-----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, NzSbx2WES6u6eJn+el898E9f3wQcyFf4VhA/LVtjh+btohHfvXzEmdLIWuDRB74M bQAt16S5y8L0rISLgCEe/w== 0001029869-99-000368.txt : 19990331 0001029869-99-000368.hdr.sgml : 19990331 ACCESSION NUMBER: 0001029869-99-000368 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K SEC ACT: SEC FILE NUMBER: 001-13654 FILM NUMBER: 99579145 BUSINESS ADDRESS: STREET 1: 600 ATLANTIC AVE 24TH FLOOR STREET 2: 24TH FL CITY: BOSTON STATE: MA ZIP: 02110-2214 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-K 1 LIBERTY FINANCIAL FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-13654 LIBERTY FINANCIAL COMPANIES, INC. (Exact name of registrant as specified in its charter) ---------------- Massachusetts 04-3260640 (State of incorporation) (I.R.S. Employer Identification No.) 600 Atlantic Avenue 02210-2214 Boston, Massachusetts (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (617) 722-6000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------------------------------- ------------------------ Common Stock, Par Value $.01 per share New York Stock Exchange Boston Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Common Stock held by non-affiliates of the registrant as of March 19, 1999 (based on the closing sale price of the Common Stock on the New York Stock Exchange on such date) was approximately $281.0 million. There were 46,675,377 shares of the registrant's Common Stock, $.01 par value, and 324,759 shares of the registrant's Series A Convertible Preferred Stock, $0.01 par value, outstanding as of March 19, 1999. ---------------- Documents Incorporated by Reference Portions of the Company's 1998 Annual Report to Stockholders are incorporated into Part II, Items 6, 7, 7A and 8, and Part IV, Item 14(a)1, of this Form 10-K. Portions of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on or about May 10, 1999 are incorporated into Part III, Items 10, 11, 12, and 13, of this Form 10-K. ================================================================================ LIBERTY FINANCIAL COMPANIES, INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS
Part I Page - ---------- ----- Item 1. Business 1 Executive Officers of the Registrant 17 Item 2. Properties 18 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Part II - ---------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19 Item 6. Selected Financial Data 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 Part III - ---------- Item 10. Directors and Executive Officers of the Registrant 20 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Related Transactions 20 Part IV - ---------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21
PART I Item 1. Business Overview Liberty Financial Companies, Inc. ("Liberty Financial" or the "Company") is a leading asset accumulation and management company. The Company has two core product lines--retirement-oriented insurance products and investment management products. Retirement-oriented insurance products consist substantially of annuities. Investment management products consist of mutual funds, private capital management and institutional asset management. The Company sells its products through multiple distribution channels, including brokerage firms, banks and other depository institutions, financial planners and insurance agents, as well as directly to investors. The Company's net operating income (i.e., net income excluding net realized investment gains and losses, net of related income taxes) was $122.6 million in 1998, $112.4 million in 1997 and $94.8 million in 1996. The following table sets forth the Company's assets under management as of December 31, 1998, 1997 and 1996, respectively.
Assets Under Management ------------------------------ As of December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (dollars in billions) Retirement-oriented insurance products .............................. $13.1 $12.8 $12.1 Mutual funds ........................... 28.6 26.8 25.7 Private capital management ............. 7.9 6.6 5.3 Institutional asset management ......... 11.4 5.3 4.9 ----- ----- ----- Total ................................ $61.0 $51.5 $48.0 ===== ===== =====
At March 19, 1999, approximately 71.0% of the combined voting power of Liberty Financial's voting stock was indirectly owned by Liberty Mutual Insurance Company ("Liberty Mutual"). Liberty Financial's principal executive offices are located at 600 Atlantic Avenue, Boston, Massachusetts 02210-2214. Its telephone number is (617) 722-6000. Recent Developments. On August 31, 1998, the Company acquired certain assets and assumed certain liabilities of Progress Investment Management Company, Inc. ("Progress"), a registered investment adviser to institutional accounts with approximately $2.1 billion in assets under management as of that date. On September 30, 1998, Liberty Financial acquired certain assets and assumed certain liabilities of The Crabbe Huson Group, Inc. ("Crabbe Huson"), a registered investment adviser with approximately $3.3 billion of assets under management as of that date. The combined purchase price for these transactions was approximately $104.0 million and consisted of $95.1 million in cash and $8.9 million in the Company's Common Stock. In addition, the Company has agreed to pay up to an additional $71.5 million in cash and Common Stock over five years, contingent upon the attainment of certain earnings objectives. The acquisitions were recorded using the purchase method of accounting. In November, 1998, the Company issued $450.0 million of senior debt securities. The offering consisted of $300.0 million of 6-3/4% 10-year notes and $150.0 million of 7-5/8% 30-year debentures. The Company used the proceeds of the offering to refinance $90.0 million of bank debt incurred in connection with the Crabbe Huson acquisition and to repay debt owed to affiliates of Liberty Mutual in the aggregate principal amount of $229.0 million. The Company will use the balance of the proceeds for general corporate purposes. In March, 1999, the Company reached a mutual agreement with Societe Generale Asset Management S.A. to terminate the previously announced acquisition of Societe Generale Asset Management Corp. Multiple Asset Accumulation Products. The Company sells a full range of retirement-oriented insurance products, grouped by whether they provide fixed, indexed or variable returns to policyholders. 1 Substantially all of these products currently are annuities that are written by the Company's wholly-owned subsidiary, Keyport Life Insurance Company ("Keyport"), one of the country's leading annuity companies. Annuities are insurance products which provide a tax-deferred means of accumulating savings for retirement needs, as well as a tax-efficient source of income in the payout period. The Company's principal fixed annuity products are individual single premium deferred fixed annuities ("SPDAs"), which represented $8.2 billion of policyholder liabilities as of December 31, 1998. In addition to SPDAs, the Company also sells equity-indexed and variable annuities. Equity-indexed annuities are an innovative product first introduced to the marketplace by the Company when it began selling its KeyIndex[RegTM] product in 1995. The Company's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion of the change in value of a specified equity index (in the case of the Company's equity-indexed products, the Standard & Poor's 500 Composite Stock Index ("S&P 500 Index")).* Under a variable annuity, the policyholder has the opportunity to select separate account investment options, consisting of underlying mutual funds, which pass the investment risk directly to the policyholder in return for the potential of higher returns. Variable annuities also include guaranteed fixed interest rate options. The Company has six operating units engaged in investment management: The Colonial Group ("Colonial"), Stein Roe & Farnham Incorporated ("Stein Roe"), Newport Pacific Management, Inc. ("Newport"), Crabbe Huson, Progress and Liberty Asset Management Company ("LAMCO"), each of which carries strong brand name recognition in the markets it serves. As of December 31, 1998, the Company sponsored 78 open-end mutual funds, as well as seven closed-end funds. The open-end funds consist of 46 intermediary-distributed funds, 19 direct-marketed funds, and 13 other funds included among the investment options available under the Company's variable annuities. The closed-end funds consist of five fixed income funds and two equity funds. Fifty-eight of the Company's 78 open-end mutual funds are long-term funds (defined as open-end funds having at least a three-year performance record, excluding funds that invest solely in money market securities). Forty of those 58 funds (representing 81% of the total assets in those 58 funds as of December 31, 1998) were ranked by Lipper Analytical Services, Inc. ("Lipper") in the top two quartiles of their respective peer groups for the three-year period ended that date. Multiple Distribution Channels. Liberty Financial sells its products through multiple distribution channels. The Company distributes its products through all the major third party intermediary channels, including national and regional brokerage firms, banks and other depository institutions, financial planners and insurance agents. To capitalize on the importance of banks and other depository institutions as intermediaries for its products, the Company also operates its own distribution unit, Independent Financial Marketing Group, Inc. ("Independent"), which sells annuities and mutual funds through such entities. Certain of the Company's products also are sold directly to investors, including its mutual funds sold without a sales load, private capital management and institutional asset management products. The Company believes that it is one of the few asset accumulators with a significant presence in both the intermediary and direct channels. Total product sales for 1998 were $9.6 billion (including $1.3 billion of reinvested dividends). During 1998, 54% of sales were made through intermediary distributors, with the balance made directly to the investor. Over 35,000 individual brokers and other intermediaries sold Liberty Financial products in 1998. Business Strategy. The Company's business strategy has four interrelated elements: o Diversification. The Company believes that the diversification in its products and distribution channels allows it to accumulate assets in different market cycles, thereby providing more consistent growth potential and reducing earnings volatility. Within its two core product lines, the Company sells a range of products that serve individuals at different stages of their life and earnings cycle. This mix also is designed to include products that will be in demand under a variety of economic and market conditions. Similarly, the Company reaches customers through a variety of distribution channels. Diversification of distribution channels allows the Company to reach many segments of the marketplace and lessens its dependence on any one source of assets. - ---------- *"S&P," "S&P 500" and "Standard & Poor's 500" are registered trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by Keyport. 2 o Integration. Liberty Financial actively promotes integration of its operating units and believes that such efforts will enable it to accumulate additional assets by leveraging distribution capabilities and to reduce expenses by consolidating redundant back office functions. The Company has consolidated its mutual fund administration and transfer agency operations as well as the distribution of all of the Company's intermediary-distributed mutual funds, while retaining the distinctive styles of its investment management subsidiaries. Stein Roe manages the majority of Keyport's general account assets and together with Colonial, Newport and LAMCO manages certain of the funds underlying Keyport's variable annuity products. Independent Financial Marketing Group, Inc. ("Independent"), the Company's bank distribution unit, was the largest distributor of Keyport's annuities and the second largest distributor of the Colonial funds in 1998. o Acquisitions. Where appropriate, the Company seeks acquisitions that provide additional assets, new or complementary investment management capabilities, distribution capabilities or other integration or diversification opportunities in its core product areas. Acquisitions are an integral part of Liberty Financial's business strategy. Stein Roe (acquired in 1986), Keyport (acquired in 1988), Colonial (acquired in 1995), Newport (acquired in 1995), Crabbe Huson (acquired in 1998), Progress (acquired in 1998) and major components of the Company's bank distribution unit (including Independent, acquired in 1996) all joined Liberty Financial by acquisition. The Company is constantly evaluating acquisition opportunities. As of the date of this Report, the Company has not entered into any definitive agreement for a material acquisition. o Innovation. Liberty Financial believes that product and distribution innovations are essential in order to grow its asset base and meet the ever changing financial needs of its customers. The Company believes that it has an impressive track record in such innovations. For example, Newport created the first U.S.-based mutual fund to focus exclusively on the "Tiger" countries of Asia, and the Company recently began to sell Colonial fixed income funds in Japan in a distribution venture with a Japanese brokerage firm. The Stein Roe Young Investor[SM] Fund was the first mutual fund to be coupled with an educational program to teach young people about investing, while offering parents an excellent device to save for educational and other family needs. The Company also introduced the first equity-indexed annuity product to the marketplace. The Company's business strategy is based on its belief that its products have attractive growth prospects due to important demographic and economic trends. These trends include the need for the aging baby boom generation to increase savings and investment, lower public confidence in the adequacy of government and employer-provided retirement benefits, longer life expectancies, and rising health care costs. The Company believes that its product mix and distribution strength are well suited to exploit these demographic and economic trends and will help the Company maintain and enhance its position as a leading asset accumulation and management company. Retirement-Oriented Insurance Products The Company sells a full range of retirement-oriented insurance products, grouped by whether they provide fixed, indexed or variable returns to policyholders. Annuities are insurance products designed to offer individuals protection against the risk of outliving their financial assets during retirement. Annuities offer a tax-deferred means of accumulating savings for retirement needs and provide a tax-efficient source of income in the payout period. The Company earns spread income from fixed and indexed annuities; variable annuities primarily produce fee income for the Company. The Company's primary financial objectives for its annuities business are to increase policyholder balances through new sales and asset retention and to earn acceptable investment spreads on its fixed and indexed return products. Products The Company's principal retirement-oriented insurance products are categorized as follows: Fixed Annuities. The Company's principal fixed annuity products are SPDAs. A SPDA policyholder makes a single premium payment at the time of issuance. The Company obligates itself to credit interest to the policyholder's account at a rate that is guaranteed for an initial term (typically one year) and is reset annually thereafter, subject to a guaranteed minimum rate. Interest crediting continues until the policy is surrendered or the policyholder dies or turns age 90. 3 Equity-Indexed Annuities. Equity-indexed annuities are an innovative product first introduced to the marketplace in 1995 by the Company when it began selling its KeyIndex product. The Company's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion (ranging for existing policies from 25% to 95%) of the change in value of a specified equity index. KeyIndex is currently offered for one, five and seven-year terms with interest earnings based on a percentage of the increase in the S&P 500 Index. With the five and seven-year terms, the interest earnings are based on the highest policy anniversary date value of the S&P 500 Index during the term. KeyIndex also provides a guarantee of principal at the end of the term. Thus, unlike a direct equity investment, even if the S&P 500 Index declines there is no market risk to the policyholder's principal. In late 1996, the Company introduced a market value adjusted ("MVA") annuity product, KeySelect, which offers a choice between an equity-indexed account similar to KeyIndex and a fixed annuity-type interest account. KeySelect offers terms for each equity-indexed account of one, three, five, six and seven years, as well as a ten-year term for the fixed interest account. KeySelect shifts some investment risk to the policyholder, since surrender of the policy before the end of the policy term will result in increased or decreased account values based on the change in rates of designated U.S. Treasury securities since the beginning of the term. The Company is continuing to develop new versions of its equity-indexed annuities, including versions registered under the Securities Act of 1933 (the "Securities Act") which are designed to be sold through major national brokerage firms. Variable Annuities. Variable annuities offer a selection of underlying investment alternatives which may satisfy a variety of policyholder risk/return objectives. Under a variable annuity, the policyholder has the opportunity to select separate account investment options (consisting of underlying mutual funds) which pass the investment risk directly to the policyholder in return for the potential of higher returns. Variable annuities also include guaranteed fixed interest options. Keyport has several different variable annuity products that currently offer from 18 to 21 separate account investment choices, depending on the product, and four guaranteed fixed-interest options. While the Company currently does not offer traditional life insurance products, it manages a closed block of single premium whole life insurance policies ("SPWLs"), a retirement-oriented tax-advantaged life insurance product. The Company discontinued sales of SPWLs in response to certain tax law changes in the 1980s. The Company had SPWL policyholder balances of $2.0 billion as of December 31, 1998. Under the Internal Revenue Code (the "Code"), returns credited on annuities and life insurance policies during the accumulation period (the period during which interest or other returns are credited) are not subject to federal income tax. Proceeds payable on death from a life insurance policy are also free from such taxes. At the maturity or payment date of an annuity policy, the policyholder is entitled to receive the original deposit plus accumulated returns. The policyholder may elect to take this amount in either a lump sum or an annualized series of payments over time. The return component of such payments is taxed at the time of receipt as ordinary income at the recipient's then applicable tax rate. The demand for the Company's retirement-oriented insurance products could be adversely affected by changes in the tax law. The following table sets forth certain information regarding Keyport's retirement-oriented insurance products for the periods indicated.
As of or for the Year Ended December 31, --------------------------------- 1998 1997 1996 --------- --------- --------- (dollars in millions, except policy data) Policy and Separate Account Liabilities: Fixed annuities ........................ $ 8,246 $ 8,417 $ 8,641 Equity indexed annuities ............... 2,125 1,527 788 Variable annuities ..................... 1,744 1,277 1,083 Life insurance ......................... 2,112 2,129 2,142 ------- ------- ------- Total ................................. $14,227 $13,350 $12,654 ======= ======= =======
4
As of or for the Year Ended December 31, -------------------------------------------- 1998 1997 1996 ------------- ------------- ------------ (dollars in millions, except policy data) Number of In Force Policies: Fixed annuities ............................... 205,510 222,903 236,574 Equity indexed annuities ...................... 46,484 39,224 24,174 Variable annuities ............................ 37,049 27,429 25,177 Life insurance ................................ 23,097 24,921 26,850 -------- -------- ------- Total ........................................ 312,140 314,477 312,775 ======== ======== ======= Average In Force Policy Amount: Fixed annuities ............................... $40,126 $37,710 $ 36,479 Equity indexed annuities ...................... $45,720 $38,943 $ 32,591 Variable annuities ............................ $47,070 $46,542 $ 43,035 Life insurance ................................ $91,435 $83,709 $ 79,207 Premiums (statutory basis): Fixed annuities ............................... $ 706 $ 425 $ 493 Equity indexed annuities ...................... 278 524 655 Variable annuities ............................ 508 173 97 Life insurance (net of reinsurance) ........... (1) (1) -- ---------- ---------- --------- Total ........................................ $ 1,491 $ 1,121 $ 1,245 ========= ========= ========= New Contracts and Policies: Fixed annuities ............................... 10,450 13,744 11,358 Equity indexed annuities ...................... 9,249 16,076 21,396 Variable annuities ............................ 12,238 4,333 1,814 --------- --------- --------- Total ........................................ 31,937 34,153 34,568 ========= ========= ========= Aggregate Amount Subject to Surrender Charges: Fixed annuities ............................... $ 6,643 $ 6,982 $ 7,371 Equity indexed annuities ...................... $ 2,125 $ 1,527 $ 788 Withdrawals and Terminations (statutory basis): Fixed Annuities: Death ........................................ $ 29 $ 60 $ 25 Maturity ..................................... $ 118 $ 110 $ 87 Surrender .................................... $ 1,226 $ 1,000 $ 966 Indexed Annuities: Death ........................................ $ 11 $ 4 $ 0.1 Maturity ..................................... -- -- -- Surrender .................................... $ 39 $ 19 $ 3 Variable Annuities: Death ........................................ $ 7 $ 4 $ 2 Maturity ..................................... $ 87 $ 28 $ 21 Surrender .................................... $ 141 $ 105 $ 77 Life Insurance: Death ........................................ $ 63 $ 66 $ 53 Surrender .................................... $ 77 $ 96 $ 98 Surrender Rates: Fixed annuities ............................... 14.73% 11.74% 11.79% Equity indexed annuities ...................... 2.13% 1.68% 0.69% Variable annuities ............................ 9.31% 8.86% 7.55% Life insurance ................................ 3.73% 4.57% 4.58%
5 Sales and Asset Retention Product sales are influenced primarily by overall market conditions affecting the attractiveness of the Company's retirement-oriented insurance products, by product features including interest crediting and participation rates, and by innovations and services that distinguish the Company's products from those of its competitors. The Company's mix of annuity products is designed to include products in demand under a variety of economic and market conditions. Sales of SPDAs, variable annuities and equity-indexed annuities tend to be sensitive to prevailing interest rates. Sales of SPDAs can be expected to increase and surrenders to decrease in interest rate environments when SPDA rates are higher than rates offered by competing conservative fixed return investments, such as bank certificates of deposit. SPDA sales can be expected to decline and surrenders to increase in interest rate environments when this differential in rates is not present (as was the case during 1998 and at the date of filing of this Report). SPDA sales also can be adversely affected by low interest rates (as was the case during 1998 and at the date of filing of this Report). Conversely, sales of variable annuities can be expected to increase and surrenders of such products to decrease in a rising equity market, low interest rate environment. While sales of equity-indexed annuities can be expected to increase and surrenders to decrease in a rising equity market, low interest rate environment, sales of these products can be affected by the participation rate credited by the Company, which may be reduced in a rising but relatively volatile equity market. The Company's insurance products include important features designed to promote both sales and asset retention, including crediting rates and, in most cases, surrender charges. Initial interest crediting and participation rates on fixed and indexed products significantly influence the sale of new policies. Resetting of rates on SPDAs impacts retention of SPDA assets, particularly on policies where surrender penalties have expired. At December 31, 1998, crediting rates on 97.0% of the Company's in force SPDA policy liabilities were subject to reset during the succeeding 12 months. In setting crediting and participation rates, the Company takes into account yield characteristics on its investment portfolio, surrender rate assumptions and competitive industry pricing. Interest crediting rates on the Company's in force SPDAs ranged from 3.50% to 7.75% at December 31, 1998. Such policies had guaranteed minimum rates ranging from 3.0% to 6.35% as of such date. Initial interest crediting rates on new policies issued in 1998 ranged from 4.30% to 7.20%. Guaranteed minimum rates on new policies issued during 1998 ranged from 3.0% to 4.5%. Substantially all of the Company's annuity insurance products permit the policyholder at anytime to withdraw all or any part of the accumulated policy value. Premature termination of a policy results in the loss by the Company of anticipated future earnings related to the premium deposit and the accelerated recognition of the expenses related to policy acquisition (principally commissions), which otherwise are deferred and amortized over the life of the policy. Surrender charges provide a measure of protection against premature withdrawal of policy values. Substantially all of the Company's insurance products currently are issued with surrender charges or similar penalties. Such surrender charges for all policies, except KeyIndex, typically start at 7% of the policy premium and then decline to zero over a five- to seven-year period. KeyIndex imposes a penalty on surrender of up to 10% of the premium deposit for the life of the policy. At December 31, 1998, 80.6% of the Company's fixed annuity policyholder balances remained in the surrender charge period. Surrender charges generally do not apply to withdrawals by policyholders of, depending on the policy, either up to 10% per year of the then accumulated value or the accumulated returns. In addition, certain policies may provide for charge-free withdrawals in certain circumstances and at certain times. All policies except for certain variable annuities also are subject to "free look" risk (the legal right of the policyholder to cancel the policy and receive back the initial premium deposit, without interest, for a period ranging from ten days to one year, depending upon the policy). To the extent a policyholder exercises the "free look" option, the Company may realize a loss as a result of any investment losses on the underlying assets during the free look period, as well as the commissions paid on the sale of the policy. While SPWLs also permit withdrawal, the withdrawal generally would produce significant adverse tax consequences to the policyholder. Keyport's financial ratings are important to its ability to accumulate and retain assets. Keyport is rated "A" (excellent) by A.M. Best, "AA" (very strong financial security) by S&P, "A2" (good) by Moody's and AA- (very high claims paying ability) by Duff & Phelps. Rating agencies periodically review the ratings 6 they issue. S&P raised Keyport's rating from "AA-" to "AA" in March, 1998 and reaffirmed that rating in January, 1999. In September 1998, Moody's reduced Keyport's rating from "A1" to "A2". In January 1999, A.M. Best reduced Keyport's rating from "A+" to "A". These ratings reflect the opinion of the rating agency as to the relative financial strength of Keyport and Keyport's ability to meet its contractual obligations to its policyholders. Such ratings are not "market" ratings or recommendations to use or invest in Keyport or Liberty Financial and should not be relied upon when making a decision to invest in the Company. Many financial institutions and broker-dealers focus on the claims-paying ability rating of an insurer in determining whether to market the insurer's annuities. If any of Keyport's ratings were downgraded from their current levels or if the ratings of Keyport's competitors improved and Keyport's did not, sales of Keyport's products, the level of surrenders on existing policies and the Company's relationships with distributors could be materially adversely affected. No assurance can be given that Keyport will be able to maintain its financial ratings. Keyport has been advised that its S&P rating was placed under credit watch with negative implications as a consequence of an acquisition announced by Liberty Mutual in January, 1999. Customer service also is essential to asset accumulation and retention. The Company believes Keyport has a reputation for excellent service to its distributors and its policyholders. Keyport has developed advanced technology systems for immediate response to customer inquiries, and rapid processing of policy issuances and commission payments (often at the point of sale). These systems also play an important role in controlling costs. Keyport's annualized operating expenses for 1998 were 0.42% of assets, which reflects Keyport's low cost operations. General Account Investments Premium deposits on fixed and indexed annuities are credited to the Company's general account investments (which at December 31, 1998 totaled $13.3 billion). General account investments include cash and cash equivalents. To maintain its investment spreads at acceptable levels, the Company must earn returns on its general account sufficiently in excess of the fixed or indexed returns credited to policyholders. The key element of this investment process is asset/liability management. Successful asset/liability management requires both a quantitative assessment of overall policy liabilities (including maturities, surrenders and crediting of interest) and prudent investment of general account assets. The two most important tools in managing policy liabilities are setting crediting rates and establishing surrender periods. The investment process requires portfolio techniques that earn acceptable yields while effectively managing both interest rate risk and credit risk. The Company emphasizes a conservative approach to asset/liability management, which is oriented toward reducing downside risk in adverse markets, as opposed to maximizing spread in favorable markets. The approach is also designed to reduce earnings volatility. Various factors can impact the Company's investment spread, including changes in interest rates and other factors affecting the Company's general account investments. The bulk of the Company's general account investments are invested in fixed maturity securities (84.7% at December 31, 1998). The Company's principal strategy for managing interest rate risk is to closely match the duration of its general account investment portfolio and its policyholder balances. The Company also employs hedging strategies to manage this risk, including interest rate swaps and caps. In the case of equity-indexed products, the Company purchases S&P 500 Index call options and futures to hedge its obligations to provide participation rate returns. Credit risk is managed by careful credit analysis and monitoring. A portion of general account investments (8.1% at December 31, 1998) is invested in below investment grade fixed maturity securities to enhance overall portfolio yield. Below investment grade securities pose greater risks than investment grade securities. The Company actively manages its below investment grade portfolio in an effort to optimize its risk/return profile. At December 31, 1998, the carrying value of fixed maturity investments that were non-income producing was $30.0 million, which constituted 0.2% of the Company's general account investments. For a more detailed description of the management of the Company's general account investments, see "Management's Discussion and Analysis of Results of Operations and Financial Condition--Quantitative and Qualitative Disclosures About Market Risk" beginning at page 33 of the Company's 1998 Annual Report To Shareholders (the "1998 Annual Report"). 7 As of December 31, 1998, the Company owned approximately $3.3 billion of mortgage-backed securities (24.8% of its general account investments), 97.3% of which were investment grade. Mortgage-backed securities are subject to significant prepayment and extension risks, since the underlying mortgages may be repaid more or less rapidly than scheduled. As of December 31, 1998, approximately $3.6 billion (26.7% of the Company's general account investments) were invested in securities which were sold without registration under the Securities Act and were not freely tradeable under the Securities Act or which were otherwise illiquid. These securities may be resold pursuant to an exemption from registration under the Securities Act. If the Company sought to sell such securities, it might be unable to do so at the then current carrying values and might have to dispose of such securities over extended periods of time at uncertain levels. Stein Roe manages the majority ($7.8 billion at December 31, 1998) of the Company's general account investments. In addition, several unaffiliated parties manage portions of its general account investments in order to obtain diversification of investment styles and asset classes. The Company's general account investments, all of which pertain to the Company's annuity insurance operations, were comprised of the following as of the dates indicated (in millions):
December 31, ---------------------------------------- 1998 1997 1996 ----------- ----------- ------------ Fixed maturities .................... $11,277.2 $11,246.5 $10,718.6 Policy loans ........................ 578.9 554.7 532.8 Other invested assets ............... 717.6 501.5 250.6 Equity securities ................... 24.6 40.8 35.9 ----- ----- ----- Investments ........................ 12,598.3 12,343.5 11,537.9 Cash and cash equivalents ........... 719.6 1,162.4 767.4 -------- -------- -------- General account investments ......... $13,317.9 $13,505.9 $12,305.3 ========= ========= =========
Investment Management Liberty Financial has three types of investment management products: mutual funds, private capital management, and institutional asset management. The Company has six separate operating units engaged in investment management: Colonial, Stein Roe, Newport, Crabbe Huson, Progress and LAMCO. The Company's primary financial objectives with respect to its investment management businesses are to increase assets under management in each of its three core products, and to improve operating margins through increasing scale and cost savings produced by integration. Products and Services. Mutual Funds. As of December 31, 1998 the Company sponsored 78 open-end mutual funds, as well as seven closed-end funds. The open-end funds include 46 intermediary-distributed mutual funds, 19 direct-marketed funds, and 13 other funds included among the investment options available under the Company's variable annuities. The closed-end funds include five fixed income funds and two equity funds. At December 31, 1998, total mutual fund assets were $28.6 billion. At December 31, 1998, 52.6% of these assets were invested in equity funds, 25.4% in taxable fixed income funds and 22.0% in tax-exempt fixed income funds. The Company seeks to increase equity mutual fund assets, which generally carry higher fees than funds that invest in fixed income securities. Private Capital Management. At December 31, 1998, the Company managed $7.9 billion in investment portfolios for high net worth individuals and families and smaller institutional investors, all of which are managed by Stein Roe. Institutional Asset Management. At December 31, 1998, the Company managed $11.4 billion of investment portfolios for institutional investors such as insurance companies, public and private retirement funds, endowments, foundations and other institutions. These assets are managed by Stein Roe, Colonial, Crabbe Huson and Progress. In addition, Stein Roe manages the majority of Keyport's general account assets supporting Keyport's insurance products. See "--Retirement-Oriented Insurance Products--General Account Investments." 8 The Company's investment management business focuses on managing the investments of each client's portfolios in accordance with the client's investment objectives and policies. The Company also provides related administrative and support services to clients, such as portfolio pricing, accounting and reporting. Investment management fees and related administrative and support fees generally are charged as a percentage of assets under management. Client accounts are managed pursuant to a written agreement which, with limited exceptions, is terminable at any time upon relatively short notice (typically 30-60 days). In the case of mutual fund clients, all services provided by the Company are subject to the supervision of the fund's Board of Trustees. Additional administrative services provided to mutual funds include provision of office space, other facilities and personnel, marketing and distribution services, and transfer agency and other shareholder support services. Investment management fees paid by a mutual fund must be approved annually by the fund's Board of Trustees, including a majority of the independent Trustees. Any increases in such fees also must be approved by fund shareholders. Most of the Company's mutual fund assets are held in open-end funds. Shareholders of open-end funds generally can redeem their shares on any business day. The Company's direct-market mutual funds are sold without a sales load. The Company's intermediary-distributed mutual funds generally offer investors a choice of three pricing options: (1) a traditional front-end load option, in which the investor pays a sales charge at the time of purchase; (2) a contingent deferred sales charge, in which the investor pays no sales charge at the time of purchase, but is subject to an asset-based sales charge paid by the fund generally for eight years after purchase and a declining contingent deferred sales charge paid by the investor if shares are redeemed generally within six years after purchase; and (3) a level-load option, in which the investor pays a small initial sales charge, and is subject to an ongoing asset-based sales charge paid by the fund and a small contingent deferred sales charge paid by the investor if shares are redeemed within one year after purchase. The following tables present certain information regarding the Company's assets under management as of or for each year in the three-year period ended December 31, 1998. Such information includes Keyport's assets (including its general account investments managed by Stein Roe, as well as loans to policyholders and Keyport's general account investments managed by unaffiliated investment managers). In addition, certain information is provided separately for mutual fund assets.
As of December 31, ------------------------------ 1998 1997 1996 Total Assets Under Management -------- -------- -------- (dollars in billions) Mutual funds: Intermediary-distributed ...................... $17.9 $16.1 $16.1 Direct-marketed ............................... 6.8 7.2 6.6 Closed-end .................................... 2.4 2.2 1.9 Variable annuity .............................. 1.5 1.3 1.1 ----- ----- ----- Total mutual funds ........................... 28.6 26.8 25.7 Private capital management ..................... 7.9 6.6 5.3 Institutional asset management ................. 11.4 5.3 4.9 Retirement-oriented insurance products ......... 13.1 12.8 12.1 ----- ----- ----- Total ...................................... $61.0 $51.5 $48.0 ===== ===== =====
9
As of December 31, ------------------------------ Total Assets Under Management 1998 1997 1996 By Asset Class (1) -------- -------- -------- (dollars in billions) Fee-based assets: Equity ........................................ $26.0 $18.2 $16.1 Fixed-income .................................. 21.9 20.5 19.8 ----- ----- ----- Total fee-based assets ....................... 47.9 38.7 35.9 Retirement-oriented insurance products ......... 13.1 12.8 12.1 ----- ----- ----- Total ...................................... $61.0 $51.5 $48.0 ===== ===== =====
- ---------------- (1) Balanced funds are classified as equity funds; all categories include cash and other short-term investments in applicable portfolios.
As of December 31, --------------------------------- Total Mutual Fund Assets Under 1998 1997 1996 Management By Asset Class (1) -------- -------- -------- (dollars in billions) Equity funds ................... $15.0 $13.3 $12.1 Fixed-income funds: Taxable ....................... 7.3 7.0 7.0 Tax-exempt .................... 6.3 6.5 6.6 ----- ----- ----- Total ...................... $28.6 $26.8 $25.7 ===== ===== =====
- ---------------- (1) Balanced funds are classified as equity funds; all categories include cash and other short-term investments in applicable portfolios.
As of December 31, --------------------------------- Total Assets Under Management -- 1998 1997 1996 Asset Flow Summary -------- -------- -------- (dollars in billions) Assets under management--beginning ......... $ 51.5 $ 48.0 $ 42.5 Sales and reinvestments .................... 9.6 7.5 8.6 Redemptions and withdrawals ................ (8.2) (7.8) (6.9) Asset acquisitions ......................... 5.4 -- 1.2 Net insurance cash flows ................... 0.6 0.7 0.7 Market appreciation ........................ 2.1 3.1 1.9 ------ ------ ------ Assets under management--ending ............ $ 61.0 $ 51.5 $ 48.0 ====== ====== ======
10 Sales and Asset Retention The Company believes that the most important factors in accumulating and retaining investment management assets are investment performance, customer service and brand name recognition. Strong investment performance is crucial to asset accumulation and retention, regardless of the product or distribution channel. Performance is particularly important for mutual funds, whether intermediary-distributed or direct-marketed. Fifty-eight of the Company's 78 open-end mutual funds were long-term funds as of December 31, 1998 (defined as open-end funds having at least a three-year performance record, excluding funds that invest solely in money market securities). Forty of those 58 funds (representing 81% of the total assets in those 58 funds as of December 31, 1998) were ranked by Lipper in the top two quartiles of their respective peer groups for the three-year period ended that date. The Company believes that over time, more sophisticated tools, such as those employed by consultants to institutional investors, will become available to consumers for analyzing mutual fund performance and risk. The Company's investment performance must remain competitive for the Company to continue to grow investment management product sales and assets. The Company believes that, in light of the proliferation of mutual funds and investment managers, strong brand name recognition in relevant distribution channels is essential to asset accumulation and retention, particularly with respect to mutual funds. The Company believes that the Colonial name carries strong brand name recognition among brokers and other intermediaries selling mutual funds, and that the Stein Roe name carries similar recognition in the direct sales channel. Similarly, the Company believes that Stein Roe has a franchise presence in the private capital management market and that Newport is a recognized leader in investments in the Asian markets. The Company believes that Crabbe Huson is a recognized leader in its specialty area of contrarian investing and that Progress has a strong reputation in the selection and management of multiple investment managers. Sales of mutual funds and other investment management products are subject to market forces, such as changes in interest rates and stock market performance. Changes in the financial markets, including significant increases or decreases in interest rates or stock prices, can increase or decrease fund sales and redemptions, as well as the values of assets in such portfolios, all of which impact investment management fees. The competitiveness of the Company's investment management products (both in terms of new sales and asset retention) also is dependent on the relative attractiveness of their underlying investment philosophies and methods. Distribution Liberty Financial sells its products through multiple distribution channels. Total product sales during 1998 were $9.6 billion (including $1.3 billion of reinvested dividends and similar reinvested returns). During 1998, 54% of these sales were made through intermediary distributors, with the balance made directly to the investor. Over 35,000 individual brokers and other intermediaries sold Liberty Financial products in 1998. Distribution Through Intermediaries The Company sells both annuities and mutual funds through various intermediaries, including national and regional brokerage firms, banks and other depository institutions, financial planners and insurance agents. The Company's annuities and mutual funds are most often sold to middle and upper- middle class investors and savers. Many of these individuals seek the help of an investment professional in selecting investment and retirement income and savings products. In each of these intermediary channels, the Company provides products, as well as promotional materials and other support services. Reflecting its diversification strategy, the Company maintains distribution relationships with several different types of intermediaries. Intermediary-distributed mutual funds and annuities historically have been distributed through brokerage firms and insurance agents. Banks and financial planners also have become significant distributors of these products. The Company employs wholesalers and other sales professionals to promote sales of its intermediary-distributed products. These representatives meet with intermediaries' sales forces to educate them on matters such as product objectives, features, performance records and other key 11 selling points. The Company also produces marketing material designed to help intermediaries sell the Company's products, and provides after-sale support to both the intermediaries and their customers. The degree and mix of these services vary with the requirements of the particular intermediary. The Company was a pioneer in selling through banks, both in terms of helping banks develop marketing programs and in establishing wholesaling relationships with banks. Liberty Financial operates a sales unit, Independent, that sells mutual funds and annuities through banks. The Company acquired Independent in March, 1996. Since the acquisition, the Company has consolidated its prior bank sales unit, the Liberty Financial Bank Group, with Independent. These businesses design and implement programs that sell annuities and mutual funds through their client banks, license and train sales personnel, and provide related financial services and administrative support. Program structures and the degree of the Company's involvement vary widely depending upon the particular needs of each bank. Products sold include the Company's proprietary products, as well as non-proprietary products (including in some cases the bank's proprietary mutual funds). At December 31, 1998, Independent had over 60 bank relationships involving over 2,500 registered salespersons. The proliferation of competing products and the market presence of certain large competitors requires the Company to compete to establish and maintain distribution relationships and to maintain "shelf space" with distributors. Many of the larger distributors have begun to reduce the number of companies for whom they distribute. Product features, relative performance, pricing and support services to distributors and their customers are important factors in competing for distribution relationships. Some distributors assess fee sharing payments or similar charges as additional compensation for fund sales. The Company can be confronted with the choice of absorbing these charges or limiting its access to certain distributors. An interruption in the Company's continuing relationship with certain of these distributors could materially adversely affect the Company's ability to sell its products. There can be no assurance that the Company would be able to find alternative sources of distribution in a timely manner. The sales practices and support needs of the Company's distributors are constantly evolving. The Company must respond to these changes in order to maintain and grow its intermediary distribution relationships. Pricing structures in these channels, particularly with respect to mutual funds, have expanded in recent years from one-time up-front sales loads to additional options that shift investors' payments over time and move somewhat toward fee-based pricing. The Company's intermediary-distributed mutual funds now are sold with alternate pricing structures. Intermediaries also increasingly demand that product providers supply new value-added services. Direct Distribution The Company's direct-marketed mutual funds, as well as its private capital management and institutional asset management services, are sold directly to investors. The Company's direct-marketed mutual funds are purchased predominantly by middle and upper-middle class investors and savers who choose to select their own funds and who wish to avoid paying sales loads and similar fees. Private capital management clients typically are high net worth individuals and families. Institutional asset management clients typically are larger institutional investors managed by in-house professional staffs that select and oversee asset managers, often with the advice of third party consultants. In each of the direct sales markets served by the Company, investment performance is essential to generating sales and retaining customers. Mutual fund sales also require robust marketing campaigns using print, radio and television advertising and direct mail that highlight performance and other selling points. The Company believes that certain technology-based customer service and support tools it is developing, including on-line account access and interactive illustrative investment tools, can become important devices in accumulating and retaining assets in the direct distribution channels. The reputation of the Company's high quality asset managers is an important factor in generating new private capital and institutional asset management clients. Active management of the client relationship, including frequent personal contacts, is necessary to retain these clients. So-called "mutual fund supermarkets," such as Charles Schwab & Co., Inc.'s OneSource[TM], have become an important source of customers for direct-marketed mutual funds. During 1998, 40% of the 12 total new sales of the Company's direct-marketed mutual funds were through mutual fund supermarkets and similar arrangements. To access these marketplaces, the Company pays the supermarket sponsor a fee based upon a percentage of mutual fund assets held by supermarket customers in return for certain services provided by the supermarket sponsor, such as omnibus shareholder accounting. Financial planners and similar unaffiliated advisors sometimes serve as sources of referrals for private capital management clients, in some cases in return for referral fees or other compensation. Industry Segment Information Liberty Financial conducts its business in two industry segments: annuity insurance and asset management. Annuity insurance operations relate primarily to the Company's fixed, indexed and variable annuities and its closed block of SPWLs. Asset management operations relate to its mutual funds, private capital management and institutional asset management products. For information on these reportable segments, see Note 12 of Notes to the Consolidated Financial Statements of the Company contained in the 1998 Annual Report. Regulation Overview The Company's business activities are extensively regulated. The following briefly summarizes the principal regulatory requirements and certain related matters. The regulatory requirements applicable to the Company include, among other things, (i) regulation of the form and in certain cases the content of the Company's products, (ii) regulation of the manner in which those products are sold and (iii) compliance oversight of the Company's business units, including frequent reporting obligations to and inspections by regulators. Changes in or the failure by the Company to comply with applicable law and regulations could have a material adverse effect on the Company. Annuity Insurance The Company's retirement-oriented insurance products generally are issued as individual policies. The policy is a contract between the issuing insurance company and the policyholder. Policy forms, including all principal contract terms, are regulated by state law. In most cases, the policy form must be approved by the insurance department or similar agency of a state in order for the policy to be sold in that state. Keyport issues most of the Company's retirement-oriented insurance products. Independence Life & Annuity Company ("Independence Life") and Keyport Benefit Life Insurance Company ("Keyport Benefit"), Keyport subsidiaries, also issue certain policies. Keyport and Independence Life are each chartered in the state of Rhode Island, and the Rhode Island Insurance Department is their primary oversight regulator. Keyport Benefit is chartered in the state of New York, and the New York Department of Insurance is its primary oversight regulator. Keyport Benefit, acquired by Keyport in January, 1998, operates exclusively in New York and Rhode Island. Keyport and Independence Life also must be licensed by the state insurance regulators in each other jurisdiction in which they conduct business. They currently are licensed to conduct business in 49 states (the exception being New York) and in the District of Columbia and the Virgin Islands. State insurance laws generally provide regulators with broad powers related to issuing licenses to transact business, regulating marketing and other trade practices, operating guaranty associations, regulating certain premium rates, regulating insurance holding company systems, establishing reserve requirements, prescribing the form and content of required financial statements and reports, performing financial and other examinations, determining the reasonableness and adequacy of statutory capital and surplus, regulating the type and amount of investments permitted, limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval, and other related matters. The regulators also make periodic examinations of individual companies and review annual and other reports on the financial condition of all companies operating within their respective jurisdictions. Keyport and Independence Life prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Rhode Island Insurance Department. Keyport Benefit prepares its statutory-basis financial statements in accordance with accounting practices 13 prescribed or permitted by the New York Department of Insurance. Certain statutory accounting practices are prescribed by state law. Permitted statutory accounting practices encompass all accounting practices that are not proscribed; such practices may differ between the states and companies within a state. The National Association of Insurance Commissioners (the "NAIC") is currently in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. That project, which is expected to be completed in 1999, may result in changes to the accounting practices that Keyport uses to prepare its statutory-basis financial statements. The impact of any such changes on Keyport's statutory surplus cannot be determined at this time. No assurance can be given that such changes would not have a material adverse effect on the Company. Risk-Based Capital Requirements. In recent years, various states have adopted new quantitative standards promulgated by the NAIC. These standards are designed to reduce the risk of insurance company insolvencies, in part by providing an early warning of financial or other difficulties. These standards include the NAIC's risk-based capital ("RBC") requirements. RBC requirements attempt to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The requirements provide for four different levels of regulatory attention which implement increasing levels of regulatory control (ranging from development of an action plan to mandatory receivership). As of December 31, 1998, Keyport's capital and surplus exceeded the level at which the least severe of these regulatory attention levels would be triggered. Guaranty Fund Assessments. Under the insurance guaranty fund laws existing in each state, insurers can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. Because assessments typically are not made for several years after an insurer fails, Keyport cannot accurately determine the precise amount or timing of its exposure to known insurance company insolvencies at this time. For certain information regarding Keyport's historical and estimated future assessments in respect of insurance guaranty funds, see Note 16 to the Notes to the Consolidated Financial Statements contained in the 1998 Annual Report. The insolvency of large life insurance companies in future years could result in material assessments to Keyport by state guaranty funds. No assurance can be given that such assessments would not have a material adverse effect on the Company. Insurance Holding Company Regulation. Current Rhode Island insurance law imposes prior approval requirements for certain transactions with affiliates and generally regulates dividend payments by a Rhode Island-chartered insurance subsidiary to its parent company. Keyport may not make distributions or dividend payments to Liberty Financial which, together with distributions and dividends paid during the preceding 12 months, exceed the lesser of (i) 10% of its statutory surplus as of the preceding December 31 or (ii) its statutory net gain from operations for the preceding fiscal year without prior approval by the Rhode Island Commissioner of Insurance. As of December 31, 1998, such restriction would limit dividends without such approval to $59.1 million. Keyport paid $20.0 million in dividends during 1998, but had not previously paid any dividends since its acquisition in December, 1988. In addition, no person or group may acquire, directly or indirectly, 10% or more of the voting stock or voting power of Liberty Financial unless such person has provided certain required information to the Rhode Island Department of Business Regulation and such acquisition is approved by the Department. General Regulation at Federal Level and Certain Related Matters. Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance business include limitations on antitrust immunity, minimum solvency requirements and the removal of barriers restricting banks from engaging in the insurance business. In particular, several proposals to repeal or modify the Bank Holding Company Act of 1956 (which prohibits banks from being affiliated with insurance companies) have been made by members of Congress and the Clinton Administration. Moreover, the United States Supreme Court held in 1995 in NationsBank of North Carolina v. Variable Annuity Life Insurance Company that annuities are not insurance for purposes of the National Bank Act. In addition, the Supreme Court also held in 1995 in Barnett Bank of Marion City v. Nelson that state laws prohibiting national banks from selling insurance in small town locations are preempted by 14 federal law. The Office of the Comptroller of the Currency adopted a ruling in November 1996 that permits national banks, under certain circumstances, to expand into other financial services, thereby increasing competition for the Company. At present, the extent to which banks can sell insurance and annuities without regulation by state insurance departments is being litigated in various courts in the United States. Although the effect of these recent developments on the Company and its competitors is uncertain, there can be no assurance that such developments would not have a material adverse effect on the Company. Asset Management Products The primary sources of regulation of the Company's asset management operations are the federal securities laws. Asset management products are subject to the Investment Advisers Act (the "Advisers Act"). The mutual funds and closed-end funds sponsored by the Company also are subject to the Investment Company Act of 1940 (the "Investment Company Act"). Mutual fund shares are securities, and, as such, must be registered under the federal securities laws. The foregoing laws impose various restrictions on the Company's asset management products, including fee structures, the timing and content of advertising, and, in the case of the funds, certain investment restrictions. Mutual funds also must be managed to comply with certain other investment restrictions imposed by the Internal Revenue Code. Accounts subject to the Employee Retirement Income Security Act of 1974 ("ERISA") must comply with certain investment and other restrictions imposed by ERISA. The Company's subsidiaries directly engaged in asset management (including Colonial, Stein Roe, Newport, Crabbe Huson, Progress and LAMCO) are registered with the Securities and Exchange Commission (the "SEC") as investment advisers under the Advisers Act. They also are subject to the Investment Company Act insofar as it relates to investment advisers to registered investment companies. These securities laws and the related regulations of the SEC require reporting, maintenance of books and records in prescribed forms, mandatory custodial arrangements, approval of employees and representatives and other compliance procedures. Possible sanctions in the event of noncompliance include the suspension of individual employees, limitations on the firm's engaging in business for specified periods of time, revocation of the firm's registrations, censures and fines. In the ordinary course of its investment management business, the Company enters into investment advisory agreements with mutual funds and others. As required by the Investment Company Act and the Advisers Act, Liberty Financial's investment advisory agreements provide that the agreements terminate automatically upon their "assignment." The Investment Company Act and the Advisers Act define the term "assignment" to include any "direct or indirect transfer" of a "controlling block of the voting securities" of the issuer's outstanding voting securities. The Investment Company Act presumes that any person holding more than 25% of the voting stock of any person "controls" such person. Sales by Liberty Mutual or other stockholders or new issuances of capital stock by Liberty Financial, among other things, may raise issues relating to assignments of the Company's investment advisory agreements. The Company's Restated Articles of Organization include provisions limiting the voting power of shares of the Company's Voting Stock (as defined in the Company's Restated Articles of Organization) held by holders of 20% or more of such Voting Stock in certain circumstances. These provisions do not apply to Liberty Mutual, subsidiaries or affiliates of Liberty Mutual, direct or indirect subsidiaries of the Company and certain employee plans established or to be established by the Company or certain of its subsidiaries. Liberty Financial's Board of Directors may approve the exemption of other persons or groups from the provisions described above. While this voting limitation is in place to reduce the likelihood, under certain circumstances, of inadvertent terminations of Liberty Financial's advisory agreements as a result of "assignments" thereof, there can be no assurance that this limitation will prevent such a termination from occurring. In addition, such limitation could be deemed to have an anti-takeover effect and to make changes in management more difficult. Several proposals to repeal or modify the Glass-Steagall Act of 1933 (which restricts banks from engaging in securities-related businesses) have been made by members of Congress and the Clinton Administration. Although the effect that any such proposals if adopted would have on the Company and its competitors is uncertain, there can be no assurance that such proposals if adopted would not have a material adverse effect on the Company. 15 Distribution Sales of the Company's annuities and mutual funds are also subject to extensive regulation. Annuities must be sold through an entity registered as an insurance agency in the particular state. The sales person must be properly licensed under state insurance law. Variable annuities and certain indexed annuities also require the sales person to be registered with the National Association of Securities Dealers ("NASD") and the applicable state securities commission. Mutual fund shares must be sold through an entity registered as a broker-dealer under the Exchange Act and applicable state law. The sales person must be registered with the NASD and the applicable state securities commission. Various business units of the Company are registered as broker-dealers. These include certain units which operate the Company's bank marketing business, as well as other units through which mutual fund and certain annuities are sold. Certain bank marketing units also are registered as insurance agencies in states where they sell annuities. These laws regulate the licensing of sales personnel and sales practices. They impose minimum net capital requirements. They also impose reporting, records maintenance, and other requirements, and provide for penalties in the event of non-compliance, similar in scope to the regulations applicable to asset managers. Certain securities sales through the Company's bank marketing units are conducted in accordance with the provisions of a "no-action" letter issued by the staff of the SEC requiring, among other things, that securities sales activities be conducted by sales personnel who are registered representatives of the Company and are subject to its supervision and control. The letter limits the functions of non-registered bank personnel to ministerial duties. The letter is not binding on the courts, however, and no assurance can be given that the SEC will not change its position. Banks are an important distribution channel for the Company's annuities and mutual funds. The recent growth in sales of mutual funds, annuities and other investment and insurance products through or at banks and similar institutions has prompted increased scrutiny by federal bank regulators, the SEC and other regulators. Regulations promulgated by federal banking authorities impose additional restrictions and duties with respect to bank sales practices, including obligations to disclose that the products are not subject to deposit insurance. Competition The Company's businesses operate in extremely competitive markets. These markets are highly fragmented, although in the case of annuities and mutual funds, a few companies do have relatively substantial market shares. Certain of the Company's competitors are significantly larger and have access to significantly greater financial and other resources. The Company's products compete with every other investment or savings vehicle available to a prospective customer, including those offered by other insurance companies, investment management firms and banks. The Company believes that the most important competitive factor affecting the marketability of its products is the degree to which they meet customer expectations, both in terms of returns (after fees and expenses) and service. These competitive pressures apply to competition for customers in general, as well as competition to access and maintain distribution relationships in the case of products sold through intermediaries. Product and service innovations also are important devices for generating new sales and maintaining distribution relationships. Sales of particular products may be affected by conditions in the financial markets, such as increases or decreases in interest rates or stock prices. Product features of particular relevance to annuities include interest crediting and participation rates, surrender charges and innovation in product design. Maintenance of Keyport's financial ratings at a high level also is important. The Company believes that the most important factors affecting competition for investment management clients are investment performance, customer service and brand name recognition. Pricing policies and product innovations also are important competitive factors. The Company's ability to increase and retain clients' assets could be materially adversely affected if client accounts underperform the market or competing products or if key investment managers leave the Company. The ability of the Company's asset management subsidiaries to compete with other asset 16 management products also is dependent, in part, on the relative attractiveness of their underlying investment philosophies and methods under prevailing market conditions. Employees As of December 31, 1998, the Company had 2,125 full-time employees summarized by activity as follows: 408 in annuity insurance operations; 1,292 in asset management activities; 374 in marketing and distribution operations; and 51 in general corporate. The Company provides its employees with a broad range of employee benefit programs. The Company believes that its relations with its employees are excellent. Executive Officers of the Registrant Set forth below are the names, ages at March 31, 1999, and principal occupations for the last five years of each executive officer of the Company. All such persons have been elected to serve until the next annual election of officers and their successors are elected or until their earlier resignation or removal.
Name Age Position - ----------------------- ----- ------------------------------------------------ Gary L. Countryman 59 Chairman and Director Kenneth R. Leibler 50 Chief Executive Officer, President and Director John A. Benning 64 Senior Vice President, General Counsel and Clerk John V. Carberry 51 Senior Vice President Lindsay Cook 47 Executive Vice President Frank A. Faggiano 59 Senior Vice President, Human Resources Stephen E. Gibson 45 President and Chief Executive Officer, The Colonial Group J. Scott Hansen 45 Senior Vice President, Corporate Development J. Andy Hilbert 40 Senior Vice President, Chief Financial Officer and Treasurer C. Allen Merritt, Jr. 58 Chief Operating Officer Porter P. Morgan 58 Senior Vice President, Marketing
Mr. Countryman has been Chairman (since 1991) and Chief Executive Officer (from 1986 until April, 1998) of Liberty Mutual and Liberty Mutual Fire Insurance Company (an affiliate of Liberty Mutual). He currently serves as a director of the Company, Liberty Mutual and certain of its affiliates, BankBoston Corporation, Boston Edison Company, Harcourt General, Inc. and Unisource Worldwide, Inc. Mr. Leibler became Chief Executive Officer of Liberty Financial on January 1, 1995, has been President of Liberty Financial since August, 1990, and was Chief Operating Officer from August, 1990, until December, 1994. Mr. Leibler currently serves as a director of the Company, Keyport Life Insurance Company, an indirect wholly-owned subsidiary of Liberty Financial, ISO New England, Inc. and the Boston Stock Exchange. Mr. Benning has been Senior Vice President, General Counsel and Clerk of Liberty Financial since October, 1989. Mr. Carberry joined Liberty Financial as Senior Vice President in February, 1998. Prior to that time he was a Managing Director of Salomon Brothers Inc. Mr. Cook became Executive Vice President of Liberty Financial in February, 1997. He became a Senior Vice President of Liberty Financial in February, 1994, having been a Vice President prior to that time. Mr. Faggiano became Senior Vice President, Human Resources in August, 1997. Prior to that time he was Vice President, Human Resources. Mr. Gibson became President and Chief Executive Officer of The Colonial Group, a subsidiary of Liberty Financial, in January, 1997. He was Executive Vice President of The Colonial Group from July, 17 1996 to January, 1997. Prior to that, he was Managing Director of Marketing at Putnam Investments from 1995 to July, 1996, and prior thereto was Executive Vice President of Putnam Mutual Funds. Mr. Hansen became Senior Vice President, Corporate Development in May, 1996. Prior to that time he was Vice President, Corporate Development. Mr. Hilbert joined the Company as Senior Vice President and Chief Financial Officer in March, 1997. He became Treasurer in March, 1998. From October, 1995 until that time, he was Senior Vice President and Chief Financial Officer of Paul Revere Corporation. Prior to joining Paul Revere, Mr. Hilbert was a partner at Price Waterhouse. Mr. Merritt became Chief Operating Officer of Liberty Financial in March, 1998. From February, 1997 to March, 1998 he was Executive Vice President. He was Senior Vice President of Liberty Financial prior to that time. Mr. Morgan has been Senior Vice President, Marketing of Liberty Financial since 1991. Item 2. Properties As of December 31, 1998, the Company leased its various office facilities. The Company's principal leasing arrangements can be summarized as follows: The Company's principal executive offices occupy approximately 30,300 square feet in a single facility in downtown Boston under a lease which expires in 2002. Keyport leases approximately 96,500 square feet in two buildings in downtown Boston under leases which expire in 2008, approximately 19,800 square feet in a single facility in Lincoln, Rhode Island under a lease which expires in 2007, and 7,700 square feet in a single facility in Maitland, Florida under a lease which expires in 1999. Colonial leases approximately 219,000 square feet in two buildings in downtown Boston under leases which expire in 2006 and approximately 31,200 square feet in Aurora, Colorado under a lease which expires in 2000. Stein Roe leases 141,300 square feet in downtown Chicago under a lease which expires in 2009. Newport leases approximately 6,900 square feet in downtown San Francisco under a lease which expires in 2000. Crabbe Huson leases approximately 17,700 square feet in downtown Portland, Oregon under a lease which expires in 2003. Progress leases approximately 9,000 square feet in downtown San Francisco under a lease which expires in 2005. Independent leases approximately 29,500 square feet in Purchase, New York under a lease which expires in 2007. Item 3. Legal Proceedings The Company is from time to time involved in litigation incidental to its businesses. In the opinion of Liberty Financial's management, the resolution of such litigation is not expected to have a material adverse effect on the Company's financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "L". The Company's Common Stock is also listed on the Boston Stock Exchange. On December 31, 1998, the closing price of the Company's Common Stock on the NYSE was $27 per share. Per share amounts have been adjusted to reflect the Company's 3 for 2 common stock split effected in the form of a 50 percent stock dividend on December 10, 1997. As of March 19, 1999 there were approximately 253 shareholders of record. In addition, the Company estimates that there are approximately 4,000 beneficial shareholders whose shares are held in street name. The high and low sales prices for each quarter during 1998 and 1997, as traded on the NYSE Composite Tape, were as follows:
1998 Quarter High Low - -------------------- ----------------- ---------- January-March $ 39-3/4 $ 33 April-June 40-5/8 32-3/4 July-September 38-9/16 25-3/4 October-December 30-5/8 20-1/8 1997 Quarter High Low - -------------------- ----------- -------- January-March $30-7/16 $25-3/4 April-June 34-1/16 25-1/4 July-September 37-1/8 32-13/16 October-December 38-1/4 33-5/16
The Company currently has a policy of paying quarterly cash dividends of $0.10 per share and has paid such quarterly dividends regularly since becoming a public company in 1995. The declaration and payment of any dividends on the Common Stock are dependent upon the Company's results of operations, financial condition, cash requirements, capital requirements, regulatory considerations and other relevant factors, and in all events are subject to the discretion of the Board of Directors and to any preferential dividend rights of the outstanding Series A Convertible Preferred Stock ("Preferred Stock") of Liberty Financial. The holders of the issued and outstanding shares of Preferred Stock are entitled to receive cumulative cash dividends at the rate of $2.875 per annum per share, payable in equal quarterly installments. The terms of the Preferred Stock preclude the payment of any dividends on the Common Stock unless cumulative dividends on the outstanding Preferred Stock have been paid or declared and set aside in full. Accordingly, there is no requirement, and no assurances can be given, that dividends will be paid on the Common Stock. The Company's Board of Directors established an optional dividend reinvestment plan ("DRIP") for holders of Common Stock and Preferred Stock. Liberty Mutual has participated in the DRIP since its inception. Such participation may be terminated at any time. For a further discussion of the Company's ability to pay dividends in cash on its Common Stock, see "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity" in the 1998 Annual Report. Sales of Unregistered Securities Liberty Financial issued shares of its Common Stock during 1998 without registration under the Securities Act of 1933 (the "Securities Act") in the transaction described below: On September 30, 1998, Liberty Financial acquired Crabbe Huson for cash and 252,969 shares of Common Stock issued to Crabbe Huson. The stock was distributed to the shareholders of Crabbe Huson, with 221,196 of such shares issued on September 30, 1998, and 31,773 of such shares issued on December 23, 1998. Crabbe Huson's shareholders made customary investment representations to the Company, and such issuances were exempt from registration pursuant to Section 4(2) of the Securities Act. 19 Item 6. Selected Financial Data Selected Consolidated Financial Data, which appears on page 27 in the 1998 Annual Report, are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Results of Operations and Financial Condition, which appears beginning on page 28 in the 1998 Annual Report, is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Quantitative and Qualitative Disclosure About Market Risk is included in Management's Discussion and Analysis of Results of Operations and Financial Condition beginning at page 33 of the 1998 Annual Report, and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements which appear beginning on page 42 in the 1998 Annual Report, and the report thereon of Ernst & Young LLP as of and for the year ended December 31, 1998, which appears on page 67 in the 1998 Annual Report, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Registrant Information relating to the executive officers of the Company appears under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K on page 17. Information relating to the directors of the Company is incorporated herein by reference from Liberty Financial's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on or about May 10, 1999 (the "Proxy Statement") under the caption "Election of Directors." In addition, the information appearing in the Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners--Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. Item 11. Executive Compensation Information relating to executive compensation is incorporated herein by reference from the Proxy Statement under the following captions: "Compensation of Executive Officers" (excluding, however, the portions thereof under the subcaptions "Compensation Committee Report on Executive Compensation" and "Stockholder Return Comparison") and "Election of Directors--1998 Meetings and Standard Fee Arrangements." Item 12. Security Ownership of Certain Beneficial Owners and Management Information relating to security ownership of certain beneficial owners and management is incorporated herein by reference from the Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners" (excluding the material under the sub-caption "Section 16(a) Beneficial Ownership Reporting Compliance"). Item 13. Certain Relationships and Related Transactions Information relating to Certain Relationships and Related Transactions is incorporated herein by reference from the Proxy Statement under the caption "Certain Relationships and Related Transactions." 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements The following Consolidated Financial Statements of the Company, which appear beginning on page 42 of the 1998 Annual Report, are incorporated herein by reference: Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Income Statements for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following financial statement schedules are included as part of this Report: I Summary of Investments II Condensed Financial Information of Registrant III Supplementary Insurance Information All other schedules are omitted because they are not applicable or are not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. 3. Exhibits The exhibits filed as part of this Report are listed on the Exhibit Index immediately following the financial statement schedules included in this Report. The following exhibits are management contracts or compensatory plans or arrangements: 10.4 through 10.14.2, 10.22, 10.28 and 10.29. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the fourth quarter of 1998. 21 SIGNATURES Pursuant to the requirements of Section 13 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, in the City of Boston and the Commonwealth of Massachusetts on March 30, 1999. LIBERTY FINANCIAL COMPANIES, INC. By: /s/ Kenneth R. Leibler ------------------------------------ Kenneth R. Leibler Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and as of the dates stated.
Signature Title Date - ----------------------------- --------------------------------------- --------------- /s/ Kenneth R. Leibler Chief Executive Officer, President March 30, 1999 - --------------------------- and Director Kenneth R. Leibler /s/ J. Andrew Hilbert Senior Vice President and Chief March 30, 1999 - --------------------------- Financial Officer (Principal Financial J. Andrew Hilbert and Accounting Officer) /s/ Gary L. Countryman Director March 30, 1999 - --------------------------- Gary L. Countryman /s/ Gerald E. Anderson Director March 30, 1999 - --------------------------- Gerald E. Anderson /s/ Michael J. Babcock Director March 30, 1999 - --------------------------- Michael J. Babcock /s/ William F. Connell Director March 30, 1999 - --------------------------- William F. Connell /s/ Paul J. Darling, II Director March 30, 1999 - --------------------------- Paul J. Darling, II /s/ David F. Figgins Director March 30, 1999 - --------------------------- David F. Figgins /s/ John B. Gray Director March 30, 1999 - --------------------------- John B. Gray /s/ Marian L. Heard Director March 30, 1999 - --------------------------- Marian L. Heard /s/ Raymond H. Hefner, Jr. Director March 30, 1999 - --------------------------- Raymond H. Hefner, Jr.
