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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
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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, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-14925
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STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Oregon 93-1253576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices)
Registrant's telephone number, including area code: (503) 321-7000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
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<S> <C>
Common Stock New York Stock Exchange
Series A Preferred Stock
Registered Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 2, 2000, was approximately $771,420,000.
As of March 2, 2000, there were 32,480,828 shares of the Registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated March 29, 2000 in
connection with the 2000 Annual Meeting of Shareholders are incorporated by
reference in Part III.
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TABLE OF CONTENTS
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Item Page
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<C> <S> <C>
PART I
1. Business.......................................................... 3
1A. Executive Officers of the Registrant.............................. 8
2. Properties........................................................ 9
3. Legal Proceedings................................................. 9
4. Submission of Matters to a Vote of Security Holders............... 9
PART II
Market for the Registrant's Common Equity and Related Stockholder
5. Matters........................................................... 10
6. Selected Financial Data........................................... 11
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations............................................. 12
7A. Quantitative and Qualitative Disclosures About Market Risk........ 22
8. Financial Statements and Supplementary Data....................... 23
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure.............................................. 48
PART III
10. Directors of the Registrant....................................... 49
11. Executive Compensation............................................ 49
12. Security Ownership of Certain Beneficial Owners and Management.... 49
13. Certain Relationships and Related Transactions.................... 49
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 50
Signatures........................................................ 51
Exhibits Index.................................................... 53
</TABLE>
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PART I
ITEM 1. BUSINESS
General
StanCorp Financial Group, Inc. ("StanCorp") was incorporated under the laws
of Oregon in 1998. StanCorp was specifically organized as a parent holding
company for its subsidiaries Standard Insurance Company; StanCorp Mortgage
Investors, LLC; StanCorp Real Estate, LLC; and Standard Management, Inc.
StanCorp is based in Portland, Oregon, and through its subsidiaries
(collectively with StanCorp, the "Company") has operations throughout the
United States.
StanCorp's principal subsidiary, Standard Insurance Company ("The
Standard"), underwrites group and individual disability, life and annuity
products, and dental insurance for groups. The Standard is domiciled in Oregon
and licensed in 49 states, the District of Columbia and the U.S. Territory of
Guam. The Standard is licensed for reinsurance only in New York.
StanCorp's other subsidiaries provide complementary financial and management
service businesses. The largest is StanCorp Mortgage Investors, LLC ("StanCorp
Mortgage Investors"), which has developed a recognized expertise in
originating and servicing small commercial mortgage loans. This ability has
been recognized by rating agencies as a strength. StanCorp Mortgage Investors
originates and services mortgage loans primarily for The Standard's investment
portfolio as well as generating fee income from the origination and servicing
of mortgage loans sold to institutional investors. StanCorp Mortgage Investors
began operations in 1996, and as of December 31, 1999 was servicing $1.91
billion in loans for The Standard and $270.8 million in loans for other
institutional investors.
Forward-looking Statements
The management of the Company has made in this Form 10-K, and from time to
time may make in its public filings, press releases and in oral presentations
and discussions, certain statements including statements regarding anticipated
development and expansion of the Company's business. Such statements may
include the effects of regulatory actions, the intent, belief, or current
expectations of the Company's management, the future operating performance of
the Company and other statements regarding matters that are not historical
facts. These statements are "forward-looking" statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Because such
statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include, but are not
limited to (i) deterioration in morbidity, mortality, and persistency, (ii)
changes in interest rates or the condition of the national economy, (iii)
changes in the regulatory environment on the state or Federal level, (iv)
competition from other insurers and financial institutions, (v) achievement of
growth in new products, (vi) achievement of operating expense management
objectives (vii) changes in claims paying ability ratings, (viii) adverse
findings in litigation or other legal proceedings, (ix) deterioration in the
experience of the closed block, and (x) on-going risks associated with Year
2000 non-compliance by StanCorp, its subsidiaries, or third parties (including
vendors and suppliers).
Recent Business Developments
In December 1997, The Standard's board of directors authorized management to
proceed with the development of a plan of reorganization to convert from a
mutual life insurance company to a stock life insurance company, a process
known as demutualization. On April 21, 1999, pursuant to an order by the
Director of the Oregon Department of Consumer and Business Services approving
the Plan of Reorganization, dated September 28, 1998, as amended on
December 14, 1998 (the "Plan"), The Standard converted from a mutual life
insurance company to a stock life insurance company and became a wholly owned
subsidiary of StanCorp. Also, on April 21, 1999, StanCorp completed an initial
public offering (the "IPO") of 15.2 million shares (including 1.3 million
shares subsequently sold pursuant to the underwriters' over-allotment option)
of its
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common stock at the IPO price of $23.75 per share. The shares of common stock
issued in the IPO were in addition to 18.7 million shares of StanCorp common
stock distributed to The Standard policyholders, pursuant to the Plan, in
exchange for their membership interests in The Standard.
On the completion of its reorganization, The Standard established a closed
block for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. The Standard
allocated to the closed block an amount of assets expected to produce cash
flows which, together with future revenues from the policies included in the
closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding), if the experience underlying such dividend scales
including the portfolio interest rate, continues. These assets totaled $599.8
million at December 31, 1999, and are for the benefit of the policies in the
closed block.
The contribution to income before Federal income taxes and extraordinary
item from the closed block is reported as a single line item in the
consolidated statements of income and comprehensive income. Accordingly, all
components of revenues, benefits and expenses for the closed block are shown
as a net amount under the caption "Contribution from closed block". Federal
income tax expense applicable to the closed block is reflected as a component
of total tax expense. Reporting of the contribution from the closed block as a
single line item results in material reductions in the respective line items
in the consolidated statements of income and comprehensive income while having
no effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities". Management believes that a better
understanding of the business results when closed block amounts are presented
on a combined basis as if the closed block had not been established.
Accordingly, the combined presentation set forth below includes revenues,
benefits and expenses associated with policies included in the closed block.
Such presentation does not affect the Company's reported net income. As a
result, amounts presented herein may differ from those presented in Item 8,
"Financial Statements and Supplementary Data". See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Reorganization Plan" and Item 8, "Financial Statements and Supplementary
Data--Notes to Consolidated Financial Statements".
Segments
The Company has three business segments: Group Insurance, Retirement Plans
and Individual Insurance.
Group Insurance Segment
The Group Insurance segment accounted for $1.01 billion, or 77.4%, of the
Company's total revenues of $1.30 billion in 1999. The Standard is a leading
provider of group life and disability insurance products, serving over 30,000
employer groups representing 4.5 million employees. The Group Insurance
segment also markets group accidental death and dismemberment and dental
insurance. Over 131 sales representatives and managers market group products
exclusively. These sales representatives, who are employees of The Standard,
are compensated through salary and incentive compensation programs. They sell
The Standard's group insurance products through a nationwide network of
approximately 13,000 employee benefits brokers, agents and consultants. The
Standard's group insurance sales representatives are located in 33 offices in
principal cities of the United States. These group field offices also provide
field underwriting, sales support and service through a field administrative
staff of 175 employees.
The Standard's group insurance products are designed for groups ranging in
size from two lives to over 150,000 lives. The Standard is one of the leading
providers of group long term and short term disability insurance, insuring
approximately 1,600 such groups, including state governments and other public
entities. The Standard endeavors to market its group products to many
different industries to provide industry diversification, reducing potential
claim fluctuations that may be associated with specific businesses or
professional groups.
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Long Term Disability Insurance. Long term disability plans provide partial
replacement of earnings to insured employees who become disabled for extended
periods of time. The Standard's basic long term disability product covers
disabilities that occur both at work and elsewhere. In order to receive
disability benefits, an employee must be continuously disabled for a specified
waiting period, generally ranging from 30 to 180 days, as provided by the
policy. Monthly benefit payments ranging from 50% to 70% of salary are
provided as long as the employee remains continuously disabled. These benefits
usually are offset by other income that the disabled employee receives from
sources such as social security disability, workers compensation and sick
leave. These benefits also may be subject to certain maximum amounts and to
maximum benefit periods. According to the 1998 U.S. Group Disability Market
Survey, based on 1998 total in force premiums, The Standard had a 6.5% market
share in long term disability insurance. Long term disability accounted for
41.6%, 39.6%, and 39.0% of total Company premiums for 1999, 1998, and 1997,
respectively.
Short Term Disability Insurance. Short term disability plans provide partial
replacement of earnings to insured employees who are temporarily disabled.
Short term disability plans generally require a short waiting period, ranging
from one to thirty days, before an employee may receive benefits. Maximum
benefit periods generally do not exceed 26 weeks. Short term disability
benefits also may be offset by other income, such as sick leave, that a
disabled employee may receive. Standard's basic short term disability policy
covers non-occupational disabilities only. Short term disability accounted for
8.5%, 8.6% and 7.6% of total Company premiums for 1999, 1998 and 1997,
respectively.
Life and Accidental Death and Dismemberment Insurance. Group life insurance
provides coverage on the insured for a specified period and has no cash value
(amount of cash available to a policyholder on the surrender of or withdrawal
from the life insurance policy). Coverage is offered to employees and their
dependents. Accidental death and dismemberment insurance is usually provided
in conjunction with group life and is payable after the accidental death of
the insured employee in an amount based on the face amount of the policy.
Accidental death and dismemberment also covers dismemberment of the insured
employee in an amount based on a schedule contained in the policy. Group life
and accidental death and dismemberment insurance accounted for 32.8%, 32.0%,
and 31.9% of total Company premiums for 1999, 1998, and 1997, respectively.
Since 1991, the Group Insurance segment has pursued geographic expansion
beyond the Western United States by opening sales offices in the Central and
Eastern regions of the United States. The Standard intends to pursue further
sales growth in the Central and Eastern regions by opening additional sales
offices and adding sales representatives to the existing offices in those
regions. For the year ended December 31, 1999, premiums were 48.2%, 29.1% and
22.7% from the Western, Central and Eastern regions, respectively.
Retirement Plans Segment
The Retirement Plans segment accounted for $66.5 million, or 5.1%, of the
Company's total revenues in 1999. The Retirement Plans segment offers full-
service 401(k) and other pension plan products and services to private and
public employers. The Standard markets retirement plan products and services
primarily to employers with 50 to 500 employees through brokers, agents,
employee benefit consultants, and other distributors served by The Standard's
11 regional Retirement Plans sales offices. Most sales of The Standard's
retirement plans products include both financial services and record-keeping
arrangements, although either financial services or record-keeping may be
provided on a stand-alone basis. Assets managed by the Retirement Plans
segment grew 26.8%, 16.0%, and 15.4% for each of the three years ended
December 31, 1999, 1998, and 1997, respectively.
Individual Insurance Segment
The Individual Insurance segment accounted for $209.0 million, or 16.1%, of
the Company's total revenues in 1999. This segment markets life insurance,
disability insurance and annuities to individuals. Individual insurance
products are distributed by licensed agents and brokers in the Western,
Central and Southeast regions of the United States. Management believes the
market for the fixed life products offered by The Standard's Individual
Insurance segment has matured and provides limited growth opportunities.
However, management believes potential growth opportunities exist in other
products within this segment.
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Competition
The life insurance business is highly competitive for all types of group and
individual insurance and retirement plans products offered by The Standard.
Competition comes from other insurers, financial services companies such as
banks, broker-dealers and mutual funds, managed care providers for employer
groups, individual consumers and distributors, many of which have greater
financial resources, offer a broader array of products and, with respect to
other insurers, may have higher claims paying ability ratings. Passage of
financial institution reform legislation, such as the Gramm-Leach-Bliley Act,
may also impact our ability to compete.
The principal competitive factors are reputation, financial strength,
quality of service, underwriting, distribution, product design and price. At
December 31, 1999, The Standard was rated: A (Excellent) by A.M. Best--3rd of
13 ratings, A+ (Good) by Standard & Poor's--5th of 17 ratings, AA- (Very High
Claims Paying Ability) by Duff & Phelps--4th of 16 ratings, and A2 (Good) by
Moody's--6th of 16 ratings.
Investments
The Company maintains a diversified investment portfolio. The Standard's
investment portfolio is regulated by the insurance laws of the state of Oregon
and other states in which The Standard does business. Oregon law generally
limits investments to bonds and other fixed maturity securities, mortgage
loans, common and preferred stock, real estate, and obligations collateralized
by cash values of life insurance policies. Decisions to acquire and dispose of
investments are made in accordance with guidelines adopted and modified from
time to time by The Standard's board of directors. Each transaction requires
the approval of one or more members of The Standard's senior investment staff,
with increasingly higher approval authorities required for more significant
investments. All transactions are reported quarterly to the Finance &
Operations Committee of the board of directors of The Standard.
Asset allocation is dependent on factors such as asset/liability matching
and liquidity considerations, economic conditions, tax issues, regulatory
considerations and social/community considerations. The Standard's policy
reserves and other liabilities are calculated in accordance with regulations
and contract provisions that must assume compounding interest at fixed rates
of return. Maturities and provisions for early withdrawal vary widely by
product type and contract form and are monitored continuously by The
Standard's actuaries. Cash flow testing is performed annually to ensure that
asset types and maturities are appropriate for The Standard's product mix and
that The Standard can meet its obligations to policyholders under a wide
variety of economic conditions. The Standard's cash flow testing consistently
supports the allocation of a large majority of assets to fixed income
investments under a wide range of economic scenarios. For additional
information see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8, "Financial Statements and
Supplementary Data".
Reinsurance
The Standard routinely assumes and cedes reinsurance with other companies.
The primary purpose of ceded reinsurance is to limit losses from large
exposures. However, if the reinsurer is unable to meet its obligations, the
originating issuer of the insurance contract retains the liability. The
Standard maintains maximum retention limits of $500,000 aggregated per
individual for both group and individual life policies. For disability
policies, The Standard maintains a maximum monthly retention limit of $10,000
gross benefit aggregated per individual for group policies and $2,000 for
individual policies. The Standard generally enters into yearly renewable term
reinsurance agreements with each reinsurer. In addition to product-specific
reinsurance arrangements, The Standard is covered by reinsurance for certain
catastrophic losses.
The Standard is involved in a reinsurance/third-party administration
arrangement with Northwestern Mutual Life Insurance Company ("NML") to market
NML's long term disability and short term disability products using NML's
agency distribution system. Under this arrangement, The Standard reinsures 60%
of the risk, and receives 60% of the premiums, for policies issued on or after
January 1, 1993. For disability policies issued prior to January 1, 1993, The
Standard assumes 80% of the risk and premiums. In addition to assuming
reinsurance
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risk, The Standard provides product design, pricing, state regulatory filings,
underwriting, legal support, claims management and other administrative
services under this arrangement. Premiums received by The Standard for the
assumed NML business accounted for 3.9%, 4.2% and 4.0% of the Company's total
premiums in 1999, 1998, and 1997, respectively.
Total reinsurance premiums ceded and assumed were $18.9 million and $39.1
million, respectively, for the year ended December 31, 1999 and $17.0 million
and $36.4 million, respectively, for the year ended December 31, 1998.
Reserves
The Standard establishes and carries as a liability actuarially determined
reserves that are calculated to meet obligations for future policy benefits
and claims. The reserves are computed at amounts that, with additions from
premiums to be received and with interest on such reserves at certain assumed
rates, are expected to be sufficient to meet The Standard's policy obligations
at their maturities or in the event of an insured's death or disability.
Reserves include unearned premiums, premium deposits, claims reported but not
yet paid, claims incurred but not reported, and claims in the process of
settlement. The Standard's reserves are based on actuarially recognized
methods for developing assumptions for estimating future policy benefits and
claims experience, including an evaluation of interest rates, mortality,
morbidity, persistency and expenses. Reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
Due to the nature of the underlying risks and the high degree of uncertainty
associated with the determination of the liability for future policy benefits
and claims, the amounts which will ultimately be paid to settle this liability
cannot be determined precisely and may vary from the estimated amounts. The
Standard evaluates its reserves periodically. Based on changes in the
assumptions used to establish the reserves, as well as The Standard's actual
policy benefits and claims experience, adjustments are made when appropriate.
The establishment of reserves (or the increase of reserves in later periods)
is charged as expense in the period the reserves are established or increased.
Regulation and Litigation
The Company's business is subject to comprehensive state regulation and
supervision throughout the United States primarily to protect policyholders,
not shareholders. The United States Federal government does not directly
regulate the insurance industry. Federal legislation and administrative
policies in certain areas can, however, significantly and adversely affect the
insurance industry. These areas include pension and employee welfare benefit
plan regulation, financial services regulation and Federal taxation.
The laws of the various states establish insurance departments with broad
powers such as licensing companies to transact business; licensing agents;
mandating certain insurance benefits; regulating premium rates; approving
policy forms; regulating unfair trade and claims practices; establishing
reserve requirements and solvency standards; fixing maximum interest rates on
life insurance policy loans and minimum rates for accumulation of surrender
values; restricting certain transactions between affiliates; and regulating
the types, amounts and valuation of investments. State insurance regulators
and the National Association of Insurance Commissioners continually reexamine
existing laws and regulations and may impose changes in the future that
materially adversely affect The Standard's business, financial condition and
results of operations.
While the Company cannot predict the impact of potential or future state or
Federal legislation or regulation on its business, future laws and
regulations, and the interpretation of those laws and regulations, may
materially adversely affect the Company's business, financial condition and
results of operations.
Insolvency regulations exist in many of the jurisdictions in which The
Standard is doing business. Such regulations may require life insurance
companies within the jurisdiction to participate in guaranty associations.
These associations levy assessments against their members for the purpose of
paying benefits due to policyholders of impaired, insolvent or failed
insurance companies. Association assessments levied against The Standard from
January 1, 1997 through December 31, 1999 aggregated $2.3 million. At December
31, 1999,
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The Standard maintained a reserve of $1.0 million for future assessments in
respect of currently impaired, insolvent or failed insurers.
StanCorp and its subsidiaries are involved in various legal actions and
other state and Federal proceedings. For additional information see Item 8,
"Financial Statements and Supplementary Data--Notes to Consolidated Financial
Statements".
Risk-Based Capital
The National Association of Insurance Commissioners has implemented a tool
to aid in the assessment of the statutory capital and surplus of life and
health insurers. This tool, known as Risk-Based Capital ("RBC"), augments
statutory minimum capital and surplus requirements. The RBC system employs a
risk-based formula that applies prescribed factors to the various risk
elements inherent in an insurer's business to arrive at minimum capital
requirements in proportion to the amount of risk assumed by the insurer. At
December 31, 1999, The Standard's RBC level was significantly in excess of
that which would require corrective action by The Standard or regulatory
agencies.
Employees
At December 31, 1999, StanCorp and its subsidiaries had 1,971 full- and
part-time employees.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of StanCorp are as follows:
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Age (as of
Name March 2, 2000) Position
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<C> <C> <S>
Ronald E. Timpe..... 60 Chairman, President, Chief Executive
Officer and Director of StanCorp and The
Standard
Patricia J. Brown*.. 41 Vice President, Information Systems of The
Standard
Dwight L. Cramer.... 47 Vice President, General Counsel and
Corporate Secretary of StanCorp and The
Standard
Kim W. Ledbetter*... 47 Senior Vice President, Retirement Plans
and Individual Insurance of The Standard
Douglas T. Maines*.. 47 Senior Vice President, Group Insurance of
The Standard
Cindy J. McPike..... 37 Assistant Vice President, Controller &
Treasurer of StanCorp and The Standard
J. Gregory Ness*.... 42 Senior Vice President, Investments of The
Standard
Eric E. Parsons..... 51 Senior Vice President and Chief Financial
Officer of StanCorp and The Standard
</TABLE>
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* Denotes an officer of a subsidiary who is not an officer of StanCorp but
who is considered an "executive officer" under the regulations of the
Securities and Exchange Commission.
Set forth below is biographical information for the executive officers.
Ronald E. Timpe, FSA, CLU, has been chairman, president and chief executive
officer of StanCorp since its incorporation. He was appointed president and
chief executive officer of The Standard in 1994 and became chairman of The
Standard in 1998. Prior to 1994 he served as president and chief operating
officer, and senior vice president of The Standard. He formerly held
management positions in each of The Standard's operating divisions.
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Patricia J. Brown, CPA, FLMI, has been vice president, Information Systems,
of The Standard since 1999. Ms. Brown formerly served in officer positions at
StanCorp and The Standard, including assistant vice president, controller and
treasurer. She has served in various management positions since 1992.
Dwight L. Cramer, J.D., has been vice president, general counsel and
corporate secretary of StanCorp and The Standard since February 2000. Prior to
joining StanCorp, Mr. Cramer served in various management positions at
American General Annuity Insurance Company since 1993, most recently, as
senior vice president-specialty products.
Kim W. Ledbetter, FSA, CLU, has been senior vice president, Individual
Insurance and Retirement Plans, of The Standard since 1997. From 1994 to 1997,
Mr. Ledbetter was vice president, Retirement Plans, of The Standard.
Douglas T. Maines has been senior vice president, Group Insurance, of The
Standard since 1998. From 1996 to 1998, Mr. Maines was vice president and
general manager, claims, for Liberty Mutual Insurance Company. From 1993 to
1996, Mr. Maines was vice president, Business Development for the same
company.
Cindy J. McPike, CPA, has been assistant vice president, controller and
treasurer of StanCorp and The Standard since February 2000. Ms. McPike was the
assistant vice president, controller of StanCorp and assistant vice president,
controller and treasurer of The Standard since 1999. Ms. McPike was the
manager, Corporate Accounting for The Standard from 1998 to 1999. Prior to
joining The Standard, Ms. McPike was director of Internal Audit for NW
Natural.
J. Gregory Ness, LLIF, has been senior vice president, Investments of The
Standard since 1999. Mr. Ness was vice president and corporate secretary of
StanCorp from its incorporation to February 2000. From 1997 to 1999, Mr. Ness
was vice president and corporate secretary of The Standard. From 1996 to 1997,
Mr. Ness was vice president, Retirement Plans Sales and Marketing, of The
Standard. He has served in various management positions with The Standard
since 1988.
Eric E. Parsons, FLMI, has been senior vice president and chief financial
officer of StanCorp since its incorporation. Mr. Parsons has been senior vice
president and chief financial officer of The Standard since 1998. From 1997 to
1998, Mr. Parsons was senior vice president and chief financial officer and
chief investment officer of The Standard. From 1993 to 1997, Mr. Parsons was
vice president, Investments.
ITEM 2. PROPERTIES
Principal properties owned by The Standard consist of two office buildings
in downtown Portland, Oregon: the Standard Insurance Center, with
approximately 459,000 square feet; and the Standard Plaza, with approximately
216,000 square feet. In addition, The Standard leases 116,000 square feet of
office space in a third office building, also located in downtown Portland,
Oregon, and 42,000 square feet of offsite storage. The Standard also leases
offices under commitments of varying terms to support its sales offices
throughout the United States.
Management believes that the capacity and types of facilities are suitable
and adequate for the present and foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
See Item 8, "Financial Statements and Supplementary Data--Notes to
Consolidated Financial Statements", for the information incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of StanCorp's shareholders during
the fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
StanCorp's common stock is listed on the New York Stock Exchange under the
symbol "SFG". As of March 2, 2000 there were 77,590 shareholders of record of
common stock.
The high and low sales prices (as reported by the New York Stock Exchange)
and cash dividends paid, per share of common stock, by calendar quarter since
the initial public offering on April 21, 1999 through December 31, 1999, were
as follows:
<TABLE>
<CAPTION>
4Q 3Q 2Q 1Q
------- ------- ------- ---
<S> <C> <C> <C> <C>
High............................................. $28.250 $27.813 $30.000 N/A
Low.............................................. 21.250 21.750 22.750 N/A
Close............................................ 25.188 22.375 30.000 N/A
Dividends Paid................................... 0.060 0.060 -- N/A
</TABLE>
Although StanCorp intends to declare quarterly cash dividends on the common
stock, the declaration and payment of dividends in the future is subject to
the discretion of the board of directors and will depend on StanCorp's
financial condition, results of operations, cash requirements, future
prospects, regulatory restrictions on the payment of dividends by The Standard
(see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Financing") and other
factors deemed relevant by StanCorp's board of directors.
On April 21, 1999, StanCorp completed an initial public offering of common
stock, issuing 15,209,400 shares (including 1,289,400 shares subsequently sold
pursuant to the underwriters' over-allotment option) at $23.75 per share, and
received proceeds, net of IPO expenses, of $336.5 million. Of the proceeds,
$276.9 million was contributed to The Standard, of which $267.9 million was
used to retire obligations to policyholders arising out of The Standard's
conversion to a stock life insurance company, and $9.0 million was paid in
exchange for ownership of The Standard's non-insurance subsidiaries. The
remaining $59.6 million was retained by StanCorp for general corporate
purposes. The shares of common stock issued in the IPO were in addition to
18,718,015 shares of StanCorp common stock distributed to The Standard
policyholders, pursuant to the Plan, in exchange for their membership
interests in The Standard.
On November 1, 1999, the board of directors of StanCorp authorized the
repurchase of up to 1,700,000 shares of StanCorp's common stock to be effected
before November 1, 2000. As of December 31, 1999, 1,277,391 shares had been
repurchased at a total cost of $34.2 million. On February 23, 2000 the board
of directors of Stancorp authorized the repurchase of up to 1,600,000 shares
of StanCorp's common stock to be effected before February 23, 2001. Both
repurchases are to be effected in the open market or in negotiated
transactions in compliance with the safeharbor provisions of Rule 10b-18 under
regulations of the Securities Exchange Act of 1934.
During 1999, the board of directors of StanCorp granted 67,704 shares of
restricted stock to key management employees. The shares vest during 2001
dependent on the recipients' continued employment with StanCorp or The
Standard.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (1)
The following financial data should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
(Dollars in millions, except share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data: (2)
Revenues:
Premiums................ $ 959.2 $ 892.8 $ 827.5 $ 747.1 $ 676.8
Net investment income... 337.6 323.1 303.2 285.2 273.5
Net realized investment
gains.................. 0.4 11.6 11.8 15.1 8.0
Other................... 3.0 3.4 2.6 1.2 0.9
---------- -------- -------- -------- --------
Total revenues........ 1,300.2 1,230.9 1,145.1 1,048.6 959.2
---------- -------- -------- -------- --------
Benefits and expenses:
Policyholder benefits
(3).................... 904.5 875.3 831.2 781.1 689.8
Operating expenses (4).. 272.3 247.0 218.6 191.9 174.8
---------- -------- -------- -------- --------
Total benefits and
expenses............. 1,176.8 1,122.3 1,049.8 973.0 864.6
---------- -------- -------- -------- --------
Income before Federal
income taxes and
extraordinary item....... 123.4 108.6 95.3 75.6 94.6
Federal income taxes...... 39.0 33.0 31.4 28.6 25.5
---------- -------- -------- -------- --------
Income before
extraordinary item....... 84.4 75.6 63.9 47.0 69.1
Extraordinary item (5).... 4.5 6.1 -- -- --
---------- -------- -------- -------- --------
Net income................ $ 79.9 $ 69.5 $ 63.9 $ 47.0 $ 69.1
========== ======== ======== ======== ========
Per Common Share:
Basic and diluted
operating income (6)(7).. $ 2.50
Basic and diluted net
income (7)............... 2.37
Book value at year-end
(excluding accumulated
other comprehensive
income).................. 26.83
Market value at year-end.. 25.19
Dividends declared and
paid..................... 0.12
Basic weighted-average
shares outstanding (7)... 33,630,692
Diluted weighted-average
shares outstanding (7)... 33,674,367
Ending shares
outstanding.............. 32,706,394
Balance Sheet Data:
General account assets.... $ 4,864.8 $4,610.4 $4,243.0 $3,967.9 $3,771.9
Separate account assets... 992.3 668.5 483.3 322.8 195.6
---------- -------- -------- -------- --------
Total assets.............. 5,857.1 5,278.9 4,726.3 4,290.7 3,967.5
Total liabilities......... 5,017.2 4,439.6 3,994.3 3,643.2 3,340.4
Total equity.............. 839.9 839.3 732.0 647.5 627.1
Statutory Data:
Premium and deposits...... $ 1,290.2 $1,127.4 $1,050.3 $ 946.2 $ 869.1
Net income................ 116.8 95.7 40.9 15.7 60.5
Policyholder surplus and
asset valuation reserve.. 547.8 432.8 341.1 302.9 287.6
Net investment yield...... 7.71% 8.11% 8.27% 8.37% 8.54%
</TABLE>
- --------
(1) Data is presented on a combined basis as if the closed block had not been
established, and therefore the data may not agree with amounts presented
in Item 8, "Financial Statements and Supplementary Data". See Item 7,
"Management's Discussions and Analysis of Financial Condition and Results
of Operations".
11
<PAGE>
(2) Certain 1998, 1997, 1996, and 1995 amounts were reclassified to conform
with the current year's presentation.
(3) Includes policyholder benefits and interest paid on policyholder funds.
(4) Includes operating expenses, commissions and the net increase in deferred
policy acquisition costs.
(5) Represents costs related to the plan of reorganization of The Standard.
(6) Excludes realized capital gains and extraordinary item, net of tax.
(7) Weighted-average shares outstanding, basic and diluted, are pro forma as
if the initial public offering had occurred on January 1, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of StanCorp Financial Group, Inc. ("StanCorp") and its
subsidiaries (collectively, the "Company") should be read in conjunction with
the consolidated financial statements and related notes thereto.
Forward-looking Statements
The management of the Company has made in this Form 10-K, and from time to
time may make in its public filings, press releases and in oral presentations
and discussions, certain statements including statements regarding anticipated
development and expansion of the Company's business. Such statements may
include the effects of regulatory actions, the intent, belief, or current
expectations of the Company's management, the future operating performance of
the Company and other statements regarding matters that are not historical
facts. These statements are "forward-looking" statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Because such
statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include, but are not
limited to (i) deterioration in morbidity, mortality, and persistency, (ii)
changes in interest rates or the condition of the national economy, (iii)
changes in the regulatory environment on the state or Federal level, (iv)
competition from other insurers and financial institutions, (v) achievement of
growth in new products, (vi) achievement of operating expense management
objectives, (vii) changes in claims paying ability ratings, (viii) adverse
findings in litigation or other legal proceedings, (ix) deterioration in the
experience of the closed block, and (x) on-going risks associated with Year
2000 non-compliance by StanCorp, its subsidiaries, or third parties (including
vendors and suppliers).
Reorganization Plan
In December 1997, Standard Insurance Company's ("The Standard") board of
directors authorized management to proceed with the development of a plan of
reorganization to convert from a mutual life insurance company to a stock life
insurance company, a process known as demutualization. Prior to the
reorganization, StanCorp was a wholly owned subsidiary of The Standard and was
formed for the purpose of becoming an insurance holding company upon the
completion of The Standard's reorganization. On April 21, 1999, pursuant to an
order by the Director of the Oregon Department of Consumer and Business
Services approving the Plan of Reorganization, dated September 28, 1998, as
amended on December 14, 1998 (the "Plan"), The Standard converted from a
mutual life insurance company to a stock life insurance company and became a
wholly owned subsidiary of StanCorp. Also, on April 21, 1999, StanCorp
completed an initial public offering (the "IPO") of 15.2 million shares
(including 1.3 million shares subsequently sold pursuant to the underwriters'
over-allotment option) of its common stock at the IPO price of $23.75 per
share, and received proceeds, net of IPO expenses, of $336.5 million. Of the
proceeds, $276.9 million was contributed to The Standard, of which $267.9
million was used to retire obligations to policyholders arising out of The
Standard's conversion to a stock life company, and $9.0 million was paid in
exchange for ownership of The Standard's non-insurance subsidiaries. The
remaining
12
<PAGE>
$59.6 million was retained by StanCorp for general corporate purposes (see "--
Liquidity and Capital Resources--Financing"). The shares of common stock
issued in the IPO were in addition to 18.7 million shares of StanCorp common
stock distributed to The Standard policyholders, pursuant to the Plan, in
exchange for their membership interests in The Standard. The costs incurred
and expensed in 1999 and 1998 related to the reorganization totaled $4.5
million and $6.1 million, respectively, and are included in the financial
statements as an extraordinary item. There are no additional reorganization
costs to be incurred.
On the completion of its reorganization, The Standard established a closed
block for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. The Standard
allocated to the closed block an amount of assets expected to produce cash
flows which, together with future revenues from the policies included in the
closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding) if the experience underlying such dividend scales
including the portfolio interest rate continues. These assets totaled $599.8
million at December 31, 1999, and are for the benefit of the policies in the
closed block.
The contribution to income before Federal income taxes and extraordinary
item from the closed block is reported as a single line item in the
consolidated statements of income and comprehensive income. Accordingly, all
components of revenues, benefits and expenses for the closed block are shown
as a net amount under the caption "Contribution from closed block". Federal
income tax expense applicable to the closed block is reflected as a component
of total tax expense. Reporting of the contribution from the closed block as a
single line item results in material reductions in the respective line items
in the consolidated statements of income and comprehensive income while having
no effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities". Management believes that a better
understanding of the business results when closed block amounts are presented
on a combined basis as if the closed block had not been established. Such
presentation does not affect the Company's reported net income. Accordingly,
the combined presentation set forth below includes revenues and expenses
associated with policies included in the closed block for the years ended
December 31.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Revenues:
Premiums................................... $ 959.2 $ 892.8 $ 827.5
Net investment income...................... 337.6 323.1 303.2
Net realized investment gains.............. 0.4 11.6 11.8
Other...................................... 3.0 3.4 2.6
-------- -------- --------
Total revenues........................... 1,300.2 1,230.9 1,145.1
-------- -------- --------
Benefits and expenses:
Policyholder benefits...................... 904.5 875.3 831.2
Operating expenses......................... 201.3 185.6 161.3
Commissions................................ 71.2 65.6 64.0
Net increase in deferred policy acquisition
costs..................................... (0.2) (4.2) (6.7)
-------- -------- --------
Total benefits and expenses.............. 1,176.8 1,122.3 1,049.8
-------- -------- --------
Income before Federal income taxes and
extraordinary item.......................... $ 123.4 $ 108.6 $ 95.3
======== ======== ========
</TABLE>
13
<PAGE>
Consolidated Results of Operations
Premiums
Premiums, which include policy and contract charges, increased $66.4
million, or 7.4%, in 1999 compared to 1998, and $65.3 million, or 7.9%, in
1998 compared to 1997. The increases resulted primarily from growth in group
insurance premiums of $71.1 million in 1999 compared to 1998, and $67.4
million in 1998 compared to 1997. Partially offsetting these increases were
decreases in individual insurance premiums of $7.3 million in 1999 compared to
1998, and $4.9 million in 1998 compared to 1997 (See "--Selected Segment
Information").
Net Investment Income
Net investment income increased $14.5 million, or 4.5%, in 1999 compared to
1998, and $19.9 million, or 6.6%, in 1998 compared to 1997. The increases were
the result of an increase in average invested assets of 6.9% to $4.34 billion
in 1999 from $4.06 billion in 1998, and a 7.7% increase in 1998 from $3.77
billion in 1997. Partially offsetting the effect of the increase in average
invested assets was a decrease in the portfolio yields for both fixed maturity
securities and mortgage loans, which resulted from turnover of investments
acquired in periods with higher yields. The portfolio yield for fixed maturity
securities decreased to 6.94% at December 31, 1999, from 7.05% at December 31,
1998 and 7.21% at December 31, 1997. The portfolio yield for mortgage loans
decreased to 8.37% at December 31, 1999, from 8.70% at December 31, 1998 and
9.13% at December 31, 1997. Portfolio yields may increase or decrease in the
future depending on changes in the overall interest rate environment and other
factors.
Although the Company's net investment income fluctuates with changes in the
overall interest rate environment, these fluctuations are offset, in part, by
inverse fluctuations in newly established reserve liabilities due to the use
of current interest rate assumptions in discounting those reserve liabilities.
Net Realized Investment Gains
Net realized gains and losses occur primarily as a result of dispositions of
the Company's invested assets in the regular course of investment management.
The sale of real estate holdings contributed net realized investment gains of
$3.2 million, $6.0 million and $6.3 million in 1999, 1998, and 1997,
respectively. Also in 1999 $4.3 million in losses were recognized on the sale
of fixed maturity securities. Dispositions of invested assets and associated
gains or losses may or may not continue into the future.
Policyholder Benefits
Policyholder benefits, including policyholder dividends and interest paid on
policyholder funds, increased $29.2 million, or 3.3%, in 1999 compared to
1998, and $44.1 million, or 5.3%, in 1998 compared to 1997. The increases for
both periods primarily related to the growth in group insurance business,
offset in part by improvements in the group insurance benefit ratios due to
favorable claims experience in the latter parts of both 1999 and 1998. Because
benefit ratios are heavily affected by actual claims experience, the
improvements in the benefit ratio may or may not continue in the future. (See
"--Selected Segment Information ".)
Operating Expenses
Operating expenses increased $15.7 million, or 8.5%, in 1999 compared to
1998, and $24.3 million, or 15.1%, in 1998 compared to 1997. Operating
expenses for both periods increased primarily due to growth in the Group
Insurance segment, as evidenced by premium growth. (See "--Selected Segment
Information".) Year 2000 computer system remediation and replacement expenses
of $2.2 million, $7.6 million, and $3.7 million for 1999, 1998 and 1997,
respectively, also contributed to the increases.
Commissions
Commissions increased $5.6 million, or 8.5%, in 1999 compared to 1998, and
$1.6 million, or 2.5%, in 1998 compared to 1997. Commissions generally
fluctuate with premiums, however not directly as commissions
14
<PAGE>
on new sales tend to be at higher rates than for renewals. The increases for
both periods related to premium growth for those same periods of 7.4% and
7.9%, respectively.
Net Increase in Deferred Policy Acquisition Costs
Declines in new sales and a slight decrease in persistency for the
Individual Insurance segment resulted in an increase in net expense related to
deferred policy acquisition costs of $4.0 million in 1999 compared to 1998,
and $2.5 million in 1998 compared to 1997.
Federal Income Taxes
The Company's provision for Federal income taxes will differ from the
amounts calculated at the corporate Federal tax rate primarily due to
permanent differences, including nontaxable investment income and tax credits.
The effective Federal income tax rates for 1999, 1998 and 1997 were 31.6%,
30.4% and 32.9%, respectively, compared to the corporate Federal tax rate of
35.0% for each of these years. In addition to the differences described above,
the 1999 and 1998 effective tax rates are less than the corporate Federal tax
rate primarily due to adjustments related to the resolution of uncertainties
provided for in prior years. See Item 8, "Financial Statements and
Supplementary Data--Notes to Consolidated Financial Statements".
Income Before Extraordinary Item
Income before extraordinary item increased $8.8 million, or 11.6%, in 1999
compared to 1998, and $11.7 million, or 18.3%, in 1998 compared to 1997. The
increases resulted primarily from business growth and favorable claims
experience in the Group Insurance segment. These increases were partially
offset by a decrease in net realized investment gains to $0.4 million in 1999
from $11.6 million in 1998.
Selected Segment Information
The following table sets forth selected segment information for the years
indicated:
<TABLE>
<CAPTION>
At or for the Year Ended
December 31,
---------------------------
1999 1998 1997
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Revenues:
Group Insurance segment.......................... $1,007.0 $ 933.1 $ 851.9
Retirement Plans segment......................... 66.5 69.1 66.0
Individual Insurance segment..................... 209.0 221.1 221.2
Other............................................ 17.7 7.6 6.0
-------- -------- --------
Total revenues................................. $1,300.2 $1,230.9 $1,145.1
======== ======== ========
Income (loss) before Federal income taxes and
extraordinary item:
Group Insurance segment.......................... $ 99.6 $ 83.6 $ 64.5
Retirement Plans segment......................... (2.7) 0.4 1.1
Individual Insurance segment..................... 12.1 19.2 24.2
Other............................................ 14.4 5.4 5.5
-------- -------- --------
Total income before Federal income taxes and
extraordinary item............................ $ 123.4 $ 108.6 $ 95.3
======== ======== ========
Reserves:(1)
Group Insurance segment.......................... $1,578.8 $1,409.7 $1,260.4
Retirement Plans segment......................... 655.3 651.2 637.7
Individual Insurance segment..................... 1,566.0 1,483.5 1,443.4
-------- -------- --------
Total reserves................................. $3,800.1 $3,544.4 $3,341.5
======== ======== ========
</TABLE>
- --------
(1) Reserves are comprised of future policy benefits and claims and other
policyholder funds.
15
<PAGE>
Group Insurance Segment
The Group Insurance segment markets long and short term disability, life,
accidental death and dismemberment, and dental insurance. As the largest of
the Company's three segments, Group Insurance premiums accounted for 89.2%,
87.9% and 86.7% of the Company's total premiums for the years ended December
31, 1999, 1998 and 1997, respectively.
Income before Federal income taxes and extraordinary item for the Group
Insurance segment increased $16.0 million, or 19.1%, in 1999 compared to 1998,
following an increase of $19.1 million, or 29.6%, in 1998 compared to 1997.
The increases were primarily the result of business growth and favorable
claims experience, which experience may or may not continue in future periods.
The following table sets forth selected financial data for this segment for
the periods indicated:
<TABLE>
<CAPTION>
At or for the Year Ended
December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in millions)
<S> <C> <C> <C>
Revenues:
Premiums................................ $ 855.6 $ 784.5 $ 717.1
Net investment income................... 151.8 143.7 131.4
Net realized investment gains (losses).. (3.3) 2.5 1.0
Other................................... 2.9 2.4 2.4
--------- --------- ---------
Total revenues........................ 1,007.0 933.1 851.9
--------- --------- ---------
Benefits and expenses:
Policyholder benefits................... 706.6 666.5 625.5
Operating expenses...................... 147.0 134.4 116.7
Commissions............................. 56.8 50.0 47.2
Net increase in deferred policy
acquisition costs...................... (3.0) (1.4) (2.0)
--------- --------- ---------
Total benefits and expenses........... 907.4 849.5 787.4
--------- --------- ---------
Income before Federal income taxes and
extraordinary item....................... $ 99.6 $ 83.6 $ 64.5
========= ========= =========
Benefit ratio (% of premiums)............. 82.6% 85.0% 87.2%
Operating expense ratio (% of premiums)... 17.2 17.1 16.3
Persistency (% of premiums)............... 86.0 84.8 86.1
Life insurance in force................... $99,418.9 $81,039.7 $74,798.3
</TABLE>
Premiums increased $71.1 million, or 9.1%, in 1999 compared to 1998, and
$67.4 million, or 9.4%, in 1998 compared to 1997. The increases included
premium growth for group long term disability products of 5.8% in 1999
compared to 1998, and 4.3% in 1998 compared to 1997. The remaining increases
were primarily attributable to increases in group life insurance premiums,
which were primarily the result of improved persistency and expanded
distribution.
Net investment income increased $8.1 million, or 5.6%, in 1999 compared to
1998, and $12.3 million, or 9.4%, in 1998 compared to 1997, respectively. The
increase was due to an increase in average assets supporting this segment,
which was partially offset by a decrease in the portfolio yield. (See "--
Consolidated Results of Operations--Net Investment Income".)
Policyholder benefits increased $40.1 million, or 6.0%, in 1999 compared to
1998, and $41.0 million, or 6.6%, in 1998 compared to 1997. The increases were
primarily a result of business growth, as evidenced by growth in premiums for
these periods. Offsetting the impact of business growth was an improvement in
the benefit ratio to 82.6% in 1999 from 85.0% in 1998, and 87.2% in 1997. The
1999 and 1998 benefit ratios reflect favorable claims experience in the latter
parts of each of those years. Policyholder benefits for 1997 were negatively
impacted by adverse claims experience on a few large long term disability
cases. In response, management increased renewal rates on those cases and
modified underwriting practices. Because the benefit ratio is heavily affected
by actual claims experience, the improvements in the benefit ratio may or may
not continue in the future.
16
<PAGE>
Operating expenses increased $12.6 million, or 9.4%, in 1999 over 1998, and
$17.7 million, or 15.2%, in 1998 over 1997. The increases were due in part to
business growth for the same periods as discussed above, and the opening of
five sales offices in 1999. Operating expenses proportional to premiums have
remained relatively stable for the years ended December 31, 1999, 1998 and
1997.
Retirement Plans Segment
The Retirement Plans segment offers full-service 401(k) and other pension
plan products and services. The loss before Federal income taxes and
extraordinary item in 1999 was $2.7 million, compared to income of
$0.4 million and $1.1 million in 1998 and 1997, respectively. Management
believes that profitability in this segment depends upon significant increases
in assets under management in future years to achieve economies of scale.
Separate account assets under management grew 48.4%, 38.3%, and 49.7% in 1999,
1998, and 1997, respectively. The following table sets forth selected
financial data for the Retirement Plans segment for the years indicated:
<TABLE>
<CAPTION>
At or for the Year Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Revenues:
Premiums...................................... $ 16.6 $ 14.0 $ 11.2
Net investment income......................... 50.6 54.0 54.3
Net realized investment gains (losses)........ (0.7) 1.1 0.8
Other......................................... -- -- (0.3)
-------- -------- --------
Total revenues.............................. 66.5 69.1 66.0
-------- -------- --------
Benefits and expenses:
Policyholder benefits......................... 43.0 46.6 47.0
Operating expenses............................ 23.9 20.4 16.5
Commissions................................... 2.3 1.7 1.4
-------- -------- --------
Total benefits and expenses................. 69.2 68.7 64.9
-------- -------- --------
Income (loss) before Federal income taxes and
extraordinary item............................. $ (2.7) $ 0.4 $ 1.1
======== ======== ========
Operating expense ratio (% of average assets
under management).............................. 1.6% 1.7% 1.6%
Assets under management:
General account............................... $ 655.4 $ 631.3 $ 637.7
Separate accounts............................. 992.3 668.5 483.3
-------- -------- --------
Total....................................... $1,647.7 $1,299.8 $1,121.0
======== ======== ========
</TABLE>
Premiums are derived from charges for administrative services on assets
managed in both the general account and separate accounts, and also include
premiums on life contingent annuities. Premiums increased $2.6 million, or
18.6%, in 1999 compared to 1998, and $2.8 million, or 25.0%, in 1998 compared
to 1997. The increases for both years resulted primarily from the growth in
assets under management.
Net investment income decreased $3.4 million, or 6.3%, in 1999 compared to
1998, and $0.3 million, or 0.6%, in 1998 compared to 1997 primarily due to a
decline in portfolio yield (see "--Consolidated Results of Operations--Net
Investment Income"). The profitability of the Retirement Plans segment is, in
part, dependent on the maintenance of targeted interest rate spreads.
Therefore, policyholder benefits (which include interest credited to
policyholders) should generally trend with net investment income. Policyholder
benefits decreased 7.7% in 1999 compared to 1998, and 0.9% in 1998 compared to
1997. The decreases were consistent with the decreases in net investment
income for this segment for these same periods.
17
<PAGE>
Although operating expenses increased $3.5 million, or 17.2%, in 1999
compared to 1998, and $3.9 million, or 23.6%, in 1998 compared to 1997,
operating expenses as a percentage of average assets managed remained
relatively stable at 1.6%, 1.7%, and 1.6% for 1999, 1998 and 1997,
respectively. The primary factor contributing to increased operating expenses
in 1999 was the opening of four field offices. Operating expenses in 1999 and
1998 also were impacted by this segment's conversion of its traditional plans
to daily plans. Daily plans, which allow daily investment directives, are
believed to be more attractive to customers than traditional plans, which only
allow quarterly investment directives. The segment completed the conversion of
the traditional plans in 1999 and while efficiencies and cost savings of the
strategy cannot be readily estimated, management believes future expense
savings will be realized.
Individual Insurance Segment
The Individual Insurance segment sells life insurance, disability insurance,
and annuities to individuals. In the individual insurance market, a growing
percentage of consumers are now reaching 45 years of age or older and are
shifting their focus from loss avoidance to asset accumulation. Moreover, the
strong stock market has increased competition from non-traditional individual
life insurance and annuities such as variable life and variable annuity
products.
Income before Federal income taxes and extraordinary item for this segment
declined $7.1 million in 1999 compared to 1998, and $5.0 million in 1998
compared to 1997. The overall market considerations discussed above were the
primary causes of the decreases. The following table sets forth selected
financial data for the Individual Insurance segment for the years indicated:
<TABLE>
<CAPTION>
At or for the Year Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Revenues:
Premiums....................................... $ 87.0 $ 94.3 $ 99.2
Net investment income.......................... 121.5 124.0 119.9
Net realized investment gains.................. 0.5 1.8 1.7
Other.......................................... -- 1.0 0.4
-------- -------- --------
Total revenues............................... 209.0 221.1 221.2
-------- -------- --------
Benefits and expenses:
Policyholder benefits.......................... 154.9 162.2 158.7
Operating expenses............................. 27.1 28.6 27.6
Commissions.................................... 12.1 13.9 15.4
Net (increase) decrease in deferred policy
acquisition costs............................. 2.8 (2.8) (4.7)
-------- -------- --------
Total benefits and expenses.................. 196.9 201.9 197.0
-------- -------- --------
Income before Federal income taxes and
extraordinary item.............................. $ 12.1 $ 19.2 $ 24.2
======== ======== ========
Operating expense ratio (% of premiums).......... 31.1% 30.3% 27.8%
Individual life persistency (% of face amount)... 88.6 89.5 90.9
Life insurance in force.......................... $7,645.9 $7,952.0 $7,732.9
</TABLE>
Premiums decreased $7.3 million, or 7.7%, in 1999 compared to 1998, and $4.9
million, or 4.9% in 1998 compared to 1997. The decrease resulted primarily
from declining demand for life insurance due to the maturing individual
insurance market.
Net investment income decreased $2.5 million, or 2.0%, in 1999 compared to
1998, and increased $4.1 million, or 3.4%, in 1998 compared to 1997. The
changes reflect similar changes in average invested assets supporting this
segment, as well as fluctuations in market prices for those same assets.
18
<PAGE>
Policyholder benefits decreased $7.3 million, or 4.5%, in 1999 compared to
1998, and increased $3.5 million, or 2.2%, in 1998 compared to 1997. The
changes are consistent with management's expectations given fluctuations in
premiums and net investment income for the same periods.
Operating expenses decreased $1.5 million, or 5.2% in 1999 compared to 1998,
and increased $1.0 million, or 3.6%, in 1998 compared to 1997. When taken as a
percent of premiums, operating expenses were 31.1%, 30.3% and 27.8% in 1999,
1998 and 1997, respectively.
Declines in new sales and a slight decrease in persistency for the segment
resulted in an increase in net expense related to deferred policy acquisition
costs of $5.6 million in 1999 compared to 1998, and $1.9 million in 1998
compared to 1997.
Other
Other businesses primarily include return on capital held by the holding
company, income from StanCorp Mortgage Investors and gains and losses related
to real estate investments owned by The Standard.
Income before Federal income taxes and extraordinary item for the years
ended December 31, 1999, 1998 and 1997 was $14.4 million, $5.4 million and
$5.5 million, respectively. Net realized investment gains for these same
periods were $3.9 million, $6.2 million and $8.3 million, respectively.
Dispositions of invested assets, and therefore associated gains and losses,
may or may not continue into the future.
Liquidity and Capital Resources
Operating Cash Flows
Operating cash inflows consist primarily of premiums, annuity deposits and
net investment income. Operating cash outflows consist primarily of benefits
to policyholders and beneficiaries, operating expenses, commissions and taxes.
Investing Cash Flows
Investing cash inflows consist primarily of the proceeds from sales or
maturities of investments. Investing cash outflows consist primarily of
payments for investments acquired. Since future benefit payments are
principally intermediate- and long-term obligations, the Company's investments
are predominantly intermediate- and long-term fixed-rate instruments, such as
fixed maturity securities and mortgage loans, which are expected to provide
sufficient cash flow to cover these obligations. The nature and quality of
various types of investments purchased by The Standard must comply with
statutes and regulations imposed by Oregon and other states in which The
Standard is licensed.
It is management's objective to generally align the cash flow
characteristics of assets and liabilities to ensure that the Company's
financial obligations can be met under a wide variety of economic conditions.
Most of The Standard's policy liabilities result from long term disability
reserves that have proven to be very stable over time, participating
individual life insurance products and other life insurance and annuity
products on which interest rates can be adjusted periodically, and products
associated with the separate accounts. Annual cash flow scenario testing is
used to assess interest rate risk and to permit The Standard's investment
policy to be modified whenever necessary to address changing economic
environments. See "--Interest Rate Risk Management".
