-----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, LnQ2t46R/8nQVwNmnnW5CpzLqmS/2fgOdydNvTFwxhn7UvMkiv5JT0nMXfaMXhEV jVo204qEQyC96DbV7X7yCw== 0000950131-02-003204.txt : 20020814 0000950131-02-003204.hdr.sgml : 20020814 20020814122340 ACCESSION NUMBER: 0000950131-02-003204 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORACE MANN EDUCATORS CORP /DE/ CENTRAL INDEX KEY: 0000850141 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 370911756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10890 FILM NUMBER: 02733138 BUSINESS ADDRESS: STREET 1: 1 HORACE MANN PLZ CITY: SPRINGFIELD STATE: IL ZIP: 62715-0001 BUSINESS PHONE: 2177892500 MAIL ADDRESS: STREET 1: 1 HORACE MANN PLZ CITY: SPRINGFIELD STATE: IL ZIP: 62715-0001 FORMER COMPANY: FORMER CONFORMED NAME: HORACE MANN EDUCATORS CORP DATE OF NAME CHANGE: 19920108 10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 1-10890 HORACE MANN EDUCATORS CORPORATION (Exact name of registrant as specified in its charter) Delaware 37-0911756 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 Horace Mann Plaza, Springfield, Illinois 62715-0001 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: 217-789-2500 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 ___ As of July 31, 2002, 40,848,319 shares of Common Stock, par value $0.001 per share, were outstanding, net of 19,341,296 shares of treasury stock. ================================================================================ [SEAL] HORACE MANN EDUCATORS CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Independent Auditors' Review Report................................... 1 Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001.................................. 2 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001.................... 3 Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended June 30, 2002 and 2001...................... 4 Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2002 and 2001.................... 5 Notes to Consolidated Financial Statements............................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 21 Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 46 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................ 46 Item 6. Exhibits and Reports on Form 8-K................................... 47 SIGNATURES........................................................................... 48
[SEAL] INDEPENDENT AUDITORS' REVIEW REPORT The Board of Directors and Shareholders Horace Mann Educators Corporation: We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of June 30, 2002, and the related consolidated statements of operations and cash flows for the three-month and six-month periods ended June 30, 2002 and 2001, and the related consolidated statements of changes in shareholders' equity for the six-month periods ended June 30, 2002 and 2001. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 7, 2002, we expressed an unqualified opinion on those consolidated financial statements. As discussed in note 5 to the consolidated financial statements, as of January 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets." /s/ KPMG LLP KPMG LLP Chicago, Illinois August 5, 2002 [SEAL] 1 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------ ASSETS Investments Fixed maturities, available for sale, at fair value (amortized cost, 2002, $2,686,345; 2001, $2,726,831) .......................... $ 2,714,475 $ 2,769,867 Short-term and other investments .................................... 167,231 107,445 Short-term investments, loaned securities collateral ................ 448,074 98,369 ----------- ------------ Total investments ................................................ 3,329,780 2,975,681 Cash .................................................................. 20,858 33,939 Accrued investment income and premiums receivable ..................... 95,203 112,746 Deferred policy acquisition costs ..................................... 170,074 157,776 Goodwill .............................................................. 47,396 47,396 Value of acquired insurance in force .................................. 35,797 38,393 Other assets .......................................................... 205,044 114,665 Variable annuity assets ............................................... 952,647 1,008,430 ----------- ------------ Total assets ..................................................... $ 4,856,799 $ 4,489,026 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities Fixed annuity contract liabilities .................................. $ 1,311,526 $ 1,278,137 Interest-sensitive life contract liabilities ........................ 530,738 518,455 Unpaid claims and claim expenses .................................... 318,538 314,295 Future policy benefits .............................................. 181,890 179,109 Unearned premiums ................................................... 175,864 185,569 ----------- ------------ Total policy liabilities ......................................... 2,518,556 2,475,565 Other policyholder funds .............................................. 123,451 123,434 Liability for securities lending agreements ........................... 448,074 98,369 Other liabilities ..................................................... 161,708 171,271 Short-term debt ....................................................... - 53,000 Long-term debt ........................................................ 212,821 99,767 Variable annuity liabilities .......................................... 952,647 1,008,430 ----------- ------------ Total liabilities ................................................ 4,417,257 4,029,836 ----------- ------------ Preferred stock, $0.001 par value, shares authorized 1,000,000; none issued ............................................... - - Common stock, $0.001 par value, shares authorized 75,000,000; shares issued, 2002, 60,189,615; 2001, 60,076,921 ..................................................... 60 60 Additional paid-in capital ............................................ 342,230 341,052 Retained earnings ..................................................... 448,844 461,139 Accumulated other comprehensive income (loss), net of taxes: Net unrealized gains on fixed maturities and equity securities ................................... 17,897 26,336 Minimum pension liability adjustment ................................ (11,530) (11,438) Treasury stock, at cost, 19,341,296 shares ............................ (357,959) (357,959) ----------- ------------ Total shareholders' equity ....................................... 439,542 459,190 ----------- ------------ Total liabilities and shareholders' equity .................... $ 4,856,799 $ 4,489,026 =========== ============
[SEAL] See accompanying notes to consolidated financial statements. 2 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Insurance premiums written and contract deposits ............................ $ 218,600 $ 218,225 $ 430,348 $ 425,997 ========= ========= ========= ========= Revenues Insurance premiums and contract charges earned ......................... $ 154,333 $ 151,990 $ 309,886 $ 301,907 Net investment income ............................ 50,350 49,835 100,035 98,598 Realized investment losses ....................... (41,277) (5,719) (38,695) (1,035) --------- --------- --------- --------- Total revenues .................................. 163,406 196,106 371,226 399,470 --------- --------- --------- --------- Benefits, losses and expenses Benefits, claims and settlement expenses ......... 115,967 134,813 226,783 242,590 Interest credited ................................ 24,441 24,508 48,590 48,317 Policy acquisition expenses amortized ............ 14,301 13,256 28,926 27,314 Operating expenses ............................... 31,714 26,798 63,990 56,292 Amortization of intangible assets ................ 1,383 1,770 2,677 3,677 Interest expense ................................. 2,364 2,323 4,431 4,847 Debt retirement costs ............................ 2,316 - 2,316 - Litigation charges ............................... 1,581 - 1,581 - Restructuring reserve adjustment ................. - (175) - (175) --------- --------- --------- --------- Total benefits, losses and expenses ............. 194,067 203,293 379,294 382,862 --------- --------- --------- --------- Income (loss) before income taxes ................. (30,661) (7,187) (8,068) 16,608 Income tax expense (benefit) ...................... (11,374) (2,261) (4,352) 4,836 --------- --------- --------- --------- Net income (loss) ................................. $ (19,287) $ (4,926) $ (3,716) $ 11,772 ========= ========= ========= ========= Net income (loss) per share Basic ............................................ $ (0.47) $ (0.12) $ (0.09) $ 0.29 ========= ========= ========= ========= Diluted .......................................... $ (0.47) $ (0.12) $ (0.09) $ 0.29 ========= ========= ========= ========= Weighted average number of shares and equivalent shares (in thousands) Basic ........................................... 40,838 40,554 40,809 40,539 Diluted ......................................... 41,294 40,874 41,272 40,800
[SEAL] See accompanying notes to consolidated financial statements. 3 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, ----------------------- 2002 2001 ---------- ---------- Common stock Beginning balance ............................................ $ 60 $ 60 Options exercised, 2002, 102,410 shares; 2001, 64,575 shares ......................................... - - Conversion of Director Stock Plan units, 2002, 10,284 shares; 2001, 10,293 shares .................... - - ---------- ---------- Ending balance ............................................... 60 60 ---------- ---------- Additional paid-in capital Beginning balance ............................................ 341,052 338,243 Options exercised and conversion of Director Stock Plan units ................................... 2,116 964 Catastrophe-linked equity put option premium ................. (938) (475) ---------- ---------- Ending balance ............................................... 342,230 338,732 ---------- ---------- Retained earnings Beginning balance ............................................ 461,139 452,624 Net income (loss) ............................................ (3,716) 11,772 Cash dividends, 2002, $0.21 per share; 2001, $0.21 per share ....................................... (8,579) (8,518) ---------- ---------- Ending balance ............................................... 448,844 455,878 ---------- ---------- Accumulated other comprehensive income (loss), net of taxes: Beginning balance ............................................ 14,898 (4,975) Change in net unrealized gains (losses) on fixed maturities and equity securities ..................... (8,439) 12,514 Increase in minimum pension liability adjustment ............ (92) - ---------- ---------- Ending balance ............................................... 6,367 7,539 ---------- ---------- Treasury stock, at cost Beginning and ending balance, 2002 and 2001, 19,341,296 shares ............................ (357,959) (357,959) ---------- ---------- Shareholders' equity at end of period ......................... $ 439,542 $ 444,250 ========== ========== Comprehensive income (loss) Net income (loss) ............................................ $ (3,716) $ 11,772 Other comprehensive income (loss), net of taxes: Change in net unrealized gains (losses) on fixed maturities and equity securities .................. (8,439) 12,514 Increase in minimum pension liability adjustment ............ (92) - ---------- ---------- Other comprehensive income (loss) ........................ (8,531) 12,514 ---------- ---------- Total .................................................. $ (12,247) $ 24,286 ========== ==========
[SEAL] See accompanying notes to consolidated financial statements. 4 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Cash flows from operating activities Premiums collected ................................... $ 165,576 $ 154,669 $ 330,262 $ 316,458 Policyholder benefits paid ........................... (118,327) (116,557) (240,169) (240,035) Policy acquisition and other operating expenses paid ....................... (50,016) (45,286) (105,202) (92,100) Federal income taxes paid ............................ (8,818) - (10,850) - Investment income collected .......................... 48,469 45,161 101,460 94,599 Interest expense paid ................................ (1,941) (6) (5,257) (4,154) Other ................................................ (3,396) (867) (3,416) (1,154) ----------- ----------- ----------- ----------- Net cash provided by operating activities ......... 31,547 37,114 66,828 73,614 ----------- ----------- ----------- ----------- Cash flows used in investing activities Fixed maturities Purchases .......................................... (417,486) (330,303) (851,430) (688,388) Sales .............................................. 290,686 208,151 683,818 470,932 Maturities ......................................... 79,612 70,217 99,214 136,916 Net cash received from (used for) short-term and other investments ............................... (45,730) 14,180 (61,072) 7,086 ----------- ----------- ----------- ----------- Net cash used in investing activities ............. (92,918) (37,755) (129,470) (73,454) ----------- ----------- ----------- ----------- Cash flows provided by (used in) financing activities Dividends paid to shareholders ....................... (4,295) (4,261) (8,579) (8,518) Principal repayments on Bank Credit Facility ......... (53,000) - (53,000) - Exercise of stock options ............................ 762 874 2,116 964 Catastrophe-linked equity put option premium ......... (938) (238) (938) (475) Proceeds from issuance of Convertible Notes ................................... 163,013 - 163,013 - Retirement of Senior Notes ........................... (56,941) - (56,941) - Annuity contracts, variable and fixed Deposits ............................................ 65,090 61,697 128,439 120,649 Maturities and withdrawals .......................... (45,770) (40,094) (86,894) (93,879) Net transfer to variable annuity assets ............. (17,250) (15,641) (34,204) (19,125) Net decrease in life policy account balances ......... (1,763) (1,210) (3,451) (2,286) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities ............................. 48,908 1,127 49,561 (2,670) ----------- ----------- ----------- ----------- Net increase (decrease) in cash ....................... (12,463) 486 (13,081) (2,510) Cash at beginning of period ........................... 33,321 18,145 33,939 21,141 ----------- ----------- ----------- ----------- Cash at end of period ................................. $ 20,858 $ 18,631 $ 20,858 $ 18,631 =========== =========== =========== ===========
[SEAL] See accompanying notes to consolidated financial statements. 5 HORACE MANN EDUCATORS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation ("HMEC"; and together with its subsidiaries, the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The Company believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of June 30, 2002 and December 31, 2001 and the consolidated results of operations, changes in shareholders' equity and cash flows for the three and six months ended June 30, 2002 and 2001. The subsidiaries of HMEC sell and underwrite tax-qualified retirement annuities and private passenger automobile, homeowners, and life insurance products, primarily to educators and other employees of public schools and their families. The Company's principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds. It is suggested that these financial statements be read in conjunction with the financial statements and the related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year. Note 2 - Restructuring Charges Restructuring charges were incurred and separately identified in the Statements of Operations for the years ended December 31, 2001 and 2000. Massachusetts Automobile Business In October 2001, the Company recorded restructuring charges of $7,290 pretax ($4,738, or $0.12 per share, after tax) reflecting a change in the Company's presence in the Massachusetts automobile market. On October 18, 2001, Horace Mann announced that it had formed a marketing alliance with The Commerce Group, Inc. ("Commerce") for the sale of automobile insurance in the state of Massachusetts. Through this alliance, and by January 1, 2002, Horace Mann began providing its Massachusetts customers with Commerce automobile insurance policies, while continuing to write other Horace Mann products, including property and life insurance and retirement annuities. [SEAL] 6 Note 2 - Restructuring Charges-(Continued) The Company's Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 did not reflect any accrued amounts due to the restructure of its Massachusetts automobile business. The Company expects that this transaction will have a positive impact on operating income of approximately $0.10 per share in 2003 and beyond. The improvement in 2002 earnings will be somewhat less reflecting the run-off of current policies in force. The Company plans to utilize the benefits of this transaction to invest in its marketing, customer service and technology infrastructures. The Company's Massachusetts automobile business represented premiums written and earned of approximately $14,000 and $27,000 for the six months ended June 30, 2001 and the twelve months ended December 31, 2001, respectively. In 2002, premiums written for the voluntary portion of this business have been reduced to zero, and premiums earned will be reduced significantly throughout the year reflecting run-off of the policies in force at December 31, 2001. For the full year 2001, claims and settlement expenses in Massachusetts for voluntary automobile business were $9,137 and for involuntary residual market business were $11,455. Claims and settlement expenses in 2002 will reflect run-off of the business and a decline in exposure to loss with expiration of all of the policies written by the Company by December 31, 2002. Printing Services, Group Insurance and Credit Union Marketing Operations In November 2001, the Company recorded restructuring charges of $450 pretax ($293, less than $0.01 per share, after tax) reflecting the decision to close its on site printing services operations based on a cost benefit analysis. Employee termination costs, for termination of 13 individuals by December 31, 2001, which represented severance, vacation buy-out and related payroll taxes represented $409 of the total charge. The eliminated positions encompass management, technical and clerical responsibilities. The remaining $41 was attributable primarily to the write-off of equipment related to this function. In December 2000, the Company recorded restructuring charges of $2,236 pretax ($1,453, or $0.04 per share, after tax) reflecting two changes in the Company's operations. Specifically, the Company restructured the operations of its group insurance business, thereby eliminating 39 jobs, and its credit union marketing group, eliminating 20 additional positions. The changes will improve business results and more closely align these functions with the Company's strategic direction. Employee termination costs, for termination of an estimated 50 individuals, represented severance, vacation buy-out and related payroll taxes. The eliminated positions encompass management, professional and clerical responsibilities. By December 31, 2001, 39 individuals had been terminated with two additional terminations scheduled in 2002. Termination of lease agreements represented office space used by the credit union marketing group. The remaining charge was attributable primarily to the write-off of software related to these two areas. [SEAL] 7 Note 2 - Restructuring Charges-(Continued) The following table provides information about the components of the charges taken in December 2001 and 2000, the balance of accrued amounts at December 31, 2001 and June 30, 2002, and payment activity during the six months ended June 30, 2002.
Original Reserve at Reserve at Pretax December 31, June 30, Charge 2001 Payments Adjustments 2002 -------- -------------- ---------- ------------ -------------- Charges to earnings: Printing Services Operations Employee termination costs......................... $ 409 $ 396 $ 215 $ - $ 181 Write-off of equipment......... 41 - - - - -------- ------- ------- ------- ------- Subtotal.................. 450 396 215 - 181 -------- ------- ------- ------- ------- Group Insurance and Credit Union Marketing Operations Employee termination costs........................ 1,827 636 243 - 393 Termination of lease agreements................... 285 - - - - Write-off of capitalized software..................... 106 - - - - Other......................... 18 - - - - -------- ------- ------- ------- ------- Subtotal.................. 2,236 636 243 - 393 -------- ------- ------- ------- ------- Total.................... $ 2,686 $ 1,032 $ 458 $ - $ 574 ======== ======= ======= ======= =======
Note 3 - Debt Indebtedness outstanding was as follows:
June 30, December 31, 2002 2001 ----------- -------------- Short-term debt: Bank Credit Facility ............................... $ - $ 53,000 Long-term debt: 1.425% Senior Convertible Notes, due May 14, 2032. Aggregate principal amount less unaccrued discount of $185,587 (3.0% imputed rate) ............................... 167,913 - 6 5/8% Senior Notes, due January 15, 2006. Aggregate principal amount less unaccrued discount of $92 and $233 (6.7% imputed rate) 44,908 99,767 ----------- -------------- Total ........................................... $ 212,821 $ 152,767 =========== ==============
[SEAL] 8 Note 3 - Debt-(Continued) Credit Agreement with Financial Institutions ("Bank Credit Facility") On May 29, 2002, the Company entered into a new Bank Credit Agreement which provides for unsecured borrowings of up to $25,000, with a provision that allows the commitment amount to be increased to $35,000 (the "Current Bank Credit Facility"). The Current Bank Credit Facility expires on May 31, 2005. Interest accrues at varying spreads relative to corporate or eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate. No amounts had been borrowed under the Current Bank Credit Facility and no balance was outstanding at June 30, 2002. The unused portion of the Current Bank Credit Facility is subject to a variable commitment fee which was 0.20% on an annual basis at June 30, 2002. An amendment to the previous Bank Credit Agreement was made prior to December 31, 2001, which extended the maturity from December 31, 2001 to June 30, 2002. The previous Bank Credit Agreement was terminated when the Company entered into the Current Bank Credit Facility. The $53,000 balance outstanding under the previous Bank Credit Agreement was repaid in full on May 14, 2002 utilizing a portion of the proceeds from the issuance of the Convertible Notes as described below. 1.425% Senior Convertible Notes ("Convertible Notes") On May 14, 2002, the Company issued $353,500 aggregate principal amount of 1.425% senior convertible notes due in 2032 at a discount of 52.5% resulting in an effective yield of 3.0%. The net proceeds from the sale of the Convertible Notes have been used to repay the balance outstanding under the previous Bank Credit Agreement and repurchase a portion of the outstanding Senior Notes, as described below, and will be used for general corporate purposes and potentially to further reduce corporate indebtedness. Interest on the Convertible Notes is payable semi-annually at a rate of 1.425% beginning November 14, 2002 until May 14, 2007. After that date, cash interest will not be paid on the Convertible Notes prior to maturity unless contingent cash interest becomes payable. Contingent cash interest becomes payable if the average market price of a Convertible Note for a five trading day measurement period preceding the applicable six-month period equals 120% or more of the sum of the Convertible Note's issue price, accrued original issue discount and accrued cash interest, if any, for such Convertible Note. The contingent cash interest payable per Convertible Note with respect to any quarterly period within any six-month period will equal the then applicable conversion rate multiplied by the greater of (i) $0.105 or (ii) any regular cash dividends paid by the Company per share on HMEC's common stock during that quarterly period. The Convertible Notes will be convertible at the option of the holders, if the conditions for conversion are satisfied, into shares of HMEC's common stock at a conversion price of $26.74. Holders may also surrender Convertible Notes for conversion during any period in which the credit rating assigned to the Convertible Notes is Ba2 or lower by Moody's or BB+ or lower by S&P, the Convertible Notes are no longer rated by either Moody's or S&P, or the credit rating assigned to the Convertible Notes has been suspended or withdrawn by either Moody's or S&P. The Convertible Notes will cease to be convertible pursuant to this credit rating criteria during any period or periods in which all of the credit ratings are increased above such levels. The Convertible Notes are redeemable by HMEC in whole or in part, at any time on or after May 14, 2007, at redemption prices equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the applicable redemption date. The [SEAL] 9 Note 3 - Debt-(Continued) holders of the Convertible Notes may require HMEC to purchase all or a portion of their Convertible Notes on either May 14, 2007, 2012, 2017, 2022, or 2027 at stated prices plus accrued cash interest, if any, to the purchase date. HMEC may pay the purchase price in cash or shares of HMEC common stock or in a combination of cash and shares of HMEC common stock. The Convertible Notes were privately offered only to qualified institutional buyers under Rule 144A under the Securities Act of 1933 and outside the United States of America ("U.S.") to non-U.S. persons under Regulation S under the Securities Act of 1933, and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. HMEC intends to file a registration statement with the Securities and Exchange Commission related to the Convertible Notes prior to September 30, 2002. 6 5/8% Senior Notes ("Senior Notes") On May 30, 2002, the Company repurchased $55,000 aggregate principal amount of its outstanding Senior Notes utilizing a portion of the proceeds from the issuance of the Convertible Notes, as described above. The aggregate cost of the repurchase was $56,838. The retirement of these Senior Notes resulted in a pretax charge to income for the six months ended June 30, 2002 of $2,316, which equated to $1,505 or $0.04 per share after tax. Note 4 - Investments The following table presents the composition and value of the Company's fixed maturity securities portfolio by rating category. The Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
Percent of Carrying Value June 30, 2002 ------------------------ --------------------------- Rating of Fixed June 30, December 31, Carrying Amortized Maturity Securities(1) 2002 2001 Value Cost ---------------------- --------- ------------- ----------- ------------- AAA......................... 39.5% 36.7% $ 1,071,145 $ 1,036,400 AA.......................... 6.5 6.3 178,048 170,096 A........................... 21.8 20.8 592,338 578,283 BBB......................... 27.7 31.6 750,875 760,885 BB.......................... 1.8 1.5 47,835 57,661 B........................... 1.7 2.1 46,141 53,055 CCC or lower................ 0.8 0.8 22,336 24,390 Not rated(2)................ 0.2 0.2 5,757 5,575 ----- ----- ----------- ------------- Total...................... 100.0% 100.0% $ 2,714,475 $ 2,686,345 ===== ===== =========== =============
(1) Ratings are as assigned primarily by Standard & Poor's Corporation ("S&P") when available, with remaining ratings as assigned on an equivalent basis by Moody's Investors Service, Inc. ("Moody's"). Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. (2) This category includes $196 of publicly traded securities not currently rated by S&P or Moody's and $5,561 of private placement securities not rated by either S&P or Moody's. The National Association of Insurance Commissioners ("NAIC") has rated 92.5% of these private placements as investment grade. [SEAL] 10 Note 4 - Investments-(Continued) The following table presents a maturity schedule of the Company's fixed maturity securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Percent Carrying of Total Value -------------------------- ------------ June 30, December 31, June 30, Scheduled Maturity 2002 2001 2002 ------------------ ---------- ------------- ------------ Due in 1 year or less...................... 4.2% 4.0% $ 114,108 Due after 1 year through 5 years........... 21.2 23.0 574,582 Due after 5 years through 10 years......... 28.0 29.9 759,235 Due after 10 years through 20 years........ 15.1 14.8 410,256 Due after 20 years......................... 31.5 28.3 856,294 ----- ----- ------------ Total..................................... 100.0% 100.0% $ 2,714,475 ===== ===== ============
The Company's investment portfolio includes no derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics). The Company reviews the fair value of the investment portfolio on a monthly basis to determine if there are any securities that have fallen below 80% of book value. This review, in conjunction with the Company's investment managers' monthly credit reports and current market data, is the basis for determining if a security has suffered an other-than-temporary decline in value. A write-down is recorded when such decline in value is deemed to be other-than-temporary, with the realized investment loss reflected in the Statement of Operations for the period. In 2002, as a result of these reviews, the Company recorded pretax impairment charges of $9,876 and $28,111 for the three months ended March 31, and June 30, respectively. Management believes that there may be further investment impairments during the remainder of 2002 if current economic and financial conditions persist. At June 30, 2002, the Company's investment portfolio had a total of 40 fixed income securities issued by telecommunications companies, with an amortized cost of $270,100 and an after-tax unrealized loss of approximately $20,000. The Company lends fixed income securities to third parties, primarily major brokerage firms. As of June 30, 2002 and December 31, 2001, fixed maturities with a fair value of $448,074 and $98,369, respectively, were on loan. The Company separately maintains a minimum of 100% of the value of the loaned securities as collateral for each loan. Securities lending collateral is classified as investments with a corresponding liability in the Company's Consolidated Balance Sheet, in accordance with the applicable accounting guidance. [SEAL] 11 Note 5 - Goodwill and Other Acquired Intangible Assets When the Company was acquired in 1989, intangible assets were recorded in the application of purchase accounting to recognize the value of acquired insurance in force and goodwill. In addition, goodwill was recorded in 1994 related to the purchase of Horace Mann Property & Casualty Insurance Company (formerly Allegiance Insurance Company). The value of acquired insurance in force is being amortized over the following periods utilizing the indicated methods for life and annuity, respectively, as follows: 20 years, in proportion to coverage provided; 20 years, in proportion to estimated gross profits. Goodwill was amortized over 40 years on a straight-line basis through December 31, 2001. Effective January 1, 2002, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". The Company's value of acquired insurance in force is an intangible asset with a definite life and will continue to be amortized under the provisions of SFAS No. 142. Goodwill will remain on the balance sheet and not be amortized. SFAS No. 142 establishes a new method of testing goodwill for impairment. On an annual basis, and when there is reason to suspect that its value may have been diminished or impaired, the goodwill asset must be tested for impairment. The amount of goodwill determined to be impaired will be expensed to current operations. As of June 30, 2002, the Company completed the allocation of goodwill by business segment and the initial impairment testing procedures which resulted in no impairment loss. The allocation of goodwill by segment was as follows:
Balance as of January 1, 2002 and June 30, 2002 ----------------- Annuity............................... $ 28,025 Life.................................. 9,911 Property and casualty................. 9,460 --------- Total............................... $ 47,396 =========
[SEAL] 12 Note 5 - Goodwill and Other Acquired Intangible Assets-(Continued) Net income (loss) and net income (loss) per share exclusive of goodwill amortization expense for the three and six months ended June 30, 2002 and 2001 were as follows:
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Reported net income (loss) .............. $ (19,287) $ (4,926) $ (3,716) $ 11,772 Add back: Goodwill amortization ........ - 404 - 809 ------------ ------------ ------------ ------------ Adjusted net income (loss) ............. $ (19,287) $ (4,522) $ (3,716) $ 12,581 ============ ============ ============ ============ Reported net income (loss) per share-basic ........................ $ (0.47) $ (0.12) $ (0.09) $ 0.29 Add back: Goodwill amortization ........ - 0.01 - 0.02 ------------ ------------ ------------ ------------ Adjusted net income (loss) per share-basic ....................... $ (0.47) $ (0.11) $ (0.09) $ 0.31 ============ ============ ============ ============ Reported net income (loss) per share-diluted ...................... $ (0.47) $ (0.12) $ (0.09) $ 0.29 Add back: Goodwill amortization ........ - 0.01 - 0.02 ------------ ------------ ------------ ------------ Adjusted net income (loss) per share-diluted ..................... $ (0.47) $ (0.11) $ (0.09) $ 0.31 ============ ============ ============ ============
Net income and net income per share exclusive of goodwill amortization expense for the years ended December 31, 2001, 2000 and 1999 were as follows:
Year Ended December 31, ------------------------------ 2001 2000 1999 -------- -------- -------- Reported net income .................. $ 25,587 $ 20,841 $ 44,505 Add back: Goodwill amortization ...... 1,618 1,618 1,618 -------- -------- -------- Adjusted net income ................. $ 27,205 $ 22,459 $ 46,123 ======== ======== ======== Reported net income per share-basic .. $ 0.63 $ 0.51 $ 1.08 Add back: Goodwill amortization ...... 0.04 0.04 0.04 -------- -------- -------- Adjusted net income per share-basic . $ 0.67 $ 0.55 $ 1.12 ======== ======== ======== Reported net income per share-diluted $ 0.63 $ 0.51 $ 1.07 Add back: Goodwill amortization ...... 0.04 0.04 0.04 -------- -------- -------- Adjusted net income per share-diluted $ 0.67 $ 0.55 $ 1.11 ======== ======== ========
[SEAL] 13 Note 5 - Goodwill and Other Acquired Intangible Assets-(Continued) For the amortization of the value of acquired insurance in force, the Company periodically reviews its estimates of future gross profits. The most significant assumptions that are involved in the estimation of future gross profits include future market performance, business surrender/lapse rates and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material charge or credit to amortization expense for the period in which the adjustment is made. The value of acquired insurance in force for investment contracts (those issued prior to August 29, 1989) is adjusted for the impact on estimated future gross profits as if net unrealized investment gains and losses had been realized at the balance sheet date. The impact of this adjustment is included in net unrealized gains and losses within shareholders' equity. The balances of value of acquired insurance in force by segment at June 30, 2002 and December 31, 2001 were as follows:
June 30, 2002 December 31, 2001 ------------------------------------- -------------------------------------- Accumulated Net Accumulated Net Cost Amortization Balance Cost Amortization Balance --------- -------------- --------- --------- -------------- --------- Value of acquired insurance in force Life.................... $ 48,746 $ 39,033 $ 9,713 $ 48,746 $ 38,151 $ 10,595 Annuity................. 87,553 61,042 26,511 87,553 59,247 28,306 --------- --------- --------- --------- --------- --------- Subtotal............... $ 136,299 $ 100,075 36,224 $ 136,299 $ 97,398 38,901 ========= ========= --------- ========= ========= --------- Impact of unrealized gains and losses................. (427) (508) --------- --------- Total................. $ 35,797 $ 38,393 ========= =========
Scheduled amortization of the December 31, 2001 balances of value of acquired insurance in force by segment over the next five years is as follows:
Year Ended December 31, ------------------------------------------------ 2002 2003 2004 2005 2006 -------- -------- -------- -------- -------- Scheduled amortization of: Value of acquired insurance in force Life................................... $ 1,726 $ 1,625 $ 1,537 $ 1,460 $ 1,394 Annuity................................ 3,779 3,785 3,917 4,037 4,140 -------- -------- -------- -------- -------- Total................................. $ 5,505 $ 5,410 $ 5,454 $ 5,497 $ 5,534 ======== ======== ======== ======== ========
[SEAL] 14 Note 6 - Shareholders' Equity Share Repurchase Programs The Company has not repurchased shares of its common stock under its stock repurchase program since the third quarter of 2000, consistent with management's stated intention to utilize excess capital to support the Company's strategic growth initiatives. Since early 1997, 8,165,100 shares, or 17% of the shares outstanding on December 31, 1996, have been repurchased at an aggregate cost of $203,657, equal to an average cost of $24.94 per share. Including shares repurchased in 1995, the Company has repurchased 33% of the shares outstanding on December 31, 1994. The repurchase of shares was financed through use of cash and, when necessary, its Bank Credit Facility. However, the Company has not utilized its Bank Credit Facility for share repurchases since the second quarter of 1999. As of June 30, 2002, $96,343 remained authorized for future share repurchases. [SEAL] 15 Note 7 - Reinsurance The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effect of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:
Ceded to Assumed Gross Other from State Amount Companies Facilities Net --------- ----------- ------------ ----------- Three months ended June 30, 2002 ------------------ Premiums written and contract deposits................. $ 223,879 $ 6,340 $ 1,061 $ 218,600 Premiums and contract charges earned........................ 161,088 10,005 3,250 154,333 Benefits, claims and settlement expenses................... 121,454 9,174 3,687 115,967 Three months ended June 30, 2001 ------------------ Premiums written and contract deposits................. $ 221,166 $ 6,825 $ 3,884 $ 218,225 Premiums and contract charges earned........................ 154,573 6,614 4,031 151,990 Benefits, claims and settlement expenses................... 130,774 1,371 5,410 134,813 Six months ended June 30, 2002 ---------------- Premiums written and contract deposits................. $ 435,052 $ 9,594 $ 4,890 $ 430,348 Premiums and contract charges earned........................ 321,141 17,868 6,613 309,886 Benefits, claims and settlement expenses................... 237,484 18,590 7,889 226,783 Six months ended June 30, 2001 ---------------- Premiums written and contract deposits................. $ 431,234 $ 12,975 $ 7,738 $ 425,997 Premiums and contract charges earned........................ 307,147 13,274 8,034 301,907 Benefits, claims and settlement expenses................... 242,048 9,161 9,703 242,590
[SEAL] 16 Note 7 - Reinsurance-(Continued) The Company maintains an excess and catastrophe treaty reinsurance program. The Company reinsures 95% of catastrophe losses above a retention of $8,500 per occurrence up to $80,000 per occurrence. In addition, the Company's predominant insurance subsidiary for property and casualty business written in Florida reinsures 90% of hurricane losses in that state above a retention of $11,000 up to $47,400 with the Florida Hurricane Catastrophe Fund, based on the Fund's financial resources. Through December 31, 2001, these catastrophe reinsurance programs were augmented by a $100,000 equity put and reinsurance agreement. This equity put provided an option to sell shares of the Company's convertible preferred stock with a floating rate dividend at a pre-negotiated price in the event losses from catastrophes exceeded the catastrophe reinsurance program coverage limit. Before tax benefits, the equity put provided a source of capital for up to $154,000 of catastrophe losses above the reinsurance coverage limit. Effective May 7, 2002, the Company entered into a replacement equity put and reinsurance agreement with a subsidiary of Swiss Reinsurance Company. The Swiss Re Group is rated "A++ (Superior)" by A.M. Best. Under the 36-month agreement, the equity put coverage of $75,000 provides a source of capital for up to $115,000 of pretax catastrophe losses above the reinsurance coverage limit. The Company also has the option, in place of the equity put, to require a Swiss Re Group member to issue a 10% quota share reinsurance coverage of all of the Company's property and casualty book of business. Annual fees related to this equity put option, which are charged directly to additional paid-in capital, increased to 145 basis points in 2002 from 95 basis points in 2001 under the prior agreement; however, in 2002 the agreement is effective only for the last eight months of the year. The agreement contains certain conditions to Horace Mann's exercise of the equity put option including: (i) the Company's shareholders' equity, adjusted to exclude goodwill, can not be less than $215,000 after recording the first triggering event; (ii) the Company's total debt as a percentage of capital can not be more than 47.5% prior to recording the triggering event; and (iii) the Company's S&P financial strength rating can not be below "BBB" prior to a triggering event. The Company's S&P financial strength rating was "A+" at June 30, 2002. For liability coverages, including the educator excess professional liability policy, the Company reinsures each loss above a retention of $500 up to $20,000. The Company also reinsures each property loss above a retention of $250 up to $2,500, including catastrophe losses that in the aggregate are less than the retention levels above. The maximum individual life insurance risk retained by the Company is $200 on any individual life and $125 is retained on each group life policy. Excess amounts are reinsured. [SEAL] 17 Note 8 - Contingencies Lawsuits and Legal Proceedings In June 2002, the Company recorded a pretax charge of $1,581, which equated to $1,028 or $0.02 per share after tax, representing the Company's best estimate of the costs of resolving class action lawsuits related to diminished value brought against the Company. While the actual costs incurred by the Company to resolve these issues could be either less or more than the liability established at June 30, 2002, management believes that, based on facts and circumstances available at this time, the amount recorded will be adequate to resolve the matters. There are various other lawsuits and legal proceedings against the Company. Management and legal counsel are of the opinion that the ultimate disposition of such other litigation will have no material adverse effect on the Company's financial position or results of operations. Assessments for Insolvencies of Unaffiliated Insurance Companies The Company is also contingently liable for possible assessments under regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies. Liabilities, which are established based upon regulatory guidance, have generally been insignificant. [SEAL] 18 Note 9 - Segment Information The Company conducts and manages its business through four segments. The three operating segments representing the major lines of insurance business are: property and casualty insurance, principally personal lines automobile and homeowners insurance; individual annuity products, principally tax-qualified; and life insurance. The fourth segment, Corporate and Other, includes primarily debt service and realized investment gains and losses. Summarized financial information for these segments is as follows:
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Insurance premiums and contract charges earned Property and casualty ................................ $ 128,651 $ 124,917 $ 256,655 $ 248,100 Annuity .............................................. 3,729 3,733 7,420 7,519 Life ................................................. 22,277 23,660 46,457 46,927 Intersegment eliminations ............................ (324) (320) (646) (639) ---------- ---------- ---------- ---------- Total ............................................ $ 154,333 $ 151,990 $ 309,886 $ 301,907 ========== ========== ========== ========== Net investment income Property and casualty ................................ $ 8,748 $ 9,156 $ 18,369 $ 18,183 Annuity .............................................. 27,583 26,837 54,911 53,496 Life ................................................. 14,171 14,168 27,199 27,528 Corporate and other .................................. 142 24 145 75 Intersegment eliminations ............................ (294) (350) (589) (684) ---------- ---------- ---------- ---------- Total ............................................ $ 50,350 $ 49,835 $ 100,035 $ 98,598 ========== ========== ========== ========== Net income (loss) Operating income (loss) Property and casualty ............................... $ 3,222 $ (9,669) $ 10,439 $ (1,805) Annuity ............................................. 4,519 5,181 9,191 9,410 Life ................................................ 4,373 5,374 8,198 9,325 Corporate and other, including interest expense ..... (2,038) (2,208) (3,859) (4,599) ---------- ---------- ---------- ---------- Total operating income (loss) ...................... 10,076 (1,322) 23,969 12,331 Realized investment losses, after tax ................ (26,830) (3,718) (25,152) (673) Debt retirement costs, after tax ..................... (1,505) - (1,505) - Litigation charges, after tax ........................ (1,028) - (1,028) - Restructuring reserve adjustment, after tax .......... - 114 - 114 ---------- ---------- ---------- ---------- Total ............................................ $ (19,287) $ (4,926) $ (3,716) $ 11,772 ========== ========== ========== ========== Amortization of intangible assets Value of acquired insurance in force Annuity ............................................. $ 942 $ 895 $ 1,795 $ 1,926 Life ................................................ 441 471 882 942 ---------- ---------- ---------- ---------- Subtotal ......................................... 1,383 1,366 2,677 2,868 Goodwill (See Note 5) ................................ - 404 - 809 ---------- ---------- ---------- ---------- Total ............................................ $ 1,383 $ 1,770 $ 2,677 $ 3,677 ========== ========== ========== ========== June 30, December 31, 2002 2001 ------------ ------------- Assets Property and casualty........................... $ 745,958 $ 738,638 Annuity......................................... 2,863,731 2,674,524 Life............................................ 1,141,848 1,007,345 Corporate and other............................. 152,143 105,215 Intersegment eliminations....................... (46,881) (36,696) ------------ ------------- Total.......................................... $ 4,856,799 $ 4,489,026 ============ =============
[SEAL] 19 Note 10 - Subsequent Event - Restructure of Property and Casualty Claims Operations In July 2002, the Company announced the restructuring of its property and casualty claims operations. The Company expects to realize operating and cost efficiencies and also improve customer service by consolidating claims office locations throughout the United States into 6 offices compared to the current 17, implementing a new claims administration system, and performing certain claims reporting and adjusting functions internally versus utilizing external service providers. The Company expects that these claims actions will have a positive impact on earnings in 2003 and beyond. In addition to the cost efficiencies anticipated from the new claims environment, the restructuring is expected to have a favorable impact on automobile and homeowners claim severity. Approximately 135 employees with management, professional and clerical responsibilities will be impacted by the office consolidations. Charges for employee termination costs, representing severance, vacation buy-out, related payroll taxes and the impact of accelerated retirements on the Company's defined benefit pension plan, and other costs related to the office closures totaling approximately $2,500 after tax, or 6 cents per share, will be reflected as a non-operating restructuring charge in the Company's financial statements for the third quarter of 2002. [SEAL] 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) FORWARD-LOOKING INFORMATION Statements made in the following discussion that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of future events or the Company's future financial performance are forward-looking statements and involve known and unknown risks, uncertainties and other factors. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements due to, among other risks and uncertainties inherent in the Company's business, the following important factors: . Changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. . Fluctuations in the market value of securities within the Company's investment portfolio due to credit issues and the related after-tax effect on the Company's shareholders' equity and total capital through either realized or unrealized investment losses. . Prevailing interest rate levels, including the impact of interest rates on (i) unrealized gains and losses on the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital and (ii) the book yield of the Company's investment portfolio. . The success of the Company's overall investment strategy which is subject to market value risk, reinvestment risk and liquidity risk. . The impact of fluctuations in the capital markets on the Company's ability to refinance outstanding indebtedness or repurchase shares of the Company's outstanding common stock. . The frequency and severity of catastrophes such as hurricanes, earthquakes and storms, the ability of the Company to maintain a favorable catastrophe reinsurance program, and the collectibility of reinsurance receivables. . Future property and casualty loss experience and its impact on estimated claims and claim adjustment expenses for losses occurring in prior years. . The cyclicality of the insurance industry. . The Company's ability to develop and expand its agency force and its direct product distribution systems, as well as the Company's ability to maintain and secure product sponsorships by local, state and national education associations. . The competitive impact of new entrants such as mutual funds and banks into the tax-deferred annuity products markets, and the Company's ability to profitably expand its property and casualty business in highly competitive environments. . Changes in insurance regulations, including (i) those affecting the ability of the Company's insurance subsidiaries to distribute cash to the holding company and (ii) those impacting the Company's ability to profitably write property and casualty insurance policies in one or more states. . Changes in federal income tax laws and changes resulting from federal tax audits affecting corporate tax rates or taxable income, and regulations changing the relative tax advantages of the Company's life and annuity products to customers. [SEAL] 21 . The impact of fluctuations in the financial markets on the Company's variable annuity fee revenues, valuations of deferred policy acquisition costs and value of acquired insurance in force, and the level of guaranteed minimum death benefit reserves. . The Company's ability to maintain favorable claims-paying ability, financial strength and debt ratings. . Adverse changes in policyholder mortality and morbidity rates. . The resolution of legal proceedings and related matters. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires the Company's management to make estimates and assumptions based on information available at the time the financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to the Company's financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgements at the time the financial statements were prepared. For the Company, the areas most subject to significant management judgements include: reserves for property and casualty claims and claim settlement expenses, reserves for future policy benefits, deferred policy acquisition costs, value of acquired insurance in force and valuation of investments. Additional information regarding the accounting policies for each of these areas is provided within the relevant topics in "Results of Operations," as well as in the Notes to Consolidated Financial Statements in the Company's Annual Report for 2001 on Form 10-K. THE HORACE MANN VALUE PROPOSITION The Horace Mann Value Proposition articulates the Company's overarching strategy and business purpose: Provide lifelong financial well-being for educators and their families through personalized service, advice, and a full range of tailored insurance and financial products. In 2000, the Company's management announced steps to focus on the Company's core business and accelerate growth of the Company's revenues and profits. These initiatives are intended to: . Grow and strengthen the agency force and make the Company's agents more productive by improving the products, tools and support the Company provides to them; . Expand the Company's penetration of targeted geographic areas and new segments of the educator market; . Broaden the Company's distribution options to complement and extend the reach of the Company's agency force; . Increase cross-selling and improve retention in the existing book of business; and . Make the Company's products more responsive to customer needs and preferences and expand the Company's product lines within the personal financial services segment. During the fourth quarter of 2000, management began implementing specific plans that address the initiatives above. New compensation and evaluation systems were implemented during 2001 to improve the performance of the Company's agents and agency managers. The Company has begun targeting high-priority geographic markets with dedicated staff teams. New [SEAL] 22 approaches to customer service are being developed and tested that will free agents to spend more time selling. Additional distribution options are being initiated to capitalize fully on the value of the Company's payroll deduction slots in schools across the country. And, the Company will increase its use of technology to improve the efficiency of its agency force and its administrative operations. RESULTS OF OPERATIONS Insurance Premiums and Contract Charges Insurance Premiums Written and Contract Deposits
Six Months Ended Growth Over June 30, Prior Year ----------------- ----------------- 2002 2001 Percent Amount ------- ------- ------- ------- Automobile and property (voluntary) .............. $ 246.3 $ 241.3 2.1% $ 5.0 Excluding Massachusetts automobile .............. 246.3 231.1 6.6% 15.2 Massachusetts automobile ........................ - 10.2 -100.0% (10.2) Annuity deposits ................................. 128.4 120.6 6.5% 7.8 Life ............................................. 55.0 58.5 -6.0% (3.5) ------- ------- ------- Subtotal - core lines ...................... 429.7 420.4 2.2% 9.3 Subtotal - core lines, excluding Massachusetts automobile .................. 429.7 410.2 4.8% 19.5 Involuntary and other property & casualty ............................. 0.6 5.6 (5.0) Excluding Massachusetts automobile .................................... (0.6) 2.3 (2.9) Massachusetts automobile ....................... 1.2 3.3 -63.6% (2.1) ------- ------- ------- Total ...................................... $ 430.3 $ 426.0 1.0% $ 4.3 ======= ======= ======= Total, excluding Massachusetts automobile ................................ $ 429.1 $ 412.5 4.0% $ 16.6 ======= ======= =======
[SEAL] 23 Insurance Premiums and Contract Charges Earned (Excludes annuity and life contract deposits)
Six Months Ended Growth Over June 30, Prior Year ------------------- ------------------- 2002 2001 Percent Amount -------- -------- -------- -------- Automobile and property (voluntary) .............. $ 250.2 $ 238.7 4.8% $ 11.5 Excluding Massachusetts automobile .............. 242.8 228.8 6.1% 14.0 Massachusetts automobile ........................ 7.4 9.9 -25.3% (2.5) Annuity .......................................... 7.4 7.5 -1.3% (0.1) Life ............................................. 45.9 46.3 -0.9% (0.4) -------- -------- -------- Subtotal - core lines ......................... 303.5 292.5 3.8% 11.0 Subtotal - core lines, excluding Massachusetts automobile .................... 296.1 282.6 4.8% 13.5 Involuntary and other property & casualty ............................. 6.4 9.4 -31.9% (3.0) Excluding Massachusetts automobile .................................... 2.8 5.4 -48.1% (2.6) Massachusetts automobile ....................... 3.6 4.0 -10.0% (0.4) -------- -------- -------- Total ......................................... $ 309.9 $ 301.9 2.6% $ 8.0 ======== ======== ======== Total, excluding Massachusetts automobile ................................... $ 298.9 $ 288.0 3.8% $ 10.9 ======== ======== ========
As previously disclosed, the Company restructured its presence in the Massachusetts automobile market and ceased writing automobile insurance policies in that state on December 31, 2001. Through a marketing alliance with The Commerce Group, Inc. ("Commerce"), the Company now offers Massachusetts customers Commerce automobile insurance policies while continuing to write other Horace Mann products, including retirement annuities and property and life insurance. Premiums written and contract deposits for the Company's core lines increased 4.8% compared to the prior year, excluding Massachusetts voluntary automobile premiums written in the first six months of 2001. The growth resulted from continued strong gains in the annuity segment, growth in the Company's automobile business and rate increases in the property line. Average agent productivity for all lines of business combined increased 9.1% compared to the first half of 2001, offsetting a 4.5% decline in the total agent count. The Company is seeing stabilization in the total number of agents due to recent improvements in agent retention as well as a 15.7% increase in new hires for the first six months of 2002, compared to the same period last year. Management anticipates ending 2002 with approximately 940 agents. At June 30, 2002, the Company's exclusive agency force totaled 836. Of those, 324 were in their first 24 months with the Company, an increase of 27.6%, compared to June 30, 2001. The number of experienced agents in the agency force, 512, was down 17.6% at June 30, 2002, compared to a year earlier, due primarily to terminations of less-productive agents over the prior 12 months. This, and the strong improvement in productivity levels of agents hired in the last 12 months, has driven the overall average agent productivity increase. Average agent productivity is measured as new sales premiums per the average number of agents for the period. [SEAL] 24 In 2001, the Company modified its agent compensation and reward structure, in order to provide an incentive for agent performance that is more closely aligned with the Company's objectives. The revised structure continues the historical focus on profitability but places a greater emphasis on individual agent productivity, new premium growth, growth in educator and cross-sold business, and business retention. The Company's agency manager compensation structure was similarly modified, and the agency management team was strengthened through the promotions of several of the Company's most experienced and capable agents. The number of new agents hired during 2001 was comparable to the prior period and the number of new hires for the first half of 2002 was higher than a year earlier, in spite of the Company's implementation of more stringent agent selection criteria to improve agent productivity and retention. The new compensation plan for agency managers became effective January 1, 2001. The new compensation plan for all agents was implemented on August 1, 2001, and there were approximately 800 agents at the time of implementation. Also in 2001, the Company implemented enhanced agent training programs to help new agents achieve production targets more rapidly and help experienced agents sharpen and strengthen their skills and began providing agents with additional tools and support programs to help them make a successful transition to their new role under the Company's Value Proposition. Management believes these actions, along with other strategic initiatives, will continue to have a positive impact on agent productivity in the future. In December 2001, the North Carolina Commissioner of Insurance (the "Commissioner") ordered a 13% reduction in private passenger automobile insurance premium rates to be effective in April 2002. The Commissioner's Order was in response to a request from the North Carolina Rate Bureau (the "Bureau"), which represents the insurance industry, to increase private passenger automobile insurance rates by 5%. The Bureau has voted to appeal the Commissioner's Order in the state appellate court and raise rates while the case is being heard. The difference between the rates ordered by the Commissioner and the Bureau would have an adverse impact of approximately $350 million for the insurance industry. The Company's full year earned premiums would be negatively impacted by approximately $2 million and $3 million in 2002 and 2003, respectively. In addition, the difference in rates between the Commissioner and the Bureau must be held in an escrow account pending the court's decision. If the court should rule in favor of the Bureau, the insurers will be entitled to the funds previously escrowed. If the court should rule in favor of the Commissioner, the escrowed funds plus interest will be refunded to the policyholders. Following the April 2002 effective date, this issue negatively impacted the Company's premiums earned and pretax results by $0.3 million for the six months ended June 30, 2002. Growth in total voluntary automobile and homeowners premium written was 6.6% for the first six months of 2002, excluding Massachusetts voluntary automobile written premiums of $10.2 million from the prior year. The average premium written per policy increased for both automobile and homeowners insurance, compared to a year earlier, and the number of automobile policies also increased. Voluntary automobile insurance premium written, excluding Massachusetts, increased 7.0% ($12.1 million) compared to the first six months of 2001, and homeowners premium increased 5.3% ($3.1 million). The property and casualty increase in premiums written resulted from growth in average premium per policy of 6% for automobile and 12% for homeowners, compared to a year earlier, as the growing impact of rate actions continue to flow through policy renewals and new business. Compared to the first six months of 2001, average earned premiums increased 4% for voluntary automobile and 10% for homeowners, reflecting the positive impact of rate increases. Over the prior 12 months and excluding an 11,000 unit decrease in Massachusetts automobile, unit growth was 0.2%, or 2,000, driven by a 6,000 unit [SEAL] 25 increase in automobile. Homeowners units were 4,000 less than 12 months earlier and 5,000 units less than at December 31, 2001 reflecting planned reductions. At June 30, 2002, there were 586,000 voluntary automobile and 287,000 homeowners policies in force for a total of 873,000, including 12,000 Massachusetts voluntary automobile units which will run off over the remaining months of 2002. Based on policies in force, the property and casualty 12-month retention rate for new and renewal policies was 88%, equal to the 12 months ended June 30, 2001 despite implemented rate increases over the period. The Company plans additional rate increases in the remainder of 2002 and beyond, with primary emphasis on the homeowners line, which are expected to have a continued adverse impact on retention of homeowners policies in force. The Company has implemented tiered rating systems for automobile and homeowners business based on customers' credit ratings, which management expects will have a positive impact on both loss ratios and business growth in the educator market. Tiered rating, together with price increases implemented and planned, are expected to return the Company to rate adequacy, with average premium growth keeping pace with average loss experience over time. For 2002, the Company is targeting combined ratios of approximately 96% for voluntary automobile and 108% for homeowners, as a result of the impact of rate actions coupled with other initiatives described under "Results of Operations -- Benefits, Claims and Settlement Expenses." The decline in premiums written for involuntary and other property and casualty was primarily attributable to a decrease in state mandatory automobile insurance facility business assumed in the first half of 2002, compared to the same period last year. Growth in annuity contract deposits for the six months ended June 30, 2002 reflected new business growth and better retention of existing business. In September 2000, the Company more than tripled the number of choices available to its customers by introducing 21 new investment options in its tax-deferred annuity product line. At the same time, the Company provided its agents with proprietary asset allocation software that helps agents assist educator customers in selecting the best retirement investment programs for their individual needs and circumstances. The fourth quarter of 2000 was the first full quarter with the expanded investment options. Compared to the first six months of 2001, new annuity deposits increased 6.5%, reflecting a 10.9% increase in scheduled deposits received partially offset by a 1.9% decrease in single premium and rollover deposits. New deposits to fixed annuities were 13.3%, or $7.8 million, higher than in the first six months of 2001, while new deposits to variable annuities were equal to a year ago. The Company offers a dollar cost averaging program for amounts systematically transferred from the fixed annuity option to the variable mutual fund investment options over 3-month, 6-month or 12-month periods. In January 2002, the Company announced that it had been selected as one of four providers of fixed and variable annuities to Chicago, Illinois, public school employees. Beginning April 1, 2002, the Company is partnering with an independent broker/dealer, which has been providing retirement planning services to Chicago Public School employees for more than two decades, to pursue this opportunity to bolster business growth in the annuity segment. The Chicago Public Schools is the third-largest school district in the United States of America. For the three months ended June 30, 2002, approximately 1,500 new flexible premium contracts were sold through this partnership representing over $6 million in contract deposits on an annual basis, $1.5 million of which were received in the current period. [SEAL] 26 Variable annuity accumulated funds on deposit at June 30, 2002 were $1.0 billion, $59.0 million less than a year earlier, a 5.8% decrease including the impact of financial market values. Variable annuity accumulated deposit retention improved 4.2 percentage points over the 12 months to 92.8%, reflecting ongoing improvement following the Company's expansion of variable investment options and implementation of proprietary asset allocation software. Fixed annuity cash value retention for the 12 months ended June 30, 2002 was 94.0%, 2.9 percentage points better than the same period last year. Fixed annuity accumulated cash value was $1.4 billion at June 30, 2002, $61.3 million, or 4.5% more than a year earlier. The number of annuity contracts outstanding increased 7.5%, or 10,000 contracts, compared to June 30, 2001. In 2000, the Company took actions to increase the variable annuity options available to customers, as described above, and also took steps to improve the returns of its proprietary mutual funds. For the six months ended June 30, 2002, the amount of variable annuity surrenders was 13% lower than for the same period last year. The amount of fixed annuity surrenders decreased 11% compared to the first six months of 2001. For the six months ended June 30, 2002, annuity segment contract charges earned decreased 1.3%, or $0.1 million, compared to the same period last year. Improvements in retention of variable and fixed accumulated values, as described above, resulted in a decline in surrender fees earned. In the current period, declines in market valuations also negatively impacted fees earned on variable annuity balances. Life segment premiums and contract deposits for the first six months of 2002 were 6.0% lower than a year earlier, due to a decrease in both new business and interest-sensitive life product deposits. The life insurance in force lapse ratio was 9.2% for the twelve months ended June 30, 2002, compared to 8.6% for the same period last year. The lapse ratios for the term portion and the whole life portion of the business were each comparable to the prior year, with the overall lapse ratio increasing as a result of a shift in the mix of business. Net Investment Income Investment income of $100.0 million for the first six months of 2002 increased 1.4%, or $1.4 million, (0.8%, or $0.5 million, after tax) compared to the prior year due primarily to growth in the size of the investment portfolio. Average investments (excluding the securities lending collateral) increased 3.5% over the past 12 months. The average pretax yield on the investment portfolio was 7.0% (4.7% after tax) for the first six months of 2002, compared to a pretax yield of 7.2% (4.8% after tax) last year. Looking to the second half of 2002, investment income will be under pressure due to investment credit issues, described under "Results of Operations -- Realized Investment Gains and Losses" below, and current reinvestment returns available. Realized Investment Gains and Losses Net realized investment losses were $38.7 million and $1.0 million for the six months ended June 30, 2002 and 2001, respectively. In the second quarter of 2002, $41.3 million of realized investment losses were recorded which included a loss of $19.4 million related to the sale and impairment of securities issued by WorldCom, Inc. Additionally, impairment losses of $21.2 million were recognized in the second quarter of 2002 relating primarily to holdings of fixed income securities of other companies in the communications sector. The first quarter of 2002 included impairment charges of $9.9 million related to fixed income securities issued by two [SEAL] 27 telecommunications companies and a realized investment loss of $2.0 million from the Company's sale of all of its holdings in securities issued by Kmart Corporation. Partially offsetting these losses for the six months were gains realized from ongoing investment portfolio management activity. The net realized losses in 2001 primarily resulted from the second quarter sale and impairment of two fixed income securities for credit-related reasons offsetting the first quarter full repayment of an impaired commercial mortgage loan and the release of a related reserve for uncollectible mortgages. Management believes that there may be further investment impairments during the remainder of 2002 if current economic and financial conditions persist. At June 30, 2002, the Company's investment portfolio had a total of 40 fixed income securities issued by telecommunications companies, with an amortized cost of $270 million and an after-tax unrealized loss of approximately $20 million. The Company reviews the fair value of the entire investment portfolio on a monthly basis to determine if there are any securities that have fallen below 80% of book value. This review, in conjunction with the Company's investment managers' monthly credit reports and current market data, is the basis for determining if a security has suffered an other-than-temporary decline in value. A write-down is recorded when such decline in value is deemed to be other-than-temporary, with the realized investment loss reflected in the Statement of Operations for the period. Historically, the Company's investment guidelines have limited single corporate issuer exposure to 1% of invested assets. Based on current financial market conditions, the Company is revising the guidelines to limit the single corporate issuer exposure to 2%, after tax, of shareholders' equity. The change in the investment guidelines will be effective immediately for new purchases of securities while the existing portfolio will be addressed over the next 18 months. Revised sector limitations are also being developed as part of the strengthened investment guidelines. Management believes that, while the turbulence in the financial market is likely to continue in the near term, it is not expected to represent a material threat to the Company's financial condition. [SEAL] 28 Benefits, Claims and Settlement Expenses
Six Months Ended Growth Over June 30, Prior Year ----------------- ----------------- 2002 2001 Percent Amount ------- ------- ------- ------- Property and casualty ...................... $ 204.5 $ 219.8 -7.0% $ (15.3) Annuity .................................... 0.6 0.4 50.0% 0.2 Life ....................................... 21.7 22.4 -3.1% (0.7) ------- ------- ------- Total .................................... $ 226.8 $ 242.6 -6.5% $ (15.8) ======= ======= ======= Property and casualty statutory loss ratio: Before catastrophe losses ............... 78.8% 84.9% -6.1% After catastrophe losses ................ 80.5% 88.6% -8.1% Impact of litigation charges (a) ........ 0.6% - 0.6%
---------- (a) Under statutory accounting practices, the $1.6 million litigation charge is reflected in property and casualty claims and settlement expenses. On a GAAP basis, this item is reported separately in the Statement of Operations as litigation charges in the Corporate and Other segment. In the first six months of 2002, the Company's benefits, claims and settlement expenses reflected improvements in both the voluntary automobile and the homeowners loss ratios excluding catastrophe losses and the impact of litigation charges, as a result of favorable weather, loss containment initiatives and the favorable impact of the Company's restructuring of its Massachusetts automobile business. In the first half of 2001, the Company's benefits, claims and settlement expenses were affected adversely by strengthening of prior years' reserves for property and casualty claims and by a high level of non-catastrophe weather-related losses. Underwriting results of the property and casualty segment are significantly influenced by estimates of the Company's ultimate liability for insured events. Reserves for property and casualty claims include provisions for payments to be made on reported claims, claims incurred but not yet reported and associated settlement expenses. The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the Company's experience with similar cases and historical trends involving claim payment patterns, claim payments, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes. As information develops which varies from experience, provides additional data or, in some cases, augments data which previously were not considered sufficient for use in determining liabilities, adjustments may be required. The effects of these adjustments may be significant and are charged or credited to income for the period in which the adjustments are made. Excluding the $1.6 million provision for the costs of resolving class action lawsuits related to diminished value brought against the Company, net development of reserves for property and casualty claims occurring in prior years, excluding involuntary business, had no impact in the first six months of 2002, compared to reserve strengthening of $10.6 million for the same period in 2001. Total reserves for property and casualty claims occurring in prior years, including involuntary business and the $1.6 million provision in 2002 for class action litigation, were [SEAL] 29 strengthened $2.5 million in the current period, compared to $11.0 million for the six months ended June 30, 2001. The reserve strengthening in 2001 was recorded in the three months ended June 30. The Company's property and casualty net reserves were $273.5 million and $271.6 million at June 30, 2002 and 2001, respectively. Non-catastrophe weather-related losses in the first and second quarters of 2001 were notably greater than historical experience. The statutory non-catastrophe property loss ratio by quarter and for the full years 2001, 2000 and 1999 was as follows:
2002 2001 2000 1999 ------- ------- ------- ------- Non-catastrophe property loss ratio for the: Quarter ended March 31 .................. 78.5% 85.1% 79.0% 81.9% Quarter ended June 30 ................... 75.4% 99.4% 91.4% 72.8% Quarter ended September 30 .............. 99.7% 82.8% 78.1% Quarter ended December 31 ............... 82.8% 80.7% 53.3% Year ended December 31 .................. 91.5% 83.4% 71.0%
After determining that the increase in non-catastrophe property losses experienced in the early months of 2000 was due to underlying loss trends, rather than the normal cyclicality of the property business, management began and has continued to implement pricing, underwriting and loss control initiatives. The Company's actions have had a positive impact on the property loss ratio in the first half of 2002, accompanied by an expected decline in homeowners policies in force. Management expects that the full impact of these changes will be realized later in 2002 and beyond. In light of experience and competitive actions in 2001, the Company is continuing to aggressively increase homeowners rates. The Company has also initiated further tightening of underwriting guidelines, expanded reunderwriting of existing policies, implemented coverage and policy form restrictions in all states where permitted, and limited new homeowners business to educators in certain areas. In addition, due to the claims experience in the fourth quarter of 2001, the Company is conducting a program to reinspect a significant portion of its property book of business. The Company also is strengthening its homeowners policies' contract language to further protect the Company against water damage and mold claims. The Company has also begun the process of redesigning its claim handling procedures in order to better control loss costs. (See also "Results of Operations -- Subsequent Event - Restructure of Property and Casualty Claims Operations.") Management anticipates that these actions will enable the Company to improve the profitability of its existing book of homeowners business and attract new business that meets its profitability standards. For the first six months of 2002, incurred catastrophe losses for all lines were $4.3 million, compared to $9.2 million for the same period last year. Incurred catastrophe losses in the first half of 2001 included a net benefit of $1.4 million due to favorable development of reserves for 2000 catastrophe losses. [SEAL] 30 The voluntary automobile loss ratio excluding catastrophe losses was 78.0% for the first six months of 2002, including 0.9 percentage points due to the aforementioned class action lawsuits, compared to 77.7% for the same period last year. The increase in average voluntary automobile premium per policy in the first six months of 2002 nearly kept pace with the increase in average current accident year loss costs. The annuity benefits in the first six months of 2002 and 2001 represented mortality charges for annuity contracts on payout status. In addition, the guaranteed minimum death benefit reserve on variable annuity contracts was increased $0.3 million in the six months ended June 30, 2002, as a result of fluctuations in the financial markets. Life mortality experience in the current period was comparable to a year earlier. Liabilities for future benefits on life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force. Liabilities for future policy benefits on certain life insurance policies are computed using the net level premium method and are based on assumptions as to future investment yield, mortality and withdrawals. Mortality and withdrawal assumptions for all policies have been based on various actuarial tables which are consistent with the Company's own experience. Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. In the event actual experience varies from the estimated liabilities, adjustments are charged or credited to income for the period in which the adjustments are made. As disclosed in the Company's Annual Report on Form 10-K for 2001, early in that year management discovered some deficiencies in the tax compliance testing procedures associated with certain of the Company's life insurance policies that could jeopardize the tax status of some of those life policies. Deficiencies in the Company's computer-based monitoring of premiums, combined with the complexity of certain of the Company's life insurance products, resulted in the acceptance of too much premium for certain policies under the applicable tax test the Company was using. As a result of this discovery, the Company retained outside experts to assist with the investigation and remedy of this issue. The deficiencies in the testing procedures were identified and corrected. Such a problem is not uncommon in the life insurance industry and will be cured using standard Internal Revenue Service ("IRS") procedures that have been established specifically to address this type of situation. The Company recorded $2.0 million of policyholder benefits in the Corporate and Other segment in the fourth quarter of 2001, as well as $1.0 million of operating expense, which represented the Company's current best estimate of the costs to the Company to resolve these problems. In the second quarter of 2002, management further refined its analysis and confirmed that the charge recorded in the fourth quarter of 2001 continues to be its best estimate of the costs to the Company to resolve these problems. As a result of the tax status issue described above, the complexity of the Company's product underlying the policies in question, and the complexity of administering that product and other life products offered by the Company, management is re-examining its life product portfolio and related administrative system. [SEAL] 31 Interest Credited to Policyholders
