-----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, IGQRW/sWfXLl3lu7+Y0Ys2fgJcpcSGGG1akrrFDbw3SfLO2dDGq13tXGMuY4YblY X5OZjH3VLhGPDFmmZil1/A== 0000912057-01-538187.txt : 20020410 0000912057-01-538187.hdr.sgml : 20020410 ACCESSION NUMBER: 0000912057-01-538187 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTY FINANCIAL COMPANIES INC /MA/ CENTRAL INDEX KEY: 0000936372 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 043260640 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13654 FILM NUMBER: 1778102 BUSINESS ADDRESS: STREET 1: 600 ATLANTIC AVE 24TH FLOOR STREET 2: 24TH FL CITY: BOSTON STATE: MA ZIP: 02210-2214 BUSINESS PHONE: 6177226000 MAIL ADDRESS: STREET 1: 600 ATLANTIC AVENUE 24TH FLOOR STREET 2: 600 ATLANTIC AVENUE 24TH FLOOR CITY: BOSTON STATE: MA ZIP: 02210-2214 FORMER COMPANY: FORMER CONFORMED NAME: NEW LFC INC DATE OF NAME CHANGE: 19950130 10-Q 1 a2061991z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------------------------------- 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: 1-13654 LIBERTY FINANCIAL COMPANIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3260640 - ---------------------------------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 600 Atlantic Avenue, Boston, Massachusetts 02210-2214 - ---------------------------------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code)
(617) 722-6000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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. [ X ] Yes [ ] No There were 49,131,858 shares of the registrant's Common Stock, $.01 par value, and no shares of the registrant's Series A Convertible Preferred Stock, $.01 par value, outstanding as of October 31, 2001. Exhibit Index - Page 28 Page 1 of 80 LIBERTY FINANCIAL COMPANIES, INC. QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE - ------- ---- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2001 and 2000 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 5 Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2001 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. OTHER INFORMATION - -------- Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27 Exhibit Index 28
2 LIBERTY FINANCIAL COMPANIES, INC. CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
SEPTEMBER 30 DECEMBER 31 2001 2000 ------------ ----------- UNAUDITED ASSETS Assets: Investments $12,053.2 $12,232.4 Cash and cash equivalents 1,959.4 1,891.0 Accrued investment income 142.8 163.5 Deferred policy acquisition costs 531.0 547.9 Deferred distribution costs 175.2 169.4 Intangible assets 507.3 533.0 Other assets 402.3 401.0 Separate account assets 3,853.3 4,212.5 --------- --------- $19,624.5 $20,150.7 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policyholder balances $12,033.3 $11,968.5 Notes payable to affiliates 200.0 200.0 Notes payable 565.3 563.2 Payable for investments purchased and loaned 1,220.9 1,364.5 Other liabilities 379.8 429.3 Separate account liabilities 3,823.4 4,166.8 --------- --------- Total liabilities 18,222.7 18,692.3 --------- --------- Series A redeemable convertible preferred stock, par value $.01; authorized, issued and outstanding, no shares in 2001 and 213,242 shares in 2000 -- 10.7 --------- --------- Stockholders' Equity: Common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding, 48,975,583 shares in 2001 and 48,784,459 shares in 2000 0.5 0.5 Additional paid-in capital 954.2 949.1 Retained earnings 413.9 532.4 Accumulated other comprehensive income (loss) 35.7 (30.6) Unearned compensation (2.5) (3.7) --------- --------- Total stockholders' equity 1,401.8 1,447.7 --------- --------- $19,624.5 $20,150.7 ========= =========
See accompanying notes to consolidated financial statements. 3 LIBERTY FINANCIAL COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE DATA) UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------- ------------------ 2001 2000 2001 2000 ------- ------- ------- ------- Investment income, including distributions from private equity limited partnerships of $0 and $26.9 million for the three months and nine months ended September 30, 2001, respectively, and $6.2 million and $8.7 million for the three months and nine months ended September 30, 2000, respectively $ 196.8 $ 214.1 $ 670.5 $ 636.4 Interest credited to policyholders (148.0) (135.8) (449.9) (396.3) ------- ------- ------- ------- INVESTMENT SPREAD 48.8 78.3 220.6 240.1 ------- ------- ------- ------- NET DERIVATIVE LOSSES (5.7) -- (1.5) -- ------- ------- ------- ------- NET REALIZED INVESTMENT LOSSES (25.3) (20.8) (58.4) (37.6) ------- ------- ------- ------- NET CHANGE IN UNREALIZED AND UNDISTRIBUTED (LOSSES) GAINS IN PRIVATE EQUITY LIMITED PARTNERSHIPS (2.5) 5.9 (17.1) 28.4 ------- ------- ------- ------- Fee income: Investment advisory and administrative fees 71.1 71.2 219.4 214.4 Distribution and service fees 12.3 15.6 41.9 46.1 Transfer agency fees 12.0 12.3 36.3 37.2 Surrender charges and net commissions 8.3 10.1 25.1 30.1 Separate account fees 12.4 11.8 39.6 33.6 ------- ------- ------- ------- TOTAL FEE INCOME 116.1 121.0 362.3 361.4 ------- ------- ------- ------- Expenses: Operating expenses (99.5) (98.1) (303.5) (300.0) Restructuring 0.2 (11.3) 0.5 (11.3) Strategic review expenses (51.0) -- (91.2) -- Amortization of deferred policy acquisition costs (24.2) (26.9) (87.8) (83.8) Amortization of deferred distribution costs (12.9) (10.9) (37.4) (31.5) Amortization of intangible assets (8.4) (5.1) (25.6) (15.3) Interest expense, net (11.0) (4.8) (30.5) (13.0) ------- ------- ------- ------- TOTAL EXPENSES (206.8) (157.1) (575.5) (454.9) ------- ------- ------- ------- PRETAX INCOME (LOSS) (75.4) 27.3 (69.6) 137.4 Income tax (expense) benefit 26.3 (5.2) 27.0 (46.9) ------- ------- ------- ------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES (49.1) 22.1 (42.6) 90.5 Cumulative effect of accounting changes, net of tax -- -- (60.8) -- ------- ------- ------- ------- NET INCOME (LOSS) $ (49.1) $ 22.1 $(103.4) $ 90.5 ======= ======= ======= ======= Net income (loss) per share - basic: Income (loss) before cumulative effect of accounting changes $ (1.02) $ 0.46 $ (0.89) $ 1.89 ======= ======= ======= ======= Net income (loss) $ (1.02) $ 0.46 $ (2.14) $ 1.89 ======= ======= ======= ======= Net income (loss) per share - assuming dilution: Income (loss) before cumulative effect of accounting changes $ (0.99) $ 0.45 $(0.85) $ 1.86 ======= ======= ======= ======= Net income (loss) $ (0.99) $ 0.45 $(2.06) $ 1.86 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 4 LIBERTY FINANCIAL COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30 ---------------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (103.4) $ 90.5 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting changes, net of tax 60.8 -- Non-cash derivative activity 95.2 -- Depreciation and amortization 73.2 59.1 Interest credited to policyholders 449.9 396.3 Net realized investment losses 58.4 37.6 Net change in unrealized and undistributed losses (gains) in private equity limited partnerships 17.1 (28.4) Net (accretion) amortization on investments (11.9) 58.5 Change in deferred policy acquisition costs (55.3) (0.9) Net change in other assets and liabilities (158.9) (81.1) --------- --------- Net cash provided by operating activities 425.1 531.6 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased available for sale (1,961.0) (4,757.9) Investments sold available for sale 2,048.3 4,756.1 Investments matured available for sale 86.6 110.8 Change in policy loans, net (12.4) (16.9) Change in mortgage loans, net 1.9 2.1 Acquisition, net of cash acquired -- (274.2) Other (4.8) 44.4 --------- --------- Net cash provided by (used in) investing activities 158.6 (135.6) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Withdrawals from policyholder accounts (1,957.6) (1,545.7) Deposits to policyholder accounts 1,568.3 1,177.3 Securities lending (106.7) 558.5 Change in notes payable 2.2 229.1 Exercise of stock options 4.5 2.2 Dividends paid (15.1) (4.7) Redemption of preferred stock (10.9) (5.5) --------- --------- Net cash (used in) provided by financing activities (515.3) 411.2 --------- --------- Increase in cash and cash equivalents 68.4 807.2 Cash and cash equivalents at beginning of period 1,891.0 1,232.6 --------- --------- Cash and cash equivalents at end of period $ 1,959.4 $ 2,039.8 ========= =========
See accompanying notes to consolidated financial statements. 5 LIBERTY FINANCIAL COMPANIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN MILLIONS) UNAUDITED
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED STOCKHOLDERS' STOCK CAPITAL EARNINGS INCOME (LOSS) COMPENSATION EQUITY ------ ---------- -------- ------------- ------------ ------------- BALANCE, DECEMBER 31, 2000 $0.5 $949.1 $ 532.4 $(30.6) $(3.7) $1,447.7 Effect of stock-based compensation plans 5.1 1.2 6.3 Common stock dividends (14.7) (14.7) Preferred stock dividends (0.4) (0.4) Net income (loss) (103.4) (103.4) Other comprehensive income, net of tax 66.3 66.3 ---- ------ ------- ------ ----- -------- BALANCE, SEPTEMBER 30, 2001 $0.5 $954.2 $ 413.9 $ 35.7 $(2.5) $1,401.8 ==== ====== ======= ====== ===== ========
See accompanying notes to consolidated financial statements. 6 LIBERTY FINANCIAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 UNAUDITED 1. GENERAL The accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of the Company's financial position and results of operations as of and for the interim periods presented. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's Form 10-K (as amended) for the year ended December 31, 2000. The results of operations for the three months and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. Certain previously reported amounts have been reclassified to conform with the current period presentation. 2. SUBSEQUENT EVENTS - DISPOSITIONS AND MERGER On October 31, 2001, the Company sold its annuity and bank marketing business to Sun Life Assurance Company of Canada, a Canadian insurance corporation ("Sun Life"). As part of this sale, Sun Life acquired Keyport Life Insurance Company and Independent Financial Marketing Group. Sun Life paid approximately $1.7 billion in cash resulting in an estimated $116 million after-tax gain. The Company received proceeds, net of estimated transaction costs and taxes, of approximately $1.454 billion. A copy of the Sun Life Stock Purchase Agreement was included as an exhibit to a Form 8-K filed on May 4, 2001. On November 1, 2001, the Company sold its asset management business to Fleet National Bank ("Fleet"). In connection with this sale, Fleet acquired all of the Company's asset management operations, including: Colonial Management Associates, Crabbe Huson Group, Inc., Liberty Asset Management Company, Liberty Funds Distributor, Liberty Funds Services, Newport Pacific Management, Inc., Progress Investment Management, Inc., Stein Roe & Farnham Incorporated and Liberty Wanger Asset Management. Fleet paid approximately $900 million in cash and assumed approximately $110 million in revolving debt incurred by a subsidiary of the Company to finance sales commissions resulting in an estimated $52 million after-tax gain. The Company received proceeds, net of estimated transaction costs and taxes, of approximately $686 million. A copy of the Fleet Stock Purchase Agreement was included as an exhibit to a Form 8-K filed on June 6, 2001. The following unaudited pro forma summary presents information as if the sales of the annuity and bank marketing business to Sun Life and the asset management business to Fleet had occurred as of January 1, 2000. The pro forma information does not necessarily reflect the actual results that would have occurred.
NINE MONTHS ENDED SEPTEMBER 30 ------------------ IN MILLIONS, EXCEPT PER SHARE DATA 2001 2000 ------ ------ Net income (loss) $(50.0) $2.8 ====== ===== Net income (loss) per share - assuming dilution $(1.00) $0.06 ====== =====
On June 4, 2001, the Company announced that it had entered into a merger agreement with Liberty Mutual Insurance Company ("Liberty Mutual"). Under the agreement, the Company will become a wholly owned subsidiary of Liberty Mutual and the Company's public stockholders will receive a cash amount currently estimated to be $33.44 per share. Such amount is subject to adjustment in certain circumstances and may be materially different than $33.44. The closing under the merger transaction is subject to certain conditions. A copy of the Merger Agreement was included as an exhibit to a Form 8-K filed on June 6, 2001. 7 On October 15, 2001, the Company commenced a cash tender offer to purchase all of its outstanding 6.75% notes due November 15, 2008 and its 7.625% debentures due November 15, 2028, collectively referred to as (the "securities"). To date, the Company has received tenders on approximately 95% of the securities. Payment, anticipated to occur on November 13, 2001, on the securities will be made from the net proceeds received in the Sun Life and Fleet transactions. In addition, debt of $200 million issued to Liberty Mutual and its affiliates was liquidated on November 1, 2001. 3. CHANGES IN ACCOUNTING PRINCIPLES The cumulative effect of accounting changes, net of tax for the nine months ended September 30, 2001 of $60.8 million includes a loss of $54.3 million relating to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133" (collectively hereafter referred to as the "Statement") in the quarter ended March 31, 2001 and a loss of $6.5 million relating to the adoption of Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" in the quarter ended June 30, 2001. The Company adopted the Statement on January 1, 2001. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through operations. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset by the change in fair value of the hedged assets, liabilities or firm commitments through operations or recognized in other comprehensive income until the hedged item is recognized in operations. The ineffective portion of a derivative's change in fair value will be immediately recognized in operations. The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of the Statement at January 1, 2001 decreased net income and stockholders' equity by $54.3 million. The adoption of the Statement may increase volatility in future reported income due, among other reasons, to the requirements of defining an effective hedging relationship under the Statement as opposed to certain hedges the Company believes are effective economic hedges. The Company anticipates that it will continue to utilize its current risk management philosophy, which includes the use of derivative instruments. The Company adopted EITF Issue No. 99-20 on April 1, 2001. EITF Issue No. 99-20 governs the method of recognizing interest income and impairment on asset-backed investment securities. EITF Issue No. 99-20 requires the Company to update the estimate of cash flows over the life of certain retained beneficial interests in securitization transactions and purchased beneficial interests in securitized financial assets. Pursuant to EITF Issue No. 99-20, based on current information and events, if the Company estimates that the fair value of its beneficial interests is not greater than or equal to its carrying value and if there has been a decrease in the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment should be recognized. The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of EITF Issue No. 99-20 on April 1, 2001 decreased net income by $6.5 million with a related increase to accumulated other comprehensive income of $1.8 million. 4. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset ("fair value hedge") or (2) utilizes the derivative as an economic hedge ("non-designated derivative"). Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset attributable to the hedged risk, are recorded in current period operations as a component of net derivative losses. Changes in the fair value of non-designated derivatives are reported in current period operations as a component of net derivative losses. 8 The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract), is carried at fair value and is considered a non-designated derivative. The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contract to provide returns based upon this index. The call options and futures are non-designated derivatives. In addition, the Company utilizes non-designated total return swap agreements to hedge its obligations related to certain separate account liabilities. As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The interest rate swap agreements are designated and qualify as fair value hedges. The ineffective portion of the fair value hedges, net of related effects on deferred policy acquisition costs, resulted in losses of $4.5 million and $2.6 million for the three and nine months ended September 30, 2001, respectively. The Company utilizes treasury rate lock agreements to reduce its exposure to interest rate risk related to certain of its notes payable. Treasury rate lock agreements are agreements to exchange with a counterparty payments based on an underlying principal balance (notional principal) to hedge against interest rate changes. The treasury rate lock agreements are designated and qualify as fair value hedges. The ineffective portion of the fair value hedges resulted in gains of $0.8 million and $0.3 million for the three and nine months ended September 30, 2001, respectively. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. This process includes linking all fair value hedges to specific assets on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value and changes in fair value will be reported in operations. The subsequent fair value changes in the hedged asset will no longer be reported in current period operations. 5. SEGMENT INFORMATION Prior to the sale of its two segments to Sun Life and Fleet (see Note 2), the Company was an asset accumulation and management company with two reportable segments: retirement-oriented insurance (principally annuities) and asset management. The annuity insurance business is conducted at Keyport Life Insurance Company ("Keyport"). Keyport generates investment spread income from the investment portfolio which supports policyholder balances associated with its fixed and indexed annuity business and its closed block of single premium whole life insurance. The annuity insurance business also derives fee income from the administration of fixed, indexed and variable annuity contracts. The asset management business is conducted at Liberty Funds Group, an investment advisor (through its subsidiary Colonial Management Associates), distributor and transfer agent to mutual funds, Stein Roe & Farnham Incorporated, a diversified investment advisor, Newport Pacific Management, Inc., an investment advisor to mutual funds and institutional accounts specializing in Asian equity markets, Crabbe Huson Group, Inc., an investment advisor to mutual funds and institutional accounts, Progress Investment Management Company, an investment advisor to institutional accounts, Liberty Asset Management Company, an investment advisor to mutual funds, and Liberty Wanger Asset Management, an investment advisor to mutual funds and institutional accounts. The asset management business derives fee income from investment products and services. 9 The Company's reportable segments offer different products and are each managed separately. Information by reportable segment is shown below (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- -------------------- 2001 2000 2001 2000 ------ ------- -------- ------ Statement of Operations Data REVENUES (EXCLUDING NET REALIZED INVESTMENT LOSSES AND NET CHANGE IN UNREALIZED AND UNDISTRIBUTED (LOSSES) GAINS IN PRIVATE EQUITY LIMITED PARTNERSHIPS): Annuity: Unaffiliated $212.6 $236.8 $ 735.9 $700.6 Intersegment (4.6) (4.1) (13.8) (12.2) ------ ------ -------- ------ Total annuity 208.0 232.7 722.1 688.4 ------ ------ -------- ------ Asset management: Unaffiliated 94.6 98.3 295.4 297.2 Intersegment 4.6 4.1 13.8 12.2 ------ ------ -------- ------ Total asset management 99.2 102.4 309.2 309.4 ------ ------ -------- ------ Total revenues (excluding net realized investment losses and net change in unrealized and undistributed (losses) gains in private equity limited partnerships) $307.2 $335.1 $1,031.3 $997.8 ====== ====== ======== ====== Statement of Operations Data INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES: Annuity: Income before amortization of intangible assets $ 15.7 $ 50.8 $ 125.9 $149.4 Amortization of intangible assets (0.3) (0.3) (0.9) (0.9) ------ ------ -------- ------ Subtotal annuity 15.4 50.5 125.0 148.5 ------ ------ -------- ------ Asset management: Income before amortization of intangible assets 12.3 21.6 43.2 57.6 Amortization of intangible assets (8.0) (4.8) (24.4) (14.4) ------ ------ -------- ------ Subtotal asset management 4.3 16.8 18.8 43.2 ------ ------ -------- ------ Other: Loss before amortization of intangible assets (16.4) (13.8) (46.9) (33.8) Amortization of intangible assets (0.1) -- (0.3) -- ------ ------ -------- ------ Subtotal other (16.5) (13.8) (47.2) (33.8) ------ ------ -------- ------ Income before non-operating items, cumulative effect of accounting changes and income taxes 3.2 53.5 96.6 157.9 Net realized investment losses (25.3) (20.8) (58.4) (37.6) Net change in unrealized and undistributed (losses) gains in private equity limited partnerships (2.5) 5.9 (17.1) 28.4 Restructuring 0.2 (11.3) 0.5 (11.3) Strategic review expenses (51.0) -- (91.2) -- ------ ------ -------- ------ Pretax income (loss) $(75.4) $ 27.3 $ (69.6) $137.4 ====== ====== ======== ======
10 6. INVESTMENTS Investments were comprised of the following (in millions):
SEPTEMBER 30 DECEMBER 31 2001 2000 ------------ ----------- Fixed maturities $10,829.1 $10,668.3 Equity securities 57.7 76.4 Policy loans 633.2 620.8 Other invested assets 533.2 866.9 --------- --------- Total $12,053.2 $12,232.4 ========= =========
