behalf of all persons who purchased or otherwise acquired Company and Unum stock in the class period or who were issued Company stock pursuant to the merger. On April 10, 2000, the defendants filed a motion to dismiss the complaints. The motion was fully submitted on June 20, 2000, but no decision has yet been rendered by the court. To date, no class has been certified, and no defendant has answered any complaint. The Company disputes the claims alleged in the complaint and plans to vigorously contest them. In certain reinsurance pools associated with the Company's reinsurance businesses there are disputes among the pool members and reinsurance participants concerning the scope of their obligations and liabilities within the complex pool arrangements, including pools for which subsidiaries of the Company acted either as pool managers or underwriting agents, as pool member or reinsurers of the pools in the process of resolving the various claims, but it is unclear what exposure the Company or its subsidiaries may ultimately have to share in the losses of pool members or reinsurers because of the subsidiaries' activities in placing insurance or otherwise. Various other lawsuits against the Company have arisen in the normal course of its business. Contingent liabilities that might arise from such other litigation are not deemed likely to materially affect the financial position or results of operations of the Company. Schedule 5.5, Page 2 SCHEDULE 5.12 ------------- The following Regulated Entities, namely Investment Companies within the meaning of the Investment Company Act of 1940 are list pursuant to Section 5.12 of the Agreement: 1. Provident National Assurance Company, Separate Account B (variable annuity account, no new contract sales) 2. Paul Revere Variable Annuity Insurance Company, Contract Accumulation Fund (variable annuity account, no new contract sales) Schedule 5.12, Page 1 SCHEDULE 5.14 ------------- Subsidiaries The attached organization chart shows the Subsidiaries of the Company. Schedule 5.14, Page 1 SCHEDULE 10.2 OFFSHORE AND DOMESTIC LENDING OFFICES, ADDRESSES FOR NOTICES BANK OF AMERICA, N.A., as Agent 231 S. LaSalle Street Chicago, Illinois 60697 Attention: Elizabeth W. F. Bishop BANK OF AMERICA, N.A. as a Bank 231 S. LaSalle Street Chicago, Illinois 60697 Attention: Elizabeth W. F. Bishop Domestic and Offshore Lending Office: Bank of America Plaza 901 Main Street Dallas, Texas 75202-3714 Attention: Linda Adjei-Kontoh Phone: 214-209-1232 Fax: 214-290-9558 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 231 S. LaSalle Street Chicago, Illinois 606097 Attention: Elizabeth W. F. Bishop CITICORP U.S.A, INC. as a Bank 399 Park Avenue New York, New York 10043 Attention: David Dodge Domestic and Offshore Lending Office: Schedule 10.2, Page 1 399 Park Avenue New York, New York 10043 Attention: David Dodge Notices (other than Borrowing notices and Notices of Conversion/Continuation): 399 Park Avenue New York, New York 10043 Attention: David Dodge WACHOVIA BANK, N.A. as a Bank 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attention: Holger Ebert Domestic and Offshore Lending Office: 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attention: Carla Banks Phone: 404-332-1127 Fax: 404-332-4320 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attention: Holger Ebert THE CHASE MANHATTAN BANK as a Bank 270 Park Avenue New York, New York 10017 Attention: Heather Lindstrom Domestic and Offshore Lending Office: One Chase Plaza New York, New York 10081 Schedule 10.2, Page 2 Phone: 212-552-7829 Fax: 212-552-7490 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 270 Park Avenue New York, New York 10017 Attention: Heather Lindstrom FLEET NATIONAL BANK as a Bank Financial Institutions 100 Federal Street - MA DE 10010H Boston, Massachusetts 02110 Attention: David A. Bosselait Domestic Lending Office: Financial Institutions 100 Federal Street - MA DE 10010H Boston, Massachusetts 02110 Attention: David A. Bosselait Phone: 617-434-3778 Fax: 617-434-1096 Offshore Lending Office: Financial Institutions 777 Main Street - CT EH 40225C Hartford, Connecticut 06115 Attention: Laura McDonough or Jill Mebane Phone: 860-986-5769 or 860-986-2008 Fax: 860-986-1264 Notices (other than Borrowing notices and Notices of Conversion/Continuation): Financial Institutions 100 Federal Street - MA DE 10010H Boston, Massachusetts 02110 Attention: David A. Bosselait Schedule 10.2, Page 3 BANK ONE, NA as a Bank 1 Bank One Plaza Chicago, Illinois 60670 Attention: Joseph Manzella Domestic and Offshore Lending Office: 1 Bank One Plaza Chicago, Illinois 60670 Attention: Armecia Mc Brew Phone: 312-732-6533 Fax: 312-732-3537 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 1 Bank One Plaza Chicago, Illinois 60670 Attention: Joseph Manzella BANK OF TOKYO - MITSUBISHI TRUST COMPANY as a Bank 1251 Avenue of the Americas, 12th Floor New York, New York 10020-1104 Attention: Matthew D. Gallino Domestic and Offshore Lending Office: 1251 Avenue of the Americas, 12th Floor New York, New York 10020-1104 Attention: Rolando Uy Phone: 201-413-8570 Fax: 201-521-2304 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 1251 Avenue of the Americas, 12th Floor New York, New York 10020-1104 Attention: Matthew D. Gallino Schedule 10.2, Page 4 MORGAN GUARANTY TRUST COMPANY OF NEW YORK as a Bank 60 Wall Street, 5th Floor New York, New York 10260-0060 Attention: Maria Dell'Aquila Domestic Lending Office: Morgan Guaranty Trust Company of New York 60 Wall Street New York, New York 10260-0060 Offshore Lending Office: c/o J.P. Morgan Services, Inc. 500 Stanton Christina Road Newark, Delaware 19713-2107 Attention: Peter Crisona Phone: 302-634-5117 Fax: 302-634-1094 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 60 Wall Street, 5th Floor New York, New York 10260-0060 Attention: Maria Dell'Aquila AMSOUTH BANK as a Bank 601 Market Center Chattanooga, Tennessee 37402 Attention: Tracy Brown Domestic and Offshore Lending Office: 601 Market Center Chattanooga, Tennessee 37402 Attention: Tracy Brown Phone: 423-752-1642 Fax: 423-752-1558 Notices (other than Borrowing notices and Notices of Schedule 10.2, Page 5 Conversion/Continuation): 601 Market Center Chattanooga, Tennessee 37402 Attention: Tracy Brown THE DAI - ICHI KANGYO BANK, LTD as a Bank One World Trade Center - 48th Floor New York, New York 10048 Attention: Nelson Y. Chang Domestic and Offshore Lending Office: One World Trade Center - 48th Floor New York, New York 10048 Attention: Wendy Yuen Phone: 212-432-6691 Fax: 212-524-0049 Notices (other than Borrowing notices and Notices of Conversion/Continuation): One World Trade Center - 48th Floor New York, New York 10048 Attention: Nelson Y. Chang LLOYDS TBS BANK PLC as a Bank One Biscayne Tower, Suite 3200 2 South Biscayne Blvd. Miami, Florida 33131 Domestic and Offshore Lending Office: One Biscayne Tower, Suite 3200 2 South Biscayne Blvd. Miami, Florida 33131 Notices (other than Borrowing notices and Notices of Conversion/Continuation): Schedule 10.2, Page 6 575 Fifth Avenue, 17th Floor New York, New York 10017 Attention: Michael Gilligan STATE STREET BANK AND TRUST COMPANY as a Bank 225 Franklin Street Boston, Massachusetts 02110 Attention: Sean Gibbons Domestic and Offshore Lending Office: 225 Franklin Street Boston, Massachusetts 02110 Attention: Sean Gibbons Phone: 617-664-4008 Fax: 617-664-3941 Notices (other than Borrowing notices and Notices of Conversion/Continuation): Lafayette Corporate Center 2 Avenue de Lafayette Boston Massachusetts 02111 Attention: Edward M. Anderson Schedule 10.2, Page 7 EXHIBIT A NOTICE OF BORROWING Date: _________, 200_ To: Bank of America, N.A., as Administrative Agent for the Banks parties to the Five-Year Credit Agreement dated as of October __, 2000 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among UnumProvident Corporation, certain Banks which are signatories thereto, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: The undersigned, UnumProvident Corporation (the "Company"), refers to the Credit Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.3 of the Credit Agreement, of the Borrowing specified below: 1. The Business Day of the proposed Borrowing is _________________, 200_. 2. The aggregate amount of the proposed Borrowing is $___________. 3. The Borrowing is to be comprised of $___________ of [Base Rate] [Offshore Rate] Loans. 4. The duration of the Interest Period for the Offshore Rate Loans included in the Borrowing shall be_____ months. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed Borrowing, before and after giving effect thereto and to the application of the proceeds therefrom: (a) the representations and warranties of the Company contained in Article V of the Credit Agreement are true and correct as though made on and as of such date (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date); and Schedule 10.2, Page 8 (b) no Default or Event of Default has occurred and is continuing, or would result from such proposed Borrowing. UNUMPROVIDENT CORPORATION By:___________________________________ Title:________________________________ Schedule 10.2, Page 9 EXHIBIT B NOTICE OF CONVERSION/CONTINUATION Date: ______, 200_ To: Bank of America National, N.A., as Administrative Agent for the Banks parties to the Five-Year Credit Agreement dated as of October ___, 2000 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among UnumProvident Corporation, certain Banks which are signatories thereto, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: The undersigned, UnumProvident Corporation (the "Company"), refers to the Credit Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.4 of the Credit Agreement, of the [conversion] [continuation] of the Loans specified herein, that: 1. The Conversion/Continuation Date is ______, 200_. 2. The aggregate amount of the Loans to be [converted] [continued] is $___________. 3. The Loans are to be [converted into] [continued as][Offshore Rate] [Base Rate] Loans. 4. [If applicable:] The duration of the Interest Period for the Loans included in the [conversion] [continuation] shall be [__ months]. UNUMPROVIDENT CORPORATION By:___________________________________ Title:________________________________ Exhibit B-1 EXHIBIT C UNUMPROVIDENT CORPORATION COMPLIANCE CERTIFICATE Financial Statement Date: __________, 200_ Reference is made to that certain Credit Agreement dated as of October , 2000 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among UnumProvident Corporation, (the "Company"), the several financial institutions from time to time parties to the Five-Year Credit Agreement (the "Banks"), Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent for the Banks (in such capacity, the "Agent"). Unless otherwise defined herein, capitalized terms used herein have the respective meanings assigned to them in the Credit Agreement. The undersigned Responsible Officer of UnumProvident Corporation, hereby certifies as of the date hereof that he/she is the __________ of the Company, and that, as such, he/she is authorized to execute and deliver this Certificate to the Banks and the Agent on the behalf of the Company and its consolidated Subsidiaries, and that: 1. The undersigned has reviewed and is familiar with the terms of the Credit Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and conditions (financial or otherwise) of the Company during the accounting period covered by the attached financial statements. 2. To the best of the undersigned's knowledge, the Company, during such period, has observed, performed or satisfied all of its covenants and other agreements, and satisfied every condition in the Credit Agreement to be observed, performed or satisfied by the Company, and the undersigned has no knowledge of any Default or Event of Default. 3. The following financial covenant analyses and information set forth on Schedule 1 attached hereto are true and accurate on and as of the date of this Certificate. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of ______, 2000. UNUMPROVIDENT CORPORATION By:___________________________________ Title:________________________________ Exhibit C-1 Schedule 1 Section 7.10(a) --------------- A. [$__________] [Required Tangible Net Worth $______________ from prior fiscal quarter/year] B. Net Income $______________ C. 25% of Item B $______________ D. Required Tangible Net Worth (Items A plus C $______________ [plus D]) E. Net Worth $______________ less: Goodwill $___________ Value of Business Acquired $___________ Deferred Acquisition Costs $___________ F. Actual Tangible Net Worth $______________ Section 7.10(b) --------------- A. Total Debt $______________ B. Net Worth $______________ C. Total Capitalization (Items A plus B) $______________ D. Ratio (Item A to Item C) to 1.0 --------------- E. Required Ratio 0.35 to 10 --------------- Section 7.10(c) --------------- A. Total Debt $______________ B. Subordinated Debt $______________ C. Senior Debt (Item A minus Item B) $______________ D. Combined Statutory Net earnings $______________ E. Combined Statutory Interest expense $______________ F. Combined Statutory Tax expense $______________ G. Statutory EBIT (Items D plus E plus F) $______________ H. Ratio (Item C to Item G) _____to 1.0 I. Required Ratio _____to 1.0 Exhibit D-2 EXHIBIT D [[FORM OF] OPINION OF BORROWER'S COUNSEL October ___, 2000 Bank of America, N.A., as Administrative Agent 231 South LaSalle Street Chicago, IL 60697 Re: UnumProvident Corporation Ladies and Gentlemen: I am Executive Vice President, Assistant Secretary and General Counsel of UnumProvident Corporation, a Delaware corporation (the "Company"). This opinion is delivered to you pursuant to Section 4.1(d) of that certain Five-Year Credit Agreement dated as of October __, 2000 (the "Credit Agreement") among the Company, certain lenders (collectively, the "Banks"), Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent for the Banks (in such capacity, the "Agent"). Capitalized terms used herein, but not otherwise defined herein, shall have the meanings ascribed to such terms in the Credit Agreement. In rendering the opinions set forth herein, I have examined and/or relied upon (i) the Company's certificate of incorporation and bylaws; (ii) certificates of public officials and officers and representatives of the Company (iii) resolutions of the board of directors of the Company with respect to the transactions referred to herein; (iv) the Credit Agreement; and (v) such other agreements, instruments and documents, and such questions of law as I have deemed necessary or appropriate to enable me to render the opinions expressed below. I also have made such inquiries of officers, representatives and attorneys in the legal department of the Company as I have deemed relevant or necessary for purposes of the opinions set forth herein. In rendering the opinions expressed below, I have, with your consent, assumed that the signatures of persons signing all documents in connection with which this opinion is rendered are genuine, all documents submitted to me as originals or duplicate originals are authentic and all documents submitted to me as copies, whether certified or not, conform to authentic original documents. Based upon the foregoing and subject to the qualifications stated herein, I am of the opinion that: Exhibit D-1 1. The Company is validly existing in the state of its organization and has the requisite power and authority to own and hold under lease its properties, to conduct its business as presently conducted and to execute and deliver the Credit Agreement. 2. The Company is duly qualified and in good standing in each state where the nature of its business and properties makes such qualification necessary, except to the extent that the failure to be so qualified or to be in good standing would not have a material averse effect on the Company's consolidated financial condition or business. 3. The execution, delivery and performance of the Credit Agreement has been duly authorized by the Company, and the Credit Agreement constitutes the valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by the application of equitable principles relating to enforceability (regardless of whether considered in a proceeding in equity or at law) including, without limitation (i) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (ii) concepts of materiality, reasonableness, good faith and fair dealing. 4. Assuming the proceeds of the loans are used solely for the purposes set forth in the Credit Agreement, neither the execution and delivery by the Company of the Credit Agreement, nor the consummation by the Company of the transactions contemplated thereby: (i) violates any provision of the Company's certificate of incorporation or bylaws; (ii) violates any law or regulation (including any applicable order or decree of any court or governmental instrumentality known to me) applicable to the Company; (iii) results in the breach of, or constitutes a default under, any material agreement binding on the Company or any of its Subsidiaries; (iv) results in the creation or imposition of any lien upon any of the property of the Company or any of its Subsidiaries under any agreement described in clause (iii) above; or (v) requires the consent or approval of, or any filing or registration with, any governmental body, agency or authority, provided that for purposes of (iii) and (iv) herein, no opinion is offered or provided with respect to D & H. 5. To our knowledge, except as disclosed in the Credit Agreement, there are no judgments outstanding against the Company or any of its Subsidiaries which would have a material adverse effect on the Company's consolidated financial condition or business. This opinion is solely for the benefit of the addressee hereof and the Banks under the Credit Agreement in connection with the execution and delivery of the Credit Agreement. This opinion may not be relied upon in any manner by any other person and may not be disclosed, quoted, filed with a governmental agency or otherwise referred to without our prior written consent. Very truly yours, Exhibit D-2 EXHIBIT E FORM OF NOTICE OF ASSIGNMENT AND ACCEPTANCE ___________, 200_ To: Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: Reference is made to that certain Five-Year Credit Agreement dated as of October __, 2000 between UnumProvident Corporation (the "Company"), lenders from time to time party thereto, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the "Agreement;" the terms defined therein being used herein as therein defined). 1. We hereby give you notice of, and request your consent to, the assignment by _________________ (the "Assignor") to _____________ (the "Assignee") of ___% of the right, title and interest of the Assignor in and to the Loan Documents, including the right, title and interest of the Assignor in and to the Commitment of the Assignor and all outstanding Loans made by the Assignor. Before giving effect to such assignment: (a) the aggregate amount of the Assignor's Commitment is $_______; (b) the aggregate principal amount of its outstanding Loans is $_______. 2. The Assignee hereby represents and warrants that it is an Eligible Assignee and has complied with the requirements of Section 10.7 of the Agreement in connection with this assignment and acknowledges and agrees that: (a) other than the representation and warranty that it is the legal and beneficial owner of the Pro Rata Share being assigned thereby free and clear of any adverse claim, the Assignor has made no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement or the execution, legality, validity, enforceability, genuineness or sufficiency of the Agreement or any other Loan Document; (b) the Assignor has made no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance by the Company of the Obligations; (c) it has received a copy of the Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.1 thereof, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (d) it will, independently and without reliance upon Agent or any Bank and based on such documents and information as it shall deem appropriate at Exhibit E-1 the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (e) it appoints and authorizes Agent to take such action and to exercise such powers under the Agreement and the other Loan Documents as are delegated to Agent by the Agreement and such other Loan Documents; and (f) it will perform in accordance with their terms all of the obligations which by the terms of the Agreement are required to be performed by it as a Bank. 3. The Assignee agrees that, upon receiving your consent to such assignment and from and after , the Assignee will be bound by the terms of the Loan Documents, with respect to the interest in the Loan Documents assigned to it as specified above, as fully and to the same extent as if the Assignee were one of the Banks originally holding such interest in the Loan Documents. 4. The following administrative details apply to the Assignee: (a) Offshore Lending Office: Assignee name: ________________________________________________ Address: ______________________________________________________ Attention: ____________________________________________________ Telephone: (___)______________________________________________ Telecopier: (___)______________________________________________ (b) Domestic Lending Office: Assignee name: ________________________________________________ Address: ______________________________________________________ Attention: ____________________________________________________ Telephone: (___)______________________________________________ Telecopier: (___)______________________________________________ (c) Notice Address: Assignee name: ________________________________________________ Address: ______________________________________________________ Attention: ____________________________________________________ Telephone: (___)______________________________________________ Telecopier: (___)______________________________________________ (d) Payment Instructions: Account No.: Assignee name: ________________________________________________ Address: ______________________________________________________ Attention: ____________________________________________________ Telephone: (___)______________________________________________ Exhibit E-2 Telecopier: (___)______________________________________________ IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice of Assignment and Acceptance to be executed by their respective duly authorized officials, officers or agents as of the date first above mentioned. Very truly yours, [ASSIGNOR] By:_____________________________ Name:___________________________ Title:__________________________ [ASSIGNEE] By:_____________________________ Name:___________________________ Title:__________________________ We hereby consent to the foregoing assignment. UNUMPROVIDENT CORPORATION By:_____________________________ Name:___________________________ Title:__________________________ BANK OF AMERICA, N.A., as Administrative Agent By:_____________________________ Name:___________________________ Title:__________________________ Exhibit E-3 EXHIBIT F [FORM OF] PROMISSORY NOTE $_____ _____________, 2000 FOR VALUE RECEIVED, the undersigned, UnumProvident Corporation (the "Company"), hereby promises to pay to the order of ___________(the "Bank") the principal sum of _________ Dollars ($______) or, if less, the aggregate unpaid principal amount of all Loans made by the Bank to the Company pursuant to the Five-Year Credit Agreement, dated as of October , 2000 (such Credit Agreement), as it may be amended, restated, supplemented or otherwise modified from time to time, being hereinafter called the "Credit Agreement"), among the Company, the Bank, the other banks parties thereto, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent for the Banks, on the dates and in the amounts provided in the Credit Agreement. The Company further promises to pay interest on the unpaid principal amount of the Loans evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Bank is authorized to endorse the amount and the date on which each Loan is made, the maturity date therefor and each payment of principal with respect thereto on the schedules annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Promissory Note (the "Note"). This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. Exhibit F-1 Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York applicable to contracts made and to be performed entirely within such State. UNUMPROVIDENT CORPORATION By:_____________________________ Title:__________________________ Exhibit F-2 Schedule A to Note BASE RATE LOANS AND REPAYMENT OF BASE RATE LOANS (2) (3) (4) Amount Maturity Amount of (5) (1) of Base Date of Base Rate Notation Date Rate Loan Base Rate Loan Loan Repaid Made By - ---- --------- -------------- ----------- ------- - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ Exhibit F-3 Schedule B to Note OFFSHORE RATE LOANS AND REPAYMENT OF OFFSHORE RATE LOANS (2) (3) (4) Amount Maturity Amount of (5) (1) of Offshore Date of Offshore Rate Notation Date Rate Loan Offshore Rate Loan Loan Repaid Made By - ---- --------- ------------------ ----------- ------- - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ Exhibit F-4 EX-10.28 14 0014.txt 364 DAY CREDIT AGREEMENT EXHIBIT 10.28 ================================================================================ 364-DAY CREDIT AGREEMENT Dated as of October 31, 2000 among UNUMPROVIDENT CORPORATION BANK OF AMERICA, N.A., as Administrative Agent, CITICORP USA, INC. and WACHOVIA BANK, N.A., as Co-Syndication Agents FLEET NATIONAL BANK, as Documentation Agent and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO BANC OF AMERICA SECURITIES, LLC as Sole Lead Arranger and Sole Book Manager ================================================================================ TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS ............................................................ 