22
Signature Title Date - --------------------------- ---------- --------------- /s/ Edmund F. Kelly Director March 30, 1999 - ------------------------- Edmund F. Kelly /s/ Sabino Marinella Director March 30, 1999 - ------------------------- Sabino Marinella /s/ Thomas J. May Director March 30, 1999 - ------------------------- Thomas J. May /s/ Ray B. Mundt Director March 30, 1999 - ------------------------- Ray B. Mundt /s/ Kenneth L. Rose Director March 30, 1999 - ------------------------- Kenneth L. Rose /s/ Glenn P. Strehle Director March 30, 1999 - ------------------------- Glenn P. Strehle /s/ Stephen J. Sweeney Director March 30, 1999 - ------------------------- Stephen J. Sweeney
23 Schedule I LIBERTY FINANCIAL COMPANIES, INC. SUMMARY OF INVESTMENTS (in millions)
December 31, 1998 ---------------------------------------- Balance Amortized Sheet Type of Investment Cost Fair Value Amount - ------------------------------------------------------------- ----------- ------------ ----------- Fixed maturity securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies ................................ $ 1,030.9 $ 1,059.3 $ 1,059.3 Foreign governments ....................................... 251.1 244.3 244.3 Corporate and other securities ............................ 7,606.1 7,641.4 7,641.4 Mortgage backed securities ................................ 2,286.6 2,332.2 2,332.2 --------- --------- --------- Total fixed maturity securities .......................... 11,174.7 11,277.2 11,277.2 Equity securities: Common stocks: Industrial, miscellaneous and all other ................... 21.8 24.6 24.6 Mortgage loans on real estate (1) ........................... 55.1 56.6 55.1 Policy loans ................................................ 578.9 578.9 578.9 Other long term investments ................................. 662.5 730.4 662.5 --------- --------- --------- Total investments ........................................ $12,493.0 $12,667.7 $12,598.3 ========= ========= =========
------------ (1) Includes mortgage notes relating to certain investment property owned by an affiliate of Liberty Mutual in the amount of $39.5 million at December 31, 1998. These notes were paid in January, 1999. 24 Schedule II LIBERTY FINANCIAL COMPANIES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in millions, except per share data) Balance Sheets
December 31 -------------------------- 1998 1997 ----------- ------------ Assets: Cash and cash equivalents ...................... $ 180.4 $ 19.4 Investments in subsidiaries .................... 1,357.4 1,183.4 Notes receivable--subsidiaries ................. 152.1 160.9 Accounts receivable--subsidiaries .............. 16.3 20.8 Other assets ................................... 50.9 44.0 -------- -------- $1,757.1 $1,428.5 ======== ======== Liabilities: Notes payable to affiliates .................... $ -- $ 199.0 Notes payable .................................. 446.9 -- Accounts payable and accrued expenses .......... 23.6 16.0 -------- -------- 470.5 215.0 -------- -------- Redeemable convertible preferred stock .......... 15.3 14.6 -------- -------- Stockholders' Equity: Common stock ................................... 0.5 0.4 Additional paid-in capital ..................... 901.5 866.2 Retained earnings .............................. 346.4 251.5 Accumulated other comprehensive income ......... 27.2 83.0 Unearned compensation .......................... (4.3) (2.2) -------- -------- Total stockholders' equity .................... 1,271.3 1,198.9 -------- -------- $1,757.1 $1,428.5 ======== ========
Income Statements
Year Ended December 31 ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Interest income, principally from subsidiaries ................... $ 15.1 $ 13.0 $ 12.1 Realized investment gains (losses) ............................... 0.3 (0.6) -- Operating expenses ............................................... (18.3) (15.6) (16.3) ------- ------- ------- Loss before income taxes ......................................... (2.9) (3.2) (4.2) Benefit for income taxes ......................................... 7.5 19.2 21.9 Equity in net income of subsidiaries ............................. 119.9 113.5 83.0 ------- ------- ------- Income before extraordinary item ................................. 124.5 129.5 100.7 Extraordinary loss on extinguishment of debt, net of tax ......... (9.7) -- -- ------- ------- ------- Net Income ....................................................... $ 114.8 $ 129.5 $ 100.7 ======= ======= ======= Net income per share--basic: Income before extraordinary item ................................ $ 2.72 $ 2.94 $ 2.36 ======= ======= ======= Net income ...................................................... $ 2.51 $ 2.94 $ 2.36 ======= ======= ======= Net income per share--assuming dilution: Income before extraordinary item ................................ $ 2.63 $ 2.77 $ 2.24 ======= ======= ======= Net income ...................................................... $ 2.42 $ 2.77 $ 2.24 ======= ======= =======
See Notes to Consolidated Financial Statements contained in the 1998 Annual Report incorporated herein by reference. 25 Schedule II (continued) LIBERTY FINANCIAL COMPANIES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in millions) Statements of Cash Flows
Year Ended December 31 ------------------------------------- 1998 1997 1996 ----------- ----------- --------- Cash flows from operating activities: Net income .................................................. $ 114.8 $ 129.5 $ 100.7 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Extraordinary loss on extinguishment of debt, net of tax .................................................. 9.7 -- -- Equity in net income of subsidiaries ...................... (119.9) (113.5) (83.0) Increase in notes receivable--subsidiaries ................ (13.0) (0.7) (1.2) Net change in accounts receivable--subsidiaries, other assets and accounts payable ....................... 13.7 (9.2) (41.2) -------- -------- ------- Net cash provided by (used in) operating activities ......... 5.3 6.1 (24.7) -------- -------- ------- Cash flows from investing activities: Acquisitions, net of cash acquired .......................... (94.7) -- (8.1) Capital contributions to subsidiaries ....................... (29.1) (25.0) (8.0) -------- -------- ------- Net cash used in investing activities ....................... (123.8) (25.0) (16.1) -------- -------- ------- Cash flows from financing activities: Repayment of notes payable to affiliates .................... (244.0) -- -- Issuance of notes payable ................................... 446.9 -- -- Exercise of stock options ................................... 7.4 7.6 2.4 Dividends, net .............................................. 69.2 23.3 36.1 -------- -------- ------- Net cash provided by financing activities ................... 279.5 30.9 38.5 -------- -------- ------- Increase (decrease) in cash and cash equivalents ............. 161.0 12.0 (2.3) Cash and cash equivalents at beginning of year ............... 19.4 7.4 9.7 -------- -------- ------- Cash and cash equivalents at end of year ..................... $ 180.4 $ 19.4 $ 7.4 ======== ======== =======
See Notes to Consolidated Financial Statements contained in the 1998 Annual Report incorporated herein by reference. 26 Schedule III LIBERTY FINANCIAL COMPANIES, INC. SUPPLEMENTARY INSURANCE INFORMATION (in millions) Three Years Ended December 31, 1998
Column A Column B Column C Column D Column E - ------------------- ------------- --------------- ---------- ----------------- Policyholder Policy contract Deferred account claims and policy balances and other acquisition future policy Unearned policyholders' costs benefits premiums funds December 31, 1998 Interest sensitive products ......... $341.0 $12,446.0 NA $58.1 ====== ========= ========== ===== December 31, 1997 Interest sensitive products ......... $232.0 $12,031.8 NA $54.3 ====== ========= ========== ===== December 31, 1996 Interest sensitive products ......... $250.4 $11,610.4 NA $27.1 ====== ========= ========== ===== Column A Column F Column G Column H Column I Column J Column K - ------------------- ----------- ------------ --------------- -------------- ----------- --------- Interest credited to Amortization policyholders of deferred Net and policy policy Other Insurance investment benefits and acquisition operating Premiums revenues income claims costs expenses written December 31, 1998 Interest sensitive products ......... $38.1 $820.9 $565.1 $69.2 $63.0 NA ===== ====== ====== ===== ===== ========== December 31, 1997 Interest sensitive products ......... $33.1 $853.1 $598.0 $75.9 $61.6 NA ===== ====== ====== ===== ===== ========== December 31, 1996 Interest sensitive products ......... $30.9 $796.4 $576.2 $60.2 $55.1 NA ===== ====== ====== ===== ===== ==========
27 Exhibit Index
Exhibit Number Description - ------------- -------------------------------------------------------------------------------------- 3.1 (1) Form of Restated Articles of Organization of the Company 3.2 (1) Form of Certificate of Designation of Series A Convertible Preferred Stock of the Company 3.3 (2) Restated By-laws of the Company, as amended 4.1 (1) Form of Certificate for Common Stock of the Company 4.2 (1) Form of Certificate for Series A Convertible Preferred Stock of the Company 4.3 (3) Form of Indenture between the Company and State Street Bank and Trust Company as Trustee 4.4 (3) Form of Senior Note 10.1 (1) Form of Intercompany Agreement between Liberty Mutual and the Company 10.2 (4) Form of Registration Rights Agreement between Liberty Mutual and the Company 10.3 (4) Form of Tax Sharing Agreement between Liberty Mutual and the Company 10.4 (1) Form of 1990 Stock Option Plan of the Company, together with amendments 1 and 2 thereto 10.5 Form of Restated Savings and Investment Plan of the Company 10.6 (1) Form of Amended and Restated Supplemental Savings Plan of the Company 10.7 (1) Form of Stein Roe Profit Sharing Plan and amendments thereto 10.8 Form of Amended and Restated Pension Plan of the Company 10.9 (1) Form of Amended and Restated Supplemental Pension Plan of the Company 10.10 (5) Form of Amended and Restated 1995 Stock Incentive Plan of the Company 10.11 (4) Form of 1995 Employee Stock Purchase Plan of the Company 10.12 (1) Form of Deferred Compensation Plan of the Company 10.12.1 (1) Letters from the Company, setting forth additional retirement benefits for John A. Benning and Sabino Marinella 10.13 (1) Form of Keyport Deferred Compensation Plan 10.14 (1) Form of Stein Roe Deferred Compensation Plan 10.14.1 (1) Form of Stein Roe Non-Qualified Supplemental Retirement Plan 10.14.2 (1) Form of Stein Roe Long Term Incentive Plan 10.16 (1) Lease Agreement with respect to 600 Atlantic Avenue, Boston, Massachusetts 10.17 (1) Lease Agreement with respect to 125 High Street, Boston, Massachusetts, as amended 10.17.1 Third and Fourth Amendments to 125 High Street Lease 10.18 (1) Lease Agreement with respect to One South Wacker Drive, Chicago, Illinois, as amended 10.19 (1) Unconditional Guarantee Agreement dated November 7, 1991 executed by Liberty Mutual and related Mortgage Maintenance Agreement by and among LRE Properties, Inc., Atlantic Real Estate Limited Partnership and Keyport Life Insurance Company 10.20 (1) Administrative Services Agreement dated as of June 9, 1993 between Liberty Life Assurance Company of Boston and Keyport Life Insurance Company 10.21 (6) Lease Agreement with respect to One Financial Center, Boston, Massachusetts 10.22 Agreement between the Company and Stephen E. Gibson, President and Chief Executive Officer of Colonial 10.23 Credit Agreement dated as of April 10, 1998 among Colonial and BankBoston, N.A., as agent for itself and certain other lenders named therein (and Amendment No. 1 to Credit Agreement) 10.28 (7) Colonial Profit Sharing Plan (and Amendment Nos. 1-3 thereto) 10.29 (7) Colonial Split-Dollar Insurance Coverage description 10.30 (6) Coinsurance Agreement between Fidelity and Guaranty Life Insurance Company and Keyport Life Insurance Company, and first and second amendments thereto 10.31 (8) Dividend Reinvestment Plan of the Company 12 Statement re computation of ratios
28
Exhibit Number Description - ---------- ------------------------------------------------------------------------------------- 13 Portions of Annual Report to Stockholders incorporated by reference into this Report 21 Subsidiaries of the Company 23 Consent of Ernst & Young LLP 27 Financial Data Schedule 99.3 (1) Form of Stockholders' Agreement among the Company, Liberty Mutual Insurance Company and certain holders of the Company's Series A Convertible Preferred Stock
- ------------ (1) Incorporated by reference to the same Exhibit Number in the Company's Registration Statement on Form S-4 (filed under the name NEW LFC, INC.) (Registration No. 33-88824). (2) Incorporated by reference to the same Exhibit Number in the Company's 1997 Annual Report on Form 10-K filed March 31, 1998. (3) Incorporated by reference to the same Exhibit number in the Company's Registration Statement on Form S-3 (Registration No. 333-63349). (4) Incorporated by reference to the same Exhibit Number in the Company's 1994 Annual Report on Form 10-K filed March 30, 1995. (5) Incorporated by reference to the same Exhibit Number in the Company's Registration Statement on Form S-3 (Registration Number 333-29315). (6) Incorporated by reference to the same Exhibit Number in the Company's 1996 Annual Report on Form 10-K filed March 28, 1997. (7) Incorporated by reference to the same Exhibit Number in the Company's 1995 Annual Report on Form 10-K filed March 29, 1996. (8) Incorporated by reference to Prospectus contained in the Company's Registration Statement on Form S-3 (Registration Number 333-20067). 29 EX-10.5 2 SAVINGS AND INVESTMENT PLAN LIBERTY FINANCIAL COMPANIES, INC. SAVINGS AND INVESTMENT PLAN --------------------------- Restated Effective July 1, 1998 August, 1998 Exec.Ver. TABLE OF CONTENTS
Page ---- ARTICLE 1 X INTRODUCTION 1.1 Amendment of Plan 1 1.2 Plan 1 1.2.A Plan Mergers 1 1.3 Purpose of Plan 2 1.4 Application of Prior Provisions of Plan 2 ARTICLE 2 X DEFINITIONS 2.1 "Account" 3 2.2 "Affiliated Company" 3 2.2.A "After Tax Contribution Account" 3 2.3 "Annual Addition" 4 2.4 "Armed Forces Leave of Absence" 4 2.5 "Beneficiary" 4 2.6 "Board of Directors" 4 2.7 "Break in Service 4 2.8 "Code" 5 2.9 "Company" 5 2.10 "Discretionary Contribution" 5 2.11 "Discretionary Contribution Account" 5 2.12 "Effective Date" 5 2.13 AElective Contribution" 5 2.14 "Elective Contribution Account" 5 2.15 "Eligible Employee" 6 2.16 "Employee" 6 2.17 "Employer" 6 2.18 "Employment Commencement Date" 6 2.19 "Entry Date" 6 2.20 "ERISA" 6 (i) Savings Plan Exec. Ver. Page ---- 2.21 "Fiduciaries" 6 2.22 "Highly Compensated Participant" 7 2.23 "Highly Compensated Employee" 7 2.24 "Hour of Service" 7 2.25 "Limitation Year" 7 2.26 "Matching Contribution" 7 2.27 "Matching Contribution Account" 7 2.28 "Maternity/Paternity Leave of Absence" 7 2.29 "Named Fiduciaries" 8 2.30 "Normal Retirement Date" 8 2.31 "Participant" 8 2.32 "Participating Employer" 8 2.33 "Plan" 9 2.34 "Plan Administrator" 9 2.35 "Plan Year" 9 2.36 "Qualified Domestic Relations Order" 9 2.37 "Rollover Account" 9 2.38 "Share of the Trust Fund" 10 2.38A "Service Termination Date" 10 2.39 "Total Compensation" 10 2.40 "Trust" 11 2.41 "Trust Fund" 11 2.42 "Trustee" or "Trustees" 11 2.43 "Valuation Date" 12 2.44 "Year of Service for Vesting" 12 ARTICLE 3 X ADMINISTRATION 3.1 Allocation of Responsibility Among Fiduciaries for Plan and Trust Administration 13 3.2 Administration 14 (ii) Savings Plan Exec. Ver. Page ---- 3.3 Claims Procedure 14 3.4 Records and Reports 15 3.5 Other Administrative Powers and Duties 15 3.6 Rules and Decisions 17 3.7 Reliance on Tables, etc. 17 3.8 Procedures 17 3.9 Authorization of Withdrawals and Distributions 17 3.10 Rules and Procedures for Withdrawals and Distributions 17 3.11 Indemnification of Plan Administrator 18 ARTICLE 4 X PARTICIPATION 4.1 Participation 19 4.2 Cessation of Participation 19 4.3 Breaks in Service 19 ARTICLE 5 X CONTRIBUTIONS 5.1 Elective Contributions 20 5.2 Compensation Reduction Authorizations 20 5.3 Revocation or Change of Compensation Deductions 20 5.4 Matching Contributions 21 5.5 Discretionary Contributions 21 5.6 Treatment of Forfeitures 21 5.7 Maximum Amount of Contributions 22 5.8 Return of Contributions 22 5.9 Nondiscrimination Requirements 23 5.10 Adjustments by Plan Administrator 23 (iii) Savings Plan Exec. Ver. Page ---- 5.11 Distribution of Excess Contributions 24 5.12 Distribution of Excess Deferrals 25 ARTICLE 6 X TRUST FUND AND INVESTMENTS 6.1 Investment Funds Within the Trust Fund 26 6.2 Selection of Investment Funds 26 6.2.A Certain Self-Managed Accounts 27 ARTICLE 7 X PARTICIPANT ACCOUNTS AND LIMITATIONS ON ANNUAL ADDITIONS 7.1 Accounts 28 7.2 Adjustment of Accounts 28 7.3 Limitations 28 ARTICLE 8 X RIGHTS TO BENEFITS 8.1 Normal Retirement 31 8.2 Disability Retirement 31 8.3 Death 31 8.4 Other Termination of Employment 34 8.5 Election of Former Vesting Schedule 35 8.6 Forfeitures 36 (iv) Savings Plan Exec. Ver. Page ---- ARTICLE 9 X DISTRIBUTION OF BENEFITS 9.1 Payment Upon Retirement, Disability, or Termination of Employment 38 9.2 Payment Upon Death 38 9.3 Amount of Distribution 38 9.4 Consent to Distributions Before Age 702 38 9.5 Latest Commencement of Benefits 39 9.6 Forms of Distribution 41 9.7 Notice to Trustee 42 9.8 Direct Rollovers 43 ARTICLE 10 X IN-SERVICE WITHDRAWALS 10.1 Hardship Withdrawals 45 10.1A Age 59-1/2 Withdrawals 47 10.2 Subsequent Distributions 48 ARTICLE 11 X LOANS 11.1 Requests for Loans 49 11.2 Rules and Procedures 49 11.3 Maximum Amount of Loan 49 11.4 Note; Security; Interest 50 11.5 Repayment 51 11.6 Repayment Upon Distribution 51 11.7 Note as Trust Asset 52 11.8 Adjustment of Accounts 52 11.9 Nondiscrimination 52 (v) Savings Plan Exec. Ver. Page ---- ARTICLE 12 X TOP HEAVY PROVISIONS 12.1 Special Contribution for Top Heavy Plan Years 54 12.2 Adjustment to Limitation on Annual Additions 54 12.3 Definitions 55 ARTICLE 13 X AMENDMENT AND TERMINATION 13.1 Amendment 58 13.1A Certain Amendments Regarding Acquisitions and Administrative Matters 59 13.2 Termination 59 13.3 Distributions Upon Termination of the Plan 60 13.4 Merger or Consolidation of Plan; Transfer of Plan Assets 60 13.5 Participating Employer Ceasing to be Affiliated With The Company 60 ARTICLE 14 X ROLLOVER CONTRIBUTIONS 14.1 Transfer of Amount Distributed from Another Qualified Plan 62 14.2 Transfer of Amount Distributed from a Rollover IRA 63 14.3 Monitoring of Rollovers 64 14.4 Treatment of Transferred Amount Under the Plan 65 (vi) Savings Plan Exec. Ver. Page ---- ARTICLE 15 X MISCELLANEOUS 15.1 Limitation of Rights 65 15.2 Nonalienability of Benefits 65 15.3 Information Between Plan Administrator and Trustee 66 15.4 Payment Under Qualified Domestic Relations Order 66 15.5 Payment of Benefit for Disabled or Incapacitated Person 67 15.6 Telephonic and/or Electronic Transactions 68 15.7 Temporary Suspensions of Transactions 68 15.8 Governing Law 68 15.9 Acquisitions 68
(vii) Savings Plan Exec. Ver. ARTICLE 1 INTRODUCTION 1.1 Amendment of Plan. Pursuant to the provisions of Article 13 of the Liberty Financial Companies, Inc. Savings and Investment Plan and Trust, Liberty Financial Companies, Inc., hereby amends, restates and continues said Plan and Trust by striking out the present provisions thereof and by substituting therefore the provisions of the Plan hereinafter set forth. Except as otherwise specifically provided, the changes contained herein are effective as of July 1, 1998; provided, however, any changes required by the Tax Reform Act of 1986 or any other applicable law are effective as of the dates required under said laws. 1.2 Plan. This Plan is intended to qualify as a profit-sharing plan and trust under Section 401(a) of the Internal Revenue Code of 1986 (without regard to current or accumulated profits pursuant to Section 401(a)(27) of the Code), and the cash or deferred arrangement and the matching contribution features of the Plan are intended to qualify under Sections 401(k) and 401(m), respectively, of the Code. Subject to the provisions of Sections 5.8, no part of the corpus or income of the Trust will be used for or diverted to purposes other than for the exclusive benefit of each Participant and Beneficiary. 1.2.A. Plan Mergers. Effective July 1, 1998, the Stein, Roe & Farnham Retirement Plan and the Keyport Life Insurance Company Savings and Investment Plan are merged into and become a part of this Plan. Effective September 1, 1998, the Colonial Profit Sharing Plan is merged into and becomes a part of this Plan. Upon such merger the accounts and investments maintained under such prior plans shall be transferred to and held pursuant to the provisions of this Plan. 1.3 Purpose of Plan. The purpose of the Plan is to provide retirement income to Eligible Employees through a program of voluntary tax-deferred contributions matched in part -1- Savings Plan Exec. Ver. by supplemental Participating Employer contributions, as well as discretionary contributions made by Participating Employers. 1.4 Application of Prior Provisions of Plan. Except as otherwise explicitly provided herein, the rights to benefits of persons who were participants in the Plan before July 1, 1998 (September 1, 1998 in the case of the Colonial Profit Sharing Plan) and who are not employed by the Employer on or after that date will be determined in accordance with the provisions of the Plan as in effect from time to time prior to that date. -2- Savings Plan Exec. Ver. ARTICLE 2 DEFINITIONS Whenever used herein, a pronoun or adjective in the masculine gender includes the feminine gender, the singular includes the plural, and the following terms have the following meanings unless a different meaning is clearly required by context: 2.1 "Account" means, for each Participant, his After-Tax Contribution Account, his Elective Contribution Account, his Matching Contribution Account, his Discretionary Contribution Account, his Rollover Account, and any other account the Plan Administrator determines is necessary for the proper administration of the Plan. 2.2 "Affiliated Company" means any corporation, trust, association or enterprise (other than the Company) which is: (a) required to be considered, together with the Company, as one employer pursuant to the provisions of Sections 414(b), 414(c), 414(m) or 414(o) of the Code; or (b) which is designated an Affiliated Employer by the Company. The term "Affiliated Company" shall not include any corporation or unincorporated trade or business prior to the date on which such corporation, trade or business satisfies the affiliation or control tests of (a) above. In identifying "Affiliated Companies" for purposes of Section 7.3, the definitions in Sections 414(b) and (c) of the Code shall be modified as provided in Section 415(h) of the Code. -3- Savings Plan Exec. Ver. 2.2.A. "After-Tax Contribution Account" means for any Participant the Account maintained for a Participant with respect to any after-tax contributions he may have made to the Plan (or a plan which has been merged with this Plan) prior to July 1, 1998. After-tax contributions are no longer permitted under this Plan. 2.3 "Annual Addition" means, in the case of any Participant, the sum for any Limitation Year of all Elective Contributions, Matching Contributions and Discretionary Contributions, and forfeitures credited to the Participant's Account for such year. 2.4 "Armed Forces Leave of Absence" means for the purpose of the Plan, service in the Armed Forces of the United States for any period prescribed under any applicable federal or state law during which the Participant has reemployment rights with the Employer, provided that the Participant shall have returned to the service of the Employer within 90 days after final release from active duty or within such longer period as may be prescribed by federal or state law then in force. 2.5 "Beneficiary" means the person or persons entitled under Section 8.3 to receive benefits under the Plan upon the death of the Participant. 2.6 "Board of Directors" means the Board of Directors of the Company. The Board of Directors may allocate and delegate its fiduciary responsibilities, or may designate others to carry out its fiduciary responsibilities, in accordance with Section 405 of ERISA. 2.7 "Break in Service" means a 12-consecutive-month period commencing on an Employee's Service Termination Date (or anniversary thereof) during which such individual does not complete an Hour of Service. -4- Savings Plan Exec. Ver. 2.8 "Code" means the Internal Revenue Code of 1986, as amended from time to time. Reference to any section or subsection of the Code includes reference to any comparable or succeeding provisions of any legislation which amends, supplements or replaces such section or subsection. 2.9 "Company" means Liberty Financial Companies, Inc., a corporation organized and existing under the laws of the Commonwealth of Massachusetts, and any successor to all or a major portion of its assets or business which assumes the obligations of the Company under the Plan. 2.10 "Discretionary Contribution" means the contribution made by a Participating Employer on behalf of a Participant under Section 5.5. 2.11 "Discretionary Contribution Account" means, for any Participant, the account described in Section 7.1 to which Discretionary Contributions for the Participant's benefit (and earnings attributable thereto) are credited. 2.12 "Effective Date" means July 1, 1998, with respect to this amended and restated Plan. 2.13 "Elective Contribution" means, in the case of any Participant, a contribution made for the benefit of the Participant under Section 5.1. 2.14 "Elective Contribution Account" means, for any Participant, the account described in Section 7.1 to which Elective Contributions for the Participant's benefit (and earnings attributable thereto) are credited. -5- Savings Plan Exec. Ver. 2.15 "Eligible Employee" means any Employee employed by a Participating Employer except for a temporary employee (an employee hired to work on a project or other matter for a period which is expected to last less than 6 months), an intern, a co-op employee or an employee residing in Puerto Rico. 2.16 "Employee" means any individual employed by the Employer. "Employee" also includes any leased employee (as defined in Section 414(n) of the Code) of the Employer, but solely for purposes of determining his service for eligibility and vesting purposes and in applying the limitations of Section 7.3. No leased employee may become a Participant hereunder unless he becomes an Eligible Employee. 2.17 "Employer" means the Company and all Affiliated Companies. 2.18 "Employment Commencement Date" means the first date on which an Employee performs an Hour of Service. 2.19 "Entry Date" means, with respect to each Employee each January 1 and July 1. 2.20 "ERISA" means the Employee Retirement Income Security Act of 1974, as from time to time amended and any successor statute or statutes of similar import. 2.21 "Fiduciaries" means the Named Fiduciaries and any other party designated as Fiduciaries by the Named Fiduciaries in accordance with the powers described herein, but only with respect to the specific responsibilities of each in connection with the Plan and Trust. -6- Savings Plan Exec. Ver. 2.22 "Highly Compensated Participant" means a Participant who is a Highly Compensated Employee. 2.23 "Highly Compensated Employee" means an Employee who, for a Plan Year, is a highly compensated employee within the meaning of Section 414(q) of the Code. 2.24 "Hour of Service" means each hour for which the Employee is directly or indirectly paid, or entitled to payment, for the performance of duties for the Employer, each such hour to be credited to the Employee for the Computation Period in which the duties were performed. In any event, Hours of Service shall be credited hereunder in accordance with Section 2530.200(b)-2 of the Department of Labor Regulations which are incorporated herein by reference. 2.25 "Limitation Year" means the calendar year. 2.26 "Matching Contribution" means, in the case of any Participant, any contribution made for the benefit of the Participant under Section 5.4. 2.27 "Matching Contribution Account" means, for any Participant, the account described in Section 7.1 to which Matching Contributions for the Participant's benefit (and earnings attributable thereto) are credited. 2.28 "Maternity/Paternity Leave of Absence" means a period of absence from an Employer that begins for any of the following reasons: (a) the Employee's pregnancy; (b) birth of the Employee's child; (c) placement of a child with the Employee in connection with the adoption of such child by the Employee; or -7- Savings Plan Exec. Ver. (d) the caring for such child for a period beginning immediately following such birth or placement; provided, however, that in order for an Employee's absence to qualify as a Maternity/Paternity Leave of Absence, the Plan Administrator may require the Employee to furnish such information (in such form and at such time as it may reasonably require) establishing that the absence from work is an absence described hereunder. 2.29 "Named Fiduciaries" means the Plan Administrator, Trustee, and the investment committee if appointed pursuant to Section 6.1. 2.30 "Normal Retirement Date" means the date on which the Participant attains age 65. 2.31 "Participant" means each Eligible Employee who participates in the Plan in accordance with Article 4 hereof. 2.32 "Participating Employer" means the Company and any other Affiliated Company which adopts the Plan with the approval of the Company. The Participating Employers as of July 1, 1998 are identified as signatories of this document at the end hereof. -8- Savings Plan Exec. Ver. 2.33 "Plan" means the Liberty Financial Companies, Inc. Savings and Investment Plan set forth herein, together with any and all amendments and supplements hereto. 2.34 "Plan Administrator" means the committee appointed by the Board of Directors to administer the Plans maintained hereunder, and shall have the authority provided in Article 3. 2.35 "Plan Year" shall mean the calendar year. 2.36 "Qualified Domestic Relations Order" means any judgment, decree or order (including approval of a property settlement agreement) which (a) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a Participant; (b) is made pursuant to a state domestic relations law (including a community property law); and (c) constitutes a "qualified domestic relations order" within the meaning of Section 414(p) of the Code. 2.37 "Rollover Account" means, for any Employee, an account to which cash is transferred pursuant to Section 14.1 or 14.2. -9- Savings Plan Exec. Ver. 2.38 "Share of the Trust Fund" means, in the case of each Participant, that portion of the Trust's assets which is allocated to the Accounts of the Participant in accordance with Article 7 of the Plan. 2.38A "Service Termination Date" means the earliest of the following: (a) the date on which the Employee resigns, is discharged or is terminated, or retires from employment with the Employer; (b) the date the Employee dies; (c) the first anniversary of the date on which the Employee starts an authorized leave of absence or is absent for any other reason other than a Maternity/Paternity Leave of Absence; and (d) the second anniversary of the date on which the Employee commenced a Maternity/Paternity Leave of Absence, if such Employee has not yet returned to work with the Employer. 2.39 "Total Compensation" means, in the case of each Employee and for each Plan Year, base pay, performance-based bonuses and incentives, commissions, overrides, overtime pay, vacation pay, and sick pay (i.e., salary continuation) received by the Employee from the Employer during the Plan Year for services rendered during such Year, plus any amounts that would have been received by the Employee from the Employer during the Plan Year except for any compensation reduction authorization described in Section 5.2 or any other election under Section 125, 401(k), 402(h), or 403(b) of the Code. "Total Compensation" does not include any other form of cash, property or "imputed" income provided by the Employer to the Employee, including without limitation the following: Employer contributions under this Plan or any other employee benefit plan, fund, program or arrangement, whether now or hereafter established; moving, -10- Savings Plan Exec. Ver. automobile or other expense reimbursements or allowances; severance pay; trip awards, personal use of company car, group term life insurance, or other imputed compensation; sign on or stay bonuses; long term incentive bonuses; employee referral fees or other cash awards; tuition aid; outplacement services or other layoff benefits; employee gifts or other property; generally, any amounts received after termination of employment which the plan administrator determines are not payment for the performance of services; and other items not includable as compensation under Treasury Regulation Section 1.415-2(d)(2). In no event shall an Employee's Total Compensation in any Plan Year exceed, for purposes of this Plan, $160,000 or such larger amount as the Secretary of the Treasury may determine for such Plan Year under Section 401(a)(17) of the Code. 2.40 "Trust" means the trust established between the Company and Trustees. 2.41 "Trust Fund" means the property held in trust by the Trustee for the benefit of Participants, former Participants and their Beneficiaries. 2.42 "Trustee" or "Trustees" means the persons who have executed this Trust as Trustee and any successor trustee or trustees, and any additional trustee or trustees. -11- Savings Plan Exec. Ver. 2.43 "Valuation Date" means the last business day of each Plan Year and such other day or days as may be specified by the Plan Administrator. 2.44 "Year of Service for Vesting" means with respect to any Employee, all periods of employment with the Employer, whether or not consecutive, measured from the Employee's Employment Commencement Date and ending on his Service Termination Date. Years of Service for Vesting shall also include the period following his Service Termination Date, provided he is reemployed by the Employer prior to incurring a Break in Service. This Section shall be subject to the reinstatement of service provision of Section 8.6(b). -12- Savings Plan Exec. Ver. ARTICLE 3 ADMINISTRATION 3.1 Allocation of Responsibility Among Fiduciaries for Plan and Trust Administration. The Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given or delegated to them under the Plan or the Trust. The Participating Employers shall have the sole responsibility for making the contributions under the Plan as specified in Article 5, and the Company shall have the sole authority to appoint and remove the Plan Administrator, any Trustee or Trustees, and any investment manager which may be provided for under the Trust, and to amend or terminate, in whole or in part, the Plan or the Trust. The Plan Administrator shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described in the Plan and the Trust. The Trustee shall have the responsibilities as specifically provided in the Trust. Each Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan or the Trust, as the case may be, authorizing or providing for such direction, information or action. Furthermore, each Fiduciary may rely upon any direction, information or action of another Fiduciary as being proper under the Plan or the Trust, and is not required under the Plan or the Trust to inquire into the propriety of any direction, information or action. It is intended under the Plan and the Trust that each Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan and the Trust and shall not be responsible for any act or failure to act of another Fiduciary. No Fiduciary guarantees the Trust in any manner against investment loss or depreciation in asset value. -13- Savings Plan Exec. Ver. 3.2 Administration. The Plan shall be administered by the Plan Administrator, which may appoint or employ persons to assist in the administration of the Plan and may appoint or employ any other agents it deems advisable, including legal counsel, actuaries, auditors, bookkeepers and recordkeepers to serve at the Plan Administrator's direction. All usual and reasonable expenses of the Plan and the Plan Administrator may be paid in whole or in part by the Company, and any expenses not paid by the Company shall be paid by the Trustee out of the Trust Fund. 3.3 Claims Procedure. The Plan Administrator, or a party designated by the Plan Administrator, shall make all determinations as to the right of any person to a distribution under the Plan. If a request for a Plan distribution by a Participant or Beneficiary is wholly or partially denied, the Plan Administrator, or the designated party, will provide such claimant a comprehensible written notice setting forth: (a) the specific reason or reasons for such denial; (b) specific reference to pertinent Plan provisions on which the denial is based; (c) a description of any additional material or information necessary for the claimant to submit to perfect the claim and an explanation of why such material or information is necessary; and (d) a description of the Plan's claim review procedure and the fact that the review procedure is available upon written request by the claimant to the Plan Administrator, or the designated party, within 60 days after receipt by the claimant of written notice of the denial of the claim, and includes the right to examine pertinent documents and submit issues and comments in writing to the Plan Administrator or the designated party. -14- Savings Plan Exec. Ver. Such written notice will be given within 90 days after the claim is received by the Plan Administrator (or within 180 days, if special circumstances require an extension of time for processing the claim, and if written notice of such extension and circumstances is given to the claimant within the initial 90-day period). If such notification is not given within such period, the claim will be considered denied as of the first day of such period and such person may request a review of his claim. The decision on review will be made within 60 days after receipt of the request for review, unless circumstances warrant an extension of time not to exceed an additional 60 days (and unless written notice of such extension and circumstances is given to the claimant within the initial 60-day period), and shall be in writing and drafted in a manner calculated to be understood by the claimant, and include specific reasons for the decision with references to the specific Plan provisions on which the decision is based. 3.4 Records and Reports. The Plan Administrator shall exercise such authority and responsibility as it deems appropriate in order to comply with ERISA and government regulations issued thereunder relating to records of Participants' service and benefits; notifications to Participants; reports to, or registration with, the Internal Revenue Service; reports to the Department of Labor; and such other documents and reports as may be required by ERISA. 3.5 Other Administrative Powers and Duties. The Plan Administrator shall have such powers and duties, in addition to those powers and duties set forth elsewhere herein, as may be necessary to discharge its functions hereunder, including the following: (a) to construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner and time of payment of any distributions -15- Savings Plan Exec. Ver. hereunder to the fullest extent provided by law; any interpretations or decisions so made will be conclusive and binding on all persons having an interest in the Plan; (b) to prescribe procedures to be followed by Participants or Beneficiaries requesting distributions or withdrawals; (c) to prepare and distribute, in such manner as the Plan Administrator determines to be appropriate, information explaining the Plan, which shall include providing Participants not less frequently than annually with periodic statements of their accounts; (d) to receive from Employees and agents such information as shall be necessary for the proper administration of the Plan; (e) to receive, review and keep on file (as it deems convenient or proper) reports of the financial condition, and of the receipts and disbursements, of the Trust from the Trustee; and (f) to designate or employ persons to carry out any of the Plan Administrator's fiduciary duties or responsibilities under the Plan. -16- Savings Plan Exec. Ver. 3.6 Rules and Decisions. The Plan Administrator may adopt such rules, regulations and procedures as it deems necessary, desirable or appropriate. All decisions of the Plan Administrator shall be uniformly and consistently applied to all Participants in similar circumstances. When making a determination or calculation, the Plan Administrator shall be entitled to rely upon information furnished by a Participant or Beneficiary, the legal counsel of the Plan Administrator, an Employer or the Trustee. 3.7 Reliance on Tables, etc. In administering the Plan, the Plan Administrator will be entitled, to the extent permitted by law, to rely conclusively on all tables, valuations, certificates, opinions and reports which are furnished by any accountant, trustee, counsel or other expert who is employed or engaged by the Plan Administrator or by the Company on the Plan Administrator's behalf. 3.8 Procedures. The Plan Administrator shall keep all necessary records and forward all necessary communications to the Trustee. 3.9 Authorization of Withdrawals and Distributions. The Plan Administrator or its agent shall issue and/or approve directions, instructions and/or procedures to the Trustee concerning all withdrawals and distributions which are to be made from the Trust pursuant to the provisions of the Plan, and shall warrant that all such directions are in accordance with the Plan. 3.10 Rules and Procedures for Withdrawals and Distributions. The Plan Administrator may require a Participant request a withdrawal or distribution pursuant to rules and procedures it may establish from time to time. The Plan Administrator may rely upon all such information so furnished it, including the Participant's current mailing address. -17- Savings Plan Exec. Ver. 3.11 Indemnification of Plan Administrator. The Company agrees to indemnify and to defend to the fullest extent permitted by law any Employee serving as Plan Administrator (including any Employee who formerly served as a Plan Administrator) against all liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by the Company) occasioned by an act or omission to act in connection with the Plan, if such act or omission is in good faith. -18- Savings Plan Exec. Ver. ARTICLE 4 PARTICIPATION 4.1 Participation. Each person who was a Participant in the Liberty Financial Companies, Inc. or the Keyport Life Insurance Company Savings Plan and Trust as of June 30, 1998, will continue to be a Participant on July 1, 1998. Any other Employee will become a Participant on the Entry Date next following his date of hire provided that he is an Eligible Employee on such Entry Date. 4.2 Cessation of Participation. A Participant will cease to be a Participant as of the earlier of (a) the date on which he ceases to be an Eligible Employee; or (b) the date on which the Plan terminates. 4.3 Breaks in Service. (a) If an Employee who has ceased to be a Participant pursuant to Section 4.2 again becomes an Eligible Employee, he will immediately become a Participant in the Plan. (b) If an Employee who was not a Participant and who terminates employment with the Company and all Affiliated Companies again becomes an Employee, he shall become a Participant on the Entry Date next following his Date of Hire. -19- Savings Plan Exec. Ver. ARTICLE 5 CONTRIBUTIONS 5.1 Elective Contributions. On behalf of each Participant for whom there is in effect, for any pay period, a compensation reduction authorization described in Section 5.2, and who is receiving Total Compensation from a Participating Employer during such pay period, such Participating Employer will contribute to the Trust, as an Elective Contribution, an amount equal to the amount by which such Total Compensation was reduced pursuant to the compensation reduction authorization. 5.2 Compensation Reduction Authorizations. For purposes of Section 5.1, a "compensation reduction authorization" is an authorization from an Eligible Employee to a Participating Employer which satisfies the requirements of this Section 5.2. Each such authorization shall provide that the Participant's Total Compensation from the Participating Employer will be reduced by a number of whole percentage points between 1% and 19%, inclusive, elected by the Participant, and that the Participating Employer will contribute such amount to the Trust as an Elective Contribution on behalf of such Participant. Each such authorization shall be made pursuant to procedures prescribed or approved by the Plan Administrator and shall be irrevocable while the authorization is in effect. 5.3 Revocation or Change of Compensation Deductions. A Participant may change or revoke his compensation reduction authorization effective as of any pay period. A Participant who has revoked his compensation reduction authorization may reinstate his prior reduction authorization as of any subsequent pay period. Any such revocation, change or reinstatement shall be made pursuant to procedures prescribed or approved by the Plan Administrator. -20- Savings Plan Exec. Ver. 5.4 Matching Contributions. For each pay period, each Participating Employer will contribute to the Trust, for the benefit of each Participant employed by the Participating Employer (including a former Participant who ceased to be a Participant during the month), a Matching Contribution equal to 75 percent of such portion of the Participant's Elective Contributions for the pay period as does not exceed six percent of the Participant's Total Compensation for the pay period from the Participating Employer. 5.5 Discretionary Contributions. For each Plan Year each Participating Employer will contribute to the Trust such amount of Discretionary Contributions, if any, as it determines. Except as hereafter provided, as of the last business day of each Plan Year, each Participating Employer's Discretionary Contribution for such year will be allocated among and credited to the Discretionary Contribution Accounts of Participants who are employed by such Participating Employer on the last day of such year in proportion to their respective amounts of Total Compensation (only Total Compensation while an Employee is a Participant and employed by a Participating Employer shall be counted for this purpose) paid by such Participating Employer for such Plan Year. A Participant who retires on or after age 65, becomes disabled, or dies while employed during a Plan Year shall be considered as if still employed on the last day of the Plan Year. 5.6 Treatment of Forfeitures. If a Participant forfeits any part of his interest in the Trust Fund under Section 8.6, the amount of the forfeiture will be applied as soon as reasonably practical (at least annually) to reduce the Matching Contributions required to be made to the Plan under Section 5.4. Forfeitures shall be maintained and applied separately with respect to each Participating Employer pursuant to procedures established by the Plan Administrator. -21- Savings Plan Exec. Ver. 5.7 Maximum Amount of Contributions. In no event will the sum of the contributions under Sections 5.1, 5.4 and 5.5 for any Plan Year be in an amount which would cause the Annual Addition for any Participant to exceed the amount permitted under Section 415 of the Code, nor will the sum of the contributions under Sections 5.1, 5.4 and 5.5 exceed the maximum amount deductible under Section 404 of the Code. Participating Employer contributions under the Plan are hereby conditioned on their deductibility under Section 404 of the Code. The Elective Contributions made for a Participant for any Plan Year may not exceed the limit as may be in effect for the Plan Year under Section 402(g)(1) of the Code, reduced by any other elective deferrals (as defined in Section 402(g)(3) of the Code) of the Participant through the Employer for the Plan Year. 5.8 Return of Contributions. If a contribution by a Participating Employer to the Trust is (a) made by reason of a good faith mistake of fact, or (b) is conditioned upon its deductibility under Section 404 of the Code, and the deduction is disallowed, the Trustee shall, upon request by the Participating Employer, return to the Participating Employer the excess of the amount contributed over the amount, if any, that would have been contributed had there not occurred a mistake of fact or a mistake in determining the deduction. In no event shall the return of a contribution hereunder cause any Participant's Share of the Trust Fund to be reduced to less than it would have been had the mistaken or nondeductible amount not been -22- Savings Plan Exec. Ver. contributed. No return of a contribution hereunder shall be made more than one year after the mistaken payment of the contribution, or disallowance of the deduction, as the case may be. 5.9 Nondiscrimination Requirements. Elective Contributions, Matching Contributions, and QNECs (that is, qualified nonelective contributions as defined in Treasury Regulation 1.401(k)-1(g)(13)(ii))for any Plan Year must satisfy the nondiscrimination requirements set forth in Sections 401(k)(3) and 401(m)(9) of the Code, Treasury Regulations 1.401(k)-1(b) and 1.401(m)-2, and any applicable successor to such Sections and/or Regulations. For this purpose the so-called prior year/look back year method shall be used. 5.10 Adjustments by Plan Administrator. (a) Notwithstanding any provision of the Plan to the contrary, the Plan Administrator may, in its sole discretion, decrease the amount of the future Elective Contributions to be made for the benefit of any Highly Compensated Employee, and pay the amount of the decrease to the Employee in cash, if the Plan Administrator deems such a decrease to be necessary in order to satisfy either the nondiscrimination requirements of Section 5.9 or the limitations described in Section 5.7, or both. If the Plan Administrator decreases any Elective Contributions in order to meet the nondiscrimination requirement of Section 5.9, such decrease shall be made first in the Elective Contributions for the Highly Compensated Employees whose Elective Contributions are expected to be the highest dollar amount for the Plan Year so that no reduction is made in the Elective Contributions for any Highly Compensated Employee as long as any other Highly Compensated Employee is expected to make a higher dollar contribution for the Plan Year. Any -23- Savings Plan Exec. Ver. decrease in the Elective Contributions for a Participant will also be effective for purposes of determining the amount of the Matching Contributions to be made for the Participant's benefit under Section 5.4. (b) Notwithstanding any provision of the Plan to the contrary, the Plan Administrator may, in its sole discretion, decrease the amount of Matching Contributions to be made for the benefit of Highly Compensated Employees if the Plan Administrator deems such decrease to be necessary in order to satisfy the nondiscrimination requirements of Section 5.9. Any decrease in Matching Contributions in order to satisfy Section 5.9 shall be made first in the Matching Contributions for the Highly Compensated Employees whose Matching Contributions for the Plan Year are expected to be the highest dollar amounts, so that no reduction is made in the Matching Contributions for any Highly Compensated Employee as long as any other Highly Compensated Employee is expected to have a higher dollar contribution for the Plan Year. 5.11 Distribution of Excess Contributions. If, after all contributions for a Plan Year have been made, the nondiscrimination requirements of Section 5.9 have not been satisfied for the Plan Year, the Plan Administrator shall, as soon as practicable (but in no event later than the close of the following Plan Year), distribute the excess contributions (adjusted for income or loss allocable to such excess) to Highly Compensated Participants, in accordance with Sections 401(k)(8) and 401(m)(6) of the Code, to the extent necessary to satisfy Section 5.9. If distributions must be made under this Section 5.11 in order to satisfy a nondiscrimination test in Section 5.9, there shall be distributed first Elective Contributions together with any Matching Contributions attributable to them (adjusted for income or loss), and then Matching Contributions (adjusted for income or loss). -24- Savings Plan Exec. Ver. 5.12 Distribution of Excess Deferrals. If, on or before March 1 of any year, a Participant notifies the Plan Administrator, in accordance with Section 402(g)(2)(A) of the Code and regulations thereunder, that all or part of the Elective Contributions made for his benefit represent an excess deferral for the preceding taxable year of the Participant, the Plan Administrator shall make every reasonable effort to cause such excess deferral (adjusted for income or loss allocable to such excess) to be distributed to the Participant no later than the April 15 following such notification. Except to the extent otherwise provided in regulations, any amount distributed under this Section 5.12 shall be taken into account in applying Sections 5.9, 5.10 and 5.11 as if it had not been distributed, except that any distribution of excess Elective Contributions to a Participant under Section 5.11 shall be reduced by the amount of any distribution to the Participant under this Section 5.12. -25- Savings Plan Exec. Ver. ARTICLE 6 TRUST FUND AND INVESTMENTS 6.1 Investment Funds Within the Trust Fund. All contributions to the Trust and all investments thereunder shall be held by the Trustee in the Trust Fund. The Trust Fund shall consist of such investment funds as the Company, or investment advisor or manager appointed by the Company, shall select, including, without limitation, fixed income contracts with one or more insurance companies, shares of one or more mutual funds, and common stock of the Company. The Company may name an investment or similar committee which shall be responsible for selecting the investment funds which will be offered hereunder from time to time. The separate investment funds made available within the Trust Fund may be changed or modified from time to time by the Company, or by an investment advisor or manager or investment committee appointed by the Company. It is expressly permissible under the Plan for Trust assets to be invested in "qualifying employer securities" as that term is defined in Section 407(d)(5) of ERISA. The Plan and Trust are intended to comply with Section 404(c) of ERISA. 6.2 Selection of Investment Funds. Each Participant may select the investment fund or funds for his future Contributions and Accounts among the funds described in Section 6.1. Each such investment election shall be made pursuant to investment election rules and procedures established by the Plan Administrator. -26- Savings Plan Exec. Ver. Notwithstanding any provision of the Plan to the contrary, to the extent permitted according to rules and procedures adopted by the Plan Administrator, an investment election or change in investment direction may be made by the telephone or other electronic means. 6.2.A. Certain Self-Managed Accounts. In conjunction with certain corporate restructuring and acquisitions, the Company has agreed to permit certain Participants to invest a portion of their Accounts in various securities that are not generally offered under the Plan (self-managed accounts). A Participant who is investing in a self-managed account may continue to utilize such self-managed account with respect to amounts held in such self-managed account but may not add any other amounts to such account. If a Participant transfers an amount from such account to one of the investment funds offered under the Plan, such amount may not be transferred back to the self-managed account. -27- Savings Plan Exec. Ver. ARTICLE 7 PARTICIPANT ACCOUNTS AND LIMITATIONS ON ANNUAL ADDITIONS 7.1 Accounts. The Plan Administrator shall maintain or cause to be maintained on its books for each Participant an Elective Contribution Account, a Matching Contribution Account, a Discretionary Contribution Account, and a Rollover Account as appropriate to correspond to the types of contributions made by or on his behalf to the Plan. The Plan Administrator shall also establish and maintain such other accounts or subaccounts as it deems necessary or desirable to carry out the provisions of the Plan, for example, to reflect any amount which is repaid to the Plan on an after-tax basis pursuant to Section 8.6(a). 7.2 Adjustment of Accounts. The Plan Administrator shall, as of each Valuation Date, adjust or cause to be adjusted each Participant's Account to reflect contributions, distributions, withdrawals, investment transfers, participant loans and repayments on any such loans, investment earnings, expenses, and any other debits or credits to such Account since the last Valuation Date, including realized and unrealized gains and losses determined on the basis of fair market value. 7.3 Limitations. Notwithstanding any other provisions of the Plan: (a) The Annual Addition to a Participant's accounts under the Plan for any Limitation year, when added to the annual additions to his accounts for such year under all other defined contribution plans (if any) maintained by the Employer, shall not exceed the lesser of (1) the maximum dollar limitation or (2) 25 percent of the Participant's Taxable Compensation for such Limitation -28- Savings Plan Exec. Ver. Year. For purposes of this Section, "maximum dollar limitation" means $30,000 (or, if greater, one-fourth of the limitation in effect for the Limitation Year under Section 414(b)(1)(A) of the Code). (b) In the case of a Participant who also participates in a defined benefit plan maintained by the Employer, the Annual Addition for a Limitation Year will, if necessary, be further limited so that the sum of the Participant's "defined contribution plan fraction" (as determined under Section 414(e) of the Code and the regulations promulgated thereunder) and his "defined benefit plan fraction" (as determined under Section 415(e) of the Code and the regulations promulgated thereunder) for such Limitation Year does not exceed 1.0. (c) To the extent necessary to satisfy the limitations of this Section 7.3 for any Participant, the Participant's benefit under any and all defined benefit plans shall be reduced before his Annual Addition under this Plan, and his Annual Addition under this Plan shall be reduced before his Annual Addition under any other defined contribution plan. The Plan Administrator may limit the amount of Elective Contributions a Participant may make hereunder during a Limitation Year so that his Annual Addition for the Year shall not exceed the limit set forth in (a) above. In the event a Participant's Annual Addition for a Limitation Year exceeds the limit set forth in (a) above, the Plan Administrator may establish a suspense account on behalf of the Participant in an amount equal to such excess and the amount in the suspense account shall be applied as a contribution due on behalf of the Participant for the succeeding Limitation year. In the event no contributions are due on behalf of the Participant for the succeeding Limitation Year, or if the amount in the -29- Savings Plan Exec. Ver. suspense account exceeds the contributions which are due, the balance in the suspense account shall be applied to reduce the contributions due on behalf of other Participants and no contributions shall be made to the Plan until the suspense account is so applied. In lieu of establishing a suspense account and applying it as above described, the Plan Administrator may correct an excess Annual Addition on behalf of a Participant for a Limitation year by distributing to such Participant all or a portion of such Participant's Elective Contribution for the Plan Year as necessary to correct such excess. -30- Savings Plan Exec. Ver. ARTICLE 8 RIGHTS TO BENEFITS 8.1 Normal Retirement. A Participant who attains his Normal Retirement Date while an Employee, will have a fully vested and nonforfeitable interest in his Share of the Trust Fund. Upon his retirement on or after his Normal Retirement Date, the Participant's Share of the Trust Fund will be distributed in accordance with Article 9 below. 8.2 Disability Retirement. A Participant may retire before his Normal Retirement Date if he becomes eligible for disability benefits under the Employer's long term disability plan. In the event of such a disability retirement, the Participant will have a fully vested and nonforfeitable interest in, and will be entitled to receive, his Share of the Trust Fund. Distribution will be made in accordance with Article 9 below. 8.3 Death. (a) If a Participant or former Participant dies while employed by the Company or an Affiliated Company before the distribution of his Share of the Trust Fund has been made under Article 9, upon his death his designated Beneficiary will have a fully vested and nonforfeitable interest in, and will be entitled to receive, the value of his Share of the Trust Fund. Distribution to the Beneficiary will be made in accordance with Article 9. (b) If the Participant was married at the time of death, he shall be deemed to have designated his surviving spouse as his Beneficiary unless: (1) prior to his death, he designated as his Beneficiary a person other than his surviving spouse, such designation to be made in writing at such time and in such manner as the Plan Administrator shall approve or prescribe; and -31- Savings Plan Exec. Ver. (2) either (A) his surviving spouse consents in writing to the designation described in (1) above, such consent acknowledges the effect of such designation and the specific non-spouse Beneficiary (including any class of Beneficiaries or any contingent Beneficiaries) or authorizes the Participant to designate Beneficiaries without further consent, and such consent is witnessed by a Plan representative or a notary public, or (B) it is established to the satisfaction of the Plan Administrator that the consent required under (A) above may not be obtained because there is no spouse, because the spouse cannot be located, or because of such other circumstances as the Secretary of the Treasury may prescribe; and -32- Savings Plan Exec. Ver. (3) the non-spouse Beneficiary designated in accordance with the provisions of this Section survives the Participant. Any consent by a spouse under (2)(A) above, or a determination by the Plan Administrator with respect to such spouse under (2)(B) above, shall be effective only with respect to such spouse. Any such consent shall be irrevocable, but shall be effective only with respect to the specific Beneficiary designation unless the consent expressly permits designations by the Participant without any requirement of further consent. Any consent that permits Beneficiary designations by the Participant without any requirement of further consent must acknowledge the spouse's right to limit consent to a specific Beneficiary and the spouse's voluntary election to relinquish such right. (c) A Participant who is not married may designate a Beneficiary in writing at such time and in such manner as the Plan Administrator shall approve or prescribe. (d) A Participant who has designated a Beneficiary in accordance with this Section 8.3 may change such designation at any time by giving written notice to the Plan Administrator, subject to the conditions of this Section 8.3 and such additional conditions and requirements as the Plan Administrator may prescribe in accordance with applicable law. (e) If a Participant dies without a surviving Beneficiary, the full amount payable upon his death will be paid to his issue per stirpes. If any of such issue is a minor, at the direction of the Plan Administrator, the Trustee may deposit his share in a savings account to his credit in a savings bank or other financial -33- Savings Plan Exec. Ver. institution for the benefit of such issue. If there are no surviving issue, then the amount may be paid to his executor or administrator or applied to the payment of his debts and funeral expenses, all as the Plan Administrator shall determine. 8.4 Other Termination of Employment. If a Participant separates from the service (within the meaning of Code Section 401(k)(2)(B)(i)(I)) of the Employer for any reason other than retirement, disability or death described in Section 8.1, 8.2 or 8.3, he will be entitled under this Section 8.4 to a benefit equal to the sum of (a) the balances of his Elective Contribution Account, that portion, if any, of his Discretionary Contribution Account attributable to qualified non-elective contributions which may have been made under a predecessor to this Plan (QNEC) and Rollover Account, if any, plus (b) his vested portion, determined under the vesting schedule below, of his Matching Contribution Account and his Discretionary Contribution Account (other than that portion, if any, attributable QNECs) determined as of the same Valuation Date. The vested portion of a Participant's Matching Contribution Account and Discretionary Contribution Account (other than amounts attributable to QNECs) will be determined by multiplying the balance of each such Account by the following percentage, based upon the number of the Participant's Years of Service for Vesting on the date his employment terminates: -34- Savings Plan Exec. Ver.
Years of Service for Vesting Percentage ---------------------------- ---------- less than 2 0 2 25 3 50 4 75 5 or more 100
Distribution of a benefit under this Section 8.4 will be made in accordance with Article 9. A Participant shall be treated as having separated from the service of the Employer if the Participant ceases to be an Employee because of the disposition by a Participating Employer of a subsidiary, or of substantially all the assets of a trade or business, unless the organization acquiring the subsidiary or trade or business maintains the Plan, as determined under Treasury Regulation 1.401(k)-1(d)(4). 8.5 Election of Former Vesting Schedule. If the Plan is amended, and if such amendment directly or indirectly affects the computation of the nonforfeitable percentage of a Participant's right to his Account, each Participant who has completed three Years of Service for Vesting as of the end of the election period described below and whose nonforfeitable percentage at any time after such amendment could be less than such percentage determined without regard to such amendment, may elect during such election period to have the nonforfeitable percentage of his Account determined without regard to such amendment. The election period referred to in the preceding sentence will begin on the date such amendment is adopted and will end on the latest of the following dates: -35- Savings Plan Exec. Ver. (a) the date which is 60 days after the date on which such amendment is adopted; (b) the date which is 60 days after the date on which such amendment becomes effective; or (c) the date which is 60 days after the date on which the Participant is issued written notice of such amendment by the Plan Administrator. An election under this Section 8.5 may be made only by an individual who is a Participant at the time such election is made and once made shall be irrevocable. 8.6 Forfeitures. (a) If a Participant separates from the service of the Employer at a time when he has less than a 100 percent nonforfeitable interest in his Matching Contribution Account or his Discretionary Contribution Account, any portion of his Matching Contribution Account or Discretionary Contribution Account not payable to him under Section 8.4 will be forfeited on the date the Participant receives a distribution of the vested portion of his Account or the date the Participant incurs a Break in Service. Any such forfeitures shall be applied as described in Section 5.6. If a Participant who has incurred such a forfeiture resumes employment with an Employer prior to incurring five consecutive Breaks in Service, the Company shall contribute to the Trust and credit to the Participant's Matching Contribution Account and/or Discretionary Contribution Account an amount equal to the amount previously forfeited if, within 5 years after the date on which the Participant resumes employment, he repays to the Plan the amount previously distributed to him, without interest. -36- Savings Plan Exec. Ver. (b) In the event a Participant terminates employment with the Company or an Affiliated Company, his years of Service for Vesting shall be reinstated if, and only if, (i) he was fully or partially vested in Employer Contributions when he terminated employment, or (ii) if he was not fully or partially vested in Employer Contributions, he returns to employment before he incurs five consecutive Breaks in Service. (c) In the event a Participant makes a withdrawal from his Account attributable to Employer Contributions before he is fully vested in such Contributions, his vested interest in his remaining Account at any time before he is 100% vested in such Account shall be determined according to the following formula: X = P (AB + D) B D where P is the Participant's vesting percentage at the time his vested interest is being determined, AB is the balance of his Account attributable to Employer Contributions, and D is the amount of the withdrawal. (d) For the purpose of determining an Employee's vesting percentage, years of employment with the Company and any Affiliated Company will be taken into consideration. -37- Savings Plan Exec. Ver. ARTICLE 9 DISTRIBUTION OF BENEFITS 9.1 Payment Upon Retirement, Disability, or Termination of Employment. If a Participant's Share of the Trust Fund becomes payable under Section 8.1, 8.2, or 8.4, distribution of such Share will be made in a form determined under Section 9.6, as soon as reasonably practicable after retirement, disability, or termination of employment, subject in each case to Sections 9.4, 9.5, and 9.6 below. 9.2 Payment Upon Death. If a Participant's Share of the Trust Fund becomes payable under Section 8.3, distribution of such Share will be made in a single payment as soon as reasonably practicable after the date of the Participant's death, and in no event later than the end of the calendar year in which occurs the fifth anniversary of the Participant's death. 9.3 Amount of Distribution. The amount of any distribution will not be more than the amount of the Participant's vested Account as of the most recent Valuation Date preceding the date of the distribution, or such other Valuation Date that conforms to the Plan's regular distribution practices. 9.4 Consent to Distributions Before Age 70-1/2. No distribution shall be made to any Participant before he reaches age 70-1/2 unless: (a) the Participant's prior written consent to the distribution has been obtained by the Plan Administrator, or -38- Savings Plan Exec. Ver. (b) the value of the vested and nonforfeitable portion of the Participant's Share of the Trust Fund, determined as of the Valuation Date coinciding with or next preceding the date of the distribution, does not exceed $5,000. If the Participant's consent is required under this Section 9.4 but is not provided prior to the time distribution is to be made or commence under Section 9.1, distribution shall be made the earliest of: (1) the April 1 following the year the Participant attains age 70-1/2, (2) as soon as practicable after the Plan Administrator is notified of the Participant's death, or (3) as soon as practicable after the date the Plan Administrator receives from the Participant and records a request for distribution. 9.5 Latest Commencement of Benefits. (a) Unless otherwise elected in accordance with the following paragraph, in no case will distributions of any Participant's Share of the Trust Fund commence later than the 60th day after the latest of the following: (i) the close of the Plan Year in which occurs the date on which the Participant attains age 65; (ii) the close of the Plan Year in which occurs the tenth anniversary of the year in which the Participant commenced participation in the Plan; or (iii) the close of the Plan Year in which the Participant's service with the Employer terminates. Subject to Section 401(a)(9) of the Code, a Participant who is entitled to a distribution of his Share pursuant to the provisions of this Article may elect, in -39- Savings Plan Exec. Ver. accordance with procedures adopted by the Plan Administrator, to defer payment of such Share but not beyond the April 1 following the Plan Year in which he attains age 70-1/2. The distribution of such Share for any Participant who makes such an election will be made in a single lump sum payment (unless otherwise provided under Section 9.6) as soon as reasonably practicable after the Valuation Date coinciding with or immediately following the commencement date elected by such Participant. (b) In any event, and notwithstanding any election or provision of this Plan to the contrary, distribution of a Participant's Account shall be made not later than the April 1 following the close of the calendar year in which he attains age 70-1/2, provided that if a Participant is still an Employee at the time distributions are required to commence under this Section 9.5(b), and the Participant is not a 5% or more owner of the Company, distributions shall be made as soon as practicable after the Participant terminates employment. (c) If a Participant dies on or after the applicable date described in (b) above and before distribution of his benefit has been completed, the remaining portion of his benefit will be distributed to his Beneficiary at least as rapidly as under the method of distribution under which the Participant was receiving his benefit as of the date of his death. -40- Savings Plan Exec. Ver. (d) All distributions under the Plan shall be made in a manner consistent with Section 401(a)(9) of the Code and regulations thereunder. (e) For purposes of this Section 9.5, life expectancies shall not be recalculated under Section 401(a)(9)(D) of the Code. 9.6 Forms of Distribution. (a) In General. Subject to Sections 9.6(b) and (c) below, and the minimum distribution rules under Code Section 401(a)(9), a Participant or Beneficiary may elect to receive the amounts payable to him under the Plan in the following form or forms: (i) a single payment in cash or in kind or a combination thereof; (ii) in the case of a Participant who became a Participant in the Plan prior to January 1, 1989, by the purchase and distribution of a non-transferable annuity contract providing for payments (A) as a single life annuity or (B) in the case of a married Participant only, as a 50 percent joint and survivor annuity providing for payments to the Participant for the remainder of his life and thereafter to his spouse for the spouse's life in an amount equal to 50 percent of the amount of the benefit then being paid to the Participant determined as of the first of the month in which the Participant dies; or (iii) A combination of (i) and (ii). A Participant may elect a partial rather than a full distribution provided that no more than one partial distribution may be made in a -41- Savings Plan Exec. Ver. calendar year and any such partial distribution shall not be less than $1,000. In any event, a terminated Participant's Account shall be distributed no later than the April 1 following the close of the calendar year in which he attains age 70-1/2. (b) Special Rule for Certain Married Participants. If a married Participant at any time elects the purchase and distribution of an annuity contract, the survivor annuity requirements of Code Sections 401(a)(11) and 417 will always thereafter apply to all of the Participant's benefits under this Plan, and the Plan shall satisfy the applicable written explanation, consent, election and withdrawal rules of such Code sections and the regulations thereunder, including payment of benefits in the form of a qualified joint and survivor annuity unless such annuity is waived and such waiver is properly consented to by the Participant's spouse within 90 days of the Participant's annuity starting date. (c) Special Rule for Certain Small Benefits. If the total amount payable before any distribution has commenced with respect to a Participant (whether or not he is a married Participant) does not exceed $5,000, such amount will be paid in a single payment in cash. (d) A Participant (with his spouse's consent if married) may waive the 30-day pre-notification requirement as described in Section 417 of the Code. 9.7 Notice to Trustee. The Plan Administrator will notify the Trustee, or its delegate, whenever any Participant or Beneficiary is entitled to receive a distribution under the Plan. In giving such notice, the Plan Administrator will specify the name and last known address of the person receiving such distribution. Upon receipt of such notice from the Plan Administrator, the Trustee, or its delegate, will, as soon as is reasonably practicable, distribute such amount. -42- Savings Plan Exec. Ver. 9.8 Direct Rollovers. Notwithstanding any provision of the Plan to the contrary, a "distributee" may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an "eligible rollover distribution" paid directly to an "eligible retirement plan" specified by the distributee as a "direct rollover". The Administrator may require evidence that the Plan to which the rollover is intended to be made is, in fact an "eligible retirement plan". The Plan Administrator is not required to make wire transfers nor to make direct rollovers to more than one eligible retirement plan on behalf of a distributee. The following definitions shall apply for purposes of this Section 9.8: (a) an "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life expectancy (or life expectancies) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined with regard to the exclusion for net unrealized appreciation with respect to employer securities); (b) an "eligible retirement plan" is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts that distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity; -43- Savings Plan Exec. Ver. (c) a "distributee" includes an employee or former employee. In addition, the employee's or former employee's surviving spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (d) a "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee. -44- Savings Plan Exec. Ver. ARTICLE 10 IN-SERVICE WITHDRAWALS 10.1 Hardship Withdrawals. A Participant who suffers a financial hardship, as defined in this Section, may request a withdrawal from (1) the vested portion of his Matching Contribution Account, (2) the vested portion of his Discretionary Contribution Account, (3) his Rollover Account, if any, and (4) his Elective Contribution Account (other than that portion of his Elective Contribution Account which is attributable to income credited after December 31, 1988). Such a request shall be made by written notice to the Plan Administrator setting forth the nature and amount of the hardship need and documentary evidence thereof. Upon receipt and recording of such a request, the Plan Administrator shall determine whether a financial hardship exists; if the Plan Administrator determines that such a hardship does exist, it shall further determine what portion of the amount requested by the Participant is required to meet the need created by the hardship, and shall direct the Trustee to distribute to the Participant in a single lump sum payment the amount so determined. A hardship withdrawal shall be permitted under this Section only in the event of a financial need arising from (I) unreimbursed major medical expenses (described in Section 213(d) of the Code) for which payment is necessary in advance in order to obtain medical services for the Participant or his spouse or dependent or for such medical expenses already incurred by the Participant or his spouse or dependent, (II) the purchase of a principal residence for the Participant (excluding mortgage payments), -45- Savings Plan Exec. Ver. (III) payment of tuition and related educational fees for the next 12 months, semester or quarter of post-secondary education for the Participant or his spouse, children, or dependents, or (IV) the need to prevent eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. For purposes of this Section, the term "dependent" shall have the meaning assigned to it by Section 152 of the Code. No distribution shall be made under this Section in excess of the amount of the Participant's immediate and heavy financial need plus any amounts necessary to pay any income taxes or penalties reasonably expected to result from the distribution. In addition, no such distribution shall be made unless the Participant has obtained all distributions (other than hardship distributions) and all loans currently available under all plans maintained by the Employer. In the event a Participant receives a distribution under this Section, (A) No Elective Contributions shall be made for the Participant's benefit for the 12 calendar months following the Valuation Date coinciding with or next following the hardship withdrawal; (B) No elective contributions or employee contributions shall be made for such 12 month period to any other qualified or nonqualified plan of deferred compensation maintained by the Employer, including stock option or stock purchase plans; and -46- Savings Plan Exec. Ver. (C) The Elective Contributions for the Participant's benefit (together with any elective contributions under other qualified retirement plans maintained by the Employer) for the calendar year following the year of the hardship withdrawal may not exceed the limit of Section 402(g)(1) of the Code applicable to the such following calendar year reduced by the amount of the Participant's Elective Contributions made during the year of the hardship withdrawal. In the event any Account from which a Participant's hardship withdrawal is made is invested in more than one of the separate investment funds maintained under the Plan, a withdrawal of less than the complete balance of the Account shall be withdrawn proportionately from each applicable investment fund. Any withdrawal hereunder shall not exceed the vested balance of the relevant Account or Accounts determined as of the Valuation Date next following receipt from the Participant and recording by the Plan Administrator of the Participant's withdrawal request, reduced by the amount of any indebtedness of the Participant to the Plan attributable to any such Account, and shall be made to the Participant as soon as practicable after such Valuation Date. 10.1A Age 59-1/2 Withdrawals. Notwithstanding Section 10.1, a Participant who has attained age 59-1/2 may request a withdrawal (minimum $1,000) from his vested Account for any reason in accordance with procedures adopted by the Plan Administrator, but no more frequently than once each calendar year. In the event any Account from which a Participant's withdrawal is made is invested in more than one of the separate investment funds maintained under the Plan, a withdrawal of less than the complete balance of the Account shall be withdrawn proportionately from each applicable investment fund. -47- Savings Plan Exec. Ver. 10.2 Subsequent Distributions. A withdrawal pursuant to this Article 10 will not affect the Participant's right to receive distribution of the remaining portion of his Share of the Trust Fund pursuant to Articles 8 and 9. -48- Savings Plan Exec. Ver. ARTICLE 11 LOANS 11.1 Requests for Loans. Each Participant, and such other persons to whom the opportunity to borrow from the Trust must be extended under applicable law, may request a loan from the Trust, subject to the conditions prescribed in this Article 11. 11.2 Rules and Procedures. The Plan Administrator shall determine the time or times when loans shall be made available, and shall formulate such rules and procedures as it deems appropriate relating to such loans. Such rules and procedures shall be set forth in the summary plan description in such detail as may be required under applicable regulations. Such rules and procedures shall form part of the Plan. No request for a loan will be accepted if the Participant then has two loans outstanding. The Plan Administrator may charge a reasonable loan fee for all loans taken under the Plan in accordance with such uniform and nondiscriminatory procedures as it shall establish. Such fee shall be deducted from the Participant's Account or loan proceeds pursuant to uniform rules established by the Plan Administrator. 11.3 Maximum Amount of Loan. The amount of any loan, together with the aggregate amount of principal and accrued interest owed by the borrower with respect to any prior loans from qualified retirement plans of the Employer, shall not exceed the lesser of: -49- Savings Plan Exec. Ver. (a) $50,000, reduced by the excess of (1) the highest outstanding loan balance of the borrower from such plans during the one year period ending on the day before the loan is made, over (2) the borrower's outstanding loan balance from such plans immediately prior to the loan; or (b) one-half of the borrower's nonforfeitable portion (determined under Article 8) of the borrower's Share of the Trust Fund. For purposes of this Section 11.3, the value of a borrower's Share of the Trust Fund shall be determined as of the Valuation Date coinciding with or next following receipt of the borrower's request for a loan. The present value of the borrower's nonforfeitable accrued benefit under any other plan shall be determined by the Plan Administrator in such manner and as of such time as the Plan Administrator decides. Notwithstanding the foregoing, no loan shall be made hereunder for less than $1,000. 11.4 Note; Security; Interest. Each loan shall be evidenced by a note and shall bear interest at a reasonable rate determined by the Plan Administrator. The rate of interest shall be the prime rate of interest of as published in the Wall Street Journal as of the first day of the calendar quarter preceding the effective date of the loan. The Committee shall review the rate of interest to determine if it is consistent with commercial rates for similar loans, and if not, the Committee shall have the authority to modify such rate of interest for new loans to be consistent with such commercial rates. Each loan must be secured by one-half of the borrower's Share of the Trust Fund and by such other security, if any, as the Plan Administrator may require. In no event, however, shall the Plan Administrator apply the borrower's Share of the Trust Fund to satisfy the borrower's loan obligation, whether or not -50- Savings Plan Exec. Ver. the borrower is in default, unless and until that amount so applied could be distributed or withdrawn in accordance with Article 8 or 9 of the Plan. 11.5 Repayment. Each such loan shall be repayable to the extent reasonably possible by payroll deduction over a specified period of time, as determined by the Plan Administrator, and on the basis of substantially level payments made no less frequently than quarterly. Such period of time shall not exceed five years (20 years if the loan is used to acquire a dwelling unit which is to be used within a reasonable time as a principal residence of the Participant). A borrower may prepay all, but not less than all, of his loan at any time, without penalty, by paying the loan principal then outstanding together with interest accrued and unpaid to the date of payment. 