The market values of the Company's investments vary with changing economic
and market conditions and interest rates. The Company is subject to the risk
of default on principal and interest payments by the issuers of the fixed
maturity securities it owns. Although almost all of the fixed maturity
securities are investment-grade and the Company believes it maintains prudent
issuer diversification, a major economic downturn could result in issuer
defaults. Since fixed maturity securities represent 50.9% of the Company's
total general account invested assets at December 31, 1999, such defaults
could materially adversely affect the Company's business, financial condition
and results of operations.
19
<PAGE>
Policyholders or claimants may not withdraw from The Standard's large block
of disability reserves. Instead, claim payments are issued monthly over
periods that may extend for many years. This holding of stable long-term
reserves makes it possible for The Standard to allocate a greater portion of
its assets to long-term commercial mortgage loans, a benefit many other
insurance companies do not experience.
At December 31, 1999, mortgage loans represented 42.9% of the total general
account invested assets and were collateralized by properties located in the
Central region representing 22.4% of the portfolio, the Eastern region
representing 11.3%, and the Western region representing 66.3%. Of the total
mortgage loan portfolio, 41.5% of the collateralized properties were located
in the state of California. The Standard generally does not require earthquake
insurance for properties on which it makes mortgage loans. The most
significant types of collateralized properties in the mortgage loan portfolio
include retail properties, representing 48.5% of the portfolio, industrial
properties, representing 26.5%, and office properties, representing 17.4%. The
remaining 7.6% balance of properties in the portfolio include commercial,
apartment, residential and agricultural properties. The Company's mortgage
loans face both delinquency and default risk. The delinquency and loss
performance of The Standard's mortgage loan portfolio has consistently
outperformed the industry averages, as reported by the American Council of
Life Insurance, by wide margins. At December 31, 1999, there were no loans
either delinquent or in process of foreclosure. The performance of the
Company's mortgage loan portfolio, however, may fluctuate in the future.
Should the delinquency rate of the Company's mortgage loan portfolio increase,
the increase could have a material adverse effect on the Company's business,
financial condition and results of operations.
At December 31, 1999, the Company had outstanding commitments to fund or
acquire various assets totaling $101.2 million. Such commitments were
principally mortgage loans with interest rates ranging from 7.50% to 10.50%.
The Company's capital expenditures are estimated to be $8.4 million for 2000.
Financing Cash Flows
Financing cash flows consist primarily of policyholder fund deposits and
withdrawals, borrowings and repayments on lines of credit, issuance and
repurchase of common stock, and dividends paid on common stock.
The Company has available lines of credit totaling $110 million, including a
$100 million unsecured revolving line of credit, which expire during the first
half of 2000 and are expected to be renewed. Under the terms of the $100
million line of credit agreement, the Company is subject to customary
covenants, including limitations on indebtedness, minimum retained earnings
and minimum claims paying ability ratings. Such covenants could have the
effect of limiting StanCorp's ability to pay dividends to its shareholders. At
December 31, 1999 there were no outstanding borrowings under the credit
agreements.
On November 1, 1999, the board of directors of StanCorp authorized the
repurchase of up to 1.7 million shares of StanCorp's common stock to be
effected before November 1, 2000. As of December 31, 1999, 1.3 million shares
had been repurchased at a total cost of $34.2 million. On February 23, 2000
the board of directors of StanCorp authorized the repurchase of up to 1.6
million shares of StanCorp's common stock to be effected before February 23,
2001. Both repurchases are to be effected in the open market or in negotiated
transactions in compliance with the safeharbor provisions of Rule 10b-18 under
regulations of the Securities Exchange Act of 1934.
StanCorp's ability to pay dividends to its shareholders and meet its
obligations substantially depends upon the receipt of dividends from The
Standard. The Standard's ability to pay dividends to StanCorp is regulated
under Oregon law. Under Oregon law, The Standard may pay dividends only from
the earned surplus arising from its business. It also must receive the prior
approval of the Director of the Oregon Department of Consumer and Business
Services (the "Department") to pay a dividend, if such dividend would exceed
certain statutory limitations. The current statutory limitation is the greater
of (a) 10% of The Standard's combined capital and surplus as of December 31st
of the preceding year or (b) the net gain from operations after dividends to
20
<PAGE>
policyholders and Federal income taxes and before capital gains or losses for
the twelve-month period ending on the December 31st last preceding. In each
case the limitation must be determined under statutory accounting practices.
Oregon law gives the Department broad discretion to disapprove requests for
dividends in excess of these limits. Based on its statutory results, The
Standard paid a $50.0 million dividend to StanCorp effective January 31, 2000,
and will be permitted to pay an additional $65.7 million in dividends to
StanCorp in 2000 without obtaining the Department's approval. The Standard
would have been permitted to pay $93.9 million, $38.7 million and $26.5
million in 1999, 1998 and 1997, respectively, without obtaining the
Department's approval. The foregoing limitations on dividends would not apply
to any dividends to StanCorp from the non-insurance subsidiaries. Combined net
income of the non-insurance subsidiaries, before elimination of intercompany
amounts, was $6.2 million, $4.8 million and $4.9 million in 1999, 1998 and
1997, respectively.
Risk-Based Capital
The National Association of Insurance Commissioners has implemented a tool
to aid in the assessment of the statutory capital and surplus of life and
health insurers. This tool, known as Risk-Based Capital ("RBC"), augments
statutory minimum capital and surplus requirements. The RBC system employs a
risk-based formula that applies prescribed factors to the various risk
elements inherent in an insurer's business to arrive at minimum capital
requirements in proportion to the amount of risk assumed by the insurer. At
December 31, 1999, The Standard's RBC level was significantly in excess of
that which would require corrective action by The Standard or regulatory
agencies.
Interest Rate Risk Management
The Company manages interest rate risk, in part, through asset/liability
duration analyses. As part of this strategy, detailed actuarial models of the
cash flows associated with each type of insurance liability and the financial
assets related to these liabilities are generated under various interest rate
scenarios. These actuarial models include those used to support the statutory
Statement of Actuarial Opinion required by insurance regulators. According to
presently accepted actuarial standards of practice, The Standard's current
reserves and related items make adequate provision for the anticipated cash
flows required to meet The Standard's contractual obligations and related
expenses.
The Company does not currently use derivatives, such as interest rate swaps,
currency swaps, futures or options, to manage interest rate risk or for
speculative purposes, but may use such instruments to manage interest rate
risk in the future. In the normal course of business, the Company commits to
fund mortgage loans generally up to 60 days in advance.
The Company's financial instruments are exposed to financial market
volatility and potential disruptions in the market that may result in certain
financial instruments becoming less valuable. The Company's primary market
risk is interest rate risk, which exposes the Company's earnings and cash
flows and the fair value of its financial assets. In accordance with Item 305
of Regulation S-K of the Securities and Exchange Commission, the Company has
analyzed the estimated loss in fair value of certain market sensitive
financial assets held at December 31, 1999 and 1998, given a hypothetical ten
percent increase in interest rates, and related qualitative information on how
the Company manages interest rate risk.
The interest rate sensitivity analysis is based upon the Company's fixed
maturity securities, mortgage loans and collateral loans held at December 31,
1999 and 1998. For the fixed maturity securities portfolio, the analysis
estimates the reduction in fair value of the portfolio utilizing a duration-
based analysis that assumes a hypothetical ten percent increase in treasury
rates. For mortgage and collateral loan portfolios, the analysis estimates the
reduction in fair value by discounting expected cash flows at theoretical
treasury spot rates in effect at December 31, 1999 and 1998. These analyses
discount cash flows using an average of possible discount rates to provide for
the potential effects of interest rate volatility. These analyses do not
provide for the possibility of non-parallel shifts in the yield curve, which
would involve discount rates for different maturities being increased by
different amounts. The actual decrease in fair value of the Company's
financial assets that would have resulted
21
<PAGE>
from a ten percent increase in interest rates could be significantly different
from that estimated by the model. The hypothetical reduction in the fair value
of the Company's financial assets that results from the model is estimated to
be $124.4 million and $58.9 million at December 31, 1999 and 1998,
respectively.
Insolvency Assessments
Insolvency regulations exist in many of the jurisdictions in which The
Standard is doing business. Such regulations may require life insurance
companies within the jurisdiction to participate in guaranty associations.
These associations levy assessments against their members for the purpose of
paying benefits due to policyholders of impaired or insolvent life insurance
companies. Association assessments levied against The Standard from January 1,
1997 through December 31, 1999 aggregated $2.3 million. At December 31, 1999,
The Standard maintained a reserve of $1.0 million for future assessments in
respect of currently impaired, insolvent or failed insurers.
Year 2000
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that include date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions and engage in normal business activities.
At the time of this release, the Company had not experienced interruptions
from the Year 2000 issue and is not aware of any material interruptions to any
of its significant suppliers or customers. While management continues to
believe that the Company is not at significant risk, the possibility still
exists that failures or incompatibilities may arise in the future.
Accordingly, the Company continues to monitor significant systems, suppliers
and customers in an effort to minimize the potential impact of this possible,
but unlikely, circumstance.
Litigation
See Item 8, "Financial Statements and Supplementary Data--Notes to
Consolidated Financial Statements".
New and Adopted Accounting Pronouncements
See Item 8, "Financial Statements and Supplementary Data--Notes to
Consolidated Financial Statements".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Interest Rate Risk Management".
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. 24
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997.................................. 25
Consolidated Balance Sheets at December 31, 1999 and 1998................ 26
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................ 27
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... 28
Notes to Consolidated Financial Statements............................... 29
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
StanCorp Financial Group, Inc.
Portland, Oregon
We have audited the accompanying consolidated balance sheets of StanCorp
Financial Group, Inc. and subsidiaries (formerly known as Standard Insurance
Company prior to the April 21, 1999 reorganization discussed in Note 1) as of
December 31, 1999 and 1998, and the related consolidated statements of income
and comprehensive income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. 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 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, such consolidated financial statements present fairly, in
all material respects, the financial position of StanCorp Financial Group,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Portland, Oregon
February 2, 2000 (February 23, 2000 as to Note 14)
24
<PAGE>
STANCORP FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In millions--except share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Premiums.......................................... $ 914.4 $ 892.8 $ 827.5
Net investment income............................. 306.7 323.1 303.2
Net realized investment gains..................... 0.5 11.6 11.8
Contribution from closed block.................... 9.9 -- --
Other............................................. 3.0 3.4 2.6
------- ------- -------
Total........................................... 1,234.5 1,230.9 1,145.1
------- ------- -------
Benefits and expenses:
Policyholder benefits............................. 756.0 783.8 736.0
Interest paid on policyholder funds............... 88.0 91.5 95.2
Operating expenses................................ 198.7 185.6 161.3
Commissions....................................... 69.7 65.6 64.0
Net increase in deferred policy acquisition
costs............................................ (1.3) (4.2) (6.7)
------- ------- -------
Total........................................... 1,111.1 1,122.3 1,049.8
------- ------- -------
Income before Federal income taxes and extraordinary
item............................................... 123.4 108.6 95.3
Federal income taxes................................ 39.0 33.0 31.4
------- ------- -------
Income before extraordinary item.................... 84.4 75.6 63.9
Extraordinary item, net of tax...................... 4.5 6.1 --
------- ------- -------
Net income.......................................... 79.9 69.5 63.9
------- ------- -------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available-
for-sale......................................... (106.2) 40.1 22.3
Adjustment for realized gains..................... (5.6) (2.3) (1.7)
------- ------- -------
Total........................................... (111.8) 37.8 20.6
------- ------- -------
Comprehensive income (loss)......................... $ (31.9) $ 107.3 $ 84.5
======= ======= =======
Net income per share (pro forma):
Basic............................................. $ 2.37
Diluted........................................... 2.37
</TABLE>
<TABLE>
<S> <C>
Weighted-average shares outstanding (pro forma):
Basic............................................................. 33,630,692
Diluted........................................................... 33,674,367
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
STANCORP FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In millions--except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
------
Investments:
Investment securities..................................... $2,064.7 $2,214.2
Mortgage loans............................................ 1,779.1 1,708.1
Real estate, net.......................................... 98.5 93.0
Policy loans.............................................. 20.5 111.0
Collateral loans.......................................... -- 71.2
-------- --------
Total investments....................................... 3,962.8 4,197.5
Cash and cash equivalents................................... 38.9 60.4
Deferred policy acquisition costs........................... 54.2 114.9
Premiums and other receivables.............................. 75.3 73.2
Accrued investment income................................... 53.3 53.5
Property and equipment, net................................. 69.0 65.9
Other assets................................................ 11.5 45.0
Separate account assets..................................... 992.3 668.5
Closed block assets......................................... 599.8 --
-------- --------
TOTAL................................................... $5,857.1 $5,278.9
======== ========
LIABILITIES AND EQUITY
----------------------
Liabilities:
Future policy benefits and claims......................... $1,643.4 $2,065.2
Other policyholder funds.................................. 1,538.6 1,479.2
Deferred tax liabilities.................................. 66.5 106.0
Other liabilities......................................... 136.9 120.7
Separate account liabilities.............................. 992.3 668.5
Closed block liabilities.................................. 639.5 --
-------- --------
Total liabilities....................................... 5,017.2 4,439.6
-------- --------
Commitments and Contingencies
Equity:
Preferred stock, 100,000,000 shares authorized; none
issued or outstanding.................................... -- --
Common stock, no par, 300,000,000 shares authorized;
32,774,098 shares issued and 32,706,394 outstanding...... 819.7 --
Accumulated other comprehensive income (loss)............. (37.6) 74.2
Retained earnings......................................... 57.8 765.1
-------- --------
Total equity............................................ 839.9 839.3
-------- --------
TOTAL................................................... $5,857.1 $5,278.9
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
STANCORP FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions--except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
------------------ Comprehensive Retained Shareholders'
Shares Amount Income (Loss) Earnings Equity
---------- ------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... -- $ -- $ 15.8 $ 631.7 $ 647.5
Net income.............. -- -- -- 63.9 63.9
Other comprehensive
income, net of tax..... -- -- 20.6 -- 20.6
---------- ------ ------- ------- -------
Balance, December 31,
1997................... -- -- 36.4 695.6 732.0
---------- ------ ------- ------- -------
Net income.............. -- -- -- 69.5 69.5
Other comprehensive
income, net of tax..... -- -- 37.8 -- 37.8
---------- ------ ------- ------- -------
Balance, December 31,
1998................... -- -- 74.2 765.1 839.3
---------- ------ ------- ------- -------
Reorganization.......... 18,718,015 515.3 -- (783.2) (267.9)
Net income.............. -- -- -- 79.9 79.9
Other comprehensive
loss, net of tax....... -- -- (111.8) -- (111.8)
Common stock:
Initial public
offering............. 15,209,400 336.5 -- -- 336.5
Repurchase............ (1,277,931) (34.2) -- -- (34.2)
Sales to employees.... 56,910 1.1 -- -- 1.1
Restricted grant...... -- 1.0 -- -- 1.0
Dividends declared on
common stock........... -- -- -- (4.0) (4.0)
---------- ------ ------- ------- -------
Balance, December 31,
1999................... 32,706,394 $819.7 $ (37.6) $ 57.8 $ 839.9
========== ====== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
STANCORP FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Operating:
Net income.................................... $ 79.9 $ 69.5 $ 63.9
Adjustments to reconcile net income to net
cash provided by operating activities:
Net realized investment gains............... (0.5) (11.6) (11.8)
Depreciation and amortization............... 25.1 22.3 22.1
Deferral of policy acquisition costs........ (15.9) (17.8) (18.9)
Deferred income taxes....................... 35.1 34.3 2.1
Changes in other assets and liabilities:
Trading securities......................... (23.9) (25.4) --
Receivables and accrued income............. (10.1) (6.6) (1.1)
Future policy benefits and claims.......... 160.0 189.8 182.9
Closed block, net.......................... (10.6) -- --
Other, net................................. 43.6 (27.8) 0.2
------- ------- -------
Net cash provided by operating
activities............................... 282.7 226.7 239.4
------- ------- -------
Investing:
Proceeds from investments sold, matured, or
repaid:
Fixed maturity securities--available-for-
sale....................................... 241.0 117.0 236.3
Fixed maturity securities--held-to-
maturity................................... -- 9.1 23.0
Mortgage loans.............................. 298.5 334.9 302.5
Real estate................................. 10.9 20.3 22.5
Other investments........................... -- -- 19.5
Costs of investments acquired:
Fixed maturity securities--available-for-
sale....................................... (444.0) (221.0) (429.8)
Fixed maturity securities--held-to-
maturity................................... -- -- (21.4)
Mortgage loans.............................. (500.1) (440.9) (394.7)
Real estate................................. (15.4) (6.3) (6.3)
Other investments........................... (18.1) (1.4) --
Property and equipment........................ (8.7) (7.8) (8.3)
------- ------- -------
Net cash used in investing activities..... (435.9) (196.1) (256.7)
------- ------- -------
Financing:
Policyholder fund deposits.................... 615.5 379.4 357.1
Policyholder fund withdrawals................. (522.7) (366.4) (347.0)
Borrowings on line of credit.................. 41.9 42.5 76.0
Repayments on line of credit.................. (41.9) (42.5) (76.0)
Other notes payable........................... 7.4 -- --
Issuance of common stock...................... 337.6 -- --
Repurchase of common stock.................... (34.2) -- --
Dividends paid on common stock................ (4.0) -- --
Payments to eligible policyholders upon
reorganization............................... (267.9) -- --
------- ------- -------
Net cash provided by financing
activities............................... 131.7 13.0 10.1
------- ------- -------
Increase (decrease) in cash and cash
equivalents.................................... (21.5) 43.6 (7.2)
Cash and cash equivalents, beginning of year.... 60.4 16.8 24.0
------- ------- -------
Cash and cash equivalents, end of year.......... $ 38.9 $ 60.4 $ 16.8
======= ======= =======
Supplemental disclosure of cash flow
information:
Cash paid (received) during the year for:
Interest.................................... $ 90.0 $ 91.6 $ 95.0
Income taxes................................ (7.0) 13.8 43.4
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and principles of consolidation. On April 21, 1999, pursuant to
an order by the Director of the Oregon Department of Consumer and Business
Services (the "Department") approving the Plan of Reorganization dated
September 28, 1998, as amended on December 14, 1998 (the "Plan"), Standard
Insurance Company ("The Standard") converted from a mutual life insurance
company to a stock life insurance company and became a wholly owned subsidiary
of StanCorp Financial Group, Inc. ("StanCorp"), an Oregon corporation. Also,
on April 21, 1999, StanCorp completed an initial public offering (the "IPO")
of 15.2 million shares (including 1.3 million shares subsequently sold
pursuant to the underwriters' over-allotment option) of its common stock at
the IPO price of $23.75 per share. The shares of common stock issued in the
IPO were in addition to 18.7 million shares of StanCorp common stock
distributed to The Standard policyholders, pursuant to the Plan, in exchange
for their membership interests in The Standard.
StanCorp was incorporated under the laws of Oregon in 1998. StanCorp was
specifically organized as a parent holding company for its subsidiaries The
Standard, StanCorp Mortgage Investors, LLC, StanCorp Real Estate, LLC and
Standard Management, Inc. StanCorp is based in Portland, Oregon, and through
its subsidiaries has operations throughout the United States.
StanCorp's principal subsidiary, The Standard, underwrites group and
individual disability, life and annuity products and dental insurance for
groups. The Standard is domiciled in Oregon and licensed in 49 states, the
District of Columbia and the U.S. Territory of Guam. The Standard is licensed
for reinsurance only in New York.
StanCorp's other subsidiaries are complementary financial and management
service businesses. The largest of StanCorp's other subsidiaries is StanCorp
Mortgage Investors, LLC, which originates and services mortgage loans for
StanCorp's investment portfolio as well as generating fee income from the
origination and servicing of mortgage loans sold to institutional investors.
The consolidated financial statements include StanCorp Financial Group, Inc.
and its subsidiaries (collectively the "Company"). All significant
intercompany balances and transactions have been eliminated.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and contingent assets and contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The estimates most susceptible to significant
changes are those used in determining the liability for future policy benefits
and claims, deferred policy acquisition costs, and the provision for Federal
income taxes. Changes in such estimates may affect amounts reported in future
periods. Actual results could differ from those estimates.
Investments. Investment securities include fixed maturity and equity
securities. Securities are categorized as held-to-maturity, stated at
amortized cost; trading, stated at fair value with changes in fair value
reflected as net realized investment gains and losses; or available-for-sale,
stated at fair value with net unrealized gains and losses recorded as an
increase or decrease to other comprehensive income or loss.
Mortgage loans are stated at amortized cost less a valuation allowance for
estimated uncollectible amounts.
Real estate held for investment is stated at cost less accumulated
depreciation. Depreciation generally is provided on the straight-line method,
with property lives varying from 30 to 40 years. Accumulated depreciation
totaled $27.0 million and $26.0 million at December 31, 1999 and 1998,
respectively. Real estate acquired in satisfaction of debt is stated at the
lower of cost or fair value less estimated costs to sell.
Policy and collateral loans are stated at their aggregate unpaid principal
balances and are secured by policy cash values.
29
<PAGE>
Investment income is presented net of investment expenses. Net investment
income and realized investment gains (losses) related to separate accounts are
included in the separate account assets and liabilities. For all investments
except investment securities, realized investment gains and losses are
recognized using the specific identification method. For investment
securities, realized investment gains and losses are recognized on a first-in,
first-out basis. For all investments, declines in fair values below amortized
cost are recorded as realized investment losses if the declines are determined
to be other than temporary.
Cash equivalents. Cash equivalents include investments purchased with
original maturities of three months or less.
Deferred policy acquisition costs. Acquisition costs related to the
production of new business have been deferred to accomplish matching against
related future premiums and gross profits. Such costs include commissions,
certain costs of policy issuance and underwriting and certain variable field
office expenses. For group life and health and individual term life insurance
products, the costs are amortized in proportion to expected future premiums.
The amortization periods for these contracts generally range from five to ten
years. For universal life-type policies, individual life insurance policies,
individual deferred annuities and investment-type contracts, the costs are
amortized over periods ranging from 20 to 30 years, in proportion to the
present value of estimated gross profits. The discount rate applied to
expected gross profits is revised for actual changes in rates. Deferred policy
acquisition costs are charged to current earnings to the extent it is
determined that future premiums or gross profits are not adequate to cover
amounts deferred.
The amounts deferred and amortized were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In millions)
<S> <C> <C> <C>
Deferred policy acquisition costs.................. $ 15.9 $ 17.8 $ 18.9
Less: amortization................................. (14.6) (13.6) (12.2)
------ ------ ------
Net increase in deferred policy acquisition
costs........................................... $ 1.3 $ 4.2 $ 6.7
====== ====== ======
</TABLE>
Property and equipment. The following table sets forth the major
classifications of the Company's property and equipment and accumulated
depreciation at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
(In millions)
<S> <C> <C>
Home office properties........................................ $ 89.8 $ 87.8
Office furniture and equipment................................ 52.1 46.5
Leasehold improvements........................................ 3.4 2.3
------ ------
Subtotal.................................................... 145.3 136.6
Less: accumulated depreciation................................ 76.3 70.7
------ ------
Property and equipment, net................................... $ 69.0 $ 65.9
====== ======
</TABLE>
Property and equipment are stated at cost less accumulated depreciation. The
Company provides for depreciation of property and equipment using the
straight-line method over the estimated useful lives, which are generally 40
years for properties, and from three to seven years for equipment.
Depreciation expense for 1999, 1998 and 1997 was $8.5 million, $7.8 million
and $6.7 million, respectively. Non-affiliated tenants leased approximately
43% of the home office properties for the three years ended December 31, 1999.
Income from the leases is included in net investment income.
Separate accounts. Separate account assets and liabilities represent
segregated funds for non-guaranteed account assets held for the exclusive
benefit of contractholders. The activities of the account primarily relate to
contractholder-directed 401(k) contracts. The Standard charges the separate
accounts for asset management fees
30
<PAGE>
and administrative expenses associated with the contracts. Separate account
assets and liabilities are carried at fair value.
Future policy benefits and claims.
The Standard establishes and carries as a liability actuarially determined
reserves that are calculated to meet obligations for future policy benefits
and claims. The reserves are computed at amounts that, with additions from
premiums to be received and with interest on such reserves at certain assumed
rates, are expected to be sufficient to meet The Standard's policy obligations
at their maturities or in the event of an insured's death or disability.
Reserves include unearned premiums, premium deposits, claims reported but not
yet paid, claims incurred but not reported, and claims in the process of
settlement. The Standard's reserves are based on actuarially recognized
methods for developing assumptions for estimating future policy benefits and
claims experience, including an evaluation of interest rates, mortality,
morbidity, persistency and expenses. Reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
Other policyholder funds. Other policyholder funds are liabilities for
universal life-type and investment-type contracts and are based on the policy
account balances including accumulated interest.
Dividends. Certain life insurance policies, including certain policies in
the closed block (see additional discussion of the closed block in Note 2
below), contain dividend payment provisions that enable the policyholder to
participate in the earnings of The Standard. Participating policies, including
those in the closed block, accounted for 3.7%, 4.7% and 5.3% of life insurance
in force at December 31, 1999, 1998 and 1997, respectively, and 15.3%, 18.8%
and 20.6% of life insurance premiums for the years ended December 31, 1999,
1998 and 1997, respectively. Annual policyholder dividends totaled $24.6
million, $24.6 million and $22.2 million for the years ended December 31,
1999, 1998, and 1997, respectively. Annual policyholder dividends, are
determined using dividend scales that are approved annually by The Standard's
board of directors. If, over time, cash flows from the assets allocated to the
closed block and claims and other experience relating to the closed block are,
in the aggregate, more or less favorable than assumed in establishing the
closed block, total dividends paid to the closed block policyholders in the
future may be greater than or less than that which would have been paid to
these policyholders if the dividend scales in effect when the closed block was
established had been continued.
Federal income taxes. The provision for Federal income taxes includes
amounts currently payable and deferred that result from temporary differences
between financial reporting and tax bases of assets and liabilities as
measured by current tax rates and laws. If it is determined more likely than
not that a deferred tax asset will not be realized, a valuation allowance will
be established.
Recognition of premiums and policyholder benefits. Premiums from group life,
group and individual disability, and traditional life insurance contracts are
recognized as revenue when due. Benefits and expenses are matched with
recognized premiums to result in recognition of profits over the life of the
contracts. This match is accomplished by recording a provision for future
policy benefits and unpaid claims and claim adjustment expenses and by
amortizing deferred policy acquisition costs.
Universal life-type and investment-type contract premiums and other policy
fee revenues consist of charges for the cost of insurance, policy
administration and surrender charges assessed during the period. Charges
related to services to be performed are deferred until earned. The amounts
received in excess of premiums and fees are included in other policyholder
funds in the consolidated balance sheets.
Experience rated refunds are computed in accordance with the terms of the
contracts with certain group policyholders and are accounted for as a
reduction of premiums.
Extraordinary item. Expenses incurred in conjunction with the Plan have been
classified as an extraordinary item. These expenses are generally non-
deductible for tax purposes. The pro forma basic and diluted expense for the
extraordinary item was $0.13 per share for the year ended December 31, 1999.
31
<PAGE>
Other comprehensive income. Other comprehensive income consists of the
current increase or decrease in net unrealized investment gains and losses on
securities available-for-sale, net of the related tax effects. Unrealized
gains and losses and the adjustment for realized gains and losses, both gross
and net of tax, were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
(In millions)
<S> <C> <C> <C>
Unrealized gains (losses) on securities available-
for-sale, gross of tax............................ $(163.4) $61.7 $34.3
Less: tax effects.................................. (57.2) 21.6 12.0
------- ----- -----
Unrealized gains (losses) on securities available-
for-sale, net of tax.............................. $(106.2) $40.1 $22.3
======= ===== =====
Adjustment for realized gains, gross of tax........ $(8.6) $(3.5) $(2.6)
Less: tax effects.................................. (3.0) (1.2) (0.9)
------- ----- -----
Adjustment for realized gains, net of tax.......... $(5.6) $(2.3) $(1.7)
======= ===== =====
</TABLE>
Net income per share. Basic net income per share was calculated based on the
weighted-average number of shares outstanding. Diluted net income per share
reflects the potential effects of the restricted stock grant and the exercise
of outstanding options. The weighted-average share and share equivalents
outstanding used to compute the dilutive effect of common stock options
outstanding were computed using the treasury stock method. Pro forma shares
and net income per share are presented as if the IPO had occurred as of
January 1, 1999. Diluted net income per share for the year ended December 31,
1999 was calculated as follows:
<TABLE>
<S> <C>
Net income (in millions)......................................... $ 79.9
==========
Basic weighted-average shares outstanding (pro forma)............ 33,630,692
Stock options.................................................... 24,405
Restricted stock................................................. 19,270
----------
Diluted weighted-average shares outstanding (pro forma).......... 33,674,367
==========
Diluted net income per share (pro forma)......................... $ 2.37
==========
</TABLE>
Reclassification. Certain 1998 and 1997 amounts have been reclassified to
conform to the current year's presentation.
Accounting Pronouncements. Effective July 1, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
and disclosure requirements for derivative instruments, including certain
instruments embedded in other financial instruments, and for hedging
activities. The Company does not have any derivative instruments that meet the
scope of this statement. The statement also allows, on the date of initial
application, an entity to transfer any held-to-maturity securities into the
available-for-sale or trading categories. During 1998, the Company transferred
all held-to-maturity securities with a book value and fair value of
$315.1 million and $335.4 million, respectively, to its available-for-sale
portfolio. The transfer was recorded as an increase to other comprehensive
income of $13.2 million (net of Federal income tax of $7.1 million).
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which establishes accounting requirements for the
capitalization of software costs incurred for the use of the organization. The
Company adopted this pronouncement beginning January 1, 1999. The amortization
period for these costs is approximately three to five years.
32
<PAGE>
2. CLOSED BLOCK
On the completion of its reorganization, The Standard established a closed
block for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. The Standard
allocated to the closed block an amount of assets expected to produce cash
flows which, together with future revenues from the policies included in the
closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding) if the experience underlying such dividend scales
including the portfolio interest rate, continues.
The contribution to income before Federal income taxes and extraordinary
item from the closed block is reported as a single line item in the
consolidated statements of income and comprehensive income. Accordingly, all
components of revenues, benefits and expenses for the closed block are shown
as a net amount under the caption "Contribution from closed block". Federal
income tax expense applicable to the closed block is reflected as a component
of total tax expense. Reporting of the contribution from the closed block as a
single line item results in material reductions in the respective line items
in the consolidated statements of income and comprehensive income while having
no effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities". Such presentation does not affect the
Company's reported net income.
Summarized financial information of the closed block at December 31, 1999
was as follows (in millions):
<TABLE>
<S> <C>
ASSETS
------
Investments:
Investment securities................................................. $220.3
Mortgage loans........................................................ 147.1
Policy loans.......................................................... 90.3
Collateral loans...................................................... 68.1
------
Total investments................................................... 525.8
Cash and cash equivalents............................................. 1.8
Deferred policy acquisition costs..................................... 66.0
Premiums and other receivables........................................ 3.3
Accrued investment income............................................. 2.9
------
Closed block assets................................................. $599.8
======
LIABILITIES
-----------
Future policy benefits and claims....................................... $585.0
Other policyholder funds................................................ 33.1
Deferred tax liabilities................................................ 17.8
Other liabilities....................................................... 3.6
------
Closed block liabilities............................................ $639.5
======
</TABLE>
33
<PAGE>
Summarized financial results for the closed block for the period from April
21, 1999 through December 31, 1999 were as follows (in millions):
<TABLE>
<S> <C>
Revenues:
Premiums............................................................... $44.8
Net investment income.................................................. 30.9
Net realized investment losses......................................... (0.1)
-----
Total revenues....................................................... 75.6
-----
Benefits and expenses:
Policyholder benefits.................................................. 59.7
Interest paid on policyholder funds.................................... 0.8
Operating expenses..................................................... 2.6
Commissions............................................................ 1.5
Net decrease in deferred policy acquisition costs...................... 1.1
-----
Total benefits and expenses.......................................... 65.7
-----
Contribution from closed block....................................... $ 9.9
=====
</TABLE>
The excess of closed block liabilities over closed block assets at December
31, 1999 represented the estimated future contribution from the closed block,
which will be recognized in the Company's consolidated statements of income
and comprehensive income over the period the underlying policies and contracts
remain in force.
If, over the period the closed block remains in existence, the actual
cumulative contribution is greater than expected, only such expected
contribution will be recognized in the Company's consolidated statements of
income and comprehensive income. The excess will be paid to closed block
policyholders as additional policyholder dividends. Alternatively, if the
actual cumulative contribution is less than expected, only such actual
contribution will be recognized in the Company's consolidated statements of
income and comprehensive income. If such circumstances arise, future
policyholder dividends will be changed to increase actual contributions until
the actual cumulative contributions equal expected cumulative contributions.
3. SEGMENTS
Three reportable segments comprise a substantial majority of the Company's
operations: Group Insurance, Retirement Plans and Individual Insurance. The
Group Insurance segment markets long term and short term disability insurance,
life, accidental death and dismemberment, and dental insurance. The Retirement
Plans segment sells full-service 401(k) and other pension plan products and
services to employers. The Individual Insurance segment sells life insurance,
disability insurance and annuities to individuals. Performance assessment and
resource allocation are done at this level.
Amounts reported as "Other" include net investment income not associated
with product segments, other financial service businesses, and adjustments
made in consolidation. Other financial service businesses are generally non-
insurance related and include StanCorp's mortgage lending and real estate
management subsidiaries.
34
<PAGE>
The following table sets forth selected segment information for the years
ended December 31:
<TABLE>
<CAPTION>
Group Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenues:
Premiums................... $ 855.6 $ 16.6 $ 42.2 $ -- $ 914.4
Net investment income...... 151.8 50.6 90.6 13.7 306.7
Net realized investment
gains (losses)............ (3.3) (0.7) 0.6 3.9 0.5
Contribution from closed
block..................... -- -- 9.9 -- 9.9
Other...................... 2.9 -- -- 0.1 3.0
-------- -------- -------- ------ --------
Total..................... 1,007.0 66.5 143.3 17.7 1,234.5
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits...... 699.9 9.5 46.6 -- 756.0
Interest paid on
policyholder funds........ 6.7 33.5 47.8 -- 88.0
Operating expenses......... 147.0 23.9 24.5 3.3 198.7
Commissions................ 56.8 2.3 10.6 -- 69.7
Net (increase) decrease in
deferred policy
acquisition costs......... (3.0) -- 1.7 -- (1.3)
-------- -------- -------- ------ --------
Total..................... 907.4 69.2 131.2 3.3 1,111.1
-------- -------- -------- ------ --------
Income (loss) before Federal
income taxes and
extraordinary item.......... $ 99.6 $ (2.7) $ 12.1 $ 14.4 $ 123.4
======== ======== ======== ====== ========
Total assets................. $2,228.3 $1,641.3 $1,772.7 $214.8 $5,857.1
======== ======== ======== ====== ========
Year ended December 31, 1998:
Revenues:
Premiums................... $ 784.5 $ 14.0 $ 94.3 $ -- $ 892.8
Net investment income...... 143.7 54.0 124.0 1.4 323.1
Net realized investment
gains..................... 2.5 1.1 1.8 6.2 11.6
Other...................... 2.4 -- 1.0 -- 3.4
-------- -------- -------- ------ --------
Total..................... 933.1 69.1 221.1 7.6 1,230.9
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits...... 660.3 10.5 113.0 -- 783.8
Interest paid on
policyholder funds........ 6.2 36.1 49.2 -- 91.5
Operating expenses......... 134.4 20.4 28.6 2.2 185.6
Commissions................ 50.0 1.7 13.9 -- 65.6
Net increase in deferred
policy acquisition costs.. (1.4) -- (2.8) -- (4.2)
-------- -------- -------- ------ --------
Total..................... 849.5 68.7 201.9 2.2 1,122.3
-------- -------- -------- ------ --------
Income before Federal income
taxes and extraordinary
item........................ $ 83.6 $ 0.4 $ 19.2 $ 5.4 $ 108.6
======== ======== ======== ====== ========
Total assets................. $2,012.3 $1,318.0 $1,573.1 $375.5 $5,278.9
======== ======== ======== ====== ========
Year ended December 31, 1997:
Revenues:
Premiums................... $ 717.1 $ 11.2 $ 99.2 $ -- $ 827.5
Net investment income
(expense)................. 131.4 54.3 119.9 (2.4) 303.2
Net realized investment
gains..................... 1.0 0.8 1.7 8.3 11.8
Other...................... 2.4 (0.3) 0.4 0.1 2.6
-------- -------- -------- ------ --------
Total..................... 851.9 66.0 221.2 6.0 1,145.1
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits...... 619.5 8.7 107.8 -- 736.0
Interest paid on
policyholder funds........ 6.0 38.3 50.9 -- 95.2
Operating expenses......... 116.7 16.5 27.6 0.5 161.3
Commissions................ 47.2 1.4 15.4 -- 64.0
Net increase in deferred
policy acquisition costs.. (2.0) -- (4.7) -- (6.7)
-------- -------- -------- ------ --------
Total..................... 787.4 64.9 197.0 0.5 1,049.8
-------- -------- -------- ------ --------
Income before Federal income
taxes and extraordinary
item........................ $ 64.5 $ 1.1 $ 24.2 $ 5.5 $ 95.3
======== ======== ======== ====== ========
Total assets................. $1,784.3 $1,140.5 $1,524.7 $276.8 $4,726.3
======== ======== ======== ====== ========
</TABLE>
35
<PAGE>
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
4. INVESTMENT SECURITIES
Investment securities at fair value were composed of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In millions)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale......................................... $2,015.5 $2,188.5
Trading securities......................................... 49.2 25.4
Equity securities............................................ -- 0.3
-------- --------
Total investment securities.............................. $2,064.7 $2,214.2
======== ========
</TABLE>
Amortized cost and fair value of investment securities, excluding trading
securities, were as follows at December 31:
<TABLE>
<CAPTION>
1999
---------------------------------
Unrealized
Amortized ------------ Estimated
Cost Gains Losses Fair Value
--------- ----- ------ ----------
(In millions)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government bonds....................... $ 465.2 $ 5.2 $ 5.3 $ 465.1
States and political subdivision bonds...... 31.6 0.3 0.2 31.7
Corporate bonds............................. 1,496.8 6.0 58.0 1,444.8
Foreign bonds............................... 68.7 0.4 1.8 67.3
Redeemable preferred stock.................. 6.6 0.3 0.3 6.6
-------- ----- ----- --------
Total fixed maturity securities........... $2,068.9 $12.2 $65.6 $2,015.5
======== ===== ===== ========
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------
Unrealized
Amortized ------------- Estimated
Cost Gains Losses Fair Value
--------- ------ ------ ----------
(In millions)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government bonds...................... $ 565.1 $ 33.7 $0.1 $ 598.7
States and political subdivision bonds..... 34.6 2.2 -- 36.8
Corporate bonds............................ 1,398.6 79.3 1.2 1,476.7
Foreign bonds.............................. 64.7 3.7 -- 68.4
Redeemable preferred stock................. 7.8 0.6 0.5 7.9
-------- ------ ---- --------
Total fixed maturity securities.......... $2,070.8 $119.5 $1.8 $2,188.5
======== ====== ==== ========
Equity securities............................ $ 0.3 $ -- $ -- $ 0.3
======== ====== ==== ========
</TABLE>
36
<PAGE>
The contractual maturities of fixed maturity securities, excluding trading
securities, were as follows at
December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
(In millions)
<S> <C> <C> <C> <C>
Available-for-sale:
Due in 1 year or less........... $ 105.1 $ 105.9 $ 77.8 $ 79.1
Due 1 through 5 years........... 849.3 846.9 887.4 931.3
Due 5 through 10 years.......... 854.4 813.3 817.8 866.2
Due after 10 years.............. 260.1 249.4 287.8 311.9
-------- -------- -------- --------
Total available-for-sale...... $2,068.9 $2,015.5 $2,070.8 $2,188.5
======== ======== ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations.
Investment income summarized by type of investment was as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In millions)
<S> <C> <C> <C>
Fixed maturity securities:
Available-for-sale................................. $144.0 $135.9 $112.0
Held-to-maturity................................... -- 11.0 25.3
Mortgage loans....................................... 155.2 159.6 146.1
Real estate.......................................... 16.6 15.2 16.5
Policy loans......................................... 2.6 7.4 7.3
Collateral loans..................................... 1.8 7.4 7.5
Other................................................ 2.9 1.5 4.0
------ ------ ------
Gross investment income.......................... 323.1 338.0 318.7
Investment expenses.................................. (16.4) (14.9) (15.5)
------ ------ ------
Net investment income............................ $306.7 $323.1 $303.2
====== ====== ======
</TABLE>
Realized investment gains (losses) were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(In millions)
<S> <C> <C> <C>
Fixed maturity securities:
Available-for-sale..................................... $(4.2) $ 1.4 $ 1.0
Trading securities..................................... 1.4 2.1 --
Equity securities........................................ -- -- 1.6
Mortgage loans........................................... 0.1 2.1 2.9
Real estate.............................................. 3.2 6.0 6.3
----- ----- -----
Net realized investment gains........................ $ 0.5 $11.6 $11.8
===== ===== =====
</TABLE>
Securities deposited for the benefit of policyholders in various states, in
accordance with various state regulations, amounted to $3.4 million and $3.0
million at December 31, 1999 and 1998, respectively.
37
<PAGE>
5. MORTGAGE LOANS
The Company held mortgage loans, primarily commercial, that were
concentrated in the following states at December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in millions)
<S> <C> <C> <C> <C>
California................................. $ 738.6 41.5% $ 747.8 43.8%
Oregon..................................... 152.4 8.6 147.8 8.6
Texas...................................... 135.8 7.6 147.0 8.6
Washington................................. 84.6 4.8 91.5 5.4
Other...................................... 667.7 37.5 574.0 33.6
-------- ----- -------- -----
Total mortgage loans..................... $1,779.1 100.0% $1,708.1 100.0%
======== ===== ======== =====
</TABLE>
Although the Company underwrites commercial mortgages throughout the United
States, mortgage loans in California represent a concentration of credit risk.
The Company requires mortgage collateral and underwrites loans on either a
partial or full recourse basis. Mortgage loans foreclosed and transferred to
real estate totaled $2.2 million, $0.8 million and $1.3 million for 1999, 1998
and 1997, respectively. The following table sets forth mortgage loan valuation
and allowance provisions for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
(In millions)
<S> <C> <C> <C>
Balance at beginning of the year........................... $ 4.3 $4.0 $3.8
Provision.................................................. 0.5 0.3 0.2
Net amount written off..................................... (0.7) -- --
----- ---- ----
Balance at end of the year................................. $ 4.1 $4.3 $4.0
===== ==== ====
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments were as
follows at December 31:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
(In millions)
<S> <C> <C> <C> <C>
Assets:
Investment securities.............. $2,064.7 $2,064.7 $2,214.2 $2,214.2
Mortgage loans..................... 1,779.1 1,748.1 1,708.1 1,887.1
Policy loans....................... 20.5 20.5 111.0 111.0
Collateral loans................... -- -- 71.2 68.0
Liabilities:
Other policyholder funds,
investment type contracts......... $1,275.2 $1,265.0 $1,215.2 $1,209.5
</TABLE>
Assets. The fair value of investment securities was based on quoted market
prices, where available, or on values obtained from independent pricing
services. The fair value of mortgage loans was estimated by discounting
expected cash flows at theoretical treasury spot rates in effect at December
31. The cash flows were discounted using an average of possible discount rates
to provide for the potential effects of interest rate volatility, and were
adjusted to reflect anticipated prepayment and foreclosure. The carrying value
of policy loans approximates fair value. While potentially financial
instruments, policy loans are an integral component of the insurance contract
and have no maturity date. The fair value of collateral loans was estimated
using discounted cash flows, at the then-prevailing interest rates offered for
similar loans with similar credit ratings.
38
<PAGE>
Liabilities. The fair value of other policyholder funds that are investment-
type contracts was estimated using discounted cash flows at the then-
prevailing interest rates offered for similar contracts or as the amount
payable on demand less surrender charges at the balance sheet date.
7. FUTURE POLICY BENEFITS AND CLAIMS AND OTHER POLICYHOLDER FUNDS
Future policy benefits and claims. Future policy benefits and claims,
include accident and health insurance products offered by The Standard such as
group long term and short term disability, individual disability, group
dental, and group accidental death and dismemberment. The liability for unpaid
accident and health claims is included in future policy benefits and claims in
the consolidated balance sheets. The liability for claim adjustment expenses
is included in other liabilities in the consolidated balance sheets. The
change in the liability for unpaid claims and related claim adjustment
expenses was as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
(In millions)
<S> <C> <C> <C>
Balance, beginning of year....................... $1,100.2 $ 975.6 $840.5
Less: reinsurance recoverable.................... (1.9) (2.2) (1.7)
-------- -------- ------
Net balance, beginning of year............... 1,098.3 973.4 838.8
-------- -------- ------
Incurred related to:
Current year................................... 516.7 450.4 399.7
Prior years.................................... 13.9 46.7 61.4
-------- -------- ------
Total incurred............................... 530.6 497.1 461.1
-------- -------- ------
Paid related to:
Current year................................... (152.9) (146.7) (126.9)
Prior years.................................... (245.0) (225.5) (199.6)
-------- -------- ------
Total paid................................... (397.9) (372.2) (326.5)
-------- -------- ------
Net balance, end of year......................... 1,231.0 1,098.3 973.4
Plus: reinsurance recoverable.................. 1.6 1.9 2.2
-------- -------- ------
Balance, end of year......................... $1,232.6 $1,100.2 $975.6
======== ======== ======
</TABLE>
The 1999 change in incurred claims and expenses related to prior years was
primarily the result of interest on long term disability reserves and
favorable claim termination rates. Interest rate assumptions ranged from 5.50%
to 9.50% for all years presented. Variations between years also were caused by
differences in actual from expected incurred but not reported claims and by
differences in actual from expected claim terminations.
Other policyholder funds. Other policyholder funds at December 31, 1999 and
1998 included $585.4 million and $582.6 million, respectively, of employer-
sponsored defined contribution and benefit plans deposits and $546.6 million
and $517.7 million, respectively, of individual deferred annuity deposits.
39
<PAGE>
8. FEDERAL INCOME TAXES
The provision (benefit) for income taxes was as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(In millions)
<S> <C> <C> <C>
Current................................................. $(2.0) $(1.3) $29.3
Deferred................................................ 41.0 34.3 2.1
----- ----- -----
Total Federal income taxes............................ $39.0 $33.0 $31.4
===== ===== =====
</TABLE>
The provision for Federal income taxes differs from income taxes calculated
by applying the corporate Federal rate as follows for the years ended December
31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(In millions)
<S> <C> <C> <C>
Tax at corporate Federal rate of 35%.................... $43.2 $38.0 $33.3
Tax exempt interest..................................... (1.1) (1.0) (1.0)
Dividend received deduction............................. (0.8) (0.5) (0.6)
Amounts provided for uncertainties and adjustments...... (2.6) (1.8) (0.6)
Other................................................... 0.3 (1.7) 0.3
----- ----- -----
Total Federal income taxes............................ $39.0 $33.0 $31.4
===== ===== =====
</TABLE>
The amounts provided for uncertainties and adjustments primarily reflect
uncertainties related to the use of estimates and the subsequent resolution of
those uncertainties. Resolution occurs when amounts provided on an estimated
basis are known or when the tax year closes.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability were as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
------ -------
(In millions)
<S> <C> <C>
Liabilities not currently deductible for tax................. $ 18.9 $ 30.1
Other........................................................ 4.8 3.1
------ -------
Total deferred tax assets.................................. 23.7 33.2
------ -------
Future policy benefits and claims............................ 9.4 14.4
Deferred policy acquisition costs............................ 3.8 25.9
Net unrealized investment gains.............................. 64.9 82.1
Due and uncollected premiums................................. 9.5 7.9
Other........................................................ 2.6 8.9
------ -------
Total deferred tax liabilities............................. 90.2 139.2
------ -------
Net deferred tax liability................................. $ 66.5 $ 106.0
====== =======
</TABLE>
Federal income tax receivable was $3.0 million and $8.4 million at December
31, 1999 and 1998, respectively.
40
<PAGE>
9. RETIREMENT BENEFITS
The Standard has two non-contributory defined benefit pension plans and a
postretirement benefit plan. The following table provides a reconciliation of
the changes in the plans' benefit obligations and fair value of assets for the
years ended December 31 and the funded status at December 31:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
------------- ----------------
1999 1998 1999 1998
------ ----- ------- -------
(In millions)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year of
year....................................... $ 97.1 $82.0 $ 12.2 $ 11.1
Service cost................................ 5.4 5.7 0.5 0.6
Interest cost............................... 6.3 6.0 0.7 0.8
Actuarial (gain) loss....................... (13.3) 5.9 (1.6) --
Benefits paid............................... (2.8) (2.5) (0.4) (0.3)
------ ----- ------- -------
Benefit obligation at end of year........... 92.7 97.1 11.4 12.2
------ ----- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of
year....................................... 89.1 78.2 8.7 7.4
Actual return on plan assets................ 6.9 5.8 (0.9) 0.7
Employer contributions...................... 8.8 7.6 0.8 0.9
Benefits paid............................... (2.8) (2.5) (0.4) (0.3)
------ ----- ------- -------
Fair value of plan assets at end of year.... 102.0 89.1 8.2 8.7
------ ----- ------- -------
Funded status................................. 9.3 (8.0) (3.2) (3.5)
Unrecognized net transition asset............. (1.4) (1.6) -- --
Unrecognized net actuarial (gain) loss........ (4.9) 8.7 (5.8) (6.0)
Unrecognized prior service cost............... 0.1 0.1 -- --
------ ----- ------- -------
Prepaid (accrued) benefit cost.............. $ 3.1 $(0.8) $ (9.0) $ (9.5)
====== ===== ======= =======
</TABLE>
At December 31, 1998, both pension plans were underfunded. The benefit
obligation at December 31, 1998 consisted of $82.6 million and $14.5 million
for the two plans. The fair value of plan assets at December 31, 1998
consisted of $75.7 million and $13.4 million, respectively, for the two plans.
Net periodic benefit cost and assumptions used in the measurement of the
benefit obligations were as follows for the years ended December 31:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
------------------- -------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost..................... $ 5.4 $ 5.7 $ 4.7 $ 0.5 $ 0.6 $ 0.6
Interest cost.................... 6.3 6.0 5.5 0.7 0.8 0.7
Expected return on plan assets... (6.2) (5.7) (5.4) (0.4) (0.4) (0.3)
Amortization of unrecognized net
transition asset................ (0.2) (0.2) (0.2) -- -- --
Recognized net actuarial (gain)
loss............................ (0.4) 0.8 0.3 (0.4) (0.3) (0.4)
----- ----- ----- ----- ----- -----
Net periodic benefit cost...... $ 4.9 $ 6.6 $ 4.9 $ 0.4 $ 0.7 $ 0.6
===== ===== ===== ===== ===== =====
Discount rate.................... 7.25% 6.50% 7.00% 7.25% 6.50% 7.00%
Expected return on plan assets... 6.75 7.00 7.50 5.00 5.00 5.00
Rate of compensation increase.... 5.96 4.75 5.25 -- -- --
</TABLE>
41
<PAGE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 6.71% in the first year, 6.21% in the
second and third years, and ratably declined to 3.50% over the next nine
years. A one-percentage-point change in the assumed health care cost trend
rates would have the following effect:
<TABLE>
<CAPTION>
1% Point 1% Point
Increase Decrease
-------- --------
(In millions)
<S> <C> <C>
Service and interest costs................................. $0.2 $(0.2)
Postretirement benefit obligation.......................... 1.5 (1.2)
</TABLE>
The pension plans' assets are invested in The Standard's general account
invested assets. The postretirement benefit plan's assets are invested
primarily in long-term municipal bonds. The Standard sponsors deferred
compensation plans covering substantially all full-time employees under which
a portion of the employee contribution is matched.