1 1.1 Certain Defined Terms ......................................... 1 1.2 Other Interpretive Provisions ................................. 21 1.3 Accounting Principles ......................................... 22 ARTICLE II THE CREDITS ............................................................ 22 2.1 Amounts and Terms of Commitments .............................. 22 2.2 Loan Accounts ................................................. 22 2.3 Procedure for Borrowing ....................................... 23 2.4 Conversion and Continuation Elections ......................... 24 2.5 Voluntary Termination or Reduction of Commitments ............. 25 2.6 Optional Prepayments .......................................... 25 2.7 Repayment ..................................................... 25 2.8 Interest ...................................................... 26 2.9 Fees .......................................................... 26 2.10 Computation of Fees and Interest .............................. 27 2.11 Payments by the Company ....................................... 27 2.12 Payments by the Banks to the Agent ............................ 28 2.13 Sharing of Payments, Etc. ..................................... 28 ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY ................................. 30 3.1 Taxes ......................................................... 30 3.2 Illegality .................................................... 31 3.3 Increased Costs and Reduction of Return ....................... 31 3.4 Funding Losses ................................................ 32 3.5 Inability to Determine Rates .................................. 33 3.6 Certificates of Banks ......................................... 33 3.7 Substitution of Banks ......................................... 33 3.8 Survival ...................................................... 33 ARTICLE IV CONDITIONS PRECEDENT ................................................... 34 4.1 Conditions of Initial Loans ................................... 34 Section Page 4.2 Conditions to All Borrowings .................................. 35 ARTICLE V REPRESENTATIONS AND WARRANTIES ......................................... 36 5.1 Corporate Existence and Power ................................. 36 5.2 Corporate Authorization; No Contravention ..................... 36 5.3 Governmental Authorization .................................... 36 5.4 Binding Effect ................................................ 37 5.5 Litigation .................................................... 37 5.6 No Default .................................................... 37 5.7 ERISA Compliance .............................................. 37 5.8 Use of Proceeds; Margin Regulations ........................... 38 5.9 Title to Properties ........................................... 38 5.10 Taxes ......................................................... 38 5.11 Financial Condition ........................................... 39 5.12 Regulated Entities ............................................ 39 5.13 No Burdensome Restrictions .................................... 39 5.14 Subsidiaries .................................................. 40 5.15 Environmental Compliance ...................................... 40 5.16 Insurance ..................................................... 40 5.17 Full Disclosure ............................................... 40 ARTICLE VI AFFIRMATIVE COVENANTS .................................................. 40 6.1 Financial Statements .......................................... 40 6.2 Certificates, Notices and Other Information ................... 41 6.3 Payment of Taxes .............................................. 43 6.4 Preservation of Existence ..................................... 44 6.5 Maintenance of Properties ..................................... 44 6.6 Maintenance of Insurance ...................................... 44 6.7 Compliance With Laws .......................................... 44 6.8 Inspection Rights ............................................. 44 6.9 Keeping of Records and Books of Account ....................... 44 6.10 Compliance with ERISA ......................................... 45 6.11 Compliance With Agreements .................................... 45 6.12 Use of Proceeds ............................................... 45 ARTICLE VII NEGATIVE COVENANTS ..................................................... 45 -ii- Section Page 7.1 Indebtedness .................................................. 45 7.2 Liens and Negative Pledges .................................... 46 7.3 Consolidations and Mergers; Sales of Assets ................... 47 7.4 Loans, Acquisitions and Investments ........................... 48 7.5 Restricted Payments ........................................... 49 7.6 ERISA ......................................................... 49 7.7 Change in Nature of Business .................................. 49 7.8 Transactions with Affiliates .................................. 49 7.9 Hostile Acquisitions .......................................... 49 7.10 Financial Covenants ........................................... 49 ARTICLE VIII EVENTS OF DEFAULT ...................................................... 50 8.1 Event of Default .............................................. 50 8.2 Remedies ...................................................... 52 8.3 Rights Not Exclusive .......................................... 52 ARTICLE IX THE AGENT .............................................................. 53 9.1 Appointment and Authorization ................................. 53 9.2 Delegation of Duties .......................................... 53 9.3 Liability of Agent ............................................ 53 9.4 Reliance by Agent ............................................. 53 9.5 Notice of Default ............................................. 54 9.6 Credit Decision ............................................... 54 9.7 Indemnification ............................................... 54 9.8 Agent in Individual Capacity .................................. 55 9.9 Successor Agent ............................................... 55 9.10 Withholding Tax ............................................... 55 9.11 Documentation Agent; Syndication Agent ........................ 57 ARTICLE X MISCELLANEOUS .......................................................... 58 10.1 Amendments and Waivers ........................................ 58 10.2 Notices ....................................................... 58 10.3 No Waiver; Cumulative Remedies ................................ 59 10.4 Costs and Expenses ............................................ 59 10.5 Indemnity ..................................................... 60 10.6 Payments Set Aside ............................................ 60 -iii- Section Page 10.7 Binding Effect; Assignment .................................... 60 10.8 Confidentiality ............................................... 62 10.9 Set-off ....................................................... 62 10.10 Notification of Addresses, Lending Offices, Etc. .............. 63 10.11 Counterparts .................................................. 63 10.12 Severability .................................................. 63 10.13 No Third Parties Benefitted ................................... 63 10.14 Governing Law and Jurisdiction ................................ 63 10.15 Waiver of Jury Trial .......................................... 64 10.16 Entire Agreement .............................................. 64 SCHEDULES Schedule 1.1 Subordinated Debt Schedule 2.1 Commitments Schedule 5.5 Litigation Schedule 5.12 Regulated Entities Schedule 5.14 Subsidiaries Schedule 7.1 Indebtedness Schedule 7.2 Liens and Negative Pledges Schedule 10.2 Lending Offices; Addresses for Notices -iv- EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Compliance Certificate Exhibit D Form of Legal Opinion of Company's Counsel Exhibit E Form of Notice of Assignment and Acceptance Exhibit F Form of Promissory Note -v- 364-DAY CREDIT AGREEMENT This 364-DAY CREDIT AGREEMENT is entered into as of October 31, 2000, among UnumProvident Corporation, a Delaware corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), Citicorp USA, Inc .and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent for the Banks. WHEREAS, the Banks have agreed to make available to the Company a credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 Certain Defined Terms. The following terms have the following meanings: "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract, or otherwise. "Agent" means Bank of America in its capacity as administrative agent for the Banks hereunder, and any successor agent arising under Section 9.9. "Agent-Related Persons" means Bank of America and any successor agent arising under Section 9.9, together with their respective Affiliates (including, in the case of Bank of America, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on Schedule 10.2 or such other address as the Agent may from time to time specify. "Agreement" means this Credit Agreement. "Annual Statement" means the annual financial statement of any insurance company as required to be filed with the Department, together with all exhibits or schedules filed therewith, prepared in conformity with SAP. References to amounts on particular exhibits, schedules, lines, pages and columns of such Annual Statements are based on the formats promulgated by the NAIC for 1999 Annual Statements for the applicable type of insurance company. If such format is changed in future years so that different information is contained in such items or they no longer exist, it is understood that the reference is to information consistent with that recorded in the referenced item in the 1999 Annual Statement of the insurance company. "Applicable Amount" means the following amounts per annum, based upon the Debt Ratings: Applicable Amount (in basis points per annum) Pricing Debt Ratings Facility Utilization Offshore Level S&P/Moody's Fee Fee Rate 1 A/A2 (or higher) 7.0 12.5 30.5 2 A-/A3 8.0 12.5 42.0 3 BBB+/Baa1 10.0 12.5 52.5 4 BBB/Baa2 15.0 12.5 72.5 5 Below BBB/Baa2 20.0 25.0 92.5 At the date hereof, Level 3 shall be applicable. "Debt Ratings" means, as of any date of determination, the rating as determined by either S&P or Moody's of the Company's senior unsecured long-term debt; provided that if Debt Ratings are issued by both of the foregoing Rating Agencies, then the less creditworthy of such credit ratings shall apply, unless there is a split in credit ratings of more than one level, in which case the level one level lower than the more creditworthy rating shall apply. The Debt Ratings shall be determined from the most recent public announcement of any changes in the Debt Ratings. Any change in the Applicable Amount shall become effective on and as of the date of any public announcement of any Debt Ratings that indicates a different Applicable Amount in accordance with this definition and the above chart. "Applicable Debt" means obligations described in clauses (a), (d) or (f) of the definition of Indebtedness contained herein. 2 "Arranger" means Banc of America Securities LLC, a Delaware limited liability company, as sole lead arranger and book manager. "Attorney Costs" means and includes all reasonable fees and disbursements of any law firm or other external counsel and the nonduplicative allocated cost of internal legal services and disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. "Bank of America" means Bank of America, N.A., a national banking association. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. ss.101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, as its "prime rate." (The "prime rate" is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the prime rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to the Company on the same day by the Banks under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.3. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina or New York, New York are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capitalized Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are classified and accounted for as a capital lease under Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board. 3 "Cash Equivalents" means: (a) securities issued or unconditionally guaranteed by the United States government or any agency or instrumentality thereof, in each case having maturities of not more than 12 months from the date of acquisition thereof; (b) securities issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof having maturities of not more than 12 months from the date of acquisition thereof and, at the time of acquisition, having a rating of at least A-2 or P-2 from either Rating Agency, or, with respect to municipal bonds, a rating of at least MIG 2 or VMIG 2 from Moody's; (c) commercial paper issued by any Bank or any bank holding company owning any Bank; (d) commercial paper maturing not more than 12 months after the date of creation thereof, and at the time of acquisition, having a rating of A-1 or P-1 from either Rating Agency; (e) commercial paper maturing not more than 6 months after the date of creation thereof and, at the time of acquisition, having a rating of A-2 or P-2 from either Rating Agency; (f) domestic and eurodollar certificates of deposit or bankers' acceptances maturing no more than one year after the date of acquisition thereof which are either issued by any Bank or any other banks having combined capital and surplus of not less than $100,000,000 (or in the case of foreign banks, the dollar equivalent thereof) or are insured by the Federal Deposit Insurance Corporation for the full amount thereof; and (g) repurchase agreements (including securities lending agreements and dollar rolls), with a term of not more than 6 months secured by the underlying securities and entered into with securities dealers of recognized national standing. "Change of Control" means, and shall be deemed to have occurred if: (a) at any time Continuing Directors shall not constitute a majority of the Board of Directors of the Company; or (b) any Person or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act), shall at any time have acquired direct or indirect beneficial ownership of a percentage equal to or more than 25% of the outstanding Voting Stock of the Company. "Closing Date" means the date on which all conditions precedent set forth in Section 4.1 are satisfied or waived by all Banks (or, in the case of Section 4.1(e), waived by the Person entitled to receive such payment). 4 "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Commitment", as to each Bank, has the meaning specified in Section 2.1. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person, with or without recourse, guaranteeing or intended to guarantee any Indebtedness, lease, dividend or other monetary obligation (the "primary obligations") of another Person (the "primary obligor") in any manner, including any obligation of that Person (a) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (b) to advance or provide funds for the payment or discharge of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder), as determined by such Person in good faith. Notwithstanding the foregoing, the term "Contingent Obligation" shall not include (a) endorsements of instruments for deposit or collection in the ordinary course of business, and (b) obligations of any Insurance Subsidiary under Insurance Contracts, Reinsurance Agreements and Retrocession Agreements (but not including any of the foregoing that constitutes financial reinsurance). "Continuing Director" means, at any date, an individual (a) who is a member of the Board of Directors of the Company on the date hereof, (b) who, as at such date, has been a member of such Board of Directors for at least the 12 preceding months (or, for the period comprising the first 12 months after the date hereof, has been a member of the Board of Directors at least since the date hereof), or (c) who has been nominated to be a member of such Board of Directors by a majority of the other Continuing Directors then in office. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section 2.4, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the 5 same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "D&H" means, collectively, Duncanson & Holt Europe Ltd., a United Kingdom company, Duncanson & Holt Asia PTE Ltd., a Singapore company, Duncanson & Holt Underwriters Ltd., a United Kingdom company, Duncanson & Holt Syndicate Management Ltd., a United Kingdom company and their respective Subsidiaries. "Debt Ratings" has the meaning set forth in the definition of "Applicable Amount". "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Department" means the applicable Governmental Authority of the state of domicile of an insurance company responsible for the regulation of said insurance company. "Dollars", "dollars" and "$" each mean lawful money of the United States. "Eligible Assignee" means (a) a financial institution organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary; (d) another Bank; (e) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act of 1933, as amended) which extends credit or buys loans as one of its businesses, including but not limited to, insurance companies, mutual funds and lease financing companies, and acceptable to the Agent; (f) a Person that is engaged in the making, purchasing or investing in commercial loans in the ordinary course of business, and acceptable to the Agent; or (g) other lenders or institutional investors consented to in writing in advance by the Agent and, so long as no Default or Event of Default has occurred and is continuing, the Company (such consents not to be unreasonably withheld or delayed). Neither the Company nor any Affiliate of the Company shall be an Eligible Assignee. "Environmental Laws" means all Laws relating to environmental, health, safety and land use matters applicable to any property. "Equity Interests" means, with respect to any Person, all shares, interests (including membership and partnership interests), participations or other equivalent (however 6 designated, whether voting or non-voting) of such Person's capital, whether now outstanding or issued after the date hereof. "ERISA" means the Employee Retirement Income Security Act of 1974 and any regulations issued pursuant thereto, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 8.1. "Exchange Act" means the Securities and Exchange Act of 1934, and regulations promulgated thereunder. "FAS 113" means Statement of Accounting Standards No. 113 and regulations promulgated thereunder. "FAS 115" means Statement of Accounting Standards No. 115 and regulations promulgated thereunder. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds 7 brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Bank of America on such day on such transactions as determined by Agent. "Fee Letter" has the meaning specified in Section 2.9. "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "GAAP" means generally accepted accounting principles in the United States as in effect and set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the United States accounting profession); provided that if there occurs after the date hereof any change in GAAP that affects in any respect the calculation of any covenant contained in Section 7.10, the Banks and the Company shall negotiate in good faith amendments to the provisions of this Agreement that relate to the calculation of such covenant with the intent of having the respective positions of the Banks and the Company after such change in GAAP conform as nearly as possible to their respective positions as of the date of this Agreement and, until any such amendments have been agreed upon, the covenants in Section 7.10 shall be calculated as if no such change in GAAP has occurred. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables (including reinsurance payables) entered into in the ordinary course of business on ordinary terms) that in accordance with GAAP would be shown on the liability side of the balance sheet of such Person; (c) the face amount of all letters of credit or surety bonds issued for the account of such Person and, without duplication, all drafts drawn thereunder; (d) all obligations evidenced by notes, bonds, debentures or similar instruments or incurred in connection with bankers' acceptances, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement that in accordance with GAAP would be shown on the 8 liability side of the balance sheet of such Person; (f) all obligations with respect to Capitalized Lease Obligations; (g) all Indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; (h) all obligations of such Person under Swap Contracts; (i) obligations under synthetic leases; and (j) without duplication, all Contingent Obligations of such Person; provided that Indebtedness shall not include obligations of any Insurance Subsidiary under or pursuant to Insurance Contracts, Reinsurance Agreements and Retrocession Agreements, trade payables and accrued expenses, in each case arising in the ordinary course of business but shall include any Reinsurance Agreement or Retrocession Agreement that would be disallowed under FAS 113. For all purposes of this Agreement, the Indebtedness of any Person shall include all recourse Indebtedness of any partnership, joint venture or limited liability company in which such Person is a general partner, a joint venturer or a member and for which such Person has liability. "Indemnified Liabilities" has the meaning specified in Section 10.5. "Indemnified Person" has the meaning specified in Section 10.5. "Insolvency Proceeding" means (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Insurance Code" means, with respect to any insurance company, the insurance code of its state of domicile and any successor statute of similar import, together with the regulations thereunder, as amended or otherwise modified and in effect from time to time. References to sections of the Insurance Code shall be construed to also refer to successor sections. "Insurance Contract" means any insurance contract or policy issued by an Insurance Subsidiary but shall not include any Reinsurance Agreement or Retrocession Agreement. "Insurance Subsidiary" means each Subsidiary of the Company identified as an Insurance Subsidiary (including Subsidiaries of such Subsidiary) on Schedule 5.14 and each other Subsidiary (including Subsidiaries of such Subsidiary) from time to time in the insurance business as certified by the Company in writing to the Agent. 