11.6 Repayment Upon Distribution. If, as of the earlier of (i) 60 days after termination of a borrower's employment with the Employer (or, if later, 30 days after written demand for repayment) or (ii) the time benefits are to be distributed to a borrower or his Beneficiary under Article 9 of the Plan, there remains any unpaid balance of a loan hereunder, such unpaid balance shall become immediately due and payable in full. Such unpaid balance, together with any accrued but unpaid interest on the loan, shall be deducted from the borrower's Share of the Trust Fund before any such distribution of benefits is made. 11.7 Note as Trust Asset. A note evidencing a loan to a Participant under this Article 11 shall be an asset of the Trust which is allocated to the account of the borrower, and shall for purposes of the Plan be deemed to have a fair market value at any given time equal to the unpaid balance of the note plus the amount of any accrued but unpaid interest. -51- Savings Plan Exec. Ver. 11.8 Adjustment of Accounts. Loans will be made from the borrower's Rollover Account (if any), Elective Contribution Account, Discretionary Contribution Account (to the extent vested), and Matching Contribution Account (to the extent vested), in that order, the funds to be removed from the borrower's investment funds in proportion to the vested balances therein. Repayments of loan principal will be credited to the borrower's Accounts in the same order as originally withdrawn. Payments of loan interest will be prorated to such Accounts based on the relative loan principal balances outstanding at the time of each such payment. Each payment of principal and interest will be deposited into the various investment funds according to the Participant's investment elections respecting future contributions as soon as reasonably practicable after such payment is made. 11.9 Nondiscrimination. Loans shall be made available to all Participants and such other persons to whom the opportunity to borrow from the Trust Fund must be extended under applicable law on a reasonably equivalent basis, except that the Plan Administrator may make reasonable distinctions based upon creditworthiness, other obligations of the borrower, state law restrictions affecting payroll deductions and other factors that may adversely affect the ability to assure repayment through payroll deduction. The Plan Administrator may reduce or refuse a requested loan where it determines that timely repayment of the loan through payroll deduction is not assured. -52- Savings Plan Exec. Ver. ARTICLE 12 TOP HEAVY PROVISIONS 12.1 Special Contribution for Top Heavy Plan Years. (a) If for any top heavy plan year the sum of the Elective Contributions, Matching Contributions and Discretionary Contributions (if any) made for the benefit of any eligible employee who is not a key employee for such year is exceeded by three percent of such eligible employee's Taxable Compensation for such year, the eligible employee's Participating Employer shall contribute to the Trust, for his benefit, an additional amount equal to such excess. However, if for such top heavy plan year the highest percentage obtained by dividing the sum of the Elective, Matching and Discretionary Contributions made for the benefit of each key employee by the key employee's Taxable Compensation is less than three percent, such percentage shall be substituted for "three percent" in the preceding sentence. Any additional contribution made for the benefit of an eligible employee under this Section 12.1 shall be credited to his Discretionary Contribution Account as soon as practicable after the close of the Plan Year for which the contribution is made. 12.2 Adjustment to Limitation on Annual Additions. For any Limitation Year which is a top heavy plan year, the adjustment described in Section 416(h) of the Code shall apply for purposes of determining a Participant's "defined contribution plan fraction" and "defined benefit plan fraction" under Section 7.3(b) unless: (a) the Plan and each plan with which the Plan is required to be aggregated pursuant to the first sentence of Section 12.3(c)(4) satisfies the requirements of Section 416(h)(2)(A) of the Code; and -53- Savings Plan Exec. Ver. (b) the Plan Year would not be a top heavy plan year if "ninety percent" were substituted for "sixty percent" in the first paragraph of Section 12.3(c). 12.3 Definitions. For purposes of this Article, (a) "eligible employee" means an Eligible Employee who has satisfied the participation requirements of Section 4.1; (b) "key employee" means a key employee described in Section 416(i)(1) of the Code, determined on the basis of Taxable Compensation; and (c) "top heavy plan year" means a Plan Year if the sum of the present value of the total accrued benefits of all key employees under each defined benefit plan (as of the applicable determination date of each such plan) which is aggregated with this Plan and the sum of the account balances of all key employees under the Plan and under each other defined contribution plan (as of the applicable determination date of each such plan) which is aggregated with this Plan exceeds 60 percent of the sum of such amounts for all Employees or former Employees (other than former key employees but including beneficiaries of deceased former Employees) under such plans. The following rules shall apply for purposes of this definition: (1) The foregoing determination will be made in accordance with the provisions of Section 416 of the Code, and the regulations promulgated thereunder, which are specifically incorporated herein by reference. -54- Savings Plan Exec. Ver. (2) "Determination date" means, with respect to the initial plan year of a plan, the last day of such plan year and, with respect to any other plan year of a plan, the last day of the preceding plan year of such plan. The "applicable determination date" means, with respect to the Plan, the determination date for the Plan Year of reference and, with respect to any other plan, the determination date for any plan year of such plan which falls within the same calendar year as the applicable determination date of the Plan. (3) Accrued benefits or account balances under a plan will include all such amounts other than deductible employee contributions and will be determined as of the most recent valuation date in the 12-month period ending on the applicable determination date of the plan; provided, however, that in the case of a defined benefit plan such valuation date must be the same date as employed for minimum funding purposes, and in the case of a defined contribution plan the value so determined will be adjusted for contributions made after the valuation date to the extent required by applicable Treasury regulations. (4) Each plan of the Company or any Affiliated Company in which a key employee participates, and any other plan of the Company or any Affiliated Company which enables a plan referred to in the preceding clause to satisfy the requirements of Sections 401(a)(4) and 410 of the Code, shall be aggregated with the Plan. Any plan of the Company or any Affiliated Company not required to be aggregated -55- Savings Plan Exec. Ver. with the Plan may nevertheless, at the discretion of the Plan Administrator, be aggregated with the Plan if the benefits and coverage of all aggregated plans would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. -56- Savings Plan Exec. Ver. ARTICLE 13 AMENDMENT AND TERMINATION 13.1 Amendment. The Company reserves the right at any time or times to amend the provisions of the Plan and Trust, by resolution of the Board of Directors, to any extent and in any manner that it may deem advisable by delivery to the Trustee of a written instrument executed by the Company providing for such amendment. Upon the delivery of such instrument to the Trustee, such instrument will become effective in accordance with its terms as to all Participants and all persons having or claiming any interest hereunder; provided, however, that the Company will not have the power: (a) to amend the Plan and Trust in such manner as would cause or permit any part of the assets of the Trust to be diverted to purposes other than for the exclusive benefit of each Participant and his Beneficiary (except as permitted by Sections 5.8 and 15.4), unless such amendment is permitted by law, governmental regulation or ruling; (b) to amend the Plan or Trust retroactively in such a manner as would deprive any Participant of any benefit to which he was entitled under the Plan by reason of contributions made prior to the amendment, unless such amendment is necessary to conform the Plan or Trust to, or satisfy the conditions of, any law, governmental regulation or ruling, or to permit the Trust and the Plan to meet the requirements of Sections 401(a) and 501(a) of the Code; or (c) to amend the Plan or Trust in such manner as would increase the duties or liabilities of the Trustee or affect its fee for services hereunder, unless the Trustee consents thereto in writing. -57- Savings Plan Exec. Ver. 13.1A Certain Amendments Regarding Acquisitions and Administrative Matters. In the event the Company or a Participating Employer acquires another corporation, a division of another corporation, or hires en masse a group of employees previously employed by another employer, the Plan Administrator may amend the participation requirements as set forth in Section 4.1 as they apply with respect to the employees of the acquired corporation or division or the employees hired en masse, for example by waiving the service requirements for one or more purposes of the Plan. In addition, the Plan Administrator may amend the Plan with respect to administrative matters and/or to comply with applicable IRS requirements, provided that in each case such amendment does not affect the Company's obligation to make contributions or the Company's fiduciary responsibilities under the Plan. 13.2 Termination. The Company has established the Plan and the Trust with the bona fide intention and expectation that contributions will be continued indefinitely, but the Company will have no obligation or liability whatsoever to maintain the Plan for any given length of time and may discontinue contributions under the Plan or terminate the Plan at any time by action of its Board without any liability whatsoever for any such discontinuance or termination. The Plan will be deemed terminated (a) if and when the Company is judicially declared bankrupt, (b) if and when the Company is a party to a merger in which it is not the surviving corporation or sells all or substantially all of its assets, unless the surviving corporation or the purchaser maintains any other defined contribution plan or adopts the Plan by an instrument in writing delivered to the Trustee within 60 days after the merger or sale, or -58- Savings Plan Exec. Ver. (c) upon dissolution of the Company. 13.3 Distributions Upon Termination of the Plan. Upon termination or partial termination of the Plan or complete discontinuance of contributions thereunder, each affected Participant (including a terminated Participant in respect of amounts not previously forfeited by him) will have a fully vested and nonforfeitable interest in his Share of the Trust Fund, and the Trustee will distribute to each such Participant (or other person entitled to distribution) the value of the Participant's Share of the Trust Fund in a single lump sum payment. However, if a successor plan is established within the meaning of Section 401(k)(2)(B)(i)(II) of the Code and Treasury Regulation 1.401(k)-1(d)(3), distributions shall be made to Participants and their beneficiaries only in accordance with Articles 8 and 9. Upon the completion of distributions to all Participants, the Trust will terminate, the Trustee will be relived from all liability under the Trust, and no Participant or other person will have any claims thereunder, except as required by applicable law. 13.4 Merger or Consolidation of Plan; Transfer of Plan Assets. In case of any merger or consolidation of the Plan with, or transfer of assets and liabilities of the Plan to, any other plan, provisions must be made so that each Participant would, if the Plan then terminated, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer if the Plan had then terminated. 13.5 Participating Employer Ceasing to be Affiliated With The Company. In the event a Participating Employer ceases to be an Affiliated Company for any reason, including a merger, reorganization, or sale or other transfer of stock, the following provisions shall apply: (a) Such Participating Employer shall thereupon cease to be a Participating Employer under this Plan. -59- Savings Plan Exec. Ver. (b) The Plan shall not terminate with respect to the Participants employed by such former Participating Employer solely because it ceased to be a Participating Employer. (c) The Company may agree with such former Participating Employer (or with an organization acquiring the former Participating Employer) that the assets of the Trust properly allocable to Participants employed by the former Participating Employer be transferred to another plan maintained by the former Participating Employer (or by such other organization), provided that the requirements of Section 13.4 are satisfied and such other plan assumes all liabilities of this Plan with respect to such Participants. The Plan Administrator shall direct the Trustee to carry out such transfer in accordance with the terms of such agreement. (d) In the absence of any agreement described in paragraph (c) above and if the former Participating Employer does not maintain the Plan, as determined under Treasury Regulation 1.401(k)-1(d)(4), each Participant employed by the former Participating Employer shall be treated as having ceased employment with the Employer for purposes of the Plan at the time the former Participating Employer ceased to be an Employer (unless the Participant was employed immediately thereafter by the Company or another Affiliated Company), and shall be entitled to benefits as a result of such cessation of employment to the extent provided by Article 8. -60- Savings Plan Exec. Ver. ARTICLE 14 ROLLOVER CONTRIBUTIONS 14.1 Transfer of Amount Distributed from Another Qualified Plan. An Eligible Employee who was formerly a participant in a plan described in Section 401(a) of the Code (the "distributing plan") and who has received an eligible rollover distribution (within the meaning of Section 402 of the Code) from the distributing plan (the "distribution") may contribute to the Trust an amount determined under (c) below (the "transferred amount") provided the conditions set forth in (a) and (b) below are satisfied. (a) The transferred amount must be contributed to the Trust on or before the 60th day following the Eligible Employee's receipt of the distribution from the distributing plan. (b) The transferred amount: (1) must not exceed the fair market value of the distribution, reduced by the amount contributed to the distributing plan by the Eligible Employee, as determined in accordance with Section 72(f) of the Code and the Treasury regulations thereunder, such amount to be reduced by any amounts theretofore distributed to the Eligible Employee which were not includible in his gross income for Federal income tax purposes, and -61- Savings Plan Exec. Ver. (2) must include no property other than (A) money received in the distribution, and (B) money attributable to other property received in the distribution which is sold and the proceeds of which are transferred pursuant to Section 402(a)(6)(D) of the Code. (c) A rollover contribution may also be made by means of a direct transfer from a distributing plan qualified under Section 401(a) of the Code to the extent permitted under Section 401(a)(31) and 402 of the Code. 14.2 Transfer of Amount Distributed from a Rollover IRA. (a) An Eligible Employee who has received a distribution meeting the requirements of Section 14.1(a), and who subsequently deposited such distribution in an individual retirement account, as defined in Section 408 of the Code, in accordance with Section 408(d)(3)(A)(ii) of the Code, may contribute a portion or all of a distribution from such account (the "transferred amount") to the trust provided the conditions set forth in (b) and (c) are satisfied. (b) The transferred amount must be contributed to the Trust on or before the 60th day following the Eligible Employee's receipt of the amount from the individual retirement account. (c) The distribution from the individual retirement account must consist of the entire amount in the account, and must include no amount attributable to any source other than a qualified plan described in Section 401(a) of the Code. -62- Savings Plan Exec. Ver. 14.3 Monitoring of Rollovers. (a) The Plan Administrator shall establish such procedures and require such information from transferring employees as it deems necessary to insure that amounts transferred under this Article 14 satisfy the requirements for tax-free rollovers established by conditions of this Article 14 and the Code and Treasury regulations. (b) No amount may be transferred under this Article 14 until approved by the Plan Administrator. 14.4 Treatment of Transferred Amount Under the Plan. (a) The Plan Administrator will establish a Rollover Account for each Eligible Employee making a contribution described in Section 14.1 or 14.2 above. (b) Upon retirement, death, or other termination of employment, the Eligible Employee's Rollover Account shall be distributed to him in accordance with Articles 8 and 9. (c) The Eligible Employee will at all times have a fully vested and nonforfeitable interest in the amount credited to his Rollover Account. (d) An Eligible Employee who contributes an amount to the Plan in accordance with this Article 14 will not become a Participant until he has satisfied the requirements of Article 4. However, such an Eligible Employee will be treated as a Participant, with respect to his interest in his Rollover Account, for purposes of Articles 3, 6, 7, 8, 9, 11, 13 and 15 of the Plan and, so long as he is an Employee, Articles 10 and 11. -63- Savings Plan Exec. Ver. ARTICLE 15 MISCELLANEOUS 15.1 Limitation of Rights. Neither the establishment of the Plan and the Trust, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to any Participant or other person any legal or equitable right against any Participating Employer or the Plan Administrator or Trustee, except as provided herein, and in no event will the terms of employment or service of any Participant be modified or in any way be affected hereby. It is a condition of the Plan, and each Participant expressly agrees by his participation herein, that each Participant will look solely to the assets held in the Trust for the payment of any benefit to which he is entitled under the Plan. 15.2 Nonalienability of Benefits. The benefits provided hereunder will not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, and any attempt to cause such benefits to be so subjected will not be recognized, except to such extent as may be required by law. The provisions of the preceding sentence shall apply in general to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, except that if such order is a Qualified Domestic Relations Order, the provisions of the preceding sentence shall not apply. -64- Savings Plan Exec. Ver. 15.3 Information Between Plan Administrator and Trustee. The Plan Administrator will furnish to the Trustee, and the Trustee will furnish to the Plan Administrator, such information relating to the Plan and Trust as may be required under the Code and any regulations issued or forms adopted by the Treasury Department thereunder or under the provisions of ERISA and any regulations issued or forms adopted by the Labor Department thereunder. 15.4 Payment Under Qualified Domestic Relations Order. Notwithstanding any provisions of the Plan to the contrary, if there is entered any Qualified Domestic Relations Order that affects the payment of benefits hereunder, such benefits shall be paid in accordance with the applicable requirements of such Order. The Committee shall establish a procedure to determine the status of a judgement, decree or order as a Qualified Domestic Relations Order and to administer Plan distributions in accordance with Qualified Domestic Relations Orders. Such procedure shall be in writing, shall include a provision specifying the notification requirements enumerated in the preceding paragraph, shall permit an alternate payee to designate a representative for receipt of communications from the Committee and shall include such other provisions as the Committee shall determine, including provisions describing the interest rate to be used in making present value determinations as well as provisions required under regulations promulgated by the Secretary of the Treasury. -65- Savings Plan Exec. Ver. Notwithstanding any Plan provision to the contrary, as permitted under Section 414(p)(10) of the Code, a payment may be made to an alternate payee in accordance with the provisions of a Qualified Domestic Relations Order before the Participant to whom the order relates separates from service with the Employer and before such Participant attains his earliest retirement age (as defined in Section 414(p)(4) of the Code). Furthermore, unless otherwise provided under a Qualified Domestic Relations Order, payment shall be made to an alternate payee in a single payment in cash or in kind as soon as practicable following the determination that such order is qualified. 15.5 Payment of Benefit for Disabled or Incapacitated Person. Whenever, in the opinion of the Plan Administrator or its agent, a person entitled to receive any payment of a benefit hereunder is under a legal disability or is incapacitated in any way so as to be unable to manage his financial affairs, the Plan Administrator or its agent may direct the Trustee to make payments to such person or to his legal representative or to a relative or friend of such its agent may direct the Trustee to apply the payment for the benefit of such person in such manner as the Plan Administrator or its agent considers advisable. Any payment under Section 15.5 shall be a complete discharge of any liability for the making of such payment under the provisions of the Plan. Nothing contained in this Section 15.5, however, should be deemed to impose upon the Plan Administrator any liability for paying a benefit to any person who is under such a legal disability or is so incapacitated unless it has received notice of such disability or incapacity from a competent source. -66- Savings Plan Exec. Ver. 15.6 Telephonic and/or Electronic Transactions. The Plan Administrator may authorize the use of telephonic and/or electronic means and procedures for effecting one or more transactions or Participant requests hereunder, for example, enrolling in the Plan, requesting loans and/or withdrawals, electing investments, and commencing, changing, and/or suspending contributions. 15.7 Temporary Suspensions of Transactions. The Plan Administrator may temporarily suspend certain transactions hereunder as may be necessary to accommodate a change in Trustee, Plan recordkeeper, and/or investment funds. Any such suspension shall be communicated to Participants in advance. 15.8 Governing Law. The Plan will be construed, administered and enforced according to the laws of the Commonwealth of Massachusetts to the extent such laws are not inconsistent with and preempted by ERISA. 15.9 Acquisitions. Notwithstanding any Plan provision to the contrary, in no event shall the employees of an entity which is acquired by the Company or any Affiliated Company be eligible to participate under the Plan unless and until the Company approves and agrees to such participation. -67- Savings Plan Exec. Ver. IN WITNESS WHEREOF, Liberty Financial Companies, Inc. and each other Participating Employer listed below has caused this instrument to be executed by its respective duly authorized officer this ____________________ day of _______________________, 19___. LIBERTY FINANCIAL COMPANIES, INC. By: _____________________________________ KEYPORT LIFE INSURANCE COMPANY By: _____________________________________ LIBERTY FUNDS GROUP, LLC By: _____________________________________ STEIN, ROE & FARNHAM INCORPORATED By: _____________________________________ -68- Savings Plan Exec. Ver. INDEPENDENT FINANCIAL MARKETING GROUP, INC. By: _____________________________________ NEWPORT PACIFIC MANAGEMENT, INC. By: _____________________________________ LIBERTY ASSET MANAGEMENT COMPANY By: _____________________________________ -69- Savings Plan Exec. Ver. APPENDIX A SPECIAL RULES FOR IFMG 1.1.A Introduction. Effective March 7, 1996, the Company acquired the Independent Financial Marketing Group, Inc. and its wholly owned subsidiary IFS Agencies, Inc. (IFMG) and effective May 1, 1996, IFMG became a Participating Employer under the Liberty Financial Companies, Inc. Savings and Investment Plan and Trust (LFC Plan). The IFMG 401(k) Plan was subsequently merged into the LFC Plan. This Appendix sets forth certain rules which apply to former IFMG employees and certain employees who transferred to IFMG after it was acquired. 1.2.A Years of Service. Employment with IFMG both prior and subsequent to March 7, 1996 will be counted as employment with the Company or an Affiliate for all purposes of the Plan except to the extent such employment may be disregarded under the break in service rules of the IFMG 401(k) Plan. 1.3.A Matching Contributions. Certain Employees transferred their employment from the Liberty Financial Bank Group, Keyport Life Insurance Company, or Liberty Financial Companies, Inc. to IFMG. The Matching Contribution for such Employees shall be increased to 100% for 60 months beginning April 1, 1997. 1.4.A Vesting. A Participant who was a participant in the IFMG Plan will become 100% vested at age 55 provided he is still employed by the Company or an affiliate. 1.5.A Spousal Consent for Distributions and Withdrawals. A married Participant who was previously a participant in the IFMG 401(k) Plan must obtain his spouse's consent in order to make a distribution or withdrawal. 1.6.A Annuity Options. In the case of a Participant who was previously a Participant in the IFMG 401(k) Plan, in addition to the other forms of payment available hereunder for a final distribution annuity options shall be available in the form of a life annuity, 50%, 66b%, and 100% contingent annuitant annuity, a 5-, 10-, or 15-year certain and continuous annuity, and a cash refund annuity. A 50% contingent annuitant annuity with his spouse as designated beneficiary shall be automatically payable if the Participant is married unless the spouse consents to another form of distribution, and a life annuity shall be the automatic form of distribution if the Participant is not married unless he consents to another form of distribution. APPENDIX B SPECIAL RULES FOR STEIN, ROE & FARNHAM EMPLOYEES 1.1.B Introduction. The special rules set forth in this Appendix B shall apply to Participants who are Employees of Stein, Roe & Farnham. 1.2.B Definition of Compensation. The definition of compensation as set forth in the Stein, Roe & Farnham Retirement Plan as it existed on June 30, 1998 shall continue to apply through December 31, 1998. Thereafter, the definition set forth in this Plan shall apply. 1.3.B Maximum Employee Contribution. The maximum Elective Employee Contribution shall be 14% unless a greater contribution is approved by the Plan Administrator in accordance with IRS rules. 1.4.B Matching Contribution. The Company matching contribution shall be 50% of the first 6% of Employee Elective Contributions and shall be made only with respect to the first $66,000 of Compensation. Effective January 1, 1999, the Matching Contribution shall be increased to 75% of the first 6% of Employee Elective Contributions and shall be made with respect to the first $80,000 of Compensation. 1.5.B Discretionary Contribution. This Discretionary Contribution shall be 7.5% of Compensation unless changed by Stein, Roe & Farnham. Notwithstanding the eligibility provisions of the Plan, an Employee hired during 1998 will not be eligible for a Discretionary Contribution until the Plan year ending December 31, 1999. 1.6.B Vesting. (a) A Participant hired before July 2, 1987 shall be 100% vested in his Discretionary Contribution Account. (b) A Participant hired before July 1, 1998 shall be 100% vested in his Company Matching Contribution Account. (c) A Participant who was previously a Participant in the KJMM Money Purchase Plan shall be vested in his transferred Money Purchase Plan Account and his Discretionary Contribution Account pursuant to the following schedule:
Years of Service Vesting Percentage ---------------- ------------------ Less than 2 0% 2 33% 3 67% 4 100%
1.7.B Forms of Payment for Former KJMM Employees. The spousal consent and forms of payment rules described in Appendix A for IFMG shall also apply to Participants who were previously Participants in the KJMM Money Purchase Plan or 401(k) Plan. 1.8.B Withdrawals. No hardship withdrawals shall be permitted from a Participant's Discretionary Contribution Account, including any Profit Sharing Accounts transferred from the Stein, Roe & Farnham Retirement Plan. Any After-Tax Contributions made under the Stein, Roe & Farnham Retirement Plan, and related investment earnings, may be withdrawn for any reason at any time, provided that any such withdrawal shall consist of the Participant's entire After-Tax Contribution Account. 1.9.B Loans. In the event a Stein, Roe & Farnham Participant has more than 2 outstanding loans as of June 30, 1998, he may continue to repay the loans according to their original terms. However, no new loan will be permitted which will cause his outstanding loans to exceed 2. 1.10.B Transfer of Accounts. Accounts held on behalf of a Participant under the Stein, Roe & Farnham Retirement Plan shall be transferred to this Plan and held under corresponding accounts maintained under this Plan. APPENDIX C SPECIAL RULES FOR COLONIAL EMPLOYEES 1.1.C Introduction. Effective September 1, 1998, the Colonial Group, Inc. Profit Sharing Plan (the Colonial Plan) is merged into and becomes a part of this Plan and the Accounts under such plan are transferred to this Plan. The special rules set forth in this Appendix C shall apply to Participants who are Employees of Colonial. 1.2.C Rules from September 1 through December 31, 1998. For the period September 1 through December 31, 1998, the rules of the Colonial Plan as in effect on August 31, 1998 shall continue to apply except that the investment funds offered under the Plan shall replace the funds previously offered under the Colonial Plan. For this purpose, the terms of the Colonial Plan are hereby incorporated by reference, except that the terms of this plan relating to investments shall apply instead of the corresponding provisions of the Colonial Plan. 1.3.C Rules on and after January 1, 1999. Effective January 1, 1999, the rules of this Plan shall entirely replace the rules of the Colonial Plan for Colonial Employees, subject to the special rules described below. 1.4.C Maximum Employee Contribution. The maximum Elective Employee Contribution shall be 12% unless a greater contribution is approved by the Plan Administrator in accordance with IRS rules. 1.5.C Withdrawals. In addition to the withdrawal rules set forth in the Plan, the following special rules apply to Colonial Employees for whom Accounts have been transferred to this Plan from the Colonial Plan. (a) After-Tax Contributions made under the Colonial Plan, and related investment earnings, may be withdrawn for any reason at any time, provided that any such withdrawal shall consist of the Participant=' entire After-Tax Contribution Account; (b) Before-Tax Contributions made under the Colonial Plan shall be subject to the same withdrawal rules as apply to Elective Employee Contributions under this Plan; (c) One half of the Participant's Profit Sharing Account (as defined under the Colonial Plan) value under the Colonial Plan determined as of January 1, 1987 (not including the value of any Before-Tax Contributions) shall be subject to the same withdrawal rules as apply to Elective Employee Contributions; (d) Except as provided in (b) and (c) above, no hardship withdrawals shall be permitted from a Participant's Profit Sharing Account, his ESOP Account (in each case as defined under the Colonial Plan), or his Discretionary Contribution Account. 1.6.C Vesting. In the case of a Colonial Employee hired prior to January 1, 1999, the following vesting rules shall apply to the extent they provide for earlier vesting than the terms of the Plan: (a) Any Before-Tax Contributions (as defined under the Colonial Plan), made under the Colonial Plan for Plan Years commencing before January 1, 1999 shall be 100% vested; (b) The following vesting schedule shall apply to both Matching Contributions and Discretionary Contributions, and related investment earnings, including any Profit Sharing Contributions under the Colonial Plan which were not Before-Tax Contributions;
Years of Service Vesting Percentage ---------------- ------------------ Less than 1 0% 1 33% 2 67% 3 100%
(c) The Employee shall become 100% vested at age 55 regardless of his Years of Service. EX-10.8 3 PENSION PLAN LIBERTY FINANCIAL COMPANIES, INC. --------------------------------- PENSION PLAN ------------ Amended and Restated Effective January 1, 1999 Exec. Ver. TABLE OF CONTENTS
Page PREAMBLE ---- ARTICLE I DEFINITIONS 1.1 "Accrued Benefit" 1 1.2 "Active Participant" 1 1.3 "Actuarial Equivalent" 1 1.4 "Actuary" 2 1.5 "Affiliated Employer" 2 1.6 "Annuity Starting Date" 2 1.7 "Authorized Leave of Absence" 2 1.8 "Average Earnings" 3 1.9 "Beneficiary" 3 1.10 "Board" 3 1.11 "Covered Compensation" 3 1.12 "Code" 4 1.13 "Contingent Annuitant" 4 1.14 "Credited Service" or "Years of Credited Service" 4 1.15 "Early Retirement Date" 4 1.16 "Earnings" or "Annual Earnings" 4 1.17 "Effective Date" 6 1.18 "Eligible Employee" 6 1.19 "Employee" 6 1.20 "Employer" 6 1.21 "Employment Date" 7 1.22 "Fiduciary" 7 1.23 "Fund", "Trust" or "Trust Fund" 7 1.24 "Hour of Service" 7 1.25 "Normal Form" 9 1.26 "Normal Retirement Age" 9 1.27 "Normal Retirement Date" 9 1.28 "One Year Break in Service" 9 1.29 "Parental Absence" 9 1.30 "Participant" 9 1.31 "Participating Employer" 10 1.32 "Plan" 10 1.33 "Plan Administrator" 10 1.34 "Plan Year" 10 1.35 "Postponed Retirement Date" 10 (i) Pension Plan Exec. Ver. Page ---- 1.36 "Prior Plan" 10 1.37 "Reemployment Date" 10 1.38 "Retired Participant" 10 1.39 "Retirement Benefit" 11 1.40 "Service Termination Date" 11 1.41 "Spouse" 12 1.42 "Trust Agreement" 12 1.43 "Trustee" 12 1.44 "Vested Inactive Participant" 12 1.45 "Years of Service" 12 ARTICLE II PARTICIPATION AND SERVICE 2.1 Participation Requirements 13 2.2 Years of Service 13 2.3 Years of Credited Service 15 2.4 Reemployment Before Benefits Commence 16 2.5 Postponed Retirement or Reemployment After Benefits Commence 17 2.6 Suspension of Benefits 19 2.7 Transfers 21 ARTICLE III NORMAL RETIREMENT BENEFIT 3.1 Normal Retirement Benefit 22 3.2 Minimum Accrued Benefit 23 3.3 Maximum Benefit 25 3.4 Continuing Employment 29 3.5 Accrued Benefit Upon Reemployment After Annuity Starting Date 29 3.6 Accrued Benefit Upon Reemployment Before Annuity Starting Date 31 ARTICLE IV EARLY RETIREMENT DATE AND EARLY RETIREMENT BENEFIT 4.1 Early Retirement Date 32 4.2 Early Retirement Benefit 32 4.3 Minimum Benefit 33 (ii) Pension Plan Exec. Ver. Page ---- ARTICLE V POSTPONED RETIREMENT DATE AND POSTPONED RETIREMENT BENEFIT 5.1 Postponed Retirement Date 34 5.2 Postponed Retirement Benefit 34 5.3 Death Prior to Postponed Retirement Date 36 ARTICLE VI TERMINATION OF EMPLOYMENT 6.1 Non-Vested Termination 37 6.2 Vested Termination 37 6.3 Early Payment 38 ARTICLE VII DEATH AND DISABILITY BENEFITS 7.1 Pre-Retirement Surviving Spouse Benefit For Death Occurring On or After Early Retirement Eligibility 39 7.2 Pre-Retirement Surviving Spouse Benefit For Death Occurring Before Early Retirement Eligibility 39 7.3 Death Benefits After Retirement Benefits Commenced 40 7.4 Disability 41 7.5 Continued Benefit Accruals 42 7.6 Payment of Disability Pension 42 7.7 Form of Payment for Disability Pension 43 7.8 Cessation of Disability Pension 43 ARTICLE VIII PAYMENT OF RETIREMENT BENEFITS 8.1 Automatic Payment Forms 44 8.2 Election of Optional Forms 44 8.3 Joint and Survivor Option 45 8.4 Life Annuity Option 46 8.5 Life Annuity With Guaranteed Payment Period Option 46 (iii) Pension Plan Exec. Ver. Page ---- 8.6 General Provisions 46 8.7 Small Benefit Cash-Out Provision 49 8.8 Missing Persons 49 8.9 Restrictions on Distributions 50 8.10 Direct Rollovers 51 ARTICLE IX PLAN ADMINISTRATION 9.1 Responsibility for Plan and Trust Administration 53 9.2 Retirement Plan Administrator 53 9.3 Agents of the Plan Administrator 53 9.4 Plan Administrator Procedures 53 9.5 Administrative Powers of the Plan Administrator 54 9.6 Benefit Claims Procedures 54 9.7 Reliance on Reports and Certificates 55 9.8 Other Plan Administrator Powers and Duties 56 9.9 Compensation of Plan Administrator 57 9.10 Plan Administrator's Own Participation 57 9.11 Liability of Plan Administrator 57 9.14 Indemnification 57 ARTICLE X FUNDING AND CONTRIBUTIONS 10.1 Establishment of Fund 58 10.2 Contribution to the Fund; Plan Expenses 58 10.3 Contributions Conditional 59 10.4 Employee Contributions 59 ARTICLE XI FIDUCIARY RESPONSIBILITIES 11.1 Basic Responsibilities 60 11.2 Actions of Fiduciaries 60 11.3 Fiduciary Liability 61 (iv) Pension Plan Exec. Ver. Page ---- ARTICLE XII AMENDMENT AND TERMINATION 12.1 Right to Amend or Terminate 62 12.2 Partial Termination 62 12.3 Vesting and Distribution of Funds Upon Termination 62 12.4 Determination of Funds Upon Termination 64 12.5 Restriction on Benefits 65 12.6 Right to Accrued Benefits 65 ARTICLE XIII TOP-HEAVY PLAN PROVISIONS 13.1 General Rule 66 13.2 Vesting Provisions 66 13.3 Minimum Benefit Provisions 66 13.4 Limitation on Benefits 67 13.5 Top-heavy Plan Definition 67 13.6 Key Employee 71 13.7 Non-Key Employee 71 ARTICLE XIV GENERAL PROVISIONS 14.1 Plan Voluntary 72 14.2 Payments to Minors and Incompetents 72 14.3 Non-Alienation of Benefits 73 14.4 Use of Masculine and Feminine; Singular and Plural 75 14.5 Merger, Consolidation or Transfer 75 14.6 Leased Employees 75 14.7 Governing Law 76 14.8 Severability 76 14.9 Captions 76 APPENDIX A GRANDFATHERING FOR KEYPORT LIFE INSURANCE COMPANY A.1 Definitions 79 A.2 Eligibility 81 A.3 Normal Retirement Benefit 82 A.4 Early Retirement Date and Early Retirement Benefit 84
(v) Pension Plan Exec. Ver. (vi) Pension Plan Exec. Ver. PREAMBLE Effective December 13, 1988, Keystone Provident Life Insurance Company established a defined benefit retirement plan referred to as the Retirement Plan for Employees of Keystone Provident Life Insurance Company (the "Prior Plan"). In 1990, Keystone Provident Life Insurance Company changed its name to Keyport Life Insurance Company. Employees of Keyport Life Insurance Company continued to participate in the Prior Plan. Effective July 1, 1992, Liberty Financial Companies, Inc. (the "Employer") changed the name of the Prior Plan to the Liberty Financial Companies, Inc. Pension Plan (the "Plan") and amended and restated the Plan. In addition to changes in the Plan reflecting a new formula and compliance with requirements of the Tax Reform Act of 1986, the restated Plan extended participation to certain subsidiaries and affiliates of Liberty Financial Companies, Inc. in addition to Keyport Life Insurance Company. Grandfathering provisions for certain employees of Keyport Life Insurance Company were included in the restated Plan. For employees of Keyport Life Insurance Company who participated in the Prior Plan, an additional benefit equal to 25% of such employee's accrued benefit under the Prior Plan as of June 30, 1992 is included as part of their Accrued Benefit hereunder. Such additional benefit as described in Section 3.1(d) represents the Actuarial Equivalent present value of the automatic cost-of-living adjustment provided under the Prior Plan. The Plan was amended and restated effective January 1, 1989 and thereafter to comply with theTax Reform Act of 1986 and certain other IRS requirements. The Plan is again being amended effective January 1, 1999 to incorporate all previous amendments, to comply with recent legislation and IRS requirements, and to improve certain aspects of Plan administration. (vii) Pension Plan Exec. Ver. It is intended that the Plan, as amended and restated herein, will continue to meet the requirements for qualification under Section 401(a) of the Internal Revenue Code of 1986 (the "Code") as amended from time to time and that the Trust shall continue to be exempt from taxation as provided under Code Section 501(a). As such, the Plan contains provisions required by the Tax Reform Act of 1986, and subsequent legislation and regulations affecting pension plan qualification requirements under Code Section 401(a). The Plan is intended to provide Eligible Employees with periodic income after retirement in addition to benefits under the Social Security Act. A Trust Agreement (the "Trust") has been adopted by the Employer and forms a part of this Plan.. Except as otherwise specifically and expressly provided herein: (a) the provisions of this Plan shall apply only to individuals who are Eligible Employees afterDecember 31, 1998; (b) a former Employee's eligibility for and amount of benefits, if any, payable to or on behalf of such former Employee, shall be determined in accordance with the provisions of the Plan in effect when his employment terminated. The benefit payable to or on behalf of a Participant included under the Plan in accordance with the following provisions shall not be affected by the terms of any amendment to the Plan adopted after such Participant's employment terminates, unless the amendment expressly provides otherwise. (viii) Pension Plan Exec. Ver. ARTICLE I DEFINITIONS The following words and phrases when used in the Plan shall have the meanings indicated in this Article I unless a different meaning is plainly required by the context: 1.1 "Accrued Benefit" shall mean the amount of monthly Retirement Benefit determined under Article III payable in the Normal Form beginning at a Participant's Normal Retirement Date or, if applicable, beginning on his Postponed Retirement Date and determined in accordance with Article V. The Accrued Benefit shall not be less than the minimum accrued benefit determined under Section 3.2 and shall not be greater than the maximum benefit determined under Section 3.3. 1.2 "Active Participant" shall mean an Eligible Employee who has become covered under the Plan under Section 2.1(a) or (b). This term includes any disabled Participant who has deferred receipt of his Retirement Benefit under Section 7.5. 1.3 "Actuarial Equivalent" shall mean a benefit of equivalent value to another benefit, determined on the following bases: (a) the applicable mortality table and applicable interest rate, as of January preceding the payment, specified under Code Section 417(e)(3); (b) for all other purposes: (i) Mortality: 1983 Group Annuity Mortality Table (male) -1- Pension Plan Exec. Ver. (ii) Interest: 8.5% annual 1.4 "Actuary" shall mean an actuary who meets the standards and qualifications established by the Joint Board for the Enrollment of Actuaries, or an actuarial firm that employs such individuals, as selected by the Plan Administrator from time to time. 1.5 "Affiliated Employer" shall mean any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o). 1.6 "Annuity Starting Date" shall mean: (a) the first day of the first period for which a benefit is payable to the Participant under the Plan as an annuity, (or to the Spouse in the case of death before Retirement Benefits commence), or (b) in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the Participant (or Spouse) to such benefit. 1.7 "Authorized Leave of Absence" shall mean any absence authorized by an Employer under the Employer's standard personnel practices, provided that all persons under similar circumstances are treated alike in the granting of such Authorized Leave of Absence, and provided further that the Participant returns or retires within the period specified in the Authorized Leave of Absence. An absence due to service in the Armed Forces of the United States shall be considered an Authorized Leave of Absence provided that the Employee complies with all of the requirements of federal law in order to be entitled to -2- Pension Plan Exec. Ver. reemployment and provided further that the Employee returns to employment with the Employer or an Affiliated Employer within the period provided by such law. 1.8 "Average Earnings" shall mean, on any date of determination, the average of a Participant's Annual Earnings for the 60 consecutive months included in the 120-month period ending on the date of determination for which his aggregate Earnings were the highest. In the case of a Participant who has not received Earnings for 60 consecutive months in the aforementioned 120-month period, Average Earnings means the average of his Annual Earnings during the consecutive calendar quarters in such period in which he received Earnings. 1.9 "Beneficiary" shall mean the individual designated by a Participant to receive payments upon the death of the Participant under one of the options elected under Section 8.3 or Section 8.5. If a Participant is married on the Annuity Starting Date, the election of an option under Sections 8.3, 8.4 or 8.5 and the naming of any Beneficiary shall be invalid unless a waiver meeting the requirements of Section 8.6(e) has been made. Death benefits which become payable under Article VII before Retirement Benefits are paid may only be paid to a Participant's Spouse. 1.10 "Board" shall mean the Board of Directors of the Employer. 1.11 "Covered Compensation" shall mean the average of the "taxable wage bases", without indexing, for the thirty-five (35) calendar years ending with the Plan Year in which a Participant attains Social Security Retirement Age as defined in Section 3.3. "Taxable wage base" means, with respect to any year, the maximum amount of earnings which may be considered wages for such year under Code Section 3121(x)(1). For an individual who terminates employment prior to Social Security Normal Retirement Age, the taxable wage bases for years until such age shall be deemed to be equal to the taxable wage base in effect on the date the individual is no longer an Eligible Employee and the -3- Pension Plan Exec. Ver. provisions of the Social Security Act on such date alone shall govern the calculation of the Covered Compensation. 1.12 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and any regulations issued thereunder. Reference to any Code Section shall include any successor provision thereto. 1.13 "Contingent Annuitant" shall mean the person designated by the Participant to receive lifetime monthly benefit payments in the event of the Participant's death after Retirement Benefits have started as provided under the joint and survivor payment forms in Section 8.3. If the Participant is married on the date Retirement Benefits are to commence, the Contingent Annuitant is his Spouse, unless a waiver meeting the requirements of Section 8.6(c) provides for the designation of a Contingent Annuitant who is not the Spouse. 1.14 "Credited Service" or "Years of Credited Service" shall mean the Participant's period of service determined in accordance with Article II. In the case of a former Eligible Employee who was transferred or deemed to have transferred to IFMG on or prior to April 1, 1997, Credited Service shall be granted for employment through March 31, 1997, even if a portion of such Credited Service would not otherwise be considered Credited Service because IMFG is not a Participating Employer. 1.15 "Early Retirement Date" shall mean the date on which a Participant becomes eligible to retire with an early retirement benefit under the Plan, as determined in accordance with Article IV. 1.16 "Earnings" or "Annual Earnings" shall mean, subject to the transfer provisions of Section 2.7, with respect to any 12-month period, the total Monthly Earnings paid to the Employee by the Employer or an Affiliated Employer for that 12-month period. "Monthly Earnings" shall mean, for any month, the amount of base salary paid, plus any pre-tax contributions made at the Participant's election to a qualified cash or deferred -4- Pension Plan Exec. Ver. arrangement as defined in Code Section 401(k) or a cafeteria plan as defined in Code Section 125 sponsored by the Employer, plus sales commissions paid, but not more than $100,000 of commissions in a calendar year ($150,000 of commissions for employees of Keyport Life Insurance Company), plus overtime pay, sick pay, pay for vacations and holidays, salary continuation payments, whether made under plans of the Employer or plans mandated by a State or Commonwealth, plus bonuses paid under the Management Incentive Program. The bonuses paid under the Management Incentive Program shall be included in Monthly Earnings in the month paid. Earnings shall not include reimbursed education expenses, relocation expenses, car allowances, employment referral awards, sales incentive awards, long-term incentive awards or income imputed for federal income tax purposes due to life insurance in excess of $50,000, loans or any other income required to be imputed for federal income tax purposes for non-cash benefits provided by the Employer. Earnings shall not include any standstill bonuses paid to employees of Keyport Life Insurance Company in 1988 or 1989. Earnings shall not include any amount deferred or paid under the Liberty Financial Companies, Inc. Supplemental Savings Plan, the Keyport Life Insurance Company Non-Qualified Deferred Compensation Plan, the Liberty Financial Companies, Inc. Voluntary Non-Qualified Deferred Compensation Plan, or any other non-qualified deferred compensation plan which a Participating Employer may adopt. Annual Earnings for a Plan Year shall not include any amount in excess of the limit prescribed under Code Section 401(a)(17) ($160,000 for 1999) adjusted for cost-of-living as permitted under such Code Section and regulations thereunder. -5- Pension Plan Exec. Ver. Earnings shall not include any compensation paid to an Employee prior to the date he first becomes an Eligible Employee. -6- Pension Plan Exec. Ver. 1.17 "Effective Date" shall mean January 1, 1989, or such other date as required by the Tax Reform Act of 1986 (or subsequent legislation or regulations); provided, however, that the Plan contains voluntary amendments effective July 1, 1992 or such other date as specified herein. 1.18 "Eligible Employee" shall mean an Employee who: (a) is employed by a Participating Employer in an employment classification designated by such Employer as eligible to participate under the Plan; (b) is not a "leased employee" as defined in Code Section 414(n)(2); (c) is not covered by a collective-bargaining agreement, unless such agreement specifically provides for eligibility herein; and (d) is not an Employee of the Chemical Investment Services division of Liberty Securities Corporation; and (e) is not a "highly compensated employee" (as defined in Code Section 414(q)) who is an Employee of Copley Venture Capital, Inc. 1.19 "Employee" shall mean a regular common-law employee of the Employer or an Affiliated Employer. A shared employee, as determined by the Plan Administrator, shall not be an Employee under this Plan. A leased employee as described in Code Section 414(n)(2) shall be considered an Employee to the extent provided under Section 14.6. 1.20 "Employer" shall mean Liberty Financial Companies, Inc. a corporation organized and existing under the laws of the Commonwealth of Massachusetts, or its successor or successors. Prior to July 1, 1992, "Employer" meant Keyport Life Insurance Company. -7- Pension Plan Exec. Ver. 1.21 "Employment Date" shall mean the first day on which an Employee is credited with an Hour of Service. 1.22 "Fiduciary" shall mean any person who exercises any discretionary authority or discretionary control respecting the management of the Plan, assets held under the Plan, or disposition of Plan assets; who renders investment advice for a fee or other compensation, direct or indirect, with respect to assets held under the Plan or has any authority or responsibility to do so; or who has any discretionary authority or discretionary responsibility in the administration of the Plan. Any person who exercises authority or has responsibility of a fiduciary nature as described above shall be considered a Fiduciary under the Plan. 1.23 "Fund", "Trust" or "Trust Fund" shall mean the cash and other investments of the Plan, and income attributable thereto, held and administered by the Trustee in accordance with the Trust Agreement. 1.24 "Hour of Service" shall mean: (a) Each hour for which an Employee is directly or indirectly paid or entitled to payment by the Employer and any Affiliated Employer for the performance of duties; (b) Each hour for which an individual is directly or indirectly paid or entitled to payment by the Employer and any Affiliated Employer (including payments made or due from a trust fund or insurer to which the Employer or Affiliated Employer contributes or pays premiums) on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to periods of vacation, holidays, illness, incapacity, disability, layoff, jury duty, military duty, or leave of absence, provided that: -8- Pension Plan Exec. Ver. (i) No more than 501 Hours of Service shall be credited under this paragraph (b) to an Employee on account of any single continuous period during which the Employee performs no duties; and (ii) Hours of Service shall not be credited under this paragraph (b) to an Employee for a payment which solely reimburses the Employee for medically related expenses incurred by the Employee or which is made or due under a plan maintained solely for the purpose of complying with applicable workers' compensation, unemployment compensation or disability insurance laws; and (c) Each hour not already included under paragraph (a) or (b) above for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer or by an Affiliated Employer, provided that crediting of Hours of Service under this paragraph with respect to periods described in paragraph (b) above shall be subject to the limitation therein set forth. The number of Hours of Service to be credited under paragraph (b) or (c) above on account of a period during which an Employee performs no duties, and the Plan Years to which Hours of Service shall be credited under paragraphs (a), (b), or (c) above shall be determined by the Plan Administrator in accordance with Sections 2530.200b-2(b) and (c) of the Regulations of the U.S. Department of Labor. To the extent not credited above, Hours of Service shall also be credited based on the customary work week of the Employee for periods of military duty (as required by applicable law), Authorized Leave of Absence and periods during which the Employee is receiving salary continuation payments under any salary continuation plan of the Employer or any mandated salary continuation plan of a State or Commonwealth. -9- Pension Plan Exec. Ver. 1.25 "Normal Form" shall mean a monthly annuity payable to a Participant commencing on his designated Annuity Starting Date and ending with the payment due for the month in which his death occurs. 1.26 "Normal Retirement Age" shall mean the later of: (a) the Participant's 65th birthday, and (b) the fifth anniversary of the date the individual became an active Participant. 1.27 "Normal Retirement Date" shall mean the first day of the month coincident with or next following the Participant's Normal Retirement Age. 1.28 "One Year Break in Service" shall mean each 12-consecutive-month period commencing on an Employee's Service Termination Date (or anniversary thereof) provided that during such 12-consecutive month period the individual fails to complete one Hour of Service. 1.29 "Parental Absence" shall mean an Employee's absence from work which has commenced for any of the following reasons: (a) the pregnancy of the Employee; (b) the birth of the Employee's child; (c) the adoption of a child by the Employee; or (d) the need to care for the Employee's child immediately following its birth or adoption. 1.30 "Participant" shall mean an Active Participant currently participating in the Plan pursuant to Article II or a Vested Inactive Participant. -10- Pension Plan Exec. Ver. 1.31 "Participating Employer" shall mean Liberty Financial Companies, Inc. and any Affiliated Employer (or a division of either) which has adopted this Plan and which has been authorized by the Board to participate in this Plan. 1.32 "Plan" shall mean the Liberty Financial Companies, Inc. Pension Plan as set forth in this document and as it may be amended from time to time. This Plan constitutes an amendment and restatement of the Prior Plan. 1.33 Plan Administrator" shall mean the persons appointed pursuant to Article IX to administer the plan. 1.34 "Plan Year" shall mean the calendar year for calendar years beginning on or after January 1, 1993. The Plan Year which began on December 13, 1991 shall end on December 12, 1992. There will be a short Plan Year for the period December 13, 1992 to December 31, 1992. 1.35 "Postponed Retirement Date" shall mean the date after his Normal Retirement Date on which a Participant elects to retire, as determined in accordance with Article V. 1.36 "Prior Plan" shall mean the Plan, as in effectDecember 31, 1998. The Prior Plan is amended and restated effective January 1, 1999 as the Plan, defined above. 1.37 "Reemployment Date" shall mean the day an Employee returns to work and is credited with an Hour of Service following a Service Termination Date or an Authorized Leave of Absence from the Employer or an Affiliated Employer. 1.38 "Retired Participant" shall mean a former Employee who is receiving a Retirement Benefit or a former Employee who has received a lump sum Retirement Benefit pursuant to Section 8.7. -11- Pension Plan Exec. Ver. 1.39 "Retirement Benefit" shall mean either: (a) a lump sum payment made pursuant to Section 8.7, or (b) an annual pension paid in monthly installments. 1.40 "Service Termination Date" shall mean the earliest of the following: (a) the date on which the Employee resigns, is discharged, or retires from employment with the Employer and all Affiliated Employers; (b) the date the Employee dies; (c) except as provided below, the first anniversary of the date on which the Employee is laid off, starts an Authorized Leave of Absence, or is absent from work for any other reason other than a Parental Absence on or after January 1, 1985; or (d) effective January 1, 1985, the second anniversary of the date on which the Employee commenced a Parental Absence, if such Employee has not yet returned to work with the Employer or an Affiliated Employer. Notwithstanding subsection (c) above, an Employee who is on an Authorized Leave of Absence due to military service in the armed forces of the United States of America shall not incur a Service Termination Date with respect to such military duty providing he returns to employment with the Employer or an Affiliated Employer within the time prescribed by law for reinstatement of employment rights. Similarly, if an Authorized Leave of Absence is granted for reasons other than military duty and the period of such authorized leave is more than 12 months, a Service Termination Date shall not occur if the Employee returns to work within the time period specified in such Authorized Leave -12- Pension Plan Exec. Ver. of Absence. If such individual does not return to employment with the Employer or an Affiliated Employer within the time period specified in the Authorized Leave of Absence, a Service Termination Date shall occur on the first anniversary of the date on which the Authorized Leave of Absence began. 1.41 "Spouse" shall mean the legal spouse to whom a Participant is married on the Annuity Starting Date under applicable state law. However, if the Participant should die before his Annuity Starting Date, then the Spouse shall be the legal spouse to whom the Participant was married on the Participant's date of death. 1.42 "Trust Agreement" shall mean the agreement or agreements governing the investment of Plan assets as amended from time to time, entered into between the Employer and the Trustee to carry out the purpose of the Plan. 1.43 "Trustee" shall mean the trustee or trustees duly appointed by the Board. 1.44 "Vested Inactive Participant" shall mean a former Active Participant who is vested in a Plan benefit, is no longer an Eligible Employee, and has not begun to receive a Retirement Benefit. 1.45 "Years of Service" shall mean the period of an Employee's employment with the Employer and all Affiliated Employers as determined in accordance with Article II. -13- Pension Plan Exec. Ver. ARTICLE II PARTICIPATION AND SERVICE 2.1 Participation Requirements. (a) Each Eligible Employee on January 1, 1999 who was an Active Participant under the Prior Plan onDecember 31, 1998, shall continue to be an Active Participant onJanuary 1, 1999. (b) On and after January 1, 1999 each Eligible Employee who has completed one Year of Service and has attained age 21 shall become an Active Participant on the January 1st or July 1st coincident with or next following the date he meets such requirements. (c) A person who is not an Eligible Employee shall not be entitled to participate in the Plan. If an individual terminates employment and is later reemployed as an Eligible Employee, subsequent participation in the Plan shall be subject to the provisions of Section 2.4. 2.2 Years of Service. Years of Service shall determine an individual's eligibility to participate in the Plan under Section 2.1 and a Participant's vested right to retirement benefits accrued under the Plan, except that upon reaching Normal Retirement Age as an Employee, a Participant shall be fully vested in his Accrued Benefit, irrespective of Years of Service. Subject to the One Year Break in Service rule under subparagraph (c), Years of Service shall be accumulated as follows: -14- Pension Plan Exec. Ver. (a) (i) One Year of Service shall be credited to an Employee for each 12-month period, whether or not consecutive, between his Employment Date and his Service Termination Date, except as provided under (b) below. In no event shall an Employee receive duplicate service credit for any single period of employment. (ii) For periods not already counted in (a) above, a fractional Year of Service calculated to three decimal places shall be credited to an Employee for the period of time (based on the number of days) between his Employment Date and his Service Termination Date. (b) The determination of Years of Service and fractional Years of Service shall also include the following additional periods of time: (i) a period of absence between an Employee's Service Termination Date and subsequent Reemployment Date provided a One Year Break in Service does not occur before the Reemployment Date; (ii) a period of Authorized Leave of Absence before a Service Termination Date is incurred; (iii) the first 12-month period of a Parental Absence; (iv) any period of absence because of service in the military forces of the United States, provided the Employee returns to work within 90 days after first becoming eligible for discharge from active duty; and (v) any single period of layoff not in excess of one year in duration. -15- Pension Plan Exec. Ver. The determination of Years of Service and fractional Years of Service shall not include a period of absence, if any, between the first anniversary of the Parental Absence and the second anniversary of the Parental Absence. (c) If an Employee incurs a One Year Break in Service, his Years of Service accumulated before such break shall be forfeited unless: (i) he was vested in Retirement Benefits under the Plan in accordance with Article VI prior to the One Year Break in Service or (ii) the number of consecutive One Year Breaks in Service is less than the greater of five or the number of his Years of Service earned before such One Year Breaks in Service. (d) No Years of Service or fractional Years of Service shall be credited for any period between a Service Termination Date and a Reemployment Date except as provided in (b) above. Employment with Liberty Mutual shall be counted as employment with the Employer or an Affiliated Employer, but solely for the purpose of meeting the participation and vesting requirements of the Plan. 2.3 Years of Credited Service. Credited Service is used in the calculation of a Participant's Accrued Benefit under Section 3.1. (a) Subject to the exclusions in Section 2.3(b) below, Years of Credited Service are equal to Years of Service. (b) Credited Service shall not include: -16- Pension Plan Exec. Ver. (i) any period of time during which an individual is not actively employed; (ii) any period of time during which an Employee is not an Eligible Employee; (iii) any unpaid period of Parental Absence; (iv) service before the Participant's 18th birthday; (v) service prior to January 1, 1980 for Employees who were employed at that time by Keyport Life Insurance Company; (vi) service prior to July 17, 1985 for Employees who were employed at that time by Liberty Investment Services, Inc., Liberty Real Estate Group, Inc., Copley Venture Capital, Liberty Financial Services, Inc., Liberty Securities Corporation or Liberty Asset Management Company; and (vii) service prior to March 17, 1988 for Employees who were employed at that time by the former Liberty PAMCO, including LSC Insurance Agency of Ohio, Inc., NFS Agency, Inc., and Liberty Securities Corporation (PAMCO). 2.4 Reemployment Before Benefits Commence. Upon reemployment before an Annuity Starting Date, the following rules shall apply: (a) The individual's Years of Service shall be determined under Section 2.2 and his Years of Credited Service shall be determined under Section 2.3. (b) If the Employee was not vested in his Accrued Benefit and he has a One Year Break in Service, on his Reemployment Date he shall be treated as a new -17- Pension Plan Exec. Ver. Employee under the Plan. However, if the period of time between his Service Termination Date and his Reemployment Date is less than the greater of (i) his Years of Service prior to the Service Termination Date and (ii) five years, his prior Years of Service shall be counted and he shall become an Active Participant on his Reemployment Date, if he is then an Eligible Employee. If he is not an Eligible Employee, he shall become an Active Participant on the date he meets the requirements of Section 2.1. (c) If the Employee was not vested in his Accrued Benefit but does not have a One Year Break in Service, his prior Years of Service, if any, shall be counted and he shall become an Active Participant on his Reemployment Date, if otherwise eligible as provided in Section 2.1. If he does not meet the requirements of Section 2.1 on his Reemployment Date, he shall become an Active Participant on the date he meets such requirements. (d) If the individual was a Vested Inactive Participant immediately prior to his Reemployment Date, he shall become a Participant on his Reemployment Date, if otherwise eligible as provided in Section 2.1. If he does not meet the requirements of Section 2.1 on his Reemployment Date, he shall become an Active Participant on the date he meets such requirements. (e) Upon reemployment, the Accrued Benefit of an individual covered by this Section 2.4 is determined under Section 3.6. 2.5 Postponed Retirement or Reemployment After Benefits Commence. If an Employee works beyond his Normal Retirement Date or if a Retired Participant returns to work with a Participating Employer after Retirement Benefits had become payable to him, the following rules shall apply: -18- Pension Plan Exec. Ver. (a) If he is a Retired Participant returning to work and he is an Eligible Employee, he shall become an Active Participant on his Reemployment Date; if he is an Active Participant continuing to work he shall remain an Active Participant as long as he is an Eligible Employee; (b) (i) if he has attained Normal Retirement Age and his Retirement Benefit was being paid, or had not yet commenced because of continued employment, such benefit shall be suspended upon proper notification, during any calendar month in which he is scheduled to complete 40 or more Hours of Service. Retirement Benefits shall resume (or commence) as hereinafter provided if the Employee is thereafter scheduled to complete less than 40 Hours of Service in any calendar month; (ii) if he has not attained Normal Retirement Age at the time of his reemployment with a Participating Employer, all Retirement Benefits shall automatically cease upon such reemployment; (c) He shall be eligible for additional Years of Service and Credited Service as a result of his reemployment in accordance with the provisions of the Plan; (d) Any Retirement Benefit subsequently paid shall be reduced to reflect the Actuarial Equivalent of the benefits previously received before Normal Retirement Age as provided under Section 3.5, but in the event that Section 2.5(b)(i) applies, the reduction in any month shall not exceed 25% of the Retirement Benefits payable to the Participant without regard to the reduction, except as provided in Section 2530.203-3 of the Code of Federal Regulations; -19- Pension Plan Exec. Ver. (e) If he shall die during the period of subsequent or continuing employment, death benefits, if any, shall be payable only in accordance with the provisions of Article VII and shall be reduced to reflect the Actuarial Equivalent of the Retirement Benefits previously received but in no event shall the reduction exceed 25% of the Retirement Benefits payable to the Participant without regard to the reduction, except as provided in Section 2530.203-3 of the Code of Federal Regulations. (f) If an Employee is covered by this Section 2.5, then his Retirement Benefit prior to any adjustment under Sections 2.5(c), 3.5 or 5.2, shall be based on the greater of: (i) his benefit determined under Section 3.1 hereof considering all his Years of Credited Service; and (ii) his benefit determined under the Plan in effect when such One Year Break in Service commenced, considering only his Years of Credited Service earned up to such time. 2.6 Suspension of Benefits. (a) During the first calendar month in which an Employee's benefits are suspended pursuant to Section 2.5(b)(i), the Plan Administrator shall deliver to the Employee, by personal delivery or first class mail, a notice setting forth a description of the specific reasons why benefit payments are being suspended, a general description of the Plan provisions relating to the suspension of benefits, a copy of the Plan provisions relating to the suspension of benefits, the statement that applicable Department of Labor Regulations may be found in Section 2530.203-3 of the Code of Federal Regulations, a description of the procedures set forth in the Plan for obtaining a review of the suspension of benefits, and a description of any notice procedure (including any forms which must be filed by the Employee) as a prerequisite for the Employee's obtaining the resumption or commencement of benefit payments. -20- Pension Plan Exec. Ver. The notice shall also set forth the periods of employment which gave rise to the offset, the suspendable amounts which are subject to offset, and the manner in which the Plan Administrator intends to offset the suspendable amounts. In no event shall the amount of benefits offset by the Plan Administrator in any month exceed 25% of the benefits to which an Employee would have been entitled but for the offset. (b) (i) If, during a calendar month, an Employee's Retirement Benefits are no longer suspendable pursuant to Section 2.5(b)(i), such payments shall resume to the Employee no later than the first day of the third calendar month after such calendar month. The initial payment upon resumption shall include the payment scheduled to occur in the calendar month when payments resume, less any offset for payments when benefits should have been suspended. (ii) If a Participant's Retirement Benefits were suspended prior to Normal Retirement Age, pursuant to Section 2.5(b)(ii), Retirement Benefits to the Participant shall resume after the Participant's subsequent retirement, except as required under Section 8.6(b). (c) In the event an Employee submits a written request to the Plan Administrator for a review of the suspension of his benefits, such request shall be deemed to be a request for a review of the denial of a claim for benefits for purposes of the benefit claims procedure set forth in Article IX. In the event an Employee submits a written request to the Plan Administrator for a determination whether specific contemplated employment will result in the suspension of benefits, the Plan Administrator shall, within 30 days of the receipt -21- Pension Plan Exec. Ver. of such request, notify the Employee in writing whether said employment will result in suspension of benefits. -22- Pension Plan Exec. Ver. 2.7 Transfers. (a) Any individual who ceases to be an Eligible Employee by reason of employment with an Affiliated Employer or a change in employment classification, either prior to or subsequent to commencement of his participation in this Plan, shall be credited with Years of Service during such period of employment pursuant to Sections 2.2 and 2.4 solely for purposes of vesting and eligibility to receive benefits. Credited Service for determining a Participant's Accrued Benefit under Section 2.3 shall not be credited during such period of employment. Credited Service shall only be earned for periods during which the Employee is an Eligible Employee. Such Participant shall be entitled only to benefits under the provisions of the Plan as in effect while he is eligible to participate in the Plan. Notwithstanding any other provisions of the Plan to the contrary, Earnings shall include all compensation, subject to the restrictions of Section 1.16, paid by the Employer or an Affiliated Employer, whether or not the individual is an Eligible Employee. It is recognized that in the case of an Employee who is not an Eligible Employee, it may be difficult or impracticable to obtain Monthly Earnings information for periods of employment when the Employee is not an Eligible Employee. In determining Earnings for such period, the Plan Administrator may use reasonable approximations to determine Monthly Earnings. For example, in the discretion of the Plan Administrator, annualized rates of earnings divided by 12 may be used to determine the base Monthly Earnings paid to the Employee rather than the Employee's actual compensation for one or more months. -23- Pension Plan Exec. Ver. ARTICLE III NORMAL RETIREMENT BENEFIT 3.1 Normal Retirement Benefit. Subject to the minimum benefit provisions under Section 3.2 and the maximum benefit limitations under Section 3.3, the amount of monthly Retirement Benefit payable to a Participant in the Normal Form beginning on his Normal Retirement Date shall be equal to one-twelfth of the sum of (a) plus (b) plus (c) plus (d) (if applicable), as follows: (a) (i) 1.35% of the Participant's Average Earnings not exceeding the Covered Compensation multiplied by (ii) his Years of Credited Service up to 25 such years. (b) (i) 1.80% of the Participant's Average Earnings which exceed the Covered Compensation multiplied by (ii) his Years of Credited Service up to 25 such years. (c) (i) 2/3% of the Participant's Average Earnings multiplied by (ii) his Years of Credited Service in excess of 25 such years, if any, up to 15 such excess years. -24- Pension Plan Exec. Ver. (d) 25% of the Participant's accrued benefit under the Prior Plan determined as of June 30, 1992 under the terms of the Prior Plan in effect on such date. This subsection (d) shall only apply to Participants employed by Keyport Life Insurance Company as of July 1, 1992. The Participant's Retirement Benefit shall be paid pursuant to Article VIII. 3.2 Minimum Accrued Benefit. (a) (i) For a Participant who was a participant under the Prior Plan and who is a "super highly compensated employee" (an individual described under Code Section 414(q)(1)(A) or (B)) for the Plan Year ending December 12, 1989, the Accrued Benefit payable at Normal Retirement Date hereunder shall not be less than: (A) such Participant's accrued benefit on December 12, 1989 under the formula of the Prior Plan on such date, plus (B) the amount determined under Section 3.1(d) above; (ii) For a Participant who was a participant under the Prior Plan and who first becomes a "super highly compensated employee" (an individual described under Code Section 414(q)(1)(A) or (B)) between the period December 13, 1989 and June 30, 1992 (both dates inclusive), the Accrued Benefit payable at Normal Retirement Date hereunder shall not be less than: (A) such Participant's accrued benefit on the last day of the Plan Year during which the Participant became a "super highly compensated employee" under the formula of the Prior Plan in effect on such date, plus -25- Pension Plan Exec. Ver. (B) the amount determined under Section 3.1(d) above. (b) For any other individual who was a participant under the Prior Plan after December 12, 1989, the Accrued Benefit payable at Normal Retirement Date shall not be less than (A) such individual's accrued benefit under the Prior Plan of such participant determined as of June 30, 1992 under the formula of the Prior Plan in effect on such date, plus (B) the amount determined under Section 3.1(d) above. (c) Notwithstanding any other provision of this Plan to the contrary, the monthly Accrued Benefit payable at Normal Retirement Date shall not be less than one-twelfth of the Grandfathered Keyport Benefit, as defined in and determined according to Appendix A of the Plan. (d) Effective January 1, 1994, each "Section 401(a)(17) Employee's" Accrued Benefit as of any determination date will be the greater of (i) or (ii) below where: (i) equals the Employee's Accrued Benefit calculated as of such determination date using the Employee's total Years of Credited Service, and (ii) equals the sum of (A) plus (B) where: (A) equals the Employees Accrued Benefit determined as of December 31, 1993, frozen in accordance with Treasury Regulation Section 1.401(a)(4)-13, and (B) equals the Employee's Accrued Benefit calculated as of such determination date using the Employee's Years of Credited Service attributable solely to Plan Years beginning on or after January 1, 1994. -26- Pension Plan Exec. Ver. A "Section 401(a)(17) Employee" means an Employee whose Accrued Benefit as of December 31, 1993 is based on Compensation for a year beginning prior to January 1, 1994 that exceeded $150,000. 3.3 Maximum Benefit. Effective January 1, 1987, notwithstanding any other provision of the Plan to the contrary, a Participant's annual retirement benefit under the Plan and any other defined benefit pension plan of an Employer or an Affiliated Employer may not exceed the lesser of (a) or (b) below, except as provided in (c) below: (a) The lesser of (i) or (ii) below, but subject to subparagraphs (iii) through (x) below: (i) 100% of his average compensation in the three consecutive highest paid calendar years while a Participant in the Plan. (ii) $90,000 (as adjusted for increases in the cost of living as provided in rules and regulations adopted by the Secretary of the Treasury) hereinafter referred to as the "Dollar Limitation". (iii) In the case where a benefit is payable prior to the Participant's Social Security Retirement Age (defined in (x) below), the Dollar Limitation in subsection (ii) above shall be adjusted so that it is the actuarial equivalent of the Dollar Limitation, beginning at the Participant's Social Security Retirement Age. For the period between age 62 and the Participant's Social Security Retirement Age, the actuarial equivalence adjustment provided for in the preceding sentence shall be made in such manner as the Secretary of the Treasury may prescribe which is consistent with the reduction for old-age insurance benefits commencing before the Social Security Retirement Age under the Social Security Act. For benefit commencing prior to age 62, the Dollar Limitation shall be the actuarial -27- Pension Plan Exec. Ver. equivalent of the limitation for benefits commencing at age 62 (as adjusted in accordance with the preceding sentence). For purposes of determining actuarial equivalence hereunder, the interest assumption shall not be less than the greater of 5% per year or the underlying rate used to determine the reduction of benefits for early payment under the Early Retirement provisions of Section 4.2. (iv) In the case where a benefit commences after a Participant has attained Social Security Retirement Age, the Dollar Limitation shall be adjusted so that it is the Actuarial Equivalent of the Dollar Limitation beginning at the Social Security Retirement Age by multiplying an adjustment factor as prescribed by the Secretary of the Treasury. For purposes of determining Actuarial Equivalence hereunder, the interest assumption shall not be greater than the lesser of 5% per year or the rate specified in Section 1.3. (v) Unless subsection (vi) applies to a Participant, the limits of subsections (i) and (ii) above shall be deemed met if: (A) the annual benefit payable to the Participant from this Plan and all other qualified defined benefit plans of the Employer does not exceed $10,000; and (B) the individual has never participated in a qualified defined contribution plan sponsored by the Employer or an Affiliated Employer. (vi) If a Participant has completed less than ten years of participation in the Plan, the Participant's Accrued Benefit shall not exceed the Dollar Limitation as adjusted by multiplying such amount by a fraction, the -28- Pension Plan Exec. Ver. numerator of which is the Participant's number of years (or part thereof) of participation in the Plan, and the denominator of which is ten. (vii) If a Participant has completed less than ten Years of Service, the limitations described in Code Sections 415(b) (1)(B) and 415(b)(4) shall be adjusted by multiplying such amounts by a fraction, the numerator of which is the Participant's number of Years of Service (or part thereof), and the denominator of which is ten. (viii) In no event shall subsections (vi) and (vii) above reduce the limitations provided under (i), (ii) and (v) above to an amount less than one-tenth of the applicable limitation. (ix) Except in the case where a benefit is payable pursuant to Section 8.1(a), if a benefit is payable in a benefit form other than a life annuity, the amount otherwise determined under this subparagraph (a) shall be the actuarial equivalent of the amount payable as a life annuity. For this purpose, the interest rate assumption shall not be less than the greater of 5% or the rate specified in Section 1.3 and the applicable mortality table under Code Section 417(e). (x) For purposes of this Section 3.3, Social Security Retirement Age shall mean such age as defined in Code Section 415(b)(8). (b) In the case of a Participant who has participated in a defined contribution plan maintained by an Employer or an Affiliated Employer, the amount determined pursuant to subparagraph (a) above shall be multiplied by 1.40 in the event (a)(i) applies or by 1.25 in the event (a)(ii) applies and shall further be multiplied by a fraction equal to one minus a fraction with a numerator equal to (i) below and a denominator equal to (ii) below: -29- Pension Plan Exec. Ver. (i) The sum of the annual additions made to the Participant's account under all defined contribution plans maintained by the Employer and its Affiliated Employers, where the annual additions are equal to the sum of (A) Employer contributions allocated to the Employee's account, (B) any forfeitures allocated to the Employee's account, (C) the portion of the Employee's after-tax contributions made prior to January 1, 1987, that represented the lesser of one-half of such contributions or the amount of such contributions in excess of 6% of his compensation, (D) all Employee after-tax contributions made after December 31, 1986, and (e) amounts described in Code Sections 415(l)(1) and 419(A)(d)(2). (ii) The sum for each calendar year of the Participant's employment with an Employer or an Affiliated Employer of the lesser of (A) 1.4 multiplied by 25% of the Participant's compensation for the calendar year, or (B) 1.25 multiplied by $30,000, as adjusted for increases in the cost of living as provided under rules and regulations adopted by the Secretary of the Treasury. (c) The provisions of subsection (a) above shall not reduce a Participant's benefit under the Plan to an amount which is less than either (i) the Participant's Accrued Benefit on December 31, 1982; or (ii) the Participant's Accrued Benefit on December 31, 1986. For purposes of this subsection (c), the Participant's Accrued Benefit on either of the foregoing dates shall be the Accrued Benefit as restricted by the Code Section 415 limitations in effect on each such respective date. -30- Pension Plan Exec. Ver. Similarly, the combined plan limits of subsection (b) above shall be modified to protect the combined plan limits in effect on December 31, 1982 and December 31, 1986 respectively, for those Participants whose combined plan benefits were within the Code Section 415 limits on each such respective date. (d) If, in any limitation year, the benefit under this Plan exceeds the lesser of (a) or (b) above, then appropriate reductions shall first be applied to the Participant's Accrued Benefit under this Plan in order to reduce such benefit to the lesser of (a) or (b). For the purpose of this Section 3.3, an Affiliated Employer shall be determined by assuming the phrase "more than 50%" is substituted for the phrase "at least 80%" wherever it appears in Code Section 1563, as it may be amended from time to time and limitation year shall mean Plan Year. 3.4 Continuing Employment. The retirement of any Participant under this Article III shall not become effective while he is in the employment of an Employer or an Affiliated Employer, except as provided in Section 2.5. If an Employee continues to work for the Employer or an Affiliated Employer beyond his Normal Retirement Date, the provisions of Article V and Article VIII shall be applicable. 3.5 Accrued Benefit Upon Reemployment After An Annuity Starting Date. If a Retired Participant has a Reemployment Date after an Annuity Starting Date, the following shall be applicable: (a) if he is an Eligible Employee upon his reemployment and he had previously received all or some of his Retirement Benefit and such benefits are suspended pursuant to Section 2.5(b): (i) his prior Years of Service and Credited Service shall be restored; -31- Pension Plan Exec. Ver. (ii) his Accrued Benefit prior to his Reemployment Date shall be restored; and (iii) the Retirement Benefit payable after a subsequent Service Termination Date shall be reduced by the Actuarial Equivalent value of all Retirement Benefit(s) previously distributed, provided however that the net Retirement Benefit payable upon subsequent retirement shall not be less than the Actuarial Equivalent value of the Participant's prior Retirement Benefit. For this purpose, the prior Retirement Benefit is the benefit last being paid before its suspension. Its Actuarial Equivalent value, however, is determined as of the date Retirement Benefits recommence. (b) if he is an Eligible Employee upon his reemployment and his Retirement Benefits continue to be paid because he is working less than 40 hours per month or because he is over age 70-1/2, (i) the Retirement Benefit currently in pay status shall continue to be paid; (ii) his prior Years of Service and Credited Service shall be restored; (iii) as of the last day of each Plan Year during which Retirement Benefits continue, an adjusted Accrued Benefit shall be calculated for such Participant as prescribed under Section 5.2(c). If there is a net increase in the Participant's Accrued Benefit as determined under Section 5.2(c), such additional Accrued Benefit shall be converted to the "current form of payment" and commence to be paid as soon as practicable, provided such form of payment remains "appropriate". The following conditions must be in place for the "current form of payment" to remain "appropriate": -32- Pension Plan Exec. Ver. (A) the Annuity Starting Date applicable to the "current form of payment" occurred on or after the Participant's 65th birthday; (B) all aspects of the Participant's marital status are the same as when the "current form of payment" commenced; and (C) the Spouse, Beneficiary or Contingent Annuitant under the "current form of payment" is not deceased. If one or more of the foregoing conditions is not present, the net increase in the Accrued Benefit, if any, will be treated as a separate benefit and paid in accordance with Article VIII. For purposes of this paragraph, "current form of payment" means the form under which the most recent net increase in the Participant's Accrued Benefit, if any, is being paid. If there has been no net increase in the Participant's Accrued Benefit, "current form of payment" means the form of payment under which the entire Retirement Benefit is currently being paid. 3.6 Accrued Benefit Upon Reemployment Before An Annuity Starting Date. Upon the Reemployment Date of an individual who is either a Vested Inactive Participant or a former Participant whose prior Credited Service is restored under Section 2.3, his Accrued Benefit before application of adjustments under Section 2.5 or 5.2 shall be the greater of: (a) his Accrued Benefit under the terms in effect on his Reemployment Date considering all his Years of Credited Service; and (b) his Accrued Benefit under the terms of the Plan when his employment last terminated considering only his Years of Credited Service, Average Earnings and Covered Compensation at such time. -33- Pension Plan Exec. Ver. If the individual's prior Credited Service is not restored pursuant to Section 2.3, he shall have no Accrued Benefit as of his Reemployment Date. -34- Pension Plan Exec. Ver. ARTICLE IV EARLY RETIREMENT DATE AND EARLY RETIREMENT BENEFIT 4.1 Early Retirement Date. A Participant may retire prior to his Normal Retirement Date on the first day of any month coincident with or next following the earlier of: (a) his attainment of age 55 and his completion of ten or more Years of Service; or (b) his attainment of age 60 and his completion of five or more Years of Service. If a Participant intends to retire early under this Article IV, he must file a written notice of his intent with the Plan Administrator. The date of his retirement must be stated in the notice. The date on which a Participant retires under this Paragraph 4.1 shall be his Early Retirement Date. 4.2 Early Retirement Benefit. Subject to the minimum benefit provisions of Sections 3.2 and 4.3 and the maximum benefit limitations of Section 3.3, a Participant may elect to retire on an Early Retirement Date and receive a Retirement Benefit. The monthly amount of the Retirement Benefit payable in the Normal Form shall be equal to his Accrued Benefit multiplied by a percentage as set forth in the following schedule: -35- Pension Plan Exec. Ver.