The Company's general investment policy is to hold fixed maturity securities for long-term investment and, accordingly, the Company does not have a trading portfolio. To provide for maximum portfolio flexibility and appropriate tax planning, the Company classifies its entire portfolio of fixed maturity securities as "available for sale" and, accordingly, carries such investments at fair value. 11 7. NET INCOME PER SHARE The following table sets forth the computation of net income per share-basic and net income per share-assuming dilution:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------ -------------------------- 2001 2000 2001 2000 ---------- ----------- ----------- ----------- Numerator (in millions) Income (loss) before cumulative effect of accounting changes $ (49.1) $ $22.1 $ (42.6) $ 90.5 Less: preferred stock dividends (0.4) (0.2) (0.7) (0.6) ---------- ----------- ----------- ----------- Numerator for income (loss) per share-basic-income (loss) before cumulative effect of accounting changes available to common stockholders (49.5) 21.9 (43.3) 89.9 Cumulative effect of accounting changes, net of tax -- -- (60.8) -- ---------- ----------- ----------- ----------- Numerator for net income (loss) per share-basic-net income (loss) available to common stockholders $ (49.5) $ 21.9 $ (104.1) $ 89.9 ========== =========== =========== =========== Income (loss) before cumulative effect of accounting changes available to common stockholders $ (49.5) $ 21.9 $ (43.3) $ 89.9 Plus: income impact of assumed conversions Preferred stock dividends 0.4 0.2 0.7 0.6 ---------- ----------- ----------- ----------- Numerator for income (loss) per share-assuming dilution-income (loss) before cumulative effect of accounting changes available to common stockholders after assumed conversions (49.1) 22.1 (42.6) 90.5 Cumulative effect of accounting changes, net of tax -- -- (60.8) -- ------------ ------------ ------------ ------------ Numerator for net income (loss) per share-assuming dilution-net income (loss) available to common stockholders after assumed conversions $ (49.1) $ 22.1 $ (103.4) $ 90.5 ========== =========== =========== =========== Denominator Denominator for net income (loss) per share-basic- weighted-average shares 48,717,648 47,927,182 48,653,911 47,680,808 Effect of dilutive securities: Employee stock options 885,981 588,352 1,159,648 407,683 Convertible preferred stock 194,570 339,547 289,496 440,543 ---------- ----------- ----------- ----------- Dilutive potential common shares 1,080,551 927,899 1,449,144 848,226 ---------- ----------- ----------- ----------- Denominator for net income (loss) per share-assuming dilution 49,798,199 48,855,081 50,103,055 48,529,034 ========== =========== =========== =========== Net income (loss) per share-basic: Income (loss) before cumulative effect of accounting changes $ (1.02) $ 0.46 $ (0.89) $ 1.89 Cumulative effect of accounting changes, net of tax -- -- (1.25) -- ---------- ----------- ----------- ----------- Net income (loss) $ (1.02) $ 0.46 $ (2.14) $ 1.89 ========== =========== =========== =========== Net income (loss) per share - assuming dilution: Income (loss) before cumulative effect of accounting changes $ (0.99) $ 0.45 $ (0.85) $ 1.86 Cumulative effect of accounting changes, net of tax -- -- (1.21) -- ---------- ----------- ----------- ----------- Net income (loss) $ (0.99) $ 0.45 $ (2.06) $ 1.86 ========== =========== =========== ===========
12 8. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) was comprised of the following (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ----------------------- 2001 2000 2001 2000 ------- ------ -------- ------ Net income (loss) $(49.1) $ 22.1 $(103.4) $ 90.5 Other comprehensive income, net of taxes: Net unrealized gains on securities 31.6 84.3 66.3 46.0 ------ ------ ------- ------ Comprehensive income (loss) $(17.5) $106.4 $ (37.1) $136.5 ====== ====== ======= ======
9. REDEMPTION OF PREFERRED STOCK The Company redeemed all outstanding shares of the Company's Series A Redeemable Convertible Preferred Stock (the "Preferred Stock") on August 23, 2001 (the "Redemption Date"). The redemption price was $51.54688 per share and included all dividends unpaid and accruing up to the Redemption Date. Any holders who did not want to participate in this redemption converted their Preferred Stock into shares of the Company's Common Stock (the "Common Stock") and received a number of shares of Common Stock determined by multiplying 1.58385 times the number of shares of Preferred Stock converted, with a cash payment in lieu of any fractional shares of Common Stock. As a result of this transaction, the Company paid $10.9 million and issued 1,656 shares of Common Stock. 10. SEPTEMBER 11, 2001 The Company has approximately $440.6 million of fixed maturities invested in entities associated with the airline, hotel, and hospitality businesses. The national tragedy of September 11, 2001 has had an adverse impact on these industries. The Company has not recorded any other-than-temporary declines due to the decrease in market value of these investments subsequent to the September 11 terrorist attacks. The Company also has a swap agreement in which the Company participates in a reinsurance pool of catastrophic insurance. The Company's maximum exposure under this agreement is $13.6 million per calendar year. The Company's estimated pro-rata share of losses associated with the September 11 terrorist attacks is $11.8 million, which has been recorded as a reduction to net investment income. 11. RECENT ACCOUNTING PRONOUNCEMENT In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition and distinguishes between intangible assets that have a finite useful life and intangible assets that have an indefinite useful life. If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset, the useful life of the asset shall be considered to be indefinite. Intangible assets that have a finite useful life are amortized in accordance with the requirements of SFAS No. 142. Intangible assets that have an indefinite useful life are not amortized until their useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. All of the provisions of SFAS No. 142 are to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at the beginning of that fiscal year, regardless of when those previously recognized assets were initially recognized. The Company has not yet determined the impact of SFAS No. 142. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On October 31, 2001, the Company sold its annuity and bank marketing business to Sun Life Assurance Company of Canada, a Canadian insurance corporation ("Sun Life"). As part of this sale, Sun Life acquired Keyport Life Insurance Company and Independent Financial Marketing Group. Sun Life paid approximately $1.7 billion in cash resulting in an estimated $116 million after-tax gain. The Company received proceeds, net of estimated transaction costs and taxes, of approximately $1.454 billion. A copy of the Sun Life Stock Purchase Agreement was included as an exhibit to a Form 8-K filed on May 4, 2001. On November 1, 2001, the Company sold its asset management business to Fleet National Bank ("Fleet"). In connection with this sale, Fleet acquired all of the Company's asset management operations, including: Colonial Management Associates, Crabbe Huson Group, Inc., Liberty Asset Management Company, Liberty Funds Distributor, Liberty Funds Services, Newport Pacific Management, Inc., Progress Investment Management, Inc., Stein Roe & Farnham Incorporated and Liberty Wanger Asset Management. Fleet paid approximately $900 million in cash and assumed approximately $110 million in revolving debt incurred by a subsidiary of the Company to finance sales commissions resulting in an estimated $52 million after-tax gain. The Company received proceeds, net of estimated transaction costs and taxes, of approximately $686 million. A copy of the Fleet Stock Purchase Agreement was included as an exhibit to a Form 8-K filed on June 6, 2001. On June 4, 2001, the Company announced that it had entered into a merger agreement with Liberty Mutual Insurance Company ("Liberty Mutual"). Under the agreement, the Company will become a wholly owned subsidiary of Liberty Mutual and the Company's public stockholders will receive a cash amount currently estimated to be $33.44 per share. Such amount is subject to adjustment in certain circumstances and may be materially different than $33.44. The closing under the merger transaction is subject to certain conditions. A copy of the Merger Agreement was included as an exhibit to a Form 8-K filed on June 6, 2001. CHANGES IN ACCOUNTING PRINCIPLES The cumulative effect of accounting changes, net of tax for the nine months ended September 30, 2001 of $(60.8) million includes a loss of $(54.3) million relating to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133," (collectively hereafter referred to as the "Statement") in the quarter ended March 31, 2001 and a loss of $(6.5) million relating to the adoption of Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," in the quarter ended June 30, 2001. The Company adopted the Statement on January 1, 2001. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through operations. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset by the change in fair value of the hedged assets, liabilities or firm commitments through operations or recognized in other comprehensive income until the hedged item is recognized in operations. The ineffective portion of a derivative's change in fair value will be immediately recognized in operations. The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of the Statement at January 1, 2001 decreased net income and stockholders' equity by $54.3 million. The adoption of the Statement may increase volatility in future reported income due, among other reasons, to the requirements of defining an effective hedging relationship under the Statement as opposed to certain hedges the Company believes are effective economic hedges. The Company anticipates that it will continue to utilize its current risk management philosophy, which includes the use of derivative instruments. The Company adopted EITF Issue No. 99-20 on April 1, 2001. EITF Issue No. 99-20 governs the method of recognizing interest income and impairment on asset-backed investment securities. EITF Issue No. 99-20 requires the Company to update the estimate of cash flows over the life of certain retained beneficial interests in securitization transactions and purchased beneficial interests in securitized financial assets. Pursuant to EITF Issue No. 99-20, based on current information and events, if the Company estimates that the fair value of its beneficial interests is not greater than or equal to its carrying value and if there has been a decrease in the estimated cash flows since the last revised 14 estimate, considering both timing and amount, then an other-than-temporary impairment should be recognized. The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of EITF Issue No. 99-20 on April 1, 2001 decreased net income by $6.5 million with a related increase to accumulated other comprehensive income of $1.8 million. SEPTEMBER 11, 2001 The Company has approximately $440.6 million of fixed maturities invested in entities associated with the airline, hotel, and hospitality businesses. The national tragedy of September 11, 2001 has had an adverse impact on these industries. The Company has not recorded any other-than-temporary declines due to the decrease in market value of these investments subsequent to the September 11 terrorist attacks. The Company also has a swap agreement in which the Company participates in a reinsurance pool of catastrophic insurance. The Company's maximum exposure under this agreement is $13.6 million per calendar year. The Company's estimated pro-rata share of losses associated with the September 11 terrorist attacks is $11.8 million, which has been recorded as a reduction to net investment income. RESULTS OF OPERATIONS NET INCOME (LOSS) was $(49.1) million or $(0.99) per share for the quarter ended September 30, 2001 compared to $22.1 million or $0.45 per share for the quarter ended September 30, 2000. This decrease resulted largely from strategic review expenses, lower investment spread, the net change in unrealized and undistributed (losses) gains in private equity limited partnerships, interest expense, net, net derivative losses and lower fee income. Partially offsetting these items was the income tax benefit in 2001 compared to income tax expense in 2000, a small restructuring credit in 2001 compared to restructuring expense in 2000 and lower net realized investment losses. For the first nine months of 2001, net income (loss) was $(103.4) million or $(2.06) per share compared to $90.5 million or $1.86 per share for the first nine months of 2000. This decrease resulted largely from strategic review expenses, cumulative effect of accounting changes discussed above, the net change in unrealized and undistributed (losses) gains in private equity limited partnerships, higher amortization expense, lower investment spread, higher interest expense, net and higher net realized investment losses. Partially offsetting these items were a tax benefit in 2001 compared to tax expense in 2000 and a small restructuring credit in 2001 compared to restructuring expense in 2000. PRETAX INCOME (LOSS) was $(75.4) million for the quarter ended September 30, 2001 compared to $27.3 million for the quarter ended September 30, 2000. This decrease resulted largely from strategic review expenses, lower investment spread, the net change in unrealized and undistributed (losses) gains in private equity limited partnerships, interest expense, net, net derivative losses and lower fee income. Partially offsetting these items was a small restructuring credit in 2001 compared to restructuring expense in 2000 and lower net realized investment losses. For the first nine months of 2001, pretax income (loss) was $(69.6) million compared to $137.4 million for the first nine months of 2000. This decrease resulted largely from strategic review expenses, cumulative effect of accounting changes discussed above, the net change in unrealized and undistributed (losses) gains in private equity limited partnerships, higher amortization expense, lower investment spread, higher interest expense, net and higher net realized investment losses. Partially offsetting these items was a small restructuring credit in 2001 compared to restructuring expense in 2000. INVESTMENT SPREAD is the amount by which investment income earned on the Company's investments exceeds interest credited on policyholder balances. Investment spread was $48.8 million for the quarter ended September 30, 2001 compared to $78.3 million for the quarter ended September 30, 2000. The amount by which the average yield on investments exceeds the average interest credited rate on policyholder balances is the investment spread percentage. The investment spread percentage for the quarter ended September 30, 2001 was 1.41% compared to 2.20% for the quarter ended September 30, 2000. For the first nine months of 2001, investment spread was $220.6 million compared to $240.1 million for the first nine months of 2000. The investment spread percentage was 2.14% for the first nine months of 2001 compared to 2.28% for the first nine months of 2000. Investment income was $196.8 million for the quarter ended September 30, 2001 compared to $214.1 million for the quarter ended September 30, 2000. The decrease of $17.3 million in 2001 compared to 2000 includes a $10.7 15 million decrease as a result of a lower average investment yield and a $6.6 million decrease resulting from a lower level of average invested assets. Included in the quarter ended September 30, 2001 is the Company's estimated pro-rata share of loss associated with a swap agreement in which the Company participates in a reinsurance pool of catastrophic insurance of $11.8 million, which has been recorded as a reduction to net investment income. The average investment yield was 6.36% for the quarter ended September 30, 2001 compared to 6.69% for the quarter ended September 30, 2000. For the first nine months of 2001, investment income was $670.5 million compared to $636.4 million for the first nine months of 2000. The increase of $34.1 million in 2001 compared to 2000 includes a $44.9 million increase as a result of a higher average investment yield and a $10.8 million decrease resulting from a lower level of average invested assets. The average investment yield was 7.14% for the first nine months of 2001 compared to 6.67% for the first nine months of 2000. The adoption of SFAS 133 requires that call options be carried at fair value and are non-designated derivatives. The changes of the fair value of the call options are reported as a component of net derivative losses in 2001. In the prior year, the premium paid for a call option was amortized over its contract term and the call option amortization was included as a component of investment income. Investment income for the three and nine months ended September 30, 2000 was net of $19.7 million and $64.3 million, respectively, of S&P 500 Index call option amortization expense related to the Company's equity-indexed annuities. If SFAS 133 was not adopted, call option amortization expense and the average investment yield would have been $19.3 million and 5.69% and $67.4 million and 6.40% for the three and nine months ended September 30, 2001, respectively. Interest credited to policyholders totaled $148.0 million for the quarter ended September 30, 2001 compared to $135.8 million for the quarter ended September 30, 2000. The increase of $12.2 million in 2001 compared to 2000 primarily relates to a $13.8 million increase as a result of a higher average interest credited rate, partially offset by a $1.6 million decrease as a result of a slightly lower level of average policyholder balances. Policyholder balances averaged $12.0 billion (including $10.3 billion of fixed products, consisting of fixed annuities and a closed block of single premium whole life insurance, and $1.7 billion of equity-indexed annuities) for the quarter ended September 30, 2001 compared to $12.1 billion (including $9.8 billion of fixed products and $2.3 billion of equity-indexed annuities) for the quarter ended September 30, 2000. The average interest credited rate was 4.95% (5.07% on fixed products and 4.31% on equity-indexed annuities) for the quarter ended September 30, 2001 compared to 4.49% (5.30% on fixed products and 0.85% on equity-indexed annuities) for the quarter ended September 30, 2000. Keyport's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion (ranging for existing policies from 25% to 120%) of the change in value of the S&P 500 Index. Keyport's equity-indexed annuities also provide a full guarantee of principal if held to term, plus interest at 0.85% annually. For the first nine months of 2001, interest credited to policyholders totaled $449.9 million compared to $396.3 million for the first nine months of 2000. The increase of $53.6 million in 2001 compared to 2000 primarily relates to a $55.7 million increase as a result of a higher average interest credited rate, partially offset by a $2.1 million decrease resulting from a slightly lower level of average policyholder balances. Policyholder balances averaged $12.0 billion (including $10.1 billion of fixed products and $1.9 billion of equity-indexed annuities) for the first nine months of 2001 compared to $12.1 billion (including $9.7 billion of fixed products and $2.4 billion of equity-indexed annuities) for the first nine months of 2000. The average interest credited rate was 5.00% (5.20% on fixed products and 3.93% on equity-indexed annuities) for the first nine months of 2001 compared to 4.39% (5.18% on fixed products and 0.85% on equity-indexed annuities) for the first nine months of 2000. Under SFAS 133, the index annuities are deemed to contain an embedded derivative (the change in value attributable to the change in the S&P 500 Index) and a host contract. The host contracts' interest rate is derived at the inception of the contract and an effective interest rate is utilized that will result in a liability equal to the guaranteed minimum account value at the end of the term. The embedded derivative is a non-designated derivative and the changes in fair value are reported as a component of derivative losses. In 2000, the interest credited to equity-indexed policyholders related to the participation rate is reflected net of income recognized on the S&P 500 Index call options and futures resulting in a 0.85% net credited rate. If SFAS 133 was not adopted, interest credited and the average interest credited rate would have been $143.7 million and 4.79% and $428.8 million and 4.76% for the three and nine months ended September 30, 2001, respectively. Average investments in the Company's general account (computed without giving effect to Statement of Financial Accounting Standards No. 115), including cash and cash equivalents in the Company's annuity operations, were $12.4 billion for the quarter ended September 30, 2001 compared to $12.8 billion for the quarter ended September 30, 2000. 16 For the first nine months of 2001, such average investments were $12.5 billion compared to $12.7 billion for the first nine months of 2000. NET DERIVATIVE LOSSES of $(5.7) million and $(1.5) million for the three months and nine months ended September 30, 2001, respectively, represent fair value changes of non-designated derivatives and the ineffective portion of fair value hedges, net of related effects on deferred policy acquisition costs. All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset ("fair value hedge") or (2) utilizes the derivative as an economic hedge ("non-designated derivative"). Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset attributable to the hedged risk, are recorded in current period operations as a component of net derivative losses. Changes in the fair value of non-designated derivatives are reported in current period operations as a component of net derivative losses. The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract), is carried at fair value and is considered a non-designated derivative. The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contract to provide returns based upon this index. The call options and futures are non-designated derivatives. In addition, the Company utilizes non-designated total return swap agreements to hedge its obligations related to certain separate account liabilities. The net derivative gain related to changes in the fair value of the "embedded" derivatives, net of related effects on deferred policy acquisition costs was $15.5 million and $46.4 million for the three and nine months ended September 30, 2001, respectively. The net derivative loss related to changes in the fair value of call options and futures, net of related effects on deferred policy acquisition costs was $(17.5) million and $(45.6) million for the three and nine months ended September 30, 2001, respectively. As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The interest rate swap agreements are designated and qualify as fair value hedges. The ineffective portion of the fair value hedges, net of related effects on deferred policy acquisition costs, resulted in a loss of $(4.5) million and $(2.6) million for the three and nine months ended September 30, 2001, respectively. The Company utilizes treasury rate lock agreements to reduce its exposure to interest rate risk related to certain of its notes payable. Treasury rate lock agreements are agreements to exchange with a counterparty payments based on an underlying principal balance (notional principal) to hedge against interest rate changes. The treasury rate lock agreements are designated and qualify as fair value hedges. The ineffective portion of the fair value hedges resulted in gains of $0.8 million and $0.3 million for the three and nine months ended September 30, 2001, respectively. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. This process includes linking all fair value hedges to specific assets on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value and changes in value will be reported in operations. The subsequent fair value changes in the hedged asset will no longer be reported in current period operations. 17 NET REALIZED INVESTMENT LOSSES were $25.3 million for the quarter ended September 30, 2001 compared to $20.8 million for the quarter ended September 30, 2000. The net realized investment losses for the three months ended September 30, 2001 and 2000 included losses of $19.3 million and $5.7 million, respectively, for certain investments where the decline in value was determined to be other-than-temporary. For the first nine months of 2001 and 2000, net realized investment losses were $58.4 million and $37.6 million, respectively. The net realized investment losses for the nine months ended September 30, 2001 and 2000 included losses of $62.2 million and $8.7 million, respectively, for certain investments where the decline in value was determined to be other-than-temporary. NET CHANGE IN UNREALIZED AND UNDISTRIBUTED (LOSSES) GAINS IN PRIVATE EQUITY LIMITED PARTNERSHIPS is accounted for on the equity method and represents primarily (decreases) increases in the fair value of the underlying investments of the private equity limited partnerships for which the Company has ownership interests in excess of 3%. The net change of $(2.5) million and $5.9 million in unrealized and undistributed (losses) gains is recorded net of the related amortization of deferred policy acquisition costs of $(4.6) million and $11.0 million for the three months ended September 30, 2001 and 2000, respectively, and net of amounts realized, which are recognized in investment income, of $1.6 million and $6.2 million for the three months ended September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001 and 2000, the change of $(17.1) million and $28.4 million in unrealized and undistributed (losses) gains is recorded net of the related amortization of deferred policy acquisition costs of $(31.7) million and $52.6 million, and net of amounts realized, which are recognized in investment income, of $31.4 million and $8.7 million, respectively. The financial information for these investments is obtained directly from the private equity limited partnerships on a periodic basis. There can be no assurance that any unrealized and undistributed gains will ultimately be realized or that the Company will not incur losses in the future on such investments. INVESTMENT ADVISORY AND ADMINISTRATIVE FEES are based on the market value of assets managed for mutual funds and institutional investors. Investment advisory and administrative fees were $71.1 million for the quarter ended September 30, 2001 compared to $71.2 million for the quarter ended September 30, 2000. For the first nine months of 2001, investment advisory and administrative fees were $219.4 million compared to $214.4 million for the first nine months of 2000. Average fee-based assets under management were $49.7 billion for the quarter ended September 30, 2001 compared to $53.3 billion for the quarter ended September 30, 2000. For the first nine months of 2001, average fee-based assets under management were $50.6 billion compared to $52.3 billion for the first nine months of 2000. The decrease during 2001 compared to 2000 included negative market action for the twelve months ended September 30, 2001 and the sale, completed on December 29, 2000, of the Company's Private Capital Management division of Stein Roe & Farnham, Incorporated, partially offset by net sales for the twelve months ended September 30, 2001. Investment advisory and administrative fees were 0.57% and 0.53% of average fee-based assets under management for the quarters ended September 30, 2001 and 2000, respectively. For the first nine months of 2001 and 2000, such percentages were 0.58% and 0.55%, respectively. 18 The amount of fee-based assets under management is affected by product sales and redemptions and changes in the market values of such assets under management. Fee-based assets under management and changes in such assets are set forth in the tables below (in billions). FEE-BASED ASSETS UNDER MANAGEMENT