The Standard sponsors deferred compensation plans covering substantially all
of its full-time employees under which The Standard matches a portion of the
employee contribution. Contributions by The Standard to the plans for 1999,
1998 and 1997 were $2.0 million, $1.8 million and $1.8 million, respectively.
The Standard has a non-qualified supplemental retirement plan for eligible
executive officers. The plan is currently unfunded. The accrued benefit cost
was $5.0 million and $3.7 million, respectively, at December 31, 1999 and
1998. Expenses related to the plan were $1.5 million, $0.6 million and $0.4
million in 1999, 1998 and 1997, respectively.
10. STOCK-BASED COMPENSATION
The 1999 Omnibus Stock Incentive Plan (the "Stock Plan") authorizes the
board of directors of StanCorp to grant eligible employees certain incentive
or non-statutory stock options, bonuses and performance stock options,
restricted and foreign stock awards, and stock appreciation and cash bonus
rights related to StanCorp's common stock. All options are granted at an
option price of not less than the market value at the date of grant and may be
exercised for a period not exceeding ten years from the date of the grant. The
maximum number of shares of common stock that may be issued under the Stock
Plan is 1.7 million.
Through December 31, 1999, 742,015 options to purchase common stock had been
granted at prices ranging from $22.125 to $25.188 per share. These options
were granted to members of StanCorp's board of directors, employee groups
consisting of non-officer employees, and officers. Members of StanCorp's board
of directors received grants totaling 21,000 options. Non-officer employees
received grants ranging from 100 to 250 options depending upon the employee's
compensation, totaling 310,515 options. Officers received grants on an
individual basis totaling 410,500 options. These grants are subject to a
three-year annual-step-vesting schedule from the date of the grant. The
Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based compensation plans. If compensation costs for awards under stock-
based compensation plans had been determined based on the fair value at the
grant dates using the method prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," net income and net income per share would have been
reduced to the following pro forma amounts for 1999:
<TABLE>
<CAPTION>
As Pro
Reported Forma
-------- -----
<S> <C> <C>
Net income (in millions)................................... $79.9 $78.2
Net income per common share:
Basic.................................................... 2.37 2.33
Diluted.................................................. 2.37 2.32
</TABLE>
For purposes of determining the pro forma expense, the fair value of each
option is estimated on the grant date using the Black-Scholes option pricing
model with the following weighted-average assumptions: expected
42
<PAGE>
dividend yield of 1.0%, risk-free interest rate of 6.6%, expected volatility
of 36.0%, and expected option lives of seven years. The weighted-average
grant-date fair value of options granted during the year ended December 31,
1999 was $10.43 per option.
The following table sets forth stock-based compensation plan activity for
the year ended December 31, 1999 (per share amounts are weighted-average):
<TABLE>
<S> <C>
Outstanding at January 1, 1999.................................... --
Granted at $22.80 per share....................................... 742,015
Forfeited at $23.75 per share..................................... (8,394)
-------
Outstanding at December 31, 1999.................................. 733,621
=======
</TABLE>
Options outstanding at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Average
Exercise Outstanding Remaining Exercise
Price at 12/31/1999 Contractual Life Price
-------- ------------- ---------------- ---------
<S> <C> <C> <C>
$25.188 1,500 10.00 years $25.19
23.750 296,321 9.29 years 23.75
22.125 435,800 9.80 years 22.13
------- ----------- ------
733,621 9.59 years $22.79
======= =========== ======
</TABLE>
At December 31, 1999, there were no exercisable options.
Also in 1999, 67,704 shares of restricted stock were granted to key
management employees. The shares vest during 2001 dependent on the recipients'
continued employment with StanCorp or The Standard.
The Employee Share Purchase Plan allows eligible employees to purchase
common stock at 85.0% of the lesser of the fair market value of the stock on
either the purchase date or the effective date of the offering period. Each
eligible employee may purchase an amount of up to 10.0% of the employee's
annual cash compensation for a maximum fair market value of $25,000.
43
<PAGE>
11. REINSURANCE
The Standard routinely assumes and cedes reinsurance with other companies.
The primary purpose of ceded reinsurance is to limit losses from large
exposures. However, if the reinsurer is unable to meet its obligations, the
originating issuer of the insurance contract retains the liability. The
following table sets forth reinsurance information for the years ended
December 31:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other From Other Assumed to
Amount Companies Companies Net Amount Net
---------- --------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Life insurance in force.. $101,796.2 $ 692.9 $123.9 $101,227.2 0.1%
========== ======== ====== ========== ===
Premiums
Life insurance and
annuities............. $ 345.6 $ 2.1 $ 0.4 $ 343.9 0.1%
Accident and health
insurance............. 540.2 8.4 38.7 570.5 6.8
---------- -------- ------ ---------- ---
Total premiums....... $ 885.8 $ 10.5 $ 39.1 $ 914.4 4.3%
========== ======== ====== ========== ===
Year ended December 31,
1998:
Life insurance in force.. $ 88,854.3 $2,411.6 $137.0 $ 86,579.7 0.2%
========== ======== ====== ========== ===
Premiums
Life insurance and
annuities............. $ 369.7 $ 10.4 $ 0.4 $ 359.7 0.1%
Accident and health
insurance............. 503.7 6.6 36.0 533.1 6.8
---------- -------- ------ ---------- ---
Total premiums....... $ 873.4 $ 17.0 $ 36.4 $ 892.8 4.1%
========== ======== ====== ========== ===
Year ended December 31,
1997:
Life insurance in force.. $ 82,354.6 $2,290.9 $176.6 $ 80,240.3 0.2%
========== ======== ====== ========== ===
Premiums
Life insurance and
annuities............. $ 355.2 $ 11.6 $ 0.6 $ 344.2 0.2%
Accident and health
insurance............. 462.3 11.8 32.8 483.3 6.8
---------- -------- ------ ---------- ---
Total premiums....... $ 817.5 $ 23.4 $ 33.4 $ 827.5 4.0%
========== ======== ====== ========== ===
</TABLE>
Recoveries recognized under reinsurance agreements were $8.7 million, $13.5
million and $6.4 million for 1999, 1998 and 1997, respectively. Amounts
recoverable from reinsurers were $4.2 million and $4.1 million at December 31,
1999 and 1998, respectively.
44
<PAGE>
12. INSURANCE INFORMATION:
The following table sets forth insurance information for the years ended
December 31, 1999, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
Future Benefits, Amortization
Deferred Policy Other Claims, of Deferred
Policy Benefits Policy- Net and Policy Other
Acquisition and holder Premium Investment Interest Acquisition Operating
Segment Costs Claims Funds Revenue Income Expense Costs Expenses
- ------- ----------- -------- -------- ------- ---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999:
Group Insurance......... $ 18.8 $1,473.8 $ 84.1 $855.6 $151.8 $706.6 $ 7.7 $193.1
Retirement Plans........ -- 69.9 585.4 16.6 50.6 43.0 -- 26.2
Individual Insurance.... 35.4 99.7 869.1 42.2 90.6 94.4 6.9 29.9
------ -------- -------- ------ ------ ------ ----- ------
Total................. $ 54.2 $1,643.4 $1,538.6 $914.4 $293.0 $844.0 $14.6 $249.2
====== ======== ======== ====== ====== ====== ===== ======
1998:
Group Insurance......... $ 15.8 $1,329.1 $ 69.3 $784.5 $143.7 $666.5 $ 6.7 $176.3
Retirement Plans........ -- 68.6 582.6 14.0 54.0 46.6 -- 22.1
Individual Insurance.... 99.1 667.5 827.3 94.3 124.0 162.2 6.9 32.8
------ -------- -------- ------ ------ ------ ----- ------
Total................. $114.9 $2,065.2 $1,479.2 $892.8 $321.7 $875.3 $13.6 $231.2
====== ======== ======== ====== ====== ====== ===== ======
1997:
Group Insurance......... $ 14.3 $1,180.8 $ 70.6 $717.1 $131.4 $625.5 $ 5.8 $156.1
Retirement Plans........ -- 66.2 571.6 11.2 54.3 47.0 -- 17.9
Individual Insurance.... 92.6 631.3 800.4 99.2 119.9 158.7 6.4 31.9
------ -------- -------- ------ ------ ------ ----- ------
Total................. $106.9 $1,878.3 $1,442.6 $827.5 $305.6 $831.2 $12.2 $205.9
====== ======== ======== ====== ====== ====== ===== ======
</TABLE>
Other operating expenses include operating expenses, commissions and the
increase in deferred policy acquisition costs.
13. REGULATORY MATTERS
The Standard prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Department. Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as accounting practices set forth in
publications of the National Association of Insurance Commissioners ("NAIC").
Permitted statutory accounting practices encompass all accounting practices
not so prescribed; such accounting practices differ from state to state, may
differ from company to company within a state, and may change in the future.
The NAIC has issued a codification of statutory accounting practices, which
is expected to become effective January 1, 2001. The result is expected to
constitute the only source of prescribed statutory accounting practices and
will change the definition of what comprises current statutory accounting
practices. Management does not expect the adoption will have a material impact
on The Standard's statutory financial statements.
Statutory accounting practices differ in some respects from GAAP. The
principal statutory practices which differ from GAAP are: a) bonds and
mortgage loans are reported principally at amortized cost and preferred stocks
principally at cost; b) asset valuation and interest maintenance reserves are
provided as prescribed by the NAIC; c) certain assets designated as non-
admitted, principally furniture, equipment, and unsecured receivables, are not
recognized; d) premiums are recognized as income when due over the premium
paying period of the
45
<PAGE>
policy, annuity and fund considerations are recognized as income when
received; e) reserves for life and disability policies and contracts are based
on statutory requirements; f) commissions, policy acquisition expenses, and
the expenses of originating or acquiring investments are charged to current
operations; g) software and software development costs are expensed as
incurred; and (h) Federal income tax expense is based on current taxable
income without recognition of deferred taxes resulting from temporary
differences in bases of accounting.
The Standard received written approval from the Department to include
collateral loan balances fully secured by policy cash values as admitted
assets, which differs from prescribed statutory accounting practices.
Prescribed accounting practices generally require amounts in excess of 80% of
the market value of the pledged collateral to be designated as non-admitted.
As of December 31, 1999 and 1998, this permitted practice increased statutory
surplus by $13.6 million and $14.3 million, respectively, over the amount that
would have been permitted under prescribed accounting practices.
The Standard is subject to statutory restrictions that limit the maximum
amount of dividends that it could declare and pay to StanCorp without prior
approval of the Department. The amount available for payment of dividends
without approval of the Department is $115.7 million in the year 2000.
State insurance departments require insurance enterprises to adhere to
minimum Risk-Based Capital ("RBC") requirements promulgated by the NAIC. At
December 31, 1999 and 1998 The Standard's RBC level was significantly in
excess of that which would require corrective action by The Standard or
regulatory agencies. The amount of statutory capital and surplus necessary to
satisfy the regulatory requirements was $200.1 million and $183.2 million at
December 31, 1999 and 1998, respectively.
The following table reconciles The Standard's statutory policyholder surplus
as reported to state insurance regulatory authorities with the Company's GAAP
equity at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
(In millions)
<S> <C> <C>
Statutory policyholder surplus............................. $506.7 $392.9
Adjustments to reconcile to GAAP equity:
Future policy benefits and policyholders' account
balances................................................ 199.9 224.6
Deferred policy acquisition costs........................ 54.2 114.9
Deferred tax liabilities................................. (66.5) (106.0)
Federal income taxes accrued............................. 38.1 15.8
Reinsurance receivable................................... 25.6 26.3
Premium receivable....................................... (22.2) (26.2)
Asset valuation reserve.................................. 41.1 39.9
Interest maintenance reserve............................. 8.5 10.0
Valuation of investments................................. (51.8) 114.2
Equity of StanCorp and its non-insurance subsidiaries.... 37.1 --
Non-admitted assets...................................... 22.8 21.5
Other, net............................................... 8.8 11.4
Closed block:
Future policy benefits and policyholders' account
balances................................................ 5.4 --
Deferred policy acquisition costs........................ 66.0 --
Deferred tax liabilities................................. (17.8) --
Federal income tax accrued............................... 0.3 --
Premium receivable....................................... (10.2) --
Valuation of investments................................. (6.1) --
------ ------
Equity, GAAP basis......................................... $839.9 $839.3
====== ======
</TABLE>
46
<PAGE>
The following table reconciles statutory gain from operations as reported to
insurance regulatory authorities with GAAP net income for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
(In millions)
<S> <C> <C> <C>
Statutory gain from operations...................... $116.8 $ 95.7 $40.9
Adjustments to reconcile to GAAP net income:
Future policy benefits and policyholders' account
balances......................................... (17.8) (17.6) 18.0
Deferred policy acquisition costs................. 6.4 8.0 6.6
Deferred income taxes............................. (41.4) (34.3) (2.1)
Current income taxes.............................. 22.6 14.2 (0.8)
Earnings of StanCorp and its non-insurance
subsidiaries..................................... 4.5 -- --
Other, net........................................ (8.6) 3.5 1.3
Closed block:
Future policy benefits and policyholders' account
balances......................................... (1.5) -- --
Deferred policy acquisition costs................. (1.1) -- --
------ ------ -----
Net income, GAAP basis.............................. $ 79.9 $ 69.5 $63.9
====== ====== =====
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company has lines of credit totaling $110 million with two financial
institutions. Interest rates are based on current market rates. The Company is
not required to maintain compensating balances, but does pay commitment fees.
At December 31, 1999, there were no outstanding borrowings on the lines of
credit. These lines expire in the first half of 2000 and are expected to be
renewed.
On November 1, 1999, the board of directors of StanCorp authorized the
repurchase of up to 1.7 million shares of StanCorp's common stock to be
effected before November 1, 2000. As of December 31, 1999, 1.3 million shares
had been repurchased at a total cost of $34.2 million. On February 23, 2000
the board of directors of StanCorp authorized the repurchase of up to 1.6
million shares of StanCorp's common stock to be effected before February 23,
2001. Both repurchases are to be effected in the open market or in negotiated
transactions in compliance with the safeharbor provisions of Rule 10b-18 under
regulations of the Securities Exchange Act of 1934.
At December 31, 1999, the Company had outstanding commitments to fund or
acquire various assets, primarily mortgage loans with fixed-interest rates
ranging from 7.50% to 10.50%, totaling $101.2 million. These commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Company evaluates each customer's credit
worthiness individually and may terminate a commitment based on the financial
condition of the borrower. Additionally, a small percentage of borrowers allow
their commitments to expire without being drawn upon. The Standard also has
commitments to contribute equity capital to third party joint ventures
totaling $16.6 million. The contributions are payable upon demand. However, to
the extent amounts are not previously drawn upon, the future minimum capital
contributions are: 2000, $0.8 million; 2001, none; 2002, $1.9 million; 2003,
none; 2004, $4.0 million; and thereafter, $9.9 million.
StanCorp and its subsidiaries lease certain buildings and equipment under
non-cancelable operating leases that expire in various years through 2009,
with renewal options for periods ranging from three to five years. Future
minimum payments under these leases are: 2000, $7.6 million; 2001, $7.1
million; 2002, $6.8 million; 2003, $3.1 million; 2004, $2.5 million and
thereafter, $9.8 million. Total rent expense was $8.0 million, $6.5 million
and $5.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, minimum future rental receivables on non-
cancelable leases with initial terms of one year or more were: 2000, $11.6
million; 2001, $11.6 million; 2002, $10.7 million; 2003, $9.2 million; and
2004, $7.5 million.
StanCorp and its subsidiaries are involved in various legal actions and
other state and Federal proceedings. A number of these actions or proceedings
were pending as of December 31, 1999. In some instances, lawsuits include
claims for punitive damages and similar types of relief in unspecified or
substantial amounts in addition
47
<PAGE>
to amounts for alleged contractual liability or other compensatory damages. In
the opinion of management, the ultimate liability, if any, arising from these
actions or proceedings is not expected to have a material adverse effect on
the Company's business, financial condition or results of operations.
On April 26, 1999, The Standard received notice from the San Francisco
office of the U.S. Department of Labor ( the "DOL") that it was conducting an
investigation with respect to The Standard's employee benefit plan clients
pursuant to Section 504(a)(1) of the Employee Retirement Income Security Act
of 1974 ("ERISA"), to determine whether any person has violated or is about to
violate any provision of Title I of ERISA. The Standard and certain of its
employee benefit plan clients are subject to ERISA in connection with, among
other things, certain policies sold by the Group Insurance segment. The notice
included a subpoena that certain documents and records be provided to the DOL.
The Standard is fully cooperating with the DOL. To date, no claims or charges
have been asserted against The Standard as a result of the investigation and
the DOL states that its investigation should not be construed as an indication
that any violations of ERISA have occurred. Management believes that The
Standard's business practices comply in all material respects with ERISA and
that the results of the investigation will not have a material adverse effect
on the Company's business, financial condition or results of operations.
15. QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth unaudited financial information for 1999 and
1998:
<TABLE>
<CAPTION>
1999
-----------------------------
4th 3rd 2nd 1st
------ ------ ------ ------
(In millions--except per
share data)
<S> <C> <C> <C> <C>
Premiums..................................... $234.4 $223.6 $217.8 $238.6
Net investment income........................ 78.6 73.7 74.0 80.4
Net realized investment gains (losses)....... (1.7) (0.6) 1.7 1.1
Contribution from closed block............... 1.3 5.3 3.3 --
Policyholders benefits....................... 180.8 182.8 187.0 205.4
Income before extraordinary item............. 23.0 20.9 19.2 21.3
Net income................................... 23.0 20.0 17.9 19.0
Basic and diluted income before extraordinary
item per share (pro forma) (1).............. 0.69 0.62 0.57 --
Basic and diluted net income per share (pro
forma) (1).................................. 0.69 0.59 0.53 --
<CAPTION>
1998
-----------------------------
4th 3rd 2nd 1st
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums..................................... $228.3 $222.0 $222.1 $220.4
Net investment income........................ 82.4 82.2 79.1 79.4
Net realized investment gains................ 2.7 3.3 5.4 0.2
Policyholder benefits........................ 201.3 191.2 192.9 198.4
Income before extraordinary item............. 20.9 23.2 16.9 14.6
Net income................................... 18.5 20.3 16.4 14.3
</TABLE>
- --------
(1) On April 21, 1999, StanCorp completed the IPO, and therefore per share
amounts for the first quarter are not presented.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE>
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
Information with respect to Directors is reported under the caption
"Election of Directors" in the Company's 2000 Proxy Statement, herein
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reported under the caption "Compensation of Executive Officers" in the
Company's 2000 Proxy Statement, herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reported under the caption "Share Ownership of Directors, Executive Officers
and Certain Shareholders" in the Company's 2000 Proxy Statement, herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the caption "Certain Relationships and Related Transactions"
in the Company's 2000 Proxy Statement, herein incorporated by reference.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index of documents filed as part of this report:
1. The following Consolidated Financial Statements of StanCorp are included in
Item 8.
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. 24
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997................................... 25
Consolidated Balance Sheets at December 31, 1999 and 1998................. 26
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997......................................... 27
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997...................................................... 28
Notes to Consolidated Financial Statements................................ 29
</TABLE>
2. Financial Statement Schedules.
None.
3. Exhibits Index.
<TABLE>
<CAPTION>
Number Name
------ ----
<C> <S>
3.1 Articles of Incorporation as amended
3.2 Bylaws
4 Shareholder Rights Plan
10.1 Change of Control Agreement
10.2 1999 Omnibus Stock Incentive Plan
10.3 1999 Employee Stock Purchase Plan
10.4 Long Term Incentive Compensation Plan
10.5 Defined Benefit Plan for Home Office Employees
10.6 Amended and Restated Supplemental Retirement Plan for Executives
10.7 Home Office Employees' Deferred Compensation Plan, as Restated in 1998
10.8 Amended and Restated Deferred Contribution Plan for Executive Officers
10.9 $100 Million Revolving Credit Agreement
10.10 $10 Million Revolving Line of Credit Agreement
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
24 Powers of Attorney
27 Financial Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K for the quarter ended
December 31, 1999.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in Portland,
Oregon on March 14, 2000.
STANCORP FINANCIAL GROUP, INC.
/s/ Ronald E. Timpe
By: _________________________________
Name:Ronald E. Timpe
Title: Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
following persons on behalf of the Registrant in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ronald E. Timpe Chairman, President & Chief March 14, 2000
____________________________________ Executive Officer
Ronald E. Timpe
/s/ Eric E. Parsons Senior Vice President & March 14, 2000
____________________________________ Chief Financial Officer
Eric E. Parsons
/s/ Cindy J. McPike Assistant Vice President, March 14, 2000
____________________________________ Controller & Treasurer
Cindy J. McPike
* Director March 14, 2000
____________________________________
Virginia L. Anderson
* Director March 14, 2000
____________________________________
Frederick W. Buckman
* Director March 14, 2000
____________________________________
John E. Chapoton
* Director March 14, 2000
____________________________________
Barry J. Galt
* Director March 14, 2000
____________________________________
Richard Geary
* Director March 14, 2000
____________________________________
Peter T. Johnson
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
* Director March 14, 2000
____________________________________
Peter O. Kohler, M.D.
* Director March 14, 2000
____________________________________
Jerome J. Meyer
* Director March 14, 2000
____________________________________
Ralph R. Peterson
* Director March 14, 2000
____________________________________
E. Kay Stepp
* Director March 14, 2000
____________________________________
William Swindells
* Director March 14, 2000
____________________________________
Mike Thorne
* Director March 14, 2000
____________________________________
Franklin E. Ulf
* Director March 14, 2000
____________________________________
Benjamin R. Whiteley
/s/ Dwight L. Cramer
*By: _______________________________
Dwight L. Cramer, as Attorney-in-
fact
(Vice President, General Counsel and
Corporate Secretary)
</TABLE>
52
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Number Name Method of Filing
------ ---- ----------------
<C> <C> <S>
3.1 Articles of Incorporation as amended Filed as Exhibit 4.1 on
Registrant's Form 8-K, dated May
7, 1999, and incorporated herein
by this reference
3.2 Bylaws Filed as Exhibit 3.1 on
Registrant's Form S-1A, dated
March 12, 1999, and incorporated
herein by this reference
4 Shareholder Rights Plan Filed as Exhibit 4.2 on the
Registrant's Form 8-K, dated May
7, 1999, and incorporated herein
by this reference
10.1 Change of Control Agreement Filed as Exhibit 10.2 on the
Registrant's Form S-1A, dated
March 12, 1999, and incorporated
herein by this reference
10.2 1999 Omnibus Stock Incentive Plan Filed herewith
10.3 1999 Employee Stock Purchase Plan Filed herewith
10.4 Long Term Incentive Compensation Filed as Exhibit 10.5 on the
Plan Registrant's Form S-1A, dated,
March 12, 1999, and incorporated
herein by this reference.
10.5 Defined Benefit Plan for Home Office Filed as Exhibit 10.6 on the
Employees Registrant's Form S-1A, dated
March 12, 1999, and incorporated
herein by this reference.
10.6 Amended and Restated Supplemental Filed as Exhibit 10.7 on the
Retirement Plan for Executives Registrant's Form S-1A, dated
March 12, 1999, and incorporated
herein by this reference
10.7 Home Office Employees' Deferred Filed herewith
Compensation Plan, as Restated in
1998
10.8 Amended and Restated Deferred Filed as Exhibit 10.8 on the
Contribution Plan for Executive Registrant's Form S-1A, dated
Officers March 12, 1999, and incorporated
herein by this reference
10.9 $100 Million Revolving Credit
Agreement Filed herewith
10.10 $10 Million Revolving Line of Credit Filed herewith
Agreement
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Accountants Filed herewith
24 Powers of Attorney Filed herewith
27 Financial Schedule Filed herewith
</TABLE>
53
<PAGE>
EXHIBIT 10.2
STANCORP FINANCIAL GROUP, INC.
1999 OMNIBUS STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is to
enable StanCorp Financial Group, Inc. an Oregon corporation (the "Company") to
attract and retain the services of (a) employees, officers and directors of the
Company or of any subsidiary of the Company, (b) selected nonemployee agents,
consultants, advisors, persons involved in the sale or distribution of the
products of the Company or any subsidiary and independent contractors of the
Company or any subsidiary, (c) non-employee directors of the Company, and (d)
non-employees to whom an offer of employment has been extended.
2. Shares Subject to the Plan. The shares to be offered under the Plan
shall consist of Common Stock of the Company. Subject to adjustment as provided
below and in Section 14, the total number of shares of Common Stock that may be
issued under the Plan shall not exceed 5% of the number of shares outstanding
after the closing of the Company's initial public offering (including shares
issued on exercise of the underwriter's overallotment option). The shares issued
under the Plan may be authorized and unissued shares or reacquired shares. If an
option, stock appreciation right or performance unit granted under the Plan
expires, terminates or is cancelled, the unissued shares subject to such option,
stock appreciation right or performance unit shall again be available under the
Plan. If shares sold or awarded as a bonus under the Plan are forfeited to the
Company or repurchased by the Company, the number of shares forfeited or
repurchased shall again be available under the Plan.
3. Effective Date and Duration of Plan.
3.1 Effective Date. The Plan shall become effective when adopted by
the Board of Directors of the Company, but no Incentive Stock Option granted
under the Plan shall become exercisable until the Plan is approved by the
affirmative vote of the holders of a majority of the shares of Common Stock
represented at a shareholders meeting at which a quorum is present. Any
Incentive Stock Options granted under the Plan prior to the receipt of
shareholder approval shall be conditioned on and subject to such approval.
Subject to the foregoing limitations, options, stock appreciation rights and
performance units may be granted and shares may be awarded as bonuses or sold
under the Plan at any time after the effective date and before termination of
the Plan.
3.2 Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any outstanding options, any right of the Company to repurchase shares or
the forfeitability of shares issued under the Plan.
1
<PAGE>
4. Administration.
4.1 Board of Directors. The Plan shall be administered by the Board
of Directors of the Company, which shall determine and designate from time to
time the individuals to whom awards shall be made, the amount of the awards and
the other terms and conditions of the awards. Subject to the provisions of the
Plan, the Board of Directors may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Board of Director necessary or
desirable for the administration of the Plan. The Board of Directors may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any related agreement in the manner and to the extent it shall deem expedient
to carry the Plan into effect, and it shall be the sole and final judge of such
expediency.
Any action taken by, or inaction of, the Company or any of its
subsidiaries or the Board of Directors relating or pursuant to this Plan,
including but not limited to the interpretation and construction of the
provisions of the Plan and related agreements by the Board of Directors, shall
be within the absolute discretion of that entity or body' and shall be
conclusive and binding upon all persons. Subject only to the express provisions
of the Plan, the Board of Directors may act in its absolute discretion in
matters within its authority related to the Plan. In making any determination or
in taking or not taking any action under the Plan, the Board of Directors may
obtain and rely upon the advice of experts, including professional advisors to
the Company. No director, officer or agent of the Company will be liable for any
such action or determination taken or made or omitted in good faith.
4.2 Committee. The Board of Directors may delegate to a committee
comprised solely of two or more members of the Board of Directors or specified
officers of the Company, or both (the "Committee") any or all authority for
administration of the Plan. If authority is delegated to a Committee, all
references to the Board of Directors in the Plan shall mean and relate to the
Committee except (i) as otherwise provided by the Board of Directors, (ii) that
only the Board of Directors may amend or terminate the Plan as provided in
Sections 3 and 17, and (iii) that a Committee including officers of the Company
shall not be permitted to grant options to persons who are officers of the
Company. If awards are to be made under the Plan to directors or officers who
are subject to Section 16(a) of the Securities Exchange Act of 1934, as amended,
authority for selection of such directors and officers for participation and
decisions concerning the timing, pricing and amount of a grant or award, if not
determined under a formula meeting the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, shall be delegated to a committee
consisting of two or more disinterested directors.
5. Types of Awards. The Board of Directors may, from time to time, take
the following actions, separately or in combination, under the Plan:
2
<PAGE>
5.1 Grant Incentive Stock Options, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), as provided in Sections
7.1 and 7.2;
5.2 Grant options other than Incentive Stock Options ("Non-Statutory
Stock Options") as provided in Sections 7.1 and 7.3;
5.3 Award stock bonuses as provided in Section 8;
5.4 Sell shares subject to restrictions as provided in Section 9;
5.5 Grant stock appreciation rights as provided in Section 10;
5.6 Grant cash bonus rights as provided in Section 11;
5.7 Grant performance units as provided in Section 12; and
5.8 Grant foreign qualified awards as provided in Section 13.
6. Eligibility. Awards may be made to regular employees in good
standing, working at least 20 hours per week and do not have a status of
"Inactive Disability", including employees who are officers or directors, and to
other individuals described in Section 1 who the Board of Directors believes
have made or will make an important contribution to the Company or any
subsidiary of the Company; provided, however, that only employees of the Company
shall be eligible to receive Incentive Stock Options under the Plan. The Board
of Directors shall select the individuals to whom awards shall be made and shall
specify the action taken with respect to each individual to whom an award is
made. At the discretion of the Board of Directors, an individual may be given an
election to surrender an award in exchange for the grant of a new award.
7. Option Grants.
7.1 General Rules Relating to Options.
7.1.1 Terms of Grant. The Board of Directors may grant options
--------------
under the Plan. With respect to each option grant, the Board of Directors
shall determine the number of shares subject to the option, the option
price, the period of the option, the time or times at which the option may
be exercised and whether the option is an Incentive Stock Option or a
Non-Statutory Stock Option. At the time of the grant of an option or at any
time thereafter, the Board of Directors may provide that an optionee who
exercised an option with Common Stock of the Company shall automatically
receive a new option to purchase additional shares equal to the number of
shares surrendered and may specify the terms and conditions of such new
options.
7.1.2 Exercise of Options. Except as provided in Section 7.1.4
-------------------
or as determined by the Board of Directors, no option granted under the
Plan may be
3
<PAGE>
exercised unless at the time of such exercise the optionee is employed on
a regular basis, working at least 20 hours or more per week or in the
service of the Company or any subsidiary of the Company and shall have been
so employed or provided such service continuously since the date such
option was granted. Absence on authorized leave or on account of illness or
disability under rules established by the Board of Directors shall not,
however, be deemed an interruption of employment or service for this
purpose. Unless otherwise determined by the Board of Directors, vesting of
options shall continue during an absence on authorized leave (including
an extended illness) or on account of disability. Except as provided in
Sections 7.1.4, 14 and 15, options granted under the Plan may be exercised
from time to time over the period stated in each option in such amounts and
at such times as shall be prescribed by the Board of Directors; provided,
that options shall not be exercised for fractional shares. Unless otherwise
determined by the Board of Directors, if the optionee does not exercise
an option in any one year with respect to the full number of shares to
which the optionee is entitled in that year, the optionee's rights shall
be cumulative and the optionee may purchase those shares in any subsequent
year during the term of the option.
7.1.3 Nontransferability. Each Incentive Stock Option and,
------------------
unless otherwise determined by the Board of Directors, each other option
granted under the Plan by its terms shall be nonassignable and
nontransferable by the optionee, either voluntarily or by operation of law,
except by will or by the laws of descent and distribution of the state or
country of the optionee's domicile at the time of death.
7.1.4 Termination of Employment or Service.
-------------- ---------------------
7.1.4.1 General Rule. Unless otherwise determined by the
Board of Directors, if the employment or service with the Company or a
subsidiary of an optionee terminates for any reason other than Total
Disability, death, Retirement, resignation or termination by the
Company without cause (each as set forth below), any options (or
portion thereof) held by such optionee shall immediately terminate.
7.1.4.2 Termination By Reason of Total Disability.
Unless otherwise determined by the Board of Directors, if an
optionee's employment or service terminates by reason of the
optionee's Total Disability (as defined below), any options held by
such optionee shall become fully exercisable and may be exercised at
any time prior to the expiration date of the option(s) or the
expiration of 12 months after the date of such termination, whichever
is the shorter period. "Total Disability" means a physical or mental
impairment which is expected to result in death or which has lasted or
is expected to last for a continuous period of 12 months or more and
which causes the optionee to be unable, in the opinion of the Company,
to perform his or her duties as an employee, director, officer or
consultant of the Company or any subsidiary and to be engaged in any
substantial gainful
4
<PAGE>
activity. Total Disability shall be deemed to have occurred on the
first day after the Company has made a determination of Total
Disability.
7.1.4.3 Termination by Reason of Death. Unless otherwise
determined by the Board of Directors, if an optionee dies while
employed by or providing service to the Company or a subsidiary, any
options held by such optionee shall become fully exercisable and may
be exercised at any time prior to the expiration date of the
option(s) or the expiration of 12 months after the date of death,
whichever is the shorter period, only by the person or persons to whom
such optionee's rights under the option(s) shall pass by the
optionee's will or by the laws of descent and distribution of the
state or country of the optionee's domicile at the time of death.
7.1.4.4 Termination by Reason of Resignation. If an
optionee resigns from employment or providing services to the Company
or a subsidiary, such optionee may exercise his or her option(s) at
any time prior to the expiration date of the option(s) or the
expiration of 90 days after the date of termination, whichever is the
shorter period, but only if and to the extent the optionee was
entitled to exercise the option(s) at the date of termination;
provided, however, the Board of Directors may in its sole discretion
at the time of grant, at the time of termination or at any other time
shorten, extend or otherwise modify or terminate such exercise period.
7.1.4.5 Termination by the Company Without Cause. If the
Company or a subsidiary terminates the employment of or the provision
of services by an optionee without cause, such optionee may exercise
his or her option(s) at any time prior to the expiration date of the
option(s) or the expiration 90 days after the date of termination,
whichever is the shorter period; provided, however, that the Board of
Directors may in its sole discretion at the time of grant, the time
of termination or any other time shorten, extend or otherwise modify
or terminate such exercise period. The Board of Directors shall
determine in its sole and absolute discretion whether an optionee has
been terminated without cause.
7.1.4.6 Termination by Reason of Retirement. Unless
otherwise determined by the Board of Directors and except as provided
in Section 7.2.6, if an optionee terminates employment by or service
with the Company by reason of "Retirement", such optionee may
exercise his or her option(s) at any time prior to the expiration date
of the option(s) or the expiration of three years after the date of
termination, whichever is the shorter period. Any options held by
such optionee shall continue to vest according to the terms of their
grant, except as provided in Section 7.2.6. "Retirement" means
voluntary retirement with the consent of the Company under any of
the Company's retirement plans.
5
<PAGE>
7.1.4.7 Amendment of Exercise Period Applicable to
Termination. The Board of Directors, at the time of grant or at
any time thereafter, may extend the above-described exercise periods
any length of time not longer than the original expiration date of the
option, and may increase the portion of an option that is exercisable,
subject to such terms and conditions as the Board of Directors may
determine.
7.1.4.8 Failure to Exercise Option. To the extent that
the option of any deceased optionee or of any optionee whose
employment or service terminates is not exercised within the
applicable period, all further rights to purchase shares pursuant to
such option shall cease and terminate.
7.1.5 Purchase of Shares. Unless the Board of Directors
------------------
determines otherwise, shares may be acquired pursuant to an option granted
under the Plan only upon receipt by the Company of notice in writing from
the optionee of the optionee's intention to exercise, specifying the
number of shares as to which the optionee desires to exercise the option
and the date on which the optionee desires to complete the transaction,
and if required in order to comply with the Securities Act of 1933, as
amended, containing a representation that it is the optionee's present
intention to acquire the shares for investment and not with a view to
distribution. In addition, unless the Board of Directors determines
otherwise, any shares acquired by the optionee shall be subject to any
stock transfer restrictions in any agreement then in effect among the
holders of the Company's Common Stock, and the exercise of an option shall
not be effective until the optionee has signed and delivered a signature
page to such stock transfer restriction agreement.
7.1.6 Payment of Exercise Price. Unless the Board of Directors
-------------------------
determines otherwise, on or before the date specified for completion
of the purchase of shares pursuant to an option, the optionee must have
paid the Company the full purchase price of such shares in cash or, with
the consent of the Board of Directors, in whole or in part, in Common Stock
of the Company valued at fair market value, restricted stock, performance
units or other contingent awards denominated in either stock or cash,
promissory notes and other forms of consideration. The fair market value of
Common Stock provided in payment of the purchase price shall be
determined by the Board of Directors. If the Common Stock of the Company is
not publicly traded on the date the option is exercised, the Board of
Directors may consider any valuation methods it deems appropriate and may,
but is not required to, obtain one or more independent appraisals of the
Company. If the Common Stock of the Company is publicly traded on the
date the option is exercised, the fair market value of Common Stock
provided in payment of the purchase price shall be the closing price of a
share of Common Stock shown in the New York Stock Exchange Composite
Transactions Listing as published in The Wall Street Journal on the trading
-----------------------
day preceding the date the option is exercised, or such other reported
value of the Common Stock as shall be specified by the Board of Directors.
6
<PAGE>
With the consent of the Board of Directors, an optionee may request
the Company to apply automatically the shares to be received upon the
exercise of a portion of an option (even though stock certificates have not
yet been issued) to satisfy the purchase price for additional portions of
the option.
In addition to the payment methods described above, the Board of
Directors may provide that an option may be exercised and payment made by
delivering a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company the amount of
sale proceeds necessary to pay the exercise price and, unless otherwise
prohibited by the Board of Directors or applicable law, any applicable
tax withholding under Section 7.1.7. The Company will not be obligated
to deliver certificates for the shares or make book entries denoting
ownership of the shares unless and until it receives full payment of the
exercise price therefor and any related withholding obligations have been
satisfied.
7.1.7 Payment of Applicable Withholding. Each optionee who has
---------------------------------
exercised an option shall immediately upon notification of the amount due,
if any, pay to the Company in cash amounts necessary to satisfy any
applicable federal, state and local tax withholding requirements. If
additional withholding is or becomes required beyond any amount deposited
before delivery of the certificates, the optionee shall pay such amount to
the Company on demand. If the optionee fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the
Company to the optionee, including salary, subject to applicable law. With
the consent of the Board of Directors an optionee may satisfy this
obligation, in whole or in part, by having the Company withhold from the
shares to be issued upon the exercise that number of shares that would
satisfy the withholding amount due or by delivering to the Company Common
Stock to satisfy the withholding amount.
7.1.8 Effect of Exercise. Upon the exercise of an option, the
------------------
number of shares reserved for issuance under the Plan shall be reduced by
the number of shares issued upon exercise of the option.
7.2 Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:
7.2.1 Limitation on Amount of Grants. No employee may be granted
------------------------------
Incentive Stock Options under the Plan if the aggregate fair market value,
on the date of grant, of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by that employee during
any calendar year under the Plan and under any other incentive stock option
plan (within the meaning of Section 422 of the Code) of the Company or any
parent or subsidiary of the Company exceeds $100,000.
7.2.2 Limitations on Grants to 10% Shareholders. An Incentive
-----------------------------------------
Stock Option may be granted under the Plan to an employee possessing more
than
7
<PAGE>
10% of the total combined voting power of all classes of stock of the
Company or of any parent or subsidiary of the Company only if the option
price is at least 110% of the fair market value of the Common Stock subject
to the option on the date it is granted, as described in Section 7.2.4,
and the option by its terms is not exercisable after the expiration of
five years from the date it is granted.
7.2.3 Duration of Options. Subject to Sections 7.1.2, 7.1.4 and
-------------------
7.2.2, Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Board of Directors, except that no
Incentive Stock Option shall be exercisable after the expiration of 10
years from the date it is granted.
7.2.4 Option Price. The option price per share shall be
------------
determined by the Board of Directors at the time of grant. Except as
provided in Section 7.2.2, the option price shall not be less than 100% of
the fair market value of the Common Stock at the date the option is
granted. The fair market value shall be determined by the Board of
Directors. If the Common Stock of the Company is not publicly traded on the
date the option is granted, the Board of Directors may consider any
valuation methods it deems appropriate and may, but is not required to,
obtain one or more independent appraisals of the Company. If the Common
Stock of the Company is publicly traded on the date the option is granted,
the fair market value shall be deemed to be the closing price of a share of
Common Stock as shown on the New York Stock Exchange Composite Transactions
Listing, as published in The Wall Street Journal on the day preceding the
-----------------------
date the option is granted, or if there has been no sale on that date, on
the last preceding date on which a sale occurred, or such other value of
the Common Stock as shall be specified by the Board of Directors.
7.2.5 Limitation on Time of Grant. No Incentive Stock Option
---------------------------
shall be granted on or after the tenth anniversary of the effective date of
the Plan.
7.2.6 Exercise Period Upon Termination By Reason of Retirement.
--------------------------------------------------------
Notwithstanding the provisions of Section 7.1.4.5, unless otherwise
determined by the Board of Directors, if an optionee holding an Incentive
Stock Option terminates employment by or service with the Company by reason
of Retirement, such optionee may exercise his or her Incentive Stock
Option(s) at any time prior to the expiration date of the option(s) or the
expiration of 90 days after the date of termination, whichever is the
shorter period.
7.2.7 Conversion of Incentive Stock Options. The Board of
-------------------------------------
Directors may at any time without the consent of the optionee convert an
Incentive Stock Option to a Non-Statutory Stock Option.
7.3 Non-Statutory Stock Options. Non-Statutory Stock Options shall be
subject to the following terms and conditions in addition to those set forth in
Section 7.1 above:
8
<PAGE>
7.3.1 Option Price. The option price for Non-Statutory Stock
------------
Options shall be determined by the Board of Directors at the time of grant
and may be any amount determined by the Board of Directors.
7.3.2 Duration of Options. Non-Statutory Stock Options granted
-------------------
under the Plan shall continue in effect for the period fixed by the Board
of Directors.
8. Stock Bonuses. The Board of Directors may award shares under the Plan
as stock bonuses. Shares awarded as a bonus shall be subject to the terms,
conditions, and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability and forfeiture
of the shares awarded, together with such other restrictions as may be
determined by the Board of Directors. If shares are subject to forfeiture, all
dividends or other distributions paid by the Company with respect to the shares
shall be retained by the Company until the shares are no longer subject to
forfeiture, at which time all accumulated amounts shall be paid to the
recipient. The Board of Directors may require the recipient to sign an agreement
as a condition of the award, but may not require the recipient to pay any
monetary consideration other than amounts necessary to satisfy tax withholding
requirements. The agreement may contain any terms, conditions, restrictions,
representations and warranties required by the Board of Directors. The
certificates representing the shares awarded shall bear any legends required by
the Board of Directors. The Company may require any recipient of a stock bonus
to pay to the Company in cash upon demand amounts necessary to satisfy any
applicable federal, state or local tax withholding requirements. If the
recipient fails to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to the recipient, including
salary or fees for services, subject to applicable law. With the consent of the
Board of Directors, a recipient may deliver Common Stock to the Company to
satisfy this withholding obligation. Upon the issuance of a stock bonus, the
number of shares reserved for issuance under the Plan shall be reduced by the
number of shares issued.
9. Restricted Stock. The Board of Directors may issue shares under the
Plan for such consideration (including promissory notes and services) as
determined by the Board of Directors. Shares issued under the Plan shall be
subject to the terms, conditions and restrictions determined by the Board of
Directors. The restrictions may include restrictions concerning transferability,
repurchase by the Company and forfeiture of the shares issued, together with
such other restrictions as may be determined by the Board of Directors. If
shares are subject to forfeiture or repurchase by the Company, all dividends or
other distributions paid by the Company with respect to the shares shall be
retained by the Company until the shares are no longer subject to forfeiture or
repurchase, at which time all accumulated amounts shall be paid to the
recipient. All Common Stock issued pursuant to this Section 9 shall be subject
to a purchase agreement, which shall be executed by the Company and the
prospective recipient of the shares prior to the delivery of certificates
representing such shares to the recipient. The purchase agreement may contain
any terms, conditions, restrictions, representations and warranties required by
the Board of Directors. The certificates, if any, representing the shares shall
bear any legends required by the Board of Directors. The Company may require any
purchaser of restricted stock to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or
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local tax withholding requirements . If the purchaser fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable by the
Company to the purchaser, including salary, subject to applicable law. With the
consent of the Board of Directors, a purchaser may deliver Common Stock to the
Company to satisfy this withholding obligation. Upon the issuance of restricted
stock, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued.
10. Stock Appreciation Rights.
10.1 Grant. Stock appreciation rights may be granted under the Plan
by the Board of Directors, subject to such rules, terms, and conditions as the
Board of Directors prescribes.
10.2 Exercise.
10.2.1 Each stock appreciation right shall entitle the holder,
upon exercise, to receive from the Company in exchange therefor an amount
equal in value to the excess of the fair market value on the date of
exercise of one share of Common Stock of the Company over its fair market
value on the date of grant (or, in the case of a stock appreciation right
granted in connection with an option, the excess of the fair market value
of one share of Common Stock of the Company over the option price per share
under the option to which the stock appreciation right relates), multiplied
by the number of shares covered by the stock appreciation right or the
option, or portion thereof, that is surrendered. No stock appreciation
right shall be exercisable at a time that the amount determined under this
subsection is negative. Payment by the Company upon exercise of a stock
appreciation right may be made in Common Stock valued at fair market value,
in cash, or partly in Common Stock and partly in cash, all as determined by
the Board of Directors.
10.2.2 A stock appreciation right shall be exercisable only at
the time or times established by the Board of Directors. If a stock
appreciation right is granted in connection with an option, the following
rules shall apply: (1) the stock appreciation right shall be exercisable
only to the extent and on the same conditions that the related option could
be exercised; (2) upon exercise of the stock appreciation right, the option
or portion thereof to which the stock appreciation right relates
terminates; and (3) upon exercise of the option, the related stock
appreciation right or portion thereof terminates.
10.2.3 The Board of Directors may withdraw any stock
appreciation right granted under the Plan at any time and may impose any
conditions upon the exercise of a stock appreciation right or adopt rules
and regulations from time to time affecting the rights of holders of stock
appreciation rights. Such rules and regulations may govern the right to
exercise stock appreciation rights granted prior to adoption or amendment
of such rules and regulations as well as stock appreciation rights granted
thereafter.
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10.2.4 For purposes of this Section 10, the fair market value of
the Common Stock shall be determined as of the date the stock appreciation
right is exercised, under the methods set forth in Section 7.2.4.
10.2.5 No fractional shares shall be issued upon exercise of a
stock appreciation right. In lieu thereof, cash may be paid in an amount
equal to the value of the fraction or, if the Board of Directors shall
determine, the number of shares may be rounded downward to the next whole
share.
10.2.6 Each stock appreciation right granted in connection with
an Incentive Stock Option, and unless otherwise determined by the Board of
Directors, each other stock appreciation right granted under the Plan by
its terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of
descent and distribution of the state or country of the holder's domicile
at the time of death, and each stock appreciation right by its terms shall
be exercisable during the holder's lifetime only by the holder.
10.2.7 Each participant who has exercised a stock appreciation
right shall, upon notification of the amount due, pay to the Company in
cash amounts necessary to satisfy any applicable federal, state and local
tax withholding requirements. If the participant fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable
by the Company to the participant including salary, subject to applicable
law. With the consent of the Board of Directors a participant may satisfy
this obligation, in whole or in part, by having the Company withhold from
any shares to be issued upon the exercise that number of shares that would
satisfy the withholding amount due or by delivering Common Stock to the
Company to satisfy the withholding amount.
10.2.8 Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments of stock appreciation
rights shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan.
11. Cash Bonus Rights.
11.1 Grant. The Board of Directors may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii)
stock appreciation rights granted or previously granted, (iii) stock bonuses
awarded or previously awarded and (iv) shares sold or previously sold under the
Plan. Cash bonus rights will be subject to rules, terms and conditions as the
Board of Directors may prescribe. Unless otherwise determined by the Board of
Directors, each cash bonus right granted under the Plan by its terms shall be
nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the holder's domicile at the time of death. The payment
of a cash bonus shall not reduce the number of shares of Common Stock reserved
for issuance under the Plan.
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11.2 Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part. If an optionee purchases shares upon exercise of an option and does not
exercise a related stock appreciation right, the amount of the bonus shall be
determined by multiplying the excess of the total fair market value of the
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage. If the optionee exercises a related
stock appreciation right in connection with the termination of an option, the
amount of the bonus shall be determined by multiplying the total fair market
value of the shares and cash received pursuant to the exercise of the stock
appreciation right by the applicable bonus percentage. The bonus percentage
applicable to a bonus right shall be determined from time to time by the Board
of Directors but shall in no event exceed 75%.
11.3 Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Board of Directors.
11.4 Cash Bonus Rights in Connection With Stock Purchases. A cash
bonus right granted in connection with the purchase of stock pursuant to Section
9 will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to Section 9 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount of any cash bonus to be awarded and timing of payment of a cash bonus
shall be determined by the Board of Directors.
11.5 Taxes. The Company shall withhold from any cash bonus paid
pursuant to Section 11 the amount necessary to satisfy any applicable federal,
state and local withholding requirements.
12. Performance Units. The Board of Directors may grant performance units
consisting of monetary units which may be earned in whole or in part if the
Company achieves certain goals established by the Board of Directors over a
designated period of time, but not in any event more than 10 years. The goals
established by the Board of Directors may include earnings per share, return on
shareholders' equity, return on invested capital, and such other goals as may be
established by the Board of Directors. In the event that the minimum performance
goal established by the Board of Directors is not achieved at the conclusion of
a period, no payment shall be made to the participants. In the event the maximum
corporate goal is achieved, 100% of the monetary value of the performance units
shall be paid to or vested in the participants. Partial achievement of the
maximum goal may
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result in a payment or vesting corresponding to the degree of achievement as
determined by the Board of Directors. Payment of an award earned may be in cash
or in Common Stock or in a combination of both, and may be made when earned, or
vested and deferred, as the Board of Directors determines. Deferred awards shall
earn interest on the terms and at a rate determined by the Board of Directors.
Unless otherwise determined by the Board of Directors, each performance unit
granted under the Plan by its terms shall be nonassignable and nontransferable
by the holder, either voluntarily or by operation of law, except by will or by
the laws of descent and distribution of the state or country of the holder's
domicile at the time of death. Each participant who has been awarded a
performance unit shall, upon notification of the amount due, pay to the Company
in cash amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the Company
to the participant, including salary or fees for services, subject to applicable
law. With the consent of the Board of Directors a participant may satisfy this
obligation, in whole or in part, by having the Company withhold from any shares
to be issued that number of shares that would satisfy the withholding amount due
or by delivering Common Stock to the Company to satisfy the withholding amount.
The payment of a performance unit in cash shall not reduce the number of shares
of Common Stock reserved for issuance under the Plan. The number of shares
reserved for issuance under the Plan shall be reduced by the number of shares
issued upon payment of an award.
13. Foreign Qualified Grants. Awards under the Plan may be granted to such
officers and employees of the Company and its subsidiaries and such other
persons described in Section 1 residing in foreign jurisdictions as the Board of
Directors may determine from time to time. The Board of Directors may adopt
such supplements to the Plan as may be necessary to comply with the applicable
laws of such foreign jurisdictions and to afford participants favorable
treatment under such laws; provided, however, that no award shall be granted
under any such supplement with terms which are more beneficial to the
participants than the terms permitted by the Plan.
14. Stock Splits; Combinations; Dividends. If the outstanding Common Stock
of the Company is hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Company by
reason of any stock split, combination of shares, reorganization,
recapitalization, reclassification, or dividend payable in shares, appropriate
adjustment shall be made by the Board of Directors in the number and kind of
shares available for awards under the Plan. In addition, the Board of Directors
shall make appropriate adjustment in the number and kind of shares as to which
outstanding options and stock appreciation rights, or portions thereof then
unexercised, shall be exercisable, so that the optionee's proportionate interest
before and after the occurrence of the event is maintained. Notwithstanding the
foregoing, the Board of Directors shall have no obligation to effect any
adjustment that would or might result in the issuance of fractional shares, and
any fractional shares resulting from any adjustment may be disregarded or
provided for in any manner determined by the Board of Directors. Any such
adjustments made by the Board of Directors shall be conclusive.
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15. Acceleration of Awards upon Change in Control.