Number of Years Early Retirement Date Precedes Normal Retirement Date Percentage of Benefit 1 100% 2 100% 3 100% 4 97.5% 5 95% 6 90% 7 85% 8 80% 9 75% 10 70%
If the period between Early and Normal Retirement Dates is not a whole number of years, the percentage to be applied shall be the percentage for the next lower whole number of years decreased by a proportionate part of the difference between that percentage and the percentage for the next higher whole number of years. A Participant retiring on an Early Retirement Date may elect the form of payment of his Retirement Benefit in accordance with Article VIII. 4.3 Minimum Benefit. In no event shall the early retirement income payable under this Plan be less than the Accrued Benefit determined under the provisions of the Plan immediately before the adoption of this amended and restated Plan, adjusted to reflect early receipt based on the early retirement reduction factors specified in the Plan as of such date. -36- Pension Plan Exec. Ver. ARTICLE V POSTPONED RETIREMENT DATE AND POSTPONED RETIREMENT BENEFIT 5.1 Postponed Retirement Date. The Postponed Retirement Date of a Participant will be the day of his actual retirement after his Normal Retirement Date. 5.2 Postponed Retirement Benefit. (a) If a Participant attained age 70-1/2 prior to January 1, 1988 or if his Postponed Retirement Date occurs during or prior to the calendar year in which he attained age 70-1/2, his Accrued Benefit under Section 3.1 (subject to the minimum benefit provisions of Section 3.2 and maximum benefit limitations of Section 3.3) shall be determined and payable as of his Postponed Retirement Date. (b) If a Participant's Postponed Retirement Date has not occurred by the end of the calendar year in which he attains age 70-1/2 and Retirement Benefits must commence pursuant to Section 8.6(b), then his Retirement Benefit shall be his Accrued Benefit calculated pursuant to Article III as of the close of the calendar year in which he attains age 70-1/2, adjusted, if applicable, under Section 3.5(a) for previous benefit payments. For subsequent required distributions, his Accrued Benefit shall be recalculated at the end of each calendar year thereafter until his actual Postponed Retirement Date or his date of death. Recalculation of the Accrued Benefit is described in the following subparagraph (c). Once Retirement Benefits commence under this Section 5.2, a Participant may not elect a different form of payment, Beneficiary or Contingent Annuitant for any additional Accrued Benefit which is calculated hereunder. If there is a net increase in the Accrued Benefit hereunder and the Participant dies before such increase has been added to the benefit in pay status, such increase will be added to the benefit in pay status once payments, if any, begin to the Spouse, Contingent Annuitant or -37- Pension Plan Exec. Ver. Beneficiary under that form of payment. No Pre-Retirement Survivor's benefit under Article VII shall be payable with respect to such net increase. (c) The recalculation of the Participant's Accrued Benefit under Section 5.2(b) shall be performed as follows: (i) a new Accrued Benefit shall be calculated using the Participant's Average Earnings and Years of Credited Service at the close of the calendar year; (ii) the new Accrued Benefit as determined under (i) above shall be adjusted, as applicable, under Section 3.5(a) for any benefits received prior to the first required distribution under this Section 5.2. Following such adjustment, if any, the Accrued Benefit for the calendar year shall be reduced by the Actuarial Equivalent value of the sum of Retirement Benefits received by the Participant between age 65 and the close of such calendar year during months in which Retirement Benefits could otherwise have been suspended pursuant to Section 2.5(b), provided that the resulting benefit shall not be less than the Actuarial Equivalent value of the Accrued Benefit before it is recalculated under (i) above; (iii) if there is a net increase in the Participant's Accrued Benefit, as determined under (ii) above, it shall be converted to the form of payment in which the current Retirement Benefit is being paid considering the current age of the Participant and, if applicable, his Spouse, Beneficiary or Contingent Annuitant. This amount, if any, shall be added to the Retirement Benefit already in pay status; no change of payment form is permitted. (d) Notwithstanding the foregoing, any adjustment to the Participant's postponed Retirement Benefits due to the mandatory commencement of benefits required -38- Pension Plan Exec. Ver. under Code Section 401(a)(9) shall be made in accordance with regulations prescribed by the Secretary of the Treasury. (e) Postponed Retirement Benefits hereunder shall commence to the Participant upon the earlier of (i) his Postponed Retirement Date, or (ii) if required pursuant to Section 8.6(b), the April 1 following the calendar year in which he has attained age 70-1/2. The Participant's Postponed Retirement Benefit shall be paid pursuant to Article VIII. 5.3 Death Prior to Postponed Retirement Date. If a Participant dies after his Normal Retirement Date, but prior to retiring on his Postponed Retirement Date, his Spouse, Contingent Annuitant or Beneficiary shall be entitled to benefits under the Plan in accordance with the applicable provisions of Sections 7.1 and 7.3. Pursuant to such provisions, there may be separate and distinct death benefits payable with respect to Retirement Benefits which have already commenced and to those which have accrued, but have not yet started to be paid. -39- Pension Plan Exec. Ver. ARTICLE VI TERMINATION OF EMPLOYMENT 6.1 Non-Vested Termination. Effective January 1, 1989, a Participant whose employment is terminated with the Employer and all Affiliated Employers prior to: (a) his Normal Retirement Age, (b) his completion of five Years of Service, and (c) the complete or partial termination of the Plan with respect to such Participant, shall have no vested interest in his Accrued Benefit and shall not be entitled to receive a Retirement Benefit from the Plan. Upon the Service Termination Date of a Participant who has no vested right to his Accrued Benefit, the entire value of his vested benefit hereunder shall be deemed to be distributed to him. In the event such Participant is credited with an Hour of Service before incurring five consecutive One Year Breaks in Service following his Service Termination Date, his vested benefit previously deemed to be distributed to him hereunder will be deemed repaid to the Plan. 6.2 Vested Termination. Effective January 1, 1989, a Participant shall have a nonforfeitable right to his Accrued Benefit upon the earliest of the following events: (a) his Normal Retirement Age if he is then an Employee, (b) his completion of five Years of Service, or (c) the complete or partial termination of the Plan with respect to such Participant. -40- Pension Plan Exec. Ver. A Vested Inactive Participant who is no longer an Employee shall be entitled to receive a deferred Retirement Benefit commencing on his Normal Retirement Date in an amount equal to his Accrued Benefit. For purposes of determining such Accrued Benefit, only the provisions of the Plan in effect at the time of the Participant's Service Termination Date shall be considered. The Participant's Retirement Benefit shall be paid pursuant to Article VIII. 6.3 Early Payment. In lieu of the deferred Retirement Benefit described in Section 6.2, a Vested Inactive Participant who has completed at least 10 Years of Service and is no longer an Employee may elect in writing to receive a reduced benefit commencing on the first day of any month between his 55th birthday and his Normal Retirement Date, and a Vested Inactive Participant who has completed at least five Years of Service and is no longer an Employee may elect in writing to receive a reduced benefit commencing on the first day of any month between his 60th birthday and his Normal Retirement Date. If the Vested Inactive Participant elects to receive his Retirement Benefit before his Normal Retirement Date, his Accrued Benefit shall be reduced by 5/12% for each calendar month by which commencement of his Retirement Benefit precedes his Normal Retirement Date. The Vested Inactive Participant's Retirement Benefit shall be paid pursuant to Article VIII. -41- Pension Plan Exec. Ver. ARTICLE VII DEATH AND DISABILITY BENEFITS 7.1 Pre-Retirement Surviving Spouse Benefit For Death Occurring On or After Early Retirement Eligibility. If a Participant who is eligible to retire on an Early Retirement Date pursuant to Section 4.1 or is eligible to early payment of his Retirement Benefit under Section 6.3 dies before his Annuity Starting Date, a monthly Retirement Benefit shall be payable to his surviving Spouse. The amount of the benefit is the amount that would have been payable to the Spouse had the Participant retired on the date of his death with an immediate benefit payable under the 50% Joint and Survivor annuity form described in Article VIII with his Spouse as Contingent Annuitant. If the Participant had not reached his Normal Retirement Date, such benefit shall reflect the reduction for early payment provided under Section 4.2(a) or Section 6.3, whichever is applicable. Unless Section 8.7 applies, such Spouse's benefit shall commence on the first day of the month coincident with or next following the Participant's date of death and continue for the surviving Spouse's lifetime. If the involuntary cash-out provisions of Section 8.7 apply, a monthly death benefit which becomes due hereunder but which has not yet commenced shall be paid in one lump sum amount to the Spouse in lieu of all other benefits under the Plan. If the Participant had no Spouse on the date of his death, no benefits are payable hereunder. 7.2 Pre-Retirement Surviving Spouse Benefit For Death Occurring Before Early Retirement Eligibility. If a Participant who has completed five Years of Service dies before he is eligible for early retirement under Section 4.1 or Section 6.3 and before his Annuity Starting Date, a monthly Retirement Benefit shall be payable to his surviving Spouse. -42- Pension Plan Exec. Ver. The amount of such benefit is the amount that would have been payable to the Spouse as Contingent Annuitant had: (a) the Participant terminated employment with the Employer and all Affiliated Employers on the day before his death (or actual termination date if earlier) and elected Retirement Benefits to begin at Early Retirement Age, and (b) his Accrued Benefit had been payable in the 50% Joint and Survivor annuity form described in Article VIII with his Spouse as Contingent Annuitant, entitled to receive 50% of the amount of the Participant's Retirement Benefit subject to the early payment reductions in Section 4.2(a), if the Participant was an Employee on his date of death, or Section 6.3 if the Participant was a Vested Inactive Participant on his date of death. Unless Section 8.7 applies, such Spouse's benefit shall be payable commencing on the first day of the month coincident with or next following the date the Participant would have been eligible to elect early payment of benefits and continue for the surviving Spouse's lifetime. If the involuntary cash-out provisions of Section 8.7 are operative, a monthly death benefit which becomes due hereunder but which has not yet commenced shall be paid in one lump sum amount to the Spouse in lieu of all other benefits. If the Participant had no Spouse on the date of his death, no benefits are payable hereunder. 7.3 Death Benefits After Retirement Benefits Have Commenced. If a Participant dies at any time after Retirement Benefits have begun, death benefits, if any, shall be payable as follows: -43- Pension Plan Exec. Ver. (a) if Retirement Benefits were being paid to the Participant immediately before his death, (i) no death benefit shall be payable to anyone unless the form in which the Retirement Benefit was being paid provided for a continuing payment. If the Retirement Benefit form of payment provided for a continuing payment, the death benefit shall be the amount payable under such form of payment; (ii) if there is a net increase in the Participant's Accrued Benefit as determined under Section 5.2(c) and such net increase has not begun to be paid to the Participant as a Retirement Benefit upon the Participant's death, such increase in the Participant's Accrued Benefit shall be added to the benefit form in pay status when determining the amount payable to any Spouse, Beneficiary or Contingent Annuitant under such form of payment. The pre-retirement death benefit provisions of Section 7.1 shall not be effective. (b) if Retirement Benefits had commenced, but were suspended pursuant to Section 2.5(b), Sections 7.1 and 7.2 shall apply with respect to the Participant's Accrued Benefit, as adjusted under Section 3.5 and, if applicable, Section 5.2(c). 7.4 Disability. The following individuals shall be considered disabled for purposes of this Plan: (a) Active Participants under the Prior Plan on June 30, 1992 who continue to be Active Participants on July 1, 1992 and were considered disabled under the terms of the Prior Plan, and -44- Pension Plan Exec. Ver. (b) Eligible Employees who become Active Participants on or after July 1, 1992, who are eligible to receive disability benefits under the long-term disability plan of the Participating Employer for which they work due to a disability which occurs on or after July 1, 1992. Such individual's rights to disability benefits are described in the following Sections 7.5, 7.6, 7.7 and 7.8. 7.5 Continued Benefit Accruals. During the time a Participant is receiving benefits under the long-term disability plan of a Participating Employer, he shall continue to accrue Years of Service and Years of Credited Service for any concurrent period during which Retirement Benefits are not being paid hereunder. For purposes of determining the Participant's Accrued Benefit, the Participant's Earnings in the last full calendar year of employment before disability was incurred shall be deemed to be the Participant's Earnings for each year during which he remains disabled and eligible for long-term disability plan payments. Providing the Participant does not return to active employment with the Employer or an Affiliated Employer, Retirement Benefits hereunder will commence on the Participant's Normal Retirement Date or, if later, the date benefits under the Participating Employer's Long Term Disability Plan cease. A Participant may, however, elect to commence Retirement Benefits prior to such date as provided in Section 7.6. In no event may payments be deferred beyond the required beginning date in Section 8.6(b). 7.6 Payment of Disability Pension. In lieu of continuing benefit accruals as provided in Section 7.5, a Participant who continues to be eligible to receive benefits under a Participating Employer's Long-Term Disability Plan may elect to receive: (a) his Retirement Benefit on or after his Normal Retirement Date; or (b) a reduced Retirement -45- Pension Plan Exec. Ver. Benefit prior to his Normal Retirement Date providing he meets the requirements for early retirement under Section 4.1. In the event the Participant elects to commence such Retirement Benefit prior to his Normal Retirement Date, his Accrued Benefit, including benefit accruals which continued under Paragraph 7.5 until the Participant's Annuity Starting Date shall be determined in accordance with Section 4.2. 7.7 Form of Payment of Disability Pension. Any Retirement Benefit payable because of a Participant's disability shall be paid in accordance with the provisions of Article VIII. 7.8 Cessation of Disability Pension. Disability Retirement Benefits shall continue hereunder until the earlier of (a) The date the Participant recovers from his disability, which shall be the date he is deemed to be recovered from disability under the Participating Employer's long-term disability plan, and (b) the date of the Participant's death. In the event that a Participant's disability payments terminate in accordance with paragraph (a), he may be eligible for Retirement Benefits under Articles III, IV, V or VI. Such Retirement Benefits will be adjusted for the disability benefits previously received in the manner prescribed under Section 3.5(a)(iii). -46- Pension Plan Exec. Ver. ARTICLE VIII PAYMENT OF RETIREMENT BENEFITS 8.1 Automatic Payment Forms. Unless the involuntary cash-out provisions of Section 8.7 apply, the automatic form of Retirement Benefit shall be as described in this Section 8.1. A Participant may, however, elect an optional form of Retirement Benefit in accordance with Section 8.2. (a) A Participant who has a Spouse on the Annuity Starting Date shall receive a reduced retirement income which shall be the Actuarial Equivalent of the Retirement Benefit payable in the Normal Form as described in (b) below. Such Retirement Benefit shall be payable monthly commencing on the first day of the month coincident with or next following the date his retirement occurs, and if he shall die prior to such Spouse, continuing to the Spouse at 50% of the reduced amount and ending with the payment due for the month in which the death of the Spouse occurs. (b) A Participant who does not have a Spouse on the Annuity Starting Date shall receive the Retirement Benefit to which he is entitled under the Plan, payable monthly commencing on the first day of the month coincident with or next following the date his retirement occurs and ending with the payment due for the month in which his death occurs. Such form of benefit shall be the Normal Form of payment. 8.2 Election of Optional Forms. Prior to an Annuity Starting Date, a Participant may elect an optional form of payment for his Retirement Benefit as may be available under Section 8.3, 8.4, or 8.5. Such election will not take effect unless the Participant's Spouse consents to the election if required under Section 8.6(e). The Plan Administrator shall provide an election form to each such eligible Participant. Such form shall describe in plain -47- Pension Plan Exec. Ver. language the terms and conditions of the normal form of payment described in Section 8.1 and the optional forms of benefit and shall provide for election of optional forms of benefit and a benefit commencement date. The completed election form must be returned to the Plan Administrator within the 90 day period ending on the designated Annuity Starting Date. In addition, the form will provide a description of the Participant's right to reinstate coverage under the normal form of benefit described in Section 8.1 prior to his Annuity Starting Date by revoking an election of an optional form of benefit. If a Participant files a subsequent election form prior to the date benefits commence, the prior form shall be of no effect. If no election has been made at the expiration of the election period, Retirement Benefits will be payable in accordance with Section 8.1. Election of optional forms of benefits under the following Sections 8.3, 8.4, and 8.5 shall be subject to the restrictions of Section 8.6. After an Annuity Starting Date, no other option may be elected, changed or revoked, except as provided in Section 3.5(b). The Plan Administrator may, on a uniform and nondiscriminatory basis, provide for such other election periods as comply with regulations issued under Code Sections 401(a)(11) and 417. Subject to the provisions of Section 8.6, the Plan Administrator shall defer a Participant's Annuity Starting Date for a period of up to 90 days if the Plan Administrator determines that the deferral is desirable in order to provide for an orderly election procedure or if it is necessary to do so in order to comply with applicable regulations. 8.3 Joint and Survivor Option. Subject to Section 8.6(c): (a) A Participant may elect, by submitting an election form to the Plan Administrator, to have his Retirement Benefit converted to the Actuarial Equivalent of the Normal Form under Section 8.1(b) and paid monthly during his life with the provision that after his death, 50% or 100% of such reduced Retirement Benefit will be payable to his Contingent Annuitant during the remaining life of such Contingent Annuitant. -48- Pension Plan Exec. Ver. (b) If a Participant elects the Joint and Survivor Option and his Contingent Annuitant dies before such Participant's benefit actually commences and the Participant does not change his election in accordance with Section 8.2, his Retirement Benefit shall be paid under the normal form under Section 8.1. (c) If a Participant elects the Joint and Survivor Option and dies before benefits commence to be paid to him, his Contingent Annuitant will not be entitled to any rights or benefits under the Plan, except as may be provided under Article VII. (d) If a Participant elects the Joint and Survivor Option and his Contingent Annuitant dies before the Participant, but after the retirement of such Participant, such Participant will continue to receive the reduced Retirement Benefit payable to him in accordance with such option. 8.4 Life Annuity Option. Subject to Section 8.6(c), a Participant may elect, by submitting an election form to the Plan Administrator, to have his Retirement Benefit paid in the Normal Form under Section 8.1(b). The Normal Form provides for monthly payments during the Participant's life, ending with the payment due for the month in which his death occurs. 8.5 Life Annuity With Guaranteed Payment Period Option. Subject to Section 8.6(e), a Participant may elect, by submitting an election form to the Plan Administrator, to have his Retirement Benefit paid as a life annuity as described in Section 8.4, but guaranteed for a period of 120 months, with the provision that if the Participant dies before payment of the guaranteed installments, payment of any remaining installments shall be paid to his Beneficiary. Such form of payment shall be the Actuarial Equivalent of the normal form of payment under Section 8.1(b). 8.6 General Provisions. -49- Pension Plan Exec. Ver. (a) Anything in the foregoing to the contrary notwithstanding, no method of distribution of Retirement Benefit may be made under this Article which would violate the requirements of Code Section 401(a)(9) and related regulations. -50- Pension Plan Exec. Ver. (b) Effective January 1, 1999, and notwithstanding any other provision of the Plan to the contrary, an Employee who attains age 70 1/2 and who has not commenced receiving his benefit hereunder shall commence receiving his benefit on the April 1 following the calendar year in which he attains age 70 1/2, and any additional benefit he may accrue shall commence to be paid no later than the April 1 following the calendar year in which the benefit accrues. Any Employee who commenced receiving distributions according to the corresponding rules of the Plan as in effect prior to January 1, 1999 shall continue to receive distributions pursuant to those rules. In any event, distributions hereunder shall be made in accordance with Code Section 401(a)(9), including the incidental death benefit requirements of such Code Section, and regulations thereunder, including Treasury Regulation 1.401(a)(9)-2. Such regulations and applicable rulings or announcements, including any grandfather provisions or provisions delaying the effective date of Code Section 401(a)(9), are hereby incorporated by reference. The provisions of Code Section 401(a)(9) override any distribution options under the Plan that are inconsistent with the requirements of such Code Section. -51- Pension Plan Exec. Ver. (c) Upon the death of a Participant any remaining interest he may have in the Plan shall be distributed within the later of five years after his death or after the death of his Beneficiary, unless another form of payment was already in effect at the time of his death, in which case benefits may be made in accordance with such form of payment. (d) If the Actuarial Equivalent value of any Plan benefit is in excess of $5,000, such benefit may not be immediately distributed prior to the Participant's Normal Retirement Date unless the Participant consents in writing. (e) If a married Participant elects to receive his Retirement Benefit in any form other than the automatic form for married individuals as described in Section 8.1(a) or under the Joint and Survivor annuity form described in Section 8.3 with his Spouse as the Contingent Annuitant, then such election shall not take effect unless either: (i) the Participant's Spouse consents in writing to such election and the Spouse's consent acknowledges the effect of such election and is witnessed by a notary public or (ii) it is established to the satisfaction of the Plan Administrator that the Participant has no Spouse, or that the Spouse's consent cannot be obtained because the Spouse cannot be located, or because of such other circumstances as may be prescribed in regulations issued pursuant to Code Section 417. (f) It is the intent of the Plan that all benefits be paid promptly when due. In the absence of any inability to determine the amount of benefit payable or the eligibility for a benefit due to the lack of adequate information with respect to the -52- Pension Plan Exec. Ver. Participant or Spouse, the first benefit shall be paid no later than the 60th day after the close of the latest Plan Year in which: (i) the Participant attains age 65; (ii) the Participant reaches the 10th anniversary of his date of commencement of participation in the Plan, or (iii) the Participant's Service Termination Date occurs. 8.7 Small Benefit Cash-Out Provision. In the event that benefits become due or payable under the Plan because of the occurrence of a Service Termination Date, such benefits shall be cashed out if the Actuarial Equivalent present value of any such benefit is $5,000 or less and the benefit has not yet commenced. A lump sum payment of such Actuarial Equivalent present value shall be made to the appropriate individual as soon as practicable following the Participant's Service Termination Date, in lieu of all other benefits hereunder. Subject to the spousal consent requirements described in Section 8.6(e) in the event the Actuarial Equivalent present value of the Participant's benefit is greater than $5,000 but less than $10,000, the Participant may elect to receive a lump sum payment of such Actuarial Equivalent Present Value as soon as practicable following his Service Termination Date, in lieu of all other benefits hereunder. A Participant who terminates employment without a vested benefit shall be deemed to have received a lump sum distribution of his benefit under the rules of this Section 8.7 even though no actual benefit payment is due or made. 8.8 Missing Persons. If the Plan Administrator shall be unable, within five years after any amount becomes due and payable from the Plan to a Participant, Retired Participant, -53- Pension Plan Exec. Ver. Contingent Annuitant, Spouse or Beneficiary, to make payment because the identity or whereabouts of such person cannot be ascertained, the Plan Administrator may mail a notice by registered mail to the last known address of such person outlining the action to be taken unless such person makes written reply to the Plan Administrator within 60 days from the mailing of such notice. The Plan Administrator may direct that such amount and all further benefits with respect to such person shall be forfeited and all liability for the payment thereof shall terminate. However, in the event of the subsequent reappearance of the Participant, Retired Participant, Spouse, Beneficiary or Contingent Annuitant prior to termination of the Plan, the benefit which was forfeited (but not any earnings attributable to such forfeiture) shall be reinstated in full. 8.9 Restrictions on Distributions. This Section 8.9 shall apply to the amount of Annual Benefits (defined below) under this Plan for any Participant who is considered a Restricted Participant as defined hereunder. Such Annual Benefits shall be limited to an amount equal to the payments that would have been made on behalf of the Restricted Participant under the life annuity form of payment described in Section 8.4 that is the Actuarial Equivalent of the Restricted Participant's Accrued Benefit under the Plan plus any Social Security supplement which may be payable under the Plan. For purposes of this Section 8.9, the term Restricted Participant shall mean all highly compensated employees as defined in Code Section 414(q) and highly compensated former employees. In any one Plan Year, the total number of Participants whose benefits are subject to restriction under this Section 8.9 shall be limited by the Plan to a group of not less than 25 highly compensated employees and highly compensated former employees with the greatest Earnings. For purposes of this Section 8.9, the term Annual Benefits shall include Retirement Benefits provided by the Plan and any death benefits not provided for by insurance on the Participant's life. -54- Pension Plan Exec. Ver. The limitations set forth in this Section 8.9 shall not restrict the current payment of the full amount of Retirement Benefits provided by the Plan if: (a) after payment to a Restricted Participant of all of the Annual Benefits described above, the value of Plan assets equals or exceeds 110% of the value of current liabilities, as defined in Code Section 412(l)(7), or (b) the value of the Annual Benefits described above for a Restricted Participant is less than 1% of the value of current liabilities, as defined in Code Section 412(l)(7), or. (c) the value of the Annual Benefits described above for a Restricted Participant does not exceed $3,500 or such higher amount described in Code Section 411(a)(11)(A). 8.10 Direct Rollovers. Effective January 1, 1993, notwithstanding any provision of the Plan to the contrary, a "distributee" may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an "eligible rollover distribution" paid directly to an "eligible retirement plan" specified by the distributee as a "direct rollover". The Plan Administrator may require evidence that the Plan to which the rollover is intended to be made is, in fact an "eligible retirement plan". The Plan is not required to make wire transfers nor to make direct rollovers to more than one eligible retirement plan on behalf of a distributee. The following definitions shall apply for purposes of this Section 8.10: (a) an "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of -55- Pension Plan Exec. Ver. ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); (b) an "eligible retirement plan" is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity; (c) a "distributee" includes an employee or former employee. In addition, the employee's or former employee's surviving spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (d) a "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee. -56- Pension Plan Exec. Ver. ARTICLE IX PLAN ADMINISTRATION 9.1 Responsibility for Plan and Trust Administration. The Employer shall have the sole authority to appoint and remove the Trustee, the Plan Administrator and any investment manager which may be provided for under the Trust, and to amend or terminate, in whole or in part this Plan or the Trust. The Employer, through the Plan Administrator, shall have the responsibility for the administration of this Plan, which is specifically described in this Plan and the related Trust Agreement. The Employer shall be the "named fiduciary" for purposes of the Code and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 9.2 Plan Administrator. The Plan shall be administered by the Employer through a Plan Administrator, within the meaning of Section 3(16)A of ERISA, appointed by and to serve at the pleasure of the Board of Directors of the Employer. Any person or persons appointed as the Plan Administrator may resign by delivering his written resignation to the Board of Directors of the Employer. 9.3 Agents of the Plan Administrator. The Plan Administrator may delegate specific responsibilities to other persons as the Plan Administrator shall determine. The Plan Administrator may authorize any agent to execute or deliver any instrument or to make any payment in their behalf. The Plan Administrator may employ and rely on the advice of counsel, accountants, and such other persons as may be necessary in administering the Plan. 9.4 Plan Administrator Procedures. The Plan Administrator may adopt such rules as it deems necessary, desirable, or appropriate. All rules and decisions of the Plan Administrator shall be uniformly and consistently applied to all Participants in similar circumstances. When making a determination or calculation, the Plan Administrator shall be entitled to -57- Pension Plan Exec. Ver. rely upon information furnished by a Participant, Retired Participant, Spouse, Contingent Annuitant, Beneficiary, the Employer, the legal counsel of the Employer or the Trustee. 9.5 Administrative Powers of the Plan Administrator. The Plan Administrator may from time to time establish rules for the administration of the Plan. Except as otherwise herein expressly provided, the Plan Administrator will have the exclusive right and discretionary authority, to the fullest extent provided by law, to interpret the Plan and decide any matters arising hereunder in the administration and operation of the Plan, and any interpretations or decisions so made will be conclusive and binding on all persons having an interest in the Plan; provided, however, that all such interpretations and decisions will be applied in a uniform and nondiscriminatory manner to all Employees. The Plan Administrator shall have no right to modify any provisions of the Plan as herein set forth. 9.6 Benefit Claims Procedures. All claims for benefits under the Plan shall be in writing and shall be submitted to the Plan Administrator. If any application for payment of a benefit under the Plan shall be denied, the Plan Administrator shall notify the claimant within 90 days of such application setting forth the specific reasons therefor and shall afford such claimant a reasonable opportunity for a full and fair review of the decision denying his claim. If special circumstances require an extension of time for processing the claim, the claimant will be furnished with a written notice of the extension prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render its decision. Notice of such denial shall set forth, in addition to the specific reasons for the denial, the following: (a) reference to pertinent provisions of the Plan; -58- Pension Plan Exec. Ver. (b) such additional information as may be relevant to the denial of the claim; (c) an explanation of the claims review procedure; and (d) notice that such claimant may request the opportunity to review pertinent Plan documents and submit a statement of issues and comments. Within 60 days following notice of denial of his claim, upon written request made by any claimant for a review of such denial to the Plan Administrator, the Plan Administrator shall take appropriate steps to review its decision in light of any further information or comments submitted by such claimant. The Plan Administrator shall render a decision within 60 days after the claimant's request for review and shall advise said claimant in writing of its decision on such review, specifying its reasons and identifying appropriate provisions of the Plan. If special circumstances require an extension of time for processing, a decision will be rendered as soon as possible, but not later than 120 days after receipt of a request for the review. If the extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. If the decision is not furnished within such time, the claim shall be deemed denied on review. The decision on review shall be in writing and shall include specific reasons for the decision, written to the best of the Plan Administrator's ability in a manner calculated to be understood by the claimant without legal counsel, as well as specific references to the pertinent Plan provisions on which the decision is based. In the event of continued disagreement, the claimant may thereafter appeal to the Employer, whose decision is final. 9.7 Reliance on Reports and Certificates. The Employer (or the Plan Administrator if so designated by the Employer) will be entitled to rely conclusively upon all valuations, certificates, opinions, and reports which may be furnished by the Actuary, or any -59- Pension Plan Exec. Ver. accountant, controller, counsel, or other person who is employed or engaged for such purposes and shall exercise the authority and responsibility as it deems appropriate to comply with all of the legal and governmental regulations affecting this Plan. 9.8 Other Plan Administrator Powers and Duties. The Plan Administrator shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) to prescribe written procedures to be followed by Participants, Retired Participants, Spouses, Contingent Annuitants and Beneficiaries filing applications for benefits; (b) to prepare and distribute, in such manner as the Plan Administrator determines to be appropriate, information explaining the Plan; (c) to receive from the Employer, Participants, Retired Participants, Spouses, Contingent Annuitants and Beneficiaries such information as shall be necessary for the proper administration of the Plan; (d) to furnish the Employer, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (e) to receive and review the periodic valuations of the Plan made by the Actuary; (f) to compute and certify (or have the Actuary do so) the amount of Retirement Benefit payable to any person hereunder; (g) to designate an Actuary to perform all actuarial calculations required in connection with the Plan; and -60- Pension Plan Exec. Ver. (h) to receive, review and keep on file (as it deems convenient or proper) reports of benefit payments by the Trustee and reports of disbursements for expenses directed by the Plan Administrator. The Plan Administrator shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. 9.9 Compensation of Plan Administrator. If the person or persons serving as Plan Administrator is an Employee, such individual(s) will not receive any compensation for his services as such, but will be reimbursed for reasonable expenses incident to the performance of such services. The reimbursement of expenses shall be paid in whole or in part by the Employer, and any expenses not paid by the Employer shall be paid by the Trustee out of the principal or income of the Trust Fund. 9.10 Plan Administrator's Own Participation. The Plan Administrator may not act, vote, or otherwise influence a decision relating to his own participation under the Plan. 9.11 Liability of Plan Administrator. The Plan Administrator will not be liable for any act of omission or commission except as provided by federal law. 9.12 Indemnification. The Board of Directors of the Employer and the Plan Administrator shall be indemnified by the Employer and not the Trust Fund against any and all expenses, costs, and liabilities arising by reason of any act or failure to act, unless such act or failure to act is judicially determined to be gross negligence or willful misconduct. -61- Pension Plan Exec. Ver. ARTICLE X FUNDING AND CONTRIBUTIONS 10.1 Establishment of Fund. The Fund shall be held and administered by the Trustee in accordance with the terms of the Trust. The Fund shall hold all contributions made by the Employer and earnings and other income attributable thereto. All benefits payable under the Plan shall be disbursed from the Fund. 10.2 Contributions to the Fund; Plan Expenses. The Employer will contribute to the Fund such sums and at such times as may be determined by the Board of Directors of the Employer in accordance with the funding method and policy to be established by the Board which are consistent with Plan objectives. The Board of Directors of the Employer, in consultation with the Actuary and the Plan Administrator, shall have the right to change the method of funding, subject only to any contractual restrictions of the existing method of funding. Forfeitures arising from termination of service will be used to reduce Employer contributions and will not be applied to increase any benefits under the Plan. Except as provided in Section 10.3 and Article XII, all contributions when made to the Fund and all property and assets of the Fund, including income from investments and from all other sources, will be retained for the exclusive benefit of Participants, Spouses, Contingent Annuitants and Beneficiaries included in the Plan and will be used to pay benefits provided hereunder or to pay expenses of administration of the Plan and the Fund to the extent not paid by the Employer. The Employer shall not be required to make, but may make, any contributions to the Fund in an amount which is greater than the amount which is deductible for federal income tax purposes. -62- Pension Plan Exec. Ver. 10.3 Contributions Conditional. Each Employer contribution to the Plan is expressly conditioned on its deductibility. If any Employer contribution is deemed to be nondeductible or made by the Employer by a mistake of fact, such contribution shall be returned to the Employer within one year of the date of the disallowance of such deduction or the date the contribution was made to the Fund, respectively. 10.4 Employee Contributions. No Employee will be required or permitted to make any contributions under this Plan. -63- Pension Plan Exec. Ver. ARTICLE XI FIDUCIARY RESPONSIBILITIES 11.1 Basic Responsibilities. Any Fiduciary under the Plan, whether specifically designated or not, shall: (a) discharge all duties solely in the interest of Participants, Spouses, Contingent Annuitants and Beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable administrative expenses under the Plan; (b) discharge his responsibilities with the care, skill, prudence, and diligence a prudent man would use in similar circumstances; and (c) conform with the provisions of the Plan. No person who is ineligible by law will be permitted to serve as Fiduciary. 11.2 Actions of Fiduciaries. Any Fiduciary: (a) may serve in more than one fiduciary capacity with respect to the Plan; (b) may employ one or more persons to render advice with regard to or to carry out any responsibility that such Fiduciary has under the Plan; and (c) may rely upon any discretion, information, or action of any other Fiduciary, acting within the scope of its responsibilities under the Plan, as being proper under the Plan. -64- Pension Plan Exec. Ver. 11.3 Fiduciary Liability. No Fiduciary shall be personally liable for any losses resulting from his action except as provided by federal law. Each Fiduciary shall have only the authority and duties which are specifically allocated to him, shall be responsible for the proper exercise of his own authority and duties, and shall not be responsible for any act or failure to act of any other Fiduciary. -65- Pension Plan Exec. Ver. ARTICLE XII AMENDMENT AND TERMINATION 12.1 Right to Amend or Terminate. The Employer reserves the right to amend, modify, suspend, or terminate the Plan in whole or in part at any time through action by the Board (or its delegate). No amendment will be effective unless the Plan, as so amended, is for the exclusive benefit of Participants, Spouses, Contingent Annuitants and Beneficiaries, and no amendment will deprive any Participant without his consent of any benefit to which he was previously entitled, provided that any and all amendments may be made which are necessary to maintain the qualification of the Plan under the Code and provided further that such amendments may be retroactively effective. The Plan shall not be automatically terminated by any Employer's acquisition by or merger or consolidation into any other corporation. In the event of a reorganization, consolidation, dissolution or merger of an Employer, the Plan can be continued by the successor, and in such event the successor shall be substituted for such Employer and shall assume all of the Plan liabilities and all of the powers, duties and responsibilities of such Employer under the Plan. 12.2 Partial Termination. Upon a partial termination of the Plan with respect to a group of Participants, as determined by a ruling of the Internal Revenue Service as to which all rights to appeal have expired, the Employer shall direct the Actuary to determine the proportionate share of the assets for Participants affected by such partial termination. After such proportionate share has been determined, the Trustees shall segregate the assets of the Fund allocable to such group of Participants for payment of benefits in accordance with the provisions of Section 12.3. 12.3 Vesting and Distribution of Funds Upon Termination. Upon termination of the Plan by the Employer, in whole or in part, all affected Participants will become fully vested and entitled to their Accrued Benefits under the Plan. In such event, the assets in the Fund (or -66- Pension Plan Exec. Ver. the portion of the Fund determined in accordance with Section 12.2) will be allocated as follows: (a) There shall first be credited to each Participant who was receiving Retirement Benefits or who was eligible to receive Retirement Benefits at least three years prior to the date of Plan termination and to each Spouse, Contingent Annuitant and Beneficiary who was receiving Retirement Benefits or who was eligible to receive Retirement Benefits at least three years prior to the date of Plan termination an amount which will provide for him the amount of Retirement Benefits then accrued to him under the Plan, but not in excess of the benefit insured by the Pension Benefit Guaranty Corporation. (b) There shall next be credited to each Participant who was receiving Retirement Benefits or who was eligible to receive Retirement Benefits on the date of Plan termination and to each Spouse, Contingent Annuitant and Beneficiary who was receiving Retirement Benefits or who was eligible to receive Retirement Benefits on the date of Plan termination an amount which will provide for him the amount of Retirement Benefits then accrued to him under the Plan, but not in excess of the benefit insured by the Pension Benefit Guaranty Corporation. (c) There shall next be credited to each other Participant who, on the date on which the Plan shall terminate, is eligible for Retirement Benefits in accordance with Article VI an amount which will provide for him the amount of the Retirement Benefits then accrued to him under the Plan, but not in excess of the benefit insured by the Pension Benefit Guaranty Corporation. (d) There shall next be credited to each other Participant who would be entitled to additional Retirement Benefits in accordance with (a), (b), and (c) above, were such additional income not in excess of the amount insured by the Pension Benefit -67- Pension Plan Exec. Ver. Guaranty Corporation, an amount which will provide for him the amount of retirement income then accrued to him under the Plan. (e) There shall next be credited to each other Participant an amount which will provide for him the amount of Retirement Benefits then accrued to him under the Plan. Allocation in any of the above classes shall be adjusted for any allocation made to the same Participant under a prior class. 12.4 Determination of Funds Upon Termination. (a) The application of the Fund on the foregoing basis shall be calculated as of the date on which the Plan shall terminate. When the calculation shall be completed, the respective interest in the Fund will be distributed to or on behalf of the respective Participants, Spouses, Contingent Annuitants and Beneficiaries under the Plan in the order stated in Section 12.3 only after the Employer has sent written notice to the Trustee, that all of the applicable requirements governing the termination of qualified retirement plans have been, or are being complied with or that appropriate authorizations, waivers, exemptions or variances have been, or are being, obtained. (b) If the assets in the Fund on the date the Plan is terminated are not sufficient to provide in full the amounts required within classes (a), (b), (c), and (d) of Section 12.3, any benefit in excess of $10,000 paid within a 12-month period during the 36- month period immediately preceding the date of termination of the Plan to a Participant, Spouse, Contingent Annuitant or Beneficiary who owns 10% or more of the outstanding voting stock of any Employer may be deemed a part of the Fund for purposes of allocation. (c) If the assets are not sufficient to provide in full for the amounts required for a class in the order listed in Section 12.3, the balance of the assets shall be allocated to -68- Pension Plan Exec. Ver. each member of a class in the proportion which his amount bears to the total amount in such class. (d) Distribution upon termination of the Plan may be in the form of an annuity contract, cash, or securities or other assets in kind as determined by the Plan Administrator in a uniform, nondiscriminatory manner and applicable to all Participants. (e) Any funds remaining after the satisfaction of all liabilities to Participants, Spouses, Contingent Annuitants and Beneficiaries under the Plan shall be returned to the Employer. 12.5 Restriction on Benefits. In the event of plan termination, the benefit of any highly compensated employee as defined in Code Section 414(q) and highly compensated former employee is limited to a benefit that is nondiscriminatory under Code Section 401(a)(4). 12.6 Right to Accrued Benefits. Any other provision of the Plan notwithstanding, upon termination or partial termination of the Plan, the right of each Participant to benefits accrued to the date of such termination or partial termination to the extent then funded or to the extent guaranteed by the Pension Benefit Guaranty Corporation shall be nonforfeitable. -69- Pension Plan Exec. Ver. ARTICLE XIII TOP-HEAVY PLAN PROVISIONS 13.1 General Rule. For any Plan Year for which this Plan is a "top-heavy plan" as defined in Section 13.5, any other provisions of the Plan to the contrary notwithstanding, the Plan shall be subject to the following provisions: (a) The vesting provisions of Section 13.2. (b) The minimum benefit provisions of Section 13.3. (c) The limitation on benefits set by Section 13.4. 13.2 Vesting Provisions. Each Participant who (a) has completed at least three Years of Service and (b) has completed an Hour of Service during any Plan Year in which the plan is "top-heavy", shall have a nonforfeitable right to his Accrued Benefit. If the Plan ceases to be "top-heavy", the vesting provisions of Section 6.2 shall be applicable. This provision shall not cause a Participant's vested percentage to be reduced. Each such Participant shall have the right to elect the applicable schedule within 60 days after the day the Participant is issued written notice by the Plan Administrator, or as otherwise provided in accordance with regulations issued under the provision of the Code, relating to changes in the vesting schedule. 13.3 Minimum Benefit Provisions. Each Participant who (a) is a "non-key employee" (as defined in Section 13.7) and (b) has completed 1,000 Hours of Service in any Plan Year shall be entitled to an annual retirement income equal to 2% of the Participant's average annual Earnings in the "testing period" multiplied by his Years of Service during which the Plan is top heavy, up to a maximum of 20%. For purposes of this Section 13.3, "testing period" means the period of five consecutive Years of Service during which the -70- Pension Plan Exec. Ver. Participant had the highest aggregate Earnings, provided that Earnings for any Plan Year after the close of the Plan Year in which the Plan was last top-heavy shall be disregarded. 13.4 Limitation on Benefits. In the event that the Employer also maintains a defined contribution plan providing contributions on behalf of Participants in this Plan, then a Participant's annual retirement benefit will be limited by: (a) the denominator of both the defined contribution plan fraction and the defined benefit plan fraction shall be calculated as set forth in Section 3.3(b) for such Plan Year by substituting "1.0" for "1.25" in each place such figure appears. (b) Paragraph (a) shall not apply if conditions (i) and (ii) below are met: (i) if for the Plan Year the Plan would not be a "top-heavy plan" (as defined in Section 13.5) if "90 percent" were substituted for "60 percent", and (ii) if the minimum benefit described in Section 13.3 is increased to 3% of average annual compensation in the "testing period" multiplied by the Participant's Years of Service during which the Plan is a "top-heavy plan", up to a maximum of 30%. 13.5 Top-heavy Plan Definition. This Plan shall be a "top-heavy plan" for any Plan Year if, as of the determination date, the present value of the Accrued Benefits under the Plan for Participants (including former Participants) who are "key employees" (as defined in Section 13.6) exceeds 60% of the present value of Accrued Benefits for all Participants (excluding former "key employees"), or if this Plan is required to be in an aggregation group which for such Plan Year is a "top-heavy group." For purposes of this Article XIII, -71- Pension Plan Exec. Ver. (a) "Determination date" means for any Plan Year the last day of the immediately preceding Plan Year (except that for the first Plan Year the determination date means the last day of such Plan Year). (b) "Present value of Accrued Benefits" shall be determined as of the most recent valuation date that is within the 12-month period ending on the determination date and as described under the Code. (c) "Aggregate of the Accounts" means the sum of (i) the Accounts determined as of the most recent Valuation Date that is within the 12-month period ending on the determination date, and (ii) the adjustment for contributions due as of the determination date, and as described in the regulations under the Code. (d) "Aggregation group" means the group of plans, if any, that includes both the group of plans that are required to be aggregated and the group of plans that are permitted to be aggregated. (i) The group of plans that are required to be aggregated (the "required aggregation group") includes: each plan of the Employer in which a key employee is a participant, including collectively-bargained plans; and each other plan of the Employer including collectively-bargained plans, which enables a plan in which a key employee is a participant to meet the requirements of the Code Sections 401(a)(4) and 410(b). (ii) The group of plans that are permitted to be aggregated (the "permissive aggregation group") includes the required aggregation group plus one or more plans of the Employer that is not part of the required aggregation group and that the Plan Administrator certifies as constituting a plan within the permissive aggregation group. Such plan or plans may be added to the permissive aggregation group only if, after the addition, the -72- Pension Plan Exec. Ver. aggregation group as a whole continues not to discriminate as to contributions or benefits in favor of officers, shareholders or the highly-compensated and to meet the minimum participation standards under the Code. (e) "Top-heavy group" means the aggregation group, if as of the applicable determination date, the sum of the present value of the cumulative accrued benefits for "key employees" under all defined benefit plans included in the aggregation group plus the aggregate of the accounts of "key employees" under all defined contribution plans included in the aggregation group exceeds 60% of the sum of the present value of the cumulative accrued benefits for all employees, excluding former "key employees," under all such defined benefit plans plus the aggregate accounts for all employees, under such defined contribution plans. If the aggregation group that is a top-heavy group is a required aggregation group, each plan in the group will be top-heavy. If the aggregation group that is a top-heavy group is a permissive aggregation group, only those plans that are part of the required aggregation group will be treated as top-heavy. If the aggregation group is not a top-heavy group, no plan within such group will be top-heavy. (f) In determining whether this Plan constitutes a "top-heavy plan", the Plan Administrator shall make the following adjustments in connection therewith: (i) When more than one plan is aggregated, the Plan Administrator shall determine separately for each plan as of each plan's determination date the present value of the accrued benefits or account balance. The results shall then be aggregated by adding the results of each plan as of the determination dates for such plans that fall within the same calendar year. (ii) In determining the present value of the Accrued Benefit or the amount of the account of any Employee, such present value or account shall include -73- Pension Plan Exec. Ver. the dollar value of the aggregate distributions made to such Employee under the applicable plan during the five-year period ending on the determination date, unless reflected in the value of the accrued benefit or account balance as of the most recent valuation date. Such amounts shall include distributions to Employees which represented the entire amount credited to their accounts under the applicable plan. (iii) Further, in making such determination, such present value or such account shall include any rollover contribution (or similar transfer), as follows: (A) If the rollover contribution (or similar transfer) is initiated by the Employee and made to or from a plan maintained by another employer the plan providing the distribution shall include such distribution in the value of such account; the plan accepting the distribution shall not include such distribution in the value of such account unless the plan accepted it before December 31, 1983. (B) If the rollover contribution (or similar transfer) is not initiated by the Employee or made from a plan maintained by another employer the plan accepting the distribution shall include such distribution in the value or such account, whether the plan accepted the distribution before or after December 31, 1983; the plan making the distribution shall not include such distribution in the value of such account. (iv) Further, in making such determination, in any case where an individual is a "non-key employee" (as defined in Section 13.7) with respect to an applicable plan, but was a "key employee" with respect to such plan for any prior plan year, any Accrued Benefit and any account of such Employee shall be altogether disregarded. For this purpose, to the extent that a key employee is deemed to be a "key employee" if he met the -74- Pension Plan Exec. Ver. definition thereof within any of the four preceding plan years, this provision shall apply following the end of such period of time. -75- Pension Plan Exec. Ver. (v) Further, in making such determination, the accrued benefit of an Employee other than a Key Employee shall be determined under (A) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer and its Affiliated Employers, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rule of Code Section 411(b)(1)(C). 13.6 Key Employee. The term "key employee" means any Employee or former Employee who would be considered a key employee under Code Section 416(i)(1) excluding any individual who has not performed services for the Employer or any of its Affiliated Employers during the five-year period ending on a particular "determination date". 13.7 Non-Key Employee. The term "non-key employee" means any Employee (and any beneficiary of an Employee) who is not a "key employee". An individual who has not performed services for the Employer or any of its Affiliated Employers during the five-year period ending on a particular "determination date", however, shall not be considered a "non-key employee". -76- Pension Plan Exec. Ver. ARTICLE XIV GENERAL PROVISIONS 14.1 Plan Voluntary. Although it is intended that the Plan shall be continued and that contributions shall be made as herein provided, this Plan is entirely voluntary on the part of each Participating Employer and the continuance of this Plan and the payment of contributions hereunder are not to be regarded as contractual obligations of any Employer, and no Employer guarantees or promises to pay or to cause to be paid any of the benefits provided by this Plan. Each person who shall claim the right to any payment or benefit under this Plan shall be entitled to look only to the Fund for any such payment or benefit and shall not have any right, claim, or demand therefore against any Employer, except as provided by federal law. The Plan shall not be deemed to constitute a contract between any Employer and any Employee or to be a consideration for, or an inducement for, the employment of any Employee by any Employer. Nothing contained in the Plan shall be deemed to give any Employee the right to be retained in the service of any Employer or to interfere with the right of any Employer to discharge or to terminate the service of any Employee at any time without regard to the effect such discharge or termination may have on any rights under the Plan. 14.2 Payments to Minor and Incompetents. If any Participant, Spouse, Contingent Annuitant, or Beneficiary entitled to receive any benefits hereunder is a minor or is deemed by the Plan Administrator or is adjudged to be legally incapable of giving valid receipt and discharge for such benefits, they will be paid to such person or institution as the Plan Administrator may designate or to the duly appointed guardian. Such payment shall, to the extent made, be deemed a complete discharge of any liability for such payment under the Plan. -77- Pension Plan Exec. Ver. 14.3 Non-Alienation of Benefits. (a) No amount payable to, or held under the Plan for the account of, any Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; nor shall any amount payable to, or held under the Plan for the account of, any Participant be in any manner liable for his debts, contracts, liabilities, engagements, or torts, or be subject to any legal process to levy upon or attach, except as may be provided under a qualified domestic relations order as defined in Code Section 414(p). However, upon authority of any Retired Participant and with the consent of the Employer, the Plan Administrator may direct the Trustee to withhold a portion of any benefit payable to the Retired Participant under this Plan for the purpose of paying the costs or premiums by the Retired Participant as a result of being included in another plan of an Employer, such as a hospital-surgical plan. The Trust shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder. (b) Under a qualified domestic relations order, an alternate payee who had been married to the Participant for at least one year may be treated as a Spouse with respect to the portion of the Participant's benefit in which such alternate payee has an interest provided that the qualified domestic relations order provides for such treatment. However, under no circumstances may the spouse of any alternate payee (who is not a Participant hereunder) be treated as a Spouse under the terms of the Plan. Upon receipt of any judgement, decree or order (including approval of a property settlement agreement) relating to the provision of payment by the Plan to an alternate payee pursuant to a state domestic relations law, the Plan Administrator -78- Pension Plan Exec. Ver. shall promptly notify the affected Participant and any alternate payee of the receipt of such judgement, decree or order and shall notify the affected Participant and any alternate payee of the Plan Administrator's procedure for determining whether or not the judgement, decree or order is a qualified domestic relations order. The Plan Administrator shall establish a procedure to determine the status of a judgement, decree or order as a qualified domestic relations order and to administer Plan distributions in accordance with qualified domestic relations orders. Such procedure shall be in writing, shall include a provision specifying the notification requirements enumerated in the preceding paragraph, shall permit an alternate payee to designate a representative for receipt of communications from the Plan Administrator and shall include such other provisions as the Plan Administrator shall determine, including provisions describing the interest rate to be used in making present value determinations as well as provisions required under regulations promulgated by the Secretary of the Treasury. During any period in which the issue of whether a judgement, decree or order is a qualified domestic relations order is being determined (by the Plan Administrator, a court of competent jurisdiction or otherwise), the Plan Administrator shall separately account for the amount, if any, which would have been payable to the alternate payee during such period if the judgement, decree or order had been determined to be a qualified domestic relations order. If the judgement, decree or order is determined by the Plan Administrator to be a qualified domestic relations order before the first payments would otherwise be due under such order, then payment of the appropriate amount shall be paid to the alternate payee(s) as required under the order. If a domestic relations order is determined by the Plan Administrator to be a qualified order within the 18 month period beginning on the date that the first payment would have been due under such order, the separately accounted for amounts (plus reasonable interest thereon) shall -79- Pension Plan Exec. Ver. be retroactively paid to the alternate payee(s) named in the order. Subsequent payments shall not include any interest component. If the Plan Administrator first determines that the order is a qualified domestic relations order after the 18-month period beginning on the date on which the first payment would have been due under the order, then the provisions of such order shall be applied on a prospective basis only. 14.4 Use of Masculine and Feminine; Singular and Plural. Wherever used in this Plan, the masculine gender will include the feminine gender and the singular will include the plural, unless the context indicates otherwise. 14.5 Merger, Consolidation, or Transfer. In the event that the Plan is merged or consolidated with any other plan, or should the assets or liabilities of the Plan be transferred to any other plan, each Participant shall be entitled to a benefit immediately after such merger, consolidation, or transfer if the Plan should then terminate equal to or greater than the benefit he would have been entitled to receive immediately before such merger, consolidation, or transfer if the Plan had then terminated. 14.6 Leased Employees. Any individual who performs services for the Employer and who, by application of Code Section 414(n)(2) and regulations issued pursuant thereto, would be considered a "leased employee", shall, for purposes of the requirements enumerated in Code Section 414(n)(3), be considered an Employee of the Employer with regard to services performed after December 31, 1986. When the total of all leased employees constitutes less than 20% of the Employer's non-highly compensated work force within the meaning of Code Section 414(n)(5)(c)(ii), however, a "leased employee" shall not be considered an Employee of the Employer if the organization from which the individual is leased maintains a qualified safe harbor plan (as defined in Code Section 414(n)(5)) in which such individual participates. -80- Pension Plan Exec. Ver. "Leased employees" who are deemed to be Employees of the Employer for purposes of this Section 14.7 shall not be eligible to participate in the Plan unless specifically provided for in Article II. 14.7 Governing Law. The provisions of the Plan will be construed, administered, and enforced in accordance with the Code and the Employee Retirement Income Security Act of 1974, as amended from time to time, and, to the extent applicable, the laws of the Commonwealth of Massachusetts. 14.8 Severability. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability will not affect any other provision of the Plan, and the Plan will be construed and enforced as if such provision had not been included. 14.9 Captions. The captions contained in the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge, or describe the scope or intent of the Plan nor in any way affect the construction of any provision of the Plan. -81- Pension Plan Exec. Ver. APPENDIX A GRANDFATHERING FOR KEYPORT LIFE INSURANCE COMPANY Pension Plan Exec. Ver. TABLE OF CONTENTS
Section SECTION A1 DEFINITIONS A1.1 "Grandfathered Keyport Employee" 81 A1.2 "Social Security Benefit" 81 A1.3 "Social Security Bridge Benefit" 82 SECTION A2 ELIGIBILITY A2.1 Eligibility Requirements 83 A2.2 Grandfathered Keyport Employee 83 SECTION A3 NORMAL RETIREMENT BENEFIT A3.1 Normal Retirement Benefit 84 A3.2 Maximum Benefit 85 SECTION A4 EARLY RETIREMENT DATE AND EARLY RETIREMENT BENEFIT A4.1 Early Retirement Date 86 A4.2 Early Retirement Benefit 86 A4.3 Social Security Bridge Benefit 86
-83- Pension Plan Exec. Ver. SECTION A1 DEFINITIONS All words and phrases used in this Appendix shall have the meanings as defined in Articles I through XIV of the Plan unless such words and phrases are defined in this Section A1. The following words and phrases when used in this Appendix shall have the meanings indicated below unless a different meaning is plainly required by the context: A1.1 "Grandfathered Keyport Employee" shall mean a Participant who meets the additional requirements of Section A2. A1.2 "Social Security Benefit" shall mean the annual amount of the Participant's Primary Insurance Amount determined in accordance with the provisions of Title II of the Social Security Act as now in effect subject to such automatic change or subsequent amendment as may occur in accordance with the rules as set forth in (a) or (b) below: (a) If the Participant retires under the Plan, the Social Security Benefit to be used in determining the retirement benefit in accordance with Section A3 shall be the Primary Insurance Amount to which the Participant would be entitled, if applied for when first entitled, at or after retirement, other than for disqualification for earnings. For purposes of determining Social Security entitlement, the Participant's Primary Insurance Amount shall be determined in accordance with Title II of the Federal Social Security Act as in effect as of the Participant's date of retirement. -84- Pension Plan Exec. Ver. (b) If the Participant terminates employment prior to eligibility for retirement under the Plan, but is entitled to a benefit under the provisions of Article VI, the Primary Insurance Amount to be used in the accrued benefit calculation as set forth in Section A4 shall be the Primary Insurance Amount to which the Participant would be entitled, other than for disqualification for earnings, if first applied for at the later of the Participant's Normal Retirement Date or date of termination of employment. For the purpose of determining Social Security entitlement, the Participant's Primary Insurance Amount shall be determined in accordance with Title II of the Federal Social Security Act as in effect as of the Participant's date of termination of employment assuming that he continued to receive earnings at the rate being received at termination of employment. If such Participant is subsequently reemployed by the Employer, the Primary Insurance Amount shall not include amounts in respect of any Social Security increase effective during the period beginning with his termination of employment and ending upon his reemployment with the Employer. A1.3 "Social Security Bridge Benefit" shall mean the benefit determined in accordance with Section A4. -85- Pension Plan Exec. Ver. SECTION A2 ELIGIBILITY A2.1 Eligibility Requirements. Each Employee: (a) who was employed by Keyport Life Insurance Company as of July 1, 1992; (b) who was a Participant in the Prior Plan as of June 30, 1992; and (c) whose age plus Years of Service as of January 1, 1989 were at least equal to 55 shall be eligible for benefits under this Appendix A. A2.2 Grandfathered Keyport Employee. Each Participant who meets the eligibility requirements under Section A2.1 above shall be entitled to receive benefits under this Appendix A. The following Employees are Grandfathered Keyport Employees:
Factor to Social Age & be Used in Security Date of Date of Service on Section Number Name Birth Hire January 1, 1989 A3.1(d)(ii) ------ ---- ----- ---- --------------- ----------- ###-##-#### I. Chiuchiolo 11/10/28 06/16/69 69.14 9.00 ###-##-#### E. Edminster 08/18/23 01/05/76 74.37 9.00 ###-##-#### I. Larkin 01/07/39 04/01/69 58.98 3.98 ###-##-#### A. Mills 07/23/26 11/24/80 70.54 8.10 ###-##-#### C. Paulis 03/28/38 06/14/82 57.31 2.31
-86- Pension Plan Exec. Ver. SECTION A3 NORMAL RETIREMENT BENEFIT A3.1 Normal Retirement Benefit. The amount of annual Grandfathered Keyport Benefit payable to a Participant who is a Grandfathered Employee in the Normal Form beginning on his Normal Retirement Date shall be equal to the sum of (a) minus (b) plus (c) plus (d) plus (e), as follows: (a) (i) 2.0% of the Participant's Average Earnings multiplied by (ii) his Years of Credited Service up to 25 such years. (b) (i) 2.0% of the Participant's Social Security Benefit multiplied by (ii) his Years of Credited Service up to 25 such years. (c) (i) 2/3% of the Participant's Average Earnings multiplied by (ii) his Years of Credited Service in excess of 25 such years, if any, up to 15 such excess years. -87- Pension Plan Exec. Ver. (d) (i) 0.55% of the Participant's Average Earnings multiplied by (ii) the excess, if any, of his age plus Years of Credited Service as of January 1, 1989 over 55, but not more than his Years of Credited Service as of January 1, 1989. A3.2 Maximum Benefit. As of July 1, 1992 no Employee listed in Section A2.2 was a "highly compensated employee" (as defined in Code Section 414(q)). If, however, for any Plan Year an Employee listed in Section A2.2 becomes a "highly compensated employee", the Employee shall not accrue additional benefits under Section A3.1 for such Plan Year or any subsequent Plan Year in which the Employee remains a "highly compensated employee". Such Participant's monthly Accrued Benefit under the Plan shall be the greater of (i) the benefit determined under this Appendix determined as of the end of the Plan Year preceding the Plan Year in which the Participant became a "highly compensated employee", and (ii) his accrued benefit as determined under Section 3.1 of the Plan. -88- Pension Plan Exec. Ver. SECTION A4 EARLY RETIREMENT DATE AND EARLY RETIREMENT BENEFIT A4.1 Early Retirement Date. A Participant's Early Retirement Date prior to his Normal Retirement Date for purposes of this Appendix A is the Early Retirement Date as determined under Section 4.1 of the Plan. The date of early payment for a Vested Inactive Participant for purposes of this Appendix A is the date determined under Section 6.3 of the Plan. A4.2 Early Retirement Benefit. The Retirement Benefit payable on an Early Retirement Date to a Participant who is a Grandfathered Keyport Employee equals the Benefit determined under Section 4.2 of the Plan. The Retirement Benefit payable on an early payment date to a Vested Inactive Participant who is a Grandfathered Keyport Employee equals the Benefit determined under Section 6.3 of the Plan. A4.3 Social Security Bridge Benefit. A Participant who is a Grandfathered Keyport Employee and whose Early Retirement Date is earlier than July 1, 1999 and is earlier than his 62nd birthday shall receive, in addition to all other benefits under the Plan, a Social Security Bridge Benefit. The amount of monthly Social Security Bridge Benefit payable on the life annuity basis shall be equal to one-twelfth of the benefit determined under Section A3.1(b) multiplied by the applicable percentage determined under Section 4.2 of the Plan. The Social Security Bridge Benefit shall be paid monthly with the final payment being made on the first day of the month coincident with or immediately preceding the earlier of: -89- Pension Plan Exec. Ver. (a) the Grandfathered Keyport Employee's date of death; (b) the Grandfathered Keyport Employee's 62nd birthday; or (c) June 1, 1999. -90- Pension Plan Exec. Ver. IN WITNESS WHEREOF, Liberty Financial Companies, Inc. has caused this instrument to be executed by its duly authorized officer this _________________________ day of ___________________, 19___. LIBERTY FINANCIAL COMPANIES, INC. By:________________________________ -91- Pension Plan Exec. Ver. EX-10.17.1 4 THIRD AMENDMENT TO LEASE Third Amendment to Lease This Third Amendment to Lease (this "Amendment"), is made as of the 15th day of December, 1997, by and between ONE TWENTY FIVE HIGH STREET LIMITED PARTNERSHIP, a Massachusetts limited partnership, with an address c/o The Travelers Insurance Company-Real Estate Investments, One Tower Square-9PB, Hartford, Connecticut 06183-2030, Attn: Asset Manager-RE JVN-NO. 00070 (the "Landlord") and KEYPORT LIFE INSURANCE COMPANY, a Rhode Island Corporation, having a business address of 125 High Street, Oliver Street Tower, Boston, Massachusetts 02110 (the "Tenant"). WITNESSETH: Reference is hereby made to the following facts: A. Landlord and Tenant entered into that certain lease (as heretofore amended, and modified and amended hereby, the "Lease"), dated May 21, 1991, as amended by that certain First Amendment to Lease, dated August 28, 1992, and that certain Second Amendment to Lease, dated as of September 21, 1994, for certain premises (the "Existing Premises") located on the 11th, 12th, 13th and 14th floors of the building commonly known as the Oliver Street Tower in the project known as 125 High Street in Boston, Massachusetts (as more particularly described in the Lease, the "Project"), all as more particularly described in the Lease. All capitalized words and phrases not otherwise defined herein shall have the meanings ascribed to them in the Lease. B. Landlord and Tenant have agreed to extend the term of the Lease, to add an additional 39,905 square feet of Gross Rentable Area located in the building in the Project commonly known as 131 Oliver Street ("131 Oliver Street") to the premises demised under the Lease, to remove the portion of the premises located on the 11th floor of the Oliver Street Tower (containing 24,256 square feet of Gross Rentable Area) from the premises, and to modify and amend the Lease, all in the manner hereinafter set forth. NOW THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt, sufficiency and delivery of which are hereby acknowledged, the parties hereby agree that the Lease is hereby further amended as follows: 1. Extension of Term. The term of the Lease is hereby extended for an additional seventy-five (75) month period, commencing on January 1, 2002 and continuing through March 31, 2008 (the "Extension Period"), unless sooner terminated, all in accordance with and subject to the terms and conditions set forth in the Lease. Without limitation, all references in the Lease to the "Lease Term" shall be deemed to include the Extension Period in all respects. 2. Renewal Term: Expiration of Early Termination Right. Sections 23.1.1, 23.1.2 and 23.2 of the Lease are hereby deleted in their entirety, and none of the provisions contained in said Sections shall be of any further force or effect. Section 23.1.1 of the Lease is restated in its entirety with the following: "Tenant shall have the option (the "Renewal Option") to extend the Lease Term for an additional 5-year period (the "Renewal Term"), which Renewal Term shall commence on April 1, 2008 and end on March 31, 2013, provided that this Lease is in full force and effect on the date Tenant gives Landlord notice (the "Renewal Notice") of Tenant's election to exercise the Renewal Option. The Renewal Option shall be exercisable by Tenant delivering the Renewal Notice to Landlord not later than April 1, 2007. If Tenant exercises the Renewal Option in accordance with the terms of this Section 23.1.1, the Renewal Term shall become part of the Lease Term and be upon the same terms, covenants and conditions as those contained in this Lease, except that (i) the Base Rent for the Renewal Term shall be determined in accordance with Section 23.1.3; (ii) there shall be no Base Rent Concession or Supplemental Base Rent Concession; and (iii) Article III and this Section 23.1.1 shall not apply to the Renewal Term." The first sentence of Section 23.1.3 of the Lease is hereby deleted in its entirety and replaced with the following: "Landlord and Tenant shall attempt to mutually agree upon the Fair Market Rent (as hereinafter defined) for the Renewal Term during the 90-day period commencing on April 1, 2007." Except as provided in this Paragraph 2, Tenant acknowledges that it has no further rights or options to extend the Lease Term, and that the early termination right afforded to Tenant pursuant to Section 23.2 of the Lease has expired and is of no further force or effect. Without limiting the foregoing, (i) all references in the Lease to the "First Renewal Term" shall mean the "Renewal Term" and all references in the Lease to the "Second Renewal Term" are hereby deleted, and (11) except as provided in this Paragraph 2, Tenant shall have no further rights or options of any kind, pursuant to Sections 23.1 and 23.2 of the Lease. 3. Surrender and Yield Up of Premises on Eleventh Floor of Oliver Street Tower. The "l1th Floor Surrender Date" shall mean the date which is the earlier to occur of (i) forty-five (45) days after Substantial Completion (hereinafter defined) of the TI Work (hereinafter defined) required to prepare the Third Amendment Additional Premises (hereinafter defined) for occupancy or (ii) June 3O, 1998. As used herein, "Substantial Completion" shall mean completion of the TI Work to the point where the Third Amendment Additional Premises are ready for occupancy without material interference to Tenant's use thereof, and an occupancy certificate may be issued with respect to the Third Amendment Additional Premises. Notwithstanding any provision in the Lease to the contrary, by not later than the 11th Floor Surrender Date, the Tenant shall yield up and surrender the portion of the Premises located on the eleventh (11th) floor of the Oliver Street Tower, containing 24,256 square feet of Gross Rentable Area (the "11th Floor Premises"). The Tenant shall surrender and deliver the 11th Floor Premises to Landlord in broom-clean condition and otherwise in the condition in which the Premises are required to be surrendered pursuant to the Lease at the expiration of the term thereof. Without limitation, Tenant shall remove from the 11th Floor Premises all of its personal property, trade fixtures (excluding permanent leasehold improvements), inventory and equipment located therein and shall repair any and all damage caused by such removal. All property of any kind, nature or description contained in the 11th Floor Premises on or after the 11th Floor Surrender Date shall be and become the property of the Landlord, without payment from Landlord and without the necessity to account therefor in any manner whatsoever to Tenant. Effective as of the 11th Floor Surrender Date, the 11th Floor Premises shall be removed from the Premises, and the rights of the Tenant with respect thereto shall terminate and expire with the same force and effect as if such date had originally been specified in the Lease as the expiration date of the term for and with respect to the 11th Floor Premises. Through the period ending on the 11th Floor Surrender Date, the Tenant shall comply with all of the terms and provisions of the Lease relating thereto, and shall fully perform all of its obligations thereunder, including, without limitation, the payment of Base Rent, Escalation Rent, and all other Additional Rent due under the Lease on account thereof. Effective as of the 11th Floor Surrender Date, Landlord shall be released from any and all obligations to Tenant thereafter accruing under the Lease relating to the 11th Floor Premises. Provided that Tenant performs all of its obligations under the Lease and this Amendment, including, without limitation, the obligation to surrender the 11th Floor Premises on the 11th Floor Surrender Date in the condition required by the Lease and this Amendment, Tenant shall be released from all liabilities and obligations under the Lease relating to the 11th Floor Premises which first accrue after the 11th Floor Surrender Date. The portions of the Existing Premises located on the twelfth (12th), thirteenth (13th) and fourteenth (14th) floors of the Oliver Street Tower are sometimes referred to herein collectively as the "Oliver Street Tower Premises." Nothing contained herein shall constitute, a waiver, limitation or modification of any of the liabilities and obligations of the Tenant or Landlord relating to the 11th Floor Premises which accrue prior to the 11th Floor Surrender Date, or a waiver or limitation of any of the liabilities and obligations of the Tenant or Landlord relating to the Oliver Street Tower Premises. 4. Rent for the Oliver Street Tower Premises for the Extension Period. For and with respect to the Oliver Street Tower Premises, during the Extension Period the Tenant shall pay Base Rent, Escalation Rent and all other Additional Rent payable pursuant to the Lease, all in accordance with the terms and provisions of the Lease. The Base Rent payable with respect to the Oliver Street Tower Premises for the Extension Period shall be as follows: (a) for and with respect to the period commencing on January 1, 2002 and terminating on June 30, 2004, at the per annum rate of Forty Dollars ($40.00) per square foot of Gross Rentable Area of the Oliver Street Tower Premises; (b) for and with respect to the period commencing on July 1, 2004 and terminating on December 31, 2005, at the per annum rate of Forty-One Dollars ($41.00) per square foot of Gross Rentable Area of the Oliver Street Tower Premises; and (c) for and with respect to the period commencing on January 1, 2006 and terminating on March 31, 2008, at the per annum rate of Forty-Two and 50/100 Dollars ($42.50) per square foot of Gross Rentable Area of the Oliver Street Tower Premises. For purposes of determining the Escalation Rent payable with respect to the Oliver Street Tower Premises during the Extension Period, (i) the Operating Expense Base for the Oliver Street Tower Premises shall be the actual unextrapolated amount of Operating Expenses attributable to the Oliver Street Tower incurred with respect to calendar year 1998, and (ii) the Tax Base shall be the actual unextrapolated real estate taxes (excluding all other components of the definition of Taxes) attributable to the Oliver Street Tower for the 1998 tax fiscal year, which commenced on July 1, 1997 and ends on June 30, 1998. 5. Demise of Third Amendment Additional Premises. Landlord hereby demises and leases to Tenant, and Tenant hereby hires and takes from Landlord, from and after December 12, 1997 (the "Delivery Date"), additional premises consisting of 39,905 square feet of Gross Rentable Area within 131 Oliver Street ("the Third Amendment Additional Premises"), which Third Amendment Additional Premises are depicted on the plans attached hereto as Exhibit B-1 and incorporated herein by this reference, for a term commencing on the Delivery Date and terminating on the expiration or earlier termination of the Lease Term. The demise and use of the Third Amendment Additional Premises shall be upon and subject to all of the other terms and conditions of the Lease, except as expressly set forth in this Amendment. Without limitation, in accordance with the provisions of this Amendment, Tenant shall not be obligated to commence paying Base Rent for the Third Amendment Additional Premises prior to the Rent Commencement Date (hereunder defined). From and after the Delivery Date, the Third Amendment Additional Premises shall be considered to be part of the Premises in all respects. From and after the Delivery Date, all references contained in the Lease to the "Premises" shall be deemed to refer to the Existing Premises and the Third Amendment Additional Premises, collectively. From and after the 11th Floor Surrender Date, all references contained in the Lease to the "Premises" shall be deemed to refer to the Oliver Street Tower Premises and the Third Amendment Additional Premises, collectively. From and after the Delivery Date, all references in the Lease to the "Building" shall be deemed to refer to the Oliver Street Tower and 131 Oliver Street, collectively and individually, as the context requires. 6. Rent for Third Amendment Additional Premises. For and with respect to the Third Amendment Additional Premises, the Tenant shall commence paying Base Rent, Escalation Rent and all other Additional Rent payable pursuant to the Lease on the earlier to occur of (i) the date Tenant first occupies the Third Amendment Additional Premises, or (ii) April 1, 1998 (the "Rent Commencement Date"). All such amounts shall be payable in accordance with the terms and provisions of the Lease. The Base Rent payable with respect to the Third Amendment Additional Premises shall be as follows: (a) for and with respect to the period commencing on the Rent Commencement Date and terminating on January 31, 2001, at the per annum rate of Twenty Five Dollars ($25.00) per square foot of Gross Rentable Area of the Third Amendment Additional Premises; (b) for and with respect to the period commencing on February 1, 2001 and terminating on January 31, 2005, at the per annum rate of Twenty Seven Dollars ($27.00) per square foot of Gross Rentable Area of the Third Amendment Additional Premises; and (c) for and with respect to the period commencing on February 1, 2005 and terminating on March 1, 2008, at the per annum rate of Twenty Nine Dollars ($29.00) per square foot of Gross Rentable Area of the Third Amendment Additional Premises. For purposes of determining the Escalation Rent payable with respect to the Third Amendment Additional Premises, (i) the Operating Expense Base for the Third Amendment Additional Premises shall be the Operating Expenses attributable to 131 Oliver Street with respect to the twelve (12) month period immediately following the date on which Tenant first occupies the Third Amendment Additional Premises (or any part thereof), and (ii) the Tax Base shall be ninety seven percent (97%) of the actual unextrapolated real estate taxes (excluding all other components of the definition of Taxes) attributable to 131 Oliver Street for the 1999 tax fiscal year, which commences on July 1, 1998 and ends on June 30, 1999. Notwithstanding any provision to the contrary contained in the Lease or in this Amendment, the provisions of Section 2.4.10 of the Lease shall have no applicability and be of no force or effect with respect to the Third Amendment Additional Premises, or the payment of Rent on account thereof, and none of the Rent Concessions shall apply to the payment of Base Rent, Escalation Rent and other Additional Rent payable with respect to the Third Amendment Additional Premises. Tenant shall make all payments of Base Rent and Escalation Rent with respect to the Third Amendment Additional Premises on the due date thereof, without giving effect to the provisions of Section 2.4.10 of the Lease. 