9 "Interest Payment Date" means, as to any Offshore Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter and each date such Loan is converted into another Type of Loan, provided, however, that if any Interest Period exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter. provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period shall extend beyond the Revolving Termination Date. "Interim Statements" means the quarterly financial statement of any insurance company as required to be filed with the Department, together with all exhibits or schedules filed therewith, prepared in conformity with SAP. References to amounts on particular exhibits, schedules, lines, pages and columns of such interim statements are based on the formats promulgated by the NAIC for 1999 interim statements for the applicable type of insurance company. If such format is changed in future years so that different information is contained in such terms or they no longer exist, it is understood that the reference is to information consistent with that recorded in the referenced item in the 1999 interim statement of the insurance company. "Investment" has the meaning specified in Section 7.4. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. 10 "Laws" or "Law" means all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permit of, and agreements with, any Government Authority, in each case whether or not having the force of law. "Legal Requirements" means all applicable laws, rules, orders and regulations made by any governmental body or regulatory authority (including any Department) having jurisdiction over the Company or a Subsidiary of the Company. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.2, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement (in the nature of compensating balances, cash collateral accounts or security interests), encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction), including the interest of a purchaser of accounts receivable. "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, any Notes, the Fee Letter and all other documents delivered to the Agent or any Bank in connection herewith. "Margin Stock" means "margin stock" as such term is defined in Regulation T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Company or the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform under any Loan Document and to avoid any Event of Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company of any Loan Document. "Material Insurance Subsidiary" means a Material Subsidiary that is also an Insurance Subsidiary. 11 "Material Subsidiary" means, at any time, (a) each of Unum Life Insurance Company of America, First Unum Life Insurance Company, Provident Life & Accident Insurance Company, The Paul Revere Life Insurance Company and Colonial Life & Accident Insurance Company and each other Subsidiary from time to time identified by the Company as a Material Subsidiary, and (b) each other Subsidiary having (on a consolidated basis with its Subsidiaries) at such time either (i) total (gross) revenues for any four fiscal quarter period in excess of 10% of the total (gross) revenues of the Company and its Subsidiaries for such four fiscal quarter period or (ii) total assets, as of the last day of the preceding fiscal quarter, having a net book value in excess of 10% of the total assets of the Company and its Subsidiaries as of such day, in each case, based upon the Company's most recent annual or quarterly financial statements delivered to the Agent under Section 6.1. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA. "NAIC" means the National Association of Insurance Commissioners or any successor thereto. "Negative Pledge" means a Contractual Obligation limiting the ability to create a Lien. "Net Income" means, for any period, the net income of the Company and its Subsidiaries on a consolidated basis in accordance with GAAP. "Net Worth" means, at any time, the sum of all amounts (without duplication) which, in accordance with GAAP, would be included in the Company's stockholders' equity (excluding unrealized gains or losses recorded pursuant to FAS 115) as required to be reported in the Company's then most recent consolidated balance sheet required to be delivered to the Agent pursuant to this Agreement. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to Section 2.2(b), in substantially the form of Exhibit F. "Notice of Assignment and Acceptance" means a notice substantially in the form of Exhibit E. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. 12 "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means for any Interest Period with respect to any Offshore Rate Loan, a rate per annum determined by Agent pursuant to the following formula: Offshore Rate = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "LIBOR" means, for such Interest Period: (a) the rate per annum (carried out to the fifth decimal place) equal to the rate determined by the Agent to be the offered rate that appears on the page of the Telerate Screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum (carried out to the fifth decimal place) equal to the rate determined by the Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by the Agent as the rate of interest at which Dollar deposits (for delivery on the first day of such Interest Period) in same day funds in the approximate amount of the applicable Offshore Rate Loan and with a term equivalent to such Interest Period would be offered by its London Branch to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Reserve Percentage" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to any Bank, under regulations issued from time to time by the Board of Governors of the Federal 13 Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Offshore Rate for each outstanding Offshore Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. The determination of the Eurodollar Reserve Percentage and LIBOR by the Agent shall be conclusive in the absence of manifest error. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Ordinary Course Indebtedness" means: (a) Indebtedness under the Loan Documents; (b) intercompany Indebtedness (i.e., Indebtedness of the Company or any of its Subsidiaries to the Company or any of its Subsidiaries); (c) Indebtedness arising from the honoring of a check, draft or similar instrument against insufficient funds; and (d) Ordinary Course Swap Obligations. "Ordinary Course Liens" means: (a) Liens pursuant to any Loan Document; (b) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP; (c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person; (d) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (e) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, 14 performance bonds and other obligations of a like nature incurred in the ordinary course of business; and (f) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of any Person. "Ordinary Course Swap Obligations" means all obligations (contingent or otherwise) of Company or any Subsidiary existing or arising under any Swap Contract, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or property held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view", and (b) such Swap Contracts do not contain (i) any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party, or (ii) any provision creating or permitting the declaration of an event of default, termination event or similar event upon the occurrence of an Event of Default hereunder. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "Other Credit Agreement" means the Five-Year Credit Agreement dated October 31, 2000 among the Company, certain banks, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and the Bank of America, as Administrative Agent. "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Company or any ERISA Affiliate or to which the Company or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years. 15 "Permitted Acquisition" means, at any time of determination, any Acquisition by the Company or any of its Subsidiaries with respect to which each of the following requirements are met: (a) such Acquisition has been approved and recommended by the board of directors or general partner (or similar entity) of the Person to be acquired or which owns the assets of the Person be acquired; (b) in respect of any Acquisition the total purchase price for which equals or exceeds $50,000,000, the Company shall have furnished to the Agent (which shall promptly distribute the same to the Bank), prior to the consummation of such Acquisition, pro forma projections and other details (with reasonable assumptions and in form and detail reasonably satisfactory to the Agent) with respect to the Person or Persons or assets to be acquired and the Company after giving effect to such Acquisition demonstrating compliance with the terms of this Agreement; (c) prior to and after giving effect to such Acquisition, no Default or Event of Default (including without limitation under the provisions of Section 7.10) shall have occurred and be continuing, or would result therefrom, as confirmed in the pro forma projections referred to in clause (b) above if required to be delivered in accordance with such clause or, if not so required, in a certificate of a Responsible Officer delivered to the Agent; (d) the business of the Person or assets to be acquired (including blocks of directly related insurance business in the ordinary course of business) comprises the insurance business (of the types currently carried on by the Company and its respective Subsidiaries on the date hereof), and/or is compatible with, and related to, existing businesses (it being agreed that finance companies are not so related); and (e) the total consideration payable in cash in respect of any one Acquisition constituting a Permitted Acquisition does not exceed $50,000,000 and the total consideration payable in cash in respect of all Acquisitions constituting Permitted Acquisitions in any Fiscal Year does not exceed $75,000,000 in the aggregate; provided, however, that if the Total Debt to Total Capitalization Ratio as of the last fiscal quarter on a pro forma basis shall be equal to or less than 0.300 to 1.0 after giving effect to a proposed Acquisition and the Company shall deliver to the Agent a certificate demonstrating such ratio, an Acquisition may be a Permitted Acquisition without meeting the requirements of clauses (b) or (e) of this definition. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. 16 "Plan" means any employee benefit plan maintained or contributed to by the Company or by any trade or business (whether or not incorporated) under common control with the Company as defined in Section 4001(b) of ERISA and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "Pounds Sterling" means lawful money of the United Kingdom. "Primary Investments" means portfolio investments in the ordinary course of business by the Company or any of its Subsidiaries in any of the following: (a) operating deposit accounts maintained in the Company's name with FDIC member institutions; (b) Cash Equivalents; (c) fixed income securities with an investment grade rating from either Rating Agency; and (d) shares of investment companies that (i) are registered under the Investment Company Act of 1940, (ii) invest solely in one or more of the types without regard to maturity of securities described in clauses (a) through (g) of the definition of "Cash Equivalents" and in securities described in clause (c) of this definition and are not leveraged. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Rating Agency" means S&P or Moody's; collectively, the "Rating Agencies". "Register" means a register maintained by the Agent of the holders of the Commitments. "Regulatory Change" shall mean, with respect to any Bank, any change after the date hereof in Federal, state or foreign law or regulations or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Bank of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reinsurance Agreement" means any agreement, contract, treaty or other arrangement whereby one or more insurers, as reinsurers, assume liabilities of one or more insurance or reinsurance companies. 17 "Replacement Bank" has the meaning specified in Section 3.7. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4062(e) of ERISA. "Required Banks" means at any time Banks then holding in excess of 50% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Banks then having in excess of 50% of the Commitments. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer, the president, the principal financial officer, principal accounting officer, the treasurer or controller of the Company, or any other officer having substantially the same authority and responsibility. "Restricted Payment" means: (a) the declaration or payment of any dividend or distribution by the Company or any of its Subsidiaries, either in cash or property, on any shares of the capital stock of any class of the Company or any of its Subsidiaries (except dividends or other distributions payable solely in shares of capital stock of the Company or any of its Subsidiaries or payable by a Subsidiary to the Company or another wholly-owned Subsidiary of the Company); (b) the purchase, redemption or retirement by the Company or any of its Subsidiaries of any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock, whether directly or indirectly; (c) any other payment or distribution by the Company or any of its Subsidiaries in respect of its capital stock, either directly or indirectly; and (d) the prepayment, repayment, redemption, defeasance or other acquisition or retirement for value prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, of any Indebtedness not otherwise permitted under any Loan Document to be so paid. "Retrocession Agreement" means any agreement, contract, treaty or other arrangement whereby one or more insurers or reinsures, as retrocessionaires, assume 18 liabilities of reinsurers under a Reinsurance Agreement or other retrocessionaires under another Retrocession Agreement. "Revolving Termination Date" means the earlier to occur of: (a) October 30, 2001, as such date may be extended pursuant to Section 2.15 (as from time to time so extended, the "Scheduled Revolving Termination Date"); and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "SAP" means, as to any insurance company, the statutory accounting practices prescribed or permitted by the Department, or in the event that the Department fails to prescribe or address such practices, NAIC guidelines; provided that if there occurs after the date hereof any change in SAP that affects in any respect the calculation of any covenant contained in Section 7.10, the Banks and the Company shall negotiate in good faith amendments to the provisions of this Agreement that relate to the calculation of such covenant with the intent of having the respective positions of the Banks and the Company after such change in SAP conform as nearly as possible to their respective positions as of the date of this Agreement and, until any such amendments have been agreed upon, the covenants in Section 7.10 shall be calculated as if no such change in SAP has occurred. "S&P" means Standard & Poor's Ratings Group. "Scheduled Revolving Termination Date" has the meaning specified in the definition of "Revolving Termination Date." "Secondary Investments" means Investments by the Company or any of its Subsidiaries in the ordinary course of business not constituting Primary Investments or Acquisitions. "Senior Debt to Statutory EBIT Ratio" means at any fiscal quarter end the ratio of the Senior Debt of the Company and its Subsidiaries on a consolidated basis at such fiscal quarter end to the Statutory EBIT of the Insurance Subsidiaries on a combined basis for the four fiscal quarter period then ending. "Senior Debt" means Total Debt minus Subordinated Debt, on a consolidated basis. "Statutory EBIT" means, net earnings before interest expense and tax expense calculated in accordance with SAP as set forth in column 1, line 29, page 4 in the 1999 Annual Statement. 19 "Subordinated Debt" means the debt on Schedule 1.1 (the "Existing Subordinated Debt") and any portion of Total Debt subordinated to the Obligations with covenants and subordination provisions no less favorable (as reasonably determined by the Administrative Agent) to the Banks than the Existing Subordinated Debt. The 8.80% monthly income debt securities due 2025 shall not be considered "Subordinated Debt" for the purpose of this Agreement. "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the Voting Stock or other Equity Interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. For the purpose of (A) the definitions of "Contingent Obligation" and "Indebtedness" and any calculations using such definitions and (B) Sections 5.2, 5.5, 5.6, 5.9, 5.13, 5.15, 5.16, 6.11 8.1(f), 8.1(g) and 8.1(i), D & H shall not be considered a Subsidiary of the Company. "Swap Contract" means any agreement relating to any transaction that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap or option, bond, note or bill option, interest rate option, forward foreign exchange transaction, cap, collar or floor transaction, currency swap, cross-currency rate swap, swap option, currency option or any other, similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, and, unless the context otherwise clearly requires, any master agreement relating to or governing any or all of the foregoing. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determinated as the mark-to-market value(s) for such Swap Contract, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Bank). "Tangible Net Worth" means, at any time, Net Worth minus intangible assets, including without limitation, goodwill, the value of business acquired and deferred acquisition costs. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Total Capitalization" means, at any time, the sum of Net Worth and Total Debt. 20 "Total Debt" means, at any time, with respect to the Company and its Subsidiaries, the sum, without duplication, of (a) Applicable Debt at such time, and (b) non-contingent reimbursement or payment obligations in respect of the items referred to in clause (c) of the definition of Indebtedness contained in this Agreement at such time. "Total Debt to Total Capitalization Ratio" means, at any time, the ratio of Total Debt to Total Capitalization at such time. "Type" has the meaning specified in the definition of "Loan." "Unfunded Pension Liability" means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. "Voting Stock" means, at any date, the capital stock of any class or classes of a corporation having general voting power under ordinary circumstances to elect the board of directors of such corporation (irrespective of whether or not at the time stock or other securities of any other class or classes shall have or might have special voting power or rights by reason of the happening of any contingency). "Wholly-Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one or more of the other Wholly-Owned Subsidiaries, or both. 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." 21 (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 1.3 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. ARTICLE II THE CREDITS 2.1 Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to make Loans to the Company from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth on Schedule 2.1 (as the same may be reduced under Section 2.5, increased under Section 2.14, or reduced or increased as a result of one or more assignments under Section 10.7, the Bank's "Commitment"); provided, however, that, after 22 giving effect to any Borrowing, the aggregate principal amount of all outstanding Loans shall not at any time exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.1, prepay under Section 2.6 and reborrow under this Section 2.1. 2.2 Loan Accounts. (a) The Loans made by each Bank shall be evidenced by one or more loan accounts or records maintained by such Bank in the ordinary course of business. The loan accounts or records maintained by the Agent and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to the Company and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. (b) Upon the request of any Bank made through the Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.3 Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to (i) 10:00 a.m. (Charlotte time) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans; and (ii) prior to 10:00 a.m. one Business Day in advance of the requested Borrowing Date, in the case of Base Rate Loans, specifying: (A) the amount of the Borrowing, which shall be in an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; and (D) the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be three months. (b) The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. 23 (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office by 11:00 a.m. (Charlotte time) on the Borrowing Date requested by the Company in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of Bank of America with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. (d) After giving effect to any Borrowing, there may not be more than five (5) different Interest Periods in effect. 2.4 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with Section 2.4(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans, to convert any such Loans (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Loans of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $5,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans, shall terminate. (b) The Company shall deliver a Notice of Conversion/ Continuation to be received by the Agent not later than (i) 10:00 a.m. (Charlotte time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans; and (ii) one Business Day in advance of the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or renewed; (C) the Type of Loans resulting from the proposed conversion or continuation; and 24 (D) other than in the case of Offshore Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans, the Company has failed to select timely a new Interest Period to be applicable to such or Offshore Rate Loans or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Required Banks otherwise agree, during the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Loan. (f) After giving effect to any conversion or continuation of Loans, there may not be more than five (5) different Interest Periods in effect. 2.5 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than three Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of the Loans would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.6 Optional Prepayments. Subject to Section 3.4, the Company may, at any time or from time to time, upon not less than three (3) Business Days' irrevocable notice to the Agent, ratably prepay Loans in whole or in part, in minimum amounts of $5,000,000 or any multiple of $1,000,000 in excess thereof. Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.4. 