AS OF SEPTEMBER 30 ----------------------- 2001 2000 ----- ----- Mutual Funds: Intermediary-distributed $16.3 $17.9 Direct-marketed 10.5 14.3 Closed-end 2.3 2.8 Variable annuity 2.5 2.9 ----- ----- 31.6 37.9 Private Capital Management -- 9.6 Institutional 14.9 15.5 ----- ----- Total Fee-Based Assets Under Management* $46.5 $63.0 ===== =====
- -------------- * As of September 30, 2001 and 2000, Keyport's insurance assets of $14.7 billion and $14.4 billion, respectively, bring total assets under management to $61.2 billion and $77.4 billion, respectively. CHANGES IN FEE-BASED ASSETS UNDER MANAGEMENT
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- --------------------- 2001 2000 2001 2000 ----- ----- ----- ----- Fee-based assets under management - beginning $51.3 $52.5 $51.8 $51.4 Sales and reinvestments: Mutual funds 1.9 1.6 7.0 4.8 Private Capital Management -- 0.4 -- 1.3 Institutional 1.0 0.7 2.4 2.9 ----- ----- ----- ----- 2.9 2.7 9.4 9.0 ----- ----- ----- ----- Redemptions and withdrawals: Mutual funds (1.8) (1.5) (6.5) (5.3) Private Capital Management -- (0.1) -- (0.6) Institutional (0.5) (0.2) (1.2) (1.2) ----- ----- ----- ----- (2.3) (1.8) (7.7) (7.1) ----- ----- ----- ----- Asset acquisition -- 9.4 -- 9.4 Market appreciation (depreciation) (5.4) 0.2 (7.0) 0.3 ----- ----- ----- ----- Fee-based assets under management - ending $46.5 $63.0 $46.5 $63.0 ===== ===== ===== =====
DISTRIBUTION AND SERVICE FEES are based on the market value of the Company's intermediary-distributed mutual funds. Distribution fees of 0.75% are generally earned on the average assets attributable to such funds sold with 12b-1 distribution fees and contingent deferred sales charges and service fees of 0.25% (net of amounts passed on to selling brokers) are generally earned on the total of such average mutual fund assets. These fees totaled $12.3 million for the quarter ended September 30, 2001 compared to $15.6 million for the quarter ended September 30, 2000. For the first nine months of 2001, distribution and service fees were $41.9 million compared to $46.1 million for the first nine months of 2000. As a percentage of intermediary-distributed average mutual fund assets, distribution and service fees were approximately 0.28% for the quarter ended September 30, 2001 compared to 0.36% for the quarter ended September 30, 2000. For the first nine months of 2001 and 2000, such percentages were 0.31% and 0.35%, respectively. TRANSFER AGENCY FEES for the Company's intermediary-distributed mutual funds are based on a three-tier structure, which includes an account fee, a transaction fee and a fee based on the market value of the assets managed. Transfer agency fees for the Company's direct-marketed mutual funds are based on the market value of the assets in the funds, and variable annuity mutual funds are charged a flat fee. Such fees were $12.0 million on average assets of $32.3 billion 19 for the quarter ended September 30, 2001 and $12.3 million on average assets of $26.6 billion for the quarter ended September 30, 2000. For the first nine months of 2001, transfer agency fees were $36.3 million on average assets of $33.2 billion compared to $37.2 million on average assets of $26.5 billion for the first nine months of 2000. As a percentage of total average assets under management, transfer agency fees were approximately 0.15% for the quarter ended September 30, 2001 compared to 0.19% for the quarter ended September 30, 2000. For the first nine months of 2001 and 2000, such percentages were 0.15% and 0.19%, respectively. SURRENDER CHARGES AND NET COMMISSIONS are revenues earned on: a) the early withdrawal of annuity policyholder balances and redemptions of the intermediary-distributed mutual funds which were sold with 12b-1 distribution fees and contingent deferred sales charges; b) the distribution of the Company's intermediary-distributed mutual funds (net of the substantial portion of commissions that is passed on to the selling brokers); and c) the sales of non-proprietary products through Independent Financial Marketing Group (net of commissions that are paid to the Company's client banks and brokers). Total surrender charges and net commissions were $8.3 million for the quarter ended September 30, 2001 compared to $10.1 million for the quarter ended September 30, 2000. For the first nine months of 2001, total surrender charges and net commissions were $25.1 million compared to $30.1 million for the first nine months of 2000. Surrender charges on fixed and variable annuity withdrawals generally are assessed at declining rates applied to policyholder withdrawals during the first five to seven years of the contract; contingent deferred sales charges on mutual fund redemptions are assessed at declining rates on amounts redeemed generally during the first nine years. Such charges totaled $5.4 million for the quarter ended September 30, 2001 and $8.0 million for the quarter ended September 30, 2000. For the first nine months of 2001, surrender charges were $16.5 million compared to $22.7 million for the first nine months of 2000. Total annuity withdrawals represented 19.0% and 15.0% of the total average annuity policyholder and separate account balances for the quarters ended September 30, 2001 and 2000, respectively. For the first nine months of 2001 and 2000, the corresponding percentages were 19.2% and 15.6%, respectively. The higher level of surrenders in 2001 compared to 2000 reflects increased competition for the Company's fixed and equity-indexed annuities from other investment products and a higher level of surrenders of the Company's equity-indexed annuities. Net commissions were $2.9 million for the quarter ended September 30, 2001 and $2.1 million for the quarter ended September 30, 2000. For the first nine months of 2001, net commissions were $8.6 million compared to $7.4 million for the first nine months of 2000. SEPARATE ACCOUNT FEES include mortality and expense charges earned on variable annuity and variable life policyholder balances. In addition, for certain separate institutional accounts, the difference between investment income and interest credited on these institutional accounts is included in separate account fees. These fees, which are primarily based on the market values of the assets in separate accounts supporting the contracts, were $12.4 million for the quarter ended September 30, 2001 compared to $11.8 million for the quarter ended September 30, 2000. For the first nine months of 2001, separate account fees were $39.6 million compared to $33.6 million for the first nine months of 2000. The increase in separate account fees was due to the increase in separate account assets in 2001. Such fees represented 1.24% and 1.23% of average variable annuity, variable life and institutional separate account balances for the quarters ended September 30, 2001 and 2000, respectively. For the first nine months of 2001 and 2000, such percentages were 1.30% and 1.25%, respectively. OPERATING EXPENSES primarily represent compensation, marketing, and other general and administrative expenses. These expenses were $99.5 million for the quarter ended September 30, 2001 compared to $98.1 million for the quarter ended September 30, 2000. For the first nine months of 2001, operating expenses were $303.5 million compared to $300.0 million for the first nine months of 2000. Operating expenses expressed as a percent of average total assets under management were 0.62% and 0.58% for the quarters ended September 30, 2001 and 2000, respectively. For the first nine months of 2001 and 2000, such percentages were 0.62% and 0.60%, respectively. RESTRUCTURING income (expense) primarily relates to three initiatives, which commenced during 2000, streamlining the Company's mutual fund product offerings, centralizing corporate functions and outsourcing certain mutual fund operations. Restructuring income (expense) was $0.2 million for the quarter ended September 30, 2001 compared to $(11.3) million for the quarter ended September 30, 2000. For the first nine months of 2001, restructuring income (expense) was $0.5 million compared to $(11.3) million for the first nine months of 2000. Restructuring income (expense) for the first nine months of 2001 is net of a $1.9 million gain from the sale of the Company's internal fund accounting system. 20 STRATEGIC REVIEW EXPENSES of $51.0 million and $91.2 million for the three months and nine months ended September 30, 2001, respectively, relates to the Company's announcement on November 1, 2000 that it had retained the investment banking firm of Credit Suisse First Boston Corporation to review its strategic initiatives, including a possible sale of the Company. Strategic review expenses include a special compensation plan, as well as certain direct related expenses. To help retain its employees during the strategic review, the Company implemented a special compensation plan that provides cash retention bonuses to substantially all employees. The retention bonuses are generally based on employees' base salary and/or target incentive compensation amounts, except for sales personnel where retention bonuses are based on sales. The estimated maximum cost of the retention bonuses, assuming all covered employees remain with the Company, is approximately $177 million with fifty percent payable on November 30, 2001 and the remainder payable on May 31, 2002. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS relates to the costs of acquiring new business, which vary with, and are primarily related to, the production of new annuity business. Such costs include commissions, costs of policy issuance and underwriting and selling expenses. Amortization was $24.2 million for the quarter ended September 30, 2001 compared to $26.9 million for the quarter ended September 30, 2000. For the first nine months of 2001, amortization of deferred policy acquisition costs was $87.8 million compared to $83.8 million for the first nine months of 2000. Amortization expense represented 40.0% and 29.9% of investment spread and separate account fees for the quarters ended September 30, 2001 and 2000, respectively. For the first nine months of 2001 and 2000, the corresponding percentages were 33.7% and 30.6%, respectively. In September 2001, an additional $5.4 million of deferred policy acquisition cost was amortized based upon revised estimates of future gross profits. Excluding the prospective unlocking adjustment of $5.4 million, amortization of deferred policy acquisition cost as a percent of investment spread and separate account fees would have been 30.7% and 31.7% for the three and nine month periods ended September 30, 2001, respectively. AMORTIZATION OF DEFERRED DISTRIBUTION COSTS relates to the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. Amortization was $12.9 million for the quarter ended September 30, 2001 compared to $10.9 million for the quarter ended September 30, 2000. For the first nine months of 2001, amortization of deferred distribution costs was $37.4 million compared to $31.5 million for the first nine months of 2000. The increase in 2001 compared to 2000 was due to increased sales of intermediary-distributed mutual funds, which were sold with 12b-1 distribution fees and contingent deferred sales charges. AMORTIZATION OF INTANGIBLE ASSETS relates to goodwill and certain identifiable intangible assets arising from business combinations accounted for as purchases. Amortization was $8.4 million for the quarter ended September 30, 2001 compared to $5.1 million for the quarter ended September 30, 2000. For the first nine months of 2001, amortization of intangible assets was $25.6 million compared to $15.3 million for the first nine months of 2000. The increase in amortization in 2001 is primarily attributable to the purchase of Wanger Asset Management, L.P. in September of 2000. The Company has experienced higher than anticipated redemptions of assets under management at an acquired company, which at September 30, 2001 had goodwill and other intangible assets of $75.1 million. Although the Company has determined that there is no impairment of goodwill and other intangible assets at this time, if the higher level of redemptions were to continue and sales were not to increase, the Company's estimate of related future cash flows may change, resulting in the need to record an impairment loss. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition and distinguishes between intangible assets that have a finite useful life and intangible assets that have an indefinite useful life. If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset, the useful life of the asset shall be considered to be indefinite. Intangible assets that have a finite useful life are amortized in accordance with the requirements of SFAS No. 142. Intangible assets that have an indefinite useful life are not amortized until their useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. 21 All of the provisions of SFAS No. 142 are to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at the beginning of that fiscal year, regardless of when those previously recognized assets were initially recognized. The Company has not yet determined the impact of SFAS No. 142. INTEREST EXPENSE, NET was $11.0 million for the quarter ended September 30, 2001 compared to $4.8 million for the quarter ended September 30, 2000. For the first nine months of 2001, interest expense, net was $30.5 million compared to $13.0 million for the first nine months of 2000. Interest expense primarily consists of interest on notes payable and interest on the Liberty Funds Group revolving credit facility which is utilized to finance sales commissions paid in connection with the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. Interest expense was net of interest income of $3.3 million and $5.7 million for the quarters ended September 30, 2001 and 2000, respectively. For the first nine months of 2001 and 2000, interest expense was net of interest income of $13.5 million and $17.4 million, respectively. INCOME TAX (EXPENSE) BENEFIT was $26.3 million or 34.9% of pretax loss for the quarter ended September 30, 2001 compared to $(5.2) million, or 19.0% of pretax income for the quarter ended September 30, 2000. For the first nine months of 2001, income tax (expense) benefit was $27.0 million or 38.8% of pretax loss compared to $(46.9) million or 34.1% of pretax income for the first nine months of 2000. FINANCIAL CONDITION STOCKHOLDERS' EQUITY was $1.40 billion as of September 30, 2001 compared to $1.45 billion as of December 31, 2000. The net loss for the first nine months of 2001 was $103.4 million and cash dividends on the Company's preferred and common stock totaled $15.1 million. Common stock totaling $4.5 million was issued in connection with the exercise of stock options. Other comprehensive income, which consists of net unrealized investment gains net of adjustments to deferred policy acquisition costs and income taxes, during the period increased stockholders' equity by $66.3 million. BOOK VALUE PER SHARE amounted to $28.62 at September 30, 2001 compared to $29.68 at December 31, 2000. Excluding net unrealized gains and losses on investments (computed pursuant to Statement of Financial Accounting Standards No. 115), book value per share amounted to $27.89 at September 30, 2001 and $30.30 at December 31, 2000. As of September 30, 2001, there were 49.0 million common shares outstanding compared to 48.8 million shares as of December 31, 2000. INVESTMENTS not including cash and cash equivalents, totaled $12.1 billion at September 30, 2001 as compared to $12.2 billion at December 31, 2000. The Company manages the majority of its invested assets internally. The Company's general investment policy is to hold fixed maturity securities for long-term investment and, accordingly, the Company does not have a trading portfolio. To provide for maximum portfolio flexibility and appropriate tax planning, the Company classifies its entire portfolio of fixed maturity securities as "available for sale" and accordingly carries such investments at fair value. The Company's total investments at September 30, 2001 and December 31, 2000 reflected gross unrealized gains (losses) of $245.9 million and $(62.0) million, respectively. Approximately $12.0 billion, or 78.2%, of the Company's general account and certain separate account investments at September 30, 2001, were rated by Standard & Poor's Corporation, Moody's Investors Service or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC"). At September 30, 2001, the carrying value of investments in below investment grade securities totaled $1.2 billion or 7.6% of general account investments, including cash and cash equivalents in the Company's annuity operations, and certain separate account investments of $15.4 billion. Below investment grade securities generally provide higher yields and involve greater risks than investment grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities may be more limited than for investment grade securities. The Company routinely reviews its portfolio of investment securities. The Company identifies monthly any investments that require additional monitoring, and reviews the carrying value of such investments at least quarterly to 22 determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other-than-temporary. In making these reviews, the Company principally considers the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports, and other externally generated information concerning the borrower's affairs. In the case of publicly traded fixed maturity securities, management also considers market value quotations if available. As of September 30, 2001 and December 31, 2000, the carrying value of fixed maturity securities that were non-income producing was $97.4 million and $24.4 million, respectively. DERIVATIVES As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate and total return swap agreements, interest rate cap agreements and treasury rate lock agreements. Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company currently utilizes interest rate swap agreements to reduce asset duration and to better match interest earned on longer-term fixed-rate assets with interest credited to policyholders. A total return swap agreement is an agreement to exchange payments based upon an underlying notional balance and changes in variable rate and total return indices. The Company utilizes total return swap agreements to hedge its obligations related to certain separate account liabilities. The Company had 99 and 69 outstanding swap agreements with an aggregate notional principal amount of $4.1 billion and $3.8 billion as of September 30, 2001 and December 31, 2000, respectively. Interest rate cap agreements are agreements with a counterparty which require the payment of a premium for the right to receive payments for the difference between the cap interest rate and a market interest rate on specified future dates based on an underlying principal balance (notional principal) to hedge against rising interest rates. The Company had no outstanding interest rate cap agreements as of September 30, 2001 and December 31, 2000. The Company utilizes treasury rate lock agreements to reduce its exposure to interest rate risk related to certain of its notes payable. Treasury rate lock agreements are agreements to exchange with a counterparty payments based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company had 2 outstanding treasury rate lock agreements with an aggregate notional principal amount of $395 million as of September 30, 2001. There were no such agreements outstanding as of December 31, 2000. With respect to the Company's equity-indexed annuities and certain separate account liabilities, the Company buys call options, futures and certain total return swap agreements on the S&P 500 Index to hedge its obligations to provide returns based upon this index. The Company had call options with a carrying value of $36.3 million and $337.7 million as of September 30, 2001 and December 31, 2000, respectively. The Company had open futures with a fair value of $(0.8) million and $10.5 million as of September 30, 2001 and December 31, 2000, respectively. The Company had total return swap agreements with a carrying value of $21.1 million and $23.9 million as of September 30, 2001 and December 31, 2000, respectively. There are risks associated with some of the techniques the Company uses to match its assets and liabilities. The primary risk associated with swap, cap and call option agreements is counterparty non-performance. The Company believes that the counterparties to its swap, cap and call option agreements are financially responsible and that the counterparty risk associated with these transactions is minimal. Futures contracts trade on organized exchanges and therefore have minimal credit risk. In addition, swap and cap agreements have interest rate risk and call options, futures and certain total return swap agreements have stock market risk. These swap and cap agreements hedge fixed-rate assets and the Company expects that any interest rate movements that adversely affect the market value of swap and cap agreements would be offset by changes in the market values of such fixed rate assets. However, there can be no assurance that these hedges will be effective in offsetting 23 the potential adverse effects of changes in interest rates. Similarly, the call options, futures and certain total return swap agreements hedge the Company's obligations to provide returns on equity-indexed annuities and certain separate account liabilities based upon the S&P 500 Index, and the Company believes that any stock market movements that adversely affect the market value of S&P 500 Index call options, futures and certain total return swap agreements would be substantially offset by a reduction in policyholder and certain separate account liabilities. However, there can be no assurance that these hedges will be effective in offsetting the potentially adverse effects of changes in S&P 500 Index levels. The Company's profitability could be adversely affected if the value of its swap and cap agreements increase less than (or decrease more than) the change in the market value of its fixed rate assets and/or if the value of its S&P 500 Index call options, futures and certain total return swap agreements increase less than (or decrease more than) the value of the guarantees made to equity-indexed and certain separate account policyholders. LIQUIDITY The Company is a holding company whose liquidity needs include the following: (i) operating expenses; (ii) debt service; (iii) dividends on preferred and common stock; (iv) acquisitions; and (v) working capital where needed by its operating subsidiaries. The Company's principal sources of cash are dividends from its operating subsidiaries, and, in the case of funding for acquisitions and certain long-term capital needs of its subsidiaries, long-term borrowings and offerings of preferred and common stock. On October 15, 2001, the Company commenced a cash tender offer to purchase all of its outstanding 6.75% notes due November 15, 2008 and its 7.625% debentures due November 15, 2028, collectively referred to as (the "securities"). To date, the Company has received tenders on approximately 95% of the securities. Payment, anticipated to occur on November 13, 2001, on the securities will be made from the net proceeds received in the Sun Life and Fleet transactions. In addition, debt of $200 million issued to Liberty Mutual and its affiliates was liquidated on November 1, 2001. The Company has a $150.0 million revolving credit facility (the "Facility") which is utilized to finance sales commissions paid in connection with the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. The Facility was established in April 1999. This five year Facility is secured by such 12b-1 distribution fees and contingent deferred sales charges. Interest accrues on the outstanding borrowings under the Facility at a rate determined by sales of highly rated commercial paper backed in part by the security interest in such fees and charges. At September 30, 2001, the interest rate on borrowings under the Facility was 3.40% per annum. Current Rhode Island insurance law applicable to Keyport permits the payment of dividends or distributions, which, together with dividends and distributions paid during the preceding 12 months, do not exceed the lesser of (i) 10% of Keyport's statutory surplus as of the preceding December 31 or (ii) Keyport's statutory net gain from operations for the preceding fiscal year. Any proposed dividend in excess of this amount is called an "extraordinary dividend" and may not be paid until it is approved by the Commissioner of Insurance of the State of Rhode Island. As of September 30, 2001, the amount of dividends that Keyport could pay during 2001 without such approval was $38.4 million. Future regulatory changes and credit agreements may create additional limitations on the ability of the Company's subsidiaries to pay dividends. Based upon the historical cash flow of the Company, the Company's current financial condition and the Company's expectation that there will not be a material adverse change in the results of operations of the Company and its subsidiaries during the next twelve months, the Company believes that cash flow provided by operating activities over this period will provide sufficient liquidity for the Company to meet its working capital, capital investment and other operational cash needs, its debt service obligations, its obligations to pay dividends on the preferred stock and its intentions to pay dividends on the common stock. Each of the Company's business segments has its own liquidity needs and financial resources. In the Company's annuity insurance operations, liquidity needs and financial resources pertain to the management of the general account assets and policyholder balances. In the Company's asset management business, liquidity needs and financial resources pertain to the investment management and distribution of mutual funds and institutional accounts. The Company expects that, based upon their historical cash flow and current prospects, these operating subsidiaries will be able to meet their liquidity needs from internal sources and, in the case of Liberty Funds Group LLC, also from its credit facility used to finance sales of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. Keyport uses cash for the payment of annuity and life insurance benefits, operating expenses and policy acquisition costs, and the purchase of investments. Keyport generates cash from annuity premiums and deposits, net investment income, and from the sales and maturities of fixed investments. Annuity premiums, maturing investments and net investment income have historically been sufficient to meet Keyport's cash requirements. Keyport monitors cash and 24 cash equivalents in an effort to maintain sufficient liquidity and has strategies in place to maintain sufficient liquidity in changing interest rate environments. Consistent with the nature of its obligations, Keyport has invested a substantial amount of its general account assets in readily marketable securities. As of September 30, 2001, $12.3 billion, or 79.9%, of Keyport's general account and certain separate account investments are considered readily marketable. To the extent that unanticipated surrenders cause Keyport to sell for liquidity purposes a material amount of securities prior to their maturity, such surrenders could have a material adverse effect on the Company. Although no assurances can be given, Keyport believes that liquidity to fund anticipated withdrawals would be available through incoming cash flow and the sale of short-term or floating-rate investments, thereby precluding the sale of fixed maturity investments in a potentially unfavorable market. In addition, the Company's fixed-rate products incorporate surrender charges to encourage persistency and to make the cost of its policyholder balances more predictable. Approximately 77.0% of the Company's fixed annuity policyholder balances were subject to surrender charges or restrictions as of September 30, 2001. EFFECTS OF INFLATION Inflation has not had a material effect on the Company's consolidated results of operations to date. The Company manages its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the market value of the Company's fixed maturity portfolio increases or decreases in inverse relationship with fluctuations in interest rates, and the Company's net investment income increases or decreases in direct relationship with interest rate changes. For example, if interest rates decline, the Company's fixed maturity investments generally will increase in market value, while net investment income will decrease as fixed maturity investments mature or are sold and the proceeds are reinvested at reduced rates. Inflation may result in increased operating expenses that may not be readily recoverable in the prices of the services charged by the Company. FORWARD-LOOKING STATEMENTS The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Investors are cautioned that all statements not based on historical fact, trend analyses and other information contained in this report or in any of the Company's filings under Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend" and other similar expressions, constitute forward-looking statements under the Reform Act. These forward-looking statements are made based on current expectations and assumptions and are subject to known and unknown risks, uncertainties and other factors, many of which are beyond the Company's control, that may cause actual results to be materially different from those expressed or implied by the forward-looking statements. Such factors include, among other things: (1) general economic conditions and market factors, such as prevailing interest rate levels and stock market performance; (2) the impact of events such as the terrorist attacks that occurred on September 11, 2001, which can impact individual businesses (including potentially the Company) or markets generally; (3) the result of any litigation or legal proceedings involving the Company, including the stockholder suit described in Part II, Item 1 of this report; (4) changes in generally accepted accounting principles and the impact of accounting principles and pronouncements on the Company's financial condition and results of operations; (5) risks related to the consummation of the merger of the Company with a wholly owned subsidiary of Liberty Mutual; (6) the failure of conditions to the closing of the merger with Liberty Mutual to be satisfied in a timely manner or at all; (7) risks that the actual consideration payable to the Company's stockholders in the merger will be less than $33.44 per share as a result of adjustments set forth in the merger agreement; (8) risks that the actual after-tax gains and net proceeds on the sales to Sun Life and Fleet may be different than estimates due to, among other things, changes in estimated stockholders' equity including the effects of Statement of Financial Accounting Standards No. 115 - net unrealized investment gains and losses, changes in estimated income taxes on the sales, transaction costs and other factors; and (9) the other risk factors or uncertainties contained from time to time in any document incorporated by reference in this report or otherwise filed by the Company under the Exchange Act. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements and no assurances can be given that the estimates and expectations reflected in such statements will be achieved. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes during the first nine months of 2001 in the Company's market risks or in the methods which the Company uses to manage such risks, which are described in the Company's Form 10-K (as amended) for the year ended December 31, 2000. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 5, 2001, a lawsuit seeking class action status was filed by purported stockholders of the Company in the Superior Court of Suffolk County, Massachusetts, against the Company, Fleet, Liberty Mutual and the directors of the Company. The plaintiff in the lawsuit alleges, among other things, that the Company, Liberty Mutual and the directors of the Company have breached fiduciary duties owed to the Company's stockholders other than Liberty Mutual and its affiliates, by not obtaining the best possible price in the proposed Fleet transaction and the merger with Liberty Mutual. The plaintiff seeks, among other things, an order enjoining the merger from being consummated (or, if consummated, an order rescinding the transaction) and an award of attorneys' fees and other costs of litigation. In the event the merger is consummated, the plaintiff has indicated that it may choose to continue its action and seek rescission of the merger, damages or both. The Company believes that this lawsuit is without merit and intends to vigorously defend it. On July 10, 2001, the Company, Liberty Mutual and the directors of the Company moved to dismiss the plaintiff's complaint in its entirety. Also, on July 11, 2001, the Company and its directors moved to stay all discovery pending a decision on the motion to dismiss. Without responding to the defendants' motion to dismiss, the plaintiff filed an Amended Complaint on October 9, 2001. In its Amended Complaint, the plaintiff now alleges that the defendants breached their fiduciary duties owed to the Company's stockholders other than Liberty Mutual and its affiliates by negotiating a deal structured as the purchase of Liberty Mutual's two business units instead of as a merger, and thereby conferring upon Liberty Mutual tax advantages at the expense of gains to the Company's public shareholders. The plaintiff also alleges that the defendants violated the Massachusetts state anti-takeover statute and made misleading statements in the Company's proxy statement, in contravention of state blue sky statutes. The plaintiff seeks, among other things, an order enjoining the merger from being consummated (or, if consummated, an order rescinding the transaction) and an award of attorneys' fees and other costs of litigation. Defendants' response to the Amended Complaint is due November 19. The Company believes plaintiff's Amended Complaint is without merit and intends to move to dismiss all claims. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 12 Statement re Computation of Ratios 99.1 Liberty Financial Companies, Inc. and Subsidiaries Commissioned Employee Severance and Retention Plan 99.2 Liberty Financial Companies, Inc. and Subsidiaries Non-Commissioned Employee Severance and Retention Plan (b) REPORTS ON FORM 8-K On October 15, 2001, the Company filed a report on Form 8-K under Item 5 of such form reporting the commencement of a cash tender offer and consent solicitation with respect to the Company's outstanding 6.75% notes due November 15, 2008, and its 7.625% debentures due November 15, 2028. The related press release was filed as Exhibit No. 99.1 to the Form 8-K. On October 16, 2001, the Company filed a report on Form 8-K under Item 5 of such form reporting the filing of an Amended Complaint in the matter of Harbor Finance Partners v. Liberty Financial Companies, Inc., dated October 9, 2001. The amended complaint was filed as Exhibit No. 99.1 to the Form 8-K. 26 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. LIBERTY FINANCIAL COMPANIES, INC. /s/ J. Andy Hilbert --------------------------------- J. Andy Hilbert (Duly Authorized Officer and Chief Financial Officer) Date: November 8, 2001 27 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE 12 Statement re Computation of Ratios 29 99.1 Liberty Financial Companies, Inc. and Subsidiaries Commissioned Employee Severance and Retention Plan 30 99.2 Liberty Financial Companies, Inc. and Subsidiaries Non-Commissioned Employee Severance and Retention Plan 56
28 EX-12 3 a2061991zex-12.txt EXHIBIT 12 LIBERTY FINANCIAL COMPANIES, INC. EXHIBIT 12 - STATEMENT RE COMPUTATION OF RATIOS ($ in millions)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------ ----------------------- 2001 2000 2001 2000 ----------- ------ --------- ------ Earnings: Pretax income (loss) $(75.4) $ 27.3 $(69.6) $137.4 Add fixed charges: Interest on indebtedness 14.0 10.5 43.7 30.4 Portion of rent representing the interest factor 1.6 1.8 4.8 4.3 Accretion to face value of redeemable convertible preferred stock -- -- -- 0.2 -------- ------ -------- ------ Sub-total of income (loss) as adjusted (59.8) 39.6 (21.1) 172.3 Interest on fixed annuities and financial products 148.0 135.8 449.9 396.3 -------- ------ -------- ------ Total income as adjusted $ 88.2 $175.4 $428.8 $568.6 ======== ====== ======== ====== Fixed charges: Interest on indebtedness $ 14.0 $ 10.5 $43.7 $30.4 Portion of rent representing the interest factor 1.6 1.8 4.8 4.3 Accretion to face value of redeemable convertible preferred stock -- -- -- 0.2 -------- ------ -------- ------ Sub-total of fixed charges 15.6 12.3 48.5 34.9 Interest on fixed annuities and financial products 148.0 135.8 449.9 396.3 -------- ------ -------- ------ Combined fixed charges 163.6 148.1 498.4 431.2 Preferred stock dividends 0.6 0.2 1.1 0.9 -------- ------ -------- ------ Fixed charges and preferred stock dividends $164.2 $148.3 $499.5 $432.1 ======== ====== ======== ====== Ratio of earnings to fixed charges: Excluding interest on fixed annuities and financial products (3.83) x 3.22 x (0.44) x 4.94 x ======== ====== ======== ====== Including interest on fixed annuities and financial products 0.54 x 1.18 x 0.86 x 1.32 x ======== ====== ======== ====== Ratio of earnings to combined fixed charges and preferred stock dividends: Excluding interest on fixed annuities and financial products (3.69) x 3.17 x (0.43) x 4.81 x ======== ====== ======== ====== Including interest on fixed annuities and financial products 0.54 x 1.18 x 0.86 x 1.32 x ======== ====== ======== ======
29 EX-99.1 4 a2061991zex-99_1.txt EXHIBIT 99.1 Exhibit 99.1 LIBERTY FINANCIAL COMPANIES, INC. AND SUBSIDIARIES COMMISSIONED EMPLOYEE SEVERANCE AND RETENTION PLAN The Company hereby adopts the Liberty Financial Companies, Inc. and Subsidiaries Commissioned Employee Severance and Retention Plan for the benefit of certain employees of the Company and its Affiliates, on the terms and conditions hereinafter stated. All capitalized terms used herein are defined in Section 1 hereof. SECTION 1. DEFINITIONS. As hereinafter used: 1.1 "AFFILIATE" shall have the meaning set forth in Rule 12b-2 under Section 12 of the Exchange Act. 1.2 "BENEFICIAL OWNER" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 1.3 "BOARD" means the Board of Directors of the Company. 1.4 "CAUSE" means (i) the willful and continued failure by a Covered Employee to substantially perform the Covered Employee's duties with the Employer (other than any such failure resulting from the Covered Employee's incapacity due to physical or mental illness), or (ii) the willful engaging by a Covered Employee in conduct which is demonstrably injurious in a material extent to the Company or any of its Affiliates, monetarily or otherwise. For purposes of this definition, no act, or failure to act, on a Covered Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Covered Employee not in good faith or without reasonable belief that the Covered Employee's act, or failure to act, was in the best interest of the Company. 1.5 A "CHANGE IN CONTROL" shall be deemed to have occurred if any of the events set forth in the following paragraphs shall have occurred: (1) any Person (other than Liberty Mutual Insurance Company or any of its affiliates) becomes the Beneficial Owner (except in connection with a transaction described in paragraphs (2) or (3) below), directly or indirectly, of (i) securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding Voting Securities or (ii) assets of the Company comprising 50% or more of such assets; (2) the consummation of any merger or consolidation or similar business transaction of the Company (or any direct or indirect subsidiary of the Company) with any other corporation or other entity in which the holders of the Company's outstanding Voting Securities immediately prior to such transaction no longer hold (in combination with the ownership of any trustee or other fiduciary holding securities under any employee benefit plan of the Company) at least 50% of the outstanding Voting Securities of the Company, the surviving entity or any parent thereof immediately after such transaction; or (3) any Person becomes the Beneficial Owner (except in connection with a transaction described in paragraphs (1) and (2) above), directly or indirectly, of assets of the Company comprising of all or substantially all of the Company's annuity or asset management business (as determined by the Board in its discretion); PROVIDED, HOWEVER, that such event will result in a "Change in Control" only with respect to a Covered Employee the assets of whose Employer are transferred in connection with the transaction described in this paragraph (3); provided, further, that a "Change in Control" shall be deemed to have occurred with respect to Covered Employees who are employed in the Company's corporate group in the event that one or more transactions described in this paragraph (3) shall occur with respect to all or substantially all of both the Company's annuity and asset management businesses. 1.6 "CHANGE IN CONTROL PRICE" means, with respect to a Covered Employee, the average of the closing share price of the Company's common stock on the New York Stock Exchange Consolidated Trading System during the 10 trading days prior to the applicable Change in Control. 1.7 "CODE" means the Internal Revenue Code of 1986, as it may be amended from time to time. 1.8 "COMPANY" means Liberty Financial Companies, Inc. or any successors thereto. 1.9 "COVERED EMPLOYEE" means any employee who is an IFMG 1, IFMG 2, LFDI 1, LFDI 2, LFDI 3, LFDI 4, Special LFDI 5, Special LFDI 6, Special Level 2, Special Level 4 or Special Level 7 Employee and who is in good standing (not on probation). A Covered Employee becomes a "SEVERED EMPLOYEE" once he or she incurs a Severance. 1.10 "DATE OF HIRE" means the earlier of the date a Covered Employee commences employment with the Employer or a Covered Employee's adjusted service date designated in the Company's records. 1.11 "DISABILITY" shall mean total and permanent disability as determined under the provisions of the applicable Employer long-term disability program. 1.12 "EARNED COMMISSIONS" means compensation (sales commissions) earned on the sale of eligible products determined using the appropriate commission schedule in accordance with established Company practice. 2 1.13 "EMPLOYER" means the Company or any of its Affiliates (or any successor Person following a Change in Control) which is an employer of a Covered Employee. 1.14 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. 1.15 "EXCISE TAX" shall have the meaning ascribed to such term in Section 6 hereof. 1.16 "FIRST PAYMENT DATE" means the date on which the initial fifty percent (50%) of a Covered Employee's Retention Bonus is paid to such Covered Employee by the Company in accordance with Section 3.1 hereof. 