7. As-Is Condition. Notwithstanding anything contained in the Lease to the contrary, the Landlord shall deliver and Tenant shall take the Third Amendment Additional Premises "-as-is", "where is", and in all respects in the condition in which the Third Amendment Additional Premises are in as of the Delivery Date, without any obligation on the part of Landlord to prepare or construct the Third Amendment Additional Premises for Tenant's occupancy, or to construct any additional improvements therein or in 131 Oliver Street or in the Oliver Street Tower, and without any representation or warranty (express or implied) on the part of Landlord as to the condition of the Third Amendment Additional Premises. 8. Construction of Tenant Improvements. Tenant shall, subject to and in accordance with the provisions of the Lease (including, without limitation, Article VII thereof) perform all leasehold improvement work required to prepare the Third Amendment Additional Premises for occupancy (collectively, the "TI Work"), in accordance with the terms and provisions of the Work Letter Agreement attached hereto as Exhibit A (the "Work Letter Agreement") and by this reference made a part hereof and incorporated herein. Notwithstanding the foregoing, the provisions of Article III of the Lease shall have no applicability and be of no force and effect with respect to the Third Amendment Additional Premises. Except for the Tenant Allowance (as defined in the Work Letter Agreement), the Tenant shall be responsible for all costs and expenses of preparing the Third Amendment Additional Premises for its occupancy. In the event of any conflict between the provisions of this Amendment and the provisions of the Work Letter Agreement, the provisions of the Work Letter Agreement shall govern and control. 9. Reference Information. Effective as of the Delivery Date, Section 1.1 of the Lease is hereby amended by deleting subsections 1.1.2, 1.1.3, 1.1.8., 1.1.9, 1.1.10, 1.1.11, 1.1.12, 1.1.13, 1.1.14 and 1.1.15, and replacing said definitions with the following: 1.1.2. LANDLORD'S ORIGINAL ADDRESS: c/o Tishman Speyer Properties Office of the Building 125 High Street Boston, Massachusetts 021 10 Attn: Property Management 1.1.3 LANDLORD'S CONSTRUCTION REPRESENTATIVE: John Karnath 1.1.8 PROJECT: The three (3) buildings bearing the following addresses: 125 High Street-Oliver Street Tower, 125 High Street-Oliver Street Tower, and 131 Oliver Street, including, without limitation, the atrium ("Atrium") joining one or more of such buildings, together with all appurtenant site improvements situated upon the Site. A City of Boston fire station and ambulance facility are located physically within the Project and a garage for tenant and visitor vehicles is located below-grade within the Project (the "Garage"). The land upon which the Project has been constructed, as more particularly described in Exhibit A attached hereto and incorporated herein by this reference, is sometimes referred to herein as the "Site." The Site, the Project, and all other improvements now or hereafter constructed on the Site are sometimes referred to herein as the "Property." 1.1.9 PREMISES: (i) the "Oliver Street Tower Premises" consisting of the following: 23,614 square feet of Gross Rentable Area located on the 12th Floor of the Oliver Street Tower; 24,604 square feet of Gross Rentable Area located on the 13th Floor of the Oliver Street Tower; 3,808 square feet of Gross Rentable Area located on the 14th Floor of the Oliver Street Tower, all as depicted on the floor plans attached hereto as Exhibit B and incorporated herein by this reference; (ii) the "Third Amendment Additional Premises" consisting of 39,905 square feet of Gross Rentable Area located in 131 Oliver Street; and (iii) the "11th Floor Premises" consisting of 24,256 square feet of Gross Rentable Area located on the 11th floor of the Oliver Street Tower, as depicted on the floor plan attached hereto as Exhibit B-1. The Oliver Street Tower Premises and the 11th Floor Premises are sometimes referred to herein collectively as the "Existing Premises." From and after the 11th Floor Surrender Date, all references in the Lease to the "Premises" shall be deemed to refer to the Oliver Street Tower Premises and the Third Amendment Additional Premises, collectively. 1.1.11 ANNUAL BASE RENT: (i) $27.00 per square foot of Gross Rentable Area of the Existing Premises for each of Lease Years 1-5; $33.00 per square foot of Gross Rentable Area of the Existing Premises for each of Lease Years 6-10; $40.00 per square foot of Gross Rentable Area of the Oliver Street Tower Premises for the period commencing on January 1, 2002 and terminating on June 30, 2004; $41.00 per square foot of Gross Rentable Area of the Oliver Street Tower Premises for the period commencing on July 1, 2004 and terminating on December 31, 2005; and $42.50 per square foot of Gross Rentable Area of the Oliver Street Tower Premises for the period commencing on January 1, 2006 and terminating on March 31, 2008; (ii) $25.00 per square foot of Gross Rentable Area of the Third Amendment Additional Premises for the period commencing on the Rent Commencement Date (as defined in this Amendment) and terminating on January 31, 2001; $27.00 per square foot of Gross Rentable Area of the Third Amendment Additional Premises for the period commencing on February 1, 2001 and terminating on January 31, 2005; and $29.00 per square foot of Gross Rentable Area of the Third Amendment Additional Premises for the period commencing on February 1, 2005 and terminating on March 31, 2008. 1.1.12 GROSS RENTABLE AREA OF THE PREMISES: 116,187 square feet of Gross Rentable Area; after the surrender of the 11th Floor Premises and the removal thereof from the Premises in accordance with the provisions of this Amendment, the Premises shall consist of 91,931 square feet of Gross Rentable Area. 1.1.13 GROSS RENTABLE AREA OF BUILDING: (1) Oliver Street Tower-508,157 square feet of Gross Rentable Area; (ii) 131 Oliver Street- 41,679 square feet of Gross Rentable Area. 1.1.14 TAX BASE: (i) For and with respect to the Existing Premises for each of Lease Years 1-10, an amount equal to the greater of (a) the product of $5.50 times the number of square feet of Gross Rentable Area of the Oliver Street Tower, or (b) the actual unextrapolated amount of real estate taxes attributable to the Oliver Street Tower for the 1993 Fiscal Tax Year, which commenced July 1, 1992 and ended on June 30, 1993, excluding all other components of the definition of Taxes (as hereinafter defined); (ii) for and with respect to the Oliver Street Tower Premises for the Extension Period, the actual unextrapolated real estate taxes (excluding all other components of the definition of Taxes) attributable to the Oliver Street Tower for the 1998 Tax Fiscal Year, which commences on July 1, 1997 and ends on June 30, 1998; (iii) for and with respect to the Third Amendment Additional Premises, 97% of the actual unextrapolated real estate taxes (excluding all other components of the definition of Taxes) attributable to 131 Oliver Street for the 1999 Tax Fiscal Year, which commences on July 1, 1998 and ends on July 30, 1999. 1.1.15 OPERATING EXPENSE BASE: (i) For and with respect to the Existing Premises for each of Lease Years 1-10, an amount equal to the greater of (a) the product of $5.50 times the number of square feet of Gross Rentable Area of the Oliver Street Tower, or (b) the actual unextrapolated amount of Operating Expenses (as hereinafter defined) attributable to the Oliver Street Tower incurred with respect to calendar year 1992; (ii) for and with respect to the Oliver Street Tower Premises for the Extension Period, the actual unextrapolated amount of Operating Expenses attributable to the Oliver Street Tower incurred with respect to calendar year 1998; (iii) for and with respect to the Third Amendment Additional Premises, the actual unextrapolated Operating Expenses attributable to 131 Oliver Street incurred with respect to the twelve (12) month period immediately following the date on which Tenant first occupies the Third Amendment Additional Premises (or any part thereof). 10. Floor Plans. Exhibit B attached to the Lease is hereby amended by adding thereto the floor plan(s) set forth in Exhibit "B-1" attached to this Amendment and incorporated herein by this reference. 11. Brokerage. Tenant warrants and represents to Landlord, and Landlord warrants and represents to Tenant, that it has dealt with no broker or agent in connection with this Amendment, other than Tishman Speyer Properties and/or Spaulding & Slye. Each of Tenant and Landlord shall indemnify and hold harmless the other from and against any and all loss, cost and expense (including attorneys' fees) involving any claims for a brokerage commission, finder's fee or similar compensation made by any person other than Tishman Speyer Properties and/or Spaulding & Slye, arising out of or in connection with this Amendment. The Landlord shall be responsible for payment of all fees payable to Tishman Speyer Properties and/or Spaulding & Slye arising out of and in connection with this Amendment. 12. Miscellaneous. Landlord and Tenant represent and warrant to each other that the execution and delivery of this Amendment have been duly authorized by all required partnership and corporation actions, as applicable. Except as expressly and specifically set forth herein, the Lease is hereby ratified and confirmed, and all of the terms, covenants, agreements and provisions of the Lease shall remain unaltered and unmodified and in full force and effect throughout the balance of the term of the Lease, as extended hereby. Except as expressly set forth herein, all of the covenants, representations and warranties made by the Tenant contained in the Lease are hereby remade, reaffirmed and ratified as of the date hereof. EXECUTED as an instrument under seal as of the date first above-written. ONE TWENTY FIVE HIGH STREET LIMITED PARTNERSHIP By: The Prospect Company, d/b/a The Prospect - Massachusetts Company, General Partner By: --------------------------------- Name: BERNARD O'CONNELL ------------------------ Title: DIRECTOR ------------------------ KEYPORT LIFE INSURANCE COMPANY, a Rhode Island Corporation By: ------------------------------- Name: ------------------------- Title: ------------------------ Fourth Amendment to Lease This Fourth Amendment to Lease (this "Amendment"), is made as of the 1st day of May, 1998, by and between TST 125 HIGH STREET, L.L.C., a Delaware limited liability company, with an address c/o Tishman Speyer Properties, 520 Madison Avenue, New York, NY 10022 (the "Landlord") and KEYPORT LIFE INSURANCE COMPANY, a Rhode Island Corporation, having a business address of 125 High Street, Oliver Street Tower, Boston, Massachusetts 02110 (the "Tenant"). WITNESSETH: Reference is hereby made to the following facts: A. The predecessor-in-interest to Landlord and Tenant entered into that certain lease (as heretofore amended, and modified and amended hereby, the "Lease"), dated May 21, 1991, as amended by that certain First Amendment to Lease, dated August 28, 1992, that certain Second Amendment to Lease, dated as of September 21, 1994, and that certain Third Amendment to Lease, dated as of December _, 1997, for certain premises (the "Existing Premises") located on the 12th, 13th and 14th floors of the building commonly known as the Oliver Street Tower and in the building commonly known as 131 Oliver Street, both in the project known as 125 High Street in Boston, Massachusetts (as more particularly described in the Lease, the "Project"), all as more particularly described in the Lease. All capitalized words and phrases not otherwise defined herein shall have the meanings ascribed to them in the Lease. B. Landlord and Tenant have agreed to add an additional 4,520 square feet of Gross Rentable Area located in the Oliver Street Tower to the premises demised under the Lease, and to modify and amend the Lease, all in the manner hereinafter set forth. NOW THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt, sufficiency and delivery of which are hereby acknowledged, the parties hereby agree that the Lease is hereby further amended as follows: 1. Demise of Fourth Amendment Additional Premises. Landlord hereby demises and leases to Tenant, and Tenant hereby hires and takes from Landlord, from and after May 1, 1998 (the "Delivery Date"), additional premises consisting of 4,520 square feet of Gross Rentable Area on the 14th floor of the Oliver Street Tower (the "Fourth Amendment Additional Premises"), which Fourth Amendment Additional Premises are depicted on the plans attached hereto as Exhibit B-2 and incorporated herein by this reference, for a term commencing on the Delivery Date and terminating on the expiration or earlier termination of the Lease Term. The demise and use of the Fourth Amendment Additional Premises shall be upon and subject to all of the other terms and conditions of the Lease, except as expressly set forth in this Amendment. From and after the Delivery Date, the Fourth Amendment Additional Premises shall be considered to be part of the Premises in all respects. From and after the Delivery Date, all references contained in the Lease to the "Premises" shall be deemed to refer to the Existing Premises and the Fourth Amendment Additional Premises, collectively. 2. Rent for Fourth Amendment Additional Premises. For and with respect to the Fourth Amendment Additional Premises, the Tenant shall commence paying Base Rent, Escalation Rent and all other Additional Rent payable pursuant to the Lease on the Delivery Date. All such amounts shall be payable in accordance with the terms and provisions of the Lease, The Base Rent payable with respect to the Fourth Amendment Additional Premises shall be as follows: (a) for and with respect to the period commencing on the Delivery Date and terminating on December 31, 2001, at the per annum rate of Fifty Dollars ($50.00) per square foot of Gross Rentable Area of the Fourth Amendment Additional Premises; (b) for and with respect to the period commencing on January 1, 2002 and terminating on June 30, 2004, at the per annum rate of Fifty-Two Dollars ($52.00) per square foot of Gross Rentable Area of the Fourth Amendment Additional Premises; (c) for and with respect to the period commencing on July 1, 2004 and terminating on December 31, 2005, at the per annum rate of Fifty-Four Dollars ($54.00) per square foot of Gross Rentable Area of the Fourth Amendment Additional Premises; and (d) for and with respect to the period commencing on January 1, 2006 and terminating on March 31, 2008 at the per annum rate of Fifty-Seven Dollars ($57.00) per square foot of Gross Rentable Area of the Fourth Amendment Additional Premises. For purposes of determining the Escalation Rent payable with respect to the Fourth Amendment Additional Premises, (i) the Operating Expense Base for the Fourth Amendment Additional Premises shall be the Operating Expenses attributable to the Oliver Street Tower with respect to the twelve (12) month period between January 1, 1998 and December 31, 1998, and (ii) the Tax Base shall be the actual unextrapolated real estate taxes (excluding all other components of the definition of Taxes) attributable to the Oliver Street Tower for the 1998 Tax Fiscal Year, which commences on July 1, 1997 and ends on June 30, 1998. Notwithstanding any provision to the contrary contained in the Lease or in this Amendment, the provisions of Section 2.4.10 of the Lease shall have no applicability and be of no force or effect with respect to the Fourth Amendment Additional Premises, or the payment of Rent on account thereof, and none of the Rent Concessions shall apply to the payment of Base Rent, Escalation Rent and other Additional Rent payable with respect to the Fourth Amendment Additional Premises. Tenant shall make all payments of Base Rent and Escalation Rent with respect to the Fourth Amendment Additional Premises on the due date thereof, without giving effect to the provisions of Section 2.4.10 of the Lease. 3. As-Is Condition. Notwithstanding anything contained in the Lease to the contrary, the Landlord shall deliver and Tenant shall take the Fourth Amendment Additional Premises "as-is", "where is", and in all respects in the condition in which the Fourth Amendment Additional Premises are in as of the Delivery Date, without any obligation on the part of Landlord to prepare or construct the Fourth Amendment Additional Premises for Tenant's occupancy, or to construct any additional improvements therein or in the Oliver Street Tower, and without any representation or warranty (express or implied) on the part of Landlord as to the condition of the Fourth Amendment Additional Premises. 4. Construction of Tenant Improvements. Tenant shall, subject to and in accordance with the provisions of the Lease (including, without limitation, Article VII thereof) perform all leasehold improvement work required to prepare the Fourth Amendment Additional Premises for occupancy (collectively, the "TI Work"), in accordance with the terms and provisions of the Work Letter Agreement attached hereto as Exhibit A (the "Work Letter Agreement") and by this reference made a part hereof and incorporated herein. Notwithstanding the foregoing, the provisions of Article III of the Lease shall have no applicability and be of no force and effect with respect to the Fourth Amendment Additional Premises. Except for the Tenant Allowance (as defined in the Work Letter Agreement), the Tenant shall be responsible for all costs and expenses of preparing the Fourth Amendment Additional Premises for its occupancy. In the event of any conflict between the provisions of this Amendment and the provisions of the Work Letter Agreement, the provisions of the Work Letter Agreement shall govern and control. 5. Reference Information. Effective as of the Delivery Date, Section 1.1 of the Lease is hereby amended by deleting subsections 1.1.9, 1.1.10, 1.1.11, 1.1.12, 1.1.14, and 1.1.15, and replacing said definitions with the following: 1.1.9 PREMISES: (i) the "Oliver Street Tower Premises" consisting of the following: 23,614 square feet of Gross Rentable Area located on the 12th Floor of the Oliver Street Tower; 24,604 square feet of Gross Rentable Area located on the 13th Floor of the Oliver Street Tower; 3,808 square feet of Gross Rentable Area located on the 14th Floor of the Oliver Street Tower, all as depicted on the floor plans attached hereto as Exhibit B and incorporated herein by this reference; (ii) the "Third Amendment Additional Premises" consisting of 39,905 square feet of Gross Rentable Area located in 131 Oliver Street, as depicted on the floor plan attached hereto as Exhibit B-1; and (iii) the "Fourth Amendment Additional Premises" consisting of 4,520 square feet of Gross Rentable Area located on the 14th floor of the Oliver Street Tower, as depicted on the floor plan attached hereto as Exhibit B-2. 1.1.11 ANNUAL BASE RENT: (i) $27.00 per square foot of Gross Rentable Area of the Existing Premises for each of Lease Years 1-5; $33.00 per square foot of Gross Rentable Area of the Existing Premises for each of Lease Years 6-10; $40.00 per square foot of Gross Rentable Area of the Oliver Street Tower Premises for the period commencing on January 1, 2002 and terminating on June 30, 2004; $41.00 per square foot of Gross Rentable Area of the Oliver Street Tower Premises for the period commencing on July 1, 2004 and terminating on December 31, 2005; and $42.50 per square foot of Gross Rentable Area of the Oliver Street Tower Premises for the period commencing on January 1, 2006 and terminating on March 31, 2008; (ii) $25.00 per square foot of Gross Rentable Area of the Third Amendment Additional Premises for the period commencing on the Rent Commencement Date (as defined in the Third Amendment) and terminating on January 31, 2001; $27.00 per square foot of Gross Rentable Area of the Third Amendment Additional Premises for the period commencing on February 1, 2001 and terminating on January 31, 2005; and $29.00 per square foot of Gross Rentable Area of the Third Amendment Additional Premises for the period commencing on February 1, 2005 and terminating on March 31, 2008; and (iii) $50.00 per square foot of Gross Rentable Area of the Fourth Amendment Additional Premises for the period commencing on the Delivery Date (as defined in this Fourth Amendment) and termination on December 1, 2001; $52.00 per square foot of Gross Rentable Area of the Fourth Amendment Additional Premises for the period commencing on January 1, 2002 and terminating on June 30, 2004; $54.00 per square foot of Gross Rentable Area of the Fourth Amendment Additional Premises for the period commencing on July 1, 2004 and terminating on December 31, 2005; and $57.00 per square foot of Gross Rentable Area of the Fourth Amendment Additional Premises for the period commencing on January 1, 2006 and terminating on March 31, 2008. 1.1.12 GROSS RENTABLE AREA OF THE PREMISES: The Premises consist of 96,451 square feet of Gross Rentable Area. 1.1.14 TAX BASE: (i) For and with respect to the Oliver Street Tower Premises for each of Lease Years 1-10, an amount equal to the greater of (a) the product of $5.50 times the number of square feet of Gross Rentable Area of the Oliver Street Tower, or (b) the actual unextrapolated amount of real estate taxes attributable to the Oliver Street Tower for the 1993 Fiscal Tax Year, which commenced July 1, 1992 and ended on June 30, 1993, excluding all other components of the definition of Taxes (as hereinafter defined); (ii) for and with respect to the Oliver Street Tower Premises for the Extension Period. the actual unextrapolated real estate taxes (excluding all other components of the definition of Taxes) attributable to the Oliver Street Tower for the 1998 Tax Fiscal Year, which commences on July 1, 1997 and ends on June 30, 1998; (iii) for and with respect to the Third Amendment Additional Premises, 97% of the actual unextrapolated real estate taxes (excluding all other components of the definition of Taxes) attributable to 131 Oliver Street for the 1999 Tax Fiscal Year, which commences on July 1, 1998 and ends on June 30, 1999; and (iv) for and with respect to the Fourth Amendment Additional Premises, the actual unextrapolated real estate taxes (excluding all other components of the definition of Taxes) attributable to the Oliver Street Tower for the 1998 Tax Fiscal Year, which commences on July 1, 1997 and ends on June 30, 1998. 1.1.15 OPERATING EXPENSE BASE: (i) For and with respect to the Existing Premises for each of Lease Years 1-10, an amount equal to the greater of (a) the product of $5.50 times the number of square feet of Gross Rentable Area of the Oliver Street Tower, or (b) the actual unextrapolated amount of Operating Expenses (as hereinafter defined) attributable to the Oliver Street Tower incurred with respect to calendar year 1992; (ii) for and with respect to the Oliver Street Tower Premises for the Extension Period, the actual unextrapolated amount of Operating Expenses attributable to the Oliver Street Tower incurred with respect to calendar year 1998; (iii) for and with respect to the Third Amendment Additional Premises, the actual unextrapolated Operating Expenses attributable to 131 Oliver Street incurred with respect to the twelve (12) month period immediately following the date on which Tenant first occupies the Third Amendment Additional Premises (or any part thereof); and (iv) for and with respect to the Fourth Amendment Additional Premises, the actual unextrapolated amount of Operating Expenses attributable to the Oliver Street Tower incurred with respect to calendar year 1998. 6. Floor Plans. Exhibit B attached to the Lease is hereby amended by adding thereto the floor plan(s) set forth in Exhibit "B-2" attached to this Amendment and incorporated herein by this reference. 7. Brokerage. Tenant warrants and represents to Landlord, and Landlord warrants and represents to Tenant, that it has dealt with no broker or agent in connection with this Amendment, other than Tishman Speyer Properties. Each of Tenant and Landlord shall indemnify and hold harmless the other from and against any and all loss, cost and expense (including attorneys' fees) involving any claims for a brokerage commission, finder's fee or similar compensation made by any person other than Tishman Speyer Properties, arising out of or in connection with this Amendment. The Landlord shall be responsible for payment of all fees payable to Tishman Speyer Properties arising out of and in connection with this Amendment. 8. Miscellaneous. Landlord and Tenant represent and warrant to each other that the execution and delivery of this Amendment have been duly authorized by all required partnership and corporation actions, as applicable. Except as expressly and specifically set forth herein, the Lease is hereby ratified and confirmed, and all of the terms, covenants, agreements and provisions of the Lease shall remain unaltered and unmodified and in full force and effect throughout the balance of the term of the Lease, as extended hereby. Except as expressly set forth herein, all of the covenants, representations and warranties made by the Tenant contained in the Lease are hereby remade, reaffirmed and ratified as of the date hereof. EXECUTED as an instrument under seal as of the date first above-written. TST 125 HIGH STREET, L.L.C., a Delaware limited liability company By: _____________________________________ Name: Its: KEYPORT LIFE INSURANCE COMPANY, a Rhode Island Corporation By: _____________________________________ Name: Its: EX-10.22 5 LETTER OF AGREEMENT Exhibit 10.22 [Liberty Financial letterhead] [logo: LIBERTY Liberty Financial Companies, Inc. F I N A N C I A L] Federal Reserve Plaza 600 Atlantic Avenue Boston, MA 02210-2214 www.lib.com 617-722-6000 February 1, 1999 CONFIDENTIAL Stephen E. Gibson President and Chief Executive Officer The Colonial Group One Financial Center, 12th Floor Boston, MA 02111 Dear Steve: This letter sets forth the terms of an additional bonus you will receive as part of your annual bonus for 1998 and 1999 in connection with the settlement of a dispute with your former employer. This letter supersedes and replaces our letter agreement dated October 29, 1998 which dealt with the same bonus. You will receive an additional bonus for 1998 and 1999, as follows: o In February 1999, Colonial will increase the bonus you otherwise would receive by $167,471.21. o In February 2000, Colonial will increase the bonus you otherwise would receive by $187,216.04, plus interest from October 28, 1998 at the rate used to credit returns under the Liberty Financial deferred compensation plan. These additional payments are subject to the approval of the Liberty Financial Compensation Committee. Liberty Financial will recommend to the Committee that it approve these payments. Colonial shall deduct from all payments to be made to you under this letter any federal, state or local withholding or other taxes or charges that Colonial is required to deduct under applicable law, and all amounts stated or calculated in this letter are presented herein prior to any such deduction. Stephen E. Gibson February 1, 1999 Page 2 You will be entitled to receive any theretofore unpaid amounts under this letter if your employment with Colonial terminates due to (i) your death, (ii) your permanent disability (such that any Liberty Financial stock awards you own would immediately vest under the terms of Liberty Financial's Amended and Restated 1995 Stock Incentive Plan), (iii) Colonial's termination of your employment without Cause or (iv) your voluntary termination of your employment for Good Reason. "Cause" shall mean (i) any material act of dishonesty committed by you against Colonial or any other member of the Liberty Group (defined as any subsidiary or affiliate of Liberty Financial Companies, Inc.), (ii) your chronic absence from work other than by reason of illness, vacations and other excused absences, (iii) your use of alcohol, drugs or other controlled substances in such a manner as to interfere materially with the performance of your duties, (iv) commission by you of conduct requiring an affirmative response to be made by Colonial Management Associates, Inc., Colonial Advisory Services, Inc., Stein Roe & Farnham Incorporated, Liberty Funds Distributor, Inc. or any of their affiliates to item 11 of Form ADV or item 22 of Form U-4 (or any successor provisions of such forms), or (v) violations by you of Colonial's Code of Ethics, Insider Trading Policy or other firm policies and procedures (including, without limitation, policies and procedures relating to non-discrimination, sexual harassment or other unlawful conduct) which would otherwise result in termination of employment. "Good Reason" shall mean your ceasing to be the Chief Executive Officer of The Colonial Group, Inc. or a successor entity or a material reduction in the nature and scope of your duties from their current level. This letter agreement is not an employment agreement; it does not create any rights or benefits on your part except as expressly provided above. This letter and the Annex hereto constitutes the complete agreement between you and the Liberty Group with respect to the subject matter of this letter (there being no other agreements pertinent to the subject matter of this letter with any other member of the Liberty Group), and this letter supercedes all prior discussions or agreements with respect thereto. This letter may be amended, but only by a subsequent written agreement between the parties. Your rights and benefits under this letter cannot be assigned, except under the laws of descent and distribution. Liberty Financial cannot assign its rights and obligations under this letter without your prior written consent. This letter agreement shall be binding on and inure to the benefit of each of the parties and their respective successors and permitted assigns. This letter agreement shall be governed by and construed in accordance with the domestic substantive laws of The Commonwealth of Massachusetts without giving Stephen E. Gibson February 1, 1999 Page 3 effect to any choice or conflicts of laws rule or provision that would result in the application of the domestic substantive laws of any other jurisdiction. If you agree to and accept the foregoing, please sign below in the space provided. Sincerely, LIBERTY FINANCIAL COMPANIES, INC. By ____________________________ Title: I agree to and accept the foregoing: ____________________________ Stephen E. Gibson EX-10.23 6 CREDIT AGREEMENT Execution Copy - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE COLONIAL GROUP, INC. CREDIT AGREEMENT Dated as of April 10, 1998 BANKBOSTON, N.A., Agent - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE 1. Definitions; Certain Rules of Construction....................................................................1 2. The Credits..................................................................................................21 2.1. Term Credit A.....................................................................................21 2.1.1. Term Loan A............................................................................21 2.1.2. Term Loan A Notes......................................................................21 2.2. Revolving Credit..................................................................................21 2.2.1. Revolving Loan.........................................................................21 2.2.2. Borrowing Requests.....................................................................22 2.2.3. Revolving Note.........................................................................22 2.3. Term Credit B.....................................................................................22 2.3.1. Term Loan B............................................................................22 2.3.2. Term Loan B Notes......................................................................23 2.4. Application of Proceeds...........................................................................23 2.4.1. Term Loan A............................................................................23 2.4.2. Revolving Loan.........................................................................23 2.4.3. Term Loan B............................................................................23 2.4.4. Specifically Prohibited Applications...................................................23 2.5. Nature of Obligations of Lenders to Extend Credit.................................................23 2.6. Increase in Stated Maximum Amount of Credit.......................................................23 2.7. Option to Extend Maturities.......................................................................24 3. Interest; Pricing Options; Fees..............................................................................24 3.1. Interest..........................................................................................24 3.2. Pricing Options...................................................................................25 3.2.1. Election of Pricing Options............................................................25 3.2.2. Notice to Lenders and Company..........................................................25 3.2.3. Selection of Interest Periods..........................................................26 3.2.4. Additional Interest....................................................................26 3.2.5. Change in Applicable Laws, Regulations, etc............................................26 3.2.6. Taxes..................................................................................27 3.2.7. Funding Procedure......................................................................27 3.3. Commitment Fees...................................................................................27 3.4. Capital Adequacy..................................................................................27 3.5. Computations of Interest and Fees.................................................................28 4. Payment......................................................................................................28 4.1. Payment at Maturity...............................................................................28
4.1.1. Term Loan A............................................................................28 4.1.2. Revolving Loan.........................................................................29 4.1.3. Term Loan B...........................................................................29 4.2. Contingent Required Prepayments...................................................................29 4.2.1. Excess Credit Exposure.................................................................29 4.2.2. Class B Share Collection Amount........................................................29 4.3. Mandatory Prepayment of Term Loan B...............................................................29 4.4. Voluntary Prepayments.............................................................................30 4.5. Reborrowing; Application of Payments..............................................................30 4.6. Payment with Accrued Interest, etc................................................................30 5. Conditions to Extending Credit...............................................................................30 5.1. Conditions on Effective Date......................................................................30 5.1.1. Notes..................................................................................30 5.1.2. Payment of Fees........................................................................30 5.1.3. Legal Opinions.........................................................................30 5.1.4. Guarantees.............................................................................31 5.1.5. Investment Assets Under Management.....................................................31 5.2. Conditions to Each Extension of Credit............................................................31 5.2.1. Officer's Certificate..................................................................31 5.2.2. Proper Proceedings.....................................................................31 5.2.3. Legality, etc..........................................................................31 6. General Covenants............................................................................................32 6.1. Taxes and Other Charges; Accounts Payable.........................................................32 6.1.1. Taxes and Other Charges................................................................32 6.1.2. Accounts Payable.......................................................................32 6.2. Conduct of Business, etc..........................................................................32 6.2.1. Types of Business......................................................................32 6.2.2. Maintenance of Properties..............................................................32 6.2.3. Compliance with Material Agreements....................................................33 6.2.4. Statutory Compliance...................................................................33 6.3. Insurance.........................................................................................34 6.3.1. Business Interruption Insurance........................................................34 6.3.2. Errors and Omissions Insurance.........................................................34 6.3.3. Directors and Officers Insurance.......................................................34 6.3.4. Property Insurance.....................................................................34 6.3.5. Liability Insurance....................................................................34 6.4. Financial Statements and Reports..................................................................34 6.4.1. Annual Reports.........................................................................35 6.4.2. Quarterly Reports......................................................................36 6.4.3. Borrowing Base Reports.................................................................37 6.4.4. Other Reports..........................................................................37
-iii- 6.4.5. Notice of Litigation; Notice of Defaults...............................................38 6.4.6. ERISA Reports..........................................................................38 6.4.7. Other Information......................................................................38 6.5. Certain Financial Tests...........................................................................39 6.5.1. Consolidated Net Worth.................................................................39 6.5.2. Consolidated Net Income................................................................39 6.6. Financing Debt. .................................................................................39 6.7. [Intentionally omitted.]..........................................................................39 6.8. Liens.............................................................................................39 6.9. Investments and Acquisitions......................................................................41 6.10. Distributions....................................................................................41 6.11. Merger, Consolidation and Dispositions of Assets.................................................42 6.12. Issuance of Stock by Subsidiaries; Subsidiary Distributions; Subsidiary Guarantors.....................................................................................42 6.12.1. Issuance of Stock by Subsidiaries.....................................................42 6.12.2. No Restrictions on Subsidiary Distributions...........................................42 6.12.3. Subsidiary Guarantors.................................................................42 6.13. ERISA, etc.......................................................................................43 6.14. Maintenance of Fee Structure.....................................................................43 7. Representations and Warranties...............................................................................43 7.1. Organization and Business.........................................................................43 7.1.1. Company................................................................................43 7.1.2. Subsidiaries...........................................................................44 7.1.3. Qualification..........................................................................44 7.2. Financial Statements and Other Information; Material Agreements...................................44 7.2.1. Financial Statements and Other Information.............................................44 7.2.2. Material Agreements....................................................................45 7.2.3. Investment Assets Under Management.....................................................46 7.3. Changes in Condition..............................................................................46 7.4. Class B Shares Systems............................................................................46 7.5. Title to Assets...................................................................................46 7.6. Licenses, etc.....................................................................................46 7.7. Litigation........................................................................................47 7.8. Tax Returns.......................................................................................47 7.9. Authorization and Enforceability..................................................................47 7.10. No Legal Obstacle to Agreements..................................................................48 7.11. Defaults.........................................................................................48 7.12. Certain Business Representations.................................................................48 7.12.1. Labor Relations.......................................................................48 7.12.2. Antitrust.............................................................................49 7.12.3. Consumer Protection...................................................................49 7.12.4. Certain Other Agreements..............................................................49
-iv- 7.12.5. Certain Laws..........................................................................49 7.12.6. Burdensome Obligations................................................................49 7.13. Pension Plans....................................................................................49 7.14. Foreign Trade Regulations; Government Regulation.................................................50 7.14.1. Foreign Trade Regulations.............................................................50 7.14.2. Government Regulation.................................................................50 7.15. Disclosure.......................................................................................50 8. Defaults.....................................................................................................50 8.1. Events of Default.................................................................................50 8.2. Certain Actions Following an Event of Default.....................................................53 8.2.1. No Obligation to Extend Credit.........................................................53 8.2.2. Specific Performance; Exercise of Rights...............................................53 8.2.3. Acceleration...........................................................................53 8.2.4. Enforcement of Payment; Credit Security; Setoff........................................54 8.2.5. Cumulative Remedies....................................................................54 8.3. Annulment of Defaults.............................................................................54 8.4. Waivers...........................................................................................54 9. Expenses; Indemnity..........................................................................................55 9.1. Expenses..........................................................................................55 9.2. General Indemnity.................................................................................55 10. Operations..............................................................................................56 10.1. Interests in Credits.............................................................................56 10.2. Agent's Authority to Act, etc....................................................................56 10.3. Company to Pay Agent, etc........................................................................57 10.4. Lender Operations for Advances, etc..............................................................57 10.4.1. Advances..............................................................................57 10.4.2. Agent to Allocate Payments, etc.......................................................57 10.4.3. Delinquent Lenders; Nonperforming Lenders.............................................57 10.5. Sharing of Payments, etc.........................................................................58 10.6. Amendments, Consents, Waivers, etc...............................................................59 10.7. Agent's Resignation..............................................................................60 10.8. Concerning the Agent.............................................................................60 10.8.1. Action in Good Faith, etc.............................................................60 10.8.2. No Implied Duties, etc................................................................61 10.8.3. Validity, etc.........................................................................61 10.8.4. Compliance............................................................................61 10.8.5. Employment of Agents and Counsel......................................................61 10.8.6. Reliance on Documents and Counsel.....................................................62 10.8.7. Agent's Reimbursement.................................................................62 10.8.8. Agent's Fees..........................................................................62
-v- 10.9. Rights as a Lender..................................................................................62 10.10. Independent Credit Decision.....................................................................62 10.11. Indemnification.................................................................................63 11. Successors and Assigns; Lender Assignments and Participations...............................................63 11.1. Assignments by Lenders...........................................................................63 11.1.1. Assignees and Assignment Procedures...................................................63 11.1.2. Terms of Assignment and Acceptance....................................................64 11.1.3. Register..............................................................................65 11.1.4. Acceptance of Assignment and Assumption...............................................65 11.1.5. Federal Reserve Bank..................................................................66 11.1.6. Further Assurances....................................................................66 11.2. Credit Participants..............................................................................66 12. Confidentiality.............................................................................................67 13. Foreign Persons.............................................................................................67 14. Notices.....................................................................................................68 15. Course of Dealing; Amendments and Waivers...................................................................68 16. Defeasance..................................................................................................69 17. Venue; Service of Process...................................................................................69 18. WAIVER OF JURY TRIAL........................................................................................69 19. General.....................................................................................................70
-vi- -vii- -viii- -ix- -x- EXHIBITS Exhibit 2.1.2 - Term Loan A Note Exhibit 2.2.3 - Revolving Note Exhibit 2.3.2 - Term Loan B Note Exhibit 5.1.4 - Subsidiary Guarantee Exhibit 5.2.1 - Officer's Certificate Exhibit 6.4.3 - Fund Reconciliation Report Exhibit 6.14 - CDSC Fee Structure Exhibit 7.1 - Company and the Subsidiaries Exhibit 11.1.1 - Assignment and Acceptance
THE COLONIAL GROUP, INC. CREDIT AGREEMENT This Credit Agreement, dated as of April 10, 1998 is among The Colonial Group, Inc., a Massachusetts corporation, and the Lenders (as defined below) and BankBoston, N.A., as agent for itself and the other Lenders, and is effective as of the Effective Date. The parties agree as follows: 1. Definitions; Certain Rules of Construction. Except as otherwise explicitly specified to the contrary, (a) the capitalized term "Section" refers to sections of this Agreement, (b) the capitalized term "Exhibit" refers to exhibits to this Agreement, (c) references to a particular Section include all subsections thereof, (d) the word "including" shall be construed as "including without limitation," (e) accounting terms not otherwise defined herein shall have the meaning provided under GAAP and (f) terms defined in the UCC and not otherwise defined herein shall have the meaning provided under the UCC. Certain capitalized terms are used in this Agreement as specifically defined as follows: 1.1. "Accumulated Benefit Obligations" means the actuarial present value of the accumulated benefit obligations under any Plan, calculated in a manner consistent with Statement No. 87 of the Financial Accounting Standards Board. 1.2. "Affiliate" means, with respect to the Company (or other specified Person), any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with the Company, and shall include (a) any officer or director or general partner of the Company and (b) any Person of which the Company or any Affiliate (as defined in clause (a) above) of the Company shall, directly or indirectly, beneficially own either (i) at least 10% of the outstanding equity securities having the general power to vote or (ii) at least 10% of all equity interests; provided, however, that in any event, Liberty Mutual Insurance Company shall be considered an Affiliate of the Company and the Subsidiaries. 1.3. "Agent" means BankBoston in its capacity as agent for the Lenders hereunder, as well as its successors and assigns in such capacity pursuant to Section 10.7. 1.4. "Applicable Margin" means, with respect to any Pricing Option with respect to the Revolving Loan or Term Loan B, the greater of (a) the percentage specified in the table below set forth opposite the S&P's Rating for Liberty Mutual Capital Corporation specified in such table or (b) the percentage specified in the table below set forth opposite the Moody's Rating for Liberty Mutual Capital Corporation specified in such table, in each case as such rating is reported on the third Banking Day prior to the commencement of the Interest Period applicable to such Pricing Option; provided, however, that on and after the Conversion Date the percentages specified in the table below shall increase by 0.125%:
S&P's Moody's Rating Percentage Rating ------ ---------- ------ AA- or higher 0.140% Aa3 or higher A+ or higher 0.160% A1 or higher A or higher 0.205% A2 or higher A- or higher 0.225% A3 or higher BBB+ or lower 0.260% Baa1 or lower
1.5. "Applicable Rate" means, at any date, (a) with respect to each portion of the Term Loan A subject to a Pricing Option, the sum of (i) 0.225% plus (ii) the Eurodollar Rate with respect to such Pricing Option; (b) with respect to each portion of the Revolving Loan or Term Loan B subject to a Pricing Option, the sum of (i) the Applicable Margin with respect to such Pricing Option plus (ii) the Eurodollar Rate with respect to such Pricing Option; and (c) with respect to each other portion of the Loan, the Base Rate. 1.6. "Assignee" is defined in Section 11.1.1. 1.7. "Assignment and Acceptance" is defined in Section 11.1.1. 1.8. "BankBoston" means BankBoston, N.A. 1.9. "Banking Day" means any day other than Saturday, Sunday or a day on which banks in Boston, Massachusetts or New York, New York are authorized or required by law or other governmental action to close and, if such term is used with reference to a Pricing Option, any day on which dealings are effected in the Eurodollars in question by first-class banks in the inter-bank Eurodollar markets in New York, New York and at the location of the applicable Eurodollar Office. -2- 1.10. "Bankruptcy Code" means Title 11 of the United States Code (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. 1.11. "Bankruptcy Default" means an Event of Default referred to in Section 8.1.11. 1.12. "Base Rate" means, on any day, the greater of (a) the rate of interest announced by BankBoston at the Boston Office as its Base Rate or (b) the sum of 1/2% plus the Federal Funds Rate. 1.13. "Basic Eurodollar Rate" means, as applied to any Interest Period, the rate of interest at which Eurodollar deposits in an amount comparable to the Percentage Interest of BankBoston in the portion of the Loan as to which a Pricing Option has been elected and which have a term corresponding to the Interest Period in question are offered to BankBoston by first class banks in the inter-bank Eurodollar market for delivery in immediately available funds at a Eurodollar Office on the first day of such Interest Period as determined by the Agent at approximately 10:00 a.m. (Boston time) two Banking Days prior to the date upon which the Interest Period in question is to commence, which determination by the Agent shall, in the absence of manifest error, be conclusive. 1.14. "Boston Office" means the principal banking office of BankBoston in Boston, Massachusetts. 1.15. "Broker" means any broker, dealer, bank or other person or entity (other than any Subsidiary or any director, officer or employee of the Company or any Subsidiary) that sells or arranges for the sale of Class B Shares and is entitled to receive from the Company or any Subsidiary any commission or other compensation in respect of such sales. 1.16. "By-laws" means all written by-laws of any Person other than an individual or similar governance documents of such Person, all as from time to time in effect. 1.17. "Capital Expenditures" means, for any period, amounts added or required to be added to the property, plant and equipment or other fixed assets account on the Consolidated balance sheet of the Company and the Subsidiaries, prepared in accordance with GAAP, in respect of (a) the acquisition, construction, improvement or replacement of land, buildings, machinery, equipment, leaseholds and any other real or personal property, (b) to the extent not included in clause (a) above, materials, contract labor and direct labor relating thereto (excluding amounts properly expensed as repairs and maintenance in accordance with GAAP) and (c) software development costs to the extent not expensed. 1.18. "Capitalized Lease" means any lease which is required to be capitalized on the balance sheet of the lessee in accordance with GAAP, including Statement Nos. 13 and 98 of the Financial Accounting Standards Board. -3- 1.19. "Capitalized Lease Obligations" means the amount of the liability reflecting the aggregate discounted amount of future payments under all Capitalized Leases calculated in accordance with GAAP, including Statement Nos. 13 and 98 of the Financial Accounting Standards Board. 1.20. "Cash Equivalents" means: (a) negotiable certificates of deposit, time deposits (including sweep accounts), demand deposits and bankers' acceptances issued by any United States financial institution having capital and surplus and undivided profits aggregating at least $100,000,000 and rated Prime-1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's Corporation (or equivalently rated by any other nationally recognized rating organization) or issued by any Lender; (b) short-term corporate obligations rated Prime-1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's Corporation (or equivalently rated by any other nationally recognized rating organization) or issued by any Lender; (c) any direct obligation of the United States of America or any agency or instrumentality thereof, or of any state or municipality thereof, (i) which has a remaining maturity at the time of purchase of not more than one year or (ii) which is subject to a repurchase agreement with any Lender (or any other financial institution referred to in clause (a) above) exercisable within one year from the time of purchase and (iii) which, in the case of obligations of any state or municipality, is rated AA or better by Moody's Investors Service, Inc. or equivalently rated by any other nationally recognized rating organization; and (d) any mutual fund or other pooled investment vehicle rated AA or better by Moody's Investors Service, Inc. or equivalently rated by any other nationally recognized rating organization which invests principally in obligations described above. 1.21. "CDSC Funds" means the Funds set forth on Exhibit 6.14, with dealer commissions no more favorable to the Brokers and Redemption Fees and Distribution Fees no more favorable to the shareholders of such Funds than as specified in Exhibit 6.14. 1.22. "Charter" means the articles of organization, certificate of incorporation, joint venture agreement, partnership agreement, trust indenture or other charter document of any Person other than an individual, each as from time to time in effect. 1.23. "CISC" means Colonial Investors Service Center, Inc., a Massachusetts corporation, and its successors and assigns. -4- 1.24. "Class B Share Collection Amount" means, for any period, the sum of Distribution Fees plus Redemption Fees. 1.25. "Class B New Shares" means Class B Shares sold on or after April 1, 1998. 1.26. "Class B Old Shares" means Class B Shares sold before April 1, 1998. 1.27. "Class B Shares" means any shares (or class of shares) of beneficial interest or capital stock of any CDSC Fund, upon the redemption of which a Redemption Fee may be payable at any time, and that are set forth on Exhibit 6.14. 1.28. "Closing Date" means the Effective Date and each subsequent date on which any extension of credit is made pursuant to Section 2. 1.29. "Code" means, collectively, the federal Internal Revenue Code of 1986 (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. 1.30. "Colonial Management" means Colonial Management Associates, Inc., a Massachusetts corporation and a Wholly Owned Subsidiary. 1.31. "Commitment" means, with respect to any Lender, such Lender's Percentage Interest in the obligations to extend the credits contemplated by the Credit Documents. 1.32. "Commitment Fee Rate" means the greater of (a) the percentage specified in the table below set forth opposite the S&P's Rating for Liberty Mutual Capital Corporation specified in such table or (b) the percentage specified in the table below set forth opposite the Moody's Rating for Liberty Mutual Capital Corporation specified in such table, in each case as such rating is reported on the immediately preceding Payment Date:
S&P's Moody's Rating Percentage Rating ------ ---------- ------ AA- or higher 0.060% Aa3 or higher A+ or higher 0.065% A1 or higher A or higher 0.070% A2 or higher A- or higher 0.075% A3 or higher BBB+ or lower 0.090% Baa1 or lower
1.33. "Commodities Act" means, collectively, the federal Commodities Exchange Act (or any successor statute), the rules and regulations thereunder and the rules and regulations of the Commodity Futures Trading Commission (or any successor), all as from time to time in effect. -5- 1.34. "Company" means The Colonial Group, Inc., a Massachusetts corporation, and its successors and assigns, including any successor by merger. 1.35. "Computation Covenants" means Sections 6.5, 6.9.7 and 6.13. 1.36. "Consolidated" and "Consolidating," when used with reference to any term, mean that term as applied to the accounts of the Company (or other specified Person) and all of its Subsidiaries (or other specified group of Persons), or such of its Subsidiaries as may be specified, consolidated (or combined) or consolidating (or combining), as the case may be, in accordance with GAAP and with appropriate deductions for minority interests in Subsidiaries, as required by GAAP. 1.37. "Consolidated Contingent Redemption Amount" means, on any date, the aggregate Redemption Fees that would then be payable to the Company and the Subsidiaries if all holders of Class B Shares redeemed such shares on such date. 1.38. "Consolidated Net Income" means, for any period, the net income (or loss) of the Company and the Subsidiaries, determined in accordance with GAAP on a Consolidated basis; provided, however, that Consolidated Net Income shall not include: (a) the income (or loss) of any Person accrued prior to the date such Person becomes a Subsidiary or is merged into or consolidated with the Company or any Subsidiary; (b) the income (or loss) of any Person (other than a Subsidiary) in which the Company or any Subsidiary has an ownership interest; provided, however, that (i) Consolidated Net Income shall include amounts in respect of the income of such Person when actually received in cash by the Company or such Subsidiary in the form of dividends or similar Distributions and (ii) Consolidated Net Income shall be reduced by the aggregate amount of all Investments, regardless of the form thereof, made by the Company or any Subsidiary in such Person for the purpose of funding any deficit or loss of such Person; (c) all amounts included in computing such net income (or loss) in respect of the write-up of any asset (and any depreciation and amortization charges resulting from any such write-up of assets) or the retirement of any Indebtedness at less than face value after December 31, 1997; (d) extraordinary and nonrecurring gains; and (e) any after-tax gains or losses attributable to returned surplus assets of any Plan. -6- 1.39. "Consolidated Net Worth" means, at any date, the total of: (a) stockholders' equity of the Company and the Subsidiaries (excluding the effect of any foreign currency translation adjustments and excluding any depreciation and amortization charges resulting from the write-up of any asset after December 31, 1997) determined in accordance with GAAP on a Consolidated basis, minus (b) the amount by which such stockholders' equity has been increased by the write-up of any asset of the Company and the Subsidiaries after December 31, 1997. 1.40. "Consolidated Revenues" means, for any period, the total revenues of the Company and the Subsidiaries determined in accordance with GAAP on a Consolidated basis. 1.41. "Consolidated Unreimbursed Sales Commissions" means, for any period, in each case with respect only to Class B New Shares: (a) for the first such period after April 1, 1998 the total of: (i) Prepaid Brokerage Commissions paid by the Company and the Subsidiaries during such period; minus (ii) the sum of Distribution Fees and Redemption Fees received by the Company and the Subsidiaries during such period. (b) for each subsequent period, (i) Consolidated Unreimbursed Sales Commissions as of the last day of the previous period; plus (ii) Prepaid Brokerage Commissions paid by the Company and the Subsidiaries during such period; minus (iii) the sum of Distribution Fees and Redemption Fees received by the Company and the Subsidiaries during such period. 1.42. "Conversion Date" means April 9, 1999 or such later date as determined in accordance with Section 2.7. 1.43. "Credit Documents" means: (a) this Agreement, the Notes, the letter agreement dated as of April 10, 1998, between the Agent and the Company, the Subsidiary Guarantee and the Liberty Mutual Guarantee, each as from time to time in effect; -7- (b) all financial statements, reports, notices and certificates delivered to any of the Lenders by the Company or any Subsidiary in connection herewith or therewith; and (c) any other present or future agreement or instrument from time to time entered into among the Company, any Subsidiary or any of their respective Affiliates on the one hand, and the Agent or all the Lenders, on the other hand, relating to, amending or modifying this Agreement or any other Credit Document referred to above or which is stated to be a Credit Document, each as from time to time in effect. 1.44. "Credit Obligations" means all present and future liabilities, obligations and Indebtedness of the Company, any Subsidiary or any of their Affiliates party to a Credit Document owing to any Lender under or in connection with this Agreement or any other Credit Document, including obligations in respect of principal, interest, commitment fees, amounts provided for in Sections 3.2.4, 3.2.6, 3.4 and 9 and other fees, charges, indemnities and expenses from time to time owing hereunder or under any other Credit Document (whether accruing before or after a Bankruptcy Default). 1.45. "Credit Participant" is defined in Section 11.2. 1.46. "Default" means any Event of Default and any event or condition which with the passage of time or giving of notice, or both, would become an Event of Default. 1.47. "Delinquency Period" is defined in Section 10.4.3. 1.48. "Delinquent Lender" is defined in Section 10.4.3. 1.49. "Delinquent Payment" is defined in Section 10.4.3. 1.50. "Distribution" means, with respect to the Company (or other specified Person): (a) the declaration or payment of any dividend, including dividends payable in shares of capital stock of the Company, on or in respect of any shares of any class of capital stock of the Company; (b) the purchase, redemption or other retirement of any shares of any class of capital stock of the Company (or of options, warrants or other rights for the purchase of such shares), directly, indirectly through a Subsidiary or otherwise; (c) any other distribution on or in respect of any shares of any class of equity of or beneficial interest in the Company; -8- (d) any payment of principal or interest with respect to, or any purchase, redemption or defeasance of, any Indebtedness of the Company which by its terms or the terms of any agreement is subordinated to the payment of the Credit Obligations; and (e) any payment, loan or advance by the Company to, or any other Investment by the Company in, the holder of any shares of any class of capital stock of or equity or interest in the Company or any Affiliate of such holder; provided, however, that the term "Distribution" shall not include payments in the ordinary course of business in respect of (i) reasonable compensation paid to employees, officers and directors (including pursuant to the Company's Profit-Sharing Plan), (ii) advances to employees for travel expenses, drawing accounts and similar expenditures, (iii) rent paid to or accounts payable for services rendered or goods sold by non-Affiliates or (iv) intercompany accounts payable and real property leases to non-Affiliates. 1.51. "Distribution Agreement" means any distribution agreement of which a Distribution Plan is a part. 1.52. "Distribution Fees" means fees (other than Redemption Fees) paid by the CDSC Funds to the Company or any Subsidiary, typically at an annual rate of 0.75% of net asset value attributable to Class B Shares of the CDSC Funds, pursuant to a Distribution Plan, but not including any "service fee" as defined in section 26 of Article III of the Rules of Fair Practice (or any successor provision) of the NASD or any fees remitted by the Company or any Subsidiary to a Broker as concessions, trailing compensation or service fees, typically payable at the annual rate of an additional 0.25% of net asset value of the CDSC Funds. 1.53. "Distribution Fees Collectible" means, on any date, the aggregate Distribution Fees that would be collected by the Company or any Subsidiary on the total Class B Shares outstanding on such date over the remaining life of the Class B Shares, assuming no redemption of the Class B Shares and assuming no change in the asset value of the Class B Shares in the future. 1.54. "Distribution Plan" means any plan duly adopted by any CDSC Fund and validly in effect pursuant to Rule 12b-1 under the Investment Company Act (or similar or successor provisions) pursuant to which such CDSC Fund may make payments to the Company or any Subsidiary in connection with the distribution of Class B Shares. 1.55. "Effective Date" means the date on which all the conditions set forth in Section 5 have been satisfied, which date may not be later than April 10, 1998. 1.56. "ERISA" means, collectively, the Employee Retirement Income Security Act of 1974 (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. -9- 1.57. "ERISA Group Person" means the Company, any Subsidiary and any Person which is a member of the controlled group or under common control with the Company or any Subsidiary within the meaning of section 414 of the Code or section 4001(a)(14) of ERISA. 1.58. "Eurodollar Office" means such non-United States office or international banking facility of any Lender as such Lender may from time to time select. 1.59. "Eurodollar Rate" for any Interest Period means the rate, rounded to the nearest 1/100%, obtained by dividing (a) the Basic Eurodollar Rate for such Interest Period by (b) an amount equal to 1 minus the Eurodollar Reserve Rate; provided, however, that if at any time during such Interest Period the Eurodollar Reserve Rate applicable to any outstanding Pricing Option changes, the Eurodollar Rate for such Interest Period shall automatically be adjusted to reflect such change, effective as of the date of such change. 1.60. "Eurodollar Reserve Rate" means the stated maximum rate (expressed as a decimal) of all reserves (including any basic, supplemental, marginal or emergency reserve or any reserve asset), if any, as from time to time in effect, required by any Legal Requirement to be maintained by any Lender against (a) "Eurocurrency liabilities" as specified in Regulation D of the Board of Governors of the Federal Reserve System (or any successor regulation) applicable to a Pricing Option, (b) any other category of liabilities that includes Eurodollar deposits by reference to which the interest rate on portions of the Loan subject to a Pricing Option is determined, (c) the principal amount of or interest on any portion of the Loan subject to a Pricing Option or (d) any other category of extensions of credit, or other assets, that includes portions of the Loan subject to a Pricing Option by a non-United States office of any of the Lenders to United States residents. 1.61. "Eurodollars" means, with respect to any Lender, deposits of United States Funds in a non-United States office or an international banking facility of such Lender. 1.62. "Event of Default" means each of (a) the events referred to as Events of Default in Section 8.1 and (b) the events described in Sections 3(a) through 3(f) of the Liberty Mutual Guarantee. 1.63. "Exchange Act" means, collectively, the federal Securities Exchange Act of 1934 (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. 1.64. "Executive Officer" means the chief executive officer, chief operating officer or president of the Company (or other specified Person) or any vice president of the Company who is not a Financial Officer. -10- 1.65. "Federal Funds Rate" means, for any day, (a) the rate equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as such weighted average is published for such day (or, if such day is not a Banking Day, for the immediately preceding Banking Day) by the Federal Reserve Bank of New York or (b) if such rate is not so published for such Banking Day, as determined by the Agent using any reasonable means of determination. Each determination by the Agent of the Federal Funds Rate shall, in the absence of manifest error, be conclusive. 1.66. "Final Term Loan A Maturity Date" means April 9, 1999. 1.67. "Final Term Loan B Maturity Date" means April 9, 2004 or such later date as determined in accordance with Section 2.7. 1.68. "Financial Officer" means the chief financial officer, treasurer or assistant treasurer of the Company (or other specified Person) or a vice president whose primary responsibility is for the financial affairs of the Company. 1.69. "Financing Debt" means: (a) Indebtedness in respect of borrowed money; (b) Indebtedness evidenced by notes, debentures or similar instruments; (c) Indebtedness in respect of Capitalized Leases; (d) Indebtedness in respect of the deferred purchase price of assets (other than normal trade accounts payable in the ordinary course of business); (e) Indebtedness in respect of mandatory redemption or dividend rights on capital stock (or other equity); (f) Indebtedness in respect of unfunded pension liabilities; and (g) Indebtedness in respect of financial Guarantees and letters of credit. 1.70. "Foreign Trade Regulations" means, collectively and as from time to time in effect (including any successor statutes or regulations), (a) any act that prohibits or restricts, or empowers the President or executive agencies of the United States of America to prohibit or restrict, exports to or financial transactions with any foreign country or foreign national, (b) the regulations with respect to certain prohibited foreign trade transactions set forth at 15 C.F.R. Parts 730 et seq., 22 C.F.R. Parts 120-130 and 31 C.F.R. Parts 500 et seq. and (c) any order, regulation, ruling, interpretation, direction, instruction or notice relating to any of the foregoing. -11- 1.71. "Fund" means (a) with respect to any Trust that has more than one portfolio, the individual portfolios, interests in which are represented by series of shares of beneficial interest or capital stock of each Trust having series, for which portfolio the Company or any of its Subsidiaries provides investment advisory services pursuant to Investment Advisory Contracts and (b) with respect to any Trust that does not have more than one portfolio, such Trust. 1.72. "GAAP" means generally accepted accounting principles, as defined by the United States Financial Accounting Standards Board, as from time to time in effect; provided, however, that for purposes of compliance with Section 6 (other than Section 6.4) and the related definitions, "GAAP" means such principles as in effect on December 31, 1997 as applied by the Company and the Subsidiaries in the preparation of the December 31, 1997 financial statements previously furnished to the Agent, and consistently followed, without giving effect to any subsequent changes therein other than changes consented to in writing by the Required Lenders. 1.73. "Guarantee" means, with respect to the Company (or other specified Person): (a) any guarantee by the Company of the payment or performance of, or any contingent obligation by the Company in respect of, any Indebtedness or other obligation of any other Person; (b) any other arrangement whereby credit is extended to a Person on the basis of any promise or undertaking of the Company (including any "comfort letter" or "keep well agreement" written by the Company to a creditor or prospective creditor of such Person) to (i) pay the Indebtedness of such Person, (ii) purchase an obligation owed by such Person, (iii) pay for the purchase or lease of assets or services regardless of the actual delivery thereof or (iv) maintain the capital, working capital, solvency or general financial condition of such Person, in each case whether or not such arrangement is disclosed in the balance sheet of the Company or referred to in a footnote thereto; (c) any liability of the Company as a general partner of a partnership in respect of Indebtedness or other obligations of such partnership; (d) any liability of the Company as a joint venturer of a joint venture in respect of Indebtedness or other obligations of such joint venture; and (e) reimbursement obligations with respect to letters of credit, surety bonds and other financial guarantees; provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Guarantee and the amount of Indebtedness resulting from such Guarantee shall be the amount which should be carried on the balance sheet of the obligor whose obligations were guaranteed in respect of such obligations (but without giving effect to any limitations on recourse against such obligor), determined in accordance with GAAP. -12- 1.74. "Guarantor" means any Subsidiary from time to time party to the Subsidiary Guarantee as a Guarantor thereunder. 1.75. "Inactive Subsidiary" means any Subsidiary that conducts no business and which has total assets with a fair market value (or book value, if greater) of less than $25,000. 1.76. "Indebtedness" means all obligations, contingent or otherwise, which in accordance with GAAP are required to be classified upon the balance sheet of the Company (or other specified Person) as liabilities, but in any event including: (a) liabilities secured by any Lien existing on property owned or acquired by the Company or any Subsidiary, whether or not the liability secured thereby shall have been assumed; (b) Capitalized Lease Obligations; (c) mandatory redemption, repurchase or dividend obligations with respect to capital stock (or other evidence of beneficial interest); and (d) all endorsements in respect of Indebtedness of others. 1.77. "Indemnified Party" is defined in Section 9.2. 1.78. "Interest Period" means any period, selected as provided in Sections 3.2.1 and 3.2.3, of one or four weeks or one, two, three or six months, commencing on any Banking Day and ending on the corresponding day in the subsequent calendar week or the corresponding date in the subsequent calendar month so indicated (or, if such subsequent calendar month has no corresponding date, on the last day of such subsequent calendar month); provided, however, that subject to Section 3.2.4, if any Interest Period so selected would otherwise begin or end on a date which is not a Banking Day, such Interest Period shall instead begin or end, as the case may be, on the immediately preceding or succeeding Banking Day as determined by the Agent in accordance with the then current banking practice in the inter-bank Eurodollar market with respect to Eurodollar deposits at the applicable Eurodollar Office, which determination by the Agent shall, in the absence of manifest error, be conclusive. 1.79. "Interest Rate Protection Agreement" means any interest rate swap, interest rate cap or other contractual arrangement protecting a Person against increases in variable interest rates on Financing Debt. 1.80. "Investment" means, with respect to the Company (or other specified Person): -13- (a) any share of capital stock, evidence of Indebtedness or other security issued by any other Person; (b) any loan, advance or extension of credit to, or contribution to the capital of, any other Person; (c) any acquisition of all or any part of the business of any other Person or the assets comprising such business or part thereof; (d) any commitment or option to make any Investment; and (e) any other similar investment. The investments described in the foregoing clauses (a) through (e) shall be included in the term "Investment" whether they are made or acquired by purchase, exchange, issuance of stock or other securities, merger, reorganization or any other method; provided, however, that the term "Investment" shall not include (i) current trade and customer accounts receivable for property leased, goods furnished or services rendered in the ordinary course of business and payable in accordance with customary trade terms, (ii) advances and prepayments to suppliers for property leased, goods furnished and services rendered in the ordinary course of business, (iii) advances to employees for travel expenses, drawing accounts and similar expenditures, (iv) stock or other securities acquired in connection with the satisfaction or enforcement of Indebtedness or claims due to the Company or any Subsidiary or as security for any such Indebtedness or claim or (v) demand deposits in banks or trust companies. In determining the amount of outstanding Investments for purposes of Section 6.9: (1) the amount of any Investment (other than Investments referred to in the following clause (2) or (3)) shall be the cost thereof minus any returns of capital on such Investment (determined in accordance with GAAP without regard to amounts realized as income on such Investment); (2) the amount of any Investment in respect of a commitment or option to make a purchase shall be the amount of any nonrefundable down payment or acquisition price plus the amount of any additional fixed payment obligation; (3) the amount of any Investment in respect of a Guarantee shall be the maximum amount that the guarantor may become obligated to pay in respect of the obligations guaranteed (whether or not such obligations are outstanding at the time of computation); (4) the amount of any Investment in respect of a purchase described in clause (c) above shall be increased by the amount of any Indebtedness assumed in connection with such purchase or secured by any asset acquired in such purchase (whether or not any Indebtedness is assumed) or for which any Person that becomes a Subsidiary is liable on the date on which the securities of such Person are acquired; and -14- (5) no Investment shall be increased as the result of an increase in the undistributed retained earnings of the Person in which the Investment was made or decreased as a result of an equity interest in the losses of such Person. 1.81. "Investment Advisers Act" means, collectively, the federal Investment Advisers Act of 1940 (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. 1.82. "Investment Advisory Contracts" means binding written contractual agreements under which the Company or any of its Subsidiaries provides investment advisory services to a Fund or Trust under the Investment Company Act or the Investment Advisers Act. 1.83. "Investment Company Act" means, collectively, the federal Investment Company Act of 1940 (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. 1.84. "Legal Requirement" means any requirement imposed upon any of the Lenders by any law of the United States of America or any jurisdiction in which any Eurodollar Office is located or by any regulation, order, interpretation, ruling or official directive of the Board of Governors of the Federal Reserve System or any other board or governmental or administrative agency of the United States of America, of any jurisdiction in which any Eurodollar Office is located, or of any political subdivision of any of the foregoing. Any requirement imposed by any such regulation, order, ruling or official directive not having the force of law shall be deemed to be a Legal Requirement if any of the Lenders reasonably believes that compliance therewith is in the best interest of such Lender. 1.85. "Lenders" means the Agent and the other Persons owning a Percentage Interest in the Credit Obligations or having a Commitment and their respective Assignees permitted by Section 11.1. 1.86. "Lending Officer" means such officers or employees of the Agent as from time to time designated by it in writing to the Company. 1.87. "LFII" means Liberty Financial Investments, Inc., a Massachusetts corporation and a Wholly Owned Subsidiary. 1.88. "Liberty Mutual Guarantee" means the Guarantee dated as of April 10, 1998, as amended, modified and in effect from time to time, among the Company, Liberty Mutual Insurance Company and the Agent. -15- 1.89. "Lien" means, with respect to the Company (or any other specified Person): (a) Any encumbrance, mortgage, pledge, lien, charge or security interest of any kind upon any property or assets of the Company, whether now owned or hereafter acquired, or upon the income or profits therefrom. (b) Any arrangement or agreement which prohibits the Company from creating encumbrances, mortgages, pledges, liens, charges or security interests. (c) The acquisition of, or the agreement to acquire, any property or asset upon conditional sale or subject to any other title retention agreement, device or arrangement (including a Capitalized Lease). (d) The sale, assignment, pledge or transfer for security of any accounts, general intangibles or chattel paper of the Company, with or without recourse. (e) The transfer of any tangible property or assets for the purpose of subjecting such items to the payment of Indebtedness in priority to payment of the general creditors of the Company. (f) The existence for a period of more than 90 consecutive days of any Indebtedness against the Company which if unpaid would by law or upon a Bankruptcy Default be given any priority over general creditors. 1.90. "Loan" means each of the Revolving Loan and the Term Loans. 1.91. "Margin Stock" means "margin stock" within the meaning of Regulation G, T, U or X (or any successor provisions) of the Board of Governors of the Federal Reserve System, or any regulations, interpretations or rulings thereunder, all as from time to time in effect. 1.92. "Material Adverse Change" means a material adverse change since December 31, 1997 in the business, assets, financial condition or prospects of the Company (on an individual basis) or the Company and the Subsidiaries (on a Consolidated basis) (or any other specified Persons), whether as a result of: (a) general economic conditions affecting the mutual fund industry, (b) fire, flood or other natural calamities, (c) regulatory changes, judicial decisions, war or other governmental action, -16- (d) termination of the Company's or any Subsidiary's status as a registered investment adviser under the Investment Advisers Act or, on an involuntary basis, under the laws of states material to the Company or such Subsidiary's business, (e) involuntary termination of the status of the Company or any Subsidiary as a registered broker/dealer in good standing under the Exchange Act or laws of states material to the Company's or such Subsidiary's business, or as a member of the NASD in good standing, (f) termination of the qualification of any Trust or Fund as a regulated investment company taxed under the rules of subchapter M of the Code (other than as a result of merger or other voluntary termination of any Trust or Fund), (g) the issuance by the Securities and Exchange Commissions of a stop order suspending the effectiveness of a Trust's or Fund's registration statement under the Securities Act, (h) suspension or termination of the registration or approval of the Company or any Subsidiary under the Commodities Act, or (i) any other event or development, whether or not related to those enumerated above. 1.93. "Material Agreements" is defined in Section 7.2.2. 1.94. "Maximum Amount of Credit" means, on any date, the least of: (a) the Stated Maximum Amount of Credit; (b) the Consolidated Unreimbursed Sales Commissions for Class B New Shares as reported for the most recent month for which such report is required to be furnished to the Lenders in accordance with Section 6.4.3; (c) the Consolidated Contingent Redemption Amount for Class B New Shares as reported for the most recent month for which such report is required to be furnished to the Lenders in accordance with Section 6.4.3; (d) the Distribution Fees Collectible for Class B New Shares as reported for the most recent month for which such report is required to be furnished to the Lenders in accordance with Section 6.4.3; and -17- (e) to the extent less than the Maximum Amount of Credit then in effect, such amount (in a minimum amount of $10,000,000 and an integral multiple of $1,000,000) specified by irrevocable notice from the Company to the Lenders. 1.95. "Multiemployer Plan" means any Plan that is a "multiemployer plan" as defined in section 4001(a)(3) of ERISA. 1.96. "Moody's Rating" means, at any time, the rating issued by Moody's Investors Service, Inc. (or any successor thereto) with respect to the senior unsecured debt of Liberty Mutual Capital Corporation. 1.97. "NASD" means The National Association of Securities Dealers, Inc. (or any successor self-regulatory organization). 1.98. "Nonperforming Lender" is defined in Section 10.4.3. 1.99. "Notes" means the Revolving Notes and the Term Notes. 1.100. "Payment Agreement" is defined in Section 7.2.2. 1.101. "Payment Date" means the last Banking Day of each March, June, September and December occurring after the Effective Date. 1.102. "PBGC" means the Pension Benefit Guaranty Corporation or any successor entity. 1.103. "Percentage Interest" is defined in Section 10.1. 1.104. "Performing Lender" is defined in Section 10.4.3. 1.105. "Person" means any present or future natural person or any corporation, association, partnership, joint venture, company, business trust, trust, organization, business or government or any governmental agency or political subdivision thereof. 