25 2.7 Repayment. The Company shall repay the Loans on the Revolving Termination Date. 2.8 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to (i) the Offshore Rate plus the Applicable Amount or (ii) the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.4). (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.6 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Required Banks. (c) Notwithstanding subsection (a) of this Section, while any Event of Default exists or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Loans, at a rate per annum which is determined by adding 2% per annum to the rate otherwise applicable to such Loans; provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus 2%. (d) Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.9 Fees. (a) Arrangement, Agency Fees. The Company shall pay fees to the Arranger for the Arranger's own account and to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company and the Arranger and Agent dated August 31, 2000. (b) Facility Fees. The Company shall pay to the Agent for the account of each Bank a facility fee on the average amount of such Bank's Commitment (irrespective of usage), computed on a quarterly basis in arrears on the last Business Day of each calendar quarter, equal to the Applicable Amount per annum. Such facility fee shall accrue from the date hereof to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December 26 commencing on December 31, 2000 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.5, the accrued facility fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The facility fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article IV are not met. (c) Utilization Fees. The Company shall pay to the Agent for the account of each Bank a utilization fee on the amount of such Bank's Loans, during any period in which the aggregate outstanding Loans plus the outstanding "Loans" under the Other Credit Agreement exceed 50% of the aggregate amount of the Commitments plus the "Commitments" under the Other Credit Agreement, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent, equal to the Applicable Amount per annum. Such utilization fee shall accrue from the date hereof to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December commencing on December 31, 2000 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date. The utilization fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at anytime during which one or more conditions in Article IV are not met. 2.10 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans when the Base Rate is determined by Bank of America's "prime rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.11 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 10:00 a.m. (Charlotte time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 10:00 a.m. (Charlotte time) 27 shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. 2.12 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 28 2.13 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.9) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. 2.14 Increase of Commitments. The Company may from time to time, by notice to the Agent, request that the aggregate Commitments be increased by an amount that will not result in the aggregate Commitments under this Agreement plus the "Commitments" under the Other Credit Agreement exceeding $1,000,000,000. Each such notice shall set forth the requested amount of the increase in the Commitments and the date on which such increase is to become effective. The Company shall have the right, but not the obligation, to arrange for one or more commercial banks or other financial institutions (any such bank or other financial institution being called an "Augmenting Bank"), which may include any Bank, to extend Commitments or increase their existing Commitments in an aggregate amount up to, but not greater than, the requested increase, provided that each Augmenting Bank, if not already a Bank hereunder (i) shall extend a new Commitment of not less than $10,000,000, (ii) shall execute all such documentation as the Agent shall specify to evidence its status as a Bank hereunder and (iii) shall be consented to by the Agent. If (and only if) Banks (including Augmenting Banks) shall have agreed to increase their aggregate Commitments or to extend new Commitments in an aggregate amount not less than $10,000,000 in the aggregate, such increases and such new Commitments shall become effective on the date agreed to by the Company, the Augmenting Banks and the Agent. Notwithstanding the foregoing, no increase in the aggregate Commitments (or in the Commitment of any Bank) shall become effective under this paragraph unless, on the date of such increase, the conditions set forth in Section 4.2 shall be satisfied (with all references in such paragraphs to a Loan being deemed to be references to such increase) and the Agent shall have received a certificate to that effect dated such date and executed by a Responsible Officer of the Company. Upon the effectiveness of any increase pursuant to this Section 2.14 of the aggregate Commitments and any resulting adjustment in the Pro Rata Share, the Banks and the Augmenting Banks will purchase from each other and sell to each other outstanding Loans sufficient to cause the 29 outstanding Loans of each Bank and Augmenting Bank to equal its Pro Rata Share (as so adjusted) of the aggregate outstanding Loans. Such purchase and sale shall be made pursuant to Section 10.7 except that no minimum amount shall be required, no processing fee shall be charged and, if any Bank shall suffer a loss or incur an expense as a result of the effectiveness of such purchase or sale being during an Interest Period, the Company shall reimburse such Bank the amount of such loss or expense. Each such Bank shall furnish the Company with a certificate setting forth the basis for determining the amount to be paid to it hereunder. 2.15 Extension of Scheduled Revolving Termination Date. Between 60 and 45 days prior to any Scheduled Revolving Termination Date, the Company may, by notice to the Agent, request that all Banks extend for 364 additional days the Scheduled Revolving Termination Date. Such extension so requested shall become effective if (and only if) on or prior to 30 days after such notice, each Bank shall have consented in its sole and absolute discretion to such extension in writing by notice to the Agent. If a Bank (a "Non-Extending Bank") shall in its sole and absolute discretion not agree to such extension, but Banks holding at least 66-2/3% of the Commitments shall agree to such extension, the Company may (a) as to the then Scheduled Revolving Termination Date, terminate the Commitment of each Non-Extending Bank and pay to the Agent, for the account of each such Non-Extending Bank, an amount equal to the outstanding principal balance of Loans held by such Non-Extending Bank, together with accrued and unpaid interest thereon to the date of such payment, and any accrued and unpaid fees or other expenses due to such Non-Extending Bank; (b) request one or more of the other Banks to purchase the Commitment of the Non-Extending Bank; or (c) with the consent of the Agent (not to be unreasonably withheld), the Company may request an Eligible Assignee to purchase the Commitment of the Non-Extending Bank (any such Bank or Eligible Assignee purchasing all or a portion of such Commitment being called a "Designated Bank"). Any such purchase by a Designated Bank shall be subject to the terms of Section 10.7. ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 3.1 Taxes. (a) Any and all payments by the Company to or for the account of Agent or any Bank under any Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of Agent and any Bank, taxes imposed on or measured by its net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which Agent or such Bank, as the case may be, is organized or maintains a lending office (all such non-excluded taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as "Taxes"). If the Company shall be required by any Laws to deduct any Taxes from or in respect of any sum payable under any Loan Document to Agent or any Bank, (i) the sum 30 payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), Agent and such Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions, (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Laws, and (iv) within 30 days after the date of such payment, the Company shall furnish to Agent (who shall forward the same to such Bank) the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Company agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Loan Document (hereinafter referred to as "Other Taxes"). (c) If the Company shall be required by the Laws of any jurisdiction outside the United States to deduct any Taxes from or in respect of any sum payable under any Loan Document to Agent or any Bank, the Company shall also pay to such Bank or Agent (for the account of such Bank), at the time interest is paid, such additional amount that the respective Bank specifies as necessary to preserve the after-tax yield (after factoring in United States (federal and state) taxes imposed on or measured by net income) such Bank would have received if such deductions (including deductions applicable to additional sums payable under this Section) had not been made. (d) The Company agrees to indemnify Agent and each Bank for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by Agent and such Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. 3.2 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans, then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 3.4, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore 31 Rate Loan, then concurrently with such prepayment, the Company shall borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. (c) If the obligation of any Bank to make or maintain Offshore Rate Loans has been so terminated or suspended, the Company may elect, by giving notice to the Bank through the Agent that all Loans which would otherwise be made by the Bank as Offshore Rate Loans shall be instead Base Rate Loans. (d) Before giving any notice to the Agent under this Section, the affected Bank shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 3.3 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate) in or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (b) Without limiting the effect of the foregoing provisions of this Section 3.3 (but without duplication), the Company shall pay directly to each Bank from time to time on request such amounts as such Bank may determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it determines are attributable to the maintenance by such Bank (or any applicable lending office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) heretofore or hereafter issued by any government or governmental or supervisory authority implementing at the national or supra-national level the Basle Accord (including, without limitation, the Final Risk-Based Capital Guidelines of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix A; 12 C.F.R. Park 225, Appendix A) and the Final Risk-based Capital Guidelines of the Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix A)), of capital in respect of its Commitment or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any applicable lending office or such bank holding 32 company) to a level below that which such Bank (or any applicable lending office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). 3.4 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation; (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.6; (d) the prepayment (including pursuant to Section 2.7) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.4 of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Company to the Banks under this Section and under Section 3.3(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the Offshore Base Rate used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 3.5 Inability to Determine Rates. If the Agent determines that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate Loan applicable pursuant to Section 2.8(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to any Bank of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. 33 3.6 Certificates of Banks. Any Bank claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. 3.7 Substitution of Banks. Upon the receipt by the Company from any Bank (an "Affected Bank") of a claim for compensation under Section 3.3, the Company may: (i) request the Affected Bank to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Company to acquire and assume all or a ratable part of all of such Affected Bank's Loans and Commitment (a "Replacement Bank"); (ii) request one more of the other Banks to acquire and assume all or part of such Affected Bank's Loans and Commitment; or (iii) designate a Replacement Bank. Any such designation of a Replacement Bank under clause (i) or (iii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld); provided, in any case, that all amounts due under this Agreement to any such Affected Bank shall be paid in full by the Replacement Bank in respect of outstanding principal and by the Company in respect of other amounts on or prior to the substitution therefor of any Replacement Bank. 3.8 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions of Initial Loans. The obligation of each Bank to make its initial Loan hereunder is subject to the condition that the Agent shall have received on or before the initial borrowing date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement and Notes. This Agreement and the Notes executed by each party thereto; (b) Resolutions; Incumbency. (i) Copies of the resolutions of the board of directors of the Company authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Company; and (ii) A certificate of the Secretary or Assistant Secretary of the Company, certifying the names and true signatures of the officers of the Company authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder; 34 (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws of the Company as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Company as of the Closing Date; and (ii) a good standing certificate for the Company from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation; (d) Legal Opinion. An opinion of F. Dean Copeland, Executive Vice President and General Counsel to the Company and addressed to the Agent and the Banks, substantially in the form of Exhibit D. (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees (including up-front fees) , costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of Bank of America to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute Bank of America's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and Bank of America); including any such costs, fees and expenses arising under or referenced in Sections 2.9 and 10.4; (f) Certificate. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article V are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Borrowing; (iii) there has occurred since June 30, 2000, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; and (iv) the Credit Agreement dated as of October 29, 1996 among Unum Corporation, certain banks and Morgan Guaranty Trust Company of New York has been repaid in full and notice of termination delivered. (g) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may request. 35 4.2 Conditions to All Borrowings. The obligation of each Bank to make any Loan to be made by it (including its initial Loan) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date: (a) Notice of Borrowing. The Agent shall have received (with, in the case of the initial Loan only, a copy for each Bank) a Notice of Borrowing; (b) Continuation of Representations and Warranties. The representations and warranties in Article V shall be true and correct on and as of such Borrowing Date with the same effect as if made on and as of such Borrowing Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing. Each Notice of Borrowing submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the date of each such notice and as of each Borrowing Date, that the conditions in Section 4.2 are satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Bank that: 5.1 Corporate Existence and Power. The Company and each of its Subsidiaries: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified as a foreign corporation and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except, in each case referred to in this Section 5.1, to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 36 5.2 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and each other Loan Document to which the Company is party, have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of the Company's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which the Company is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or its property is subject; or (c) violate any Requirement of Law. 5.3 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company of the Agreement or any other Loan Document. 5.4 Binding Effect. This Agreement and each other Loan Document to which the Company is a party constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by the application of equitable principles relating to enforceability (regardless of whether considered in a proceeding in equity or at law) including, without limitation (i) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (ii) concepts of materiality, reasonableness, good faith and fair dealing. 5.5 Litigation. Except as in Schedule 5.5, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Company, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) if adversely determined, could reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 37 5.6 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Company. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under Section 8.1(e). 5.7 ERISA Compliance. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state Laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of the Company, nothing has occurred which would prevent, or cause the loss of, such qualification. The Company and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of the Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that has a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. 5.8 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 6.12. Neither the Company nor any Subsidiary is generally engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No part of the proceeds of any Loan will be used for purchasing or carrying Margin Stock or for any purpose which violates, or which would be inconsistent with, the provisions of Regulations U or X of the FRB. 5.9 Title to Properties. 38 (a) Each of the Company and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, subject only to Liens permitted by Section 7.2 and except for minor defects in title that could not reasonably be expected to have a Material Adverse Effect. (b) Each of the Company and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Company and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 5.10 Taxes. The Company and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP or immaterial taxes; provided, however, that in each case no material item or portion of property of the Company or any of its Subsidiaries is in jeopardy of being seized, levied upon or forfeited. 5.11 Financial Condition. (a) The audited consolidated financial statements of the Company and its Subsidiaries dated December 31, 1999 and the unaudited consolidated financial statements of the Company and its Subsidiaries dated June 30, 2000, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal periods ended on such dates: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, subject in the case of the June 30, 2000 statements to ordinary, good faith year end audit adjustments; (ii) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Company and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Contingent Obligations. (b) The financial statements of the Material Insurance Subsidiaries of the Company, dated December 31, 1999 and June 30, 2000: 39 (i) were prepared in accordance with SAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (ii) fairly present in all material respects in accordance with SAP the financial condition of the Insurance Subsidiaries as of the date thereof and results of operations for the period covered thereby. (c) Since December 31, 1999, there has been no Material Adverse Effect. 5.12 Regulated Entities. Except as listed on Schedule 5.12 hereto, none of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 5.13 No Burdensome Restrictions. Neither the Company nor any Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 5.14 Subsidiaries. As of the Closing Date, the Company has no Subsidiaries other than those specifically disclosed in Schedule 5.14 hereto. 5.15 Environmental Compliance. The Company and its Subsidiaries conduct in the ordinary course of business a review of claims alleging potential liability or responsibility for violation of any Environmental Law on their respective businesses, operations and properties, and as a result thereof the Company has reasonably concluded that such Environmental Laws and claims do not, individually or in the aggregate, have a Material Adverse Effect. 5.16 Insurance. The properties of the Company and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or such Subsidiary operates. 5.17 Full Disclosure. None of the representations or warranties made by the Company or any Subsidiary in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company or any Subsidiary in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of the Company to the Banks prior to the Closing Date), contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light 40 of the circumstances under which they are made, not misleading as of the time when made or delivered. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Banks waive compliance in writing: 6.1 Financial Statements. The Company shall deliver to each of the Banks: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, audited and accompanied by a report and opinion of an independent certified public accountant of nationally recognized standing, which report and opinion shall be prepared in accordance with GAAP and shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualification which is of a "going concern" or similar nature; and (b) as soon as available, but in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal quarter, and the related consolidated statement of income and cash flows for such fiscal quarter and for the portion of the Company's fiscal year then ended, setting forth in each case in comparative form the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year then ended, all in reasonable detail and certified by the principal financial officer or principal accounting officer of the Company as fairly presenting the financial condition, results of operations and cash flows of the Company and its Subsidiaries in accordance with GAAP, subject only to normal year-end adjustments and the absence of footnotes; (c) as soon as available, but not later than 60 days after the end of each fiscal year, a copy of the Annual Statement of each Material Insurance Subsidiary for such fiscal year prepared in accordance with SAP and accompanied by the certification of the principal financial officer or principal accounting officer of such Material Insurance Subsidiary that such Annual Statement presents fairly in accordance with SAP the financial position of such Material Insurance Subsidiary for the period then ended; (d) as soon as possible, but no later than 45 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the Interim Statement of each Material 41 Insurance Subsidiary for each such fiscal quarter, all prepared in accordance with SAP and accompanied by the certification of the principal financial officer or principal accounting officer of such Insurance Subsidiary that all such quarterly statements present fairly in accordance with SAP the financial position of such Insurance Subsidiary for the period then ended; (e) within 75 days after the close of each fiscal year, a copy of each Material Insurance Subsidiary's "Statement of Actuarial Opinion" which is provided to the Department (or equivalent information should the Department no longer require such a statement) as to the adequacy of loss reserves of such Material Insurance Subsidiary, which opinion shall be in the format prescribed by the Insurance Code; and (f) as soon as available, a copy of the Management Discussion and Analysis filed with the Department with respect to any of the foregoing financial statements and such other information. 