1.17 "GOOD REASON" in respect to a Covered Employee designated on Exhibit C attached hereto means, the occurrence, on or after the date of a Change in Control and without the affected Covered Employee's written consent (which the Covered Employee may withhold in his or her sole discretion), of (i) the assignment to the Covered Employee of duties in the aggregate that are materially different with the Covered Employee's level of responsibility either as of November 1, 2000 or immediately prior to the date of the Change in Control or any material reduction in the nature or status of the Covered Employee's responsibilities from those in effect either as of November 1, 2000 or immediately prior to the date of the Change in Control; PROVIDED, HOWEVER, that the mere fact of a Covered Employee ceasing to be an officer of a public company shall not constitute a material reduction in the nature or status of such Covered Employee's responsibilities; (ii) a material reduction by the Employer in the Covered Employee's annual base salary or annual incentive compensation opportunity (based upon factors reasonably within the management control and influence of such Covered Employee) from that in effect immediately prior to the Change in Control; or (iii) the relocation of the Covered Employee's principal place of employment to a location more than fifty (50) miles from the Covered Employee's principal place of employment immediately prior to the date of the Change in Control. "Good Reason" in respect of any other Covered Employees means, the occurrence, on or after the date of a Change in Control and without the Covered Employee's written consent, of (i) a material reduction by the Employer in the Covered Employee's total annual pay (including the variable pay target) from that in effect immediately prior to the Change in Control or (ii) the relocation of the Covered Employee's principal place of employment to a location more than fifty (50) miles from the Covered Employee's principal place of employment immediately prior to the date of the Change in Control. Notwithstanding the foregoing, with respect to Covered Employees who are employed in the Company's corporate group and who have been designated as required to stay through the LFC Merger Date, Good Reason cannot occur until the LFC Merger Date. 3 1.18 "GROSS-UP PAYMENT" shall have the meaning ascribed to such term in Section 6 hereof. 1.19 "IFMG 1 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as an IFMG 1 Participant. 1.20 "IFMG 2 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as an IFMG 2 Participant. 1.21 "LFC MERGER" means the merger or similar business transaction occurring after the last Change in Control by which the Company shall be merged with or into Liberty Mutual Insurance Company or a wholly owned subsidiary thereof. 1.22 "LFC MERGER DATE" shall mean the effective date of the LFC Merger. 1.23 "LFC MERGER SHAREHOLDER PRICE" shall mean the cash value payable to minority public shareholders of a share of the Company's common stock on the LFC Merger Date as finally determined after applicable adjustments thereto in accordance with the Agreement and Plan of Merger relating to the LFC Merger. 1.24 "LFDI 1 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a LFDI 1 Participant. 1.25 "LFDI 2 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a LFDI 2 Participant. 1.26 "LFDI 3 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a LFDI 3 Participant. 1.27 "LFDI 4 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a LFDI 4 Participant. 1.28 "MAXIMUM RETENTION BONUS" shall mean a cash amount equal to the following with respect to a IFMG 1, IFMG 2, LFDI 1, LFDI 2, LFDI 3, LFDI 4, Special LFDI 5, Special LFDI 6, Special Level 2, Special Level 4 or Special Level 7 Employee: 4 - ---------------------------------------------------------------------------------------------------------------- LFDI 4 Employee Two times the sum of (i) (A) his or her Target Bonus multiplied by (B) a fraction, the numerator of which shall be the number of full months from November 1, 2000 to the earlier of the date of a Change in Control or November 1, 2001, and the denominator of which shall be twelve (12); PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for purposes of determining the number of full months to be included in the numerator of such fraction, plus (ii) Earned Commissions during the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such period shall begin on the Date of Hire; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- LFDI 1, LFDI 2, LFDI 3, Two times Earned Commissions during the period beginning on November 1, 2000 IFMG 1 and IFMG 2 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that with Employees respect to a New Covered Employee, such period shall begin on the Date of Hire; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- Special LFDI 6 Employee Two times Earned Commissions during the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- Special LFDI 5 Employee Two times (i) his or her Target Bonus multiplied by (ii) a fraction, the numerator of which shall be the number of full months from November 1, 2000 to the earlier of the date of a Change in Control or November 1, 2001, and the denominator of which shall be twelve (12); PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for purposes of determining the number of full months to be included in the numerator of such fraction. - ----------------------------------------------------------------------------------------------------------------
5 - ---------------------------------------------------------------------------------------------------------------- Special Level 7 Employee The sum of (i) (A) his or her annual base salary rate multiplied by (B) a fraction, the numerator of which shall be the number of full months from November 1, 2000 to the earlier of the date of a Change in Control or November 1, 2001, and the denominator of which shall be twelve (12); PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for purposes of determining the number of full months to be included in the numerator of such fraction, plus (ii) Earned Commissions during the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- Special Level 4 Employee The sum of (i) (A) nine months of his or her annual base salary rate multiplied by (B) a fraction, the numerator of which shall be the number of full months from November 1, 2000 to the earlier of the date of a Change in Control or November 1, 2001, and the denominator of which shall be twelve (12); PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for purposes of determining the number of full months to be included in the numerator of such fraction, plus (ii) Earned Commissions during the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- Special Level 2 Employee The sum of (i) six months of his or her annual base salary rate, plus (ii) Earned Commissions during the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ----------------------------------------------------------------------------------------------------------------
For purposes of this Section 1.28, "annual base salary rate" shall be determined immediately prior to a Change in Control (without regard to any reductions therein which constitute Good Reason). 1.29 "MINIMUM RETENTION BONUS" shall mean a cash amount equal to the following with respect to a IFMG 1, IFMG 2, LFDI 1, LFDI 2, LFDI 3, LFDI 4, Special LFDI 5, Special LFDI 6, Special Level 4 or Special Level 7 Employee: 6 - ---------------------------------------------------------------------------------------------------------------- LFDI 4 Employee Two times the sum of (i) (A) his or her Target Bonus multiplied by (B) a fraction, the numerator of which shall be the number of full months from November 1, 2000 to the earlier of the date of a Change in Control or November 1, 2001, and the denominator of which shall be twelve (12); PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for purposes of determining the number of full months to be included in the numerator of such fraction, plus (ii) a minimum commission of $5,000 per month for each full month for the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for the purpose of determining the number of full months in such period; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- LFDI 3 Employee Two times a minimum commission of $5,000 per month for each full month for the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for the purpose of determining the number of full months in such period; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- LFDI 2 Employee Two times a minimum commission of $5,000 per month for each full month for the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such period shall begin on the first day of the month during which the Date of Hire occurs if the Date of Hire occurs on or before the 14th day of such month, otherwise, such period shall begin on the first day of the month following the month during which the Date of Hire occurs; PROVIDED, FURTHER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for the purpose of determining the number of full months in such period; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ----------------------------------------------------------------------------------------------------------------
7 - ---------------------------------------------------------------------------------------------------------------- LFDI 1 Employee Two times a minimum commission of $1,000 per month for each full month for the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such period shall begin on the first day of the month during which the Date of Hire occurs if the Date of Hire occurs on or before the 14th day of such month, otherwise, such period shall begin on the first day of the month following the month during which the Date of Hire occurs; PROVIDED, FURTHER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for the purpose of determining the number of full months in such period; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- IFMG 2 Employee Two times a minimum commission of $2,500 per month for each full month for the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such period shall begin on the first day of the month during which the Date of Hire occurs if the Date of Hire occurs on or before the 14th day of such month, otherwise, such period shall begin on the first day of the month following the month during which the Date of Hire occurs; PROVIDED, FURTHER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for the purpose of determining the number of full months in such period; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ----------------------------------------------------------------------------------------------------------------
8 - ---------------------------------------------------------------------------------------------------------------- IFMG 1 Employee Two times a minimum commission of $5,000 per month for each full month for the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such period shall begin on the first day of the month during which the Date of Hire occurs if the Date of Hire occurs on or before the 14th day of such month, otherwise, such period shall begin on the first day of the month following the month during which the Date of Hire occurs; PROVIDED, FURTHER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for the purpose of determining the number of full months in such period; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- Special LFDI 6 Employee The sum of (i) a minimum commission of $50,000 per month for each full month for the period beginning on November 1, 2000 and ending on May 31, 2001, plus (ii) a minimum commission of $25,000 per month for each full month for the period beginning on June 1, 2001 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for the purpose of determining the number of full months in such period; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- Special LFDI 5 Employee A minimum commission of $41,667 per month for each full month for the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for the purpose of determining the number of full months in such period; PROVIDED, FURTHER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------------------------------------------------------------------------------------------- Special Level 7 and The sum of (i) six months of his or her annual base salary rate, plus Special Level 4 Employees (ii) Earned Commissions during the period beginning on November 1, 2000 and ending on the date of a Change in Control; PROVIDED, HOWEVER, that such period shall end on November 1, 2001 in the event a Change in Control does not occur prior to November 1, 2001. - ---------------------------- -----------------------------------------------------------------------------------
9 For purposes of this Section 1.29, "annual base salary rate" shall be determined immediately prior to a Change in Control (without regard to any reductions therein which constitute Good Reason). 1.30 "MONTH OF SERVICE" means each full month during which a New Covered Employee has been employed by the Employer; PROVIDED, HOWEVER, that a New Covered Employee whose Date of Hire occurs on or before the 14th day of the month in which the Date of Hire occurs shall be credited with a Month of Service for such month; PROVIDED, FURTHER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, a New Covered Employee who is then employed by the Employer shall be credited with a Month of Service for such month. 1.31 "NEW COVERED EMPLOYEE" means any IFMG 1, IFMG 2, LFDI 1 or LDFI 2 Employee who commences employment with the Employer following November 6, 2000 and who is designated as a New Covered Employee in his or her offer of employment; PROVIDED, HOWEVER, that any IFMG 1, IFMG 2, LFDI 1 or LDFI 2 Employee who is designated as a Covered Employee in his or her offer of employment shall be a Covered Employee and shall not be a New Covered Employee; PROVIDED, FURTHER, that a New Covered Employee shall be treated the same as a Covered Employee for purposes of the Plan except where different treatment is specifically stated in the Plan. 1.32 "NOTICE PERIOD" shall have the meaning ascribed to such term in Section 2.4 hereof. 1.33 "PERSON" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its Affiliates, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 1.34 "PLAN" means this Liberty Financial Companies, Inc. and Subsidiaries Commissioned Employee Severance and Retention Plan, as set forth herein, as it may be amended from time to time in accordance with Section 8 hereof. 1.35 "PLAN ADMINISTRATOR" means the Compensation Committee of the Board or one or more successors appointed by the Board. 1.36 "RESTRICTED STOCK AGREEMENT" means a restricted stock agreement between a Covered Employee and the Company pursuant to which the Covered Employee was granted shares of the Company's common stock that are subject to restrictions on transfer. 10 1.37 "RESTRICTED PERIOD" shall have the meaning set forth in a Covered Employee's Restricted Stock Agreement. 1.38 "RESTRICTED STOCK TARGET PRICE" means that price per share of the Company's common stock stipulated in a Covered Employee's Restricted Stock Agreement at which such shares must trade for a period of ten consecutive trading days after the expiration of the applicable two year waiting period set forth in such Covered Employee's Restricted Stock Agreement as a condition precedent to the expiration of the Restricted Period. 1.39 "RETENTION BONUS" shall have the meaning ascribed to such term in Section 3 hereof. 1.40 "RETIREMENT" means a termination of a Covered Employee's employment with the Employer within or after the calendar year the Covered Employee attains age sixty (60). 1.41 "SECOND PAYMENT DATE" means a date six months immediately following a Change in Control. 1.42 "SEVERANCE" means the termination of a Covered Employee's employment with the Employer (or, if applicable, a successor to the Employer) on or within eighteen (18) months following the date of the Change in Control, (i) by the Employer (or, if applicable, a successor to the Employer) other than for Cause, or (ii) by the Covered Employee for Good Reason. A Covered Employee will not be considered to have incurred a Severance (i) if his or her employment is discontinued by reason of the Covered Employee's death or a physical or mental condition causing such Covered Employee's inability to substantially perform his or her duties with the Employer, including, without limitation, such condition entitling him or her to benefits under any sick pay or disability income policy or program of the Employer; PROVIDED, HOWEVER, that a Covered Employee who is entitled to short-term disability benefits may incur a Severance of such Covered Employee's employment in accordance with this Section 1.43 or (ii) by reason of the divestiture of a facility, sale of a business or business unit, or the outsourcing of a business activity with which the Covered Employee is affiliated (including, but not limited to, a sale of the Company's annuity or asset management business that results in a Change in Control pursuant to Section 1.5(3) hereof) if the Covered Employee is offered employment by the entity which acquires such facility, business or business unit or which succeeds to such outsourced business activity (subject to such Covered Employee's right to terminate his or her employment for Good Reason), in which case such acquiring entity shall be treated as the Employer of such Covered Employee for all purposes under the Plan. 1.43 "SEVERANCE DATE" means the date on or after the date of the Change in Control on which a Covered Employee incurs a Severance. 11 1.44 "SEVERANCE PAY" shall mean a cash payment from the Company equal to the greater of (i) any severance pay due under the Employer's existing severance guidelines based upon a Covered Employee's Date of Hire or (ii) the following with respect to a IFMG 1, IFMG 2, LFDI 1, LFDI 2, LFDI 3, LFDI 4, Special LFDI 5, Special LFDI 6, Special Level 2, Special Level 4 or Special Level 7 Employee: - ---------------------------------------------------------------------------------------------------------------- LFDI 4 and Special LFDI 6 Two times his or her annual base salary rate. Employees - ---------------------------------------------------------------------------------------------------------------- LFDI 3, Special LFDI 5 The sum of (i) his or her annual base salary rate, plus (ii) his and Special Level 7 or her Target Bonus. Employees - ---------------------------------------------------------------------------------------------------------------- LFDI 2 Two times his or her annual base salary rate; PROVIDED, HOWEVER, that Employee with respect to a New Covered Employee, such amount shall be equal to the greater of (i) two months of his or her annual base salary rate for each Month of Service (subject to a maximum of two times his or her annual base salary rate) or (ii) four months of his or her annual base salary rate. - ---------------------------------------------------------------------------------------------------------------- LFDI 1 Employee His or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the greater of (i) one month of his or her annual base salary rate for each Month of Service (subject to a maximum of his or her annual base salary rate) or (ii) two months of his or her annual base salary rate. - ---------------------------------------------------------------------------------------------------------------- IFMG 1 and IFMG 2 The sum of (i) six months of his or her annual base salary rate, plus Employees (ii) Earned Commissions during the six month period immediately preceding the Severance Date; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the greater of (i) the sum of (A) one month of his or her annual base salary rate for each Month of Service, plus (B) Earned Commissions during the period beginning on the Date of Hire and ending on the Severance Date (subject to a maximum equal to the sum of (i) six months of his or her annual base salary rate, plus (ii) Earned Commissions during the six month period immediately preceding the Severance Date) or (ii) the sum of (X) two months of his or her annual base salary rate, plus (Y) Earned Commissions during the two month period immediately preceding the Severance Date or, if the Date of Hire occurs less than two months prior to the Severance Date, the equivalent of two months of commissions based upon actual Earned Commissions. - ----------------------------------------------------------------------------------------------------------------
12 - ---------------------------------------------------------------------------------------------------------------- Special Level 2 and His or her annual base salary rate. Special Level 4 Employees - ----------------------------------------------------------------------------------------------------------------
For purposes of this Section 1.45, "annual base salary rate" shall be determined immediately prior to the Severance (without regard to any reductions therein which constitute Good Reason). 1.45 "SPECIAL LEVEL 2 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Special Level 2 Participant. 1.46 "SPECIAL LEVEL 4 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Special Level 4 Participant. 1.47 "SPECIAL LEVEL 7 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Special Level 7 Participant. 1.48 "SPECIAL LFDI 5 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Special LFDI 5 Participant. 1.49 "SPECIAL LFDI 6 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Special LFDI 6 Participant. 1.50 "TARGET BONUS" means the Covered Employee's target annual incentive bonus in effect on the date immediately prior to the Change in Control or, in the event a Change in Control does not occur prior to November 1, 2001, the Covered Employee's target annual incentive bonus in effect on October 31, 2001. 1.51 "TOTAL PAYMENTS" shall have the meaning ascribed to such term in Section 6 hereof. 1.52 "VOTING SECURITIES" means voting securities entitled to be voted generally in the election of directors. SECTION 2. SEVERANCE BENEFITS. 2.1 Each Covered Employee who incurs a Severance shall be entitled, subject to Section 2.5 hereof, to receive Severance Pay. Severance Pay shall be paid to a Severed Employee in a cash lump sum, as soon as practicable following the Severance Date, but in no event later than thirty (30) days immediately following 13 the expiration of the revocation period, if any, applicable to such Severed Employee's Nonsolicitation/Waiver and Release of Claims Agreement, described in Section 2.5. 2.2 The Company shall provide each Severed Employee with outplacement services for a period of up to twelve (12) months. 2.3 Except for Level 8 Severed Employees, the coverage period for purposes of the group health continuation requirements of section 4980B of the Code shall commence on a Severed Employee's Severance Date. The Company shall waive any premium payments otherwise required of a Severed Employee in connection with such continuation coverage with respect to the period beginning on each such Severed Employee's Severance Date and continuing thereafter for the period with respect to which such Severed Employee is entitled to Severance Pay in accordance with Section 1.45 hereof; PROVIDED, HOWEVER, that during such period, each such Severed Employee shall continue to pay to the Company the employee portion of any premium payments at active employee rates (which may be changed by the Company). Level 8 Severed Employees' group health continuation requirements of Section 4980B of the Code shall commence six (6) months after a Severed Employee's Severance Date. 2.4 If an Employer is obligated by law or by contract to pay severance pay, a termination indemnity, notice pay, or the like to a Covered Employee, or if an Employer is obligated by law to provide advance notice of separation (not including any notice period that relates to obligations of an Employer which arise under the Worker Adjustment Retraining Notification Act, 29 U.S.C. Section 2101, et seq.) ("NOTICE PERIOD") to a Covered Employee, then any Severance Pay hereunder to such Covered Employee shall be reduced by the amount of any such severance pay, termination indemnity, notice pay or the like, as applicable, and by the amount of any compensation received during any Notice Period. Any Severance Pay hereunder shall be reduced, on a dollar for dollar basis, by any severance payment made by the Company, any subsidiary of the Company, the Employer or successor Employer to the Covered Employee pursuant to any other severance plan, program, policy or arrangement. 