1.106. "Plan" means, at any time, any pension benefit plan subject to Title IV of ERISA maintained, or to which contributions have been made or are required to be made, by any ERISA Group Person within six years prior to such time. -18- 1.107. "Prepaid Brokerage Commissions" means commissions or other selling compensation paid or payable by the Company or any Subsidiary to Brokers in respect of sales of Class B Shares at the respective commission rates for each CDSC Fund set forth in Exhibit 6.14 without giving effect to any increases permitted in the ordinary course of business under Section 6.14 or otherwise. 1.108. "Pricing Options" means the options granted pursuant to Section 3.2.1 to have the interest on any portion of the Loan computed on the basis of a Eurodollar Rate. 1.109. "Prior Credit Agreement" means the Credit Agreement dated as of May 5, 1993, as amended and restated as of December 17, 1993 and as in effect prior to the Effective Date, among the Company, the Lenders and BankBoston, N.A., as agent for itself and the other Lenders. 1.110. "Qualified Institutional Buyer" means: (a) a duly authorized domestic bank, savings and loan association, registered investment company, registered investment adviser or registered dealer, acting for its own account or the accounts of other Qualified Institutional Buyers, which in the aggregate owns and invests on a discretionary basis at least $100 million in securities and (if a bank or savings and loan association) which has a net worth of at least $25 million; or (b) a foreign bank or savings and loan association or equivalent institution, acting for its own account or the account of other Qualified Institutional Buyers, which in the aggregate owns and invests on a discretionary basis at least $100 million in securities and has a net worth of at least $25 million; or (c) any other entity which also constitutes a "qualified institutional buyer" as defined in Rule 144A under the Securities Act. 1.111. "Redemption Fee" means any amount that is or may be payable to the Company or any Subsidiary or to any Fund by any holder of Class B Shares in such capacity upon redemption of all or a portion of the Class B Shares. 1.112. "Register" is defined in Section 11.1.3. 1.113. "Required Lenders" means, with respect to any consent or other action to be taken by the Agent or the Lenders under the Credit Documents, such Lenders as own at least the portion of the Percentage Interests required by Section 10.6 with respect to such consent or other action. 1.114. "Revolving Loan" is defined in Section 2.2.1. 1.115. "Revolving Note" is defined in Section 2.2.3. 1.116. "S&P's Rating" means, at any time, the rating issued by Standard & Poor's Ratings Group (or any successor thereto) with respect to the senior unsecured debt of Liberty Mutual Capital Corporation. -19- 1.117. "Securities Act" means, collectively, the federal Securities Act of 1933 (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. 1.118. "Stated Maximum Amount of Credit" means (i) $40,000,000 or (ii) such greater amount up to $60,000,000 as determined in accordance with Section 2.6. 1.119. "Subsidiary" means any Person of which the Company (or other specified Person) shall at the time, directly or indirectly through one or more of its Subsidiaries, (a) own at least 50% of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally, (b) hold at least 50% of the partnership, joint venture or similar interests or (c) be a general partner or joint venturer. 1.120. "Subsidiary Guarantee" means the guarantee of the Credit Obligations in substantially the form of Exhibit 5.1.4 from CISC and any other Subsidiaries (other than Inactive Subsidiaries) that are not broker/dealers for purposes of the Exchange Act to the Agent for the benefit of the Lenders. 1.121. "Tax" means any tax, levy, duty, deduction, withholding or other charges of whatever nature at any time required by any Legal Requirement (a) to be paid by any Lender or (b) to be withheld or deducted from any payment otherwise required hereby to be made to any Lender, in each case on or with respect to (i) any Eurodollar deposit which was used (or deemed by Section 3.2.6 to have been used) to fund any portion of the Loan subject to a Pricing Option, (ii) any portion of the Loan subject to a Pricing Option funded (or deemed by Section 3.2.6 to have been funded) with the proceeds of any such Eurodollar deposit, (iii) the principal amount of or interest on any portion of the Loan subject to a Pricing Option or (iv) funds transferred from a non-United States office or an international banking facility of such Lender to a United States office of such Lender in order to fund (or deemed by Section 3.2.6 to have funded) a portion of the Loan subject to a Pricing Option; provided, however, that the term "Tax" shall not include (1) taxes imposed upon or measured by the net income of such Lender, (2) taxes which would have been imposed even if no provision for Pricing Options appeared in this Agreement or (3) amounts required to be withheld by such Lender from payments of interest to Persons from whom Eurodollar deposits were purchased by such Lender. 1.122. "Term Loan A" is defined in Section 2.1.1. 1.123. "Term Loan B" is defined in Section 2.3.1. 1.124. "Term Loans" means Term Loan A and Term Loan B. 1.125. "Term Loan A Note" is defined in Section 2.1.2. 1.126. "Term Loan B Note" is defined in Section 2.3.2. -20- 1.127. "Term Notes" means each of the Term Loan A Notes and the Term Loan B Notes. 1.128. "Trust" means each registered investment company under the Investment Company Act for which the Company or any of its Subsidiaries provides investment advisory services pursuant to Investment Advisory Contracts and for which the Company or any Subsidiary is the principal underwriter. 1.129. "UCC" means the Uniform Commercial Code, as in effect from time to time in The Commonwealth of Massachusetts. 1.130. "Wholly Owned Subsidiary" means any Subsidiary of which all of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally (other than directors' qualifying shares) is owned by the Company (or other specified Person) directly, or indirectly through one or more Wholly Owned Subsidiaries. 20 The Credits. 2.1. Term Credit A. 2.1.1. Term Loan A. Subject to all the terms and conditions of this Agreement and so long as no Default exists, on the Effective Date the Lenders will lend to the Company as a term loan, in accordance with their respective Percentage Interests, the aggregate principal amount of $18,000,000. The aggregate principal amount of the loan made pursuant to this Section 2.1.1 at any time outstanding is referred to as "Term Loan A". 2.1.2. Term Loan A Notes. Term Loan A shall be made at the Boston Office by crediting the amount of such loan to the general account of the Company with the Agent against delivery to the Agent of the separate term notes of the Company in substantially the form of Exhibit 2.1.2 (each a "Term Loan A Note") payable to the respective Lenders. The Term Loan A Note issued to each Lender shall be in a principal amount equal to such Lender's Percentage Interest in Term Loan A. In connection with Term Loan A, the Company shall furnish to the Agent a certificate in substantially the form of Exhibit 5.2.1, together with any other documents required by Section 5. 2.2. Revolving Credit. 2.2.1. Revolving Loan. Subject to all of the terms and conditions of this Agreement and so long as no Default exists, the Lenders, in accordance with their respective Percentage Interests, will make loans to the Company in an aggregate principal amount requested in accordance with Section 2.2.2, but not to exceed at any time outstanding the Maximum Amount of Credit. The Maximum Amount of Credit shall be calculated based on the following information with respect to the Class B New Shares as -21- of the respective dates referred to below: (i) on the Consolidated Unreimbursed Sales Commissions as of the most recently ended month as reported in accordance with Section 6.4.3(a); (ii) on the Consolidated Contingent Redemption Amount as of the most recently ended month as reported in accordance with Section 6.4.3(b); and (iii) on the Distribution Fees Collectible as of the most recently ended month as reported in accordance with Section 6.4.3(b); provided, however, that in each case the calculation of such amounts shall not be made more than 31 days prior to the date of such calculation. The aggregate principal amount of the loans made pursuant to this Section 2.1 from time to time outstanding is referred to as the "Revolving Loan." 2.2.2. Borrowing Requests. Loans will be made to the Company by the Lenders under this Section 2.1 in any month prior to the Conversion Date as requested by the Company on the earlier of the following days, provided that the statements required by Section 6.4.3 are received by the Lenders prior to the time of borrowing on such day: (i) the sixth Banking Day of such month or (ii) the day of such month when the statements are received by the Lenders. Not later than 12:00 p.m. (Boston time) on the same Banking Day (third Banking Day if any portion of such loan will be subject to a Pricing Option on the requested Closing Date) of each requested Closing Date for any such loan, the Company will give the Agent notice of its request for a loan (which may be given by a telephone call received by a Lending Officer and promptly confirmed in writing), specifying (a) the amount of the requested loan (not less than $1,000,000 and an integral multiple of $500,000) and (b) the requested Closing Date therefor. Each such loan will be made at the Boston Office by depositing the amount thereof to the general account of the Company with the Agent, or as the Company may otherwise direct. In connection with each such loan, the Company shall furnish to the Agent a certificate dated the applicable Closing Date in substantially the form of Exhibit 5.2.1, together with any other documents required by Section 5. 2.2.3. Revolving Note. The Revolving Loan shall be evidenced by the separate revolving notes of the Company in substantially the form of Exhibit 2.1.3 (each a "Revolving Note") payable to the respective Lenders in an amount equal to such Lender's Percentage Interest in the Revolving Loan. Each Lender shall keep a record of the date and amount of (a) each loan made by such Lender pursuant to this Section 2.1 and (b) each payment of principal made to such Lender on the Revolving Loan pursuant to Section 4. Prior to any transfer of any Revolving Note, the Lender holding such Revolving Note shall record on a schedule thereto appropriate notations evidencing such dates and amounts; provided, however, that the failure of any Lender to make any such recordation shall not affect the obligations of the Company under this Agreement, the Revolving Notes or any other Credit Document. -22- 2.3. Term Credit B. 2.3.1. Term Loan B. Subject to all the terms and conditions hereof and so long as no Default exists, on the Conversion Date the Lenders will lend to the Company as a term loan, in accordance with their respective Percentage Interests, an aggregate amount equal to the principal amount of the Revolving Loan outstanding on such date, which shall not in any event exceed the Maximum Amount of Credit. The aggregate principal amount of the loans made pursuant to this Section 2.3.1 at any time outstanding is referred to as "Term Loan B." 2.3.2. Term Loan B Notes. The Term Loan B shall be made at the Boston Office by crediting the amount of such loan to the Revolving Loan against delivery to the Agent of the separate term notes of the Company in substantially the form of Exhibit 2.3.2 (each a "Term Loan B Note") payable to the respective Lenders. The Term Loan B Note sent to each Lender shall be in a principal amount equal to such Lender's respective Percentage Interest in Term Loan B. In connection with the Term Loan B, the Company shall furnish to the Agent a certificate in substantially the form of Exhibit 5.2.1, together with any other documents required by Section 5. Upon issuance of the Term Loan B Notes in accordance with this Section 2.2, the Revolving Notes shall be deemed to be canceled. 2.4. Application of Proceeds. 2.4.1. Term Loan A. The Company will apply the proceeds of Term Loan A to prepay the Revolving Loan under the Prior Credit Agreement. 2.4.2. Revolving Loan. Subject to Section 2.4.4, the Company will apply the proceeds of the Revolving Loan only to pay Prepaid Brokerage Commissions for sales of Class B New Shares. 2.4.3. Term Loan B. The Company will apply the proceeds of the Term Loan B solely as provided in Section 2.3.2. 2.4.4. Specifically Prohibited Applications. The Company will not, directly or indirectly, apply any part of the proceeds of any extension of credit made pursuant to this Agreement to purchase or to carry Margin Stock or to any transaction prohibited by the Foreign Trade Regulations, by other Legal Requirements applicable to the Lenders or by the Credit Documents. 2.5. Nature of Obligations of Lenders to Extend Credit. The Lenders' obligations under this Agreement to make Term Loan A, the Revolving Loan or Term Loan B are several and are not joint or joint and several. If any Lender shall fail to perform its obligations to extend any such credit, the amount of the commitment of the Lender so failing to perform may be assumed -23- by the other Lenders, in their sole discretion, in such proportions as such Lenders may agree among themselves and the Percentage Interests of each other Lender shall be appropriately adjusted, but such assumption and adjustment shall not relieve the Lenders from any of their obligations to make any such extension of credit or to repay any Delinquent Payment required by Section 10.4.3. 2.6. Increase in Stated Maximum Amount of Credit. The Company may elect, on any one occasion prior to the Conversion Date, to increase the Stated Maximum Amount of Credit to an amount (in integral multiples of $10,000,000) up to $60,000,000, provided that, at the time of the Agent's receipt of such request, no Default or Event of Default shall exist. Such election shall be made in writing to the Agent which shall, in turn, promptly deliver a copy thereof to each Lender. Upon receipt of the Company's election to increase the Stated Maximum Amount of Credit, any Lender may (but is not obligated to) elect to increase its maximum principal amount in the Loan set forth in Section 10.1 and, with the written consent of the Agent (such consent not to be unreasonably withheld), any one or more additional banks or financial institutions may become Lenders by undertaking any portion of such increase in the Stated Maximum Amount of Credit. If, and to the extent that, existing Lenders and acceptable additional banks or other financial institutions are not willing to undertake such increase in the Stated Maximum Amount of Credit in the amount elected by the Company, the Stated Maximum Amount of Credit shall not be increased. On and as of the date upon which an increase in the Stated Maximum Amount of Credit pursuant to this Section shall become effective, each Lender increasing its maximum principal amount in the Loan set forth in Section 10.1 and each new Lender undertaking any portion of such increase shall pay to the Agent, for the account of the Lenders, an amount specified by the Agent that shall be required, upon distribution of such amounts by the Agent to the Lenders, to cause the outstanding principal balance of each Lender's Revolving Credit loans to be equal to such Lender's Percentage Interest in all outstanding Revolving Credit loans. Upon any such increase in the Stated Maximum Amount of Credit pursuant to this Section, (i) the Company will duly execute and deliver to each new Lender a Revolving Note, and (ii) the Agent will deliver to each Lender a revised Section 10.1 to this Agreement reflecting the maximum principal amount in the Loan and Percentage Interests of the Lenders after giving effect to such increase. 2.7. Option to Extend Maturities. So long as no Default exists, the Company may request by notice to each Lender delivered no later than 90 days prior to the Conversion Date that the Conversion Date be extended for a 364-day period, commencing on the date the Lenders grant such request, and that the Final Term Loan B Maturity Date be extended to the fifth anniversary of the new Conversion Date. The Lenders shall inform the Company by written notice delivered no later than 60 days prior to the Conversion Date whether the Lenders will grant such request. In no event shall the Conversion Date and the Final Maturity Date be extended without the written consent of each Lender in its sole discretion. -24- 3. Interest; Pricing Options; Fees. 3.1. Interest. The Loan shall accrue and bear daily interest at a rate per annum which shall at all times equal the Applicable Rate. Prior to any stated or accelerated maturity of the Loan, the Company will, on each Payment Date, pay the accrued and unpaid interest on the portion of the Loan which was not subject to a Pricing Option. On the last day of each Interest Period or on any earlier termination of any Pricing Option, the Company will pay the accrued and unpaid interest on the portion of the Loan which was subject to the Pricing Option which expired or terminated on such date; provided, however, that in the case of any Interest Period longer than three months, the Company will also pay the accrued and unpaid interest on the portion of the Loan subject to the Pricing Option having such Interest Period on the Banking Day constituting the 90th day after the commencement of such Interest Period (or if such day is not a Banking Day, the Banking Day immediately preceding such 90th day). On any stated or accelerated maturity of the Loan, the Company will pay all accrued and unpaid interest on the Loan, including any accrued and unpaid interest on such portion of the Loan which is subject to a Pricing Option. In addition, the Company will on demand pay daily interest on any overdue installments of principal and, to the extent not prohibited by applicable law, on any overdue installments of interest and fees owed under any Credit Document at a rate per annum which equals the sum of 2% plus the highest Applicable Rate then in effect. All payments of interest hereunder shall be made to the Agent for the account of each Lender in accordance with the Lenders' respective Percentage Interests. -25- 3.2. Pricing Options. 3.2.1. Election of Pricing Options. Subject to all of the terms and conditions hereof and so long as no Default exists, the Company may from time to time, by irrevocable notice to the Agent received not less than three Banking Days prior to the commencement of the Interest Period selected in such notice, elect to have such portion of the Loan as the Company may specify in such notice accrue and bear daily interest during the Interest Period so selected at the Applicable Rate computed on the basis of the Eurodollar Rate. No such election shall become effective if, prior to the commencement of any such Interest Period, the Agent determines that (a) the electing or granting of the Pricing Option in question would violate a Legal Requirement or (b) Eurodollar deposits in an amount comparable to the principal amount of the Loan as to which such Pricing Option has been elected and which have a term corresponding to the proposed Interest Period are not readily available in the inter-bank Eurodollar market for delivery at any Eurodollar Office or, by reason of circumstances affecting such market, adequate and reasonable methods do not exist for ascertaining the interest rate applicable to such deposits for the proposed Interest Period. For purposes of determining ready availability of Eurodollar deposits with respect to a proposed Interest Period, such Eurodollar deposits shall not be deemed readily available if any Lender shall have advised the Agent by telephone, confirmed in writing, at or prior to noon (Boston time) on the second Banking Day prior to the commencement of such proposed Interest Period that, based upon the knowledge of such Lender of the Eurodollar market and after reasonable efforts to determine the availability of such Eurodollar deposits, such Lender reasonably anticipates that Eurodollar deposits in an amount equal to the respective Percentage Interest of such Lender in the portion of the Loan as to which such Pricing Option has been elected and which have a term corresponding to the Interest Period in question will not be offered in the Eurodollar market to such Lender at a rate of interest that does not exceed the Basic Eurodollar Rate. 3.2.2. Notice to Lenders and Company. The Agent will promptly inform each Lender (by telephone or otherwise) of each notice received by it from the Company pursuant to Section 3.2.1 and of the Interest Period specified in such notice. Upon determination by the Agent of the Eurodollar Rate for such Interest Period or in the event that no such election shall become effective, the Agent will promptly notify the Company and each Lender (by telephone or otherwise) of the Eurodollar Rate so determined. 3.2.3. Selection of Interest Periods. Interest Periods shall be selected so that: (a the minimum portion of the Loan subject to any Pricing Option shall be $1,000,000 and an integral multiple of $500,000; (b no more than 10 Pricing Options shall be outstanding at any one time; and -26- (c no Interest Period with respect to any part of the Loan subject to a Pricing Option shall expire later than the Final Maturity Date. If on the Conversion Date all or any portion of the Revolving Loan is subject to one or more effective Pricing Options, then each such Pricing Option shall apply to an equal amount of the Term Loan until the expiration of the Interest Period for such Pricing Option. 3.2.4. Additional Interest. If any portion of the Loan which is subject to a Pricing Option is repaid, or any Pricing Option is terminated for any reason, on a date which is prior to the last Banking Day of the Interest Period applicable to such Pricing Option, the Company will pay to the Agent for the account of each Lender in accordance with the Lenders' respective Percentage Interests, in addition to any amounts of interest otherwise payable hereunder, an amount equal to daily interest for the unexpired portion of such Interest Period on the portion of the Loan so repaid, or as to which a Pricing Option was so terminated, at a per annum rate equal to the excess, if any, of (a) the Applicable Rate calculated on the basis of the rate applicable to such Pricing Option minus (b) the rate of interest obtainable by the Agent upon the purchase of debt securities customarily issued by the Treasury of the United States of America which have a maturity date approximating the last Banking Day of such Interest Period. For purposes of this Section 3.2.4, if any portion of the Loan which was to have been subject to a Pricing Option is not outstanding on the first day of the Interest Period applicable to such Pricing Option other than for reasons described in Section 3.2.1 or the failure to advance funds by a Delinquent Lender, the Company shall be deemed to have terminated such Pricing Option. The determination by the Agent of such amount of interest shall, in the absence of manifest error, be conclusive. 3.2.5. Change in Applicable Laws, Regulations, etc. If any Legal Requirement shall prevent any Lender from funding through the purchase of deposits any portion of the Loan subject to a Pricing Option or otherwise from giving effect to such Lender's obligations as contemplated hereby, (a) the Agent may by notice to the Company terminate all of the affected Pricing Option, (b) the portion of the Loan subject to such terminated Pricing Option shall immediately bear interest thereafter at the Applicable Rate computed on the basis of the Base Rate and (c) the Company shall make any payment required by Section 3.2.4. 3.2.6. Taxes. If (a) any Lender shall be subject to any Tax or (b) the Company shall be required to withhold or deduct any Tax, the Company will on demand by the Agent or such Lender, accompanied by the certificate referred to below, pay to the Agent for such Lender's account such additional amount as is necessary to enable such Lender to receive net of any Tax the full amount of all payments of principal of, interest on and fees payable pursuant to a Credit Document. Each Lender agrees that if, after the payment by the Company of any such additional amount, any amount identifiable as a part of any Tax -27- related thereto is subsequently recovered or used as a credit by such Lender, such Lender shall reimburse the Company to the extent of the amount so recovered or used. A certificate of an officer of such Lender setting forth the amount of such Tax or recovery or use and the basis therefor shall, in the absence of manifest error, be conclusive. 3.2.7. Funding Procedure. The Lenders may fund any portion of the Loan subject to a Pricing Option out of any funds available to the Lenders. Regardless of the source of the funds actually used by any of the Lenders to fund any portion of the Loan subject to a Pricing Option, however, all amounts payable hereunder, including the interest rate applicable to any such portion of the Loan and the amounts payable under Sections 3.2.4 and 3.2.6, shall be computed as if each Lender had actually funded such Lender's Percentage Interest in such portion of the Loan through the purchase of deposits in such amount with a maturity the same as the applicable Interest Period relating thereto and through the transfer of such deposits from an office of such Lender having the same location as the applicable Eurodollar Office to one of such Lender's offices in the United States of America. 3.3. Commitment Fees. In consideration of the Lenders' commitments to make extensions of credit provided for in Section 2, while such commitments are outstanding, the Company will pay to the Agent for the account of the Lenders in accordance with their respective Percentage Interests, in arrears on (a) each Payment Date on or prior to the Conversion Date and (b) the Conversion Date, an amount equal to daily interest, computed at the Commitment Fee Rate, on the Stated Maximum Amount of Credit. 3.4. Capital Adequacy. If any Lender shall have determined that (a) compliance by such Lender with any applicable law, governmental rule, regulation or order regarding capital adequacy of banks or bank holding companies, or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital as a consequence of such Lender's obligations hereunder to a level below that which such Lender could have achieved but for such compliance (taking into consideration such Lender's policies with respect to capital adequacy immediately before such compliance and assuming that such Lender's capital was fully utilized prior to such compliance) by an amount deemed by such Lender to be material, or (b) any change in any Legal Requirement after the date hereof shall directly or indirectly (i) reduce the amount of any sum received or receivable by such Lender with respect to the Loan, (ii) impose a cost on such Lender that is attributable to the making or maintaining of, or such Lender's commitment to make, its portion of the Loan, or (iii) require such Lender to make any payment on or calculated by reference to the gross amount of any amount received by such Lender under any Credit Document, then, in the case of clause (a) or (b), the Company will on demand by the Agent, accompanied by the certificate referred to below, pay to the Agent from -28- time to time as specified by such Lenders as are so affected such additional amounts as shall be sufficient to compensate such Lenders for such reduced return, reduction, increased cost or payment together with interest on each such amount from five Banking Days after the date demanded until payment in full thereof at the rate of interest on overdue installments of principal provided in Section 3.1. A certificate of an officer of any such Lender setting forth the amount to be paid to it and the basis for computation thereof hereunder shall, in the absence of manifest error, be conclusive. In determining such amount, such Lender may use any reasonable averaging and attribution methods to allocate any increased costs in good faith on a reasonably equitable basis. The Company may at its option elect to seek a substitute Lender (which may be one or more of the Lenders and which shall be reasonably satisfactory to the Required Lenders other than the Lender demanding such compensation) to purchase the portion of the Loan then held by, and to assume the Commitments hereunder of, such Lender. Until such substitution shall be consummated, the Company shall continue to pay to such Lender being replaced any amounts required by this Agreement, including this Section 3.4. Upon any such substitution, the Company (or such substitute Lender, as applicable) shall pay to such Lender being replaced all principal, interest and other amounts accrued or owing to such Lender hereunder through the date of substitution. 3.5. Computations of Interest and Fees. For purposes of this Agreement, interest and commitment fees (and any amount expressed as interest or such fees) shall be computed on a daily basis and (a) with respect to any portion of the Loan subject to a Pricing Option, on the basis of a 360-day year and (b) with respect to fees or any other portion of the Loan, on the basis of a 365- or 366-day year, as the case may be. 4. Payment. 4.1. Payment at Maturity. 4.1.1. Term Loan A. On the Final Term Loan A Maturity Date or any accelerated maturity of Term Loan A, the Company will pay to the Agent for the account of the Lenders an amount equal to Term Loan A then due, together with all accrued and unpaid interest thereon and all other Credit Obligations in respect of Term Loan A then outstanding. 4.1.2. Revolving Loan. On the Conversion Date or any accelerated maturity of the Revolving Loan, the Company will pay to the Agent for the account of the Lenders an amount equal to the Revolving Loan then due, together with all accrued and unpaid interest thereon and all other Credit Obligations in respect of the Revolving Loan then outstanding. 4.1.3. Term Loan B. On the Final Term Loan B Maturity Date or any accelerated maturity of Term Loan B, the Company will pay to the Agent for the account of the Lenders an amount equal to Term Loan B then due, together with all accrued and unpaid interest thereon and all other Credit Obligations in respect of Term Loan B then outstanding. -29- 4.2. Contingent Required Prepayments. 4.2.1. Excess Credit Exposure. If at any time the Revolving Loan or Term Loan B exceeds the Maximum Amount of Credit either prior to the Conversion Date or thereafter, whether as a result of changes with respect to the Class B New Shares in Consolidated Unreimbursed Sales Commissions, in Distribution Fees Collectible or in the Consolidated Contingent Redemption Amount or otherwise, the Company will promptly pay the amount of such excess to the Agent for the account of the Lenders without premium (except as provided in Section 3.2.4), for credit to the Loan. 4.2.2. Class B Share Collection Amount. Within three days after furnishing statements required by Section 6.4.3, and in any event by the ninth Banking Day of each month, the Company will, as a mandatory prepayment on account of Term Loan A with respect to the Class B Old Shares and the Revolving Loan or Term Loan B with respect to the Class B New Shares, pay to the Agent for the account of each Lender, without premium (except as provided in Section 3.2.4), an amount equal to the Class B Share Collection Amount for the period covered by the statements so required to be furnished with respect to the Class B Old Shares and Class B New Shares, respectively (giving credit for any payments made in accordance with Section 4.2.1 on the Revolving Loan or Term Loan B as a result of decreases in Consolidated Unreimbursed Sales Commissions with respect to the Class B New Shares during such period) minus any voluntary prepayments with respect to such Loan made since the beginning of such period. 4.3. Mandatory Prepayment of Term Loan B. In addition to any amounts paid in accordance with Section 4.2, the Company will, as a mandatory prepayment of the Term Loan B, pay to the Agent for the Lenders' accounts on each Payment Date, commencing on the last Banking Day of the first full calendar quarter after the Conversion Date, an amount equal to the lesser of (a) the amount, if any, by which (i) 5% of the Term Loan B outstanding on the Conversion Date exceeds (ii) any prepayments made since the prior Payment Date under Section 4.2 or (b) the amount of the Term Loan B. 4.4. Voluntary Prepayments. In addition to the prepayments required by Sections 4.2 and 4.3, the Company may from time to time prepay all or any portion of the Loan (in integral multiples of $1,000,000), without premium (except as provided in Section 3.2.4 with respect to Pricing Options). Any prepayments of Term Loan A and Term Loan B shall be applied in the inverse order of maturity with respect to such Term Loan. The Company shall give the Agent at least five Banking Days' prior notice of its intention to prepay, specifying the date of payment, which Loan is to be prepaid, the total principal amount of such Loan to be paid on such date and the amount of interest to be paid with such prepayment. 4.5. Reborrowing; Application of Payments. The amounts of the Revolving Loan prepaid pursuant to Section 4.4 may be reborrowed from time to time prior to the Conversion -30- Date in accordance with Section 2.1. No portion of the Term Loans prepaid hereunder may be reborrowed. Any prepayment of the Loan shall be applied first to the portion of the Loan not then subject to Pricing Options, then the balance of any such prepayment shall be applied to the portion of the Loan then subject to Pricing Options, in the chronological order of the respective maturities thereof, together with any payments required by Section 3.2.4. All payments of principal hereunder shall be made to the Agent for the account of each Lender in accordance with the Lenders' respective Percentage Interests. 4.6. Payment with Accrued Interest, etc. Upon all prepayments of the Term Loan, the Company shall pay to the Agent for each Lender's account the principal amount to be prepaid together with unpaid interest in respect thereof accrued to the date of prepayment. Notice of prepayment having been given in accordance with Section 4.4, and whether or not notice is given of prepayments pursuant to Sections 4.2 and 4.3, the amount specified to be prepaid shall become due and payable on the date specified for prepayment. 5. Conditions to Extending Credit. 5.1. Conditions on Effective Date. The obligations of the Lenders to make any extension of credit pursuant to Section 2 shall be subject to the satisfaction, on or before the Effective Date, of the following conditions (in addition to the further conditions in Section 5.2): 5.1.1. Notes. The Company shall have duly executed the Term Loan A Notes and the Revolving Notes and delivered them to the Agent for each Lender. 5.1.2. Payment of Fees. The Company shall have paid to the Agent (a) for the Lenders' accounts, the commitment fee required by Section 3.3 and (b) for the Agent's account, the fees as separately agreed between the Company and the Agent. 5.1.3. Legal Opinions. On the Effective Date, the Lenders shall have received from the following counsel their respective opinions with respect to the transactions contemplated by the Credit Documents, which opinions shall be in form and substance satisfactory to the Lenders: (a Nancy L. Conlin, Vice President and Counsel of the Company and the Subsidiaries. (b Ropes & Gray, special counsel for the Agent. 5.1.4. Guarantees. The Liberty Mutual Guarantee and Subsidiary Guarantee shall be in full force and effect. 5.1.5. Investment Assets Under Management. On the Effective Date, the aggregate investment assets under management by the Company and the Subsidiaries -31- shall equal or exceed $17,000,000,000, and the Company shall have furnished to the Agent on such date a certificate to such effect signed by an Executive Officer or a Financial Officer. 5.2. Conditions to Each Extension of Credit. The obligations of the Lenders to make any extension of credit pursuant to Section 2 shall be subject to the satisfaction, on or before the Closing Date for such extension of credit, of the following conditions: 5.2.1. Officer's Certificate. The representations and warranties contained in Section 7 shall be true and correct on and as of the Closing Date with the same force and effect as though originally made on and as of such date; no Default shall exist on such Closing Date prior to or immediately after giving effect to the requested extension of credit; as of such Closing Date, no Material Adverse Change shall have occurred; and the Company shall have furnished to the Agent on such Closing Date a certificate to these effects, in substantially the form of Exhibit 5.2.1, signed by an Executive Officer or a Financial Officer. 5.2.2. Proper Proceedings. This Agreement, each other Credit Document and the transactions contemplated hereby and thereby shall have been authorized by all necessary proceedings of the Company and any of its Affiliates party thereto. All necessary consents, approvals and authorizations of any governmental or administrative agency or any other Person of any of the transactions contemplated hereby or by any other Credit Document shall have been obtained and shall be in full force and effect. 5.2.3. Legality, etc. The making of the requested extension of credit shall not (a) subject any Lender to any penalty or special tax (other than a Tax for which the Company has reimbursed the Lenders under Section 3.2.6), (b) be prohibited by any law or governmental order or regulation applicable to any Lender or the Company or (c) violate any voluntary credit restraint program of the executive branch of the government of the United States of America, the Board of Governors of the Federal Reserve System or any other governmental or administrative agency so long as any Lender reasonably believes that compliance therewith is in the best interests of such Lender. 6. General Covenants. The Company covenants that, until all of the Credit Obligations shall have been paid in full and until the Lenders' commitments to extend credit under this Agreement and any other Credit Document shall have been irrevocably terminated, the Company and the Subsidiaries will comply with such of the following provisions as are applicable to the Person in question: 6.1. Taxes and Other Charges; Accounts Payable. -32- 6.1.1. Taxes and Other Charges. Each of the Company and the Subsidiaries will duly pay and discharge, or cause to be paid and discharged, before the same shall become in arrears, all taxes, assessments and other governmental charges imposed upon such Person and its properties, sales or activities, or upon the income or profits therefrom, as well as all claims for labor, materials or supplies which if unpaid might by law become a Lien upon any of its property; provided, however, that any such tax, assessment, charge or claim need not be paid if the validity or amount thereof shall at the time be contested in good faith by appropriate proceedings and if such Person shall, in accordance with GAAP, have set aside on its books adequate reserves with respect thereto; and provided, further, that each of the Company and the Subsidiaries will pay or bond, or cause to be paid or bonded, all such taxes, assessments, charges or other governmental claims immediately upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor (except to the extent such proceedings have been dismissed or stayed). 6.1.2. Accounts Payable. Each of the Company and the Subsidiaries will promptly pay when due, or in conformity with customary trade terms, all other Indebtedness incident to the operations of such Person; provided, however, that any such Indebtedness need not be paid if the validity or amount thereof shall at the time be contested in good faith and if such Person shall, in accordance with GAAP, have set aside on its books adequate reserves with respect thereto. 6.2. Conduct of Business, etc. 6.2.1. Types of Business. The Company and the Subsidiaries will engage only in the business of providing investment advisory, distribution, portfolio execution, administration and transfer agency services, pricing and bookkeeping services and other services incidental or closely related to the investment advisory and investment company complex business. 6.2.2. Maintenance of Properties. Each of the Company and the Subsidiaries: (a will keep its properties in such repair, working order and condition, and will from time to time make such repairs, replacements, additions and improvements thereto for the efficient operation of its businesses and will comply at all times in all material respects with all franchises, licenses and leases to which it is party so as to prevent any loss or forfeiture thereof or thereunder, unless compliance is at the time being contested in good faith by appropriate proceedings; and (b except to the extent permitted under Section 6.11, will do all things necessary to preserve, renew and keep in full force and effect and in good standing its legal existence and authority necessary to continue its business (other than in the case of an Inactive Subsidiary). -33- 6.2.3. Compliance with Material Agreements. Each of the Company and the Subsidiaries will comply in all material respects with the provisions of the Material Agreements (to the extent not inconsistent with this Agreement or any other Credit Document). Without the prior written consent of the Required Lenders, no Material Agreement shall be amended, modified, waived or terminated in any manner that would have in any material respect an adverse effect on the interests of the Lenders. 6.2.4. Statutory Compliance. Each of the Company and the Subsidiaries will comply, and will use reasonable efforts to cause the Trusts and Funds to comply to the extent applicable (subject to the discretion of their trustees and directors and other than a reasonable business decision to merge or terminate any Trust or Fund), in all material respects with the Investment Company Act (including (a) receipt of financial statements accompanied by an auditor's report of Price Waterhouse (or other independent public accountants of nationally recognized standing), (b) maintenance of a fidelity bond to secure the Funds from larceny and embezzlement and (c) continued registration in full force and effect of each Trust as a registered investment company), the Investment Advisers Act (including Colonial Management's continued status as a registered investment adviser), the Exchange Act, the Securities Act (including the continued registration of the shares representing beneficial interests of, or common stock in, each Fund or Trust), the rules and regulations of the NASD, subchapter M of the Code (to the extent of each Fund's or Trust's continued qualification as a regulated investment company thereunder and subject to the Company's reasonable business judgment that such compliance is not in the interests of the Fund or Trust), the Commodities Act, any other law, statute, rule or regulation governing investment advisers, investment companies, broker-dealers, underwriters, custodians or transfer agents, including capital requirements, and all other valid and applicable statutes, ordinances, zoning and building codes and other rules and regulations of the United States of America, of the states and territories thereof and their counties, municipalities and other subdivisions and of any foreign country or other jurisdictions applicable to such Person, except where compliance therewith shall at the time be contested in good faith by appropriate proceedings or where failure so to comply has not resulted, or does not pose a material risk of resulting, in the aggregate in any Material Adverse Change. 6.3. Insurance. 6.3.1. Business Interruption Insurance. Each of the Company and the Subsidiaries will maintain with financially sound and reputable insurers insurance related to interruption of business, either for loss of revenues or for extra expense, in the manner customary for similar businesses similarly situated. 6.3.2. Errors and Omissions Insurance. Each of the Company and the Subsidiaries will maintain a joint errors and omissions policy insuring the Company and -34- each Subsidiary for losses arising from any breach of duty, error or omission arising from the performance of transfer agency services in such amounts as are customarily carried by Persons of established reputation engaged in the same or a similar business and similarly situated. 6.3.3. Directors and Officers Insurance. Each of the Company and the Subsidiaries will maintain directors and officers liability insurance insuring the Company and each Subsidiary in such amounts as are customarily carried by Persons of established reputation employed in the same or a similar business and similarly situated. 6.3.4. Property Insurance. Each of the Company and the Subsidiaries will keep its assets which are of an insurable character insured by financially sound and reputable insurers against theft and fraud and against loss or damage by fire, explosion or hazards to the extent, in amounts and with deductibles at least as favorable as those generally maintained by businesses of similar size engaged in similar activities. Such insurance shall provide extended coverage in amounts sufficient to prevent such Person from becoming a co-insurer. 6.3.5. Liability Insurance. Each of the Company and the Subsidiaries will maintain with financially sound and reputable insurers insurance against liability for hazards, risks and liability to persons and property, including product liability insurance, to the extent, in amounts and with deductibles at least as favorable as those generally maintained by businesses of similar size engaged in similar activities; provided, however, that it may effect workers' compensation insurance or similar coverage with respect to operations in any particular state or other jurisdiction through an insurance fund operated by such state or jurisdiction or by meeting the self-insurance requirements of such state or jurisdiction. 6.4. Financial Statements and Reports. Each of the Company and the Subsidiaries will maintain a system of accounting in which correct entries will be made of all transactions in relation to their business and affairs in accordance with GAAP. The fiscal year of the Company and the Subsidiaries will end on December 31 in each year. 6.4.1. Annual Reports. The Company will furnish to the Lenders as soon as available, and in any event within 90 days after the end of each fiscal year of the Company, the internally prepared Consolidated balance sheet of the Company and the Subsidiaries as at the end of such fiscal year and the Consolidated statements of income, of changes in shareholders' equity and of cash flows of the Company and the Subsidiaries for such fiscal year (all in reasonable detail), together with comparative figures for the preceding fiscal year or fiscal year end, all accompanied by: (a A report by Ernst & Young LLP (or, if they cease to be auditors of Liberty Financial Companies, Inc., other independent certified public accountants of recognized -35- national standing reasonably satisfactory to the Required Lenders) that in the course of their annual audit of Liberty Financial Companies, Inc. and its Subsidiaries nothing came to their attention that caused them to believe that the Company failed to comply with the terms, covenants, provisions and conditions of Section 6.5, as calculated on an annual basis that coincides with the Company's fiscal year end, insofar as they relate to accounting matters. The report is furnished by such accountants with the understanding that their audit was not directed primarily toward obtaining knowledge of such noncompliance. Further, it is understood that the report is intended solely for the information and use of (i) the management of the Company and (ii) the Lenders hereunder, and cannot be used for any other purpose without the prior written consent of such accountants. (b A certificate of the Company signed by a Financial Officer to the effect that such financial statements have been prepared in accordance with GAAP and present fairly, in all material respects, the financial position of the Company and the Subsidiaries covered thereby at the dates thereof and the results of their operations for the periods covered thereby, subject only to normal year-end audit adjustments and the addition of footnotes. (c A certificate of the Company signed by a Financial Officer to the effect that such officer has caused this Agreement to be reviewed and has no knowledge of any Default, or if such officer has such knowledge, specifying such Default and the nature thereof, and what action the Company has taken, is taking or proposes to take with respect thereto. (d In the event of a change in GAAP after the date hereof, computations by the Company, certified by a Financial Officer, reconciling the financial statements referred to above with financial statements referred to above with financial statements prepared in accordance with GAAP as applied to the other covenants in Section 6 and the related definitions. (e Computations by the Company demonstrating, as of the end of such fiscal year, compliance with the Computation Covenants. (f Calculations, as at the end of the fiscal year covered by such financial statements, of (i) the Accumulated Benefit Obligations for each Plan covered by Title IV of ERISA (other than Multiemployer Plans) and (ii) the fair market value of the assets of such Plan allocable to such benefits. (g Supplements to Exhibit 7.1 showing any changes in the information set forth in such Exhibits during the last quarter of such fiscal year, as well as any changes in the Charter, Bylaws or incumbency of officers of the Company and the Subsidiaries from those previously certified to the Agent. -36- 6.4.2. Quarterly Reports. The Company will furnish to the Lenders as soon as available and, in any event, within 45 days after the end of each of the first three fiscal quarters of the Company, the internally prepared Consolidated balance sheet of the Company and the Subsidiaries as of the end of such fiscal quarter and the Consolidated statements of income, changes in shareholders' equity and cash flows of the Company and the Subsidiaries for such fiscal quarter and for the portion of the fiscal year then ending (all in reasonable detail), together with comparative figures for the same date or period in the preceding fiscal year, all accompanied by: (a A certificate of the Company signed by a Financial Officer to the effect that such financial statements have been prepared in accordance with GAAP and present fairly, in all material respects, the financial position of the Company and the Subsidiaries covered thereby at the dates thereof and the results of their operations for the periods covered thereby, subject only to normal year-end audit adjustments and the addition of footnotes. (b In the event of a change in GAAP after the date hereof, computations by the Company, certified by a Financial Officer, reconciling the financial statements referred to above with financial statements prepared in accordance with GAAP as applied to the other covenants in Section 6 and related definitions. (c Computations by the Company demonstrating, as of the end of such quarter, compliance with the Computation Covenants. (d Supplements to Exhibits 7.1 and 7.4 showing any changes in the information set forth in such Exhibits during such fiscal quarter, as well as any changes in the Charter, Bylaws or incumbency of officers of the Company and the Subsidiaries from those previously certified to the Agent. (e A certificate of the Company signed by a Financial Officer to the effect that such officer has caused this Agreement to be reviewed and has no knowledge of any Default, or if such officer has such knowledge, specifying such Default and the nature thereof and what action the Company has taken, is taking or proposes to take with respect thereto. 6.4.3. Borrowing Base Reports. The Company will furnish to the Lenders: (a on the sixth Banking Day of each month, a certificate of an Executive Officer or Financial Officer supplying computations of Consolidated Unreimbursed Sales Commissions with respect to the Class B New Shares and the Class B Old Shares, respectively, for the preceding month and ending on such date; and -37- (b on the sixth Banking Day of each month, a certificate of an Executive Officer or Financial Officer supplying: (i) computations of the Consolidated Contingent Redemption Amount and Distribution Fees Collectible with respect to the Class B New Shares and the Class B Old Shares, respectively, at the last day of the preceding month; and (ii) reconciliation of beginning and ending balances of the Funds on an aggregate basis with respect to the Class B New Shares and the Class B Old Shares, respectively, showing sales and redemptions as set forth in Exhibit 6.4.3. (c the above reports shall not be required for the Class B Old Shares when Term Loan A has been paid in full. 6.4.4. Other Reports. The Company will promptly furnish to the Lenders: (a As soon as prepared and in any event before January 31 in each year, an annual budget and operating projections for such fiscal year of the Company and the Subsidiaries, prepared in a manner consistent with the manner in which the financial projections described in Section 7.2.1 were prepared. (b Any material updates of such budget and projections. (c Any management letters furnished to the Company or any Subsidiary by the Company's auditors. (d All budgets, projections, Consolidated statements of operations and other reports furnished by the Company or any Subsidiary generally to the shareholders of the Company in such capacity. (e Such registration statements, proxy statements and reports, including Forms 10-K, 10-Q, 8-K, ADV and BD, as may be filed by the Company or any Subsidiary (but in no event including the Trusts and Funds) with the Securities and Exchange Commission. (f Any 90-day letter or 30-day letter from the federal Internal Revenue Service asserting tax deficiencies against the Company and the Subsidiaries. (g Upon the request of the Agent or the Required Lenders, the Trust financial statements and auditor opinions required by Section 6.2.4. 6.4.5. Notice of Litigation; Notice of Defaults. The Company will promptly furnish to the Lenders notice of any litigation or any administrative or arbitration -38- proceeding to which the Company or any Subsidiary may hereafter become a party which poses a material risk of resulting, after giving effect to any applicable insurance, in the payment by the Company and the Subsidiaries of at least $500,000 or which seeks to enjoin or questions the validity or enforceability of any Credit Document. Promptly upon acquiring knowledge thereof, the Company will notify the Lenders of the existence of any Default, specifying the nature thereof and what action the Company or any Subsidiary has taken, is taking or proposes to take with respect thereto. 6.4.6. ERISA Reports. The Company will furnish to the Lenders as soon as available the following items with respect to any Plan: (a any request for a waiver of the funding standards or an extension of the amortization period, (b any reportable event (as defined in section 4043 of ERISA), unless the notice requirement with respect thereto has been waived by regulation, (c any notice received by any ERISA Group Person that the PBGC has instituted or intends to institute proceedings to terminate any Plan, or that any Multiemployer Plan is insolvent or in reorganization, (d notice of the possibility of the termination of any Plan by its administrator pursuant to section 4041 of ERISA, and (e notice of the intention of any ERISA Group Person to withdraw, in whole or in part, from any Multiemployer Plan. 6.4.7. Other Information. From time to time upon request of any authorized officer of any Lender, each of the Company and the Subsidiaries will furnish to the Lenders such other information regarding the business, assets, financial condition, income or prospects of the Company and the Subsidiaries as such officer may reasonably request, including copies of all tax returns, licenses, agreements, contracts, leases and instruments to which any of the Company or the Subsidiaries is party, including copies of the Investment Advisory Contracts, Distribution Plans or Distribution Agreements, principal underwriting agreements and custodian, registrar, transfer agent and shareholder services contracts of the Company, the Subsidiaries and the Funds. The Lenders' authorized officers and representatives shall have the right during normal business hours upon reasonable notice and at reasonable intervals to examine the books and records of the Company and the Subsidiaries, to make copies, notes and abstracts therefrom and to make an independent examination of their books and records, for the purpose of verifying the accuracy of the reports delivered by any of the Company and the Subsidiaries pursuant to this Section 6.4 or otherwise and ascertaining compliance with or obtaining enforcement of this Agreement or any other Credit Document. -39- 6.5. Certain Financial Tests. 6.5.1. Consolidated Net Worth. Consolidated Net Worth shall at all times equal or exceed $150,000,000. 6.5.2. Consolidated Net Income. For each period of four consecutive fiscal quarters of the Company, Consolidated Net Income shall exceed $0. 6.6. Financing Debt. So long as immediately before or after giving effect thereto any Default shall exist, neither the Company nor any Subsidiary will create, incur, assume or otherwise become liable with respect to any Financing Debt. 6.7. [Intentionally omitted.] 6.8. Liens. Neither the Company nor any Subsidiary shall create, incur or enter into, or suffer to be created or incurred or to exist, any Lien (including any arrangement or agreement which prohibits it from creating any Lien), except the following: 6.8.1. Restrictions on transfer and Liens contained in the Credit Documents. 6.8.2. Liens to secure taxes, assessments and other governmental charges, to the extent that payment thereof shall not at the time be required by Section 6.1. 6.8.3. Deposits or pledges made (a) in connection with, or to secure payment of, workers' compensation, unemployment insurance, old age pensions or other social security, (b) in connection with casualty insurance maintained in accordance with Section 6.3, (c) to secure the performance of bids, tenders, contracts (other than contracts relating to Financing Debt) or leases, (d) to secure statutory obligations or surety or appeal bonds, (e) to secure indemnity, performance or other similar bonds in the ordinary course of business or (f) in connection with contested payments to the extent that payment thereof shall not at that time be required by Section 6.1. 6.8.4. Liens in respect of judgments or awards, to the extent that such judgments or awards are permitted by Section 6.6.5. 6.8.5. Liens of carriers, warehousemen, mechanics and similar Liens, in each case (a) in existence less than 90 days from the date of creation thereof or (b) being contested in good faith by the Company or any Subsidiary in appropriate proceedings (so long as the Company or such Subsidiary shall, in accordance with GAAP, have set aside on its books adequate reserves with respect thereto). -40- 6.8.6. Encumbrances in the nature of (a) zoning restrictions, (b) easements, (c) restrictions of record on the use of real property, (d) landlords' and lessors' Liens on rented premises and (e) restrictions on transfers or assignments of leases, which in each case do not materially detract from the value of the encumbered property or impair the use thereof in the business of the Company or any Subsidiary. 6.8.7. Restrictions under federal and state securities laws on the transfer of securities. 6.8.8. Restrictions under Foreign Trade Regulations on the transfer or licensing of certain assets of the Company and the Subsidiaries. 6.8.9. Set-off rights of depository institutions with which the Company or any Subsidiary maintains deposit accounts. 6.8.10. Liens constituting (a) purchase money security interests (including mortgages, conditional sales, Capitalized Leases and any other title retention or deferred purchase devices) in real property, interests in leases or tangible personal property existing or created on the date on which such property is acquired, and (b) the renewal, extension or refunding of any security interest referred to in the foregoing clause (a) in an amount not to exceed the amount thereof remaining unpaid immediately prior to such renewal, extension or refunding; provided, however, that each such security interest shall attach solely to the particular item of property so acquired, and the principal amount of Indebtedness (including Indebtedness in respect of Capitalized Lease Obligations) secured thereby shall not exceed the cost (including all such Indebtedness secured thereby, whether or not assumed) of such item of property; and provided, further, that the aggregate principal amount of all Indebtedness secured by Liens permitted by this Section 6.8.10 shall not exceed the amount permitted by Sections 6.6.9 and 6.6.12. 6.8.11. Any prohibition imposed by applicable law, including section 15(a) of the Investment Company Act and section 205 of the Investment Advisers Act, or any regulatory agency, on the creation of Liens and the assignment of contracts. 6.8.12. Restrictive covenants limiting the Company and the Subsidiaries from creating or allowing to exist Liens customarily included in agreements for Financing Debt permitted by Section 6.6.12, but in no event including any restrictions on the creation or existence of Liens on Distribution Fees or Redemption Fees with respect to Class B Shares sold on or prior to the Conversion Date. 6.9. Investments and Acquisitions. Neither the Company nor any Subsidiary will have outstanding, acquire, commit itself to acquire or hold any Investment (including any Investment consisting of the acquisition of any business) except for the following: -41- 6.9.1. Investments of the Company and the Subsidiaries in Wholly Owned Subsidiaries; provided, however, that so long as immediately before and after giving effect thereto no Default exists, Investments in Wholly Owned Subsidiaries may be made only to the extent reasonably necessary for the conduct of the business permitted by Section 6.2.1. 6.9.2. Investments in Cash Equivalents. 6.9.3. Intercompany loans and advances by and among the Company and the Guarantors. 6.9.4. Other intercompany loans and advances from the Company or any Subsidiary to any other Subsidiary which is not a Guarantor or the Company, but only to the extent reasonably necessary for Consolidated tax planning and working capital management. 6.9.5. Prepaid royalties and fees paid in the ordinary course of business. 6.9.6. Investments in investment companies sponsored by the Company for which the Company or any Subsidiary is or will become the investment adviser. 6.9.7. Other Investments in an amount not exceeding $75,000,000 in the aggregate. 6.10. Distributions. So long as immediately before or after giving effect thereto any Default shall exist, neither the Company nor any of the Subsidiaries shall make any Distribution. 6.11. Merger, Consolidation and Dispositions of Assets. Neither the Company nor any of the Subsidiaries will become party to any merger or consolidation or will sell, lease, sell and lease back, sublease or otherwise dispose of any of its assets, except the following: 6.11.1. The Company and any Subsidiary may sell or otherwise dispose of (a) inventory in the ordinary course of business, (b) tangible assets to be replaced in the ordinary course of business by other tangible assets of equal or greater value and (c) tangible assets or stock or assets of Inactive Subsidiaries that are no longer used or useful in the business of the Company or such Subsidiary; provided, however, that the aggregate fair market value (or book value if greater) of such assets, rights or stock no longer being used or useful shall not exceed $5,000,000 in any fiscal year. 6.11.2. Any Subsidiary may merge or be liquidated into the Company or any other Subsidiary. -42- 6.11.3. The Company may license software rights related to its fund and shareholder accounting systems to other Persons in the ordinary course of business and transfer source code to such software in accordance with customary license terms. 6.11.4. So long as immediately before and after giving effect thereto no Default exists, the Company may dispose, after the Conversion Date, of its rights to receive Distribution Fees and Redemption Fees in respect of Class B Shares or any similar shares of any Fund sold after the Conversion Date. 6.12. Issuance of Stock by Subsidiaries; Subsidiary Distributions; Subsidiary Guarantors. 6.12.1. Issuance of Stock by Subsidiaries. No Subsidiary shall issue or sell any shares of its capital stock or other evidence of beneficial ownership to any Person other than the Company or any Wholly Owned Subsidiary of the Company. 6.12.2. No Restrictions on Subsidiary Distributions. Neither the Company nor any Subsidiary will enter into or be bound by any agreement (including covenants requiring the maintenance of specified amounts of net worth or working capital) restricting the right of any Subsidiary to make Distributions or extensions of credit to the Company (directly or indirectly through another Subsidiary). 6.12.3. Subsidiary Guarantors. The Company agrees to cause any Subsidiary that is not a broker/dealer for purposes of the Exchange Act or an Inactive Subsidiary to enter into the Subsidiary Guarantee pursuant to a joinder satisfactory to the Agent. 6.13. ERISA, etc. Each of the Company and the Subsidiaries will comply, and will cause all ERISA Group Persons to comply, in all material respects, with the provisions of ERISA and the Code applicable to each Plan. Each of the Company and the Subsidiaries will meet, and will cause all ERISA Group Persons to meet, all minimum funding requirements applicable to them with respect to any Plan pursuant to section 302 of ERISA or section 412 of the Code, without giving effect to any waivers of such requirements or extensions of the related amortization periods which may be granted. At no time shall the Accumulated Benefit Obligations under any Plan that is not a Multiemployer Plan exceed the fair market value of the assets of such Plan allocable to such benefits by more than $1,000,000. The Company and the Subsidiaries will not withdraw, and will cause all other ERISA Group Persons not to withdraw, in whole or in part, from any Multiemployer Plan so as to give rise to withdrawal liability exceeding $1,000,000 in the aggregate. At no time shall the actuarial present value of unfunded liabilities for post-employment health care benefits, whether or not provided under a Plan, calculated in a manner consistent with Statement No. 106 of the Financial Accounting Standards Board, exceed $1,000,000. 6.14. Maintenance of Fee Structure. With respect to the Class B Shares, neither the Company nor any Subsidiary shall cause dealer commissions to be amended to be more -43- favorable to the Brokers or Redemption Fees to be amended to be more favorable to the shareholders of the CDSC Funds. The Company or any Subsidiary, as the case may be, shall continue to receive Distribution Fees at rates no less favorable than the minimum amounts set forth on Exhibit 6.14 and shall continue to act as sole distributor of each Fund and to be the only Person to whom the Funds are permitted to make any payments under the respective Distribution Plan or Distribution Agreement. Exhibit 6.14 may be amended from time to time by the Company upon 60 days prior notice to the Agent, and the Agent shall give prompt notice thereof to the other Lenders, only to add to such Exhibit a Fund with dealer reallowances no more favorable to the Brokers and Redemption Fees and Distribution Fees no more favorable to the shareholders of such Fund than those applicable to the Funds set forth on Exhibit 6.14 on the date hereof. The Company may offer increases in the commission rates for the sale of Class B Shares by Brokers in the ordinary course of business, but may not use the proceeds of the Revolving Loan to pay such increases in the commissions. 7. Representations and Warranties. In order to induce the Lenders to extend credit to the Company hereunder, the Company represents and warrants that: 7.1. Organization and Business. 7.1.1. Company. The Company is a duly organized and validly existing corporation, in good standing under the laws of Massachusetts, with all power and authority, corporate or otherwise, necessary to (a) enter into and perform this Agreement and each other Credit Document to which it is party and make the borrowings hereunder and (b) own its properties and carry on the business now conducted or proposed to be conducted by it. Certified copies of the Charter and By-laws of the Company have been previously delivered to the Agent and are correct and complete. Exhibit 7.1, as from time to time hereafter supplemented in accordance with Sections 6.4.1 and 6.4.2, sets forth, as of the end of the most recent fiscal year or quarter for which such financial statements are required to be furnished, (i) the jurisdiction of incorporation of the Company, (ii) the address of the Company's principal executive office and chief place of business and (iii) the name under which the Company conducts its business and the jurisdictions in which the name is used. 7.1.2. Subsidiaries. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized, with all power and authority, corporate or otherwise, necessary to (a) enter into and perform this Agreement and each other Credit Document to which it is party and (b) own its properties and carry on the business now conducted or proposed to be conducted by it. Certified copies of the Charter and By-laws of Colonial Management and each Subsidiary that is party to the Subsidiary Guarantee have been previously delivered to the Agent and are correct and complete. Exhibit 7.1, as from time to time hereafter supplemented in accordance with Sections 6.4.1 and 6.4.2, sets forth, as of the end of the most recent fiscal year or quarter for which such financial statements are required to be furnished, (i) the name and jurisdiction of organization of each Subsidiary, (ii) the address of the chief executive office and principal place of business of each Subsidiary, (iii) each name under which each Subsidiary conducts its business and the jurisdictions in which each such name is used and (iv) the number of authorized and issued shares and ownership of each Subsidiary. -44- 7.1.3. Qualification. Except as set forth on Exhibit 7.1, as from time to time supplemented in accordance with Sections 6.4.1 and 6.4.2, each of the Company and each Subsidiary is duly and legally qualified to do business as a foreign corporation or other entity and is in good standing in each state or jurisdiction in which such qualification is required and is duly authorized, qualified and licensed under all laws, regulations, ordinances or orders of public authorities, or otherwise, to carry on its business in the places and in the manner in which it is conducted, except for failures to be so qualified, authorized or licensed which would not in the aggregate result, or pose a material risk of resulting, in any Material Adverse Change. 7.2. Financial Statements and Other Information; Material Agreements. 7.2.1. Financial Statements and Other Information. The Company has previously furnished to the Lenders copies of the following: (a) The unaudited Consolidated balance sheet of the Company and the Subsidiaries as at December 31, 1997 and the audited Consolidated statements of income, changes in shareholders' equity and cash flows of the Company and the Subsidiaries for the fiscal year of the Company then ended. (b) The annual statement of the Liberty Mutual Insurance Company as of the end of December 31, 1997, as filed with (and in the form required under applicable laws and regulations of) the insurance regulatory authorities of The Commonwealth of Massachusetts and the audited statutory balance sheet of the Liberty Mutual Insurance Company as of the end of such fiscal year and the related audited statutory statements of income, surplus and special reserves, and cash flows for such fiscal year. (c) The annual budget and operating projections for the fiscal year ending December 31, 1998 of the Company and the Subsidiaries. The financial statements referred to in clause (a) above (or delivered pursuant to Section 6.4.1 or 6.4.2) were prepared in accordance with GAAP and fairly present the financial position of each of the Company and the Subsidiaries, respectively, covered thereby at the respective dates thereof and the results of their operations for the periods covered thereby. Neither the Company nor any Subsidiary has any known contingent liability material to the Company and the Subsidiaries on a Consolidated basis which is not reflected in the most recent balance sheet referred to in clause (a) above (or delivered pursuant to Section 6.4.1 or 6.4.2) or the notes thereto. -45- The financial statements referred to in clause (b) above (or delivered pursuant to Section 2.12 of the Liberty Mutual Guarantee) are in the form required under applicable laws and regulations of the insurance regulatory authorities of The Commonwealth of Massachusetts, consistent with respect to accounting and actuarial policies and such annual statement is a full and true statement of all the assets and liabilities and of the condition and affairs of the Liberty Mutual Insurance Company as of the end of such fiscal year and of its income and deductions therefrom for such fiscal year (within the meaning of applicable regulations and practices of the insurance regulatory authorities of The Commonwealth of Massachusetts). In the Company's judgment, the annual budget and operating projections referred to in clause (c) above constitute a reasonable basis as of the date hereof for the assessment of the future performance of the Company and the Subsidiaries during the periods indicated therein, it being understood that any projected financial information represents an estimate, based on various assumptions, of future results of operations and factors outside of its control which may or may not in fact occur. 7.2.2. Material Agreements. The Company has previously furnished to the Lenders correct and complete copies, including all exhibits, schedules and amendments thereto, of the following agreements (the "Material Agreements"): (a) the Agreement dated April 14, 1995 between LFII and the Company assigning the right to receive Distribution Fees and Redemption Fees to the Company (as from time to time amended in accordance with Section 6.2.3, the "Payment Agreement"); (b) the form of Distribution Plan or Distribution Agreement; (c) the form of transfer agency agreement between CISC and the Funds; and (d) the Liberty Mutual Guarantee. 7.2.3. Investment Assets Under Management. The aggregate investment assets under management by the Company and the Subsidiaries were at least $17,000,000,000 on March 31, 1998. 7.3. Changes in Condition. No Material Adverse Change has occurred, and since December 31, 1997, neither the Company nor any Subsidiary has entered into any material transaction outside the ordinary course of business except for the transactions contemplated by this Agreement and the Material Agreements or as specifically described to the Lenders in writing. 7.4. Class B Shares Systems. The Company has in place all systems necessary to segregate and report (a) separately for the Class B New Shares and the Class B Old Shares, the -46- Class B Share Collection Amount with the Distribution Fees and the Redemption Fees and (b) separately for the Class B New Shares, the Maximum Amount of Credit with the Consolidated Unreimbursed Sales Commissions, Consolidated Contingent Redemption Amount and the Distribution Fees Collectible. 7.5. Title to Assets. The Company and the Subsidiaries have good and marketable title to or valid leases of all material assets necessary for or used in the operations of their business as now conducted by them and reflected in the most recent balance sheet referred to in Section 7.2.1(i) (or the balance sheet most recently furnished to the Lenders pursuant to Section 6.4.1 or 6.4.2), and to all material assets acquired subsequent to the date of such balance sheet, subject to no Liens except for those permitted by Section 6.8 and except for assets disposed of as permitted by Section 6.11. 7.6. Licenses, etc. (a) Colonial Management is a registered investment adviser under the Investment Advisers Act, with similar registrations with state authorities required to conduct its business as currently conducted and proposed to be conducted except to the extent immaterial to the Company's business, assets, financial condition or prospects; and LFII is a registered broker/dealer under the Exchange Act and a member in good standing of the NASD, with similar registrations with state authorities required to conduct its business as currently conducted and proposed to be conducted except to the extent immaterial to the Company's business, assets, financial condition or prospects. (b) The Company and the Subsidiaries have all material patents, patent applications, patent rights, service marks, service mark rights, trademarks, trademark rights, trade names, trade name rights, copyrights, licenses, franchises, permits, authorizations, including authorizations under state securities laws, and other material rights as are necessary for the conduct of the business of the Company and the Subsidiaries. All of the foregoing are in full force and effect, and each of the Company and the Subsidiaries is in substantial compliance with the foregoing without any known conflict with the valid rights of others which has resulted, or poses a material risk of resulting, in any Material Adverse Change. No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such license, franchise or other right or affects the rights of any of the Company and the Subsidiaries thereunder so as to result in any Material Adverse Change. No litigation or other proceeding or dispute with respect to the validity or, where applicable, the extension or renewal, of any of the foregoing has resulted, or poses a material risk of resulting, in any Material Adverse Change. 7.7. Litigation. No litigation, at law or in equity, or any proceeding before any court, board or other governmental or administrative agency or any arbitrator is pending or, to the knowledge of the Company, threatened which involves any material risk of any final judgment, order or liability which, after giving effect to any applicable insurance, has resulted, or poses a -47- material risk of resulting, in any Material Adverse Change (except for the investigation by the federal Securities and Exchange Commission into Colonial Management's compliance with net capital rules under the Exchange Act) or which seeks to enjoin the consummation, or which questions the validity or enforceability, of any of the transactions contemplated by this Agreement or any other Credit Document. No judgment, decree or order of any court, board or other governmental or administrative agency or any arbitrator has been issued against or binds the Company or any Subsidiary which has resulted, or poses a material risk of resulting, in any Material Adverse Change. 7.8. Tax Returns. Each of the Company and the Subsidiaries has filed all material tax and information returns which are required to be filed by it and has paid, or made adequate provision for the payment of, all taxes which have or may become due pursuant to such returns or to any assessment received by it. Neither the Company nor any Subsidiary knows of any material additional assessments or any basis therefor. The Company reasonably believes that the charges, accruals and reserves on the books of the Company and the Subsidiaries in respect of taxes or other governmental charges are adequate. 7.9. Authorization and Enforceability. Each of the Company and any Subsidiary party to the Subsidiary Guarantee has taken all corporate action required to execute, deliver and perform this Agreement and each other Credit Document, including the borrowings, to which it is party. Each of this Agreement and each other Credit Document constitutes the legal, valid and binding obligation of the Company or such Subsidiary party thereto and is enforceable against such Person in accordance with its terms. 7.10. No Legal Obstacle to Agreements. Neither the execution and delivery of this Agreement or any other Credit Document, nor the making of any borrowings hereunder, nor the consummation of any transaction referred to in or contemplated by this Agreement or any other Credit Document, nor the fulfillment of the terms hereof or thereof or of any other agreement, instrument, deed or lease contemplated by this Agreement or any other Credit Document, has constituted or resulted in or will constitute or result in: (a) any breach or termination of the provisions of any agreement, instrument, deed or lease to which the Company or any Subsidiary is a party or by which it is bound, or of the Charter or By-laws of the Company or any Subsidiary; (b) the violation of any law, statute, judgment, decree or governmental order, rule or regulation applicable to the Company or any Subsidiary; (c) the creation under any agreement, instrument, deed or lease of any Lien upon any of the assets of the Company or any Subsidiary; or (d) any redemption, retirement or other repurchase obligation of the Company or any Subsidiary under any Charter, By-law, agreement, instrument, deed or lease. -48- No approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by the Company or any Subsidiary in connection with the execution, delivery and performance of this Agreement, the Notes or any other Credit Document, the transactions contemplated hereby or thereby or the making of any borrowing hereunder. 7.11. Defaults. Neither the Company nor any Subsidiary is in default under any provision of its Charter or By-laws or of this Agreement or any other Credit Document. Neither the Company nor any Subsidiary is in default under any provision of any agreement, instrument, deed or lease to which it is party or by which it or its property is bound, or has violated any law, judgment, decree or governmental order, rule or regulation, in each case so as to result, or pose a material risk of resulting, in any Material Adverse Change. 7.12. Certain Business Representations. 7.12.1. Labor Relations. No dispute or controversy between the Company or any Subsidiary and any of their respective employees has resulted, or is reasonably likely to result, in any Material Adverse Change, and neither the Company nor any Subsidiary anticipates that its relationships with its unions or employees will result, or are reasonably likely to result, in any Material Adverse Change. The Company and each of the Subsidiaries is in compliance in all material respects with all federal and state laws with respect to (a) non-discrimination in employment with which the failure to comply, in the aggregate, has resulted in, or poses a material risk of resulting in, a Material Adverse Change and (b) the payment of wages. 7.12.2. Antitrust. Each of the Company and the Subsidiaries is in compliance in all material respects with all federal and state antitrust laws relating to its business and the geographic concentration of its business. 7.12.3. Consumer Protection. Neither the Company nor any of its Subsidiaries is in violation of any rule, regulation, order, or interpretation of any rule, regulation or order of the Federal Trade Commission (including truth-in-lending), with which the failure to comply, in the aggregate, has resulted in, or poses a material risk of resulting in, a Material Adverse Change. 7.12.4. Certain Other Agreements. Each of the Funds has entered into Investment Advisory Contracts and shareholder services agreements, and in the case of CDSC Funds, a Distribution Plan or Distribution Agreement with the Company or another Subsidiary of the Company, which agreements are in full force and effect. The Company has furnished to the trustees, directors or managing partners, as the case may be, of each Fund and Trust such information as may be reasonably necessary to evaluate -49- the terms of each Investment Advisory Contract and Distribution Plan or Distribution Agreement in accordance with sections 15(c) and 12(b) of the Investment Company Act. 7.12.5. Certain Laws. Each of the Company and the Subsidiaries is in compliance with the Investment Company Act, the Investment Advisers Act, the Exchange Act, the Commodities Act and the rules and regulations of the NASD and similar state laws, except to the extent that noncompliance would not result, or pose a material risk of resulting, in any Material Adverse Change. Each Trust and Fund is in compliance with the Investment Company Act and the Securities Act and similar state laws, except to the extent that noncompliance would not result, or pose a material risk of resulting, in any Material Adverse Change. 7.12.6. Burdensome Obligations. Neither the Company nor any Subsidiary is party to or bound by any agreement, instrument, deed or lease or is subject to any Charter, By-law or other restriction or commitment or requirement for future expenditures which, in the opinion of the management of such Person, is so burdensome as in the foreseeable future to result in, or pose a material risk of resulting in, a Material Adverse Change. 7.13. Pension Plans. Neither the Company nor any Subsidiary has any Plan as of the date hereof except for (a) the Company's defined benefit plan terminated on June 30, 1987 in accordance in all material respects with the Code and ERISA and which was fully funded at such termination and (b) Plans of which the Agent has been notified in writing and are in compliance with Section 6.13. 7.14. Foreign Trade Regulations; Government Regulation. 7.14.1. Foreign Trade Regulations. Neither the execution and delivery of this Agreement or any other Credit Document, nor the making by the Company of any borrowings hereunder has constituted or resulted in or will constitute or result in the violation of any Foreign Trade Regulation. 7.14.2. Government Regulation. Neither the Company nor any Subsidiary, nor any Person controlling the Company or any Subsidiary or under common control with the Company or any Subsidiary is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or any statute or regulation which regulates the incurring by the Company or any Subsidiary of Financing Debt as contemplated by this Agreement and the other Credit Documents. -50- 7.15. Disclosure. Neither this Agreement nor any other Credit Document to be furnished to the Lenders by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated hereby or by such other Credit Document contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. No fact is actually known to the Company or any Subsidiary which has resulted, or in the future (so far as the Company or any Subsidiary can reasonably foresee) will result, or poses a material risk of resulting, in any Material Adverse Change, except to the extent that present or future general economic conditions may result in a Material Adverse Change. 8. Defaults. 8.1. Events of Default. The following events are referred to as "Events of Default": 8.1.1. The Company shall fail to make any payment in respect of: (a) interest or any fee on or in respect of any of the Credit Obligations as the same shall become due and payable, and such failure shall continue for a period of three Banking Days or (b) principal of any of the Credit Obligations as the same shall become due, whether at maturity or by acceleration or otherwise. 8.1.2. The Company or any Subsidiary shall fail to perform or observe any of the provisions (a) of Section 6.4.3 and such failure shall continue for a period of two Banking Days or (b) of Sections 6.5 through 6.14. 8.1.3. The Company or any Subsidiary or any of their respective Affiliates party to any Credit Document shall fail to perform or observe any other covenant, agreement or provision to be performed or observed by it under this Agreement or any other Credit Document, and such failure shall not be rectified or cured to the written satisfaction of the Required Lenders within 30 days after notice thereof by the Agent to the Company. 8.1.4. Any representation or warranty of or with respect to the Company, any Subsidiary or any of their respective Affiliates party to any Credit Document made to the Lenders in, pursuant to or in connection with this Agreement or any other Credit Document shall be materially false on the date as of which it was made. 8.1.5. (a) The Company or any Subsidiary shall fail to make any payment when due (after giving effect to any applicable grace periods) in respect of any Financing Debt (other than the Credit Obligations) outstanding in an aggregate amount of principal and accrued interest exceeding $1,000,000; (b) The Company or any Subsidiary shall fail to perform or observe the terms of any agreement relating to such Financing Debt, and such failure shall continue, without having been duly cured, waived or consented to, beyond the period of grace, if any, -51- specified in such agreement, and such failure shall permit the acceleration of such Financing Debt; (c) Any such Financing Debt of the Company or any Subsidiary shall be accelerated or become due or payable prior to its stated maturity for any reason whatsoever (other than voluntary prepayments thereof); (d) Any Lien on any property of the Company or any Subsidiary securing any such Financing Debt shall be enforced by foreclosure or similar action. 8.1.6. Except as permitted by Section 6.11: (a) The Company shall cease to own, directly or indirectly, all the capital stock of the Subsidiaries; or (b) The Company or any Subsidiary shall initiate any action to dissolve, liquidate or otherwise terminate its existence. 8.1.7. Any Credit Document or Material Agreement shall cease, for any reason (other than the scheduled termination thereof in accordance with its terms), to be in full force and effect; or the Company, any Subsidiary or any of their respective Affiliates party thereto shall so assert in a judicial or similar proceeding. 8.1.8. A final judgment (a) which, with other outstanding final judgments against the Company, the Subsidiaries and any of their Affiliates party to any Credit Document, exceeds an aggregate of $1,000,000 shall be rendered against the Company or any of the Subsidiaries or Affiliates party to any Credit Document, or (b) which grants injunctive relief that results in, or poses a material risk of resulting in, a Material Adverse Change, and if, within 30 days after entry thereof, such judgment shall not have been discharged or execution thereof stayed pending appeal, or if, within 30 days after the expiration of any such stay, such judgment shall not have been discharged. 8.1.9. (a) In any four consecutive fiscal quarters of the Company, Investment Advisory Contracts that contributed more than 10% of Consolidated Revenues arising from all Investment Advisory Contracts for the four fiscal quarters of the Company completed immediately prior to the commencement of the four consecutive fiscal quarters in question shall have been terminated during the four fiscal quarters in question and shall not have been extended or replaced (by merger of a Fund or Trust into another Fund or Trust or otherwise) with other Investment Advisory Contracts with terms not materially less favorable to the Company and the Subsidiaries and applicable fee rates not less than the previous terms and applicable fee rates. -52- (b) Any Distribution Plan or Distribution Agreement shall have been terminated and shall not have been extended or replaced with another Distribution Plan or Distribution Agreement with terms not materially less favorable to the Company and the Subsidiaries and applicable fee rates not less than the terms and fee rates applicable to Distribution Fees of the previous Distribution Plan or Distribution Agreement so terminated. 8.1.10. ERISA Group Persons shall fail to pay when due amounts (other than amounts being contested in good faith through appropriate proceedings) aggregating in excess of $1,000,000 for all ERISA Group Persons for which they shall have become liable under Title IV of ERISA to pay to the PBGC or to a Plan; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Plan or a proceeding shall be instituted by a fiduciary of any Plan against any ERISA Group Person to enforce section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist which would require the PBGC to obtain a decree adjudicating that any Plan must be terminated. 8.1.11. The Company, any Subsidiary or any of their respective Affiliates obligated with respect to any Credit Obligation shall: (a) commence a voluntary case under the Bankruptcy Code or authorize, by appropriate proceedings of its board of directors or other governing body, the commencement of such a voluntary case; (b) have filed against it a petition commencing an involuntary case under the Bankruptcy Code which shall not have been dismissed within 60 days after the date on which such petition is filed; or file an answer or other pleading within such 60-day period admitting or failing to deny the material allegations of such a petition or seeking, consenting to or acquiescing in the relief therein provided; (c) have entered against it an order for relief in any involuntary case commenced under the Bankruptcy Code; (d) seek relief as a debtor under any applicable law, other than the Bankruptcy Code, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or consent to or acquiesce in such relief; (e) have entered against it an order by a court of competent jurisdiction (i) finding it to be bankrupt or insolvent, (ii) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors or (iii) assuming custody of, or appointing a receiver or other custodian for, all or a substantial portion of its property; or -53- (f) make an assignment for the benefit of, or enter into a composition with, its creditors, or appoint, or consent to the appointment of, or suffer to exist a receiver or other custodian for, all or a substantial portion of its property. 8.1.12. Liberty Mutual Insurance Company shall fail to perform or observe any covenant, agreement or provision to be performed or observed by it under the Liberty Mutual Guarantee. 8.2. Certain Actions Following an Event of Default. If any one or more Events of Default shall occur, then in each and every such case: 8.2.1. No Obligation to Extend Credit. The Agent may (and upon written request of the Required Lenders shall) terminate the obligations of the Lenders to make any further extensions of credit under the Credit Documents by furnishing notice thereof to the Company; provided, however, that if a Bankruptcy Default shall have occurred, such obligations shall automatically terminate. 8.2.2. Specific Performance; Exercise of Rights. The Agent may (and upon written request of the Required Lenders shall) proceed to protect and enforce the Lenders' rights by suit in equity, action at law and/or other appropriate proceeding, either for specific performance of any covenant or condition contained in this Agreement or any other Credit Document or in any instrument or assignment delivered to the Lenders pursuant to this Agreement or any other Credit Document, or in aid of the exercise of any power granted in this Agreement or any other Credit Document or any such instrument or assignment. 8.2.3. Acceleration. The Agent on behalf of the Lenders may (and upon written request of the Required Lenders shall) by notice in writing to the Company declare all or any part of the unpaid balance of the Credit Obligations then outstanding to be immediately due and payable, and thereupon such unpaid balance or part thereof shall become so due and payable without presentment, protest or further demand or notice of any kind, all of which are expressly waived; provided, however, that if a Bankruptcy Default shall have occurred, the unpaid balance of the Credit Obligations shall automatically become immediately due and payable without presentment, protest or further demand or notice of any kind, all of which are expressly waived. 8.2.4. Enforcement of Payment; Credit Security; Setoff. The Agent may (and upon written request of the Required Lenders shall) proceed to enforce payment of the Credit Obligations in such manner as it may elect. The Lenders may offset and apply toward the payment of the Credit Obligations (and/or toward the curing of any Event of Default) any Indebtedness from the Lenders to the Company and its Subsidiaries, including any Indebtedness represented by deposits in any account maintained with the -54- Lenders, regardless of the adequacy of any security for the Credit Obligations. The Lenders shall have no duty to determine the adequacy of any such security in connection with any such offset. 8.2.5. Cumulative Remedies. To the extent not prohibited by applicable law which cannot be waived, all of the Lenders' rights hereunder and under each other Credit Document shall be cumulative. 8.3. Annulment of Defaults. Any Default or Event of Default shall be deemed to exist and to be continuing for any purpose of this Agreement until the Required Lenders or the Agent (with any consent of the Required Lenders) shall have waived such Default or Event of Default in writing, stated in writing that the same has been cured to such Lenders' reasonable satisfaction or entered into an amendment to this Agreement which by its express terms cures such Default or Event of Default. No such action by the Lenders or the Agent shall extend to or affect any subsequent Default or Event of Default or impair any rights of the Lenders upon the occurrence thereof. The making of any extension of credit during the existence of any Default or Event of Default shall not constitute a waiver thereof. 8.4. Waivers. The Company waives to the extent not prohibited by the provisions of applicable law that cannot be waived: (a) all presentments, demands for performance, notices of nonperformance (except to the extent required by the provisions of this Agreement or any other Credit Document), protests, notices of protest and notices of dishonor; (b) any requirement of diligence or promptness on the part of any Lender in the enforcement of its rights under this Agreement, the Notes or any other Credit Document; (c) any and all notices of every kind and description which may be required to be given by any statute or rule of law; and (d) any defense (other than indefeasible payment in full) which it may now or hereafter have with respect to the Credit Obligations. 9. Expenses; Indemnity. 9.1. Expenses. Whether or not the transactions contemplated hereby shall be consummated, the Company will pay: (a) all reasonable expenses of the Agent (including the out-of-pocket expenses related to forming the group of Lenders and reasonable fees and disbursements of the special counsel to the Agent) in connection with the preparation and duplication of this Agreement and each other Credit Document, examinations by, and reports of, the Agent's commercial financial examiners (limited to not more than one per year prior to the -55- existence of a Default), the transactions contemplated hereby and thereby and operations hereunder and thereunder (other than for assignments pursuant to Section 11.1.1); (b) all recording and filing fees and transfer and documentary stamp and similar taxes at any time payable in respect of this Agreement, any other Credit Document or the incurrence of the Credit Obligations; and (c) to the extent not prohibited by applicable law that cannot be waived, all other reasonable expenses incurred by the Lenders or the holder of any Credit Obligation in connection with the enforcement of any rights hereunder or under any other Credit Document, including costs of collection and reasonable attorneys' fees (including a reasonable allowance for the hourly cost of attorneys employed by the Lenders on a salaried basis) and expenses. 9.2. General Indemnity. The Company will indemnify the Lenders and hold them harmless from any liability, loss or damage resulting from the violation by the Company of Section 2.4. The Company will also indemnify each Lender, each of the Lenders' directors, officers and employees, and each Person, if any, who controls any Lender (each Lender and each of such directors, officers, employees and control Persons is referred to as an "Indemnified Party") and hold each of them harmless from and against any and all claims, damages, liabilities and reasonable expenses (including reasonable fees and disbursements of counsel with whom any Indemnified Party may consult in connection therewith and all reasonable expenses of litigation or preparation therefor) which any Indemnified Party may incur or which may be asserted against any Indemnified Party in connection with (a) such Indemnified Party's compliance with or contest of any subpoena or other process issued against it in any proceeding involving the Company or any Subsidiary or their Affiliates arising from this Agreement or any other Credit Document, the transactions contemplated hereby and thereby or the operations hereunder or thereunder or (b) any litigation or investigation involving the Company, any Subsidiaries or their Affiliates, or any officer, director or employee thereof, other than litigation commenced by the Company against the Lenders which seeks enforcement of any of the rights of the Company hereunder or under any other Credit Document and is determined adversely to the Lenders in a final nonappealable judgment and except to the extent such claims, damages, liabilities and expenses result from the Agent's or a Lender's, as the case may be, gross negligence or willful misconduct. 10. Operations. 10.1. Interests in Credits. The percentage interest of each Lender in the Loan, including Term Loan A and the Revolving Loan or Term Loan B in the aggregate, shall be computed based on the maximum principal amount for each Lender as follows:
Maximum Principal Percentage Lender Amount Interest ------ ------ -------- -56- BankBoston, N.A. $11,277,752 19.4444% Bank of America National $17,077,752 29.4444% Trust and Savings Association The Bank of New York $ 7,411,124 12.7778% Credit Lyonnais New York Branch $ 7,411,124 12.7778% Fleet National Bank $ 7,411,124 12.7778% Mellon Bank, N.A. $ 7,411,124 12.7778% ----------- ---------- Total $58,000,000 100.0000%
The foregoing percentage interests, as otherwise adjusted as the Lenders may from time to time agree among themselves, or pursuant to Section 11, are referred to as the "Percentage Interests" with respect to all or any portion of the Loan. References in any Credit Document to the Lenders' respective Percentage Interests are to such interests as from time to time in effect. 10.2. Agent's Authority to Act, etc. Each of the Lenders appoints and authorizes the Agent to act for the Lenders as the Lenders' Agent in connection with the transactions contemplated by this Agreement and the other Credit Documents on the terms set forth herein. In acting hereunder, the Agent is acting for its own account to the extent of its Percentage Interest and for the accounts of each other Lender to the extent of the Lenders' respective Percentage Interests, and all action in connection with the enforcement of, or the exercise of any remedies (other than the Lenders' rights of set-off as provided in Section 8.2.4 or in any Credit Document) in respect of the Credit Obligations and Credit Documents shall be taken by the Agent. 10.3. Company to Pay Agent, etc. The Company shall be fully protected in making all payments in respect of the Credit Obligations to the Agent, in relying upon consents, modifications and amendments executed by the Agent purportedly on the Lenders' behalf, and in dealing with the Agent as herein provided. The Agent shall charge the accounts of the Company, on the dates when the amounts thereof become due and payable, with the amounts of the principal of and interest on the Loan, commitment fees, agent's fees and upon notice to the Company, any other fees and amounts owing under any Credit Document. 10.4. Lender Operations for Advances, etc. -57- 10.4.1. Advances. On each Closing Date, each Lender, upon notice by the Agent, given promptly after its receipt of the borrowing request, shall advance to the Agent in immediately available funds such Lender's Percentage Interest in the portion of the Loan advanced on such Closing Date prior to 1:00 p.m. (Boston time). If such funds are not received at such time, but all the conditions set forth in Section 5 have been satisfied, each Lender hereby authorizes and requests the Agent to advance for such Lender's account, pursuant to the terms hereof, such Lender's respective Percentage Interest in such portion of the Loan and agrees to reimburse the Agent in immediately available funds for the amount thereof prior to 3:00 p.m. (Boston time) on the day such portion of the Loan is advanced hereunder; provided, however, that the Agent is not authorized to make any such advance for the account of any Lender who has previously notified the Agent in writing that such Lender will not be performing its obligations to make further advances hereunder. 10.4.2. Agent to Allocate Payments, etc. All payments of principal and interest in respect of the extensions of credit made pursuant to this Agreement, commitment fees and other fees under this Agreement shall, as a matter of convenience, be made by the Company to the Agent in immediately available funds. Under no circumstances shall any Lender be required to produce or present its Notes as evidence of its interests in the Credit Obligations in any action or proceeding relating to the Credit Obligations. The share of each Lender shall be credited to such Lender by the Agent in immediately available funds in such manner that the principal amount of the Credit Obligations to be paid shall be paid proportionately in accordance with the Lenders' respective Percentage Interests in such Credit Obligations, except as otherwise provided in this Agreement. 10.4.3. Delinquent Lenders; Nonperforming Lenders. In the event that any Lender fails to reimburse the Agent pursuant to Section 10.4.1 for the Percentage Interest of such Lender (a "Delinquent Lender") in any credit advanced by the Agent pursuant hereto, overdue amounts (the "Delinquent Payment") due from the Delinquent Lender to the Agent shall bear interest, payable by the Delinquent Lender on demand, at a per annum rate equal to (a) the Federal Funds Rate for the first three days overdue and (b) the sum of 2% plus the Federal Funds Rate for any longer period. Such interest shall be payable to the Agent for its own account for the period commencing on the date of the Delinquent Payment and ending on the date the Delinquent Lender reimburses the Agent on account of the Delinquent Payment (to the extent not paid by the Company as provided below) and the accrued interest thereon (the "Delinquency Period"), whether pursuant to the assignments referred to below or otherwise. Upon notice by the Agent, the Company will pay to the Agent the principal (but not the interest) portion of the Delinquent Payment. During the Delinquency Period, in order to make reimbursements for the Delinquent Payment and accrued interest thereon, the Delinquent Lender shall be deemed to have assigned to the Agent all payments made by the Company under Section 4 which would have thereafter otherwise been payable under the Credit Documents to the Delinquent Lender. During any other period in which any Lender is not performing its -58- obligations to extend credit under Section 2 (a "Nonperforming Lender"), the Nonperforming Lender shall be deemed to have assigned to each Lender that is not a Nonperforming Lender (a "Performing Lender") all payments made by the Company under Section 4 which would have thereafter otherwise been payable under the Credit Documents to the Nonperforming Lender, and the Agent shall credit a portion of such payments to each Performing Lender in an amount equal to the Percentage Interest of such Performing Lender divided by one minus the Percentage Interest of the Nonperforming Lender until the respective portions of the Loan owed to all the Lenders are the same as the Percentage Interests of the Lenders immediately prior to the failure of the Nonperforming Lender to perform its obligations under Section 2. The foregoing provisions shall be in addition to any other remedies the Agent, the Performing Lenders or the Company may have under law or equity against the Delinquent Lender as a result of the Delinquent Payment or against the Nonperforming Lender as a result of its failure to perform its obligations under Section 2. 10.5. Sharing of Payments, etc. Each Lender agrees that (a) if by exercising any right of set-off or counterclaim or otherwise, it shall receive payment of a proportion of the aggregate amount of principal, interest and fees due with respect to its Percentage Interest in the Loan which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal, interest and fees due with respect to the Percentage Interest of such other Lender and (b) if such inequality shall continue for more than 10 days, the Lender receiving such proportionately greater payment shall purchase participations in the Percentage Interests in the Loan held by the other Lenders, and such other adjustments shall be made from time to time (including rescission of such purchases of participations in the event the unequal payment originally received is recovered from such Lender through bankruptcy proceedings or otherwise), as may be required so that all such payments of principal, interest and fees with respect to the Loan held by the Lenders shall be shared by the Lenders pro rata in accordance with their respective Percentage Interests; provided, however, that this Section 10.5 shall not impair the right of any Lender to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of Indebtedness of the Company other than the Company's Indebtedness with respect to the Loan. The Company agrees, to the fullest extent permitted by applicable law, that any Credit Participant and any Lender purchasing a participation from another Lender pursuant to this Section 10.5 may exercise all rights of payment (including the right of set-off), and shall be obligated to share payments under this Section 10.5, with respect to its participation as fully as if such Credit Participant or such Lender were the direct creditor of the Company and a Lender hereunder in the amount of such participation. -59- 10.6. Amendments, Consents, Waivers, etc. Except as otherwise set forth herein and subject to Section 10.4.2(c), the Agent may (and upon the written request of the Required Lenders described in paragraph (a) or (b) below, the Agent shall) take or refrain from taking any action under this Agreement or any other Credit Document, including giving its written consent to any modification of or amendment to and waiving in writing compliance with any covenant or condition in this Agreement or any other Credit Document or any Default or Event of Default, all of which actions shall be binding upon all of the Lenders; provided, however, that: (a) Except as provided below, without the written consent of Lenders owning at least a majority of the Percentage Interests, no modification of or amendment to, or consent with respect to or waiver of compliance with, any of the Credit Documents or waiver of a Default or Event of Default shall be made. (b) Without the written consent of Lenders owning at least two thirds of the Percentage Interests, (i) no modification of, amendment to, consent with respect to or waiver of compliance with or of a Default under Sections 6.2.3 or 6.5 of this Section 10.6(b) (and related defined terms) shall be made, and (ii) no exercise by the Lenders of their rights under Section 8.2 shall be taken. (c) Without the written consent of such Lenders as own 100% of the Percentage Interests (other than Delinquent Lenders during the existence of a Delinquency Period so long as such Delinquent Lender is treated the same as the other Lenders with respect to any actions enumerated below): (i) No reduction in the interest rate on the Loan or in commitment fees shall be made. (ii) No extension or postponement of the stated time of payment of all or any portion of the Loan or interest thereon or any commitment fees shall be made. (iii) No waiver or forgiveness of payment of any portion of the Loan shall be made. (iv) No increase in the amount, or extension of the term, of the Commitments beyond that provided for under Section 2 shall be made. (v) No alteration of the Lenders' rights of set-off contained in Section 8.2.4 shall be made. (vi) No amendment to or modification of Section 6.14 (and Exhibit 6.14 to the extent not amended in accordance with Section 6.14) or this Section 10.6(c) shall be made. -60- (vii) No assignment by the Company of its rights or delegation of its duties under any Credit Document shall be made. (viii) No assignment by Liberty Mutual Insurance Company of its obligations under the Liberty Mutual Guarantee shall be made. (ix) No release of Liberty Mutual Insurance Company as guarantor under the Liberty Mutual Guarantee shall be made. (x) No termination of the Liberty Mutual Guarantee shall be made. 10.7. Agent's Resignation. The Agent may resign at any time by giving at least 60 days' prior written notice of its intention to do so to each other of the Lenders and upon the appointment by the Required Lenders of a successor Agent satisfactory to the Company. If no successor Agent shall have been so appointed and shall have accepted such appointment within 45 days after the retiring Agent's giving of such notice of resignation, then the retiring Agent may with the consent of the Company, which shall not be unreasonably withheld, appoint a successor Agent which shall be a bank or a trust company organized under the laws of the United States of America or any state thereof and having a combined capital, surplus and undivided profit of at least $500,000,000; provided, however, that any successor Agent appointed under this sentence may be removed upon the written request of the Required Lenders, which request shall also appoint a successor Agent satisfactory to the Company. Upon the appointment of a new Agent hereunder, the term "Agent" shall for all purposes of this Agreement thereafter mean such successor. After any retiring Agent's resignation hereunder as Agent, or the removal hereunder of any successor Agent, the provisions of this Agreement shall continue to inure to the benefit of such Agent as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 10.8. Concerning the Agent. 10.8.1. Action in Good Faith, etc. The Agent and its officers, directors, employees and agents shall be under no liability to any of the Lenders or to any future holder of any interest in the Credit Obligations for any action or failure to act taken or suffered in good faith, and any action or failure to act in accordance with an opinion of its counsel shall conclusively be deemed to be in good faith. The Agent shall in all cases be entitled to rely, and shall be fully protected in relying, on instructions given to the Agent by the required holders of Credit Obligations as provided in this Agreement. 10.8.2. No Implied Duties, etc. The Agent shall have and may exercise such powers as are specifically delegated to the Agent under this Agreement or any other Credit Document together with all other powers incidental thereto. The Agent shall have no implied duties to any Person or any obligation to take any action under this Agreement or any other Credit Document except for action specifically provided for in this -61- Agreement or any other Credit Document to be taken by the Agent. Before taking any action under this Agreement or any other Credit Document, the Agent may request an appropriate specific indemnity satisfactory to it from each Lender in addition to the general indemnity provided for in Section 10.11; provided, however, that no such indemnity shall extend to actions or omissions which are taken by the Agent with gross negligence or willful misconduct. Until the Agent has received such specific indemnity, the Agent shall not be obligated to take (although it may in its sole discretion take) any such action under this Agreement or any other Credit Document. Each Lender confirms that the Agent does not have a fiduciary relationship to it under the Credit Documents. The Company confirms that neither the Agent nor any other Lender has a fiduciary relationship to it under the Credit Documents. 10.8.3. Validity, etc. Subject to Section 10.8.1, the Agent shall not be responsible to any Lender or any future holder of any interest in the Credit Obligations (a) for the legality, validity, enforceability or effectiveness of this Agreement or any other Credit Document, (b) for any recitals, reports, representations, warranties or statements contained in or made in connection with this Agreement or any other Credit Document, (c) for the existence or value of any assets included in any security for the Credit Obligations, (d) for the perfection or effectiveness of any Lien purported to be included in such security or (e) for the specification or failure to specify any particular assets to be included in such security. 10.8.4. Compliance. The Agent shall not be obligated to ascertain or inquire as to the performance or observance of any of the terms of this Agreement or any other Credit Document; and in connection with any extension of credit under this Agreement or any other Credit Document, the Agent shall be fully protected in relying on a certificate of the Company as to the fulfillment by the Company of any conditions to such extension of credit. 10.8.5. Employment of Agents and Counsel. The Agent may execute any of its duties as Agent under this Agreement or any other Credit Document by or through employees, agents and attorneys-in-fact and shall not be responsible to any of the Lenders, the Company or any Subsidiary (except as to money or securities received by the Agent or the Agent's authorized agents) for the default or misconduct of any such agents or attorneys-in-fact selected by the Agent with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder or under any other Credit Document. 10.8.6. Reliance on Documents and Counsel. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any affidavit, certificate, cablegram, consent, instrument, letter, notice, order, document, statement, telecopy, telegram, telex or teletype message or writing reasonably believed in good faith by the Agent to be genuine and correct and to have been signed, sent or made by the Person in question, including any -62- telephonic or oral statement made by such Person, and, with respect to legal matters, upon the opinion of counsel selected by the Agent. 10.8.7. Agent's Reimbursement. Each of the Lenders severally agrees to reimburse the Agent, in the amount of such Lender's Percentage Interest, for any reasonable expenses not reimbursed by the Company (without limiting the obligation of the Company to make such reimbursement): (a) for which the Agent is entitled to reimbursement by the Company under this Agreement or any other Credit Document, and (b) after the occurrence of a Default, for any other reasonable expenses incurred by the Agent on the Lenders' behalf in connection with the enforcement of the Lenders' rights under this Agreement or any other Credit Document. 10.8.8. Agent's Fees. The Company shall pay to the Agent for its own account the amounts prior to the Effective Date, as provided in the Prior Credit Agreement and thereafter as separately agreed between the Company and the Agent. 10.9. Rights as a Lender. With respect to any credit extended by it hereunder, BankBoston shall have the same rights, obligations and powers hereunder as any other Lender and may exercise such rights and powers as though it were not the Agent, and unless the context otherwise specifies, BankBoston shall be treated in its individual capacity as though it were not the Agent hereunder. Without limiting the generality of the foregoing, the Percentage Interest of BankBoston shall be included in any computations of Percentage Interests. BankBoston and its Affiliates may accept deposits from, lend money to, act as trustee for and generally engage in any kind of banking or trust business with the Company, any Subsidiary or any Affiliate of any of them and any Person who may do business with or own an equity interest in the Company, any of the Subsidiaries or any Affiliate of any of them, all as if BankBoston were not the Agent and without any duty to account therefor to the other Lenders. 10.10. Independent Credit Decision. Each of the Lenders acknowledges that it has independently and without reliance upon the Agent, based on the financial statements and other documents referred to in Section 7.2, on the other representations and warranties contained herein and on such other information with respect to the Company and the Subsidiaries as such Lender deemed appropriate, made such Lender's own credit analysis and decision to enter into this Agreement and to make the extensions of credit provided for hereunder. Each Lender represents to the Agent that such Lender will continue to make its own independent credit and other decisions in taking or not taking action under this Agreement or any other Credit Document. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to such Lender, and no act by the Agent taken under this Agreement or any other Credit Document, including any review of the affairs of the Company and the Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent. Except for notices, reports and other documents expressly required to be furnished to each Lender by the Agent under this Agreement or any other Credit Document, the Agent shall not have any duty or responsibility to -63- provide any Lender with any credit or other information concerning the business, operations, property, condition, financial or otherwise, or credit worthiness of the Company or any Subsidiary which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 10.11. Indemnification. The holders of the Credit Obligations hereby agree to indemnify the Agent (to the extent not reimbursed by the Company and without limiting the obligation of the Company to do so), pro rata according to their respective Percentage Interests, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time be imposed on, incurred by or asserted against the Agent relating to or arising out of this Agreement, any other Credit Document, the transactions contemplated hereby or thereby, or any action taken or omitted by the Agent in connection with any of the foregoing; provided, however, that the foregoing shall not extend to actions or omissions which are taken by the Agent with gross negligence or willful misconduct. 11. Successors and Assigns; Lender Assignments and Participations. Any reference in this Agreement to any of the parties hereto shall be deemed to include the successors and assigns of such party, and all covenants and agreements by or on behalf of the Company, the Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns; provided, however, that (a) the Company may not assign its rights or obligations under this Agreement, and (b) the Lenders shall be not entitled to assign their respective Percentage Interests in the Loan hereunder except as set forth below in this Section 11. 11.1. Assignments by Lenders. 11.1.1. Assignees and Assignment Procedures. Each Lender may (a) without the consent of the Agent or the Company if the proposed assignee is already a Lender or an Affiliate of a Lender hereunder or (b) otherwise with the consents of the Agent and the Company (which consents will not be unreasonably withheld), in compliance with applicable laws in connection with such assignment, assign to one or more commercial banks or other financial institutions (other than mutual funds) (each, an "Assignee") all or a portion of its interests, rights and obligations under this Agreement and the other Credit Documents, including its Percentage Interest in the Loan; provided, however, that: (i) the aggregate amount of the Commitment of the assigning Lender subject to each such assignment to any Assignee other than another Lender (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall be not less than $10,000,000 and in increments of $1,000,000; and (ii) the parties to each such assignment shall execute and deliver to the Agent an Assignment and Acceptance (the "Assignment and Acceptance") substantially in the form of Exhibit 11.1.1 together with the Note or Notes subject to such assignment and a -64- processing and recordation fee of $3,000 from the Lenders; provided, however, that no such processing and recording fee shall be payable upon an assignment effected pursuant to Section 3.4. Upon acceptance and recording pursuant to Section 11.1.4, from and after the effective date specified in each Assignment and Acceptance (which effective date shall be at least five Banking Days after the execution thereof unless waived by the Agent): (1) the Assignee shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (2) the assigning Lender shall, to the extent provided in such assignment, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.2.4, 3.2.6, 3.4 and 9, as well as to any fees accrued for its account hereunder and not yet paid). 11.1.2. Terms of Assignment and Acceptance. By executing and delivering an Assignment and Acceptance, the assigning Lender and Assignee shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (a) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, any other Credit Document or any other instrument or document furnished pursuant hereto or thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Credit Document or any other instrument or document furnished pursuant hereto or thereto; (b) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company and the Subsidiaries or the performance or observance by the Company or any Subsidiary of any of their obligations under this Agreement, any other Credit Document or any other instrument or document furnished pursuant hereto or thereto; (c) such Assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.4 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; -65- (d) such Assignee will independently and without reliance upon the Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (e) such Assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (f) such Assignee agrees that it will perform in accordance with the terms of this Agreement all the obligations which are required to be performed by it as a Lender, including any requirements under Section 13. 11.1.3. Register. The Agent shall maintain at the Boston Office a register (the "Register") for the recordation of (a) the names and addresses of the Lenders and the Assignees which assume rights and obligations pursuant to an assignment under Section 11.1.1, (b) the Percentage Interest of each such Lender as set forth in Section 10.1 and (c) the amount of the Loan owing to each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Company, the Agent and the Lenders may treat each Person whose name is registered therein for all purposes as a party to this Agreement. The Register shall be available for inspection by the Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. 11.1.4. Acceptance of Assignment and Assumption. Upon its receipt of a completed Assignment and Acceptance executed by an assigning Lender and an Assignee together with the Note or Notes subject to such assignment, and the processing and recordation fee referred to in Section 11.1.1, the Agent shall (a) accept such Assignment and Acceptance, (b) record the information contained therein in the Register and (c) give prompt notice thereof to the Company. Within five Banking Days after receipt of notice, the Company shall execute and deliver to the Agent, in exchange for the surrendered Note or Notes, a new Note or Notes to the order of such Assignee in a principal amount equal to the applicable Commitment and Loan assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment and Loan, a new Note to the order of such assigning Lender in a principal amount equal to the applicable Commitment and Loan retained by it. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, and shall be dated the date of the surrendered Notes which they replace. 11.1.5. Federal Reserve Bank. Notwithstanding the foregoing provisions of this Section 11, any Lender may at any time pledge or assign all or any portion of such -66- Lender's rights under this Agreement and the other Credit Documents to a Federal Reserve Bank; provided, however, that no such pledge or assignment shall release such Lender from such Lender's obligations hereunder or under any other Credit Document. 11.1.6. Further Assurances. The Company and the Subsidiaries shall sign such documents and take such other actions from time to time reasonably requested by an Assignee to enable it to share in the benefits of the rights created by the Credit Documents. 11.2. Credit Participants. Each Lender may, without the consent of the Company or the Agent, in compliance with applicable laws in connection with such participation, sell to one or more Qualified Institutional Buyers (each a "Credit Participant") participations in all or a portion of its interests, rights and obligations under this Agreement and the other Credit Documents (including all or a portion of its Commitment and the Loan owing to it and the Notes held by it); provided, however, that: (a) such Lender's obligations under this Agreement shall remain unchanged; (b) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (c) the Credit Participant shall be entitled to the benefit of the cost protection provisions contained in Sections 3.2.4, 3.2.6, 3.4 and 9, but shall not be entitled to receive any greater payment thereunder than the selling Lender would have been entitled to receive with respect to the interest so sold if such interest had not been sold; and (d) the Company, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Company relating to the Loan and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers with respect to any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loan, or the stated dates for payments of principal of or interest on the Loan). Such Lender shall promptly give notice of such participation to the Company and the Agent. 12. Confidentiality. Each Lender agrees that it will make no disclosure of confidential information furnished to it by the Company or any Subsidiary unless such information shall have become public other than by the actions of such Lender, except: (a) in connection with operations under or the enforcement of this Agreement or any other Credit Document; -67- (b) to the applicable bank regulatory or other governmental agencies relating to such Lender or pursuant to any statutory or regulatory requirement or any mandatory court order, subpoena or other legal process of which the Lender will give, if practicable, prompt notice to the Company; (c) to any parent or corporate Affiliate of such Lender or to any Credit Participant, proposed Credit Participant or proposed Assignee; provided, however, that any such Person shall agree to comply with the restrictions set forth in this Section 12 with respect to such information; (d) to its independent counsel, auditors and other professional advisors with an instruction to such Person to keep such information confidential; (e) in connection with any litigation or arbitration proceedings to which such Lender is a party arising out of this Agreement or any other Credit Document; and (f) with the prior written consent of the Company, to any other Person. 13. Foreign Persons. If any assignment is made under Section 11.1 to any Person that is not incorporated or organized under the laws of the United States of America or a state thereof, the Lender making such assignment shall cause such Person to agree that, on or prior to the date of such assignment, it will deliver to the Company and the Agent the following: (a) Two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor form, as the case may be, certifying in each case that such Person is entitled to receive payments under this Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes. (b) A duly completed Internal Revenue Service Form W-8 or W-9 or successor form, as the case may be, to establish an exemption from United States backup withholding tax. Each such Person that delivers to the Company and the Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to this Section 13 further undertakes to deliver to the Company and the Agent two further copies of Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Company and the Agent. Such Form 1001 or 4224 shall certify that such Person is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. The foregoing documents need not be delivered in the event any change in treaty, law or regulation or official interpretation thereof has occurred which renders all such forms inapplicable or which -68- would prevent such transferee from delivering any such form with respect to it, or such transferee advises the Company that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax. Until such time as the Company and the Agent have received such forms indicating that payments hereunder are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Company shall withhold taxes from such payments at the applicable statutory rate. 14. Notices. Except as otherwise specified in this Agreement, any notice required to be given pursuant to this Agreement shall be given in writing. Any notice, demand or other communication in connection with this Agreement shall be deemed to be given if given in writing (including telex, telecopy or similar teletransmission) addressed as provided below (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addressor), and if either (a) actually delivered in fully legible form to such address (evidenced in the case of a telex by receipt of the correct answerback) or (b) in the case of a letter, five days shall have elapsed after the same shall have been deposited in the United States mails, with first-class postage prepaid and registered or certified. If to the Company or any Subsidiary, to it at its address set forth in Exhibit 7.1 (as supplemented pursuant to Sections 6.4.1 and 6.4.2), to the attention of the chief financial officer, with a copy to the attention of the chief legal officer. If to the Agent or any Lender, to it at its address set forth on the signature page of this Agreement, to the attention of the account officer specified on the signature page, with a copy to the Agent. 15. Course of Dealing; Amendments and Waivers. No course of dealing between any Lender, on the one hand, and the Company or any Subsidiary or Affiliate of the Company, on the other hand, shall operate as a waiver of any of the Lenders' rights under this Agreement or any other Credit Document or with respect to the Credit Obligations. The Company acknowledges that if the Lenders, without being required to do so by this Agreement or any other Credit Document, give any notice or information to, or obtain any consent from, any of the Company and the Subsidiaries or any of their respective Affiliates, the Lenders shall not by implication have amended, waived or modified any provision of this Agreement or any other Credit Document, or created any duty to give any such notice or information or to obtain any such consent on any future occasion. No delay or omission in exercising any right, or any partial exercise of any right, on the part of any Lender under this Agreement or any other Credit Document or with respect to the Credit Obligations shall operate as a waiver of such right or any other right hereunder or thereunder. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. No waiver, consent or amendment with respect to this Agreement or any other Credit Document shall be binding unless it is in writing and signed by the Agent or the holders of the required Credit Obligations. -69- 16. Defeasance. When all Credit Obligations have been paid, performed and reasonably determined by the Lenders to have been indefeasibly discharged in full, and if at the time no Lender continues to be committed to extend any credit to the Company hereunder or under any other Credit Document, this Agreement shall terminate; provided, however, that Sections 3.2.4, 3.2.6, 3.4, 9, 10.8.7, 10.11, 12, 17 and 18 shall survive the termination of this Agreement. 17. Venue; Service of Process. Each of the Company and the Lenders: (a) Irrevocably submits to the nonexclusive jurisdiction of the state courts of The Commonwealth of Massachusetts and to the nonexclusive jurisdiction of the United States District Court for the District of Massachusetts for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or any other Credit Document or the subject matter hereof or thereof. (b) Waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding brought in any of the above-named courts, any claim that it is not subject personally to the jurisdiction of such court, that its property is exempt or immune from attachment or execution, that such proceeding is brought in an inconvenient forum, that the venue of such proceeding is improper, or that this Agreement or any other Credit Document, or the subject matter hereof or thereof, may not be enforced in or by such court. Each of the Company and the Lenders consents to service of process in any such proceeding in any manner permitted by Chapter 223A of the General Laws of The Commonwealth of Massachusetts and agrees that service of process by registered or certified mail, return receipt requested, at its address specified in or pursuant to Section 14 is reasonably calculated to give actual notice. 18. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, EACH OF THE COMPANY AND THE LENDERS WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY CREDIT OBLIGATION OR IN ANY WAY CONNECTED WITH THE DEALINGS OF THE LENDERS OR THE COMPANY IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT, TORT OR OTHERWISE. The Company acknowledges that it has been informed by the Lenders that the provisions of this Section 18 constitute a material inducement upon which each of the Lenders has relied and will rely in entering into this Agreement and any other Credit Document, and that it has reviewed the provisions of this Section 18 with its counsel. Any Lender or the Company may file an original -70- counterpart or a copy of this Section 18 with any court as written evidence of the consent of the Company and the Lenders to the waiver of their rights to trial by jury. 19. General. All covenants, agreements, representations and warranties made in this Agreement or any other Credit Document or in certificates delivered pursuant hereto or thereto shall be deemed to have been relied on by each Lender, notwithstanding any investigation made by any Lender on its behalf, and shall survive the execution and delivery to the Lenders hereof and thereof. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement and the other Credit Documents constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral, with respect to such subject matter. This Agreement may be executed in any number of counterparts which together shall constitute one instrument. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE COMMONWEALTH OF MASSACHUSETTS. -71- [THIS PAGE LEFT INTENTIONALLY BLANK] -72- [THIS PAGE LEFT INTENTIONALLY BLANK] -73- Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. THE COLONIAL GROUP, INC. By _________________________________ Title: BANKBOSTON, N.A. By _________________________________ Title: Financial Institutions Division 100 Federal Street Boston, Massachusetts 02110 Telecopy: (617) 434-1537 Telex: 940581 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By _________________________________ Title: 231 South LaSalle Street Chicago, Illinois 60697 Telecopy: (312) 987-0889 Telex: -74- THE BANK OF NEW YORK By _________________________________ Title: One Wall Street Securities Industry Division New York, New York 10286 Telecopy: (212) 809-9575 Telex: CREDIT LYONNAIS NEW YORK BRANCH By _________________________________ Authorized Signature c/o Credit Lyonnais Representative Office 53 State Street Boston, Massachusetts 02109 Telecopy: (617) 723-4803 Telex: FLEET NATIONAL BANK By _________________________________ Title: 777 Main Street Hartford, Connecticut 06115 Telecopy: Telex: -75- MELLON BANK, N.A. By _________________________________ Title: One Mellon Bank Center Pittsburgh, Pennsylvania 15258 Telecopy: (412) 234-8087 Telex: -76- Execution Copy THE COLONIAL GROUP, INC. CREDIT AGREEMENT Amendment No. 1 This Agreement, dated as of December 23, 1998, is among The Colonial Group, Inc., a Massachusetts corporation ("CGI"), COGRA, LLC, a newly organized Delaware limited liability company to be the successor by merger (the "Merger") to CGI ("COGRA, LLC"), the other Lenders (as defined below) and BankBoston, N.A. ("BankBoston"), as agent (the "Agent") for itself and the other Lenders. The parties agree as follows: 1. Reference to Credit Agreement; Definitions. Reference is made to the Credit Agreement dated as of April 10, 1998 (the "Credit Agreement"), among the Company, the Lenders and the Agent. Terms defined in the Credit Agreement, as amended hereby (the "Amended Credit Agreement"), and not otherwise defined herein are used herein with the meanings so defined. Except as the context otherwise explicitly requires, the capitalized terms "Section" and "Exhibit" refer to sections hereof and exhibits hereto. 2. Amendments to Credit Agreement. Subject to all of the terms and conditions hereof and in reliance upon the representations and warranties set forth or incorporated by reference in Section 3, the Credit Agreement is amended as follows, effective upon the date (the "Amendment Date") that the conditions in Section 4 are satisfied, which conditions must be satisfied no later than December 31, 1998 or this Agreement shall be of no force or effect: 2.1. Amendment to Section 1.21A. A new Section 1.21A is added to the Credit Agreement immediately after Section 1.21 of the Credit Agreement to read in its entirety as follows: "1.21A. "CGI" means The Colonial Group, Inc., a Massachusetts corporation, which is a Wholly Owned Subsidiary of Liberty Financial Companies, Inc., which in turn is an indirect, majority owned Subsidiary of Liberty Mutual Insurance Company, and to which COGRA, LLC will be the successor by the Merger." 2.2. Amendment to Section 1.22. Section 1.22 of the Credit Agreement is amended to read in its entirety as follows: "1.22. "Charter" means the articles of organization, certificate of incorporation, limited liability company agreement, joint venture agreement, partnership agreement, trust indenture or other charter document of any person other than an individual, each as from time to time in effect." 2.3. Deletion of Section 1.23. Section 1.23 (definition of CISC) of the Credit Agreement is deleted and all references to "CISC" in the Amended Credit Agreement shall be deemed to be references to "LFSI" which means Liberty Funds Services, Inc., and its successors and assigns. 2.4. Addition of Section 1.29A. A new Section 1.29A is added to the Credit Agreement immediately after Section 1.29 of the Credit Agreement to read in its entirety as follows: "1.29A. "COGRA, LLC" means a newly organized Delaware limited liability company to be the successor by the Merger to CGI, which new limited liability company shall be a Wholly Owned Subsidiary of Liberty Financial Services, Inc., which in turn shall remain a Wholly Owned Subsidiary of Liberty Financial Companies, Inc., which in turn shall remain an indirect, majority owned Subsidiary of Liberty Mutual Insurance Company." 2.5. Amendment to Section 1.34. Section 1.34 of the Credit Agreement is amended to read in its entirety as follows: "1.34. "Company" means (a) prior to the Merger, CGI and (b) from and after the Merger, COGRA, LLC, and their successors and assigns, including any successor by merger." 2.6. Amendment to Section 1.39. Section 1.39 of the Credit Agreement is amended to read in its entirety as follows: "1.39. "Consolidated Net Worth" means, at any date, the total of: (a) partners' capital of the Company and the Subsidiaries (excluding the effect of any foreign currency translation adjustments and excluding any depreciation and amortization charges resulting from the write-up of any asset after December 31, 1997) determined in accordance with GAAP on a Consolidated basis, minus (b) the amount by which such partners' capital has been increased by the write-up of any asset of the Company and the Subsidiaries after December 31, 1997." 2.7. Amendment to Section 1.88. Section 1.88 of the Credit Agreement is amended to read in its entirety as follows: "1.88. "Liberty Mutual Guarantee" means the Guarantee dated as of April 10, 1998, as amended, modified and in effect from time to time, among the Company, Liberty Mutual Insurance Company and the Agent." 2 2.8. Addition of Section 1.94A. A new Section 1.94A is added to the Credit Agreement immediately after Section 1.94 of the Credit Agreement to read in its entirety as follows: "1.94A. "Merger" means the merger of CGI into COGRA, LLC, whereby COGRA, LLC shall be the surviving entity, occurring on or before December 31, 1998." 2.9. Deletion of Section 2.1.1. Section 2.1.1 (Term Loan A) and all references thereto, including Term Loan A Note and Term Loan A Maturity Date is deleted from the Credit Agreement in its entirety, including the related defined terms, "Term Loan A", "Term Loan A Note" and "Term Loan A Maturity Date." 2.10. Amendment to Section 6.4.1. The introductory paragraph of Section 6.4.1 of the Credit Agreement is amended to read in its entirety as follows: "6.4.1. Annual Reports. The Company will furnish to the Lenders as soon as available, and in any event within 90 days after the end of each fiscal year of the Company, the internally prepared Consolidated balance sheet of the Company and the Subsidiaries as at the end of such fiscal year and the Consolidated statements of income, of changes in partners' capital and of cash flows of the Company and the Subsidiaries for such fiscal year (all in reasonable detail), together with comparative figures (in the case of partners' capital in fiscal year 1999, to shareholders' equity prior to the Merger) for the preceding fiscal year end, all accompanied by:" 2.11. Amendment to Section 6.4.2. The introductory paragraph of Section 6.4.2 of the Credit Agreement is amended to read in its entirety as follows: "6.4.2. Quarterly Reports. The Company will furnish to the Lenders as soon as available and, in any event, within 45 days after the end of each of the first three fiscal quarters of the Company, the internally prepared Consolidated balance sheet of the Company and the Subsidiaries as of the end of such fiscal quarter and the Consolidated states of income, of changes in partners' capital in fiscal year 1999 and of cash flows of the Company and the Subsidiaries for such fiscal quarter and for the portion of the fiscal year then ending (all in reasonable detail), together with comparative figures (in the case of partners' capital in fiscal year 1999, to shareholders' equity prior to the Merger) for the same date or period in the preceding fiscal year, all accompanied by:" 2.12. Amendment to Section 6.9.1. Section 6.9.1 of the Credit Agreement is amended to read in its entirety as follows: 3 "6.9.1. Investments of the Company and the Subsidiaries in Wholly Owned Subsidiaries; provided, however, that so long as immediately before and after giving effect thereto no Default exists, Investments in Wholly Owned Subsidiaries may be made only (a) to the extent reasonably necessary for the conduct of the business permitted by Section 6.2.1 and (b) to form COGRA, LLC for purposes of effecting the Merger with CGI." 2.13. Addition of Section 6.11.5. A new Section 6.11.5 is added to the Credit Agreement immediately after Section 6.11.4 of the Credit Agreement to read in its entirety as follows: "6.11.5. In connection with the Merger, CGI may (a) contribute all of its assets and liabilities to COGRA, LLC in exchange for 100% of the ownership and economic interests in COGRA, LLC and (b) subsequently effect the Merger into COGRA, LLC." 2.14. Amendment to Section 7.1.1. Section 7.1.1 of the Credit Agreement is amended to read in its entirety as follows: "7.1.1. Company. The Company is prior to the Merger, a duly organized and validly existing corporation, in good standing under the laws of Massachusetts (and from and after the Merger, a duly organized and validly existing limited liability company, in good standing under the laws of Delaware), with all power and authority, corporate or otherwise, necessary to (a) enter into and perform this Agreement and each other Credit Document to which it is a party and make the borrowings hereunder and (b) own its property and carry on the business conducted or proposed to be conducted by it. Certified copies of the Charter and By-laws of the Company have been previously delivered to the Agent and are correct and complete. Exhibit 7.1, as from time to time hereafter supplemented in accordance with Sections 6.4.1 and 6.4.2, sets forth, as of the end of the most recent fiscal year or quarter for which such financial statements are required to be furnished, (i) the jurisdiction of formation of the Company, (ii) the address of the Company's principal executive office and chief place of business and (iii) the name under which the Company conducts its business and the jurisdiction in which the name is used." 2.15. Amendment to Section 10.1. Section 10.1 of the Credit Agreement is amended to read in its entirety as follows: "10.1. Interests in Credits. The percentage interest of each Lender in the Loan, including the Revolving Loan or Term Loan B in the aggregate, shall be computed based on the maximum principal amount for each Lender as follows: 4
Maximum Principal Percentage Lender Amount Interest ------ ----------------- ---------- BankBoston, N.A. $11,666,640 19.4444% Bank of America National $17,666,640 29.4444% Trust and Savings Association The Bank of New York $ 7,666,680 12.7778% Credit Lyonnais $ 7,666,680 12.7778% New York Branch Fleet National Bank $ 7,666,680 12.7778% Mellon Bank, N.A. $ 7,666,680 12.7778% ----------- --------- Total $60,000,000 100.0000%
The foregoing percentage interests, as otherwise adjusted as the Lenders may from time to time agree among themselves, or pursuant to Section 11, are referred to as the "Percentage Interests" with respect to all or any portion of the Loan. References in any Credit Document to the Lenders' respective Percentage Interests are to such interests as from time to time in effect." 2.16. Amendment to Exhibit 2.2.3. Exhibit 2.2.3 (Revolving Note) of the Credit Agreement is amended to read in its entirety as set forth on Exhibit 2.2.3 hereto. 2.17. Amendment to Exhibit 2.3.2. Exhibit 2.3.2 (Term Loan B Note) of the Credit Agreement is amended to read in its entirety as set forth on Exhibit 2.3.2 hereto. 2.18. Amendment to Exhibit 5.1.4. Exhibit 5.1.4 (Subsidiary Guarantee) of the Credit Agreement is amended by Amendment No. 1 to the Subsidiary Guarantee in substantially the form of Exhibit 4.4 hereto. 2.19. Amendment to Exhibit 7.1. Exhibit 7.1 of the Credit Agreement (Company and the Subsidiaries) is amended to read in its entirety as set forth on Exhibit 7.1 hereto. 3. Representations and Warranties. In order to induce the Lenders to enter into 5 this Agreement, CGI and COGRA, LLC each represents and warrants to each of the Lenders that: 3.1. Organization and Business. CGI is a duly organized and validly existing corporation in good standing under the laws of Massachusetts, and COGRA, LLC is a duly organized and validly existing limited liability company, in good standing under the laws of Delaware, each with all power and authority, corporate and otherwise, necessary to (a) enter into and perform this Agreement and perform the Amended Credit Agreement and each other Credit Document to which it is a party and make the borrowings under the Amended Credit Agreement and (b) own its properties and carry on the business now conducted or proposed to be conducted by it. Certified copies of the Charters and By-laws of CGI and COGRA have been previously delivered to the Agent and are correct and complete. Exhibit 7.1 attached hereto sets forth, as of the Amendment Date after giving effect to the Merger, (i) the jurisdiction of formation COGRA, LLC, (ii) the address of the principal executive office and chief place of business for COGRA, LLC and (iii) the name under which COGRA, LLC conducts its business and the jurisdiction in which the name is used. 3.2. Title to Assets. Prior to the Merger, CGI and the Subsidiaries have (and from and after the Merger, COGRA, LLC and the Subsidiaries shall have) good and marketable title to or valid leases of all material assets necessary for or used in the operations of their business now conducted by them and reflected in the balance sheet most recently furnished to the Lenders pursuant to Section 6.4.2, and all material assets acquired subsequent to the date of such balance sheet, subject to no Liens except for those permitted by Section 6.8 and except for assets disposed of as permitted by Section 6.11. 3.3. Enforceability. Each of CGI and COGRA, LLC has duly executed and delivered this Agreement. Each of this Agreement and the Amended Credit Agreement is the legal, valid and binding obligation of each of CGI and COGRA, LLC and is enforceable in accordance with its terms. 3.4. No Legal Obstacle to Agreements. Neither the execution, delivery or performance of this Agreement, the New Notes or the amendment to the Subsidiary Guarantee, nor the performance of the Amended Credit Agreement, nor the consummation of any other transaction referred to in or contemplated by this Agreement or the Amended Credit Agreement, nor the fulfillment of the terms hereof or thereof, has constituted or resulted in or will constitute or result in: (1) any breach or termination of the provisions of any agreement, instrument, deed or lease to which either CGI or COGRA, LLC or any Subsidiary is a party or by which it is bound, or of the Charter or By-laws, of CGI or COGRA, LLC or any Subsidiary; 6 (2) the violation of any law, judgment, decree or governmental order, rule or regulation applicable to CGI or COGRA, LLC or any Subsidiary; (3) the creation under any agreement, instrument, deed or lease of any Lien upon any of the assets of CGI or COGRA, LLC or any Subsidiary; or (4) any redemption, retirement or other repurchase obligation of CGI or COGRA, LLC or any Subsidiary under any Charter, By-law, agreement, instrument, deed or lease. No approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by CGI or COGRA, LLC or any Subsidiary in connection with the execution, delivery and performance of this Agreement, or the amendment to the Subsidiary Guarantee, the New Notes, or the amendments to the Subsidiary Guarantee or the performance of the Amended Credit Agreement, or the consummation of the transactions contemplated hereby or thereby. 3.5. No Default. Immediately prior to and after giving effect to the amendments set forth in Section 2, no Default will exist. 3.6. Incorporation of Representations and Warranties. The representations and warranties set forth in Section 7 of the Credit Agreement are true and correct on the date hereof as if originally made on and as of the date hereof. 4. Conditions. The effectiveness of this Agreement shall be subject to the satisfaction of the following conditions: 4.1. The Merger. The Merger shall have occurred contemporaneously with the effectiveness of this Agreement on the Amendment Date. 4.2. New Notes. The Revolving Notes of CGI dated as of April 10, 1998 payable by the CGI to each of the Lenders as required by Section 2.2.3 of the Credit Agreement shall be replaced with new Revolving Notes of COGRA, LLC, to be dated as of the Closing Date (the "New Notes"), substantially in the form of Exhibit 2.2.3 hereto, and each such New Note shall be in full force and effect. 4.3. Amendment to the Liberty Mutual Guarantee. The Liberty Mutual Guarantee among CGI, Liberty Mutual Insurance Company and the Agent shall be amended to reflect the Merger by Amendment No. 1 to the Liberty Mutual Guarantee, substantially in the form of Exhibit 4.3 hereto, and shall be in full force and effect. 4.4. Amendment to the Subsidiary Guarantee and the Guarantors Contribution Agreement. Each of (i) the Subsidiary Guarantee dated as of April 10, 1998 among Colonial 7 Management, Liberty Funds Services, Inc. (f/k/a Colonial Investors Service Center, Inc.), Colonial Advisory Services, Inc., Liberty Financial Advisers, Inc. (collectively, the "Subsidiary Guarantors") and the Agent for itself and the other Lenders and (ii) the Guarantors Contribution Agreement dated as of April 10, 1998 among CGI and the Subsidiary Guarantors, shall be amended to reflect the Merger by Amendment No. 1 to the Subsidiary Guarantee and Amendment No. 1 to the Guarantors Contribution Agreement, substantially in the form of Exhibit 4.4 hereto, and the Subsidiary Guarantee shall be in full force and effect. 4.5. Legal Opinions. The Lenders shall have received from Nancy L. Conlin, Senior Vice President and General Counsel of the Company and the Subsidiaries, her opinion with respect to the transaction contemplated by this Amendment, which opinion shall be in form and substance satisfactory to the Lenders. 4.6. Officer's Certificate. The representations and warranties contained in Section 3 shall be true and correct as of the Amendment Date with the same force and effect as though originally made on and as of such date; no Default shall exist on the Amendment Date immediately prior to and after giving effect to this Agreement; as of the Amendment Date, no Material Adverse Change shall have occurred; and the Company shall have furnished to the Agent on the Amendment Date a certificate to these effects, in substantially the form of Exhibit 4.6, signed by an Executive Officer or a Financial Officer. 4.7. Execution by Lenders. Each of the Lenders shall have executed and delivered this Agreement to the Company. 4.8. Fees. The Company shall have paid all fees due to the Agent or other Lenders and all reasonable fees and disbursements of Ropes & Gray, special counsel to the Lenders. 4.9. Proper Proceedings. All proper corporate proceedings shall have been taken by each of CGI, COGRA, LLC, the Subsidiaries and Liberty Mutual Insurance Company to authorize this Agreement, the Credit Agreement, the Liberty Mutual Guarantee, the Subsidiary Guarantee and the transactions contemplated hereby and thereby. The Agent shall have received copies of all documents, including legal opinions of counsel and records of corporate proceedings which the Agent may have requested in connection therewith, such documents, where appropriate, to be certified by proper corporate or governmental authorities. 5. Further Assurances. Each of CGI and COGRA, LLC will, promptly upon request of the Agent from time to time, execute, acknowledge and deliver, and file and record, all such instruments and notices, and take all such action, as the Agent deems necessary or advisable to carry out the intent and purposes of this Agreement. 6. General. The Amended Credit Agreement and all of the Credit Documents, including the Liberty Mutual Guarantee and the Subsidiary Guarantee, each as amended, are each confirmed as being in full force and effect. This Agreement, the Amended Credit Agreement 8 and the other Credit Documents referred to herein or therein constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral, with respect to such subject matter. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter, limit or otherwise affect the meaning hereof. Each of this Agreement and the Amended Credit Agreement is a Credit Document and may be executed in any number of counterparts, which together shall constitute one instrument, and shall bind and inure to the benefit of the parties and their respective successors and assigns, including as such successors and assigns all holders of any Note. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE COMMONWEALTH OF MASSACHUSETTS. 9 Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. THE COLONIAL GROUP, INC. By _________________________________ Title: COGRA, LLC By _________________________________ Title: BANKBOSTON, N.A. By _________________________________ Title: Financial Institutions Division 100 Federal Street Boston, Massachusetts 02110 Telecopy: (617) 434-1537 Telex: 940581 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By _________________________________ Title: 231 South LaSalle Street Chicago, Illinois 60697 Telecopy: (312) 987-0889 Telex: (312) 828-3734 10 THE BANK OF NEW YORK By _________________________________ Title: One Wall Street Mutual Funds Banking Division New York, New York 10286 Telecopy: (212) 635-6958 Telex: CREDIT LYONNAIS NEW YORK BRANCH By _________________________________ Authorized Signature 1301 Avenue of the Americas New York, New York 10019 Telecopy: (212) 261-3401 Telex: FLEET NATIONAL BANK By _________________________________ Title: 777 Main Street Hartford, Connecticut 06115 Telecopy: Telex: 11 MELLON BANK, N.A. By _________________________________ Title: One Mellon Bank Center Pittsburgh, Pennsylvania 15258 Telecopy: (412) 234-8087 Telex: 12 EX-12 7 STATEMENT RE: COMPUTATION OF RATIOS LIBERTY FINANCIAL COMPANIES, INC. EXHIBIT 12 - Statement re Computation of Ratios ($ in millions)
Years Ended December 31 -------------------------------------- 1998 1997 1996 -------- -------- -------- Earnings: Pretax income $ 178.9 $ 192.1 $ 150.3 Add fixed charges: Interest on indebtedness 24.1 21.4 19.7 Portion of rent representing the interest factor 4.1 3.7 4.0 Accretion to face value of redeemable convertible preferred stock 0.8 0.8 0.9 -------- -------- -------- Sub-total of income as adjusted 207.9 218.0 174.9 Interest on fixed annuities and financial products 562.2 594.1 572.7 -------- -------- -------- Total income as adjusted $ 770.1 $ 812.1 $ 747.6 ======== ======== ======== Fixed charges: Interest on indebtedness $ 24.1 $ 21.4 $ 19.7 Portion of rent representing the interest factor 4.1 3.7 4.0 Accretion to face value of redeemable convertible preferred stock 0.8 0.8 0.9 -------- -------- -------- Sub-total of fixed charges 29.0 25.9 24.6 Interest on fixed annuities and financial products 562.2 594.1 572.7 -------- -------- -------- Sub-total of fixed charges 591.2 620.0 597.3 Preferred stock dividends 1.4 1.4 1.4 -------- -------- -------- Total fixed charges $ 592.6 $ 621.4 $ 598.7 ======== ======== ======== Ratio of earnings to fixed charges: Excluding interest on fixed annuities and financial products 7.17x 8.42x 7.11x ======== ======== ======== Including interest on fixed annuities and financial products 1.30x 1.31x 1.25x ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividends: Excluding interest on fixed annuities and financial products 6.84x 7.99x 6.73x ======== ======== ======== Including interest on fixed annuities and financial products 1.30x 1.31x 1.25x ======== ======== ========
EX-13 8 PORTIONS OF ANNUAL REPORT Selected Financial Data SELECTED CONSOLIDATED FINANCIAL DATA(1) (IN MILLIONS, EXCEPT PER SHARE DATA)
AS OF OR FOR THE YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Income Statement Data Investment income $ 820.9 $ 853.1 $ 796.4 $ 761.8 $ 695.1 Interest credited to policyholders (562.2) (594.1) (572.7) (555.8) (481.9) - -------------------------------------------------------------------------------------------------------------------------- Investment spread 258.7 259.0 223.7 206.0 213.2 - -------------------------------------------------------------------------------------------------------------------------- Net realized investment gains (losses) 2.4 25.9 8.0 (4.0) (8.2) - -------------------------------------------------------------------------------------------------------------------------- Fee income: Investment advisory and administrative fees 237.7 217.9 196.4 155.8 95.9 Distribution and service fees 52.7 49.2 44.9 28.9 -- Transfer agency fees 49.0 47.7 43.9 30.8 4.0 Surrender charges and net commissions 33.7 36.1 34.7 23.4 20.0 Separate account fees 20.6 17.1 16.0 13.2 12.5 - -------------------------------------------------------------------------------------------------------------------------- Total fee income 393.7 368.0 335.9 252.1 132.4 - -------------------------------------------------------------------------------------------------------------------------- Expenses: Operating expenses (328.2) (309.7) (277.9) (225.1) (174.9) Amortization of deferred policy acquisition costs (69.2) (75.9) (60.2) (58.5) (52.2) Amortization of deferred distribution costs (40.1) (34.2) (33.9) (18.8) -- Amortization of value of insurance in force (8.2) (10.5) (10.2) (9.5) (17.0) Amortization of intangible assets (15.3) (13.5) (15.4) (12.2) (5.8) Interest expense, net (14.9) (17.0) (19.7) (16.2) (4.2) - -------------------------------------------------------------------------------------------------------------------------- Total expenses (475.9) (460.8) (417.3) (340.3) (254.1) - -------------------------------------------------------------------------------------------------------------------------- Pretax income 178.9 192.1 150.3 113.8 83.3 Income tax expense (54.4) (62.6) (49.6) (39.9) (32.5) - -------------------------------------------------------------------------------------------------------------------------- Income before extraordinary item 124.5 129.5 100.7 73.9 50.8 Extraordinary loss on extinguishment of debt, net of tax (9.7) -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Net income $ 114.8 $ 129.5 $ 100.7 $ 73.9 $ 50.8 ========================================================================================================================== Per Share Data(2) Net income per share--basic $ 2.51 $ 2.94 $ 2.36 $ 1.85 $ 1.49 Net income per share--assuming dilution 2.42 2.77 2.24 1.76 1.43 Dividends on common stock(3) 0.40 0.40 0.40 0.30 -- Dividends on convertible preferred stock 2.88 2.88 2.88 2.21 -- Book value 27.41 26.82 24.42 23.03 18.25 Other Operating Data Net operating income(4) $ 122.6 $ 112.4 $ 94.8 $ 76.5 $ 56.2 Extraordinary loss on extinguishment of debt, net of tax (9.7) -- -- -- -- Net realized investment gains (losses), net of taxes 1.9 17.1 5.9 (2.6) (5.4) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 114.8 $ 129.5 $ 100.7 $ 73.9 $ 50.8 ========================================================================================================================== Balance Sheet Data Total investments $ 12,598.3 $ 12,343.5 $ 11,537.9 $ 10,144.7 $ 8,590.2 Intangible assets 292.8 199.0 205.4 192.3 29.3 Total assets 16,519.1 15,851.6 14,427.7 12,749.4 10,968.8 Notes payable to affiliates -- 229.0 229.0 229.0 75.0 Notes payable 486.4 26.5 52.5 61.0 -- Series A redeemable convertible preferred stock 15.3 14.6 13.8 13.0 -- Stockholders' equity 1,271.3 1,198.9 1,051.4 956.4 624.7 Shares of common stock outstanding(2) 46.4 44.7 43.1 41.5 34.2
1 Includes data for acquired entities from and after the applicable acquisition date (the most significant being Colonial, which was acquired on March 24, 1995). The data presented should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other financial information included herein and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION." 2 Share and per share amounts have been adjusted for a three-for-two common stock split effected in the form of a 50 percent stock dividend distributed on December 10, 1997. 3 The amount for 1995 does not include a non-cash dividend of $30.0 million to an affiliate of Liberty Mutual. See Note 5 of Notes to the Consolidated Financial Statements. 4 Net operating income is defined as net income, excluding extraordinary items and net realized investment gains and losses, net of related income taxes. 27 Management's Discussion MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net Income was $114.8 million or $2.42 per share in 1998 compared to $129.5 million or $2.77 per share in 1997 and $100.7 million or $2.24 per share in 1996. The decrease in 1998 compared to 1997 resulted primarily from lower net realized investment gains and higher operating expenses. Partially offsetting these items were increased fee income and decreased amortization expense, interest expense, net and income tax expense. In addition, net income for 1998 included an extraordinary loss on extinguishment of debt, net of tax, of $9.7 million. The increase in 1997 compared to 1996 resulted primarily from higher investment spread, higher fee income, higher net realized investment gains and lower interest expense, net. Partially offsetting these items were increased operating expenses, amortization expense and income tax expense. Pretax Income was $178.9 million in 1998 compared to $192.1 million in 1997 and $150.3 million in 1996. The lower pretax income in 1998 compared to 1997 resulted primarily from lower net realized investment gains and higher operating expenses. Partially offsetting these items were increased fee income and decreased amortization expense and interest expense, net. The higher pretax income in 1997 compared to 1996 resulted primarily from higher investment spread, higher fee income, higher net realized investment gains and lower interest expense, net. Partially offsetting these items were increased operating expenses and amortization expense. Investment Spread is the amount by which investment income earned on the Company's investments exceeds interest credited on policyholder balances. Investment spread was $258.7 million in 1998 compared to $259.0 million in 1997 and $223.7 million in 1996. 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 in 1998 was 1.83% compared to 1.96% for 1997 and 1.89% for 1996. Investment income was $820.9 million in 1998 compared to $853.1 million in 1997 and $796.4 million in 1996. The decrease of $32.2 million in 1998 compared to 1997 primarily relates to a $66.0 million decrease as a result of a lower average investment yield, partially offset by a $33.8 million increase resulting from a higher level of average invested assets. The 1998 investment income was net of $70.8 million of S&P 500 Index call option amortization expense related to the Company's equity-indexed annuities compared to $47.6 million in 1997. The average investment yield was 6.41% in 1998 compared to 6.95% in 1997. The increase of $56.7 million in 1997 compared to 1996 primarily relates to an $86.2 million increase as a result of the higher level of average invested assets, partially offset by a $29.5 million decrease resulting from a lower average investment yield. The 1996 investment income was net of $14.0 million of S&P 500 Index call option amortization expense. The average investment yield was 7.21% in 1996. Interest credited to policyholders totaled $562.2 million in 1998 compared to $594.1 million in 1997 and $572.7 million in 1996. The decrease of $31.9 million in 1998 compared to 1997 primarily relates to a $48.6 million decrease resulting from a lower average interest credited rate, partially offset by a $16.8 million increase as a result of a higher level of average policyholder balances. Policyholder balances averaged $12.3 billion (including $10.5 billion of fixed products, consisting of fixed annuities and a closed block of single premium whole life insurance, and $1.8 28 billion of equity-indexed annuities) in 1998 compared to $11.9 billion (including $10.8 billion of fixed products and $1.1 billion of equity-indexed annuities) in 1997. The average interest credited rate was 4.58% (5.23% on fixed products and 0.85% on equity-indexed annuities) in 1998 compared to 4.99% (5.45% on fixed products and 0.85% on equity-indexed annuities) in 1997. 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 95%) 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 each of the periods presented, the interest credited to equity-indexed policyholders related to the participation rate was offset by investment income recognized on the S&P 500 Index call options and futures, resulting in a 0.85% net credited rate. The increase of $21.4 million in 1997 compared to 1996 primarily relates to a $56.4 million increase as a result of a higher level of average policyholder balances, partially offset by a $35.0 million decrease resulting from a lower average interest credited rate. Policyholder balances averaged $10.8 billion (including $10.4 billion of fixed products and $0.4 billion of equity-indexed annuities) in 1996. The average interest credited rate was 5.32% (5.50% on fixed products and 0.85% on equity-indexed annuities) in 1996. Average investments in the Company's general account (computed without giving effect to Statement of Financial Accounting Standards No. 115), including a portion of the Company's cash and cash equivalents, were $12.8 billion in 1998 compared to $12.3 billion in 1997 and $11.0 billion in 1996. The increase of $0.5 billion in 1998 compared to 1997 was primarily due to the reinvestment of portfolio earnings. The increase of $1.3 billion in 1997 compared to 1996 was primarily due to a 100 percent coinsurance agreement with respect to a $954.0 million block of single premium deferred annuities ("SPDAs") entered into with Fidelity & Guaranty Life Insurance Company ("F&G Life") during the third quarter of 1996 and the reinvestment of portfolio earnings of $0.7 billion. Net Realized Investment Gains were $2.4 million in 1998 compared to $25.9 million in 1997 and $8.0 million in 1996. The net realized investment gains in 1998 were net of losses of $28.3 million for certain fixed maturity investments where the decline in value was determined to be other than temporary. Investment Advisory and Administrative Fees are based on the market value of assets managed for mutual funds, wealth management and institutional investors. Investment advisory and administrative fees were $237.7 million in 1998 compared to $217.9 million in 1997 and $196.4 million in 1996. These increases primarily reflect a higher level of average fee-based assets under management. Average fee-based assets under management were $41.9 billion in 1998 compared to $37.2 billion in 1997 and $33.9 billion in 1996. The increase during 1998 compared to 1997 resulted from acquisitions, market appreciation and net sales for the year ended December 31, 1998. The increase during 1997 compared to 1996 was primarily due to market appreciation. Investment advisory and administrative fees were 0.57% of average fee-based assets under management in 1998, 0.59% in 1997 and 0.58% in 1996. The amount of fee-based assets under management are affected by product sales and redemptions, acquisitions, and by 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). 29 Fee-Based Assets Under Management
As of December 31 ------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------- Mutual Funds: Intermediary-distributed $ 17.9 $ 16.1 $ 16.1 Direct-marketed 6.8 7.2 6.6 Closed-end 2.4 2.2 1.9 Variable annuity 1.5 1.3 1.1 - ------------------------------------------------------------------------- 28.6 26.8 25.7 Private Capital Management 7.9 6.6 5.3 Institutional 11.4 5.3 4.9 - ------------------------------------------------------------------------- Total fee-based assets under management* $ 47.9 $ 38.7 $ 35.9 =========================================================================
* As of December 31, 1998, 1997 and 1996, Keyport's insurance assets of $13.1 billion, $12.8 billion and $12.1 billion, respectively, bring total assets under management to $61.0 billion, $51.5 billion and $48.0 billion, respectively. Changes in Fee-Based Assets Under Management
Year Ended December 31 -------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Fee-based assets under management--beginning $ 38.7 $ 35.9 $ 31.9 Sales and reinvestments 8.5 6.6 7.5 Redemptions and withdrawals ( 6.8) ( 6.6) ( 5.7) Acquisitions 5.4 -- 0.3 Market appreciation 2.1 2.8 1.9 - ------------------------------------------------------------------------------- Fee-based assets under management--ending $ 47.9 $ 38.7 $ 35.9 ===============================================================================