6.2 Certificates, Notices and Other Information. The Company shall deliver to each of the Banks in form and detail reasonably satisfactory to the Agent: (a) concurrently with the delivery of the financial statements referred to in Section 6.1(a), a certificate of its independent certified public accountants certifying such financial statement and stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default hereunder or, if any such Default or Event of Default shall exist, stating the nature and status of such event; (b) concurrently with the delivery of the financial statements referred to in Sections 6.1(a) and (b), a duly completed Compliance Certificate signed by a Responsible Officer of the Company; (c) promptly after request by Agent or any Bank, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors (or the audit committee of the board of directors) of the Company by independent accountants in connection with the accounts or books of the Company or any of its Material Subsidiaries, or any audit of any of them; (d) promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Company, and copies of all annual, regular, periodic and special reports and registration statements which the Company may file or be required to file with the Securities and Exchange Commission under Sections 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to Agent pursuant hereto; (e) promptly after the occurrence thereof, notice of any Default or Event of Default; 42 (f) notice of any material change in accounting policies or financial reporting practices by the Company or any of its Subsidiaries; (g) promptly after the commencement thereof, notice of any litigation, investigation or proceeding affecting the Company any of its Subsidiaries which may reasonably be expected to have a Material Adverse Effect; (h) promptly after the occurrence thereof, notice of any Reportable Event with respect to any Plan or the intent to terminate any Plan, or the institution of proceedings or the taking or expected taking of any other action to terminate any Plan or withdraw from any Plan; (i) promptly after the occurrence thereof, notice of any Material Adverse Effect; (j) promptly, notice of any announcement by any rating agency of any change or possible change in the Debt Rating by either Rating Agency or in the "financial strength" rating by either Rating Agency of any Material Insurance Subsidiary; (k) the following certificates and other information: (i) not later than 60 days after received, a copy of any final financial examination reports or market conduct examination reports issued by a Governmental Authority with respect to any Material Insurance Subsidiary of the Company (and the Company, should it at any time engage or become involved in the business of insurance), relating to the insurance business of each Material Insurance Subsidiary or, if applicable, the Company (when, and if, prepared) and of any and all interim reports;provided that such Material Insurance Subsidiary or, if applicable, the Company shall not have to deliver any interim report hereunder if (A) the items described in such report could not reasonably have a Material Adverse Effect or (B) a final report is issued and delivered to the Agent within 90 days of such interim report; (ii) within two Business Days of the receipt of such notice, notice of the actual suspension, termination or revocation of any material license of the Company or any of its Material Subsidiaries by any Governmental Authority or notice from any Governmental Authority notifying the Company or any of its Material Subsidiaries of a hearing relating to such a suspension, termination or revocation, including any request by a Governmental Authority which commits the Company or any of its Material Subsidiaries to take, or refrain from taking, any action or which otherwise materially and adversely affects the authority of the Company or any of its Material Subsidiaries to conduct its business; (iii) within two Business Days of the receipt of such notice, notice of any material pending or threatened investigation or regulatory proceeding (other than 43 routine periodic investigations or reviews or routine market conduct reviews) by any Governmental Authority concerning the business practices or operations of the Company or any of its Material Subsidiaries; and (iv) promptly upon the receipt of such notice, notice of any actual material changes in the Insurance Code governing the investment or dividend practices of insurance companies domiciled in any of the states in which any Insurance Subsidiary is domiciled; (l) promptly upon occurrence, notice of (i) the acquisition by the Company or any of its Subsidiaries of any Person which engages in any material respect in an insurance business or (ii) any Subsidiary of the Company or any of its Subsidiaries becoming engaged in any material respect in an insurance business; and (m) promptly, such other data and information as from time to time may be reasonably requested by Agent, or, through Agent by the Required Banks. 6.3 Payment of Taxes. The Company shall, and shall cause each of its Subsidiaries to, pay and discharge when due all taxes, assessments, and governmental charges, Ordinary Course Liens or levies imposed on any Company or any of its Subsidiaries or on its income or profits or any of its property, except for any such tax, assessment, charge, or levy which is an Ordinary Course Lien under subsection (b) of the definition of such term. 6.4 Preservation of Existence. The Company shall, and shall cause each of its Subsidiaries to, preserve and maintain its existence, licenses, permits, rights, franchises and privileges necessary or desirable in the normal conduct of its business, except where failure to do so does not have a Material Adverse Effect and except as permitted under Section 7.3. 6.5 Maintenance of Properties. The Company shall, and shall cause each of its Subsidiaries to, maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good order and condition, subject to wear and tear in the ordinary course of business, and not permit any waste of its properties and, except where failure to do so does not have a Material Adverse Effect. 6.6 Maintenance of Insurance. The Company shall, and shall cause each of its Subsidiaries to, maintain liability and casualty insurance with responsible insurance companies in such amounts and against such risks as is customary for similarly situated businesses; provided, that the Company may in its reasonable discretion, choose not to have certain Subsidiaries, other than Material Subsidiaries, carry certain insurance, so long as the failure to carry such insurance does not have a Material Adverse Effect. 6.7 Compliance With Laws. (a) The Company shall, and shall cause each of its Subsidiaries to, comply with the requirements of all applicable Laws and orders of any Governmental Authority, noncompliance with which has a Material Adverse Effect. 44 (b) The Company shall, and shall cause each of its Subsidiaries to, conduct its operations and keep and maintain its property in compliance with all Environmental Laws. 6.8 Inspection Rights. At any time during regular business hours and as often as reasonably requested, the Company shall, and shall cause each of its Subsidiaries to, permit the Agent or any Bank, or any employee, agent or representative thereof, to examine, audit and make copies and abstracts from the records and books of account of the Company and its Subsidiaries and to visit and inspect their properties and to discuss their affairs, finances and accounts with any of their officers and key employees, and, upon request, furnish promptly to Agent or any Bank true copies of all financial information, provided that, when a Default or Event of Default exists, the Agent or any Bank may do any of the foregoing at the expense of the Company at any time during normal business hours and without advance notice. 6.9 Keeping of Records and Books of Account. The Company shall, and shall cause each of its Subsidiaries to, keep adequate records and books of account reflecting all financial transactions in conformity with GAAP, consistently applied, and in material conformity with all applicable requirements of any Governmental Authority having regulatory jurisdiction over the Company or any of its Subsidiaries. 6.10 Compliance with ERISA. The Company shall and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 6.11 Compliance With Agreements. The Company shall, and shall cause each of its Subsidiaries to, promptly and fully comply with all Contractual Obligations to which any one or more of them is a party, except for any such Contractual Obligations (a) the nonperformance of which would not cause a Default or Event of Default, (b) then being contested by any of them in good faith by appropriate proceedings, or (c) if the failure to comply therewith does not have a Material Adverse Effect. 6.12 Use of Proceeds. The Company shall use proceeds of the Loans for general corporate purposes, including commercial paper back up, not otherwise in contravention of this Agreement. ARTICLE VII NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Banks waive compliance in writing: 45 7.1 Indebtedness. The Company shall not, and shall not permit any Subsidiary to, create, incur, assume or suffer to exist any Indebtedness, except: (a) Commercial paper, Obligations and "Obligations" under the Other Credit Agreement aggregating an amount not in excess of $1,000,000,000 at any time outstanding; and (b) Indebtedness outstanding on the date hereof and listed on Schedule 7.1 and any refinancings, refundings, renewals or extensions thereof, provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to the premium or other amount paid, and fees and expenses incurred, in connection with such refinancing and by an amount equal to any utilized commitments thereunder; and provided, further, that the terms of such refinancing, renewal or refunding shall have covenants, defaults or other terms and conditions (other than interest rates) no more restrictive than those contained in this Agreement and, if the Indebtedness being refinanced is Subordinated Debt, the refinancing Indebtedness shall be Subordinated Debt with subordination terms at least as favorable to the Banks as such terms in the refinanced Indebtedness; and (c) Ordinary Course Indebtedness; and (d) Indebtedness in respect of repurchase obligations (including securities lending and dollar rolls) described in clause(g) of the definition of "Cash Equivalents" in amounts not in excess of $500,000,000 at any time outstanding; and (e) Contingent Obligations of the Company with respect to letters of credit in an amount not in excess of 33,300,000 Pounds Sterling with respect to which D & H is the account party; and (f) Additional Contingent Obligations in amounts not in excess of $50,000,000 at any time outstanding; provided, that notwithstanding the foregoing the Subsidiaries shall have no Indebtedness except Indebtedness described in clauses (c) and (d), Indebtedness payable to the Company and other Wholly-Owned Subsidiaries and other Indebtedness not to exceed $5,000,000 at any time outstanding; and provided, further, that no Subsidiary shall have any Contingent Obligations in respect of Indebtedness of the Company. 7.2 Liens and Negative Pledges. The Company shall not, and shall not permit any Subsidiary to, incur, assume or suffer to exist, any Lien or Negative Pledge upon any of its property, assets or revenues, whether now owned or hereafter acquired, except: (a) Liens and Negative Pledges existing on the date hereof and listed on Schedule 7.2 and any renewals or extensions thereof, provided that the property covered thereby is not 46 increased and any renewal or extension of the obligations secured or benefitted thereby is permitted by Section 7.1(a); (b) Ordinary Course Liens; (c) Liens consisting of pledges or deposits of cash or securities made by any Insurance Subsidiary as a condition to obtaining or maintaining any licenses issued to it by, or to satisfy the requirements of, any Department; (d) Liens consisting of judgment or judicial attachment Liens (other than arising as a result of claims under or related to Insurance Contracts, Retrocession Agreements or Reinsurance Agreements); provided that the enforcement of such Liens is effectively stayed or fully covered by insurance and all such liens in the aggregate at any time outstanding for the Company and its Subsidiaries do not exceed $35,000,000; (e) Liens arising as a result of claims under or related to Insurance Contracts, Reinsurance Agreements or Retrocession Agreements in the ordinary course of business, or securing Indebtedness of Insurance Subsidiaries incurred or assumed in connection with the settlement of claim losses in the ordinary course of business of such Insurance Subsidiaries; (f) Liens securing Ordinary Course Swap Obligations with Swap Termination Values not at any time exceeding $200,000,000 in the aggregate; (g) Liens on securities securing repurchase agreements (including securities lending and dollar rolls) with a term of not more than 6 months and an aggregate purchase price not in excess of $500,000,000; (h) any extension, renewal or replacement of the foregoing; provided that the Liens permitted hereby shall not be spread to cover any additional Indebtedness or property (other than a substitution of like property); and (i) Additional Liens on property having a value not in excess of $50,000,000 and securing Indebtedness not in excess of $50,000,000. Notwithstanding the foregoing, no Liens shall be permitted on the Equity Interests of any Subsidiary. 7.3 Consolidations and Mergers; Sales of Assets. The Company shall not, and shall not allow any of its Subsidiaries to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or any part of its assets (including receivables and Equity Interests, and in all cases whether now owned or hereafter acquired) to or in favor of any Person, except: 47 (a) any Subsidiary may merge with the Company (provided that the Company shall be the continuing or surviving Person), or with any one or more Subsidiaries (provided that, if a Wholly-Owned Subsidiary is a party to said merger, a Wholly-Owned Subsidiary shall be the continuing or surviving Person and if neither Subsidiary party to said merger is a Wholly-Owned Subsidiary, the Subsidiary of which the Company owns directly or indirectly the highest percentage shall be the continuing or surviving Person); (b) any Subsidiary may sell all or any part of its assets (upon voluntary liquidation or otherwise) to the Company or another Subsidiary that is a direct or indirect Wholly-Owned Subsidiary; (c) the Company or any Subsidiary may sell, lease, convey or otherwise dispose of assets if such sale, lease, conveyance or other disposition is (i) of portfolio Investments in the ordinary course of its business at fair market value, (ii) of obsolete, worn-out or surplus property, and (iii) a sale of property to the extent such property is exchanged for credit against the purchase price of similar replacement property or the net proceeds thereof are applied to the purchase of such replacement property within 180 days or the Commitments shall be reduced within 180 days by the amount of such net proceeds and any outstanding Loans in excess of such reduced Commitments shall be simultaneously repaid. (d) the Company or any Subsidiary may merge with another Person, if the Company or such Subsidiary shall be the surviving Person, to accomplish a Permitted Acquisition; (e) the Company or any Insurance Subsidiary may enter into Reinsurance Agreements in the ordinary course of business, so long as the net proceeds of any Reinsurance Agreements are reinvested in the business of the Company and its Subsidiaries within 180 days; (f) Subsidiaries, other than Material Subsidiaries, may be dissolved or liquidated; and (g) other sales of assets at fair market value the proceeds of which shall not exceed $50,000,000 in any fiscal year so long as the net proceeds of such sale are reinvested in the business of the Company and its Subsidiaries within 180 days or the Commitments shall be reduced within 180 days by the amount of such net proceeds and any outstanding Loans in excess of such reduced Commitments shall be simultaneously repaid. 7.4 Loans, Acquisitions and Investments. The Company shall not purchase or acquire, and shall not allow any of its Subsidiaries to purchase or acquire, or make any commitment to purchase or acquire, any Equity Interest in, any Person, or make or commit to make any Acquisitions, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in any Person including any Affiliate of the Company (together, "Investments"), except for: 48 (a) Investments held by the Company or any of its Subsidiaries in the form of (i) Primary Investments and (ii) so long as no Default or Event of Default has occurred and is continuing at the time of the making of such Investment, and after giving effect thereto, Secondary Investments; provided that, (A) such Investments comply with all Legal Requirements, and (B) the aggregate amount of Secondary Investments shall not exceed 30% of the aggregate amount of the Company's aggregate Investments (with all valuations for purposes of compliance with this clause (ii) being on a cost basis); (b) extensions of credit and capital contributions by the Company to any of its Wholly-Owned Subsidiaries existing on the date hereof or to new Wholly-Owned Subsidiaries created after the date hereof in accordance with this Agreement or by any of its Wholly-Owned Subsidiaries to another of its Wholly-Owned Subsidiaries existing on the date hereof or to new Wholly-Owned Subsidiaries created after the date hereof in accordance with this Agreement; provided that additional investments, capital contributions or extensions of credit made after the date hereof in D&H shall not exceed $50,000,000 and shall be applied to increase reserves at D&H; (c) extensions of credit in the nature of accounts receivable, notes receivable, lease obligations and similar obligations arising in the ordinary course of business; (d) Investments constituting Permitted Acquisitions; and (e) Investments consisting of non-cash proceeds from dispositions permitted under Section 7.3. 7.5 Restricted Payments. (a) The Company shall not, and shall not permit any Subsidiary to, make any Restricted Payments, if before or after giving effect to any such Restricted Payment a Default or Event of Default shall have occurred and be continuing. (b) No payments shall be made on the principal of the $300,000,000 Junior Subordinated Deferrable Interest Debentures, Series A of the Company due 2038 (the "Junior Subordinated Deferrable Interest Debentures") or on the Company's guaranty of the Provident Financing Trust I Capital Securities except from proceeds of Indebtedness issued concurrently with said payments, subordinated to the Obligations in a form at least as favorable to the Banks as the Junior Subordinated Deferrable Interest Debentures and with a term no shorter than the terms of the Junior Subordinated Deferrable Interest Debentures and a lower cost to the Company. 7.6 ERISA. The Company shall not, and shall not permit any Subsidiary to, at any time engage in a transaction which could be subject to Sections 4069 or 4212(c) of ERISA, or permit any Pension Plan to (a) engage in any non-exempt "prohibited transaction" (as defined in Section 4975 of the Code); (b) fail to comply with ERISA or any other applicable Laws; or (c) incur any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), which, with respect to each event listed above, has a Material Adverse Effect. 49 7.7 Change in Nature of Business. The Company shall not, and shall not permit any Subsidiary to, make any change in the nature of the business of the Company and its Subsidiaries taken as a whole as conducted and as proposed to be conducted as of the date hereof. 7.8 Transactions with Affiliates. The Company shall not, and shall not allow any of its Subsidiaries to, enter into any transaction with any Affiliate of the Company, except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary; 7.9 Hostile Acquisitions. The Company shall not use the proceeds of any Loan in connection with the acquisition of a voting interest of five percent or more in any Person if such acquisition is opposed by the board of directors or management of such Person. 7.10 Financial Covenants. (a) The Company shall not permit its Tangible Net Worth at any time to be less than (i) $1,325,000,000 plus (ii) 25% of consolidated Net Income (in excess of zero) for any fiscal quarter ending on or after September 30, 2000. (b) The Company shall not permit its Total Debt to Total Capitalization Ratio at any time to be greater than 0.35 to 1.0. (c) The Company shall not permit its Senior Debt to Statutory EBIT Ratio to be greater than: 6.0 to 1.0 at any fiscal quarter end from March 31, 2001 through December 31, 2001 4.75 to 1.0 at any fiscal quarter end from March 31, 2002 through December 31, 2002 4.25 to 1.0 at any fiscal quarter end from March 31, 2003 through December 31, 2003 4.0 to 1.0 at fiscal quarter end thereafter 50 ARTICLE VIII EVENTS OF DEFAULT 8.1 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within three days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by the Company made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The Company fails to perform or observe any term, covenant or agreement contained in Sections 6.1 or 6.2 or in Article VII; or (d) Other Defaults. The Company fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 30 days after the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Default. The Company or any Subsidiary (i) fails to make any payment in respect of any Indebtedness having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or any Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or 51 (f) Insolvency; Voluntary Proceedings. The Company or any Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Company under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the $10,000,000; (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds the $10,000,000; or (iii) the Company or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the $10,000,000; or (i) Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $10,000,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 30 days after the entry thereof; or (j) Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against the Company or any Subsidiary which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or 52 (k) Change of Control. There occurs any Change of Control. 8.2 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Required Banks, (a) declare the Commitment of each Bank to make Loans to be terminated, whereupon such Commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. 8.3 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE IX THE AGENT 9.1 Appointment and Authorization. Each Bank hereby irrevocably (subject to Section 9.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 53 9.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 9.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. 9.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Banks in accordance with Article VIII; provided, however, that unless and until the Agent has 54 received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 9.6 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 9.7 Indemnification. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 9.8 Agent in Individual Capacity. Bank of America and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though Bank of America were not the Agent 55 hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, Bank of America shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include Bank of America in its individual capacity. 9.9 Successor Agent. The Agent may, and at the request of the Required Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Required Banks shall appoint from among the Banks a successor agent for the Banks. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX and Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Banks appoint a successor agent as provided for above. 9.