15.1 Unless prior to a Change in Control Event (as defined in
Section 15.2), the Board of Directors determines that, upon its occurrence
benefits under awards made pursuant to this Plan will not accelerate or
determines that only certain or limited benefits under awards made pursuant to
this Plan will be accelerated and the extent to which they will be accelerated,
or establishes a different time in respect of such event for such acceleration,
then upon the occurrence of a Change in Control Event:
15.1.1 Each option and stock appreciation right will become
immediately exercisable;
15.1.2 Restricted stock will immediately vest free of restrictions;
15.1.3 Each performance share award will become payable to the
participant;
provided, however, that in no event will any award be accelerated as to any
Section 16 Person to a date less than six months after the award date of such
award. A "Section 16 Person" means a person subject to Section 16(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Board of Directors may override the limitations on acceleration in
this Section 15 by express provision in the award agreement of any participant
and may accord any participant a right to refuse any acceleration, whether
pursuant to an award agreement or otherwise, in such circumstances as the Board
of Directors may approve. Any acceleration of awards will comply with all
applicable legal requirements.
15.2 "Change in Control Event" shall have occurred if:
15.2.1 Any "Person," as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any company
owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the
Company's then outstanding securities;
15.2.2 The shareholders of the Company approve a merger or other
consolidation of the Company with any other company, other than (a) a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) 51% or more of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation or (b) a merger
or
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consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person acquires more than 30% of the
combined voting power of the Company's then outstanding securities;
15.2.3 The shareholders of the Company approve an agreement for
the sale or disposition by the Company of all or substantially all of its
assets;
15.2.4 A tender or exchange offer is made for Common Stock (or
securities convertible into Common Stock) of the Company and such offer
results in a portion of those securities being purchased and the offeror
after the consummation of the offer is the beneficial owner (as determined
pursuant to Section 13(d) of the Exchange Act), directly or indirectly, of
securities representing at least 30% of the voting power of outstanding
securities of the Company;
15.2.5 During any period of twelve months or less, individuals
who at the beginning of such period constituted a majority of the Board
cease for any reason to constitute a majority of the Board unless the
nomination or election of such new directors was approved by a vote of at
least two-thirds of the directors then still in office who were directors
at the beginning of such period;
15.2.6 Any other event or combination of events which the
Board, acting in its sole discretion, determines to be a "Change of
Control" for purposes of this Agreement;
15.3 If any option or other right to acquire Common Stock under this
Plan has been fully accelerated as permitted by Section 15.1 but is not
exercised prior to (a) a dissolution of the Company, (b) an event described in
Section 15.2 that the Company does not survive or (c) the consummation of an
event described in Section 15.2 that results in a change in control approved by
the Board of Directors, such option or right will terminate, subject to any
provision that has been expressly made for the assumption, conversion,
substitution, survival, exchange or other settlement of such option or right.
16. Corporate Mergers, Acquisitions, etc. The Board of Directors may also
grant options, stock appreciation rights, performance units, stock bonuses and
cash bonuses and issue restricted stock under the Plan having terms, conditions
and provisions that vary from those specified in this Plan provided that any
such awards are granted in substitution for, or in connection with the
assumption of, existing options, stock appreciation rights, stock bonuses, cash
bonuses, restricted stock and performance units granted, awarded or issued by
another corporation and assumed or otherwise agreed to be provided for by the
Company pursuant to or by reason of a transaction (other than a Change of
Control Event as defined in Section 15.2) involving a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to which the Company or a subsidiary is a party.
17. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because
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of changes in the law while the Plan is in effect or for any other reason;
provided, however, that except as provided in Sections 7.1.4, 7.2.6, 10, 14 and
15, no change in an award already granted shall be made without the written
consent of the holder of such award.
18. Approvals. The obligations of the Company under the Plan are subject
to the approval of state and federal authorities or agencies with jurisdiction
in the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the grants under the
Plan. The foregoing notwithstanding, the Company shall not be obligated to issue
or deliver Common Stock under the Plan if such issuance or delivery would
violate applicable state or federal securities laws. Any securities delivered
under this Plan will be subject to such restrictions, and to any restrictions
the Board of Directors may require to preserve a pooling of interests under
generally accepted accounting principles, and the person acquiring such
securities will, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements.
19. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
20. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue of such shares. Except as otherwise expressly provided in the
Plan, no adjustment shall be made for dividends or other rights for which the
record date occurs prior to the date such stock certificate is issued.
21. Plan Not Funded. Awards payable under this Plan will be payable in
shares or from the general assets of the Company, and no special or separate
reserve, fund or deposit will be made to assure payment of such awards. No
participant, beneficiary or other person will have any right, title or interest
in any fund or in any specific asset (including shares of Common Stock, except
as expressly otherwise provided) of the Company by reason of any award
hereunder. Neither the provisions of this Plan (or of any related documents),
nor the creation or adoption of this Plan, nor any action taken pursuant to the
provisions of this Plan will create, or be construed to create, a trust of any
kind or a fiduciary relationship between the Company and any participant,
beneficiary or other person. To the extent that a participant, beneficiary or
other person acquires a right to receive payment pursuant to any award
hereunder, such right will be no greater than the right of any unsecured general
creditor of the Company.
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22. Notices. Any notices required or permitted to be given to holders of
awards pursuant to the Plan shall be in writing, addressed to the most recent
address on the Company's records, and shall be deemed to be effectively given
when (a) mailed by registered or certified mail with postage and fees prepaid,
(b) sent by overnight delivery service, (c) personally delivered, or (d) sent by
facsimile with confirmed transmission.
Date adopted by the Board of Directors: March 16, 1999
Date approved by the Sole Shareholder: March 17, 1999
Amended: _____________, 1999 (Section 4.2)
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EXHIBIT 10.3
STANCORP FINANCIAL GROUP, INC.
1999 EMPLOYEE SHARE PURCHASE PLAN
1. Purpose of the Plan. StanCorp Financial Group, Inc. (the "Company")
believes that ownership of shares of its Common Stock by employees of the
Company and its Participating Subsidiaries (hereinafter defined) is desirable as
an incentive to better performance and improvement of profits, and as a means by
which employees may share in the rewards of growth and success. The purpose of
the 1999 Employee Share Purchase Plan (the "Plan) is to provide a convenient
means by which employees of the Company and Participating Subsidiaries may
purchase the Company's shares through payroll deductions and a method by which
the Company may assist and encourage such employees to become share owners.
2. Shares Reserved for the Plan. There are 1,000,000 shares of the
Company's authorized Common Stock reserved for issuance under the Plan. The
number of shares reserved for issuance under the Plan is subject to adjustment
in the event of any stock dividend, stock split, combination of shares,
recapitalization or other change in the outstanding Common Stock of the Company.
The determination of whether an adjustment shall be made and the manner of any
such adjustment shall be made by the Board of Directors of the Company, which
determination shall be conclusive.
3. Administration of the Plan. The Plan shall be administered by the
Board of Directors of the Company (the "Board of Directors"). The Board of
Directors may promulgate rules and regulations for the operation of the Plan,
adopt forms or electronic or telephonic procedures for use in connection with
the Plan, and decide any question of interpretation of the Plan or rights
arising thereunder. The Board of Directors may consult with counsel for the
Company on any matter arising under the Plan. All determinations and decisions
of the Board of Directors shall be conclusive. Notwithstanding the foregoing,
the Board of Directors, if it so desires, may delegate to the Compensation
Committee of the Board the authority for general administration of the Plan.
4. Eligible Employees. Except as indicated below all regular employees of
the Company and of each of the Company's subsidiary corporations which is
designated by the Board of Directors as a participant in the Plan (such
participating subsidiary being hereinafter called a "Participating Subsidiary)
are eligible to participate in the Plan. Any employee who would, after a
purchase of shares under the Plan, own or be deemed (under Section 424(d) of the
Internal Revenue Code of 1986, as amended (the "Code") to own stock (including
stock subject to any outstanding options held by the employee) possessing 5%
or more of the total combined voting power or value of all classes of stock of
the Company or any parent or subsidiary of the Company, shall be ineligible to
participate in the Plan. A "regular employee" is a person who has been in the
employ of the Company or a Participating Subsidiary for at least one calendar
month and whose employment relationship has not terminated (as determined under
Section 1.421-7(h)(2) of U.S. Treasury Regulations or a successor regulations),
excluding, however, any employee whose customary employment is less than 20
hours per week.
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5. Offerings.
(a) Offering Periods. The Plan shall be implemented by a series of
offering periods of approximately six months' duration or such other duration as
the Board of Directors shall determine ("Offering Periods"), commencing on
January 1 of each year and July 1 of each year. An Offering Period commencing on
or about January 1 shall end on or about the next June 30. An Offering Period
commencing on or about July 1 shall end on or about the next December 31. During
1999 there shall be two Offering Periods as follows: the initial Offering Period
shall commence on a date selected by the Board of Directors that is not earlier
than 15 days after the effective date of the Company's initial public offering
and shall end on the date that is 180 days after the effective date of the
Company's initial public offering, and the second Offering Period shall commence
on the first day following the end of the initial Offering Period and shall end
on December 31, 1999. Notwithstanding the foregoing, the Board of Directors may
establish a different duration for one or more future Offering Periods;
provided, however, that no Offering Period may have a duration exceeding twenty-
seven (27) months.
The first day of each Offering Period is an "Offering Date" and
the last day of each Offering Period is a "Purchase Date" for the Offering
Period. If an Offering Date or a Purchase Date falls on a day on which the
public equity securities markets in the United States are not open for trading,
the Company shall, by announcement at least ten days before the date on which
the Offering Date or Purchase Date would otherwise fall, specify the trading day
that will be deemed that Offering Date or Purchase Date, as the case may be.
(b) Offerings. As of each Offering Date, the Board of Directors may
make an option grant under the Plan to all, but not fewer than all, eligible
employees. Options granted pursuant to the Plan shall give each eligible
employee a right under the Plan to purchase shares of Common Stock on the
Purchase Date for the price determined under paragraph 7 of the Plan
exclusively through payroll deductions authorized under paragraph 6 of the Plan;
provided, however, that no such right shall, for each calendar year in which
such right is outstanding, (a) permit the purchase of more than 5,000 shares, or
(b) allow an employee's right to purchase shares under all stock purchase plans
of the Company and its parents and subsidiaries to which Section 423 of the Code
applies to accrue at a rate that exceeds $25,000 of fair market value of shares
(determined at the Offering Date).
6. Participation in the Plan.
(a) Initiating Participation. An eligible employee may participate in
an Offering Period under the Plan by filing with the Custodian no later than ten
days prior to the Offering Date, on forms furnished by the Custodian or pursuant
to electronic or telephonic procedures established by the Custodian, a
subscription and payroll deduction authorization. Once filed, a subscription and
payroll deduction authorization shall remain in effect for subsequent Offering
Periods unless amended or terminated. The payroll deduction authorization will
take effect on the Offering Date and will authorize the employing entity to make
payroll deductions in the specified amount from each paycheck of the
participating
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employee. Payroll deductions for any Offering Period may not exceed 10% of the
gross amount of total cash compensation in the aggregate payable to the employee
for such Offering Period. Total cash compensation does not include amounts paid
under disability plans. If a payroll deduction is made by a Participating
Subsidiary, that entity will promptly remit the amount of the deduction to the
Company.
(b) Amending or Terminating Participation. A participating
employee may amend his or her payroll deduction authorization once during any
Offering Period, to reduce the amount of future payroll deductions, with effect
during the remaining part of the Offering Period. Other amendments to the
payroll deduction authorization will not become effective until the next
following Offering Period. A permitted change in payroll deductions shall be
effective for any pay period only if notice is received by the Custodian at
least ten business days before the payday on which the change will become
effective. After an employee has begun participating in the Plan, he or she may
terminate participation in the Plan by notice received by the Custodian at any
time up to the tenth day before a Purchase Date. Any notices required under this
paragraph 6(b) shall be in writing, unless electronic or telephonic procedures
are then in effect in which case the notices shall be in the form required under
those procedures. Participation in the Plan shall also terminate when a
participant ceases to be an eligible employee for any reason, including death or
retirement. Determination of when the employment relationship terminates for
this purpose shall be made under Section 1.421-7 of U.S. Treasury Regulations or
successor regulations. A participant may not reinstate participation in the Plan
with respect to a particular Offering Period after once terminating
participation in the Plan with respect to that Offering Period. Upon
termination of a participant's participation in the Plan, all amounts deducted
from the partcipant's pay and not previously used to purchase shares under the
Plan shall be returned to the participant, without interest.
7. Option Price. The price at which shares shall be purchased in a
Offering Period shall be the lower of (a) 85% of the fair market value of a
share of Common Stock on the Offering Date of the applicable Offering Period or
(b) 85% of the fair market value of a share of Common Stock on the Purchase
Date. The fair market value of a share of Common Stock on any date shall be the
closing price of a share of Common Stock as shown on the New York Stock Exchange
Composite Transactions Listing for such date, as published in The Wall Street
Journal. In the event that the Common Stock is not listed on the New York Stock
Exchange or the price is no longer shown on the New York Stock Exchange
Composite Transactions Listing, the Board of Directors shall substitute a
comparable source of closing price information.
8. Newly Eligible Employees. A person who becomes an eligible employee
after the Offering Date of an Offering Period shall not be eligible to
participate in such Offering Period but may participate in any subsequent
Offering Period provided he or she is still an eligible employee as of the
Offering Date of such subsequent Offering Period.
9. Purchase of Shares. All amounts withheld from the pay of a participant
shall be credited to his or her account under the Plan by the Custodian
appointed under paragraph 10. No interest will be paid on such accounts unless
the Board of Directors
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determines otherwise. On each Purchase Date of an Offering Period, the amount of
the account of each participant will be applied to the purchase of whole shares
by such participant from the Company at the price determined under paragraph 7.
Any cash balance remaining in a participant's account after a Purchase Date
because it was less than the amount required to purchase a full share shall be
retained in the participant's account for the next Offering Period.
10. Delivery and Custody of Shares. Shares purchased by participants
pursuant to the Plan will be held in the custody of such investment or financial
firm (the "Custodian") as shall be appointed by the Board of Directors. The
Custodian may hold shares purchased pursuant to the Plan in book entry form and
may commingle shares in its custody pursuant to the Plan in a single account
without identification as to individual participants. By appropriate
instructions to the Custodian on forms to be provided for that purpose, a
participant may from time to time obtain (a) transfer into the participant's own
name of some or all of the shares held by the Custodian for the participant's
account and delivery of such shares to the participant; (b) transfer of some or
all of the shares held for the participant's account by the Custodian to a
regular individual brokerage account in the participant's own name, either with
the firm then acting as Custodian or with another firm, or (c) sale of some or
all of the shares held by the Custodian for the participant's account at the
market price at the time the order is executed and remittance of the net
proceeds of sale to the participant. Upon termination of participation in the
Plan, a participant may elect to have the shares held by the Custodian for his
or her account transferred and delivered in accordance with (a) above,
transferred to a brokerage account in accordance with (b), or sold in accordance
with (c).
11. Records and Statements. The Custodian will maintain the records of the
Plan. As soon as practicable after each Purchase Date the Custodian will furnish
to each participant a statement showing the activity in the participant's
account for the period covered by the statement and the cash and share balances
in the account as of the Purchase Date. Participants will be furnished such
other reports and statements, and at such intervals, as the Board of Directors
shall determine from time to time.
12. Expense of the Plan. The Company will pay all expenses incident to
operation of the Plan, including costs of record keeping, accounting fees, legal
fees, commissions and issue or transfer taxes on purchases pursuant to the Plan
and on delivery of shares to a participant or into his or her brokerage account.
The Company will not pay expenses, commissions or taxes incurred in connection
with sales of shares by the Custodian at the request of a participant. Expenses
to be paid by a participant will be deducted from the proceeds of sale prior to
remittance.
13. Rights Not Transferable. The right to purchase shares under this Plan
is not transferable by a participant, and such right is exercisable during the
participant's lifetime only by the participant. Upon the death of a participant,
any cash or shares held for the participant's account shall be transferred to
the persons entitled thereto under the laws of the state of domicile of the
participant upon a proper showing of authority.
4
<PAGE>
14. Dividends and Other Distributions. Cash dividends and other cash
distributions, if any, on shares held by the Custodian will be paid currently to
the participants entitled thereto unless the Company subsequently adopts a
dividend reinvestment plan and the participant directs that his or her cash
dividends be invested in accordance with such plan. Stock dividends and other
distributions in shares of the Company on shares held by the Custodian shall be
issued to the Custodian and held by it for the account of the respective
participants entitled thereto.
15. Voting and Shareholder Communications. In connection with voting on
any matter submitted to the shareholders of the Company, the Custodian will
furnish to each participant a proxy authorizing the participant to vote the
shares held by the custodian for his account. Copies of all general
communications to shareholders of the Company will be sent to participants in
the Plan.
16. Tax Withholding. Each participant who has purchased shares under the
Plan shall immediately upon notification of the amount due, if any, pay to the
Company in cash amounts necessary to satisfy any applicable federal, state,
local, national or other governmental tax withholding determined by the Company
to be required in any country having taxing jurisdiction. If the Company
determines that additional withholding is required beyond any amount deposited
at the time of purchase, the participant shall pay such amount to the Company on
demand. If the participant fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the
participant, including salary, subject to applicable law.
17. Responsibility and Indemnity. Neither the Company, its Board of
Directors, the Custodian, any Participating Subsidiary, nor any member, officer,
agent, or employee of any of them, shall be liable to any participant under the
Plan for any mistake of judgment or for any omission or wrongful act unless
resulting from gross negligence, willful misconduct or intentional misfeasance.
The Company will indemnify and save harmless its Board of Directors, the
Custodian and any such member, officer, agent or employee against any claim,
loss, liability or expense arising out of the Plan, except such as may result
from the gross negligence, willful misconduct or intentional misfeasance of such
entity or person.
18. Conditions and Approvals. The obligations of the Company under the
Plan shall be subject to and conditioned upon compliance with all applicable
state, federal and foreign laws and regulations, compliance with the rules of
any stock exchange or market on which the Company's securities may be listed,
and approval of such federal, state and foreign authorities or agencies as may
have jurisdiction over the Plan or the Company. The Company will use its best
effort to comply with such laws, regulations and rules and to obtain such
approvals.
19. Amendment of the Plan. The Board of Directors of the Company may from
time to time amend the Plan in any and all respects, except that without the
approval of the shareholders of the Company, the Board of Directors may not
increase the number of shares reserved for the Plan or decrease the purchase
price of shares offered pursuant to the Plan.
5
<PAGE>
20. Termination of the Plan. The Plan shall terminate when all of the
shares reserved for purposes of the Plan have been purchased, provided that the
Board of Directors in its sole discretion may at any time terminate the Plan
without any obligation on account of such termination, except as hereinafter in
this paragraph provided. Upon termination of the Plan, the cash and shares, if
any, held in the account of each participant shall forthwith be distributed to
the participant or to the participant's order, provided that if prior to the
termination of the Plan, the Board of Directors and shareholders of the Company
shall have adopted and approved a substantially similar plan, the Board of
Directors may in its discretion determine that the account of each participant
under this Plan shall be carried forward and continued as the account of such
participant under such other plan, subject to the right of any participant to
request distribution of the cash and shares, if any, held for his account.
21. Effective Date of the Plan. The Plan shall become effective on the
effective date of the Company's initial public offering, subject to prior or
subsequent approval by the affirmative vote, in person or by proxy, of the
holders of at least a majority of the shares of the Company represented and
voting on the approval of the Plan at a validly held meeting of the
shareholders.
Date approved by Board of Directors: May 16, 1999
Date approved by Shareholders: May 17, 1999
6
<PAGE>
EXHIBIT 10.7
STANDARD INSURANCE COMPANY
HOME OFFICE EMPLOYEES'
DEFERRED COMPENSATION PLAN
RESTATEMENT
(1994)
By: /s/ Ivy E. Lenz
--------------------------
(Signature)
By: Ivy E. Lenz
--------------------------
(Name Printed or Typed
Title: Corporate Secretary
--------------------------
Date Adopted: Feb 28, 1994
--------------------------
<PAGE>
OUTLINE OF KEY PLAN PROVISIONS
1 . Definition of Compensation (See Plan Section 2.7):
--------------------------
Generally, "Compensation" means wages that are reportable as income on IRS
Form W-2 and that were earned while the Employee was an "Eligible
Employee". However, Compensation does not include amounts attributable to
Company-wide profit sharing bonuses, officers' hiring, relocation, or other
individualized bonuses, long term incentive compensation plans,
reimbursement for unused vacation at the time of termination, severance
pay, taxable fringe benefits, tax reimbursements, awards and prizes, club
dues, noncash compensation, or contributions to and benefits from any other
employee benefit plan maintained by Standard, except as provided below.
In addition, Compensation means elective deferrals (including, for example,
Elective Contributions under this Plan) and any amounts deferred under a
"cafeteria plan".
2. Definition of Eligible Employee (See Plan Section 2.13):
-------------------------------
"Eligible Employee" means, at any time, an Employee who is not a union
member except to the extent the collective bargaining agreement expressly
permits or requires participation in this Plan, who is not a Leased
Employee or an Agent, and whose Service is based at the Home Office or an
Agency office.
Eligible Employees are those Employees who are potentially eligible to
participate in this Plan.
3. Minimum Participation Standards (See Plan Section 3.2):
-------------------------------
An Employee may participate in the Plan as of any Entry Date when he or
she:
a. is an Eligible Employee,
b. with respect to Elective Contributions, has been an Employee for 28
consecutive days, and
c. with respect to Matching Contributions, has been an Employee for at
least one year.
4. Basic Contributions (See Plan Sections 4.1.1 - 4.1.4):
-------------------
a. Amount: Matching Contributions may be made equal to 100% of the
------
Participant's Elective Contributions during the period in which he was
a Participant with respect to Matching Contributions.
b. Allocation: Matching Contributions shall be allocated to those
----------
Participants who make Elective Contributions according to the Matching
Contributions formula described above, EXCEPT that a Participant's
Elective Contributions in excess of 3% of the Participant's Eligible
Compensation shall not be taken into account.
c. Vestinq: Basic Contributions are 100% vested at all times.
-------
5. Elective Contributions (See Plan Sections 4.2.1 - 4.2.5):
----------------------
Elective deferrals may be contributed to the Plan by Participants in
amounts equal to not less than 3% nor more than the maximum percentage
legally premissible of their Elective Compensation.
Elective Contributions are 100% vested at all times.
FIFTH AMENDMENT
Outline of Key Plan Provisions
Effective 7/1/98
<PAGE>
6. Expenses (See Plan Section 6.4):
--------
The Expenses of maintaining this Plan which are not paid by the Employer
shall be satisfied directly out of the Plan's assets, except for certain
transactional charges which shall be paid by the particular Participants
involved.
7. Investments (See Plan Section 6.1.2):
-----------
Effective April 1, 1994, Participants are permitted to direct the
investment of amounts held by the Plan on their behalf.
8. Loans (See Plan Section 7.6):
-----
Participant loans are permitted under this Plan.
PLEASE NOTE
- -----------
THE FOREGOING STATEMENTS ARE MERELY SUMMARIES OF SPECIFIC PLAN PROVISIONS,
PROVIDED FOR QUICK REFERENCE. THE PLAN TEXT ITSELF CONTROLS AND MUST BE REFERRED
TO FOR THE ACTUAL AND COMPLETE PLAN PROVISIONS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I STATEMENT OF PURPOSE AND INTENTIONS
<S> <C>
1.1 Purpose............................................................ Page 1
1.2 Intent to Qualify.................................................. 1
1.3 Effect of Amendment and Restatement................................ 1
ARTICLE II DEFINITIONS
2.1 Anniversary Date................................................... 2
2.2 Annuity Starting Date.............................................. 2
2.3 Beneficiary........................................................ 2
2.4 Break in Service Year.............................................. 2
2.5 Code............................................................... 2
2.6 Company............................................................ 2
2.7 Compensation....................................................... 2
2.8 Date of Employment................................................. 3
2.9 Date of Re-employment.............................................. 4
2.10 Effective Date..................................................... 4
2.11 Elective Compensation.............................................. 4
2.12 Eligible Compensation.............................................. 4
2.13 Employee........................................................... 4
2.14 Employer........................................................... 7
2.15 Hour of Service.................................................... 8
2.16 Individual Accounts................................................ 9
2.17 Insurance Company.................................................. 9
2.18 Limitation Year.................................................... 9
2.19 Normal Retirement Age and Normal Retirement Date................... 9
2.20 Participant........................................................ 9
2.21 Plan............................................................... 10
2.22 Plan Administrator................................................. 10
2.23 Plan Year.......................................................... 10
2.24 Preliminary Service................................................ 10
2.25 Qualified Matching Contributions ("QMAC").......................... 10
Qualified Nonelective Contributions ("QNC")........................ 10
2.26 Required Beginning Date............................................ 10
2.27 Retirement and Retirement Date..................................... 11
2.28 Service............................................................ 11
2.29 Total and Permanent Disability..................................... 11
2.30 Trustees........................................................... 11
2.31 Vested Benefit..................................................... 11
2.32 Years of Service................................................... 11
ARTICLE III PARTICIPATION
3.1 Commencement of Participant........................................ 13
3.2 Minimum Participation Standards.................................... 13
3.3 Preliminary Service................................................ 13
3.4 Active Participation; Inactive Participation....................... 14
3.5 Cessation of Participation......................................... 14
3.6 Participation on Resumption of Employment.......................... 14
</TABLE>
<PAGE>
<TABLE>
ARTICLE IV CONTRIBUTIONS
<S> <C>
4.1.1 Basic Contributions: Amount .......................................... 15
4.1.2 Basic Contribution Account............................................ 15
4.1.3 Basic Contributions: Allocations ..................................... 16
4.1.4 Basic Contributions: Vesting ......................................... 16
4.2.1 Elective Contributions: Amount ....................................... 17
4.2.2 Elective Contribution Account ........................................ 19
4.2.3 Elective Contributions: Allocations .................................. 19
4.2.4 Elective Contributions: Vesting ...................................... 19
4.2.5 Elective Contributions: Withdrawals .................................. 20
4.3.1 Supplemental Contributions: Amount ................................... 22
4.3.2 Supplemental Contribution Accounts ................................... 22
4.3.3 Supplemental Contributions: Allocations .............................. 22
4.3.4 Supplemental Contributions: Vesting .................................. 22
4.4.1 Rollover Contributions: Amount ....................................... 23
4.4.2 Rollover Contribution Account ........................................ 23
4.4.3 Rollover Contributions: Allocation ................................... 23
4.4.4 Rollover Contributions: Vesting ...................................... 23
4.5.1 Prior Plan Contributions Account ..................................... 23
4.5.2 Prior Plan Contributions: Vesting .................................... 24
4.5.3 Prior Plan Contributions: Withdrawals ................................ 24
ARTICLE V REQUIRED NON-DISCRIMINATION TESTING
5.1.1 Limitation on Additions .............................................. 25
5.1.2 Suspense Account ..................................................... 30
5.2.1 Top-Heavy Provisions: Application .................................... 30
5.2.2 Top-Heavy Determination .............................................. 30
5.2.3 Special Rules for Top-Heavy Plans .................................... 33
5.3 Actual Deferral Percentage Test ...................................... 34
5.4 Average Contribution Percentage Test ................................. 38
5.5 Multiple Use of Alternative Limitation ............................... 42
ARTICLE VI ADMINISTRATION OF PLAN ASSETS
6.1.1 The Investment Fund ................................................. 44
6.1.2 Employee Directed Investments........................................ 44
6.2 Net Adjustments...................................................... 45
6.3 Distribution Adjustments............................................. 45
6.4 Expenses ............................................................ 45
ARTICLE VII DISTRIBUTIONS
7.1 Termination of Employment (Including Disability)
Before Retirement.................................................. 47
7.2 Death Benefits....................................................... 47
7.3 Retirement .......................................................... 51
7.4 Form of Retirement Benefit .......................................... 51
7.5 Retirement Benefits: Election of Forms and Commencement
of Payments........................................................ 53
7.6 Loans to Participants................................................ 57
</TABLE>
<PAGE>
<TABLE>
ARTICLE VIII GENERAL PROVISIONS
<S> <C>
8.1.1 Plan Modification: Authority........................................ 62
8.1.2 Plan Modification: Merger........................................... 62
8.1.3 Plan Modification: Termination...................................... 62
8.2.1 Duties: Plan Administrator.......................................... 62
8.2.2 Duties: Employer.................................................... 63
8.3 Benefit Claims Procedure............................................ 63
8.4 Review Procedure.................................................... 63
8.5 Qualification of the Plan and Conditions of Contributions........... 64
8.6 Beneficiaries....................................................... 64
8.7 Spendthrift Clause.................................................. 65
8.8 Annuities........................................................... 65
8.9 Limitations of the Employer's Liability............................. 65
8.10 Non-Guarantee of Employment......................................... 66
8.11 Applicable Law...................................................... 66
8.12 USERRA Requirements................................................. 66
ARTICLE IX DIRECT ROLLOVERS
9.1 General Rule........................................................ 67
9.2 Definitions......................................................... 67
</TABLE>
<PAGE>
ARTICLE I
STATEMENT OF PURPOSE AND
INTENTIONS
1.1 Purpose
- --- -------
The Employer adopts this Plan as a defined contribution retirement plan
of the profit sharing type with a cash or deferred arrangement to provide
retirement benefits and incidental benefits to certain Employees who
qualify for such benefits as more particularly provided herein.
1.2 Intent to Qualify
- --- -----------------
It is the Employer's intent that this Plan be a qualified plan in the
meaning of sec. 401 of the Internal Revenue Code of 1986, as amended, that
any trust that may become part hereof be exempt from tax under sec. 501(a)
of the Code, and that contributions made by the Employer be deductible
under sec. 404 of the Code. This Plan shall be interpreted, applied and
administered in a manner consistent with this intent to qualify. All
amounts contributed to, accumulated and/or held pursuant to this Plan
shall not be diverted to or used for other than the exclusive benefit of
the Participants or their beneficiaries until after such amounts have been
distributed from this Plan. In the event that the portion of this Plan
comprising the qualified cash or deferred arrangement fails to qualify
under the provisions of sec. 401(k) of the Code, the Plan as a whole
shall nonetheless be interpreted so as to qualify under sec. 401(a) of
the Code.
1.3 Effect of Amendment and Restatement
- --- -----------------------------------
This Plan is an amendment and restatement of the Standard Insurance
Company Employees and Agents Deferred Compensation Plan. As such, it is
effective only with respect to Home Office Employees and to Employees who
terminate employment with the Employer on or after the date the restated
Plan was adopted, so that the rights to benefits from the Plan, if any,
of former Employees who terminated employment before that date shall be
determined according to the Plan as it was on the date they terminated
employment, except to the extent that it may cause this Plan's document
to more accurately reflect both the intent of the Employer and the ongoing
administration of the Plan, and except as may be otherwise specifically
provided in this Plan, and except to the extent required by law.
1
<PAGE>
ARTICLE II
DEFINITIONS
For the purposes of this Plan, when the following terms appear in this Plan in
boldface type, they shall have the meanings indicated in this Article unless a
different meaning is clearly required by the context.
Whenever required by the context, masculine pronouns shall include the feminine,
and singular the plural.
2.1 Anniversary Date means each January 1.
- --- ----------------
2.2 Annuity Starting Date means the first day of the first period for which an
- --- ---------------------
amount is payable as an annuity or any other form.
2.3 Beneficiary is defined in Section 8.6, except as specifically provided to
- --- -----------
the contrary elsewhere in this Plan.
2.4 Break in Service Year means a twelve-consecutive-month period commencing on
- --- ---------------------
an Anniversary Date (or, for the purposes of determining an Employee's
Preliminary Service, each Preliminary Computation Period, as described in
Article III) and during which an Employee (or former Employee) is not
credited with any Hours of Service.
2.5 Code means the Internal Revenue Code of 1986, as amended, and all
- --- ----
regulations promulgated thereunder.
2.6 Company means Standard Insurance Company, an Oregon mutual insurance
- --- -------
company.
2.7 Compensation means wages, salary, and/or other remuneration that is
- --- ------------
receivable by an individual during a Plan Year in exchange for Service
while an Eligible Employee and that is required to be reported as income
on the individual's Form W-2 for federal income tax purposes, EXCEPT that
Compensation shall not include amounts attributable to Company-wide profit
sharing bonuses, officers' hiring or relocation bonuses, other
individualized bonuses paid to officers, long-term incentive compensation
plans, reimbursement for unused vacation at the time of termination of
Service, severance pay, taxable fringe benefits, tax reimbursements,
awards and prizes, club dues, noncash compensation, or contributions to
and benefits from any other employee benefit plan maintained by the
Company except as provided below.
In addition, Compensation shall include the following amounts:
(a) all elective deferrals (as defined by Code sec. 402(g)(3)) made by
the Participant during the Plan Year pursuant to a cash or deferred
arrangement sponsored by the Employer, including those described by
Section 4.2.1 of this Plan; and
2
<PAGE>
(b) all Compensation accrued by the Participant during the Plan Year but
which is not then included as taxable income of the Participant
pursuant to a "cafeteria" or other such plan maintained by the
Employer according to Code sec. 125.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan
Years beginning on or after January 1, 1994, the annual Compensation of
each Employee taken into account under the Plan shall not exceed the OBRA
`93 annual compensation limit. The OBRA `93 annual compensation limit is
$150,000, as adjusted by the Commissioner for increases in the cost of
living in accordance with section 401 (a)(17)(B) of the Internal Revenue
Code. The cost-of-living adjustment in effect or a calendar year applies
to any period, not exceeding 12 months, over which Compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA `93 annual
compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the
denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under section 401 (a)(17) of the Code shall
mean the OBRA `93 annual compensation limit set forth in this provision.
If Compensation for any prior determination period is taken into account
in determining an Employee's benefits accruing in the current Plan Year,
the Compensation for the prior determination period is subject to the OBRA
`93 annual compensation limit in effect for that prior determination
period. For this purpose, for determination periods beginning before the
first day of the first Plan Year beginning on or after January 1, 1994,
the OBRA `93 annual compensation limit is $150,000.
Any provision of this Section to the contrary notwithstanding, the amount
of Compensation for each Participant taken into account under this Plan
in any Plan Year beginning after 1988 and before 1994 may not exceed
$200,000, or such greater amount as the Secretary of the Treasury or his
delegate may have authorized pursuant to Code sec. 401 (a)(17).
In applying this limit, the family aggregation rules of Code sec.
414(q)(6) shall apply, except that in applying such rules, the term
"family" shall include only the spouse of the Employee and any lineal
descendants of the Employee who have not attained age 19 before the close
of the Plan Year. In addition, if this limit applies to a family unit,
then for the purposes of this Plan, each affected family member shall be
credited with an amount of Compensation on a pro rata basis, so that such
credited amount, when compared to the adjusted compensation limit, shall
have the same direct proportion that exists in comparing that person's
actual Compensation to the sum of all that family's affected members'
Compensation.
3
<PAGE>
2.8 Date of Employment means the date on which an Employee has his first Hour
- --- ------------------
of Service.
2.9 Date of Re-employment means the first date as of which an Employee has an
- --- ---------------------
Hour of Service after his most recent termination of Service, EXCEPT that
for the purposes of determining Preliminary Service, Date of Re-employment
means the first date as of which an Employee is credited with an Hour of
Service after he most recently has accrued a Break in Service Year which
permits his prior Preliminary Service to be disregarded.
2.10 Effective Date means January 1, 1980. The effective date of this
- ---- --------------
amendment and restatement is January 1, 1994, except as may be otherwise
required by law for particular Plan provisions.
2.11 Elective Compensation means that portion of a Participant's Compensation
- ---- ---------------------
that is attributable to Service performed while the Participant had in
------
effect an election to have Elective Contributions made on his behalf,
------
pursuant to Article IV.
2.12 Eligible Compensation means that portion of a Participant's
- ---- ---------------------
Compensation that is attributable to Service performed while he was a
Participant with respect to Basic Matching Contributions (i.e. he had
satisfied the one year Preliminary Service requirement and commenced
participation on the next Entry Date).
2.13 Employee means a natural person who performs Service for the Employer in
- ---- --------
exchange for Compensation, including any Leased Employee (as described
below) but excluding any independent contractor who is not a Leased,
Employee. For the purposes of this Plan, Employee shall be further
described as follows.
(a) Eligible Employee means (1) an Employee who is not a Leased Employee,
-----------------
(2) an Employee who is not included in a unit of employees covered by
a collective bargaining agreement with the Employer pursuant to which
retirement benefits were the subject of good faith bargaining, except
to the extent that such agreement expressly permits or requires
participation in this Plan and (3) an Employee whose Service is
based at the Company's Home Office in Portland, Oregon, or at any
Agency Office of the Company. However, Eligible Employee does not
mean any person who is an Agent. An Agent means an agency manager,
district manager, associate manager, agency supervisor, career agent
or senior agent engaged as such pursuant to a contract with the
Company.
(b) Highly Compensated Employee ("HCE") means:
-----------------------------------------
(1) The group of HCEs includes any Employee who during the Plan Year
performs services for the Employer and who (i) in a 5-percent
owner, (ii) receives compensation for the Plan Year in excess of
the sec. 414(q)(1)(B) amount for the Plan Year, (iii) receives
compensation for the Plan Year in excess of the
sec. 414(q)(1)(C) amount for
FIFTH AMENDMENT
Section 2.12
Effective 7/1/98
4
<PAGE>
the Plan Year and is a member of the top paid group of Employees
within the meaning of sec. 414(q)(4), or (iv) is an officer and
receives compensation during the Plan Year that is greater than
50 percent of the dollar limitation in effect under sec.
415(b)(1)(A). If no officer satisfies the compensation
requirement during the Plan Year, the highest paid officer for
such year shall be treated as an HCE.
For purposes of determining who is an HCE, compensation means
compensation within the meaning of sec. 415(c)(3) as set forth in
the Plan for purposes of determining the sec. 415 limits, except
that amounts excluded pursuant to sections 125, 402(e)(3),
402(h)(1)(B) and 403(b) are included. If compensation used for
purposes of determining the sec. 415 limits under the Plan is not
defined as total compensation as provided under sec. 415(c)(3)
and the regulations thereunder, then for purposes of determining
who is an HCE, compensation means compensation within the meaning
of sec. 1.415-2(d)(11)(i) of the Income Tax Regulations, except
that amounts excluded pursuant to sections 125, 402(e)(3),
402(h)(1)(B) and 403(b) are included.
(2) If an Employee is a family member of either a 5-percent owner
(whether active or former) or an HCE who is one of the 10 most
highly compensated Employees ranked on the basis of compensation
paid by the Employer during such year, then the family member and
the 5-percent owner or top-ten HCE shall be aggregated. In such
case, the family member and 5-percent owner or top-ten HCE shall
be treated as a single Employee receiving compensation and plan
contributions or benefits equal to the sum of the compensation
and benefits of the family member and 5-percent owner or top-ten
HCE. For purposes of this Section, family member includes the
spouse, lineal ascendants and descendants of the Employee or
former Employee, and the spouses of such lineal ascendants and
descendants.
(3) The determination of who is an HCE, including the determination
of the number and identity of Employees in the top paid group,
the number of Employees treated as officers and the compensation
that is taken into account, shall be made in accordance with the
sec. 414(q) and sec. 1.414(q)-1T of the temporary Income Tax
Regulations to the extent they are not inconsistent with the
method established above.
THIRD AMENDMENT
Section 2.13
Effective 1/1/95
5
<PAGE>
(c) Key Employee means (solely for the purposes of Section 5.2) an
------------
Employee who, at any time during the Plan Year or 4 preceding Plan
Years, was:
(1) an officer of the Employer having an annual Compensation greater
than 50% of the amount in effect under Code sec. 415(b)(1)(A) for
any such Plan Year; or
(2) one of the ten Employees having annual Compensation greater than
the limitation in effect under Code sec. 415(c)(1)(A) and owning
(or considered as owning within the meaning of Code sec. 318) the
largest interests of the Employer; or
THIRD AMENDMENT
Section 2.13
Effective 1/1/95
6
<PAGE>
(3) a 5 percent owner of the Employer; or
(4) a 1 percent owner of the Employer having an annual Compensation
of more than $150,000.
For the purposes of this Plan, Key Employee shall be described more
particularly by (and in any event, interpreted consistent with) Code
sec. 416(i)(1) and regulations promulgated thereunder.
(d) Leased Employee means a person who is employed (either as a common
---------------
law employee or an independent contractor) by a leasing organization
(but not by the Employer) and who performs services for the
Employer on a substantially full-time basis for a period of at
least one year, where such services are of a type historically
performed by Employees within the business field of the Employer, and
where such services are provided pursuant to a contract between the
leasing organization and the Employer, EXCEPT that if such person is
covered under a money purchase pension plan maintained by the leasing
organization and which provides (1) a nonintegrated employer
contribution rate of at least 7 1/2% of compensation for services
performed prior to January 1, 1987, and at least 10% of compensation
for services performed after December 31, 1986, with compensation
being determined according to Code sec. 415(c)(3), but including
amounts contributed by the Employer pursuant to a salary reduction
agreement which are excludable from the Employee's gross income
under Code sec. 125, 402(e)(3), 402(h), or 403(b); (2) immediate
participation; and (3) full and immediate vesting, AND if the sum of
all such persons is not more than 20% of the Employer's "nonhighly
compensated workforce" (as defined in 26 CFR 1.414(n)-2(f)(3)(ii)),
then for the purposes of this Plan such person is not a Leased
Employee, and is at that time ineligible for a benefit or any vested
interest in this Plan.
Any provisions of this Section and this Plan to the contrary
notwithstanding, the term "Leased Employee" shall be more
specifically defined by, and Leased Employees shall be treated under
this Plan consistent with, Code sec. 414(n) and 26 CFR 1.414(n)-2.
2.14 Employer means Standard Insurance Company, and any other person or
--------
business organization which has adopted and maintains this Plan on behalf
of its employees with the consent of Standard Insurance Company.
In addition, to the extent required for this Plan's qualification for
special tax treatment under the Code, and to the extent otherwise required
by applicable law, including for example the determination of a
Participant's Preliminary Service and Years of Service, Employer also
means any predecessor organization which previously maintained this Plan
on behalf of its employees (but only with regard to that period of time
during which the Plan was maintained by such organization(s)), and any
employer which, together with the Employer (as otherwise defined in this
Section), is a member of a controlled group of corporations in the meaning
of Code sec. 414(b), or is a member of a group of trades or business
(whether or not incorporated) under common control in the meaning of Code
sec. 414(c), or is a member of an affiliated service group in the meaning
of Code sec. 414(m), or is otherwise required to be aggregated by Code
sec. 414(o).
7
<PAGE>
2.15 Hour of Service means:
---------------
(a) each hour for which an Employee is paid, or entitled to payment, by
the Employer for the performance of duties;
(b) each hour for which an Employee is directly or indirectly paid, or
entitled to payment, by the Employer on account of a period of time
during which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation, holiday,
il1ness, incapacity (including disability), layoff, jury duty,
military duty or leave of absence except with respect to payments
made or due under a plan maintained solely for the purpose of
complying with applicable workers' compensation or unemployment
compensation or disability insurance laws or which are solely in
reimbursement to the Employee for medical or medically-related
expenses incurred by the Employee; however, no more than 501 Hours of
Service shall be credited pursuant to this paragraph to an Employee
on account of any single continuous period during which the Employee
performs no duties (whether or not such period occurs in a single
Plan Year); and
(c) each hour for which back pay, irrespective of mitigation of damages,
is either awarded or agreed to by the Employer; however, an Hour of
Service shall not be credited under both this paragraph and
paragraph (a) or (b), above.
Hours of Service credited under paragraphs (b) and (c), above, shall be
credited in accordance with Department of Labor Regulations found at 29CFR
sec. 2530.200b-2(b). Hours of Service shall be credited to the appropriate
Plan Year in accordance with 29CFR sec. 2530.200b-2(c).
Hours of Service included pursuant to paragraph (a) shall be determined
according to records of employment maintained by the Employer. If such
records do not provide an adequate basis for determining the actual number
of Hours of Service accrued by a particular Employee (e.g. a salaried
Employee), then Hours of Service under paragraph (a) shall be credited to
the Employee on a weekly basis and the Employee shall be credited with 45
Hours of Service for every week in which he has accrued at least one Hour
of Service as otherwise described in paragraph (a).
Special Rule for Maternity or Paternity Absences
------------------------------------------------
If an Employee is absent from work after December 31, 1984, due to
(1) the pregnancy of the Employee,
(2) the birth of a child to the Employee,
(3) the placement of a child with the Employee pursuant to the Employee's
adoption of the child, or
(4) the care of such child described in (2) or (3) above immediately
following its birth or placement,
Art. II
8
<PAGE>
the Employee shall nonetheless be credited with the number of Hours of
Service which normally would have been credited to the Employee but for
said absence (or, if the Plan Administrator is unable to determine said
number, with eight (8) Hours of Service for each regularly scheduled
workday the Employee is absent), to a maximum of 501 Hours of Service,
PROVIDED that this special crediting of Hours of Service occurs during
only one Plan Year, and
PROVIDED that the Plan Year in which such Hours of Service are credited is
the Plan Year in which the absence begins, unless such crediting would
not be necessary to avoid a Break in Service Year in said Plan Year, in
which case such Hours of Service shall be credited as they accrue in the
Plan Year immediately following the Plan Year in which the absence begins,
and
PROVIDED that the crediting of such Hours of Service shall be solely for
the purpose of avoiding a Break in Service Year, and shall not operate to
increase any Employee's or former Employee's vested percentage or
retirement benefit, nor shall the crediting have any other operative
effect regarding this Plan, and
PROVIDED that, under rules established by the Plan Administrator, the
Employee may be required to provide to the Plan Administrator written
certification from the Employee's attending doctor or other professional
attendant at birth or representative of the relevant adoption agency to
establish that the absence from work is for the reasons referred to above.
2.16 Individual Accounts means, for any Participant, those accounts which are
- ---- -------------------
both listed below and maintained pursuant to this Plan on his behalf.
(a) Basic Contribution Account
(b) Elective Contribution Account
(c) Rollover Contribution Account
(d) Prior Plan Contribution Account
(e) Supplemental Contribution Account
2.17 Insurance Company means a legal reserve life insurance company, licensed
- ---- -----------------
to do business in the state of Oregon, with which the Trustees have
entered into a contract to provide benefits under the Plan.
2.18 Limitation Year, for purposes of determining the limitation on certain
- ---- ---------------
additions to the Plan for the benefit of an Employee as described in
Section 5.1.1, means a twelve-consecutive-month period beginning on an
Anniversary Date.
2.19 Normal Retirement Age and Normal Retirement Date are defined in Article
- ---- --------------------- ----------------------
VII under "Retirement".
2.20 Participant means an Employee or former Employee who has become a
- ---- -----------
Participant or resumed participation pursuant to Section 3.1 or 3.6 and
who has not subsequently ceased to participate as provided in Section 3.5.
A Participant may be Active or Inactive as provided in Section 3.4.
9
<PAGE>
2.21 Plan means this Standard Insurance Company Home Office Employees' Deferred
- --- ----
Compensation Plan.
2.22 Plan Administrator means one or more persons appointed by the Trustees to
- ---- ------------------
control and manage the operation and administration of the Plan. The
person or persons so appointed shall constitute a named fiduciary or
fiduciaries for purposes of the Employee Retirement Income Security Act
of 1974. If no Plan Administrator is appointed, then the Employer (or the
Trustee(s) if the Plan is trusteed) shall be the Plan Administrator.
2.23 Plan Year means a period of time commencing on an Anniversary Date and
- ---- ---------
ending with the day immediately preceding the next Anniversary Date.
2.24 Preliminary Service is defined in Article III.
- ---- -------------------
2.25 Qualified Matching Contributions ("QMAC") means employer contributions
- ---- ----------------------------------------
(other than Elective Contributions) made to a plan for a Participant on
account of any employee contributions or Elective Contributions made to a
plan by or on behalf of the Participant, PROVIDED that the amounts of the
employer contributions are subject to the nonforfeitability and
distribution limitations of Income Tax Reg. 26 CFR 1.401(k)-1(c) & (d) the
same as elective contributions.
Qualified Nonelective Contributions ("QNC") means employer contributions
------------------------------------------
made to a plan which are not matching contributions (i.e. not made on
account of any employee or elective contribution) or Elective
Contributions, but which are subject to the nonforfeitability and
distribution limitations of Income Tax Reg. 26 CFR 1.401(k)-1(c) & (d) the
same as elective contributions.
2.26 Required Beginning Date means the later of:
- ---- -----------------------
(a) General Rule. Required Beginning Date means, for any Participant,
------------
April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2.
(b) Transition Rules: The Required Beginning Date of any Participant who
----------------
attained age 70 1/2 before January 1, 1988, shall be determined
according to (1) or (2) below:
(1) The Required Beginning Date of a Participant who is not a 5%
---
owner is April 1 of the calendar year following the later of:
(A) the calendar year in which the Participant attained age
70 1/2, or
(B) the calendar year in which the Participant retires.
(2) The Required Beginning Date of any Participant who is a 5%
owner during any year beginning after December 31, 1979, is
April 1 of the calendar year following the later of:
10
<PAGE>
(A) the calendar year in which the Participant attained age
70 1/2, or
(B) the earlier of
(i) the calendar year with or within which ends the Plan
Year in which the Participant becomes a 5% owner, or
(ii) the calendar year in which the Participant retires.
(c) The Required Beginning Date of any Participant who is not a 5% owner,
who attained age 70 1/2 during 1988, and who did not retire as of
January 1, 1989, is April 1, 1990.
(d) 5% owner, for purposes of this Section, means a Participant who is a
5% owner within the meaning of Code sec. 416(i) (except without
regard to whether the Plan is actually top-heavy) at any time during
the Plan Year ending with or within the calendar year in which the
Participant attains age 66 1/2, or any subsequent Plan Year.
2.27 Retirement and Retirement Date are defined in Article VII under
- ---- ---------- ---------------
"Retirement".
2.28 Service means employment of the Employee by the Employer for the
- ---- -------
performance of labor or duties by the Employee on behalf of the Employer
and for which the Employee is to be compensated by the Employer.
2.29 Total and Permanent Disability means a physical or mental condition that
- ---- ------------------------------
in the opinion of the Plan Administrator precludes a person from
employment for which he is qualified because of his experience, training,
and education, and that is expected to continue for not less than 12
months. The Plan Administrator's opinion regarding the degree and
permanence of the disability shall be supported by medical evidence.
2.30 Trustees means those persons or the organization with which the Employer
- ---- --------
has entered into a trust agreement to provide benefits under the Plan.
However, at any time that the Plan is not trusteed, "Trustees" shall mean
the Company.
2.31 Vested Benefit means, at any time, the sum of the Participant's vested
- ---- --------------
Individual Account balances.
2.32 Years of Service
- ---- ----------------
(a) General Rule
------------
Subject to the exclusions set forth in (b) below, a Participant's
period of employment taken into account to determine his Years of
Service for the purposes of this Plan shall be measured as follows.
A Participant shall be credited with one Year of Service for each
twelve-consecutive-month period which commenced on an Anniversary
Date on or after the Effective Date and during which the Participant
accrued at least 1,000 Hours of Service.
11
<PAGE>
In addition, if the Participant was an Employee on the Effective Date,
he shall also be credited with one Year of Service for each twelve-
consecutive-month period which commenced on an Anniversary Date prior to
the Effective Date and during which the Participant accrued at least
1,000 Hours of Service.
(b) Exclusions
----------
If a Participant or former Participant accrues a Break in Service Year,
all Years of Service attributable to his employment prior to that Break
in Service Year shall thereafter be disregarded unless either
(1) his Vested Percentage is greater than zero at the time the Break in
Service Year has accrued, or
(2) the number of his consecutive Break in Service Years is less than
(A) or (B), whichever is greater, where
(A) equals 5, and
(B) equals the aggregate number of his Years of Service before the
Break in Service Years, not taking into account Years of
Service previously disregarded because of prior Break in
Service Years.
In addition, if a Participant or former Participant has at least five
consecutive Break in Service Years, all Years of Service attributable to
his employment subsequent to said five consecutive Break in Service
Years shall thereafter be disregarded for purposes of determining his
vested interest in the amount which had been allocated to his Basic
Contribution Account (pursuant to Section 4.1.3) prior to the period of
such five consecutive Break in Service Years.
12
<PAGE>
ARTICLE III
PARTICIPATION
3.1 Commencement of Participation
- --- -----------------------------
The date of commencement of participation of Employees who were
Participants before the date as of which this restatement of the Plan
became effective (i.e. January 1, 1994) shall be determined by the terms
of this Plan as it was in effect before this restatement.