Six Months Ended Growth Over June 30, Prior Year ----------------- ----------------- 2002 2001 Percent Amount ------- ------- ------- ------- Annuity.................................. $ 33.5 $ 34.1 -1.8% $ (0.6) Life..................................... 15.1 14.2 6.3% 0.9 ------- ------- ------- Total.................................. $ 48.6 $ 48.3 0.6% $ 0.3 ======= ======= =======
The fixed annuity average annual interest rate credited decreased to 4.9% for the six months ended June 30, 2002, compared to 5.2% for the same period last year. Partially offsetting the decline in the rate credited, the average accumulated fixed deposits increased 4.6% for the first six months of 2002, compared to the same period in 2001. Life insurance interest credited increased as a result of continued growth in interest-sensitive life insurance reserves. Operating Expenses For the first six months of 2002, operating expenses increased $7.6 million, or 13.5%, compared to last year. The higher level of company-wide expense was due primarily to $2.9 million of transition costs related to changes in the Company's pension plan and elimination of the provision for 2001 employee incentive compensation in the second quarter of 2001 as a consequence of the Company's earnings reported in the first half of 2001. The increase in these company-wide expenses impacted each of the Company's insurance segments. In 2001, the Company determined that it would freeze its defined benefit pension plan and move to a defined contribution structure. This change is expected to reduce the Company's pension expense by approximately $2 million to $3 million per year beginning in 2004. Costs of transitioning to the new structure, based upon assumptions of future events, are estimated to be approximately $5.5 million and $2 million for the full years 2002 and 2003, respectively, largely from provisions that are expected to be triggered as a result of the higher retirement rate currently being experienced by the Company, coupled with more retirees choosing lump sum distributions. To the extent that actual experience differs from the Company's assumptions, adjustments may be required with the effects of these adjustments charged or credited to income for the period in which the adjustments are made. Effective January 1, 2002, the Company also implemented changes to its employee medical plans to mitigate that cost. The total corporate expense ratio on a statutory accounting basis was 24.0% for the six months ended June 30, 2002, 2.1 percentage points higher than the same period in 2001, reflecting the expense items discussed above. The property and casualty statutory expense ratio, the 16th lowest of the 100 largest property and casualty insurance groups for 2000 (the most recent industry ranking available), was 23.2% for the six months ended June 30, 2002, compared to 20.6% last year. The property and casualty expense ratio reflected that segment's portion of the increase in company-wide operating expenses as well as an increase in automobile new business commissions. [SEAL] 32 Amortization of Policy Acquisition Expenses and Intangible Assets For the first six months of 2002, the combined amortization of policy acquisition expenses and intangible assets was $31.6 million, compared to the $31.0 million recorded for the same period in 2001. Amortization of intangible assets decreased to $2.7 million for the six months ended June 30, 2002, compared to $3.7 million for the same period in 2001. The decline primarily reflected the elimination of amortization of goodwill as the result of the adoption of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Amortization of goodwill was $0.8 million and $1.6 million for the six months ended June 30, 2001 and the year ended December 31, 2001, respectively. In addition, the June 2002 valuation of annuity value of business acquired in the 1989 acquisition of the Company ("Annuity VIF") resulted in a $0.1 million reduction in amortization scheduled for the six months. The valuation identified an increase in amortization due to lower than expected market performance offset by the impact of realized investment losses. Policy acquisition expenses amortized for the six months ended June 30, 2002 of $28.9 million were $1.6 million more than the same period last year primarily related to the property and casualty segment. Over the past 12 months, this segment has experienced accelerated growth in business and the acquisition cost amortization period matches the terms of the insurance policies (six and twelve months). The increase in amortization for the property and casualty segment was partially offset by a $1.0 million reduction in amortization for the annuity and life segments combined as a result of the current year valuation. The favorable impact of realized investment losses in the valuation was only partially offset by lower than expected market performance in the annuity segment. Policy acquisition costs, consisting of commissions, premium taxes and other costs, which vary with and are primarily related to the production of business are capitalized and amortized on a basis consistent with the type of insurance coverage. For investment (annuity) contracts, acquisition costs, and also the value of annuity business acquired in the 1989 acquisition of the Company, are amortized over 20 years in proportion to estimated future gross profits. Capitalized acquisition costs for interest-sensitive life contracts are also amortized over 20 years in proportion to estimated future gross profits. The most significant assumptions that are involved in the estimation of future gross profits include future market performance, business surrender/lapse rates and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material charge or credit to amortization expense for the period in which the adjustment is made. Income Tax Expense The effective income tax rate on income including realized investment gains and losses was a benefit of 54.3% for the six months ended June 30, 2002, compared to a tax of 28.9% for the same period last year. [SEAL] 33 Income from investments in tax-advantaged securities reduced the effective income tax rate 20.7 and 12.4 percentage points for the six months ended June 30, 2002, and 2001, respectively. While the amount of income from tax-advantaged securities in the current year was slightly less than in the first half of 2001, the reduced level of income before income taxes in the current period resulted in this having a more significant impact on the effective income tax rate. The effective income tax rate on operating income, as defined below, before income taxes was 30.6% for the six months ended June 30, 2002, comparable to the effective income tax rate of 29.4% on the same basis for the prior year. Operating Income (Loss) The Company defines operating income as net income before the after-tax impact of realized investment gains and losses and non-recurring items. Non-recurring items included debt retirement costs and class action litigation charges in the first half of 2002 as well as a restructuring reserve adjustment in the same period a year earlier. Compared to the first half of 2001, current period operating income benefitted from mild weather, the impact of property and casualty rate increases on earned premiums, the positive impact of the Company's restructuring of its Massachusetts automobile business, and the discontinuance of goodwill amortization with the adoption of SFAS No. 142 on January 1, 2002. These positive prior year comparisons were partially offset by an increase in company-wide operating expenses due to (1) transition costs related to changes in the Company's retirement plans, which are expected to have a favorable long-term impact on employee benefit costs, and (2) elimination of the provision for 2001 employee incentive compensation in the second quarter of last year. Operating income in the first six months of 2001 was adversely affected by strengthening of prior years' property and casualty reserves. Consistent with previous indications, at the time of this Report on Form 10-Q management anticipates that 2002 full year operating income will be within a range of $1.15 to $1.25 per share. However, the recent turmoil in the financial markets will put pressure on earnings. In the second half of 2002, management anticipates lower investment income due to investment credit issues and tightening margins on variable annuities resulting from declining market valuations. As described throughout this discussion of Results of Operations, certain of the Company's significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made. [SEAL] 34 Operating income (loss) by segment was as follows:
Six Months Ended Growth Over June 30, Prior Year ----------------- ----------------- 2002 2001 Percent Amount ------- ------- ------- ------- Property & casualty Before catastrophe losses ..................... $ 13.3 $ 4.1 $ 9.2 Catastrophe losses, after tax ................. (2.8) (6.0) 3.2 ------- ------- ------- Total including catastrophe losses ......... 10.5 (1.9) 12.4 Annuity ......................................... 9.2 9.4 -2.1% (0.2) Life ........................................... 8.2 9.4 -12.8% (1.2) Corporate and other expense ..................... (1.0) (1.5) 0.5 Interest expense, after tax ..................... (2.9) (3.1) 0.2 ------- ------- ------- Total ...................................... $ 24.0 $ 12.3 95.1% $ 11.7 ======= ======= ======= Total before catastrophe losses ............ $ 26.8 $ 18.3 46.4% $ 8.5 ======= ======= ======= Property and casualty statutory combined ratio: Before catastrophe losses ..................... 102.0% 105.5% -3.5% After catastrophe losses ...................... 103.7% 109.2% -5.5% Impact of litigation charges .................. 0.6% - 0.6%
Property and casualty segment operating income of $10.5 million for the first six months of 2002 increased $12.4 million compared to the same period last year. Excluding the $1.0 million after-tax provision for class action litigation, development of prior years' reserves decreased operating income $0.6 million after tax for the first half of 2002. For the first six months of 2001, the Company strengthened prior years' reserves by $7.2 million after tax, all recorded in the three months ended June 30. Compared to a year earlier, 2002 property and casualty segment operating income reflected favorable weather, partially offset by increases in claim adjustment expenses and company-wide operating expenses. For the first six months of 2002, the Company's increase in average voluntary automobile insurance premium per policy nearly kept pace with the increase in average loss costs for the current accident year. The Company has implemented tiered rating systems based on customers' credit ratings for automobile and homeowners business, which management expects will have a positive impact on both loss ratios and business growth for these products in the Company's target market. The Company is continuing to approach the pricing and underwriting of its homeowners products aggressively, to accelerate margin recovery. And, due to homeowners loss experience in the fourth quarter of 2001, the Company identified additional initiatives. Actions include further tightening of underwriting guidelines, expanded reunderwriting of existing policies, coverage and policy form restrictions in all states where permitted, limited coverage of new homeowners business to educators in certain areas, reinspection of the homeowners book of business and redesign of the Company's claim handling procedures. (See also "Results of Operations -- Subsequent Event - - Restructure of Property and Casualty Claims Operations.") The property and casualty statutory combined ratio was 103.7% for the first six months of 2002, compared to 109.2% for the same period in 2001. The statutory loss ratio for the segment improved compared to the prior year; however, the statutory expense ratio increased 2.6 percentage points, primarily reflecting this segment's portion of the increase in company-wide operating expenses as well as an increase in automobile new business commissions. [SEAL] 35 Annuity segment operating income in the first six months of 2002 was only slightly less than the prior year. Improvement in the net interest margin was offset primarily by the increase in company-wide operating expenses. Valuation of annuity segment deferred acquisition costs and value of acquired insurance in force at June 30, 2002, including lower than expected market appreciation offset by the impact of realized investment losses, resulted in an after-tax reduction in amortization of $0.4 million for the six months. Similar valuations a year earlier reduced after-tax amortization $0.1 million for the six months. Variable annuity fee income for the current period was comparable to the first six months of 2001. Variable annuity accumulated funds on deposit were $1.0 billion at June 30, 2002, $59.0 million, or 5.8%, less than 12 months earlier. Fixed annuity accumulated cash value of $1.4 billion was $61.3 million, or 4.5%, greater than June 30, 2001. Life segment operating income decreased $1.2 million compared to the first six months of 2001 as a result of this segment's portion of the increase in company-wide operating expenses and pressure on the interest margin. Mortality experience on ordinary life business was comparable to the first half of 2001. Valuation of life segment deferred acquisition costs at June 30, 2002 resulted in a reduction in amortization of $0.4 million after tax due to the impact of realized investment losses. The reduction in the operating loss for the corporate and other segment compared to the first six months of 2001 primarily reflected the change in accounting, which was effective January 1, 2002, that eliminated goodwill amortization. For the six months ended June 30, 2001, amortization of goodwill was $0.8 million, or 2 cent per share. Net Income (Loss) Net Income (Loss) Per Share, Diluted
Six Months Ended Growth Over June 30, Prior Year ----------------- ----------------- 2002 2001 Percent Amount ------- ------- ------- ------- Operating income ................................ $ 0.58 $ 0.30 93.3% $ 0.28 Realized investment losses ...................... (0.61) (0.01) (0.60) Debt retirement costs ........................... (0.04) - (0.04) Litigation charges .............................. (0.02) - (0.02) Restructuring reserve adjustment ................ - - - ------- ------- ------- Net income (loss) .......................... $ (0.09) $ 0.29 $ (0.38) ======= ======= =======
Net income (loss), includes net realized investment gains and losses and non-recurring items reflected in the Corporate and Other segment. For the six months ended June 30, 2002, the Company reported a net loss of $3.7 million, or $0.09 per share, including after-tax realized investment losses of $25.2 million, or $0.61 per share. For the first half of 2001, net income was $11.8 million, or $0.29 per share, including after-tax realized investment losses of $0.6 million, or $0.01 per share. After-tax realized investment losses are described in "Results of Operations -- Realized Investment Gains and Losses." [SEAL] 36 In addition to the changes in after-tax realized investment losses and operating income, the Company recorded non-recurring items in the first six months of both 2002 and 2001. In May 2002, the Company used a portion of the proceeds from the sale of its Convertible Notes to repay the balance outstanding under the previous Bank Credit Agreement and repurchase $55.0 million of its outstanding Senior Notes. The debt retirement resulted in an after-tax charge of $1.5 million, or $0.04 per share, which was reflected in current period net income. In June 2002, the Company recorded an after-tax charge of $1.0 million, or $0.02 per share, to net income, representing the Company's best estimate of the costs of resolving class action lawsuits related to diminished value brought against the Company. While the actual costs incurred by the Company to resolve these issues could be either less or more than the liability established in the current period, management believes that, based on facts and circumstances available at this time, the amount recorded will be adequate to resolve the matters. In the first six months of 2001, the Company recorded an after-tax reduction to restructuring reserves of $0.1 million, less than $0.01 per share. Return on shareholders' equity was 10% based on operating income and 2% based on net income for the 12 months ended June 30, 2002. Subsequent Event - Restructure of Property and Casualty Claims Operations In July 2002, the Company announced the restructuring of its property and casualty claims operations. The Company expects to realize operating and cost efficiencies and also improve customer service by consolidating claims office locations throughout the United States into 6 offices compared to the current 17, implementing a new claims administration system, and performing certain claims reporting and adjusting functions internally versus utilizing external service providers. The Company expects that these claims actions will have a positive impact on earnings in 2003 and beyond. In addition to the cost efficiencies anticipated from the new claims environment, the restructuring is expected to have a favorable impact on automobile and homeowners claim severity. Approximately 135 employees with management, professional and clerical responsibilities will be impacted by the office consolidations. Charges for employee termination costs, representing severance, vacation buy-out, related payroll taxes and the impact of accelerated retirements on the Company's defined benefit pension plan, and other costs related to the office closures totaling approximately $2.5 million after tax, or $0.06 per share, will be reflected as a non-operating restructuring charge in the Company's financial statements for the third quarter of 2002. LIQUIDITY AND FINANCIAL RESOURCES Special Purpose Entities At June 30, 2002 and 2001, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. [SEAL] 37 As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships. Related Party Transactions The Company does not have any contracts or other transactions with related parties that are required to be reported under the applicable securities laws and regulations. Ariel Capital Management, Inc., HMEC's largest shareholder with 23% of the common shares outstanding per their SEC filing on Form 13F as of June 30, 2002, is the investment adviser for two of the mutual funds offered to the Company's annuity customers. In addition, T. Rowe Price Associates, Inc., HMEC's second largest shareholder with 8% of the common shares outstanding per their SEC filing on Form 13F as of March 31, 2002, is the investment advisor for two of the mutual funds offered to the Company's annuity customers. Investments The Company's investment strategy emphasizes investment grade, publicly traded fixed income securities. At June 30, 2002, fixed income securities represented 94.2% of investments excluding the securities lending collateral. Of the fixed income investment portfolio, 95.5% was investment grade and 99.8% was publicly traded. The average quality of the total fixed income portfolio was A+ at June 30, 2002. The duration of the investment portfolio is managed to provide cash flow to satisfy policyholder liabilities as they become due. The average option adjusted duration of total investments was 4.4 years at June 30, 2002 and 5.0 years at December 31, 2001. The Company has included in its annuity products substantial surrender penalties to reduce the likelihood of unexpected increases in policy or contract surrenders. All annuities issued since 1982, and approximately 79% of all outstanding fixed annuity accumulated cash values, are subject in most cases to substantial early withdrawal penalties. Additional discussion of the Company's investment guidelines is included in "Results of Operations -- Realized Investment Gains and Losses." Cash Flow The short-term liquidity requirements of the Company, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow in excess of these amounts has been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase shares of the Company's common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance policy claims and benefits and retirement of long-term notes. Operating Activities As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium and investment income, [SEAL] 38 generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries. Net cash provided by operating activities was $6.8 million less than the first six months of 2001 due primarily to an increase in federal income taxes paid in the current year. The Company has entered into various operating lease agreements, primarily for computer equipment, computer software and real estate (agency and claims offices across the country and portions of the home office complex). These leases have varying commitment periods with most in the 1 to 3 year range. Operating cash flow reflects payments on these leases of approximately $4 million for both the six months ended June 30, 2002 and 2001. It is anticipated that the Company's payments under operating leases for the full year 2002 will be comparable to prior years' payments of approximately $8 million. The Company does not have any other arrangements that expose it to material liability that are not recorded in the financial statements. Payment of principal and interest on debt, fees related to the catastrophe-linked equity put option and reinsurance agreement, dividends to shareholders and parent company operating expenses, as well as the share repurchase program, are dependent upon the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. Dividends which may be paid by the insurance subsidiaries to HMEC during 2002 without prior approval are approximately $40 million, of which $5 million had been paid as of June 30, 2002. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for HMEC's capital needs. Investing Activities HMEC's insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity and reinvest the proceeds in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as available for sale. Financing Activities Financing activities include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, repurchases of the Company's common stock, and borrowings and repayments under the Company's debt facilities. Fees related to the catastrophe-linked equity put option and reinsurance agreement, which augments its other reinsurance program, have been charged directly to additional paid-in capital. In May 2002, the Company issued $353.5 million aggregate principal amount of 1.425% Senior Convertible Notes ("Convertible Notes"), which will mature on May 14, 2032, at a discount of 52.5%. As of June 30, 2002, proceeds from the sale of the Convertible Notes have been used to repay the $53.0 million balance outstanding under the previous Bank Credit Agreement on May 14, 2002 and repurchase $55.0 million aggregate principal amount of the Company's outstanding [SEAL] 39 6 5/8% Senior Notes due January 15, 2006 on May 30, 2002 at an aggregate cost of $56.8 million. The remaining proceeds will be used for general corporate purposes and potentially to further reduce corporate indebtedness. (See also "Liquidity and Financial Resources -- Capital Resources" for additional description of the Convertible Notes.) For the first six months ended June 30, 2002, receipts from annuity contracts increased 6.5%. Annuity contract maturities and withdrawals decreased $7.0 million, or 7.5%, compared to the same period last year including decreases of 10.7% and 13.0% in surrenders of variable and fixed annuities, respectively. Reflecting continued improvement in recent quarterly trends, cash value retention for variable and fixed annuities was 92.8% and 94.0%, respectively, for the 12 month period ended June 30, 2002. Net transfers to variable annuity assets increased $15.1 million compared to the same period last year reflecting the Company's expansion of its variable investment options. The Company has not repurchased shares of its common stock under its stock repurchase program since the third quarter of 2000, consistent with management's stated intention to utilize excess capital to support the Company's strategic growth initiatives. Historically, the repurchase of shares was financed through use of cash and, when necessary, its Bank Credit Facility. However, the Company has not utilized its Bank Credit Facility for share repurchases since the second quarter of 1999. As of June 30, 2002, $96.3 million remained authorized for future share repurchases. Capital Resources The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners ("NAIC"). Historically, the Company's insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, increase and pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes. Management anticipates that the Company's sources of capital will continue to generate capital in excess of the needs for business growth, debt interest payments and shareholder dividends. The total capital of the Company was $652.3 million at June 30, 2002, including $212.8 million of long-term debt and no short-term debt outstanding. Total debt represented 32.6% of capital (33.5% excluding unrealized investment gains and losses) at June 30, 2002, which exceeded the Company's long-term operating target of approximately 25%. The Company anticipates additional reductions in long-term debt prior to December 31, 2002 utilizing a portion of the remaining proceeds from the issuance of the Convertible Notes (discussed below). Upon completion of the anticipated additional reductions in long-term debt, the Company's debt is expected to represent less than 30% of total capital. Shareholders' equity was $439.5 million at June 30, 2002, including an unrealized gain in the Company's investment portfolio of $17.9 million after taxes and the related impact on deferred policy acquisition costs and the value of acquired insurance in force associated with annuity and interest-sensitive life policies. The market value of the Company's common stock and the market value per share were $762.6 million and $18.67, respectively, at June 30, 2002. Book value per share was $10.76 at June 30, 2002, $10.32 excluding investment fair value adjustments. At June [SEAL] 40 30, 2001, book value per share was $10.94, $10.73 excluding investment fair value adjustments. The decrease over the 12 months included the effects of realized and unrealized investment gains and losses and an increase in the Company's minimum pension liability recorded at December 31, 2001. On May 14, 2002, the Company issued $353.5 million aggregate principal amount of 1.425% senior convertible notes due in 2032 ("Convertible Notes") at a discount of 52.5% resulting in an effective yield of 3.0%. The net proceeds from the sale of the Convertible Notes have been used to repay the balance outstanding under the previous Bank Credit Agreement and repurchase a portion of the outstanding Senior Notes, as described below, and will be used for general corporate purposes and potentially to further reduce corporate indebtedness. Interest on the Convertible Notes is payable semi-annually at a rate of 1.425% beginning November 14, 2002 until May 14, 2007. After that date, cash interest will not be paid on the Convertible Notes prior to maturity unless contingent cash interest becomes payable. Contingent cash interest becomes payable if the average market price of a Convertible Note for a five trading day measurement period preceding the applicable six-month period equals 120% or more of the sum of the Convertible Note's issue price, accrued original issue discount and accrued cash interest, if any, for such Convertible Note. The contingent cash interest payable per Convertible Note with respect to any quarterly period within any six-month period will equal the then applicable conversion rate multiplied by the greater of (i) $0.105 or (ii) any regular cash dividends paid by the Company per share on HMEC's common stock during that quarterly period. The Convertible Notes will be convertible at the option of the holders, if the conditions for conversion are satisfied, into shares of HMEC's common stock at a conversion price of $26.74. Holders may also surrender Convertible Notes for conversion during any period in which the credit rating assigned to the Convertible Notes is Ba2 or lower by Moody's or BB+ or lower by S&P, the Convertible Notes are no longer rated by either Moody's or S&P, or the credit rating assigned to the Convertible Notes has been suspended or withdrawn by either Moody's or S&P. The Convertible Notes will cease to be convertible pursuant to this credit rating criteria during any period or periods in which all of the credit ratings are increased above such levels. The Convertible Notes are redeemable by HMEC in whole or in part, at any time on or after May 14, 2007, at redemption prices equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the applicable redemption date. The holders of the Convertible Notes may require HMEC to purchase all or a portion of their Convertible Notes on either May 14, 2007, 2012, 2017, 2022, or 2027 at stated prices plus accrued cash interest, if any, to the purchase date. HMEC may pay the purchase price in cash or shares of HMEC common stock or in a combination of cash and shares of HMEC common stock. The Convertible Notes were privately offered only to qualified institutional buyers under Rule 144A under the Securities Act of 1933 and outside the United States of America ("U.S.") to non-U.S. persons under Regulation S under the Securities Act of 1933, and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. The Convertible Notes have an investment grade rating from S&P (BBB+), Moody's (Baa2) and A.M. Best (bbb+). S&P and A.M. Best have indicated the outlook for their rating is "Stable." On July 25, 2002, Moody's affirmed its Baa2 rating, but revised the outlook for the rating to "Negative" from "Stable." This change in outlook was the result of the Company's second quarter 2002 investment losses stemming from the impact on the financial markets from the announced SEC investigation into the accounting practices of WorldCom, Inc. Moody's announcement indicated that material adverse deviations from the Company's expected level of capital growth and earnings could trigger a subsequent ratings downgrade. HMEC intends to file a registration statement with the Securities and Exchange Commission related to the Convertible Notes prior to September 30, 2002. [SEAL] 41 In January 1996, the Company issued $100.0 million aggregate principal amount of 6 5/8% Senior Notes ("Senior Notes") at a discount of 0.5% which will mature on January 15, 2006. On May 30, 2002, the Company repurchased $55.0 million aggregate principal amount of its outstanding Senior Notes utilizing a portion of the proceeds from the issuance of the Convertible Notes, as described above. Interest on the Senior Notes is payable semi-annually. The Senior Notes are redeemable in whole or in part, at any time at the Company's option. The Senior Notes have an investment grade rating from Standard & Poor's Corporation ("S&P") (BBB+), Fitch, Inc. ("Fitch") (A-), Moody's Investors Service, Inc. ("Moody's") (Baa2), and A.M. Best Company, Inc. ("A.M. Best") (bbb+). S&P, Fitch and A.M. Best have indicated the outlook for their rating is "Stable." On July 25, 2002, Moody's affirmed its Baa2 rating, but revised the outlook for the rating to "Negative" from "Stable", as described above in the paragraph regarding the Convertible Notes. The Senior Notes are traded on the New York Stock Exchange (HMN 6 5/8). As of December 31, 2001, the Company had short-term debt of $53.0 million outstanding under the previous Bank Credit Agreement. The $53.0 million balance outstanding under the previous Bank Credit Agreement was repaid in full on May 14, 2002 utilizing a portion of the proceeds from the issuance of the Convertible Notes, as described above. On May 29, 2002, the Company entered into a new Bank Credit Agreement which provides for unsecured borrowings of up to $25.0 million, with a provision that allows the commitment amount to be increased to $35.0 million (the "Current Bank Credit Facility"). The Current Bank Credit Facility expires on May 31, 2005. Interest accrues at varying spreads relative to corporate or eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate. No amounts had been borrowed under the Current Bank Credit Facility and no balance was outstanding at June 30, 2002. The unused portion of the Current Bank Credit Facility is subject to a variable commitment fee which was 0.20% on an annual basis at June 30, 2002. The Company's ratio of earnings to fixed charges for the six months ended June 30, 2002 was 0x, reflecting the impact of $38.7 million pretax of realized investment losses recognized during the period, compared to 4.5x for the same period in 2001. Total shareholder dividends were $8.6 million for the six months ended June 30, 2002. In February 2002 and May 2002, the Board of Directors announced regular quarterly dividends of $0.105 per share. The Company maintains an excess and catastrophe treaty reinsurance program. The Company reinsures 95% of catastrophe losses above a retention of $8.5 million per occurrence up to $80 million per occurrence. In addition, the Company's predominant insurance subsidiary for property and casualty business written in Florida reinsures 90% of hurricane losses in that state above a retention of $11.0 million up to $47.4 million with the Florida Hurricane Catastrophe Fund, based on the Fund's financial resources. Through December 31, 2001, these catastrophe reinsurance programs were augmented by a $100 million equity put and reinsurance agreement. This equity put provided an option to sell shares of the Company's convertible preferred stock with a floating rate dividend at a pre-negotiated price in the event losses from catastrophes exceeded the catastrophe reinsurance program coverage limit. Before tax benefits, the equity put provided a source of capital for up to $154 million of catastrophe losses above the reinsurance coverage limit. Effective May 7, 2002, the Company entered into a replacement equity put and reinsurance agreement with a subsidiary of Swiss Reinsurance Company. The Swiss Re Group is rated "A++ [SEAL] 42 (Superior)" by A.M. Best. Under the 36-month agreement, the equity put coverage of $75.0 million provides a source of capital for up to $115.0 million of pretax catastrophe losses above the reinsurance coverage limit. The Company also has the option, in place of the equity put, to require a Swiss Re Group member to issue a 10% quota share reinsurance coverage of all of the Company's property and casualty book of business. Annual fees related to this equity put option, which are charged directly to additional paid-in capital, increased to 145 basis points in 2002 from 95 basis points in 2001 under the prior agreement; however, in 2002 the agreement is effective only for the last eight months of the year. The agreement contains certain conditions to Horace Mann's exercise of the equity put option including: (i) the Company's shareholders' equity, adjusted to exclude goodwill, can not be less than $215.0 million after recording the first triggering event; (ii) the Company's total debt as a percentage of capital can not be more than 47.5% prior to recording the triggering event; and (iii) the Company's S&P financial strength rating can not be below "BBB" prior to a triggering event. The Company's S&P financial strength rating was "A+" at June 30, 2002. For liability coverages, including the educator excess professional liability policy, the Company reinsures each loss above a retention of $500 thousand up to $20 million. The Company also reinsures each property loss above a retention of $250 thousand up to $2.5 million in 2001 and 2002, including catastrophe losses that in the aggregate are less than the retention levels above. The cost of the Company's catastrophe reinsurance coverage program for the full year 2002 increased approximately 50%, or $2.0 million, compared to full year 2001 as a result of the effects on the reinsurance market of the September 11, 2001 terrorist attacks. However the impact on the Company was mitigated due to the fact that 38% of the Company's catastrophe coverage is under a three-year contract from January 1, 2001 through December 31, 2003. The cost of the Company's entire property and casualty reinsurance program for the full year 2002 increased approximately 35%, or $2.5 million, compared to full year 2001. INSURANCE FINANCIAL RATINGS AND IMSA CERTIFICATION The Company's principal insurance subsidiaries are rated by various rating agencies. Additional information regarding the rating processes and ratings definitions for each agency is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 in "Business -- Insurance Financial Ratings and IMSA Certification." Each of the ratings below is unchanged from December 31, 2001 with the exception of A.M. Best's rating for the Company's property and casualty subsidiaries and Moody's outlook for the Company's financial strength ratings. On May 9, 2002 following its annual review of Horace Mann's ratings, A.M. Best Company, Inc. ("A.M. Best") announced that it was affirming the "A (Excellent)" financial strength rating of the Company's principal life insurance subsidiary. A.M. Best downgraded the financial strength ratings of the Company's property and casualty subsidiaries one notch from "A+ (Superior)" to "A (Excellent)" reflecting capitalization of these subsidiaries being below A.M. Best's standard for the Superior rating and the impact on earnings in 2000 and 2001 of prior years' reserve strengthening. A.M. Best has identified the outlook for the ratings as "Stable." [SEAL] 43 As affirmed on May 2, 2002, each of HMEC's principal insurance subsidiaries is rated "A+ (Strong)" for financial strength by Standard & Poor's Corporation ("S&P") with a ratings outlook of "Stable", with the exception of Horace Mann Lloyds which is not yet rated by S&P. Each of HMEC's principal insurance subsidiaries is rated "AA- (Very Strong)" for financial strength by Fitch, Inc. ("Fitch") with a rating outlook of "Stable". Moody's Investors Service, Inc. ("Moody's") has assigned a financial strength rating of "A2 (Good)" to each of HMEC's principal subsidiaries, with the exception of Horace Mann Lloyds which is not yet rated by Moody's. On July 25, 2002, Moody's affirmed these ratings, but revised the outlook for the ratings to "Negative" from "Stable." This change in outlook was the result of the Company's second quarter 2002 investment losses stemming from the impact on the financial markets from the announced SEC investigation into the accounting practices of WorldCom, Inc. Moody's announcement indicated that material adverse deviations from the Company's expected level of capital growth and earnings could trigger a subsequent ratings downgrade. As of 2001, Horace Mann is one of only two insurance groups that have been named to The Ward's Financial Group's ("Wards") Top 50 for both its property and casualty and life subsidiaries in each of the last eight years. Identified annually, the Top 50 represent benchmark groups of 50 life insurance companies and 50 property and casualty insurance companies that, over the prior five years, have in Ward's opinion excelled at balancing safety, consistency and performance. In July 2001, Horace Mann Life Insurance Company, the Company's principal life insurance subsidiary, earned membership in the Insurance Marketplace Standards Association ("IMSA"). HMLIC is an IMSA member for three years, after which it must demonstrate continuous improvement and repeat the self- and independent assessment process to retain its membership. As of June 30, 2002, fewer than 250 companies had earned IMSA membership. MARKET VALUE RISK Market value risk is the risk that the Company's invested assets will decrease in value. This decrease in value may be due to a change in (1) the yields realized on the Company's assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also "Results of Operations -- Realized Investment Gains and Losses." Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company's investments and the credited interest rates on the Company's insurance liabilities. The Company manages its market value risk by coordinating the projected cash outflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality while providing for liquidity and diversification. The investment risk associated with variable annuity products and the underlying mutual funds is assumed by those contractholders, and not by the Company. [SEAL] 44 A more detailed description of the Company's exposure to market value risks and the management of those risks is presented in the Company's 2001 Form 10-K "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk." RECENT ACCOUNTING CHANGES SFAS No. 143 In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. The accounting practices in this statement apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset. This statement will not have a material impact on the Company because it does not own a significant amount of property and equipment. SFAS No. 145 In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," effective for fiscal years beginning after May 15, 2002. Under SFAS No. 4, all gains and losses from the extinguishment of debt, exclusive of an exception identified in SFAS No. 64, were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. With adoption of SFAS No. 145, gains and losses from extinguishment of debt should be classified as extraordinary only if they meet the criteria of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. In the six months ended June 30, 2002, the Company recorded a charge for the extinguishment of debt and did not report this charge as an extraordinary item. SFAS No. 44 was not applicable to the Company. Although the evaluation of the impact of the remaining provisions of SFAS No. 145 is not yet complete, at this time management anticipates that the impact will not be material. SFAS No. 146 In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective for exit or disposal activities that are initiated after December 31, 2002. This statement nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between SFAS No. 146 and EITF No. 94-3 relates to the requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that such liability be recognized when the liability is incurred. Under EITF No. 94-3, a liability for defined exit costs was recognized at the date of an entity's commitment to an exit plan. Management anticipates that the impact of this statement will not be material. [SEAL] 45 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 305 of Regulation S-K is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this Form 10-Q. PART II: OTHER INFORMATION ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on May 14, 2002. The results of the matters submitted to a vote of security holders are shown in the table below.
Votes Votes For Against Abstentions ----------- --------- ------------ Votes representing 36,788,830 shares of Common Stock were represented and cast regarding Proposal 1. Election of the following nominees to hold the office of Director until the next Annual Meeting of Shareholders and until their respective successors have been duly elected and qualified: William W. Abbott 35,923,225 865,605 - Mary H. Futrell 28,051,523 8,737,307 - Donald E. Kiernan 34,872,475 1,916,355 - Louis G. Lower II 35,924,425 864,405 - Joseph J. Melone 29,068,830 7,720,000 - Jeffrey L. Morby 28,112,853 8,675,977 - Shaun F. O'Malley 36,064,675 724,155 - Charles A. Parker 36,064,675 724,155 - William J. Schoen 36,064,675 724,155 - Votes representing 33,941,411 shares of Common Stock were represented and cast regarding Proposal 2. Approval of the Company's 2002 Incentive Compensation Plan. 28,218,350 4,690,942 582,119
[SEAL] 46 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K Exhibit No. Description ------- ----------- (a) The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*). (4) Instruments defining the rights of security holders, including indentures: 4.1 Indenture dated as of May 14, 2002, between HMEC and JPMorgan Chase Bank as trustee, with regard to HMEC's 1.425% Senior Convertible Notes Due 2032 (10) Material contracts: 10.1 Credit Agreement dated as of May 29, 2002 (the "Bank Credit Facility") among HMEC, certain financial institutions named therein and Bank of America, N.A., as administrative agent (the "Agent"). 10.2* Horace Mann Educators Corporation 2002 Incentive Compensation Plan. 10.2(a)* Specimen Employee Stock Option Agreement under the Horace Mann Educators Corporation 2002 Incentive Compensation Plan. 10.2(b) Specimen Regular Employee Stock Option Agreement under the Horace Mann Educators Corporation 2002 Incentive Compensation Plan. 10.2(c)* Specimen Director Stock Option Agreement under the Horace Mann Educators Corporation 2002 Incentive Compensation Plan. (11) Statement re computation of per share earnings. (15) KPMG LLP letter regarding unaudited interim financial information. (99) Additional exhibits: 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Louis G. Lower II, Chief Executive Officer of Horace Mann Educators Corporation. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Peter H. Heckman, Chief Financial Officer of Horace Mann Educators Corporation. (b) No reports on Form 8-K were filed by the Company during the second quarter of 2002. [SEAL] 47 SIGNATURES Pursuant to the requirements 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. HORACE MANN EDUCATORS CORPORATION (Registrant) Date August 13, 2002 /s/ Louis G. Lower II --------------- ----------------------------------------- Louis G. Lower II President and Chief Executive Officer Date August 13, 2002 /s/ Peter H. Heckman --------------- ----------------------------------------- Peter H. Heckman Executive Vice President and Chief Financial Officer Date August 13, 2002 /s/ Bret A. Conklin --------------- ----------------------------------------- Bret A. Conklin Senior Vice President and Controller [SEAL] 48 EX-4.1 3 dex41.txt INDENTURE BETWEEN HMEC AND JP MORGAN CHASE BANK Exhibit 4.1 ---------------------------------------------------------- HORACE MANN EDUCATORS CORPORATION, ISSUER AND JPMORGAN CHASE BANK, TRUSTEE Senior Convertible Notes due 2032 ---------------------------------------------------------- INDENTURE Dated as of May 14, 2002 ---------------------------------------------------------- CROSS REFERENCE TABLE* TIA Section Indenture Section 310(a)(1) ..................................... 7.10 (a)(2) ..................................... 7.10 (a)(3) ..................................... N.A. (a)(4) ..................................... N.A. (b) ........................................ 7.08; 7.10 (c) ........................................ N.A. 311(a) ........................................ 7.11 (b) ........................................ 7.11 (c) ........................................ N.A. 312(a) ........................................ 2.05 (b) ........................................ 14.03 (c) ........................................ 14.03 313(a) ........................................ 7.06 (b)(1) ..................................... N.A. (b)(2) ..................................... 7.06 (c) ........................................ 14.02 (d) ........................................ 7.06 314(a) ........................................ 4.02; 4.03; 14.02 (b) ........................................ N.A. (c)(1) ..................................... 14.04 (c)(2) ..................................... 14.04 (c)(3) ..................................... N.A. (d) ........................................ N.A. (e) ........................................ 14.05 (f) ........................................ N.A. 315(a) ........................................ 7.01 (b) ........................................ 7.05; 14.02 (c) ........................................ 7.01 (d) ........................................ 7.01 (e) ........................................ 6.11 316(a) (last sentence) ........................ 2.08 (a)(1)(A) .................................. 6.05 (a)(1)(B) .................................. 6.04 (a)(2) ..................................... N.A. (b) ........................................ 6.07 317(a)(1) ..................................... 6.08 (a)(2) ..................................... 6.09 (b) ........................................ 2.04 318(a) ........................................ 14.01 N.A. means Not Applicable. _____________ * Note: This Cross Reference Table shall not, for any purpose, be deemed to be part of the Indenture. TABLE OF CONTENTS*
Page ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions............................................................... 1 SECTION 1.02 Other Definitions......................................................... 7 SECTION 1.03 Incorporation by Reference of Trust Indenture Act......................... 8 SECTION 1.04 Rules of Construction..................................................... 8 SECTION 1.05 Acts of Holders........................................................... 9 ARTICLE 2 THE SECURITIES SECTION 2.01 Form and Dating........................................................... 10 SECTION 2.02 Execution and Authentication.............................................. 12 SECTION 2.03 Registrar, Paying Agent, Conversion Agent and Bid Calculation Agent....... 12 SECTION 2.04 Paying Agent to Hold Money and Securities in Trust........................ 13 SECTION 2.05 Securityholder Lists...................................................... 13 SECTION 2.06 Transfer and Exchange..................................................... 13 SECTION 2.07 Replacement Securities.................................................... 15 SECTION 2.08 Outstanding Securities; Determinations of Holders' Action................. 16 SECTION 2.09 Temporary Securities...................................................... 16 SECTION 2.10 Cancellation.............................................................. 17 SECTION 2.11 Persons Deemed Owners..................................................... 17 SECTION 2.12 Global Securities......................................................... 17 SECTION 2.13 CUSIP Numbers............................................................. 22 ARTICLE 3 REDEMPTION AND PURCHASES SECTION 3.01 Right to Redeem; Notices to Trustee....................................... 22 SECTION 3.02 Selection of Securities to Be Redeemed.................................... 22 SECTION 3.03 Notice of Redemption...................................................... 23 SECTION 3.04 Effect of Notice of Redemption............................................ 24 SECTION 3.05 Deposit of Redemption Price............................................... 24 SECTION 3.06 Securities Redeemed in Part............................................... 24 SECTION 3.07 Conversion Arrangement on Call for Redemption............................. 24 SECTION 3.08 Purchase of Securities at Option of the Holder............................ 25 SECTION 3.09 Purchase of Securities at Option of the Holder upon Change in Control..... 31
_________________ * Note: This Table of Contents shall not, for any purpose, be deemed to be part of the Indenture. i SECTION 3.10 Effect of Purchase Notice or Change in Control Purchase Notice........... 34 SECTION 3.11 Deposit of Purchase Price or Change in Control Purchase Price............ 35 SECTION 3.12 Securities Purchased in Part............................................. 36 SECTION 3.13 Repayment to the Company................................................. 36 ARTICLE 4 COVENANTS SECTION 4.01 Payment of Securities.................................................... 36 SECTION 4.02 SEC and Other Reports.................................................... 37 SECTION 4.03 Compliance Certificate................................................... 37 SECTION 4.04 Further Instruments and Acts............................................. 37 SECTION 4.05 Maintenance of Office or Agency.......................................... 37 SECTION 4.06 Delivery of Certain Information.......................................... 38 SECTION 4.07 Covenant to Comply With Securities Laws Upon Purchase of Securities...... 38 SECTION 4.08 Waiver of Compliance..................................................... 38 ARTICLE 5 SUCCESSOR CORPORATION SECTION 5.01 When Company May Merge or Transfer Assets................................ 38 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01 Events of Default........................................................ 40 SECTION 6.02 Acceleration............................................................. 41 SECTION 6.03 Other Remedies........................................................... 42 SECTION 6.04 Waiver of Past Defaults.................................................. 42 SECTION 6.05 Control by Majority...................................................... 42 SECTION 6.06 Limitation on Suits...................................................... 42 SECTION 6.07 Rights of Holders to Receive Payment..................................... 43 SECTION 6.08 Collection Suit by Trustee............................................... 43 SECTION 6.09 Trustee May File Proofs of Claim......................................... 43 SECTION 6.10 Priorities............................................................... 44 SECTION 6.11 Undertaking for Costs.................................................... 44 SECTION 6.12 Waiver of Stay, Extension or Usury Laws.................................. 45 ARTICLE 7 TRUSTEE SECTION 7.01 Duties of Trustee........................................................ 45 SECTION 7.02 Rights of Trustee........................................................ 46 SECTION 7.03 Individual Rights of Trustee............................................. 48 SECTION 7.04 Trustee's Disclaimer..................................................... 48 SECTION 7.05 Notice of Defaults....................................................... 48 SECTION 7.06 Reports by Trustee to Holders............................................ 48 SECTION 7.07 Compensation and Indemnity............................................... 49
ii SECTION 7.08 Replacement of Trustee.................................................. 49 SECTION 7.09 Successor Trustee by Merger............................................. 50 SECTION 7.10 Eligibility; Disqualification........................................... 50 SECTION 7.11 Preferential Collection of Claims Against Company....................... 50 ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01 Discharge of Liability on Securities.................................... 50 SECTION 8.02 Repayment to the Company................................................ 51 ARTICLE 9 AMENDMENTS SECTION 9.01 Without Consent of Holders.............................................. 51 SECTION 9.02 With Consent of Holders................................................. 52 SECTION 9.03 Compliance with Trust Indenture Act..................................... 52 SECTION 9.04 Revocation and Effect of Consents, Waivers and Actions.................. 52 SECTION 9.05 Notation on or Exchange of Securities................................... 53 SECTION 9.06 Trustee to Sign Supplemental Indentures................................. 53 SECTION 9.07 Effect of Supplemental Indentures....................................... 53 ARTICLE 10 SPECIAL TAX EVENT CONVERSION SECTION 10.01 Optional Conversion to Semiannual Coupon Note upon Tax Event............ 53 ARTICLE 11 CONVERSION SECTION 11.01 Conversion Privilege.................................................... 54 SECTION 11.02 Conversion Procedure.................................................... 54 SECTION 11.03 Fractional Shares....................................................... 56 SECTION 11.04 Taxes on Conversion..................................................... 56 SECTION 11.05 Company to Provide Stock................................................ 56 SECTION 11.06 Adjustment for Change in Capital Stock.................................. 56 SECTION 11.07 Adjustment for Rights Issue............................................. 57 SECTION 11.08 Adjustment for Other Distributions...................................... 58 SECTION 11.09 When Adjustment May Be Deferred......................................... 59 SECTION 11.10 When No Adjustment Required............................................. 59 SECTION 11.11 Notice of Adjustment.................................................... 60 SECTION 11.12 Voluntary Increase...................................................... 60 SECTION 11.13 Notice of Certain Transactions.......................................... 60 SECTION 11.14 Reorganization of Company; Special Distributions........................ 60 SECTION 11.15 Company Determination Final............................................. 61 SECTION 11.16 Trustee's Adjustment Disclaimer......................................... 61 SECTION 11.17 Simultaneous Adjustments................................................ 61 SECTION 11.18 Successive Adjustments.................................................. 62
iii SECTION 11.19 Rights Issued in Respect of Common Stock Issued Upon Conversion.......... 62 SECTION 11.20 Company's Right to Elect to Pay Cash or Common Stock..................... 62 ARTICLE 12 PAYMENT OF INTEREST SECTION 12.01 Interest Payments........................................................ 63 SECTION 12.02 Defaulted Interest....................................................... 63 SECTION 12.03 Interest Rights Preserved................................................ 64 ARTICLE 13 CONTINGENT CASH INTEREST SECTION 13.01 Contingent Cash Interest................................................. 64 SECTION 13.02 Payment of Contingent Cash Interest; Contingent Cash Interest Rights Preserved............................................................. 65 SECTION 13.03 Bid Calculation Agent.................................................... 65 ARTICLE 13A TAX MATTERS SECTION 13A.01 Tax Treatment............................................................ 66 SECTION 13A.02 Comparable Yield and Projected Payment Schedule.......................... 66 ARTICLE 14 MISCELLANEOUS SECTION 14.01 Trust Indenture Act Controls............................................. 67 SECTION 14.02 Notices.................................................................. 67 SECTION 14.03 Communication by Holders with Other Holders.............................. 68 SECTION 14.04 Certificate and Opinion as to Conditions Precedent....................... 68 SECTION 14.05 Statements Required in Certificate or Opinion............................ 68 SECTION 14.06 Separability Clause...................................................... 69 SECTION 14.07 Rules by Trustee, Paying Agent, Conversion Agent and Registrar........... 69 SECTION 14.08 Calculations............................................................. 69 SECTION 14.09 Legal Holidays........................................................... 69 SECTION 14.10 GOVERNING LAW............................................................ 69 SECTION 14.11 No Recourse Against Others............................................... 69 SECTION 14.12 Successors............................................................... 69 SECTION 14.13 Multiple Originals....................................................... 69
Appendix 1 Projected Payment Schedule Exhibit A-1 Form of Face of Global Security Exhibit A-2 Form of Certificated Security Exhibit B-1 Transfer Certificate iv Exhibit B-2 Form of Letter to be Delivered by Accredited Investors v INDENTURE dated as of May 14, 2002 by and among HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the "Company") and JPMORGAN CHASE BANK a New York banking corporation (the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of Senior Convertible Notes due 2032 (collectively, the "Securities" and each, individually, a "Security") having the terms, tenor, amount and other provisions hereinafter set forth, and, to provide therefor, the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when the Securities are duly executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid and binding agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions. "144A Global Security" means a permanent Global Security in the form of the Security attached hereto as Exhibit A-1, and that is deposited with and registered in the name of the Depositary, representing Securities sold in reliance on Rule 144A under the Securities Act. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any specified person means the power to direct or cause the direction of the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, in each case to the extent applicable to such transaction and as in effect from time to time. "Average Sale Price" means the average of the Sale Prices of the Common Stock for the shorter of: (a) 30 consecutive Trading Days ending on the last full Trading Day prior to the Time of Determination with respect to the rights, warrants or options or distribution in respect of which the Average Sale Price is being calculated, or (b) the period (x) commencing on the date next succeeding the first public announcement of (i) the issuance of rights, warrants or options or (ii) the distribution, in each case, in respect of which the Average Sale Price is being calculated and (y) proceeding through the last full Trading Day prior to the Time of Determination with respect to the rights, warrants or options or distribution in respect of which the Average Sale Price is being calculated (excluding days within such period, if any, which are not Trading Days), or (c) the period, if any, (x) commencing on the date next succeeding the Ex-Dividend Time with respect to the next preceding (i) issuance of rights, warrants or options or (ii) distribution, in each case, for which an adjustment is required by the provisions of Section 11.06(c), 11.07 or 11.08 hereof and (y) proceeding through the last full Trading Day prior to the Time of Determination with respect to the rights, warrants or options or distribution in respect of which the Average Sale Price is being calculated (excluding days within such period, if any, which are not Trading Days). In the event that the Ex-Dividend Time (or in the case of a subdivision, combination or reclassification, the effective date with respect thereto) with respect to a dividend, subdivision, combination or reclassification to which Section 11.06(a), (b), (d) or (e) hereof applies occurs during the period applicable for calculating "Average Sale Price" pursuant to the definition in the preceding sentence, "Average Sale Price" shall be calculated for such period in a manner determined by the Board of Directors to reflect the impact of such dividend, subdivision, combination or reclassification on the Sale Price of the Common Stock during such period. "Bankruptcy Law" means title 11, United States Code, or any similar Federal or state law for the relief of debtors. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of such board. "Business Day" means each day of the year other than a Saturday or a Sunday or other day on which banking institutions in The City of New York are required or authorized to close. "Capital Stock" for any corporation means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) stock or other equity issued by that corporation. "Certificated Securities" means any of the Securities that are in the form of the Securities attached hereto as Exhibit A-2. 2 "Common Stock" shall mean the shares of Common Stock, $0.001 par value per share, of the Company as it exists on the date of this Indenture or any other shares of Capital Stock of the Company into which the Common Stock shall be reclassified or changed. "Company" means the party named as the "Company" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any two Officers. "Contingent Cash Interest" shall mean such cash interest payable, as described in Article 13 hereof. "Corporate Trust Office" means the principal office of the Trustee at which at any time its corporate trust business shall be administered, which office at the date hereof is located at 450 West 33rd Street, 15th Floor, New York, New York 10001, Attention: Institutional Trust Services, or such other address as the Trustee may designate from time to time by notice to the Company, or the principal corporate trust office of any successor Trustee (or such other address as a successor Trustee may designate from time to time by notice to the Company). "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. "Debt" means with respect to the Company at any date, without duplication, obligations (other than nonrecourse obligations) for borrowed money or evidenced by bonds, debentures, notes or similar instruments. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Ex-Dividend Time" means with respect to stockholders of the Company entitled to receive rights, warrants or options or a distribution, the time immediately prior to the commencement of "ex-dividend" trading for such rights, warrants or options or distribution on the NYSE or such other national or regional exchange or market on which the Common Stock is then listed or quoted. "Global Securities" means any of the Securities that are in the form of the Securities attached hereto as Exhibit A-1, and to the extent that such Securities are required to bear the Legend required by Section 2.06 hereof, such Securities will be in the form of a 144A Global Security. "Holder" or "Securityholder" means a person in whose name a Security is registered on the Registrar's books. 3 "Indenture" means this instrument, as amended or supplemented from time to time in accordance with the terms hereof, including, if applicable, the provisions of the TIA that are deemed to be a part hereof. "Institutional Accredited Investor Security" means a Security in the form of the Security attached hereto as Exhibit A-2, representing Securities sold to Institutional Accredited Investors. "Issue Date" of any Security means the date on which the Security was originally issued or deemed issued as set forth on the face of the Security. "Issue Price" of any Security means, in connection with the original issuance of such Security, the initial issue price at which the Security is sold as set forth on the face of the Security. "NYSE" means the New York Stock Exchange. "Officer" means the Chairman of the Board, the Vice Chairman, the Chief Executive Officer, the President, any Executive Vice President, any Senior Vice President, any Vice President, the Treasurer or the Secretary or any Assistant Treasurer or Assistant Secretary of the Company. "Officers' Certificate" means a written certificate containing the information specified in Sections 14.04 and 14.05 hereof, signed in the name of the Company by any two Officers, and delivered to the Trustee. An Officers' Certificate given pursuant to Section 4.03 hereof shall be signed by the principal executive financial or accounting Officer of the Company but need not contain the information specified in Sections 14.04 and 14.05 hereof. "Opinion of Counsel" means a written opinion containing the information specified in Sections 14.04 and 14.05, from legal counsel who is acceptable to the Trustee. The counsel may be an employee of, or counsel to, the Company or the Trustee. "Original Issue Discount" of any Security means the difference between the Issue Price and the Principal Amount at Maturity of the Security as set forth on the face of the Security, which shall accrue as set forth in the form of Security. "person" or "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof. "Principal Amount at Maturity" of a Security means the principal amount at maturity as set forth on the face of the Security. "Record Date" means either a Regular Record Date or a Contingent Cash Interest Record Date. "Redemption Date" or "redemption date" means the date specified for redemption of the Securities in accordance with the terms of the Securities and this Indenture. 4 "Redemption Price" or "redemption price" shall have the meaning set forth in paragraph 6 of the Securities. "Regular Cash Dividends" means quarterly or other periodic cash dividends on the Common Stock as declared by the Board of Directors as part of its cash dividend payment practices that are not designated by the Board of Directors as extraordinary or special or other non-recurring dividends. "Responsible Officer" means, when used with respect to the Trustee, any officer within the corporate trust department of the Trustee, with direct responsibility for the administration of this Indenture and also means, any other officer to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject. "Restricted Security" means a Security required to bear the restrictive legend set forth in the form of Security set forth in Exhibits A-1 and A-2 of this Indenture. "Rule 144" means Rule 144 under the Securities Act (or any successor rule having substantially similar provisions), as it may be amended from time to time. "Rule 144A" means Rule 144A under the Securities Act (or any successor rule having substantially similar provisions), as it may be amended from time to time. "Sale Price" of Capital Stock on any date means (a) the closing per share sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on such date as reported on the NYSE or such other United States securities exchange on which the Capital Stock is traded or, if the Capital Stock is not listed on a United States national or regional securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System or by the National Quotation Bureau Incorporated or (b) in the absence of such quotation, such price as the Company shall reasonably determine on the basis of such quotations as most accurately reflecting the price that a fully-informed buyer, acting on his own accord, would pay to a fully-informed seller, acting on his own accord in an arms-length transaction, for a share of such Capital Stock. "SEC" means the United States Securities and Exchange Commission. "Security" or "Securities" means any of the Company's Senior Convertible Notes due 2032, as amended or supplemented from time to time, issued under this Indenture. "Securityholder" or "Holder" means a person in whose name a Security is registered on the Registrar's books. "Stated Maturity", when used with respect to any Security, means the date specified in such Security as the fixed date on which an amount equal to the Principal Amount at Maturity of such Security is due and payable. 5 "Subsidiary" means (a) a corporation, a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly owned by the Company, by one or more Subsidiaries of the Company or by the Company and one or more Subsidiaries of the Company, (b) a partnership in which the Company or a Subsidiary of the Company holds a majority interest in the equity capital or profits of such partnership, or (c) any other person (other than a corporation or a partnership) in which the Company, a Subsidiary of the Company or the Company and one or more Subsidiaries of the Company, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such person. "Tax Event" means that the Company shall have received an opinion from independent tax counsel experienced in such matters to the effect that, on or after May 14, 2002, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein or (b) any amendment to, or change in, an interpretation or application (including through litigation or a settlement involving the Company) of such laws or regulations by any legislative body, court, governmental agency or regulatory authority, in each case which amendment or change is enacted, promulgated, issued or announced or which interpretation is issued or announced or which action is taken, on or after May 14, 2002, there is more than an insubstantial risk that accrued Original Issue Discount payable on the Securities either (i) would not be deductible on a current accrual basis or (ii) would not be deductible under any other method, in either case in whole or in part, by the Company (by reason of deferral, disallowance, or otherwise) for United States federal income tax purposes. "TIA" means the Trust Indenture Act of 1939 as in effect on the date of this Indenture, provided, however, that in the event the TIA is amended after such date, TIA means, to the extent required by any such amendment, the TIA as so amended. "Time of Determination" means the time and date of the earlier of (a) the determination of stockholders entitled to receive rights, warrants or options or a distribution, in each case, to which Section 11.07 or 11.08 hereof applies and (b) the Ex-Dividend Time. "Trading Day" means a day during which trading in securities generally occurs on the NYSE or, if the Common Stock is not listed on the NYSE, on the principal other national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not listed on a national or regional securities exchange, on the National Association of Securities Dealers Automated Quotation System or, if the Common Stock is not quoted on the National Association of Securities Dealers Automated Quotation System, on the principal other market on which the Common Stock is then traded. "Trustee" means the party named as the "Trustee" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. 6 SECTION 1.02 Other Definitions. Defined in Term Section - ---- ------- "Act" ............................................................. 1.05(a) "Agent Members" ................................................... 2.12(f) "beneficial owner" ................................................ 3.09(a) "Bid Calculation Agent" ........................................... 2.03 "cash" ............................................................ 3.08(b) "Change in Control" ............................................... 3.09(a) "Change in Control Purchase Date" ................................. 3.09(a) "Change in Control Purchase Notice" ............................... 3.09(c) "Change in Control Purchase Price" ................................ 3.09(a) "Common Stock Record Date" ........................................ 13.01 "Company Notice" .................................................. 3.08(e) "Company Notice Date" ............................................. 3.08(c) "Contingent Cash Interest Payment Date" ........................... 13.02 "Contingent Cash Interest Record Date" ............................ 13.02 "Continuing Directors" ............................................ 3.09(a) "Conversion Agent" ................................................ 2.03 "Conversion Date" ................................................. 11.02 "Conversion Rate" ................................................. 11.01 "Defaulted Interest" .............................................. 12.02 "Depositary" ...................................................... 2.01(a) "DTC" ............................................................. 2.01(a) "Event of Default" ................................................ 6.01 "Ex-Dividend Measurement Period" .................................. 11.08 "Exchange Act" .................................................... 3.08(d) "Extraordinary Cash Dividend" ..................................... 11.08 "Five-Trading-Day Measurement Period" ............................. 13.01 "Institutional Accredited Investors" .............................. 2.01(b) "Interest Payment Date" ........................................... 10.01 "Legal Holiday" ................................................... 14.09 "Legend" .......................................................... 2.06(f) "Market Price" .................................................... 3.08(d) "Notice of Default" ............................................... 6.01 "Option Exercise Date" ............................................ 10.01 "Paying Agent" .................................................... 2.03 "Protected Purchaser" ............................................. 2.07 "Purchase Date" ................................................... 3.08(a) "Purchase Notice" ................................................. 3.08(a) "Purchase Price" .................................................. 3.08(a) "QIBs" ............................................................ 2.01(a) "Registrar" ....................................................... 2.03 "Regular Record Date" ............................................. 10.01 "Relevant Cash Dividends" ......................................... 11.08 7 "Relevant Value" .................................................. 13.01 "Restated Principal Amount" ....................................... 10.01 "Rights" .......................................................... 11.19 "Rights Agreement" ................................................ 11.19 "Rule 144A Information" ........................................... 4.06 "Securities Act" .................................................. 3.08(d) "Security Market Price" ........................................... 13.01 "Semiannual Period" ............................................... 13.01 "Special Record Date" ............................................. 12.02 "Tax Event Date" .................................................. 10.01 SECTION 1.03 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.04 Rules of Construction. Unless the context otherwise requires: (a) a defined term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with United States generally accepted accounting principles as in effect from time to time; (c) "or" is not exclusive; (d) "including" means including, without limitation; and (e) words in the singular include the plural, and words in the plural include the singular. 8 SECTION 1.05 Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments (which may take the form of an electronic writing or messaging or otherwise be in accordance with customary procedures of the Depositary or the Trustee) of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing (which may be in electronic form); and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, when it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent (either of which may be in electronic form) shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution (or electronic delivery) or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing or delivering such instrument or writing acknowledged to such officer the execution (or electronic delivery) thereof. When such execution is by a signer acting in a capacity other than such signer's individual capacity, such certificate or affidavit shall also constitute sufficient proof of such signer's authority. The fact and date of the execution of any such instrument or writing (electronic or otherwise), or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The ownership of Securities shall be proved by the register maintained by the Registrar. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (e) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a resolution of the Board of Directors, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other 9 Act, and for that purpose the outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture within six months after the record date. ARTICLE 2 THE SECURITIES SECTION 2.01 Form and Dating. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibits A-1 and A-2 attached hereto, which are a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage (provided that any such notation, legend or endorsement required by usage is in a form acceptable to the Company). The Company shall provide any such notations, legends or endorsements to the Trustee in writing. Each Security shall be dated the date of its authentication. (a) 144A Global Securities. Securities offered and sold within the United States to "qualified institutional buyers" as defined in Rule 144A ("QIBs") in reliance on Rule 144A shall be issued initially in the form of a 144A Global Security, which shall be deposited with the Trustee at its Corporate Trust Office, as custodian for the Depositary and registered in the name of The Depository Trust Company ("DTC") or the nominee thereof (such depositary, or any successor thereto, and any such nominee being hereinafter referred to as the "Depositary") duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate Principal Amount at Maturity of the 144A Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary as hereinafter provided. (b) Institutional Accredited Investor Securities. Except as provided in Section 2.12(f)(i) and in this Section 2.01, 2.06 or the remainder of Section 2.12 hereof, owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of Certificated Securities. Securities offered and sold within the United States to institutional "accredited investors" as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities Act ("Institutional Accredited Investors") shall be issued, if in the form of Certificated Securities, initially in the form of an Institutional Accredited Investor Security, duly executed by the Company and authenticated by the Trustee as hereinafter provided. (c) Global Securities in General. Each Global Security shall represent such of the outstanding Securities as shall be specified therein and each shall provide that it shall represent the aggregate Principal Amount at Maturity of outstanding Securities from time to time endorsed thereon and that the aggregate Principal Amount at Maturity of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges, redemptions and conversions. Any adjustment of the aggregate Principal Amount at Maturity of a Global Security to reflect the amount of any increase or decrease in the Principal Amount at Maturity of outstanding Securities represented thereby shall be made by the Trustee in accordance with 10 instructions given by the Holder thereof as required by Section 2.12 hereof and shall be made on the records of the Trustee and the Depositary. (d) Book-Entry Provisions. This Section 2.01(d) shall apply only to Global Securities deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.01(d), authenticate and deliver initially one or more Global Securities that (i) shall be registered in the name of the Depositary, (ii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Trustee as custodian for such Depositary and (iii) shall bear legends substantially to the following effect: "UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS, IN WHOLE BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF." (e) Certificated Securities. Securities not issued as interests in the Global Securities will be issued in certificated form substantially in the form of Exhibit A-2 attached hereto. (f) U.S. Tax Legend. All Securities shall bear the following legend: THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT, FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE OF THIS NOTE WAS $475.00 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY; THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, INCLUDING CASH INTEREST PAYABLE THROUGH MAY 14, 2007 TAXABLE AS ORIGINAL ISSUE DISCOUNT UNDER TREASURY REGULATION SECTION 1.1273-1, IS $2,378.67 PER $1,000 11 OF PRINCIPAL AMOUNT AT MATURITY; THE ISSUE DATE IS MAY 14, 2002; AND THE YIELD TO MATURITY FOR THE PURPOSES OF ACCRUING TAX ORIGINAL ISSUE DISCOUNT IS 6.90% PER ANNUM, CALCULATED ON A SEMIANNUAL BOND EQUIVALENT BASIS. SECTION 2.02 Execution and Authentication. The Securities shall be executed on behalf of the Company by any Officer. The signature of the Officer on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of an individual who was at the time of the execution of the Securities the proper Officer of the Company shall bind the Company, notwithstanding that such individual has ceased to hold such office prior to the authentication and delivery of such Securities or did not hold such office at the date of authentication of such Securities. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of an authorized officer of the Trustee and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. The Trustee shall authenticate and deliver Securities for original issue in an aggregate Principal Amount at Maturity of up to $368,500,000 upon a Company Order without any further action by the Company. The aggregate Principal Amount at Maturity of Securities outstanding at any time may not exceed the amount set forth in the foregoing sentence, except as provided in Section 2.07 hereof The Securities shall be issued only in registered form without coupons and only in denominations of $1,000 of Principal Amount at Maturity and any integral multiple thereof. SECTION 2.03 Registrar, Paying Agent, Conversion Agent and Bid Calculation Agent. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Securities may be presented for purchase or payment ("Paying Agent") and an office or agency where Securities may be presented for conversion ("Conversion Agent"). The Company shall also appoint a bid calculation agent (the "Bid Calculation Agent") to act pursuant to Article 13. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars, one or more additional paying agents and one or more additional conversion agents. The term Paying Agent includes any additional paying agent, including any named pursuant to Section 4.05 hereof. The term Conversion Agent includes any additional conversion agent, including any named pursuant to Section 4.05 hereof. The Company shall enter into an appropriate agency agreement with any Registrar or co-registrar, Paying Agent, Conversion Agent or Bid Calculation Agent (other than the Trustee). The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the 12 Company fails to maintain a Registrar, Paying Agent, Conversion Agent or Bid Calculation Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07 hereof. The Company or any Subsidiary or an Affiliate of either of them may act as Paying Agent, Registrar, Conversion Agent or co-registrar. None of the Company or any Subsidiary or any Affiliate of either of them may act as Bid Calculation Agent. The Company initially appoints the Trustee as Registrar, Conversion Agent, Paying Agent and Bid Calculation Agent in connection with the Securities. SECTION 2.04 Paying Agent to Hold Money and Securities in Trust. Except as otherwise provided herein, not later than 10:00 a.m., New York City time, on each due date of payments in respect of any Security, the Company shall deposit with the Paying Agent a sum of money (in immediately available funds if deposited on the due date) or Common Stock sufficient to make such payments when so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money and Common Stock held by the Paying Agent for the making of payments in respect of the Securities and shall notify the Trustee of any default by the Company in making any such payment. At any time during the continuance of any such default, the Paying Agent shall, upon the written request of the Trustee, forthwith pay to the Trustee all money and Common Stock so held in trust. If the Company, a Subsidiary or an Affiliate of either of them acts as Paying Agent, it shall segregate the money and Common Stock held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money and Common Stock held by it to the Trustee and to account for any funds and Common Stock disbursed by it. Upon doing so, the Paying Agent shall have no further liability for the money or Common Stock. SECTION 2.05 Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall cause to be furnished to the Trustee at least semiannually on April 29 and October 30 a listing of Securityholders dated within 15 days of the date on which the list is furnished and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. SECTION 2.06 Transfer and Exchange. Subject to Section 2.12 hereof, (a) Upon surrender for registration of transfer of any Security, together with a written instrument of transfer satisfactory to the Registrar duly executed by the Securityholder or such Securityholder's attorney duly authorized in writing, at the office or agency of the Company designated as Registrar or co-registrar pursuant to Section 2.03 hereof, the Company shall execute, and the Trustee upon receipt of a Company Order shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denomination or denominations, of a like aggregate Principal Amount at Maturity. The Company shall not charge a service charge for any registration of transfer or exchange, but the Company or the Trustee may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges that may be imposed in connection with the registration of transfer 13 or exchange of the Securities from the Securityholder requesting such registration of transfer or exchange. At the option of the Holder, Certificated Securities may be exchanged for other Securities of any authorized denomination or denominations, of a like aggregate Principal Amount at Maturity, upon surrender of the Securities to be exchanged, together with a written instrument of transfer satisfactory to the Registrar duly executed by the Securityholder or such Securityholder's attorney duly authorized in writing, at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee upon receipt of a Company Order shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. The Company shall not be required to make, and the Registrar need not register, transfers or exchanges of Securities selected for redemption (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or any Securities in respect of which a Purchase Notice or Change in Control Purchase Notice has been given and not withdrawn by the Holder thereof in accordance with the terms of this Indenture (except, in the case of Securities to be purchased in part, the portion thereof not to be purchased) or any Securities for a period of 15 days before the mailing of a notice of redemption of Securities to be redeemed. (b) Notwithstanding any provision to the contrary herein, so long as a Global Security remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Security, in whole or in part, shall be made only in accordance with Section 2.12 hereof and this Section 2.06(b). Transfers of a Global Security shall be limited to transfers of such Global Security in whole, or in part, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee. (c) Successive registrations and registrations of transfers and exchanges as aforesaid may be made from time to time as desired, and each such registration shall be noted on the register for the Securities. (d) Any Registrar appointed pursuant to Section 2.03 hereof shall provide to the Trustee such information as the Trustee may reasonably require in connection with the delivery by such Registrar of Securities upon registration of transfer or exchange of Securities. (e) No Registrar shall be required to make registrations of transfer or exchange of Securities during any periods designated in the text of the Securities or in this Indenture as periods during which such registration of transfers and exchanges need not be made. (f) If Securities are issued upon the registration of transfer, exchange or replacement of Securities subject to restrictions on transfer and bearing the legends set forth on the form of Security attached hereto as Exhibits A-1 and A-2 setting forth such restrictions (collectively, the "Legend"), or if a request is made to remove the Legend on a Security, the Securities so issued shall bear the Legend, or the Legend shall not be removed, as the case may be, unless there is delivered to the Company and the Registrar such satisfactory evidence, which shall include an Opinion of Counsel, as may be reasonably required by the Company and the Registrar, that neither the Legend nor the restrictions on transfer set forth therein are required to 14 ensure that transfers thereof comply with the provisions of Rule 144A or Rule 144 or that such Securities are not "restricted" within the meaning of Rule 144. Upon (i) provision of such satisfactory evidence, or (ii) notification by the Company to the Trustee and Registrar of the sale of such Security pursuant to a registration statement that is effective at the time of such sale, the Trustee, upon receipt of a Company Order, shall authenticate and deliver a Security that does not bear the Legend. If the Legend is removed from the face of a Security and the Security is subsequently held by an Affiliate of the Company, the Company shall use reasonable efforts to reinstate the Legend. The Trustee and the Registrar shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Depositary participants or beneficial owners of interests in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 2.07 Replacement Securities. If (a) any mutilated Security is surrendered to the Trustee, or (b) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a protected purchaser within the meaning of Article 8 of the Uniform Commercial Code (a "Protected Purchaser"), the Company shall execute and upon receipt of a Company Order, the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and Principal Amount at Maturity, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, or is about to be purchased by the Company pursuant to Article 3 hereof, the Company in its discretion may, instead of issuing a new Security, pay or purchase such Security, as the case may be. Upon the issuance of any new Securities under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. 15 The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 2.08 Outstanding Securities; Determinations of Holders' Action. Securities outstanding at any time are all the Securities authenticated by the Trustee, except for those cancelled by it, those paid pursuant to Section 2.10 hereof and delivered to it for cancellation and those described in this Section 2.08 as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate thereof holds the Security; provided, however, that in determining whether the Holders of the requisite Principal Amount at Maturity of Securities have given or concurred in any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Subject to the foregoing, only Securities outstanding at the time of such determination shall be considered in any such determination (including, without limitation, determinations pursuant to Articles 6 and 9). If a Security is replaced pursuant to Section 2.07 hereof, the replaced Security ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to each of them that the replaced Security is held by a Protected Purchaser unaware that such Security has been replaced, in which case the replacement security shall be deemed not to be outstanding. If the Paying Agent holds, in accordance with this Indenture, on a Redemption Date, or on the Business Day following the Purchase Date or a Change in Control Purchase Date, or on Stated Maturity, money or securities, if permitted hereunder, sufficient to pay Securities payable on that date, then immediately after such Redemption Date, Purchase Date, Change in Control Purchase Date or Stated Maturity, as the case may be, such Securities shall cease to be outstanding and Original Issue Discount or any cash interest on such Securities shall cease to accrue; provided, that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture. If a Security is converted in accordance with Article 11, then from and after the time of conversion on the Conversion Date, such Security shall cease to be outstanding and Original Issue Discount or cash interest shall cease to accrue on such Security. SECTION 2.09 Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon a Company Order, the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. 16 If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 2.03, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Company shall execute and upon Company Order the Trustee shall authenticate and deliver in exchange therefor a like Principal Amount at Maturity of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 2.10 Cancellation. All Securities surrendered for payment, purchase by the Company pursuant to Article 3 hereof, conversion, redemption or registration of transfer or exchange shall, if surrendered to any person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. The Company may not issue new Securities to replace Securities it has paid or delivered to the Trustee for cancellation or that any Holder has converted pursuant to Article 11 hereof. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of by the Trustee. SECTION 2.11 Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of the Security or the payment of any Redemption Price, Purchase Price or Change in Control Purchase Price in respect thereof or cash interest thereon, for the purpose of conversion and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 2.12 Global Securities. (a) Notwithstanding any other provisions of this Indenture or the Securities, (i) transfers of a Global Security, in whole or in part, shall be made only in accordance with Sections 2.06 and 2.12(b)(i) hereof, (ii) transfer of a beneficial interest in a Global Security for a Certificated Security shall comply with Sections 2.06 and 2.12(b)(i) hereof, and (iii) transfers of a Certificated Security shall comply with Sections 2.06 and 2.12(b)(ii) hereof and transfer of a Certificated Security for a Beneficial Interest in a Global Security shall comply with Sections 2.06 and 2.12(b)(iii) hereof. (b) Transfer of Global Security. A Global Security may not be transferred, in whole or in part, to any Person other than the Depositary or a nominee or any successor thereof, and no such transfer to any such other Person may be registered; provided that this Section 2.12(b) shall not prohibit any transfer of a Security that is issued in exchange for a Global Security but is not itself a Global Security. No transfer of a Security to any Person shall be 17 effective under this Indenture or the Securities unless and until such Security has been registered in the name of such Person. Nothing in this Section 2.12(b) shall prohibit or render ineffective any transfer of a beneficial interest in a Global Security effected in accordance with the other provisions of this Section 2.12(b). (i) Restrictions on Transfer of a Beneficial Interest in a Global Security for a Certificated Security. A beneficial interest in a Global Security may not be exchanged for a Certificated Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a request for transfer of a beneficial interest in a Global Security in accordance with Applicable Procedures for a Certificated Security in the form satisfactory to the Trustee, together with: (A) so long as the Securities are Restricted Securities, certification, in the form set forth in Exhibit B-1 attached hereto, and, if requested by the Company or the Registrar, certification in the form set forth in Exhibit B-2 attached hereto, that such beneficial interest in the Global Security is being transferred to an Institutional Accredited Investor that satisfies the definitions set forth in subparagraphs (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act; (B) written instructions to the Trustee to make, or direct the Registrar to make, an adjustment on its books and records with respect to such Global Security to reflect a decrease in the aggregate Principal Amount at Maturity of the Securities represented by the Global Security, such instructions to contain information regarding the Depositary account to be credited with such decrease; and (C) if the Company or Registrar so requests, an Opinion of Counsel or other evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the Legend, then the Trustee shall cause, or direct the Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Registrar, the aggregate Principal Amount at Maturity of Securities represented by the Global Security to be decreased by the aggregate Principal Amount at Maturity of the Certificated Security to be issued, shall authenticate and deliver such Certificated Security and shall debit or cause to be debited to the account of the Person specified in such instructions a beneficial interest in the Global Security equal to the Principal Amount at Maturity of the Certificated Security so issued. (ii) Transfer and Exchange of Certificated Securities. When Certificated Securities are presented to the Registrar with a request: (x) to register the transfer of such Certificated Securities; or (y) to exchange such Certificated Securities for an equal Principal Amount at Maturity of Certificated Securities of other authorized denominations, 18 the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Certificated Securities surrendered for registration of transfer or exchange: (A) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (B) so long as such Securities are Restricted Securities, such Securities are being transferred or exchanged pursuant to an effective registration statement under the Securities Act or, if being transferred pursuant to clause (1), (2) or (3) of this Section 2.12(b)(ii)B, are accompanied by the additional information and documents specified in each such clause, as applicable: (1) if such Certificated Securities are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (2) if such Certificated Securities are being transferred to the Company, a certification to that effect; or (3) if such Certificated Securities are being transferred pursuant to an exemption from registration (1) a certification to that effect (in the form set forth in Exhibit B-1 and B-2 attached hereto, if applicable) and (2) if the Company or Registrar so requests, an opinion of counsel or other evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the Legend. (iii) Restrictions on Transfer of a Certificated Security for a Beneficial Interest in a Global Security. A Certificated Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Certificated Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (A) so long as the Securities are Restricted Securities, certification, in the form set forth in Exhibit B-1 attached hereto, that such Certificated Security is being transferred to a QIB in accordance with Rule 144A; and (B) written instructions directing the Trustee to make, or to direct the Registrar to make, an adjustment on its books and records with respect to such Global Security to reflect an increase in the aggregate Principal Amount at Maturity of the Securities represented by the Global Security, such instructions to contain information regarding the Depositary account to be credited with such increase; and 19 then the Trustee shall cancel such Certificated Security and cause, or direct the Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Registrar, the aggregate Principal Amount at Maturity of Securities represented by the Global Security to be increased by the aggregate Principal Amount at Maturity of the Certificated Security to be exchanged, and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Security equal to the Principal Amount at Maturity of the Certificated Security so cancelled. If no Global Securities are then outstanding, the Company shall issue and the Trustee, upon receipt of a Company Order, shall authenticate a new Global Security in the appropriate Principal Amount at Maturity. (c) Subject to the succeeding paragraph, every Security shall be subject to the restrictions on transfer provided in the Legend including the requirement of the delivery of an Opinion of Counsel, if so provided. Whenever any Restricted Security is presented or surrendered for registration of transfer or for exchange for a Security registered in a name other than that of the Holder, such Security must be accompanied by a certificate in substantially the form set forth in Exhibit B-1 attached hereto, dated the date of such surrender and signed by the Holder of such Security, as to compliance with such restrictions on transfer. The Registrar shall not be required to accept for such registration of transfer or exchange any Security not so accompanied by a properly completed certificate. (d) The restrictions imposed by the Legend upon the transferability of any Security shall cease and terminate when such Security has been sold pursuant to an effective registration statement under the Securities Act or transferred in compliance with Rule 144 or, if earlier, upon the expiration of the holding period applicable to sales thereof under paragraph (k) of Rule 144. Any Security as to which such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon a surrender of such Security for exchange to the Registrar in accordance with the provisions of this Section 2.12 (accompanied, in the event that such restrictions on transfer have terminated by reason of a transfer in compliance with Rule 144, by an opinion of counsel having substantial experience in practice under the Securities Act and otherwise reasonably acceptable to the Company, addressed to the Company, the Trustee and the Registrar and in form acceptable to the Company, to the effect that the transfer of such Security has been made in compliance with Rule 144), be exchanged for a new Security, of like tenor and aggregate Principal Amount at Maturity, which shall not bear the restrictive Legend. The Company shall inform the Trustee of the effective date of any registration statement registering the Securities under the Securities Act. The Trustee and the Registrar shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the aforementioned opinion of counsel or registration statement. (e) As used in the preceding two paragraphs of this Section 2.12, the term "transfer" encompasses any sale, pledge, transfer, hypothecation or other disposition of any Security. (f) The provisions of clauses (i), (ii), (iii), (iv) and (v) of this Section 2.12(f) shall apply only to Global Securities: 20 (i) Notwithstanding any other provisions of this Indenture or the Securities, except as provided in Section 2.12(b)(i) hereof, a Global Security shall not be exchanged in whole or in part for a Security registered in the name of any Person other than the Depositary or one or more nominees thereof, provided that a Global Security may be exchanged for Securities registered in the names of any person designated by the Depositary in the event that (A) the Depositary has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or such Depositary has ceased to be a "clearing agency" registered under the Exchange Act, and a successor Depositary is not appointed by the Company within 90 days; (B) the Company elects to discontinue use of the system of book-entry transfer through DTC (or any successor depositary); or (C) an Event of Default has occurred and is continuing with respect to the Securities. Any Global Security exchanged pursuant to clause (A) of this sub-section shall be so exchanged in whole and not in part, and any Global Security exchanged pursuant to clause (B) of this sub-section may be exchanged in whole or from time to time in part as directed by the Depositary. Any Security issued in exchange for a Global Security or any portion thereof shall be a Global Security; provided that any such Security so issued that is registered in the name of a person other than the Depositary or a nominee thereof shall not be a Global Security. (ii) Securities issued in exchange for a Global Security or any portion thereof shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate Principal Amount at Maturity equal to that of such Global Security or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Depositary shall designate and shall bear the applicable legends provided for herein. Any Global Security to be exchanged in whole shall be surrendered by the Depositary to the Registrar. With regard to any Global Security to be exchanged in part, to give effect to any conversion, redemption or other disposition of such part or otherwise, either such Global Security shall be so surrendered for exchange or, if the Trustee is acting as custodian for the Depositary or its nominee with respect to such Global Security, the Principal Amount at Maturity thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall authenticate and deliver the Security issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof. (iii) Subject to the provisions of clause (v) of this Section 2.12(f), the registered Holder may grant proxies and otherwise authorize any Person, including Agent Members (as defined below) and persons that may hold interests through Agent Members, to take any action which a holder is entitled to take under this Indenture or the Securities. (iv) In the event of the occurrence of any of the events specified in clause (i) above, the Company will promptly make available to the Trustee a reasonable supply of Certificated Securities in definitive, fully registered form, without interest coupons. (v) Neither any members of, or participants in, the Depositary (collectively, the "Agent Members") nor any other Persons on whose behalf Agent Members may act 21 shall have any rights under this Indenture with respect to any Global Security registered in the name of the Depositary or any nominee thereof, or under any such Global Security, and the Depositary or such nominee, as the case may be, may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner and holder of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such Persons governing the exercise of the rights of a holder of any Security. SECTION 2.13 CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE 3 REDEMPTION AND PURCHASES SECTION 3.01 Right to Redeem; Notices to Trustee. The Company, at its option, may redeem the Securities in accordance with the provisions of paragraphs 6 and 8 of the Securities. Prior to May 14, 2007, the Company may not redeem the Securities. Beginning on May 14, 2007, the Company may redeem the Securities for cash in whole at any time, or in part from time to time. If the Company elects to redeem Securities pursuant to paragraph 6 of the Securities, it shall notify the Trustee in writing of the Redemption Date, the Principal Amount at Maturity of Securities to be redeemed, the Redemption Price and the amount of accrued and unpaid cash interest, if any, payable on the Redemption Date. The Company shall give the notice to the Trustee provided for in this Section 3.01 by a Company Order, at least 45 days before the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee). If fewer than all the Securities are to be redeemed, the record date relating to such redemption shall be selected by the Company and given to the Trustee, which record date shall not be less than ten days after the date of notice to the Trustee. SECTION 3.02 Selection of Securities to Be Redeemed. If less than all the outstanding Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by any other method the Trustee considers fair and appropriate (so long as such method is not prohibited by the rules of any stock exchange on which the Securities are then listed). The Trustee shall make the selection at least 30 days but not more than 60 days before the Redemption Date from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the Principal Amount at Maturity of Securities that have denominations larger than $1,000. 22 Securities and portions of them the Trustee selects shall be in Principal Amounts at Maturity of $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall promptly notify the Company in writing of the Securities or portions of Securities to be redeemed. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed may be treated by the Trustee as outstanding for the purpose of such selection. SECTION 3.03 Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first-class mail, postage prepaid, to each Holder of Securities to be redeemed. The notice shall identify the Securities to be redeemed and shall state: (a) the Redemption Date; (b) the Redemption Price, or if then not ascertainable, the manner of calculation thereof, and accrued and unpaid cash interest, if any, payable on the Redemption Date; (c) the Conversion Rate; (d) the name and address of the Paying Agent and Conversion Agent; (e) that Securities called for redemption may be converted at any time before the close of business on the second Business Day immediately preceding the Redemption Date, even if not otherwise convertible at such time; (f) that Holders who want to convert Securities must satisfy the requirements set forth in paragraph 9 of the Securities; (g) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price and accrued and unpaid cash interest, if any; (h) if fewer than all the outstanding Securities are to be redeemed, the certificate number and Principal Amounts at Maturity of the particular Securities to be redeemed; (i) that, unless the Company defaults in making payment of such Redemption Price and any cash interest which is due and payable, Original Issue Discount or cash interest, including Contingent Cash Interest, will cease to accrue on and after the Redemption Date; (j) the CUSIP number of the Securities; and 23 (k) any other information the Company desires, in its own discretion, to present. At the Company's request, the Trustee shall give the notice of redemption to Holders in the Company's name and at the Company's expense, provided that the Company makes such request at least five Business Days (unless a shorter period shall be satisfactory to the Trustee) prior to the date such notice of redemption must be mailed. SECTION 3.04 Effect of Notice of Redemption. Once notice of redemption is given, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price (together with accrued and unpaid cash interest, if any, to but not including the date of redemption) stated in the notice except for Securities which are converted in accordance with the terms of this Indenture. Upon surrender to the Paying Agent, such Securities shall be paid at the Redemption Price (together with accrued and unpaid cash interest, if any, to but not including the date of redemption) stated in the notice. SECTION 3.05 Deposit of Redemption Price. Prior to 10:00 a.m. New York City time, on any Redemption Date, the Company shall deposit with the Paying Agent (or if the Company or a Subsidiary or an Affiliate of either of them is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the Redemption Price of, and any accrued and unpaid interest to but not including the date of redemption with respect to, all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which on or prior thereto have been delivered by the Company to the Trustee for cancellation or have been converted. The Paying Agent shall as promptly as practicable return to the Company any money not required for that purpose because of conversion of Securities pursuant to Article 11 hereof. If such money is then held by the Company in trust and is not required for such purpose it shall be discharged from such trust. SECTION 3.06 Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Security in an authorized denomination equal in Principal Amount at Maturity to the unredeemed portion of the Security surrendered. SECTION 3.07 Conversion Arrangement on Call for Redemption. In connection with any redemption of Securities, the Company may arrange for the purchase and conversion of any Securities called for redemption by an agreement with one or more investment banks or other purchasers to purchase such Securities by paying to the Trustee in trust for the Securityholders, on or prior to 10:00 a.m. New York City time on the Redemption Date, an amount that, together with any amounts deposited with the Trustee by the Company for the redemption of such Securities, is not less than the Redemption Price of, and any accrued and unpaid interest with respect to, such Securities. Notwithstanding anything to the contrary contained in this Article 3, the obligation of the Company to pay the Redemption Prices of such Securities shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, any Securities not duly surrendered for conversion by the Holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such Holders and (notwithstanding anything to the contrary contained in Article 11) surrendered by such purchasers for conversion, 24 all as of immediately prior to the close of business on the Business Day prior to the Redemption Date, subject to payment of the above amount as aforesaid. The Trustee shall hold and pay to the Holders whose Securities are selected for redemption any such amount paid to it for purchase and conversion in the same manner as it would moneys deposited with it by the Company for the redemption of Securities. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Securities shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and the Company agrees to indemnify the Trustee from, and hold it harmless against, any loss, liability or expense arising out of or in connection with any such arrangement for the purchase and conversion of any Securities between the Company and such purchasers, including the costs and expenses incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture. SECTION 3.08 Purchase of Securities at Option of the Holder. (a) General. Securities shall be purchased by the Company pursuant to paragraph 7 of the Securities as of May 14, 2007, 2012, 2017, 2022 and 2027 (each, a "Purchase Date"), at the purchase price of $425.00 per $1,000 of Principal Amount at Maturity as of May 14, 2007, of $551.26 per $1,000 of Principal Amount at Maturity as of May 14, 2012, of $639.76 per $1,000 of Principal Amount at Maturity as of May 14, 2017, of $742.47 per $1,000 Principal Amount at Maturity as of May 14, 2022, and of $861.67 per $1,000 Principal Amount at Maturity as of May 14, 2027 in each case, plus accrued and unpaid cash interest, if any, to the Purchase Date (each, a "Purchase Price", as applicable), at the option of the Holder thereof, upon: (i) delivery to the Paying Agent, by the Holder, of a written notice of purchase (a "Purchase Notice") at any time from the opening of business on the date that is 20 Business Days prior to a Purchase Date until the close of business on such Purchase Date stating: (A) the certificate number of the Security which the Holder will deliver to be purchased, (B) the portion of the Principal Amount at Maturity of the Security which the Holder will deliver to be purchased, which portion must be a Principal Amount at Maturity of $1,000 or an integral multiple thereof, (C) that such Security shall be purchased as of the Purchase Date pursuant to the terms and conditions specified in paragraph 7 of the Securities and in this Indenture, and (D) in the event the Company elects, pursuant to Section 3.08(b) hereof, to pay the Purchase Price to be paid as of such Purchase Date, in whole or in part, in shares of Common Stock but such portion of the Purchase Price shall ultimately be payable to such Holder entirely in cash because any of the conditions to payment of the Purchase Price in Common Stock is not satisfied 25 prior to the close of business on such Purchase Date, as set forth in Section 3.08(d) hereof, whether such Holder elects (1) to withdraw such Purchase Notice as to some or all of the Securities to which such Purchase Notice relates (stating the Principal Amount at Maturity and certificate numbers of the Securities as to which such withdrawal shall relate), or (2) to receive cash in respect of the entire Purchase Price for all Securities (or portions thereof) to which such Purchase Notice relates; and (ii) delivery of such Security to the Paying Agent prior to, on or after the Purchase Date (together with all necessary endorsements) at the offices of the Paying Agent, such delivery being a condition to receipt by the Holder of the Purchase Price therefor; provided, however, that such Purchase Price shall be so paid pursuant to this Section 3.08 only if the Security so delivered to the Paying Agent shall conform in all respects to the description thereof in the related Purchase Notice, as determined by the Company. If a Holder, in such Holder's Purchase Notice and in any written notice of withdrawal delivered by such Holder pursuant to the terms of Section 3.10 hereof, fails to indicate such Holder's choice with respect to the election set forth in clause (D) of Section 3.08(a)(i) hereof, such Holder shall be deemed to have elected to receive cash in respect of the Purchase Price for all Securities subject to such Purchase Notice in the circumstances set forth in such clause (D). The Company shall purchase from the Holder thereof, pursuant to this Section 3.08, a portion of a Security if the Principal Amount at Maturity of such portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to the purchase of all of a Security also apply to the purchase of such portion of such Security. Any purchase by the Company contemplated pursuant to the provisions of this Section 3.08 shall be consummated by the delivery of the consideration to be received by the Holder (together with accrued and unpaid cash interest, if any) promptly following the later of the Purchase Date and the time of delivery of the Security. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Purchase Notice contemplated by this Section 3.08(a) shall have the right to withdraw such Purchase Notice at any time prior to the close of business on the business day prior to the Purchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 3.10 hereof. The Paying Agent shall promptly notify the Company of the receipt by it of any Purchase Notice or written notice of withdrawal thereof. (b) Company's Right to Elect Manner of Payment of Purchase Price. The Securities to be purchased pursuant to Section 3.08(a) hereof may be paid for, at the election of the Company, in U.S. legal tender ("cash") or Common Stock, or in any combination of cash and Common Stock, subject to the conditions set forth in Sections 3.08(c) and (d) hereof. The Company shall designate, in the Company Notice delivered pursuant to Section 3.08(e) hereof, 26 whether the Company will purchase the Securities for cash or Common Stock, or, if a combination thereof, the percentages or amounts of the Purchase Price of Securities in respect of which it will pay in cash or Common Stock; provided that the Company will pay cash for fractional interests in Common Stock. For purposes of determining the existence of potential fractional interests, all Securities subject to purchase by the Company held by a Holder shall be considered together (no matter how many separate certificates are to be presented). Each Holder whose Securities are purchased pursuant to this Section 3.08 shall receive the same percentage of cash or Common Stock in payment of the Purchase Price for such Securities, except (i) as provided in Section 3.08(d) hereof with regard to the payment of cash in lieu of fractional shares of Common Stock and (ii) in the event that the Company is unable to purchase the Securities of a Holder or Holders for Common Stock because any necessary qualifications or registrations of the Common Stock under applicable state securities laws cannot be obtained, the Company may purchase the Securities of such Holder or Holders for cash. The Company may not change its election with respect to the consideration (or components or percentages of components thereof) to be paid once the Company has given its Company Notice to Securityholders except pursuant to this Section 3.08(b) or pursuant to Section 3.08(d) hereof in the event of a failure to satisfy, prior to the close of business on the Purchase Date, any condition to the payment of the Purchase Price, in whole or in part, in Common Stock. At least three Business Days before the Company Notice Date, the Company shall deliver an Officers' Certificate to the Trustee specifying: (i) the manner of payment selected by the Company, (ii) the information required by Section 3.08(e) hereof, (iii) if the Company elects to pay the Purchase Price, or a specified percentage thereof, in Common Stock, that the conditions to such manner of payment set forth in Section 3.08(d) have been or will be complied with, and (iv) whether the Company desires the Trustee to give the Company Notice required by Section 3.08(e) hereof. (c) Purchase with Cash. On each Purchase Date, at the option of the Company, the Purchase Price of Securities in respect of which a Purchase Notice pursuant to Section 3.08(a) hereof has been given, or a specified percentage thereof, may be paid by the Company with cash equal to the aggregate Purchase Price of such Securities. If the Company elects to purchase Securities with cash, the Company Notice, as provided in Section 3.08(e) hereof, shall be sent to Holders (and to beneficial owners as required by applicable law) not less than 20 Business Days prior to such Purchase Date (the "Company Notice Date"). (d) Payment by Issuance of Common Stock. On each Purchase Date, at the option of the Company, the Purchase Price of Securities in respect of which a Purchase Notice pursuant to Section 3.08(a) hereof has been given, or a specified percentage thereof, may be paid by the Company by the issuance of a number of shares of Common Stock equal to the quotient obtained by dividing (i) the amount of cash to which the Securityholders would have been entitled had the Company elected to pay all or such specified percentage, as the case may be, of 27 the Purchase Price of such Securities in cash by (ii) the Market Price of a share of Common Stock, subject to the next succeeding paragraph. The Company will not issue a fractional share of Common Stock in payment of the Purchase Price. Instead the Company will pay cash for the current market value of the fractional share. The current market value of a fraction of a share shall be determined by multiplying the Market Price by such fraction and rounding the product to the nearest whole cent. It is understood that if a Holder elects to have more than one Security purchased, the number of shares of Common Stock shall be based on the aggregate amount of Securities to be purchased. Upon a payment by Common Stock pursuant to the terms hereof, that portion of accrued Original Issue Discount or cash interest attributable to the period from the Issue Date to the Purchase Date with respect to the purchased Security shall not be cancelled, extinguished or forfeited but rather shall be deemed paid in full to the Holder through the delivery of the Common Stock in exchange for the Security being purchased pursuant to the terms hereof, and the fair market value of such Common Stock (together with any cash payments in lieu of fractional shares of Common Stock) shall be treated as issued, to the extent thereof, first in exchange for the accrued Original Issue Discount or cash interest through the Purchase Date, and the balance, if any, of the fair market value of such shares of Common Stock shall be treated as issued in exchange for the Issue Price of the Security being purchased pursuant to the provisions hereof. If the Company elects to purchase the Securities by the issuance of shares of Common Stock, the Company Notice, as provided in Section 3.08(e) hereof, shall be sent to the Holders (and to beneficial owners as required by applicable law) not later than the Company Notice Date. The Company's right to exercise its election to purchase the Securities pursuant to this Section 3.08 through the issuance of shares of Common Stock shall be conditioned upon: (i) the Company's not having given its Company Notice of an election to pay entirely in cash and its giving of timely Company Notice of election to purchase all or a specified percentage of the Securities with Common Stock as provided herein; (ii) the shares of Common Stock having been admitted for listing or admitted for listing subject to notice of issuance on the principal United States securities exchange on which the Common Stock is then listed or, if the Common Stock is not then listed on a national or regional securities exchange, as quoted on the National Association of Securities Dealers Automated Quotation System; (iii) the registration of the shares of Common Stock to be issued in respect of the payment of the Purchase Price under the Securities Act of 1933, as amended (the "Securities Act"), or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case, if required; (iv) any necessary qualification or registration under applicable state securities laws or the availability of an exemption from such qualification and registration; and (v) the receipt by the Trustee of an Officers' Certificate and an Opinion of Counsel each stating that (A) the terms of the issuance of the Common Stock are in 28 conformity with this Indenture and (B) the shares of Common Stock to be issued by the Company in payment of the Purchase Price in respect of Securities have been duly authorized and, when issued and delivered pursuant to the terms of this Indenture in payment of the Purchase Price in respect of the Securities, will be validly issued, fully paid and non-assessable and, to the best of such counsel's knowledge, free from preemptive rights under law or material contracts, and, in the case of such Officers' Certificate, stating that conditions (i), (ii), (iii) and (iv) above and the condition set forth in the second succeeding sentence have been satisfied and, in the case of such Opinion of Counsel, stating that conditions (ii) and (iii) above have been satisfied. Such Officers' Certificate shall also set forth the number of shares of Common Stock to be issued for each $1,000 Principal Amount at Maturity of Securities and the Sale Price of a share of Common Stock on each Trading Day during the period for which the Market Price is calculated. The Company may pay the Purchase Price (or any portion thereof) in Common Stock only if the information necessary to calculate the Market Price is published in a daily newspaper of national circulation. If the foregoing conditions are not satisfied with respect to a Holder or Holders prior to the close of business on the Purchase Date and the Company has elected to purchase the Securities pursuant to this Section 3.08 through the issuance of shares of Common Stock, the Company shall pay the entire Purchase Price of the Securities of such Holder or Holders in cash. The "Market Price" of the Common Stock means the average of the Sale Prices of the Common Stock for the five Trading Day period ending on the third Business Day (if the third Business Day prior to the applicable Purchase Date is a Trading Day or, if not, then on the last Trading Day prior to such Business Day) prior to the applicable Purchase Date, appropriately adjusted to take into account the occurrence, during the period commencing on the first of such Trading Days during such five Trading Day period and ending on such Purchase Date, of any event described in Section 11.06, 11.07 or 11.08 hereof; subject, however, to the conditions set forth in Sections 11.09 and 11.10 hereof. (e) Notice of Election. The Company's notice of election to purchase with cash or Common Stock or any combination thereof shall be sent to the Holders (and to beneficial owners as required by applicable law) in the manner provided in Section 14.02 hereof at the time specified in Section 3.08(c) or (d) hereof, as applicable (the "Company Notice"). Such Company Notice shall state the manner of payment elected and shall contain the following information: In the event the Company has elected to pay the Purchase Price (or a specified percentage thereof) with Common Stock, the Company Notice shall: (i) state that each Holder will receive Common Stock with a Market Price determined as of a specified date prior to the Purchase Date equal to such specified percentage of the Purchase Price of the Securities held by such Holder (except any cash amount to be paid in lieu of fractional shares); (ii) set forth the method of calculating the Market Price of the Common Stock; and 29 (iii) state that because the Market Price of Common Stock will be determined prior to the Purchase Date, Holders will bear the market risk with respect to the value of the Common Stock to be received from the date such Market Price is determined to the Purchase Date. In any case, each Company Notice shall include a form of Purchase Notice to be completed by a Securityholder and shall state: (i) the Purchase Price, the Conversion Rate and accrued and unpaid cash interest, including Contingent Cash Interest, if any, that will be accrued and payable with respect to the Securities as of the Purchase Date; (ii) whether the Company will pay the Purchase Price in cash or in Common Stock or any combination thereof, specifying the percentage of each; (iii) the name and address of the Paying Agent and the Conversion Agent; (iv) that Securities as to which a Purchase Notice has been given may be converted pursuant to Article 11 hereof only if the applicable Purchase Notice has been withdrawn in accordance with the terms of this Indenture; (v) that Securities must be surrendered to the Paying Agent to collect payment of the Purchase Price and interest, if any; (vi) that the Purchase Price for any Security as to which a Purchase Notice has been given and not withdrawn, together with any cash interest payable with respect thereto, will be paid promptly following the later of the Purchase Date and the time of surrender of such Security as described in (v); (vii) the procedures the Holder must follow to exercise rights under this Section 3.08 and a brief description of those rights; (viii) briefly, the conversion rights of the Securities and that Holders who want to convert Securities must satisfy the requirements set forth in paragraph 9 of the Securities; (ix) the procedures for withdrawing a Purchase Notice (including, without limitation, for a conditional withdrawal pursuant to the terms of Section 3.08(a)(i)(D) or Section 3.10 hereof); (x) that, unless the Company defaults in making payment of such Purchase Price and cash interest, if any, Original Issue Discount and cash interest, including Contingent Cash Interest, if any, on Securities surrendered for purchase will cease to accrue on and after the Purchase Date; and (xi) the CUSIP number of the Securities. 30 At the Company's request, the Trustee shall give such Company Notice in the Company's name and at the Company's expense; provided, however, that, in all cases, the text of such Company Notice shall be prepared by the Company. Upon determination of the actual number of shares of Common Stock to be issued for each $1,000 Principal Amount at Maturity of Securities, the Company will issue a press release and publish such determination on the Company's web site on the World Wide Web. (f) Covenants of the Company. All shares of Common Stock delivered upon purchase of the Securities shall be newly issued shares or treasury shares, shall be duly authorized, validly issued, fully paid and nonassessable and shall be free from preemptive rights and free of any lien or adverse claim created by the Company. The Company shall use its reasonable efforts to list or cause to have quoted any shares of Common Stock to be issued to purchase Securities on the principal United States securities exchange or over-the-counter or other domestic market on which any other shares of the Common Stock are then listed or quoted. The Company will promptly inform the Trustee in writing of any such listing. (g) Procedure upon Purchase. The Company shall deposit cash (in respect of a cash purchase under Section 3.08(c) hereof or for fractional interests as applicable) or shares of Common Stock, or a combination thereof, as applicable, at the time and in the manner as provided in Section 3.11 hereof, sufficient to pay the aggregate Purchase Price of, and any accrued and unpaid interest with respect to all Securities to be purchased pursuant to this Section 3.08. As soon as practicable after the Purchase Date, the Company shall deliver to each Holder entitled to receive Common Stock through the Paying Agent, a certificate for the number of full shares of Common Stock issuable in payment of the Purchase Price and cash in lieu of any fractional interests. The person in whose name the certificate for Common Stock is registered shall be treated as a holder of record of shares of Common Stock on the Business Day following the Purchase Date. Subject to Section 3.08(d) hereof, no payment or adjustment will be made for dividends on the Common Stock the record date for which occurred on or prior to the Purchase Date. (h) Taxes. If a Holder of a Security is paid in Common Stock, the Company shall pay any documentary, stamp or similar issue or transfer tax due on such issue of shares of Common Stock. However, the Holder shall pay any such tax which is due because the Holder requests the shares of Common Stock to be issued in a name other than the Holder's name. The Paying Agent may refuse to deliver the certificates representing the Common Stock being issued in a name other than the Holder's name until the Paying Agent receives a sum sufficient to pay any tax which will be due because the shares of Common Stock are to be issued in a name other than the Holder's name. Nothing herein shall preclude any income tax withholding required by law or regulations. SECTION 3.09 Purchase of Securities at Option of the Holder upon Change in Control. 31 (a) If there shall have occurred a Change in Control, Securities shall be purchased by the Company, at the option of the Holder thereof, at a purchase price specified in paragraph 7 of the Securities (the "Change in Control Purchase Price"), as of the date that is no later than 30 Business Days after the occurrence of the Change in Control but in no event prior to the date on which such Change in Control occurs (the "Change in Control Purchase Date"), subject to satisfaction by or on behalf of the Holder of the requirements set forth in Section 3.09(c) hereof. A "Change in Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to any "person" or "group" (as such terms are used in Section 13(d) of the Exchange Act), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" or "group" (as such terms are used in Section 13(d) of the Exchange Act) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly through one or more intermediaries, of more than 50% of the voting power of the outstanding voting stock of the Company, or (iv) the first day on which more than a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of the Board of Directors of the Company on May 14, 2002 or (ii) was nominated for election to the Board of Directors of the Company with the approval of, or whose election to the Board of Directors of the Company was ratified by, at least a majority of the Continuing Directors who were members of the Board of Directors of the Company at the time of such nomination or election. (b) Within 15 days after the occurrence of a Change in Control, the Company shall mail a written notice of Change in Control by first-class mail to the Trustee and to each Holder (and to beneficial owners as required by applicable law). The notice shall include a form of Change in Control Purchase Notice to be completed by the Securityholder and shall state: (i) briefly, the events causing a Change in Control and the date of such Change in Control; (ii) the date by which the Change in Control Purchase Notice pursuant to this Section 3.09 must be given; (iii) the Change in Control Purchase Date; (iv) the Change in Control Purchase Price and, to the extent known at the time of such notice, the amount of interest, if any, that will be accrued and payable with respect to the Securities as of the Change in Control Purchase Date; (v) the name and address of the Paying Agent and the Conversion Agent; 32 (vi) the Conversion Rate and any adjustments thereto resulting from the Change in Control; (vii) that Securities as to which a Change in Control Purchase Notice has been given may be converted pursuant to Article 11 hereof only if the Change in Control Purchase Notice has been withdrawn in accordance with the terms of this Indenture; (viii) that Securities must be surrendered to the Paying Agent to collect payment of the Change in Control Purchase Price and accrued and unpaid cash interest, if any; (ix) that the Change in Control Purchase Price for any Security as to which a Change in Control Purchase Notice has been duly given and not withdrawn, together with any accrued interest payable with respect thereto, will be paid promptly following the later of the Change in Control Purchase Date and the time of surrender of such Security as described in Section 3.09(b)(viii) hereof; (x) briefly, the procedures the Holder must follow to exercise rights under this Section 3.09; (xi) briefly, the conversion rights of the Securities; (xii) the procedures for withdrawing a Change in Control Purchase Notice; (xiii) that, unless the Company defaults in making payment of such Change in Control Purchase Price and cash interest, if any on Securities surrendered for purchase, Original Issue Discount and any cash interest, including Contingent Cash Interest, on Securities surrendered for purchase will cease to accrue on and after the Change in Control Purchase Date; and (xiv) the CUSIP number of the Securities. (c) A Holder may exercise its rights specified in Section 3.09(a) hereof upon delivery of a written notice of purchase (a "Change in Control Purchase Notice") to the Paying Agent at any time prior to the close of business on the Business Day prior to the Change in Control Purchase Date, stating: (i) the certificate number or numbers of the Security or Securities which the Holder will deliver to be purchased; (ii) the portion of the Principal Amount at Maturity of the Security which the Holder will deliver to be purchased, which portion must be $1,000 or an integral multiple thereof; and (iii) that such Security shall be purchased pursuant to the terms and conditions specified in paragraph 7 of the Securities. The delivery of such Security to the Paying Agent at any time after the delivery of the Change in Control Purchase Notice (together with all necessary endorsements) at the offices 33 of the Paying Agent shall be a condition to the receipt by the Holder of the Change in Control Purchase Price therefor; provided, however, that such Change in Control Purchase Price shall be so paid pursuant to this Section 3.09 only if the Security so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Change in Control Purchase Notice. The Company shall purchase from the Holder thereof, pursuant to this Section 3.09, a portion of a Security if the Principal Amount at Maturity of such portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to the purchase of all of a Security also apply to the purchase of such portion of such Security. Any purchase by the Company contemplated pursuant to the provisions of this Section 3.09 shall be consummated by the delivery of the consideration to be received by the Holder (together with accrued and unpaid interest, if any) promptly following the later of the Change in Control Purchase Date and the time of delivery of the Security to the Paying Agent in accordance with this Section 3.09. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Change in Control Purchase Notice contemplated by this Section 3.09(c) shall have the right to withdraw such Change in Control Purchase Notice at any time prior to the close of business on the Business Day prior to the Change in Control Purchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 3.10 hereof. The Paying Agent shall promptly notify the Company of the receipt by it of any Change in Control Purchase Notice or written withdrawal thereof. The Company shall not be required to comply with this Section 3.09 if a third party mails a written notice of Change in Control in the manner, at the times and otherwise in compliance with this Section 3.09 and repurchases all Securities for which a Change in Control Purchase Notice shall be delivered and not withdrawn. SECTION 3.10 Effect of Purchase Notice or Change in Control Purchase Notice. Upon receipt by the Paying Agent of the Purchase Notice or Change in Control Purchase Notice specified in Section 3.08(a) or Section 3.09(c) hereof, as applicable, the Holder of the Security in respect of which such Purchase Notice or Change in Control Purchase Notice, as the case may be, was given shall (unless such Purchase Notice or Change in Control Purchase Notice is withdrawn as specified in the following two paragraphs) thereafter be entitled to receive solely the Purchase Price or Change in Control Purchase Price, as the case may be, and any accrued and unpaid interest, with respect to such Security. Such Purchase Price or Change in Control Purchase Price which price reflects the Issue Price plus accrued Original Issue Discount and accrued and unpaid cash interest, including Contingent Cash Interest, if any, shall be paid to such Holder, subject to receipt of funds and/or securities by the Paying Agent, promptly following the later of (x) the Purchase Date or the Change in Control Purchase Date, as the case may be, with respect to such Security (provided the conditions in Section 3.08(a) or Section 3.09(c) hereof, as applicable, have been satisfied) and (y) the time of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 3.08(a) or Section 3.09(c) hereof, as applicable. Securities in respect of which a Purchase Notice or Change in Control Purchase 34 Notice, as the case may be, has been given by the Holder thereof may not be converted pursuant to Article 11 hereof on or after the date of the delivery of such Purchase Notice or Change in Control Purchase Notice, as the case may be, unless such Purchase Notice or Change in Control Purchase Notice, as the case may be, has first been validly withdrawn as specified in the following two paragraphs. A Purchase Notice or Change in Control Purchase Notice, as the case may be, may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent at any time prior to the close of business on the Business Day prior to the Purchase Date or the Change in Control Purchase Date, as the case may be, specifying: (a) the certificate number or numbers of the Security or Securities in respect of which such notice of withdrawal is being submitted, (b) the Principal Amount at Maturity of the Security or Securities with respect to which such notice of withdrawal is being submitted, and (c) the Principal Amount at Maturity, if any, of such Security which remains subject to the original Purchase Notice or Change in Control Purchase Notice, as the case may be, and which has been or will be delivered for purchase by the Company. A written notice of withdrawal of a Purchase Notice may be in the form set forth in the preceding paragraph or may be in the form of a conditional withdrawal contained in a Purchase Notice pursuant to the terms of Section 3.08(a)(i)(D) hereof. There shall be no purchase of any Securities pursuant to Section 3.08 hereof (other than through the issuance of Common Stock in payment of the Purchase Price, including cash in lieu of fractional shares) or 3.09 hereof if there has occurred (prior to, on or after, as the case may be, the giving, by the Holders of such Securities, of the required Purchase Notice or Change in Control Purchase Notice, as the case may be) and is continuing an Event of Default (other than a default in the payment of the Purchase Price or Change in Control Purchase Price, as the case may be, and any accrued and unpaid cash interest with respect to such Securities). The Paying Agent will promptly return to the respective Holders thereof any Securities (x) with respect to which a Purchase Notice or Change in Control Purchase Notice, as the case may be, has been withdrawn in compliance with this Indenture, or (y) held by it during the continuance of an Event of Default (other than a default in the payment of the Purchase Price or Change in Control Purchase Price, as the case may be, and any accrued and unpaid cash interest with respect to such Securities) in which case, upon such return, the Purchase Notice or Change in Control Purchase Notice with respect thereto shall be deemed to have been withdrawn. SECTION 3.11 Deposit of Purchase Price or Change in Control Purchase Price. Prior to 10:00 a.m., New York City time, on the Business Day following the Purchase Date or the Change in Control Purchase Date, as the case may be, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is acting as the Paying Agent, shall segregate and hold in trust as provided in Section 2.04 hereof) an amount of money (in immediately available funds if deposited on such Business Day) or Common Stock, if permitted hereunder, sufficient to pay the aggregate 35 Purchase Price or Change in Control Purchase Price, as the case may be, of, and any accrued and unpaid cash interest with respect to, all the Securities or portions thereof which are to be purchased as of the Purchase Date or Change in Control Purchase Date, as the case may be. SECTION 3.12 Securities Purchased in Part. Any Security which is to be purchased only in part shall be surrendered at the office of the Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate Principal Amount at Maturity equal to, and in exchange for, the portion of the Principal Amount at Maturity of the Security so surrendered which is not purchased. SECTION 3.13 Repayment to the Company. The Trustee and the Paying Agent shall promptly return to the Company any cash or shares of Common Stock that remain unclaimed as provided in paragraph 15 of the Securities, together with interest or dividends, if any, thereon (subject to the provisions of Section 7.01(f) hereof), held by them for the payment of the Purchase Price or Change in Control Purchase Price, as the case may be, or contingent interest, if any; provided, however, that to the extent that the aggregate amount of cash or shares of Common Stock deposited by the Company pursuant to Section 3.11 hereof exceeds the aggregate Purchase Price or Change in Control Purchase Price, as the case may be, of, and the accrued and unpaid contingent interest with respect to, the Securities or portions thereof which the Company is obligated to purchase as of the Purchase Date or Change in Control Purchase Date, as the case may be, whether as a result of withdrawal or otherwise, then promptly after the Business Day following the Purchase Date or Change in Control Purchase Date, as the case may be, the Trustee shall return any such excess to the Company together with interest or dividends, if any, thereon (subject to the provisions of Section 7.01(f) hereof). ARTICLE 4 COVENANTS SECTION 4.01 Payment of Securities. The Company shall promptly make all payments in respect of the Securities on the dates and in the manner provided in the Securities or pursuant to this Indenture. Any amounts to be given to the Trustee or Paying Agent, shall be deposited with the Trustee or Paying Agent by 10:00 a.m., New York City time, by the Company. Principal Amount at Maturity, Restated Principal Amount, Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Change in Control Purchase Price, and cash interest shall be considered paid on the applicable date due if on such date (or, in the case of a Purchase Price or Change in Control Purchase Price, on the Business Day following the applicable Purchase Date or Change in Control Purchase Date, as the case may be) the Trustee or the Paying Agent holds, in accordance with this Indenture, money or securities, if permitted hereunder, sufficient to pay all such amounts then due. The Company shall, to the extent permitted by law, pay cash interest on overdue amounts at the rate per annum set forth in paragraph 1 of the Securities, compounded semiannually, which interest shall accrue from the date such overdue amount was originally due 36 to the date payment of such amount, including interest thereon, has been made or duly provided for. All such interest shall be payable on demand. The accrual of such interest on overdue amounts shall be in lieu of, and not in addition to, the continued accrual of Original Issue Discount. SECTION 4.02 SEC and Other Reports. The Company shall deliver to the Trustee, within 30 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company also shall comply with the provisions of TIA Section 314(a), provided that no report required thereby to be filed with the SEC need be so filed unless this Indenture is qualified under the TIA. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of the same shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 4.03 Compliance Certificate. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year ending on December 31, 2002) an Officers' Certificate, stating whether or not to the knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 4.04 Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out the purposes of this Indenture. SECTION 4.05 Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, The City of New York, an office or agency of the Trustee, Registrar, Paying Agent and Conversion Agent where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer, exchange, purchase, redemption or conversion and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The office of the Trustee, located at JPMorgan Chase Bank, 450 W. 33rd Street, 15th Floor, New York, New York 10001 Attention: Institutional Trust Services, shall initially be such office or agency for all of the aforesaid purposes. The Company shall give prompt written notice to the Trustee of the location, and of any change in the location, of any such office or agency (other than a change in the location of the office of the Trustee). If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 14.02 hereof. 37 The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. SECTION 4.06 Delivery of Certain Information. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a Holder or any beneficial holder of Securities or shares of Common Stock which are restricted securities issued upon conversion thereof, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder or any beneficial holder of Securities or holder of shares of Common Stock issued upon conversion of Securities, or to a prospective purchaser of any such security designated by any such holder, as the case may be, to the extent required to permit compliance by such Holder or holder with Rule 144A under the Securities Act in connection with the resale of any such security. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 4.07 Covenant to Comply With Securities Laws Upon Purchase of Securities. In connection with any offer to purchase or purchase of Securities under Section 3.08 or 3.09 hereof (provided that such offer or purchase constitutes an "issuer tender offer" for purposes of Rule 13e-4 (which term, as used herein, includes any successor provision thereto) under the Exchange Act at the time of such offer or purchase), the Company shall to the extent applicable (a) comply with Rule 13e-4 and Rule 14e-1 under the Exchange Act, (b) file the related Schedule TO (or any successor schedule, form or report) under the Exchange Act, and (c) otherwise comply with all Federal and state securities laws so as to permit the rights and obligations under Sections 3.08 and 3.09 hereof to be exercised in the time and in the manner specified in Sections 3.08 and 3.09 hereof. SECTION 4.08 Waiver of Compliance. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 4.01 to 4.07, inclusive, if before the time for such compliance the Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding shall notify the Company that they elect to either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. ARTICLE 5 SUCCESSOR CORPORATION SECTION 5.01 When Company May Merge or Transfer Assets. The Company shall not consolidate with or merge with or into any other person or convey, transfer or lease all or substantially all of its properties and assets to any person, nor will the Company permit any Subsidiary to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in a sale, assignment, transfer, 38 lease or other disposition of all or substantially all of the properties and assets of the Company and its Subsidiaries on a consolidated basis to any other person or persons, unless: (a) either (i) the Company or such subsidiary shall be the surviving corporation or (ii) the person (if other than the Company) formed by such consolidation or into which the Company or such Subsidiary is merged or the person which acquires by conveyance, transfer or lease the properties and assets of the Company or such Subsidiary substantially as an entirety (A) shall be organized and validly existing under the laws of the United States or any state thereof or the District of Columbia and (B) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, all of the obligations of the Company or such Subsidiary under the Securities and this Indenture; (b) immediately after giving effect to such transaction, no Default shall have occurred and be continuing; and (c) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with this Article 5 and that all conditions precedent herein provided for relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of the properties and assets of one or more Subsidiaries (other than to the Company or another Subsidiary), which, if such assets were owned by the Company, would constitute all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The successor person formed by such consolidation or into which the Company or the applicable Subsidiary is merged or the successor person to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or the applicable Subsidiary under this Indenture with the same effect as if such successor had been named as the Company or the applicable Subsidiary herein; and thereafter, except in the case of a lease and any obligations the Company or the applicable Subsidiary may have under a supplemental indenture pursuant to Section 11.14 hereof, the Company or the applicable Subsidiary shall be discharged from all obligations and covenants under this Indenture and the Securities. Subject to Section 9.06 hereof, the Company, the applicable Subsidiary, the Trustee and the successor person shall enter into a supplemental indenture to evidence the succession and substitution of such successor person and such discharge and release of the Company and the applicable Subsidiary. 39 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01 Events of Default. An "Event of Default" occurs if: (a) the Company defaults in payment of any interest, including any Contingent Cash Interest, when due under the Securities and such default continues for 30 days; (b) the Company defaults in the payment of the Principal Amount at Maturity (or, if the Securities have been converted to semiannual coupon notes following a Tax Event pursuant to Section 10.01 of the Indenture, the Restated Principal Amount), Issue Price plus accrued Original Issue Discount and any cash interest, including any Contingent Cash Interest, Redemption Price, Purchase Price or Change in Control Purchase Price on any Security when the same becomes due and payable at its Stated Maturity, upon redemption, upon declaration, when due for purchase by the Company or otherwise; (c) the Company fails to comply with any of its agreements in the Security or this Indenture (other than those referred to in clauses (a) and (b) above) and such failure continues for 60 days after receipt by the Company of a Notice of Default; (d) default under any Debt, whether such Debt now exists or is created later, which default results in such Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, and the principal amount of all Debt so accelerated, together with all Debt due and payable but not paid prior to the end of any grace period, is $10,000,000 or more, and such acceleration has not been rescinded or annulled within a period of 10 days after receipt by the Company of a Notice of Default from the Trustee; provided, however, that if any such default shall be cured, waived, rescinded or annulled, then the Event of Default by reason thereof shall be deemed not to have occurred; (e) the Company pursuant to or under or within the meaning of any Bankruptcy Law: (ii) commences a voluntary case or proceeding; (iii) consents to the entry of an order for relief against it in an involuntary case or proceeding or the commencement of any case against it; (iv) consents to the appointment of a Custodian of it or for any substantial part of its property; (v) makes a general assignment for the benefit of its creditors; (vi) files a petition in bankruptcy or answer or consent seeking reorganization or relief; or 40 (vii) consents to the filing of such petition or the appointment of or taking possession by a Custodian; or (f) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company in an involuntary case or proceeding, or adjudicates the Company insolvent or bankrupt; (ii) appoints a Custodian of the Company or for any substantial part of its property; or (iii) orders the winding up or liquidation of the Company; and such order or decree remains unstayed and in effect for 60 days. A Default under clause (c) or clause (d) above is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in aggregate Principal Amount at Maturity of the Securities at the time outstanding notify the Company and the Trustee, of the Default and the Company does not cure such Default (and such Default is not waived) within the time specified in clause (c) or clause (d) above after actual receipt of such notice. Any such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". The Company shall deliver to the Trustee, within 30 days after it becomes aware of the occurrence thereof, written notice of any event which with the giving of notice or the lapse of time, or both, would become an Event of Default under clause (3) or clause (4) above, its status and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02 Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.01(e) or (f) in respect of the Company) occurs and is continuing, the Trustee by written Notice to the Company, or the Holders of at least 25% in aggregate Principal Amount at Maturity of the Securities at the time outstanding by notice to the Company and the Trustee, may declare the Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or if the Securities have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued interest), including accrued and unpaid Contingent Cash Interest, through the date of declaration on all the Securities to be immediately due and payable. Upon such a declaration, such Issue Price plus accrued Original Issue Discount, and such accrued and unpaid interest, if any, shall be due and payable immediately. If an Event of Default specified in Section 6.01(e) or (f) occurs in respect of the Company and is continuing, the Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or, if the Securities have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued interest), including accrued and unpaid Contingent Cash Interest, on all the Securities shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholders. The Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding, by notice to the Trustee (and without notice to any other 41 Securityholder) may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of the Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or, if the Securities have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued interest), including accrued and unpaid Contingent Cash Interest, that have become due solely as a result of acceleration and if all amounts due to the Trustee under Section 7.07 hereof have been paid. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of the Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or, if the Securities have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued interest), including accrued and unpaid Contingent Cash Interest, on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if the Trustee does not possess any of the Securities or does not produce any of the Securities in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of, or acquiescence in, the Event of Default. Except as set forth in Section 2.07 hereof, no remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04 Waiver of Past Defaults. Subject to Section 6.02, the Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding, by notice to the Trustee (and without notice to any other Securityholder), may waive an existing Default and its consequences except (a) an Event of Default described in Section 6.01(a) or (b), (b) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Securityholder affected or (c) a Default which constitutes a failure to convert any Security in accordance with the terms of Article 11. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. This Section 6.04 shall be in lieu of Section 316(a)1(B) of the TIA and such Section 316(a)1(B) is hereby expressly excluded from this Indenture, as permitted by the TIA. SECTION 6.05 Control by Majority. The Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or that the Trustee determines in good faith is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability unless the Trustee is offered indemnity satisfactory to it. This Section 6.05 shall be in lieu of Section 316(a)1(A) of the TIA and such Section 316(a)1(A) is hereby expressly excluded from this Indenture, as permitted by the TIA. SECTION 6.06 Limitation on Suits. A Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless: 42 (a) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (b) the Holders of at least 25% in aggregate Principal Amount at Maturity of the Securities at the time outstanding make a written request to the Trustee to pursue the remedy; (c) such Holder or Holders offer to the Trustee security or indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of such notice, request and offer of security or indemnity; and (e) the Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding do not give the Trustee a direction inconsistent with the request during such 60-day period. A Securityholder may not use this Indenture to prejudice the rights of any other Securityholder or to obtain a preference or priority over any other Securityholder. SECTION 6.07 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of the Principal Amount at Maturity (or if the Securities have been converted to semiannual coupon notes following a Tax Event pursuant to Article 10 hereof, the Restated Principal Amount, plus accrued cash interest), Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Change in Control Purchase Price, or cash interest, including Contingent Cash Interest, in respect of the Securities held by such Holder, on or after the respective due dates expressed in the Securities or any Redemption Date, and to convert the Securities in accordance with Article 11 hereof, or to bring suit for the enforcement of any such payment on or after such respective dates or the right to convert, shall not be impaired or affected adversely without the consent of such Holder. SECTION 6.08 Collection Suit by Trustee. If an Event of Default described in Section 6.01(a) or (b) hereof occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount owing with respect to the Securities and the amounts provided for in Section 7.07 hereof. SECTION 6.09 Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the Principal Amount at Maturity, Restated Principal Amount, Issue Price plus accrued Original Issue Discount, cash interest, including Contingent Cash Interest, Redemption Price, Purchase Price, Change in Control Purchase Price shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of any such amount) shall be entitled and empowered, by intervention in such proceeding or otherwise, 43 (a) to file and prove a claim for the whole amount of the Principal Amount at Maturity, Restated Principal Amount, Issue Price plus accrued Original Issue Discount, cash interest, including Contingent Cash Interest, Redemption Price, Purchase Price or Change in Control Purchase Price (or, if the Securities have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued interest), as the case may be, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel or any other amounts due the Trustee under Section 7.07 hereof) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10 Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: FIRST: to the Trustee for amounts due under Section 7.07 hereof; SECOND: to Securityholders for amounts due and unpaid on the Securities for the Principal Amount at Maturity, Restated Principal Amount, Issue Price plus accrued Original Issue Discount, cash interest, including Contingent Cash Interest, Redemption Price, Purchase Price or Change in Control Purchase Price (or, if the Securities have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued cash interest), as the case may be, ratably, without preference or priority of any kind, according to such amounts due and payable on the Securities; and THIRD: the balance, if any, to the Company. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section 6.10. At least 15 days before such record date, the Trustee shall mail to each Securityholder and the Company a notice that states the record date, the payment date and the amount to be paid. SECTION 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or 44 omitted by it as Trustee, a court in its discretion may require the filing by any party litigant (other than the Trustee) in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in aggregate Principal Amount at Maturity of the Securities at the time outstanding. This Section 6.11 shall be in lieu of Section 315(e) of the TIA and such Section 315(e) is hereby expressly excluded from this Indenture, as permitted by the TIA. SECTION 6.12 Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the Principal Amount at Maturity, Restated Principal Amount, Issue Price plus accrued Original Issue Discount, cash interest, including Contingent Cash Interest, Redemption Price, Purchase Price or Change in Control Purchase Price (or, if the Securities have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued interest), as contemplated herein, or which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 7 TRUSTEE SECTION 7.01 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture, but in case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the 45 requirements of this Indenture, but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein. This Section 7.01(b) shall be in lieu of Section 315(a) of the TIA and such Section 315(a) is hereby expressly excluded from this Indenture, as permitted by the TIA. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this paragraph (c) does not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. Subparagraphs (c)(i), (ii) and (iii) of this Section 7.01 shall be in lieu of Sections 315(d)(1), 315(d)(2) and 315(d)(3) of the TIA and such Sections 315(d)(1), 315(d)(2) and 315(d)(3) are hereby expressly excluded from this Indenture, as permitted by the TIA. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section 7.01. (e) The Trustee may refuse to perform any duty or exercise any right or power or extend or risk its own funds or otherwise incur any financial liability unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee (acting in any capacity hereunder) shall be under no liability for interest on any money received by it hereunder unless otherwise agreed in writing with the Company. SECTION 7.02 Rights of Trustee. Subject to its duties and responsibilities under the provisions of Section 7.01 hereof, and, except as expressly excluded from this Indenture pursuant to said Section 7.01 hereof, subject also to its duties and responsibilities under the TIA: (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; 46 (b) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers' Certificate; (c) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (d) the Trustee shall not be liable for any action taken, suffered or omitted to be taken by it in good faith which it believes to be authorized or within its rights or powers conferred under this Indenture; (e) the Trustee may consult with counsel selected by it and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (f) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders, pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby; (g) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a resolution of the Board of Directors; (h) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation; (i) the Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by a Responsible Officer of the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Securities and this Indenture; (j) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be 47 enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder; (k) the Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any person authorized to sign an Officers' Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded; and (l) the permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as duties. SECTION 7.03 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar, Conversion Agent or co-registrar may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11 hereof. SECTION 7.04 Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use or application of the proceeds from the Securities, it shall not be responsible for any statement in the registration statement for the Securities under the Securities Act or in the Indenture or the Securities (other than its certificate of authentication), or the determination as to which beneficial owners are entitled to receive any notices hereunder. SECTION 7.05 Notice of Defaults. If a Default occurs and if it is known to a Responsible Officer of the Trustee, the Trustee shall give to each Securityholder notice of the Default within 90 days after such Responsible Officer obtains knowledge of such Default unless such Default shall have been cured or waived before the giving of such notice. Except in the case of a Default described in Section 6.01(a) or (b) hereof, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Securityholders. The second sentence of this Section 7.05 shall be in lieu of the proviso to Section 315(b) of the TIA and such proviso is hereby expressly excluded from this Indenture, as permitted by the TIA. The Trustee shall not be deemed to have knowledge of a Default unless a Responsible Officer of the Trustee has received written notice of such Default. SECTION 7.06 Reports by Trustee to Holders. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, the Trustee shall mail to each Securityholder a brief report dated as of such May 15 that complies with TIA Section 313(a), if required by such Section 313(a). The Trustee also shall comply with TIA Section 313(b). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC (but only if this Indenture is then qualified under the TIA) and with each securities exchange, if any, on which the Securities are listed. The Company agrees to promptly notify the 48 Trustee whenever the Securities become listed on any securities exchange and of any delisting thereof. SECTION 7.07 Compensation and Indemnity. The Company agrees: (a) to pay to the Trustee from time to time such reasonable compensation as the Company and the Trustee shall from time to time agree in writing for all services rendered by it hereunder (which compensation shall not be limited (to the extent permitted by law) by any provision of law in regard to the compensation of a trustee of an express trust); (b) to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses, advances and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify the Trustee and its agents for, and to hold them harmless against, any loss, liability or expense (including reasonable attorney's fees and expenses and taxes (other than taxes based upon, measured by or determined by the income of the Trustee)) incurred without negligence or bad faith on their part, arising out of or in connection with the acceptance or administration of this trust, including the reasonable costs and expenses of defending itself against any claim (whether asserted by the Company or any Holder or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder. To secure the Company's payment obligations in this Section 7.07, the Holders shall have been deemed to have granted to the Trustee a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay the Principal Amount at Maturity, Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Change in Control Purchase Price or cash interest, if any, as the case may be, on particular Securities. The Company's payment obligations pursuant to this Section 7.07 shall survive the discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.01(e) or (f) hereof, the expenses including the reasonable charges and expenses of its counsel, are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08 Replacement of Trustee. The Trustee may resign by so notifying the Company; provided, however, no such resignation shall be effective until a successor Trustee has accepted its appointment pursuant to this Section 7.08. The Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding may remove the Trustee by so notifying the Trustee and the Company. The Company shall remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged bankrupt or insolvent; 49 (c) a receiver or public officer takes charge of the Trustee or its property; or (d) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint, by resolution of its Board of Directors, a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company satisfactory in form and substance to the retiring Trustee and the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07 hereof. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding may petition any court of competent jurisdiction at the expense of the Company for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10 hereof, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. SECTION 7.09 Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. SECTION 7.10 Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of TIA Sections 310(a)(1) and 310(b). The Trustee (or its parent holding company) shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. Nothing herein contained shall prevent the Trustee from filing with the Commission the application referred to in the penultimate paragraph of TIA Section 310(b). SECTION 7.11 Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01 Discharge of Liability on Securities. When (a) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced 50 pursuant to Section 2.07 hereof) for cancellation or (b) all outstanding Securities have become due and payable and the Company irrevocably deposits with the Trustee, the Paying Agent (if the Paying Agent is not the Company or any of its Affiliates) or the Conversion Agent cash or, if expressly permitted by the terms of the Securities or the Indenture, Common Stock sufficient to pay all amounts due and owing on all outstanding Securities (other than Securities replaced pursuant to Section 2.07 hereof), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Section 7.07 hereof, cease to be of further effect. The Trustee shall join in the execution of a document prepared by the Company acknowledging satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and Opinion of Counsel and at the cost and expense of the Company. SECTION 8.02 Repayment to the Company. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Securities that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person and the Trustee and the Paying Agent shall have no further liability to the Securityholders with respect to such money or securities for that period commencing after the return thereof. ARTICLE 9 AMENDMENTS SECTION 9.01 Without Consent of Holders. The Company and the Trustee may amend this Indenture or the Securities without the consent of any Securityholder: (a) to cure any ambiguity, omission, defect or inconsistency; (b) to comply with Article 5 or Section 11.14 hereof; (c) to secure the Company's obligations under the Securities and this Indenture; (d) to add to the Company's covenants for the benefit of the Securityholders or to surrender any right or power conferred upon the Company; (e) to make any change to comply with the TIA, or any amendment thereto, or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA, or as necessary in connection with the registration of the Securities under the Securities Act; or (f) to make any change that does not adversely affect the rights of any Holders (it being understood that any amendment described in clause (a) of this Section 9.01 made solely to conform this Indenture to the final offering memorandum provided to investors in connection with the initial offering of the Securities will be deemed not to adversely affect the rights or interests of Holders). 51 SECTION 9.02 With Consent of Holders. With the written consent of the Holders of at least a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding, the Company and the Trustee may amend this Indenture or the Securities. However, without the consent of each Securityholder affected, an amendment to this Indenture or the Securities may not: (a) reduce the percentage in Principal Amount at Maturity of Securities whose Holders must consent to an amendment; (b) make any change in the manner or rate of accrual of Original Issue Discount or cash interest, including Contingent Cash Interest, reduce the rate of cash interest, including Contingent Cash Interest, referred to in paragraph 1 of the Securities, or extend the time for payment of Original Issue Discount or cash interest, including Contingent Cash Interest, on any Security; (c) reduce the Principal Amount at Maturity, Restated Principal Amount, Issue Price, accrued Original Issue Discount or cash interest, with respect to any Security, or extend the Stated Maturity of any Security; (d) reduce the Redemption Price, Purchase Price or Change in Control Purchase Price of any Security; (e) make any Security payable in money or securities other than that stated in the Security; (f) make any change in Article 10 hereof, or this Section 9.02, except to increase any percentage set forth therein; (g) make any change that adversely affects the right to convert any Security; (h) make any change that adversely affects the right to require the Company to purchase the Securities in accordance with the terms thereof and this Indenture; or (i) impair the right to institute suit for the enforcement of any payment with respect to, or conversion of, the Securities. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section 9.02 becomes effective, the Company shall mail to each Holder a notice briefly describing the amendment. SECTION 9.03 Compliance with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article 9 shall comply with the TIA. SECTION 9.04 Revocation and Effect of Consents, Waivers and Actions. Until an amendment, consent, waiver or other action by Holders becomes effective, a consent 52 thereto by a Holder of a Security hereunder is a continuing consent by the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same obligation as the consenting Holder's Security, even if notation of the amendment, consent, waiver or other action is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date as of which the amendment, consent, waiver or action is made effective. After an amendment, consent, waiver or action becomes effective, it shall bind every Securityholder. SECTION 9.05 Notation on or Exchange of Securities. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article 9 may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Board of Directors, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for outstanding Securities. SECTION 9.06 Trustee to Sign Supplemental Indentures. The Trustee shall sign any supplemental indenture authorized pursuant to this Article 9 if the amendment contained therein does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign such supplemental indenture. In signing such supplemental indenture the Trustee shall receive, and (subject to the provisions of Section 7.01 hereof) shall be fully protected in relying upon, in addition to the documents required by Section 14.04 hereof, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. SECTION 9.07 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. ARTICLE 10 SPECIAL TAX EVENT CONVERSION SECTION 10.01 Optional Conversion to Semiannual Coupon Note upon Tax Event. From and after (a) the date of the occurrence of a Tax Event (the "Tax Event Date") subsequent to May 14, 2007 and (b) the date the Company exercises the option provided for in this Section 10.01, whichever is later (the "Option Exercise Date"), at the option of the Company, interest in lieu of future Original Issue Discount or cash interest shall accrue at the rate of 3% per annum, calculated on a semiannual bond equivalent basis, on a Restated Principal Amount, per $1,000 original Principal Amount at Maturity (the "Restated Principal Amount") equal to the Issue Price plus Original Issue Discount accrued through the Option Exercise Date and shall be payable semiannually on May 14 and November 14 of each year (each an "Interest Payment Date") to Holders of record at the close of business on the April 29 or October 30, respectively, (each a "Regular Record Date") immediately preceding such Interest Payment Date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months and 53 will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Option Exercise Date. Within 15 days of the occurrence of a Tax Event, the Company shall deliver a written notice of such Tax Event by facsimile and first-class mail to the Trustee and within 15 days of its exercise of such option the Company shall deliver a written notice of the Option Exercise Date by facsimile and first-class mail to the Trustee and by first class mail to the Holders of the Securities. From and after the Option Exercise Date, (a) the Company shall be obligated to pay at Stated Maturity, in lieu of the Principal Amount at Maturity of a Security, the Restated Principal Amount thereof plus accrued and unpaid interest on such Security and (b) "Issue Price and accrued Original Issue Discount," "Issue Price plus Original Issue Discount" or similar words, as used herein, shall mean Restated Principal Amount plus accrued and unpaid interest with respect to any Security. Securities authenticated and delivered after the Option Exercise Date may, and shall if required by the Trustee, bear a notation in a form approved by the Trustee as to the conversion of the Securities to semiannual coupon notes. No other changes to this Indenture shall result as a result of the events described in this Section 10.01. ARTICLE 11 CONVERSION SECTION 11.01 Conversion Privilege. A Holder of a Security may convert such Security into shares of Common Stock at any time prior to the close of business on May 14, 2032, subject to the provisions of this Article 11 and paragraph 9 of the Securities. The number of shares of Common Stock issuable upon conversion of a Security per $1,000 of Principal Amount at Maturity thereof (the "Conversion Rate") shall be determined in accordance with the provisions of paragraph 9 of the Securities. A Holder may convert a portion of the Principal Amount at Maturity of a Security if the portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to conversion of all of a Security also apply to conversion of a portion of a Security. SECTION 11.02 Conversion Procedure. To convert a Security, a Holder must satisfy the requirements in paragraph 9 in the Securities. The date on which the Holder satisfies all those requirements is the conversion date (the "Conversion Date"). As soon as practicable after the Conversion Date but in any event no later than the seventh Business Day following the Conversion Date, the Company shall deliver to the Holder, through the Conversion Agent, a certificate for the number of full shares of Common Stock issuable upon the conversion and cash in lieu of any fractional share determined pursuant to Section 11.03 hereof. The Company shall determine such full number of shares and the amounts of the required cash with respect to any fractional share, and shall set forth such information in an Officer's certificate delivered to the Conversion Agent. The Conversion Agent shall have no duties under this paragraph unless and until it has received such certificate. The Person in whose name the certificate is registered shall be treated as a stockholder of record on and after the Conversion Date; provided, however, that no surrender of a Security on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the Person or Persons entitled to receive the shares of Common Stock upon such conversion as the record holder or holders of such shares of Common Stock on such 54 date, but such surrender shall be effective to constitute the Person or Persons entitled to receive such shares of Common Stock as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; such conversion shall be at the Conversion Rate in effect on the date that such Security shall have been surrendered for conversion, as if the stock transfer books of the Company had not been closed. Upon conversion of a Security, such Person shall no longer be a Holder of such Security. No payment or adjustment will be made for dividends on, or other distributions with respect to, any Common Stock except as provided in this Article 11. On conversion of a Security, that portion of accrued Original Issue Discount and cash interest, including Contingent Cash Interest, if any, attributable to the period from the Issue Date of the Security through the Conversion Date, with respect to the converted Security shall not be cancelled, extinguished or forfeited, but rather shall be deemed to be paid in full to the Holder thereof through delivery of the Common Stock (together with the cash payment, if any, in lieu of fractional shares) in exchange for the Security being converted pursuant to the provisions hereof; and the fair market value of such shares of Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as issued, to the extent thereof, first in exchange for accrued Original Issue Discount and cash interest, including Contingent Cash Interest, if any, through the Conversion Date, and the balance, if any, of such fair market value of such Common Stock (and any such cash payment) shall be treated as issued in exchange for the Issue Price of the Security being converted pursuant to the provisions hereof. Notwithstanding the foregoing, accrued cash interest will be payable upon conversion of Securities made concurrently with or after acceleration of Securities following an Event of Default. If the Holder converts more than one Security at the same time, the number of shares of Common Stock issuable upon the conversion shall be based on the total Principal Amount at Maturity of the Securities converted. A Security surrendered for conversion based on (a) the Common Stock price may be surrendered for conversion until the close of business on May 14, 2032, (b) the Security being called for redemption may be surrendered for conversion at any time prior to the close of business on the second Business Day immediately preceding the Redemption Date, even if it is not otherwise convertible at such time, (c) a credit downgrade may be surrendered for conversion until the close of business on any Business Day during the period of the continuance of the credit downgrade as more fully described in paragraph 9 of the Security, and (d) upon the occurrence of certain corporate transactions more fully described in paragraph 9 of the Security may be surrendered for conversion at any time from and after the date which is 15 days prior to the anticipated effective date of such transaction until 15 days after the actual date of such transaction, and if such day is not a Business Day, the next occurring Business Day following such day. Upon surrender of a Security that is converted in part, the Company shall execute, and the Trustee shall authenticate and deliver to the Holder, a new Security in an authorized denomination equal in Principal Amount at Maturity to the unconverted portion of the Security surrendered. 55 SECTION 11.03 Fractional Shares. The Company will not issue a fractional share of Common Stock upon conversion of a Security. Instead, the Company will deliver cash for the current market value of the fractional share. The current market value of a fractional share shall be determined, to the nearest 1/1,000th of a share, by multiplying the per share Sale Price of the Common Stock, on the last Trading Day prior to the Conversion Date, by the fractional amount and rounding the product to the nearest whole cent. SECTION 11.04 Taxes on Conversion. If a Holder converts a Security, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the Holder shall pay any such tax which is due because the Holder requests the shares to be issued in a name other than the Holder's name and any income tax which is imposed on the Holder as a result of the conversion. The Conversion Agent may refuse to deliver the certificates representing the Common Stock being issued in a name other than the Holder's name until the Conversion Agent receives a sum sufficient to pay any tax which will be due because the shares are to be issued in a name other than the Holder's name. Nothing herein shall preclude the Company from any tax withholding or directing the withholding of any tax required by law or regulations. SECTION 11.05 Company to Provide Stock. The Company shall, prior to issuance of any Securities under this Article 11, and from time to time as may be necessary, reserve out of its authorized but unissued Common Stock a sufficient number of shares of Common Stock to permit the conversion of the Securities. All shares of Common Stock delivered upon conversion of the Securities shall be newly issued shares or treasury shares, shall be duly and validly issued and fully paid and nonassessable and shall be free from preemptive rights and free of any lien or adverse claim created by the Company. The Company will endeavor promptly to comply with all federal and state securities laws regulating the offer and delivery of shares of Common Stock upon conversion of Securities, if any, and will list or cause to have quoted such shares of Common Stock on each national securities exchange or in the over-the-counter market or such other market on which the Common Stock is then listed or quoted. SECTION 11.06 Adjustment for Change in Capital Stock. Except as set forth in Section 11.14 hereof, if, after the Issue Date of the Securities, the Company: (a) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock or other Capital Stock; (b) subdivides its outstanding shares of Common Stock into a greater number of shares; (c) pays a dividend or makes a distribution of its Common Stock in shares of its Capital Stock (other than Common Stock or rights, warrants or options for its Capital Stock); (d) combines its outstanding shares of Common Stock into a smaller number of shares; or 56 (e) issues by reclassification of its Common Stock any shares of its Capital Stock (other than rights, warrants or options for its Capital Stock); then the conversion privilege and the Conversion Rate in effect immediately prior to such action shall be adjusted so that the Holder of a Security thereafter converted may receive the number of shares or other units of Capital Stock of the Company which such Holder would have owned immediately following such action if such Holder had converted the Security immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. SECTION 11.07 Adjustment for Rights Issue. Except as set forth in Sections 11.14 and 11.19 hereof, if after the Issue Date, the Company distributes any rights, warrants or options to all holders of its Common Stock entitling them, for a period expiring within 60 days of the Issue Date, to purchase shares of Common Stock at a price per share less than the Sale Price of the Common Stock as of the Time of Determination, the Conversion Rate shall be adjusted in accordance with the formula: R' = R (O + N) ------------------- (O + [(N x P)/M]) where: R' = the adjusted Conversion Rate. R = the current Conversion Rate. O = the number of shares of Common Stock outstanding on the record date for the distribution to which this Section 11.07 is being applied. N = the number of additional shares of Common Stock offered pursuant to the distribution. P = the offering price per share of the additional shares. M = the Average Sale Price. The adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive the rights, warrants or options to which this Section 11.07 applies. If all of the shares of Common Stock subject to such rights, warrants or options have not been issued when such rights, warrants or options expire, then the Conversion Rate shall promptly be readjusted to the Conversion Rate which would then be in effect had the adjustment upon the issuance of such rights, warrants or options been made on the basis of the actual number of shares of Common Stock issued upon the exercise of such rights, warrants or options. 57 No adjustment shall be made under this Section 11.07 if the application of the formula stated above in this Section 11.07 would result in a value of R' that is equal to or less than the value of R. SECTION 11.08 Adjustment for Other Distributions. If, after the Issue Date of the Securities, the Company distributes to all holders of its Common Stock any of its assets or evidence of indebtedness or any rights, warrants or options to purchase securities of the Company (including securities or cash, but excluding (x) distributions of Capital Stock referred to in Section 11.06 hereof and distributions of rights, warrants or options referred to in Section 11.07 hereof and (y) cash dividends or other cash distributions that are paid out of consolidated current net earnings or earnings retained in the business as shown on the books of the Company unless such cash dividends or other cash distributions are Extraordinary Cash Dividends), the Conversion Rate shall be adjusted, in accordance with the formula: R' = R x M ------- M - F where: R' = the adjusted Conversion Rate. R = the current Conversion Rate. M = the Average Sale Price. F = the fair market value (on the record date for the distribution to which this Section 11.08 applies) of the assets, securities, rights, warrants or options to be distributed in respect of each share of Common Stock in the distribution to which this Section 11.08 is being applied (including, in the case of cash dividends or other cash distributions giving rise to an adjustment, all such cash distributed concurrently). The Board of Directors shall determine fair market values for the purposes of this Section 11.08. The adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive the distribution to which this Section 11.08 applies. For purposes of this Section 11.08, the term "Extraordinary Cash Dividend" shall mean any cash dividend or distribution with respect to the Common Stock the amount of which, together with the aggregate amount of cash dividends on the Common Stock to be aggregated with such cash dividend in accordance with the provisions of this paragraph, equals or exceeds the threshold percentage set forth in item (a) below. For purposes of item (a) below, the "Ex-Dividend Measurement Period" with respect to a cash dividend on the Common Stock shall mean the 365 consecutive day period ending on the date prior to the Ex-Dividend Time with respect to such cash dividend, and the "Relevant Cash Dividends" with respect to a cash dividend on the Common Stock shall mean the cash dividends on the Common Stock with Ex-Dividend Times occurring in the Ex-Dividend Measurement Period. 58 (a) If, upon the date prior to the Ex-Dividend Time with respect to a cash dividend on the Common Stock, the aggregate amount of such cash dividend together with the amounts of all Relevant Cash Dividends equals or exceeds on a per share basis 5% of the Sale Price of the Common Stock on the last Trading Day preceding the date of declaration by the Board of Directors of the cash dividend or distribution with respect to which this provision is being applied, then such cash dividend together with all Relevant Cash Dividends, shall be deemed to be an Extraordinary Cash Dividend and for purposes of applying the formula set forth above in this Section 11.08, the value of "F" shall be equal to (y) the aggregate amount of such cash dividend together with the amount of all Relevant Cash Dividends, minus (z) the aggregate amount of all Relevant Cash Dividends for which a prior adjustment in the Conversion Rate was previously made under this Section 11.08. In making the determinations required by item (a) above, the amount of cash dividends paid on a per share basis and the amount of any Relevant Cash Dividends specified in item (a) above, shall be appropriately adjusted to reflect the occurrence during such period of any event described in Section 11.06 hereof. SECTION 11.09 When Adjustment May Be Deferred. No adjustment in the Conversion Rate need be made unless the adjustment would require an increase or decrease of at least 1% in the Conversion Rate. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment and all adjustments that are made and carried forward shall be taken in the aggregate in order to determine if the 1% threshold is met. All calculations under this Article 11 shall be made to the nearest cent or to the nearest 1/1,000th of a share, as the case may be. SECTION 11.10 When No Adjustment Required. No adjustment need be made for a transaction referred to in Section 11.06, 11.07, 11.08 or 11.14 hereof if Securityholders may participate in the transaction. Such participation by Securityholders may include participation without conversion or upon conversion, provided that if such participation is upon conversion, an adjustment shall be made at such time as the Securityholders are no longer entitled to participate. No adjustment need be made for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or interest. Unless otherwise required by a provision of this Article 11, no adjustment need be made for a change in the par value or no par value of the Common Stock. To the extent the Securities become convertible pursuant to this Article 11 into cash, no adjustment need be made thereafter as to the cash. Interest will not accrue on the cash. No adjustment will be made pursuant to this Article 11 that would result, through the application of two or more provisions hereof, in the duplication of any adjustment. 59 SECTION 11.11 Notice of Adjustment. Whenever the Conversion Rate is adjusted, the Company shall promptly mail to Securityholders a notice of the adjustment. The Company shall file with the Trustee and the Conversion Agent such notice and a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. Upon receipt by it of such notice, and at the written request of the Company, the Conversion Agent will promptly mail such notice to Securityholders at the Company's expense. The certificate shall be conclusive evidence that the adjustment is correct. Neither the Trustee nor any Conversion Agent shall be under any duty or responsibility with respect to any such certificate except to exhibit the same to any Holder desiring inspection thereof. SECTION 11.12 Voluntary Increase. The Company from time to time may increase the Conversion Rate by any amount for any period of time. Whenever the Conversion Rate is increased, the Company shall mail to Securityholders and file with the Trustee and the Conversion Agent a notice of the increase. The Company shall mail the notice at least 15 days before the date the increased Conversion Rate takes effect. The notice shall state the increased Conversion Rate and the period it will be in effect. A voluntary increase of the Conversion Rate does not change or adjust the Conversion Rate otherwise in effect for purposes of Section 11.06, 11.07 or 11.08 or 11.14 hereof. SECTION 11.13 Notice of Certain Transactions. If: (a) the Company takes any action that would require an adjustment in the Conversion Rate pursuant to Section 11.06, 11.07 or 11.08 hereof (unless no adjustment is to occur pursuant to Section 11.10 hereof); or (b) the Company takes any action that would require a supplemental indenture pursuant to Section 11.14; or (c) there is a liquidation or dissolution of the Company; then the Company shall mail to Securityholders and file with the Trustee and the Conversion Agent a notice stating the proposed record date for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, binding share exchange, transfer, liquidation or dissolution. The Company shall file and mail the notice at least 15 days before such date. Failure to file or mail the notice or any defect in it shall not affect the validity of the transaction. SECTION 11.14 Reorganization of Company; Special Distributions. If the Company is a party to a transaction subject to Article 5 hereof (other than a sale of all or substantially all of the assets of the Company in a transaction in which the holders of Common Stock immediately prior to such transaction do not receive securities, cash, property or other assets of the Company or any other Person) or a merger or binding share exchange which reclassifies or changes its outstanding Common Stock, the Person obligated to deliver securities, cash or other assets upon conversion of Securities shall, no later than the closing date of such transaction, enter into a supplemental indenture. If the issuer of securities deliverable upon 60 conversion of Securities is an Affiliate of the successor Company, that issuer shall, no later than the closing date of such transaction, join in the supplemental indenture. The supplemental indenture shall provide that the Holder of a Security may convert it into the kind and amount of securities, cash or other assets which such Holder would have received immediately after the consolidation, merger, binding share exchange or transfer if such Holder had converted the Security immediately before the effective date of the transaction, assuming (to the extent applicable) that such Holder was not a constituent Person or an Affiliate of a constituent Person to such transaction. The supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Article 11. The successor Company shall mail to Securityholders a notice briefly describing the supplemental indenture. If this Section applies, neither Section 11.06 nor 11.07 hereof applies. If the Company makes a distribution to all holders of its Common Stock of any of its assets, or debt securities or any rights, warrants or options to purchase securities of the Company that would otherwise result in an adjustment in the Conversion Rate pursuant to the provisions of Section 11.08 hereof, then, from and after the record date for determining the holders of Common Stock entitled to receive the distribution, a Holder of a Security that converts such Security in accordance with the provisions of this Indenture shall upon such conversion be entitled to receive, in addition to the shares of Common Stock into which the Security is convertible, the kind and amount of securities, cash or other assets comprising the distribution that such Holder would have received if such Holder had converted the Security immediately prior to the record date for determining the holders of Common Stock entitled to receive the distribution. SECTION 11.15 Company Determination Final. Any determination that the Company or the Board of Directors must make pursuant to Section 11.03, 11.06, 11.07, 11.08, 11.09, 11.10, 11.14 or 11.17 hereof is conclusive. SECTION 11.16 Trustee's Adjustment Disclaimer. The Trustee has no duty to determine when an adjustment under this Article 11 should be made, how it should be made or what it should be. The Trustee has no duty to determine whether a supplemental indenture under Section 11.14 hereof need be entered into or whether any provisions of any supplemental indenture are correct. The Trustee shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon conversion of Securities. The Trustee shall not be responsible for the Company's failure to comply with this Article 11. Each Conversion Agent (other than the Company or an Affiliate of the Company) shall have the same protection under this Section 11.16 as the Trustee. SECTION 11.17 Simultaneous Adjustments. In the event that this Article 11 requires adjustments to the Conversion Rate under more than one of Sections 11.06, 11.07 or 11.08 hereof, and the record dates for the distributions giving rise to such adjustments shall occur on the same date, then such adjustments shall be made by applying, first, the provisions of Section 11.06 hereof, second, the provisions of Section 11.08 hereof and, third, the provisions of Section 11.07 hereof. 61 SECTION 11.18 Successive Adjustments. After an adjustment to the Conversion Rate under this Article 11, any subsequent event requiring an adjustment under this Article 11 shall cause an adjustment to the Conversion Rate as so adjusted. SECTION 11.19 Rights Issued in Respect of Common Stock Issued Upon Conversion. Each share of Common Stock issued upon conversion of Securities pursuant to this Article 11 shall be entitled to receive the appropriate number of common stock or preferred stock purchase rights, as the case may be (the "Rights"), if any, that all shares of Common Stock are entitled to receive and the certificates representing the Common Stock issued upon such conversion shall bear such legends, if any, in each case as may be provided by the terms of any shareholder rights agreement adopted by the Company, as the same may be amended from time to time (in each case, a "Rights Agreement"). Provided that such Rights Agreement requires that each share of Common Stock issued by the Company (including those that might be issued upon conversion of Securities) at any time prior to the distribution of separate certificates representing the Rights be entitled to receive such Rights, then, notwithstanding anything else to the contrary in this Article 11, there shall not be any adjustment to the conversion privilege or Conversion Rate or any other term or provision of the Securities as a result of the issuance of Rights, the distribution of separate certificates representing the Rights, the exercise or redemption of such Rights in accordance with any such Rights Agreement, or the termination or invalidation of such Rights. SECTION 11.20 Company's Right to Elect to Pay Cash or Common Stock. In lieu of delivery of Common Stock upon notice of conversion of any Securities (for all or any portion of the Securities), the Company may elect to pay holders surrendering Securities an amount in cash per Security (or a portion of a Security) equal to the Average Sale Price of Common Stock for the five consecutive Trading Days immediately following either (a) the date of notice of election to deliver cash as described below if the Company has not given notice of redemption, or (b) the conversion date, in the case of conversion following the notice of redemption specifying that the Company intends to deliver cash upon conversion, in either case multiplied by the Conversion Rate in effect on that date. The Company will inform the Holders through the Trustee no later than two business days following the Conversion Date of its election to deliver shares of Common Stock or to pay cash in lieu of delivery of Common Stock, unless the Company has already informed holders of its election in connection with its optional redemption of the Securities pursuant to Section 3.1 herein. If the Company elects to deliver all of such payment in Common Stock, the Common Stock will be delivered through the Conversion Agent no later than the fifth business day following the Conversion Date. If the Company elects to pay all or a portion of such payment in cash, the payment, including any delivery of Common Stock, will be made to Holders surrendering Securities no later than the tenth business day following the applicable conversion date. If an Event of Default (other than a default in a cash payment upon conversion of the Securities) has occurred and is continuing, the Company may not pay cash upon conversion of any Security or portion of a Security (other than cash for fractional shares). 62 ARTICLE 12 PAYMENT OF INTEREST SECTION 12.01 Interest Payments. Interest on any Security that is payable in cash, and is punctually paid or duly provided for, on any applicable payment date shall be paid to the person in whose name that Security is registered at the close of business on the Record Date or accrual date, as the case may be, for such interest at the office or agency of the Company maintained for such purpose. Each installment of semiannual or contingent interest on any Security shall be paid in same-day funds by transfer to an account maintained by the payee located inside the United States, if the Trustee shall have received proper wire transfer instructions from such payee not later than the related Record Date or accrual date, as the case may be, or, if no such instructions have been received, by check drawn on a bank in New York City mailed to the payee at its address set forth on the Registrar's books. In the case of a permanent Global Security, semiannual or contingent interest payable on any applicable payment date will be paid to the Depositary, with respect to that portion of such permanent Global Security held for its account by Cede & Co. for the purpose of permitting such party to credit the interest received by it in respect of such permanent Global Security to the accounts of the beneficial owners thereof. SECTION 12.02 Defaulted Interest. Except as otherwise specified with respect to the Securities, any interest on any Security that is payable, but is not punctually paid or duly provided for, within 30 days following any applicable payment date (herein called "Defaulted Interest", which term shall include any accrued and unpaid interest that has accrued on such defaulted amount in accordance with paragraph 1 of the Securities), shall be paid by the Company, at its election in each case (x) to the Holder as of Special Record Date, as determined in accordance with clause (a) below, or (y) in the manner set forth in clause (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Securities are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment (which shall not be less than 20 days after such notice is received by the Trustee), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date (the "Special Record Date") for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Securities at his address as it appears on the list of Securityholders maintained pursuant to Section 2.05 hereof not less than 10 days prior to such Special Record Date. 63 Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the persons in whose names the Securities are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (b) of this Section 12.02. (b) The Company may make payment of any Defaulted Interest on the Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. SECTION 12.03 Interest Rights Preserved. Subject to the foregoing provisions of this Article 12 and Section 2.06 hereof, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to semiannual interest accrued and unpaid, and to accrue, which were carried by such other Security. ARTICLE 13 CONTINGENT CASH INTEREST SECTION 13.01 Contingent Cash Interest. The Company shall make Contingent Cash Interest payments to the Holders of Securities, as set forth in Section 13.02 below, during any six month period commencing May 14 or November 14 beginning with the six-month period commencing on May 14, 2007 (each a "Semiannual Period") if, but only if, the average of the Security Market Prices of a Security for the five Trading Days in the relevant Five-Trading-Day Measurement Period equals 120% or more of the Relevant Value of such Security. During any Semiannual Period when Contingent Cash Interest is payable pursuant to this section, each Contingent Cash Interest payment due and payable on each $1,000 Principal Amount at Maturity shall be calculated for any quarterly period within the applicable Semiannual Period, and in each instance shall equal the greater of the applicable Conversion Rate at such time with respect to the Securities as determined in accordance with Article 11 hereof and paragraph 9 of the Securities, multiplied by the greater of (a) $0.105 and (b) the sum of all Regular Cash Dividends paid by the Company per share on the Common Stock during the applicable quarter of such Semiannual Period. As used in this Article 13, "Five-Trading-Day Measurement Period" means the five Trading Days ending on the third Trading Day immediately preceding the first day of the applicable Semiannual Period; provided, however, that if the Company declares a dividend on the Common Stock for which the record date (the "Common Stock Record Date") falls prior to the first day of the next Semiannual Period, but the payment date for the Common Stock falls within such Semiannual Period, then, the "Five-Trading-Day Measurement Period" shall mean the five Trading Days ending on the third Trading Day immediately preceding such Common Stock Record Date. "Relevant Value" means the sum of the Issue Price, the accrued Original Issue Discount and accrued cash interest, if any, on such Security to the day immediately preceding the first day of the applicable Semiannual Period. "Security Market Price" means, as 64 of any date of determination, the average of the secondary market bid quotations per $1,000 Principal Amount at Maturity of Securities obtained by the Bid Calculation Agent for $5 million Principal Amount at Maturity of Securities at approximately 4:00 p.m., New York City time, on such determination date from three independent nationally recognized securities dealers (none of which shall be an Affiliate of the Company) selected by the Company; provided, however, if (a) at least three such bids are not obtained by the Bid Calculation Agent or (b) in the Company's reasonable judgment, the bid quotations are not indicative of the secondary market value of the Securities as of such determination date, then the Securities Market Price for such determination date shall equal the product of (i) the Conversion Rate in effect as of such determination date multiplied by (ii) the average Sale Price of the Common Stock for the five Trading Days ending on such determination date, appropriately adjusted to take into account the occurrence, during the period commencing on the first of such Trading Days during such five Trading Day period and ending on such determination date, of any event described in Section 11.06, 11.07 or 11.08 hereof (subject to the conditions set forth in Sections 11.08 and 11.10 hereof). The Original Issue Discount of the Securities will continue to accrue whether or not Contingent Cash Interest payments are made. SECTION 13.02 Payment of Contingent Cash Interest; Contingent Cash Interest Rights Preserved. If payable, Contingent Cash Interest shall be paid on the last day of the applicable Semiannual Period (in each case, a "Contingent Cash Interest Payment Date") or, if the Company pays a Regular Cash Dividend on the Common Stock during a Semiannual Period, on the payment date for the related Common Stock dividend. Contingent Cash Interest payments on any Security that are payable, and are punctually paid or duly provided for, on any Contingent Cash Interest Payment Date shall be paid to the Person who is the holder of that Security on the 15th day preceding the last day of such Semiannual Period (the "Contingent Cash Interest Record Date") or, if the company pays regular cash dividends on the Common Stock during one quarter within such Semiannual Period, the Common Stock Record Date. Each payment of Contingent Cash Interest on any Security shall be paid (A) if such Security is held in the form of a Global Note, in the same-day funds by transfer to an account maintained by the payee located inside the United States, or (B) if such Security is held in the form of a Certificated Note, by check, mailed to the address of such Holder as set forth in the Security Register. In the case of a Global Note, interest payable on any Contingent Cash Interest Payment date will be paid to the Depositary for the purpose of permitting DTC to credit the interest received by it in respect of such Global Note to the accounts of the beneficial owners thereof. If the Company only pays a Regular Cash Dividend on the Common Stock during one quarter within such Semiannual Period, the remaining Contingent Cash Interest payments will accrue and be payable as of the 15th day preceding the last day of the applicable Semiannual Period. Upon determination that Holders of Securities will be entitled to receive Contingent Cash Interest during a Semiannual Period, prior to the start of such Semiannual Period, the Company will issue a press release and publish such information on its website as soon as practicable. SECTION 13.03 Bid Calculation Agent. The Bid Calculation Agent shall solicit bids from securities dealers which the Company indicates that it believes are willing to bid for the Securities. The Company initially appoints the Trustee to act as the Bid Calculation 65 Agent. The Company may change the Bid Calculation Agent at its discretion; provided, however, the Bid Calculation Agent may not be an Affiliate of the Company. ARTICLE 13A TAX MATTERS SECTION 13A.01 Tax Treatment. The parties hereto hereby agree, and each Holder and any beneficial holder of a Security by its purchase of a Security hereby agrees (in the absence of administrative pronouncement or judicial ruling to the contrary): (a) to treat the Securities as indebtedness of the Company for all United States federal income tax purposes; (b) to treat the Securities as debt instruments that are subject to U.S. Treasury Regulation section 1.1275-4(b); and (c) to treat any payment to and receipt by a Holder of Common Stock upon conversion of a Security, or upon a purchase by the Company at the option of the Holder of a Security where the Company elects to pay in Common Stock, as a contingent payment under U.S. Treasury Regulation section 1.1275-4(b). SECTION 13A.02 Comparable Yield and Projected Payment Schedule. Solely for purposes of applying U.S. Treasury Regulation section 1.1275-4 to the Notes: (a) for United States Federal income tax purposes, the Company shall accrue interest with respect to outstanding Securities as original issue discount according to the "noncontingent bond method," as set forth in U.S. Treasury Regulation section 1.1275-4(b) using a comparable yield of 6.90%, compounded semiannually, and the projected payment schedule attached as Annex 1 to this Indenture; (b) the Company shall file with the Trustee promptly at the end of each calendar year (i) a written notice specifying the amount of original issue discount for United States federal income tax purposes (including daily rates and accrual periods) accrued on outstanding Securities as of the end of such year and (ii) such other specific information relating to such original issue discount that the Company determines to be relevant under the Internal Revenue Code of 1986, as amended from time to time, including the amount of any adjustment made under the noncontingent bond method to account for the amount of any difference between the amount of an actual payment and the amount of a projected payment; and (c) the Company acknowledges and agrees, and each Holder and any beneficial holder of a Security, by its purchase of a Security shall be deemed to acknowledge and agree, that (i) the comparable yield and the projected payment schedule are determined on the basis of an assumption of linear growth of stock price and a constant growth in dividend yield, (ii) the comparable yield and the projected payment schedule are not 66 determined for any purpose other than for the purpose of applying U.S. Treasury Regulation section 1.1275-4(b)(4) to the Security and (iii) the comparable yield and the projected payment schedule do not constitute a projection or representation regarding the actual amounts payable on the Securities. ARTICLE 14 MISCELLANEOUS SECTION 14.01 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. SECTION 14.02 Notices. Any request, demand, authorization, notice, waiver, consent or communication shall be in writing and delivered in person or delivery by courier guaranteeing overnight delivery or mailed by first-class mail, postage prepaid, addressed as follows or transmitted by facsimile transmission (confirmed by guaranteed overnight courier) to the following facsimile numbers: if to the Company: Horace Mann Educators Corporation 1 Horace Mann Plaza Springfield, IL 62715 Attention: General Counsel Facsimile: (217) 788-5757 with a copy of any notice given pursuant to Article 6 hereof to: Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, NY 10166 Attention: Conor D. Reilly, Esq. Telephone: (212) 351-3850 Facsimile: (212) 351-4035 if to the Trustee: JPMorgan Chase Bank 450 W. 33rd Street, 15th Floor New York, NY 10001 Attention: Institutional Trust Services Telephone: (212) 946-7550 Facsimile: (212) 946-8810 67 The Company or the Trustee by notice given to the other in the manner provided above may designate additional or different addresses for subsequent notices or communications. Any notice or communication given to a Securityholder shall be mailed to the Securityholder, by first-class mail, postage prepaid, at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not received by the addressee. If the Company mails a notice or communication to the Securityholders, it shall mail a copy to the Trustee and each Registrar, Paying Agent, Conversion Agent or co-registrar. SECTION 14.03 Communication by Holders with Other Holders. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar, the Paying Agent, the Conversion Agent and anyone else shall have the protection of TIA Section 312(c). SECTION 14.04 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel stating that, in the opinion of such counsel, such actions are authorized or permitted by this Indenture and that all such conditions precedent have been complied with. SECTION 14.05 Statements Required in Certificate or Opinion. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a covenant or condition provided for in this Indenture shall include to the extent required by the Trustee: (a) a statement that each person making such Officers' Certificate or Opinion of Counsel has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officers' Certificate or Opinion of Counsel are based; (c) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable such person to express an informed opinion as to whether or not such covenant or condition has been complied with; and 68 (d) a statement that, in the opinion of such person, such covenant or condition has been complied with. SECTION 14.06 Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 14.07 Rules by Trustee, Paying Agent, Conversion Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Securityholders. The Registrar, Conversion Agent and the Paying Agent may make reasonable rules for their functions. SECTION 14.08 Calculations. The calculation of the Purchase Price, Change in Control Purchase Price, Conversion Rate, Market Price, Sale Price of the Common Stock and each other calculation to be made hereunder shall be the obligation of the Company. All calculations made by the Company as contemplated pursuant to this Section 14.08 shall be final and binding on the Company and the Holders absent manifest error. The Trustee, Paying Agent and Conversion Agent shall not be obligated to recalculate, recompute or confirm any such calculations. SECTION 14.09 Legal Holidays. A "Legal Holiday" is any day other than a Business Day. If any specified date (including a date for giving notice) is a Legal Holiday, the action shall be taken on the next succeeding day that is not a Legal Holiday, and, if the action to be taken on such date is a payment in respect of the Securities, no Original Issue Discount or interest, if any, shall accrue for the intervening period. SECTION 14.10 GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE SECURITIES. SECTION 14.11 No Recourse Against Others. A director, officer, employee, agent, representative, stockholder or equity holder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 14.12 Successors. All agreements of the Company in this Indenture and the Securities shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 14.13 Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One originally signed copy is enough to prove this Indenture. 69 IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Indenture on behalf of the respective parties hereto as of the date first above written. HORACE MANN EDUCATORS CORPORATION By: /s/ Peter H. Heckman Name: Peter H. Heckman Title: Executive V.P. & Chief Financial Officer /s/ Ann Caparros Name: Ann Caparros Title: Corporate Secretary & General Counsel JPMORGAN CHASE BANK, as Trustee By: _____________________________________ Name: Title: ANNEX 1 Projected Payment Schedule*
Projected Interest Payment per $1,000 Principal Amount at Maturity of Period Ending Notes* November 14, 2002 7.13 May 14, 2003 7.13 November 14, 2003 7.13 May 14, 2004 7.13 November 14, 2004 7.13 May 14, 2005 7.13 November 14, 2005 7.13 May 14, 2006 7.13 November 14, 2006 7.13 May 14, 2007 7.13 November 14, 2007 0 May 14, 2008 0 November 14, 2008 0 May 14, 2009 0 November 14, 2009 0 May 14, 2010 0 November 14, 2010 0 May 14, 2011 0 November 14, 2011 0 December 15, 2011 3.04
* The comparable yield and the schedule of projected payments are determined on the basis of an assumption of linear growth of the stock price and a constant growth in dividend yield and are not determined for any purpose other than for the determination of interest accruals and adjustments thereof in respect of the Securities for United States federal income tax purposes. The comparable yield and the schedule of projected payments do not constitute a projection or representation regarding the amounts payable on Securities.
Projected Interest Payment per $1,000 Principal Amount at Maturity of Period Ending Notes* March 15, 2012 3.04 June 15, 2012 3.19 September 15, 2012 3.19 December 15, 2012 3.19 March 15, 2013 3.19
Annex 1-1
Projected Interest Payment per $1,000 Principal Amount at Maturity of Period Ending Notes* June 15, 2013 3.35 September 15, 2013 3.35 December 15, 2013 3.35 March 15, 2014 3.35 June 15, 2014 3.52 September 15, 2014 3.52 December 15, 2014 3.52 March 15, 2015 3.52 June 15, 2015 3.69 September 15, 2015 3.69 December 15, 2015 3.69 March 15, 2016 3.69 June 15, 2016 3.88 September 15, 2016 3.88 December 15, 2016 3.88 March 15, 2017 3.88 June 15, 2017 4.07 September 15, 2017 4.07 December 15, 2017 4.07 March 15, 2018 4.07 June 15, 2018 4.27 September 15, 2018 4.27 December 15, 2018 4.27 March 15, 2019 4.27 June 15, 2019 4.49 September 15, 2019 4.49 December 15, 2019 4.49 March 15, 2020 4.49 June 15, 2020 4.71 September 15, 2020 4.71 December 15, 2020 4.71 March 15, 2021 4.71 June 15, 2021 4.95 September 15, 2021 4.95 December 15, 2021 4.95 March 15, 2022 4.95 June 15, 2022 5.20 September 15, 2022 5.20 December 15, 2022 5.20 March 15, 2023 5.20 June 15, 2023 5.46 September 15, 2023 5.46 December 15, 2023 5.46
Annex 1-2 Projected Interest Payment per $1,000 Principal Amount at Maturity of Period Ending Notes* March 15, 2024 5.46 June 15, 2024 5.73 September 15, 2024 5.73 December 15, 2024 5.73 March 15, 2025 5.73 June 15, 2025 6.02 September 15, 2025 6.02 December 15, 2025 6.02 March 15, 2026 6.02 June 15, 2026 6.32 September 15, 2026 6.32 December 15, 2026 6.32 March 15, 2027 6.32 June 15, 2027 6.63 September 15, 2027 6.63 December 15, 2027 6.63 March 15, 2028 6.63 June 15, 2028 6.96 September 15, 2028 6.96 December 15, 2028 6.96 March 15, 2029 6.96 June 15, 2029 7.31 September 15, 2029 7.31 December 15, 2029 7.31 March 15, 2030 7.31 June 15, 2030 7.68 September 15, 2030 7.68 December 15, 2030 7.68 March 15, 2031 7.68 June 15, 2031 8.06 September 15, 2031 8.06 December 15, 2031 8.06 March 15, 2032 8.06 Terminal Value at Maturity $2,354.43 Annex 1-3 EXHIBIT A-1 [FORM OF FACE OF GLOBAL SECURITY] THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT, FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE OF THIS NOTE WAS $475.00 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY; THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, INCLUDING CASH INTEREST PAYABLE THROUGH MAY 14, 2007 TAXABLE AS ORIGINAL ISSUE DISCOUNT UNDER TREASURY REGULATION SECTION 1.1273-1, IS $2,378.67 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY; THE ISSUE DATE IS MAY 14, 2002; AND THE YIELD TO MATURITY FOR THE PURPOSES OF ACCRUING TAX ORIGINAL ISSUE DISCOUNT IS 6.90% PER ANNUM, CALCULATED ON A SEMIANNUAL BOND EQUIVALENT BASIS. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY, OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER, SELL, OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER A-1-1 (X) THE LATER OF THE LAST DAY SECURITIES OF THIS ISSUE WERE ISSUED AND (Y) THE LAST DATE ON WHICH HORACE MANN EDUCATORS CORPORATION (THE "COMPANY" OR THE "ISSUER") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF ANY HOLDER THAT IS NOT AN AFFILIATE OF THE COMPANY AFTER THE RESALE RESTRICTION TERMINATION DATE. THE FOREGOING LEGEND MAY BE REMOVED FROM THIS SECURITY ON SATISFACTION OF THE CONDITIONS SPECIFIED IN THE INDENTURE. A-1-2 HORACE MANN EDUCATORS CORPORATION Senior Convertible Note due 2032 No. A-1 CUSIP: 440327 AF 1 Issue Date: May 14, 2002 Original Issue Discount: $525.00 Issue Price: $475.00 (for each $1,000 Principal (for each $1,000 Principal Amount at Maturity) Amount at Maturity) HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (herein called the "Company"), promises to pay to Cede & Co. or registered assigns, the Principal Amount at Maturity of THREE HUNDRED FIFTEEN MILLION EIGHT HUNDRED THOUSAND DOLLARS $315,800,000 on May 14, 2032. This Security shall not bear interest except as specified on the other side of this Security. Original Issue Discount will accrue as specified on the other side of this Security. This Security is convertible as specified on the other side of this Security. Additional provisions of this Security are set forth on the other side of this Security. Dated: May 14, 2002 HORACE MANN EDUCATORS CORPORATION By: ________________________________ Title: By: ________________________________ Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION JPMORGAN CHASE BANK, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture. By:________________________ Authorized Officer A-1-3 [FORM OF REVERSE SIDE OF ALL SECURITIES] Senior Convertible Notes due 2032 1. Interest. The Company promises to pay interest in cash on the Principal Amount at Maturity of this Note at the rate per annum of 1.425% from the Issue Date, or from the most recent date to which interest has been paid or provided for, until May 14, 2007. During such period, the Company will pay cash interest semiannually in arrears on May 14 and November 14 of each year (each an "Interest Payment Date") to Holders of record at the close of business on each April 29 and October 30 (whether or not a business day) (each a "Regular Record Date") immediately preceding such Interest Payment Date. Cash interest on the Securities will accrue from the most recent date to which interest has been paid or duly provided or, if no interest has been paid, from the Issue Date. Cash interest will be computed on the basis of a 360-day year of twelve 30-day months. After May 14, 2007, this Security shall not bear interest, except as specified in this paragraph or in paragraph 11 hereof. If the Principal Amount at Maturity hereof or any portion of such Principal Amount at Maturity is not paid when due (whether upon acceleration pursuant to Section 6.02 of the Indenture, upon the date set for payment of the Redemption Price pursuant to paragraph 6 hereof, upon the date set for payment of the Purchase Price or Change in Control Purchase Price pursuant to paragraph 7 hereof or upon the Stated Maturity of this Security) or if installments of cash interest are not paid when due in accordance with paragraph 11 hereof, then in each such case the overdue amount shall, to the extent permitted by law, bear interest at the rate of 3% per annum, compounded semiannually, which interest shall accrue from the date such overdue amount was originally due to the date payment of such amount, including interest thereon, has been made or duly provided for. All such interest shall be payable on demand. The accrual of such interest on overdue amounts shall be in lieu of, and not in addition to, the continued accrual of Original Issue Discount or cash interest. Original Issue Discount (the difference between the Issue Price and the Principal Amount at Maturity of the Security), in the period during which a Security remains outstanding, shall accrue at 3.00% per annum, on a semiannual bond equivalent basis using a 360-day year composed of twelve 30-day months, from the Issue Date of this Security. 2. Method of Payment. Subject to the terms and conditions of the Indenture, the Company will make payments in respect of Redemption Prices, Purchase Prices, Change in Control Purchase Prices and at Stated Maturity to Holders who surrender Securities to a Paying Agent to collect such payments in respect of the Securities. In addition, the Company will pay cash interest from the Issue Date until May 14, 2007, as more fully described in paragraph 1 hereof. The Company will pay any cash amounts in money of the United States that at the time of payment is legal tender for A-1-4 payment of public and private debts. However, the Company may make such cash payments by check payable in such money. 3. Paying Agent, Conversion Agent, Registrar and Bid Calculation Agent. Initially, JPMorgan Chase Bank, a New York banking corporation chartered trust company (the "Trustee"), will act as Paying Agent, Conversion Agent, Registrar and Bid Calculation Agent. The Company may appoint and change any Paying Agent, Conversion Agent, Registrar or co-registrar and Bid Calculation Agent without notice, other than notice to the Trustee except that the Company will maintain at least one Paying Agent in the State of New York, City of New York, Borough of Manhattan, which shall initially be an office or agency of the Trustee. The Company or any of its Subsidiaries or any of their Affiliates may act as Paying Agent, Conversion Agent, Registrar or co-registrar. None of the Company, any of its Subsidiaries or any of their Affiliates shall act as Bid Calculation Agent. 4. Indenture. The Company issued the Securities pursuant to an Indenture dated as of May 14, 2002 (the "Indenture"), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as in effect from time to time (the "TIA"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the TIA for a statement of those terms. The Securities are general unsecured and unsubordinated obligations, of the Company, limited to $368,500,000 aggregate Principal Amount at Maturity (subject to Section 2.07 of the Indenture). The Indenture does not limit other indebtedness of the Company, secured or unsecured. 5. Contingent Cash Interest. Subject to the conditions of the Indenture and the accrual and record date provisions specified in this paragraph 5, the Company shall pay Contingent Cash Interest to the Securityholders during any six-month period (a "Contingent Cash Interest Period") from May 14 to November 14 and from November 14 to May 14, with the initial six-month period commencing after May 14, 2007, if the average Securities Market Price for the Five-Trading-Day Measurement Period with respect to such Contingent Cash Interest period equals 120% or more of the sum of the Issue Price of a Security, Original Issue Discount and cash interest, if any, accrued thereon to the day immediately preceding the first day of the relevant Contingent Interest Period. Contingent Cash Interest, if any, will accrue and be payable to holders of this Security as of the Contingent Cash Interest Record Date or a Common Stock Record Date, as applicable. Original Issue Discount will continue to accrue at 3% whether or not Contingent Cash Interest is paid. A-1-5 The amount of Contingent Cash Interest payable per $1,000 Principal Amount at Maturity hereof in respect of any quarterly period of the applicable Contingent Cash Interest Period shall equal the greater of (x) $0.105 and (y) the sum of all Regular Cash Dividends paid by the Company per share of Common Stock during that three-month period of the applicable Contingent Cash Interest Period, in each case, multiplied by the number of shares of Common Stock into which $1,000 Principal Amount at Maturity hereof is convertible pursuant to paragraph 9 hereof as of the accrual date for such Contingent Cash Interest. Upon determination that Securityholders will be entitled to receive Contingent Cash Interest during a Contingent Cash Interest Period, the Company shall issue a press release and publish such information on its web site on the World Wide Web as soon as practicable. 6. Redemption at the Option of the Company. No sinking fund is provided for the Securities. The Securities are redeemable as a whole, or from time to time in part, at any time at the option of the Company in accordance with the Indenture at the Redemption Prices set forth below, provided that the Securities are not redeemable prior to May 14, 2007. The table below shows Redemption Prices of a Security per $1,000 Principal Amount at Maturity on the dates shown below and at Stated Maturity, which prices reflect accrued Original Issue Discount calculated to each such date. The Redemption Price of a Security redeemed between such dates shall include an additional amount reflecting the additional Original Issue Discount accrued since the immediately preceding date in the table to, but not including, the Redemption Date and any accrued and unpaid cash interest. [Remainder of page intentionally left blank] A-1-6
(1) (2) (3) Note Accrued Original Redemption Price Redemption Date Issue Price Issue Discount (1) + (2) - --------------- ----------- -------------- --------- May 14 2007 ............................................ $475.00 $ 0.00 $ 475.00 2008 ............................................ 475.00 14.36 489.36 2009 ............................................ 475.00 29.15 504.15 2010 ............................................ 475.00 44.39 519.39 2011 ............................................ 475.00 60.09 535.09 2012 ............................................ 475.00 76.26 551.26 2013 ............................................ 475.00 92.92 567.92 2014 ............................................ 475.00 110.09 585.09 2015 ............................................ 475.00 127.77 602.77 2016 ............................................ 475.00 145.99 620.99 2017 ............................................ 475.00 164.76 639.76 2018 ............................................ 475.00 184.10 659.10 2019 ............................................ 475.00 204.02 679.02 2020 ............................................ 475.00 224.54 699.54 2021 ............................................ 475.00 245.69 720.69 2022 ............................................ 475.00 267.47 742.47 2023 ............................................ 475.00 289.91 764.91 2024 ............................................ 475.00 313.03 788.03 2025 ............................................ 475.00 336.85 811.85 2026 ............................................ 475.00 361.39 836.39 2027 ............................................ 475.00 386.67 861.67 2028 ............................................ 475.00 412.71 887.71 2029 ............................................ 475.00 439.54 914.54 2030 ............................................ 475.00 467.18 942.18 2031 ............................................ 475.00 495.66 970.66 At stated maturity .............................. 475.00 525.00 1,000.00