2.5 No Severed Employee shall be eligible to receive Severance Pay or other benefits under the Plan unless he or she first executes a Nonsolicitation/ Waiver and Release of Claims Agreement substantially in the form attached hereto as Schedule A or in the forms generally used by the Beneficial Owner or other acquiring Person (or, if the Severed Employee is not a United States employee, a similar agreement which is in accordance with the applicable laws of the relevant jurisdiction). 2.6 Notwithstanding the foregoing, any individual who is designated on Exhibit A hereto will not be entitled to any benefits under this Section 2. 14 SECTION 3. RETENTION BONUS. 3.1 PAYMENT OF RETENTION BONUS. A Covered Employee's Retention Bonus shall be paid by the Company to the Covered Employee as follows: (1) In the event a Change in Control occurs during the period beginning on November 1, 2000 and ending on October 31, 2001, a Covered Employee who is employed by the Employer on the date of a Change in Control shall be entitled to receive from the Company an amount equal to the greater of (A) such Covered Employee's Minimum Retention Bonus or (B) such Covered Employee's Maximum Retention Bonus (such greater amount, the "RETENTION BONUS"). Fifty percent (50%) of such Covered Employee's Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days, following the date of a Change in Control. The remaining fifty percent (50%) of such Covered Employee's Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days, following the Second Payment Date if the Covered Employee is then employed by the Employer. If such Covered Employee's employment is terminated prior to the Second Payment Date by the Employer without Cause, by the Covered Employee for Good Reason or due to the Covered Employee's death, Disability or Retirement, the remaining fifty percent (50%) of such Covered Employee's Retention Bonus shall be paid by the Company as soon as practicable, but no later than thirty (30) days, following the date of such termination. If such Covered Employee's employment is terminated prior to the Second Payment Date for any other reason, the remaining fifty percent (50%) of such Covered Employee's Retention Bonus shall be forfeited. (2) In the event a Change in Control does not occur prior to November 1, 2001, a Covered Employee who is employed by the Employer on November 1, 2001 shall be entitled to receive from the Company an amount equal to the greater of (A) such Covered Employee's Minimum Retention Bonus or (B) such Covered Employee's Maximum Retention Bonus (such greater amount, the "RETENTION BONUS"). Fifty percent (50%) of such Covered Employee's Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days, following November 1, 2001. The remaining fifty percent (50%) of such Covered Employee's Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days, following May 1, 2002 if the Covered Employee is then employed by the Employer. If such Covered Employee's employment is terminated prior to May 1, 2002 by the Employer without Cause, by the Covered Employee for Good Reason or due to the Covered Employee's death, Disability or Retirement, the remaining fifty percent (50%) of such Covered Employee's Retention Bonus shall be paid by the Company as soon as practicable, but no later than thirty (30) days, following the date of such termination. If such Covered Employee's employment is terminated prior to May 1, 2002 for any other reason, the remaining fifty percent (50%) of such Covered Employee's Retention Bonus shall be forfeited. 15 3.2 Notwithstanding the foregoing, any individual who is designated on Exhibit B hereto will not be entitled to any benefits under this Section 3. SECTION 4. STOCK OPTIONS. 4.1 VESTED STOCK OPTIONS. Upon a Change in Control, each then outstanding vested stock option held by a Covered Employee can be exercised at any time prior to the earlier of (i) the LFC Merger Date, or (ii) the date such option expires in accordance with its terms. If the LFC Merger Date is not on or prior to such expiration date, the Covered Employee's vested options not exercised on or prior to such expiration date will expire. If the LFC Merger Date is on or prior to such expiration date, vested options not exercised prior to the LFC Merger Date will be cancelled as of the LFC Merger Date in exchange for a cash payment from the Company equal to the excess, if any, of the LFC Merger Shareholder Price over the exercise price per share of each such option, multiplied by the number of shares subject to such option. The Company shall make such payment within thirty (30) days of the LFC Merger Date. 4.2 UNVESTED STOCK OPTIONS. Upon a Change in Control, any then outstanding unvested stock options held by a Covered Employee shall be subject to the following provisions, whichever is applicable to the Covered Employee: (1) COVERED EMPLOYEE CONTINUES EMPLOYMENT UNTIL THE LFC MERGER DATE. With respect to each Covered Employee who continues employment with the Employer following the Change in Control until the LFC Merger Date, each outstanding unvested option shall be cancelled upon the Change in Control in exchange for cash payments from the Company determined as follows: (i) Within thirty (30) days after the Change in Control, the Company shall make a cash payment to the Covered Employee equal to fifty percent (50%) of the excess, if any, of the Change in Control Price over the exercise price of each such option, multiplied by the number of shares subject to such option (the "First Option Payment"). (ii) Within thirty (30) days after the Second Payment Date, the Company shall make a cash payment to the Covered Employee equal to the combination of (a) fifty percent (50%) of the excess, if any, of the LFC Merger Shareholder Price over the exercise price of each such option, multiplied by the number of shares subject to each such option, and (b) plus the excess, or minus the deficit, of the LFC Merger Shareholder Price over the Change in Control Price multiplied by fifty percent (50%) of the number of shares subject to each such option (the "Second Option Payment"). (The purpose of clause (b) of the preceding sentence is to "true up" the cash out price of the First Option Payment so that it is based on the LFC Merger Shareholder Price.) 16 (iii) If the Covered Employee's employment is terminated prior to the Second Payment Date by the Employer without Cause, by the Covered Employee for Good Reason or due to the Covered Employee's death, Disability or Retirement (each of such reasons being hereinafter referred to as a "Valid Reason"), the Company shall make the Second Option Payment to the Covered Employee within thirty (30) days after the later of such Covered Employee's termination of employment or the LFC Merger Date. If the Covered Employee's employment is terminated prior to the Second Payment Date for any other reason other than a Valid Reason, the Second Option Payment shall not be made. (2) COVERED EMPLOYEE TERMINATES EMPLOYMENT PRIOR TO LFC MERGER DATE. With respect to each Covered Employee who continues in employment with the Employer following a Change in Control but then terminates such employment prior to the LFC Merger Date, each outstanding unvested option shall be cancelled upon the Change in Control in exchange for cash payments from the Company determined as follows: (i) Within thirty (30) days after the Change in Control, the Company shall make a First Option Payment to the Covered Employee. (ii) If the Covered Employee's employment is terminated for a Valid Reason, then within thirty (30) days after the LFC Merger Date, the Company shall make a Second Option Payment to the Covered Employee. If the Covered Employee's employment is terminated for any reason other than a Valid Reason, then the Second Option Payment shall not be made. SECTION 5. RESTRICTED STOCK. If the LFC Merger Shareholder Price equals or exceeds the Restricted Stock Target Price applicable to an outstanding share of restricted stock held by a Covered Employee, then, immediately prior to the LFC Merger, such outstanding share of restricted stock shall become fully vested and all restrictions relating to such stock shall lapse. Any then outstanding share of restricted stock of the Company held by a Covered Employee for which the Restricted Stock Target Price applicable to such share of restricted stock is more than the LFC Merger Shareholder Price shall be forfeited by the Covered Employee upon the LFC Merger. The phrase "immediately prior to the LFC Merger" in the first sentence of this Section 5 shall be understood to mean sufficiently in advance of the LFC Merger Date to permit the Covered Employee to take all steps reasonably necessary to deal with the shares of such stock so that such shares may be treated in the same manner, subject to the consummation of the LFC Merger, as the shares of stock of other shareholders (other than Liberty Mutual Insurance Company or any shareholders seeking appraisal rights) in connection with the LFC Merger. SECTION 6. EXCISE TAX. 17 If any of the payments or benefits received or to be received by a Covered Employee in connection with the Change in Control or his or her termination of employment (whether pursuant to the terms of this Plan or any other plan, arrangement or agreement) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "TOTAL PAYMENTS") will be subject to any excise tax imposed under section 4999 of the Code (the "EXCISE TAX"), the Company shall pay to the Covered Employee an additional amount (the "GROSS-UP PAYMENT") such that the net amount retained by the Covered Employee, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. The amount of the Gross-Up Payment, if any, shall be determined in a reasonable manner by the Plan Administrator or any person or entity designated by the Plan Administrator. The Gross-Up Payment, if any, (a) with respect to a Severed Employee, shall be paid in a cash lump sum, as soon as practicable following the Severance Date, but, in any event, not later than thirty (30) days immediately following the expiration of the revocation period, if any, applicable to such Severed Employee's release, described in Section 2.5, and, (b) with respect to any other Covered Employee, shall be paid in a cash lump sum not later than thirty (30) days immediately following the receipt of payments subject to the Excise Tax. SECTION 7. PLAN ADMINISTRATION. 7.1 The Plan Administrator shall administer the Plan and may interpret the Plan, prescribe, amend and rescind rules and regulations under the Plan and make all other determinations necessary or advisable for the administration of the Plan, subject to all of the provisions of the Plan, including, without limitation, Sections 8 and 9.2 hereof. 7.2 The Plan Administrator is empowered, on behalf of the Plan, to engage accountants, legal counsel and such other personnel as it deems necessary or advisable to assist it in the performance of its duties under the Plan. The functions of any such persons engaged by the Plan Administrator shall be limited to the specified services and duties for which they are engaged, and such persons shall have no other duties, obligations or responsibilities under the Plan. Such persons shall exercise no discretionary authority or discretionary control respecting the management of the Plan. All reasonable expenses thereof shall be borne by the Company. SECTION 8. PLAN MODIFICATION OR TERMINATION. The Plan may be amended or terminated by the Board at any time; PROVIDED, HOWEVER, that the Plan may not be amended or terminated during the eighteen (18) month period following a Change in Control. 18 SECTION 9. GENERAL PROVISIONS. 9.1 The Company shall pay to each Covered Employee all reasonable legal fees and expenses incurred by such Covered Employee in pursuing any claim under the Plan in which such Covered Employee prevails in any material respect. 9.2 In the event of a claim by a Covered Employee as to the amount or timing of any distribution, such Covered Employee shall present the reason for his or her claim in writing to the Plan Administrator or its designee. The Plan Administrator shall, within sixty (60) days after receipt of such written claim, send a written notification to the Covered Employee as to its disposition. In the event the claim is wholly or partially denied, such written notification shall (a) state the specific reason or reasons for the denial, (b) make specific reference to pertinent Plan provisions on which the denial is based, (c) provide a description of any additional material or information necessary for the Covered Employee to perfect the claim and an explanation of why such material or information is necessary, and (d) set forth the procedure by which the Covered Employee may appeal the denial of his or her claim. In the event a Covered Employee wishes to appeal the denial of his or her claim, he or she may request a review of such denial by making application in writing to the Plan Administrator within sixty (60) days after receipt of such denial. Such Covered Employee (or his or her duly authorized legal representative) may, upon written request to the Plan Administrator, review any documents pertinent to his or her claim, and submit in writing, issues and comments in support of his or her position. Within sixty (60) days after receipt of a written appeal (unless special circumstances, such as the need to hold a hearing, require an extension of time, but in no event more than one hundred twenty (120) days after such receipt), the Plan Administrator shall notify the Covered Employee of the final decision. The final decision shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. 9.3 An Employer shall be entitled to withhold from amounts to be paid to a Covered Employee hereunder any federal, state or local withholding or other taxes or charges (or foreign equivalents of such taxes or charges) which it is from time to time required to withhold. 9.4 Except as otherwise provided herein or by law, no right or interest of any Covered Employee under the Plan shall be assignable or transferable, in whole or in part, either directly or by operation of law or otherwise, including without limitation by execution, levy, garnishment, attachment, pledge or in any manner; no attempted assignment or transfer thereof shall be effective; and no right or interest of any Covered Employee under the Plan shall be liable for, or subject to, any obligation or liability of such Covered Employee. When a payment is due under this Plan to a Severed Employee who is unable to care for his or her affairs, payment may be made directly to his or her legal guardian or personal representative. 19 9.5 Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Covered Employee, or any person whomsoever, the right to be retained in the service of the Employer, and all Covered Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. 9.6 If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. 9.7 This Plan shall inure to the benefit of and be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Covered Employee, present and future, and any successor to the Company or the Employer. If a Severed Employee shall die while any amount would still be payable to such Severed Employee hereunder if the Severed Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to the executor, personal representative or administrators of the Severed Employee's estate. 9.8 The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 9.9 The Plan shall not be funded. No Covered Employee shall have any right to, or interest in, any assets of any Employer which may be applied by the Employer to the payment of benefits or other rights under this Plan. 9.10 Any notice or other communication required or permitted pursuant to the terms hereof shall have been duly given when delivered or mailed by United States Mail, first class, postage prepaid, addressed to the intended recipient at his, her or its last known address. The address of the Plan Administrator is c/o Liberty Financial Companies, Inc., 600 Atlantic Avenue, 24th Floor, Boston, Massachusetts 02110, Attention: William O'Donnell. The Plan Administrator may change such address by notice to the Covered Employees. 9.11 This Plan shall be construed and enforced according to the laws of the Commonwealth of Massachusetts to the extent not preempted by federal law, which shall otherwise control. 20 DRAFT SUBJECT TO CHANGE SCHEDULE A NONSOLICITATION/WAIVER AND RELEASE OF CLAIMS AGREEMENT YOU HAVE BEEN ADVISED TO CONSULT AN ATTORNEY PRIOR TO SIGNING THIS NONSOLICITATION/WAIVER AND RELEASE OF CLAIMS AGREEMENT (the "AGREEMENT"). [YOU HAVE [FORTY-FIVE] [TWENTY-ONE] DAYS AFTER RECEIVING THIS AGREEMENT TO CONSIDER WHETHER TO SIGN IT. YOU AGREE THAT ANY MODIFICATIONS, MATERIAL OR OTHERWISE, DO NOT RESTART OR AFFECT IN ANY MANNER THE ORIGINAL CONSIDERATION PERIOD. YOU ACKNOWLEDGE THAT YOU HAVE RECEIVED THE EXHIBITS A AND B ATTACHED WHICH PROVIDE INFORMATION REGARDING THE EMPLOYEES SELECTED FOR SEPARATION AS PART OF THIS ORGANIZATION RESTRUCTURING. AFTER SIGNING THIS AGREEMENT, YOU HAVE ANOTHER SEVEN DAYS IN WHICH TO REVOKE IT, AND IT DOES NOT TAKE EFFECT UNTIL THOSE SEVEN DAYS HAVE ENDED.(1) ANY REVOCATION MUST BE SUBMITTED, IN WRITING, TO FRANK FAGGIANO OR HIS SUCCESSOR, SENIOR VICE PRESIDENT, HUMAN RESOURCES, AND STATE "I HEREBY REVOKE MY ACCEPTANCE OF THE NONSOLICITATION/WAIVER AND RELEASE OF CLAIMS AGREEMENT." THE REVOCATION MUST BE PERSONALLY DELIVERED TO MR. FAGGIANO OR HIS SUCCESSOR AT LIBERTY FINANCIAL COMPANIES, INC., 600 ATLANTIC AVENUE, 24TH FLOOR, BOSTON, MASSACHUSETTS 02210, AND POSTMARKED WITHIN SEVEN (7) DAYS OF EXECUTION OF THIS AGREEMENT. In consideration of, and subject to, the payments to be made to me by Liberty Financial Companies, Inc. (together with its subsidiaries, related corporations, parent and any of their respective successors, the "COMPANY"), pursuant to the Liberty Financial Companies, Inc. and Subsidiaries Commissioned Employee Severance and Retention Plan (the "PLAN"), which I acknowledge that I would not otherwise be entitled to receive, I hereby waive any claims I may have for employment or re-employment by the Company after the date hereof, and I further agree to and do release and forever discharge the Company and its present officers, directors, shareholders, employees and agents from any and all claims and causes of action, known or unknown, arising out of or relating to my employment with the Company or the termination thereof, including, but not limited to, wrongful discharge, breach of - -------- (1) Square bracketed sections for employees over age 40 only. A-1 contract, tort, fraud, Title VII of the Civil Rights Act of 1964, [Age Discrimination in Employment Act,] Employee Retirement Income Security Act, Americans with Disabilities Act, the Massachusetts Law Against Discrimination, G.L. 151B, or any other federal, state or local legislation or common law relating to employment or discrimination in employment, labor or human rights or otherwise. Notwithstanding the foregoing or any other provision hereof, nothing in this Agreement shall adversely affect (i) my rights under the Plan; (ii) my rights to benefits other than severance benefits under written plans of the Company; or (iii) my rights to indemnification under any indemnification agreement, applicable law and the certificates of incorporation and bylaws of the Company, and my rights under any director's and officer's liability insurance policy covering me. I hereby acknowledge and agree that, for a period of twelve months from my Severance Date (as such term is defined in the Plan), I will not, either directly or indirectly, solicit, recruit, hire or promise future employment to any employee of the Company, or solicit or encourage any employee of the Company to leave the employment of the Company. I acknowledge that I have signed this Agreement voluntarily, knowingly, of my own free will and without reservation or duress, and that no promises or representations, written or oral, have been made to me by any person to induce me to do so other than the promise of payment set forth in the first paragraph above and the Company's acknowledgment of my rights reserved under the second paragraph above. I understand that this Agreement will be deemed to be an application for benefits under the Plan, and that my entitlement thereto shall be governed by the terms and conditions of the Plan, and I expressly hereby consent to such terms and conditions. I acknowledge that [I have been given not less than [forty-five (45)] [twenty-one (21)] days to review and consider this Agreement, and that I have had the opportunity to consult with an attorney or other advisor of my choice and have been advised by the Company to do so if I choose. [I may revoke this Agreement seven days or less after its execution by providing written notice to the Company.] Finally, I acknowledge that I have carefully read this Agreement and understand all of its terms. This is the entire Agreement between the parties and is legally binding and enforceable. This Agreement shall be governed and interpreted under federal law and the laws of the Commonwealth of Massachusetts. A-2 I knowingly and voluntarily sign this Agreement. Date Delivered to Employee: [Company] - ------------------------ Date Signed by Employee: By: -------------------------------- Title: - ------------------------ ----------------------------- [Seven-Day Revocation Period Ends: - ------------------------] Signed: Date: ---------------------------- ------------------------------ - ----------------------------------- (Print Employee's Name) A-3 EXHIBIT A NAME BUSINESS UNIT James S. Tambone LFDI Louis Tasiopoulos LFDI E-1 EXHIBIT B NAME BUSINESS UNIT Mike Conlon Crabbe Huson Thane Cleland Crabbe Huson E-2 EXHIBIT C NAME Kevin O'Shea Jeffrey Place James Kilbane John Bartlett Elizabeth Carey Robert Hussey E-3 EX-99.2 5 a2061991zex-99_2.txt EXHIBIT 99.2 Exhibit 99.2 LIBERTY FINANCIAL COMPANIES, INC. AND SUBSIDIARIES NON-COMMISSIONED EMPLOYEE SEVERANCE AND RETENTION PLAN The Company hereby adopts the Liberty Financial Companies, Inc. and Subsidiaries Non-Commissioned Employee Severance and Retention Plan for the benefit of certain employees of the Company and its Affiliates, on the terms and conditions hereinafter stated. All capitalized terms used herein are defined in Section 1 hereof. SECTION 1. DEFINITIONS. As hereinafter used: 1.1 "AFFILIATE" shall have the meaning set forth in Rule 12b-2 under Section 12 of the Exchange Act. 1.2 "BENEFICIAL OWNER" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 1.3 "BOARD" means the Board of Directors of the Company. 1.4 "CAUSE" means (i) the willful and continued failure by a Covered Employee to substantially perform the Covered Employee's duties with the Employer (other than any such failure resulting from the Covered Employee's incapacity due to physical or mental illness), or (ii) the willful engaging by a Covered Employee in conduct which is demonstrably injurious in a material extent to the Company or any of its Affiliates, monetarily or otherwise. For purposes of this definition, no act, or failure to act, on a Covered Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Covered Employee not in good faith or without reasonable belief that the Covered Employee's act, or failure to act, was in the best interest of the Company. 