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 $52.7 million in 1998 compared to $49.2 million in 1997 and $44.9 million in 1996. These increases in 1998 and 1997 were primarily attributable to the higher asset levels of mutual funds with 12b-1 distribution fees and contingent deferred sales charges. As a percentage of weighted average assets, distribution and service fees were approximately 0.71% in 1998, 0.71% in 1997 and 0.69% in 1996. Transfer Agency Fees are based on the market value of the assets managed in the Company's intermediary-distributed and direct-marketed mutual funds. Such fees were $49.0 million on average assets of $24.9 billion in 1998, $47.7 million on average assets of $24.1 billion in 1997 and $43.9 million on average assets of $22.6 billion in 1996. These increases in 1998 and 1997 were primarily due to higher average assets. As a percentage of total average mutual fund assets under management, transfer agency fees were approximately 0.20%, 0.20% and 0.19% in 1998, 1997 and 1996, respectively. 30 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 in the Company's bank marketing businesses (net of commissions that are paid to the Company's client banks and brokers). Total surrender charges and net commissions were $33.7 million in 1998 compared to $36.1 million in 1997 and $34.7 million in 1996. 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 six years. Such charges totaled $21.9 million, $21.4 million and $19.8 million in 1998, 1997 and 1996, respectively. Total annuity withdrawals represented 13.2%, 11.6% and 11.6% of the total average annuity policyholder and separate account balances in 1998, 1997 and 1996, respectively. Net commissions were $11.8 million in 1998, $14.7 million in 1997 and $14.9 million in 1996. Separate Account Fees are primarily mortality and expense charges earned on variable annuity and variable life policyholder balances. These fees, which are based on the market values of the assets in separate accounts supporting the contracts, were $20.6 million in 1998 compared to $17.1 million in 1997 and $16.0 million in 1996. Such fees represented 1.44%, 1.54% and 1.68% of average variable annuity and variable life separate account balances in 1998, 1997 and 1996, respectively. Operating Expenses primarily represent compensation, marketing and other general and administrative expenses. These expenses were $328.2 million in 1998 compared to $309.7 million in 1997 and $277.9 million in 1996. These increases were primarily due to increases in compensation and marketing expenses. Operating expenses expressed as a percent of average total assets under management were 0.60%, 0.63% and 0.62% in 1998, 1997 and 1996, respectively. 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 $69.2 million in 1998 compared to $75.9 million in 1997 and $60.2 million in 1996. The decrease in amortization in 1998 compared to 1997 was primarily related to revisions in investment spread assumptions, partially offset by increased amortization from the growth of business in force associated with increased sales of variable annuity products during 1998. The increase in amortization in 1997 compared to 1996 was primarily related to the increase in investment spread from the growth of business in force associated with fixed and indexed products and the increased sales of variable annuity products during 1997. Amortization expense represented 24.8%, 27.5% and 25.1% of investment spread and separate account fees in 1998, 1997 and 1996, 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 $40.1 million in 1998 compared to $34.2 million in 1997 and $33.9 million in 1996. The increase in amortization in 1998 compared to 1997 was primarily attributable to the continuing sales of such fund shares during 1998 and 1997. The increase in amortization in 1997 31 compared to 1996 was primarily attributable to the continuing sales of such fund shares during 1997 and 1996, partially offset by a $3.8 million charge in the fourth quarter of 1996 relating to a reduction in the amortization period. Amortization of Value of Insurance in Force relates to the actuarially-determined present value of projected future gross profits from policies in force at the date of acquisition. Amortization totaled $8.2 million in 1998 compared to $10.5 million in 1997 and $10.2 million in 1996. The decrease in amortization in 1998 compared to 1997 was primarily due to lower amortization related to the F&G Life block of SPDAs. The increase in amortization in 1997 compared to 1996 included increased amortization of $4.0 million related to the F&G Life block of SPDAs partially offset by decreased amortization related to a change in mortality assumptions. Amortization of Intangible Assets relates to goodwill and certain identifiable intangible assets arising from business combinations accounted for as purchases. Amortization was $15.3 million in 1998 compared to $13.5 million in 1997 and $15.4 million in 1996. The increase in amortization in 1998 compared to 1997 was primarily attributable to acquisitions during 1998. The decrease in amortization in 1997 compared to 1996 was primarily attributable to certain assets becoming fully amortized in the third quarter of 1996. Interest Expense, Net was $14.9 million in 1998 compared to $17.0 million in 1997 and $19.7 million in 1996. The decrease in 1998 compared to 1997 was due largely to higher interest income, which is netted against interest expense, and lower interest expense related to Colonial's revolving credit facility which is utilized to finance deferred sales commissions paid in connection with the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. Partially offsetting these items was higher interest expense on debt. The decrease in 1997 compared to 1996 was due to lower interest expense related to Colonial's credit facility and to higher interest income which is netted against interest expense. Income Tax Expense was $54.4 million or 30.4% of pretax income in 1998 compared to $62.6 million or 32.6% of pretax income in 1997 and $49.6 million or 33.0% of pretax income in 1996. The Company expects its effective tax rate on pretax income in 1999 to approximate 38.5%. The significantly lower effective tax rates on pretax income in 1998, 1997 and 1996 were primarily attributable to reductions in the deferred tax asset valuation allowance on federal net operating loss carryforwards. At December 31, 1998, the valuation allowance on federal net operating loss carryforwards has been reduced to zero. FINANCIAL CONDITION Stockholders' Equity as of December 31, 1998 was $1.27 billion compared to $1.20 billion as of December 31, 1997. Net income in 1998 was $114.8 million and cash dividends on the Company's preferred and common stock totaled $5.9 million. Common stock totaling $8.9 million was issued in connection with the acquisition of Crabbe Huson and common stock totaling $7.3 million was issued in connection with the exercise of stock options. In addition, the exercise of certain stock options resulted in a federal income tax benefit to the Company of $2.5 million which was credited to additional paid-in capital. A decrease in accumulated other comprehensive income which consists of net unrealized investment gains, net of adjustments to deferred policy acquisition costs, value of insurance in force and income taxes, during the period decreased stockholders' equity by $55.8 million. Book Value Per Share amounted to $27.41 at December 31, 1998 compared to $26.82 at December 31, 1997. Excluding net unrealized gains on investments, book value per share amounted to $26.82 at December 31, 1998 and 32 $24.97 at December 31, 1997. As of December 31, 1998, there were 46.4 million common shares outstanding compared to 44.7 million common shares outstanding as of December 31, 1997. Investments not including cash and cash equivalents, totaled $12.6 billion at December 31, 1998 compared to $12.3 billion at December 31, 1997. The increase primarily reflects the reinvestment of portfolio earnings. 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 December 31, 1998 and 1997 reflected net unrealized gains of $105.3 million and $283.8 million, respectively, relating to its fixed maturity and equity portfolios. Approximately $11.3 billion or 84.9% of the Company's general account investments at December 31, 1998 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 December 31, 1998, the carrying value of investments in below investment grade securities totaled $1.1 billion or 8.1% of general account investments of $13.3 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 carefully reviews the carrying value of such investments at least quarterly to 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 December 31, 1998, the carrying value of fixed maturity securities that were non-income producing was $30.0 million, which constituted 0.2% of investments. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market-Sensitive Instruments and Risk Management Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. The Company's primary market risk exposures are to changes in interest rates and to changes in equity prices. The active management of market risk is integral to the Company's operations. The Company may use the following approaches to manage its exposure to market risk within defined tolerance ranges: rebalance its existing asset and liability portfolios, change the character of future investment purchases, or use derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased. 33 Corporate Oversight The Company generates substantial investable funds from its annuity operations. The Company believes that its fixed and indexed policyholder balances should be backed by investments, principally comprised of fixed maturities, which generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rates, the slope of the yield curve and the excess at which fixed maturities are priced over the yield curve. The Company's portfolio strategy is designed to achieve acceptable risk-adjusted returns by effectively managing portfolio liquidity and credit quality. The Company administers and oversees the investment risk management processes primarily through its Investment Committee and its Board of Directors. The Investment Committee and Board of Directors provide executive oversight of investment activities. The Investment Committee is a committee consisting of the Chief Executive Officer and other members of senior management of the Company. The Investment Committee meets monthly to provide detailed oversight of investment risk, including market risk. The Company has investment guidelines that define the overall framework for managing market and other investment risks, including the accountability and control over these activities. In addition, the Company has specific investment policies that delineate the investment limits and strategies that are appropriate given the Company's liquidity, product and regulatory requirements. The Company monitors and manages its exposure to market risk through asset allocation limits, duration limits, and stress tests. Asset allocation limits place restrictions on the aggregate fair value which may be invested within an asset class. Duration limits on the aggregate investment portfolio, and, as appropriate, on individual components of the portfolio, place restrictions on the amount of interest rate risk that may be taken. Stress tests measure downside risk to fair value and earnings over longer time intervals and for adverse market scenarios. The day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by asset allocation, duration and other limits, including but not limited to credit and liquidity. Interest Rate Risk Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates. This risk arises from the Company's primary activities, as the Company invests substantial funds in interest-sensitive assets and also has interest-sensitive liabilities. The Company's asset/liability management emphasizes a conservative approach, which is oriented toward reducing downside risk in adverse markets, as opposed to maximizing spread in favorable markets. The Company manages the interest rate risk inherent in its assets relative to the interest rate risk inherent in its liabilities. One of the measures the Company uses to quantify this exposure is effective duration. Effective duration is a common measure for the price sensitivity of assets and liabilities to changes in interest rates. It measures the approximate percentage change in the market value of assets and liabilities when interest rates change by 100 basis points. This measure includes the impact of estimated changes in portfolio cash flows from features such as prepayments and bond calls. The effective duration of assets and related liabilities are produced using standard financial valuation techniques. At December 31, 1998, the estimated difference between the Company's asset and 34 liability duration was approximately 1.2. This positive duration gap indicates that the fair value of the Company's assets is somewhat more sensitive to interest rate movements than the fair value of its liabilities. The Company seeks to invest premiums and deposits to create future cash flows that will fund future benefits, claims, and expenses, and earn stable margins across a wide variety of interest rate and economic scenarios. In order to achieve this objective and limit its exposure to interest rate risk, the Company adheres to a philosophy of managing the effective duration of assets and related liabilities. The Company uses interest rate swaps, futures and caps to reduce the interest rate risk resulting from effective duration mismatches between assets and liabilities. To the extent that actual results differ from the assumptions utilized, the Company's effective duration could be significantly impacted. Important assumptions include the timing of cashflows on mortgage-related assets and liabilities subject to policyholder surrenders. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. The Company's potential exposure due to a 10% increase in prevailing interest rates from their December 31, 1998 levels is a loss of $87.0 million in fair value of its fixed-rate assets that is not offset by a decrease in the fair value of its fixed-rate liabilities. Because the Company actively manages its assets and liabilities and has strategies in place to minimize its exposure to loss as interest rate changes occur, it expects that actual losses would be less than the estimated potential loss. Equity Price Risk Equity price risk is the risk that the Company will incur economic losses due to adverse changes in a particular stock or stock index. At December 31, 1998, the Company had approximately $24.6 million in common stocks and $535.1 million in other equity investments (primarily equity options and equity futures). At December 31, 1998, the Company had $2.0 billion in equity-indexed annuity liabilities which provide customers with contractually guaranteed participation in price appreciation of the Standard & Poor's 500 Composite Price Index ("S&P 500 Index"). The Company purchases equity-indexed options and futures to hedge the risk associated with the price appreciation component of equity-indexed annuity liabilities. The Company manages the equity risk inherent in its assets relative to the equity risk inherent in its liabilities by conducting detailed computer simulations that model its S&P 500 Index derivatives and its equity-indexed annuity liabilities under stress-test scenarios in which both the index level and the index option implied volatility are varied through a wide range. Implied volatility is a value derived from standard option valuation models representing an implicit forecast of the standard deviation of the returns on the underlying asset over the life of the option or future. The fair values of S&P 500 Index linked securities, derivatives, and annuities are produced using standard derivative valuation techniques. The derivatives portfolio is constructed to maintain acceptable interest margins under a variety of possible future S&P 500 Index levels and option and futures cost environments. In order to achieve this objective and limit its exposure to equity price risk, the Company measures and manages these exposures using methods based on the fair value of assets and the price appreciation component of related liabilities. The Company uses derivatives, including futures and options, to modify its net exposure to fluctuations in the S&P 500 Index. 35 Based upon the information and assumptions the Company uses in its stress-test scenarios at December 31, 1998, management estimates that if the S&P 500 Index increases by 10%, the net fair value of its assets and liabilities described above would decrease by approximately $2.0 million. If option implied volatilities increase by 100 basis points, management estimates that the net fair value of its assets and liabilities will decrease by approximately $6.0 million. The simulations do not consider the effects of other changes in market conditions that could accompany changes in the equity option and futures markets including the effects of changes in implied dividend yields, interest rates, and equity-indexed annuity policy surrenders. DERIVATIVES As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements and interest rate cap agreements to match assets more closely to liabilities. 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. The Company had 42 and 45 outstanding interest rate swap agreements with an aggregate notional principal amount of $2.4 billion and $2.6 billion as of December 31, 1998 and 1997, 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 interest rate cap agreements with an aggregate notional amount of $250.0 million as of December 31, 1998 and 1997. With respect to the Company's equity-indexed annuities, the Company buys call options and futures 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 $535.7 million and $323.3 million as of December 31, 1998 and 1997, respectively. The Company had futures with a carrying value of $(0.6) million and $0.8 million as of December 31, 1998, and 1997, 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 and futures 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 the potential adverse effects of changes in interest rates. Similarly, the call options and futures hedge the Company's obligations to provide returns on equity-indexed annuities based upon the S&P 500 Index, and the Company believes that any stock market movements that adversely affect the market value 36 of S&P 500 Index call options and futures would be substantially offset by a reduction in policyholder 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 and futures increase less than (or decrease more than) the value of the guarantees made to equity-indexed policyholders. In June 1998, Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. This statement standardizes the accounting for derivative instruments and the derivative portion of certain other contracts that have similar characteristics by requiring that an entity recognize those instruments on the balance sheet at fair value. This statement also requires a new method of accounting for hedging transactions, prescribes the type of items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. This statement is effective for fiscal years beginning after June 15, 1999. Earlier adoption is permitted. The Company is evaluating the impact of this statement. Upon adoption, the Company will be required to record a cumulative effect adjustment to reflect this accounting change. At this time, the Company has not completed its analysis and evaluation of the requirements and impact of this statement. LIQUIDITY The Company is a holding company whose liquidity needs include the following: (i) operating expenses; (ii) debt service; (iii) dividends on preferred stock 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. In connection with the Crabbe Huson acquisition, the Company entered into a $100.0 million revolving credit facility with a commercial bank (the "Bridge Facility"). The Bridge Facility matures on March 30, 1999 and bears interest at a per annum rate equal to LIBOR plus twenty-five basis points. The Company borrowed $90.0 million under the Bridge Facility to finance the acquisition of Crabbe Huson. In November 1998, the Company issued $450.0 million of senior debt securities. The offering consisted of $300.0 million of 6-3/4% 10-year notes due November 15, 2008 and $150.0 million of 7-5/8% 30-year debentures due November 15, 2028. The proceeds were utilized to repay the $90.0 million borrowed under the Bridge Facility and to repay the $229.0 million notes payable to affiliates. The balance of the proceeds will be utilized for general corporate purposes. The Company also has a $60.0 million revolving credit facility (the "Facility") which is utilized to finance deferred sales commissions paid in connection with the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. This Facility is subject to annual renewal. If not renewed, effective April 11, 1999 this Facility converts to a term loan which matures on April 11, 2004. Upon such conversion, minimum quarterly payments of principal equal to 5.0% of outstanding borrowings as of the conversion date are required. Interest accrues on the outstanding borrowings of the Facility at floating rates based upon LIBOR plus 0.225%. The terms of the Facility place certain restrictions on Colonial's ability to pay dividends. Under the terms of the Facility, Colonial could pay dividends of up to $32.3 million as of December 31, 1998. 37 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 December 31, 1998, the amount of dividends that Keyport could pay without such approval was $59.1 million. Keyport paid dividends of $20.0 million during 1998 but had not previously paid any dividends since its acquisition in 1988. 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. The Company may require external sources of liquidity in order to finance material acquisitions where the purchase price is not paid in equity. 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, private capital management 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 Colonial, 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 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 December 31, 1998, $9.7 billion, or 73.3% of Keyport's general 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 instruments, thereby precluding the sale of fixed maturity investments in a potentially unfavorable market. In addition, the Company's fixed-rate products incorporate 38 surrender charges to encourage persistency and to make the cost of its policyholder balances more predictable. Approximately 80.6% of the Company's fixed annuity policyholder balances were subject to surrender charges or restrictions as of December 31, 1998. YEAR 2000 Many companies and organizations have computer programs that use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. The Company relies significantly on computer systems and applications in its operations. Some of these systems are not presently Year 2000 compliant. If not corrected, this could cause system failures. Such failures could have an adverse effect on the Company causing disruption of operations, including, among other things, an inability to process transactions. In addressing the Year 2000 issue, the Company has completed an inventory of its information technology systems and assessed its Year 2000 readiness. The Company's systems include internally developed programs, third-party purchased programs and third-party custom developed programs. For programs which were identified as not being Year 2000 compliant, the Company has implemented a remediation plan which includes repairing or replacing the programs and testing for Year 2000 compliance. The remediation plan is substantially complete and is currently in the final testing phase. The Company also identified its non-information technology systems affected by Year 2000 issues. The Company initiated remediation efforts in this area and expects to complete this phase during 1999. The Company has initiated communication with third parties to determine the extent to which the Company's systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company received feedback from such parties and is in the process of requesting confirmation from these parties with respect to remediation of their Year 2000 issues. The Company is developing, and will continue to develop, contingency plans for dealing with adverse effects that are known in the event the Company's remediation plans are not successful or third parties fail to remediate their own Year 2000 issues. The Company expects contingency planning to be substantially complete by June, 1999. If necessary modifications and conversions are not made, or are not timely completed, or if the systems of the companies on which the Company's systems rely are not timely converted, the Year 2000 issues could have a material impact on the operations of the Company. However, the Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. Through December 31, 1998, the external cost of the Year 2000 project was approximately $2.5 million, which was primarily related to consultants and replacement hardware and software. The additional external costs to complete the project are currently expected to be approximately $4.0 million, which are primarily related to testing and contingency plan development. All of the costs of the Year 2000 project are funded through operating cash flows. In the opinion of management, the cost of addressing the Year 2000 issue is not expected to have a material adverse effect on the Company's financial condition or its results of operations. 39 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, 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"), relative to the markets for the Company's products and trends in the Company's operations or financial results, 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 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 contemplated by the forward-looking statements. Such factors include, among other things: (1) general economic conditions and market factors, such as prevailing interest rate levels, stock market performance and fluctuations in the market for retirement-oriented savings products and investment management products, which may adversely affect the ability of the Company to sell its products and services and the market value of the Company's investments and assets under management and, therefore, the portion of its revenues that are based on a percentage of assets under management; (2) the Company's ability to manage effectively its investment spread (i.e. the amount by which investment income exceeds interest credited to annuity and life insurance policyholders) as a result of changes in interest rates and crediting rates to policyholders, market conditions and other factors (the Company's results of operations and financial condition are significantly dependent on the Company's ability to manage effectively its investment spread); (3) levels of surrenders, withdrawals and net redemptions of the Company's retirement-oriented insurance products and investment management products; (4) relationships with investment management clients, including levels of assets under management; (5) the ability of the Company to manage effectively certain risks with respect to its investment portfolio, including risks relating to holding below investment grade securities and the ability to dispose of illiquid and/or restricted securities at desired times and prices, and the ability to manage and hedge against interest rate changes through asset/liability management techniques; (6) competition in the sale of the Company's products and services, including the Company's ability to establish and maintain relationships with distributors of its products; (7) changes in financial ratings of Keyport or those of its competitors; (8) the Company's ability to attract and retain key employees, including senior officers, portfolio managers and sales executives; (9) the impact of and compliance by the Company with existing and future regulation, including restrictions on the ability of 40 certain subsidiaries to pay dividends and any obligations of the Company under any guaranty fund assessment laws; (10) changes in applicable tax laws which may affect the relative tax advantages and attractiveness of some of the Company's products; (11) the result of any litigation or legal proceedings involving the Company; (12) changes in generally accepted accounting principles and the impact of accounting principles and pronouncements on the Company's financial condition and results of operation; (13) the impact of Year 2000 issues on the operations of the Company and its subsidiaries; (14) changes in the Company's senior debt ratings; and (15) 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. 41 LIBERTY FINANCIAL COMPANIES, INC. Consolidated Financial Statements CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS) DECEMBER 31 1998 1997 - --------------------------------------------------------------------------------------------------------- ASSETS Assets: Investments $ 12,598.3 $ 12,343.5 Cash and cash equivalents 984.1 1,290.1 Accrued investment income 161.0 165.0 Deferred policy acquisition costs 341.0 232.0 Value of insurance in force 66.6 53.3 Deferred distribution costs 130.2 108.1 Intangible assets 292.8 199.0 Other assets 179.6 131.4 Separate account assets 1,765.5 1,329.2 - --------------------------------------------------------------------------------------------------------- $ 16,519.1 $ 15,851.6 ========================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policyholder balances $ 12,504.1 $ 12,086.1 Notes payable to affiliates -- 229.0 Notes payable 486.4 26.5 Payable for investments purchased and loaned 240.4 722.1 Other liabilities 278.4 310.4 Separate account liabilities 1,723.2 1,264.0 - --------------------------------------------------------------------------------------------------------- Total liabilities 15,232.5 14,638.1 - --------------------------------------------------------------------------------------------------------- Series A redeemable convertible preferred stock, par value $.01; authorized, issued and outstanding 324,759 shares in 1998 and 327,006 shares in 1997 15.3 14.6 - --------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, $.01 par value, authorized 100,000,000 shares; issued 46,384,015 shares in 1998 and 44,706,398 shares in 1997 0.5 0.4 Additional paid-in capital 901.5 866.2 Retained earnings 346.4 251.5 Accumulated other comprehensive income 27.2 83.0 Unearned compensation (4.3) (2.2) - --------------------------------------------------------------------------------------------------------- Total stockholders' equity 1,271.3 1,198.9 - --------------------------------------------------------------------------------------------------------- $ 16,519.1 $ 15,851.6 =========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 42 CONSOLIDATED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31 1998 1997 1996 - ------------------------------------------------------------------------------------------ Investment income $ 820.9 $ 853.1 $ 796.4 Interest credited to policyholders (562.2) (594.1) (572.7) - ------------------------------------------------------------------------------------------ Investment spread 258.7 259.0 223.7 - ------------------------------------------------------------------------------------------ Net realized investment gains 2.4 25.9 8.0 - ------------------------------------------------------------------------------------------ Fee income: Investment advisory and administrative fees 237.7 217.9 196.4 Distribution and service fees 52.7 49.2 44.9 Transfer agency fees 49.0 47.7 43.9 Surrender charges and net commissions 33.7 36.1 34.7 Separate account fees 20.6 17.1 16.0 - ------------------------------------------------------------------------------------------ Total fee income 393.7 368.0 335.9 - ------------------------------------------------------------------------------------------ Expenses: Operating expenses (328.2) (309.7) (277.9) Amortization of deferred policy acquisition costs (69.2) (75.9) (60.2) Amortization of deferred distribution costs (40.1) (34.2) (33.9) Amortization of value of insurance in force (8.2) (10.5) (10.2) Amortization of intangible assets (15.3) (13.5) (15.4) Interest expense, net (14.9) (17.0) (19.7) - ------------------------------------------------------------------------------------------ Total expenses (475.9) (460.8) (417.3) - ------------------------------------------------------------------------------------------ Pretax income 178.9 192.1 150.3 Income tax expense (54.4) (62.6) (49.6) - ------------------------------------------------------------------------------------------ Income before extraordinary item 124.5 129.5 100.7 Extraordinary loss on extinguishment of debt (9.7) -- -- - ------------------------------------------------------------------------------------------ Net income $ 114.8 $ 129.5 $ 100.7 ========================================================================================== Net income per share--basic: Income before extraordinary item $ 2.72 $ 2.94 $ 2.36 - ------------------------------------------------------------------------------------------ Net income $ 2.51 $ 2.94 $ 2.36 - ------------------------------------------------------------------------------------------ Net income per share--assuming dilution: Income before extraordinary item $ 2.63 $ 2.77 $ 2.24 - ------------------------------------------------------------------------------------------ Net income $ 2.42 $ 2.77 $ 2.24 - ------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 43 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Unearned Stockholders' (IN MILLIONS) Stock Capital Earnings Income Compensation Equity - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $ 0.3 $ 810.5 $ 59.4 $ 87.1 $ (0.9) $ 956.4 --------- Comprehensive income: Net income 100.7 100.7 Other comprehensive income, net of taxes: Net unrealized losses on securities (12.7) (12.7) --------- Total comprehensive income 88.0 --------- Common stock issued for acquisition 8.5 8.5 Effect of stock-based compensation plans 2.4 0.9 3.3 Accretion to face value of preferred stock (0.9) (0.9) Common stock dividends 13.9 (16.9) (3.0) Preferred stock dividends (0.9) (0.9) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 0.3 835.3 141.4 74.4 -- 1,051.4 --------- Comprehensive income: Net income 129.5 129.5 Other comprehensive income, net of taxes: Net unrealized gains on securities 8.6 8.6 --------- Total comprehensive income 138.1 --------- 3 for 2 common stock split effected in the form of a 50 percent stock dividend 0.1 (0.1) -- Common stock issued for acquisition 2.5 2.5 Effect of stock-based compensation plans 14.8 (2.2) 12.6 Accretion to face value of preferred stock (0.8) (0.8) Common stock dividends 13.6 (17.6) (4.0) Preferred stock dividends (0.9) (0.9) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 0.4 866.2 251.5 83.0 (2.2) 1,198.9 --------- Comprehensive income: Net income 114.8 114.8 Other comprehensive income, net of taxes: Net unrealized losses on securities (55.8) (55.8) --------- Total comprehensive income 59.0 --------- Common stock issued for acquisition 8.9 8.9 Effect of stock-based compensation plans 0.1 13.2 (2.1) 11.2 Accretion to face value of preferred stock (0.8) (0.8) Common stock dividends 13.2 (18.2) (5.0) Preferred stock dividends (0.9) (0.9) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 0.5 $ 901.5 $ 346.4 $ 27.2 $ (4.3) $ 1,271.3 ==========================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 44 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS) YEAR ENDED DECEMBER 31 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 114.8 $ 129.5 $ 100.7 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on extinguishment of debt, net of tax 9.7 -- -- Depreciation and amortization 81.6 74.4 74.3 Interest credited to policyholders 562.2 594.1 572.7 Net realized investment gains (2.4) (25.9) (8.0) Net amortization (accretion) on investments 75.4 29.9 (29.1) Change in deferred policy acquisition costs (33.7) (10.3) (24.4) Change in current and deferred income taxes (3.8) 71.9 7.3 Net change in other assets and liabilities (115.1) (8.2) (62.5) - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 688.7 855.4 631.0 - -------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investments purchased available for sale (6,789.0) (4,548.4) (4,365.4) Investments sold available for sale 5,406.0 2,563.5 1,714.0 Investments matured available for sale 1,273.5 1,531.6 1,387.7 Increase in policy loans, net (24.1) (21.9) (34.5) Decrease in mortgage loans, net 5.5 6.4 7.5 Acquisitions, net of cash acquired (98.7) -- (41.5) Other (9.7) (73.9) (149.5) - -------------------------------------------------------------------------------------------------------- Net cash used in investing activities (236.5) (542.7) (1,481.7) - -------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Withdrawals from policyholder accounts (1,690.0) (1,320.8) (1,154.1) Deposits to policyholder accounts 1,225.0 950.5 2,134.5 Securities lending (510.6) 495.2 (119.2) Repayment of notes payable to affiliates (244.0) -- -- Change in notes payable 459.9 (26.0) (8.5) Exercise of stock options 7.4 7.6 2.4 Dividends paid (5.9) (4.9) (3.9) - -------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (758.2) 101.6 851.2 - -------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (306.0) 414.3 0.5 Cash and cash equivalents at beginning of year 1,290.1 875.8 875.3 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 984.1 $ 1,290.1 $ 875.8 ========================================================================================================
Noncash Financing Activities: Noncash financing activities relate to dividends paid in common stock, primarily to an affiliate of Liberty Mutual, in the amount of $13.2 million, $13.6 million and $13.9 million in 1998, 1997 and 1996, respectively, pursuant to the Company's dividend reinvestment plan. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 45 LIBERTY FINANCIAL COMPANIES, INC. Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Organization Liberty Financial Companies, Inc. (the "Company") is an asset accumulation and management company providing investment management products and retirement- oriented insurance products through multiple distribution channels. The Company is a majority owned indirect subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual"). Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, including Keyport Life Insurance Company ("Keyport"), Stein Roe & Farnham Incorporated ("Stein Roe"), The Colonial Group ("Colonial"), Newport Pacific Management, Inc. ("Newport") and, from the date of acquisition: The Crabbe Huson Group, Inc. ("Crabbe Huson"), Progress Investment Management Company ("Progress") and Independent Holdings, Inc. ("Independent"). All significant intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year's presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investments Investments in debt and equity securities which are classified as available for sale are carried at fair value, and unrealized gains and losses (net of adjustments to deferred policy acquisition costs, value of insurance in force and income taxes) are reported as a separate component of stockholders' equity. The cost basis of securities is adjusted for declines in value that are determined to be other than temporary. Realized investment gains and losses are calculated on a first-in, first-out basis, net of adjustment for amortization of deferred policy acquisition costs and value of insurance in force. For the mortgage-backed bond portion of the fixed maturity investment portfolio, the Company recognizes income using a constant effective yield based on anticipated prepayments over the estimated economic life of the security. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments; and any resulting adjustment is included in investment income. Mortgage loans are carried at amortized cost. Policy loans are carried at the unpaid principal balances plus accrued interest. Partnerships are generally accounted for by using the equity method of accounting. Partnership investments totaled $126.8 million and $117.3 million at December 31, 1998 and 1997, respectively. 46 Derivatives The Company uses interest rate swap and cap agreements to manage its interest rate risk and call options and futures on the Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index") to hedge its obligations to provide returns based upon this index. The Company utilizes interest rate swap agreements ("swap agreements") and interest rate cap agreements ("cap agreements") to match assets more closely to liabilities. 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 swap agreements to reduce asset duration and to better match interest rates earned on longer-term fixed rate assets with interest rates credited to policyholders. 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. Hedge accounting is applied after the Company determines that the items to be hedged expose it to interest rate or price risk, designates the instruments as hedges and assesses whether the instruments reduce the indicated risks through the measurement of changes in the value of the instruments and the items being hedged at both inception and throughout the hedge period. From time to time, interest rate swap agreements, cap agreements, call options and futures are terminated. If the terminated position was accounted for as a hedge, realized gains or losses are deferred and amortized over the remaining lives of the hedged assets or liabilities. Conversely, if the terminated position was not accounted for as a hedge, or the assets and liabilities that were hedged no longer exist, the position is "marked to market" and realized gains or losses are immediately recognized in income. The net differential to be paid or received on interest rate swap agreements is recognized as a component of net investment income. Premiums paid for interest rate cap agreements are deferred and amortized to net investment income on a straight-line basis over the terms of the agreements. The unamortized premium is included in other invested assets. Amounts earned on interest rate cap agreements are recorded as an adjustment to net investment income. Interest rate swap agreements and cap agreements hedging investments designated as available for sale are adjusted to fair value with the resulting unrealized gains and losses included in stockholders' equity. Premiums paid on call options are amortized to net investment income over the terms of the contracts. The call options are included in other invested assets and are carried at amortized cost plus intrinsic value, if any, of the call options as of the valuation date. Changes in intrinsic value of the call options are recorded as an adjustment to interest credited to policyholders. Futures are carried at fair value and require daily cash settlement. Changes in the fair value of futures that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. Call options and futures that do not qualify as hedges are carried at fair value; changes in value are immediately recognized in income. In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. This statement standardizes the accounting for derivative instruments and the derivative portion of certain other contracts that have similar characteristics by requiring that an entity recognize those instruments on the balance sheet at fair value. This statement also requires a new method of accounting for hedging 47 transactions, prescribes the type of items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. This statement is effective for fiscal years beginning after June 15, 1999. Earlier adoption is permitted. The Company is evaluating the impact of this statement. Upon adoption, the Company will be required to record a cumulative effect adjustment to reflect this accounting change. At this time, the Company has not completed its analysis and evaluation of the requirements and impact of this statement. Fee Income Fees from asset management and investment advisory services and from transfer agent, bookkeeping, 12b-1 distribution and service fees are recognized as revenues when services are provided. Revenues from fixed and variable annuities and single premium whole life policies include mortality charges, surrender charges, policy fees and contract fees and are recognized when earned under the respective contracts. Net commission revenue is recognized on the trade date. Deferred Policy Acquisition Costs Policy acquisition costs are 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. These costs are deferred and amortized in relation to the present value of estimated gross profits from mortality, investment spread and expense margins. Deferred policy acquisition costs are adjusted for amounts relating to unrealized gains and losses on fixed maturity securities the Company has designated as available for sale. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to stockholders' equity. Deferred policy acquisition costs were decreased by $56.0 million at December 31, 1998 and $126.9 million at December 31, 1997, respectively, relating to this adjustment. Value of Insurance in Force Value of insurance in force represents the actuarially-determined present value of projected future gross profits from policies in force at the date of their acquisition. This amount is amortized in proportion to the projected emergence of profits over periods not exceeding 15 years for annuities and 25 years for life insurance. The value of insurance in force is adjusted for amounts relating to the recognition of unrealized investment gains and losses. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to stockholders' equity. Value of insurance in force was decreased by $10.3 million and $31.8 million at December 31, 1998 and 1997, respectively, relating to this adjustment. Deferred Distribution Costs Sales commissions and other direct costs related to the sale of Company- sponsored intermediary-distributed mutual funds which charge 12b-1 distribution fees and contingent deferred sales commissions are recorded as deferred distribution costs. Amortization is provided on a straight-line basis over periods up to six years to match the estimated period in which the associated fees will be earned. Contingent deferred sales charges (back-end loads) received are applied to deferred distribution costs to the extent of the estimated unamortized portion of such costs, with the remainder recognized as additional distribution fee income. 48 Intangible Assets Intangible assets consist of goodwill and certain identifiable intangible assets arising from business combinations accounted for as a purchase. Amortization is provided on a straight-line basis over estimated lives of the acquired intangibles which range from 5 to 30 years. Separate Account Assets and Liabilities The assets and liabilities resulting from variable annuity and variable life policies are segregated in separate accounts. Separate account assets, which are carried at fair value, consist principally of investments in mutual funds. Investment income and changes in asset values are allocated to the policyholders, and therefore, do not affect the operating results of the Company. The Company provides administrative services and bears the mortality risk related to these contracts. Keyport also classified as separate account assets investments in Company-sponsored mutual funds and other investments of $42.3 million and $65.2 million at December 31, 1998 and 1997, respectively. Policy Liabilities Policy liabilities consist of deposits received plus interest credited, less accumulated policyholder charges, assessments, and withdrawals related to deferred annuities and single premium whole life policies. Policy benefits that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Income Taxes Effective July 18, 1997, the Company and its non-life insurance subsidiaries file a consolidated federal income tax return and the Company's life insurance subsidiaries file separate life company returns. Prior to July 18, 1997, the Company was included in the consolidated federal income tax return filed by Liberty Mutual. Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and, for periods prior to July 18, 1997, were calculated as if the Company filed its own consolidated income tax return. Earnings Per Share Basic earnings per share is calculated using income available to common shareholders divided by the weighted average of common shares outstanding during the year. Diluted earnings per share is similar to basic earnings per share except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Cash Equivalents Short-term investments having an original maturity of three months or less are classified as cash equivalents. 49 Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130,"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity, to be included in accumulated other comprehensive income. The adoption of SFAS 130 had no impact on the Company's net income or stockholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. 2. ACQUISITIONS On August 31, 1998, the Company acquired certain assets and assumed certain liabilities of Progress Investment Management Company, a registered investment adviser to institutional accounts with approximately $2.1 billion in assets under management as of that date. On September 30, 1998, the Company acquired certain assets and assumed certain liabilities of The Crabbe Huson Group, Inc., a registered investment adviser with approximately $3.3 billion in assets under management as of that date. The combined purchase price for these transactions was approximately $104.0 million and consisted of $95.1 million in cash and $8.9 million in the Company's common stock. In addition, the Company has agreed to pay up to an additional approximate $71.5 million in cash and common stock over five years, contingent upon the attainment of certain earnings objectives. These transactions were accounted for as purchases and resulted in the recording of goodwill and other intangible assets of approximately $101.6 million. 3. INVESTMENTS Investments, all of which pertain to the Company's annuity insurance operations, were comprised of the following (in millions):
December 31 1998 1997 - --------------------------------------------------- Fixed maturities $ 11,277.2 $ 11,246.5 Equity securities 24.6 40.8 Policy loans 578.9 554.7 Other invested assets 717.6 501.5 - --------------------------------------------------- $ 12,598.3 $ 12,343.5 ===================================================
As of December 31, 1998, the Company did not have a material concentration of financial instruments in a single investee, industry or geographic location and no investment in any person or its affiliates (other than bonds issued by agencies of the United States government) exceeded ten percent of stockholders' equity. As of December 31, 1998, $1.1 billion of fixed maturities were below investment grade. These securities represented 8.1% of the Company's total investments, including certain cash and cash equivalents. 50 Fixed Maturities The amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities are as follows (in millions):
Gross Gross Amortized Unrealized Unrealized December 31, 1998 Cost Gains Losses Fair Value - -------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 90.8 $ 3.1 $ (0.2) $ 93.7 Mortgage backed securities of U.S. government corporations and agencies 940.1 28.4 (2.9) 965.6 Debt securities issued by foreign governments 251.1 9.4 (16.2) 244.3 Corporate securities 5,396.3 185.1 (156.3) 5,425.1 Other mortgage backed securities 2,286.6 65.1 (19.5) 2,332.2 Asset backed securities 1,942.0 25.9 (16.5) 1,951.4 Senior secured loans 267.8 1.2 (4.1) 264.9 - -------------------------------------------------------------------------------------------------- Total fixed maturities $ 11,174.7 $ 318.2 $ (215.7) $ 11,277.2 ==================================================================================================
Gross Gross Amortized Unrealized Unrealized December 31, 1997 Cost Gains Losses Fair Value - -------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 128.6 $ 1.1 $ -- $ 129.7 Mortgage backed securities of U.S. government corporations and agencies 1,089.8 49.5 (1.6) 1,137.7 Debt securities issued by foreign governments 272.5 12.7 (5.0) 280.2 Corporate securities 4,744.2 189.4 (83.6) 4,850.0 Other mortgage backed securities 2,325.9 81.9 (2.6) 2,405.2 Asset backed securities 2,200.7 26.2 (3.1) 2,223.8 Senior secured loans 219.9 -- -- 219.9 - -------------------------------------------------------------------------------------------------- Total fixed maturities $ 10,981.6 $ 360.8 $ (95.9) $ 11,246.5 ==================================================================================================
At December 31, 1998 and 1997, gross unrealized gains on equity securities, interest rate cap agreements and investments in separate accounts aggregated $7.8 million and $27.4 million, and gross unrealized losses aggregated $3.6 million and $6.9 million, respectively. Net unrealized gains (losses) on securities included in other comprehensive income in 1998, 1997 and 1996 include: gross unrealized gains (losses) on securities of $(182.1) million, $73.7 million and $(64.4) million, respectively; reclassification adjustments for realized (gains) losses in net income of $3.6 million, $(31.3) million and $(7.7) million, respectively; and adjustments to deferred policy acquisition costs and value of insurance in force of $92.5 million, $(29.1) million and $54.2 million, respectively. The above amounts are shown before income tax expense (benefit) of $(30.2) million, $4.7 million and $(5.2) million, respectively. 51 Deferred tax liabilities for the Company's unrealized investment gains and losses, net of adjustments to deferred policy acquisition costs and value of insurance in force, were $14.1 million and $44.3 million at December 31, 1998 and 1997, respectively. Contractual Maturities The amortized cost and estimated fair value of fixed maturities by contractual maturity as of December 31, 1998 are as follows (in millions):
Amortized Fair December 31, 1998 Cost Value - ------------------------------------------------------------------ Due in one year or less $ 334.9 $ 335.2 Due after one year through five years 2,998.4 3,005.1 Due after five years through ten years 1,638.5 1,656.2 Due after ten years 1,034.3 1,031.5 - ------------------------------------------------------------------ 6,006.1 6,028.0 Mortgage and asset backed securities 5,168.6 5,249.2 - ------------------------------------------------------------------ $ 11,174.7 $ 11,277.2 ==================================================================
Actual maturities may differ from those shown above because borrowers may have the right to call or prepay obligations. Net Investment Income Net investment income is summarized as follows (in millions):
Year Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------------- Fixed maturities $ 810.5 $ 811.7 $ 737.4 Equity securities 4.4 5.4 4.5 Policy loans 33.2 32.2 30.2 Other invested assets 18.2 27.8 11.4 Cash and cash equivalents 38.3 34.5 36.1 - -------------------------------------------------------------------------------------- Gross investment income 904.6 911.6 819.6 Investment expenses (11.6) (9.2) (6.7) Amortization of call options and interest rate caps (72.1) (49.3) (16.5) - -------------------------------------------------------------------------------------- Net investment income $ 820.9 $ 853.1 $ 796.4 ======================================================================================
As of December 31, 1998, the carrying value of fixed maturity investments that were non-income producing was $30.0 million. 52 Net Realized Investment Gains (Losses) Net realized investment gains (losses) primarily relate to the Company's fixed maturity investments. Gross realized gains were $88.5 million, $51.6 million and $28.3 million for 1998, 1997 and 1996, respectively. Gross realized losses were $90.4 million, $19.2 million and $18.6 million for 1998, 1997 and 1996, respectively. Gross realized losses in 1998 included $28.3 million for certain fixed maturity investments where the decline in value was determined to be other than temporary. Proceeds from sales of fixed maturities available for sale were $5.3 billion, $2.6 billion and $1.7 billion in 1998, 1997 and 1996, respectively. 4. DERIVATIVES Outstanding derivatives are as follows (in millions):
Assets (Liabilities) --------------------------------------------------- Notional Amounts 1998 1997 ----------------------------- --------------------------------------------------- Carrying Fair Carrying Fair December 31 1998 1997 Value Value Value Value - -------------------------------------------------------------------------------------------------------------------- Interest rate swap agreements $ 2,369.0 $ 2,575.0 $ (71.2) $ (71.2) $ (42.1) $ (42.1) Interest rate cap agreements 250.0 250.0 -- -- 0.1 0.1 S&P 500 Index call options -- -- 535.7 607.0 323.3 345.3 S&P 500 Index futures -- -- ( 0.6) ( 0.6) 0.8 0.8 - --------------------------------------------------------------------------------------------------------------------
The interest rate swap agreements expire in 1999 through 2005. The interest rate cap agreements expire in 1999 through 2000. The S&P 500 call options and futures maturities range from 1999 to 2002. The Company currently utilizes interest rate swap agreements to reduce asset duration and to better match interest rates earned on longer-term fixed rate assets with interest credited to policyholders. Cap agreements are used to hedge against rising interest rates. With respect to the Company's equity- indexed annuities, the Company buys call options and futures on the S&P 500 Index to hedge its obligations to provide returns based upon this index. At December 31, 1998 and 1997, the Company had approximately $156.4 million and $155.0 million, respectively, of unamortized premium in call option contracts. Fair values for swap and cap agreements are based on current settlement values. The current settlement values are based on quoted market prices and brokerage quotes, which utilize pricing models or formulas using current assumptions. Fair values for call options and futures are based upon quoted market prices. 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 the risk associated with counterparty nonperformance. 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 trade on organized exchanges and, therefore, have minimal credit risk. 53 5. NOTES PAYABLE Notes payable include the following (in millions):
December 31 1998 1997 - -------------------------------------------------------------------------------- Notes payable to affiliates: 8.0% promissory note due April 3, 2000 $ -- $ 99.0 8.0% promissory note due March 31, 2000 -- 30.0 8.5% promissory notes due March 24, 2005 -- 100.0 - -------------------------------------------------------------------------------- -- 229.0 6-3/4% notes due 2008, net of unamortized discount of $2.3 million in 1998, effective rate 6.86% 297.7 -- 7-5/8% debentures due 2028, net of unamortized discount of $0.8 million in 1998, effective rate 7.67% 149.2 -- Revolving credit facility 39.5 26.5 - -------------------------------------------------------------------------------- $486.4 $ 255.5 ================================================================================
In connection with the Crabbe Huson acquisition, the Company entered into a $100.0 million revolving credit facility with a commercial bank (the "Bridge Facility"). The Bridge Facility matures on March 30, 1999 and bears interest at a per annum rate equal to LIBOR plus twenty-five basis points. The Company borrowed $90.0 million under the Bridge Facility to finance the acquisition of Crabbe Huson. In November 1998, the Company issued $450.0 million of senior debt securities. The offering consisted of $300.0 million of 6-3/4% 10-year notes due November 15, 2008 and $150.0 million of 7-5/8% 30-year debentures due November 15, 2028. The proceeds were utilized to repay the $90.0 million borrowed under the Bridge Facility and to discharge the Company's existing $229.0 million notes payable to affiliates. The early extinguishment of the notes payable to affiliates resulted in an extraordinary charge of $9.7 million, net of a tax benefit of $5.3 million. The Indenture under which the senior notes and debentures were issued contains covenants which prohibit the Company from granting a lien on or disposing of the stock of any subsidiary which accounts for more than 10% of the consolidated revenues or assets of the Company. The Company also has a $60.0 million revolving credit facility (the "Facility") which is utilized to finance deferred sales commissions paid in connection with the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. This Facility is subject to annual renewal. If not renewed, effective April 11, 1999 this Facility converts to a term loan which matures on April 11, 2004. Upon such conversion, minimum quarterly payments of principal equal to 5.0% of outstanding borrowings as of the conversion date are required. Interest accrues on the outstanding borrowings of the Facility at floating rates based upon LIBOR plus 0.225%. The terms of the Facility place certain restrictions on Colonial's ability to pay dividends. Interest paid was $25.5 million, $21.7 million and $22.9 million in 1998, 1997 and 1996, respectively. 54 6. INCOME TAXES Income tax expense is summarized as follows (in millions):
Year Ended December 31 1998 1997 1996 - -------------------------------------------------------- Current $ 10.1 $ (42.0) $ 54.8 Deferred 44.3 104.6 (5.2) - -------------------------------------------------------- $ 54.4 $ 62.6 $ 49.6 ========================================================
A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows (in millions):
Year Ended December 31 1998 1997 1996 - --------------------------------------------------------------------------------------- Expected income tax expense $ 62.6 $ 67.3 $ 52.6 Increase (decrease) in income taxes resulting from: Nontaxable investment income (2.1) (1.4) (1.2) Reduction in deferred tax asset valuation allowance (10.6) (10.0) (6.7) Amortization of goodwill and other intangible assets 3.8 3.1 2.0 State taxes, net of federal tax benefit 0.7 1.2 2.5 Stock option plan compensation -- -- 0.8 Other, net -- 2.4 (0.4) - --------------------------------------------------------------------------------------- Income tax expense $ 54.4 $ 62.6 $ 49.6 =======================================================================================
55 The components of deferred federal income taxes are as follows (in millions):
December 31 1998 1997 - ---------------------------------------------------------------------------- Deferred tax assets: Policy liabilities $ 107.4 $ 124.3 Guaranty fund expense 2.1 2.8 Stock option plan compensation -- 1.0 Deferred compensation and other benefit plans 16.2 11.4 Net operating loss carryforwards 25.3 13.1 Distribution fees 18.4 17.8 Other 7.4 3.4 - ---------------------------------------------------------------------------- Total deferred tax assets 176.8 173.8 Less: valuation allowance (2.3) (10.6) - ---------------------------------------------------------------------------- Net deferred tax assets 174.5 163.2 - ---------------------------------------------------------------------------- Deferred tax liabilities: Deferred policy acquisition costs (92.5) (56.3) Value of insurance in force and intangible assets (23.3) (18.0) Excess of book over tax basis of investments (141.0) (187.6) Deferred revenue (24.0) (4.1) Amortization of deferred distribution costs (35.8) (34.8) Other (9.1) (1.9) - ---------------------------------------------------------------------------- Total deferred tax liabilities (325.7) (302.7) - ---------------------------------------------------------------------------- Net deferred tax liability $ (151.2) $ (139.5) ============================================================================
As of December 31, 1998, the Company had Federal net operating loss carryforwards related to certain of the Company's non-insurance operations of $60.7 million. Of this amount, $10.4 million, which expires through 2003, is limited to use against future profits in a component of the Company's non-insurance operations. The remaining Federal non-insurance loss carryforwards of $50.3 million expire through 2018. As of December 31, 1998, the Company also had $5.1 million of purchased Federal net operating loss carryforwards, which expire through 2006, relating to an acquisition in its insurance operations. Utilization of these loss carryforwards is limited to use against future profits in a component of the Company's insurance operations. The Company believes that it is more likely than not that it will realize the benefit of the deferred tax asset related to its Federal net operating loss carryforwards. Additionally, as of December 31, 1998, the Company had state net operating loss carryforwards related to certain of the Company's non-insurance operations of $48.6 million. Utilization of these loss carryforwards, which expire through 2008, is limited to use against future profits of a component of the Company's non-insurance operations. The Company believes that it is not more likely than not that it will realize the benefit of the deferred tax asset related to these state net operating loss carryforwards. 56 Income taxes paid (refunded) were $27.6 million, ($4.2) million and $45.7 million in 1998, 1997 and 1996, respectively. 7. REDEEMABLE CONVERTIBLE PREFERRED STOCK The Series A Redeemable Convertible Preferred Stock, which has a $50 face value, has an annual cumulative cash dividend rate of $2.875 per share and is convertible into shares of Company common stock at a rate of 1.58385 for each share of such preferred stock. The preferred stock is redeemable at the option of the Company anytime after March 24, 1998 provided that the market value of the Company's common stock exceeds a specified amount. The preferred stock may also be put to the Company by the holders of such preferred stock after March 24, 2000, for a period of sixty days, at face value plus cumulative unpaid dividends. Each share of preferred stock is entitled to that number of votes equal to the number of common shares into which it is convertible. The difference between the face value of the preferred stock and its fair value at the time of its issuance is being added to the carrying value of the preferred stock ratably over a five year period by a direct charge to retained earnings. 8. RETIREMENT PLANS The Company maintains a noncontributory defined benefit pension plan (the "Plan") covering its employees (except employees of Stein Roe and Colonial, who participate in separate profit sharing plans, and except employees of Independent). It is the Company's practice to fund amounts for the Plan sufficient to meet the minimum requirements of the Employee Retirement Income Security Act of 1974. Additional amounts are contributed from time to time when deemed appropriate by the Company. Under the Plan, all employees are vested after five years of service. Benefits are based on years of service, the employee's average pay for the highest five consecutive years during the last ten years of employment and the employee's estimated social security retirement benefit. The Company also has an unfunded nonqualified Supplemental Pension Plan (collectively with the Plan, the "Plans") to replace benefits lost due to limits imposed on Plan benefits under the Internal Revenue Code. Plan assets consist of investments in certain Company-sponsored mutual funds. 57 The following table sets forth the Plans' funded status (in millions) as of December 31, 1998 and 1997.
December 31 1998 1997 - ---------------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 27.1 $ 23.4 Service cost 1.8 1.6 Interest cost 2.1 1.8 Actuarial loss 2.4 0.7 Benefits paid (0.6) (0.4) - ---------------------------------------------------------------------------------------- Benefit obligation at end of year 32.8 27.1 - ---------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year 14.7 11.7 Expected return on plan assets 1.1 1.7 Employer contribution 0.9 1.7 Benefits paid (0.6) (0.4) - ---------------------------------------------------------------------------------------- Fair value of plan assets at end of year 16.1 14.7 - ---------------------------------------------------------------------------------------- Projected benefit obligation in excess of the plans' assets 16.7 12.4 Unrecognized net actuarial loss (4.4) (2.0) Prior service cost not yet recognized in net periodic pension cost (1.8) (2.2) - ---------------------------------------------------------------------------------------- Accrued pension cost $ 10.5 $ 8.2 ========================================================================================
Pension cost includes the following components (in millions):
Year Ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------------------- Service cost benefits earned during the period $ 1.8 $ 1.6 $ 1.6 Interest cost on projected benefit obligation 2.1 1.8 1.6 Expected return on plan assets (1.2 (1.7) (1.3) Net amortization and deferred amounts 0.4 1.2 1.1 - --------------------------------------------------------------------------------------- Total net periodic pension cost $ 3.1 $ 2.9 $ 3.0 - ---------------------------------------------------------------------------------------
The assumptions used to develop the actuarial present value of the projected benefit obligation, and the expected long-term rate of return on plan assets are as follows:
Year Ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------------------- Discount rate 6.75% 7.25% 7.50% Rate of increase in compensation level 4.75% 5.00% 5.25% Expected long-term rate of return on assets 9.00% 8.50% 8.50%
58 The Company provides various other funded and unfunded defined contribution plans, which include savings and investment plans and supplemental savings plans. Expenses related to these defined contribution plans totaled $9.5 million, $8.5 million and $7.6 million in 1998, 1997 and 1996, respectively. 9. STOCKHOLDERS' EQUITY On December 10, 1997, the Company effected a three-for-two common stock split in the form of a 50 percent stock dividend. The Company has two stock-based compensation plans, the 1990 Stock Option Plan (the "1990 Plan") and the 1995 Stock Incentive Plan (the "1995 Plan"). The 1990 Plan provided for grants of incentive and nonqualified stock options, which were issued from 1990 through 1994. The 1995 Plan provides for grants of incentive and nonqualified stock options, stock appreciation rights, nonvested stock, unrestricted stock and performance shares, as well as cash and other awards. To date, only stock options and nonvested stock have been granted under the 1995 Plan. For any year, the Company may issue awards under the 1995 Plan providing for the issuance of not more than two percent of the total number of shares outstanding as of December 31 of the preceding year, subject to certain adjustments and to certain carryovers for expired and forfeited awards. This amount does not include 911,700 nonqualified options at prices ranging from $0.67 to $21.00 that were assumed by the Company in connection with the Colonial acquisition. All options granted under the 1990 Plan were granted at a price not less than the fair market value of the Company's Common Stock (determined by the valuation provisions of the 1990 Plan). All options granted under the 1995 Plan have been granted at the market price of the Company's Common Stock on the grant date. All granted options provide for vesting in four equal annual installments, beginning one year after the date of grant, and expire 10 years after the grant date. Compensation expense associated with these option plans was $0.9 million in 1996. There was no such compensation expense in 1998 or 1997. In April 1997, the Company began to award nonvested stock under the 1995 Plan. The nonvested shares issued to employees vest generally after the end of six years. Such vesting date may accelerate if the Company achieves certain performance targets. Upon termination of employment, any nonvested shares would generally be forfeited. The Company recorded $1.0 million and $0.4 million in compensation expense related to nonvested stock in 1998 and 1997, respectively. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. As provided for under SFAS 123, the fair value for these options was estimated using a Black-Scholes option pricing model with the following assumptions: risk free interest rate: 4.68% for 1998, 5.73% for 1997 and 6.26% for 1996; dividend yield: 1.22% for 1998, 1.25% for 1997 and 1.99% for 1996; expected volatility of the market price of the Company's Common Stock: 23.2% for 1998, 19.1% for 1997 and 15.0% for 1996; and the weighted average life of the options: 6 years for all three periods. For pro forma disclosure purposes, the estimated fair value of the options is amortized to expense over the options' vesting period. Pro forma information follows (in millions, except for earnings per share information): 59
Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------- Income before extraordinary item $ 120.6 $ 127.1 $ 99.3 Extraordinary loss on extinguishment of debt, net of tax (9.7) -- -- - ------------------------------------------------------------------------------------------- Net income $ 110.9 $ 127.1 $ 99.3 =========================================================================================== Net income per share--basic: Income before extraordinary item $ 2.64 $ 2.88 $ 2.32 Extraordinary loss on extinguishment of debt, net of tax (0.21) -- -- - ------------------------------------------------------------------------------------------- Net income $ 2.43 $ 2.88 $ 2.32 =========================================================================================== Net income per share--assuming dilution: Income before extraordinary item $ 2.55 $ 2.73 $ 2.21 Extraordinary loss on extinguishment of debt, net of tax (0.21) -- -- - ------------------------------------------------------------------------------------------- Net income $ 2.34 $ 2.73 $ 2.21 ===========================================================================================
Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect was not fully reflected until 1998. A summary of the stock option activity, and related information for the years ended December 31 follows (in thousands, except price data):
1998 1997 1996 ----------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price - ------------------------------------------------------------------------------------------------------- Outstanding--beginning of year 4,038 $ 16.31 4,484 $ 12.49 4,133 $ 9.58 Granted 627 36.92 699 28.67 918 22.00 Exercised (936) 8.57 (1,027) 7.56 (489) 4.81 Forfeited -- -- (118) 20.74 (78) 17.95 - ------------------------------------------------------------------------------------------------------- Outstanding--end of year 3,729 $ 21.72 4,038 $ 16.31 4,484 $ 12.49 ======================================================================================================= Exercisable--end of year 2,051 $ 15.72 2,346 $ 11.11 2,709 $ 8.60 ======================================================================================================= Weighted-average fair value of options granted during year $ 10.62 $ 8.15 $ 5.31 =======================================================================================================
Exercise prices for options outstanding as of December 31, 1998 ranged from $0.67 to $38.94. The weighted-average remaining contractual life of these options is 6.88 years. 60 10. NET INCOME PER SHARE The following table sets forth the computation of net income per share--basic and net income per share--assuming dilution:
1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Numerator (in millions) Income before extraordinary item $ 124.5 $ 129.5 $ 100.7 Less: preferred stock dividends (0.9) (0.9) (0.9) - ----------------------------------------------------------------------------------------------------------- Numerator for income per share--basic--income before extraordinary item available to common stockholders 123.6 128.6 99.8 Extraordinary loss on extinguishment of debt, net of tax (9.7) -- -- - ----------------------------------------------------------------------------------------------------------- Numerator for net income per share--basic--net income available to common stockholders $ 113.9 $ 128.6 $ 99.8 - ----------------------------------------------------------------------------------------------------------- Income available to common stockholders $ 123.6 $ 128.6 $ 99.8 Plus: income impact of assumed conversions Preferred stock dividends 0.9 0.9 0.9 - ----------------------------------------------------------------------------------------------------------- Numerator for income per share--assuming dilution--income before extraordinary item available to common stockholders after assumed conversions 124.5 129.5 100.7 Extraordinary loss on extinguishment of debt, net of tax (9.7) -- -- - ----------------------------------------------------------------------------------------------------------- Numerator for net income per share--assuming dilution--net income available to common stockholders after assumed conversions $ 114.8 $ 129.5 $ 100.7 - ----------------------------------------------------------------------------------------------------------- Denominator Denominator for basic--weighted average shares 45,330,561 43,808,904 42,353,927 - ----------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Employee stock options 1,521,333 2,403,729 2,115,125 Convertible preferred stock 515,657 518,081 519,012 - ----------------------------------------------------------------------------------------------------------- Dilutive potential common shares 2,036,990 2,921,810 2,634,137 - ----------------------------------------------------------------------------------------------------------- Denominator for assuming dilution 47,367,551 46,730,714 44,988,064 =========================================================================================================== Net income per share--basic: Income before extraordinary item $ 2.72 $ 2.94 $ 2.36 Extraordinary loss on extinguishment of debt, net of tax (0.21) -- -- - ----------------------------------------------------------------------------------------------------------- Net income $ 2.51 $ 2.94 $ 2.36 =========================================================================================================== Net income per share--assuming dilution: Income before extraordinary item $ 2.63 $ 2.77 $ 2.24 Extraordinary loss on extinguishment of debt, net of tax (0.21) -- -- - ----------------------------------------------------------------------------------------------------------- Net income $ 2.42 $ 2.77 $ 2.24 ===========================================================================================================
61 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in determining fair values of financial instruments: Fixed maturities and equity securities: Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturities not actively traded, the fair values are determined using values from independent pricing services, or, in the case of private placements, are determined by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the securities. The fair values for equity securities are based on quoted market prices. Policy loans: The carrying value of policy loans approximates fair value. Other invested assets: The fair values for other invested assets are generally based on quoted market prices. Cash and cash equivalents: The carrying value of cash and cash equivalents approximates fair value. Policyholder balances: Deferred annuity contracts are assigned fair value equal to current net surrender value. Annuitized contracts are valued based on the present value of the future cash flows at current pricing rates. Notes payable: The fair value of the Company's notes payable is either estimated based on quoted market prices or using discounted cash flow analyses based on the Company's incremental borrowing rate. The fair values and carrying values of the Company's financial instruments are as follows (in millions):
1998 1997 --------------------------------------------------- Carrying Fair Carrying Fair December 31 Value Value Value Value - --------------------------------------------------------------------------------------- Assets: Fixed maturity securities $ 11,277.2 $ 11,277.2 $ 11,246.5 $ 11,246.5 Equity securities 24.6 24.6 40.8 40.8 Policy loans 578.9 578.9 554.7 554.7 Other invested assets 717.6 787.0 501.5 525.7 Cash and cash equivalents 984.1 984.1 1,290.1 1,290.1 Liabilities: Policyholder balances 12,504.1 11,647.6 12,086.1 11,366.5 Notes payable 486.4 511.7 255.5 271.5
62 12. SEGMENT INFORMATION The Company has two reportable segments: annuity and asset management. Annuity operations relate principally to the issuance of fixed, indexed and variable annuity products and a closed block of investment-oriented life insurance products. Asset management includes mutual funds, private capital management and institutional asset management. The Company evaluates performance based on earnings before income taxes, not including net realized gains and losses. The Company's reportable segments offer different products and are each managed separately. Information by reported segment for 1998, 1997 and 1996 is shown below (in millions):
Year Ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Statement of Operations Data Revenues: Annuity: Unaffiliated $ 870.9 $ 922.4 $ 840.8 Intersegment (10.5) (9.3) (8.6) - ---------------------------------------------------------------------------------------------------- Total annuity 860.4 913.1 832.2 - ---------------------------------------------------------------------------------------------------- Asset management: Unaffiliated 346.1 324.6 299.5 Intersegment 10.5 9.3 8.6 Total asset management 356.6 333.9 308.1 - ---------------------------------------------------------------------------------------------------- Total revenues $ 1,217.0 $ 1,247.0 $ 1,140.3 ==================================================================================================== Income before income taxes and extraordinary item: Annuity: Income before net realized investment gains and amortization of intangible assets $ 155.2 $ 143.1 $ 127.3 Net realized investment gains 0.8 24.7 5.5 Amortization of intangible assets (1.3) (1.1) (1.1) - ---------------------------------------------------------------------------------------------------- Subtotal annuity 154.7 166.7 131.7 - ---------------------------------------------------------------------------------------------------- Asset management: Income before net realized investment gains and amortization of intangible assets 77.0 79.9 68.7 Net realized investment gains 1.3 1.8 2.5 Amortization of intangible assets (13.8) (12.1) (14.1) - ---------------------------------------------------------------------------------------------------- Subtotal asset management 64.5 69.6 57.1 - ---------------------------------------------------------------------------------------------------- Other: Loss before net realized investment gains (losses) and amortization of intangible assets (40.4) (43.3) (38.3) Net realized investment gains (losses) 0.3 (0.6) -- Amortization of intangible assets (0.2) (0.3) (0.2) - ---------------------------------------------------------------------------------------------------- Subtotal other (40.3) (44.2) (38.5) - ---------------------------------------------------------------------------------------------------- Total income before income taxes and extraordinary item $ 178.9 $ 192.1 $ 150.3 ====================================================================================================
63
December 31 1998 1997 1996 - ------------------------------------------------------------------------ Balance Sheet Data Identifiable Assets: Annuity $15,742.9 $15,342.2 $13,924.6 Asset management 575.3 477.1 484.0 Other 200.9 34.0 22.0 Intercompany eliminations -- (1.7) (2.9) - ------------------------------------------------------------------------ Total consolidated assets $16,519.1 $15,851.6 $14,427.7 ========================================================================
All revenues are attributed to the United States. All long-lived assets are located in the United States. 13. QUARTERLY FINANCIAL DATA, IN MILLIONS, EXCEPT PER SHARE AMOUNTS (UNAUDITED)
Quarter Ended 1998 March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------------------------------- Investment income $ 207.4 $ 202.3 $ 202.7 $ 208.5 Interest credited to policyholders (142.1) (140.2) (143.3) (136.6) - -------------------------------------------------------------------------------------------------- Investment spread 65.3 62.1 59.4 71.9 Net realized investment gains (losses) 2.2 (2.4) 4.2 (1.6) Fee income 94.7 100.0 97.1 101.9 Pretax income 45.4 43.5 49.4 40.6 Income before extraordinary item 31.5 29.7 33.5 29.8 Extraordinary loss on extinguishment of debt, net of tax -- -- -- (9.7) Net income 31.5 29.7 33.5 20.1 Net income per share--basic: Income before extraordinary item $ 0.70 $ 0.65 $ 0.73 $ 0.64 Extraordinary loss on extinguishment of debt, net of tax -- -- -- (0.21) - -------------------------------------------------------------------------------------------------- Net income per share--basic $ 0.70 $ 0.65 $ 0.73 $ 0.43 ================================================================================================== Net income per share--assuming dilution: Income before extraordinary item $ 0.67 $ 0.63 $ 0.71 $ 0.63 Extraordinary loss on extinguishment of debt, net of tax -- -- -- (0.21) - -------------------------------------------------------------------------------------------------- Net income per share--assuming dilution $ 0.67 $ 0.63 $ 0.71 $ 0.42 ==================================================================================================
64
Quarter Ended 1997 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------ Investment income $ 208.0 $ 212.2 $ 212.0 $ 220.9 Interest credited to policyholders (147.3) (147.2) (150.9) (148.7) - ------------------------------------------------------------------------------------------ Investment spread 60.7 65.0 61.1 72.2 Net realized investment gains 12.9 3.1 6.1 3.8 Fee income 89.4 89.1 95.2 94.3 Pretax income 51.8 43.9 47.8 48.6 Net income 35.0 30.0 32.9 31.6 Net income per share--basic 0.80 0.68 0.74 0.71 Net income per share--assuming dilution 0.76 0.65 0.70 0.67
14. STATUTORY INFORMATION Keyport is domiciled in Rhode Island and prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the State of Rhode Island Insurance Department. Statutory surplus and statutory net income differ from shareholder's equity and net income reported in accordance with GAAP primarily because policy acquisition costs are expensed when incurred, policy liabilities are based on different assumptions, and income tax expense reflects only taxes paid or currently payable. Keyport's statutory surplus and net income are as follows (in millions):
Year Ended December 31 1998 1997 1996 - ---------------------------------------------------------- Statutory surplus $ 790.9 $ 702.6 $ 567.7 Statutory net income 95.4 107.1 40.2
15. TRANSACTIONS WITH AFFILIATED COMPANIES Liberty Mutual from time to time provides management, legal, audit and financial services to the Company. Reimbursements to Liberty Mutual for these services totaled $0.6 million, $0.7 million and $0.6 million in 1998, 1997 and 1996, respectively. These reimbursements are based on direct and indirect costs incurred by Liberty Mutual and are allocated to the Company primarily based upon the amount of time spent by Liberty Mutual's employees on the Company's behalf. The Company believes that this allocation methodology is reasonable. Regulatory authorities permit dividend payments from Keyport to the Company up to the lesser of (i) 10% of statutory surplus as of the preceding December 31 or (ii) the net gain from operations for the preceding fiscal year. As of December 31, 1998, Keyport could pay dividends of up to $59.1 million without the approval of the Commissioner of Insurance of the State of Rhode Island. Keyport paid dividends of $20.0 million during 1998 but had not previously paid any dividends since its acquisition in 1988. 65 16. COMMITMENTS AND CONTINGENCIES Leases: The Company leases data processing equipment, furniture and certain office facilities from others under operating leases expiring in various years through 2009. Rental expense amounted to $16.5 million, $15.0 million and $16.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. For each of the next five years, and in the aggregate, as of December 31, 1998, the following are the minimum future rental payments under noncancelable operating leases having remaining terms in excess of one year (in millions):
Year Payments - ------------------------------ 1999 $ 19.0 2000 19.0 2001 18.3 2002 17.1 2003 16.7 Thereafter 42.8
Legal Matters: The Company is involved at various times in litigation common to its business. In the opinion of management, the resolution of any such litigation is not expected to have a material adverse effect on the Company's financial condition, results of operations or cash flows. Regulatory Matters: Under existing guaranty fund laws in all states, insurers licensed to do business in those states can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. The actual amount of such assessments will depend upon the final outcome of rehabilitation proceedings and will be paid over several years. In 1998, 1997 and 1996, Keyport was assessed $3.2 million, $5.9 million and $10.0 million, respectively. During 1998, 1997 and 1996, Keyport recorded $1.2 million, $1.0 million and $1.0 million, respectively, of provisions for state guaranty fund association expense. At December 31, 1998 and 1997, the reserve for such assessments was $6.0 million and $8.0 million, respectively. 66 Report of Independent Auditors [logo: Ernst & Young LLP] Shareholders and Board of Directors Liberty Financial Companies, Inc. We have audited the accompanying consolidated balance sheets of Liberty Financial Companies, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Financial Companies, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts February 2, 1999 67 EX-21 9 SUBSIDIARIES OF LIBERTY FINANCIAL COS., INC. Exhibit 21 LIBERTY FINANCIAL COMPANIES, INC. SUBSIDIARIES OF THE COMPANY
Jurisdiction of Immediate Incorporation or Subsidiary Parent Organization - ---------- ------ ------------ Liberty Financial Services, Inc. ("LFS") The Company Massachusetts Liberty Newport Holdings, Limited ("LNHL") The Company Delaware Independent Holdings, Inc. ("IHI") The Company Massachusetts Crabbe Huson Group, Inc. The Company Massachusetts Progress Investment Management Company The Company California LREG, Inc. The Company Delaware The PAMCO Group, Inc. The Company Delaware SteinRoe Services, Inc. ("SSI") The Company Massachusetts Stein Roe & Farnham Incorporated ("Stein Roe") SSI Delaware SteinRoe Futures, Inc. Stein Roe Illinois Liberty Funds Group LLC ("LFG") LFS Delaware Colonial Management Associates, Inc. ("CMA") LFG Massachusetts Colonial Advisory Services, Inc. LFG Massachusetts Liberty Funds Services, Inc. LFG Massachusetts Liberty Funds Distributor, Inc. CMA Massachusetts Liberty Financial Advisors, Inc. CMA Delaware AlphaTrade, Inc. CMA Massachusetts Keyport Life Insurance Company ("Keyport") SSI Rhode Island Keyport Benefit Life Insurance Company Keyport New York Keyport Financial Services Corp. Keyport Massachusetts Independence Life & Annuity Company Keyport Rhode Island Liberty Advisory Services Corp. Keyport Massachusetts Newport Pacific Management, Inc. ("NPMI") LNHL California Newport Fund Management, Inc. NPMI Virginia
Jurisdiction of Immediate Incorporation or Subsidiary Parent Organization - ---------- ------ ------------ Liberty Asset Management Company LFS Delaware Copley Venture Capital, Inc. LFS Massachusetts Liberty Investment Services, Inc. LFS Massachusetts Liberty Securities Corporation LIS Delaware Financial Centre Insurance Agency, Inc. LIS Massachusetts LSC Insurance Agency of Arizona, Inc. LIS Arizona LSC Insurance Agency of Maine, Inc. LIS Maine LSC Insurance Agency of New Mexico, Inc. LIS New Mexico LSC Insurance Agency of Nevada, Inc. LIS Nevada Independent Financial Marketing IHI Delaware Group, Inc. ("IFMG") IFS Agencies, Inc. IFMG New York IFS Agencies of Alabama, Inc. IFMG Alabama IFMG Agencies of Maine, Inc. IFMG Maine IFS Agencies of New Mexico, Inc. IFMG New Mexico
EX-23 10 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Liberty Financial Companies, Inc. of our report dated February 2, 1999, included in the 1998 Annual Report to Shareholders of Liberty Financial Companies, Inc. Our audits also included the financial statement schedules of Liberty Financial Companies, Inc. listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-61511) pertaining to the Liberty Financial Companies, Inc. Savings and Investment Plan, in the Registration Statements (Form S-8 No. 333-61509 and Form S-8 No. 333-28073) pertaining to the Liberty Financial Companies Inc. 1995 Stock Incentive Plan, in the Registration Statement (Form S-8 No. 33-90626) pertaining to the Liberty Financial Companies, Inc. 1990 Stock Option Plan, 1995 Stock Incentive Plan and 1995 Employee Stock Purchase Plan, and in the Registration Statement (Form S-3 No. 333-20067 pertaining to the Liberty Financial Companies Inc. Dividend Reinvestment Plan of our report dated February 2, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Liberty Financial Companies, Inc. /s/ Ernst & Young Boston, MA March 23, 1999 EX-27 11 FINANCIAL DATA SCHEDULE
7 1,000,000 USD 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 11,277 0 0 25 0 0 12,598 984 0 341 16,519 0 0 12,504 0 486 0 15 1 1,270 16,519 0 821 2 394 0 69 328 179 54 0 0 (10) 0 115 2.51 2.42 0 0 0 0 0 0 0
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