If this Security has been converted to a semiannual coupon note following the occurrence of a Tax Event, the Redemption Price will be equal to the Restated Principal Amount plus accrued and unpaid interest from the date of such conversion to but not including the Redemption Date; but in no event will this Security be redeemable before May 14, 2007. 7. Purchase by the Company at the Option of the Holder. Subject to the terms and conditions of the Indenture, the Company shall become obligated to purchase, at the option of the Holder, the Securities held by such Holder on the following Purchase Dates and at the following Purchase Prices, plus accrued and unpaid cash interest, if any, per $1,000 Principal Amount at Maturity, upon delivery of a Purchase Notice containing the information set forth in the Indenture, at any time from the opening of business on the date that is 20 Business Days prior to such Purchase Date until the close of business on the day immediately preceding such Purchase Date and upon delivery of the Securities to the Paying Agent by the Holder as set forth in the Indenture. A-1-7 Purchase Date Price Purchase ------------- -------------- May 14, 2007 $475.00 May 14, 2012 $551.26 May 14, 2017 $639.76 May 14, 2022 $742.47 May 14, 2027 $861.67 The Purchase Price (equal to the Issue Price plus accrued Original Issue Discount to the Purchase Date) may be paid, at the option of the Company, in cash or by the issuance and delivery of shares of Common Stock of the Company, or in any combination thereof in accordance with the Indenture. If prior to a Purchase Date this Security has been converted to a semiannual coupon note following the occurrence of a Tax Event, the Purchase Price will be equal to the Restated Principal Amount plus accrued and unpaid cash interest from the date of conversion to the Purchase Date as provided in the Indenture. At the option of the Holder and subject to the terms and conditions of the Indenture, the Company shall become obligated to purchase the Securities held by such Holder no later than 30 Business Days after the occurrence of a Change in Control of the Company for a Change in Control Purchase Price equal to the Issue Price plus accrued Original Issue Discount and accrued and unpaid cash interest, including Contingent Cash Interest, if any, to but not including the Change in Control Purchase Date, which Change in Control Purchase Price shall be paid in cash. If prior to a Change in Control Purchase Date this Security has been converted to a semiannual coupon note following the occurrence of a Tax Event, the Change in Control Purchase Price shall be equal to the Restated Principal Amount plus accrued cash interest from the date of conversion to the Change in Control Purchase Date. A third party may make the offer and purchase of the Securities in lieu of the Company in accordance with the Indenture. Holders have the right to withdraw any Purchase Notice or Change in Control Purchase Notice, as the case may be, by delivering to the Paying Agent a written notice of withdrawal in accordance with the provisions of the Indenture. If cash (and/or securities if permitted under the Indenture) sufficient to pay the Purchase Price or Change in Control Purchase Price, as the case may be, of all Securities or portions thereof to be purchased as of the Purchase Date or the Change in Control Purchase Date, as the case may be, is deposited with the Paying Agent on the Business Day following the Purchase Date or the Change in Control Purchase Date, as the case may be, Original Issue Discount or cash interest, if any, shall cease to accrue on such Securities (or portions thereof) on such Purchase Date or Change in Control Purchase Date, as the case may be, and the Holder thereof shall have no other rights as such (other than the right to receive the Purchase Price or Change in Control Purchase Price, as the case may be, if any, upon surrender of such Security). A-1-8 8. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at the Holder's registered address. If money sufficient to pay the Redemption Price of, and accrued and unpaid cash interest, if any, with respect to, all Securities (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent prior to or on the Redemption Date, on such Redemption Date, Original Issue Discount or accrued cash interest, if any, shall cease to accrue on such Securities or portions thereof. Securities in denominations larger than $1,000 of Principal Amount at Maturity may be redeemed in part but only in integral multiples of $1,000 of Principal Amount at Maturity. 9. Conversion. Conversion Based on Sale Price of Common Stock. Subject to the provisions of this paragraph 9 and notwithstanding the fact that any other condition to conversion described below has not been satisfied, Holders may convert the Securities into Common Stock on a Conversion Date if the Sale Price of the Common Stock for at least 20 Trading Days in a period of 30 consecutive Trading Days ending on the last Trading Day of the most recently ended fiscal quarter, commencing with the quarter ending September 30, 2002, is greater than the conversion trigger price per share. The "conversion trigger price" for any fiscal quarter shall be the following percentage of the accreted conversion price per share of Common Stock on the last day of such calendar quarter: (a) 120% until and including March 31, 2007 and (b) declining 0.1% per calendar quarter thereafter to 110% on the last day of the calendar quarter ending March 31, 2032. If the foregoing condition is satisfied, then the Securities will be convertible at any time at the option of the Holder, through their maturity. The "accreted conversion price per share" of Common Stock as of any day equals the quotient of: . the Issue Price and accrued Original Issue Discount or accrued cash interest to that day, divided by . the number of shares of Common Stock issuable upon conversion of $1,000 Principal Amount at Maturity of Securities on that day pursuant to this paragraph 9 and Article 11 of the Indenture. Conversion Based on Credit Ratings Downgrade. Subject to the provisions of this paragraph 9 and the Indenture and notwithstanding the fact that any other condition to conversion has not been satisfied, the Securities shall be convertible into Common Stock at the election of a Holder on a Conversion Date at any time that (a) the credit rating assigned to the Securities by Moody's Investors Service Inc. and its successors ("Moody's") is Ba2 or lower or the credit rating assigned to the Securities by Standard & Poor's Credit Market Services, a division of the McGraw-Hill Companies Inc. and its successors ("Standard & Poor's) is BB+ or lower, or (b) the Securities are no longer rated by either or both of Moody's or Standard & Poor's, or (c) either or both of Moody's or Standard & Poor's have suspended or withdrawn their ratings of the Securities. A-1-9 Conversion upon Redemption. Subject to the provisions of this paragraph 9 and notwithstanding the fact that any other condition described herein to conversion has not been satisfied, a Holder may convert into Common Stock a Security or portion of a Security which has been called for redemption pursuant to paragraph 6 hereof, but such Securities may be surrendered for conversion only until the close of business on the second Business Day immediately preceding the Redemption Date. Conversion Upon Certain Distributions. Subject to the provisions of this paragraph 9 and notwithstanding the fact that any other condition to conversion has not been satisfied, in the event that the Company declares a dividend or distribution described in Section 11.07 of the Indenture, or a dividend or a distribution described in Section 11.08 of the Indenture and, in the case of a dividend or distribution described in Section 11.08 of the Indenture, the fair market value, per share, of such dividend or distribution per share of Common Stock, as determined in the Indenture, exceeds 15% of the Sale Price of the Common Stock on the Business Day immediately preceding the date of declaration for such dividend or distribution, the Securities may be surrendered for conversion beginning on the date the Company gives notice to the Holders of such right, which shall not be less than 20 days prior to the Ex-Dividend Time for such dividend or distribution, and Securities may be surrendered for conversion at any time thereafter until the close of business on the Business Day prior to the Ex-Dividend Time or until the Company announces that such dividend or distribution will not take place. Conversion Upon Occurrence of Certain Corporate Transactions. Subject to the provisions of this paragraph 9 and notwithstanding the fact that any other condition described herein to conversion has not been satisfied, in the event the Company is a party to a consolidation, merger or binding share exchange pursuant to which the Common Stock would be converted into cash, securities or other property as set forth in Section 11.14 of the Indenture, the Securities may be surrendered for conversion at any time from and after the date which is 15 days prior to the date announced by the Company as the anticipated effective time until 15 days after the actual effective date of such transaction, and at the effective time of such transaction the right to convert a Security into Common Stock will be deemed to have changed into a right to convert it into the kind and amount of cash, securities or other property which the holder would have received if the holder had converted its Security immediately prior to the transaction. A Security in respect of which a Holder has delivered a Purchase Notice or Change in Control Purchase Notice exercising the option of such Holder to require the Company to purchase such Security may be converted only if such notice of exercise is withdrawn in accordance with the terms of the Indenture. The initial Conversion Rate is 17.763 shares of Common Stock per $1,000 Principal Amount at Maturity, subject to adjustment in the case of certain events described in the Indenture. The Company will deliver cash or a check in lieu of any fractional share of Common Stock. The ability to surrender Securities for conversion will expire at the close of business on May 14, 2032. In the event the Company exercises its option pursuant to Section 10.01 of the Indenture to have interest in lieu of Original Issue Discount or cash interest accrue on the Security following a Tax Event, the Holder will be entitled on conversion to receive the same number of A-1-10 shares of Common Stock such Holder would have received if the Company had not exercised such option. Accrued and unpaid interest in lieu of Original Issue Discount and cash interest, including Contingent Cash Interest, will not be paid on Securities that are converted following a Tax Event provided, however that Securities surrendered for conversion during the period, in the case of interest in lieu of Original Issue Discount, from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date, shall be entitled to receive such interest, in lieu of Original Issue Discount, payable on such Securities on the corresponding Interest Payment Date and (except Securities with respect to which the Company has mailed a notice of redemption) Securities surrendered for conversion during such periods must be accompanied by payment of an amount equal to the interest in lieu of Original Issue Discount with respect thereto that the registered Holder is to receive. To convert a Security, a Holder must (a) complete and manually sign the conversion notice (or complete and manually sign a facsimile of such notice) and deliver such notice to the Conversion Agent, (b) surrender the Security to the Conversion Agent, (c) furnish appropriate endorsements and transfer documents if required by the Conversion Agent, the Company or the Trustee and (d) pay any transfer or similar taxes, if required. A Holder may convert a portion of a Security if the Principal Amount at Maturity of such portion is $1,000 or an integral multiple of $1,000. No payment or adjustment will be made for dividends on the Common Stock except as provided in the Indenture. On conversion of a Security, accrued Original Issue Discount and any accrued and unpaid cash interest (or interest if the Company has exercised its option provided for in paragraph 11 hereof), including Contingent Cash Interest, attributable to the period from the Issue Date (or, if the Company has exercised the option referred to in paragraph 11 hereof, the later of (x) the date of such exercise and (y) the date on which interest was last paid) through the Conversion Date shall not be cancelled, extinguished or forfeited, but rather shall be deemed to be paid in full to the Holder thereof through the delivery of the Common Stock (together with the cash payment, if any, in lieu of fractional shares) in exchange for the Security being converted pursuant to the terms hereof; and the fair market value of such shares of Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as issued, to the extent thereof, first in exchange for the Original Issue Discount and any accrued and unpaid cash interest (or interest, if the Company has exercised its option provided for in paragraph 11 hereof), including Contingent Cash Interest, accrued through the Conversion Date, and the balance, if any, of such fair market value of such Common Stock (and any such cash payment) shall be treated as issued in exchange for the Issue Price of the Security being converted pursuant to the provisions hereof. The Conversion Rate will be adjusted in accordance with Article 11 of the Indenture for dividends or distributions on Common Stock payable in Common Stock or other Capital Stock; subdivisions, combinations or certain reclassifications of Common Stock; distributions to all holders of Common Stock of certain rights to purchase Common Stock for a period expiring within 60 days of the Issue Date at less than the Sale Price of the Common Stock at the Time of Determination; and distributions to such holders of assets or debt securities of the Company or certain rights to purchase securities of the Company (excluding certain cash dividends or A-1-11 distributions) and certain rights pursuant to shareholder rights plans. The Company from time to time may voluntarily increase the Conversion Rate. If the Company is a party to a consolidation, merger or binding share exchange or a transfer of all or substantially all of its assets, or upon certain distributions described in the Indenture, the right to convert a Security into Common Stock may be changed into a right to convert it into securities, cash or other assets of the Company or another person. 10. [INTENTIONALLY OMITTED.] 11. Tax Event. (a) From and after (i) the date (the "Tax Event Date") of the occurrence of a Tax Event and (ii) the date the Company exercises the option provided for in this paragraph 11, whichever is later (the "Option Exercise Date"), at the option of the Company, interest in lieu of future Original Issue Discount shall accrue at the rate of 3% per annum on a principal amount per Note (the "Restated Principal Amount") equal to the Issue Price plus Original Issue Discount accrued through the Option Exercise Date and shall be payable semiannually on May 14 and November 14 of each year (each an "Interest Payment Date") to Holders of record at the close of business on the April 29 and October 30, respectively, (each a "Regular Record Date") immediately preceding such Interest Payment Date. Interest will be computed on a semiannual bond equivalent basis using a 360-day year comprised of twelve 30-day months and will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Option Exercise Date. (b) Interest on any Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Security is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose. Each installment of interest on any Security shall be paid in same-day funds by transfer to an account maintained by the payee located inside the United States. 12. Defaulted Interest. Except as otherwise specified with respect to the Securities, any Defaulted Interest on any Security shall forthwith cease to be payable to the registered Holder thereof on the relevant Regular Record Date or accrual date, as the case may be, and such Defaulted Interest shall be paid by the Company as provided for in Section 12.02 of the Indenture. 13. Denominations; Transfer; Exchange. The Securities are in fully registered form, without coupons, in denominations of $1,000 of Principal Amount at Maturity and integral multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities in respect of which a A-1-12 Purchase Notice or Change in Control Purchase Notice has been given and not withdrawn (except, in the case of a Security to be purchased in part, the portion of the Security not to be purchased) or any Securities for a period of 15 days before the mailing of a notice of redemption of Securities to be redeemed. 14. Persons Deemed Owners. The registered Holder of this Security may be treated as the owner of this Security for all purposes. 15. Unclaimed Money or Securities. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Securities that remains unclaimed for two years, subject to applicable unclaimed property laws. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person. 16. Amendment; Waiver. Subject to certain exceptions set forth in the Indenture, (a) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding and (b) certain Defaults may be waived with the written consent of the Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 or Section 11.14 of the Indenture, to secure the Company's obligations under this Security or to add to the Company's covenants for the benefit of the Securityholders or to surrender any right or power conferred, to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA, or as necessary in connection with the registration of the Securities under the Securities Act or to make any change that does not adversely affect the rights of any Holders. 17. Defaults and Remedies. Under the Indenture, Events of Default include (a) default in payment of interest when due under the Securities and such default continues for 30 days; (b) default in payment of the Principal Amount at Maturity (or, if the Securities have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount), Issue Price plus accrued Original Issue Discount or cash interest, Redemption Price, Purchase Price or Change in Control Purchase Price, as the case may be, in respect of the Securities when the same becomes due and payable; (c) failure by the Company to comply with other agreements in the Indenture or the Securities, subject to notice and lapse of time; (d) default in the payment of any principal when due or resulting in acceleration of other indebtedness of the Company for borrowed money where the aggregate principal amount with respect to which the default or acceleration has occurred exceeds $10,000,000, and such acceleration has not been rescinded or annulled within a period A-1-13 of 10 days after receipt by the Company of a Notice of Default, subject to notice and lapse of time; and (e) certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Trustee, or the Holders of at least 25% in aggregate Principal Amount at Maturity of the Securities at the time outstanding, may declare all the Securities to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities becoming due and payable immediately upon the occurrence of such Events of Default. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives indemnity or security reasonably satisfactory to it. Subject to certain limitations, Holders of a majority in aggregate Principal Amount at Maturity of the Securities at the time outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of amounts specified in clause (a) or (b) above) if it determines that withholding notice is in their interests. 18. Trustee Dealings with the Company. Subject to certain limitations imposed by the TIA, if applicable, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 19. No Recourse Against Others. A director, officer, employee, agent, representative, stockholder or equity holder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 20. Authentication. This Security shall not be valid until an authorized signatory of the Trustee manually signs the Trustee's Certificate of Authentication on the other side of this Security. 21. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). A-1-14 22. GOVERNING LAW. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THIS SECURITY. A-1-15 The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture which has in it the text of this Security in larger type. Requests may be made to: Horace Mann Educators Corporation 1 Horace Mann Plaza Springfield, IL 62715 Attention: General Counsel A-1-16 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ________________________________________________________________________ ________________________________________________________________________ (Insert assignee's soc. sec. or tax ID no.) ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint _____________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. CONVERSION NOTICE To convert this Security into Common Stock of the Company, check the box: [_] To convert only part of this Security, state the Principal Amount at Maturity to be converted (which must be $1,000 or an integral multiple of $1,000): $________________________________________________________________________ If you want the stock certificate made out in another person's name, fill in the form below: ________________________________________________________________________ ________________________________________________________________________ (Insert other person's soc. sec. or tax ID no.) ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ (Print or type other person's name, address and zip code) A-1-17 ________________________________________________________________________________ Date: _____________________ Your Signature:___________________________________ ________________________________________________________________________________ (Sign exactly as your name appears on the other side of this Security) A-1-18 EXHIBIT A-2 [Form of Face of Certificated Security] THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT, FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE OF THIS NOTE WAS $475.00 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY; THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, INCLUDING CASH INTEREST PAYABLE THROUGH MAY 14, 2007 TAXABLE AS ORIGINAL ISSUE DISCOUNT UNDER TREASURY REGULATION SECTION 1.1273-1, IS $2,378.67 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY; THE ISSUE DATE IS MAY 14, 2002; AND THE YIELD TO MATURITY FOR THE PURPOSES OF ACCRUING TAX ORIGINAL ISSUE DISCOUNT IS 6.90% PER ANNUM, CALCULATED ON A SEMIANNUAL BOND EQUIVALENT BASIS. [INCLUDE IF SECURITY IS A CERTIFICATED SECURITY TO BE HELD BY AN INSTITUTIONAL ACCREDITED INVESTOR--IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOLLOWING RESTRICTIONS.] THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER, SELL, OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER THE LATER OF (X) THE LAST DAY SECURITIES OF THIS ISSUE WERE ISSUED AND (Y) AND THE LAST DATE ON WHICH HORACE MANN EDUCATORS CORPORATION (THE "COMPANY" OR THE "ISSUER") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2),(3) OR (7) OF RULE 501 UNDER THE A-2-1 SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF ANY HOLDER THAT IS NOT AN AFFILIATE OF THE COMPANY AFTER THE RESALE RESTRICTION TERMINATION DATE. THE FOREGOING LEGEND MAY BE REMOVED FROM THIS SECURITY ON SATISFACTION OF THE CONDITIONS SPECIFIED IN THE INDENTURE. A-2-2 HORACE MANN EDUCATORS CORPORATION Senior Convertible Note due 2032 No. A-1 CUSIP: 440327 AF 1 Issue Date: May 14, 2002 Original Issue Discount: $525.00 Issue Price: $475.00 (for each $1,000 Principal (for each $1,000 Principal Amount at Maturity) Amount at Maturity) HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (herein called the "Company"), promises to pay to Cede & Co. or registered assigns, the Principal Amount at Maturity of THREE HUNDRED FIFTEEN MILLION EIGHT HUNDRED THOUSAND DOLLARS $315,800,000 on May 14, 2032. This Security shall not bear interest except as specified on the other side of this Security. Original Issue Discount will accrue as specified on the other side of this Security. This Security is convertible as specified on the other side of this Security. Additional provisions of this Security are set forth on the other side of this Security. Dated: May 14, 2002 HORACE MANN EDUCATORS CORPORATION By: Title: By: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION JPMORGAN CHASE BANK, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture. By:________________________ Authorized Officer A-2-3 [Form of Reverse Side of Certificated Security is the same as the Form of Reverse Side of Global Security] A-2-4 EXHIBIT B-1 Transfer Certificate In connection with any transfer of any of the Securities within the period prior to the expiration of the holding period applicable to the sales thereof under Rule 144(k) (or any successor provision) under the Securities Act of 1933, as amended (the "Securities Act"), the undersigned registered owner of this Security hereby certifies with respect to $__________ Principal Amount at Maturity of the above-captioned securities presented or surrendered on the date hereof (the "Surrendered Securities") for registration of transfer, or for exchange or conversion where the securities issuable upon such exchange or conversion are to be registered in a name other than that of the undersigned registered owner (each such transaction being a "transfer"), that such transfer complies with the restrictive legend set forth on the face of the Surrendered Securities for the reason checked below: [_] The transfer of the Surrendered Securities is made to the Company or any subsidiaries; or [_] The transfer of the Surrendered Securities complies with Rule 144A under the Securities Act; or [_] The transfer of the Surrendered Securities is to an institutional accredited investor, as described in Rule 501(a)(1), (2), (3) or (7) under the Securities Act; or The transfer of the Surrendered Securities is pursuant to an effective registration statement under the Securities Act; or The transfer of the Surrendered Securities is pursuant to an offshore transaction in accordance with Rule 904 under the Securities Act; or The transfer of the Surrendered Securities is pursuant to another available exemption from the registration requirement of the Securities Act. and unless the box below is checked, the undersigned confirms that, to the undersigned's knowledge, such Securities are not being transferred to an "affiliate" of the Company as defined in Rule 144 under the Securities Act (an "Affiliate"). The transferee is an Affiliate of the Company. DATE: __________________ _______________________________________________ Signature(s) (If the registered owner is a corporation, partnership or fiduciary, the title of the Person signing on behalf of such registered owner must be stated.) B-1-1 EXHIBIT B-2 Form of Letter to be Delivered by Accredited Investors Horace Mann Educators Corporation 1 Horace Mann Plaza Springfield, IL 62715 Attention: Chief Financial Officer JPMorgan Chase Bank 450 W. 33rd Street, 15th floor New York, NY 10001 Attention: Institutional Trust Services Dear Sirs: We are delivering this letter in connection with the proposed transfer of $_________ Principal Amount at Maturity of the Senior Convertible Notes due 2032 (the "Securities") issued by Horace Mann Educators Corporation (the "Company"), which are convertible into shares of the Company's Common Stock, $0.001 par value per share (the "Common Stock"). We hereby confirm that: (i) we are an "accredited investor" within the meaning of Rule 501(a)(1), (2) or (3) under the Securities Act of 1933, as amended (the "Securities Act"), or an entity in which all of the equity owners are accredited investors within the meaning of Rule 501(a)(1), (2) or (3) under the Securities Act (an "Institutional Accredited Investor"); (ii) the purchase of Securities by us is for our own account or for the account of one or more other Institutional Accredited Investors or as fiduciary for the account of one or more trusts, each of which is an "accredited investor" within the meaning of Rule 501(a)(7) under the Securities Act and for each of which we exercise sole investment discretion or (B) we are a "bank," within the meaning of Section 3(a)(2) of the Securities Act, or a "savings and loan association" or other institution described in Section 3(a)(5)(A) of the Securities Act that is acquiring Securities as fiduciary for the account of one or more institutions for which we exercise sole investment discretion; (iii) we will acquire Securities having a minimum principal amount at maturity of not less than $250,000 for our own account or for any separate account for which we are acting; B-2-1 (iv) we have such knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of purchasing Securities; and (v) we are not acquiring Securities with a view to distribution thereof or with any present intention of offering or selling Securities or the Common Stock issuable upon conversion thereof, except as permitted below; provided that the disposition of our property and property of any accounts for which we are acting as fiduciary shall remain at all times within our control. We understand that the Securities were originally offered and sold in a transaction not involving any public offering within the United States within the meaning of the Securities Act and that the Securities and the Common Stock issuable upon conversion thereof (the Securities and such Common Stock hereinafter referred to as the "Securities") have not been registered under the Securities Act, and we agree, on our own behalf and on behalf of each account for which we acquire any Securities, that if in the future we decide to resell or otherwise transfer such Securities prior to the date (the "Resale Restriction Termination Date") which is two years after the later of the last day the Securities of this issue were issued and the last date on which the Company or an affiliate of the Company was the owner of the Security, such Securities may be resold or otherwise transferred only (i) to Horace Mann Educators Corporation or any subsidiary thereof, or (ii) for as long as the Securities are eligible for resale pursuant to Rule 144A, to a person it reasonably believes is a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) that purchases for its own account or for the account of a qualified institutional buyer to which notice is given that the transfer is being made in reliance on Rule 144A, or (iii) to an Institutional Accredited Investor that is acquiring the Security for its own account, or for the account of such Institutional Accredited Investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, or (iv) pursuant to another available exemption from registration under the Securities Act (if applicable), or (v) pursuant to a registration statement which has been declared effective under the Securities Act and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction and in accordance with the legends set forth on the Securities. We further agree to provide any person purchasing any of the Securities from us other than pursuant to clause (v) above a notice advising such purchaser that resales of such securities are restricted as stated herein. We understand that the trustee or the transfer agent, as the case may be, for the Securities will not be required to accept for registration of transfer any Securities pursuant to (iii) or (iv) above except upon presentation of evidence satisfactory to the Company that the foregoing restrictions on transfer have been complied with. We further understand that any Securities will be in the form of definitive physical certificates and that such certificates will bear a legend reflecting the substance of this paragraph other than certificates representing Securities transferred pursuant to clause (v) above. We acknowledge that the Company, others and you will rely upon our confirmations, acknowledgments and agreements set forth herein, and we agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate and complete. B-2-2 THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. __________________________________ (Name of Purchaser) By: ______________________________ Name: Title: Address: B-2-3 EX-10.1 4 dex101.txt CREDIT AGREEMENT DATED AS OF MAY 29, 2002 Exhibit 10.1 CREDIT AGREEMENT dated as of May 29, 2002 among HORACE MANN EDUCATORS CORPORATION as the Borrower, VARIOUS FINANCIAL INSTITUTIONS, as the Lenders, and BANK OF AMERICA, N.A. as Administrative Agent TABLE OF CONTENTS ARTICLE I DEFINITIONS ............................................................. 1 SECTION 1.1 Definitions ........................................................ 1 SECTION 1.2 Use of Defined Terms ............................................... 14 SECTION 1.3 Cross References; Headings ......................................... 14 SECTION 1.4 Other Definitional Provisions ...................................... 14 ARTICLE II AMOUNT AND TERMS OF COMMITMENT .......................................... 14 SECTION 2.1 Revolving Loan Commitment .......................................... 14 SECTION 2.2 Types of Loans ..................................................... 16 SECTION 2.3 Borrowing Request .................................................. 16 SECTION 2.4 Funding of Borrowing ............................................... 16 ARTICLE III RECORDKEEPING; NOTE; PAYMENTS; SETOFF ................................... 16 SECTION 3.1 Evidence of Debt ................................................... 16 SECTION 3.2 Payment of the Loans ............................................... 17 SECTION 3.3 Making of Payments ................................................. 17 SECTION 3.4 Due Date Extension ................................................. 18 SECTION 3.5 Set-off ............................................................ 18 ARTICLE IV INTEREST; CONVERSION; EURODOLLAR LOANS .................................. 18 SECTION 4.1 Interest Rates ..................................................... 18 SECTION 4.2 Interest Payment Dates ............................................. 19 SECTION 4.3 Setting of Rates ................................................... 19 SECTION 4.4 Computation of Interest and Fees ................................... 19 SECTION 4.5 Continuation and Conversion Elections .............................. 19 SECTION 4.6 Funding ............................................................ 20 SECTION 4.7 Eurodollar Rate Lending Unlawful ................................... 20 SECTION 4.8 Eurodollar Deposits Unavailable .................................... 20 ARTICLE V FEES .................................................................... 21 SECTION 5.1 Payment of Fees .................................................... 21 SECTION 5.2 Non-Use Fee ........................................................ 21 SECTION 5.3 Compensation of Administrative Agent ............................... 21 ARTICLE VI INCREASED COSTS AND OTHER SPECIAL PROVISIONS ............................ 21 SECTION 6.1 Increased Costs .................................................... 21 SECTION 6.2 Payment for Credits ................................................ 22 SECTION 6.3 Certificate Requirements ........................................... 22
i SECTION 6.4 General Funding Losses........................................................ 22 SECTION 6.5 Discretion of Lender as to Manner of Funding.................................. 22 SECTION 6.6 Conclusiveness of Statements: Survival of Provisions.......................... 23 ARTICLE VII REPRESENTATIONS AND WARRANTIES..................................................... 23 SECTION 7.1 Due Organization, Authorization, etc.......................................... 23 SECTION 7.2 Statutory Financial Statements................................................ 24 SECTION 7.3 GAAP Financial Statements..................................................... 25 SECTION 7.4 Litigation and Contingent Liabilities......................................... 25 SECTION 7.5 Investment Company Act........................................................ 25 SECTION 7.6 Regulations T, U and X........................................................ 25 SECTION 7.7 Proceeds...................................................................... 26 SECTION 7.8 Insurance..................................................................... 26 SECTION 7.9 Accuracy of Information....................................................... 26 SECTION 7.10 Subsidiaries.................................................................. 26 SECTION 7.11 Insurance Licenses............................................................ 26 SECTION 7.12 Taxes......................................................................... 26 SECTION 7.13 Compliance with Laws.......................................................... 27 ARTICLE VIII COVENANTS.......................................................................... 27 SECTION 8.1 Affirmative Covenants......................................................... 27 SECTION 8.2 Negative Covenants............................................................ 32 ARTICLE IX CONDITIONS......................................................................... 34 SECTION 9.1 Conditions to Occurrence of the Effective Date................................ 34 SECTION 9.2 Conditions to All Borrowings.................................................. 35 ARTICLE X EVENTS OF DEFAULT AND THEIR EFFECT................................................. 36 SECTION 10.1 Events of Default............................................................. 36 SECTION 10.2 Effect of Event of Default.................................................... 38 ARTICLE XI THE ADMINISTRATIVE AGENT........................................................... 39 SECTION 11.1 Appointment and Authorization of Administrative Agent......................... 39 SECTION 11.2 Delegation of Duties.......................................................... 39 SECTION 11.3 Liability of Administrative Agent............................................. 39 SECTION 11.4 Reliance by Administrative Agent.............................................. 40 SECTION 11.5 Notice of Default............................................................. 40
ii SECTION 11.6 Credit Decision; Disclosure of Information by Administrative Agent............ 40 SECTION 11.7 Indemnification of Administrative Agent....................................... 41 SECTION 11.8 Administrative Agent in its Individual Capacity............................... 41 SECTION 11.9 Successor Administrative Agent................................................ 42 SECTION 11.10 Administrative Agent May File Proofs of Claim................................. 42 ARTICLE XII ASSIGNMENTS AND PARTICIPATIONS..................................................... 43 SECTION 12.1 Successors and Assigns........................................................ 43 SECTION 12.2 Assignments................................................................... 43 SECTION 12.3 Register...................................................................... 44 SECTION 12.4 Participations................................................................ 44 SECTION 12.5 Greater Payment............................................................... 45 SECTION 12.6 Pledge........................................................................ 45 SECTION 12.7 Definitions................................................................... 45 ARTICLE XIII GENERAL............................................................................ 46 SECTION 13.1 Waiver; Amendments............................................................ 46 SECTION 13.2 Confirmations................................................................. 46 SECTION 13.3 Notices and Other Communications; Facsimile Copies............................ 46 SECTION 13.4 Attorney Costs, Expenses and Taxes............................................ 47 SECTION 13.5 Indemnification by the Borrower............................................... 48 SECTION 13.6 Survival of Representations and Warranties.................................... 49 SECTION 13.7 GOVERNING LAW................................................................. 49 SECTION 13.8 JURY TRIAL.................................................................... 49 SECTION 13.9 Successors and Assigns........................................................ 49
iii SCHEDULES AND EXHIBITS SCHEDULE 2.1 Commitments SCHEDULE 7.1 Jurisdictions SCHEDULE 7.2(a) SAP Exceptions SCHEDULE 7.2(e) Adverse Changes and Dividends SCHEDULE 7.4 Litigation SCHEDULE 7.10 Subsidiaries SCHEDULE 7.11 Insurance Licenses SCHEDULE 7.12 Taxes SCHEDULE 13.3 Addresses EXHIBIT A Borrowing Request ((S)2.3) EXHIBIT B Note ((S)3.1) EXHIBIT C Continuation/Conversion Notice ((S)4.5) EXHIBIT D Compliance Certificate ((S)8.1.1(f)) EXHIBIT E Opinion of Counsel ((S)9.1.4) EXHIBIT F Assignment Agreement ((S)12.1.1) CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of May 29, 2002, is entered into by and among HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the "Borrower"), various financial institutions which are parties hereto (the "Lenders"), and BANK OF AMERICA, N.A., as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the Lenders have agreed to make available to the Borrower a revolving credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Definitions. When used herein the following terms shall have the following meanings: Administrative Agent shall mean (a) Bank of America, N.A., in its capacity as administrative agent for the Lenders, and (b) each other Person as shall have subsequently been appointed as the successor Administrative Agent pursuant to Section 11.9. Administrative Questionnaire means an administrative questionnaire in a form supplied by the Administrative Agent. Affiliate of any Person shall mean any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person (excluding any trustee under, or any committee with responsibility for administering, any Plan). A Person shall be deemed to be: (a) "controlled by" any other Person if such other Person possesses, directly or indirectly, power: (i) to vote 10% or more of the securities having at the time of any determination hereunder voting power for the election of directors of such Person; or (ii) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; or (b) "controlled by" or "under common control with" such other Person if such other Person is the executor, administrator, or other personal representative of such Person. Agent-Related Persons shall mean the Administrative Agent, together with its Affiliates, and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. Agreement shall mean this Credit Agreement as from time to time amended, modified, supplemented, restated, refunded or renewed and in effect. Annual Statement shall mean the annual financial statement of any Insurance Subsidiary as required to be filed with the insurance commissioner (or similar authority) of such Insurance Subsidiary's state of domicile, 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 the Annual Statement are based on the format promulgated by the NAIC for 2001 Annual Statements. 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 reported in the referenced item in the 2001 Annual Statement of such Insurance Subsidiary. Applicable Eurodollar Interest Rate Margin shall mean at any time, subject to Section 4.1(c), the applicable percentage per annum determined pursuant to the following table by reference to the higher public rating, if any, assigned to the Borrower's senior, unsecured long-term debt by Standard & Poor's Rating Group ("S&P") or Moody's Investor Service Inc. ("Moody's"), as the case may be: S&P/Moody's Rating Interest Rate Margin - -------------------------------------------------------------------------------- A/A2 or above 0.500 A-/A3 0.625 BBB+/Baa1 0.750 BBB/Baa2 1.000 BBB-/Baa3 or lower (or no rating) 1.250 - -------------------------------------------------------------------------------- Applicable Non-Use Fee Rate shall mean at any time, the applicable percentage per annum determined pursuant to the following table by reference to the higher public rating, if any, assigned to the Borrower's senior, unsecured long-term debt by S&P or Moody's, as the case may be: S&P/Moody's Rating Non-Use Fee Rate - -------------------------------------------------------------------------------- A/A2 or above 0.1000 A-/A3 0.1500 2 BBB+/Baa1 0.2000 BBB/Baa2 0.2500 BBB-/Baa3 or lower (or no rating) 0.300 - -------------------------------------------------------------------------------- Assignment and Assumption shall mean an Assignment and Assumption substantially in the form of Exhibit F. Attributable Indebtedness shall mean, on any date, (a) in respect of any capital lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a capital lease. Authorized Officers shall mean those officers of the Borrower whose signatures and incumbency shall have been certified to the Administrative Agent pursuant to Section 9.1.3. Bank of America shall mean Bank of America, N.A. Base Rate shall mean, for any day, a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% 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 such 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 shall mean any Loan which bears interest at or by reference to the Base Rate. Borrower is defined in the Preamble. Borrowing shall mean the Loans of a single Type and Interest Period made by the Lenders on any single specified day in accordance with Section 2.1. Borrowing Date shall mean any Business Day on which a Borrowing is made. Borrowing Request shall mean a loan request and certificate duly executed by two Authorized Officers of the Borrower substantially in the form of Exhibit A. Business Day shall mean any day other than a Saturday, Sunday or other day on which commercial banks in New York City or Chicago are authorized or required by law to close and, if the applicable Business Day relates to any Eurodollar Loan, shall mean such a day on which dealings are carried on in the applicable offshore dollar interbank market. 3 Capitalized Lease shall mean, as to any Person, any lease which is or should be capitalized on the balance sheet in accordance with GAAP, together with any other lease which is in substance a financing lease, including, without limitation, any lease under which (a) such Person has or will have an option to purchase the property subject thereto at a nominal amount or an amount less than a reasonable estimate of the fair market value of such property as of the date the lease is entered into or (b) the term of the lease approximates or exceeds the expected useful life of the property leased thereunder. Change in Control shall be deemed to have occurred if (a) there shall be consummated (i) any consolidation or merger of the Borrower in which the Borrower is not the continuing or surviving corporation, or pursuant to which shares of the Borrower's common stock would be converted into cash, securities or other property, other than a merger of the Borrower in which no Borrower shareholder's ownership percentage in the surviving corporation immediately after the merger is less than such shareholder's ownership percentage in the Borrower immediately prior to such merger by ten percent (10%) or more, or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Borrower; (b) the shareholders of the Borrower approve any plan or proposal for the liquidation or dissolution of the Borrower which is a part of a similar transaction; (c) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes, directly or indirectly, the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of securities of the Borrower that represent 51% or more of the combined voting power of the Borrower's then outstanding securities; or (d) a majority of the members of the Borrower's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated by the Borrower for election by its shareholders. Closing shall mean the execution and delivery of this Agreement by the parties hereto. Code shall mean the Internal Revenue Code of 1986, as amended and any successor statute of similar import, together with the regulations thereunder, as amended, reformed or otherwise modified and in effect from time to time. References to sections of the Code shall be construed to also refer to successor sections. Combined shall mean with reference to any group of two or more Persons and to any financial item (e.g., Statutory EBT, etc.), the amount obtained by aggregating the respective amounts of such financial item for all such Persons, without duplication. Commitment is defined in Section 2.1. Commitment Amount shall mean, on any date, the aggregate amount shown on Schedule 2.1 for all Lenders, as such amount may be reduced pursuant to Section 2.1.1 or 10.2 or increased pursuant to Section 2.1.2. Commitment Termination Date shall mean the earlier to occur of May 31, 2005 or the date on which any Commitment Termination Event occurs. 4 Commitment Termination Event shall mean (a) the occurrence of a Default described in Section 10.1.5 or (b) the occurrence and continuance of any other Event of Default and either (i) the Loans are declared to be due and payable pursuant to Section 10.2, or (ii) in the absence of such declaration, the Administrative Agent, acting at the direction of the Required Lenders, gives notice to the Borrower that the Commitments have been terminated. Compliance Certificate shall mean a certificate substantially in the form of Exhibit D but with such changes as the Administrative Agent may from time to time request for purposes of monitoring the Borrower's compliance herewith. Consolidated Debt shall mean the consolidated Debt of the Borrower and its consolidated Subsidiaries, including without limitation the principal amount of the Loans. Contingent Liability shall mean any agreement, undertaking or arrangement by which any Person (outside the ordinary course of business) guarantees, endorses, acts as surety for or otherwise becomes or is contingently liable for (by direct or indirect agreement, contingent or otherwise, to provide funds for payment by, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the debt, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or for the payment of dividends or other distributions upon the shares of any other Person or undertakes or agrees (contingently or otherwise) to purchase, repurchase, or otherwise acquire or become responsible for any Debt, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, or other financial condition of any other Person, or to make payment or transfer property to any other Person other than for fair value received; provided, however, that obligations of each of the Insurance Subsidiaries under insurance policies, annuities, or surety contracts issued by it or to which it is a party, reinsurance treaties, certificates or other agreements of each of the Insurance Subsidiaries which are entered into in the ordinary course of business (including security posted by each of the Insurance Subsidiaries in the ordinary course of its business to secure obligations thereunder) shall not be deemed to be Contingent Liabilities of such Insurance Subsidiary or the Borrower for the purposes of this Agreement. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the debt, obligation or other liability guaranteed or supported thereby. Continuation/Conversion Notice shall mean a notice of continuation or conversion duly executed by two Authorized Officers substantially in the form of Exhibit C. Contractual Obligation shall mean, relative to any Person, any obligation, commitment or undertaking under any agreement or other instrument to which such Person is a party or by which it or any of its property is bound or subject. Controlled Group shall mean the Borrower and any corporation, trade or business that is, along with the Borrower, a member of a controlled group of corporations or a controlled group of trades or businesses as described in sections 414(b) and 414(c), respectively, of the Code or in section 4001 of ERISA. 5 Debt shall mean, with respect to any Person, at any date, without duplication, (a) all obligations of such Person for borrowed money or in respect of loans or advances; (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations in respect of letters of credit which have been drawn but not reimbursed by the Person for whose account such letter of credit was issued, and bankers' acceptances issued for the account of such Person; (d) all obligations in respect of Capitalized Leases and Synthetic Lease Obligations of such Person; (e) all Hedging Obligations of such Person; (f) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services; (g) Debt of such Person secured by a Lien on property owned or being purchased by such Person (including Debt arising under conditional sales or other title retention agreements) whether or not such Debt is limited in recourse; (h) any Debt of another Person secured by a Lien on any assets of such first Person, whether or not such Debt is assumed by such first Person; (i) any Debt of a partnership in which such Person is a general partner; and (j) all Contingent Liabilities of such Person whether or not in connection with the foregoing. The amount of any net obligation under any Hedging Obligation on any date shall be deemed to be the Swap Termination Value thereof as of such date. The amount of any capital lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date. Default shall mean any Event of Default or any Unmatured Event of Default. Default Rate is defined in Section 4.1(c). Department is defined in Section 7.2(a). Dollar(s) and the sign "$" shall mean lawful money of the United States of America. Effective Date shall mean the first date when all of the conditions set forth in Article IX shall have been satisfied. Eligible Assignee is defined in Section 2.17. ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations promulgated thereunder and under the Code, in each case as in effect from time to time. References to sections of ERISA also refer to successor sections. Eurodollar Loan(s) shall mean any Loan bearing interest at a rate determined with reference to the Offshore Rate. Event of Default shall mean any of the events described in Section 10.1. Executive Officer shall mean, as to any Person, the president, the chief financial officer, the chief executive officer, the general counsel, the treasurer or the secretary. Federal Funds Rate shall mean, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the 6 Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank 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 (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent. Fiscal Quarter shall mean any quarter of a Fiscal Year. Fiscal Year shall mean any period of twelve consecutive calendar months ending on the last day of December. F.R.S. Board shall mean the Board of Governors of the Federal Reserve System (or any successor thereto). Funding Percentage shall mean for any Lender, the percentage set forth opposite the name of such Lender in Schedule 2.1. Future Interest Expense shall mean at any time the sum of (a) the consolidated projected interest expense on Consolidated Debt. For purposes of this definition, the projected interest expense with respect to any Debt shall be calculated by multiplying the outstanding principal amount of such Debt at the date of calculation by the annualized interest rate then applicable to such principal amount and subtracting therefrom, for each mandatory reduction of such principal that is scheduled to occur within such four Fiscal Quarters, the corresponding portion of such interest. GAAP shall mean generally accepted accounting principles in the United States of America as in effect from time to time. Governmental Authority shall mean any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. Hedging Obligations shall mean, with respect to any Person, the net liability of such Person under Swap Contracts. Included Taxes shall mean all taxes, duties or other similar charges imposed on a Lender including any interest or penalties thereon, except for any taxes, duties or similar charges imposed on the net income of such Lender by the jurisdiction under the laws of which such Lender is constituted, by the jurisdiction in which such Lender booked the Loans made pursuant to this Agreement, or by the jurisdiction in which such Lender's principal office is located, but including taxes, duties or similar charges including any interest or penalties thereon imposed by the United States by means of withholding at the source on payments of principal and interest on the Loans. Indemnified Liabilities is defined in Section 13.5. 7 Indemnified Parties is defined in Section 13.5. Insurance Code shall mean, with respect to any Insurance Subsidiary, the Insurance Code of such Insurance Subsidiary's 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 Policies shall mean policies purchased from insurance companies by any of the Borrower or its Subsidiaries, for its own account to insure against its own liability and property loss (including, without limitation, casualty, liability and workers' compensation insurance), other than Reinsurance Agreements and Surplus Relief Reinsurance Agreements. Insurance Subsidiary shall mean any Life Subsidiary or any P/C Subsidiary. Interest Coverage Ratio shall mean the ratio of (a) the combined dividends then permitted to be paid by the Insurance Subsidiaries to the Borrower under applicable law without approval of the Department to (b) Future Interest Expense for the following four Fiscal Quarters. Interest Period shall mean, relative to any Eurodollar Loan, the period which begins on (and includes) the date on which such Eurodollar Loan is made or continued as, or converted into, a Eurodollar Loan pursuant to Section 4.5 and, unless the maturity of such a Eurodollar Loan is accelerated, ends on (but excludes) the day which numerically corresponds to such date one, two, three or six months thereafter, as the Borrower may select in its relevant Borrowing Request or Continuation/Conversion Notice; provided, that: (a) if there exists no numerically corresponding day in such month, such Interest Period shall end on the last Business Day of such month; (b) if such Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next following Business Day (unless such next following Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the Business Day next preceding such numerically corresponding day); and (c) the Borrower shall not be permitted to select, and there shall not be applicable, any Interest Period that would end later than the maturity of the Loans. Lease Obligations shall mean, at any date, the rental commitments of any person under leases for real and/or personal property (including taxes, insurance, maintenance and similar expenses which any Person is obligated to pay under the terms of said leases) on such date, whether or not such obligations are reflected as liabilities or commitments on a balance sheet of such Person or in the notes thereto, excluding, however, obligations under Capitalized Leases. Lenders is defined in the Preamble. License(s) is defined in Section 7.13. 8 Lien shall mean, when used with respect to any Person, any interest in any real or personal property, asset or other right held, owned or being purchased or acquired by such Person for its own use, consumption or enjoyment which secures payment or performance of any obligation and shall include any mortgage, lien, pledge, encumbrance, charge, retained title of a conditional vendor or lessor, or other security agreement, mortgage, deed of trust, chattel mortgage, assignment, pledge, retention of title, financing or similar statement or notice, or other encumbrance arising as a matter of law, judicial process or otherwise. Life Subsidiary shall mean any Subsidiary of the Borrower that is engaged in the business of providing life insurance and/or annuities, and related services. Loan(s) is defined in Section 2.1. Loan Documents shall mean this Agreement, the Note, and all other agreements, instruments, certificates, documents, schedules or other written indicia relating to or delivered by the Borrower or any of its Subsidiaries in connection with any of the foregoing. Material Adverse Effect shall mean, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), a materially adverse effect on: (a) the assets, business, financial condition, operations or prospects of the Borrower or any Subsidiary; or (b) the ability of the Borrower or any Subsidiary to perform any of its payment or other material obligations under any of the Loan Documents. Moody's is defined in the definition of "Applicable Eurodollar Interest Rate Margin". Multiemployer Plan shall mean a "multiemployer plan" as defined in section 4001(a)(3) of ERISA, and to which the Borrower or any of the Subsidiaries is making, or is obligated to make, contributions, or has made, or has been obligated to make, contributions. NAIC shall mean the National Association of Insurance Commissioners, or any successor thereto. Net Worth means the consolidated net worth, calculated in accordance with GAAP, of the Borrower and its consolidated Subsidiaries, excluding unrealized gains and losses as calculated in accordance with FASB 115. Note is defined in Section 3.1. Obligations shall mean all obligations and liabilities of the Borrower and its Subsidiaries to the Administrative Agent or any of the Lenders, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, primary or secondary, joint or several, recourse or nonrecourse or now or hereafter existing or due or to become due, whether for principal, interest, fees, expenses, lease obligations, claims, indemnities or otherwise, under 9 or in connection with this Agreement or any other Loan Document and including any Hedging Obligations to the Administrative Agent or any of the Lenders. Offshore Rate shall mean for any Interest Period with respect to any Eurodollar Rate Loan, a rate per annum determined by the Administrative Agent pursuant to the following formula: Offshore Rate = Eurodollar Base Rate --------------------------------------------- 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Base Rate" means, for such Interest Period: (a) the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate that appears on the page of the Telerate screen (or any successor thereto) 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) if the rate referenced in the preceding clause (a) does not appear on such page or service or such page or service shall not be available, the rate per annum equal to the rate determined by the Administrative 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) if the rates referenced in the preceding clauses (a) and (b) are not available, the rate per annum determined by the Administrative Agent as the rate of interest at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by Bank of America and with a term equivalent to such Interest Period would be offered by Bank of America's London Branch to major banks in the London interbank eurodollar market at their request at approximately 4:00 p.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, carried out to five decimal places) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the F.R.S. Board 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 Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. 10 Ordinary Course Litigation is defined in Section 7.4. Participants is defined in Section 12.2.1. Participations is defined in Section 12.2.1. Payment Date shall mean (a) with respect to any Eurodollar Loan, the last day of each Interest Period with respect thereto and, if such Interest Period is in excess of three months, the day three months after the commencement of such Interest Period, and (b) with respect to any Base Rate Loan, the last Business Day of each month. Payor is defined in Section 11.6. PBGC shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions. P/C Subsidiary shall mean any Subsidiary of the Borrower that is engaged in the business of providing property and casualty insurance and related services. Person shall mean any natural person, corporation, limited liability company, partnership, firm, trust, association, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity. Plan shall mean any "employee pension benefit plan," as such term is defined in ERISA, which is subject to Title IV of ERISA (other than a "Multiemployer Plan"), and as to which any entity in the Controlled Group has or may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA for any time within the preceding five years or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. Regulatory Change shall mean, relative to any Lender: (a) any change in (or the adoption, implementation, phase-in or commencement of effectiveness of) any (i) United States federal or state law or foreign law applicable to such Lender; (ii) regulation, interpretation, directive, requirement or request applicable to such Lender of any court or governmental authority charged with the interpretation or administration of any law referred to in clause (a)(i) or of any fiscal, monetary or other authority having jurisdiction over such Lender; or (b) any change in the application to such Lender of any existing law, regulation, interpretation, directive, requirement or request referred to in clause (a)(i) or (a)(ii) above; in either case, occurring after the date hereof. 11 Reinsurance Agreements shall mean any agreement, contract, treaty, certificate or other arrangement (other than a Surplus Relief Reinsurance Agreement) whereby any Insurance Subsidiary agrees to transfer or cede to another insurer all or part of the liability assumed by such Insurance Subsidiary under a policy or policies of insurance reinsured by such Insurance Subsidiary. Required Lenders shall mean, at any time, Lenders having, in the aggregate, a Voting Percentage of 66% or more at such time. Required Payment is defined in Section 11.6. Requirement of Law for any Person shall mean the corporate charter and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule, ordinance or regulation or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. SAP shall mean, as to each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority) in such Insurance Subsidiary's state of domicile for the preparation of Annual Statements and other financial reports by insurance corporations of the same type as such Insurance Subsidiary. S & P is defined in the definition of "Applicable Eurodollar Interest Rate Margin." Statutory Carrying Value shall mean, as to any investment of any Insurance Subsidiary, the value of such investment as determined in accordance with SAP consistently applied. Statutory Financial Statements is defined in Section 7.2. Statutory Liabilities shall mean, as to any Person, as of any date, with respect to (a) any Life Subsidiary, the amount reported on page 3, line 28, column 1 of its Annual Statement, and (b) any P/C Subsidiary, the amount reported on page 3, line 21, column 1 of its Annual Statement; or an amount determined in a consistent manner for any date other than one as of which an Annual Statement is prepared. Subsidiary shall mean a corporation of which the indicated Person and/or its other Subsidiaries, individually or in the aggregate, own, directly or indirectly, such number of outstanding shares as have at the time of any determination hereunder more than 50% of the ordinary voting power. Unless otherwise specified, "Subsidiary" shall mean a Subsidiary of the Borrower. Surplus Relief Reinsurance Agreements shall mean any agreement whereby any Insurance Subsidiary assumes or cedes business under a reinsurance agreement that would be considered a "financing-type" reinsurance agreement and (a) with respect to any P/C Subsidiary, which is entered into solely for the purpose of affecting the income statement of such P/C Subsidiary as the same may be amended from time to time, and (b) with respect to any Life 12 Subsidiary, as determined in the Fourth Edition of the AICPA Audit Guide for Stock Life Insurance Companies on pp. 91-92 thereof as the same may be amended from time to time. Swap Contract shall mean (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a "Master Agreement"), including any such obligations or liabilities under any Master Agreement. Swap Termination Value shall mean, 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) determined as the mark-to-market value(s) for such Swap Contracts, 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 a Lender or any Affiliate of a Lender). Synthetic Lease Obligation shall mean the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment). 2001 Annual Statement is defined in Section 7.2(b). 2002 Quarterly Statement is defined in Section 7.2(b). Types of Loan -- see Section 2.2. The Types of Loans under this Agreement are as follows: Base Rate Loans and Eurodollar Loans. Unmatured Event of Default shall mean any condition or event, which, after notice or lapse of time or both, would constitute an Event of Default. Voting Percentage shall mean at any time, with respect to any Lender, the percentage calculated by dividing the aggregate principal amount of such Lender's Loans by the aggregate principal amount of all Lenders' Loans then outstanding or, if no Loans are outstanding, the Funding Percentage. 13 Welfare Plan shall mean any "employee welfare benefit plan" as such term is defined in ERISA, as to which the Borrower has any liability. SECTION 1.2 Use of Defined Terms. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the Schedules hereto, the Loan Documents, the Exhibits and any other communications delivered from time to time in connection with this Agreement. SECTION 1.3 Cross References; Headings. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement or in any of the Loan Documents shall refer to this Agreement or such Loan Document as a whole and not to any particular provision of this Agreement or such Loan Document. Section, Schedule and Exhibit references contained in this Agreement are references to Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified. Any reference in any Section or definition to any clause is, unless otherwise specified, to such clause of such Section or definition. The various headings in this Agreement and the Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such Loan Document or any provision hereof or thereof. SECTION 1.4 Other Definitional Provisions. Unless otherwise defined or the context otherwise requires, all financial and accounting terms used herein or in any of the Loan Documents or any certificate or other document made or delivered pursuant hereto shall be defined in accordance with GAAP or SAP, as the context may require. When used in this Agreement, the term "financial statements" shall include the notes and schedules thereto. In addition, when used herein, the terms "best knowledge of" or "to the best knowledge of" any Person shall mean matters within the actual knowledge of such Person (or an Executive Officer or general partner of such Person) or which should have been known by such Person after reasonable inquiry. ARTICLE II AMOUNT AND TERMS OF COMMITMENT SECTION 2.1 Revolving Loan Commitment. Upon and subject to the terms and conditions hereof, each of the Lenders severally and for itself agrees to make revolving loans (collectively called the "Loans" and individually called a "Loan") from time to time on any Business Day occurring prior to the Commitment Termination Date, in such Lender's Funding Percentage of the aggregate amount of the Borrowing requested by the Borrower to be made on such date; provided, that (i) the aggregate unpaid principal amount of all Loans from any single Lender shall not exceed the amount set forth opposite the name of such Lender on Schedule 2.1 and (ii) the aggregate unpaid principal amount of all Loans from all Lenders outstanding at any time shall not exceed the Commitment Amount. The Commitment of each Lender to make the Loans pursuant to this Section 2.1 is herein referred to as its "Commitment." 2.1.1 Voluntary Reduction of Commitment Amount. The Borrower may, from time to time on any Business Day, voluntarily reduce the unused amount of the Commitment Amount in whole or in part; provided, however, that (i) each such voluntary 14 reduction shall require at least two (2) Business Days' prior written notice to the Administrative Agent and shall be permanent, and (ii) each such voluntary reduction shall be in an aggregate minimum amount of $1,000,000 and an integral multiple of $100,000 (or, if less, the entire unused amount of the Commitment Amount). 2.1.2 Increase of Commitments. The Borrower may from time to time, by notice to the Administrative Agent, request that the aggregate Commitments be increased by an amount that will not result in the aggregate Commitments under this Agreement to exceed $35,000,000. 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 Borrower 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 Lender"), which may include any Lender, 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 Lender, if not already a Lender hereunder (i) shall extend a new Commitment of not less than $5,000,000, (ii) shall execute all such documentation as the Administrative Agent shall specify to evidence its status as a Lender hereunder and (iii) shall be consented to by the Administrative Agent. If (and only if) Lenders (including Augmenting Lenders) shall have agreed to increase their aggregate Commitments or to extend new Commitments in an aggregate amount not less than $5,000,000 in the aggregate, such increases and such new Commitments shall become effective on the date agreed to by the Borrower, the Augmenting Lenders and the Administrative Agent. Notwithstanding the foregoing, no increase in the aggregate Commitments (or in the Commitment of any Lender) shall become effective under this paragraph unless, on the date of such increase, the conditions set forth in Section 9.2 shall be satisfied (with all references in such paragraphs to a Loan being deemed to be references to such increase) and the Administrative Agent shall have received a certificate to that effect dated such date and executed by an Authorized Officer of the Borrower. Upon the effectiveness of any increase pursuant to this Section 2.1.2 of the aggregate Commitments and any resulting adjustment in the Funding Percentage, the Lenders and the Augmenting Lenders will purchase from each other and sell to each other outstanding Loans sufficient to cause the outstanding Loans of each Lender and Augmenting Lender to equal its Funding Percentage (as so adjusted) of the aggregate outstanding Loans. Such purchase and sale shall be made pursuant to Section 12.2 except that no minimum amount shall be required, no processing fee shall be charged and, if any Lender 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 Borrower shall reimburse such Lender the amount of such loss or expense. Each such Lender shall furnish the Borrower with a certificate setting forth the basis for determining the amount to be paid to it hereunder. SECTION 2.2 Types of Loans. The Loans shall be denominated as Base Rate Loans or Eurodollar Loans (each being herein called a "Type" of Loan), as the Borrower shall specify in the related Borrowing Request pursuant to Section 2.3 or Continuation/Conversion Notice pursuant to Section 4.5. Base Rate Loans and Eurodollar Loans may be outstanding at 15 the same time, provided that (a) in the case of Eurodollar Loans, not more than three (3) different Interest Periods shall be outstanding at any one time for all such Loans, and (b) the Borrower shall specify Types of Loans and Interest Periods such that no payment or prepayment of any principal on any Eurodollar Loan shall result in an interruption of any Interest Period. In the absence of instructions to the contrary in any Borrowing Request and in the absence of the delivery of any Continuation/Conversion Notice, the Borrower shall be deemed to have requested that any affected Loan be made or converted to a Base Rate Loan. SECTION 2.3 Borrowing Request. By delivering to the Agent a Borrowing Request at or before 9:00 a.m., Chicago time, on a Business Day, the Borrower may from time to time irrevocably request, on not less than two (2) Business Days' notice, that a Borrowing be made in an amount equal to all or any portion of the unused Commitment Amount (i.e., the Commitment Amount minus the aggregate amount of all outstanding Loans). SECTION 2.4 Funding of Borrowing. On each Borrowing Date, each Lender shall deposit with the Administrative Agent same day funds, at or before 10:00 a.m., Chicago time, in an amount equal to its Funding Percentage of the requested Borrowing. Such deposit shall be made to such account as the Administrative Agent shall specify. After timely receipt of such funds, the Administrative Agent shall, at or before 1:00 p.m., Chicago time, on the Borrowing Date, make such funds available to the Borrower by wire transfer in same day funds to such accounts of the Borrower as the Borrower shall have specified in writing. No Lender's obligation to make any portion of the Loans shall be affected by any other Lender's failure to make any portion of the Loans. ARTICLE III RECORDKEEPING; NOTE; PAYMENTS; SETOFF SECTION 3.1 Evidence of Debt. The Loans made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Loans made by the Lenders to the Borrower and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender made through the Administrative Agent, the Borrower shall execute and deliver to such Lender (through the Administrative Agent) a Note, which shall evidence such Lender's Loans in addition to such accounts or records. Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with respect thereto. SECTION 3.2 Payment of the Loans. 3.2.1 Required Payments. 16 (a) If at any time the aggregate outstanding principal amount of the Loans shall exceed the Commitment Amount in effect at such time, the Borrower shall make a principal repayment of the Loans in an amount equal to such excess. (b) The Borrower shall, immediately upon any acceleration of the maturity date of the Loans pursuant to Section 11.2, repay the Loans. 3.2.2 Voluntary Payments. The Borrower may, from time to time on any Business Day, make a voluntary payment, in whole or in part, of the outstanding principal amount of any Loans, subject to Section 3.3.3. 3.2.3 Conditions Applicable to all Payments. (a) Each payment of a portion of the Loans shall be made pro rata among Loans of the same Type and, if applicable, having the same Interest Period of all Lenders. (b) No payment of any Eurodollar Loan may be made on any day other than the last day of the Interest Period for such Loan. (c) All voluntary payments shall require at least three but no more than five Business Days' prior written notice to the Administrative Agent. (d) All voluntary partial payments shall be in an aggregate minimum amount of $1,000,000 and an integral multiple of $100,000. (e) All payments of principal of the Loans (in whole or in part) shall be accompanied by the payment of interest accrued on the principal amount being prepaid. SECTION 3.3 Making of Payments. All payments of principal of, or interest on, the Note and of all fees and other Obligations to be made by the Borrower pursuant to this Agreement shall be made by the Borrower without condition or deduction for any counterclaim, defense, recoupment or setoff to the Administrative Agent for the Administrative Agent's account or for the benefit of the Lenders, as applicable, in immediately available Dollars. All such payments shall be deposited to the Borrower's Account No. 74-50915 at Bank of America (or such other account as the Administrative Agent may from time to time specify), not later than 10:00 am., Chicago time, on the date due. The Administrative Agent shall have the authority to debit such account for the amount of any payments due in order to effect each such payment. Funds received after 11:30 a.m., Chicago time, shall be deemed to have been received by the Administrative Agent on the next following Business Day (unless such failure to receive funds in a timely fashion is due to the Administrative Agent's failure to debit the Borrower's account). SECTION 3.4 Due Date Extension. If any payment of principal or interest with respect to the Loans falls due on a day which is not a Business Day, then such due date shall be extended to the next following Business Day, and additional interest shall accrue and be payable for the period of such extension. SECTION 3.5 Set-off. The Borrower agrees that each of the Lenders, the Administrative Agent and any Participant shall have all rights of set-off provided by applicable 17 law, and in addition thereto, the Borrower agrees that at any time (a) any payment or amount owing by the Borrower under or in connection with this Agreement or the Loan Documents is then due or (b) any Unmatured Event of Default pursuant to Section 10.1.5 or Event of Default exists, each Lender, the Administrative Agent or any Participant may apply to the payment of such payment or other amount any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter with such Lender, the Administrative Agent or any Participant; provided, that, any proceeds or recoveries obtained by any such Lender, the Administrative Agent or any Participant from any such appropriation and application in excess of such entity's pro rata share of such payments or amounts shall be shared with the other Lenders, the Administrative Agent and the participants on a pro rata basis; provided, further however, no such set-off shall be undertaken by any Lender or Participant domiciled in or with respect to property located in California without the written consent of the Administrative Agent. ARTICLE IV INTEREST; CONVERSION; EURODOLLAR LOANS SECTION 4.1 Interest Rates. The Borrower shall pay interest on the unpaid principal amount of the Loans for the period commencing on the date of each such Loan until such Loan is paid in full, at the rates per annum specified below: (a) On the outstanding principal amount of the Loans maintained from time to time as Base Rate Loans, interest shall accrue at the Base Rate from time to time in effect; and (b) On the outstanding principal amount of each Loan maintained from time to time as a Eurodollar Loan, interest shall accrue at a rate per annum equal to the Offshore Rate from time to time in effect for the related Interest Period plus the Applicable Eurodollar Interest Rate Margin in effect from time to time; and (c) Notwithstanding the foregoing, (i) any amount past due shall bear interest at a rate per annum (the "Default Rate") equal to the Base Rate Loan from time to time in effect (but not less than the Base Rate as in effect at such occurrence date) plus 3.5% per annum, and (ii) upon the occurrence and during the continuation of any Event of Default, and after notice by the Administrative Agent to the Borrower of the Required Lenders' intent to apply the Default Rate of interest the outstanding principal amount of the Loans and any other monetary Obligations shall bear interest at the Default Rate. SECTION 4.2 Interest Payment Dates. Accrued interest on the Loans shall be paid on each Payment Date, commencing with the first such date following the Effective Date. After maturity, accrued interest on the Loans shall be payable on demand. SECTION 4.3 Setting of Rates. Interest rates hereunder shall be calculated from time to time by the Administrative Agent and each such calculation of an interest rate shall be conclusive and binding on the Borrower in the absence of manifest error. Any change in the Applicable Eurodollar Rate Margin resulting from a change in the Borrower's public ratings shall be effective on the date such public rating change is announced. 18 SECTION 4.4 Computation of Interest and Fees. Interest on Base Rate Loans, when based on the "prime rate," shall be computed on the basis of actual days elapsed and a year consisting of 365 or 366 days, as applicable. All other interest and fees shall be computed on the basis of actual days elapsed and a year consisting of 360 days. SECTION 4.5 Continuation and Conversion Elections. At the election of the Borrower pursuant to a Continuation/ Conversion Notice delivered to the Administrative Agent at or before 10:00 a.m., Chicago time, the Borrower may elect, from time to time on not less than three (3) Business Days' notice: (a) that all, or any portion, in an aggregate minimum amount of $1,000,000 and an integral multiple of $100,000, of the Loans be converted from Base Rate Loans into Eurodollar Loans; and (b) on the expiration of the Interest Period applicable to any Eurodollar Loans, that all, or any portion, in an aggregate minimum amount of $1,000,000 and an integral multiple of $100,000, of such Loans be continued as Eurodollar Loans or converted into Base Rate Loans; provided, however, that: (i) no portion of the outstanding principal amount of any Loan may be continued as, or be converted into, a Eurodollar Loan when any Default has occurred and is continuing; and (ii) no portion of the outstanding principal amount of any Loan may be made or continued as, or be converted into, a Eurodollar Loan if, after giving effect to such action, the Interest Period applicable thereto shall extend beyond the date of any mandatory payment of such Loan unless a sufficient principal amount of the Loans is being maintained as Base Rate Loans or as Eurodollar Loans having Interest Periods ending on or prior to the date of any such mandatory prepayment to permit such repayment to be applied in full to Base Rate Loans. SECTION 4.6 Funding. In the event the Borrower elects to obtain any portion of the Loans as Eurodollar Loans, or elects to convert any portion of the principal amount of any Base Rate Loan into a Eurodollar Loan, each Lender may, if it so elects, fulfill its obligation to make or continue any portion of the principal amount of the Loans as, or to convert any portion of the principal amount of any Loan into, a Eurodollar Loan in accordance with any election made by the Borrower by causing a foreign branch or Affiliate of such Lender or an international banking facility created by such Lender to make such Eurodollar Loan; provided, however, that in such event such Eurodollar Loan shall be deemed to have been made by such Lender for the purpose of all provisions of this Agreement, and the obligation of the Borrower to repay such Eurodollar Loan shall nevertheless be to such Lender and shall be deemed to be held by it, to the extent of such Eurodollar Loan, for the account of such foreign branch, Affiliate or international banking facility. 