1.5 A "CHANGE IN CONTROL" shall be deemed to have occurred if any of the events set forth in the following paragraphs shall have occurred: (1) any Person (other than Liberty Mutual Insurance Company or any of its affiliates) becomes the Beneficial Owner (except in connection with a transaction described in paragraphs (2) or (3) below), directly or indirectly, of (i) securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding Voting Securities or (ii) assets of the Company comprising 50% or more of such assets; (2) the consummation of any merger or consolidation or similar business transaction of the Company (or any direct or indirect subsidiary of the Company) with any other corporation or other entity in which the holders of the Company's outstanding Voting Securities immediately prior to such transaction no longer hold (in combination with the ownership of any trustee or other fiduciary holding securities under any employee benefit plan of the Company) at least 50% of the outstanding Voting Securities of the Company, the surviving entity or any parent thereof immediately after such transaction; or (3) any Person becomes the Beneficial Owner (except in connection with a transaction described in paragraphs (1) and (2) above), directly or indirectly, of assets of the Company comprising of all or substantially all of the Company's annuity or asset management business (as determined by the Board in its discretion); PROVIDED, HOWEVER, that such event will result in a "Change in Control" only with respect to a Covered Employee the assets of whose Employer are transferred in connection with the transaction described in this paragraph (3); provided, further, that a "Change of Control" shall be deemed to have occurred with respect to Covered Employees who are employed in the Company's corporate group in the event that one or more transactions described in this paragraph (3) shall occur with respect to all or substantially all of both of the Company's annuity and asset management businesses. 1.6 "CHANGE IN CONTROL PRICE" means, with respect to a Covered Employee, the average of the closing share price of the Company's common stock on the New York Stock Exchange Consolidated Trading System during the 10 trading days prior to the applicable Change in Control. 1.7 "CODE" means the Internal Revenue Code of 1986, as it may be amended from time to time. 1.8 "COMPANY" means Liberty Financial Companies, Inc. or any successors thereto. 1.9 "COVERED EMPLOYEE" means any employee who is a Tier 1, Tier 2, Tier 3, Tier 4, Tier 5, Tier 6, Tier 7 or Tier 8 Employee and who is in good standing (not on probation). A Covered Employee becomes a "SEVERED EMPLOYEE" once he or she incurs a Severance. 1.10 "DATE OF HIRE" means the earlier of the date a Covered Employee commences employment with the Employer or a Covered Employee's adjusted service date designated in the Company's records. 2 1.11 "DISABILITY" shall mean total and permanent disability as determined under the provisions of the applicable Employer long-term disability program. 1.12 "EMPLOYER" means the Company or any of its Affiliates (or any successor Person following a Change in Control) which is an employer of a Covered Employee. 1.13 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. 1.14 "EXCISE TAX" shall have the meaning ascribed to such term in Section 6 hereof. 1.15 "FIRST PAYMENT DATE" means the date on which the initial fifty percent (50%) of a Covered Employee's Prorated Retention Bonus or Maximum Retention Bonus, as the case may be, is paid to such Covered Employee by the Company in accordance with Section 3.1 hereof. 1.16 "GOOD REASON" in respect to a Tier 7 or Tier 8 Employee means, the occurrence, on or after the date of a Change in Control and without the affected Covered Employee's written consent (which the Covered Employee may withhold in his or her sole discretion), of (i) the assignment to the Covered Employee of duties in the aggregate that are materially different with the Covered Employee's level of responsibility either as of November 1, 2000 or immediately prior to the date of the Change in Control or any material reduction in the nature or status of the Covered Employee's responsibilities from those in effect either as of November 1, 2000 or immediately prior to the date of the Change in Control; PROVIDED, HOWEVER, that the mere fact of a Covered Employee ceasing to be an officer of a public company shall not constitute a material reduction in the nature or status of such Covered Employee's responsibilities; (ii) a material reduction by the Employer in the Covered Employee's annual base salary or annual incentive compensation opportunity (based upon factors reasonably within the management control and influence of such Covered Employee) from that in effect immediately prior to the Change in Control; or (iii) the relocation of the Covered Employee's principal place of employment to a location more than fifty (50) miles from the Covered Employee's principal place of employment immediately prior to the date of the Change in Control. "Good Reason" in respect of a Tier 1, Tier 2, Tier 3, Tier 4, Tier 5 or Tier 6 Employee means, the occurrence, on or after the date of a Change in Control and without the Covered Employee's written consent, of (i) a material reduction by the Employer in the Covered Employee's total annual pay (including the variable pay target) from that in 3 effect immediately prior to the Change in Control or (ii) the relocation of the Covered Employee's principal place of employment to a location more than fifty (50) miles from the Covered Employee's principal place of employment immediately prior to the date of the Change in Control. Notwithstanding the foregoing, with respect to Covered Employees who are employed in the Company's corporate group and who have been designated as required to stay through the LFC Merger Date, Good Reason cannot occur until the LFC Merger Date. 1.17 "GROSS-UP PAYMENT" shall have the meaning ascribed to such term in Section 6 hereof. 1.18 "LFC MERGER" means the merger or similar business transaction occurring after the last Change in Control by which the Company shall be merged with or into Liberty Mutual Insurance Company or a wholly owned subsidiary thereof. 1.19 "LFC MERGER DATE" shall mean the effective date of the LFC Merger. 1.20 "LFC MERGER SHAREHOLDER PRICE" shall mean the cash value payable to minority public shareholders of a share of the Company's common stock on the LFC Merger Date as finally determined after applicable adjustments thereto in accordance with the Agreement and Plan of Merger relating to the LFC Merger. 1.21 "MAXIMUM RETENTION BONUS" shall mean a cash amount equal to the following with respect to a Tier 1, Tier 2, Tier 3, Tier 4, Tier 5, Tier 6, Tier 7 or Tier 8 Employee: 4 - ------------------------------------------------------------------------------------------------------ Tier 8 Employee Two times his or her Target Bonus. - ------------------------------------------------------------------------------------------------------ Tier 7 Employee His or her annual base salary rate. - ------------------------------------------------------------------------------------------------------ Tier 5 or Tier 6 Employee The greater of (i) two times his or her Target Bonus or (ii) nine months of his or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the maximum of the product of (i) 75% and (ii) one month of his or her annual base salary rate for each Month of Service (subject to a maximum of nine months of his or her annual base salary rate) or 200% of monthly target bonus per each month of employment through the date of closing. - ------------------------------------------------------------------------------------------------------ Tier 3 or Tier 4 Employee Nine months of his or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the product of (i) 75% and (ii) one month of his or her annual base salary rate for each Month of Service (subject to a maximum of nine months of his or her annual base salary rate). - ------------------------------------------------------------------------------------------------------ Tier 2 Employee Six months of his or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the greater of (i) one month of his or her annual base salary rate for each Month of Service (subject to a maximum of six months of his or her annual base salary rate) or (ii) one month of his or her annual base salary rate. - ------------------------------------------------------------------------------------------------------ Tier 1 Employee Four months of his or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the greater of (i) one month of his or her annual base salary rate for each Month of Service (subject to a maximum of four months of his or her annual base salary rate) or (ii) one month of his or her annual base salary rate. - ------------------------------------------------------------------------------------------------------
5 For purposes of this Section 1.21, "annual base salary rate" shall be determined immediately prior to a Change in Control. 1.22 "MINIMUM RETENTION BONUS" shall mean a cash amount equal to the following with respect to a Tier 3, Tier 4, Tier 5, Tier 6, Tier 7 or Tier 8 Employee: - ------------------------------------------------------------------------------------------------------ Tier 8 Employee His or her Target Bonus. - ------------------------------------------------------------------------------------------------------ Tier 7 Employee Six months of his or her annual base salary rate. - ------------------------------------------------------------------------------------------------------ Tier 5 or Tier 6 Employee The greater of (i) his or her Target Bonus or (ii) six months of his or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the greater of four months of his or her annual base salary rate or the equivalency of 200% of monthly target bonus for three months. - ------------------------------------------------------------------------------------------------------ Tier 3 or Tier 4 Employee Six months of his or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to two months of his or her annual base salary rate. - ------------------------------------------------------------------------------------------------------
6 For purposes of this Section 1.22, "annual base salary rate" shall be determined immediately prior to a Change in Control. 1.23 "MONTH OF SERVICE" means each full month during which a New Covered Employee has been employed by the Employer; PROVIDED, HOWEVER, that a New Covered Employee whose Date of Hire occurs on or before the 14th day of the month in which the Date of Hire occurs shall be credited with a Month of Service for such month; PROVIDED, FURTHER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, a New Covered Employee who is then employed by the Employer shall be credited with a Month of Service for such month. 1.24 "NEW COVERED EMPLOYEE" means any Tier 1, Tier 2, Tier 3, Tier 4 or Tier 5 Employee who commences employment with the Employer following November 6, 2000 and who is designated as a New Covered Employee in his or her offer of employment; PROVIDED, HOWEVER, that any Tier 1, Tier 2, Tier 3, Tier 4 or Tier 5 Employee who is designated as a Covered Employee in his or her offer of employment shall be a Covered Employee and shall not be a New Covered Employee; PROVIDED, FURTHER, that a New Covered Employee shall be treated the same as a Covered Employee for purposes of the Plan except where different treatment is specifically stated in the Plan. 1.25 "NOTICE PERIOD" shall have the meaning ascribed to such term in Section 2.4 hereof. 1.26 "PERSON" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its Affiliates, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 1.27 "PLAN" means this Liberty Financial Companies, Inc. and Subsidiaries Non-Commissioned Employee Severance and Retention Plan, as set forth herein, as it may be amended from time to time in accordance with Section 8 hereof. 7 1.28 "PLAN ADMINISTRATOR" means the Compensation Committee of the Board or one or more successors appointed by the Board. 1.29 "PRORATED RETENTION BONUS" shall have the meaning ascribed to such term in Section 3.1(1) hereof. 1.30 "RESTRICTED STOCK AGREEMENT" means a restricted stock agreement between a Covered Employee and the Company pursuant to which the Covered Employee was granted shares of the Company's common stock that are subject to restrictions on transfer. 1.31 "RESTRICTED PERIOD" shall have the meaning set forth in a Covered Employee's Restricted Stock Agreement. 1.32 "RESTRICTED STOCK TARGET PRICE" means that price per share of the Company's common stock stipulated in a Covered Employee's Restricted Stock Agreement at which such shares must trade for a period of ten consecutive trading days after the expiration of the applicable two year waiting period set forth in such Covered Employee's Restricted Stock Agreement as a condition precedent to the expiration of the Restricted Period. 1.33 "RETIREMENT" means a termination of a Covered Employee's employment with the Employer within or after the calendar year the Covered Employee attains age sixty (60). 1.34 "SECOND PAYMENT DATE" means a date six months immediately following a Change in Control. 1.35 "SEVERANCE" means the termination of a Covered Employee's employment with the Employer (or, if applicable, a successor to the Employer) on or within eighteen (18) months following the date of the Change in Control, (i) by the Employer (or, if applicable, a successor to the Employer) other than for Cause, or (ii) by the Covered Employee for Good Reason. A Covered Employee will not be considered to have incurred a Severance (i) if his or her employment is discontinued by reason of the Covered Employee's death or a physical or mental condition causing such Covered Employee's inability to substantially perform his or her duties with the Employer, including, without limitation, such condition entitling him or her to benefits under any sick pay or disability income policy or program of the Employer; PROVIDED, HOWEVER, that a Covered Employee who is entitled to short-term disability benefits may incur a Severance of such Covered Employee's employment in accordance with this Section 1.36 or (ii) by reason of the divestiture of a facility, sale of a 8 business or business unit, or the outsourcing of a business activity with which the Covered Employee is affiliated (including, but not limited to, a sale of the Company's annuity or asset management business that results in a Change in Control pursuant to Section 1.5(3) hereof) if the Covered Employee is offered employment by the entity which acquires such facility, business or business unit or which succeeds to such outsourced business activity (subject to such Covered Employee's right to terminate his or her employment for Good Reason), in which case such acquiring entity shall be treated as the Employer of such Covered Employee for all purposes under the Plan. 1.36 "SEVERANCE DATE" means the date on or after the date of the Change in Control on which a Covered Employee incurs a Severance. 1.37 "SEVERANCE PAY" shall mean a cash payment from the Company equal to the greater of (i) any severance pay due under the Employer's existing severance guidelines based upon a Covered Employee's Date of Hire or (ii) the following with respect to a Tier 1, Tier 2, Tier 3, Tier 4, Tier 5, Tier 6, Tier 7 or Tier 8 Employee: - ------------------------------------------------------------------------------------------------------ Tier 8 Employee The sum of (i) two times his or her annual base salary rate, plus (ii) his or her Target Bonus. - ------------------------------------------------------------------------------------------------------ Tier 6 or Tier 7 Employee The sum of (i) his or her annual base salary rate, plus (ii) his or her Target Bonus. - ------------------------------------------------------------------------------------------------------ Tier 2, Tier 3, Tier 4 or Tier 5 Employee His or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the greater of (i) one month of his or her annual base salary rate for each Month of Service (subject to a maximum of his or her annual base salary rate) or (ii) two months of his or her annual base salary rate. - ------------------------------------------------------------------------------------------------------ Tier 1 Employee Six months of his or her annual base salary rate; PROVIDED, HOWEVER, that with respect to a New Covered Employee, such amount shall be equal to the greater of (i) one month of his or her annual base salary rate for each Month of Service (subject to a maximum of six months of his or her annual base salary rate) or (ii) one month of his or her annual base salary rate. - ------------------------------------------------------------------------------------------------------
9 For purposes of this Section 1.38, "annual base salary rate" shall be determined immediately prior to the Severance (without regard to any reductions therein which constitute Good Reason). 1.38 "TARGET BONUS" means the Covered Employee's target annual incentive bonus in effect on the date immediately prior to the Change in Control or, in the event a Change in Control does not occur prior to November 1, 2001, the Covered Employee's target annual incentive bonus in effect on October 31, 2001. 1.39 "TIER 1 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Tier 1 Participant. 1.40 "TIER 2 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Tier 2 Participant. 1.41 "TIER 3 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Tier 3 Participant. 1.42 "TIER 4 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Tier 4 Participant. 1.43 "TIER 5 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Tier 5 Participant. 10 1.44 "TIER 6 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Tier 6 Participant. 1.45 "TIER 7 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Tier 7 Participant. 1.46 "TIER 8 EMPLOYEE" means any employee of the Employer selected by the Plan Administrator to participate in the Plan and who is designated in the Company's records as a Tier 8 Participant. 1.47 "TOTAL PAYMENTS" shall have the meaning ascribed to such term in Section 6 hereof. 1.48 "VOTING SECURITIES" means voting securities entitled to be voted generally in the election of directors. SECTION 2. SEVERANCE BENEFITS. 2.1 Each Covered Employee who incurs a Severance shall be entitled, subject to Section 2.5 hereof, to receive Severance Pay. Severance Pay shall be paid to a Severed Employee in a cash lump sum, as soon as practicable following the Severance Date, but in no event later than thirty (30) days immediately following the expiration of the revocation period, if any, applicable to such Severed Employee's Nonsolicitation/Waiver and Release of Claims Agreement, described in Section 2.5. 2.2 The Company shall provide each Severed Employee with outplacement services for a period of up to twelve (12) months. 2.3 Except for Level 8 Severed Employees, the coverage period for purposes of the group health continuation requirements of section 4980B of the Code shall commence on a Severed Employee's Severance Date. The Company shall waive any premium payments otherwise required of a Severed Employee in connection with such continuation coverage with respect to the period beginning on each such Severed Employee's Severance Date and continuing thereafter for the period with respect to which such Severed Employee is entitled to Severance Pay in accordance with Section 1.38 hereof; PROVIDED, HOWEVER, that during such period, each such Severed Employee shall continue to pay to the Company the employee portion of any premium payments at active employee rates (which may be changed by the Company). Level 8 Severed Employees' group health continuation requirements of Section 4980B of the Code shall commence six (6) months after a Severed Employee's Severance Date. 11 2.4 If an Employer is obligated by law or by contract to pay severance pay, a termination indemnity, notice pay, or the like to a Covered Employee, or if an Employer is obligated by law to provide advance notice of separation (not including any notice period that relates to obligations of an Employer which arise under the Worker Adjustment Retraining Notification Act, 29 U.S.C. Section 2101, et seq.) ("NOTICE PERIOD") to a Covered Employee, then any Severance Pay hereunder to such Covered Employee shall be reduced by the amount of any such severance pay, termination indemnity, notice pay or the like, as applicable, and by the amount of any compensation received during any Notice Period. Any Severance Pay hereunder shall be reduced, on a dollar for dollar basis, by any severance payment made by the Company, any subsidiary of the Company, the Employer or successor Employer to the Covered Employee pursuant to any other severance plan, program, policy or arrangement. 2.5 No Severed Employee shall be eligible to receive Severance Pay or other benefits under the Plan unless he or she first executes a Nonsolicitation/ Waiver and Release of Claims Agreement substantially in the form attached hereto as Schedule A or in the form generally used by the Beneficial Owner or other acquiring Person (or, if the Severed Employee is not a United States employee, a similar agreement which is in accordance with the applicable laws of the relevant jurisdiction). 2.6 Notwithstanding the foregoing, any individual who is designated on Exhibit A hereto will not be entitled to any benefits under this Section 2. SECTION 3. RETENTION BONUS. 3.1 PAYMENT OF RETENTION BONUS. A Covered Employee's Retention Bonus shall be paid by the Company to the Covered Employee as follows: (1) In the event a Change in Control occurs during the period beginning on November 1, 2000 and ending on October 31, 2001, a Tier 3, Tier 4, Tier 5, Tier 6, Tier 7 or Tier 8 Employee who is employed by the Employer on the date of a Change in Control shall be entitled to receive from the Company an amount equal to the greater of (A) such Covered Employee's Minimum Retention Bonus or (B) the product of (i) such Covered Employee's Maximum Retention Bonus multiplied by (ii) 12 a fraction, the numerator of which shall the number of full months from November 1, 2000 to the date of a Change in Control and the denominator of which shall be twelve (12) (such greater amount, the "PRORATED RETENTION BONUS"); PROVIDED, HOWEVER, that in the event the date of a Change in Control occurs on or after the 15th day of the month during which a Change in Control occurs, the month during which a Change in Control occurs shall be deemed to be a full month for purposes of determining the number of full months to be included in the numerator of such fraction. Fifty percent (50%) of such Covered Employee's Prorated Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days, following the date of a Change in Control. The remaining fifty percent (50%) of such Covered Employee's Prorated Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days following, the Second Payment Date if the Covered Employee is then employed by the Employer. If such Covered Employee's employment is terminated prior to the Second Payment Date by the Employer without Cause, by the Covered Employee for Good Reason or due to the Covered Employee's death, Disability or Retirement, the remaining fifty percent (50%) of the Covered Employee's Prorated Retention Bonus shall be paid by the Company as soon as practicable, but no later than thirty (30) days, following the date of such termination. If such Covered Employee's employment is terminated prior to the Second Payment Date for any other reason, the remaining fifty percent (50%) of the Covered Employee's Prorated Retention Bonus shall be forfeited. (2) In the event a Change in Control occurs during the period beginning on November 1, 2000 and ending on October 31, 2001, a Tier 1 or Tier 2 Employee who is employed by the Employer on the date of a Change in Control shall be entitled to receive from the Company an amount equal to such Covered Employee's Maximum Retention Bonus. Fifty percent (50%) of such Covered Employee's Maximum Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days, following the date of a Change in Control. The remaining fifty percent (50%) of such Covered Employee's Maximum Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days following, the Second Payment Date if the Covered Employee is then employed by the Employer. If such Covered Employee's employment is terminated prior to the Second Payment Date by the Employer without Cause, by the Covered Employee for Good Reason or due to the Covered Employee's death, Disability or Retirement, the remaining fifty percent (50%) of the Covered Employee's Maximum Retention Bonus shall be paid by the Company as soon as practicable, but no later than thirty (30) days, following the date of such termination. If such Covered Employee's employment is terminated prior to the Second Payment Date for any other reason, the remaining fifty percent (50%) of the Covered Employee's Maximum Retention Bonus shall be forfeited. 