An Employee who did not participate before this restatement became
effective shall commence participation on this restatement's effective
date if he meets the Plan's Minimum Participation Standards. If not, he
shall commence participation on the first Entry Date thereafter on which
he meets the Plan's Minimum Participation Standards.
The Entry Dates shall be the first day of each month.
3.2 Minimum Participation Standards
- --- -------------------------------
An Employee meets the Plan's Minimum Participation Standards at any time
when he satisfies the following conditions:
(a) He is an Eligible Employee.
(b) With respect to Elective Contributions, he has been an Employee for
at least 28 consecutive days.
(c) With respect to Basic Matching Contributions, he is credited with at
least one year of Preliminary Service.
3.3 Preliminary Service
- --- -------------------
An Employee shall be credited with a year of Preliminary Service for each
complete Preliminary Computation Period in which he has not less than
1,000 Hours of Service, whether or not he was continuously employed during
the Preliminary Computation Period.
Preliminary Computation Periods shall have a duration of twelve
consecutive months. Each Employee's initial Preliminary Computation Period
shall commence as of his Date of Employment (or, after a Break in Service
Year that permits his prior Preliminary Service to be disregarded, his
Date of Re-employment). Thereafter, the Preliminary Computation Periods
shall commence as of each Anniversary Date, beginning with the first
Anniversary Date following the Employee's Date of Employment (or Date of
Re-employment, if applicable).
If an Employee accrues a Break in Service Year, then his Preliminary
Service attributable to his employment prior to that Break in Service Year
shall thereafter be disregarded unless either
(1) his Vested Percentage is greater than zero at the time the Break in
Service Year accrues, or
FIFTH AMENDMENT
Section 3.2
Effective 7/1/98 13
<PAGE>
(2) the number of his consecutive Break in Service Years is less than
(A) or (B), whichever is greater, where
(A) equals 5, and
(B) equals the aggregate number of his Years of Preliminary
Service before the Break in Service Years, not taking into
account Years of Preliminary Service previously disregarded
because of prior Break in Service Years.
3.4 Active Participation; Inactive Participation
- --- --------------------------------------------
Once an Employee has commenced participation (or if he subsequently
ceased to participate, once he has resumed participation), he shall be an
Active Participant with respect to each Hour of Service accrued while he
is an Eligible Employee. At any time thereafter at which he is not an
Eligible Employee, but before his participation has ceased, he shall be
an Inactive Participant.
3.5 Cessation of Participation
- --- --------------------------
A Participant shall cease to participate in this Plan (without regard to
his status as an Employee) as of the first date on which he has most
recently terminated his employment as an Employee and also has no rights
(present or contingent) to any benefit under this Plan.
3.6 Participation on Resumption of Employment
- --- -----------------------------------------
A former Employee who participated during the period of his prior
employment and who does not have Break in Service Years which permit his
Preliminary Service earned during his prior employment to be disregarded
shall resume participation as of his first Hour of Service upon
resumption of employment as an Eligible Employee.
Any other former Employee shall commence participation as of the first
Entry Date which occurs on or after the date of his resumption of
employment as an Eligible Employee and as of which he has satisfied the
Minimum Participation Standards described in Section 3.2.
Art. III 14
<PAGE>
ARTICLE IV
CONTRIBUTIONS
4.1.1 Basic Contributions: Amount
---------------------------
For each Plan Year, the Employer may contribute amounts to the Plan.
These amounts shall be called Basic Contributions, and shall be
determined according to the following provisions.
(a) Basic Matching Contribution
---------------------------
The Employer may contribute amounts as a match of Elective
Contributions for the Plan Year. The amount of each matching
contribution will equal one hundred percent (100%) of each
Participant's Elective Contribution (if any) for the period in the
Plan Year during which he was a Participant with respect to Basic
Matching Contributions (i.e., he had satisfied the one year
Preliminary Service requirement and commenced participation on the
next Entry Date). However, in determining the amount of a matching
contribution, no matching contribution shall be made on behalf of
any Participant for the Plan Year in excess of three percent (3%)
of the Participants Eligible Compensation for the Plan Year.
For the purposes of this subsection (a), the amount of Elective
Contributions to be matched shall be determined without regard to
any withdrawals of Elective Contributions that were made during
that Plan Year (see Section 4.2.5).
(b) Basic Top-Heavy Contribution
---------------------------
If a Participant is to be credited with some additional amount
pursuant to the "top-heavy provisions of Section 5.2 of this Plan,
such additional amount shall be contributed and credited as an
additional portion of the Basic Contribution for that Plan Year.
Any of the provisions of this Section to the contrary notwithstanding,
no amounts may be contributed to the Plan as Basic Contributions in
excess of the maximum amount that the Employer may deduct from its net
income subject to federal income taxation for the Employer's taxable
year on account of which such contributions have been made plus any
amount which may be currently contributed and "carried over" for
succeeding taxable years pursuant to Code sec. 404(a)(3)(A)(ii)
(assuming that the Employer is subject to federal income taxation), nor
shall such amounts exceed the maximum amount which may be allocated
consistently with the limitations stated in Section 5.1.1.
Basic Contributions shall be allocated among the Plan's Participants
pursuant to Section 4.1.3 in a uniform and nondiscriminatory manner.
4.1.2 Basic Contribution Account
--------------------------
Each Participant shall have maintained on his behalf a Basic
Contribution Account, which shall be adjusted as provided in Article VI
and which shall be closed when the Participant is entitled to no
further benefits under the terms of the Plan.
<PAGE>
4.1.3 Basic Contributions: Allocations
- ----- --------------------------------
(a) As of the last day of each Plan Year (but before the allocation of
the Net Adjustment described in Section 6.2 below), a portion of the
Basic Contribution for the Plan Year, if any, shall be allocated to
the Basic Contribution Account of each Participant who is allocated
an Elective Contribution for that Plan Year.
Each such Participant shall be allocated a portion of that Basic
Contribution according to the Basic Contribution match described in
Section 4.1.1(a).
(b) Also, as of the last day of each Plan Year (but before the allocation
of the Net Adjustment described below in Article VI), each
Participant who is entitled to be credited with an additional amount
of Basic Contribution pursuant to Section 5.2 of this Plan shall have
such amount credited to his Basic Contribution Account.
4.1.4 Basic Contributions: Vesting
- ----- ----------------------------
(a) At any time, each Participant's interest in his Basic Contribution
Account balance (EXCEPT in Basic Matching Contributions that are
forfeited because they relate to excess deferrals, excess
contributions, or excess aggregate contributions) shall be fully
vested in the Participant and not subject to forfeiture prior to the
withdrawal or distribution of such balance pursuant to this Plan.
(b) Under no circumstances shall any amendment of this Plan reduce any
Participant's Vested Percentage regarding any benefits accrued under
this Plan as of the adoption date (or effective date, if later) of
such amendment. With regard to the effect of such an amendment on
subsequently accrued benefits, for each Participant whose Vested
Percentage under the Plan as amended would at any future time be less
than it would be if determined without regard to such amendment, then
provided that the Participant had completed at least three Years of
Service as of the adoption date (or effective date, if later) of the
amendment, such Participant may irrevocably elect in a writing
delivered to the Plan Administrator during the election period
described below to have his Vested Percentage in his subsequently
accrued benefits under this Plan determined without regard to such
amendment.
For the purpose of this Section, the election period within which
such election may be delivered to the Plan Administrator shall begin
as of the adoption date of the amendment, and shall end on the
sixtieth day after the latest of:
(1) the adoption date of the amendment;
(2) the effective date of the amendment; or
(3) the date on which the Participant received written notice of the
amendment from the Employer or Plan Administrator.
Art. IV 16
<PAGE>
4.2.1 Elective Contributions: Amount
- ----- ------------------------------
(a) Elective Deferral
-----------------
Each Participant may elect to defer his receipt of Compensation that
has not yet become available to him. For each Plan Year, the total
amount of Compensation that may be deferred may equal not less than
three percent (3%) and not more than the maximum amount of his
Elective Compensation for the Plan Year permissible consistent with
Section 5.1.1 and all other limiting provisions of this Plan, the
Code, and all other applicable legal limits.
(For the purposes of this Section, the Participant's "Elective
Compensation for the Plan Year" shall include Elective Compensation
attributable to Service performed by the Participant during the Plan
Year and which, but for the Participant's elective deferral, would
have been received by the Participant within two and one-half months
after the close of the Plan Year.)
For each Plan Year, on behalf of each Participant who has made such
an elective deferral, the Employer shall contribute an amount to the
Plan equal to the amount of the Participant's elective deferral of
Compensation for the Plan Year. This contribution shall be called an
Elective Contribution.
Each Elective Contribution shall be paid to the Plan by the Employer
as soon as reasonably practicable (in no event later than 90 days)
after it is withheld by or otherwise paid to the Employer. In
addition, each Elective Contribution shall be paid to the Plan by
the Employer no later than the last day of the twelve-month period
immediately following the Plan Year with respect to which the
contribution is made.
(b) Election
--------
A Participant may elect to change the amount of his elective
deferrals, and therefore the amount of the Elective Contributions
made on his behalf, within the limits prescribed in subsection (a)
above. A Participant may also elect to cease his elective deferrals
and Elective Contributions altogether, or, having done so, may elect
to recommence them.
A Participant's election to commence or recommence elective deferrals
may become effective only as of the first day of any prospective
month.
A Participant's election to change the amount of his e1ective
deferrals may become effective only as of the first day of any
prospective calendar quarter, however, a Participant may elect only
one change each quarter.
A Participant's election to cease his elective deferrals altogether
may become effective only as of the first day of any prospective
payroll period.
However, any of the provisions of this subparagraph (b) to the
contrary notwithstanding, any election described by this subparagraph
(b) regarding elective deferrals may become effective only after
written notice delivered to the Plan Administrator within a
reasonable time prior to the effective date of the election.
Art. IV 17
<PAGE>
(c) Limit on Amount
---------------
The total sum of any Participant's elective deferrals for any taxable year
of the Participant may not exceed the limit prescribed by IRC Reg.
l.402(g)-1(c). (Generally, for taxable years beginning in 1994, that limit
equals $9,240, except for adjustments made to take into account elective
deferrals made to annuity contracts under Code sec. 403(b)).
For the purposes of this subsection (c), "elective deferrals" has the
meaning defined in IRC Reg. 1.402(g)-1(b), including (but not limited to)
Elective Contributions received by this Plan on the Participant's behalf.
For any Participant, if this limit on elective deferrals is exceeded, then
the following corrective measures are permitted.
(1) The Participant may notify the Plan Administrator of the excess
deferral, and may request that the Plan Administrator distribute to
the Participant an amount not exceeding the lesser of:
(A) the amount of the excess deferral, plus all income allocable
to the excess deferral;
(B) the sum of all amounts deferred by the Participant and
contributed to the Plan as Elective Contributions on behalf of
the Participant with regard to the affected taxable year, net of
any allocable earnings, gains or losses attributable to such
amounts; or
(C) the balance of the Participant's Elective Contribution Account
as of the date of distribution, minus any amounts of withholding
that are legally required.
In addition, the amount that may be included in a corrective
distribution shall be reduced by any excess contributions previously
distributed to the Participant for the Plan Year that began with or
within the affected taxable year of the Participant.
To be effective for the purposes of this Plan, the Participant's
notice and request must be in writing and delivered to the Plan
Administrator prior to the first April 15 following the close of the
affected taxable year of the Participant.
To the extent that the Participant has excess deferrals for the
taxable year calculated by taking into account only elective deferrals
under this Plan and other plans of the Employer, and absent actual
notification by the Participant, the Participant shall be deemed to
have provided the notice described above in this subsection.
(2) A corrective distribution of excess deferrals and allocable income may
be made during the affected taxable year of the Participant only if
all of the following conditions are satisfied.
Art. IV 18
<PAGE>
(A) The Participant has designated the amount of the
distribution as being attributable to an excess
deferral. (Because subsection (1) above limits the
amount of the corrective distribution to not more than
the amount of excess deferrals calculated by taking
into account only elective deferrals under this Plan
and other plans of the Employer, and absent an actual
designation by the Participant, the Participant shall
be deemed to have provided the designation described
above in this subsection.)
(B) The corrective distribution is made after the date on
which the Plan received the excess deferral.
(C) The Plan has designated the amount of the distribution
as being attributable to an excess deferral.
(3) Not later than the first April 15 following the close of the
affected taxable year of the Participant, and after receipt
of the Participant's written notice and request, the Plan
Administrator may make the appropriate corrective
distribution, consistent with the provisions of this
subparagraph (c).
The Plan Administrator may require that before the
corrective distribution is made, the Participant must
provide to the Plan Administrator additional documentation
evidencing the Participant's representations regarding the
excess deferrals.
The income allocable to excess deferrals for the affected taxable
year of the Participant shall be determined according to IRC Reg.
1.402(g)-(1)(d)(5).
In the event of a corrective distribution of excess deferrals and
allocable income, the balance of the Participant's Elective
Contribution Account shall be reduced accordingly.
4.2.2 Elective Contribution Account
- ----- -----------------------------
On behalf of each Participant who has elected to defer some portion of
his Compensation pursuant to this Article IV, there shall be
maintained an Elective Contribution Account, which shall be adjusted
as provided in Article VI and which shall be closed when the
Participant is entitled to no further benefits under the terms of this
Plan.
4.2.3 Elective Contributions: Allocations
- ----- -----------------------------------
Any Elective Contribution received by the Plan on behalf of a
Participant shall be credited to the Elective Contribution Account of
that Participant as of the date on which the contribution was received
by the Plan, but in any event not later than the last day of the Plan
Year with respect to which the Participant deferred Compensation so as
to receive the Elective Contribution.
4.2.4 Elective Contributions: Vesting
- ----- -------------------------------
The Elective Contributions received by the Plan on behalf of any
Participant shall be fully vested in such Participant and not subject
to forfeiture prior to the time they are withdrawn or distributed
pursuant to this Plan.
Art. IV 19
<PAGE>
4.2.5 Elective Contributions: Withdrawals
- ----- -----------------------------------
(a) At any time before his Retirement Date, a Participant may apply to
withdraw an amount from his Elective Contribution Account. The
application must be in writing and received by the Plan
Administrator. If the Participant has attained age 59 1/2 or is not
an Employee as of the date of distribution, the Participant may
withdraw up to the entire balance of his Elective Contribution
Account, including interest or other earnings. Subject to the
additional restrictions of this section, any other Participant may
withdraw an amount that does not exceed the balance of the account
attributable to Elective Contributions made on his behalf, excluding
any interest or other earnings that have been allocated after the
last day of the Plan Year ending before July 1, 1989.
A Participant's application may be approved by the Plan
Administrator only if spousal consent requirements of the type
described in Section 7.5(d) have been met within 90 days before the
proposed date of distribution, provided that the Participant's
Vested Benefit exceeds $3,500.00 or has exceeded $3,500.00 as of
any prior distribution from this Plan on behalf of the Participant;
otherwise, such consent need not be obtained.
(b) If the Participant is an Employee on the date as of which the
withdrawal is to be distributed, and if the Participant has not yet
attained age 59 1/2 as of the date of distribution, the Plan
Administrator may permit the distribution only if the distribution
is both made on account of an immediate and heavy financial need of
the Participant and necessary to satisfy that financial need.
(1) Any of the following facts and circumstances shall constitute
an immediate and heavy financial need of the Participant:
(A) expenses for medical care (as defined in Code sec. 213(d))
that were either previously incurred by the Participant,
the Participant's spouse, or any dependents of the
Participant (with "dependents" being as defined by Code
sec. 152) or that are necessary for these persons to
obtain such medical care;
(B) costs directly related to the purchase of a principal
residence for the Participant (excluding mortgage
payments);
(C) payment of tuition and related educational fees for the
next 12 months of post-secondary education for the
Participant, or the Participant's spouse, children, or
dependents (as defined in Code sec. 152);
(D) payments necessary to prevent the eviction of the
Participant from the Participant's principal residence,
or foreclosure on the mortgage on that residence; or
(E) expenses of repair or replacement of the Participant's
principal residence and its contents for damages caused by
natural disasters;
(F) funeral expenses for members of the Participant's family,
or
First Amendment
Art. IV, Section 4.2.5
Effective 7/1/94 20
<PAGE>
(G) any other facts and circumstances that the Commissioner of
the Internal Revenue Service has included through the
publication of revenue rulings, notices, or other
documents of general applicability.
A financial need shall not fail to qualify as immediate and
heavy merely because such need was reasonably foreseeable or
voluntarily incurred by the Participant.
(2) In requesting a withdrawal due to financial need, the
Participant shall specifically identify the facts and
circumstances which have caused the financial need and shall
state the amount needed to satisfy the need, which may include
amounts necessary to pay any income taxes or penalties
reasonably anticipated to result from the distribution. The
Participant shall further state that, to the extent of the
amount requested, the financial need cannot otherwise be
satisfied by:
(A) reimbursement or compensation by insurance or otherwise;
(B) reasonable liquidation of the Participant's assets, but
only to the extent that such liquidation would not in
itself cause an immediate and heavy financial need;
(C) cessation of elective deferrals or any Participant
contributions permitted by the Plan;
(D) other distributions or nontaxable (at the time of the
loan) loans from this Plan or any other plan maintained by
the Employer or any other employer; and/or
(E) borrowing from commercial sources on reasonable commercial
terms.
For the purposes of this subsection, the Participant's
resources shall be deemed to include those assets of the
Participant's spouse and minor children to the extent that such
assets are reasonably available to the Participant.
(3) Before the withdrawal may be permitted, the Plan Administrator
shall receive from the Participant any documentation that the
Plan Administrator requires in the performance of his fiduciary
duty to substantiate that the withdrawal is necessary to
satisfy the financial need identified by the Participant. Under
no circumstances shall the Plan Administrator distribute more
than the Plan Administrator reasonably believes is necessary to
satisfy the financial need identified by the Participant.
(c) The Plan Administrator shall approve or deny the Participant's
application for such a withdrawal within a reasonable amount of time
after receipt of such application. If approved, payment shall be
made by the Plan Administrator as soon as administratively
practicable, but in any event within ninety (90) days after the Plan
Administrator's receipt of the Participant's application.
First Amendment
Art. IV, Section 4.2.5
Effective 7/1/94 21
<PAGE>
The Plan Administrator shall also issue any denial of such an
application as soon as administratively practicable. Such a denial
shall be delivered in writing and shall state specifically the
reasons for such denial.
(d) The Plan Administrator may limit the frequency of withdrawals. Such
limit shall apply uniformly to all Participants.
(e) The amount of any withdrawal from an Elective Contribution Account
pursuant to this Section shall be charged against that Account as of
the date that the withdrawal is distributed from the Plan.
A withdrawal shall be taken pro rata from the Participant's balances
in the Plan's investment options (described in Section 6.1.2) as of
the date of withdrawal.
4.3.1 Supplemental Contributions: Amount
- ----- ----------------------------------
For any Plan Year in which the Plan Administrator determines that the
average of the actual deferral ratios and/or the actual contribution
ratios of Participants who are HCE's exceeds the limit determined
pursuant to Section 5.3(b) or 5.4(b), as applicable, the Employer may
make Supplemental Contributions that meet the requirements for Qualified
Nonelective Contributions or Qualified Matching Contributions described
in Article II. Supplemental Contributions shall be made solely for the
purpose of complying with the limitations of the applicable Section,
and shall not exceed the amount necessary to satisfy the test described
therein, subject to the limits of Section 5.1.
4.3.2 Supplemental Contribution Accounts
- ----- ----------------------------------
A Supplemental Contribution Account shall be maintained on behalf of
each Participant who will be allocated a portion of the Supplemental
Contribution. The account shall be adjusted as provided in Article VI and
shall be closed when the Participant is entitled to no further benefits
under the terms of the Plan.
4.3.3 Supplemental Contributions: Allocations
- ----- ---------------------------------------
As of the last day of the Plan Year, a portion of the Supplemental
Contribution for the Plan Year, if any, shall be allocated to the
Supplemental Contribution Account of each Participant who is not an HCE
and who is allocated an Elective Contribution for that Plan Year.
Each such Participant shall be allocated a portion of that Supplemental
Contribution so that such portion, when compared with the entire amount
of Supplemental Contribution that is allocated to all such Participants
for the Plan Year, shall bear the same direct proportion that the
Participant's Basic Matching Contribution for that Plan Year bears to the
sum of all such Participants' Basic Matching Contributions for the Plan
Year.
4.3.4 Supplemental Contributions: Vesting
- ----- -----------------------------------
At any time, a Participant's interest in his Supplemental Contribution
Account shall be fully vested and not subject to forfeiture prior to the
withdrawal or distribution of such balance pursuant to this Plan.
Art. IV 22
<PAGE>
4.4.1 Rollover Contribution: Amount
- ----- -----------------------------
The Plan Administrator may accept Rollover Contributions from or on
behalf of a Participant, and also from or on behalf of any Eligible
Employee who is not a Participant solely because he has not yet accrued
the required amount of Preliminary Service (pursuant to Sections 3.2 and
3.3). An Employee who makes such an early Rollover Contribution shall be
treated as a Participant for all purposes, except that he shall not
receive an allocation or share of any Employer contribution, including
Elective Contributions, until he satisfies the requirements of Article
III.
As used herein, Rollover Contribution means all or a portion of an
"eligible rollover distribution" described in Code sec. 402(c), or an
amount paid or distributed out of an individual retirement account or
individual retirement annuity described in Code sec. 408(d)(3)(A)(ii).
The Plan Administrator may require such assurance and proofs of fact from
the Participant as may be necessary to determine whether an amount the
Participant desires to contribute is a Rollover Contribution as defined
herein. He may further require the Participant to agree to indemnify the
Plan for any adverse consequences which may follow if a contribution
proves not to have been a Rollover Contribution. An Employee on whose
behalf a transfer described in this Section is made shall agree to
cooperate fully with the Plan Administrator in effecting any and all
corrective measures which may be required by an agency of the federal
government to prevent the Plan's disqualification as a result of the
transfer.
4.4.2 Rollover Contribution Account
- ----- -----------------------------
For the benefit of any Participant on whose behalf the Plan has accepted
any Rollover Contribution, there shall be maintained a Rollover Account.
Rollover Accounts shall be adjusted as provided in Article VI, and shall
be closed when the balances of such accounts, including allocable
earnings, gains and losses, have been distributed pursuant to this Plan.
4.4.3 Rollover Contributions: Allocation
- ----- ----------------------------------
Any Rollover Contribution received by the Plan pursuant to this Article
IV shall be credited as it is received to the Rollover Account(s) of the
Participant on whose behalf it was received.
4.4.4 Rollover Contributions: Vesting
- ----- -------------------------------
The Rollover Contributions received by the Plan on behalf of any
Participant shall be fully vested in such Participant and not subject to
forfeiture prior to the time they are distributed pursuant to this Plan.
4.5.1 Prior Plan Contributions Account
- ----- --------------------------------
On behalf of any Participant for whom amounts are held under this Plan
which are attributable to Employer Match, Basic, Supplementary or Special
Contributions made to and defined under this Plan as it existed prior to
the effective date of the 1984 restatement, there shall be maintained a
Prior Plan Contribution Account, into which all such amounts shall be
credited. Within this account, all amounts
Art. IV 23
<PAGE>
attributable to pre-tax contributions and all earnings on both pre-tax and
after-tax contributions shall be held and accounted separate from any
after-tax contributions that are held.
Prior Plan Contribution Accounts shall be adjusted as provided in
Article VI, and shall be closed when the balances of such accounts,
including allocable earnings, gains and losses, have been distributed
pursuant to this Plan.
4.5.2 Prior Plan Contributions: Vesting
- ----- ---------------------------------
At any time, the balance of any Participant's Prior Plan Contribution
Account shall be fully vested in such Participant and not subject to
forfeiture prior to the time they are distributed pursuant to this Plan.
4.5.3 Prior Plan Contributions: Withdrawals
- ----- -------------------------------------
(a) Subject to the provisions of this Section, a Participant may withdraw
some or all of the amounts credited to his Prior Plan Contribution
Account. A Participant may elect to withdraw such amounts only (1)
while still employed as an Employee, (2) upon termination of his
employment, or (3) after attaining Retirement Age, by filing a
written election to do so with the Plan Administrator in the time,
form and manner which the Plan Administrator will have prescribed.
(b) Withdrawals pursuant to this Section shall be subject to the
following restrictions:
(1) a Participant may make no more than one withdrawal per Plan
Year; and
(2) a withdrawal must equal at least $100, but may not exceed the
amount credited to the Prior Plan Contribution Account.
(c) In no event shall a Participant satisfy the requisite demonstration
of "financial need," defined in Section 4.2.5(b) required for in-
service withdrawals of Elective Contributions, prior to withdrawing
all amounts attributable to the Participant's Prior Plan Contribution
Account.
Art. IV 24
<PAGE>
ARTICLE V
REQUIRED NON-DISCRIMINATION TESTING
5.1.1 Limitation on Additions
- ----- -----------------------
(a) The Annual Additions to this Plan for the benefit of a Participant in
a Limitation Year are the sum of:
(1) Allocations to his Elective Contribution Account for the
Limitation Year, directly or indirectly, of the Elective
Contributions to the Plan; and
(2) Allocations to his Basic Contribution Account for the
Limitation Year, directly or indirectly, of the Basic
Contributions to the Plan; and
(3) Allocations to his Supplemental Contribution Account for the
Limitation Year, directly or indirectly, of any Supplemental
Contributions to the Plan; and
(4) Allocations to any individual medical account maintained on
behalf of the Participant by the Employer pursuant to a pension
or annuity plan, as described in Sections 415(l)(1) and
419A(d)(2) of the Code.
Contributions shall not fail to be Annual Additions to this Plan
merely because such contributions are excess contributions or excess
aggregate contributions, or merely because such excess contributions
or excess aggregate contributions are distributed. Excess deferrals
are Annual Additions only if they are not distributed as provided in
Article IV.
(b) A Participant's Maximum Annual Addition for a Limitation Year is
the lesser of:
(1) 25% of the Participant's compensation for the Limitation Year;
or
(2) the greater of:
(A) $30,000; or
(B) 25% of the defined benefit dollar limitation set forth in
Section 4l5(b)(1)(A) of the Code as in effect for the
Limitation Year or such other amount as the Secretary of
the Treasury or his delegate may from time to time
authorize pursuant to Section 415(d) of the Code.
(c) Any provisions of this Plan to the contrary notwithstanding, the
Annual Additions to this Plan for the benefit of a Participant in a
Limitation Year shall in no event exceed the Participant's Maximum
Annual Addition for that Limitation Year.
Art. V 25
<PAGE>
If allocations pursuant to Article IV would otherwise result in the
limitation in the preceding sentence being exceeded for a Participant
in a Limitation Year because of the allocation of Forfeitures, if any,
or because of a reasonable error in estimating a Participant's annual
compensation, or because of a reasonable error in determining the amount
of elective deferrals (within the meaning of Code sec. 402(g)(3), or
because of any other facts and circumstances which the Internal Revenue
Service finds to be appropriate consistent with sec. 415 of the Code and
regulations promulgated thereunder, the Plan Administrator shall reduce
that Participant's Annual Additions, but only to the extent that the sum
of such Additions no longer exceeds his Maximum Annual Additions.
This reduction of the Participant's Annual Additions shall be
accomplished by reducing the allocation (if any) to the Participant's
Individual Accounts of each of the allocated amounts described below
according to the order in which they are listed. Each such amount shall
be completely exhausted before the next listed allocation is reduced.
The allocations to be reduced (and the order in which they shall be
reduced) shall be as follows:
(1) Elective Contributions and related Basic Matching Contributions
(2) Supplemental Contributions
The amount by which an Elective Contribution is reduced shall be
distributed to the Participant on whose behalf it was received as soon
as administratively practicable, and shall include any earnings and
gains that have been allocated and which are attributable to that
returned amount.
The remaining surplus amounts created by the reductions described above
shall be reallocated to a Suspense Account established and administered
pursuant to Section 5.1.2.
(d) For purposes of this Section, "compensation" means a Participant's
wages, salaries, fees for professional service and other amounts
received for personal services actually rendered in the course of
employment with the Employer, but does not include:
(1) contributions made by the Employer on behalf of the Participant:
(A) for medical benefits within the meaning of Code
section 419A(f)(2) after the Participant's most recent
termination of employment as an Employee or for medica1
benefits as described by Code section 416(1)(1), where such
contributions are treated as Annual Additions;
(B) to a plan of deferred compensation to the extent that, before
the application of Code section 415 to that plan, the
contributions are not includible in the gross income of the
Participant for the taxable year in which contributed; or
Art. V 26
<PAGE>
(C) to a simplified employee pension (according to Code
section 408(k)) to the extent that such contributions are
deductible by the Participant pursuant to Code section
219(b)(7);
(2) distributions from a plan of deferred compensation except for
amounts received by the Participant pursuant to an unfunded
non-qualified plan of deferred compensation in the year such
amounts are includible in the Participant's gross income;
(3) amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
Participant either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture for purposes of
sec. 83 of the Code and regulations thereunder;
(4) amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; or
(5) other amounts which receive special tax benefits, such as
premiums for group term life insurance (but only to the extent
that the premiums are not includible in the gross income of the
Participant), or contributions made by an employer (whether or
not under a salary reduction agreement) towards the purchase of
an annuity contract described in sec. 403(b) of the Code (whether
or not the contributions are excludible from the gross income of
the Participant); or
(6) elective deferrals (as defined by Code sec. 402(g)(3)) made by
the Participant and amounts accrued by the Participant but which
are not then included as taxable income of the Participant
pursuant to a "cafeteria" or other such plan maintained by the
Employer according to Code sec. 125.
For the purposes of this Section, the total amount of compensation
that is actually paid or made available to a Participant within a
Limitation Year shall be the amount of that Participant's compensation
taken into account regarding that Limitation Year.
(e) Additional Limitation in the Case of Defined Benefit Plan and Defined
---------------------------------------------------------------------
Contribution Plan for Same Employee
-----------------------------------
(1) When used in this Section, the term "current accrued benefit"
means a Participant's accrued benefit as of December 31, 1982,
when expressed as an annual benefit (as defined in sec.
4l5(b)(2) of the Code and regulations thereunder). For purposes
of determining the amount of a Participant's current accrued
benefit, the following shall not be taken into account:
(A) any change in the terms and conditions of the Plan after
July 1, 1982;
Art. V 27
<PAGE>
(B) any cost of living adjustment occurring after July 1,
1982.
Effective for Plan Years beginning after December 31, 1982,
in any case where a Participant has at any time participated
in a defined benefit plan maintained by the Employer, the
limitation imposed by this Section (without regard to this
Additional Limitation) shall be reduced to the extent
necessary to prevent the Participant's Combination Ratio
from exceeding 1.0 in any Limitation Year. A Participant's
Combination Ratio is the sum of his Defined Benefit Fraction
and his Defined Contribution Fraction.
(2) A Participant's Defined Benefit Fraction for a Limitation
Year is a fraction-
(A) the numerator of which is his projected annual benefit
(as defined in sec. 415(e) of the Code and regulations
thereunder) to which the Participant would be entitled
under the defined benefit plan as of the close of the
Limitation Year; and
(B) the denominator of which is the lesser of:
(i) the product of 1.25 (or, if the Plan is top-heavy
as determined under the provisions of Section
5.2, 1.0) multiplied by the greater of (I) and
(II) where
(I) is the dollar limitation in effect under sec.
415(b)(1)(A) of the Code for such Limitation
Year, and
(II) is, in the case of a Participant who was a
Participant prior to January 1, 1983, such
Participant's current accrued benefit as of
December 31, 1982; or
(ii) the product of 1.4 multiplied by the amount which
may be taken into account under sec. 415(b)(1)(B)
of the Code with respect to such Participant for
such Limitation Year.
(3) A Participant's Defined Contribution Fraction for a Limitation
Year is a fraction -
(A) the numerator of which is the sum of the Annual Additions
(as defined in this Section) to the Participant's account
for the Participant's benefit as of the close of the
Limitation Year and for all prior Limitation Years; and
(B) the denominator of which is the sum of the lesser of the
following amounts determined for such Limitation Year and
for each prior Limitation Year of service with the
Employer:
(i) the product of 1.25 (or, if the Plan is top-heavy
as determined under the provisions of Section 5.2,
1.0) multiplied by the dollar limitation in effect
under sec. 415(c)(1)(A) of the Code for such
Limitation Year (determined without regard to sec.
415(c)(6) of the Code), or
Art. V 28
<PAGE>
(ii) the product of 1.4 multiplied by the amount which
may be taken into account under sec. 415(c)(1)(B)
of the Code (or subsection (c)(7) or (8), if
applicable) with respect to such Participant for
such Limitation Year.
Provided that the Plan satisfied the applicable requirements
of Code sec. 415 as then in effect for the Limitation Year
(if any) which began in 1986, an amount shall be subtracted
from the numerator of the Defined Contribution Fraction (not
exceeding such numerator) so that the sum of the Defined
Benefit Fraction and the Defined Contribution Fraction for
such Limitation Year, determined according to Code sec. 415
as amended effective in 1987, does not exceed 1.0.
(C) The Plan Administrator may elect that the maximum
annual additions in the denominator of the Defined
Contribution Fraction for all Limitation Years ending
before January 1, 1983, shall be an amount equal to the
product of:
(i) the amount determined under sec. 415(e)(3)(B) of
the Code for the Limitation Year ending in 1982,
and
(ii) the transition fraction, the numerator of which
is the lesser of
(I) $51,875 or
(II) 1.4 multiplied by 25 percent of such
Participant's compensation for the Plan
Year ending in 1981
and the denominator of which is the lesser of
(III) $41,500 or
(IV) 25 percent of such Participant's
compensation for the Plan Year ending in
1981.
(4) For purposes of this Additional Limitation, Employee
contributions to any defined benefit plan maintained by the
Employer, whether mandatory or voluntary, shall be treated
as a separate defined contribution plan maintained by the
Employer.
(5) If an additional limitation is applicable, it shall be
imposed in the defined benefit plan before any reduction in
the annual additions under this Plan.
(f) Aggregation of Plans
--------------------
For purposes of this Section, all qualified defined
contribution plans (without regard to whether a plan has
been terminated) ever maintained by the Employer will be
treated as part of this Plan, and all qualified defined
benefit plans (without regard to whether a plan has been
terminated) ever maintained by the Employer will be treated
as one defined benefit plan.
29
<PAGE>
Employee contributions (whether mandatory or voluntary) to a qualified
defined benefit plan maintained by the Employer shall be treated as a
defined contribution plan maintained by the Employer.
Any qualified defined benefit or defined contribution plan maintained
by any member of a controlled group of corporations or group of trades
or businesses (whether or not incorporated) under common control
(within the meaning of sec. 414(b) and (c) of the Code as modified by
sec. 415(h)) of which the Employer is a member shall be treated as a
plan maintained by the Employer.
5.1.2 Suspense Account
- ----- ----------------
For any Plan Year, after application of Section 5.1.1, if there remain
amounts which have been contributed to the Plan but which cannot
otherwise be permissibly reallocated according to the terms of this Plan,
then such excess amounts shall be held unallocated in a Suspense
Account.
Any provisions of this Plan to the contrary notwithstanding, any amounts
held in a Suspense Account shall be applied toward Employer contributions
and Plan expenses as such obligations accrue, with the Employer making no
further contributions to the Plan until such time as the Suspense Account
balance has been exhausted.
Any Suspense Account balance which is maintained at any time shall not
share in any portion of the Net Adjustment described in Section 6.2 which
is attributable to earnings, gains, or losses. No amounts held in a
Suspense Account may be distributed to any Participant at any time prior
to termination of the Plan. If there are amounts held in a Suspense
Account at a time when the Plan is terminated, such amounts may revert to
the Employer according to Section 8.1.3.
5.2.1 Top-Heavy Provisions: Application
- ----- ---------------------------------
The provisions of this Article shall become effective only if, as of the
first day of the applicable Plan Year, the Plan is top-heavy pursuant to
the Test described in Section 5.2.2.
5.2.2 Top-Heavy Determination
- ----- -----------------------
(a) Definitions
(1) Aggregation Group.
-----------------
(A) Required Aggregation Group means
--------------------------
(i) each and every plan of the Employer in which a Key
Employee is a Participant during the Plan Year
containing the Determination Date or any of the four
preceding Plan Years, including any plan that has
subsequently terminated, and
30
<PAGE>
(ii) each other plan of the Employer which enables any plan
described in subsection (i) above to meet the
participation and nondiscrimination requirements of the
Code, including (but not limited to) the requirements of
Code sections 401(a)(4) and 410.
(B) Permissive Aggregation Group means a Required Aggregation
----------------------------
Group or a plan described in subsection (A)(i) above
together with any other plan of the Employer which is not
required to be included in an Aggregation Group under
subsection (A)(ii) above but which may be so included if such
group would continue to meet the participation and
nondiscrimination requirements of the Internal Revenue Code.
(C) Top-Heavy Group means any Required Aggregation Group found
---------------
to be top-heavy pursuant to subsection (b) of this Section
5.2.2.
(2) Determination Date means the last day of the preceding Plan Year.
------------------
(3) Key Employee and non-Key Employee are defined in Section 416(i)
---------------------------------
of the Code. For the purposes of determining who is a Key
Employee, "Compensation" shall be determined according to Code
sec. 415(c)(3), but including amounts contributed by the Employer
pursuant to a salary reduction agreement and which are excludable
from the Employee's gross income under Code sec. 125, 402(e)(3),
402(h), or 403(b). Key Employee is also described in Article II,
under the definition of "Employee".
(4) Present Value of Accrued Benefits means, for this Plan, the sum of
---------------------------------
(A) the account balances attributable to Basic and Elective
Contributions and Supplemental Contributions as of the most
recent Valuation Date occurring within a twelve-month period
ending on the Determination Date, and
(B) an adjustment for contributions due as of the Determination
Date.
If this Plan is a member of an Aggregation Group, Present Value of
Accrued Benefits shall mean the sum of the account balances of all
Employer and non-deductible Employee Contribution Accounts
maintained for the Participant pursuant to all defined
contribution plans that belong to the group and of which he is a
member and also the sum of the present values of the vested
accrued benefits due the Participant pursuant to all defined
benefit plans that belong to the group and of which the
Participant is a member.
(5) Valuation Date means the last date in each Plan Year on which
--------------
interest is allocated and account balances are determined.
31
<PAGE>
(b) Top-Heavy Test
The Plan (or Aggregation Group) shall be top-heavy for each Plan Year
beginning after 1983 if, as of the Determination Date, the Plan's (or
Aggregation Group's) top-heavy ratio for the Plan Year exceeds sixty
percent (60%). The top-heavy ratio is the Present Value of Accrued
Benefits of all Key Employees over the Present Value of Accrued
Benefits of all Employees, excluding former Key Employees. Calculation
of the top-heavy ratio shall be made in accordance with sec. 416 of the
Code (with specific reference to Code sec. 416(g)(3)) and the
regulations promulgated thereunder and shall take into account the
following amounts:
(i) Present Value of Accrued Benefits as described in subsection
(a)(4) above; and
(ii) The amount of all distributions to Participants or their
Beneficiaries during the Plan Year that includes the Determination
Date and also during the four preceding Plan Years pursuant to
this Plan or pursuant to a terminated plan which if it had not
been terminated would have been required to be included in an
Aggregation Group, EXCEPT
(A) any rollover to this Plan initiated by the Employee; and
(B) any transfer to this Plan from a qualified plan maintained by
an unrelated employer; and
(C) any distribution which occurred after the Valuation Date but
prior to the Determination Date to the extent that such a
distribution has been included in the calculation of the
Present Value of Accrued Benefits.
However, calculation of the top-heavy ratio for any Plan Year shall not
take into account the Present Value of Accrued Benefits or the amount of
all distributions made to any individual who has not performed services
for the Employer at any time during the 5-year period ending on such
Plan Year's Determination Date.
For an Aggregation Group, each plan shall initially be tested
separately, and then the plans shall be aggregated by adding together
the results for each plan as of the Determination Dates that fall within
the same calendar year. If the Aggregation Group includes two or more
defined benefit plans, the same actuarial assumptions will be specified
within and used by such plans for the purposes of this Section 5.2.
Also, in such defined benefit plans proportional subsidies shall be
ignored and non-proportional subsidies considered for the purposes of
this Section 5.2.2(b).
For a Required Aggregation Group, each Plan shall be tested by
determining the Present Value of Accrued Benefits for non-Key Employees
(1) pursuant to the method, if any, that uniformly applies for accrual
purposes under all plans maintained by the affiliated Employers; or (2)
if there is no such method, as if such Accrued Benefits accrued not more
rapidly than the slowest accrual rate permitted under the fractional
accrual rates of Section 411(b)(1)(C) of the Code.
32
<PAGE>
5.2.3 Special Rules for Top-Heavy Plans
- ----- ---------------------------------
(a) Application of Special Rules
(1) If, after application of the top-heavy test described in
Section 5.2.2(b), this Plan is found not to be top-heavy,
then the special rules set forth below shall not apply to
this Plan. In that event, the other applicable provisions in
this Plan will govern.
(2) If, after application of the top-heavy test in Section
5.2.2(b), this Plan is found to be top-heavy, then the
following special rules shall govern.
(b) Minimum Contribution
(1) For each Plan Year in which the Plan is top-heavy, each non-
Key Employee who is a Participant and who has not separated
from Service at the end of the Plan Year, including any
Participant who failed to complete 1,000 Hours of Service,
and any who did not make an Elective Contribute pursuant to
Section 4.2.1, shall accrue not less than the minimum
contribution described below.
(2) The sum of the Employer's contributions and any forfeitures
allocated to the Individual Accounts of each such
Participant for each Plan Year in which the Plan is top-
heavy must equal not less than
(A) at least three percent (3%) of each such Participant's
Compensation for that Plan Year; or
(B) if the highest percentage of Compensation provided on
behalf of Key Employees who are Participants for that
Plan Year is less than three percent (3%), then not
less than the same percent of such Compensation for
that Plan Year for each non-Key Employee Participant as
the largest percentage of such Compensation provided on
behalf of Key Employee Participants for that Plan Year.
(3) Any provisions of subsection (2) above to the contrary
notwithstanding, for each Plan Year in which the Employer
maintains both a defined plan and a defined contribution
plan and both plans are top-heavy, each non-Key Employee who
is a Participant in both such Plans shall be credited with
not less than a portion of the sum of the Employer's
contributions and forfeitures made under the terms of this
Plan for that Plan Year equal to five percent (5%) of his
Compensation.
In determining the minimum contribution or benefit that is
required for non-Key Employees by this Section, Election
Contributions and matching contributions, if any, that are
allocated to Key Employees shall be taken into account. However,
to the extent that matching contributions made on behalf of non-
Key Employees are taken into account in meeting the Actual
Deferral Percentage Test and/or the Actual Contribution
Percentage Test
33
<PAGE>
described in Article V, such contributions may not additionally be
credited as part of any minimum contribution or benefit required by
this Section. For Plan Years beginning after 1988, Elective
Contributions made on behalf of non-Key Employees may not be credited
as part of any minimum contribution or benefit required by this
Section.
If the Employer is required to contribute an additional amount to the
Plan on behalf of a Participant as a result of the operation of this
Article, that amount shall be credited to a Basic Contribution Account
established and maintained on his behalf.
5.3 Actual Deferral Percentage Test
- --- -------------------------------
(a) For each Plan Year, the Plan Administrator shall perform (or have
performed) an Actual Deferral Percentage Test in order to ensure that
the Plan's cash or deferred arrangement satisfies the requirements of
Code sec. 401(k)(3) and does not impermissibly discriminate in favor
of Participants who are Highly Compensated Employees ("HCE's").
The Actual Deferral Percentage ("ADP") Test shall cormpare the ADP of
those Participants who are HCE's with the ADP of those Participants
who are not HCE's.
For any group of Participants, the group's ADP equals the average
(expressed as a percentage) of the actual deferral ratios of that
group's Participants, with each Participant's actual deferral ratio
calculated separately.
For any Plan Year, a Participant's actual deferral ratio consists of
the amount of the Participant's Elective Contribution for the Plan
Year (subject to the limitations of the following paragraph) plus, at
the discretion of the Plan Administrator, the amount of any Qualified
Matching Contributions ("QMAC's") and Qualified Nonelective
Contributions ("QNC's") that are treated as Elective Contributions and
included in the ADP testing by the Plan Administrator, with such sum
expressed as a percentage of his Compensation. For this purpose, in
any Plan Year, the Plan Administrator may elect to limit the
Compensation taken into account for every Participant to Compensation
received while participating in the Plan.
However, the Plan Administrator's discretion in choosing to include
any QMAC's or QNC's is limited to the extent that such inclusion
satisfies the conditions and requirements set forth in 26 CFR 1.40
1(k)-1(b)(5).
In determining a Participant's actual deferral ratio, the
Participant's Elective Contributions may be taken into account only to
the extent that they satisfy the following conditions.
(1) The Elective Contribution must be allocated to an account
maintained on behalf of the Participant as of a day within the
plan year being considered. For the purpose of this provision, an
Elective Contribution shall be considered allocated as of a date
within a plan year only if both:
34
<PAGE>
(A) the allocation is not contingent upon the Participant's
participation in a plan or performance of service on any
date subsequent to the date of allocation; and
(B) the amount of the Elective Contribution is actually paid to
the plan pursuant to which the Elective Contribution is
made no later than the end of the twelve-consecutive-month
period immediately following the plan year to which the
contribution relates.
(2) The Elective Contribution relates to Compensation that either:
(A) would have been received by the Participant in the plan year
but for the Participant's election to defer that
Compensation, or
(B) is attributable to service performed by the Participant in
the plan year and, but for the Participant's election to
defer, would have been received by the Participant within
two and one-half months after the close of the plan year.
In addition, if with reference to a Plan Year the Participant was an
HCE and also participated in more than one cash or deferred
arrangement sponsored by the Employer, then all such cash or deferred
arrangements shall be aggregated and treated as one arrangement for
the purposes of determining the Participant's actual deferral ratio
for that Plan Year. If these arrangements have different plan years,
then for the Plan Years beginning after December 31, 1988, these
arrangements' plan years that end with or within the same calendar
year shall be aggregated and treated for ADP purposes as a single
arrangement and single plan year. However, the preceding provisions to
the contrary notwithstanding, contributions and allocations under
plans described by Code sec. 4975(e)(7) (i.e. "ESOP's") shall not be
aggregated.
(b) For each Plan Year beginning after 1986, the ADP for the group of
Eligible Participants who are HCE's for that Plan Year shall not
exceed the greater of (1) or (2), where
(1) equals 125% of the ADP for the group of Eligible Participants who
are non-HCE's for that Plan Year; and
(2) equals the lesser of (A) and (B), where
(A) equals 200% of the ADP for the group of Eligible
Participants who are non-HCE's for that Plan Year; and
(B) equals the ADP for the group of Eligible Participants who
are non-HCE's for that Plan Year, plus 2 percentage points
(or such other amount as may be prescribed by the Secretary
of the Treasury).
35
<PAGE>
For the purposes of this subsection, "Eligible Participants" means
those Participants who during the Plan Year were eligible to have
elected to defer some portion of their Compensation for that Plan Year
so as to receive an Elective Contribution, regardless of whether such
an election was actually made.
(c) If for a Plan Year the ADP limits of subsection (b) above are
exceeded, the amount of excess contributions to be attributed to each
HCE shall be determined by the following leveling method.
The Plan Administrator shall reduce the amount of Elective
Contributions that are allocated pursuant to the Plan for that Plan
Year on behalf of the HCE with the highest actual deferral ratio. This
reduction shall be made only to the extent required to (1) enable the
Plan to meet the ADP limits, or (2) cause the HCE's actual deferral
ratio to equal the actual deferral ratio of the HCE with the next
highest actual deferral ratio, whichever occurs first.
This process shall be repeated by the Plan Administrator until the ADP
test limits of subsection (b) above have been met.
For each Plan Year, the amount of excess contributions, if any, for
each HCE shall equal the sum of the HCE's Elective Contributions, plus
any Qualified Nonelective Contributions and Qualified Matching
Contributions that are treated as Elective Contributions (determined
prior to the application of this subsection) in determining the HCE's
actual deferral ratio, minus the product of the HCE's actual deferral
ratio (determined after application of this subsection) multiplied by
the HCE's Compensation.
(d) After the close of the Plan Year to which the excess contributions
are attributable, but within twelve months after such Plan Year's
close, the Plan Administrator shall designate as such and distribute
to each HCE the amount (if any) of excess contributions (plus any
allocable income attributable to such contributions) that were made on
that HCE's behalf, minus the sum of any excess deferrals previously
distributed to the HCE for the HCE's taxable year ending with or
within that Plan Year.
The income allocable to a Participant's excess contributions (the
"excess income") for the Plan Year shall be determined separately
from the excess income for the period between the end of the Plan Year
and the date as of which the corrective distribution is made (the "gap
period").
The excess income for the Plan Year shall be determined by multiplying
the income for the Plan Year allocable to the Participant's Elective
Contributions (and amounts treated as Elective Contributions) by a
fraction. The numerator of the fraction is the amount of excess
contributions made on behalf of the Participant for the Plan Year. The
denominator is the Participant's Individual Account balance
attributable to Elective Contributions (and amounts treated as
Elective Contributions) as of the end of the Plan Year, with such
balance reduced by the gain allocable to such total balance for the
Plan Year and increased by the loss allocable to such total balance
for the Plan Year.
36
<PAGE>
The excess income for the gap period may be calculated by utilizing
either a fractional method or a safe-harbor method, with the choice of
method being made by the Plan Administrator in his or her sole
discretion.
Under the fractional method, the income for the gap period that is
allocable to the Participant's Elective Contributions is multiplied by
the same fraction that is used to determine the excess income for the
Plan Year.
Under the safe-harbor method, the excess income for the gap period
shall equal the product of:
(1) 10% of the Participant's excess income for the Plan Year,
multiplied by
(2) the number of the calendar months that have elapsed since the end
of the Plan Year. (In determining the number of months that have
elapsed, a distribution that occurs on or before the fifteenth
day of the month shall be deemed to have been made as of the last
day of the preceding month, and a distribution occurring after
such fifteenth day shall be deemed to have occurred as of the
first day of the next subsequent month.)
(e) Any of the provisions of this Section to the contrary notwithstanding,
in determining the actual deferral ratio of a Participant who is an
HCE, the family aggregation rules described in paragraph (4) of the
definition in Article II of Highly Compensated Employee shall apply,
and the actual deferral ratio of any such family aggregate shall equal
the actual deferral ratio determined by combining the contributions
received by the Plan on behalf of and Compensation paid to all
eligible family members.
After the actual deferral ratio of such a family aggregate has been
determined, the amount of excess contributions (if any) that were
allocated on behalf of the family aggregate shall be determined and
corrected according to the "leveling" method described in subsection
(c) above. The resulting excess contributions shall be reallocated
among those family members whose contributions were combined to
determine the actual deferral ratio of the family aggregate, with each
such member being allocated an amount of excess contribution in
proportion to the contributions of each such member that have been
combined.
(f) For the purposes of satisfying the limits specified in this Section
and in Code sections 401(a)(4), 410(b), and 401(k), two or more cash
or deferred arrangements may be aggregated, provided that such
aggregation is consistent with the provisions of IRC Regs. 1.401(k)-
1(b)(3) and 1.401(k)-1(g)(1)(ii); for example, for Plan Years
beginning after 1989, cash or deferred arrangements may be aggregated
pursuant to this subsection only if the respective plans of which they
are part have the same plan years. All elective contributions that are
made under any plan that are aggregated with this Plan for the
purposes of Code sec. 401(a)(4) or sec. 410(b) (other than sec.
410(b)(2)(A)(ii) are to be treated as if they were made under a single
plan. In addition, if any plans are permissively aggregated with this
Plan for the purposes of Code sec. 401(k), the aggregated plans must
also satisfy Code secs. 401(a)(4) and 410(b) as though they were a
single plan.
37
<PAGE>
5.4 Average Contribution Percentage Test
- --- ------------------------------------
(a) For each Plan Year, the Plan Administrator shall perform (or have
performed) an Average Contribution Percentage Test in order to ensure
that the Plan's receipt and allocation of matching contributions
and/or employee contributions, if any, satisfy the requirements of
Code sec. 401(m) and do not impermissibly discriminate in favor of
Participants who are Highly Compensated Employees ("HCE's").