19 SECTION 4.7 Eurodollar Rate Lending Unlawful. If as the result of any Regulatory Change, any Lender shall determine (which determination shall be conclusive and binding on the Borrower) that it is unlawful for such Lender to make, continue, or maintain any Loan as, or to convert any Loan into, a Eurodollar Loan, the obligations of all Lenders to make, continue or maintain any portion of the principal amount of any Loan as, or to convert any Loan into, a Eurodollar Loan shall be, upon such determination (and telephonic notice thereof, confirmed in writing, to the Administrative Agent and the Borrower), forthwith suspended until such Lender shall notify the Administrative Agent that the circumstances causing such suspension no longer exist, and all Eurodollar Loans shall automatically convert into Base Rate Loans; provided, however, that each Lender shall take any reasonable actions available to it (including the designation of its lending office) consistent with legal and regulatory restrictions that will avoid the need for such suspension and will not, in the reasonable judgment of such Lender, be otherwise materially disadvantageous to the Lender. SECTION 4.8 Eurodollar Deposits Unavailable. If prior to the date on which all or any portion of the principal amount of any Loan is to be made or continued as, or be converted into, a Eurodollar Loan, the Administrative Agent shall have determined (and telephonic notice thereof, confirmed in writing, shall have been given to the Borrower and the Lenders) that: (a) Dollar deposits in the relevant amount and for the relevant Interest Period are not available to the Administrative Agent or any Lender in the interbank eurodollar market; or (b) by reason of circumstances affecting the interbank eurodollar market in Dollars, adequate means do not exist for ascertaining the interest rate applicable hereunder to such Eurodollar Loan; then, the obligations of all Lenders to make or continue any portion of the principal amount of any Loan as, or to convert any portion of any Loan into, Eurodollar Loans shall forthwith be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist; provided, however, that each Lender shall take any reasonable actions available to it (including the designation of its lending office) consistent with legal and regulatory restrictions that will avoid the need for such suspension and will not, in the reasonable judgment of such Lender, be otherwise materially disadvantageous to the Lender. ARTICLE V FEES SECTION 5.1 Payment of Fees. The Borrower agrees to pay the fees set forth in this Article V. Where such fees are paid to the Administrative Agent for the benefit of the Lenders, the Administrative Agent shall, upon receipt of any such fees, promptly transmit to each Lender such Lender's ratable portion of such fees. SECTION 5.2 Non-Use Fee. The Borrower agrees to pay to the Administrative Agent for the ratable benefit of the Lenders a fee for the period commencing on the Effective 20 Date and ending on the Commitment Termination Date, equal to the Applicable Non-Use Fee Rate in effect from time to time in each case applied to the daily average unused portion of the Commitment Amount from time to time. Accrued non-use fees shall be payable in arrears on the last day of each Fiscal Quarter of Borrower and on the Commitment Termination Date. SECTION 5.3 Compensation of Administrative Agent. The Borrower shall pay to the Administrative Agent such fees and other amounts as each shall agree to in writing with the Borrower from time to time. ARTICLE VI INCREASED COSTS AND OTHER SPECIAL PROVISIONS SECTION 6.1 Increased Costs. If, after the date hereof, any Regulatory Change, or compliance by the Administrative Agent or any Lender with any request or directive (whether or not having the force of law) of any Governmental Authority, shall subject the Administrative Agent or any Lender to any Included Tax or capital adequacy requirement with respect to, or shall otherwise increase the effective cost of the Loans or such Lender's obligation to make, issue or maintain the Loans (except for taxes, duties or similar charges including any interest or penalties thereon which do not constitute Included Taxes), or shall impose on a Lender any other condition, except with respect to taxes, duties or similar charges including any interest or penalties thereon which do not constitute Included Taxes, affecting the Loan, or such Lender's obligation to make the Loans and the result of any of the foregoing is to increase the cost to any Lender of making, issuing or maintaining the Loans, or to reduce the amount of, or any rate of return on, any sum received or receivable by such Lender under this Agreement or under the Note with respect thereto, then upon written notice of such occurrence to the Borrower by such Lender (which notice shall contain a statement setting forth a description of such occurrence and shall be signed by an authorized officer of such Lender), the Borrower shall pay directly to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or such reduction; provided, however, that each Lender shall take any reasonable actions available to it (including the designation of a different lending office) consistent with legal and regulatory restrictions that will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable judgment of such Lender, be otherwise materially disadvantageous to such Lender. SECTION 6.2 Payment for Credits. If the Borrower is required pursuant to Section 6.1 to pay and pays a Lender for any increased costs or any reduction of any rate of return, and if such Lender, in good faith, determines that it has received or been granted a credit against or relief or remission for or repayment of any tax paid or payable by it, it shall, to the extent that it could do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to the Borrower such amount as such Lender shall, in good faith, have determined to be attributable to such payment by the Borrower. SECTION 6.3 Certificate Requirements. Each Lender that is not an entity organized under the laws of the United States shall deliver to the Borrower (with a copy to the Administrative Agent) an accurate and complete original signed copy of an Internal Revenue Service Form W-8BEN or W-8ECI properly claiming complete exemption from withholding, 21 within thirty days of the signing of this Agreement, and shall promptly deliver such additional or supplemental forms thereafter as may be required in order to maintain the effectiveness and accuracy of such forms. In addition, each Lender shall deliver to the Borrower such other forms or documentation as the Borrower may reasonably request in order to comply with the United States tax laws. SECTION 6.4 General Funding Losses. The Borrower hereby agrees that upon demand by the Administrative Agent (which demand shall be accompanied by a statement signed by an authorized officer of the Administrative Agent setting forth the basis for the calculations of the amount being claimed) the Borrower will indemnify such Lender against any loss or expense which each Lender may sustain or incur as reasonably determined by such Lender in accordance with the provisions of this Section 6.4, as a result of any failure of the Borrower to borrow, continue, convert or repay any Loan on a date specified therefor in a notice (whether written or oral) of borrowing continuation, conversion or repayment pursuant to this Agreement. For the purposes of this Section 6.4 such loss or expense for each Lender shall include an amount equal to the excess, if any, of (a) its cost of obtaining in the interbank eurodollar market the funds for the Loans being repaid or not borrowed for the period from the date of such prepayment or failure to borrow to the last day of the then current Interest Period for such Loans (or, in the case of a failure to borrow, the Interest Period for such Loans that would have commenced on the date of such failure) over (b) the amount of interest that such Lender would have earned had it invested the entire amount of funds so prepaid or the entire amount of funds acquired to effect, fund or maintain the Loans not borrowed, at the Federal Funds Rate. For this purpose, all notices to a Lender or the Administrative Agent pursuant to this Agreement shall be deemed to be irrevocable. SECTION 6.5 Discretion of Lender as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or its portion of the Loans in any manner it sees fit; provided, however, that each Lender shall take any reasonable actions available to it (including the designation of its lending office) consistent with legal and regulatory restrictions that will avoid increased cost to the Borrower and will not, in the reasonable judgment of such Lender, be otherwise materially disadvantageous to the Lender. SECTION 6.6 Conclusiveness of Statements: Survival of Provisions. In making the determinations contemplated by this Article VI, the Administrative Agent or the Lenders may make such reasonable estimates, assumptions, allocations and the like that the Administrative Agent or the Lenders in good faith determine to be appropriate. Upon making any determination pursuant to this Article VI, the Administrative Agent shall provide the Borrower with a certificate signed by an authorized officer of the Administrative Agent setting forth any estimates, assumptions, allocations or other similar calculations made by the Administrative Agent in connection with such determination. Subject to the foregoing, determinations and statements of the Administrative Agent and the Lenders pursuant to this Article VI and any certificates delivered in connection therewith shall be conclusive absent manifest error. The provisions of this Article VI shall survive termination of this Agreement. 22 ARTICLE VII REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants to each Lender that: SECTION 7.1 Due Organization, Authorization, etc. Each of the Borrower and each Subsidiary (a) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (b) is duly qualified to do business and in good standing in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, which jurisdictions are set forth with respect to the Borrower and each Subsidiary on Schedule 7.1, (c) has the requisite corporate power and authority and the right to own and operate its properties, to lease the property it operates under lease, and to conduct its business as now and proposed to be conducted, and (d) has obtained all material licenses, permits, consents or approvals from or by, and has made all filings with, and given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct (including, without limitation, the consummation of the transactions contemplated by this Agreement) as to each of the foregoing except where the failure to do so would not have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. The execution, delivery and performance by the Borrower of this Agreement and the consummation of the transactions contemplated hereby and thereby are within its corporate powers and have been duly authorized by all necessary corporate action (including, without limitation, shareholder approval, if required). Each of the Borrower and its Subsidiaries has received all material governmental and other consents and approvals (if any shall be required) necessary for such execution, delivery and performance, and such execution, delivery and performance do not and will not contravene or conflict with, or create a Lien or right of termination or acceleration under, any Requirement of Law or Contractual Obligation binding upon the Borrower or such Subsidiaries. This Agreement and each of the Loan Documents is (or when executed and delivered will be) the legal, valid, and binding obligation of the Borrower enforceable against the Borrower in accordance with its respective terms; provided that the Borrower assumes for purposes of this Section 7.1 that this Agreement and the other Loan Documents have been validly executed and delivered by each of the parties thereto other than the Borrower. SECTION 7.2 Statutory Financial Statements. (a) The Annual Statement of each of the Insurance Subsidiaries (including, without limitation, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and Statutory Liabilities) as filed with the appropriate Governmental Authority of its state of domicile (the "Department") and delivered to each Lender prior to the execution and delivery of this Agreement, as of and for the 1997, 1998, 1999, 2000 and 2001 Fiscal Years, and as of and for the Fiscal Quarter ended March 31, 2002 (collectively, the "Statutory Financial Statements"), have been prepared in accordance with SAP applied on a consistent basis (except as noted therein). Each such Statutory Financial Statement was in material compliance with applicable law when filed. The Statutory Financial Statements fairly present the financial position, the results of operations, changes in equity and changes in financial position of each such Insurance Subsidiary as of and for the respective dates and periods indicated therein in accordance with 23 SAP applied on a consistent basis, except as set forth in the notes thereto or on Schedule 7.2(a). Except for liabilities and obligations, including, without limitation, reserves, policy and contract claims and Statutory Liabilities (all of which have been computed in accordance with SAP), disclosed or provided for in the Statutory Financial Statements, the Insurance Subsidiaries did not have, as of the respective dates of each of such financial statements, any material liabilities or obligations (whether absolute or contingent and whether due or to become due) which, in conformity with SAP, applied on a consistent basis, would have been required to be or should be disclosed or provided for in such financial statements. All books of account of each of the Insurance Subsidiaries fully and fairly disclose all of the transactions, properties, assets, investments, liabilities and obligations of such Insurance Subsidiary and all of such books of account are in the possession of each such Insurance Subsidiary and are true, correct and complete in all material respects. (b) The investments of Insurance Subsidiaries reflected in the Annual Statements filed with the respective Departments with respect to the 2001 Fiscal Year (the "2001 Annual Statement") and the March 31, 2002 Quarterly Statement (the "2002 Quarterly Statement") comply in all material respects with all applicable requirements of the Department with respect to each such Insurance Subsidiary as well as those of any other applicable jurisdiction relating to investments in respect of which it may invest its funds. (c) The provisions made by each Insurance Subsidiary in its 2001 Annual Statement and in its 2002 Quarterly Statement for reserves, policy and contract claims and Statutory Liabilities are in compliance in all material respects with the requirements of the applicable Department as well as those of any other applicable jurisdiction, and have been computed in accordance with SAP. (d) Marketable securities and short term investments reflected in the 2001 Annual Statement and in the 2002 Quarterly Statement of each Insurance Subsidiary are valued at cost, amortized cost or market value, as required by applicable law. (e) Except as set forth on Schedule 7.2(e), there has been no material adverse change in the business, assets, operations or financial condition of the Borrower or any Subsidiary which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole since December 31, 2001. SECTION 7.3 GAAP Financial Statements. (a) The Borrower has furnished to the Administrative Agent and each of the Lenders (i) a copy of the unaudited consolidated balance sheets of the Borrower and its Subsidiaries, and the balance sheet of the Borrower on an unconsolidated basis as of the close of such Fiscal Quarter and the related consolidated statements of income and cash flows for that portion of the Fiscal Year ending as of the close of such a Fiscal Quarter and (ii) a copy of the unaudited consolidated statement of Income of the Borrower and its Subsidiaries, and the statement of income of the Borrower on an unconsolidated basis, for such Fiscal Quarter, all prepared in accordance with GAAP (subject to normal year-end adjustments and except that footnote and schedule disclosures are abbreviated) which financial statements are complete and 24 correct and present fairly in accordance with GAAP (subject to normal year-end adjustments) consolidated or unconsolidated, as the case may be results of operations and cash flows of the Borrower as of the end of such Fiscal Quarter and the period then ended. (b) With respect to any representation and warranty which is deemed to be made after the date hereof by the Borrower, the balance sheet and statements of operations, of shareholders' equity and of cash flow, which as of such date shall most recently have been furnished by or on behalf of the Borrower to each Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby, shall have been prepared in accordance with GAAP consistently applied (except as disclosed therein), and shall present fairly the consolidated financial condition of the corporations covered thereby as at the dates thereof for the periods then ended, subject, in the case of quarterly financial statements, to normal year-end audit adjustments. SECTION 7.4 Litigation and Contingent Liabilities. as set forth (including estimates of the dollar amounts involved) in Schedule 7.4 hereto and (b) except for claims which are covered by Insurance Policies, coverage for which has not been denied in writing, or which relate to insurance policies or surety contracts issued by the Borrower or to which it is a party, reinsurance treaties, reinsurance certificates, or any other such agreements entered into by the Borrower in the ordinary course of business (referred to herein as "Ordinary Course Litigation"), no claim, litigation (including, without limitation, derivative actions), arbitration, governmental investigation or proceeding or inquiry is pending or threatened against the Borrower or any of its Subsidiaries (i) which would, if adversely determined, have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole or (ii) which relates to any of the transactions contemplated hereby, and there is no basis known to the Borrower for any of the foregoing. Other than any liability incident to such claims, litigation or proceedings, the Borrower has no material Contingent Liabilities not provided for or referred to in the financial statements delivered pursuant to Section 7.3. SECTION 7.5 Investment Company Act. Other than Horace Mann Investors, Inc., neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled by an investment company," within the meaning of the Investment Company Act of 1940, as amended. SECTION 7.6 Regulations T, U and X. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. None of the Borrower, any of its Subsidiaries or any Person acting on their behalf has taken or will take action to cause the execution, delivery or performance of this Agreement or the Note, the making or existence of the Loans or the use of proceeds of the Loans to violate Regulations T, U or X of the F.R.S. Board. SECTION 7.7 Proceeds. The proceeds of the Loans will be used for general corporate purposes. None of such proceeds will be used in violation of applicable law, and none of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any margin stock as defined in Regulation U of the F.R.S. Board. 25 SECTION 7.8 Insurance. The Borrower and its Subsidiaries maintain Insurance Policies to such extent and against such hazards and liabilities as is required by law or customarily maintained by prudent companies similarly situated. SECTION 7.9 Accuracy of Information. All factual written information furnished heretofore or contemporaneously herewith by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or the Lenders for purposes of or in connection with this Agreement or any of the transactions contemplated hereby, as supplemented to the date hereof, is and all other such factual written information hereafter furnished by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or the Lenders will be, true and accurate in every material respect on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information not misleading. SECTION 7.10 Subsidiaries. Schedule 7.10 contains a complete list of the Borrower's Subsidiaries. SECTION 7.11 Insurance Licenses. Except as set forth on Schedule 7.11, to the best of the Borrower's knowledge, no license (including, without limitation, licenses or certificates of authority from applicable insurance departments), permits or authorizations to transact insurance and reinsurance business (collectively, the "Licenses") is the subject of a proceeding for suspension or revocation or any similar proceedings, there is no sustainable basis for such a suspension or revocation, and no such suspension or revocation is threatened by any state insurance department. SECTION 7.12 Taxes. The Borrower and each of its Subsidiaries has filed all material tax returns that are required to be filed by it, and has paid or provided adequate reserves for the payment of all material taxes, including, without limitation, all payroll taxes and federal and state withholding taxes, and all assessments payable by it that have become due, other than those that are not yet delinquent or that are disclosed on Schedule 7.12 and are being contested in good faith by appropriate proceedings and with respect to which reserves have been established, and are being maintained, in accordance with GAAP. Except as set forth in Schedule 7.12, there is no ongoing audit or, to the Borrower's knowledge, other governmental investigation of the tax liability of the Borrower or any of its Subsidiaries and there is no unresolved claim by a taxing authority concerning the Borrower's or any such Subsidiary's tax liability, for any period for which returns have been filed or were due. As used in this Section 7.12, the term "taxes" includes all taxes of any nature whatsoever and however denominated, including, without limitation, excise, import, governmental fees, duties and all other charges, as well as additions to tax, penalties and interest thereon, imposed by any government or instrumentality, whether federal, state, local, foreign or other. SECTION 7.13 Compliance with Laws. Neither the Borrower nor any of its Subsidiaries is in violation of any law, ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental Authority, if the effect of such violation could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole and, to the best of the Borrower's knowledge, no such violation has been alleged and each of the Borrower and its Subsidiaries (a) has filed in a timely 26 manner all reports, documents and other materials required to be filed by it with any Governmental Authority, if such failure to so file could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole; and the information contained in each of such filings is true, correct and complete in all material respects and (b) has retained all records and documents required to be retained by it pursuant to any law, ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental Authority, if the failure to so retain such records and documents could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. ARTICLE VIII COVENANTS Until the Loans and all other Obligations are paid in full, and until the Commitment Termination Date, the Borrower agrees that, unless at any time the Required Lenders shall otherwise expressly consent in writing, it will: SECTION 8.1 Affirmative Covenants. 8.1.1 Reports, Certificates and Other Information. Furnish or cause to be furnished to the Administrative Agent and the Lenders: (a) GAAP Financial Statements: (i) Within 55 days after the close of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, a copy of its Form 10Q filed with the Securities and Exchange Commission and accompanied by the certification of the chief executive officer, chief financial officer or treasurer of the Borrower that the financial statements set forth therein are complete and correct and present fairly in accordance with GAAP (subject to normal year-end adjustments) the consolidated, or unconsolidated, as the case may be, results of operations and cash flows of the Borrower as at the end of such Fiscal Quarter and for the period then ended. (ii) Within 100 days after the close of each Fiscal Year, a copy of the annual audited consolidated financial statements of the Borrower and its Subsidiaries, consisting of consolidated balance sheets and consolidated statements of income and retained earnings and cash flows, setting forth in comparative form in each case the consolidated figures for the previous Fiscal Year, which financial statements shall be prepared in accordance with GAAP, certified without material qualification by the independent certified public accountants regularly retained by the Borrower, or any other firm of independent certified public accountants of recognized national standing selected by the Borrower and reasonably acceptable to the Required Lenders that all such financial statements are complete and correct and present fairly in accordance with GAAP the consolidated financial position and the consolidated results of 27 operations and cash flows of the Borrower and its Subsidiaries as at the end of such year and for the period then ended. (b) Tax Returns. If requested by the Administrative Agent, copies of all federal, state, local and foreign tax returns and reports in respect of income, franchise or other taxes on or measured by income (excluding sales, use or like taxes) filed by the Borrower or any of its Subsidiaries. (c) SAP Financial Statements: (i) Within 10 days after the applicable regulatory filing date for each of its Fiscal Quarters, but in any event within 55 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of each Insurance Subsidiary a copy of the Quarterly Statement of such Insurance Subsidiary for such Fiscal Quarter, all prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer of each Insurance Subsidiary that all such financial statements are complete and correct and present fairly in accordance with SAP the financial position of such Insurance Subsidiary for the periods then ended. (ii) Within 10 days after the applicable regulatory filing date for each of its Fiscal Years, but in any event within 65 days after the end of each Fiscal Year of each Insurance Subsidiary a copy of the Annual Statement of each Insurance Subsidiary for such Fiscal Year prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer of each Insurance Subsidiary that such financial statement is complete and correct and presents fairly in accordance with SAP the financial position of such Insurance Subsidiary for the period then ended. (iii) Within 10 days after the applicable regulatory filing date for each of its Fiscal Years, but in any event within 100 days after the close of each Fiscal Year of each Insurance Subsidiary a copy of each Insurance Subsidiary's "Statement of Actuarial Opinion" which is provided to the applicable Department (or equivalent information should the Department no longer require such a statement) as to the adequacy of loss reserves of such Insurance Subsidiary. Such opinion shall be in the format prescribed by the applicable Insurance Code. (d) Notice of Default, etc. Immediately after an Executive Officer of the Borrower knows or has reason to know of the existence of any Default, or any development or other information which would have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole, telephonic notice specifying the nature of such Default or development or information, including the anticipated effect thereof, which notice shall be promptly confirmed in writing within two (2) Business Days. (e) Other Information. The following certificates and other information related to the Borrower: 28 (i) Promptly after completion of each such item but in no event later than the first day of April of each Fiscal Year of the Borrower, a copy of the Borrower's (A) operating budget, (B) new business plans, if any, and (C) estimated quarterly Statutory EBT of the Insurance Subsidiaries for such Fiscal Year which, in the case of each of clause (A) and (B), are in the form approved by the Board of Directors of the Borrower. (ii) Within five (5) Business Days of receipt, a copy of any financial examination reports by a Governmental Authority with respect to the Insurance Subsidiaries relating to the insurance business of the Insurance Subsidiaries (when, and if, prepared); provided, the Borrower shall only be required to deliver any interim report hereunder at such time as Borrower has knowledge that a final report will not be issued and delivered to the Administrative Agent within 90 days of any such interim report. (iii) Copies of all Insurance Holding Company System Act filings with Governmental Authorities, with respect to any occurrence which might reasonably be expected to have a Material Adverse Effect, by the Borrower or any Subsidiary not later than five (5) Business Days after such filings are made, including, without limitation, filings which seek approval of Governmental Authorities with respect to transactions between the Borrower or such Subsidiary and its Affiliates. (iv) Within five (5) Business Days of such notice, notice of actual suspension, termination or revocation of any material License of the Insurance Subsidiaries by any Governmental Authority or of receipt of notice from any Governmental Authority notifying the Borrower of a hearing (which is not withdrawn within ten (10) days) relating to such a suspension, termination or revocation, including any request by a Governmental Authority which commits the Borrower to take, or refrain from taking, any action or which otherwise materially and adversely affects the authority of the Borrower to conduct its business. (v) Within five (5) Business Days of such notice, notice of any pending or threatened investigation or regulatory proceeding (other than routine periodic investigations or reviews) by any Governmental Authority concerning the business, practices or operations of the Borrower, including any agent or managing general agent thereof. (vi) Promptly, such additional financial and other information as the Administrative Agent may from time to time reasonably request. (vii) Promptly, notice of any actual or, to the best of the Borrower's knowledge, proposed material changes in the Insurance Code governing the investment or dividend practices of any Insurance Subsidiary. 29 (f) Compliance Certificates. Concurrently with the later to occur of delivery to the Administrative Agent of the GAAP financial statements and delivery to the Administrative Agent of the SAP financial statements under Sections 8.1.1(a) and 8.1.1(c), for each Fiscal Quarter and Fiscal Year of the Borrower, and at any other time no later than thirty (30) Business Days following a written request of the Administrative Agent, a duly completed Compliance Certificate, signed by the chief financial officer or treasurer of the Borrower, containing, among other things, a computation of, and showing compliance with, each of the applicable financial ratios and restrictions contained in Sections 8.2.1 through 8.2.3, and to the effect that, to the best of such officer's knowledge, as of such date no Default has occurred and is continuing. (g) Reports to SEC and to Shareholders. Promptly upon the filing or making thereof (i) copies of each filing and report made by the Borrower or any of its Subsidiaries with or to any securities exchange or the Securities and Exchange Commission and (ii) of each communication from the Borrower to shareholders generally; provided that only those items described in clauses (i) and (ii) of this Section 8.1.1(g) which are material to the interest of the Lenders hereunder shall be provided to the Administrative Agent and the Lenders hereunder. (h) Notice of Litigation, License and ERISA Matters. Upon learning of the occurrence of any of the following, written notice thereof, describing the same and the steps being taken by the Borrower with respect thereto: (i) the institution of, or any adverse determination in, any litigation, arbitration proceeding or governmental proceeding (including any Internal Revenue Service or Department of Labor proceeding with respect to any Plan or Welfare Plan) which could, if adversely determined, be reasonably expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole and which is not Ordinary Course Litigation, (ii) the failure of any Person in the Controlled Group to make a required contribution to any Plan if such failure is sufficient to give rise to a Lien under section 302(f)(1) of ERISA, (iii) the institution of any steps by any entity in the Controlled Group to withdraw from, or the institution of any steps by the Borrower or any other Person to terminate under a distress termination, any Plan or the taking of any action with respect to a Plan which could result in the requirement that the Borrower or any of its Subsidiaries furnish a bond or other security to such Plan, or the occurrence of any event with respect to any Plan which could result in the incurrence by the Borrower or any of its Subsidiaries of any material liability (other than a liability for contributions or premiums), fine or penalty, (iv) the commencement of any dispute which might lead to the modification, transfer, revocation, suspension or termination of this Agreement or any Loan Document or (v) any event which could be reasonably expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. (i) Other Information. From time to time such other information concerning the Borrower or any Subsidiary as the Administrative Agent may reasonably request. 8.1.2 Corporate Existence; Foreign Qualification. Do and cause to be done at all times all things necessary to (a) maintain and preserve the corporate existence of the 30 Borrower, (b) be, and ensure that each Subsidiary of the Borrower is, duly qualified to do business and be in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary, and (c) do or cause to be done all things necessary to preserve and keep in full force and effect the Borrower's corporate existence. 8.1.3 Books, Records and Inspections. (a) Maintain, and cause each of its Subsidiaries to maintain, materially complete and accurate books and records, (b) permit, and cause each of its Subsidiaries to permit, access at reasonable times by the Administrative Agent to its books and records, (c) permit, and cause each of its Subsidiaries to permit, the Administrative Agent or its designated representative to inspect at reasonable times its properties and operations, and (d) permit, and cause each of its Subsidiaries to permit, the Administrative Agent to discuss its business, operations and financial condition with its officers. 8.1.4 Insurance. Maintain, and cause each of its Subsidiaries to maintain, Insurance Policies to such extent and against such hazards and liabilities as is required by law or customarily maintained by prudent companies similarly situated. 8.1.5 Taxes and Liabilities. Pay, and cause each of its Subsidiaries to pay, when due all material taxes, assessments and other material liabilities except as contested in good faith and by appropriate proceedings with respect to which reserves have been established, and are being maintained, in accordance with GAAP if and so long as such contest could not reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. 8.1.6 Compliance with Laws. Comply, and cause each of its Subsidiaries to comply, (a) with all federal, state and local laws, rules and regulations related to its businesses (including, without limitation, the establishment of all insurance reserves required to be established under SAP and applicable laws restricting the investments of the Borrower), and (b) with all Contractual Obligations binding upon such entity, except where failure so to comply would not in the aggregate have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. 8.1.7 Conduct of Business. Engage on a consolidated basis with its Subsidiaries primarily in the same business in which the Borrower and its Subsidiaries are engaged on the date hereof. SECTION 8.2 Negative Covenants. From and after the Effective Date. 8.2.1 Consolidated Debt to Total Capitalization. Not permit the ratio of (a) the principal amount of Consolidated Debt to (b) the sum of (i) Net Worth plus (ii) Consolidated Debt to exceed 0.35 to 1.0 at any time prior to January 1, 2003, 0.325 to 1.0 at any time thereafter prior to January 1, 2004 or 0.30 to 1.0 at any time thereafter. 8.2.2 Risk Based Capital. Not permit (a) the adjusted surplus (as defined by the applicable Department's risk based capital guidelines) of any of the Insurance Subsidiary to be less than 175% of such Insurance Subsidiary's respective Company Action Level 31 (as defined by the applicable Department's risk based capital guidelines) as of the end of each Fiscal Year, (b) the adjusted surplus (as defined by the applicable Department's risk based capital guidelines) of the Life Subsidiaries on a Combined basis to be less than 250% of Company Action Level (as defined by the applicable Department's risk based capital guidelines) as of the end of each Fiscal Year or (c) the adjusted surplus (as defined in the applicable Department's risk based capital guidelines) of the P/C Subsidiaries on a Combined basis to be less than 250% of Company Action Level (as defined by the applicable Department's risk based capital guidelines), as of the end of each Fiscal Year. 8.2.3 Interest Coverage Ratio. Not permit the Interest Coverage Ratio as at any Fiscal Quarter end to be less than 4.0 to 1.0; provided that this Section 8.2.3 shall not be deemed breached if the Borrower shall apply to the applicable Department within 20 days of such Fiscal Quarter end for permission to pay a special dividend in an amount when added to the amount set forth in clause (a) of the definition of "Interest Coverage Ratio" would cause such ratio to be complied with, and such permission is granted within 45 days of such Fiscal Quarter end. 8.2.4 Mergers, Consolidations and Sales. Not, and not permit any of its Subsidiaries to, (a) merge or consolidate, or purchase or otherwise acquire all or substantially all of the assets or stock of any class of, or any partnership or joint venture interest in, any other Person, other than (i) the acquisition by Borrower of all or a portion of the capital stock of Horace Mann Life Insurance Company from Allegiance Life Insurance Company and (ii) mergers or acquisitions where the corporate existence of the Borrower is not affected by such merger or acquisition and, subsequent to such merger or acquisition, the Borrower is in compliance with all the provisions of this Agreement and no Default shall exist, or (b) sell, transfer, convey or lease all or any substantial part of its assets or sell or assign with or without recourse any receivables, other than any sale, transfer, conveyance or lease in the ordinary course of business. 8.2.5 Regulations T, U and X. Not, and not permit any of its Subsidiaries to, use or permit any proceeds of the Loans to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying margin stock, as defined in Regulation U of the F.R.S. Board. 8.2.6 Other Agreements. Not, and not permit any of its Subsidiaries to, enter into any agreement containing any provision which would be violated or breached by the performance of obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith. 8.2.7 Transactions with Affiliates. Not, and not permit any Subsidiary to, enter into, or cause, suffer or permit to exist, directly or indirectly, any arrangement, transaction or contract with any of its Affiliates unless such arrangement, transaction or contract is in the ordinary course of business, reasonably intended to satisfy the reasonable business requirements of the Borrower or such Subsidiary, and on terms and conditions at least as favorable to the Borrower or such Subsidiary as the terms and conditions which would apply in a similar arrangement, transaction or contract with a Person or entity not an Affiliate; provided that transactions between the Borrower and 32 any wholly-owned Subsidiary of the Borrower or between any wholly-owned Subsidiaries of the Borrower shall be excluded from the restrictions set forth in this Section 8.2.7. 8.2.8 Liens. Not, and not permit any of its Subsidiaries to, create or permit to exist any Lien with respect to any assets now or hereafter existing or acquired, except the following: (a) Liens for current taxes not delinquent or for taxes being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, (b) Liens arising in the ordinary course of business or by operation of law for sums being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, or for sums not due, and in either case not involving any deposits or advances for borrowed money or the deferred purchase price of property or services, (c) Liens in connection with the acquisition of fixed assets after the date hereof and attaching only to the property being acquired, (d) Liens incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, (e) mechanics', workers', materialmen's and other like Liens arising in the ordinary course of business in respect of obligations which are not delinquent or which are being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, and (f) other Liens securing Debt which Debt does not in the aggregate exceed $5,000,000; provided, however, that, no Lien shall be permitted to exist on the shares of stock of any of its Subsidiaries. ARTICLE IX CONDITIONS SECTION 9.1 Conditions to Occurrence of the Effective Date. The occurrence of the Effective Date shall be subject to receipt by the Administrative Agent of all of the following, each duly executed and dated the Effective Date (or such earlier date as shall be satisfactory to the Administrative Agent), each in form and substance satisfactory to the Administrative Agent (with sufficient copies for each Lender): 9.1.1 This Agreement and Certain Related Documents. This Agreement, the Note and such other Loan Documents as are required to be delivered by the terms of this Agreement. 9.1.2 Resolutions. Certified copies of resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance, respectively, of those documents and matters required of it with respect to this Agreement or the other Loan Documents. 9.1.3 Incumbency and Signatures. A certificate of an Authorized Officer certifying the names of the individual or individuals authorized to sign this Agreement and the other Loan Documents, together with a sample of the true signature of each such 33 individual. (The Lenders may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein.) 9.1.4 Opinion of Counsel. The opinion of the general counsel of the Borrower, addressed to the Administrative Agent and the Lenders, in the form of Exhibit E. 9.1.5 Charter and By-Laws of the Borrower. Copies of the corporate charter and by-laws of the Borrower certified by the Secretary of the Borrower. 9.1.6 Insurance Proceedings. Certificate of an Authorized Officer that there are no material insurance regulatory proceedings pending or threatened against the Borrower in any state. 9.1.7 Material Adverse Change Certificate. An officer's certificate, signed by an Authorized Officer, certifying that to such officer's best knowledge, since December 31, 2001, no event has occurred which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. 9.1.8 Payment of Existing Credit Agreement. Evidence satisfactory to the Administrative Agent that prior to or simultaneously with the initial Borrowing under this Agreement all obligations of the Borrower under that certain Credit Agreement dated as of December 31, 1996 among the Borrower, various financial institutions and Bank of America, as Administrative Agent, have been paid in full. 9.1.9 Other. Such other documents as the Administrative Agent may reasonably request. SECTION 9.2 Conditions to All Borrowings. The obligation of the Lenders to make all Loans shall be subject to the prior or concurrent satisfaction (in form and substance satisfactory to the Administrative Agent) of each of the conditions precedent set forth below: 9.2.1 No Default. No Default shall have occurred and be continuing or will result from the making of the Loans. 9.2.2 Warranties and Representations. (a) All warranties and representations contained in this Agreement (other than Section 7.4 except in the case of the initial Borrowing and except that as to Sections 7.1 and 7.10, Schedules 7.1 and 7.10 may be updated after the initial Borrowing by the Borrower by written notice to the Administrative Agent) shall be true and correct in all material respects as of the date of any Loan, with the same effect as though made on the date of and concurrently with the making of such Loan (except where such representation speaks as of specified date) and (b) all covenants contained herein and in such documents to be performed by each of the parties thereto (other than the Administrative Agent or the Lenders) prior to the date of any Loan shall have been performed. 9.2.3 Litigation. (a) No litigation (including, without limitation, derivative actions), arbitration, governmental investigation or proceeding or inquiry shall be, on the 34 date of any Loan, pending, or to the knowledge of the Borrower, threatened which seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or to obtain material relief as a result of, the transactions contemplated hereunder or, in the reasonable opinion of the Required Lenders, could be reasonably expected to be materially adverse to any of the parties to this Agreement and which is not Ordinary Course Litigation, and (b) in the reasonable opinion of the Required Lenders, no material adverse development shall have occurred in any litigation (including, without limitation, derivative actions), arbitration, government investigation or proceeding or inquiry disclosed in Schedule 7.4 which is likely to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. 9.2.4 Fees. The fees referred to in Article V which are due and payable on or prior to the Effective Date or the date of any Loan shall have been paid to the Administrative Agent, where applicable, for the benefit of the Lenders. 9.2.5 Borrowing Request. The Administrative Agent shall have received a Borrowing Request in form and substance acceptable to the Administrative Agent. ARTICLE X EVENTS OF DEFAULT AND THEIR EFFECT SECTION 10.1 Events of Default. Each of the following shall constitute an Event of Default under this Agreement: 10.1.1 Non-Payment of Loan. Default in the payment when due of any principal on the Loans. 10.1.2 Non-Payment of Interest, Fees, etc. Default, and continuance thereof for three (3) Business Days, in the payment when due of interest on the Loans or of any other amount payable hereunder or under the Loan Documents. 10.1.3 Non-Payment of Other Debt. (a) Default in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any other Debt of, or guaranteed by, the Borrower or any of its Subsidiaries if the aggregate amount of Debt of the Borrower and/or any of its Subsidiaries which is accelerated or due and payable, or which may be accelerated or otherwise become due and payable, by reason of such default or defaults is $10,000,000 or more, or (b) default in the performance or observance of any obligation or condition with respect to any such other Debt of, or guaranteed by, the Borrower and/or any of its Subsidiaries if the effect of such default or defaults is to accelerate the maturity of any such Debt of $10,000,000 or more in the aggregate or to permit the holder or holders of such Debt of $10,000,000 or more in the aggregate, or any trustee or agent for such holders, to cause such Debt to become due and payable prior to its expressed maturity. 10.1.4 Other Material Obligations. Except for obligations covered under other provisions of this Article X, default in the payment when due, or in the performance or observance of, any material obligation of, or material condition agreed to by, the 35 Borrower or any of its Subsidiaries with respect to any material purchase or Lease Obligation (except only to the extent that the existence of any such default is being contested by the Borrower in good faith and by appropriate proceedings and the Borrower has established, and is maintaining, adequate reserves therefor in accordance with GAAP) which default continues for a period of 30 days. 10.1.5 Bankruptcy, Insolvency, etc. (a) (i) The Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay, debts as they become due; or (ii) the Borrower applies for, consents to, or acquiesces in the appointment of, a trustee, receiver or other custodian or similar Person for the Borrower or any property of any thereof, or makes a general assignment for the benefit of creditors; or (iii) in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian or similar Person is appointed for the Borrower or for a substantial part of the property of any thereof, unless (A) the Borrower institutes appropriate proceedings to contest or discharge such appointment within 30 days and thereafter continuously and diligently prosecutes such proceedings and (B) such appointment is in fact discharged within 60 days of such appointment; or (iv) any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding is commenced in respect of the Borrower, unless (A) such case or proceeding is not commenced by the Borrower, (B) such case or proceeding is not consented to or acquiesced in by the Borrower, (C) the Borrower institutes appropriate proceedings to dismiss such case or proceeding within 30 days and thereafter continuously and diligently prosecutes such proceedings, and (D) such case or proceeding is in fact dismissed within 60 days after the commencement thereof; or (E) the Borrower takes any action to authorize, or in furtherance of, any of the foregoing; or (b) (i) there shall be commenced against any Insurance Subsidiary any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, supervision, conservatorship, liquidation, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, rehabilitation, conservation, supervision, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, obligations or liabilities, or (B) seeking appointment of a receiver, trustee, custodian, rehabilitator, conservator, supervisor, liquidator or other similar official for it or for all or any substantial part of its assets, in each case which (1) results in the entry of an order for relief or any such adjudication or appointment or (2) remains undismissed, undischarged or unbonded for a period of 60 days; or (ii) there shall be commenced against any of such Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iii) any of such Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause(b)(i) or (ii) above; or (iv) any Governmental Authority shall issue any order of conservation, supervision or any other order of like effect relating to any of such Subsidiaries. 36 10.1.6 Non-compliance With Certain Provisions. Failure of the Borrower to comply with the provisions of each of Sections 8.1.1(d), 8.1.1(h), 8.2.1 through 8.2.4, 8.2.7 or 8.2.8. 10.1.7 Non-compliance With Other Provisions. Failure by the Borrower to comply with or to perform any provision of this Agreement or the other Loan Documents (and not constituting an Event of Default under any of the other provisions of this Article X) and continuance of such failure for 30 days after notice thereof from the Administrative Agent to the Borrower. 10.1.8 Warranties and Representations. Any warranty or representation made by or on behalf of the Borrower or any Subsidiary herein is inaccurate or incorrect or is breached or false or misleading in any material respect as of the date such warranty or representation is made; or any schedule, certificate, financial statement, report, notice, or other instrument furnished by or on behalf of Borrower or any Subsidiary to the Administrative Agent or the Lenders is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified. 10.1.9 Employee Benefit Plans. A contribution failure occurs with respect to any Plan sufficient to give rise to a Lien against the Borrower or any of its Subsidiaries under section 302(f)(1) of ERISA (as in effect on the Effective Date); or withdrawal by one or more companies in the Controlled Group from one or more Multiemployer Plans to which it or they have an obligation to contribute and the withdrawal liability (without unaccrued interest) to multiemployer plans as a result of such withdrawal or withdrawals (including any outstanding withdrawal liability that the Controlled Group has incurred on the date of such withdrawal) is material. 10.1.10 Change in Control. A Change in Control occurs. 10.1.11 Litigation. (a) There shall be entered against the Borrower one or more judgments, awards or decrees, or orders of attachment, garnishment or any other writ, which exceed ten percent (10%) of Net Worth at any one time outstanding, excluding judgments, awards, decrees, orders or writs (i) for which there is insurance, but only to the extent there is actual insurance coverage, (ii) for which there is indemnification (upon terms and from creditworthy indemnitors which are satisfactory to Administrative Agent), but only to the extent there is actual indemnification, (iii) which have been in force for less than the applicable period for filing an appeal so long as execution is not levied thereunder (or in respect of which the Borrower or its appropriate Subsidiary shall at the time in good faith be prosecuting an appeal or proceeding for review and in respect of which a stay of execution or appropriate appeal bond shall have been obtained pending such appeal or review), (iv) which constitute Ordinary Course Litigation, or (v) which are reserved for, to the actual extent of reserves or (b) there has been a final judgment or final judgments for the payment of money exceeding, in the aggregate, ten percent (10%) of Net Worth rendered against the Borrower or any of its Subsidiaries by a court of competent jurisdiction and such judgment(s) remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days after such judgment(s) become final and nonappealable. 37 10.1.12 Change in Law. Any change is made in the Insurance Code which affects the dividend practices of any Insurance Subsidiary and which is reasonably likely to have a Material Adverse Effect on the ability of the Borrower to perform its obligations under the Agreement and such circumstances shall continue for 120 days. SECTION 10.2 Effect of Event of Default. If any Event of Default described in Section 10.1.5 shall occur, the Loans and the Note and all other Obligations shall become immediately due and payable, all without notice of any kind; and, in the case of any other Event of Default, the Administrative Agent may, and upon the written request of the Required Lenders shall, terminate the Commitments hereunder and declare all or any portion of the Loans and all or such portion of the Note and all other Obligations to be due and payable, whereupon the Commitment shall terminate and all or such portion of the Loans and all or such portion of the Note and all other Obligations shall become immediately due and payable, all without further notice of any kind. The Administrative Agent shall promptly advise the Borrower of any such declaration but failure to do so shall not impair the effect of such declaration. Notwithstanding the foregoing, the effect as an Event of Default of any event described in Section 10.1.1 may not be waived except by consent of all of the Lenders in writing. ARTICLE XI THE ADMINISTRATIVE AGENT SECTION 11.1 Appointment and Authorization of Administrative Agent. Each Lender hereby irrevocably appoints, designates and authorizes the Administrative 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 herein or in any other Loan Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or participant, 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 Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" herein and in the other Loan Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 11.2 Delegation of Duties. The Administrative 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 and other consultants or experts concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct. 38 SECTION 11.3 Liability of Administrative Agent. No Agent-Related Person shall (a) 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 in connection with its duties expressly set forth herein), or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation or warranty made by any Loan Party or any officer thereof, contained herein 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 Administrative 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 any Loan Party 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 Lender or participant 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 any Loan Party or any Affiliate thereof. SECTION 11.4 Reliance by Administrative Agent. (a) The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, electronic mail 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 any Loan Party), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under any Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders 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 Administrative 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 Lenders (or such greater number of Lenders as may be expressly required hereby in any instance) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lender. (b) For purposes of determining compliance with the conditions specified in Section 9.11, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed the date of Closing specifying its objection thereto. SECTION 11.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent for the account of the Lenders, unless the Administrative Agent shall have received 39 written notice from a Lender or the Borrower referring to this Agreement, describing such Default and stating that such notice is a "notice of default." The Administrative Agent will notify the Lenders of its receipt of any such notice. The Administrative Agent shall take such action with respect to such Default as may be directed by the Required Lenders in accordance with Article X; provided, however, that unless and until the Administrative Agent has received any such direction, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable or in the best interest of the Lenders. SECTION 11.6 Credit Decision; Disclosure of Information by Administrative Agent. Each Lender acknowledges that no Agent-Related Person has made any representation or warranty to it, and that no act by the Administrative Agent hereafter taken, including any consent to and acceptance of any assignment or review of the affairs of any Loan Party or any Affiliate thereof, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender as to any matter, including whether Agent-Related Persons have disclosed material information in their possession. Each Lender represents to the Administrative 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 Loan Parties and their respective Subsidiaries, and all applicable bank or other regulatory Laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Borrower hereunder. Each Lender 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 Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent herein, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of any of the Loan Parties or any of their respective Affiliates which may come into the possession of any Agent-Related Person. SECTION 11.7 Indemnification of Administrative Agent. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand each Agent-Related Person (to the extent not reimbursed by or on behalf of any Loan Party and without limiting the obligation of any Loan Party to do so), pro rata, and hold harmless each Agent-Related Person from and against any and all Indemnified Liabilities incurred by it; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities to the extent determined in a final, nonappealable judgment by a court of competent jurisdiction to have resulted from such Agent-Related Person's own gross negligence or willful misconduct; provided, however, that no action taken in accordance with the directions of the Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse the Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the 40 Administrative 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 Administrative Agent is not reimbursed for such expenses by or on behalf of the Borrower. The undertaking in this Section shall survive termination of the combined Commitments, the payment of all other Obligations and the resignation of the Administrative Agent. SECTION 11.8 Administrative Agent in its 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 each of the Loan Parties and their respective Affiliates as though Bank of America were not the Administrative Agent hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding any Loan Party or its Affiliates (including information that may be subject to confidentiality obligations in favor of such Loan Party or such Affiliate) and acknowledge that the Administrative 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 Lender and may exercise such rights and powers as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" include Bank of America in its individual capacity. SECTION 11.9 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 30 days' notice to the Lenders. If the Administrative Agent resigns under this Agreement, the Required Lenders shall appoint from among the Lenders a successor administrative agent for the Lenders, which successor administrative agent shall be consented to by the Borrower at all times other than during the existence of an Event of Default (which consent of the Borrower shall not be unreasonably withheld or delayed). If no successor administrative agent is appointed prior to the effective date of the resignation of the Administrative Agent, the Administrative Agent may appoint, after consulting with the Lenders and the Borrower, a successor administrative agent from among the Lenders. Upon the acceptance of its appointment as successor administrative agent hereunder, the Person acting as such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term "Administrative Agent shall mean such successor administrative agent and the retiring Administrative Agent's appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article XI and Sections 13.4 and 13.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If no successor administrative agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. SECTION 11.10 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, 41 adjustment, composition or other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise (a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Article V and Section 13.4 allowed in such judicial proceeding; and (b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Article V and Section 13.4. Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding. ARTICLE XII ASSIGNMENTS AND PARTICIPATIONS SECTION 12.1 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of Section 12.2, (ii) by way of participation in accordance with the provisions of Section 12.4, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 12.6 (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in 42 subsection (d) of this Section and, to the extent expressly contemplated hereby, the Indemnitees) any legal or equitable right, remedy or claim under or by reason of this Agreement. SECTION 12.2 Assignments. Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender's Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund (as defined in subsection (g) of this Section) with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if "Trade Date" is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loans or the Commitment assigned; (iii) any assignment of a Commitment must be approved by the Administrative Agent unless the Person that is the proposed assignee is itself a Lender (whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); and (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500. Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 6.1, 6.4, 13.4 and 13.5 with respect to facts and circumstances occurring prior to the effective date of such assignment). Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section. SECTION 12.3 Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agent's Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the 43 contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. SECTION 12.4 Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrower's Affiliates or Subsidiaries) (each, a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification requiring consent of all Lenders that directly affects such Participant. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 6.1 and 6.4 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 3.5 as though it were a Lender, provided such Participant agrees to be subject to Section 3.5 as though it were a Lender. SECTION 12.5 Greater Payment. A Participant shall not be entitled to receive any greater payment under Section 6.4 or 6.4 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Lender not organized in the United States shall not be entitled to the benefits of Section 6.1 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 6.4 as though it were a Lender. SECTION 12.6 Pledge. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. SECTION 12.7 Definitions. As used herein, the following terms have the following meanings: "Eligible Assignee" means (a) a Lender; (b) an Affiliate of a Lender; (c) an Approved Fund; and (d) any other Person (other than a natural person) approved by (i) the Administrative Agent, and (ii) unless an Event of Default has occurred and is continuing, the Borrower (each such approval not to be unreasonably withheld or 44 delayed); provided that notwithstanding the foregoing, "Eligible Assignee" shall not include the Borrower or any of the Borrower's Affiliates or Subsidiaries. "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. ARTICLE XIII GENERAL SECTION 13.1 Waiver; Amendments. No delay on the part of the Administrative Agent or any Lender or any holder of a Note or other Obligation in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the Note or any Loan Document shall in any event be effective unless the same shall be in writing and signed and delivered by the Borrower and the Required Lenders and acknowledged by the Administrative Agent and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Notwithstanding the foregoing, no amendment, modification, waiver or consent which would do any of the following shall be effective unless in writing and signed by the Borrower and each of the Lenders and acknowledged by the Administrative Agent: (a) extend the due date for, or reduce the amount of, any payment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or rate of interest on any Loan) or any fees; (b) change the definition of Required Lenders or subject any Lender to any additional obligations including, without limitation, any increase in the Commitment Amount; (c) waive any of the conditions precedent set forth in Article IX (other than Sections 9.1.5, 9.1.6, 9.1.7, and 9.1.8), or (d) amend this Section 13.1, Section 10.2 with regard to the waiver of an Event of Default under Section 10.1.1 or 13.9. Notwithstanding the foregoing, no provisions of Article XI shall be amended, modified or waived without the written consent the Administrative Agent. SECTION 13.2 Confirmations. The Borrower and the Administrative Agent (or any holder of a Note) agree from time to time, upon written request received by it from the other, to confirm to the other in writing the aggregate unpaid principal amount of the Loan then outstanding under such Note. SECTION 13.3 Notices and Other Communications; Facsimile Copies. (a) General. Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in in writing (including by facsimile transmission). All such written notices shall be mailed, faxed or delivered to the 45 applicable address, facsimile number or (subject to subsection (c) below) electronic mail address, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows: (i) if to the Borrower or the Administrative Agent, to the address, facsimile number, electronic mail address or telephone number specified for such Person on Schedule 13.3 or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the other parties; and (ii) if to any other Lender, to the address, facsimile number, electronic mail address or telephone number specified in its Administrative Questionnaire or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the Borrower and the Administrative Agent. All such notices and other communications shall be deemed to be given or made upon the earlier to occur of (i) actual receipt by the relevant party hereto and (ii) (A) if delivered by hand or by courier, when signed for by or on behalf of the relevant party hereto; (B) if delivered by mail, four Business Days after deposit in the mails, postage prepaid; (C) if delivered by facsimile, when sent and receipt has been confirmed by telephone; and (D) if delivered by electronic mail (which form of delivery is subject to the provisions of subsection (c) below), when delivered; provided, however, that notices and other communications to the Administrative Agent pursuant to Article II shall not be effective until actually received by such Person. In no event shall a voicemail message be effective as a notice, communication or confirmation hereunder. (b) Effectiveness of Facsimile Documents and Signatures. Loan Documents may be transmitted and/or signed by facsimile. The effectiveness of any such documents and signatures shall, subject to applicable Law, have the same force and effect as manually-signed originals and shall be binding on the Borrower, the Administrative Agent and the Lenders. The Administrative Agent may also require that any such documents and signatures be confirmed by a manually-signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature. (c) Limited Use of Electronic Mail. Electronic mail and Internet and intranet websites may be used only to distribute routine communications, such as financial statements and other information as provided in Section 8.1, and to distribute Loan Documents for execution by the parties thereto, and may not be used for any other purpose. (d) Reliance by Administrative Agent and Lenders. The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices (including telephonic Borrowing Requests and Continuation/Conversion Notices) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied 46 from any confirmation thereof. The Borrower shall indemnify each Agent-Related Person and each Lender from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording. SECTION 13.4 Attorney Costs, Expenses and Taxes. The Borrower agrees to pay or reimburse the Administrative Agent and each Lender for all costs and expenses incurred in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or the other Loan Documents (including all such costs and expenses incurred during any "workout" or restructuring in respect of the Obligations and during any legal proceeding, including any proceeding under any bankruptcy or insolvency laws), including all Attorney Costs. The foregoing costs and expenses shall include all search, filing, recording, title insurance and appraisal charges and fees and taxes related thereto, and other out-of-pocket expenses incurred by the Administrative Agent and the cost of independent public accountants and other outside experts retained by the Administrative Agent or any Lender. All amounts due under this Section 13.4 shall be payable within ten Business Days after demand therefor. The agreements in this Section shall survive the termination of the aggregate Commitments and repayment of all other Obligations. SECTION 13.5 Indemnification by the Borrower. Whether or not the transactions contemplated hereby are consummated, the Borrower shall indemnify and hold harmless each Agent-Related Person, each Lender and their respective Affiliates, directors, officers, employees, counsel, agents and attorneys-in-fact (collectively the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (a) the execution, delivery, enforcement, performance or administration of any Loan Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation of the transactions contemplated thereby, (b) any Commitment or Loan or the use or proposed use of the proceeds therefrom or (c) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. No Indemnitee shall be liable for any damages arising from the use by others of any information or other materials obtained through IntraLinks or other similar information transmission systems in connection with this Agreement, nor shall any Indemnitee have any liability for any indirect or consequential damages relating to this Agreement or any other Loan Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date). All amounts due under this Section 13.5 shall be payable within ten 47 Business Days after demand therefor. The agreements in this Section shall survive the resignation of the Administrative Agent, the replacement of any Lender, the termination of the aggregate Commitments and the repayment, satisfaction or discharge of all the other Obligations. SECTION 13.6 Survival of Representations and Warranties. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default at the time of any Loan, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied. SECTION 13.7 GOVERNING LAW. THIS AGREEMENT, THE LOAN DOCUMENTS AND THE NOTE SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. WHENEVER POSSIBLE EACH PROVISION OF THIS AGREEMENT SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY PROVISION OF THIS AGREEMENT SHALL BE PROHIBITED BY OR INVALID UNDER APPLICABLE LAW, SUCH PROVISION SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS AGREEMENT. ALL OBLIGATIONS OF THE BORROWER AND RIGHTS OF ANY LENDER EXPRESSED HEREIN OR IN THE LOAN DOCUMENTS SHALL BE IN ADDITION TO AND NOT IN LIMITATION OF THOSE PROVIDED BY APPLICABLE LAW OR IN ANY OTHER WRITTEN INSTRUMENT OR AGREEMENT RELATING TO ANY OF THE OBLIGATIONS. SECTION 13.8 JURY TRIAL. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS TO WHICH IT IS A PARTY, OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY LOAN DOCUMENTS, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. SECTION 13.9 Successors and Assigns. This Agreement shall be binding upon Borrower, the Administrative Agent, the Lenders and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Administrative Agent, the Lenders and their respective successors and assigns; provided, however, that the Borrower shall have no right to assign its rights or delegate its duties under this Agreement. This Agreement and the Loan Documents contain the entire agreement of the parties hereto with respect to the matters covered hereby. 48 Delivered at Chicago, Illinois, as of the day and year first above written. HORACE MANN EDUCATORS CORPORATION By: /s/ Peter H. Heckman Title: Executive V.P. & Chief Financial Officer By: /s/ Ann Caparros Title: Corporate Secretary & General Counsel BANK OF AMERICA, N.A., as Administrative Agent and Lender By: /s/ Debra Basler Title: Vice President SCHEDULE 2.1 COMMITMENTS Lender Commitment Bank of America, N.A. $25,000,000 SCHEDULE 7.1 * - Notes state of domicile A.12/K.2. (TIC redomesticated from Delaware to Illinois 12-23-88. HMIC redomesticated from Florida to Illinois 12-23-88.) CERTIFICATES OF AUTHORITY BY STATE AND DATE ISSUED
- ----------------------------------------------------------------------------------------------------------------------------------- STATE HMIC TIC HMP&CIC HMLIC ALIC HMEBCC HMSC ELICA =================================================================================================================================== Alabama 12-19-66 04-18-73 Pending 12-15-58 06-28-85 X - ----------------------------------------------------------------------------------------------------------------------------------- Alaska 01-31-64 03-26-73 12-22-87 02-02-62 03-09-01 X - ----------------------------------------------------------------------------------------------------------------------------------- Arizona 05-27-59 11-12-74 06-09-80 07-15-59 08-21-57 10-28-86 X 03-18-64* - ----------------------------------------------------------------------------------------------------------------------------------- Arkansas 01-31-64 10-06-77 11-19-75 05-06-50 09-13-88 X - ----------------------------------------------------------------------------------------------------------------------------------- California 01-31-64 03-25-65* 08-18-67 12-22-00 X - ----------------------------------------------------------------------------------------------------------------------------------- Colorado 06-05-64 09-05-73 11-13-81 11-02-56 12-31-84 12-04-87 X - ----------------------------------------------------------------------------------------------------------------------------------- Connecticut 06-28-74 11-18-99 11-18-99 11-20-78 11-25-86 X - ----------------------------------------------------------------------------------------------------------------------------------- Delaware 06-02-59 03-02-71 09-25-98 12-08-55 09-18-86 X - ----------------------------------------------------------------------------------------------------------------------------------- Dist. of Col. 08-20-59 01-30-73 05-01-97 12-03-65 pending X - ----------------------------------------------------------------------------------------------------------------------------------- Florida 12-23-63 08-19-76 07-16-62 08-15-66 11-07-85 X - ----------------------------------------------------------------------------------------------------------------------------------- Georgia 01-31-64 02-09-78 Pending 04-05-61 03-30-83 X - ----------------------------------------------------------------------------------------------------------------------------------- Hawaii 08-25-87 02-01-85 - ----------------------------------------------------------------------------------------------------------------------------------- Idaho 12-16-68 04-16-73 05-26-88 05-09-60 12-07-87 X - ----------------------------------------------------------------------------------------------------------------------------------- Illinois 01-31-64* 03-09-77* 04-25-75 08-09-49* 12-31-84* 10-19-79* 08-13-73* - ----------------------------------------------------------------------------------------------------------------------------------- Indiana 05-01-68 12-01-77 01-15-98 05-01-57 12-19-00 X - ----------------------------------------------------------------------------------------------------------------------------------- Iowa 12-29-64 05-04-73 11-26-74 08-01-52 05-15-85 X - ----------------------------------------------------------------------------------------------------------------------------------- Kansas 01-31-64 09-13-96 12/21/99 11-12-61 12-29-87 X - ----------------------------------------------------------------------------------------------------------------------------------- Kentucky 01-31-64 08-02-64 11-01-99 02-21-69 12-20-00 X - ----------------------------------------------------------------------------------------------------------------------------------- Louisiana 12-23-58 11-14-73 09-30-99 05-16-61 09-03-85 X - ----------------------------------------------------------------------------------------------------------------------------------- Maine 06-01-70 05-04-88 12-30-98 09-02-60 12-16-85 X - ----------------------------------------------------------------------------------------------------------------------------------- Maryland 01-10-68 10-29-91 03-31-98 06-26-56 12-16-85 X - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------------------------- STATE HMIC TIC HMP&CIC HMLIC ALIC HMEBCC HMSC ELICA ================================================================================================================= Massachusetts 10-25-68 02-12-81 09-09-68 pending X - ----------------------------------------------------------------------------------------------------------------- Michigan 03-19-59 12-14-77 02-23-99 10-27-59 12-21-00 X - ----------------------------------------------------------------------------------------------------------------- Minnesota 02-11-64 06-01-74 08-19-98 10-08-56 12-16-85 X - ----------------------------------------------------------------------------------------------------------------- Mississippi 06-01-58 07-19-74 06-01-97 10- -61 07-26-85 X - ----------------------------------------------------------------------------------------------------------------- Missouri 03-01-64 07-19-88 11-25-74 06-27-60 12-16-86 X - ----------------------------------------------------------------------------------------------------------------- Montana 01-31-64 06-01-73 02-26-88 01-02-54 12-16-87 X - ----------------------------------------------------------------------------------------------------------------- Nebraska 08-30-60 12-15-76 06-24-97 10-29-59 09-28-61 09-18-86 X - ----------------------------------------------------------------------------------------------------------------- Nevada 02-12-68 06-14-99 06-17-99 05-10-60 02-04-83 02-25-87 X - ----------------------------------------------------------------------------------------------------------------- New Hampshire 04-09-69 11-15-76 03-19-01 07-13-61 12-15-86 X - ----------------------------------------------------------------------------------------------------------------- New Jersey Cancelled 12-22-00 X 05-30-96 - ----------------------------------------------------------------------------------------------------------------- New Mexico 03-01-64 08-15-73 Pending 05-21-56 02-03-87 X - ----------------------------------------------------------------------------------------------------------------- New York 01-31-64 Pending 03-27-00 pending X - ----------------------------------------------------------------------------------------------------------------- North Carolina 10-18-68 07-01-74 03-05-98 07-10-59 04-21-83 X - ----------------------------------------------------------------------------------------------------------------- North Dakota 05-08-62 03-22-73 06-21-88 05-29-62 09-23-86 X - ----------------------------------------------------------------------------------------------------------------- Ohio 02-07-64 12-03-84 12-31-96 12-02-59 10-09-84 12-28-00 X - ----------------------------------------------------------------------------------------------------------------- Oklahoma 03-01-68 11-25-74 11-07-74 12-07-60 08-02-66 12-07-87 X - ----------------------------------------------------------------------------------------------------------------- Oregon 07-15-70 09-01-73 11-15-74 11-01-53 06-05-57 12-08-87 X - ----------------------------------------------------------------------------------------------------------------- Pennsylvania 12-29-63 04-16-81 12-20-99 09-01-49 01-09-01 X - ----------------------------------------------------------------------------------------------------------------- Rhode Island 01-23-70 12-13-73 01-12-98 09-05-61 11-24-86 09-10-73 - ----------------------------------------------------------------------------------------------------------------- South Carolina 10-02-58 02-08-74 05-04-82 08-14-61 09-06-83 X - ----------------------------------------------------------------------------------------------------------------- South Dakota 05-01-62 01-22-74 09-14-88 08-03-53 10-23-86 X - ----------------------------------------------------------------------------------------------------------------- Tennessee 01-31-64 09-07-77 11-19-97 03-28-56 01-14-83 X - ----------------------------------------------------------------------------------------------------------------- Texas 01-31-64 12-29-78 05-29-75 07-14-60 06-26-68 08-02-85 09-10-73 - -----------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------ STATE HMIC TIC HMP&CIC HMLIC ALIC HMEBCC HMSC ELICA ====================================================================================================== Utah 03-01-64 06-14-73 04-05-88 11-22-55 12-20-00 X - ------------------------------------------------------------------------------------------------------ Vermont 10-01-68 08-25-99 08-25-97 04-18-56 12-19-00 X - ------------------------------------------------------------------------------------------------------ Virginia 02-03-64 03-19-91 03-30-99 04-18-56 06-21-83 X - ------------------------------------------------------------------------------------------------------ Washington 02-10-64 12-28-73 12-31-98 11-13-58 09-20-57 12-24-87 X - ------------------------------------------------------------------------------------------------------ West Virginia 01-23-64 10-23-89 03-29-99 12-28-60 08-08-85 X - ------------------------------------------------------------------------------------------------------ Wisconsin 01-31-64 09-14-73 06-27-74 11-22-68 08-01-85 X - ------------------------------------------------------------------------------------------------------ Wyoming 12-24-58 07-23-87 01-18-88 03-24-53 12-10-87 X - ------------------------------------------------------------------------------------------------------ Puerto Rico 08-15-00 - ------------------------------------------------------------------------------------------------------