13 (3) In the event a Change in Control does not occur prior to November 1, 2001, a Tier 3, Tier 4, Tier 5, Tier 6, Tier 7 or Tier 8 Employee who is employed by the Employer on November 1, 2001 shall be entitled to receive from the Company an amount equal to such Covered Employee's Maximum Retention Bonus. Fifty percent (50%) of such Covered Employee's Maximum Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days, following November 1, 2001. The remaining fifty percent (50%) of such Covered Employee's Maximum Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days following, May 1, 2002 if the Covered Employee is then employed by the Employer. If such Covered Employee's employment is terminated prior to May 1, 2002 by the Employer without Cause, by the Covered Employee for Good Reason or due to the Covered Employee's death, Disability or Retirement, the then unpaid amount of a Covered Employee's Maximum Retention Bonus shall be paid by the Company as soon as practicable, but no later than thirty (30) days, following the date of such termination. If such Covered Employee's employment is terminated prior to May 1, 2002 for any other reason, the remaining fifty percent (50%) of the Covered Employee's Maximum Retention Bonus shall be forfeited. (4) In the event a Change in Control does not occur prior to November 1, 2001, a Tier 1 or Tier 2 Employee who is employed by the Employer on November 1, 2001 shall be entitled to receive from the Company an amount equal to such Covered Employee's Maximum Retention Bonus. Fifty percent (50%) of such Covered Employee's Maximum Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days, following November 1, 2001. The remaining fifty percent (50%) of such Covered Employee's Maximum Retention Bonus shall be paid by the Company to the Covered Employee as soon as practicable, but no later than thirty (30) days following, May 1, 2002 if the Covered Employee is then employed by the Employer. If such Covered Employee's employment is terminated prior to May 1, 2002 by the Employer without Cause, by the Covered Employee for Good Reason or due to the Covered Employee's death, Disability or Retirement, the then unpaid amount of a Covered Employee's Maximum Retention Bonus shall be paid by the Company as soon as practicable, but no later than thirty (30) days, following the date of such termination. If such Covered Employee's employment is terminated prior to May 1, 2002 for any other reason, the remaining fifty percent (50%) of the Covered Employee's Maximum Retention Bonus shall be forfeited. 14 3.2 Notwithstanding the foregoing, any individual who is designated on Exhibit B hereto will not be entitled to any benefits under this Section 3. SECTION 4. STOCK OPTIONS. 4.1 VESTED STOCK OPTIONS. Upon a Change in Control, each then outstanding vested stock option held by a Covered Employee can be exercised at any time prior to the earlier of (i) the LFC Merger Date, or (ii) the date such option expires in accordance with its terms. If the LFC Merger Date is not on or prior to such expiration date, the Covered Employee's vested options not exercised on or prior to such expiration date will expire. If the LFC Merger Date is on or prior to such expiration date, vested options not exercised prior to the LFC Merger Date will be cancelled as of the LFC Merger Date in exchange for a cash payment from the Company equal to the excess, if any, of the LFC Merger Shareholder Price over the exercise price per share of each such option, multiplied by the number of shares subject to such option. The Company shall make such payment within thirty (30) days of the LFC Merger Date. 4.2 UNVESTED STOCK OPTIONS. Upon a Change in Control, any then outstanding unvested stock options held by a Covered Employee shall be subject to the following provisions, whichever is applicable to the Covered Employee: (1) COVERED EMPLOYEE CONTINUES EMPLOYMENT UNTIL THE LFC MERGER DATE. With respect to each Covered Employee who continues employment with the Employer following the Change in Control until the LFC Merger Date, each outstanding unvested option shall be cancelled upon the Change in Control in exchange for cash payments from the Company determined as follows: (i) Within thirty (30) days after the Change in Control, the Company shall make a cash payment to the Covered Employee equal to fifty percent (50%) of the excess, if any, of the Change in Control Price over the exercise price of each such option, multiplied by the number of shares subject to such option (the "First Option Payment"). (ii) Within thirty (30) days after the Second Payment Date, the Company shall make a cash payment to the Covered Employee equal to the combination of (a) fifty percent (50%) of the excess, if any, of the LFC Merger Shareholder Price over the exercise price of each such option, multiplied by the number of shares subject to each such option, and (b) plus the excess, or minus the deficit, of the LFC Merger Shareholder Price over the Change in Control Price 15 multiplied by fifty percent (50%) of the number of shares subject to each such option (the "Second Option Payment"). (The purpose of clause (b) of the preceding sentence is to "true up" the cash out price of the First Option Payment so that it is based on the LFC Merger Shareholder Price.) (iii) If the Covered Employee's employment is terminated prior to the Second Payment Date by the Employer without Cause, by the Covered Employee for Good Reason or due to the Covered Employee's death, Disability or Retirement (each of such reasons being hereinafter referred to as a "Valid Reason"), the Company shall make the Second Option Payment to the Covered Employee within thirty (30) days after the later of such Covered Employee's termination of employment or the LFC Merger Date. If the Covered Employee's employment is terminated prior to the Second Payment Date for any other reason other than a Valid Reason, the Second Option Payment shall not be made. (2) COVERED EMPLOYEE TERMINATES EMPLOYMENT PRIOR TO LFC MERGER DATE. With respect to each Covered Employee who continues in employment with the Employer following a Change in Control but then terminates such employment prior to the LFC Merger Date, each outstanding unvested option shall be cancelled upon the Change in Control in exchange for cash payments from the Company determined as follows: (i) Within thirty (30) days after the Change in Control, the Company shall make a First Option Payment to the Covered Employee. (ii) If the Covered Employee's employment is terminated for a Valid Reason, then within thirty (30) days after the LFC Merger Date, the Company shall make a Second Option Payment to the Covered Employee. If the Covered Employee's employment is terminated for any reason other than a Valid Reason, then the Second Option Payment shall not be made. SECTION 5. RESTRICTED STOCK. If the LFC Merger Shareholder Price equals or exceeds the Restricted Stock Target Price applicable to an outstanding share of restricted stock held by a Covered Employee, then, immediately prior to the LFC Merger, such outstanding share of restricted stock shall become fully vested and all restrictions relating to such stock shall lapse. Any then outstanding share of restricted stock of the Company held by a Covered Employee for which the Restricted Stock Target Price applicable to such share of restricted stock is more than the LFC Merger Shareholder Price shall be 16 forfeited by the Covered Employee upon the LFC Merger. The phrase "immediately prior to the LFC Merger Date" in the first sentence of this Section 5 shall be understood to mean sufficiently in advance of the LFC Merger to permit the Covered Employee to take all steps reasonably necessary to deal with the shares of such stock so that such shares may be treated in the same manner, subject to the consummation of the LFC Merger, as the shares of stock of other shareholders (other than Liberty Mutual Insurance Company or any shareholders seeking appraisal rights) in connection with the LFC Merger. SECTION 6. EXCISE TAX. If any of the payments or benefits received or to be received by a Covered Employee in connection with the Change in Control or his or her termination of employment (whether pursuant to the terms of this Plan or any other plan, arrangement or agreement) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "TOTAL PAYMENTS") will be subject to any excise tax imposed under section 4999 of the Code (the "EXCISE TAX"), the Company shall pay to the Covered Employee an additional amount (the "GROSS-UP PAYMENT") such that the net amount retained by the Covered Employee, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. The amount of the Gross-Up Payment, if any, shall be determined in a reasonable manner by the Plan Administrator or any person or entity designated by the Plan Administrator. The Gross-Up Payment, if any, (a) with respect to a Severed Employee, shall be paid in a cash lump sum, as soon as practicable following the Severance Date, but, in any event, not later than thirty (30) days immediately following the expiration of the revocation period, if any, applicable to such Severed Employee's release, described in Section 2.5, and, (b) with respect to any other Covered Employee, shall be paid in a cash lump sum not later than thirty (30) days immediately following the receipt of payments subject to the Excise Tax. SECTION 7. PLAN ADMINISTRATION. 7.1 The Plan Administrator shall administer the Plan and may interpret the Plan, prescribe, amend and rescind rules and regulations under the Plan and make all other determinations necessary or advisable for the administration of the Plan, subject to all of the provisions of the Plan, including, without limitation, Sections 8 and 9.2 hereof. 17 7.2 The Plan Administrator is empowered, on behalf of the Plan, to engage accountants, legal counsel and such other personnel as it deems necessary or advisable to assist it in the performance of its duties under the Plan. The functions of any such persons engaged by the Plan Administrator shall be limited to the specified services and duties for which they are engaged, and such persons shall have no other duties, obligations or responsibilities under the Plan. Such persons shall exercise no discretionary authority or discretionary control respecting the management of the Plan. All reasonable expenses thereof shall be borne by the Company. SECTION 8. PLAN MODIFICATION OR TERMINATION. The Plan may be amended or terminated by the Board at any time; PROVIDED, HOWEVER, that the Plan may not be amended or terminated during the eighteen (18) month period following a Change in Control. SECTION 9. GENERAL PROVISIONS. 9.1 The Company shall pay to each Covered Employee all reasonable legal fees and expenses incurred by such Covered Employee in pursuing any claim under the Plan in which such Covered Employee prevails in any material respect. 9.2 In the event of a claim by a Covered Employee as to the amount or timing of any distribution, such Covered Employee shall present the reason for his or her claim in writing to the Plan Administrator or its designee. The Plan Administrator shall, within sixty (60) days after receipt of such written claim, send a written notification to the Covered Employee as to its disposition. In the event the claim is wholly or partially denied, such written notification shall (a) state the specific reason or reasons for the denial, (b) make specific reference to pertinent Plan provisions on which the denial is based, (c) provide a description of any additional material or information necessary for the Covered Employee to perfect the claim and an explanation of why such material or information is necessary, and (d) set forth the procedure by which the Covered Employee may appeal the denial of his or her claim. In the event a Covered Employee wishes to appeal the denial of his or her claim, he or she may request a review of such denial by making application in writing to the Plan Administrator within sixty (60) days after receipt of such denial. Such Covered Employee (or his or her duly authorized legal representative) may, upon written request to the Plan Administrator, review any documents pertinent to his or her claim, and submit in writing, issues and comments in support of his or her position. Within 18 sixty (60) days after receipt of a written appeal (unless special circumstances, such as the need to hold a hearing, require an extension of time, but in no event more than one hundred twenty (120) days after such receipt), the Plan Administrator shall notify the Covered Employee of the final decision. The final decision shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. 9.3 An Employer shall be entitled to withhold from amounts to be paid to a Covered Employee hereunder any federal, state or local withholding or other taxes or charges (or foreign equivalents of such taxes or charges) which it is from time to time required to withhold. 9.4 Except as otherwise provided herein or by law, no right or interest of any Covered Employee under the Plan shall be assignable or transferable, in whole or in part, either directly or by operation of law or otherwise, including without limitation by execution, levy, garnishment, attachment, pledge or in any manner; no attempted assignment or transfer thereof shall be effective; and no right or interest of any Covered Employee under the Plan shall be liable for, or subject to, any obligation or liability of such Covered Employee. When a payment is due under this Plan to a Severed Employee who is unable to care for his or her affairs, payment may be made directly to his or her legal guardian or personal representative. 9.5 Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Covered Employee, or any person whomsoever, the right to be retained in the service of the Employer, and all Covered Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. 9.6 If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. 9.7 This Plan shall inure to the benefit of and be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Covered Employee, present and future, and any successor to the Company or the Employer. If a Severed Employee shall die while any amount would still be payable to such Severed Employee hereunder if the Severed Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to the executor, personal representative or administrators of the Severed Employee's estate. 19 9.8 The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 9.9 The Plan shall not be funded. No Covered Employee shall have any right to, or interest in, any assets of any Employer which may be applied by the Employer to the payment of benefits or other rights under this Plan. 9.10 Any notice or other communication required or permitted pursuant to the terms hereof shall have been duly given when delivered or mailed by United States Mail, first class, postage prepaid, addressed to the intended recipient at his, her or its last known address. The address of the Plan Administrator is c/o Liberty Financial Companies, Inc., 600 Atlantic Avenue, 24th Floor, Boston, Massachusetts 02110, Attention: William O'Donnell. The Plan Administrator may change such address by notice to the Covered Employees. 9.11 This Plan shall be construed and enforced according to the laws of the Commonwealth of Massachusetts to the extent not preempted by federal law, which shall otherwise control. 20 DRAFT SUBJECT TO CHANGE SCHEDULE A NONSOLICITATION/WAIVER AND RELEASE OF CLAIMS AGREEMENT YOU HAVE BEEN ADVISED TO CONSULT AN ATTORNEY PRIOR TO SIGNING THIS NONSOLICITATION/WAIVER AND RELEASE OF CLAIMS AGREEMENT (the "AGREEMENT"). [YOU HAVE [FORTY-FIVE] [TWENTY-ONE] DAYS AFTER RECEIVING THIS AGREEMENT TO CONSIDER WHETHER TO SIGN IT. YOU AGREE THAT ANY MODIFICATIONS, MATERIAL OR OTHERWISE, DO NOT RESTART OR AFFECT IN ANY MANNER THE ORIGINAL CONSIDERATION PERIOD. YOU ACKNOWLEDGE THAT YOU HAVE RECEIVED THE EXHIBITS A AND B ATTACHED WHICH PROVIDE INFORMATION REGARDING THE EMPLOYEES SELECTED FOR SEPARATION AS PART OF THIS ORGANIZATION RESTRUCTURING. AFTER SIGNING THIS AGREEMENT, YOU HAVE ANOTHER SEVEN DAYS IN WHICH TO REVOKE IT, AND IT DOES NOT TAKE EFFECT UNTIL THOSE SEVEN DAYS HAVE ENDED.(1) ANY REVOCATION MUST BE SUBMITTED, IN WRITING, TO FRANK FAGGIANO OR HIS SUCCESSOR, SENIOR VICE PRESIDENT, HUMAN RESOURCES, AND STATE "I HEREBY REVOKE MY ACCEPTANCE OF THE NONSOLICITATION/WAIVER AND RELEASE OF CLAIMS AGREEMENT." THE REVOCATION MUST BE PERSONALLY DELIVERED TO MR. FAGGIANO OR HIS SUCCESSOR AT LIBERTY FINANCIAL COMPANIES, INC., 600 ATLANTIC AVENUE, 24TH FLOOR, BOSTON, MASSACHUSETTS 02210, AND POSTMARKED WITHIN SEVEN (7) DAYS OF EXECUTION OF THIS AGREEMENT. In consideration of, and subject to, the payments to be made to me by Liberty Financial Companies, Inc. (together with its subsidiaries, related corporations, parent and any of their respective successors, the "COMPANY"), pursuant to the Liberty Financial Companies, Inc. and Subsidiaries Non-Commissioned Employee Severance and Retention Plan (the "PLAN"), which I acknowledge that I would not otherwise be - ------------------------- (1) Square bracketed sections for employees over age 40 only. A-1 entitled to receive, I hereby waive any claims I may have for employment or re-employment by the Company after the date hereof, and I further agree to and do release and forever discharge the Company and its present officers, directors, shareholders, employees and agents from any and all claims and causes of action, known or unknown, arising out of or relating to my employment with the Company or the termination thereof, including, but not limited to, wrongful discharge, breach of contract, tort, fraud, Title VII of the Civil Rights Act of 1964, [Age Discrimination in Employment Act], Employee Retirement Income Security Act, Americans with Disabilities Act, the Massachusetts Law Against Discrimination, G.L. 151B, or any other federal, state or local legislation or common law relating to employment or discrimination in employment, labor or human rights law or otherwise. Notwithstanding the foregoing or any other provision hereof, nothing in this Agreement shall adversely affect (i) my rights under the Plan; (ii) my rights to benefits other than severance benefits under written plans of the Company; or (iii) my rights to indemnification under any indemnification agreement, applicable law and the certificates of incorporation and bylaws of the Company, and my rights under any director's and officer's liability insurance policy covering me. I hereby acknowledge and agree that, for a period of twelve months from my Severance Date (as such term is defined in the Plan), I will not, either directly or indirectly, solicit, recruit, hire or promise future employment to any employee of the Company, or solicit or encourage any employee of the Company to leave the employment of the Company. I acknowledge that I have signed this Agreement voluntarily, knowingly, of my own free will and without reservation or duress, and that no promises or representations, written or oral, have been made to me by any person to induce me to do so other than the promise of payment set forth in the first paragraph above and the Company's acknowledgment of my rights reserved under the second paragraph above. I understand that this Agreement will be deemed to be an application for benefits under the Plan, and that my entitlement thereto shall be governed by the terms and conditions of the Plan, and I expressly hereby consent to such terms and conditions. I acknowledge that [I have been given not less than [forty-five (45)] [twenty-one (21)] days to review and consider this Agreement, and that] I have had the opportunity to consult with an attorney or other advisor of my choice and have been advised by the Company to do so if I choose. [I may revoke this Agreement seven days or less after its execution by providing written notice to the Company.] A-2 Finally, I acknowledge that I have carefully read this Agreement and understand all of its terms. This is the entire Agreement between the parties and is legally binding and enforceable. This Agreement shall be governed and interpreted under federal law and the laws of the Commonwealth of Massachusetts. I knowingly and voluntarily sign this Agreement. Date Delivered to Employee: [Company] - ------------------------------------ Date Signed by Employee: By: ----------------------------- Title: - ------------------------------------ -------------------------- [Seven-Day Revocation Period Ends: - ------------------------------------] Signed: Date: ----------------------------- --------------------------- - ------------------------------------ (Print Employee's Name) A-3 EXHIBIT A NAME BUSINESS UNIT - ---- ------------- James S. Tambone LFDI Louis Tasiopoulos LFDI Thomas R. Tuttle Newport Ralph L. Wanger Wanger Leah Zell Wanger Wanger Charles P. McQuaid Wanger Marcel P. Houtzager Wanger Robert A. Mohn Wanger John H. Park Wanger Bruce H. Lauer Wanger Peter A. Zaldivar Wanger Jason Selch Wanger Todd Narter Wanger Erik P. Gustafson Stein Roe Brian W. Good Stein Roe James R. Fellows Stein Roe Kathleen Ann Zarn Stein Roe Brian Murphy Stein Roe David P. Brady Stein Roe Daniel Cantor Stein Roe Ben Andrews Wanger Michael King Wanger Zach Egan Wanger E-1 EXHIBIT B
NAME BUSINESS UNIT NAME BUSINESS UNIT - ---- ------------- ---- ------------- Erik P. Gustafson Stein Roe Bruce H. Lauer Wanger Brian W. Good Stein Roe Peter A. Zaldivar Wanger James R. Fellows Stein Roe Eric Arvold Wanger Kathleen Ann Zarn Stein Roe Ken Kalina Wanger Brian Murphy Stein Roe Marilyn Morrison Wanger David P. Brady Stein Roe Susan Pinsky Wanger Daniel Cantor Stein Roe Harold Lichtenstein Wanger Marx Cazenave Progress Rob Chapulnik Wanger A. Ronald Berryman Progress Jason Selch Wanger Clayton Jue Progress Todd Narter Wanger Thurman White Progress Michael King Wanger Garth Nisbet Crabbe Huson Paul Rocheleau Crabbe Huson John Johnson Crabbe Huson Peter Belton Crabbe Huson Robert Anton Crabbe Huson Denise O'Brien Wanger Ben Andrews Wanger Zach Egan Wanger James S. Tambone LFDI Louis Tasiopoulos LFDI Thomas R. Tuttle Newport Ralph L. Wanger Wanger Leah Zell Wanger Wanger Charles P. McQuaid Wanger Marcel P. Houtzager Wanger Robert A. Mohn Wanger John H. Park Wanger
E-2 -----END PRIVACY-ENHANCED MESSAGE-----