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-BEN before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form W-8ECI before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; 56 (iii) if such Bank is a foreign partnership or other intermediary and its partners claim an exemption from, or a reduction of, withholding tax under a United States tax treaty or if its partners claim that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with the conduct with a United States trade or business, two properly completed and executed copies of IRS Form W-8IMY on or before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; and (iv) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form W-8BEN as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form W-8ECI with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any bank is a foreign partnership or other intermediary and its partners claim exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN or its partners claim exemption from United States withholding tax by filing IRS Form W-8ECI, and any of its partners sell, assign, grant a participation in, or otherwise transfer all or part of the Obligations to such Bank, such Bank agrees to notify the Agent of the percentage amount in which the partner is no longer the beneficial owner of Obligations to such Bank. To the extent of such percentage amount, the Administrative Agent will treat such partner's IRS Form W-8BEN or W-8ECI as no longer valid. (e) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other 57 documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (f) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered, was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. 9.11 Documentation Agent; Syndication Agent. None of the Banks identified on the facing page or signature pages of this Agreement as a "Documentation Agent" or "Syndication Agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Banks so identified as a "Documentation Agent" or "Syndication Agent" shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on any of the Banks so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE X MISCELLANEOUS 10.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Required Banks (or by the Agent at the written request of the Required Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 8.2); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or 58 any of them) hereunder or under any other Loan Document, it being understood that a mandatory prepayment date shall not be deemed a date fixed for payment; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section, or Section 2.13, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letters may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 10.2 Notices. (a) All notices, requests and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.2, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.2; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or IX shall not be effective until actually received by the Agent. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any Person identifying himself or herself as a Person who has been identified by the Company to the Agent as a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The 59 obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.4 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse Bank of America (including in its capacity as Agent) within five Business Days after demand (subject to Section 4.1(e)) for all costs and expenses incurred by Bank of America (including in its capacity as Agent) in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by Bank of America (including in its capacity as Agent) with respect thereto; and (b) pay or reimburse the Agent, the Arranger and each Bank within five Business Days after demand (subject to Section 4.1(e)) for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). 10.5 Indemnity. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Indemnified Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Indemnified Person under or in connection with any of the foregoing, 60 including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. 10.6 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 10.7 Binding Effect; Assignment. (a) This Agreement and the other Loan Documents to which the Company is a party will be binding upon and inure to the benefit of the Company, the Agent, the Banks and their respective successors and assigns, except that, the Company may not assign its rights hereunder or thereunder or any interest herein or therein without the prior written consent of all the Banks and any such attempted assignment shall be void. Any Bank may at any time pledge its Note or any other instrument evidencing its rights as a Bank under this Agreement to a Federal Reserve Bank (without the consent of or notice to the Agent or the Company), but no such pledge shall release that Bank from its obligations hereunder or grant to such Federal Reserve Bank the rights of a Bank hereunder absent foreclosure of such pledge. (b) From time to time following the Closing Date, each Bank may assign to one or more Eligible Assignees all or any portion of its Pro Rata Share of its Commitment and/or Loans; provided that (i) such assignment, if not to a Bank or an Affiliate of the assigning Bank, requires the consent in advance of the Company at all times other than during the existence of a Default or Event of Default and the Agent (which approval of the Company and the Agent shall not be unreasonably withheld or delayed), (ii) a copy of a duly signed and completed Notice of Assignment and Acceptance shall be delivered to Agent, (iii) except in the case of an assignment to an Affiliate of the assigning Bank, to another Bank or of the entire remaining Commitment of the assigning Bank, the assignment shall not assign a Pro Rata Share equivalent to less than the $1,000,000, and (iv) the effective date of any such assignment shall be as specified in the Notice of Assignment and Acceptance, but not earlier than the date which is five Business Days after the date the Agent has received the Notice of Assignment and Acceptance. Upon acceptance by the Agent of such Notice of Assignment and Acceptance and consent thereto by Agent and the Company, if required, and 61 payment of the requisite fee described below, the Eligible Assignee named therein shall be a Bank for all purposes of this Agreement, with the Pro Rata Share therein set forth and, to the extent of such Pro Rata Share, the assigning Bank shall be released from its further obligations under this Agreement. The Company agrees that it shall execute and deliver upon request (against delivery by the assigning Bank to the Company of any Note) to such assignee Bank, one or more Notes evidencing that assignee Bank's Pro Rata Share, and to the assigning Bank if requested, one or more Notes evidencing the remaining balance Pro Rata Share retained by the assigning Bank. The Agent's consent to and acceptance of any assignment shall not be deemed to constitute any representation or warranty by any Agent-Related Person as to any matter. The Agent shall record the information contained in the Notice of Assignment and Acceptance in the Register. (c) After receipt of a completed Notice of Assignment and Acceptance, and receipt of an assignment fee of $3,500 from the assigning Bank (including Affiliates of assigning Banks), Agent shall, promptly following the effective date thereof, provide to the Company and the Banks a revised Schedule 10.2 giving effect thereto. (d) Each Bank may from time to time, without the consent of any other Person, grant participations to one or more other Person (including another Bank) all or any portion of its Pro Rata Share of its Commitment and/or Loans; provided, however, that (i) such Bank's obligations under this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other financial institutions shall not be a Bank hereunder for any purpose except, if the participation agreement so provides, for the purposes of Article III (but only to the extent that the cost of such benefits to the Company does not exceed the cost which the Company would have incurred in respect of such Bank absent the participation) and subject to Sections 2.13 and 10.9, (iv) the Company, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, (v) the participation shall not restrict an increase in the Commitment or in granting Bank's Pro Rata Share, so long as the amount of the participation interest is not affected thereby, and (vi) the consent of the holder of such participation interest shall not be required for amendments or waivers of provisions of the Loan Documents; provided, however, that the assigning Bank may, in any agreement with a participant, give such participant the right to consent to any matter which (A) extends the Revolving Termination Date as to such participant or any other date upon which any payment of money is due to such participant, (B) reduces the rate of interest owing to such participant, any fee or any other monetary amount owing to such participant, or (C) reduces the amount of any installment of principal owing to such participant. 10.8 Confidentiality. Each Bank agrees to maintain the confidentiality of information provided to it by the Company or any Subsidiary, or by the Agent on such Company's or Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, 62 or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Bank's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (H) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I) to its Affiliates. 10.9 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice or demand to the Company, any such notice or demand being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.10 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.11 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.12 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 63 10.13 No Third Parties Benefitted. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 10.14 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW. 10.15 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 64 10.16 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. 65 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. UNUMPROVIDENT CORPORATION By:____________________________________ Title:_________________________________ S-1 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. BANK OF AMERICA, N.A., as Administrative Agent and as a Bank By:____________________________________ Title:_________________________________ S-2 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. CITICORP USA, INC. By:____________________________________ Title:_________________________________ S-3 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. WACHOVIA BANK, N.A. By:____________________________________ Title:_________________________________ S-4 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. FLEET NATIONAL BANK By:____________________________________ Title:_________________________________ S-5 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. BANK ONE, NA By:____________________________________ Title:_________________________________ S-6 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. THE CHASE MANHATTAN BANK By:____________________________________ Title:_________________________________ S-7 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By:______________________________________ Title:___________________________________ S-8 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. AMSOUTH BANK By:____________________________________ Title:_________________________________ S-9 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. BANK OF TOKYO - MITSUBISHI TRUST COMPANY By:____________________________________ Title:_________________________________ S-10 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. THE DAI - ICHI KANGYO BANK, LTD By:____________________________________ Title:_________________________________ S-11 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. LLOYDS TBS BANK PLC By:____________________________________ Title:_________________________________ S-12 364-Day Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. STATE STREET BANK AND TRUST COMPANY By:____________________________________ Title:_________________________________ S-13 364-Day Credit Agreement SCHEDULE 2.1 364-DAY CREDIT AGREEMENT COMMITMENTS AND PRO RATA SHARES Pro Rata Bank Commitment Share ---- --------------------- BANK OF AMERICA,N.A. $62,500,000 13.5135135% CITICORP USA,Inc. $62,500,000 13.5135135% WACHOVIA BANK, N.A. $62,500,000 13.5135135% FLEET NATIONAL BANK,N.A. $50,000,000 10.8108108% BANK ONE, NA $37,500,000 8.1081081 % THE CHASE MANHATTAN BANK $37,500,000 8.1081081 % MORGAN GUARANTY TRUST COMPANY OF NEW YORK $37,500,000 8.1081081 % AMSOUTH BANK $25,000,000 5.4054054 % BANK OF TOKYO - MITSUBISHI TRUST COMPANY $25,000,000 5.4054054 % THE DAI-ICHI KANGYO BANK, LTD $25,000,000 5.4054054 % LLOYDS TBS BANK PLC $25,000,000 5.4054054 % STATE STREET BANK AND TRUST COMPANY $12,500,000 2.7027027 % TOTAL $462,500,000 100 % Schedule 2.1, Page 1 364-Day Credit Agreement SCHEDULE 5.5 In 1997 two alleged class action lawsuits were filed in September Court in Worcester, Massachusetts (Superior Court) against the Company - one purporting to represent all career agents of subsidiaries of The Paul Revere Corporation (Paul Revere) whose employment relationships ended on June 30, 1997 and were offered contracts to sell insurance policies as independent producers and the other purporting to represent independent brokers who sold certain Paul Revere individuals disability income policies with benefit riders. Motions filed by the Company to dismiss most of the counts in the complaints, which allege various breach of contract and statutory claims, have been denied, but these cases remain at a preliminary stage. A hearing to determine class certification was heard on December 20, 1999 in Massachusetts state court. The court certified a class for the independent brokers and has denied class certification for the career agents. The Company appealed the class certification for the independent brokers, but the appeal was denied. A tentative trial date of January 2001 has been set. The Company has filed a conditional counterclaim in each action which requests a substantial return on commissions should the Superior Court agree with the plaintiffs' interpretation of the contracts. The Company has received notice that career agent plaintiffs plat to re-file their class action and limit it solely to the issues in the certified broker class action. The Company believes that it has strong defenses both lawsuits and plans to vigorously defend its position. In addition, the same plaintiffs' attorney who has filed the purported class action lawsuits has filed 47 individual lawsuits on behalf of current and former Paul Revere sales managers alleging various breach of contract claims. The Company has filed a motion in federal court to compel arbitration for 17 of the plaintiffs who are licensed by the National Association of Securities Dealers and have executed the Uniform Application for Registration or Transfer in the Securities Industry (Form U-4). The federal court has denied 15 of those motions and granted two. The Company is appealing the denial of the 15 motions, and a hearing before the First Circuit Court of Appeals was held on August 1, 2000. The Company believes that it has strong defenses and plans to vigorously defend its position in these cases. Although the alleged class action lawsuits and individual lawsuits described above are in the early stages, management does not currently expect these suits to materially affect the financial position or results of operations of the Company. During September and October 1999, the company and several of its officers were named as defendants in five class action lawsuits filed in the United States District Court for the District of Maine. On January 3, 2000, the Maine district court appointed a lead class action plaintiff and ordered plaintiffs to file a consolidated amended complaint. On January 27, 2000, a sixth complaint against the same defendants was filed in the Southern District of New York. On March 7, 2000, the sixth action was transferred to the District of Maine, and that action was voluntarily dismissed by the plaintiff on June 12, 2000. On February 23, 2000, two consolidated amended class action complaints asserts a variety of claims under the Securities Exchange Act of 1934, as amended on behalf of a putative class of shareholders who purchased or otherwise acquired stock in the Company or Unum between February 4, 1998 and February 9, 2000. The second amended complaint asserts a variety of claims under the Securities Act of 1933 and the Schedule 5.5, Page 1 Securities Exchange Act of 1934, as amended, on behalf of a putative class of shareholders who exchanged the common stock of Unum or Provident for the Company's stock pursuant to the joint proxy/registration statement issued in connection with the merger between Unum and Provident. The complaints allege that the defendants made false and misleading public statements concerning, among other things, Unum's and the Company's reserves for disability insurance and pricing policies, the Company's merger costs, and the adequacy of the due diligence reviews performed in connection with the merger. The complaints seek money damages on behalf of all persons who purchased or otherwise acquired Company and Unum stock in the class period or who were issued Company stock pursuant to the merger. On April 10, 2000, the defendants filed a motion to dismiss the complaints. The motion was fully submitted on June 20, 2000, but no decision has yet been rendered by the court. To date, no class has been certified, and no defendant has answered any complaint. The Company disputes the claims alleged in the complaint and plans to vigorously contest them. In certain reinsurance pools associated with the Company's reinsurance businesses there are disputes among the pool members and reinsurance participants concerning the scope of their obligations and liabilities within the complex pool arrangements, including pools for which subsidiaries of the Company acted either as pool managers or underwriting agents, as pool member or reinsurers of the pools in the process of resolving the various claims, but it is unclear what exposure the Company or its subsidiaries may ultimately have to share in the losses of pool members or reinsurers because of the subsidiaries' activities in placing insurance or otherwise. Various other lawsuits against the Company have arisen in the normal course of its business. Contingent liabilities that might arise from such other litigation are not deemed likely to materially affect the financial position or results of operations of the Company. Schedule 5.5, Page 2 SCHEDULE 5.12 The following Regulated Entities, namely Investment Companies within the meaning of the Investment Company Act of 1940 are list pursuant to Section 5.12 of the Agreement: 1. Provident National Assurance Company, Separate Account B (variable annuity account, no new contract sales) 2. Paul Revere Variable Annuity Insurance Company, Contract Accumulation Fund (variable annuity account, no new contract sales) Schedule 5.12, Page 1 SCHEDULE 5.14 Subsidiaries The attached organization chart shows the Subsidiaries of the Company. Schedule 5.14, Page 1 SCHEDULE 10.2 OFFSHORE AND DOMESTIC LENDING OFFICES, ADDRESSES FOR NOTICES BANK OF AMERICA, N.A., as Agent 231 S. LaSalle Street Chicago, Illinois 60697 Attention: Elizabeth W. F. Bishop BANK OF AMERICA, N.A. as a Bank 231 S. LaSalle Street Chicago, Illinois 60697 Attention: Elizabeth W. F. Bishop Domestic and Offshore Lending Office: Bank of America Plaza 901 Main Street Dallas, Texas 75202-3714 Attention: Linda Adjei-Kontoh Phone: 214-209-1232 Fax: 214-290-9558 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 231 S. LaSalle Street Chicago, Illinois 606097 Attention: Elizabeth W. F. Bishop CITICORP U.S.A, INC. as a Bank 399 Park Avenue New York, New York 10043 Attention: David Dodge Domestic and Offshore Lending Office: Schedule 10.2, Page 1 399 Park Avenue New York, New York 10043 Attention: David Dodge Notices (other than Borrowing notices and Notices of Conversion/Continuation): 399 Park Avenue New York, New York 10043 Attention: David Dodge WACHOVIA BANK, N.A. as a Bank 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attention: Holger Ebert Domestic and Offshore Lending Office: 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attention: Carla Banks Phone: 404-332-1127 Fax: 404-332-4320 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attention: Holger Ebert THE CHASE MANHATTAN BANK as a Bank 270 Park Avenue New York, New York 10017 Attention: Heather Lindstrom Domestic and Offshore Lending Office: One Chase Plaza New York, New York 10081 Schedule 10.2, Page 2 Phone: 212-552-7829 Fax: 212-552-7490 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 270 Park Avenue New York, New York 10017 Attention: Heather Lindstrom FLEET NATIONAL BANK as a Bank Financial Institutions 100 Federal Street - MA DE 10010H Boston, Massachusetts 02110 Attention: David A. Bosselait Domestic Lending Office: Financial Institutions 100 Federal Street - MA DE 10010H Boston, Massachusetts 02110 Attention: David A. Bosselait Phone: 617-434-3778 Fax: 617-434-1096 Offshore Lending Office: Financial Institutions 777 Main Street - CT EH 40225C Hartford, Connecticut 06115 Attention: Laura McDonough or Jill Mebane Phone: 860-986-5769 or 860-986-2008 Fax: 860-986-1264 Notices (other than Borrowing notices and Notices of Conversion/Continuation): Financial Institutions 100 Federal Street - MA DE 10010H Boston, Massachusetts 02110 Attention: David A. Bosselait Schedule 10.2, Page 3 BANK ONE, NA as a Bank 1 Bank One Plaza Chicago, Illinois 60670 Attention: Joseph Manzella Domestic and Offshore Lending Office: 1 Bank One Plaza Chicago, Illinois 60670 Attention: Armecia Mc Brew Phone: 312-732-6533 Fax: 312-732-3537 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 1 Bank One Plaza Chicago, Illinois 60670 Attention: Joseph Manzella BANK OF TOKYO - MITSUBISHI TRUST COMPANY as a Bank 1251 Avenue of the Americas, 12th Floor New York, New York 10020-1104 Attention: Matthew D. Gallino Domestic and Offshore Lending Office: 1251 Avenue of the Americas, 12th Floor New York, New York 10020-1104 Attention: Rolando Uy Phone: 201-413-8570 Fax: 201-521-2304 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 1251 Avenue of the Americas, 12th Floor New York, New York 10020-1104 Attention: Matthew D. Gallino Schedule 10.2, Page 4 MORGAN GUARANTY TRUST COMPANY OF NEW YORK as a Bank 60 Wall Street, 5th Floor New York, New York 10260-0060 Attention: Maria Dell'Aquila Domestic Lending Office: Morgan Guaranty Trust Company of New York 60 Wall Street New York, New York 10260-0060 Offshore Lending Office: c/o J.P. Morgan Services, Inc. 500 Stanton Christina Road Newark, Delaware 19713-2107 Attention: Peter Crisona Phone: 302-634-5117 Fax: 302-634-1094 Notices (other than Borrowing notices and Notices of Conversion/Continuation): 60 Wall Street, 5th Floor New York, New York 10260-0060 Attention: Maria Dell'Aquila AMSOUTH BANK as a Bank 601 Market Center Chattanooga, Tennessee 37402 Attention: Tracy Brown Domestic and Offshore Lending Office: 601 Market Center Chattanooga, Tennessee 37402 Attention: Tracy Brown Phone: 423-752-1642 Fax: 423-752-1558 Notices (other than Borrowing notices and Notices of Schedule 10.2, Page 5 Conversion/Continuation): 601 Market Center Chattanooga, Tennessee 37402 Attention: Tracy Brown THE DAI - ICHI KANGYO BANK, LTD as a Bank One World Trade Center - 48th Floor New York, New York 10048 Attention: Nelson Y. Chang Domestic and Offshore Lending Office: One World Trade Center - 48th Floor New York, New York 10048 Attention: Wendy Yuen Phone: 212-432-6691 Fax: 212-524-0049 Notices (other than Borrowing notices and Notices of Conversion/Continuation): One World Trade Center - 48th Floor New York, New York 10048 Attention: Nelson Y. Chang LLOYDS TBS BANK PLC as a Bank One Biscayne Tower, Suite 3200 2 South Biscayne Blvd. Miami, Florida 33131 Domestic and Offshore Lending Office: One Biscayne Tower, Suite 3200 2 South Biscayne Blvd. Miami, Florida 33131 Notices (other than Borrowing notices and Notices of Conversion/Continuation): Schedule 10.2, Page 6 575 Fifth Avenue, 17th Floor New York, New York 10017 Attention: Michael Gilligan STATE STREET BANK AND TRUST COMPANY as a Bank 225 Franklin Street Boston, Massachusetts 02110 Attention: Sean Gibbons Domestic and Offshore Lending Office: 225 Franklin Street Boston, Massachusetts 02110 Attention: Sean Gibbons Phone: 617-664-4008 Fax: 617-664-3941 Notices (other than Borrowing notices and Notices of Conversion/Continuation): Lafayette Corporate Center 2 Avenue de Lafayette Boston Massachusetts 02111 Attention: Edward M. Anderson Schedule 10.2, Page 7 EXHIBIT A NOTICE OF BORROWING Date: ___________, 200_ To: Bank of America, N.A., as Administrative Agent for the Banks parties to the 364-Day Credit Agreement dated as of October ___, 2000 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among UnumProvident Corporation, certain Banks which are signatories thereto, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: The undersigned, UnumProvident Corporation (the "Company"), refers to the Credit Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.3 of the Credit Agreement, of the Borrowing specified below: 1. The Business Day of the proposed Borrowing is ___________, 200_. 