The Average Contribution Percentage ("ACP") Test shall compare the ACP
of those Participants who are HCE's with the ACP of those Participants
who are not HCE's.
For any group of Participants, the group's ACP equals the average
(expressed as a percentage) of the actual contribution ratios of that
group's Participants, with each Participant's actual contribution
ratio calculated separately.
For any Plan Year, a Participant's actual contribution ratio consists
of the sum of the following contributions (if any) which have been
received by the Plan on the Participant's behalf for that Plan Year:
(1) "matching" employer contributions (within the meaning of Code
sec. 401(m)(4)(A));
(2) employee contributions; and
(3) Any Elective Contributions and Qualified Nonelective
Contributions ("QNC's") that the Plan Administrator, in the
exercise of his sole discretion, chooses to take into account for
the purposes of ACP testing (except that the Plan Administrator's
discretion in choosing to include any Elective Contributions and
QNC's is limited to the extent that such inclusion satisfies the
conditions and requirements set forth in 26 CFR 1.401(m)-
1(b)(5));
with such sum expressed as a percentage of the Participant's
Compensation. For this purpose, in any Plan Year, the Plan
Administrator may elect to limit the Compensation taken into account
for every Participant to Compensation received while participating in
the Plan.
In determining a Participant's actual contribution ratio, matching
contributions made on behalf of the Participant may be taken into
account only to the extent that they satisfy the following conditions.
(1) The matching contribution must be allocated to an account
maintained on behalf of the Participant as of a day within the
plan year being considered.
(2) The amount of the matching contribution is actually paid to the
plan pursuant to which the matching contribution is made no later
than the end of the twelve-consecutive-month period immediately
following the plan year to which the contribution relates.
38
<PAGE>
(3) The matching contribution is made on behalf of the Participant on
account of the Participant's elective contributions or employee
contributions (if any) for the plan year to which the matching
contribution relates. Matching contributions that are forfeited
because they relate to excess deferrals, excess contributions or
excess aggregate contributions shall not be taken into account.
(b) For each Plan Year beginning after 1986, the ACP for the group of Eligible
Participants who are HCE's for that Plan Year shall not exceed the greater
of (1) or (2), where
(1) equals 125% of the ACP for the group of Eligible Participants who are
non-HCE's for that Plan Year; and
(2) equals the lesser of (A) and (B), where
(A) equals 200% of the ACP for the group of Eligible Participants who
are non-HCE's for that Plan Year; and
(B) equals the ACP for the group of Eligible Participants who are
non-HCE's for that Plan Year, plus 2 percentage points (or such
other amount as may be prescribed by the Secretary of the
Treasury).
For the purposes of this subsection, "Eligible Particpants" means those
Participants who are directly or indirectly eligible to make an employee
contribution or to receive an allocation of matching contributions
(including matching contributions derived from Forfeitures, if any) under
the terms of this Plan for the Plan Year being reviewed.
If a Participant has "excess deferrals" according to Section 4.2.1(c) or
"excess contributions" for the Plan Year according to Section 5.3, then
such excess deferrals and/or excess contributions shall be calculated and
distributed prior to determining the Participant's excess aggregate
contributions for the Plan Year.
(c) If for a Plan Year the ACP limits of subsection (b) above are exceeded, the
amount of excess aggregate contributions to be attributed to each HCE
shall be determined by the following leveling method.
The Plan Administrator shall reduce the employee contributions and, if
necessary, the matching contributions that had been allocated pursuant to
the Plan Year for that Plan Year on behalf of the HCE with the highest
actual contribution ratio. This reduction shall be made only to the extent
required to (1) enable the Plan to meet the ACP limits, or (2) cause the
HCE's actual contribution ratio to equal the next highest actual
contribution ratio, whichever occurs first.
This process shall be repeated by the Plan Administrator until the ACP
test limits of subsection (b) above have been met.
39
<PAGE>
For each Plan Year, the amount of excess aggregate contributions, if any,
for each HCE shall equal the sum of the HCE's employee contributions and
matching contributions, if any, plus any Qualified Nonelective
Contributions and Elective Contributions that are treated as matching
contributions (determined prior to the application of this subsection) in
determining the HCE's actual contribution ratio, minus the product of the
HCE's actual contribution ratio (determined after application of this
subsection) multiplied by the HCE's Compensation.
For the Plan Years beginning after 1988, determinations of actual
contribution ratios shall be rounded to the nearest one-hundredth of one
percent of the Participant's Compensation.
(d) After the close of the Plan Year to which the excess aggregate
contributions are attributable, but within twelve months after such Plan
Year's close, the Plan Administrator shall designate the amount (if any) of
the excess aggregate contributions (plus any allocable income attributable
to such contributions) that are attributable to amounts received and
accumulated under the Plan on each HCE's behalf.
Such excess aggregate contributions shall be forfeited, if forfeitable. As
of the last day of the Plan Year, these forfeited amounts shall be
reallocated only to Participants who are NHCE's for the Plan Year. This
allocation shall be made on a pro rata basis, with each such Participant
being allocated a portion of the total forfeited amounts so that such
portion, when compared to the total of the forfeited amounts, shall bear
the same direct proportion that the amount of Basic Matching Contribution
being allocated to the Participant pursuant to Section 4.1.1, subsection
(a), bears to the entire amount of Basic Matching Contribution that is
allocated to all such NHCE Participants pursuant to Section 4.1.1(a).
If not forfeitable, the amount of the excess aggregate contribution shall
be distributed to the HCE on whose behalf the excess aggregate contribution
was received. If such excess aggregate contributions are distributed more
than 2 1/2 months after the last day of the Plan Year in which such excess
amounts arose, a 10% excise tax will be imposed on the Employer with
respect to these amounts.
The income allocable to a Participant's excess aggregate contributions (the
"excess income") for the Plan Year shall be determined separately from the
excess income for the period between the end of the Plan Year and the date
as of which the corrective distribution is made (the "gap period").
The excess income for the Plan Year shall be determined by multiplying the
income for the Plan Year allocable to the Participant's employee and
matching contributions (and amounts treated as matching contributions), if
any, by a fraction. The numerator of the fraction is the amount of excess
contributions made on behalf of the Participant for the Plan Year. The
denominator is the sum of the Participant's Individual Accounts' balances
attributable to employee and matching contributions (plus balances
attributable to amounts treated as matching contributions), if any, as of
the end of the Plan Year, with such sum reduced by the gain and increased
by the loss allocable to the total sum of such balances for the Plan Year.
40
<PAGE>
A Participant's excess income for the gap period may be calculated by
utilizing either a fractional method or safe-harbor method, with the
choice of method being made by the Plan Administrator in his or her sole
discretion.
Under the fractional method, the income for the gap period that is
allocable to the Participant's employee and matching contributions (and
amounts treated as matching contributions), if any, is multiplied by the
same fraction that is used to determine the excess income for the Plan
Year.
Under the safe-harbor method, the excess income for the gap period shall
equal the product of:
(1) 10% of the Participant's excess income for the Plan Year,
multiplied by
(2) the number of calendar months that have elapsed since the end of
the Plan Year. (In determining the number of months that have
elapsed, a distribution that occurs on or before the fifteenth day
of the month shall be deemed to have been made as of the last day
of the preceding month, and a distribution occurring after such
fifteenth day shall be deemed to have occurred as of the first
day of the next subsequent month.)
(e) Any of the provisions of this Section to the contrary notwithstanding,
in determining the actual contribution ratio of a Participant who is an
HCE, the family aggregation rules described in paragraph (4) of the
definition in Article II of Highly Compensated Employee shall apply, and
the actual contribution ratio of any such family aggregate shall equal
the actual contribution ratio determined by combining the contributions
received by the Plan on behalf of and Compensation paid to all eligible
family members.
After the actual contribution ratio of such a family aggregate has been
determined, the amount of excess aggregate contributions (if any) that
were allocated on behalf of the family aggregate shall be determined and
corrected according to the "leveling" method described in subsection (c)
above. The resulting excess aggregate contributions shall be
reallocated among those family members whose contributions were combined
to determine the actual contribution ratio of the family aggregate, with
each such member being allocated an amount of excess aggregate
contribution in proportion to the contributions of each such member that
have been combined.
(f) Any provisions of this Section to the contrary notwithstanding, for the
purposes of determining whether this Plan satisfies the ACP test, all
employee and matching contributions that are made under any plans that
are aggregated with this Plan for the purposes of Code sec. 401(a)(4)
and/or 410(b) (other than Code sec. 4l0(b)(2)(A)(ii)) shall be
aggregated and treated as if made under a single plan. In addition, if
any plans are permissively aggregated with this Plan for the purposes
of ACP testing, then the aggregated plans must also satisfy Code secs.
401(a)(4) and 410(b) as though they were a single plan.
Art. V 41
<PAGE>
Also, if a Participant who is a Highly Compensated Employee also
participates in other retirement plans sponsored by the Employer to
which employer matching contributions (as defined in Code section
401(m)(4)(A)) or employee contributions are made, then all such
contributions made on the Participant's behalf shall be aggregated for
the purposes of this Section.
However, for Plan Years beginning after 1989, plans may be aggregated
pursuant to this subsection (f) only if they have the same plan year.
5.5 Multiple Use of Alternative Limitation
- --- --------------------------------------
(a) Any provisions of this Plan to the contrary notwithstanding, if for
any Plan Year a multiple use of the alternative limitation occurs with
respect to two or more cash or deferred arrangements ("CODA's") and/or
plans maintained by the Employer, such multiple use shall be corrected
by reducing the actual deferral percentage ("ADP") or actual
contribution percentage ("ACP") of HCE's who are eligible to
participate in such CODA's and/or plans.
(b) Multiple use of the alternative limitation occurs if the following
conditions are met:
(1) one or more HCE's are eligible to defer compensation pursuant to
a CODA subject to Code sec. 401(k) and sponsored by the
Employer, and also are allocated contributions pursuant to a
plan subject to Code sec. 401(m) and sponsored by the Employer;
and
(2) the ADP for the group of HCE's eligible to defer compensation
pursuant to the CODA exceeds 125% of the ADP for the group of
non-HCE's and the ACP for the group of HCE's allocated
contributions pursuant to the Plan subject to Code sec. 401(m)
exceeds 125% of the ACP for the group of non-HCE's; and
(3) the sum of the ADP for the group of HCE's eligible to defer
compensation pursuant to the CODA and the ACP for the group of
HCE's allocated contributions pursuant to the Plan subject to
Code sec. 401(m) exceeds the "Aggregate Limit".
The "Aggregate Limit" is the greater of (A) and (B), where:
(A) equals the sum of:
(I) 125% of the greater of the ADP or the ACP for the
group of non-HCE's, and
(II) 2 plus the lesser of the ADP or the ACP for the group
of non-HCE's, but not more than 200% of the lesser of
the ADP or the ACP for the group of non-HCE's; and
(B) equals the sum of:
(I) 125% of the lesser of the ADP or the ACP for the
group of non-HCE's, and
Art. V 42
<PAGE>
(II) 2 plus the greater of the ADP or the ACP for the group of
non-HCE's, but no more than 200% of the greater of the ADP
or the ACP for the group of non-HCE's.
(c) So that there is no multiple use of the alternative limitation, all HCE's
who were eligible to have deferred compensation under the CODA and who were
also allocated contributions under an Employer-sponsored plan subject to
Code sec. 401(m) testing shall have their ADP reduced in the manner
described in 26 CFR 1.401(k)-1(f)(2).
43
<PAGE>
ARTICLE VI
ADMINISTRATION OF PLAN ASSETS
6.1.1 The Investment Fund
- ----- -------------------
All funds received by the Plan pursuant to Article IV, including amounts
deposited with the Insurance Company under an annuity or insurance
contract, shall be credited to an Investment Fund. The Investment Fund
shall be of a suitable nature to hold the funds and to provide the
benefits payable under this Plan.
The Plan Administrator shall create and maintain adequate records to
disclose the interest in the Investment Fund of each Participant or,
where appropriate, his Beneficiary. Such records shall be in the form of
Individual Accounts, and credits and charges shall be made to such
accounts in the manner herein described. These amounts shall be
maintained for accounting purposes only and shall not represent any
segregated or identifiable portion of the Investment Fund.
All deposits to the Investment Fund shall be applied for the exclusive
benefit of Participants and their Beneficiaries, except for such
reasonable expenses as may be incurred in the establishment or operation
of the Plan and which are not otherwise paid. Except as provided in
Sections 8.1.3 and 8.5, no amounts in the Investment Fund, nor any
earnings attributable thereto, may ever revert to the Employer prior to
full satisfaction of all liabilities under the Plan.
6.1.2 Employee Directed Investments
- ----- -----------------------------
Beginning April 1, 1994, each Participant may direct the allocation of
amounts held in the Investment Fund on his behalf, including amounts in
the Prior Plan Account, among a variety of investment options made
available and selected by the Trustees pursuant to the contract with the
Insurance Company.
To the extent that the Participant does not direct the investment of such
amounts received on his behalf, the remainder will automatically be
allocated to and invested in one of the funds or accounts available under
the Insurance Company contract and pursuant to the Trustees' direction.
Each Participant may elect to redirect the investment of amounts held in
the Investment Fund on his behalf, provided that in any calendar quarter
a Participant may transfer out of the Portfolio Fund no more than
$5,000.00 or 5% of his balance in such account, whichever is greater.
This limitation is waived for any directive effective April 1, 1994. The
limitation on a transfer out of the Portfolio Fund on April 1, 1994,
shall be $5,000 or 50% of his balance in such account, whichever is
greater. Furthermore, an exception will be made for any Participant who
elects to transfer his entire balance out of such an account. In that
event, the transfer can be made over a five-year period in quarterly
increments. The amount of each quarterly increment shall be determined by
multiplying the Participant's then-current account balance by a fraction,
the numerator of which is one, and the denominator of which is the number
of quarterly incremental payments remaining to be made within the five-
year period.
First Amendment
Art. IV, Section 6.1.2
Effective 4/1/94 44
<PAGE>
Any of the above-specified directives to allocate, re-allocate, transfer
or remove funds from or among the various investment options shall be
effective for the purposes of this Plan only prospectively as of the first
day of the calendar quarter (i.e. January 1, April 1, July 1, or October
1) on which the Employee is a Participant and which is the first calendar
quarter beginning not sooner than 15 days following the receipt by the
Insurance Company of such directive in writing.
6.2 Net Adjustments
- --- ---------------
The Net Adjustment of amounts directed by Participants under Section 6.1.2
shall be determined and applied separately to the Participant-directed
amounts in each investment fund or account. Amounts that are not directed
by Participants shall share in the Net Adjustment attributable to the
investment of all such amounts.
Earnings, gains and losses, and any expenses accrued to the Investment
Fund shall be allocated to the Individual Accounts in the following
manner:
(1) The Plan Administrator shall periodically determine the Net
Adjustment for each calendar quarter. The Net Adjustment shall be the
sum of any earnings and gains experienced by the Investment Fund
during the calendar quarter, less any losses experienced by the
Investment Fund during that quarter, and less expenses for that
quarter (if any) to be allocated pursuant to Section 6.4. The fair
market value of the Plan's assets as of the last day of the calendar
quarter shall be used in determining such earnings, gains and losses.
(2) The Plan Administrator shall allocate the Net Adjustment for each
calendar quarter as of the last day of that quarter, but only to
those Individual Accounts remaining at the end of that quarter.
Individual Accounts that are closed on a date other than the last day
of a calendar quarter shall not be allocated a portion of the Net
Adjustment for that calendar quarter.
(3) The Net Adjustment shall be allocated according to each Individual
Account's balance at the beginning of the calendar quarter, adjusted
in a uniform and consistent manner for any contributions and
distributions made during that quarter.
(4) An Individual Account's allocation of the Plan's Net Adjustment shall
be made in the same proportion that such Individual Account's balance
bears to the sum of such balances of all Individual Accounts.
6.3 Distribution Adjustments
- --- ------------------------
The amount of any distribution from an account maintained on behalf of a
Participant pursuant to the terms of this Plan shall be debited from that
account as of the date such distribution is made.
6.4 Expenses
- --- --------
For any Plan Year, the Employer may pay the expenses of operating and
maintaining the Plan. Such payment shall be in addition to and independent
of any contributions to the Plan or assets held by the Plan.
Art. VI 45
<PAGE>
Absent prompt and timely payment by the Employer, the expenses of operating
and maintaining the Plan for the Plan Year shall first be paid by application
(and commensurate reduction) of the balance of any Suspense Account that may
be maintained under the terms of this Plan, and then shall become part of the
Net Adjustment allocated pursuant to Section 6.2 EXCEPT that any expenses
attributable to a Participant's re-allocating, transferring, or removing
amounts to, from, or among the Employee Directed Investment options described
in and pursuant to Section 6.1.2 shall be accounted as a loss to be allocated
solely as part of the next subsequent Net Adjustment of that Participant's
Individual Accounts. However, with respect to expenses attributable to
directives effective on April 1, 1994, no such expenses will be charged to
the Participant's Individual Accounts.
Art. VI 46
<PAGE>
ARTICLE VII
DISTRIBUTIONS
7.1 Termination of Employment (Including Disability) Before Retirement
- --- ------------------------------------------------------------------
(a) If a Participant's employment as an Employee is terminated due to his
Total and Permanent Disability, or due to any other reason except his
death or Retirement, he may elect to receive his entire Vested
Benefit. To be effective for the purposes of this Plan, such an
election must be delivered in writing to the Plan Administrator not
more than 90 days before the Annuity Starting Date that he has
selected. In the election the Participant shall specify a form in
which the Vested Benefit is to be distributed from among the forms
described in Section 7.4, and also an Annuity Starting Date (see
Section 2.2), provided that no distribution under this Section shall
be made or commence before the Participant's date of termination as
an Employee, nor later than the date which would be the
Participant's Normal Retirement Date had he not terminated such
employment until then.
If the Participant is married at the time of his election, his
election shall have no effect for the purposes of this Plan unless
the requirements of Section 7.5(d) regarding waiver of the Qualified
Joint and Survivor Annuity are met within 90 days before the Annuity
Starting Date.
(b) In any event, the Plan Administrator (or Trustee, as applicable)
shall distribute to the Participant his entire Vested Benefit in a
lump sum as soon as administratively practicable after the time of
his termination, provided that as of the Annuity Starting Date the
Participant's Vested Benefit has not ever exceeded $3,500 as of the
date of any prior distribution to the Participant. If the
Participant's entire Vested Benefit equals zero as of the date his
Service terminates, then the Participant shall be deemed to have
received a distribution of his entire Vested Benefit as of that date
of termination.
(c) Any distribution that is made to a Participant pursuant to this
Section shall be in lieu of any and all other benefits, present or
contingent, to which the Participant may be entitled under the terms
of this Plan.
7.2 Death Benefits
- --- --------------
(a) If a Participant who is credited with a Vested Benefit dies prior to
the Annuity Starting Date of his Vested Benefit, then the Plan shall
distribute a death benefit on his behalf.
The amount of the death benefit shall be the actuarial equivalent of
his Vested Benefit (after having taken into account any security
interest in his Vested Benefit that the Plan has as a result of any
currently outstanding loan to the Participant).
(b) Unless the Participant elects otherwise as provided in subsection (e)
below, if the Participant has a "surviving spouse" (as such term is
defined in this Section below) as of his date of death, the death
benefit shall be payable to such surviving spouse. If the
Participant has no surviving spouse, the death benefit will be paid
to the Participant's designated Beneficiary.
Art. VII 47
<PAGE>
If the Participant's Vested Benefit has always had a lump sum value of
$3,500 or less as of the death benefit's Annuity Starting Date, then
that benefit shall be distributed in the form of a lump sum, and the
Annuity Starting Date of that benefit shall be as soon as
administratively practicable (in any event, within one year) following
the Participant's date of death.
If the Participant's death benefit has ever had a lump sum value in
excess of $3,500 as of that benefit's Annuity Starting Date, and if the
Participant has a surviving spouse as of his date of death, unless the
Participant elects otherwise as provided in subsection (e) below, the
form in which that benefit will be automatically distributable to the
surviving spouse (or to a non-spouse Beneficiary elected pursuant to
subsection (e)) shall be a "qualified preretirement survivor annuity",
providing equal monthly payments to the surviving spouse (or non-spouse
Beneficiary, as applicable) for the duration of his or her life, with no
payments after his or her death.
(c) The Annuity Starting Date of the qualified preretirement survivor
annuity shall be within a reasonable time (not exceeding 90 days)
following the Plan Administrator's receipt from the surviving spouse (or
non-spouse Beneficiary, as applicable) of a writing requesting the
commencement of that annuity. Absent such a request, the Annuity
Starting Date shall be not earlier than the date on which the
Participant would have attained Normal Retirement Age (or age 62, if
later).
(d) "Surviving spouse" means a spouse to whom the Participant was married
throughout the one-year period ending on the earlier of:
(1) the date the Participant's death benefit payments commence under
the terms of this Plan PROVIDED that if the Participant was
married within one year of the date his benefit payments began and
he and his spouse from such marriage were married for at least a
one-year period ending on the date of the Participant's death,
such Participant and such spouse shall be treated as having been
married throughout the one-year period ending on the date the
Participant's benefit payments began, or
(2) the date of the Participant's death.
(e) (1) Subject to paragraph (2) below, at any time during the "election
period" a Participant may elect to waive the qualified
preretirement survivor annuity benefit form so that the benefit
will be payable, if at all, in an alternate form permissible under
this Plan, and may also elect a specifically designated non-spouse
Beneficiary to replace his surviving spouse as the contingent
annuitant. He may also at any time revoke such election and make
another election. Any such election or revocation shall be in
writing and shall be effective upon receipt by the Plan
Administrator.
(2) An election by a Participant pursuant to paragraph (1) shall not
take effect unless:
Art. VII 48
<PAGE>
(A) the Participant's spouse, in a writing received by the Plan
Administrator and witnessed by the Plan Administrator or a
notary public, acknowledges the effect of and consents to the
Participant's election; or
(B) it is established to the Plan Administrator's satisfaction
that the spousal consent described in (A) above cannot be
obtained because there is no spouse, because the spouse
cannot be located, or because of other circumstances which
render obtaining such spousal consent impossible.
(3) For purposes of this subsection, the "election period' shall be:
(A) for a Participant who has not separated from Service, the
period commencing on his Date of Employment or Re-employment
and ending on the last day of the Plan Year preceding the
Plan Year in which he attains age 35. Thereafter, a
Participant must make a new election within the period
beginning on the later of the first day of the Plan Year in
which he attains age 35 or his Date of Employment or Re-
employment and ending on the day of his death; or
(B) for a Participant who is separated from Service with the
Employer, the period beginning on the date such Participant
separates from service with the Employer and ending on the
date of his death. In the case of such Participant, such
election shall pertain only to his account balances earned
prior to the date of such separation.
(4) A written explanation with respect to the qualified preretirement
survivor annuity shall be provided to each Participant within a
reasonable period following his commencement of participation
and, if later, once within the period commencing with the first
day of the Plan Year in which he attains age 32 and ending with
the last day of the Plan Year preceding the Plan Year in which he
attains age 35, unless he terminates his employment as an
Employee prior to his attainment of age 35, in which case
such written explanation shall be provided at the time of his
termination or within a reasonable period thereafter. The written
explanation shall be provided in such terms and in such manner as
would be comparable to the explanation provided for meeting the
requirements of Section 7.5 regarding the Qualified Joint and
Survivor Annuity.
For the purposes of applying the preceding paragraph, a
reasonable period ending after the enumerated events is the end of
the two-year period beginning one year prior to the date the
applicable event occurs, and ending one year after that date.
In the case of a Participant who separates from Service before
the Plan Year in which he attains age 35, notice shall be provided
within the two-year period beginning one year prior to separation
and ending one year after separation. If such a Participant
thereafter returns to employment with the Employer, the applicable
period for such Participant shall be redetermined.
49
Art. VII
<PAGE>
(f) Except as provided above regarding the qualified preretirement survivor
annuity, the Participant's death benefit shall be distributed to the
surviving spouse or other designated Beneficiary in the form of a lump
sum, and the Annuity Starting Date of that benefit shall be as soon as
administratively practicable (in any event, within one year) following
the Participant's date of death. However, the person to whom that
benefit is to be distributed, whether surviving spouse or other
designated Beneficiary, may elect to have the death benefit distributed
in any other form of benefit described in Section 7.4 and not precluded
thereby. To be effective for the purposes of this Plan, such an election
must be in writing, and must be received by the Plan Administrator
prior to the death benefit's Annuity Starting Date. Given such an
election, the Annuity Starting Date for the death benefit would then
occur within 90 days after receipt of that election.
In any event, any death benefit payable pursuant to this Section shall
commence or be distributed not later than the time period described in
(1) or (2) below, as appropriate:
(1) if payable to a surviving spouse (or child of the Participant, as
provided below), not later than December 31 of the calendar year
in which the Participant would have attained 70 1/2; or
(2) if payable to any other Beneficiary, not later than the first
anniversary of the Participant's death;
PROVIDED that, if said spouse or Beneficiary cannot be located within
the applicable time period specified above, the Plan Administrator may
delay commencement or distribution of payments for a period ending not
later than the first day of the first month beginning after the sixtieth
day following the date on which such spouse or Beneficiary has been
identified and located by the Plan Administrator and the Plan
Administrator has received any necessary documentation of death.
A death benefit payable to any surviving child of the Participant shall
be treated as if payable to the surviving spouse for purposes of (1)
above in this subsection PROVIDED that such benefit will become
payable to the surviving spouse as of the date such child reaches age 21
or as of such other time as prescribed by the Secretary of the Treasury
under regulations.
If a surviving spouse is eligible to receive death benefits under this
Plan, and if that surviving spouse dies prior to the Annuity Starting
Date of those death benefits, then the death benefits to which the
deceased spouse had been entitled shall be payable on his or her behalf
within such a time-frame as would be appropriate if the deceased spouse
had been the Participant, with the date of death of the surviving spouse
being substituted for the Participant's. However, the exceptions
provided in Code sec. 401(a)(9)(B)(iv) shall not be available regarding
any surviving spouse of the Participant's surviving spouse.
Art. VII 50
<PAGE>
(g) If a Participant dies after his Vested Benefit has been distributed
in the form of a lump sum, there shall be no benefit payable from the
Plan as a result of his death. If his Vested Benefit has been
distributed in the form of an annuity, any benefit payable as a
result of his death shall be determined solely under the terms of the
annuity that was distributed, provided that the remaining portion of
such benefit, if any, shall be distributed to the beneficiary at
least as rapidly as provided in the terms of said annuity but in any
event consistent with Code sec. 401(a)(9)(B).
If a Participant dies while receiving the Payments from Account
described in Section 7.4 before his entire Vested Benefit has been
distributed, his surviving spouse, if any, may elect in writing to
the Plan Administrator to receive the previously undistributed
portion of such Vested Benefit in the form of a lump sum; in any
event, the remaining portion of such benefit, if any, shall be
distributed at least as rapidly as under the terms of said Payments
from Account in effect for the Participant at death.
7.3 Retirement
----------
A Participant, regardless of his status as an Employee, shall have attained
Retirement Age when he:
(a) has attained at least age 60, which shall be his Early Retirement
Age; or
(b) has attained age 65, which shall be his Normal Retirement Age.
A Participant who has attained Retirement Age may retire by designating in
writing to the Plan Administrator a Retirement Date, which shall be his
Retirement benefit's Annuity Starting Date, and which may be the first
day of any month after he has attained Normal Retirement Age or the first
day of any month after he has both attained Early Retirement Age and
terminated Service, but not later than the latest date permitted by the
provisions of Section 7.5 regarding Commencement of Payments. This latter
date shall be the Retirement Date of any Participant who has not, prior
thereto, designated a Retirement Date.
If the date on which the Participant attains Normal Retirement Age is the
first day of a month, that date shall be his Normal Retirement Date.
Otherwise, the Participant's Normal Retirement Date shall be the first day
of the first month following his attainment of Normal Retirement Age.
Upon Retirement, a Participant shall commence to receive his Vested
Benefit as provided in Section 7.5.
7.4 Form of Retirement Benefit
--------------------------
(a) Unless an optional form of benefit has been selected pursuant to
subsection (b) below, the Retirement benefit payable to a Participant
at the time of his Retirement shall be the actuarial value of his
Vested Benefit distributed in the form of a Qualified Joint and
Survivor Annuity.
(1) For a Participant who has no spouse as of his Retirement, his
Qualified Joint and Survivor Annuity is an annuity providing
monthly income payable for his life only, with no payments after
his death.
Art. VII 51
<PAGE>
(2) For a Participant who has a spouse as of his Retirement, his
Qualified Joint and Survivor Annuity is an annuity which provides
monthly income payable for his life, and thereafter for the life
of his spouse, with payments to the spouse equal to one-half of
the payments to the Participant.
(b) Subject to the provisions of Section 7.5, a Participant may elect to
waive receipt of the actuarial value of his Vested Benefit in the form
of a Qualified Joint and Survivor Annuity, and instead to receive such
value in one of the following forms.
(1) Joint and Contingent Survivor Annuity - monthly income payable for
the life of the Participant, and thereafter for the life of his
spouse, if the Participant is married on the Annuity Starting Date
designated in the election, otherwise for the life of his
Beneficiary. Payments to the spouse or beneficiary may be the same
amount as or two-thirds of the payment paid to the Participant,
as specified in the election.
(2) Straight Life Annuity - monthly income payable for the life of
the Participant only, with no payments after his death.
(3) Certain and Life Annuity - monthly income payable for the life of
the Participant with the provision that if the Participant dies
after his Retirement Date, or if a Beneficiary dies after
commencement of payments, but before the end of a certain period
of 60, 120 or 180 months, as elected, payments will commence or be
continued for the remainder of the certain period to the
Participant's Beneficiary (or, if the annuity is distributed
pursuant to Section 7.2, to a beneficiary designated by the
Participant's Beneficiary) PROVIDED, however, that the certain
period elected shall not extend beyond (1) the life expectancy of
the Participant, (2) the life expectancies of the Participant and
his designated Beneficiary, (3) if payable pursuant to Section
7.2, the life expectancy of the designated Beneficiary or (4) 60
months, if by operation of Section 8.6 the Participant's
Beneficiary is his estate.
(4) Annuity for a Period Certain - monthly income payable for a
certain period elected by the Participant of not more than 240
months, with the provision that if the Participant dies after his
Retirement Date, or if a Beneficiary dies after commencement of
payments, but before the end of the certain period, payments will
commence or be continued for the remainder of the certain period
to the Participant's Beneficiary (or, if the annuity is
distributed pursuant to Section 7.2, to a beneficiary designated
by the Participant's Beneficiary) PROVIDED, however, that the
certain period elected shall not extend beyond (1) the life
expectancy of the Participant, (2) the life expectancies of the
Participant and his designated Beneficiary, (3) if payable
pursuant to Section 7.2, the life expectancy of the designated
Beneficiary, or (4) 60 months, if by operation of Section 8.6 the
Participant's Beneficiary is his estate.
(5) Lump Sum - a single payment in an amount equal to the
Participant's Vested Benefit.
Art. VII 52
<PAGE>
(6) Partial Distributions - payments in an amount specified by the
Participant. The Participant may request a partial distribution at
any time following his attainment of Retirement Age. However, no
more than four (4) distributions shall be made to the Participant
during any Plan Year, and the amount of each distribution may not
be less than five hundred dollars ($500.00).
However, no optional form may be elected under which the amount of
monthly benefit payable to the Participant would not exceed 50% of
the amount he would receive in the form of a Straight Life Annuity
unless such optional form is a Lump Sum or a Joint and Survivor
Annuity with the Participant's spouse as contingent annuitant.
(c) Subject to the provisions of Section 7.5, and solely for the
purposes of distributing to a Participant his Vested Benefit where
such distribution has not occurred prior to his Required Beginning
Date (see Section 7.5(e)(2) below), the Participant may elect to
receive the distribution to commence as of his Required Beginning
Date in the form of Payments from Account, rather than in one of the
forms of retirement benefit payment already provided by this Article
VII.
Payments from Account shall mean periodic payments in an amount
specified by the Participant or his Beneficiary continuing until such
time as the Participant's Vested Benefit (adjusted for subsequent Net
Adjustments) is exhausted, PROVIDED however that the period over
which said payments are to be made shall not extend beyond (1) the
life expectancy of the Participant, (2) the life expectancies of the
Participant and his designated Beneficiary, (3) if payable pursuant
to Section 7.2, the life expectancy of the designated Beneficiary,
or (4) 60 months, if by operation of Section 8.6 the Participant's
Beneficiary is his estate.
7.5 Retirement Benefits: Election of Forms and Commencement of Payments
-------------------------------------------------------------------
(a) Applicability of this Section
-----------------------------
In the case of a Participant who will receive a distribution pursuant
to Section 7.1 due to his termination of employment before his
attainment of Retirement Age, the form of the distribution and the
time of commencement of payments will be as provided in that section.
The form and time of commencement of death benefits payable to
Beneficiaries shall be governed according to Section 7.2. The form
and time of commencement of any other benefits payable pursuant to
this Plan will be determined according to this section and Section
7.4.
In any event, all distributions required under this Section shall be
determined and made in accordance with the Income Tax Regulations
under Code sec. 401(a)(9), including the minimum distribution
incidental benefit requirement of sec. 1.401(a)(9)-2 of the
regulations.
Art. VII 53
<PAGE>
(b) Explanation
-----------
No less than 30 days and no more than 90 days before a Participant's
Annuity Starting Date, the Plan Administrator shall provide the
Participant with a written explanation of (i) the terms and conditions
of the Qualified Joint and Survivor Annuity; (ii) the Participant's
right to make and the effect of an election to waive the Qualified
Joint and Survivor Annuity; (iii) the rights of the Participant's
spouse (if any) regarding the Qualified Joint and Survivor Annuity;
and (iv) the right to make, and the effect of, a revocation of a
previous election to waive the Qualified Joint and Survivor Annuity.
(c) Election
--------
A Participant may elect to waive his right to receive his Retirement
benefit in the form of a Qualified Joint and Survivor Annuity so as to
receive his Retirement benefit in one of the alternative forms
described in Section 7.4, and may also elect to name a person as
contingent annuitant or to replace the person currently designated by
him or this Plan to be his contingent annuitant. Such an election may
be revoked and replaced with another such election. However, to be
effective for the purposes of this Plan, any such an election or
revocation must be made in writing and received by the Plan
Administrator within ninety (90) days before the Participant's Annuity
Starting Date, and must satisfy the spousal consent requirements
described in subsection (d) below, and must specifically designate the
form in which the benefits shall be paid. In addition, if the election
is to replace the person currently designated by the Participant
pursuant to this Plan (or if there is no such designation by the
Participant, then the person (if any) designated by this Plan) to be
his contingent annuitant, then the election must specifically
designate the person who is to become the contingent annuitant.
(d) Spousal Consent
---------------
An election by a Participant to receive his Retirement benefit in one
of the alternative benefits forms or to change his contingent
annuitant shall not have any effect for the purposes of this Plan
unless:
(1) the Participant's spouse, in a writing received by the Plan
Administrator, acknowledges the effect of and consents to the
Participant's election within 90 days before the Annuity Starting
Date, and the writing is witnessed by the Plan Administrator or a
notary public; or
(2) it can be established to the Plan Administrator's satisfaction
that spousal consent cannot be obtained because there is no
spouse, or because the spouse cannot be located, or because of
other circumstances which render obtaining such spousal consent
impossible.
Any consent by a spouse (or establishment that the consent of the
spouse cannot be obtained) pursuant to this subsection shall be
effective only with respect to such spouse.
54
Art. VII
<PAGE>
(e) Commencement of Payments
------------------------
(1) Unless a Participant otherwise elects in a writing received by
the Plan Administrator prior to the Participant's Annuity
Starting Date, payment of the Participant's Vested Benefit
shall begin not later than the 60th day after the close of the
Plan Year in which occurs the latest of:
(A) the Participant's attainment of Normal Retirement Age;
(B) the 10th anniversary of the date on which the Participant
commenced participation in this Plan; or
(C) the Participant's termination of employment as an Employee,
provided that if the Participant has failed to provide the Plan
Administrator with sufficient information as to age and marital
status or any other relevant information, so that the amounts
of payment may not be determined, or if the Participant cannot
be located, then the Plan Administrator may delay commencement
of payments for not more than 60 days after the earliest date on
which the amount and form of payment may be determined under the
terms of this Plan, or the Participant is located. The amount
of payment in the event of such a delay shall be retroactive to
the Participant's Retirement Date.
Notwithstanding any provisions of this paragraph (1) to the
contrary, the failure of a Participant and the Participant's
spouse to consent to the distribution of a benefit while that
benefit is immediately distributable pursuant to this Section
shall be deemed to be an election to defer commencement of
payment of that benefit.
(2) Any provisions of this Plan to the contrary notwithstanding, the
entire vested interest of the Participant in benefits under this
Plan:
(A) will be distributed to the Participant not later than the
Participant's Required Beginning Date, or
(B) will be distributed, beginning not later than the
Participant's Required Beginning Date, over the life of
tile Participant or over the lives of the Participant and a
designated beneficiary (or over a period not extending
beyond the life expectancy of the Participant or the life
expectancy of the Participant and a designated
beneficiary).
For the purpose of determining the amount to be distributed as
of the Participant's Required Beginning Date, his Vested Benefit
shall be valued as of December 31 of the calendar year
immediately preceding his Required Beginning Date.
The Participant may elect for these required distributions to be
paid in any of the forms if benefit described in Section 7.4,
subject to any spousal consent requirements that may apply
pursuant to this Plan. Absent such an election, these
distributions automatically shall be payable in the form
described in Section 7.4(a).
Art. VII 55
<PAGE>
(3) If a Participant's interest is to be distributed in a form other
than a Lump Sum, the following minimum distribution rules shall
apply on or after the Participant's Required Beginning Date.
(A) If the Participant's benefit is to be distributed over (1) a
period not extending beyond the life expectancy of the
Participant or the joint life and last survivor expectancy of
the Participant and the Participant's Beneficiary, or (2) a
period not extending beyond the life expectancy of the
Beneficiary, then the amount required to be distributed for
each calendar year, beginning with distribution for the
first distribution calendar year, must at least equal the
quotient obtained by dividing the Participant's benefit by
the applicable life expectancy.
(B) For calendar years beginning before January 1, 1989, if the
Participant's spouse (if any) is not the Beneficiary, the
method of distribution selected must assure that at least
50% of the present value of the amount available for
distribution is paid within the life expectancy of the
Participant.
(C) For calendar years beginning after December 31, 1988, the
amount to be distributed each year, beginning with
distributions for the first distribution calendar year, shall
not be less than the quotient obtained by dividing the
Participant's benefit by the lesser of (1) the applicable
life expectancy, or (2) if the Participant's spouse (if any)
is not the Beneficiary, the applicable divisor determined
from the table set forth in Q&A-4 of section 1.401(a)(9)-2 of
the Income Tax Regulations. Distributions after the death of
the Participant shall be distributed using the applicable
life expectancy referenced in subsection (3)(A) above as the
relevant divisor without regard to Regulations sec.
1.401(a)(9)-2.
(D) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the
Participant's Required Beginning Date. The minimum
distribution for other calendar years, including the minimum
distribution for the distribution calendar year in which the
Participant's Required Beginning Date occurs, must be made on
or before December 31 of that distribution calendar year.
If the Participant's benefit is distributed in the form of an
annuity purchased from an Insurance Company, any such
distribution shall be made in accordance with the requirements of
Code sec. 401(a)(9) and the regulations promulgated thereunder.
(4) Any additional amounts of Vested Benefit accrued by the
Participant after his Required Beginning Date shall be distributed
annually in the form of a lump sum consistent with the
requirements of Code sec. 401(a)(9) and applicable regulations.
Art. VII 56
<PAGE>
(5) Once distributions have begun to a 5% owner under this
subsection, they must continue to be distributed even if the
Participant ceases to be a 5% owner in a subsequent year.
(6) For the purposes of this subsection, "applicable life
expectancy" means the life expectancy (or joint and last
survivor expectancy) calculated using the attained age of the
Participant (or designated beneficiary) as of the
Participant's (or designated beneficiary's) birthday in the
applicable calendar year reduced by one for each calendar
year which has elapsed since the date the life expectancy was
first calculated.
If the life expectancy is being recalculated, the applicable
life expectancy shall be the life expectancy as so
recalculated.
The applicable calendar year shall be the first distribution
calendar year, and if the life expectancy is being
recalculated, each such succeeding calendar year.
If annuity payments commence before the Required Beginning
Date, the applicable calendar year is the year such payments
commence. If the distribution is in the form of an immediate
annuity purchased after the Participant's death with the
Participant's remaining Vested Benefit, the applicable
calendar year is the year of purchase.
(7) Unless otherwise elected by the Participant (or spouse, as
applicable) by the time distributions are required to begin,
life expectancies shall be recalculated annually. If such an
election has been made by the Participant (or spouse, as
applicable), it shall be irrevocable as to the Participant
(or spouse) and shall apply to all subsequent years.
The life expectancy of a nonspouse beneficiary may not be
recalculated.
7.6 Loans to Participants
---------------------
Each Active Participant may apply to obtain loans from the Plan according
to the procedures and limits described below.
(a) Any application for a loan may only be made in writing, and will
become effective only upon receipt by the Plan Administrator. The
principal amount of the loan requested may not be less than five
hundred dollars ($500.00).
<PAGE>
A loan shall be available only for the applicant's "immediate and
heavy financial need" as described in Section 4.2.5(b)(1) or for
payment of any of the following expenses:
(1) educational expenses not described in Section 4.2.5(b)(1) of the
applicant or an immediate family member;
(2) Taxes owed by the applicant;
(3) Living and home repair expenses and costs of necessary
appliances, e.g. furnace, plumbing, new roof, incurred or to be
incurred by the applicant;
(4) Business or employment expenses, e.g. transportation, of the
applicant;
(5) Payments to prevent mortgage foreclosure on the residence of an
immediate family member;
(6) Debt of the applicant on which collection action by the creditor
has begun;
(7) Legal fees and costs, settlements of claims and lawsuits, and
fines owing by the applicant or an immediate family member;
(8) Uninsured damages caused by natural disasters to any real or
personal property of the applicant.
The written loan application must document the reason for the loan.
Subject to the additional limitations of Section 7.6(f), the
principal amount of the loan may not exceed the amount of that
"immediate and heavy financial need" or expense from the list above.
(b) The Plan Administrator may choose to grant or deny the request in a
reasonably equivalent and nondiscriminatory manner, consistent with
the requirements of section 401 (and all other relevant provisions)
of the Internal Revenue Code, as amended. However, under no
circumstances shall a loan be made by this Plan to any person who is
or is deemed to be (or has as a member of his immediate family) an
"owner-employee" (as defined in Code 4975(d)) or a "shareholder-
employee" (as defined in Code secs. 401(j) and 1379(d)).
(c) If the request is granted and an amount is loaned to the Participant
(hereinafter "the Borrower"), the resulting liability of the Borrower
for repayment of the loan to the Plan shall be accounted through the
establishment of a Segregated Investment Fund into which the
principal amount of the loan shall be entered as of the date on
which the amount of the loan is provided to the Borrower.
FOURTH AMENDMENT
Art. VII, Section 7.6
Effective 1/1/97 58
<PAGE>
The loan amount shall be taken pro rata from the Participant's
balances in the Plan's investment options (described in Section
6.1.2) as of the date the loan is made.
Any such loan shall be treated as a directed investment by the
Borrower of Plan assets separate and apart from the Investment Fund
of the Insurance Company or any other assets of the Plan. As such,
any earnings, gains or losses attributable to the loan shall be
credited only to the Segregated Investment Fund representing that
loan, and shall in turn be allocated solely to the Borrower's
Individual Accounts.
(d) Each loan shall bear interest at a reasonable fixed rate established
by the Plan Administrator with reference to the economic conditions
and interest rates being charged by local financial institutions for
similar loans with similar collateral as of the time when the loan
request is being processed. In addition, the Plan Administrator may
require the Borrower to pay any administrative fees that are deemed
to be necessary to establish or maintain the Segregated Investment
Fund, provided that all such fees or fee schedules shall be disclosed
to the Borrower at the time the loan is made and again prior to any
modification of such fees or schedules by the Plan Administrator
(which may be enacted by the Plan Administrator at any time that the
Plan Administrator determines that such modification is appropriate,
in the exercise of his or her fiduciary duty), and further provided
that the ability to obtain loans from the Plan shall remain available
to all Borrowers on a reasonably equivalent basis.
Loans shall not be made available to HCE's in an amount greater than
the amount made available to non-HCE's; however, maximum loan
amounts may vary directly according to the size of each Participant's
vested accrued benefit under this Plan.
Each amount received in repayment of the loan shall be credited to
the Borrower's Segregated Investment Fund as of the day on which it
was received by the Plan Administrator, after its having first been
reduced by any administrative fees charged by the Plan Administrator
pursuant to the preceding paragraph.
(e) Each loan shall be evidenced by a negotiable promissory note signed
by the Borrower and his spouse (if any, as of the time of the making
of the note) within 90 days before the loan is made, and secured by a
portion of the Borrower's vested interest in amounts held under the
Plan on the Borrower's behalf, with such portion equal to the amount
that is loaned to the Borrower at the time of the loan's origination.
FOURTH AMENDMENT
Art. VII, Section 7.6
Effective 1/1/97 59
<PAGE>
The note shall contain the consent of the Borrower's spouse to the
loan and an acknowledgment that any default on the loan may under
certain circumstances reduce benefits under the Plan to which such
spouse may become entitled, unless it is established to the Plan
Administrator's satisfaction that spousal consent cannot be obtained
because there is no spouse, or because the spouse cannot be located,
or because of other circumstances which render obtaining such spousal
consent impossible. The note must be witnessed by a notary public or
the Plan Administrator. The note also must state that in the event of
the Borrower's default on the loan, the Borrower (and the Borrower's
spouse, if any, as of the time of the processing of the loan) agree
to be bound by the provisions of this Plan, and particularly of this
Section.
The Plan Administrator, in the exercise of his sole discretion, may
require that additional security or documentation be provided by the
Borrower.
(f) Immediately after the origination of any Plan loan to the Borrower,
the total amount of the outstanding balances of all loans made to the
Borrower from this Plan may not exceed the lesser of:
(1) 50% of the present value of the Borrower's vested interest in
amounts held under the Plan on the Borrower's behalf (determined
immediately after the loan's origination); or
(2) $50,000, except that with regard to loans made, renewed,
negotiated, modified or extended on or after January 1, 1987,
such $50,000 limit shall be reduced by the excess (if any) of:
(A) the highest outstanding balance of all loans to the
Borrower, under all qualified retirement plans maintained
by the Employer, during the one-year period ending on the
day before the date as of which the most recent loan was
made, over
(B) the outstanding balance of all loans to the Borrower, under
all qualified retirement plans maintained by the Employer,
on the date as of which the most recent loan was made.
For the purposes of this subsection (f), "Employer" shall be as
defined in Article II, and in addition shall mean any other employers
which when taken together with the Employer(s) sponsoring this Plan
are treated as a single employer under section 414(b), (c) or (m) of
the Internal Revenue Code, as amended.
FOURTH AMENDMENT
Art. VII, Section 7.6
Effective 1/1/97 60
<PAGE>
For the purposes of this subsection (f), simplified employee pension
plans shall not be regarded as qualified retirement plans.
(g) Each loan made, renewed, negotiated, modified or extended on or
after January 1, 1987, shall be subject to substantially level
amortization.
(h) Each loan shall be distributed (if at all) as soon as reasonably
practicable, but in any event not later than 90 days after the date
on which the Plan Administrator receives the prescribed loan request.
(i) Whenever possible, loans shall be repaid to the Plan through periodic
payroll deductions from the Borrower's Compensation (if any).
(j) With the consent of the Plan Administrator, the Borrower may at any
time prepay an amount against the outstanding balance of the loan;
however, unless the entire outstanding balance is prepaid, repayment
installments must continue to be made periodically according to the
pre-arranged repayment schedule.
Notwithstanding any provision of this Section to the contrary, loan
repayments will be suspended as permitted under Code sec. 414(u)(4).
Provided the Plan Administrator consents, a Borrower may refinance
any loan that he has outstanding from the Plan. The procedures and
limits applying to refinancing a loan shall be substantially the same
as those prescribed herein for obtaining a loan.
(k) At any time before it has been completely repaid (including principal
and interest), a loan under this Plan shall be in default as of the
earlier of:
(1) the end of a reasonable period of time (not exceeding 30 days)
specified by the Plan Administrator and immediately following
the date on which any periodic installment payment required
under the Promissory Note is not received by the holder of the
Note when due;
(2) the date as of which any amount becomes distributable to a
Borrower from the Plan, including for example the Borrower's
date of Retirement, but only to the extent that such
distribution would result in the loan balance equaling more
than the Borrower's vested interest in the Plan's assets after
such distribution; or
FOURTH AMENDMENT
Art. VII, Section 7.6
Effective 1/1/97 61
<PAGE>
(3) the fifth anniversary of the date on which the amount of the
loan was paid from the Plan to the Borrower, or in the case of a
loan for the purchase of the Borrower's principal residence, the
tenth anniversary of the date on which the amount of the loan
was paid to the Borrower.
(l) If the Plan Administrator as holder of the Promissory Note determines
that a loan under this Plan is in default, then at the option of the
Plan Administrator, the Borrower may be given a reasonable amount of
time (in any event not exceeding 30 days) to cure the default by
repaying all amounts that have become due as of that date.
If the default results from a distribution of excess elective
deferrals (pursuant to Code sec. 402(g)(2)), excess contributions
(pursuant to Code sec. 401(k)(8)), or excess aggregate contributions
(pursuant to Code sec. 401 (m)(6)), if any, then the Borrower may
cure the default by repaying to the Plan an amount sufficient to
reduce the outstanding balance of the loan to an amount equal to not
more than the Borrower's vested interest in Plan Assets remaining
after such distribution.
(m) In addition, as of the date of such default, the Plan shall
immediately stop accepting elective deferrals (if any) on that
Borrower's behalf until such time as the loan is no longer in
default.
(n) If there is security for the loan available in addition to or
instead of the Borrower's vested interest in Plan assets, then upon
default, the holder of the Promissory Note may (but is not required
to) look to that other security for liquidation and repayment of the
loan.
(o) To the extent that a default of a loan is not cured or is not repaid
through security other than the Borrower's vested interest in the
Plan's assets, then the Plan Administrator shall reduce the
Borrower's vested interest in the Plan's assets. The amount of such
reduction shall equal the outstanding balance of the loan, including
any interest that has accrued as of that date of determination,
except that if the default has resulted from a distribution of Plan
assets that has been made to bring the Plan into compliance with any
of the nondiscrimination limits and tests of the Code (as specified,
e.g. in Code secs. 401(k), 401(m), or 415), then the amount of the
reduction shall equal only that amount which is necessary to cure the
default by reducing the outstanding balance of the loan to an amount
equal to the Borrower's vested interest in the Plan's assets as of
that date of determination and after the distribution has been made.
FOURTH AMENDMENT
Art. VII, Section 7.6
Effective 1/1/97 61a
<PAGE>
Any reduction in a Borrower's vested interest in Plan assets
accomplished pursuant to this paragraph shall immediately result in a
corresponding reduction and offset of the outstanding balance of the
loan as of that date of determination.
However, under any circumstances, a Borrower's vested interest in the
Plan's assets that are attributable to Elective Contributions, if any
(or to amounts that are treated as Elective Contributions pursuant to
Article V) may not be reduced pursuant to this subsection (o) sooner
or to a greater extent than such amounts become distributable
consistent with the provisions of Code sec. 401(k), all other
relevant Code sections, and regulations promulgated thereunder.
(p) In the event that a loan from this Plan to a Borrower is treated as a
distribution under Code sec. 72, and/or under applicable Department
of Labor regulations, the Borrower's obligation to repay the loan
shall remain unchanged by such distribution treatment.
(q) When the Borrower is no longer indebted under the Promissory Note
(e.g. due to the complete repayment of the loan, or due to recovery
of the loan's security upon default), the Borrower's Segregated
Investment Fund shall then be closed.