HMIC: Horace Mann Insurance Company TIC: Teachers Insurance Company HMP&CIC: Horace Mann Property & Casualty Insurance Company HMLIC: Horace Mann Life Insurance Company ALIC: Allegiance Life Insurance Company HMEBCC: Horace Mann Educator Benefits Consulting Corporation HMSC: Horace Mann Service Corporation ELICA: Educators Life Insurance Company of America Page 4 SCHEDULE 7.2 (a) SAP EXCEPTIONS None Page 5 SCHEDULE 7.2 (e) ADVERSE CHANGES AND DIVIDENDS None SCHEDULE 7.4 LITIGATION None SCHEDULE 7.10 SUBSIDIARIES AIC Acquisition Corporation Allegiance Life Insurance Company Association & Consumer Marketing Services Corp. Educators Life Insurance Company of America Horace Mann Balanced Fund, Inc. Horace Mann Equity Fund, Inc. Horace Mann Investment Fund, Inc. Horace Mann Short-Term Fund, Inc. Horace Mann Insurance Company Horace Mann Investors, Inc. Horace Mann Life Insurance Company Horace Mann Property & Casualty Insurance Company Horace Mann Service Corporation Senior Marketing Insurance Service Corporation Teachers Insurance Company Well-Care, Inc. SCHEDULE 7.11 INSURANCE COMPANY LICENSES Property & Casualty State Lines Authorized Subsidiary Horace Mann Insurance Alabama Property; Miscellaneous Casualty, Company excluding Official Surety Bonds. Alaska Property (as 21.12.060); Casualty (as 21.12.070) All Clauses (1-14); Surety (as 21.12.080); Marine, Wet Marine & Transportation (as 21.12.090). Arizona Casualty without Worker's Compensation; Marine and Transportation; Property; Vehicle. Arkansas Property; Marine; Casualty; Workmen's Compensation California Fire; Marine; Plate Glass; Liability; Boiler and Machinery; Burglary; Sprinkler; Automobile; and Miscellaneous. Colorado (21) Plate Glass; (22) Steam Boiler, Machinery; (23) Burglary and Theft; (24) Fidelity and Surety; (25) Motor Vehicle-Full Coverage; (26) Worker's Compensation; (27) Liability; (28) Personal Property Floaters; (41) Fire & Lighting; (42) Extended Coverage; (44) Earthquake; (46) Aircraft; (47) Inland Marine; (48) Ocean Marine; (54) Homeowners Multiple Peril; (55) Commercial Multiple Peril; (56) Farm Owners Multiple Peril. Connecticut Fire, Extended Coverage and Other Allied Lines; Homeowners Multiple Peril; Inland Marine; Auto Liability (B.I. and P.D.); Auto Physical Damage; Reinsurance. Delaware Property; Marine & Transportation; Casualty, including: Vehicle, Liability, Burglary & Theft, Personal Property Floater, Glass, Boiler & Machinery, Leakage & Fire Extinguisher Equipment, Elevator, Livestock, and Miscellaneous. District of (1) Fire; (16) Worker's Compensation; Columbia (17) Other Liability; (19.2) Other Private Passenger Auto; (19.4) Other Commercial Auto Liability; (2.1) Allied Lines; (21.1) Private Passenger Auto Physical Damage; (21.2) Commercial Auto Physical Damage; (22) Aircraft (all perils); (23) Fidelity; (24) Surety; (25) Glass; (26) Burglary and Theft; (27) Boiler and Machinery; (3) Farmowners Multiple Peril; (4) Homeowners Multiple Peril; (5.1) Commercial Multiple Peril; (8) Ocean Marine; (9) Inland Marine; (PC) Property and Casualty. Florida 010 Fire; 020 Allied Lines; 040 Homeowners Multi Peril; 050 Commercial Multi Peril; 080 Ocean Marine; 090 Inland Marine; 170 Other Liability; 192 Auto Casualty; 211 Ppa Physical Damage; 220 Aircraft; 230 Fidelity; 240 Surety; 450 Accident and Health; 540 Mobile Home Multi Peril. Georgia Property; Marine and Transportation; Casualty (excluding Worker's Compensation). Idaho Property; Marine & Transportation; Casualty - excluding Workers' Compensation; Surety. Illinois Casualty, Fidelity, Surety, as provided in Clauses (a), (b), (c), (d), (e), (f), (g), (h), (i), (j) of Class 2 and Fire and Marine as provided in Clauses (a), (b), (c), (d), (e), (f), (g), (h) of Class 3 in accordance with 215 ILCS 5/4. Indiana Multi Line Property and Casualty as provided in Class II (a) (b) (c) (e) (f) (g) (h) (i) (j) (l) and Class III (a) (b) (c) (d) in accordance with IC 27-1-5-1. Iowa Fire; Extended coverage; Other allied lines; Homeowners multiple peril 10 (Inc. B.I.); Commercial multiple peril; Earthquake; Growing crops; Ocean marine; Inland marine; Accident only (Individual); Accident and health (Individual); Hospital and Medical Expense (Individual); Group Accident and Health; Non-cancellable Accident and Health; Workers' Compensation; Liability other than Auto (B.I.); Liability other than Auto (P.D.); Auto Liability (B.I.); Auto Liability (P.D.); Auto Physical Damage; Aircraft Physical Damage; Fidelity; Surety; Glass; Burglary and Theft; Boiler and Machinery. Kansas Fire; Windstorm & Hail; Extended Coverage; Sprinkler Leakage; Business Interruption; Inland Marine; Automobile Physical Damage; Homeowners Policies; Accident & Health; Automobile Liability; General Liability; Glass; Burglary; Theft & Robbery; Malpractice Liability; Aircraft Liability. Kentucky Multiple Line - Property, Casualty, Marine and Transportation. Louisiana Vehicle; Liability; Workmen's Compensation; Burglary and Forgery; Glass; Fire and Extended Coverage; Steam Boiler and Sprinkler Leakage; Marine and Transportation (Inland Marine); Miscellaneous. Maine Fire; Allied Lines; Homeowners Multiple Peril; Inland Marine; Earthquake; Other Liability; Auto Liability; Auto Physical Damage. Maryland Workers' Compensation - Sections 1- 101(k), 19-101, 19-402; Casualty (not including Vehicle Liability, Mortgage Guaranty & Workers' Compensation) - Section 1-101(k); Health - Section 1-101(q); Property and Marine (excluding Wet Marine and Transportation) - Section 1-101(ee); Surety - Section 1-101(mm); Vehicle Liability - Sections 1-101 (k), 19-101, 11 19-502, 19-503, 19-504. Massachusetts Fire; Burglary; Robbery and Theft; Repair - Replacement; Inland Marine Only; Liability other than Auto; Auto Liability; Glass;; Water Damage and Sprinkler Leakage. Michigan Disability; Property; Ocean Marine; Inland Marine; Automobile Insurance - limited; Casualty: Steam Boiler, Flywheel & Machinery; Casualty: Automobile; Casualty: Workers' Compensation; Casualty: Liability; Casualty: Plate Glass; Casualty: Sprinkler and Water Damage; Casualty: Burglary and Theft; Casualty: Livestock; Casualty: Malpractice; Disability coverage supplemental to Auto Insurance; Surety & Fidelity in accordance with Sections 606, 610, 614, 616, 620, 624, 625 and 628 of Chapter 6 of P.A. 218. Minnesota Property, Liability, Accident and Health, Surety and Casualty as specified in Minnesota Statutes, Section 60A.06, Subdivision 1, Clauses 1, 2A, 2B, 3, 5A, 5B, 6, 8, 9A, 9B, 9C, 9D, 12, 13, 14. Mississippi (01) Fire and Allied Lines; (03) Casualty/Liability; (04) Fidelity; (05) Surety; (06) Workers' Compensation; (07) Boiler and Machinery;; (08) Plate Glass; (13) Inland Marine; (14) Ocean Marine; (26) Auto Phy Damage/Liability; (30 Home/Form Owners. Missouri (B1) Property; (B2) Liability; (B3) Fidelity and Surety; (B5) Miscellaneous. Montana Property; Casualty; Marine. Nebraska 05 Property Insurance; 07 Glass Insurance; 08 Burglary and Theft Insurance; 09 Boiler and Machinery Insurance; 10 Liability Insurance; 11 Worker's Comp & Employer's Liability; 12 Vehicle Insurance; 13 12 Fidelity Insurance; 14 Surety Insurance; and18 Marine Insurance as described in Section 44-201 of the Statutes of Nebraska. Nevada Property; Casualty; Surety. New Hampshire Property & Casualty lines in accordance with paragraphs I, II, V, VI of State Statutes. New Mexico General Casualty and/or Surety; Property and/or Marine & Transportation; and Vehicle Insurance. New York Accident and health, fire, miscellaneous property, water damage, burglary and theft, glass boiler and machinery, collision, personal injury liability, property damage liability, workers' compensation and employers' liability, fidelity and surety, motor vehicle and aircraft physical damage, and marine and inland marine (inland only) insurance, as specified in paragraph(s) 3, 4, 5, 6, 7, 8, 9, 12, 13, 14, 15, 16, 19, and 20 of Section 1113(a) of the New York Insurance Law to the extent permitted by certified copy of the Company's charter document on file with the Department. North Carolina (04) Fire; (05a) Extended Coverage; (06a) Commercial Water Damage; (07) Burglary and Theft; (08) Glass; (09) Boiler and Machinery; (10) Elevator; (11) Animal; (12a) Automobile Collision; (12b) Other Collision; (13a) Personal Injury Liability - Automobile; (13b) Personal Injury Liability - Other; (14a) Property Damage Liability - Automobile; (14b) Property Damage Liability - Other; (15) Workmen's Compensation & Employer's Liability; (16) Fidelity and Surety; (19a) Motor Vehicle and Aircraft - Property Damage; (19b) Motor 13 Vehicle and Aircraft - Fire; (19c) Motor Vehicle and Aircraft - Theft; (19d) Motor Vehicle and Aircraft - Comprehensive; (19e) Motor Vehicle and Aircraft - Collision; (20a) Inland Marine; and (21) Marine Protection and Indemnity, as defined in N.C.G.S. 58-7-15. North Dakota Accident and Health; Casualty; Property. Ohio Allied Lines; Earthquake; Fire; Inland Marine; Multiple Peril - Commercial; Multiple Peril - Homeowners; Other Liability; Private Passenger Auto - Liab.; Private Passenger Auto - Other; Private Passenger - Phys Damage Oklahoma Property; Casualty; Marine; Vehicle. Oregon Property; Casualty (excluding Workers' Compensation); Marine and Transportation. Pennsylvania Auto Liability; Burglary and Theft; Fidelity and Surety; Inland Marine and Physical Damage; Other Liability; Worker's Compensation; Boiler and Machinery; Elevator; Glass; Ocean Marine; Property and Allied Lines. Puerto Rico Casualty insurance. Rhode Island Fire and Allied Lines; Homeowners; SMP Programs as approved; Inland Marine; Automobile Physical Damage including Collision; Automobile Bodily Injury and Property Damage; Aircraft; Plate Glass; Burglary; General Liability; Fidelity and Surety; Workmen's Compensation and Employer's Liability; Accident and Sickness. South Carolina 22 - Property; 23 - Casualty; 25 - Marine. South Dakota Fire & Allied Lines; Inland & Ocean Marine; Bodily Injury (No Auto); Property Damage (No Auto); Bodily Injury (Auto); Property Damage (Auto); Physical Damage (Auto); 14 Glass; Burglary & Theft. Tennessee Property; Casualty; Vehicle; Surety Texas Fire; Allied Coverages; Hail-growing crops only; Rain; Inland Marine; Ocean Marine; Aircraft--Liability & Physical Damage; Employers' Liability; Automobile--Liability & Physical Damage; Liability other than Automobile; Fidelity & Surely; Glass; Burglary & Theft; Boiler & Machinery; Livestock. Utah Disability; Property; Surety; Liability (incl. veh., excl. dis.); Marine and Transport; Workers' Compensation; Vehicle Liability; Professional Liability (incl med mal). Vermont The insurance business authorized by the Company's Charter in accordance with the laws of the State of Vermont (see Illinois). Virginia Fire; Miscellaneous Property; Farm Multiple Peril; Homeowners Multiple Peril; Ocean Marine; Inland Marine; Liability other than Auto; Automobile Liability; Automobile Physical Damage; Aircraft Liability; Air Physical Damage; Glass; Burglary and Theft; Boiler and Machinery; Water Damage. Washington Property; Marine and Transportation; General Casualty; Surety. West Virginia Business of Insurance as defined in Chapter 33, Article 1, Section 10(c) Fire; Article 1, Section 10(d) Marine; Article 1, Section 10(e) Casualty; and Article 1, Section 10(f)(1)(2)&(3) Surety. Wisconsin (1) Fire; (2) Marine; (4) Disability; (5) Liability; (6) Steam Boiler; (7) Fidelity; (10) Burglary, (11) Plate Glass; (12) Sprinkler Leakage; (13) Elevator; (14) Livestock; (15) Automobile; (17) Other Casualty; (18) Medical Payments Insurance. Wyoming Multiple Lines. 15 Horace Mann Property & Alaska Property (AS 21.12.060); Casualty (AS Casualty Insurance 21.12.070) All Clauses (except 3 and Company 6-13); Company Marine, Wet Marine and Transportation (AS 21.12.090). Arizona Property; Vehicle; Casualty (excluding Workers' Compensation; Boiler and Machinery; Leakage and Fire Extinguishing Equipment; Credit, Malpractice and Miscellaneous Casualty Insurances). Arkansas Casualty (a) California Fire; Marine; Plate Glass; Liability; Burglary; Automobile; Aircraft and Miscellaneous Colorado Multiple Line - Credit (Casualty, Accident & Health); General Property; General Casualty' Motor Vehicle (Property). Connecticut Fire, Extended Coverage and Other Allied Lines; Homeowners Multiple Peril; Inland Marine; Liability other than Auto (B.I. and P.D.); Auto Liability (B.I. and P.D.); Auto Physical Damage. Delaware Property; Marine & Transportation; Casualty, including: Vehicle, Liability, Personal Property Floater and Miscellaneous. District of (1) Fire; (12) Earthquake; (19.2) Columbia Other Private Passenger Auto; (21.1) Private Passenger Auto Physical Damage; (4) Homeowners Multiple Peril; (9) InlandMarine; (PC) Property and Casualty. Idaho Casualty, Excluding Workers Compensation; Property. Illinois Casualty, Fidelity, Surety, as provided in Clauses (b), (c), (i) of Class 2 of the Insurance Code. Indiana Multi Line Property and Casualty as provided in Class II (f), (h), (l) and Class III (a) and (d) of the Indiana Insurance Code. Iowa Auto liability (B.I.); Auto liability 16 (P.D.); Auto physical damage. Kansas Fire; Windstorm & Hail; Extended Coverage; Earthquake; Inland Marine; Automobile Physical Damage; Homeowners Policies; Automobile Liability, General Liability. Kentucky Property; Marine and Transportation; and Casualty (vehicle, liability, burglary and theft, and personal property floater) Insurance. Louisiana Vehicle; Liability; Burglary & Forgery; Glass; Fire & Extended Coverage; Steam Boiler & Sprinkler Leakage; Marine & Transportation (inland marine); and Miscellaneous. Maine Fire; Allied Lines; Homeowners Multiple Peril; Inland Marine; Earthquake; Auto Liability; Auto Physical Damage. Maryland (P) Property and Marine (excluding Wet Marine and Transportation) - Section 1 - 101 (ee); (C) Casualty (not including Vehicle Liability, Mortgage Guaranty & Worker's Compensation- Section 1-101 (k); and (V) Vehicle Liability - Sections 1-101(k); 19-101, 19-502, 19-503, 19-504. Michigan Property; Inland Marine; Automobile Insurance - limited; Casualty: Workers' Compensation; Casualty: Liability; Casualty: Automobile; Disability coverage supplemental to Auto Insurance. Minnesota Property, Liability, Accident and Health, Surety, and Casualty as specified in Minnesota Statutes, Section 60A.06, Subdivision 1, Clause(s) 1, 2A, 2B, 3, 5A, 5B, 6, 8, 9A, 9B, 9C, 9D, 12, 13, 14. Mississippi Fire and Allied Lines; Casualty/Liability; Auto Physical Damage/Liability; Home/Farm Owners. Missouri Liability; Miscellaneous; Property. Montana Property; Casualty; Marine. Nebraska Property; Liability; Vehicle; Marine; 17 Miscellaneous. Nevada Property and Casualty. New Hampshire Property & Casualty in accordance with paragraphs I, II, V, VI of the State Statutes. New York Fire; Miscellaneous Property; Water Damage; Burglary and Theft; Glass; Boiler and Machinery; Collision; Personal Injury Liability; Property Damage Liability; Workers' Compensation and Employers' Liability; Credit; Motor Vehicle and Aircraft Physical Damage; Marine and Inland Marine; Marine Protection and Indemnity Insurance; as specified in paragraphs 4, 5, 6, 7, 8, 9, 12, 13, 14, 15, 17, 19, 20, and 21 of Section 1113(a) of the New York Insurance Law . and also such workers' compensation insurance as may be incident to coverages contemplated under paragraphs 20 and 21 of Section 1113(a), including insurances described in the Longshoremen's and Harbor Workers' Compensation Act (Public Law No. 803, 69 Cong. As amended; 33 USC Section 901 et. Seq. as amended) to the extent permitted by certified copy of its charter documents on file in this Department. North Carolina Fire Fire; Miscellaneous Property, Extended Coverage; Water Damage (including Sprinkler Leakage) Residential; Burglary and Theft; Glass; Collision, Automobile and other; Marine, Inland. Casualty Personal Injury Liability, Automobile and Other; Property Damage Liability, Automobile and Other; Motor Vehicle and Aircraft, Property Damage, Fire, Theft, Comprehensive, 18 Collision; Marine Protection and Indemnity. North Dakota Casualty; Property as defined in Title 26.1 of the insurance Laws of ND. Ohio Allied Lines; Earthquake; Fire; Inland Marine; Multiple Peril - Homeowners; Other liability; Private Passenger Auto-Liability; Private Passenger Auto - Other; Private Passenger - Physical Damage. Oklahoma Property & Casualty Oregon Casualty (excluding Workers' Compensation. Pennsylvania Auto Liability; Inland Marine and Physical Damage; Property and Allied Lines; Burglary and Theft; Other Liability Rhode Island Fire; Allied Lines; Homeowners Multiple Peril; Inland Marine; Earthquake, Other Liability; Full Coverage Automobile. South Carolina Property; Casualty. South Dakota Fire & Allied Lines; Inland & Ocean Marine; Bodily Injury (No Auto); Property Damage (No Auto); Bodily Injury (Auto); Property Damage (Auto); Physical Damage (Auto). Tennessee Property; Casualty; Vehicle. Texas Fire; Allied Coverages; Inland Marine; Automobile--Liability & Physical Damage; Liability other than Automobile; Glass and Burglary & Theft. Utah Property; Liability; Marine & Transport. Vermont Insurance business authorized by the Company's Charter in accordance with the Laws of the State of Vermont. (See Illinois) Virginia Fire; Miscellaneous Property; Homeowners Multiple Peril; Inland Marine; Liability other than Auto; Automobile Liability; Automobile Physical Damage; Glass; Burglary and Theft. Washington Property; Marine & Transportation; 19 Vehicle; General Casualty. West Virginia Business of Insurance as defined in Chapter 33 Article 1, Section 10(c) Fire Article 1, Section 10(d) Marine Article 1, Section 10(e) Casualty Article 1, Section 10(f) (1), (2), & (3) Surety. Wisconsin Disability Insurance; Liability and Incidental Medical Expense Insurance; Automobile and Aircraft Insurance. Wyoming Multiple Lines Alabama Property; Miscellaneous Casualty (excluding Official Surety Bonds). Teachers Insurance Company Alaska Disability (as 21.12.050); Property (as 21.12.060); Casualty (as 21.12.070) all clauses (1-14); Surety (as 21.12.080); and Marine, Wet Marine & Transportation (as 21.12.090). Arizona Disability; Property; Casualty (excluding Workers' Compensation); Vehicle; Marine and Transportation. Arkansas Disability; Property; Casualty (excluding workmen's compensation); and, Marine. Colorado Accident and Health; Livestock; Plate Glass; Steam Boiler, Machinery; Burglary and Theft; Fidelity and Surety; Motor Vehicle-Full Coverage; Workmen's Compensation; Liability; Personal Property Floaters; Mortgage; Credit; Credit - A&H Franchise A&H; Fire & Lighting; Extended Coverage; Hail on Growing Crops; Earthquake; Motor Vehicle-Full Coverage; Aircraft; Inland Marine; Ocean Marine. Connecticut Fire, Extended Coverage, and Other Allied Lines; Homeowners Multiple Peril: Inland Marine; Liability other than Auto (B.I. and P.D.); Auto 20 Liability (B.I. and P.D.); and, Auto Physical Damage. Delaware Health; Credit Health; Property; Surety; Marine & Transportation; Casualty, including: Vehicle, Liability, Burglary & Theft, Personal Property Floater, Glass, Boiler & Machinery, Credit, Workmen's Compensation & Employers' Liability, Leakage & Fire Extinguisher Equipment, Malpractice, Elevator, Congenital Defects, Livestock, Entertainments and Miscellaneous. District of Fire; Earthquake; Group Accident Columbia and Health; Non-Renewable for Stated Reason; Other Liability; Other Private Passenger Auto; Allied Lines; Private Passenger Auto Physical Damage; Commercial Auto Physical Damage; Aircraft (all perils); Fidelity; Surety; Glass; Burglary and Theft; Boiler and Machinery; Credit; Farmowners Multiple Peril; Homeowners Multiple Peril; Commercial Multiple Peril; Ocean Marine; Inland Marine; and, Property and Casualty. Florida Fire; Allied Lines; Homeowners Multi Peril; Commercial Multi Peril; Inland Marine; Other Liability; Auto Casualty; Ppa Physical Damage; Boiler and Machinery; Mobile Home Multi Peril. Georgia Property; Marine and Transportation; Casualty (excluding Workers' Compensation). Idaho Disability; Property; Marine & Transportation; Casualty (excluding Workers' Compensation); Surety Illinois Casualty, Fidelity, Surety, as provided in clauses (a), (b), (c), (d), (e), (f), (g), (h), (i), (j) of Class 2 and Fire and Marine as provided in clauses (a), (b), (c), (d), (e), (f), (g), (h) of Class 3, in accordance with 215 21 ILCS 5/4. Indiana Multi-Line Property and Casualty as provided in Class II (a), (b), (c), (d), (e), (f), (h), (l) and Class III (a), (b), (c), (d) in accordance with IC 27-1-5-1. Iowa Fire; Extended Coverage; Other allied lines; Homeowners Multiple Peril (Inc. B.I.); Commercial Multiple Peril; Earthquake; Growing Crops; Ocean Marine; Inland Marine; Accident only (Individual); Accident and Health (Individual); Hospital and Medical Expense (Individual); Group Accident and Health; Non-Cancellable Accident and Health; Workers' Compensation; Liability other than Auto (B.I.); Liability other than Auto (P.D.); Auto Liability (B.I.); Auto Liability (P.D.); Auto Physical Damage; Aircraft Physical Damage; Fidelity; Surety; Glass; Burglary and Theft; Boiler and Machinery. Kansas Fire; Windstorm & Hail; Extended Coverage; Earthquake; Inland Marine; Automobile Physical Damage; Homeowners Policies; Automobile Liability. Kentucky Multiple Line - Property, Casualty and Marine & Transportation insurance Louisiana Vehicle; Liability; Workmen's Compensation; Glass; Burglary and Forgery; Fidelity and Surety; Fire and Extended Coverage; Steam Boiler and Sprinkler Leakage; Crop and Livestock; Marine and transportation (Inland Marine); Miscellaneous. Maine Fire; Allied Lines; Homeowners Multiple Peril; Inland Marine; Earthquake; Auto Liability; Auto Physical Damage. Maryland Casualty (not including Vehicle Liability, Mortgage Guaranty & Worker's Compensation) - Section 1- 22 101(k); Property and Marine (excluding Wet Marine and Transportation) - Section 1-101(ee); Vehicle Liability - Sections 1-101(k), 19-101, 19-502, 19-503, 19-504. Massachusetts Fire; Variable Annuity Authorization; Inland Marine Only; Dwellings; Commercial Property; Liability other than Auto; Auto Liability. Michigan Property; Inland Marine; Automobile Insurance - limited; Casualty: Liability; Casualty: Automobile; Disability coverage supplemental to Auto Insurance, as defined in Sections 610, 616, 620, 624 and 625 of Chapter 6 of P.A. 218. Minnesota Property, Liability, Accident and Health, Surety, and Casualty as specified in Minnesota Statutes, Section 60A.06, Subdivision 1, clauses 1, 2A, 2B, 3, 5A, 5B, 6, 8, 9A, 9B, 9C, 9D, 10, 11, 12, 13 and 14. Mississippi Fire and Allied Lines; Casualty/Liability; Fidelity; Surety; Workers' Compensation; Boiler and Machinery; Plate Glass; Inland Marine; Ocean Marine; Accident & Health; Auto Phy Damage/Liab; Home/Farm Owners. Missouri Property ((S)379.010.1(1), RSMo); Liability ((S)379.010.1(2), RSMo); Accident and Health ((S)379.010.1(4), RSMo); Miscellaneous ((S)379.010.1(5), RSMo). Montana Disability; Property; Casualty; Surety; Marine. Nebraska 05 Property Insurance; 07 Glass Insurance; 08 Burglary and Theft Insurance; 09 Boiler and Machinery Insurance; 10 Liability Insurance; 11 Worker's Comp & Employer's Liability; 12 Vehicle Insurance; and, 18 Marine Insurance, in accordance with Section 44-201 of the Statutes of Nebraska. 23 Nevada Property and Casualty (excluding Workmen's Compensation). New Hampshire Property and Casualty lines in accordance with paragraphs I, II, V, VI of State Statutes. New Mexico General Casualty and/or Surety; Property and/or Marine & Transportation; Vehicle Insurance. New York Accident and health; fire; miscellaneous property; water damage; burglary and theft; glass; boiler and machinery; elevator; collision; personal injury liability; property damage liability; workers' compensation and employers' liability; fidelity and surety; credit; motor vehicle and aircraft physical damage; marine and inland marine and marine protection and indemnity insurance, as specified in paragraphs 3, 4, 5, 6, 7, 8, 9, 10, 12, 13, 14, 15, 16, 17, 19, 20 and 21 of Section 1113(a) of the New York Insurance Law and also such workers' compensation insurance as may be incident to coverages contemplated under paragraphs 20 and 21 of Section 1113(a), including insurances described in Longshoremen's and Harbor Workers' Compensation Act (Public Law No. 803, 69 Cong. as amended; 33 USC Section 901 et. seq. as amended) to the extent permitted by certified copy of its charter document on file with the Department. North Carolina (04) Fire; (05a) Extended Coverage; (05b) Growing Crops; (06a) Commercial Water Damage (including sprinkler leakage); (06b) Residential Water Damage (including sprinkler leakage); (07) Burglary and Theft; (08) Glass; (09) Boiler and Machinery; (10) Elevator; (11) Animal; (12a) Automobile Collision; (12b) Other Collision; (13a) 24 Automobile Personal Injury Liability; (13b) Other Personal Injury Liability; (14a) Automobile Property Damage Liability; (14b) Other Property Damage Liability; (15) Workmen's Compensation and Employer's Liability; (21) Marine Protection and Indemnity, as defined in N.C.G.S. 58-7-15. North Dakota Accident & Health, Casualty and Property, as defined in Title 26.1 of the North Dakota insurance laws. Ohio Allied Lines, Earthquake, Fire, Inland Marine, Multiple Peril - Commercial, Multiple Peril - Homeowners, Other Liability, Private Passenger Auto - Liab., Private Passenger Auto - Other and Private Passenger - Phys Damage, as defined in Section 3929.01(A) of Ohio laws. Oklahoma Accident & Health; Property; Casualty; Marine; Vehicle; Surety. Oregon Property; Casualty (excluding Workers' Compensation); Marine and Transportation; Surety; Health. Pennsylvania Auto Liability 40-5-102(c)(11); Fidelity and Surety 40-5-102(c)(1); Inland Marine and Physical Damage 40-5-102(b)(2); Other Liability 40-5-102(c)(4); Property and Allied Lines 40-5-102(b)(1); Burglary and Theft 40-5-102(c)(6); Glass 40-5-102(c)(3); Ocean Marine 40-5-102(b)(3); Personal Property Floater 40-5-102(c)(13). Rhode Island Property; Casualty; Surety; Marine and Transportation. South Carolina Accident & Health; Property; Casualty; Surety; Marine. South Dakota Health; Fire & Allied Lines; Inland & Ocean Marine; Worker's Compensation; Bodily Injury (No Auto); Property Damage (No Auto); Bodily Injury (Auto); Property Damage (Auto); Physical Damage (Auto); Fidelity & Surety Bonds; 25 Glass; Burglary & Theft; Boiler & Machinery; Aircraft; Credit (Mortgage Guaranty); Crop Hail; Livestock. Tennessee Property; Casualty; Vehicle; Surety. Texas Fire; Allied Coverages; Inland Marine; Automobile--Liability & Physical Damage; Liability other than Automobile; Glass and Burglary & Theft. Utah Disability; Property; Surety; Liability (incl. veh., excl. dis.); Marine and Transport; Workers' Compensation; Vehicle Liability; Professional Liability (incl. med. mal.). Vermont The insurance business authorized by the Company's Charter in accordance with the laws of the State of Vermont (see Illinois). Virginia Fire; Miscellaneous Property; Homeowners Multiple Peril; Inland Marine; Liability other than Auto; Automobile Liability; Automobile Physical Damage. Washington Property; Marine & Transportation; Vehicle; General Casualty; Surety West Virginia Business of Insurance as defined in Chapter 33, Article 1, Section 10(c) Fire; Article 1, Section 10(d) Marine; and Article 1, Section 10(e) Casualty. Wisconsin Fire, inland marine and other property; Ocean marine insurance; Casualty disability insurance; Liability and nonauto medical insurance; Auto and aircraft insurance; Fidelity insurance; Surety insurance; Credit insurance; Workers compensation insurance; Miscellaneous insurance. Wyoming Multiple Lines. Horace Mann Lloyds Management Texas Fire; Allied Coverages; Inland Corporation Marine; Liability other than Automobile and Reinsurance on all 26 lines authorized to be written on a direct basis. Life Allegiance Life Insurance Arizona Disability; Life. Company Colorado General Life; Accident and Health; Annuities; Credit; Variable Contracts. Florida Life; Group Life and Annuities; Accident and Health. Hawaii Life; Disability. Illinois Life; Accident and Health. Nebraska Life; Sickness and Accident Nevada Life; Health; Variable Annuities. Ohio Life; Health; Annuities. Oklahoma Life; Accident and Health. Oregon Life; Health, Texas Life; Accident and Health. Washington Life; Disability. Educators Life Insurance Arizona Life and Disability Reinsurance Company of America Horace Mann Life Insurance Alabama Life, Disability and Annuities. Company Alaska Life, Annuities and Disability Insurance as defined in Title 21, Sections 21.12.040 = 21.12.055 of the Alaska Statutes. Arizona Disability; Life; Variable Annuities. Arkansas Life; Disability; Variable Contracts. California Life and Disability. Colorado Life (Ordinary, Group Life, Accident & Health, Annuity Contracts, Variable Annuities, Franchise-Life, Franchise-A&H, Group A&H). Connecticut Accident and Health; Life Non-Participating; Variable Annuities. Delaware Life; Variable Annuities; Health District of Group Accident & Health; Group Columbia Annuities; Group Life and Health; Individual Accident and Health; Individual Annuities; Individual Life; Life and Health. Florida Life; Variable Annuities; Group Life and Annuities; Accident and Health. Georgia Life; Accident; Sickness (including 27 Variable Annuity) Hawaii Life; Disability. Idaho Life; Disability. Illinois Life (including Variable Contracts); Accident & Health Indiana Class 1 (a), (b), (c) Iowa Accident Only (Individual); Accident and Health (Individual); Hospital and Medical Expense (Individual); Group Accident and Health; Non-cancellable Accident and Health; Life (includes Credit Life, Variable Life, Annuities, Variable Annuities and Group). Kansas Life; Accident and Health. Kentucky Life; Health; Variable Annuities. Louisiana Life; Health and Accident. Maine Life (including Credit Life); Health (including Credit Health); Variable Annuities. Maryland Variable Annuities; Health; Life, including Annuities and Health (except Variable Life and Variable Annuities). Massachusetts Life - All Kinds; Variable Annuity Authorization; Accident - All Kinds; Health - All Kinds. Michigan Life and Annuities; Disability; Variable Annuities. Minnesota An insurance company for the lines of insurance specified in Minnesota Statutes, Section 60A.06, Subdivision 1, Clause 4 (including Variable Contracts). Mississippi Life; Accident and Health; Variable Contracts. Missouri Life and Health which includes Life, Annuities and Endowments; Accident and Health; Variable Contracts. Montana Life; Disability. Nebraska Life; Variable Annuities; Sickness and Accident. Nevada Life; Health; Variable Annuities. New Hampshire Life; Accident and Health.; Variable Products. New Mexico Life; Health; Variable Annuities. North Carolina Life, including Industrial Sick Benefit 28 Insurance; Annuities, including Annuities and Variable Annuities; Accident and Health, including Hospitalization (Cancelable and Non-cancelable). North Dakota Life and Annuity; Accident and Health; Variable Life and Annuities. Ohio Life; Health; Annuities. Oklahoma Life; Accident & Health; Variable. Oregon Life; Health. Pennsylvania Accident and Health; Separate Account Annuities; Life and Annuities. Rhode Island Life; Accident and Health; Annuities including Variable Annuities. South Carolina Life; Variable Annuity; Accident and Health. South Dakota Life; Health; Variable Annuities. Tennessee Life; Variable Contracts; Disability. Texas Life; Health and Accident; Variable Annuities. Utah Life; Annuity' Variable Life/Annuity; Disability. Vermont Insurance business authorized by its Charter in accordance with the Laws of the State of Vermont. Virginia Life; Annuities; Variable Annuities; Accident and Sickness. Washington Life; Disability. West Virginia Life; Accident & Sickness; Variable Annuities. Wisconsin Life Insurance and Annuities (Nonparticipating); Variable Life Insurance and Variable Annuities; Disability Insurance. Wyoming Life; Disability; Annuity. 29 SCHEDULE 7.12 TAXES None SCHEDULE 13.3 ADDRESSES 1. Notices to Horace Mann Educators Corporation should be sent to: Ann Caparros Vice President, General Counsel and Corporate Secretary Horace Mann Educators Corporation 1 Horace Mann Plaza Springfield, Illinois 62715-0001 Phone: (217) 788-5757 Fax: (217) 527-4029 2. Notices to Bank of America, N.A. as Lender should be sent to: Debra Basler Bank of America, N.A. 231 South LaSalle Street Chicago, Illinois 60697 Phone: (312) 828-3734 Fax: (312) 987-0889 3. Notices to Bank of America, N.A. as Administrative Agent should be sent to: Jesus Lopez Bank of America, N.A. 231 South LaSalle Street Chicago, Illinois 60697 Phone: (312) 828-6580 Fax: (312) 987-0889 EXHIBIT A FORM OF BORROWING REQUEST Bank of America, N.A., as Administrative Agent 231 South LaSalle Street Chicago, Illinois 60697 Attention: Jesus Lopez Re: Horace Mann Educators Corporation Gentlemen and Ladies: This Borrowing Request is delivered to you pursuant to Section 2.3 of that certain Credit Agreement, dated as of May ___, 2002 (as amended, modified, supplemented, restated, refunded or renewed from time to time and in effect, the "Credit Agreement"), among Horace Mann Educators Corporation, a Delaware corporation (the "Borrower"), various financial institutions which are, or may become, parties thereto (the "Lenders"), and Bank of America, N.A., as Administrative Agent for the Lenders. Unless otherwise defined herein or the context otherwise requires, capitalized terms used herein have the meanings provided in the Credit Agreement. The Borrower hereby requests that a Borrowing be made in the aggregate principal amount of $________ on _____, 20__ as a [Eurodollar Loan having an Interest Period of _____ months] [Base Rate Loan]. The Borrower hereby certifies and warrants that (a) that no Default under any of the Loan Documents has occurred and is continuing or, after giving effect to the Borrowing requested hereby, will have occurred and be continuing; (b) all representations and warranties contained in the Credit Agreement [(other than Section 7.4)]* and the other Loan Documents are true and correct in all material respects on the date of this Borrowing Request and (except as otherwise disclosed in writing to the Administrative Agent and the Lenders prior to the date of such Borrowing) shall be true and correct in all material respects on the date of the Borrowing requested hereunder with the same effect as though made on the date of and concurrently with such Borrowing Request and such Borrowing hereunder (except where such representation or warranty speaks as of specified date); and (c) all covenants contained in the Credit Agreement and the other Loan Documents to be performed by each of the parties thereto (other than the Administrative Agent or the Lenders) have been performed in all material respects and, prior to the date of the Borrowing requested hereunder, will be performed in all material respects. Please disburse the proceeds of the Borrowing requested hereby as follows: ________________ * Delete for the initial Borrowing. The Borrower has caused this Borrowing Request to be executed and delivered, and the certification and warranties contained herein to be made, by its duly Authorized Officers this __ day of __________, 20__. HORACE MANN EDUCATORS CORPORATION By _________________________________ Name Printed _______________________ Title ______________________________ By _________________________________ Name Printed _______________________ Title ______________________________ EXHIBIT B NOTE U.S. $25,000,000 Chicago, Illinois May ___, 2002 The undersigned, FOR VALUE RECEIVED, promises to pay to the order of BANK OF AMERICA, N.A., as Administrative Agent for the ratable benefit of the Lenders, at its principal office at 231 South LaSalle Street, Chicago, Illinois 60697, TWENTY FIVE MILLION DOLLARS ($25,000,000) or, if less, the aggregate unpaid principal amount of all Loans made by the Lenders to the undersigned pursuant to that certain Credit Agreement, dated as of May ___, 2002 (as amended, modified, supplemented, restated, refunded or renewed from time to time and in effect, the "Credit Agreement") among the undersigned, various financial institutions which are, or may become, parties thereto and Bank of America, N.A., as Administrative Agent for the Lenders, as shown either in the schedule attached hereto (and any continuation thereof) or in the records of the payee. Unless otherwise defined herein or the context otherwise requires, capitalized terms used herein shall have the meanings provided in the Credit Agreement. The unpaid principal amount hereof from time to time outstanding shall bear interest from the date hereof at the rates, and such interest shall be payable at the times, set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America. This Note is the Note described in, and is subject to the terms and provisions of, the Credit Agreement. Reference is hereby made to the Credit Agreement for a statement of the maturity of the Loans, the prepayment rights and obligations of the undersigned, the nature and extent of the collateral security and the rights of the parties to the Loan Documents in respect of such collateral security, and for a statement of the terms and conditions under which the due date of this Note may be accelerated. In addition to and not in limitation of the foregoing and the provisions of the Credit Agreement, the undersigned further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including reasonable attorneys' fees and legal expenses, incurred by the holder of this Note in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. All parties hereto, whether as makers, endorsers, or otherwise, severally waive presentment for payment, demand, protest and notice of dishonor. THIS NOTE HAS BEEN DELIVERED IN CHICAGO, ILLINOIS AND SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. HORACE MANN EDUCATORS CORPORATION By _____________________________________ Title __________________________________ By _____________________________________ Title __________________________________ LOANS AND PRINCIPAL PAYMENTS
Amount of Amount of Unpaid Principal Loan Made Principal Repaid Balance --------- ---------------- ------- Interest Base Eurodollar Period (if Base Eurodollar Base Eurodollar Notation Date Rate Rate applicable) Rate Rate Rate Rate Made By ---- ---- ---- ----------- ---- ---- ---- ---- ------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
EXHIBIT C FORM OF CONTINUATION/CONVERSION NOTICE Bank of America, N.A., as Administrative Agent 231 South LaSalle Street Chicago, Illinois 60697 Attention: Jesus Lopez Re: Horace Mann Educators Corporation Ladies and Gentlemen: This Continuation/Conversion Notice (the "Notice") is delivered to you pursuant to Section 4.5 of that certain Credit Agreement, dated as of May ___, 2002 (as amended, modified, supplemented, restated, refunded or renewed from time to time and in effect, the "Credit Agreement"), among Horace Mann Educators Corporation, a Delaware corporation (the "Borrower"), various financial institutions which are or may become parties thereto (the "Lenders") and Bank of America, N.A., as Administrative Agent for the Lenders. Unless otherwise defined herein or the context otherwise requires, capitalized terms used herein shall have the meanings provided in the Credit Agreement. The Borrower hereby requests that: 1. on __________, 20__, $________ of the presently outstanding principal amount of the Loans originally made on ______, 20__, currently being maintained as Base Rate Loans, be converted from Base Rate Loans into Eurodollar Loans; and 2. on __________, 20__, $________ of the presently outstanding principal amount of the Loans originally made on ______, 20__ currently being maintained as a Eurodollar Loan, be [continued as] [Eurodollar Loans having an Interest Period of months] [converted into] [Base Rate Loans]. The Borrower hereby certifies and warrants that no Default has occurred and is continuing or, after giving effect to the continuation and/or conversion of any Loan requested hereby, will have occurred and be continuing. The Borrower has caused this Notice to be executed and delivered, and the certification and warranties contained herein to be made, by its duly Authorized Officer this _____ day of __________, 20__. HORACE MANN EDUCATORS CORPORATION By _________________________________ Name Printed _______________________ Title ______________________________ By _________________________________ Name Printed _______________________ Title ______________________________ EXHIBIT D FORM OF COMPLIANCE CERTIFICATE Date: ________, 20__ TO: Bank of America, N.A., as Administrative Agent, and the Lenders under the Credit Agreement referred to below Re: Horace Mann Educators Corporation Please refer to that certain Credit Agreement (as heretofore amended, modified, supplemented, restated, refunded or renewed and as currently in effect, herein called the "Agreement"), dated as of May ___, 2002, among Horace Mann Educators Corporation (the "Borrower"), the Lenders referred to therein, and Bank of America, N.A., as Administrative Agent. Terms defined in the Agreement shall have the same meanings when used herein. In accordance with Section 8.1.1(f) of the Agreement, the Borrower hereby certifies that the statements and calculations set forth below are true and correct as of _______, 20__ (the "Calculation Date"): I. Section 8.2.1 - Consolidated Debt to Capital. A. Consolidated Debt $___________ B. Net Worth $___________ C. Sum of Item A plus Item B $___________ D. Ratio of Item A to Item C ____________ [Item D is not permitted to exceed 0.35 to 1.0 at any time prior to January 1, 2003, 0.325 to 1.0 at any time thereafter prior to January 1, 2004 or 0.30 to 1.0 at any time thereafter.] II. Section 8.2.2 - Risk Based Capital. A. Adjusted surplus for each Insurance Subsidiary (list separately) $___________ B. Company Action Level for each Insurance Subsidiary (list separately) $___________ [Item A for any Insurance Subsidiary is not permitted to be less than 175% of Item B for such Insurance Subsidiary as of the end of each Fiscal Year. Item A for the Life Subsidiaries on a Combined basis is not permitted to be less than 250% of Item B for the Life Subsidiaries as of the end of each Fiscal Year. Item A for the P/C Subsidiaries on a Combined basis is not permitted to be less than 250% of Item B for the P/C Subsidiaries as of the end of each Fiscal Year.] III. Section 8.2.3 - Interest Coverage Ratio. A. Combined dividends permitted to be paid by the Insurance Subsidiaries to the Borrower on the Calculation Date under applicable law without approval of the Department $___________ B. Future Interest Expense for the next four Fiscal Quarters: C. Ratio of Item A to Item B ____________ [Item C is not permitted to be less than 4.0 to 1.0 at any Fiscal Quarter end unless the Borrower has applied to the applicable Department within 20 days of such Fiscal Quarter end for permission to pay a special dividend in an amount that when added to the amount set forth in clause (a) of the definition of Interest Coverage Ratio, would cause such ratio to be complied with, and such permission is granted within 45 days of such Fiscal Quarter end.] There have been no changes in the Executive Officers or Directors of the Borrower since the last Compliance Certificate [except as described below.] The undersigned officer further certifies that, to the best of his/her knowledge, no Default had occurred and was continuing as of the Calculation Date. HORACE MANN EDUCATORS CORPORATION By ______________________________ ** Title ___________________________ _________________________ ** To be executed by the chief financial officer or treasurer of the Borrower. EXHIBIT E FORM OF OPINION OF BORROWER'S COUNSEL May ___, 2002 To: Bank of America, N.A., as Administrative Agent, and the Lenders referred to below 231 South LaSalle Street Chicago, Illinois 60697 Re: Horace Mann Educators Corporation Ladies and Gentlemen: I refer to that certain Credit Agreement, dated as of May ___, 2002 (the "Credit Agreement"), between Horace Mann Educators Corporation, a Delaware corporation (the "Borrower"), various financial institutions which are, or may become, parties thereto (the "Lenders") and Bank of America, N.A., as Administrative Agent for the Lenders (the "Administrative Agent"). I am the General Counsel of the Borrower and have represented the Borrower in connection with the preparation, execution and delivery of the Credit Agreement and the transactions contemplated thereby. This opinion is delivered to you pursuant to Section 9.1.4 of the Credit Agreement. Capitalized terms not otherwise defined herein shall have the definitions assigned to such terms in the Credit Agreement, unless the context otherwise requires. I have examined such matters of law and such certificates, documents and records of public officials and of officers of the Borrower and its Subsidiaries as I have deemed necessary for purposes of this opinion, including, but not limited to, the Credit Agreement and the other Loan Documents. As to questions of fact material to such opinions, I have relied on certificates of officers of the Borrower and its Subsidiaries. In rendering this opinion, I have made the following assumptions: (a) All documents submitted to or reviewed by me are accurate and complete and if not originals are true and correct copies of the originals. The signatures on each of such documents by the parties thereto (other than the Borrower) are genuine. Each individual who signed such documents on behalf of any Person (other than the Borrower) had the legal capacity to do so. All individuals who signed such documents on behalf of a corporation (other than the Borrower) were duly authorized to do so. (b) The Lenders and the Administrative Agent have the corporate power and authority to execute and deliver the Credit Agreement and other Loan Documents to which they are parties and to perform their obligations under the Credit Agreement and the other Loan Documents. (c) The execution and delivery by the Administrative Agent and the Lenders of the Credit Agreement and the other Loan Documents to which they are parties have been duly authorized by all requisite corporate action and such documents have been duly executed and delivered by the Administrative Agent and the Lenders. Based upon the foregoing and subject to the limitations, qualifications and exceptions set forth herein, I am of opinion that: 1. Each of the Borrower and each Subsidiary (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (ii) is duly qualified to do business and in good standing in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, which jurisdictions are set forth with respect to the Borrower and each Subsidiary on Schedule 7.10 of the Credit Agreement , (iii) has the requisite corporate power and authority and the right to own and operate its properties, to lease the property it operate under lease, and to conduct its business as now and proposed to be conducted and (iv) has obtained all material licenses, permits, consents or approvals from or by, and has made all filings with, and given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct (including, without limitation, the consummation of the transactions contemplated by the Credit Agreement and the other Loan Documents) as to each of the foregoing except where the failure to do so would not have a Material Adverse Effect on the Borrower and its Subsidiaries taken as a whole. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the consummation of the transactions contemplated thereby are within its corporate powers and have been duly authorized by all necessary corporate action (including, without limitation, shareholder approval, if required). 3. Each of the Borrower and its Subsidiaries has received all material governmental and other consents and approvals (if any shall be required) necessary for such execution, delivery and performance, and such execution, delivery and performance do not and will not contravene or conflict with, or create a Lien or right of termination or acceleration under, any Requirement of Law or Contractual Obligation binding upon the Borrower or such Subsidiaries. 4. The Credit Agreement and the other Loan Documents to which it is a party have been executed by the Borrower and constitute the legal, binding and enforceable obligations of Borrower enforceable against the Borrower in accordance with their respective terms. 5. Other than Horace Mann Investors, Inc., neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled by an investment company", within the meaning of the Investment Company Act of 1940, as amended. 6. (a) Except as set forth in Schedule 7.4 of the Credit Agreement and (b) except for claims which are covered by Insurance Policies, coverage for which has not been denied in writing, or which relate to Ordinary Course Litigation, no claim, litigation (including, without limitation, derivative actions), arbitration, governmental investigation or proceeding or inquiry is pending or threatened against the Borrower or any of its Subsidiaries (i) which would, if adversely determined, have a Material Adverse Effect on the Borrower or its Subsidiaries taken as a whole or (ii) which relates to any of the transactions contemplated hereby, and there is no basis known to the Borrower for any of the foregoing. The opinions expressed herein are limited (i) to the extent that general equitable principles limit the availability of equitable remedies, including but not limited to the remedy of specific performance, injunctive relief, the appointment of a receiver, and rights of acceleration; and (ii) to the extent that the enforceability of the Credit Agreement and the other Loan Documents is limited by applicable bankruptcy, insolvency, and other debtor relief laws of general applicability. This opinion is based on my knowledge of the law and facts as of the date hereof. I assume no duty to update or supplement this opinion to reflect any facts or circumstances which may hereafter come to my attention or to reflect any changes in any law which may hereafter occur or become effective. Respectfully submitted, ________________________________ EXHIBIT F FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement"), dated as of the date set forth in Item 1 (each reference to an "Item" herein shall be deemed to refer to such Item on Schedule I hereto), is made by the party designated as the Assignor on the signature pages hereto (the "Assignor") to the Person designated as the Assignee on the signature pages hereto (the "Assignee"). W I T N E S E T H: The Assignor has entered into a Credit Agreement, dated as of May ___, 2002 (as such agreement may be amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among Horace Mann Educators Corporation, a Delaware corporation (the "Borrower"), certain financial institutions as are or may become parties thereto, including the Assignor (collectively, the "Lenders"), and Bank of America, N.A., as administrative agent (the "Administrative Agent") for the Lenders, under which the Assignor has agreed to make Loans in the amounts of up to the amount set forth in Item 2 (such amount equals the current Commitment of the Assignor and may have been, or may be, reduced by Section 2.1.1 of the Credit Agreement and by other assignments by or to the Assignor, and will be reduced by the assignment under this Agreement) and the Lenders have agreed to make Loans in the amounts of up to the current aggregate Commitment Amount set forth in Item 3. Such Loans are sometimes hereinafter referred to as the "Advances" or each, an "Advance". Unless otherwise defined, all terms used herein have the meanings provided in the Credit Agreement. In consideration of the premises and the mutual covenants contained herein, the Assignor and the Assignee hereby covenant and agree as follows: 1. Assignment and Assumption. Subject to the terms and conditions of this Agreement, the Assignor and the Assignee agree that: (a) the Assignor hereby sells, transfers, assigns and delegates to the Assignee, in consideration of the Assignee's entering into this Agreement and the Assignee's payment to the Assignor of the amount set forth in Item 4; and (b) the Assignee hereby purchases, assumes and undertakes from the Assignor, without recourse and without representation or warranty of any kind (except as expressly provided in this Agreement), a share (equal to the Funding Percentage set forth in Item 5 expressed as a percentage of the aggregate Commitment Amount of the Lenders) of the Assignor's Commitment, Advances, rights, benefits, obligations, liabilities and indemnities under and in connection with the Credit Agreement and all of the Advances, including without limitation the right to receive payment of principal and interest on such percentage of the Assignor's Advances, and the obligation to fund all future Advances in respect of such assignment, and to indemnify the Administrative Agent or any other party under the Credit Agreement and to pay all other amounts payable by a Lender (in its respective percentage of the aggregate obligations of the Lenders) under or in connection with the Credit Agreement but not including any fees except as otherwise agreed by the Assignor and the Assignee. The interest of the Assignor under the Credit Agreement (including the portion of the Assignor's Advances and all such Commitments, Advances, rights, benefits, obligations, liabilities and indemnities) which the Assignee purchases and assumes hereunder is hereinafter referred to as its "Assigned Share". The day upon which the Assignee shall make the payment described in the prior paragraph is hereinafter referred to as the "Funding Date". Upon completion of the assignment hereunder, the Assignor will have the revised share of the total Commitment Amount as of the Lenders and Funding Percentage set forth in Item 6. 2. Future Payments. The Assignor shall notify the Administrative Agent to make all payments with respect to the Assigned Share after the Funding Date directly to the Assignee. The Assignor and Assignee agree and acknowledge that all payments of interest, commitment fees and other fees accrued up to, but not including, the Funding Date are the property of the Assignor, and not the Assignee. The Assignee shall, upon payment of any interest, commitment fees or other fees, remit to the Assignor all of such interest, commitment fees and other fees accrued up to, but not including, the Funding Date. 3. No Warranty or Recourse. The sale, transfer, assignment and delegation of the Assigned Share is made without warranty or recourse against the Assignor of any kind, except that the Assignor warrants that it has not sold or otherwise transferred any other interest in the Assigned Share to any other party. The Assignor may, however, have sold and may hereafter sell participations in, or may have assigned or may hereafter assign, portions of its interest in the Advances and the Credit Agreement. 4. Covenants and Warranties. To induce each other to enter into this Agreement, each of the Assignee and the Assignor warrants and covenants with respect to itself that: (a) Existence and Organization. It is, in each case, the type of institution, and duly organized under the laws of the jurisdiction, set forth in Item 7. (b) Authority and Authorization. It is duly authorized to execute, deliver and perform its obligations under this Agreement and all acts and conditions required to be done and performed and to have occurred prior to the execution and delivery of, and performance of its obligations under, this Agreement have been done and performed and have occurred in compliance with all applicable laws. (c) No Conflict. The execution and delivery of, and performance of its obligations under, this Agreement do not conflict with any provision of law or of the charter or by-laws (or equivalent constituent documents) of such party, or of any agreement binding upon it; and (d) Valid and Binding. This Agreement constitutes the legal, valid and binding obligation of such party enforceable against such party in accordance with its terms. 5. Covenants and Warranties by the Assignee. To induce the Assignor to enter into this Agreement, the Assignee warrants and covenants that (a) it is purchasing and assuming the Assigned Share in the course of making loans in the ordinary course of its business, and (b) it has, independently and without reliance upon the Assignor, the Administrative Agent or any other Lender, and based upon such financial statements and other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. The Assignee acknowledges that the Assignor, the Administrative Agent or any other Lender have not made and do not make any representations or warranties or assume any responsibility with respect to the validity, genuineness, enforceability or collectibility of the Advances, the Credit Agreement or any related instrument, document or agreement. The Assignee warrants and covenants that it is an Eligible Assignee. 6. Payments to the Assignor. All amounts payable to the Assignor in U.S. Dollars shall be paid by transfer of federal funds to the Assignor as set forth in Item 9. 7. Other Transactions. The Assignee shall have no interest in any property in the Assignor's possession or control, or in any deposit held or other indebtedness owing by the Assignor, which may be or become collateral for or otherwise be available for payment of the Advances by reason of the general description of secured obligations contained in any security agreement or other agreement or instrument held by the Assignor or by reason of the right of set-off, counterclaim or otherwise, except that if such interest is provided for in provisions of the Credit Agreement regarding sharing of set-off, the Assignee shall have the same rights as any other Lender that is a party to the Credit Agreement. The Assignor and its affiliates may accept deposits from, lend money to, act as trustee under indentures for and generally engage in any kind of business with the Borrower, and any person who may do business with or own securities of the Borrower or any of its Subsidiaries. The Assignee shall have no interest in any property taken as security for any other loan or any other credits extended to the Borrower or any of its Subsidiaries by the Assignor. 8. Expenses. In the event of any action to enforce the provisions of this Agreement against a party hereto, the prevailing party shall be entitled to recover all costs and expenses incurred in connection therewith, including without limitation, attorneys' fees and expenses. 9. Successors and Assigns. This Agreement shall inure the benefit of and be binding upon the successors and assigns of the Assignor and the Assignee. 10. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS. 11. Amendments, Changes and Modifications. This Agreement may not be amended, changed, modified, altered, or terminated except by an agreement in writing signed by the Assignor and the Assignee (or their permitted successors or assigns) and the consent of the Borrower (which shall not be unreasonably withheld). 12. Withholding Taxes. The Assignee (a) represents and warrants to the Assignor, the Administrative Agent and the Borrower that under applicable law and treaties no tax will be required to be withheld by the Assignor with respect to any payments to be made to the Assignee hereunder, (b) agrees to furnish (if it is organized under the laws of any jurisdiction other than the United States or any State thereof and if it is not otherwise prohibited or prevented by applicable law or court order) to the Assignor, the Administrative Agent and the Borrower upon the effectiveness of this Agreement, either U.S. Internal Revenue Service Form W-8 BEN or U.S. Internal Revenue Service Form W-8 ECI, and agrees to provide (if not otherwise prohibited or prevented by applicable law or court order) new Forms W-8 BEN or W-8 ECI upon (1) the expiration or obsolescence of any previously delivered Form W-8 BEN or Form W-8 ECI or comparable statements in accordance with applicable U.S. law and regulations and amendments thereto, duly executed and completed by the Assignee, and (ii) in any event, in the case of Form W-8 BEN, on each calendar year following the Funding Date, and, in the case of Form W-8 ECI, at the end of each three-year period following the Funding Date, and (c) agrees to comply with all applicable U.S. laws and regulations with regard to such withholding tax exemption. 13. Entire Agreement. This Agreement sets forth the entire understanding of the parties (except for any side letter between the Assignor and the Assignee with reference to fees and other items) and supersedes any and all prior agreements, arrangements, and understandings relating to the subject matter hereof. No representation, promise, inducement or statement of intent has been made by any party which is not embodied in this Agreement, and no party shall be bound by or liable for any alleged representation, promise, inducement or statement of intention not expressly set forth herein. 14. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed on its behalf by its duly Authorized Officer as of the day and year first above written. ASSIGNOR: By:_________________________________________ ____________________________________________ (print name) Title: _____________________________________ Address: __________________________ __________________________ __________________________ ASSIGNEE: By:_________________________________________ ____________________________________________ (print name) Title: _____________________________________ Address: __________________________ __________________________ __________________________ Consented to this __ day of ________, 20__ BANK OF AMERICA, N.A., as Administrative Agent By:_________________________________________ ____________________________________________ (print name) Title: _____________________________________ Consented to this __ day of ________, 20__ HORACE MANN EDUCATORS CORPORATION By:_________________________________________ ____________________________________________ (print name) Title: _____________________________________ By:_________________________________________ ____________________________________________ (print name) Title: _____________________________________ SCHEDULE I TO ASSIGNMENT AND ASSUMPTION AGREEMENT Item No. 1. Date of Assignment: 2. Current Commitment Amount and Funding Percentage of Assignor prior to Assignment: 3. Current Aggregate Commitment Amount: 4. Amount of Initial Payment to Assignor: 5. Amount of Commitment Assigned to Assignee Hereunder: 6. Assignee's Funding Percentage Hereunder: 7. Assignor's Commitment Amount and Funding Percentage after Assignment to Assignee Hereunder: 8. Type of Institution and Jurisdiction of Organization: (a) of Assignor: (b) of Assignee 9. Information Regarding Payments to the Assignor: EX-10.2 5 dex102.txt HORACE MANN 2002 INCENTIVE COMPENSATION PLAN Exhibit 10.2 HORACE MANN EDUCATORS CORPORATION 2002 Incentive Compensation Plan HORACE MANN EDUCATORS CORPORATION 2002 Incentive Compensation Plan
Page ---- 1. Purpose .............................................................. 1 2. Definitions .......................................................... 1 3. Administration ....................................................... 3 4. Stock Subject to Plan ................................................ 4 5. Eligibility; Per-Person Award Limitations ............................ 5 6. Specific Terms of Awards ............................................. 5 7. Performance Awards, Including Annual Incentive Awards ................ 8 8. Certain Provisions Applicable to Awards .............................. 10 9. Change of Control .................................................... 11 10. Additional Award Forfeiture Provisions ............................... 12 11. General Provisions ................................................... 13
HORACE MANN EDUCATORS CORPORATION 2002 Incentive Compensation Plan 1. Purpose. The purpose of this 2002 Incentive Compensation Plan (the "Plan") is to aid Horace Mann Educators Corporation, a Delaware corporation (the "Company"), in attracting, retaining, motivating and rewarding employees, non-employee directors, and other persons who provide substantial services to the Company or its subsidiaries or affiliates, to provide for equitable and competitive compensation opportunities, to encourage long-term service, to recognize individual contributions and reward achievement of Company goals, and promote the creation of long-term value for shareholders by closely aligning the interests of Participants with those of shareholders. The Plan authorizes stock-based and cash-based incentives for Participants. 2. Definitions. In addition to the terms defined in Section 1 above and elsewhere in the Plan, the following capitalized terms used in the Plan have the respective meanings set forth in this Section: (a) "Annual Incentive Award" means a type of Performance Award granted to a Participant under Section 7(c) representing a conditional right to receive cash, Stock or other Awards or payments, as determined by the Committee, based on performance in a performance period of one fiscal year or a portion thereof. (b) "Award" means any Option, SAR, Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another award, Dividend Equivalent, Other StockBased Award, Performance Award or Annual Incentive Award, together with any related right or interest, granted to a Participant under the Plan. (c) "Beneficiary" means the individual or entity designated by the Participant to receive the benefits specified under the Participant's Award upon such Participant's death. If no such designation is made, or if the designated individual predeceases the Participant or the entity no longer exists, then the Beneficiary shall be the Participant's estate. (d) "Beneficial Owner" has the meaning specified in Rule 13d-3 under the Exchange Act. (e) "Board" means the Company's Board of Directors. (f) "Change of Control" means, unless otherwise defined in an Award Agreement, any one or more of the following: (i) Approval by the shareholders of the Company of a merger, reorganization, consolidation, or similar transaction, in which the Company is not the continuing or the surviving corporation, or pursuant to which Shares would be converted into cash, securities or other property, other than a merger of the Company in which no Company shareholder's ownership percentage in the surviving corporation immediately after the merger is less than such shareholder's ownership percentage in the Company immediately prior to such merger by ten percent (10%) or more (unless such change results from elimination of an odd lot that represented less than 0.1% of the outstanding of Stock); or (2) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or (ii) The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company which is part of a sale of assets, merger, or reorganization of the Company or other similar transaction; or (iii) Any "person", as such term is defined in Sections 13(d) and 14(d) of the Exchange Act, is or becomes, directly or indirectly, the "beneficial owner" as defined in Rule 13d-3 under the Exchange Act, of securities of the Company that represent more than 50% of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (iv) The Incumbent Directors (determined using the Effective Date as the baseline date) cease for any reason to constitute at least a majority of the directors of the Company then serving. (g) "Code" means the Internal Revenue Code of 1986, as amended. References to any provision of the Code or regulation (including a proposed regulation) thereunder shall include any successor provisions and regulations. (h) "Committee" means a committee of two or more directors designated by the Board to administer the Plan; provided, however, that, directors appointed or serving as members of a Board committee designated as the Committee shall not be employees of the Company or any subsidiary or affiliate. In appointing members of the Committee, the Board will consider whether a member is or will be a Qualified Member, but such members are not required to be Qualified Members at the time of appointment or during their term of service on the Committee. The full Board may perform any function of the Committee hereunder, in which case the term "Committee" shall refer to the Board. Initially, the Compensation Committee of the Board of Directors will be designated as the "Committee" under the Plan. (i) "Covered Employee" means an Eligible Person who is a Covered Employee as specified in Section 11(j). (j) "Deferred Stock" means a right, granted to a Participant under Section 6(e), to receive Stock or other Awards or a combination thereof at the end of a specified deferral period. (k) "Dividend Equivalent" means a right, granted to a Participant under Section 6(g), to receive cash, Stock, other Awards or other property equal in value to all or a specified portion of the dividends paid with respect to a specified number of shares of Stock. (l) "Effective Date" means the effective date specified in Section 11(q). (m) "Eligible Person" has the meaning specified in Section 5. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended. References to any provision of the Exchange Act or rule (including a proposed rule) thereunder shall include any successor provisions and rules. (o) "Fair Market Value" means (i) with respect to any property other than Stock, the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee, and (ii) with respect to Stock, unless otherwise determined by the Committee, as of any date, (A) the mean between the highest and lowest trading prices of the Stock on such date on the New York Stock Exchange Composite Transactions Tape (or, if no sale of Stock was reported for such date, on the next preceding date on which a sale of Stock was reported) or (B) if the Stock is not listed on the New York Stock Exchange, the mean of the highest and lowest trading prices of Stock on such other national exchange on which the Stock is principally traded or as reported by the National Market System, or other similar organization; or (C) in the event that there shall be no public market for the Stock, the fair market value of the Stock as determined by the Committee. (p) "Incentive Stock Option" or "ISO" means any Option designated as an incentive stock option within the meaning of Code Section 422 or any successor provision thereto and qualifying thereunder. (q) "Incumbent Directors" means, as of any specified baseline date, individuals then serving as members of the Board who were members of the Board as of the date immediately preceding such baseline date; provided that any subsequently-appointed or elected member of the Board whose election, or nomination for election by shareholders of the Company or the Surviving Corporation, as applicable, was approved by a vote or written consent of a majority of the directors then comprising the Incumbent Directors shall also thereafter be considered an Incumbent Director, unless the initial assumption of office of such subsequently-elected or appointed director was in connection with (i) an actual or threatened election contest, including a consent solicitation, relating to the election or removal of one or more members of the Board, (ii) a "tender offer" (as such term is used in Section 14(d) of the Exchange Act), or (iii) a proposed reorganization transaction. (r) "Option" means a right, granted to a Participant under Section 6(b), to purchase Stock or other Awards at a specified price during specified time periods. (s) "Other Stock-Based Awards" means Awards granted to a Participant under Section 6(h). (t) "Participant" means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person. (u) "Performance Award" means a conditional right, granted to a Participant under Sections 6(i) and 7, to receive cash, Stock or other Awards or payments, as determined by the Committee, based upon performance criteria specified by the Committee. (v) "Preexisting Plans" mean the Company's 2001 Stock Incentive Plan and 1991 Stock Incentive Plan. (w) "Qualified Member" means a member of the Committee who is a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and an "outside director" within the meaning of Regulation 1.162-27 under Code Section 162(m). (x) "Restricted Stock" means Stock granted to a Participant under Section 6(d) which is subject to certain restrictions and to a risk of forfeiture. (y) "Rule 16b3" means Rule 16b-3, as from time to time in effect and applicable to Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. (z) "Stock" means the Company's Common Stock, and any other equity securities of the Company that may be substituted or resubstituted for Stock pursuant to Section 11(c). (aa) "Stock Appreciation Rights" or "SAR" means a right granted to a Participant under Section 6(c). -3- 3. Administration. (a) Authority of the Committee. The Plan shall be administered by the Committee, which shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants; to grant Awards; to determine the type and number of Awards, the dates on which Awards may be exercised and on which the risk of forfeiture or deferral period relating to Awards shall lapse or terminate, the acceleration of any such dates, the expiration date of any Award, whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Stock, other Awards, or other property, and other terms and conditions of, and all other matters relating to, Awards; to prescribe documents evidencing or setting terms of Awards (such Award documents need not be identical for each Participant), amendments thereto, and rules and regulations for the administration of the Plan and amendments thereto; to construe and interpret the Plan and Award documents and correct defects, supply omissions or reconcile inconsistencies therein; and to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Plan. Decisions of the Committee with respect to the administration and interpretation of the Plan shall be final, conclusive, and binding upon all persons interested in the Plan, including Participants, Beneficiaries, transferees under Section 11(b) and other persons claiming rights from or through a Participant, and shareholders. The foregoing notwithstanding, the Board shall perform the functions of the Committee for purposes of granting Awards under the Plan to non-employee directors (authority with respect to other aspects of non-employee director awards is not exclusive to the Board, however). (b) Manner of Exercise of Committee Authority. At any time that a member of the Committee is not a Qualified Member, (i) any action of the Committee relating to an Award intended by the Committee to qualify as "performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder may be taken by a subcommittee, designated by the Committee or the Board, composed solely of two or more Qualified Members, and (ii) any action relating to an Award granted or to be granted to a Participant who is then subject to Section 16 of the Exchange Act in respect of the Company may be taken either by such a subcommittee or by the Committee but with each such member who is not a Qualified Member abstaining or recusing himself or herself from such action, provided that, upon such abstention or recusal, the Committee remains composed of two or more Qualified Members. Such action, authorized by such a subcommittee or by the Committee upon the abstention or recusal of such non-Qualified Member(s), shall be the action of the Committee for purposes of the Plan. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any subsidiary or affiliate, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the fullest extent permitted under Section 157 of the Delaware General Corporation Law. (c) Limitation of Liability. The Committee and each member thereof and any person acting pursuant to authority delegated by the Committee, shall be entitled, in good faith, to rely or act upon any report or other information furnished by any executive officer, other officer or employee of the Company or a subsidiary or affiliate, the Company's independent auditors, consultants or any other agents assisting in the administration of the Plan. Members of the Committee, any person acting pursuant to authority delegated by the Committee, and any officer or employee of the Company or a subsidiary or affiliate acting at the direction or on behalf of the Committee or a delegee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination. 4. Stock Subject to Plan. -4- (a) Overall Number of Shares Available for Delivery. Subject to adjustment as provided in Section 11(c), the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be (i) three million plus (ii) the number of shares that, immediately prior to the Effective Date, remain available for issuance under the Preexisting Plans plus (iii) the number of shares subject to awards under the Preexisting Plans which become available in accordance with Section 4(b) after the Effective Date; provided, however, that the total number of shares with respect to which ISOs may be granted shall not exceed the number specified under clauses (i) and (ii) above; and provided further, that the total number of shares which may be issued and delivered in connection with Awards other than Options and SARs shall not exceed 5% of the total number of shares reserved under the Plan. Any shares of Stock delivered under the Plan shall consist of authorized and unissued shares or treasury shares. (b) Share Counting Rules. The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award. Shares subject to an Award or an award under a Preexisting Plan that is canceled, expired, forfeited, settled in cash or otherwise terminated without a delivery of shares to the Participant will again be available for Awards, and shares withheld in payment of the exercise price or taxes relating to an Award or Preexisting Plan award and shares equal to the number surrendered in payment of any exercise price or taxes relating to an Award or Preexisting Plan award shall be deemed to constitute shares not delivered to the Participant and shall be deemed to again be available for Awards under the Plan. In addition, in the case of any Award granted in substitution for an award of a company or business acquired by the Company or a subsidiary or affiliate, shares issued or issuable in connection with such substitute Award shall not be counted against the number of shares reserved under the Plan, but shall be available under the Plan by virtue of the Company's assumption of the plan or arrangement of the acquired company or business. This Section 4(b) shall apply to the number of shares reserved and available for ISOs only to the extent consistent with applicable regulations relating to ISOs under the Code. 5. Eligibility; PerPerson Award Limitations. Awards may be granted under the Plan only to Eligible Persons. For purposes of the Plan, an "Eligible Person" means an employee of the Company or any subsidiary or affiliate, including any executive officer, a non-employee director of the Company, a consultant or other person who provides substantial services to the Company or a subsidiary or affiliate, and any person who has been offered employment by the Company or a subsidiary or affiliate, provided that such prospective employee may not receive any payment or exercise any right relating to an Award until such person has commenced employment with the Company or a subsidiary or affiliate. An employee on leave of absence, including for a disability that has not resulted in termination of employment, may be considered as still in the employ of the Company or a subsidiary or affiliate for purposes of eligibility for participation in the Plan. For purposes of the Plan, a joint venture in which the Company or a subsidiary has a substantial direct or indirect equity investment shall be deemed an affiliate, if so determined by the Committee. In each calendar year during any part of which the Plan is in effect, an Eligible Person may be granted Awards intended to qualify as "performance-based compensation" under Code Section 162(m) under Section 6 relating to up to his or her Annual Limit. A Participant's Annual Limit, in any year during any part of which the Participant is then eligible under the Plan, shall equal 500,000 shares plus the amount of the Participant's unused Annual Limit relating to the same type of Award as of the close of the previous year, subject to adjustment as provided in Section 11(c). In the case of a cash-denominated Award for which the limitation set forth in the preceding sentence would not operate as an effective limitation satisfying Treasury Regulation 1.162-27(e)(4) (including a cash Performance Award under Section 7), an Eligible Person may not be granted Awards authorizing the earning during any calendar year of an amount that exceeds the Participant's Annual Limit, which for this purpose shall equal $2.5 million plus the amount of the Participant's unused cash Annual Limit as of the close of the previous year (this limitation is separate and not affected by the number of Awards granted during such calendar year -5- subject to the limitation in the preceding sentence). For this purpose, (i) "earning" means satisfying performance conditions so that an amount becomes payable, without regard to whether it is to be paid currently or on a deferred basis or continues to be subject to any service requirement or other non-performance condition, and (ii) a Participant's Annual Limit is used to the extent a cash amount or number of shares may be potentially earned or paid under an Award, regardless of whether such amount or shares are in fact earned or paid. 6. Specific Terms of Awards. (a) General. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 11(e)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment or service by the Participant and terms permitting a Participant to make elections relating to his or her Award. The Committee shall retain full power and discretion with respect to any term or condition of an Award that is not mandatory under the Plan. The Committee shall require the payment of lawful consideration for an Award to the extent necessary to satisfy the requirements of the New York Business Corporation Law, and may otherwise require payment of consideration for an Award except as limited by the Plan. (b) Options. The Committee is authorized to grant Options to Participants on the following terms and conditions: (i) Exercise Price. The exercise price per share of Stock purchasable under an Option (including both ISOs and non-qualified Options) shall be determined by the Committee, provided that such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option, subject to Sections 6(f) and 8(a). (ii) Option Term; Time and Method of Exercise. The Committee shall determine the term of each Option, which in no event shall exceed a period of ten years from the date of grant. The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid and the form of such payment (subject to Section 11(k)), including, without limitation, cash, Stock, other Awards or awards granted under other plans of the Company or any subsidiary or affiliate, or other property (including notes and other contractual obligations of Participants to make payment on a deferred basis, such as through "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by or forms in which Stock will be delivered or deemed to be delivered in satisfaction of Options to Participants (including deferred delivery of shares representing the Option "profit," at the election of the Participant or as mandated by the Committee, with such deferred shares subject to any vesting, forfeiture or other terms as the Committee may specify). (iii) ISOs. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Code Section 422, including but not limited to the requirement that no ISO shall be granted more than ten years after the Effective Date. (c) Stock Appreciation Rights. The Committee is authorized to grant SAR's to Participants on the following terms and conditions: (i) Right to Payment. An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise (or, in the case of a "Limited SAR," the Fair Market Value determined by -6- reference to the Change of Control price or value, as defined in the applicable Award agreement) over (B) the grant price of the SAR as determined by the Committee. (ii) Other Terms. The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Participants, and whether or not a SAR shall be free-standing or in tandem or combination with any other Award. Limited SARs that may only be exercised in connection with a Change of Control or other event as specified by the Committee may be granted on such terms, not inconsistent with this Section 6(c), as the Committee may determine. (d) Restricted Stock. The Committee is authorized to grant Restricted Stock to Participants on the following terms and conditions: (i) Grant and Restrictions. Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise and under such other circumstances as the Committee may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the Plan and any Award document relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee). (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee may provide, by rule or regulation or in any Award document, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will lapse in whole or in part, including in the event of terminations resulting from specified causes. (iii) Certificates for Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock. (iv) Dividends and Splits. As a condition to the grant of an Award of Restricted Stock, the Committee may require that any dividends paid on a share of Restricted Stock shall be either (A) paid with respect to such Restricted Stock at the dividend payment date in cash, in kind, or in a number of shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) automatically reinvested in additional Restricted Stock or held in kind, which shall be subject to the same terms as applied to the original Restricted Stock to which it relates, or (C) deferred as to payment, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in shares of Deferred Stock, other Awards or other investment vehicles, subject to such terms as the Committee shall determine or permit a Participant to elect. Unless otherwise determined by the Committee, Stock distributed in connection with a Stock split or Stock dividend, and other property distributed as a dividend, shall be subject to -7- restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed. (e) Deferred Stock. The Committee is authorized to grant Deferred Stock to Participants, which are rights to receive Stock, other Awards, or a combination thereof at the end of a specified deferral period, subject to the following terms and conditions: (i) Award and Restrictions. Issuance of Stock will occur upon expiration of the deferral period specified for an Award of Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, and under such other circumstances as the Committee may determine at the date of grant or thereafter. Deferred Stock may be satisfied by delivery of Stock, other Awards, or a combination thereof (subject to Section 11(k)), as determined by the Committee at the date of grant or thereafter. (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award document evidencing the Deferred Stock), all Deferred Stock that is at that time subject to such forfeiture conditions shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award document, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock will lapse in whole or in part, including in the event of terminations resulting from specified causes. (iii) Dividend Equivalents. Unless otherwise determined by the Committee, Dividend Equivalents on the specified number of shares of Stock covered by an Award of Deferred Stock shall be either (A) paid with respect to such Deferred Stock at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such Deferred Stock, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in additional Deferred Stock, other Awards or other investment vehicles having a Fair Market Value equal to the amount of such dividends, as the Committee shall determine or permit a Participant to elect. (f) Bonus Stock and Awards in Lieu of Obligations. The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of obligations of the Company or a subsidiary or affiliate to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements, subject to such terms as shall be determined by the Committee. (g) Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to a Participant, entitling the Participant to receive cash, Stock, other Awards, or other property equivalent to all or a portion of the dividends paid with respect to a specified number of shares of Stock. Dividend Equivalents may be awarded on a freestanding basis or in connection with another Award. The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to restrictions on transferability, risks of forfeiture and such other terms as the Committee may specify. (h) Other StockBased Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock or factors that may influence the value of Stock, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with -8- value and payment contingent upon performance of the Company or business units thereof or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified subsidiaries or affiliates or other business units. The Committee shall determine the terms and conditions of such Awards. Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, notes, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 6(h). (i) Performance Awards. Performance Awards, denominated in cash or in Stock or other Awards, may be granted by the Committee in accordance with Section 7. 7. Performance Awards, Including Annual Incentive Awards. (a) Performance Awards Generally. The Committee is authorized to grant Performance Awards on the terms and conditions specified in this Section 7. Performance Awards may be denominated as a cash amount, number of shares of Stock, or specified number of other Awards (or a combination) which may be earned upon achievement or satisfaction of performance conditions specified by the Committee. In addition, the Committee may specify that any other Award shall constitute a Performance Award by conditioning the right of a Participant to exercise the Award or have it settled, and the timing thereof, upon achievement or satisfaction of such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Sections 7(b) and 7(c) in the case of a Performance Award intended to qualify as "performance-based compensation" under Code Section 162(m). (b) Performance Awards Granted to Covered Employees. If the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of a preestablished performance goal and other terms set forth in this Section 7(b). (i) Performance Goal Generally. The performance goal for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 7(b). The performance goal shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder (including Regulation 1.16227 and successor regulations thereto), including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain." The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants. (ii) Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries or affiliates, other business units, or lines of business of the Company shall be used by the Committee in establishing performance goals for such Performance Awards: (1) insurance premiums written, contract deposits, contract charges earned, or contracts in force; (2) operating income, before or after taxes, and income before or after interest, depreciation, amortization, or extraordinary or special items; (3) operating -9- income per common share (basic or diluted), and operating income from continuing operations per common share (basic or diluted); (4) return on equity, return on assets (gross or net), return on investment, or return on capital; (5) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (6) net interest margin or interest expense after taxes; (7) accumulated value and accumulated value persistency; (8) net investment income and realized investment gains (including on a per share basis); (9) economic value created; (10) operating margin or profit margin; (11) restructuring charges, litigation charges, or expense ratios; (12) stock price or total shareholder return; (13) dividends, including as a percentage of net income; and (14) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion goals, cost targets, customer satisfaction, employee satisfaction, management of employment practices and employee benefits, supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures. The targeted level or levels of performance with respect to such business criteria may be established at such levels and in such terms as the Committee may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies. (iii) Performance Period; Timing for Establishing Performance Goals; Per-Person Limit. Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to one year or more than one year, as specified by the Committee. A performance goal shall be established not later than the earlier of (A) 90 days after the beginning of any performance period applicable to such Performance Award or (B) the time 25% of such performance period has elapsed. In all cases, the maximum Performance Award of any Participant shall be subject to the limitation set forth in Section 5. (iv) Performance Award Pool. The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) during the given performance period, as specified by the Committee in accordance with Section 7(b)(iv). The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. (v) Settlement of Performance Awards; Other Terms. Settlement of such Performance Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, increase or reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Performance Award subject to this Section 7(b). Any settlement which changes the form of payment from that originally specified shall be implemented in a manner such that the Performance Award and other related Awards do not, solely for that reason, fail to qualify as "performance-based compensation" for purposes of Code Section 162(m). The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant or other event (including a Change of Control) prior to the end of a performance period or settlement of such Performance Awards. (c) Annual Incentive Awards Granted to Designated Covered Employees. The Committee may grant an Annual Incentive Award to an Eligible Person who is designated by the Committee as likely to be a Covered Employee. Such Annual Incentive Award will be intended to qualify as "performance- -10- based compensation" for purposes of Code Section 162(m), and therefore its grant, exercise and/or settlement shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 7(c). (i) Grant of Annual Incentive Awards. Not later than the earlier of 90 days after the beginning of any performance period applicable to such Annual Incentive Award or the time 25% of such performance period has elapsed, the Committee shall determine the Covered Employees who will potentially receive Annual Incentive Awards, and the amount(s) potentially payable thereunder, for that performance period. The amount(s) potentially payable shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) in the given performance period, as specified by the Committee. The Committee may designate an annual incentive award pool as the means by which Annual Incentive Awards will be measured, which pool shall conform to the provisions of Section 7(b)(iv). In such case, the portion of the Annual Incentive Award pool potentially payable to each Covered Employee shall be preestablished by the Committee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the limitation set forth in Section 5. (ii) Payout of Annual Incentive Awards. After the end of each performance period, the Committee shall determine the amount, if any, of the Annual Incentive Award for that performance period payable to each Participant. The Committee may, in its discretion, determine that the amount payable to any Participant as a final Annual Incentive Award shall be reduced from the amount of his or her potential Annual Incentive Award, including a determination to make no final Award whatsoever, but may not exercise discretion to increase any such amount. The Committee shall specify the circumstances in which an Annual Incentive Award shall be paid or forfeited in the event of termination of employment by the Participant or other event (including a Change of Control) prior to the end of a performance period or settlement of such Annual Incentive Award. (d) Written Determinations. Determinations by the Committee as to the establishment of performance goals, the amount potentially payable in respect of Performance Awards and Annual Incentive Awards, the level of actual achievement of the specified performance goals relating to Performance Awards and Annual Incentive Awards, and the amount of any final Performance Award and Annual Incentive Award shall be recorded in writing in the case of Performance Awards intended to qualify under Section 162(m). Specifically, the Committee shall certify in writing, in a manner conforming to applicable regulations under Section 162(m), prior to settlement of each such Award granted to a Covered Employee, that the performance objective relating to the Performance Award and other material terms of the Award upon which settlement of the Award was conditioned have been satisfied. 8. Certain Provisions Applicable to Awards. (a) Stand Alone, Additional, 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 or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary or affiliate, or any business entity to be acquired by the Company or a subsidiary or affiliate, or any other right of a Participant to receive payment from the Company or any subsidiary or affiliate. Awards granted in addition to or in tandem with other Awards or awards may be granted either as of the same time as or a different time from the grant of such other Awards or awards. Subject to Section 11(k), the Committee may determine that, in granting a new Award, the in-the-money value of any surrendered Award or award may be applied to reduce the exercise price of any Option, grant price of any SAR, or purchase price of any other Award. -11- (b) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee, subject to the express limitations set forth in Section 6(b)(ii). (c) Form and Timing of Payment under Awards; Deferrals. Subject to the terms of the Plan (including Section 11(k)) and any applicable Award document, payments to be made by the Company or a subsidiary or affiliate upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, Stock, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Stock in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events (subject to Section 11(k)). Installment or deferred payments may be required by the Committee (subject to Section 11(e)) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock. (d) Exemptions from Section 16(b) Liability. With respect to a Participant who is then subject to the reporting requirements of Section 16(a) of the Exchange Act in respect of the Company, the Committee shall implement transactions under the Plan and administer the Plan in a manner that will ensure that each transaction with respect to such a Participant is exempt from liability under Rule 16b-3 or otherwise not subject to liability under Section 16(b)), except that this provision shall not limit sales by such a Participant, and such a Participant may engage in other non-exempt transactions under the Plan. The Committee may authorize the Company to repurchase any Award or shares of Stock deliverable or delivered in connection with any Award (subject to Section 11(k)) in order to avoid a Participant who is subject to Section 16 of the Exchange Act incurring liability under Section 16(b). Unless otherwise specified by the Participant, equity securities or derivative securities acquired under the Plan which are disposed of by a Participant shall be deemed to be disposed of in the order acquired by the Participant. (e) Loan Provisions. With the consent of the Committee, and subject at all times to, and only to the extent, if any, permitted under and in accordance with, laws and regulations and other binding obligations or provisions applicable to the Company, the Company may make, guarantee, or arrange for a loan or loans to a Participant with respect to the exercise of any Option or other payment in connection with any Award, including the payment by a Participant of any or all federal, state, or local income or other taxes due in connection with any Award. Subject to such limitations, the Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, terms, and provisions of any such loan or loans, including the interest rate, if any, to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and conditions, if any, under which the loan or loans may be forgiven. 9. Change of Control. (a) Effect of "Change of Control" on Non-Performance Based Awards. In the event of a "Change of Control," the provisions of this Section 9(a) shall apply to non-performance based Awards, including Awards as to which performance conditions previously have been satisfied or are deemed satisfied under Section 9(b) and the applicable terms of the Award agreement, unless otherwise provided by the Committee in the Award agreement. In such case, if a Participant has a termination of employment or service during the period commencing immediately prior to the Change of Control and ending on the first anniversary of the Change of Control ("Change of Control Period"), which termination is initiated by the Company or a subsidiary other than for Cause (as defined below), then: -12- (i) Any Award subject to forfeiture based on failure to satisfy a condition requiring continued employment or service shall thereupon become nonforfeitable; (ii) Any Award (other than an Award the exercise of which is within the control of the Participant without penalty, including under subparagraph (iii) hereof) subject to deferral of settlement shall be settled as promptly as practicable upon such termination; (iii) Any unexercised Option or SAR or other Award potentially exercisable by the Participant, whether or not exercisable by its terms on the date of such termination, shall thereupon be fully exercisable and may be exercised, in whole or in part for the greater of three (3) months following such termination or such longer period as may be provided under the applicable Option agreement (but only during the stated term of the Option); (b) Effect of "Change of Control" on Performance-Based Awards. In the event of a "Change of Control," with respect to an outstanding Award subject to achievement of performance goals and conditions, such performance goals and conditions shall be deemed to be met or exceeded if and to the extent so provided by the Committee in the Award document governing such Award or other agreement with the Participant. (c) "Cause." For purposes of this Section 9, the term "Cause" shall mean, unless otherwise defined in an Award agreement or employment or Change-of-Control agreement between the Company or a subsidiary and the Participant then in effect: (i) A Participant's conviction of any felony under federal law or the law of the state in which the act occurred; (ii) Dishonesty by the Participant in the course of fulfilling his or her employment duties or service duties to the Company or a subsidiary; or (iii) Willful and deliberate failure on the part of the Participant to perform his or her employment or service duties to the Company or a subsidiary in any material respect, after reasonable notice of the non-performance and opportunity to correct it. 10. Additional Award Forfeiture Provisions. The Committee may condition a Participant's right to receive a grant of an Award, to exercise the Award, to retain Stock acquired in connection with an Award, or to retain the profit or gain realized by a Participant in connection with an Award, including cash received upon sale of Stock acquired in connection with an Award, upon compliance by the Participant with specified conditions relating to non-competition, confidentiality of information relating to the Company, non-solicitation of customers, suppliers, and employees of the Company, cooperation in litigation, non-disparagement of the Company and its officers, directors and affiliates, and other requirements applicable to the Participant, including during specified periods following termination of employment or service to the Company. -13- 11. General Provisions. (a) Compliance with Legal and Other Requirements. The Company may, to the extent deemed necessary or advisable by the Committee, postpone the issuance or delivery of Stock or payment of other benefits under any Award until completion of such registration or qualification of such Stock or other required action under any federal or state law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Stock or other securities of the Company are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change of Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of Stock or payment of benefits under any Award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on a Participant than existed on the 90th day preceding the Change of Control. (b) Limits on Transferability; Beneficiaries. No Award or other right or interest of a Participant under the Plan shall be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any party (other than the Company or a subsidiary or affiliate thereof), or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution or to a Beneficiary upon the death of a Participant, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative, except that Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred to one or more transferees during the lifetime of the Participant, and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent such transfers are permitted by the Committee, subject to any terms and conditions which the Committee may impose thereon (including limitations the Committee may deem appropriate in order that offers and sales under the Plan will meet applicable requirements of registration forms under the Securities Act of 1933 specified by the Securities and Exchange Commission). A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award document applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee. (c) Adjustments. In the event that any large, special and non-recurring dividend or other distribution (whether in the form of cash or property other than Stock), recapitalization, forward or reverse split, Stock dividend, reorganization, merger, consolidation, spinoff, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Stock such that an adjustment is determined by the Committee to be appropriate under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock which may be delivered in connection with Awards granted thereafter, (ii) the number and kind of shares of Stock by which annual per person Award limitations are measured under Section 5, (iii) the number and kind of shares of Stock subject to or deliverable in respect of outstanding Awards and (iv) the exercise price, grant price or purchase price relating to any Award or, if deemed appropriate, the Committee may make provision for a payment of cash or property to the holder of an outstanding Option (subject to Section 11(k)). In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards and performance goals and any hypothetical funding pool relating thereto) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or affiliate or other business unit, or the financial statements of the Company -14- or any subsidiary or affiliate, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any subsidiary or affiliate or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that the existence of such authority (i) would cause Options, SARs, or Performance Awards granted under Section 8 to Participants designated by the Committee as Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder to otherwise fail to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder, or (ii) would cause the Committee to be deemed to have authority to change the targets, within the meaning of Treasury Regulation 1.162-27(e)(4)(vi), under the performance goals relating to Options or SARs granted to Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder. (d) Tax Provisions. (i) Withholding. The Company and any subsidiary or affiliate is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's withholding obligations, either on a mandatory or elective basis in the discretion of the Committee. Other provisions of the Plan notwithstanding, only the minimum amount of Stock deliverable in connection with an Award necessary to satisfy statutory withholding requirements will be withheld. (ii) Required Consent to and Notification of Code Section 83(b) Election. No election under Section 83(b) of the Code (to include in gross income in the year of transfer the amounts specified in Code Section 83(b)) or under a similar provision of the laws of a jurisdiction outside the United States may be made unless expressly permitted by the terms of the Award document or by action of the Committee in writing prior to the making of such election. In any case in which a Participant is permitted to make such an election in connection with an Award, the Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b) or other applicable provision. (iii) Requirement of Notification Upon Disqualifying Disposition Under Code Section 421(b). If any Participant shall make any disposition of shares of Stock delivered pursuant to the exercise of an Incentive Stock Option under the circumstances described in Code Section 421(b) (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten days thereof. (e) Changes to the Plan. The Board may amend, suspend or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of shareholders or Participants; provided, however, that any amendment to the Plan shall be submitted to the Company's shareholders for approval not later than the earliest annual meeting for which the record date is after the date of such Board action if the Board determines that such shareholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its -15- discretion, determine to submit other amendments to the Plan to shareholders for approval; and provided further, that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any outstanding Award. Without the approval of shareholders, the Committee will not amend or replace previously granted Options in a transaction that constitutes a "repricing," as such term is used in Instruction 3 to Item 402(b)(2)(iv) of Regulation S-K, as promulgated by the Securities and Exchange Commission. With regard to other terms of Awards, the Committee shall have no authority to waive or modify any such Award term after the Award has been granted to the extent the waived or modified term would be mandatory under the Plan for any Award newly granted at the date of the waiver or modification. (f) Right of Setoff. The Company or any subsidiary or affiliate may, to the extent permitted by applicable law, deduct from and set off against any amounts the Company or a subsidiary or affiliate may owe to the Participant from time to time, including amounts payable in connection with any Award, owed as wages, fringe benefits, or other compensation owed to the Participant, such amounts as may be owed by the Participant to the Company, including but not limited to amounts owed under Section 10, although the Participant shall remain liable for any part of the Participant's payment obligation not satisfied through such deduction and setoff. By accepting any Award granted hereunder, the Participant agrees to any deduction or setoff under this Section 11(f). (g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Stock pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Stock, other Awards or other property, or make other arrangements to meet the Company's obligations under the Plan. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. (h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements, apart from the Plan, as it may deem desirable, including incentive arrangements and awards which do not qualify under Code Section 162(m), and such other arrangements may be either applicable generally or only in specific cases. (i) Payments in the Event of Forfeitures; Fractional Shares. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash consideration, the Participant shall be repaid the amount of such cash consideration. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. (j) Compliance with Code Section 162(m). It is the intent of the Company that Options and SARs granted to Covered Employees and other Awards designated as Awards to Covered Employees subject to Section 7 shall constitute qualified "performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder, unless otherwise determined by the Committee at the time of allocation of an Award. Accordingly, the terms of Sections 7(b), (c), and (d), including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner -16- consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee as likely to be a Covered Employee with respect to a specified fiscal year. If any provision of the Plan or any Award document relating to a Performance Award that is designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and no provision shall be deemed to confer upon the Committee or any other person discretion to increase the amount of compensation otherwise payable in connection with any such Award upon attainment of the applicable performance objectives. (k) Certain Limitations Relating to Accounting Treatment of Awards. The Company intends that stock-denominated Awards (other than SARs) will qualify for fixed accounting under Accounting Principles Board Opinion 25 ("APB 25"), with the compensation measurement date for accounting purposes to occur at the date of grant or the date performance conditions are met if an Award is fully contingent on achievement of performance goals, unless the Committee specifically determines otherwise. Therefore, other provisions of the Plan notwithstanding, in order to preserve this fundamental objective of the Plan, if any authority granted to the Committee hereunder or any provision of the Plan or an Award agreement would result, under APB 25, in "variable" accounting or a measurement date other than the date of grant or the date such performance conditions are met, if the Committee was not specifically aware of such accounting consequence at the time such Award was granted or provision otherwise became effective, such authority shall be limited and such provision shall be automatically modified and reformed to the extent necessary to preserve the accounting treatment of the award intended by the Committee, subject to Section 11(e) of the Plan. (l) Governing Law. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan and any Award document shall be determined in accordance with the laws of the State of New York, without giving effect to principles of conflicts of laws, and applicable provisions of federal law. (m) Awards to Participants Outside the United States. The Committee may modify the terms of any Award under the Plan made to or held by a Participant who is then resident or primarily employed outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that such Award shall conform to laws, regulations, and customs of the country in which the Participant is then resident or primarily employed, or so that the value and other benefits of the Award to the Participant, as affected by foreign tax laws and other restrictions applicable as a result of the Participant's residence or employment abroad shall be comparable to the value of such an Award to a Participant who is resident or primarily employed in the United States. An Award may be modified under this Section 11(m) in a manner that is inconsistent with the express terms of the Plan, so long as such modifications will not contravene any applicable law or regulation or result in actual liability under Section 16(b) for the Participant whose Award is modified. (n) Limitation on Rights Conferred under Plan. Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or a subsidiary or affiliate, (ii) interfering in any way with the right of the Company or a subsidiary or affiliate to terminate any Eligible Person's or Participant's employment or service at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees, or (iv) conferring on a Participant any of the rights of a shareholder of the -17- Company unless and until the Participant is duly issued or transferred shares of Stock in accordance with the terms of an Award or an Option is duly exercised. Except as expressly provided in the Plan and an Award document, neither the Plan nor any Award document shall confer on any person other than the Company and the Participant any rights or remedies thereunder. (o) Severability; Entire Agreement. If any of the provisions of this Plan or any Award document is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability, and the remaining provisions shall not be affected thereby; provided, that, if any of such provisions is finally held to be invalid, illegal, or unenforceable because it exceeds the maximum scope determined to be acceptable to permit such provision to be enforceable, such provision shall be deemed to be modified to the minimum extent necessary to modify such scope in order to make such provision enforceable hereunder. The Plan and any Award documents contain the entire agreement of the parties with respect to the subject matter thereof and supersede all prior agreements, promises, covenants, arrangements, communications, representations and warranties between them, whether written or oral with respect to the subject matter thereof. (p) Preexisting Plans. Upon shareholder approval of the Plan as provided under Section 11(q), no further grants of Awards will be made under any Preexisting Plan. (q) Plan Effective Date and Termination. The Plan shall become effective at March 6, 2002, provided, however, that the Plan shall be subject to the approval of the Company's stockholders within one year thereafter by the affirmative vote of the holders of a majority of the voting securities of the Company present, or represented, and entitled to vote on the subject matter at a duly held meeting of shareholders. Any Award authorized or granted prior to such shareholder approval shall be canceled or forfeited if, upon submission to shareholders, the Plan is disapproved, and not amounts may be paid out under any such Award prior to the requisite shareholder approval. Unless earlier terminated by action of the Board of Directors, the Plan will remain in effect until such time as no Stock remains available for delivery under the Plan and the Company has no further rights or obligations under the Plan with respect to outstanding Awards under the Plan. -18- EX-10.2(A) 6 dex102a.txt SPECIMEN EMPLOYEE STOCK OPTION AGREEMENT Exhibit 10.2(a) Form of Employee Option Agreement - Performance Accelerated ISO -- Under 2002 Incentive Compensation Plan HORACE MANN EDUCATORS CORPORATION 2002 Incentive Compensation Plan Stock Option Agreement This Stock Option Agreement (the "Agreement") confirms the grant on _________ __, ____ (the "Grant Date") by HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the "Company"), to _______________ ("Employee") of an incentive stock option (the "Option") to purchase shares of Common Stock, par value $.001 per share (the "Shares"), as follows: Shares purchasable: ________________ Shares Exercise Price: $______________ per Share Option vests and becomes exercisable: As to all of the Shares on __________, ____; provided that portions of the Option will vest and become cumulatively exercisable ("Accelerated Vesting") if and to the extent that the performance goals set forth under the Company's Long-Term Incentive Plan have been achieved for the specified performance year. As specified on Attachment A hereto, for each year in the period ____ - ____, a level of achievement of performance targets, based __% on_________________ and __% on ____________________, will be determined by the Committee. This level of achievement (the "Achievement Level") will be expressed as a percentage of target level performance (blending ____ and ____ performance), ranging from __% if the "threshold" level of performance is achieved to ____% if the "target" level of performance is achieved to ___% if the "maximum" level is achieved or exceeded. If the calculated Achievement Level for any year would be less than __%, the Achievement Level will be deemed to be __, and no Accelerated Vesting will result for that year. Straight-line interpolation will apply if the level of achievement of ________ or _______ is less than "target," based on the "threshold" and "target" datapoints, or between "target" and "maximum" based on those datapoints. The Committee will determine the Achievement Level following the completion of the audit of the Company's financial statements for the performance year, with any resulting Accelerated Vesting effective at the date of such determination. Committee determinations of the Achievement Level under the Long-Term Incentive Plan and all other matters hereunder will be final. The portion of the Option, expressed as a percentage of the total number of Shares purchasable under the Option, subject to Accelerated Vesting in each year will be as follows: Portion of Option Subject Performance Year to Accelerated Vesting ---------------- ---------------------- ____ __% times the Achievement Level ____ __% times the Achievement Level ____ __% times the Achievement Level provided, however, that the portion of the Option subject to Accelerated Vesting in ____ in no event will exceed the then remaining unvested portion of the Option. In addition to possible Accelerated Vesting, the Option will become immediately vested and exercisable upon the occurrence of certain events relating to Termination of Employment, in accordance with Section 4 hereof. (Note: If the portion of this Option and any previously granted incentive stock option which vests in any one year has an aggregate exercise price in excess of $100,000, that portion of this Option in excess of that $100,000 aggregate vesting limit will not qualify as an incentive stock option but will be treated as a vested non-qualified stock option.) Expiration Date: _______ __, ____ (the "Stated Expiration Date") or, in the event Employee's employment by the Company and its subsidiaries terminates earlier, the date the Option ceases to 1 be exercisable under Section 4 hereof. The Option is subject to the terms and conditions of the 2002 Incentive Compensation Plan (the "Plan") and this Agreement, including the Terms and Conditions of Option Grant attached hereto and deemed a part hereof. The number and kind of shares purchasable, the Exercise Price, and other terms and conditions are subject to adjustment in accordance with Section 11(c) of the Plan. Employee acknowledges and agrees that (i) the Option is nontransferable, except as provided in Section 6 hereof and Section 11(b) of the Plan, (ii) the Option is subject to forfeiture in the event of Employee's termination of employment in certain circumstances, as specified in Section 4 hereof, and (iii) sales of Shares will be subject to the Company's policies regulating trading by employees. IN WITNESS WHEREOF, HORACE MANN EDUCATORS CORPORATION has caused this Agreement to be executed by its officer thereunto duly authorized. HORACE MANN EDUCATORS CORPORATION By:_____________________ [Name] [Title] 2 TERMS AND CONDITIONS OF OPTION GRANT The following Terms and Conditions apply to the Option granted to Employee by HORACE MANN EDUCATORS CORPORATION (the "Company"), as specified on the preceding page. Certain specific terms of the Option, including the number of shares purchasable, vesting and Expiration Date, and Exercise Price, are set forth on the preceding page. 1. General. The Option is granted to Employee under the Company's 2002 Incentive Compensation Plan (the "Plan"), which has been previously delivered to Employee and/or is available upon request to the Corporate Benefits Department. All of the applicable terms, conditions and other provisions of the Plan are incorporated by reference herein. Capitalized terms used in this Agreement but not defined herein shall have the same meanings as in the Plan. If there is any conflict between the provisions of this document and mandatory provisions of the Plan, the provisions of the Plan govern. By accepting the grant of the Option, Employee agrees to be bound by all of the terms and provisions of the Plan (as presently in effect or later amended), the rules and regulations under the Plan adopted from time to time, and the decisions and determinations of the Compensation Committee of the Company's Board of Directors (the "Committee") made from time to time. The Option is an incentive stock option as defined under Section 422 of the Internal Revenue Code of 1986, as amended, to the maximum extent possible, and any portion that does not so qualify is a non-qualified stock option. 2. Right to Exercise Option. Subject to all applicable laws, rules, regulations and the terms of the Plan and this Agreement, Employee may exercise the Option only after the time and to the extent the Option has become vested and exercisable and prior to the Expiration Date of the Option. 3. Method of Exercise. To exercise the Option, Employee must (a) give written notice to the Vice President, Corporate Benefits of the Company, which notice shall specifically refer to this Agreement, state the number of Shares as to which the Option is being exercised, the name in which he or she wishes the Shares to be issued, and be signed by Employee, and (b) pay in full to the Company the Exercise Price of the Option for the number of Shares being purchased either (i) in cash (including by check), payable in United States dollars, (ii), by delivery of Shares already owned by Employee (which Shares must have been held for at least six months if they were acquired under a Company plan and are not considered to be "mature" shares for accounting purposes) having a fair market value, determined as of the date the Option is exercised, equal to all or the part of the aggregate Exercise Price being paid in this way, or (iii) in any other manner then permitted by the Committee. Once Employee gives notice of exercise, such notice may not be revoked. When Employee exercises the Option, or part thereof, the Company will transfer Shares (or make a non-certificated credit) to Employee's brokerage account at a designated securities brokerage firm or otherwise deliver Shares to Employee. No Employee or Beneficiary shall have at any time any rights with respect to Shares covered by this Agreement prior to the valid exercise and full payment for the Shares as specified herein, and no adjustment shall be made for dividends or other rights for which the record date is prior to such valid exercise and payment. 4. Termination Provisions. The following provisions will govern the vesting, exercisability and expiration of the Option in the event of termination of Employee's employment, unless the Committee determines to provide more favorable terms; provided, however, that the vesting, exercisability and expiration of the Option provided under Section 9(a)(iii) of the Plan, relating to certain Terminations following a Change of Control, shall apply to the extent that the provisions of Section 9(a)(iii) would be more favorable to Employee, except as limited under Subsection (h) below: (a) Death. In the event of Employee's Termination of Employment due to death, the Option, to the extent then outstanding, will vest and become immediately exercisable in full, and will remain exercisable, in accordance with Section 11(b) of the Plan, until the earlier of one year after such death or the Stated Expiration Date. (Note: Exercise of the option more than three months after Termination would not qualify for favorable incentive stock option tax treatment.) (b) Disability. In the event of Employee's Termination of Employment due to Disability (as defined below), the Option, to the extent then outstanding, will vest and become immediately exercisable in full, and will remain exercisable until the earlier of one year after such Termination of Employment or the Stated Expiration Date. (Note: Certain Disabilities under the Plan may not 3 qualify as a "disability" under incentive stock option tax rules, so that exercise of the option more than three months after Termination would not qualify for favorable incentive stock option tax treatment.) (c) Retirement. In the event of Employee's Termination of Employment due to Retirement (as defined below), the Option, to the extent then outstanding, will vest and become immediately exercisable in full, and will remain exercisable until the earlier of five years after such Termination of Employment or the Stated Expiration Date. (Note: Exercise of the option more than three months after Termination would not qualify for favorable incentive stock option tax treatment.) (d) Termination by the Company Without Cause. In the event of Employee's Termination of Employment by the Company without Cause, the portion of the then-outstanding Option not vested and exercisable at the date of termination will be forfeited, and any portion of the then-outstanding Option that is vested and exercisable at the date of termination will expire at the earlier of three months after Termination of Employment or the Stated Expiration Date. (e) Termination by the Company for Cause. In the event of Employee's Termination of Employment by the Company for Cause (as defined below), the Option, whether or not then vested and exercisable, immediately will be forfeited and will expire. (f) Termination by the Employee Voluntarily. In the event of Employee's voluntary Termination of Employment, the portion of the then-outstanding Option not vested and exercisable at the date of termination will be forfeited, and any vested portion of the then-outstanding Option will expire immediately at the date of Termination of Employment. (g) Certain Definitions. The following definitions apply for purposes of this Agreement: (i) "Cause" means (A) the willful and continued failure by Employee to perform substantially his duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Employee which specifically identifies the manner in which Employee has not substantially performed his duties, (B) the willful engagement by Employee in conduct which is not authorized by the Board of Directors of the Company or within the normal course of Employee's business decisions and is known by Employee to be materially detrimental to the best interests of the Company or any of its subsidiaries, or (C) the willful engagement by Employee in illegal conduct or any act of serious dishonesty which adversely affects, or, in the reasonable estimation of the Board of Directors of the Company, could in the future adversely affect, the value, reliability or performance of Employee to the Company in a material manner. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Employee in good faith and in the best interests of the Company. The foregoing notwithstanding, in any case governed by Section 9 of the Plan (following a Change of Control), the definition set forth in Section 9(c) of the Plan shall govern. (ii) "Disability" means a disability entitling the Employee to long-term disability benefits under the Company's long-term disability policy as in effect at the date of Employee's Termination of Employment. (iii) "Retirement" means retirement from active employment with the Company or a subsidiary pursuant to the early or normal retirement provisions of the Company's or the subsidiary's qualified retirement plan. (iv) "Termination of Employment" means the earliest time at which Employee is not employed by the Company or a subsidiary of the Company and is not serving as a 4 non-employee director of the Company or a subsidiary of the Company. (h) Limitation on Acceleration of Certain Options Upon Termination Following a Change of Control. In the event of a Termination of Employment of Employee following a Change of Control, if Section 9(a)(iii) of the Plan or any other provision (an "Enhancement Provision") would apply so as to accelerate vesting of the Option or otherwise enhance the rights of Employee with respect to the exercise or expiration of the Option, and if Employee will be subject to a golden parachute excise tax under Section 4999 of the Internal Revenue Code (regardless of any rights to a gross-up payment from the Company or any other party), and if the amount of "parachute payments" resulting from the Enhancement Provision exceeds the intrinsic value of the Option (i.e., the "spread") at the date parachute payments would be measured for purposes of Section 4999, then the Enhancement Provision shall not apply to the Option except to the extent (if any) possible without Employee becoming subject to the golden parachute excise tax under Section 4999. 5. Employee Representations and Warranties Upon Exercise. As a condition to the exercise of the Option, the Company may require Employee to make any representation or warranty to the Company as may be required under any applicable law or regulation. 6. Nontransferability. Employee may not transfer the Option or any rights thereunder to any third party other than by will or the laws of descent and distribution, and, during Employee's lifetime, only Employee or his or her duly appointed guardian or legal representative may exercise the Option, except for transfers to a Beneficiary in the event of death or as otherwise permitted and subject to the conditions under Section 11(b) of the Plan (note: these exceptions do not apply to portions of the Option that are incentive stock options). 7. Miscellaneous. (a) Binding Agreement; Written Amendments. This Agreement shall be binding upon the heirs, executors, administrators and successors of the parties. This Agreement constitutes the entire agreement between the parties with respect to the Option, and supersedes any prior agreements or documents with respect to the Option. No amendment or alteration of this Agreement which may impose any additional obligation upon the Company shall be valid unless expressed in a written instrument duly executed in the name of the Company, and no amendment, alteration, suspension or termination of this Agreement which may materially impair the rights of Employee with respect to the Option shall be valid unless expressed in a written instrument executed by Employee. (b) No Promise of Employment. The Option and the granting thereof shall not constitute or be evidence of any agreement or understanding, express or implied, that Employee has a right to continue as an officer or employee of the Company for any period of time, or at any particular rate of compensation. (c) Governing Law. The validity, construction, and effect of this agreement shall be determined in accordance with the laws (including those governing contracts) of the state of Delaware, without giving effect to principles of conflicts of laws, and applicable federal law. (d) Notices. Any notice to be given the Company under this Agreement shall be addressed to the Company at its principal executive offices, in care of the Vice President, Corporate Benefits, and any notice to the Employee shall be addressed to the Employee at Employee's address as then appearing in the records of the Company. 5 Attachment A CORPORATE PERFORMANCE MEASURES FOR THE LONG TERM INCENTIVE PLAN
Measure Weight ____ (__% Vesting) ____ (___% Vesting) ____ (_0% Vesting) - ---------------------------------------------------------------------------------------------------------------- Thres. Target Max. Thres. Target Max. Thres. Target Max. ------------------------------------------------------------------------------ - ----------------- --% $---- $---- $---- $---- $---- $---- $---- $---- $---- - ----------------- --% ----% ----% ----% ----% ----% ----% ----% ----% ----%
Note: Threshold payout is at __%. Target payout is at ___%. Maximum is at____%. 6 EX-10.2(B) 7 dex102b.txt SPECIMEN REGULAR EMPLOYEE STOCK OPTION AGREEMENT Exhibit 10.2(b) Form of Regular Employee Option Agreement - ISO w/ standard vesting -- Under 2002 Incentive Compensation Plan HORACE MANN EDUCATORS CORPORATION 2002 Incentive Compensation Plan Stock Option Agreement This Stock Option Agreement (the "Agreement") confirms the grant on _________ __, ____ (the "Grant Date") by HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the "Company"), to ____________ ("Employee") of an incentive stock option (the "Option") to purchase shares of Common Stock, par value $.001 per share (the "Shares"), as follows: Shares purchasable: _____________ Shares Exercise Price: $____________ per Share Option vests and becomes exercisable: As to __% of the Shares on the Grant Date and thereafter as to __% of the Shares, cumulatively, on each of the first, second, and third anniversaries of the Grant Date (rounded to the nearest whole share). In addition, the Option will become immediately vested and exercisable upon the occurrence of certain events relating to Termination of Employment, in accordance with Section 4 hereof. (Note: If the portion of this Option and any previously granted incentive stock option which vests in any one year has an aggregate exercise price in excess of $100,000, that portion of this Option in excess of that $100,000 aggregate vesting limit will not qualify as an incentive stock option but will be treated as a vested non-qualified stock option.) Expiration Date: _______ __, ___ (the "Stated Expiration Date") or, in the event Employee's employment by the Company and its subsidiaries terminates earlier, the date the Option ceases to be exercisable under Section 4 hereof. The Option is subject to the terms and conditions of the 2002 Incentive Compensation Plan (the "Plan") and this Agreement, including the Terms and Conditions of Option Grant attached hereto and deemed a part hereof. The number and kind of shares purchasable, the Exercise Price, and other terms and conditions are subject to adjustment in accordance with Section 11(c) of the Plan. Employee acknowledges and agrees that (i) the Option is nontransferable, except as provided in Section 6 hereof and Section 11(b) of the Plan, (ii) the Option is subject to forfeiture in the event of Employee's termination of employment in certain circumstances, as specified in Section 4 hereof, and (iii) sales of Shares will be subject to the Company's policies regulating trading by employees. IN WITNESS WHEREOF, HORACE MANN EDUCATORS CORPORATION has caused this Agreement to be executed by its officer thereunto duly authorized. HORACE MANN EDUCATORS CORPORATION By:_______________________________ [Name] [Title] TERMS AND CONDITIONS OF OPTION GRANT The following Terms and Conditions apply to the Option granted to Employee by HORACE MANN EDUCATORS CORPORATION (the "Company"), as specified on the preceding page. Certain specific terms of the Option, including the number of shares purchasable, vesting and Expiration Date, and Exercise Price, are set forth on the preceding page. 1. General. The Option is granted to Employee under the Company's 2002 Incentive Compensation Plan (the "Plan"), which has been previously delivered to Employee and/or is available upon request to the Corporate Benefits Department. All of the applicable terms, conditions and other provisions of the Plan are incorporated by reference herein. Capitalized terms used in this Agreement but not defined herein shall have the same meanings as in the Plan. If there is any conflict between the provisions of this document and mandatory provisions of the Plan, the provisions of the Plan govern. By accepting the grant of the Option, Employee agrees to be bound by all of the terms and provisions of the Plan (as presently in effect or later amended), the rules and regulations under the Plan adopted from time to time, and the decisions and determinations of the Compensation Committee of the Company's Board of Directors (the "Committee") made from time to time. The Option is an incentive stock option as defined under Section 422 of the Internal Revenue Code of 1986, as amended, to the maximum extent possible, and any portion that does not so qualify is a non-qualified stock option. 2. Right to Exercise Option. Subject to all applicable laws, rules, regulations and the terms of the Plan and this Agreement, Employee may exercise the Option only after the time and to the extent the Option has become vested and exercisable and prior to the Expiration Date of the Option. 3. Method of Exercise. To exercise the Option, Employee must (a) give written notice to the Vice President, Corporate Benefits of the Company, which notice shall specifically refer to this Agreement, state the number of Shares as to which the Option is being exercised, the name in which he or she wishes the Shares to be issued, and be signed by Employee, and (b) pay in full to the Company the Exercise Price of the Option for the number of Shares being purchased either (i) in cash (including by check), payable in United States dollars, (ii), by delivery of Shares already owned by Employee (which Shares must have been held for at least six months if they were acquired under a Company plan and are not considered to be "mature" shares for accounting purposes) having a fair market value, determined as of the date the Option is exercised, equal to all or the part of the aggregate Exercise Price being paid in this way, or (iii) in any other manner then permitted by the Committee. Once Employee gives notice of exercise, such notice may not be revoked. When Employee exercises the Option, or part thereof, the Company will transfer Shares (or make a non-certificated credit) to Employee's brokerage account at a designated securities brokerage firm or otherwise deliver Shares to Employee. No Employee or Beneficiary shall have at any time any rights with respect to Shares covered by this Agreement prior to the valid exercise and full payment for the Shares as specified herein, and no adjustment shall be made for dividends or other rights for which the record date is prior to such valid exercise and payment. 4. Termination Provisions. The following provisions will govern the vesting, exercisability and expiration of the Option in the event of termination of Employee's employment, unless the Committee determines to provide more favorable terms; provided, however, that the vesting, exercisability and expiration of the Option provided under Section 9(a)(iii) of the Plan, relating to certain Terminations following a Change of Control, shall apply to the extent that the provisions of Section 9(a)(iii) would be more favorable to Employee, except as limited under Subsection (h) below: (a) Death. In the event of Employee's Termination of Employment due to death, the Option, to the extent then outstanding, will vest and become immediately exercisable in full, and will remain exercisable, in accordance with Section 11(b) of the Plan, until the earlier of one year after such death or the Stated Expiration Date. (Note: Exercise of the option more than three months after Termination would not qualify for favorable incentive stock option tax treatment.) (b) Disability. In the event of Employee's Termination of Employment due to Disability (as defined below), the Option, to the extent then outstanding[, will vest and become immediately exercisable in full, and will remain exercisable until the earlier of one year after such Termination 2 of Employment or the Stated Expiration Date. (Note: Certain Disabilities under the Plan may not qualify as a "disability" under incentive stock option tax rules, so that exercise of the option more than three months after Termination would not qualify for favorable incentive stock option tax treatment.) (c) Retirement. In the event of Employee's Termination of Employment due to Retirement (as defined below), the Option, to the extent then outstanding, will not be forfeited, but will remain outstanding until the date that is the earlier of two years after such Termination of Employment or the Stated Expiration Date. Any portion of the Option that had not become exercisable as of the date of Termination of Employment will become exercisable one year after the date of Termination of Employment (without regard to any intervening vesting date specified on the cover page of this Agreement). (Note: Exercise of any portion of the option more than three months after Termination would not qualify for favorable incentive stock option tax treatment.) (d) Termination by the Company Without Cause. In the event of Employee's Termination of Employment by the Company without Cause, the portion of the then-outstanding Option not vested and exercisable at the date of termination will be forfeited, and any portion of the then-outstanding Option that is vested and exercisable at the date of termination will expire at the earlier of three months after Termination of Employment or the Stated Expiration Date. (e) Termination by the Company for Cause. In the event of Employee's Termination of Employment by the Company for Cause (as defined below), the Option, whether or not then vested and exercisable, immediately will be forfeited and will expire. (f) Termination by the Employee Voluntarily. In the event of Employee's voluntary Termination of Employment, the portion of the then-outstanding Option not vested and exercisable at the date of termination will be forfeited, and any vested portion of the then-outstanding Option will expire immediately at the date of Termination of Employment. (g) Certain Definitions. The following definitions apply for purposes of this Agreement: (i) "Cause" means (A) the willful and continued failure by Employee to perform substantially his duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Employee which specifically identifies the manner in which Employee has not substantially performed his duties, (B) the willful engagement by Employee in conduct which is not authorized by the Board of Directors of the Company or within the normal course of Employee's business decisions and is known by Employee to be materially detrimental to the best interests of the Company or any of its subsidiaries, or (C) the willful engagement by Employee in illegal conduct or any act of serious dishonesty which adversely affects, or, in the reasonable estimation of the Board of Directors of the Company, could in the future adversely affect, the value, reliability or performance of Employee to the Company in a material manner. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Employee in good faith and in the best interests of the Company. The foregoing notwithstanding, in any case governed by Section 9 of the Plan (following a Change of Control), the definition set forth in Section 9(c) of the Plan shall govern. (ii) "Disability" means a disability entitling the Employee to long-term disability benefits under the Company's long-term disability policy as in effect at the date of Employee's Termination of Employment. 3 (iii) "Retirement" means retirement from active employment with the Company or a subsidiary pursuant to the early or normal retirement provisions of the Company's or the subsidiary's qualified retirement plan. (iv) "Termination of Employment" means the earliest time at which Employee is not employed by the Company or a subsidiary of the Company and is not serving as a non-employee director of the Company or a subsidiary of the Company. (h) Limitation on Acceleration of Certain Options Upon Termination Following a Change of Control. In the event of a Termination of Employment of Employee following a Change of Control, if Section 9(a)(iii) of the Plan or any other provision (an "Enhancement Provision") would apply so as to accelerate vesting of the Option or otherwise enhance the rights of Employee with respect to the exercise or expiration of the Option, and if Employee will be subject to a golden parachute excise tax under Section 4999 of the Internal Revenue Code (regardless of any rights to a gross-up payment from the Company or any other party), and if the amount of "parachute payments" resulting from the Enhancement Provision exceeds the intrinsic value of the Option (i.e., the "spread") at the date parachute payments would be measured for purposes of Section 4999, then the Enhancement Provision shall not apply to the Option except to the extent (if any) possible without Employee becoming subject to the golden parachute excise tax under Section 4999. 5. Employee Representations and Warranties Upon Exercise. As a condition to the exercise of the Option, the Company may require Employee to make any representation or warranty to the Company as may be required under any applicable law or regulation. 6. Nontransferability. Employee may not transfer the Option or any rights thereunder to any third party other than by will or the laws of descent and distribution, and, during Employee's lifetime, only Employee or his or her duly appointed guardian or legal representative may exercise the Option, except for transfers to a Beneficiary in the event of death or as otherwise permitted and subject to the conditions under Section 11(b) of the Plan (note: these exceptions do not apply to portions of the Option that are incentive stock options). 7. Miscellaneous. (a) Binding Agreement; Written Amendments. This Agreement shall be binding upon the heirs, executors, administrators and successors of the parties. This Agreement constitutes the entire agreement between the parties with respect to the Option, and supersedes any prior agreements or documents with respect to the Option. No amendment or alteration of this Agreement which may impose any additional obligation upon the Company shall be valid unless expressed in a written instrument duly executed in the name of the Company, and no amendment, alteration, suspension or termination of this Agreement which may materially impair the rights of Employee with respect to the Option shall be valid unless expressed in a written instrument executed by Employee. (b) No Promise of Employment. The Option and the granting thereof shall not constitute or be evidence of any agreement or understanding, express or implied, that Employee has a right to continue as an officer or employee of the Company for any period of time, or at any particular rate of compensation. (c) Governing Law. The validity, construction, and effect of this agreement shall be determined in accordance with the laws (including those governing contracts) of the state of Delaware, without giving effect to principles of conflicts of laws, and applicable federal law. (d) Notices. Any notice to be given the Company under this Agreement shall be addressed to the Company at its principal executive offices, in care of the Vice President, Corporate Benefits, and any notice to the Employee shall be addressed to the Employee at Employee's address as then appearing in the records of the Company. 4 EX-10.2(C) 8 dex102c.txt SPECIMEN DIRECTOR STOCK OPTION AGREEMENT Exhibit 10.2(c) Form of Director Option Agreement - Performance Accelerated NQSO -- Under 2002 Incentive Compensation Plan HORACE MANN EDUCATORS CORPORATION 2002 Incentive Compensation Plan Stock Option Agreement -- Non-Employee Director This Stock Option Agreement (the "Agreement") confirms the grant on _________ __, ____ (the "Grant Date") by HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the "Company"), to _______________ ("Optionee") of a non-qualified stock option (the "Option") to purchase shares of Common Stock, par value $.001 per share (the "Shares"), as follows: Shares purchasable: ________________ Shares Exercise Price: $_______________ per Share Option vests and becomes exercisable: As to all of the Shares on __________,_____; provided that portions of the Option will vest and become cumulatively exercisable ("Accelerated Vesting") if and to the extent that the performance goals set forth under the Company's Long-Term Incentive Plan have been achieved for the specified performance year. As specified on Attachment A hereto, for each year in the period _____ - _____, a level of achievement of performance targets, based __% on _____________ and __% on ________________, will be determined by the Committee. This level of achievement (the "Achievement Level") will be expressed as a percentage of target level performance (blending _____and ______performance), ranging from __% if the "threshold" level of performance is achieved to ___% if the "target" level of performance is achieved to ___% if the "maximum" level is achieved or exceeded. If the calculated Achievement Level for any year would be less than __%, the Achievement Level will be deemed to be _%, and no Accelerated Vesting will result for that year. Straight-line interpolation will apply if the level of achievement of _______ or ________is less than "target," based on the "threshold" and "target" datapoints, or between "target" and "maximum" based on those datapoints. The Committee will determine the Achievement Level following the completion of the audit of the Company's financial statements for the performance year, with any resulting Accelerated Vesting effective at the date of such determination. Committee determinations of the Achievement Level under the Long-Term Incentive Plan and all other matters hereunder will be final. The portion of the Option, expressed as a percentage of the total number of Shares purchasable under the Option, subject to Accelerated Vesting in each year will be as follows: Portion of Option Subject Performance Year to Accelerated Vesting ---------------- ---------------------- ____ __% times the Achievement Level ____ __% times the Achievement Level ____ __% times the Achievement Level provided, however, that the portion of the Option subject to Accelerated Vesting in ____ in no event will exceed the then remaining unvested portion of the Option. In addition to possible Accelerated Vesting, the Option will become immediately vested and exercisable upon the occurrence of certain events relating to termination of service as a director, in accordance with Section 4 hereof. Expiration Date: _______ __, ____ (the "Stated Expiration Date"). The Option is subject to the terms and conditions of the 2002 Incentive Compensation Plan (the "Plan") and this Agreement, including the Terms and Conditions of Option Grant attached hereto and deemed a part hereof. The number and kind of shares purchasable, the Exercise Price, and other terms and conditions are subject to adjustment in accordance with Section 11(c) of the Plan. Optionee acknowledges and agrees that (i) the Option is nontransferable, except as provided in Section 6 hereof and Section 11(b) of the Plan, and (ii) sales of Shares will be subject to any Company policy regulating trading by employees and directors. IN WITNESS WHEREOF, HORACE MANN EDUCATORS CORPORATION has caused this Agreement to be executed by its officer thereunto duly authorized. HORACE MANN EDUCATORS CORPORATION By:______________________________ [Name] [Title] TERMS AND CONDITIONS OF OPTION GRANT The following Terms and Conditions apply to the Option granted to Optionee by HORACE MANN EDUCATORS CORPORATION (the "Company"), as specified on the preceding page. Certain specific terms of the Option, including the number of shares purchasable, vesting and Expiration Date, and Exercise Price, are set forth on the preceding page. 1. General. The Option is granted to Optionee under the Company's 2002 Incentive Compensation Plan (the "Plan"), which has been previously delivered to Optionee and/or is available upon request to the Corporate Benefits Department. All of the applicable terms, conditions and other provisions of the Plan are incorporated by reference herein. Capitalized terms used in this Agreement but not defined herein shall have the same meanings as in the Plan. If there is any conflict between the provisions of this document and mandatory provisions of the Plan, the provisions of the Plan govern. By accepting the grant of the Option, Optionee agrees to be bound by all of the terms and provisions of the Plan (as presently in effect or later amended), the rules and regulations under the Plan adopted from time to time, and the decisions and determinations of the Compensation Committee of the Company's Board of Directors (the "Committee") made from time to time. The Option is a non-qualified stock option and not an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended. 2. Right to Exercise Option. Subject to all applicable laws, rules, regulations and the terms of the Plan and this Agreement, Optionee may exercise the Option only after the time and to the extent the Option has become vested and exercisable and prior to the Expiration Date of the Option. 3. Method of Exercise. To exercise the Option, Optionee must (a) give written notice to the Vice President, Corporate Benefits of the Company, which notice shall specifically refer to this Agreement, state the number of Shares as to which the Option is being exercised, the name in which he or she wishes the Shares to be issued, and be signed by Optionee, and (b) pay in full to the Company the Exercise Price of the Option for the number of Shares being purchased either (i) in cash (including by check), payable in United States dollars, (ii), by delivery of Shares already owned by Optionee (which Shares must have been held for at least six months if they were acquired under a Company plan and are not considered to be "mature" shares for accounting purposes) having a fair market value, determined as of the date the Option is exercised, equal to all or the part of the aggregate Exercise Price being paid in this way, or (iii) in any other manner then permitted by the Committee. Once Optionee gives notice of exercise, such notice may not be revoked. When Optionee exercises the Option, or part thereof, the Company will transfer Shares (or make a non-certificated credit) to Optionee's brokerage account at a designated securities brokerage firm or otherwise deliver Shares to Optionee. No Optionee or Beneficiary shall have at any time any rights with respect to Shares covered by this Agreement prior to the valid exercise and full payment for the Shares as specified herein, and no adjustment shall be made for dividends or other rights for which the record date is prior to such valid exercise and payment. 4. Termination Provisions. In the event of Optionee's termination of service as a director of the Company for any reason (including due to death), the Option, to the extent then outstanding, will vest and become immediately exercisable in full, and will remain exercisable until the Stated Expiration Date. 5. Optionee Representations and Warranties Upon Exercise. As a condition to the exercise of the Option, the Company may require Optionee to make any representation or warranty to the Company as may be required under any applicable law or regulation. 6. Nontransferability. The Option is not transferable except to: (a) the Optionee's spouse, sibling, parent, child or grandchild (including adoptive relationships), (b) a trust primarily for the benefit of Optionee or the persons described in (a), and (c) a corporation or other entity exclusively owned by Optionee or by persons described in (a). In addition, the Option may be transferred to a Beneficiary in the event of death or as otherwise permitted and subject to the conditions under Section 11(b) of the Plan. 3 7. Miscellaneous. (a) Binding Agreement; Written Amendments. This Agreement shall be binding upon the heirs, executors, administrators and successors of the parties. This Agreement constitutes the entire agreement between the parties with respect to the Option, and supersedes any prior agreements or documents with respect to the Option. No amendment or alteration of this Agreement which may impose any additional obligation upon the Company shall be valid unless expressed in a written instrument duly executed in the name of the Company, and no amendment, alteration, suspension or termination of this Agreement which may materially impair the rights of Optionee with respect to the Option shall be valid unless expressed in a written instrument executed by Optionee. (b) No Promise of Service. The Option and the granting thereof shall not constitute or be evidence of any agreement or understanding, express or implied, that Optionee has a right to continue as a director of the Company for any period of time, or at any particular rate of compensation. (c) Governing Law. The validity, construction, and effect of this agreement shall be determined in accordance with the laws (including those governing contracts) of the state of Delaware, without giving effect to principles of conflicts of laws, and applicable federal law. (d) Notices. Any notice to be given the Company under this Agreement shall be addressed to the Company at its principal executive offices, in care of the Vice President, Corporate Benefits, and any notice to the Optionee shall be addressed to the Optionee at Optionee's address as then appearing in the records of the Company. 4 Attachment A CORPORATE PERFORMANCE MEASURES FOR THE LONG TERM INCENTIVE PLAN ____-____
Measure Weight ____ ( % Vesting) ____ ( % Vesting) ____ ( % Vesting) - ------------------------------------------------------------------------------------------------------------------------------------ Thres. Target Max. Thres. Target Max. Thres. Target Max. ---------------------------------------------------------------------------------------- - ----------------- --% --- ---- ---- ---- ---- ---- ---- ---- ---- - ----------------- --% --- ---- ---- ---- ---- ---- ---- ---- ----
Note: Threshold payout is at __%. Target payout is at ___%. Maximum is at ___%. 5 EX-11 9 dex11.txt STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Exhibit 11 Horace Mann Educators Corporation Computation of Net Income per Share For the Three and Six Months Ended June 30, 2002 and 2001 (Amounts in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Basic - assumes no dilution: Net income (loss) for the period $ (19,287) $ (4,926) $ (3,716) $ 11,772 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding during the period 40,838 40,554 40,809 40,539 ---------- ---------- ---------- ---------- Net income (loss) per share - basic $ (0.47) $ (0.12) $ (0.09) $ 0.29 ========== ========== ========== ========== Diluted - assumes full dilution: Net income (loss) for the period $ (19,287) $ (4,926) $ (3,716) $ 11,772 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding during the period 40,838 40,554 40,809 40,539 Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: Stock options 292 189 299 130 Common stock units related to Deferred Equity Compensation Plan for Directors 134 117 134 117 Common stock units related to Deferred Compensation Plan for Employees 30 14 30 14 ---------- ---------- ---------- ---------- Total common and common equivalent shares adjusted to calculate diluted earnings per share 41,294 40,874 41,272 40,800 ---------- ---------- ---------- ---------- Net income (loss) per share - diluted $ (0.47) $ (0.12) $ (0.09) $ 0.29 ========== ========== ========== ========== Percentage of dilution compared to basic net income per share 0.0% 0.0% 0.0% 0.0%
[SEAL] EX-15 10 dex15.txt KPMG LLP LETTER Exhibit 15 Horace Mann Educators Corporation Springfield, Illinois Re: Registration Statement on Forms S-8 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated August 5, 2002, related to our review of interim financial information. Pursuant to Rule 436 under the Securities Act of 1933 (the "Act"), such report is not considered part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. /s/ KPMG LLP KPMG LLP Chicago, Illinois August 13, 2002 [SEAL] EX-99.1 11 dex991.txt CERTIFICATION - CHIEF EXECUTIVE OFFICER Exhibit 99.1 HORACE MANN EDUCATORS CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Horace Mann Educators Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Louis G. Lower II, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Louis G. Lower II - ----------------------------- Louis G. Lower II Chief Executive Officer August 13, 2002 [SEAL] EX-99.2 12 dex992.txt CERTIFICATION - CHIEF FINANCIAL OFFICER Exhibit 99.2 HORACE MANN EDUCATORS CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Horace Mann Educators Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter H. Heckman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Peter H. Heckman - ----------------------------- Peter H. Heckman Chief Financial Officer August 13, 2002 [SEAL] -----END PRIVACY-ENHANCED MESSAGE-----