2. The aggregate amount of the proposed Borrowing is $_____________. 3. The Borrowing is to be comprised of $_________ of [Base Rate] [Offshore Rate] Loans. 4. The duration of the Interest Period for the Offshore Rate Loans included in the Borrowing shall be _____ months. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed Borrowing, before and after giving effect thereto and to the application of the proceeds therefrom: (a) the representations and warranties of the Company contained in Article V of the Credit Agreement are true and correct as though made on and as of such date (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date); and Exhibit A-1 (b) no Default or Event of Default has occurred and is continuing, or would result from such proposed Borrowing. UNUMPROVIDENT CORPORATION By:____________________________________ Title:_________________________________ Exhibit A-2 EXHIBIT B NOTICE OF CONVERSION/CONTINUATION Date: ______, 200_ To: Bank of America National, N.A., as Administrative Agent for the Banks parties to the 364-Day Credit Agreement dated as of October ____, 2000 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among UnumProvident Corporation, certain Banks which are signatories thereto, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: The undersigned, UnumProvident Corporation (the "Company"), refers to the Credit Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.4 of the Credit Agreement, of the [conversion] [continuation] of the Loans specified herein, that: 1. The Conversion/Continuation Date is ______, 200_. 2. The aggregate amount of the Loans to be [converted] [continued] is $___________. 3. The Loans are to be [converted into] [continued as][Offshore Rate] [Base Rate] Loans. 4. [If applicable:] The duration of the Interest Period for the Loans included in the [conversion] [continuation] shall be [___ months]. UNUMPROVIDENT CORPORATION By:____________________________________ Title:_________________________________ Exhibit B-1 EXHIBIT C UNUMPROVIDENT CORPORATION COMPLIANCE CERTIFICATE Financial Statement Date: __________, 200_ Reference is made to that certain 364-Day Credit Agreement dated as of October , 2000 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among UnumProvident Corporation, (the "Company"), the several financial institutions from time to time parties to the Credit Agreement (the "Banks"), Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent for the Banks (in such capacity, the "Agent"). Unless otherwise defined herein, capitalized terms used herein have the respective meanings assigned to them in the Credit Agreement. The undersigned Responsible Officer of UnumProvident Corporation, hereby certifies as of the date hereof that he/she is the ________ of the Company, and that, as such, he/she is authorized to execute and deliver this Certificate to the Banks and the Agent on the behalf of the Company and its consolidated Subsidiaries, and that: 1. The undersigned has reviewed and is familiar with the terms of the Credit Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and conditions (financial or otherwise) of the Company during the accounting period covered by the attached financial statements. 2. To the best of the undersigned's knowledge, the Company, during such period, has observed, performed or satisfied all of its covenants and other agreements, and satisfied every condition in the Credit Agreement to be observed, performed or satisfied by the Company, and the undersigned has no knowledge of any Default or Event of Default. 3. The following financial covenant analyses and information set forth on Schedule 1 attached hereto are true and accurate on and as of the date of this Certificate. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of , 2000. UNUMPROVIDENT CORPORATION By:____________________________________ Title:_________________________________ Exhibit C-1 Schedule 1 Section 7.10(a) --------------- A. [$__________] [Required Tangible Net Worth $______________ from prior fiscal quarter/year] B. Net Income $______________ C. 25% of Item B $______________ D. Required Tangible Net Worth (Items A plus C $______________ [plus D]) E. Net Worth $______________ less: Goodwill $___________ Value of Business Acquired $___________ Deferred Acquisition Costs $___________ F. Actual Tangible Net Worth $______________ Section 7.10(b) --------------- A. Total Debt $______________ B. Net Worth $______________ C. Total Capitalization (Items A plus B) $______________ D. Ratio (Item A to Item C) to 1.0 --------------- E. Required Ratio 0.35 to 10 --------------- Section 7.10(c) --------------- A. Total Debt $______________ B. Subordinated Debt $______________ C. Senior Debt (Item A minus Item B) $______________ D. Combined Statutory Net earnings $______________ E. Combined Statutory Interest expense $______________ F. Combined Statutory Tax expense $______________ G. Statutory EBIT (Items D plus E plus F) $______________ H. Ratio (Item C to Item G) _____to 1.0 I. Required Ratio _____to 1.0 Exhibit D-2 EXHIBIT D [[FORM OF] OPINION OF BORROWER'S COUNSEL October ___, 2000 Bank of America, N.A., as Administrative Agent 231 South LaSalle Street Chicago, IL 60697 Re: UnumProvident Corporation Ladies and Gentlemen: I am Executive Vice President, Assistant Secretary and General Counsel of UnumProvident Corporation, a Delaware corporation (the "Company"). This opinion is delivered to you pursuant to Section 4.1(d) of that certain 364-Day Credit Agreement dated as of October , 2000 (the "Credit Agreement") among the Company, certain lenders (collectively, the "Banks"), Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent for the Banks (in such capacity, the "Agent"). Capitalized terms used herein, but not otherwise defined herein, shall have the meanings ascribed to such terms in the Credit Agreement. In rendering the opinions set forth herein, I have examined and/or relied upon (i) the Company's certificate of incorporation and bylaws; (ii) certificates of public officials and officers and representatives of the Company (iii) resolutions of the board of directors of the Company with respect to the transactions referred to herein; (iv) the Credit Agreement; and (v) such other agreements, instruments and documents, and such questions of law as I have deemed necessary or appropriate to enable me to render the opinions expressed below. I also have made such inquiries of officers, representatives and attorneys in the legal department of the Company as I have deemed relevant or necessary for purposes of the opinions set forth herein. In rendering the opinions expressed below, I have, with your consent, assumed that the signatures of persons signing all documents in connection with which this opinion is rendered are genuine, all documents submitted to me as originals or duplicate originals are authentic and all documents submitted to me as copies, whether certified or not, conform to authentic original documents. Based upon the foregoing and subject to the qualifications stated herein, I am of the opinion that: Exhibit D-1 1. The Company is validly existing in the state of its organization and has the requisite power and authority to own and hold under lease its properties, to conduct its business as presently conducted and to execute and deliver the Credit Agreement. 2. The Company is duly qualified and in good standing in each state where the nature of its business and properties makes such qualification necessary, except to the extent that the failure to be so qualified or to be in good standing would not have a material averse effect on the Company's consolidated financial condition or business. 3. The execution, delivery and performance of the Credit Agreement has been duly authorized by the Company, and the Credit Agreement constitutes the valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by the application of equitable principles relating to enforceability (regardless of whether considered in a proceeding in equity or at law) including, without limitation (i) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (ii) concepts of materiality, reasonableness, good faith and fair dealing. 4. Assuming the proceeds of the loans are used solely for the purposes set forth in the Credit Agreement, neither the execution and delivery by the Company of the Credit Agreement, nor the consummation by the Company of the transactions contemplated thereby: (i) violates any provision of the Company's certificate of incorporation or bylaws; (ii) violates any law or regulation (including any applicable order or decree of any court or governmental instrumentality known to me) applicable to the Company; (iii) results in the breach of, or constitutes a default under, any material agreement binding on the Company or any of its Subsidiaries; (iv) results in the creation or imposition of any lien upon any of the property of the Company or any of its Subsidiaries under any agreement described in clause (iii) above; or (v) requires the consent or approval of, or any filing or registration with, any governmental body, agency or authority, provided that for purposes of (iii) and (iv) herein, no opinion is offered or provided with respect to D & H. 5. To our knowledge, except as disclosed in the Credit Agreement, there are no judgments outstanding against the Company or any of its Subsidiaries which would have a material adverse effect on the Company's consolidated financial condition or business. This opinion is solely for the benefit of the addressee hereof and the Banks under the Credit Agreement in connection with the execution and delivery of the Credit Agreement. This opinion may not be relied upon in any manner by any other person and may not be disclosed, quoted, filed with a governmental agency or otherwise referred to without our prior written consent. Very truly yours, Exhibit D-2 EXHIBIT E FORM OF NOTICE OF ASSIGNMENT AND ACCEPTANCE __________, 200_ To: Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: Reference is made to that certain 364-Day Credit Agreement dated as of October __, 2000 between UnumProvident Corporation (the "Company"), lenders from time to time party thereto, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the "Agreement;" the terms defined therein being used herein as therein defined). 1. We hereby give you notice of, and request your consent to, the assignment by _______________ (the "Assignor") to ____________ (the "Assignee") of ___% of the right, title and interest of the Assignor in and to the Loan Documents, including the right, title and interest of the Assignor in and to the Commitment of the Assignor and all outstanding Loans made by the Assignor. Before giving effect to such assignment: (a) the aggregate amount of the Assignor's Commitment is $_______; (b) the aggregate principal amount of its outstanding Loans is $______. 2. The Assignee hereby represents and warrants that it is an Eligible Assignee and has complied with the requirements of Section 10.7 of the Agreement in connection with this assignment and acknowledges and agrees that: (a) other than the representation and warranty that it is the legal and beneficial owner of the Pro Rata Share being assigned thereby free and clear of any adverse claim, the Assignor has made no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement or the execution, legality, validity, enforceability, genuineness or sufficiency of the Agreement or any other Loan Document; (b) the Assignor has made no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance by the Company of the Obligations; (c) it has received a copy of the Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.1 thereof, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (d) it will, independently and without reliance upon Agent or any Bank and based on such documents and information as it shall deem appropriate at Exhibit E-1 the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (e) it appoints and authorizes Agent to take such action and to exercise such powers under the Agreement and the other Loan Documents as are delegated to Agent by the Agreement and such other Loan Documents; and (f) it will perform in accordance with their terms all of the obligations which by the terms of the Agreement are required to be performed by it as a Bank. 3. The Assignee agrees that, upon receiving your consent to such assignment and from and after , the Assignee will be bound by the terms of the Loan Documents, with respect to the interest in the Loan Documents assigned to it as specified above, as fully and to the same extent as if the Assignee were one of the Banks originally holding such interest in the Loan Documents. 4. The following administrative details apply to the Assignee: (a) Offshore Lending Office: Assignee name: ________________________________________________ Address: ______________________________________________________ Attention: ____________________________________________________ Telephone: (___)______________________________________________ Telecopier: (___)______________________________________________ (b) Domestic Lending Office: Assignee name: ________________________________________________ Address: ______________________________________________________ Attention: ____________________________________________________ Telephone: (___)______________________________________________ Telecopier: (___)______________________________________________ (c) Notice Address: Assignee name: ________________________________________________ Address: ______________________________________________________ Attention: ____________________________________________________ Telephone: (___)______________________________________________ Telecopier: (___)______________________________________________ (d) Payment Instructions: Account No.: Assignee name: ________________________________________________ Address: ______________________________________________________ Attention: ____________________________________________________ Telephone: (___)______________________________________________ Exhibit E-2 Telecopier: (___)______________________________________________ IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice of Assignment and Acceptance to be executed by their respective duly authorized officials, officers or agents as of the date first above mentioned. Very truly yours, [ASSIGNOR] By:______________________________ Name:____________________________ Title:___________________________ [ASSIGNEE] By:______________________________ Name:____________________________ Title:___________________________ We hereby consent to the foregoing assignment. UNUMPROVIDENT CORPORATION By:______________________________ Name:____________________________ Title:___________________________ BANK OF AMERICA, N.A., as Administrative Agent By:______________________________ Name:____________________________ Title:___________________________ Exhibit E-3 EXHIBIT F [FORM OF] PROMISSORY NOTE $____________ _______________, 2000 FOR VALUE RECEIVED, the undersigned, UnumProvident Corporation (the "Company"), hereby promises to pay to the order of ________ (the "Bank") the principal sum of _______ Dollars ($_____) or, if less, the aggregate unpaid principal amount of all Loans made by the Bank to the Company pursuant to the 364-Day Credit Agreement, dated as of October , 2000 (such Credit Agreement), as it may be amended, restated, supplemented or otherwise modified from time to time, being hereinafter called the "Credit Agreement"), among the Company, the Bank, the other banks parties thereto, Citicorp USA, Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Fleet National Bank, as Documentation Agent and Bank of America, N.A., as Administrative Agent for the Banks, on the dates and in the amounts provided in the Credit Agreement. The Company further promises to pay interest on the unpaid principal amount of the Loans evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Bank is authorized to endorse the amount and the date on which each Loan is made, the maturity date therefor and each payment of principal with respect thereto on the schedules annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Promissory Note (the "Note"). This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. Exhibit F-1 Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York applicable to contracts made and to be performed entirely within such State. UNUMPROVIDENT CORPORATION By:______________________________ Title:___________________________ Exhibit F-2 Schedule A to Note BASE RATE LOANS AND REPAYMENT OF BASE RATE LOANS (2) (3) (4) Amount Maturity Amount of (5) (1) of Base Date of Base Rate Notation Date Rate Loan Base Rate Loan Loan Repaid Made By - ---- --------- -------------- ----------- ------- - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ Exhibit F-3 Schedule B to Note OFFSHORE RATE LOANS AND REPAYMENT OF OFFSHORE RATE LOANS (2) (3) (4) Amount Maturity Amount of (5) (1) of Offshore Date of Offshore Rate Notation Date Rate Loan Offshore Rate Loan Loan Repaid Made By - ---- --------- ------------------ ----------- ------- - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ - ------- ----------- -------------- ------------- ------------ Exhibit F-4 EX-10.30 15 0015.txt AUGMENTING AGREEMENT EXHIBIT 10.30 AUGMENTING AGREEMENT This Augmenting Agreement dated as of November 6, 2000 (the "Agreement"), among Unum Provident Corporation, (the "Company"), Bank of America, N.A., as Administrative Agent (in such capacity, the "Agent") and The Royal Bank of Canada (the "Augmenting Bank"). WHEREAS, the Company, certain banks and the Agent are parties to that certain 364-Day Credit Agreement dated as of October 31, 2000, a fully executed copy of which is attached hereto as Annex A (the "Credit Agreement"); WHEREAS, pursuant to the terms of the Credit Agreement, the Commitments may be increased; WHEREAS, the Augmenting Bank has agreed to become a Bank, party to the Credit Agreements, pursuant to the terms of Section 2.14 of the Credit Agreement. NOW THEREFORE, the parties hereto agree as follows: 1. Reference is made to the Credit Agreement. All capitalized terms used in this Agreement shall have the meanings set forth in the Credit Agreement, unless otherwise defined herein or the context otherwise required. 2. The Augmenting Bank is hereby designated as a "Bank" under the Credit Agreement with a Commitment of $65,000,000. The Augmenting Bank agrees to be bound by the terms and conditions of the Credit Agreement. 3. Schedule 2.1 of the Credit Agreement is hereby amended to state as set forth in Schedule 2.1 to this Agreement. 4. Schedule 10.2 of the Credit Agreement is hereby amended to include the provisions set forth in Schedule 10.2 to this Agreement. 5. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute one in the same instrument. 6. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, The parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the date and year first written above. UNUMPROVIDENT CORPORATION By: ----------------------------------- Title: ----------------------------------- ROYAL BANK OF CANADA By: ----------------------------------- Title: ----------------------------------- BANK OF AMERICA, N.A. As Administrative Agent By: ----------------------------------- Title: ----------------------------------- SCHEDULE 2.1 364-DAY CREDIT AGREEMENT COMMITMENTS AND PRO RATA SHARES Pro Rata Bank Commitment Share - ---------------------------------------------------------------- BANK OF AMERICA, N.A. $62,500,000 11.8483412% CITICORP USA, Inc. $62,500,000 11.8483412% WACHOVIA BANK, N.A. $62,500,000 11.8483412% FLEET NATIONAL BANK, N.A. $50,000,000 9.4786730% BANK ONE, NA $37,500,000 7.1090047% THE CHASE MANHATTAN BANK $37,500,000 7.1090047% MORGAN GUARANTY TRUST COMPANY OF NEW YORK $37,500,000 7.1090047% AM SOUTH BANK $25,000,000 4.7393365% BANK OF TOKYO - MITSUBISHI TRUST COMPANY $25,000,000 4.7393365% THE DAI-ICHI KANGYO BANK, LED $25,000,000 4.7393365% LLOYDS T.S. BANK PLC $25,000,000 4.7393365% STATE STREET BANK AND TRUST COMPANY $12,500,000 2.3696682% ROYAL BANK OF CANADA $65,000,000 12.3222749% TOTAL $527,500,000 100 % SCHEDULE 10.2 ROYAL BANK OF CANADA as a Bank Royal Bank of Canada New York Branch One Liberty Plaza, 3rd Floor New York, New York 10006-1404 Attention: Manager, Loans Administration Telephone No.: (212) 428-6322 Facsimile No.: (212) 428-2372 with a copy to: Royal Bank of Canada One Liberty Plaza, 3rd Floor New York, New York 10006-1404 Attention: A. Birr Telephone No.: (212) 428-6404 Facsimile No.: (212) 428-6201 EX-10.31 16 0016.txt AUGMENTING AGREEMENT EXHIBIT 10.31 AUGMENTING AGREEMENT This Augmenting Agreement dated as of November 6, 2000 (the "Agreement"), among Unum Provident Corporation, (the "Company"), Bank of America, N.A., as Administrative Agent (in such capacity, the "Agent") and The Royal Bank of Canada (the "Augmenting Bank"). WHEREAS, the Company, certain banks and the Agent are parties to that certain Five-Year Credit Agreement dated as of October 31, 2000, a fully executed copy of which is attached hereto as Annex A (the "Credit Agreement"); WHEREAS, pursuant to the terms of the Credit Agreement, the Commitments may be increased; WHEREAS, the Augmenting Bank has agreed to become a Bank, party to the Credit Agreement, pursuant to the terms of Section 2.14 of the Credit Agreement. NOW THEREFORE, the parties hereto agree as follows: 1. Reference is made to the Credit Agreement. All capitalized terms used in this Agreement shall have the meanings set forth in the Credit Agreement, unless otherwise defined herein or the context otherwise required. 2. The Augmenting Bank is hereby designated as a "Bank" under the Credit Agreement with a Commitment of $10,000,000. The Augmenting Bank agrees to be bound by the terms and conditions of the Credit Agreement. 3. Schedule 2.1 of the Credit Agreement is hereby amended to state as set forth in Schedule 2.1 to this Agreement. 4. Schedule 10.2 of the Credit Agreement is hereby amended to include the provisions set forth in Schedule 10.2 to this Agreement. 5. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute one in the same instrument. 6. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, The parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the date and year first written above. UNUMPROVIDENT CORPORATION By: ----------------------------------- Title: ----------------------------------- ROYAL BANK OF CANADA By: ----------------------------------- Title: ----------------------------------- BANK OF AMERICA, N.A. As Administrative Agent By: ----------------------------------- Title: ----------------------------------- SCHEDULE 2.1 FIVE-YEAR CREDIT AGREEMENT COMMITMENTS AND PRO RATA SHARES Pro Rata Bank Commitment Share ---- ---------------------------------- BANK OF AMERICA, N.A. $62,500,000 13.2275132% CITICORP USA, Inc. $62,500,000 13.2275132% WACHOVIA BANK, N.A. $62,500,000 13.2275132% FLEET NATIONAL BANK, N.A. $50,000,000 10.5820105% BANK ONE, NA $37,500,000 7.9365079% THE CHASE MANHATTAN BANK $37,500,000 7.9365079% MORGAN GUARANTY TRUST COMPANY OF NEW YORK $37,500,000 7.9365079% AMSOUTH BANK $25,000,000 5.2910053% BANK OF TOKYO - MITSUBISHI TRUST COMPANY $25,000,000 5.2910053% THE DAI-ICHI KANGYO BANK, LTD $25,000,000 5.2910053% LLOYDS TBS BANK PLC $25,000,000 5.2910053% STATE STREET BANK AND TRUST COMPANY $12,500,000 2.6455026% ROYAL BANK OF CANADA $10,000,000 2.1164021% TOTAL $472,500,000 100% SCHEDULE 10.2 ROYAL BANK OF CANADA as a Bank Domestic and Offshore Lending Office: Grand Cayman (North America No. 1) Branch c/o New York Branch 1 Liberty Plaza - 3rd Floor New York, New York 10006-1404 Royal Bank of Canada Grand Cayman (North America No. 1) Branch c/o New York Branch One Liberty Plaza, 3rd Floor New York, New York 10006-1404 Attention: Manager, Loans Administration Telephone No.: (212) 428-6322 Facsimile No.: (212) 428-2372 with a copy to: Royal Bank of Canada One Liberty Plaza, 3rd Floor New York, New York 10006-1404 Attention: A. Birr Telephone No.: (212) 428-6404 Facsimile No.: (212) 428-6201 EX-10.32 17 0017.txt UNUMPROVIDENT CORP 2000 ANNUAL INCENTIVE PLAN EXHIBIT 10.32 UNUMPROVIDENT CORPORATION 2000 ANNUAL INCENTIVE PLAN ARTICLE 1 ESTABLISHMENT OF PLAN 1.1 BACKGROUND OF PLAN. UnumProvident Corporation hereby establishes an ------------------ annual cash incentive plan for selected levels of employees known as the UnumProvident Corporation 2000 Annual Incentive Plan. The Plan was adopted by the Compensation Committee on August 4, 2000 and is to be effective initially for calendar year 2000. 