FOURTH AMENDMENT
Art. VII, Section 7.6
Effective 1/1/97 61b
<PAGE>
ARTICLE VIII
GENERAL PROVISIONS
8.1.1 Plan Modification: Authority
- ----- ----------------------------
The Trustees reserve the right to amend, modify, or terminate the Plan at
any time, provided that no amendment or modification shall act to reduce
the balances of the Individual Accounts of any Participant accrued to the
time of such amendment or modification.
8.1.2 Plan Modification: Merger
- ----- -------------------------
No merger, consolidation, or transfer of the assets or 1iabilities of
this Plan with or to any other qualified plan shall be undertaken unless,
after such merger, consolidation, or transfer, each Participant would,
if the Plan then terminated, receive a benefit not less than the benefit
he would have received had the Plan terminated immediately prior to such
merger, consolidation, or transfer.
8.1.3 Plan Modification: Termination
- ----- ------------------------------
Upon termination or partial termination of this Plan, or the complete
discontinuance of contributions by the Employer (as defined in Code
secs. 1.401-6(c) and 1.411(d)-2(d)), the rights of each affected
Participant to benefits accrued to the date of termination or partial
termination, or the complete cessation of contributions by the Employer,
shall be fully vested to the extent funded.
If, after the allocation of the Plan's assets pursuant to the Plan's
termination, all liabilities of the Plan have been satisfied in full and
there remain surplus Plan assets not necessary to satisfy the liabilities
of the Plan, such surplus shall revert to the Employer, consistent with
the provisions of the termination amendment of this Plan, and provided
that no successor plan is established (with "successor plan" having the
same meaning as that described in IRC Reg. 1.401(k)-1(d)(3)).
8.2.1 Duties: Plan Administrator
- ----- --------------------------
The Plan Administrator has the discretionary authority to control and
manage the operation and administration of the Plan, including the
specific duties outlined below. The Plan Administrator in his sole
discretion shall make such rules, regulations, interpretations, and
computations and shall take such other actions to administer the Plan
as he may deem appropriate. Such rules, regulations, computations, and
other actions shall be conclusive and binding upon all persons.
Duties of the Plan Administrator include, but are not limited to,
determination of benefits and eligibility to participate, payment of
funds to the Insurance Company or Trustee, authorization of benefit
payments and payment of any expenses incurred in the administration of
the Plan. The Plan Administrator may employ such consultants and advisors
as he deems necessary or desirable for carrying out his duties under the
Plan.
Art. VIII 62
<PAGE>
8.2.2 Duties: Employer
- ----- ----------------
Duties of the Employer include, but are not limited to, payment of funds
to the Insurance Company or Trustee, in addition to payment of any
expenses incurred in the administration of the Plan. The Employer shall
indemnify and hold harmless any fiduciary who is an employee of the
Employer from any and all claims, loss, damages, expense (including
counsel fees), and liability (including amounts paid in settlement with
the Employer's written consent) arising from any act or omission of the
fiduciary, except when the same is judicially determined to be done due
to the gross negligence or willful misconduct of the fiduciary.
8.3 Benefit Claims Procedure
- --- ------------------------
Any Participant in this Plan, or his Beneficiary, may make a claim for
benefits due to him under this Plan by delivering a written application
to the Plan Administrator. If a claim is wholly or partially denied,
notice of the decision shall be furnished to the claimant by the Plan
Administrator within 90 days after receipt of the claim by the Plan
Administrator unless special circumstances require an extension of time
for processing the claim. If an extension of time is required the Plan
Administrator shall furnish the claimant with written notice of that
fact, including the reason why an extension is required and an estimated
date upon which a final decision is expected, which shall be not later
than 180 days after the claim was made. In that event, if the claim is
denied in whole or part, written notice of denial shall be given as soon
as practicable, but not later than 180 days after the claim was made.
A notice of denial of a claim shall state:
(1) the specific reason or reasons for the denial;
(2) reference to the specific Plan provisions upon which the denial was
based; and
(3) a description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why such
additional material or information is required.
If this notice is not furnished within the time provided in this Section,
the claim shall be deemed wholly denied.
8.4 Review Procedure
- --- ----------------
In the event that a claim is denied under this Plan, the claimant or his
authorized representative may apply in writing to the Plan Administrator
within 60 days of receiving notice of the denial or, if no written notice
of denial is received within the 180-day period prescribed in Section
8.3, within 60 days after the expiration of said 180 day period, asking
that the denial be reviewed. This time limit may be extended by the Plan
Administrator if an extension appears to be reasonable in view of the
nature of the claim and the pertinent circumstances. Upon receipt of such
application, the Plan Administrator shall afford the claimant an
opportunity to review pertinent documents and to submit issues and
comments in writing. A decision on review shall be rendered by the Plan
Administrator not later than 60 days after the claimant's application
for review unless an extension of time for processing is required, in
which case a decision will be made as soon as possible,
Art. VIII 63
<PAGE>
but not later than 120 days after the request for review was made. If an
extension of time is required, the Plan Administrator shall give the
claimant written notice of that fact before the extension period begins. A
decision on review shall be in writing and shall include specific reasons
for the decision and specific references to the Plan provisions on which
the decision is based.
If the claimant has not received written decision on review within 60 days
after the request for review was received, or within 120 days if an
extension of time was required, the claim will be considered wholly denied
on review.
8.5 Qualification of the Plan and Conditions of Contributions
- --- ---------------------------------------------------------
This Plan, together with any insurance or annuity contracts or trust
agreement used in conjunction with it, is intended to meet the requirements
of the Internal Revenue Service for approval as a tax-exempt plan or trust
under Section 401 of the Code. Any amendments which may be necessary to
meet these requirements shall be made retroactive to the date upon which
the Plan failed to meet these requirements.
Contributions to this Plan are made with the intent and on the condition
that such contributions are deductible under Section 404 of the Code. If
any contribution by the Employer is disallowed as a deduction by the
Internal Revenue Service then, to the extent the deduction is disallowed,
the contribution shall be refunded to the Employer within one year after
the disallowance of the deduction. If any contribution by the Employer is
made by a mistake of fact, such contribution shall be refunded to the
Employer within one year after the payment of the contribution.
If a refund occurs pursuant to this Section, the amount which shall be
returned to the Employer shall be the excess of the amount which was
contributed over the amount (1) which was deductible, or (2) which would
have been contributed absent the mistake of fact (as the case may be),
without any earnings but net of any losses attributable to such excess.
Further, no amount shall be refunded to the Employer if such a refund would
result in a reduction of any Participant's Prior Plan Account to an amount
less than the amount the Account would have been had there never been a
refund pursuant to this Section.
8.6 Beneficiaries
- --- -------------
Any payments due under the Plan to a Participant's Beneficiary shall be
paid according to the Beneficiary designation last filed in writing with
the Plan Administrator by the Participant. If no such designation is made,
payments shall be made in the following order of priority:
(a) to the surviving spouse of the Participant;
(b) if no spouse survives the Participant, then to the children of the
Participant in equal shares, with a share by right of representation
to the then surviving children of any deceased child; or
(c) if neither a spouse, children nor grandchildren survive the
Participant, then to the Participant's estate.
Art. VIII 64
<PAGE>
8.7 Spendthrift Clause
--- ------------------
(a) General Rule
------------
Subject to the exception specified in subsection (b) below,
benefits payable under this Plan shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of
any kind, either voluntary or involuntary, including any such
liability which is for alimony or other payments for the support
of a spouse or former spouse, or for any other relative of the
Employee, prior to actually being received by the person entitled
to the benefit under the terms of the Plan except as provided!
below, and any attempt to anticipate, alienate, sell, transfer,
assign, pledge, encumber, charge or otherwise dispose of any
right to benefits payable hereunder shall be void; also, the Plan
shall not in any manner be liable for, nor subject to, the debts,
contracts, liabilities, engagements or torts of any person
entitled to benefits hereunder.
(b) Exception
---------
The provisions of subsection (a) above to the contrary shall not
withstand a right to a benefit payable under this Plan that has
been created, assigned or recognized pursuant to a "qualified
domestic relations order", as defined in Code sec. 414(p).
Administration of the Plan with respect to qualified domestic
relations orders shall at all times be consistent with Code sec.
414, regulations promulgated thereunder, and any other provisions
of state and federal law that may be applicable. Payment of a
benefit to an alternate payee pursuant to a qualified domestic
relations order may be made prior to the time such payment could
be made to the Participant, provided that such payment is
consistent with the provisions of this Plan in all respects
except for the time of payment.
8.8 Annuities
- --- ---------
Any provisions of this Plan to the contrary notwithstanding:
(a) any annuity contract distributed from this Plan shall contain
express provisions sufficient to make such contract
nontransferable; and
(b) the terms of any annuity contract purchased and distributed by
the Plan to a Participant or Participant's spouse shall comply
and be consistent with the requirements of this Plan.
8.9 Limitations of the Employer's Liability
- --- ---------------------------------------
To the extent permitted by law, the liability of the Employer with
respect to any and all obligations arising from or in any way
connected with this Plan shall be limited to amounts already
contributed.
Art. VIII 65
<PAGE>
8.10 Non-Guarantee of Employment
---------------------------
This Plan shall not be considered to constitute a contract of employment
and nothing contained in the Plan shall give any Employee the right to be
retained in employment, nor shall anything contained in the Plan interfere
with the Employer's right to discharge or retire any Employee at any time.
Participation in the Plan shall not give any Employee any right or claim
in any benefits except as specifically provided in this Plan.
8.11 Applicable Law
--------------
The provisions of this Plan shall be governed, construed, and administered
in accordance with federal law, and to the extent that state law is not
preempted by federal law, the law of the state of Oregon.
8.12 USERRA Requirements
-------------------
Notwithstanding any provisions of this Plan to the contrary, contributions
and Service with respect to qualified military service will be provided in
accordance with Code sec. 414(u).
<PAGE>
ARTICLE IX
DIRECT ROLLOVERS
9.1 General Rule
- --- ------------
This Article applies to distributions made on or after January 1, 1993.
Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Article, 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
in a direct rollover.
9.2 Definitions
-----------
(a) Eligible rollover distribution: 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 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) Eligible retirement plan: 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) Distributee: A distributee includes an Employee or former Employee.
In addition, the Employee's or former Employee's surviving spouse and
the Employee's or former Employee's 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) Direct rollover: A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
Art. IX 67
<PAGE>
EXHIBIT 10.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
Among
STANCORP FINANCIAL GROUP, INC.
and
U.S. BANK NATIONAL ASSOCIATION
Dated as of June 30, 1999
$ 100,000,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS............................... 1
Section 1.1 Defined Terms............................................. 1
Section 1.2 Accounting Terms and Calculations......................... 8
Section 1.3 Computation of Time Periods............................... 8
Section 1.4 Other Definitional Terms.................................. 8
ARTICLE II TERMS OF LENDING.............................................. 8
Section 2.1 The Commitment............................................ 8
Section 2.2 Advance Options........................................... 8
Section 2.3 Borrowing Procedures...................................... 9
Section 2.4 Continuation or Conversion of Loan........................ 9
Section 2.5 The Note.................................................. 10
Section 2.6 Funding Losses............................................ 10
Section 2.7 Letters of Credit......................................... 10
ARTICLE III INTEREST AND FEES............................................ 12
Section 3.1 Interest.................................................. 12
Section 3.2 Facility Fee.............................................. 12
Section 3.3 Computation............................................... 12
Section 3.4 Payment Dates............................................. 12
ARTICLE IV PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION
OF THE CREDIT AND FUNDING OF THE BANK......................... 13
Section 4.1 Repayment................................................. 13
Section 4.2 Prepayments............................................... 13
Section 4.3 Payments.................................................. 13
Section 4.4 Optional Reduction or Termination of Commitment........... 13
ARTICLE V ADDITIONAL PROVISIONS RELATING TO LOAN AND LETTERS OF CREDIT... 14
Section 5.1 Increased Costs........................................... 14
Section 5.2 Deposits Unavailable or Interest Rate Unascertainable or
Inadequate; Impracticability............................. 15
Section 5.3 Changes in Law Rendering LIBOR Advances Unlawful.......... 15
Section 5.4 Discretion of the Bank as to Manner of Funding............ 16
Section 5.5 Claims for Increased Costs................................ 16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI CONDITIONS PRECEDENT.......................................... 16
Section 6.1 Conditions of Initial Advance............................. 16
Section 6.2 Conditions Precedent to all Advances...................... 17
ARTICLE VII REPRESENTATIONS AND WARRANTIES............................... 17
Section 7.1 Organization, Standing, Etc............................... 18
Section 7.2 Authorization and Validity................................ 18
Section 7.3 No Conflict; No Default................................... 18
Section 7.4 Government Consent........................................ 18
Section 7.5 Financial Statements and Conditions....................... 19
Section 7.6 Litigation and Contingent Liabilities..................... 19
Section 7.7 Compliance................................................ 19
Section 7.8 Environmental, Health and Safety Laws..................... 19
Section 7.9 ERISA..................................................... 20
Section 7.10 Regulation U.............................................. 20
Section 7.11 Ownership of Property..................................... 20
Section 7.12 Taxes..................................................... 20
Section 7.13 Trademarks, Patents....................................... 21
Section 7.14 Investments Company Act................................... 21
Section 7.15 Public Utility Holding Company Act........................ 21
Section 7.16 Subsidiaries.............................................. 21
Section 7.17 Partnerships and Joint Ventures........................... 21
Section 7.18 Year 2000................................................. 21
ARTICLE VIII AFFIRMATIVE COVENANTS....................................... 22
Section 8.1 Financial Statements and Reports.......................... 22
Section 8.2 Corporate Existence....................................... 24
Section 8.3 Insurance................................................. 24
Section 8.4 Payment of Taxes and Claims............................... 24
Section 8.5 Inspection................................................ 24
Section 8.6 Maintenance of Properties................................. 25
Section 8.7 Books and Records......................................... 25
Section 8.8 Compliance................................................ 25
Section 8.9 ERISA..................................................... 25
Section 8.10 Environmental Matters..................................... 25
ARTICLE IX NEGATIVE COVENANTS............................................ 25
Section 9.1 Merger.................................................... 25
Section 9.2 Sale of Assets............................................ 26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 9.3 Plans..................................................... 26
Section 9.4 Change in Nature of Business.............................. 26
Section 9.5 Subsidiaries.............................................. 26
Section 9.6 Other Agreements.......................................... 26
Section 9.7 Funded Debt............................................... 27
Section 9.8 Unconditional Purchase Obligations........................ 27
Section 9.9 Transactions with Related Parties......................... 27
Section 9.10 Use of Proceeds........................................... 27
Section 9.11 Borrower's Retained Earnings.............................. 27
Section 9.12 SMI's Tangible Net Worth.................................. 27
Section 9.13 SIC's Claims Paying Ability Rating........................ 28
ARTICLE X EVENTS OF DEFAULT AND REMEDIES................................. 28
Section 10.1 Events of Default......................................... 28
Section 10.2 Remedies.................................................. 29
Section 10.3 Letters of Credit......................................... 30
Section 10.4 Offset.................................................... 30
ARTICLE XI ARBITRATION................................................... 31
Section 11.1 Arbitration of Claims..................................... 31
Section 11.2 Arbitrators............................................... 31
Section 11.3 Other Remedies............................................ 31
Section 11.4 Non-Waiver; Governing Provision........................... 31
ARTICLE XII MISCELLANEOUS................................................ 31
Section 12.1 Waiver and Amendment...................................... 31
Section 12.2 Amendments, Etc........................................... 32
Section 12.3 Assignments and Participations............................ 32
Section 12.4 Costs, Expenses and Taxes................................. 34
Section 12.5 Notices................................................... 34
Section 12.6 Successors................................................ 34
Section 12.7 Severability.............................................. 34
Section 12.8 Subsidiary References..................................... 35
Section 12.9 Captions.................................................. 35
Section 12.10 Entire Agreement.......................................... 35
Section 12.11 Counterparts.............................................. 35
Section 12.12 Governing Law............................................. 35
Section 12.13 Consent to Jurisdiction................................... 35
Section 12.14 Waiver of Jury Trial...................................... 36
Section 12.15 Disclosure................................................ 36
</TABLE>
iii
<PAGE>
Section 12.16 Termination of SIC Credit Agreement................... 36
EXHIBITS:
Exhibit A: Promissory Note
Exhibit B: Subsidiary Guaranty
Exhibit C: Compliance Certificate
Exhibit D: Opinion of Counsel to the Borrower
Exhibit E: Material Actions, Suits, and Proceedings (Section 7.6)
Exhibit F: Material Contingent Liabilities (Section 7.6)
Exhibit G: Subsidiaries (Section 7.16)
Exhibit H: Partnerships and Joint Ventures (Section 7.17)
iv
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated and effective as of June 30, 1999, is made by
and among StanCorp Financial Group, Inc., an Oregon corporation (the "Borrower")
and U.S. BANK NATIONAL ASSOCIATION, a national banking association ("Bank").
Standard Insurance Company and Bank are parties to an agreement entitled
Credit Agreement dated as of March 19, 1999 which provides in part for the
extension by Bank to Standard Insurance Company of up to $100,000,000 in credit
facilities (the "SIC Credit Agreement").
Standard Insurance Company, Borrower and Bank, as contemplated by the SIC
Credit Agreement, now wish to replace the SIC Credit Agreement with this
Agreement.
Now, therefore, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Borrower and Bank agree as follows:
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
---------
Section 1.1 Defined Terms.
-------------
In addition to the terms defined elsewhere in this Agreement, the
following terms shall have the following respective meanings (and such
meanings shall be equally applicable to both the singular and plural form of
the terms defined, as the context may require):
"Advance": The portion of the outstanding Loan bearing interest at an
-------
identical rate for an identical Interest Period, provided that all Federal Funds
Rate Advances shall be deemed a single Advance. An Advance may be a "LIBOR
Advance" or "Federal Funds Rate Advance" (each, a "type" of Advance).
"Adverse Event": The occurrence of any event that could have a material
-------------
adverse effect on the business, operations, property, assets or condition
(financial or otherwise) of the Borrower and its Subsidiaries, taken as whole,
or on the ability of the Borrower to perform its obligations under the Loan
Documents.
"Agreement": This Credit Agreement, as it may be amended, modified,
---------
supplemented, restated or replaced from time to time.
"Applicable Margin": The percentages set forth below, calculated based on
-----------------
SIC's Claims Paying Ability Rating:
1
<PAGE>
Federal Funds Rate
------------------
Rating: LIBOR Advances Advances
------ -------------- --------
A.M. Best "A" or better
and Standard and Poor's
"A+" or better 0.40% 0.50%
A.M. Best less than "A" or
Standard and Poor's less
than "A+" 0.50% 0.60%
The Applicable Margin shall initially be 0.40% for LIBOR advances and 0.50% for
Reference Rate Advances.
"Business Day": Any day (other than a Saturday, Sunday or legal holiday in
------------
the State of Oregon) on which national banks are permitted to be open in
Portland, Oregon and, with respect to LIBOR Advances, a day on which dealings in
Dollars may be carried on by the Banks in the interbank LIBOR market.
"Capitalized Lease": Any lease which is or should be capitalized on the
-----------------
books of the lessee in accordance with GAAP.
"Claims Paying Ability Rating": SIC's ability to pay claims as determined
----------------------------
by the ratings of A.M. Best Company, Inc. and Standard and Poor's Rating Group,
or if either or both of such companies cease to provide ratings of SIC's ability
to pay claims, the ratings of SIC's ability to pay claims as determined by a
substitute rating company or companies of recognized standing selected by Bank.
If A.M. Best Company, Inc., Standard and Poor's Rating Group, or other rating
companies selected by Bank to determine SIC's ability to pay claims materially
change its current or future system of ratings, Bank shall determine the new
rating or ratings which most nearly correspond to the ratings set forth herein
and shall notify the Borrower of such determination in writing, at which time
such determination(s) shall become effective and this Agreement shall be deemed
modified to reflect such determination(s).
"Code": The Internal Revenue Code of 1986, as amended, or any successor
----
statute, together with regulations thereunder.
"Commitment": One hundred million dollars ($100,000,000) as such amount may
----------
be reduced from time to time pursuant to Section 4.4 or Section 10.2, or the
----------- ------------
Bank's commitment to make Loans and issue Letters of Credit hereunder, as the
context may require.
"Compliance Certificate": A certificate in the form of Exhibit C, duly
---------------------- ---------
completed and signed by an authorized officer of the Borrower.
2
<PAGE>
"Default": Any event which, with the giving of notice to the Borrower or
-------
lapse of time, or both, would constitute an Event of Default.
"ERISA": The Employee Retirement Income Security Act of 1974, as amended,
-----
and any successor statute, together with regulations thereunder.
"ERISA Affiliate": Any trade or business (whether or not incorporated) that
---------------
is a member of a group of which the Borrower is a member and which is treated as
a single employer under Section 414 of the Code.
"Event of Default": Any event described in Section 10.1.
------------
"Executive Officer": The chief executive officer, president, chief
-----------------
financial officer, chief investment officer, a senior vice president or
corporate secretary.
"Federal Funds Rate": The daily opening rate of interest on overnight
------------------
federal funds transactions (a) as such rate appears on Dow Jones Page 5
(designated as such) of the on-line service provided by Dow Jones Market Service
(formerly known as Telerate Service) or such page as may replace Page 5 of that
service for the purpose of displaying opening federal funds rates, or (b) the
rate determined by Bank based on such other published service of general
application as shall be selected by Bank for such purpose, or (c) if Dow Jones
Market Service (formerly known as Telerate Service) or such other service does
not report such rates or such rates do not, in the judgment of Bank, accurately
reflect the rates of interest applicable to Bank in the relevant markets, the
rate shall be determined by Bank based on opening rates of interest offered to
Bank for overnight deposits in the federal funds market. If such rate is not
provided for any day (e.g., weekend or holiday), such rate for such day shall be
the rate for the next preceding day on which such rate was provided.
"Federal Funds Rate Advance": An Advance designated as such in a notice of
--------------------------
borrowing under Section 2.3 or a notice of continuation or conversion under
-----------
Section 2.4.
- -----------
"Federal Reserve Board": The Board of Governors of the Federal Reserve
---------------------
System or a successor thereto.
"Funded Debt": Without duplication, the following obligations, contingent
-----------
or otherwise, of Borrower and its Subsidiaries (whether or not classified as
liabilities upon the obligor's balance sheet, whether originally incurred or
later assumed, and whether or not incurred as a general partner or joint
venturer of a partnership or joint venture): (a) obligations under this
Agreement; (b) Indebtedness for borrowed money; (c) "surplus notes" as set forth
in Borrower's financial statements prepared in accordance with NAIC Standards;
(d) any obligations as lessee under any Capitalized Lease or synthetic lease;
(e) obligations secured by any mortgage, pledge, security interest, lien, charge
or other encumbrance existing on property owned or acquired and whether or not
the obligation secured is the obligation of the owner or another party; (f) all
guaranties, endorsements and other contingent obligations in respect to
Indebtedness of others, including agreements to maintain net worth or working
3
<PAGE>
capital of, or provide funds to satisfy any other financial test applicable to
any other Person; and (g) undertakings or agreements to reimburse or indemnify
issuers of letters of credit; but in any event excluding: (v) obligations in
which the creditor's only recourse is to the property which secures the
obligation; and (w) obligations of partnerships or joint ventures where the
recourse of the creditor on the obligation is limited to assets of the
partnership or joint venture; (x) obligations arising on account of the
endorsement of negotiable instruments for deposit or collection (or similar
transactions) in the ordinary course of business; (y) obligations of Borrower or
any wholly owned Subsidiary to another wholly owned Subsidiary or the Borrower;
and (z) extensions, renewals, or refinancings of obligations under
paragraphs (v), (w), (x), and (y) so long as such obligations are in an amount
not greater than the amount of the obligation being extended, renewed or
refinanced.
"GAAP": Generally accepted accounting principles consistently applied.
----
"Guarantors": SIC and SMI.
"Guaranty": A guaranty in the form of Exhibit B, duly completed and signed
by authorized officers of the Guarantors.
"Indebtedness": Without duplication, all obligations, contingent or
-------------
otherwise, which in accordance with GAAP should be classified upon the obligor's
balance sheet as liabilities, but in any event including the following (whether
or not they should be classified as liabilities upon such balance sheet): (a)
obligations secured by any mortgage, pledge, security interest, lien, charge or
other encumbrance existing on property owned or acquired subject thereto,
whether or not the obligation secured thereby shall have been assumed and
whether or not the obligation secured is the obligation of the owner or
another party; (b) any obligation on account of deposits or advances; (c) any
obligation for the deferred purchase price of any property or services, except
Trade Accounts Payable, (d) any obligation as lessee under any Capitalized
Lease; (e) all guaranties, endorsements and other contingent obligations in
respect to Indebtedness of others; and (f) undertakings or agreements to
reimburse or indemnify issuers of letters of credit. For all purposes of this
Agreement, the Indebtedness of any Person shall include the Indebtedness of any
partnership or joint venture in which such Person is a general partner or a
joint venturer.
"Interest Period" For any LIBOR Advance, the period commencing on the
---------------
borrowing date of such LIBOR Advance or the date a Federal Funds Rate Advance is
converted into such LIBOR Advance, or the last day of the preceding Interest
Period for such LIBOR Advance, as the case may be, and ending on the numerically
corresponding day one, two, three, six, or nine months thereafter, as selected
by the Borrower pursuant to Section 2.3 or Section 2.4; provided, that:
----------- ----------- ---------
(i) any Interest Period which would otherwise end on a day which is
not a Business Day shall end on the next succeeding Business Day unless
such next succeeding Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding Business
Day;
4
<PAGE>
(ii) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on
the last Business Day of the calendar month at the end of such Interest
Period; and
(iii) no Interest Period shall extend beyond the Termination Date.
"Letters of Credit": Shall have the meaning set forth in Section 2.7.
----------------- -----------
"Letter of Credit Agreements": Shall have the meaning set forth in
---------------------------
Section 2.7.
- -----------
"Letter of Credit Obligations": Shall mean the aggregate amount of all
----------------------------
possible drawings under all outstanding Letters of Credit plus all amounts drawn
under any Letter of Credit and not reimbursed by the Borrower under the
applicable Letter of Credit Agreement.
"LIBOR Advance": An Advance designated as such in a notice of borrowing
-------------
under Section 2.3 or a notice of continuation or conversion under Section 2.4.
----------- -----------
"LIBOR Interbank Rate": The offered rate for deposits in United 5tates
--------------------
Dollars (rounded upwards, if necessary, to the nearest 1/16 of 1%), for
delivery of such deposits on the first day of an Interest Period of a LIBOR
Advance, for the number of days comprised therein, which appears on Dow Jones
Page 3750 as of 11:00 a.m., London time, on the day that is two Banking Days
preceding the first day of the Interest Period of such LIBOR Advance or the rate
determined by the Bank at such time based on such other published service of
general application as shall be selected by the Bank for such purpose. If Dow
Jones Page 3750 or such other service does not report such rates or such rates
do not, in the judgment of the Bank, accurately reflect the rates of interest
applicable to the Bank in the relevant markets, the rate for such Interest
Period shall be determined by the Bank based on rates offered to the Bank for
United States Dollar deposits in the interbank LIBOR market. "Dow Jones Page
3750" means the display designated as 3750 on the service provided by Dow Jones
Market Service (formerly known as Telerate Service) or such other page as may
replace such page of that services for the purpose of displaying London
interbank offered rates of major banks for United States Dollar deposits.
"LIBOR Rate (Reserve Adjusted)": A rate per annum (rounded upwards, if
-----------------------------
necessary, to the nearest 1/16th of 1%) calculated for the Interest Period of a
LIBOR Advance in accordance with the following formula:
ERRA = LIBOR Interbank Rate
--------------------
1.00 - ERR
In such formula, "ERR" means "LIBOR Reserve Rate" and "ERRA" means "LIBOR Rate
(Reserve Adjusted)", in each instance determined by the Bank for the applicable
Interest Period. The Bank's determination of all such rates for any Interest
Period shall be conclusive in the absence of manifest error.
5
<PAGE>
"LIBOR Reserve Rate": A percentage equal to the daily average during such
-------------------
Interest Period of the aggregate maximum reserve requirements (including all
basic, supplemental, marginal and other reserves), as specified under Regulation
D of the Federal Reserve Board, or any other applicable regulation that
prescribes reserve requirements applicable to Eurocurrency liabilities (as
presently defined in Regulation D) or applicable to extensions of credit by the
Bank or the rate of interest on which is determined with regard to rates
applicable to Eurocurrency liabilities. Without limiting the generality of the
foregoing, the Eurocurrency Reserve Requirement shall reflect any reserves
required to be maintained by the Bank against (i) any category of liabilities
that includes deposits by reference to which the LIBOR Rate is to be determined,
or (ii) any category of extensions of credit or other assets that includes LIBOR
Advances.
"Lien": Any security interest, mortgage, pledge, lien, hypothecation,
----
judgment lien or similar legal process, charge, encumbrance, title retention
agreement or analogous instrument or device (including, without limitation, the
interest of the lessors under Capitalized Leases and the interest of a vendor
under any conditional sale or other title retention agreement).
"Loan Documents": This Agreement, the Note, the Guaranty, each Letter of
---------------
Credit Agreement, and each other instrument, document, guaranty, security
agreement, mortgage, or other agreement executed and delivered by the Borrower
or any guarantor or party granting security interests in connection with this
Agreement, the Loan or any collateral for the Loan.
"NAIC Standards": Accounting standards of the National Association of
---------------
Insurance Commissioners for life and health insurers, as such standards may be
amended from time to time.
"Note": A note in the form of Exhibit A, duly completed and signed by
----
authorized officer(s) of the Borrower.
"Payment Date": The Termination Date, or date of any other termination of
-------------
the Commitment, plus (a) the last day of each Interest Period and, in the case
of an Interest Period of more than three months, on the date(s) occurring every
three months after the first day of the Interest Period, for each LIBOR Advance;
(b) the last day of each month for each Federal Funds Rate Advance; and (c) the
last day of each quarter for any fees including, without limitation, Facility
Fees.
"PBGC": The Pension Benefit Guaranty Corporation, established pursuant to
----
Subtitle A of Title IV of ERISA, and any successor thereto or to the functions
thereof.
"Person": Any natural person, corporation, partnership, joint venture,
------
firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether
acting in an individual, fiduciary or other capacity.
"Plan": An employee benefit plan or other plan, maintained for employees of
----
the Borrower or of any ERISA Affiliate, and subject to Title IV of ERISA or
Section 412 of the Code.
6
<PAGE>
"Related Party": Any Person (other than a Subsidiary): (a) which directly
--------------
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, the Borrower, (b) which beneficially owns or
holds 5% or more of the equity interest of the Borrower; or (c) 5% or more of
the equity interest of which is beneficially owned or held by the Borrower or
a Subsidiary. The term "control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
"Reportable Event": A reportable event as defined in Section 4043 of ERISA
-----------------
and the regulations issued under such Section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation has waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided that a failure to meet the minimum
funding standard of Section 412 of the Code and Section 302 of ERISA shall be a
reportable event regardless of the issuance of any such waivers in accordance
with Section 412(d) of the Code.
"SIC": Standard Insurance Company, a Subsidiary of Borrower.
"SIC Credit Agreement": A credit agreement entitled Credit Agreement dated
as of March 19, 1999 among SIC and Bank.
"SMI": Standard Mortgage Investors, LLC, a Subsidiary of Borrower.
---
"SREI": Standard Real Estate Investors, LLC, a Subsidiary of Borrower.
----
"Subsidiary": Any Person of which or in which the Borrower or its other
-----------
Subsidiaries own directly or indirectly 50% or more of: (a) the combined voting
power of all classes of stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of such Person, if
it is a corporation, (b) the capital interest or profit interest of such Person,
if it is a partnership, joint venture or similar entity, or (c) the beneficial
interest of such Person, if it is a trust, association or other unincorporated
organization.
"Tangible Net Worth": As of any date of determination, the sum of the
-------------------
amounts set forth on the balance sheet of the Borrower on a consolidated or non-
consolidated basis (as indicated), as the sum of the common stock, preferred
stock, additional paid-in capital and retained earnings of the Borrower
(excluding treasury stock), less the book value of all assets of the Borrower
(and, if consolidated, its Subsidiaries) that would be treated as intangibles
under GAAP, including, without limitation, all such items as goodwill,
trademarks, trade names, service marks, copyrights, patents, licenses,
unamortized debt discount and unamortized deferred charges.
"Termination Date": The earliest of (a) the date the Bank demands payment
-----------------
of the entire balance of the Loan, (b) 364 days after the date of this
Agreement, or (c) the date on which the Commitment is terminated pursuant to
Section 4.4 or Section 10.2 hereof.
- -------------- ------------
7
<PAGE>
"Trade Accounts Payable": The trade accounts payable of any Person with a
-----------------------
maturity of not greater than 90 days incurred in the ordinary course of such
Person's business.
Section 1.2 Accounting Terms and Calculations.
Except as may be expressly provided to the contrary herein, all accounting
terms used herein shall be interpreted and all accounting determinations
hereunder (including, without limitation, determination of compliance with
financial ratios and restrictions in Articles VIII and IX hereof) shall be made
------------- --
in accordance with GAAP as in effect on the date of application thereof. Any
reference to "consolidated" financial terms shall be deemed to refer to those
financial terms as applied to the Borrower and its Subsidiaries, as applicable,
in accordance with GAAP.
Section 1.3 Computation of Time Periods.
In this Agreement, in the computation of a period of time from a specified
date to a later specified date, unless otherwise stated the word "from" means
"from and including" and the word "to" or "until" each means "to but excluding."
Section 1.4 Other Definitional Terms.
The words "hereof", "herein" and "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement. References to Sections, Exhibits,
schedules and like references are to this Agreement unless otherwise expressly
provided.
ARTICLE II TERMS OF LENDING
----------
Section 2.1 The Commitment.
--------------
Subject to the terms and conditions hereof and in reliance upon the
warranties of the Borrower herein, Bank shall make loans (the "Loan") to the
Borrower from time to time from the date hereof until the Termination Date,
during which period the Borrower may repay and reborrow in accordance with the
provisions hereof, provided, that the unpaid principal amount of the Loan plus
the Letter of Credit Obligations shall not at any time exceed the Commitment.
Section 2.2 Advance Options.
---------------
The Loan shall be constituted of LIBOR Advances and Federal Funds Rate
Advances, as shall be selected by the Borrower, except as otherwise provided
herein. Any combination of types of Advances may be outstanding at the same
time, except that the total of outstanding LIBOR Advances shall not exceed five
(5) at any one time. Each LIBOR Advance shall be in a minimum amount of $500,000
and in an integral multiple of $100,000 if above such amount. Each Federal Funds
Rate Advance shall be in a minimum amount of $500,000 and in an integral
multiple of $100,000 if above such amount.
8
<PAGE>
Section 2.3 Borrowing Procedures.
--------------------------------
(a) Request by Borrower Any request by the Borrower for a Loan shall be in
-------------------
writing, or by telephone promptly confirmed in writing, and must be given
so as to be received by the Bank not later than:
(i) 4:00 p.m., Portland time, on the date of the requested
Loan, if the Loan is a Federal Funds Rate Advance; or
(ii) 12:00 noon, Portland time, two Business days prior to the
date of the requested Loan, if the Loan is, or includes, a LIBOR
Advance.
Each request for a Loan shall specify (i) the borrowing date (which shall
be a Business Day), (ii) the amount of such Loan and the type or types of
Advances comprising such Loan, and (iii) if such Loan includes LIBOR
Advances, the initial Interest Periods for such Advances.
Section 2.4 Continuation or Conversion of Loan.
----------------------------------
The Borrower may elect to (i) continue any outstanding LIBOR Advance from
one Interest Period into a subsequent Interest Period to begin on the last day
of the earlier Interest Period, or (II) convert any outstanding Advance into
another type of Advance (on the last day of an Interest Period only, in the
instance of a LIBOR Advance), by giving the Bank notice in writing, or by
telephone promptly confirmed in writing, given so as to be received by the Bank
not later than:
(a) 4:00 p.m., Portland time, on the date of the requested
continuation or conversion, if the continuing or converted Advance shall
be a Federal Funds Rate Advance; or
(b) 12:00 noon, Portland time, two Business days prior to the date of
the requested continuation or conversion, if the continuing or converted
Advance shall be a LIBOR Advance.
Each notice of continuation or conversion of an Advance shall specify (i) the
effective date of the continuation or conversion date (which shall be a Business
Day), (ii) the amount and the type or types of Advances following such
continuation or conversion (subject to the limitation on amount set forth in
Section 2.2), and (iii) for continuation as, or conversion into, LIBOR
- ------------
Advances, the Interest Periods for such Advances. Absent timely notice of
continuation or conversion, each LIBOR Advance shall automatically convert into
a Federal Funds Rate Advance on the last day of an applicable Interest Period,
unless paid in full on such last day. No Advance shall be continued as, or
converted into, a LIBOR Advance if the shortest Interest Period for such
Advance may not transpire prior to the Termination Date or if a Default or Event
of Default shall exist.
9
<PAGE>
Section 2.5 The Note
--------
The Loan shall be evidenced by the Note in the amount of the Commitment
originally in effect and dated as of the date of this Agreement. The Bank shall
enter in its records the amount of the Loan and each Advance, the rate of
interest borne by each Advance and the payments made on the Loan, and such
records shall be deemed conclusive evidence of the subject matter thereof,
absent manifest error.
Section 2.6 Funding Losses.
--------------
The Borrower will indemnify the Bank upon demand against any loss or
expense which the Bank may sustain or incur (including, without limitation, any
loss or expense sustained or incurred in obtaining, liquidating or employing
deposits or other funds acquired to effect, fund, or maintain any Advance) as a
consequence of (i) any failure of the Borrower to make any payment when due of
any amount due hereunder or under the Note, (ii) any failure of the Borrower to
borrow, continue or convert an Advance on a date specified therefor in a notice
thereof, or (iii) any payment (including, without limitation, any payment
pursuant to Section 4.2 or 10.2), prepayment or conversion of any LIBOR Advance
----------- ----
on a date other than the last day of the Interest Period for such Advance.
Determinations by the Bank for purposes of this Section 2.6 of the amount
-----------
required to indemnify the Bank shall be conclusive in the absence of manifest
error.
Section 2.7 Letters of Credit
-----------------
(a) Letters of Credit. Subject to the terms and conditions of this
-----------------
Agreement, the Borrower may, in addition to requesting Loans, request that
the Bank issue letters of credit for the account of the Borrower, by making
such request to the Bank (such letters of credit as any of them may be
amended, supplemented, extended or confirmed from time to time, being
herein collectively called the `Letters of Credit'). The Bank may, at its
discretion, elect to issue or decline to issue any requested Letter of
Credit.
(b) Additional Provisions. The following additional provisions shall apply
---------------------
to each Letter of
Credit:
(i) No Letter of Credit may be issued if after giving effect
thereto the Letter of Credit Obligations shall exceed $10,000,000 or
if the sum of (a) the outstanding principal amount of the Loan plus
----
(B) the Letter of Credit Obligations would exceed the Commitment.
(ii) No Letter of Credit shall be issued on or after the
Termination Date. No Letter of Credit shall be issued which expires or
which permits presentment of drafts or other documents for payment
later than one year after the Termination Date.
10
<PAGE>
(iii) Upon receipt from the beneficiary of any Letter of Credit
of any demand for payment thereunder, Bank shall promptly notify the
Borrower as to the amount to be paid as a result of such demand and
the payment date.
(iv) The Borrower shall be irrevocably and unconditionally
obligated forthwith to reimburse the Bank for any amount paid by the
Bank upon any drawing under any Letter of Credit, without
presentment, demand, protest or other formalities of any kind, all of
which are hereby waived. Such reimbursement may, subject to
satisfaction of the conditions in Article VI hereof and to the
----------
available Commitment (after adjustment in the same to reflect the
elimination of the corresponding Letter of Credit Obligation), be made
by the making of a Loan.
(v) The Borrower will pay to Bank a letter of credit fee with
respect to each Letter of Credit equal to an amount, calculated on the
basis of face amount of each Letter of Credit, in each case for the
period from and including the date of issuance of such Letter of
Credit to and including the date of expiration or termination thereof
at a rate equal to the 0.50% per annum, but in no event less than
$350, such fee to be due and payable in advance on the date of the
issuance thereof, and shall be adjusted for any cancellation or
reduction in the face amount of the Letter of Credit. All fees
hereunder shall be computed on the basis of a year of 360 days and
paid for the actual number of days elapsed.
(vi) The issuance by the Bank of each Letter of Credit shall, in
addition to the discretionary nature of this facility, be subject to
the conditions precedent that the Borrower shall have executed and
delivered such applications and other instruments and agreements
relating to such Letter of Credit as the Bank shall have reasonably
requested and are not inconsistent with the terms of this Agreement
(the `Letter of Credit Agreements'). In the event of a conflict
between the terms of this Agreement and the terms of any Letter of
Credit Agreement (including the charging of any fees other than normal
and customary reimbursable expenses), the terms hereof shall control.
(c) Indemnification: Release. Borrower hereby indemnifies and holds
------------------------
harmless the Bank from and against any and all claims and damages, losses,
liabilities, costs or expenses which the Bank may incur (or which may be claimed
against the Bank by any Person whatsoever), in connection with the execution and
delivery of any Letter of Credit or transfer of or payment or failure to pay
under any Letter of Credit; provided that the Borrower shall not be required to
--------
indemnify any party seeking indemnification for any claims, damages, losses,
liabilities, costs or expenses to the extent, but only to the extent, caused by
(i) the willful misconduct or gross negligence of the party seeking
indemnification, or (ii) by the failure by the party seeking indemnification to
pay under any Letter of Credit after the presentation to it of a request
required to be paid under applicable law.
11
<PAGE>
ARTICLE III INTEREST AND FEES
-----------
Section 3.1 Interest.
--------
(a) LIBOR Advances. The unpaid principal amount of each LIBOR Advance
--------------
shall bear interest prior to maturity at a rate per annum equal to the
LIBOR Rate (Reserve Adjusted) in effect for each Interest Period for such
LIBOR Advance plus the Applicable Margin.
(b) Federal Funds Rate Advances. The unpaid principal amount of each
---------------------------
Federal Funds Rate Advance shall bear interest prior to maturity at a rate
per annum equal to the Federal Funds Rate plus the Applicable Margin. The
interest rate on Advances which bear interest at a rate tied to the Federal
Funds Rate shall be determined and adjusted daily.
(c) Interest After Maturity. Any amount of the Loan not paid when due,
-----------------------
whether at the date scheduled therefor or earlier upon acceleration, shall
bear interest until paid in full at a rate per annum equal to 2.00% in
excess of the rate applicable to the unpaid principal amount immediately
before it became due.
Section 3.2 Facility Fee.
------------
On the applicable Payment Date, the Borrower shall pay to the Bank a non-
refundable fee (the "Facility Fee") in an amount determined by applying a rate
of 0.075% per annum to the daily amount of the Commitment for the quarter then
ended.
Section 3.3 Computation.
-----------
Interest and the Facility Fee shall be computed on the basis of actual days
elapsed and a year of 360 days.
Section 3.4 Payment Dates.
-------------
Accrued interest under Section 3.1 (a), and (b) and Facility Fee under
----------------
Section 3.2 shall be payable on the Payment Dates for the applicable types of
- -----------
Advances and for fees. Accrued interest under Section 3.1(c) shall be payable on
-------------
demand.
12
<PAGE>
ARTICLE IV
PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION
OF THE CREDIT AND FUNDING OF THE BANK
Section 4.1 Repayment.
---------
Principal of the Loan, together with all accrued and unpaid interest
thereon, shall be due and payable on demand and on any other Termination Date.
Any demand for payment shall not require the occurrence of an Event of Default.
Section 4.2 Prepayments.
-----------
(a) Optional. The Borrower may, upon at least 2 Business Days' prior
--------
written or telephonic notice received by the Bank, prepay the Loan, in
whole or in part. Any such prepayment must be accompanied by accrued and
unpaid interest on the amount prepaid. Each partial prepayment shall be in
an amount of $100,000 or an integral multiple thereof.
(b) Funding Indemnity. All prepayments, whether or not following the
-----------------
occurrence of an Event of Default, shall be subject to the provisions of
Section 2.6 hereof.
-----------
Section 4.3 Payments.
--------
Payments and prepayments of principal of, and interest on, the Note and all
fees, expenses and other obligations under the Loan Documents shall be made
without set-off or counterclaim in immediately available funds not later than
4:00 p.m., Portland time, on the dates due at the main office of the Bank in
Portland, Oregon. Funds received on any day after such time shall be deemed to
have been received on the next Business Day. Subject to the definition of the
term "Interest Period", whenever any payment to be made hereunder or on the Note
shall be stated to be due on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day and such extension of time
shall be included in the computation of any interest or fees.
Section 4.4 Optional Reduction or Termination of Commitment.
-----------------------------------------------
The Borrower may, at any time, upon no less than 5 Business Days prior
written or telephonic notice received by the Bank, reduce the Commitment, with
any such reduction in a minimum amount of $1,000,000 or an integral multiple
thereof. Upon any reduction in the Commitment pursuant to this Section 4.4, the
-----------
Borrower shall pay to the Bank the amount, if any, by which the unpaid principal
amount of outstanding Loan plus the Letter of Credit Obligations exceeds the
Commitment as so reduced. Amounts so paid cannot be reborrowed. The Borrower
may, at any time, upon not less than five (5) Business Days prior written notice
to the Bank, terminate the Commitment in its entirety. Upon termination of the
Commitment pursuant to this Section, the Borrower shall pay to the Bank the full
13
<PAGE>
amount of the outstanding Loan, all accrued and unpaid interest thereon, all
unpaid Commitment Fees accrued to the date of such termination and all other
unpaid obligations of the Borrower to the Bank hereunder. All payments
described in this Section are subject to the provisions of Section 2.6.
-----------
Notwithstanding the foregoing, the Commitment may not be reduced to an amount
below outstanding Letter of Credit Obligations, or terminated, if Letters of
Credit are outstanding.
ARTICLE V
ADDITIONAL PROVISIONS RELATING TO LOAN AND LETTERS OF CREDIT
Section 5.1 Increased Costs.
---------------
If, as a result of any law, rule, regulation, treaty or directive, or any
change therein or in the interpretation or administration thereof, or compliance
by the Bank with any request or directive (whether or not having the force of
law) from any court, central bank, governmental authority, agency or
instrumentality, or comparable agency:
(a) any tax, duty or other charge with respect to the Loan, the Note
or the Commitment is imposed, modified or deemed applicable, or the basis
of taxation of payments to the Bank of interest or principal of the Loan or
of the Facility Fees (other than taxes imposed on the overall net income of
the Bank is changed;
(b) any reserve, special deposit, special assessment or similar
requirement against assets of, deposits with or for the account of, or
credit extended by, the Bank is imposed, modified or deemed applicable;
(c) any increase in the amount of capital required or expected to be
maintained by the Bank or any Person controlling the Bank is imposed,
modified or deemed applicable; or
(d) any other condition affecting this Agreement or the Commitment is
imposed on the Bank or the relevant funding markets;
and the Bank determines that, by reason thereof, the cost to the Bank of making
or maintaining the Loan, issuing or participating in the Letters of Credit or
extending the Commitment is increased, or the amount of any sum receivable by
the Bank hereunder or under the Note in respect of any Loan or Letters of Credit
is reduced;
then, the Borrower shall pay to the Bank upon demand such additional amount or
- ----
amounts as will compensate the Bank (or the controlling Person in the instance
of (c) above) for such additional costs or reduction (provided that the Bank has
not been compensated for such additional cost or reduction in the calculation of
the LIBOR Reserve Rate). Determinations by the Bank for purposes of this
Section 5.1 of the additional amounts required to compensate the Bank shall be
- -----------
conclusive in the absence of manifest
14
<PAGE>
error. In determining such amounts, the Bank may use any reasonable averaging,
attribution and allocation methods.
Section 5.2 Deposits Unavailable or Interest Rate Unascertainable or
--------------------------------------------------------
Inadequate; Impracticability.
- ----------------------------
If the Bank in good faith determines (which determination shall be
conclusive and binding on the parties hereto) that:
(a) deposits of the necessary amount for the relevant Interest Period
for any LIBOR Advance are not available to the Bank in the relevant markets
or that, by reason of circumstances affecting such market, adequate and
reasonable means do not exist for ascertaining the LIBOR Rate for such
Interest Period;
(b) the LIBOR Rate (Reserve Adjusted) will not adequately and fairly
reflect the cost to the Bank of making or funding the LIBOR Advance for a
relevant Interest Period; or
(c) the making or funding of LIBOR Advances has become impracticable
as a result of any event occurring after the date of this Agreement which,
in the opinion of the Bank, materially and adversely affects such Advances
or the Bank's Commitment to make such Advances or the relevant market;
the Bank shall promptly give notice of such determination to the Borrower,
and (i) any notice of a new LIBOR Advance previously given by the Borrower
and not yet borrowed or converted shall be deemed to be a notice to make a
Federal Funds Rate Advance, and (ii) the Borrower shall be obligated to
either prepay in full any outstanding LIBOR Advances, without premium or
penalty, on the last day of the current Interest Period with respect
thereto or convert any such LIBOR Advance to a Federal Funds Rate Advance
on such last day.
Section 5.3 Changes in Law Rendering LIBOR Advances Unlawful.
------------------------------------------------
If at any time due to the adoption of any law, rule, regulation, treaty or
directive, or any change therein or in the interpretation or administration
thereof by any court, central bank, governmental authority, agency or
instrumentality, or comparable agency charged with the interpretation or
administration thereof, or for any other reason arising subsequent to the date
of this Agreement, it shall become unlawful or impossible for the Bank to make
or fund any LIBOR Advance, the obligation of the Bank to provide such Advance
shall, upon the happening of such event, forthwith be suspended for the duration
of such illegality or impossibility. If any such event shall make it unlawful or
impossible for the Bank to continue any LIBOR Advance previously made by it
hereunder, the Bank shall, upon the happening of such event, notify the Borrower
thereof in writing, and the Borrower shall, at the time notified by the Bank,
either convert each such unlawful Advance to a Federal Funds Rate Advance or
repay such Advance in full, together with accrued interest thereon, subject to
the provisions of Section 2.6.
-----------
15
<PAGE>
Section 5.4 Discretion of the Bank as to Manner of Funding.
-----------------------------------------------
Notwithstanding any provision of this Agreement to the contrary, the Bank
shall be entitled to fund and maintain its funding of all or any part of the
Loan in any manner it elects; it being understood, however, that for purposes of
this Agreement, all determinations hereunder shall be made as if the Bank had
actually funded and maintained each LIBOR Advance during the Interest Period for
such Advance through the purchase of deposits having a term corresponding to
such Interest Period and bearing an interest rate equal to the LIBOR Rate for
such Interest Period (whether or not the Bank shall have granted any
participations in such Advances).
Section 5.5 Claims for Increased Costs.
--------------------------
The Bank shall not be entitled to compensation under this Article V for any
increased costs incurred with respect to any date unless the Bank shall have
notified the Borrower of such increased costs not more than 180 days after the
later of (i) such date and (ii) the date on which the Bank became aware of such
increased costs.
ARTICLE VI CONDITIONS PRECEDENT
----------
Section 6.1 Conditions of Initial Advance.
-----------------------------
The obligation of the Bank to make the initial Advance hereunder shall be
subject to the satisfaction of the conditions precedent, in addition to the
applicable conditions precedent set forth in Section 6.2 below, that the Bank
-----------
shall have received all of the following, in form and substance satisfactory to
the Bank, each duly executed and certified or dated the date of the initial Loan
or such other date as is satisfactory to the Bank:
(a) The Note
(b) The Guaranty
(c) A copy of the corporate resolution of the Borrower authorizing
the execution, delivery and performance of the Loan Documents, certified by
the Secretary or an Assistant Secretary of the Borrower.
(d) A copy of the corporate resolutions of the Guarantors authorizing
the execution, delivery and performance of the Guaranty, certified by the
Secretary or an Assistant Secretary of Guarantors.
(e) An incumbency certificate showing the names and titles, and
bearing the signatures of, the officers of the Borrower authorized to
execute the Loan Documents and to request Loan hereunder, certified by the
Secretary or an Assistant Secretary of the Borrower.