1.2 PURPOSE. The purpose of the Plan is to provide for the payment of ------- annual monetary awards for the Plan Year to each Participant equal to a percentage of such Participant's base salary based upon (i) the achievement by the Company of certain corporate performance goals and (ii) the performance of the Participant, including achievement of certain individual goals. The Plan is not intended to provide "performance-based compensation" within the meaning of Section 162(m) of the Code. ARTICLE 2 DEFINITIONS 2.1 DEFINITIONS. Certain terms of the Plan have defined meanings set ----------- forth in this Article and which shall govern unless the context in which they are used clearly indicates that some other meaning is intended. Board. The Board of Directors of the Company. ----- Code. The Internal Revenue Code of 1986, as amended from time to time. ---- Committee. The Compensation Committee of the Board. --------- Company. UnumProvident Corporation, a Delaware corporation, and its ------- corporate successors. The context may imply that Company means Company and its Subsidiaries when the consolidated operations are intended to be included. Disability. Any illness or other physical or mental condition of a ---------- Participant that renders the Participant incapable of performing his customary and usual duties for the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which, in either case, has lasted or can reasonable be expected to last for at least 180 days in a continuous 365- day period. Management may require such medical or other evidence as it deems necessary to judge the nature and permanency of the Participant's condition. The effective date of a Participant's Disability shall be as determined by management consistent with normal Company policies and communicated to the Participant in writing. Incentive Award. Has the meaning described in Section 5.1. --------------- Participant. An employee of the Company or any of its Subsidiaries ----------- selected by the Committee by name or level of position to participate in the Plan for any Plan Year. Performance Criteria. The performance criteria listed in Section 5.2 from -------------------- among which the Committee may set Performance Goals in each Plan Year. Performance Goals. The performance goals established each Plan Year by the ----------------- Committee from among the Performance Criteria listed in Section 5.2. The performance goals may apply to the Company and one or more of its Subsidiaries as determined by the Committee and there may be more than one set of performance goals, e.g. North American operations, worldwide operations, etc. Plan. The UnumProvident Corporation 2000 Annual Incentive Plan as set ---- forth in this document together with any subsequent amendments hereto. Plan Year. The initial Plan Year shall be calendar year 2000; any --------- subsequent Plan Year in which this Plan is implemented shall be a designated calendar year unless the Committee determines otherwise. Retirement. A Participant's termination of employment with the Company or ---------- a Subsidiary after attaining any normal or early retirement age specified in any pension, profit sharing or other retirement program sponsored by the Company, or, in the event of the inapplicability thereof with respect to the person in question, as determined by the Committee in its judgment. Subsidiary. Any corporation, limited liability company, partnership or ---------- other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. Target Award. Has the meaning described in Section 5.3. ------------ Threshold Amounts. Has the meaning described in Section 5.1. ----------------- ARTICLE 3 ADMINISTRATION 3.1 COMMITTEE. The Plan shall be administered by the Committee. --------- 3.2 AUTHORITY OF COMMITTEE. The Committee has the exclusive power, ---------------------- authority and discretion to: (a) Designate, add or delete Participants; (b) Establish Threshold Amounts, Performance Goals, percentage weightings for different Performance Goals and performance ranges above and below 100% of the target set to achieve a Performance Goal; -2- (c) Make changes to Threshold Amounts, Performance Goals, percentage weightings and performance ranges as deemed appropriate; (d) Establish Target Awards for Participants, either individually or based on level of position; (e) Determine whether Threshold Amounts and Performance Goals were achieved in a given Plan Year; (f) Approve any Incentive Award, including increasing or reducing any Target Award regardless of the achievement of Performance Goals, after considering the Target Award; (g) Establish, adopt or revise any rules and policies as it may deem necessary or advisable to implement or administer the Plan; (h) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan; and (i) Amend the Plan as provided in Article 6 hereof. 3.3 DECISIONS BINDING. The Committee's interpretation of the Plan ----------------- and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. ARTICLE 4 ELIGIBILITY 4.1 GENERAL. Those employees of the Company or a Subsidiary selected to ------- participate in the Plan by the Committee. Participation in one Plan Year does not guarantee participation in a following Plan Year. The Committee will notify Participants of their eligibility to participate, and the terms thereof. 4.2 PARTIAL YEAR PARTICIPATION. When employees are chosen for -------------------------- participation during the middle of a Plan Year, the Committee may prorate their Incentive Bonus amounts based on the number of days they participated in the Plan during the Plan Year. Since the Plan was adopted after the beginning of 2000, this provision regarding proration does not apply to the initial designation by the Committee of those employees who have been employed by the Company since January 1, 2000 and are to be Participants in the Plan for 2000. 4.3 DEMOTIONS. If a Participant is demoted during the Plan Year, the --------- Committee will determine whether Plan participation ends at that time, or is continued, perhaps at a reduced level. If participation ends, incentives earned during the time of participation will be prorated for the Plan Year, provided the Participant is still an employee at the time Incentive Awards are made. -3- ARTICLE 5 OPERATION OF THE PLAN 5.1 PLAN STRUCTURE. Each Participant shall be eligible to receive an -------------- Incentive Award in connection with a particular Plan Year if (i) the Company and its Subsidiaries meet or exceed certain Threshold Amounts set for that Plan Year by the Committee, (ii) the Company and its Subsidiaries (or, for certain Participants, the Company and certain designated Subsidiaries, or only one or more Subsidiaries or divisions of the Company) meet the Performance Goals (at least the low end of the range set for target performance for each Performance Goal included in the Plan for the Plan Year), and (iii) the Participant is approved for an Incentive Award by the Committee following a recommendation by management and is employed by the Company or a Subsidiary on the date the Committee approves the Incentive Award (unless otherwise provided in Sections 5.6 or 5.7 hereof). 5.2 ESTABLISHMENT OF CORPORATE PERFORMANCE GOALS. Not later than ninety -------------------------------------------- (90) days after the commencement of any Plan Year (or by September 30, 2000 in the case of the initial Plan Year), the Committee will establish in writing Performance Goals for such Plan Year based upon one or more of the following performance criteria: (a) the achievement by the Company (or one or more Subsidiaries or divisions of the Company) of a specified target return, or target growth in return, on equity or assets, (b) the achievement by the Company (or one or more Subsidiaries or divisions of the Company) of a specified target, or target growth in, premium revenues, sales or market share, (c) the achievement by the Company (or one or more Subsidiaries or divisions of the Company) of a specified target, or target growth in, revenues, net income (which may be on a pre-tax or after-tax basis) or earnings per share, (d) the Company's stock price, (e) expense efficiency ratios (ratio of expenses to premium income), (f) customer service measures or indices, (g) underwriting efficiency and/or quality, (h) persistency factors, (i) any other operating or performance factor selected by the Committee, or (j) any combination of the criteria set forth in (a) through (i) above. As to any Performance Goal the Committee may set a range of performance measurements that are above or below 100% of the target performance goal. The Performance Goals for 2000 were adopted by the Committee on August 4, 2000. -4- 5.3 ESTABLISHMENT OF INDIVIDUAL INCENTIVE TARGETS. At the time the --------------------------------------------- Committee sets the Performance Goals for a particular Plan Year, it shall also set in writing the percentages of each Participant's base salary (either individually or by level of position) that will be awarded to the Participant if the Threshold Amounts are met or exceeded, the established Performance Goals are achieved at 100% of target and the Participant is evaluated to be at 100% of his or her individual performance (the "Target Award"). The Target Award percent will be communicated in writing to each Participant generally at the beginning of the performance period. The Committee may, but is not required to, establish the percents of Target Awards for each Participant for his or her overall performance. If established, the range would be expressed as a percent of the Target Award that can be earned by the Participant, e.g. 70% to 125%. These percentage ranges will be used by management in evaluating individual performance and making a recommended Incentive Award to the Committee. 5.4 PAYOUT FORM AND TIMING. Incentive Awards will be determined as ---------------------- soon as possible by the Committee following management's recommendation and after the audited results for the Company and its Subsidiaries are available for the Plan Year. Notwithstanding the above, the Committee may, in its discretion, increase or reduce the amount of an Incentive Award otherwise payable to one or more Participants under the Plan. Since the Plan is a cash plan, Incentive Awards will be made by check in accordance with the Company's payroll systems as soon as practicable following approval by the Committee. 5.6 DEATH, DISABILITY AND RETIREMENT. In the event of a Participant's -------------------------------- termination of employment by reason of death, Disability or Retirement, during a Plan Year, no Incentive Award will be made unless specifically approved by the Compensation Committee. 5.7 OTHER TERMINATIONS OF EMPLOYMENT. In the event of a termination -------------------------------- of employment other than by reason of death, Disability or Retirement prior to the date the Committee approves the Incentive Award for a terminated Participant, the Participant will forfeit any right to an Incentive Award for the Plan Year under consideration. Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur in a circumstance in which a Participant transfers from the Company to one of its Subsidiaries, transfers from a Subsidiary to the Company, or transfers from one Subsidiary to another Subsidiary. ARTICLE 6 AMENDMENT, MODIFICATION AND TERMINATION 6.1. AMENDMENT, MODIFICATION AND TERMINATION. The Committee may, at --------------------------------------- any time and from time to time, amend, modify or terminate the Plan without seeking approval of the stockholders of the Company. -5- 6.2 TERMINATION AFTER OR DURING A PLAN YEAR. Termination of the Plan --------------------------------------- after a Plan Year and after the Incentive Awards have been approved by the Committee will not reduce Participants' rights to receive such Incentive Awards as have been approved at the time of termination of the Plan by the Committee. Termination or amendment of the Plan during a Plan Year may be retroactive to the beginning of the Plan Year, at the discretion of the Committee. If any amendment or termination occurs during the Plan Year, the Committee shall determine when and to what extent awards, if any, shall be paid for the portion of the Plan Year preceding the amendment or termination. ARTICLE 7 GENERAL PROVISIONS 7.1 NO RIGHT TO PARTICIPATE. No officer or employee shall have any ----------------------- right to be selected to participate in the Plan in any Plan Year. 7.2 NO RIGHT TO EMPLOYMENT. The selection of an individual for ---------------------- participation in the Plan shall not give such Participant any right to be retained in the employ of the Company or any of its Subsidiaries, nor does it affect the right of the Company or any such Subsidiary to dismiss or discharge any such Participant. The benefits provided for Participants under the Plan shall be in addition to, and shall in no way preclude, other forms of compensation to or in respect of such Participants. 7.3 WITHHOLDING. The Company or any Subsidiary shall have the authority ----------- and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. 7.4 UNFUNDED STATUS OF AWARDS. The Plan is intended to be an "unfunded" ------------------------- plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to the Plan, nothing contained in the Plan shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary. 7.5 LIABILITY AND INDEMNIFICATION. The Committee shall be entitled ----------------------------- to rely on the advice of counsel and other experts, including the independent accountants for the Company. No member of the Committee or any officers of the Company or its Subsidiaries shall be liable for any act or failure to act under the Plan, except in circumstances involving bad faith on the part of such member or officer. To the extent allowable under applicable law, each member of the Committee shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit, or proceeding to which such person may be a party or in which he may be involved by reason of any action or failure to act under the Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the Company's Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify him or hold him harmless. -6- 7.6 EXPENSES. The expenses of administering the Plan shall be borne by -------- the Company and its Subsidiaries. 7.7 TITLES AND HEADINGS. The titles and headings of the Sections in ------------------- the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 7.8 GENDER AND NUMBER. Except where otherwise indicated by the ----------------- context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 7.9 GOVERNING LAW. To the extent not governed by federal law, the -------------- Plan shall be construed in accordance with and governed by the laws of the State of Delaware. The foregoing is hereby acknowledged as being the UnumProvident Corporation 2000 Annual Incentive Plan as authorized and approved by the Compensation Committee on August 4, 2000. UNUMPROVIDENT CORPORATION By: ------------------------------- -7- EX-12.1 18 0018.txt COMPUTATION OF RATIO EXHIBIT 12.1 STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31 2000 1999 1998 1997 1996 (in millions, except ratios) ----------------------------------------------------- Earnings Income (Loss) Before Income Taxes $ 865.6 $ (165.5) $ 920.2 $ 916.7 $ 567.8 Fixed Charges 197.1 155.2 138.3 101.1 71.9 -------- -------- -------- -------- -------- Adjusted Earnings $1,062.7 $ (10.3) $1,058.5 $1,017.8 $ 639.7 ======== ======== ======== ======== ======== Fixed Charges Interest and Debt Expense $ 181.8 $ 137.8 $ 119.9 $ 84.9 $ 58.5 Amortization of Deferred Debt Costs 2.4 2.4 3.3 0.7 -- Portion of Rents Deemed Representative of Interest (a) 12.9 15.0 15.1 15.5 13.4 -------- -------- -------- -------- -------- Total Fixed Charges $ 197.1 $ 155.2 $ 138.3 $ 101.1 $ 71.9 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 5.4 (0.1) 7.7 10.1 8.9
(a) Generally deemed to be one-third of rental expense. 1 EX-12.2 19 0019.txt COMPUTATION OF RATIO EXHIBIT 12.2 STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Year Ended December 31 2000 1999 1998 1997 1996 (in millions, except ratios) ----------------------------------------------------- Earnings Income (Loss) Before Income Taxes $ 865.6 $ (165.5) $ 920.2 $ 916.7 $ 567.8 Fixed Charges 197.1 155.2 138.3 101.1 71.9 -------- -------- -------- -------- -------- Adjusted Earnings $1,062.7 $ (10.3) $1,058.5 $1,017.8 $ 639.7 ======== ======== ======== ======== ======== Combined Fixed Charges and Preferred Stock Dividends Interest and Debt Expense $ 181.8 $ 137.8 $ 119.9 $ 84.9 $ 58.5 Amortization of Deferred Debt Costs 2.4 2.4 3.3 0.7 -- Portion of Rents Deemed Representative of Interest (a) 12.9 15.0 15.1 15.5 13.4 Preferred Stock Dividends -- -- 2.9 19.5 19.5 -------- -------- -------- -------- -------- Total Combined Fixed Charges and Preferred Stock Dividends $ 197.1 $ 155.2 $ 141.2 $ 120.6 $ 91.4 ======== ======== ======== ======== ======== Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 5.4 (0.1) 7.5 8.4 7.0
(a) Generally deemed to be one-third of rental expense. 1 EX-21 20 0020.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 State or Other Subsidiaries of the Registrant Jurisdiction of Incorporation - ------------------------------ ----------------------------- Unum Holding Company Delaware Unum Life Insurance Company of America Maine SP Administrator, LLC California First Unum Life Insurance Company New York Claims Service International, Inc. Delaware Unum Development Corporation Maine Unum International Underwriters Inc. Delaware Unum European Holding Company Limited United Kingdom Unum General Company Limited United Kingdom Unum Management Company Limited United Kingdom Unum Limited United Kingdom Claims Service International Limited United Kingdom Open Door VAC Limited United Kingdom Mindtask Limited United Kingdom Duncanson & Holt, Inc. New York Duncanson & Holt Underwriters Ltd. United Kingdom Duncanson & Holt Syndicate Management Ltd. United Kingdom LRG Services Limited United Kingdom Trafalgar Underwriting Agencies Ltd. United Kingdom Duncanson & Holt Europe Ltd. United Kingdom Duncanson & Holt Agencies, Ltd. United Kingdom Duncanson & Holt Services Inc. Maine Duncanson & Holt Canada Ltd. Canada TRI-CAN Reinsurance, Inc. Canada Duncanson & Holt Asia PTE Ltd. Singapore Colonial Companies, Inc. Delaware Colonial Life & Accident Insurance Company South Carolina Benefit America Inc. South Carolina Unum Japan Accident Insurance Company Limited Japan Unum International Ltd. Bermuda Boston Compania Argentina de Seguros S.A. Argentina Boston Sequros de Retiro S.A. Argentina Boston Sequros de Vida S.A. Argentina Fibos S.A. Argentina Options and Choices, Inc. Wyoming The Paul Revere Corporation Massachusetts The Paul Revere Life Insurance Company Massachusetts The Paul Revere Protective Life Insurance Company Delaware The Paul Revere Variable Annuity Insurance Company Massachusetts GENEX Services, Inc. Pennsylvania GENEX Services of Canada, Inc. Ontario Primecor, Inc. Pennsylvania GENEX Services, Inc. of Ohio Ohio Provident Life and Accident Insurance Company Tennessee Provident National Assurance Company Tennessee Provident Life and Casualty Insurance Company Tennessee Provident Investment Management, LLC Tennessee Provident International Ltd. Bermuda Provident Insurance Agency, LLC Delaware EX-23.1 21 0021.txt CONSENT OF AUDITORS Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-47551, Form S-8 No. 33-88108,Form S-8 No. 333-40219, Form S-8 No. 33-62231, Form S-8 No. 333-81669 and Form S-8 No. 333-81969) of Provident Companies, Inc. pertaining to the Provident Life and Accident Insurance Company MoneyMaker, A Long-Term 401(k) Retirement Savings Plan, the Provident Life and Accident Insurance Company Stock Purchase Plan of 1994, the Provident Life and Accident Insurance Company Employee Stock Purchase Plan of 1995, the Provident Life and Accident Insurance Company Management Incentive Compensation Plan of 1994, The Paul Revere Savings Plan, Provident Companies, Inc. Stock Plan of 1999, Provident Companies, Inc, Non-Employee Director Compensation Plan of 1998, Employee Stock Option Plan of 1998, Amended and Restated Annual Management Incentive Compensation Plan of 1994, the UnumProvident Corporation 1987 Executive Stock Option Plan, UnumProvident Corporation 1990 Long-Term Stock Incentive Plan, UnumProvident Corporation Plan 1996 Long-Term Stock Incentive Plan and UnumProvident Corporation 1998 Goals Stock Option Plan, and in the Registration Statement (Form S-3 No. 333-17849) of Provident Companies, Inc. for the registration of 9,523,810 shares of its common stock, and in the shelf Registration Statement (Form S-3 No. 333-43808) of UnumProvident Corporation of our report dated February 12, 2001, except for Notes 13 and 15, for which the date is February 27, 2001 with respect to the consolidated financial statements and schedules of UnumProvident Corporation and subsidiaries, included in its Annual Report on Form 10-K for the year ended December 31, 2000. /s/ ERNST & YOUNG LLP Chattanooga, Tennessee March 26, 2001 EX-23.2 22 0022.txt CONSENT OF AUDITORS Exhibit 23.2 CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS We hereby consent to the incorporation by reference into the Registration Statements on Form S-8 (File Nos. 33-47551, 33-88108, 333-40219, 33-62231, 333-81669 and 333-81969) and on Form S-3 (File Nos. 333-17849 and 333-43808) of UnumProvident Corporation of our report dated February 2, 1999 relating to the consolidated financial statements of UNUM Corporation and subsidiaries for the year ended December 31, 1998 (not presented separately therein) which are included in UnumProvident's Annual Report on Form 10-K for the year ended December 31, 2000 as a result of a pooling of interest business combination. /s/ PRICEWATERHOUSECOOPERS LLP Portland, Maine March 26, 2001 EX-24 23 0023.txt POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY OF DIRECTORS OF UNUMPROVIDENT CORPORATION The undersigned directors of UnumProvident Corporation, a Delaware Corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 2000 each hereby constitutes and appoints F. Dean Copeland, or Susan N. Roth, as his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him/her and in his/her name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all such other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has each executed this Power of Attorney as of March 23, 2001. /s/ William L. Armstrong /s/ J. Harold Chandler - ------------------------------ ----------------------------- William L. Armstrong J. Harold Chandler /s/ Ronald E. Goldsberry /s/ Hugh O. Maclellan, Jr. - ------------------------------ ----------------------------- Ronald E. Goldsberry Hugh O. Maclellan, Jr. /s/ A.S. MacMillan, Jr. /s/ George J. Mitchell - ------------------------------ ----------------------------- A.S. MacMillan, Jr. George J. Mitchell /s/ Cynthia A. Montgomery /s/ James L. Moody, Jr. - ------------------------------ ----------------------------- Cynthia A. Montgomery James L. Moody, Jr. /s/ C. William Pollard /s/ Lawrence R. Pugh - ------------------------------ ----------------------------- C. William Pollard Lawrence R. Pugh /s/ Lois D. Rice /s/ John W. Rowe - ------------------------------ ----------------------------- Lois D. Rice John W. Rowe /s/ Burton E. Sorensen - ------------------------------ Burton E. Sorensen -----END PRIVACY-ENHANCED MESSAGE-----