16
<PAGE>
(f) Incumbency certificates showing the names and titles, and bearing
the signatures of, the officers of the Guarantors authorized to execute the
Guaranty, certified by the Secretary or an Assistant Secretary of the
Guarantors.
(g) A status certificate for the Borrower and each Guarantor in the
jurisdiction of its incorporation, certified by the appropriate
governmental officials.
(h) Copies of the Articles or Certificate of Incorporation and the By-
Laws of the Borrower and each Guarantor with all amendments thereto,
certified by the Secretary or an Assistant Secretary of the Borrower.
(f) An opinion of counsel to the Borrower, addressed to the Bank, in
substantially the form of Exhibit D.
---------
(h) Payment of the Facility Fees as provided in Section 3.2 and the
-----------
expenses of the Bank as provided in Section 12.4 hereof.
------------
Section 6.2 Conditions Precedent to all Advances.
The obligation of the Bank to make any Advance hereunder (including the
initial Advance) shall be subject to the satisfaction of the following
conditions precedent (and each request for an Advance shall be deemed a
representation and warranty by the Borrower that the following have been
satisfied):
(a) Before and after giving effect to such Advance, the representation
and warranties contained in Article VII shall be true and correct in all
-----------
material respects, as though made on the date of such Advance (except to
the extent such representation or warranty expressly relates to an earlier
date.
(b) Before and after giving effect to such Advance, no Default or
Event of Default shall have occurred and be continuing.
ARTICLE VII REPRESENTATIONS AND WARRANTIES
-----------
To induce the Bank to enter into this Agreement, and to make the Loan and
issue Letters of Credit hereunder, the Borrower represents and warrants to the
Bank:
17
<PAGE>
Section 7.1 Organization, Standing, Etc.
---------------------------
The Borrower and each of the corporate Subsidiaries are corporations duly
incorporated and validly existing and if applicable in good standing under the
laws of the jurisdiction of their respective incorporation and have all
requisite corporate power and authority to carry on their respective businesses
as now conducted, to enter into the Loan Documents and to perform its
obligations under the Loan Documents. The Borrower and each of the Subsidiaries
are duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the failure to qualify could reasonably be expected to
have an Adverse Effect.
Section 7.2 Authorization and Validity.
--------------------------
The execution, delivery and performance by the Borrower of the Loan
Documents have been duly authorized by all necessary corporate action by the
Borrower, and the Loan Documents constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms, subject to limitations as to enforceability which might
result from bankruptcy, insolvency, moratorium and other similar laws affecting
creditors' rights generally and subject to limitations on the availability of
equitable remedies.
Section 7.3 No Conflict; No Default.
-----------------------
The execution, delivery and performance by the Borrower of the Loan
Documents will not (a) violate any provision of any law, statute, rule or
regulation or any order, writ, judgment, injunction, decree, determination or
award of any court, governmental agency or arbitrator presently in effect having
applicability to the Borrower, (b) violate or contravene any provisions of the
Articles (or Certificate) of Incorporation or by-laws of the Borrower, or (c)
result in a breach of or constitute a default under any indenture, loan or
credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or any of its properties may be bound or
result in the creation of any Lien on any asset of the Borrower or any
Subsidiary. Neither the Borrower nor any Subsidiary is in default under or in
violation of any such law, statute, rule or regulation, order, writ, judgment,
injunction, decree, determination or award or any such indenture, loan or credit
agreement or other agreement, lease or instrument in any case in which the
consequences of such default or violation could reasonably be expected to result
in an Adverse Event.
Section 7.4 Government Consent.
------------------
No order, consent, approval, license, authorization or validation of, or
filing, recording or registration with, or exemption by, any governmental or
public body or authority is required on the part of the Borrower to authorize,
or is required in connection with the execution, delivery and performance of, or
the legality, validity, binding effect or enforceability of, the Loan Documents.
18
<PAGE>
Section 7.5 Financial Statements and Condition.
----------------------------------
The Borrower's audited consolidated and consolidating financial statements
and its unaudited consolidated and consolidating financial statements as
heretofore furnished to the Bank have been prepared in accordance with GAAP or
in accordance with NAIC Standards on a consistent basis and fairly present the
financial condition of the Borrower and its Subsidiaries as at such dates and
the results of their operations and changes in financial position for the
respective periods then ended, subject, in the case of interim financial
statements, to the absence of footnotes and year-end adjustments. As of the
dates of such financial statements, neither the Borrower nor any Subsidiary had
any material obligation, contingent liability, liability for taxes or long-term
lease obligation which is not reflected in such financial statements or in the
Note thereto. Since the dates of the most recent of such financial statements,
no Adverse Event has occurred.
Section 7.6 Litigation and Contingent Liabilities.
-------------------------------------
Except as described in Exhibit E, there are no actions, suits or
---------
proceedings pending or, to the knowledge of the Borrower, threatened against or
affecting the Borrower or any Subsidiary or any of their properties before any
court or arbitrator, or any governmental department, board, agency or other
instrumentality which, if determined adversely to the Borrower or any
Subsidiary, could reasonably be expected to result in an Adverse Event. Except
as described in Exhibit F, neither the Borrower nor any Subsidiary has any
contingent liabilities which are material to the Borrower and the Subsidiaries
as a consolidated enterprise.
Section 7.7 Compliance.
----------
The Borrower and the Subsidiaries are in material compliance with all
statutes and governmental rules and regulations applicable to them.
Section 7.8 Environmental, Health and Safety Laws.
-------------------------------------
There does not exist any violation by the Borrower or any Subsidiary of any
applicable federal, state or local law, rule or regulation or order of any
government, governmental department, board, agency or other instrumentality
relating to environmental, pollution, health or safety matters which will or
could reasonably be expected to impose a material liability on the Borrower or a
Subsidiary or which would or could reasonably be expected to require a material
expenditure by the Borrower or such Subsidiary to cure. Neither the Borrower nor
any Subsidiary has received any notice to the effect that any part of its
operations or properties is not in material compliance with any such law, rule,
regulation or order or notice that it or its property is the subject of any
governmental investigation evaluating whether any remedial action is needed to
respond to any release of any toxic or hazardous waste or substance into the
environment, the consequences of which non-compliance or remedial action could
reasonably be expected to result in an Adverse Event.
19
<PAGE>
Section 7.9 ERISA
-----
Each Plan complies with all material applicable requirements of ERISA and
the Code and with all material applicable rulings and regulations issued under
the provisions of ERISA and the Code setting forth those requirements. No
Reportable Event, other than a Reportable Event for which the reporting
requirements have been waived by regulations of the PBGC, has occurred and is
continuing with respect to any Plan. All of the minimum funding standards
applicable to such Plans have been satisfied and there exists no event or
condition which would permit the institution of proceedings to terminate any
Plan under Section 4042 of ERISA. The current value of the Plans' benefits
guaranteed under Title IV or ERISA does not exceed the current value of the
Plans' assets allocable to such benefits.
Section 7.10 Regulation U.
------------
Neither the Borrower nor any Subsidiary is engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (as
defined in Regulation U of the Board of Governors of the Federal Reserve System)
and no part of the proceeds of the Loan will be used to purchase or carry
margin stock or for any other purpose which would violate any of the margin
requirements of the Board of Governors of the Federal Reserve System.
Section 7.11 Ownership of Property.
---------------------
Each of the Borrower and the Subsidiaries has good and marketable title to
its real properties and good and sufficient title to or right to use its other
properties, including all properties and assets referred to as owned by the
Borrower and its Subsidiaries in the audited financial statement of the Borrower
referred to in Section 7.5 (other than property disposed of since the date of
-----------
such financial statement in the ordinary course of business).
Section 7.12 Taxes.
-----
Each of the Borrower and the Subsidiaries has filed all federal, state and
local tax returns required to be filed and has paid or made provision for the
payment of all taxes due and payable pursuant to such returns and pursuant to
any assessments made against it or any of its property and all other taxes, fees
and other charges imposed on it or any of its property by any governmental
authority (other than taxes, fees or charges the amount or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in accordance with GAAP have been provided on the
books of the Borrower). No tax Liens have been filed and no material claims are
being asserted with respect to any such taxes, fees or charges. The charges,
accruals and reserves on the books of the Borrower in respect of taxes and other
governmental charges are adequate
20
<PAGE>
Section 7.13 Trademarks, Patents.
-------------------
Each of the Borrower and the Subsidiaries possesses or has the right to use
all of the patents, trademarks, trade names, service marks and copyrights, and
applications therefor, and all technology, know-how, processes, methods and
designs which are material to the conduct of its business, without known
conflict with the rights of others.
Section 7.14 Investment Company Act.
----------------------
Neither the Borrower nor any Subsidiary is an "investment company" or a
company "controlled" by an investment company within the meaning of the
Investment Company Act of 1940, as amended.
Section 7.15 Public Utility Holding Company Act.
----------------------------------
Neither the Borrower nor any Subsidiary is a "holding company" or a
"subsidiary company" of a holding company or an "affiliate" of a holding company
or of a subsidiary company of a holding company within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
Section 7.16 Subsidiaries.
------------
Exhibit G sets forth as of the date of this Agreement a list of all
---------
Subsidiaries and the number and percentage of the shares of each class of
capital stock owned beneficially or of record by the Borrower or any Subsidiary
therein, and the jurisdiction of incorporation of each Subsidiary.
Section 7.17 Partnerships and Joint Ventures.
-------------------------------
Exhibit H sets forth as of the date of this Agreement a list of all
---------
partnerships or joint ventures in which the Borrower or any Subsidiary is a
partner (limited or general) or joint venturer.
Section 7.18 Year 2000.
---------
Borrower has reviewed and assessed its and its Subsidiaries business
operations and computer systems and applications to address the "year 2000
problem" (that is, that computer applications and equipment used by Borrower and
its Subsidiaries, directly or indirectly through third parties, may be unable to
properly perform date-sensitive functions before, during and after January 1,
2000). Borrower and its Subsidiaries are in the process of implementing a plan
to remediate year 2000 problems and will complete implementation of such plan
with respect to any material year 2000 problems, and testing thereof, by
September 30, 1999. Borrower believes the year 2000 problem will not result in
an Adverse Event. Borrower warrants this representation will be true and correct
on and shall be deemed made by Borrower on each date Borrower requests any Loan
or the issuance of any Letter of Credit or delivers any information to Bank.
21
<PAGE>
ARTICLE VIII AFFIRMATIVE COVENANTS
------------
From the date of this Agreement and thereafter until the Loan and all
other liabilities and obligations of the Borrower to the Bank hereunder and
under the Note have been paid in full, unless the Bank shall otherwise expressly
consent in writing, the Borrower will do, and will cause each Subsidiary (except
in the instance of Section 8.1) to do, all of the following:
-----------
Section 8.1 Financial Statements and Reports.
--------------------------------
Furnish to Bank:
(a) As soon as available and in any event within 120 days after the
end of each fiscal year of the Borrower, the consolidated annual audit
reports of the Borrower (and its Subsidiaries) prepared on a consolidated
basis and in conformity with GAAP, consisting of at least statements of
income, cash flow, changes in financial position and stockholders' equity,
and a consolidated balance sheet as at the end of such year, setting forth
in each case in comparative form corresponding figures from the previous
annual audit, certified without qualification by independent certified
public accountants of recognized standing selected by the Borrower and
reasonably acceptable to the Bank, together with any management letters,
management reports or other supplementary comments or reports to the
Borrower or its board of directors furnished by such accountants, and a
statement by the accounting firm performing such audit stating that it has
reviewed this Agreement and that in performing its examination nothing
came to its attention that caused it to believe that any Default or Event
of Default exists, or, if such Default or Event of Default exists,
describing its nature.
(b) As soon as available and in any event within 120 days after the
end of each fiscal year of Borrower, the unaudited annual financial
statements of SIC prepared in conformity with NAIC Standards and the
unaudited annual financial statements of SMI and SREI prepared in
conformity with GAAP, each certified by the Borrower's chief financial
officer or controller, consisting of at least statements of income, cash
flow, changes in financial position and stockholders' equity, and a balance
sheet as at the end of such year setting forth in each case in comparative
form corresponding figures from the previous annual financial statements.
(c) As soon as available and in any event within 45 days after the end
of the first three fiscal quarters of each fiscal year of Borrower, the
unaudited financial statements of SIC prepared in conformity with NAIC
Standards and the unaudited financial statements of SMI and SREI prepared
in conformity with GAAP (except for the absence of footnotes and subject to
year-end audit adjustments), each certified by the Borrower's chief
financial officer or controller, consisting of at least statements of
income, cash flow, changes in financial position and stockholders' equity
for such quarter and for the period from the beginning of such fiscal year
to the end of such quarter, and a balance sheet as at the end of such
quarter.
22
<PAGE>
(d) Together with the financial statements furnished by the Borrower
under Sections 8. 1 (a) and 8.1 (c), a Compliance Certificate in
----------- ----- -------
substantially the form of Exhibit C signed by the chief financial officer
or controller of the Borrower.
(e) As soon as available and in any event within 30 days after the end
of each month, Borrower's internal Monthly Investment Division Report
describing investments and returns on investments made by Borrower and its
Subsidiaries, as such report may be amended or modified from time to time,
signed by Borrower's chief financial officer or controller.
(f) Immediately upon an Executive Officer of Borrower becoming aware
thereof, notice of any change in SIC's Claims Paying Ability Rating.
(g) Immediately upon an Executive Officer of Borrower becoming aware
of any Default or Event of Default, a notice describing the nature thereof
and what action the Borrower proposes to take with respect thereto.
(h) Immediately upon an Executive Officer of Borrower becoming aware
of the occurrence, with respect to any Plan, of any Reportable Event (other
than a Reportable Event for which the reporting requirements have been
waived by PBGC regulations) or any "prohibited transaction" (as defined in
Section 4975 of the Code), a notice specifying the nature thereof and what
action the Borrower proposes to take with respect thereto, and, when
received, copies of any notice from PBGC of intention to terminate or have
a trustee appointed for any Plan.
(i) Promptly upon the mailing or filing thereof, copies of all
financial statements, reports and proxy statements mailed to the Borrower's
stockholders, and copies of all registration statements, periodic reports
and other documents filed by Borrower or any of its Subsidiaries with the
Securities and Exchange Commission and Oregon Department of Consumer and
Business Services (and any successor to either entity).
(j) Immediately upon an Executive Officer of Borrower becoming aware
of the occurrence thereof, notice of the institution of any litigation,
arbitration or governmental proceeding, or the rendering of a judgment or
decision in such litigation or proceeding, which could reasonably be
expected to result in an Adverse Event, and the steps being taken by the
Person(s) affected by such proceeding.
(k) Immediately upon an Executive Officer of Borrower becoming aware
of the occurrence thereof, notice of any violation as to any environmental
matter by the Borrower or any Subsidiary and of the commencement of any
judicial or administrative proceeding relating to health, safety or
environmental matters (i) in which an adverse determination or result could
reasonably be expected to result in the revocation of or have a material
adverse effect on any operating permits, air emission permits, water
discharge permits, hazardous waste permits or other permits held by the
Borrower or any Subsidiary which are material to the operations of the
Borrower or such Subsidiary, or (ii) which will or reasonably could be
expected to impose a
23
<PAGE>
material liability on the Borrower or such Subsidiary to any Person or
which will require a material expenditure by the Borrower or such
Subsidiary to cure any alleged problem or violation.
(l) From time to time, such other information regarding the business,
operation and financial condition of the Borrower and the Subsidiaries as
the Bank may reasonably request, including information regarding Borrower's
response to the "year 2000 problem".
Section 8.2 Corporate Existence.
-------------------
Subject to Section 9.1 in the instance of Borrower and each Subsidiary,
-----------
maintain its corporate existence under the laws of its jurisdiction of
incorporation and its qualification to transact business in each jurisdiction in
which the failure to qualify could reasonably be expected to Adverse an Adverse
Effect.
Section 8.3 Insurance.
---------
Maintain with financially sound and reputable insurance companies such
insurance as may be required by law and such other insurance in such amounts and
against such hazards as is customary in the case of reputable corporations
engaged in the same or similar business and similarly situated.
Section 8.4 Payment of Taxes and Claims.
---------------------------
File all tax returns and reports which are required by law to be filed by
it and pay before they become delinquent all taxes, assessments and governmental
charges and levies imposed upon it or its property and all claims or demands of
any kind (including, without limitation, those of suppliers, mechanics,
carriers, warehouses, landlords and other like Persons) which, if unpaid, might
result in the creation of a Lien upon its property; provided that the foregoing
--------
items need not be paid if they are being contested in good faith by appropriate
proceedings, and as long as the Borrower's or such Subsidiary's title to its
property is not materially adversely affected, its use of such property in the
ordinary course of its business is not materially interfered with and adequate
reserves with respect thereto have been set aside on the Borrower's or such
Subsidiary's books in accordance with GAAP.
Section 8.5 Inspection.
----------
Permit any Person designated by the Bank to visit and inspect any of its
properties, corporate books and financial records, to examine and to make copies
of its books of accounts and other financial records, and to discuss the
affairs, finances and accounts of the Borrower and the Subsidiaries with, and to
be advised as to the same by, its officers, all at such reasonable times and
intervals as the Bank may designate.
24
<PAGE>
Section 8.6 Maintenance of Properties.
-------------------------
Maintain its properties used or useful in the conduct of its business in
good condition, repair and working order, and supplied with all necessary
equipment, and make repairs, renewals, replacements, betterments and
improvements thereto, all as may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times.
Section 8.7 Books and Records.
-----------------
Keep adequate and proper records and books of account in which full and
correct entries will be made of its dealings, business and affairs.
Section 8.8 Compliance.
----------
Comply in all material respects with all laws, rules, regulations, orders,
writs, judgments, injunctions, decrees or awards to which it may be subject.
Section 8.9 ERISA.
-----
Maintain each Plan in compliance with all material applicable requirements
of ERISA and of the Code and with all material applicable rulings and
regulations issued under the provisions of ERISA and of the Code.
Section 8.10 Environmental Matters.
---------------------
Observe and comply with all laws, rules, regulations and orders of any
government or government agency relating to health, safety, pollution, hazardous
materials or other environmental matters to the extent non-compliance could
result in a material liability or otherwise constitute an Adverse Event.
ARTICLE IX NEGATIVE COVENANTS
----------
From the date of this Agreement and thereafter until the Loan and all other
liabilities and obligations of the Borrower to the Bank hereunder and under the
Note have been paid in full, unless the Bank shall otherwise expressly consent
in writing, the Borrower will not, and will not permit any Subsidiary to, do any
of the following:
Section 9.1 Merger.
------
Merge or consolidate or enter into any analogous reorganization or
transaction with any Person; provided, however, (a) any wholly-owned Subsidiary
--------- -------
(except SIC) may be merged with or liquidated into the Borrower (if the Borrower
is the surviving corporation) or SIC (if SIC is the surviving corporation) or
any other wholly-owned Subsidiary; and (b) the Borrower or any Subsidiary may
merge or consolidate
25
<PAGE>
with any other Person so long as (i) (A) the Borrower or such Subsidiary shall
be the continuing or surviving Person or (B) in the case of a merger with a
Subsidiary, the acquired Person is, as a result of the merger transaction, a
wholly owned Subsidiary of the Borrower, and (ii) immediately before and after
giving effect to such merger, there shall be no Default or Event of Default.
Section 9.2 Sale of Assets.
--------------
Sell, transfer, lease or otherwise convey all or any substantial part of
its assets except for sales or other transfers by a wholly-owned Subsidiary to
the Borrower or another wholly-owned Subsidiary.
Section 9.3 Plans.
-----
Permit any condition to exist in connection with any Plan which might
constitute grounds for the PBGC to institute proceedings to have such Plan
terminated or a trustee appointed to administer such Plan, permit any Plan to
terminate under any circumstances which would cause the lien provided for in
Section 4068 of ERISA to attach to any property, revenue or asset of the
Borrower or any Subsidiary.
Section 9.4 Change in Nature of Business.
----------------------------
Make any material change in the nature of the business of the Borrower and
its Subsidiaries, taken as a whole, carried on at the date hereof.
Section 9.5 Subsidiaries.
------------
Take any action or permit any Subsidiary to take any action, which would
result in either (a) Borrower's direct or indirect ownership interest in SIC or
SMI to be less than 100%, or (b) the Borrower's or the Subsidiary's direct
ownership interest in any other Subsidiary now owned or hereafter acquired to
be less than 50%.
Section 9.6 Other Agreements.
----------------
Enter into any agreement, bond, note or other instrument with or for the
benefit of any Person other than the Bank which would: (a) prohibit the Borrower
or any Subsidiary from granting, or otherwise limit the ability of the Borrower
or such Subsidiary to grant, to the Bank any Lien on any assets or properties
of the Borrower or such Subsidiary (other than prohibitions or limitations (i)
existing on the date of this Agreement, (ii) affecting the assets of any Person
acquired after the date of this Agreement, and existing on the date of the
acquisition of the Person, (iii) existing under, or by reason of, applicable
law, or (iv) constituting an encumbrance or restriction on any property or
assets in an agreement relating to the acquisition of such property or asset
that is otherwise permitted by the terms of this Agreement; or (b) be violated
or breached by the Borrower's performance of its obligations under the Loan
Documents.
26
<PAGE>
Section 9.7 Funded Debt.
-----------
Incur, create, issue, assume or suffer to exist Funded Debt in excess of
$150,000,000 outstanding at any time.
Section 9.8 Unconditional Purchase Obligations.
----------------------------------
Enter into or be a party to any contract for the purchase or lease of
materials, supplies or other property or services involving payments of more
than $5,000,000 if such contract requires that payment be made by it regardless
of whether or not delivery is ever made of such materials, supplies or other
property or services.
Section 9.9 Transactions with Related Parties.
---------------------------------
Enter into or be a party to any transaction or arrangement, including
without limitation, the purchase, sale, lease or exchange of property or the
rendering of any service, with any Related Party, except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower's or the
applicable Subsidiary's business and upon fair and reasonable terms no less
favorable to the Borrower or such Subsidiary than would obtain in a comparable
arm's-length transaction with a Person not a Related Party.
Section 9.10 Use of Proceeds.
---------------
Permit any proceeds of the Loan to be used, either directly or indirectly,
for the purpose, whether immediate, incidental or ultimate, of "purchasing or
carrying any margin stock" within the meaning of Regulation U of the Federal
Reserve Board, as amended from time to time, and furnish to the Bank, upon its
request, a statement in conformity with the requirements of Federal Reserve
Form U-1 referred to in Regulation U.
Section 9.11 Borrower's Equity.
-----------------
Permit the stockholder's equity of the Borrower and its Subsidiaries on a
consolidated basis determined in accordance with GAAP as of the last day of any
fiscal quarter to be less than $650,000,000, but excluding the effect of net
unrealized gains and losses included in or excluded from stockholder's equity on
account of Statement No. 115 of the Financial Accounting Standards Board and
similar accounting rules.
Section 9.12 SMI's Tangible Net Worth.
------------------------
Permit the Tangible Net Worth of SMI as of the last day of any fiscal
quarter to be less than $5,000,000.
27
<PAGE>
Section 9.13 SIC's Claims Paying Ability Rating.
----------------------------
Cause SIC to maintain a Claims Paying Ability Rating from A.M. Best of A-
or better and maintain a Claims Paying Ability Rating from Standard and Poor's
of A or better.
ARTICLE X EVENTS OF DEFAULT AND REMEDIES
---------
Section 10.1 Events of Default.
-----------------
The occurrence of any one or more of the following events shall constitute
an Event of Default:
(a) The Borrower shall fail to make when due, whether by acceleration
or otherwise, any payment of principal or any payment of interest on the
Note or any fee or other amount required to be made to the Bank pursuant to
the Loan Documents within three business days of the due date thereof;
(b) Any representation or warranty made or deemed to have been made by
or on behalf of the Borrower or any Subsidiary in the Loan Documents or on
behalf of the Borrower or any Subsidiary in any certificate, statement,
report or other writing furnished by or on behalf of the Borrower to the
Bank pursuant to the Loan Documents or any other instrument, document or
agreement shall prove to have been false or misleading in any material
respect on the date as of which the facts set forth are stated or certified
or deemed to have been slated or certified;
(c) The Borrower shall fail to comply with Section 8.2 hereof or any
-----------
Section of Article IX hereof;
----------
(d) The Borrower shall fail to comply with any agreement, covenant,
condition, provision or term contained in the Loan Documents except the
inadvertent failure to list less than $500,000 in contingent obligations in
a Compliance Certificate required by Section 8.1(d) (and such failure shall
-------------
not constitute an Event of Default under any of the other provisions of
this Section 10.1) and such failure to comply shall continue for 30
------------
calendar days after notice thereof to the Borrower by the Bank;
(e) The Borrower or any Subsidiary shall become insolvent or shall
generally not pay its debts as they mature or shall apply for, shall
consent to, or shall acquiesce in the appointment of a custodian,
trustee or receiver of the Borrower or such Subsidiary or for a substantial
part of the property thereof or, in the absence of such application,
consent or acquiescence, a custodian, trustee or receiver shall be
appointed for the Borrower or a Subsidiary or for a substantial part of the
property thereof and shall not be discharged within 45 days;
(f) Any bankruptcy, reorganization, debt arrangement or other
proceedings under any bankruptcy or insolvency law shall be instituted by
or against the Borrower or a Subsidiary, and, if instituted against the
Borrower or a Subsidiary, shall have been consented to or acquiesced in by
28
<PAGE>
the Borrower or such Subsidiary, or shall remain undismissed for 45 days,
or an order for relief shall have been entered against the Borrower or such
Subsidiary, or the Borrower or any Subsidiary shall take any corporate
action to approve institution of, or acquiescence in, such a proceeding;
(g) Any dissolution or liquidation proceeding shall be instituted by
or against the Borrower or a Subsidiary and, if instituted against the
Borrower or such Subsidiary, shall be consented to or acquiesced in by the
Borrower or such Subsidiary or shall remain for 45 days undismissed, or the
Borrower or any Subsidiary shall take any corporate action to approve
institution of, or acquiescence in, such a proceeding;
(h) A judgment or judgments for the payment of money in excess of the
sum of $5,000,000 in the aggregate shall be rendered against the Borrower
or a Subsidiary and the Borrower or such Subsidiary shall not discharge the
same or provide for its discharge in accordance with its terms, or procure
a stay of execution thereof, prior to any execution on such judgments by
such judgment creditor, within 30 days from the date of entry thereof, and
within said period of 30 days, or such longer period during which execution
of such judgment shall be stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal;
(i) The institution by the Borrower, any ERISA Affiliate or the PBGC
of steps to terminate any Plan other than a termination under Section
4041(b) of ERISA by the Borrower or ERISA Affiliate;
(j) The maturity of any Indebtedness of the Borrower (other than
Indebtedness under this Agreement) or a Subsidiary shall be accelerated, or
the Borrower or a Subsidiary shall fail to pay any such Indebtedness when
due or, in the case of such Indebtedness payable on demand, when demanded,
or any event shall occur or condition shall exist and shall continue for
more than the period of grace, if any, applicable thereto and shall have
the effect of causing, or permitting (any required notice having been
given and grace period having expired) the holder of any such Indebtedness
or any trustee or other Person acting on behalf of such holder to cause,
such indebtedness to become due prior to its stated maturity or to realize
upon any collateral given as security therefor; or
(k) Either SIC or SMI shall cease to be a wholly owned Subsidiary of
Borrower.
Section 10.2 Remedies.
--------
If (a) any Event of Default described in Sections 10.1 (e), (f) or (g)
-----------------
shall occur with respect to the Borrower, the Commitment shall automatically
terminate and the outstanding unpaid principal balance of the Note, the accrued
interest thereon and all other obligations of the Borrower to the Bank under the
Loan Documents shall automatically become immediately due and payable; or (b)
any other Event of Default shall occur and be continuing, then the Bank may take
any or all of the following actions: (i) declare the Commitment terminated,
whereupon the Commitment shall terminate, (ii)
29
<PAGE>
declare that the outstanding unpaid principal balance of the Note, the accrued
and unpaid interest thereon and all other obligations of the Borrower to the
Bank under the Loan Documents to be forthwith due and payable, whereupon the
Note, all accrued and unpaid interest thereon and all such obligations shall
immediately become due and payable, in each case without demand or notice of
any kind, all of which are hereby expressly waived, anything in this Agreement
or in the Note to the contrary notwithstanding, (iii) exercise all rights and
remedies under any other instrument, document or agreement between the Borrower
and the Bank, and (iv) enforce all rights and remedies under any applicable law.
Section 10.3 Letters of Credit.
-----------------
In addition to the foregoing remedies, if any Event of Default described
in Section 10.1(e), (f) or (g) shall have occurred, or if any other Event of
---------------
Default shall have occurred and the Bank shall have declared that the principal
balance of the Note is due and payable, the Borrower shall pay to the Bank an
amount equal to the all Letter of Credit Obligations. Such payment shall be in
immediately available funds or in similar cash collateral acceptable to the Bank
and shall be pledged to the Bank. Such amount shall be held by the Bank in a
cash collateral account until the outstanding Letters of Credit are terminated
without payment or are paid and Letter of Credit Obligations with respect
thereto are payable. In the event the Borrower defaults in the payment of any
Letter of Credit Obligations, the proceeds of the cash collateral account shall
be applied to the payment thereof. The Borrower acknowledges and agrees that the
Bank would not have an adequate remedy at law for failure by the Borrower to pay
immediately to the Bank the amount provided under this Section 10.3, and that
------------
the Bank shall have the right to require the Borrower to perform specifically
such undertaking whether or not any of the Letter of Credit Obligations are due
and payable. Upon the failure of the Borrower to make any payment required under
this Section, the Bank may proceed to use all remedies available at law or
equity to enforce the obligation of the Borrower to pay or reimburse the Bank.
The balance of any payment due under this Section shall bear interest payable
on demand until paid in full at a per annum rate equal to the Federal Funds Rate
plus 3.00%.
Section 10.4 Offset.
------
In addition to the remedies set forth in Section 10.2, upon the occurrence
------------
of any Event of Default or at any time thereafter while such Event of Default
continues, the Bank may offset any and all balances, credits, deposits (general
or special, time or demand, provisional or final), accounts or monies of the
Borrower then or thereafter with the Bank, or any obligations of the Bank
against the Indebtedness then owed by the Borrower to such Bank.
30
<PAGE>
ARTICLE XI ARBITRATION
Section 11.1 Arbitration of Claims.
---------------------
Notwithstanding Sections 12.13 and 12.14 of this Agreement, Borrower, any
------------------------
Guarantor or Bank may require that any and all disputes, claims, counterclaims,
and defenses, including those based on or arising from any alleged tort
("Claims") relating in any way to this Agreement, the Loan, any of the Loan
Documents, or any transaction of which this Agreement is a part (each a
"Credit"), be settled by binding arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration association and Title 9 of the
U.S. Code. All Claims will be subject to the statutes of limitation applicable
if they were litigated. This provision is void if the Credit, at the time of the
proposed submission to arbitration, is secured by real property located outside
of Oregon or Washington, or if the effect of the arbitration procedure (as
opposed to any Claims of the Borrower or Guarantor) would be to materially
impair the Bank's ability to realize on any collateral securing the Credit.
Section 11.2 Arbitrators.
-----------
If each party's Claim is less than $100,000, one neutral arbitrator will
decide all issues; if any party's claim is $100,000 or more three neutral
arbitrators will decide all issues. All arbitrators will be active Oregon State
Bar members in good standing. All arbitration hearings will be held in Portland,
Oregon. In addition to all other powers, the arbitrator(s) shall have the
exclusive right to determine all issues of arbitrability. Judgment on any
arbitration award may be entered in and enforced by any court with jurisdiction.
Section 11.3 Other Remedies.
--------------
Each party has the right before, during, and after any arbitration to
exercise any number of the following remedies, in any order or concurrently; (a)
setoff; (b) self-help repossession; (c) judicial or non-judicial foreclosure
against real or personal property collateral; and (d) provisional remedies,
including injunction, appointment of receiver, attachment, claim and delivery
and replevin.
Section 11.4 Non-Waiver; Governing Provision.
-------------------------------
The institution of any judicial proceeding relating to any Credit shall not
be a waiver of the right to submit any Claim to arbitration. The provision of
this Article shall govern the arbitration of all matters described herein
notwithstanding any contrary provision of any Note or any Loan Document.
ARTICLE XII MISCELLANEOUS
Section 12.1 Waiver and Amendment.
--------------------
No failure on the part of the Bank to exercise and no delay in exercising
any power or right hereunder or under any other Loan Document shall operate as a
waiver thereof; nor shall any single or
31
<PAGE>
partial exercise of any power or right preclude any other or further exercise
thereof or the exercise of any other power or right. The remedies herein and in
any other instrument, document or agreement delivered or to be delivered to the
Bank hereunder or in connection herewith are cumulative and not exclusive of any
remedies provided by law. No notice to or demand on the Borrower not required
hereunder or under the Note shall in any event entitle the Borrower to any other
or further notice or demand in similar or other circumstances or constitute a
waiver of the right of the Bank or the holder of the Note to any other or
further action in any circumstances without notice or demand. Borrower and SIC
hereby waive and discharge any and all defenses, claims, counterclaims and
offsets which either or both may have against Bank and which have arisen or
accrued through the date of this Agreement.
Section 12.2 Amendments, Etc.
---------------
No amendment or waiver of any provision of this Agreement, nor consent to
any departure by the Borrower therefrom, shall in any event be effective unless
the same shall be in writing and signed by the Borrower and the Bank and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
Section 12.3 Assignments and Participations.
------------------------------
(a) Assignments. With the prior written consent of the Borrower, the
-----------
Bank shall have the right, subject to the further provisions of this
Section 12.3, to sell or assign all or any part of the Loan, Note, and
------------
other rights and obligations under this Agreement and related documents
(such transfer, and "Assignment") to any commercial lender, other financial
institution or other entity (an "Assignee"). Upon such Assignment becoming
effective as provided in Section 12.3(b), the Bank shall be relieved from
---------------
its obligations hereunder to the extent assumed and undertaken by the
Assignee, and to such extent the Assignee shall have the rights and
obligations of the Bank hereunder. Notwithstanding the foregoing, unless
otherwise consented to by the Borrower and the Bank, each Assignment shall
be in the initial principal amount of not less than $10,000,000 in the
aggregate for all Loan and Commitments assigned, or an integral multiple of
$10,000,000 if above such amount. Each Assignment shall be documented by an
agreement between the Bank and the Assignee (an "Assignment and Assumption
Agreement") in form and substance satisfactory to the Bank.
(b) Effectiveness of Assignments. An Assignment shall become
----------------------------
effective hereunder when the Borrower shall have been given notice of the
Assignment. Upon the Assignment becoming effective, if requested by the
Bank, the Borrower shall make appropriate arrangements so that a new Note
is issued to the Bank and the Assignee.
(c) Participations. With the prior written consent of the Borrower,
--------------
the Bank shall have the right, subject to the further provisions of this
Section 12.3, to grant or sell a participation in all or any part of the
------------
Loan and Note (a "Participation") to any commercial lender, other financial
institution or other entity (a "Participant"). The Borrower agrees that if
amounts outstanding under this Agreement and the Note are due and unpaid,
or shall have been declared or shall have
32
<PAGE>
become due and payable upon the occurrence of an Event of Default, each
Participant shall be deemed to have the right of setoff in respect of its
Participation in amounts owing under this Agreement and any Note to the
same extent as if the amount of its Participation were owing directly to it
as a Bank under this Agreement or the Note. The Borrower also agrees that
each Participant shall be entitled to the benefits of Article V with
---------
respect to its Participation, provided, that no Participant shall be
entitled to receive and greater amount pursuant to such Sections than the
transferor Bank would have been entitled to receive in respect of the
amount of the Participation transferred by such transferor Bank to such
Participant had no such transfer occurred.
(d) Limitation of Rights of any Assignee or Participant.
---------------------------------------------------
Notwithstanding anything in the foregoing to the contrary, except in the
instance of an Assignment that has become effective as provided in Section
-------
12.3(b), (i) no Assignee or Participant shall have any direct rights
-------
hereunder, (ii) the Borrower shall deal solely with the Bank and shall not
be obligated to extend any rights or make any payment to, or seek any
consent of the Assignee or Participant, (iii) no Assignment or
Participation shall relieve the Bank from any of its other obligations
hereunder and the Bank shall remain solely responsible for the performance
hereof, the (iv) no Assignee or Participant shall be entitled to require
the Bank to take or omit to take any action hereunder, except that the Bank
may agree with such Assignee or Participant that the Bank will not, without
such Assignee's or Participant's consent, take any action which would, in
the case of any principal, interest or fee in which the Assignee or
Participant has an ownership or beneficial interest: (w) extend the final
maturity of the Loan or extend the Termination Date, (x) reduce the
interest rate on the Loan, or (y) forgive any principal of, or interest on,
the Loan or any fees.
(e) Tax Matters. The Bank shall not be permitted to enter into any
-----------
Assignment or Participation with any Assignee or Participant who is not a
United States Person unless such Assignee or Participant represents and
warrants to such Bank that, as at the date of such Assignment or
Participation, it is entitled to receive interest payments without
withholding or deduction of any taxes and such Assignee or Participant
executes and delivers to the Bank on or before the date of execution and
delivery of documentation of such Participation or Assignment, a United
States Internal Revenue Service Form 1001 or 4224, or any successor to
either of such forms, as appropriate, properly completed and claiming
complete exemption from withholding and deduction of all Federal Income
Taxes. A "United States Person" means any citizen, national or resident of
the United States, any corporation or other entity created or organized in
or under the laws of the United States or any political subdivision hereof
or any estate or trust, in each case that is not subject to withholding of
United States Federal income taxes or other taxes on payment of interest,
principal of fees hereunder.
(f) Information. The Bank may furnish any information concerning the
-----------
Borrower in the possession of such Bank from time to time to Assignees and
Participants and potential Assignees and Participants.
33
<PAGE>
(g) Federal Reserve Bank. Nothing herein stated shall limit the right
--------------------
of the Bank to assign any interest herein and in the Note to a Federal
Reserve Bank.
Section 12.4 Costs, Expenses and Taxes.
-------------------------
The Borrower agrees, whether or not any Loan is made hereunder, to pay on
demand all costs and expenses of the following persons (including the reasonable
fees and expenses of counsel and paralegals for such persons who may be
employees of such persons), incurred in connection with the following matters:
(i) the Bank in connection with the preparation, execution and delivery of the
Loan Documents and the preparation, negotiation and execution of any and all
amendments to each thereof and (ii) the Bank in connection with the enforcement
of the Loan Documents. The Borrower agrees to pay, and save the Bank harmless
from all liability for, any stamp or other taxes which may be payable with
respect to the execution or delivery of the Loan Documents. The Borrower agrees
to indemnify and hold the Bank harmless from any loss or expense which may arise
or be created by the acceptance of telephonic or other instructions for making
the Loan or disbursing the proceeds thereof. The obligations of the Borrower
under this Section 13.4 shall survive any termination of this Agreement.
------------
Section 12.5 Notices.
-------
Except when telephonic notice is expressly authorized by this Agreement,
any notice or other communication to any party in connection with this Agreement
shall be in writing and shall be sent by manual delivery, telegram, telex,
facsimile transmission, overnight courier or United States mail (postage
prepaid) addressed to such party at the address specified on the signature page
hereof, or at such other address as such party shall have specified to the other
party hereto in writing. All periods of notice shall be measured from the date
of delivery thereof if manually delivered, from the date of sending thereof if
sent by telegram, telex or facsimile transmission, from the first Business Day
after the date of sending if sent by overnight courier, or upon receipt if
mailed; provided, however, that any notice to the Bank under Article II hereof
-------- ------- ----------
shall be deemed to have been given only when received by the Bank.
Section 12.6 Successors.
----------
This Agreement shall be binding upon the Borrower and the Bank and their
respective successors and permitted assigns, and shall inure to the benefit of
the Borrower and the Bank and the successors and permitted assigns of the Bank.
The Borrower shall not assign its rights or duties hereunder without the written
consent of the Bank, except as expressly permitted herein.
Section 12.7 Severability.
------------
Any provision of the Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
34
<PAGE>
Section 12.8 Subsidiary Reference
--------------------
The provisions of this Agreement relating to Subsidiaries shall apply
only during such times as the Borrower has one or more Subsidiaries.
Section 12.9 Captions.
--------
The captions or headings herein and any table of contents hereto are for
convenience only and in no way define, limit or describe the scope or intent of
any provision of this Agreement.
Section 12.10 Entire Agreement.
----------------
The Loan Documents embody the entire agreement and understanding between
the Borrower and the Bank with respect to the subject matter hereof and thereof.
This Agreement supersedes all prior agreements and understandings relating to
the subject matter hereof.
Section 12.11 Counterparts.
------------
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument, and either of the
parties hereto may execute this Agreement by signing any such counterpart.
Section 12.12 Governing Law.
-------------
THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE
NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF OREGON, WITHOUT
GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLE THEREOF, BUT GIVING EFFECT TO
FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANK.
Section 12.13 Consent to Jurisdiction.
-----------------------
WITHOUT LIMITING ARTICLE XI, AT THE OPTION OF THE BANK, THIS AGREEMENT AND
THE NOTE MAY BE ENFORCED IN ANY FEDERAL COURT OR OREGON STATE COURT SITTING IN
PORTLAND, OREGON; AND THE BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY
SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT.
IN THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE
UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY AND INDIRECTLY FROM THE
RELATIONSHIP CREATED BY THIS AGREEMENT, THE BANK AT ITS OPTION SHALL BE ENTITLED
TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES
ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE
LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.
35
<PAGE>
Section 12.14 Waiver of Jury Trail.
--------------------
WITHOUT LIMITING ARTICLE XI, THE BORROWER WAIVES ANY RIGHT TO A TRIAL BY
JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a) UNDER THIS
AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR
WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (b) ARISING FROM
ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES
THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE
A JURY.
Section 12.15 Disclosure.
-----------
Under Oregon law, most agreements, promises and commitments made by
-------------------------------------------------------------------
lenders after October 3, 1989, concerning loans and other credit extensions
- ---------------------------------------------------------------------------
which are not for personal, family or household purposes or secured solely by
- -----------------------------------------------------------------------------
the borrower's residence must be in writing, express consideration and be signed
- --------------------------------------------------------------------------------
by the lender to be enforceable.
- -------------------------------
Section 12.16 Termination of SIC Credit Agreement.
-----------------------------------
The SIC Credit Agreement is hereby terminated. SIC and Bank affirm
that there are no outstanding Advances or Letter of Credit Obligations under the
SIC Credit Agreement. Bank hereby waives prior written notice of termination of
the commitment under Section 4.4 of the SIC Credit Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above.
STANCORP FINANCIAL GROUP, INC.
By: /s/ Patricia J. Brown
----------------------------
Title: AVP & Controller
-------------------------
1100 SW Sixth Avenue
Portland, OR 97304-1093
Attention: Eric E. Parsons
Telephone: (503) 321-8616
Fax: (503) 321-7935
36
<PAGE>
STANDARD INSURANCE COMPANY
By: /s/ Patricia J. Brown
----------------------------------
Title: AVP, Controller and Treasurer
-------------------------------
1100 SW Sixth Avenue
Portland, OR 97304-1093
Attention: Eric E. Parsons
Telephone: (503) 321-8616
Fax: (503) 321-7935
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Jennifer L. Briglia
----------------------------------
Vice President
Oregon Corporate Banking
4th Floor
111 SW Fifth Avenue
Portland, OR 97204
Attention: Jennifer Briglia
Telephone: (503) 275-6991
Fax: (503) 275-5415
37
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$ 100,000,000 June 30, 1999
FOR VALUE RECEIVED, the undersigned StanCorp Financial Group, Inc., an
Oregon corporation (the "Borrower"), promises to pay to the order of U.S. BANK
NATIONAL ASSOCIATION (the "Bank"), on the due date or dates determined under
the Credit Agreement hereinafter referred to, the principal sum of ONE HUNDRED
MILLION DOLLARS ($100,000,000.00), or if less, the then unpaid principal amount
of the Loan (as such terms are defined in the Credit Agreement) as may be
borrowed by the Borrower from the Bank under the Credit Agreement. All Loans
and all payments of principal shall be recorded by the holder in its records
which records shall be conclusive evidence of the subject matter thereof, absent
manifest error.
The Borrower further promises to pay to the order of the Bank interest on
the aggregate unpaid principal amount hereof from time to time outstanding from
the date hereof until paid in full at the rates per annum which shall be
determined in accordance with the provisions of the Credit Agreement. Accrued
interest shall be payable on the dates specified in the Credit Agreement.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds at
the Bank's office at Corporate Loan Servicing (PL-7), 111 SW Fifth Avenue,
-----------------------------------------------------
Portland, Oregon 97204, or at such other place as may be designated by the Bank
- ----------------------
to the Borrower in writing.
This Note is the Note referred to in, and evidences indebtedness incurred
under, a Credit Agreement dated as of June 30, 1999 (herein, as it may be
-------------
amended, modified or supplemented from time to time, called the "Credit
Agreement") among the Borrower arid the Bank to which Credit Agreement reference
is made for a statement of the terms and provisions thereof, including those
under which the Borrower is permitted and required to make prepayments and
repayments of principal of such indebtedness and under which such indebtedness
may be declared to be immediately due and payable.
All parties hereto, whether as makers, endorsers or otherwise, severally
waive presentment, demand, protest and notice of dishonor in connection with
this Note.
This Note is made under and governed by the internal laws of the State of
Oregon.
STANCORP FINANCIAL GROUP, INC.
By:___________________________________
Title:________________________________
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EXHIBIT B
SUBSIDIARY GUARANTY
GUARANTY, dated as of June 30, 1999 (as amended, modified or supplemented
from time to time, this "Guaranty"), made by each of the undersigned (each, a
"Guarantor" and, collectively, the "Guarantors"). Except as otherwise defined
herein, terms used herein and defined in the Credit Agreement (as defined below)
shall be used herein as therein defined.
WITNESSETH:
WHEREAS, StanCorp Financial Group, Inc. (the "Borrower") and U.S. Bank
National Association (the "Bank"), have entered into a Credit Agreement, dated
as of June 30, 1999 providing for the making of Loans and the issuance of
Letters of Credit as contemplated therein (as used herein, the term "Credit
Agreement" means the Credit Agreement described above in this paragraph, as the
same may be amended, modified, extended, renewed, replaced or supplemented from
time to time, and including any agreement extending the maturity of, refinancing
or restructuring all or any portion of the Indebtedness under such agreement or
any successor agreement).
WHEREAS, each Guarantor is a Subsidiary of the Borrower and each Guarantor
and the Borrower are operated as one consolidated business entity and are
directly dependent upon each other for and in connection with their respective
financial resources;
WHEREAS, it is a condition to the making of Loans and the issuance of
Letters of Credit under the Credit Agreement that each Guarantor shall have
executed and delivered this Guaranty; and
WHEREAS, each Guarantor will obtain direct and indirect economic, financial
and other benefits from the incurrence of Loans by the Borrower and the issuance
of Letters of Credit under the Credit Agreement and, accordingly, desires to
execute this Guaranty in order to satisfy the conditions described in the
preceding paragraph and to induce the Bank to make Loans and issue Letters of
Credit for the account of the Borrower;
NOW, THEREFORE, in consideration of the foregoing and other benefits
accruing to each Guarantor, the receipt and sufficiency of which are hereby
acknowledged, each Guarantor hereby makes the following representations and
warranties to the Bank and hereby covenants and agrees with the Bank as
follows:
1. As used herein, the term "Guaranteed Obligations" means (x) the
principal of and interest on the Note issued by, and the Loan made to, the
Borrower under the Credit Agreement and all Letter of Credit Obligations and (y)
all other obligations (including obligations which, but for the automatic stay
under Section 362(a) of the Bankruptcy Code, would become due) and liabilities
owing by the Borrower to the Bank under the Credit Agreement (including, without
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limitation, indemnities, fees and interest thereon) whether now existing or
hereafter incurred under, arising out of or in connection with the Credit
Agreement or any other Loan Document and the due performance and compliance with
the terms of the Loan Documents by the Borrower.
2. Notwithstanding any other term or provision of this Guaranty, the
liability of (a) Standard Insurance Company hereunder shall be limited to the
amount of Guaranteed Obligations in existence on the date an Event of Default
occurs which is not subsequently cured, less twenty million dollars
($20,000,000), plus interest thereon from such date until paid at the highest
rate of interest which any outstanding Advance under the Note bears, as such
rate may vary from time to time, and (b) Standard Mortgage Investors, LLC
hereunder shall be unlimited.
3. Each Guarantor, jointly and severally, irrevocably and unconditionally
guarantees to the Bank the full and prompt payment when due (whether at the
stated maturity, by acceleration or otherwise) of the Guaranteed Obligations to
the extent provided herein. Each Guarantor understands, agrees and confirms that
the Bank may enforce this Guaranty against each Guarantor without proceeding
against any other Guarantor, the Borrower, against any security for the
Guaranteed Obligations, or under any other guaranty covering all or a portion of
the Guaranteed Obligations.
4. Additionally, each Guarantor, jointly and severally, unconditionally
and irrevocably, guarantees to the extent provided herein the payment of any and
all Guaranteed Obligations of the Borrower to the Bank whether or not due or
payable by the Borrower upon the occurrence in respect of the Borrower of an
Event of Default, and unconditionally and irrevocably, jointly and severally,
promises to pay such Guaranteed Obligations to the Bank, on order, or on demand,
in lawful money of the United States.
5. The liability of each Guarantor hereunder is exclusive and independent
of any security for or other guaranty of the Guaranteed Obligations of the
Borrower whether executed by such Guarantor, any other Guarantor, any other
guarantor or by any other party, and the liability of each Guarantor hereunder
shall not be affected or impaired by (a) any direction as to application of
payment by the Borrower or by any other party, (b) any other continuing or other
guaranty, undertaking or maximum liability of a guarantor or of any other party
as to the Guaranteed Obligations of the Borrower, (c) any payment on or in
reduction of any such other guaranty or undertaking, (d) any termination of, or
increase, decrease or charge in, personnel by the Borrower or (e) any payment
made to Bank on the Guaranteed Obligations which Bank repays the Borrower
pursuant to court order in any bankruptcy, reorganization, arrangement,
moratorium or other debtor relief proceeding, and each Guarantor waives any
right to the deferral or modification of its obligations hereunder by reason of
any such proceeding.
6. The obligations of each Guarantor hereunder are independent of the
obligations of any other Guarantor, any other guarantor or the Borrower, and a
separate action or actions may be brought and prosecuted against each Guarantor
whether or not action is brought against any other Guarantor, any other
guarantor or the Borrower and whether or not any' other Guarantor, any other
guarantor of the Borrower or the Borrower be joined in any such action or
actions. Each Guarantor waives, to the fullest extent permitted by law, the
benefit of any statute of
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limitations affecting its liability hereunder or the enforcement thereof. Any
payment by the Borrower or other circumstance which operates to toll any statute
of limitations as to the Borrower shall operate to toll the statute of
limitations as to each Guarantor.
7. Each Guarantor hereby waives (to the fullest extent permitted by
applicable law) notice of acceptance of this Guaranty and notice of any
liability to which it may apply, and waives promptness, diligence, presentment,
demand of payment, protest, notice of dishonor or nonpayment of any such
liabilities, suit or taking of other action by the Bank against, and any other
notice to, any party liable thereon (including such Guarantor or any other
Guarantor or guarantor or the Borrower).
8. Bank may at any time and from time to time without the consent of, or
notice to, any Guarantor, without incurring responsibility to such Guarantor,
without impairing or releasing the obligations of such Guarantor hereunder, upon
or without any terms or conditions and in whole or in part:
(a) change the manner, place or terms of payment of, and/or change or
extend the time of payment of, renew, increase, accelerate or alter, any of
the Guaranteed Obligations, any security therefor, or any liability
incurred directly or indirectly in respect thereof, and the guaranty herein
made shall apply to the Guaranteed Obligations as so changed, extended,
renewed or altered;
(b) sell, exchange, release, surrender, realize upon or otherwise
deal with in any manner and in any order any property by whomsoever at any
time pledged or mortgaged to secure, or howsoever securing, the Guaranteed
Obligations or any liabilities (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and/or any offset
thereagainst;
(c) exercise or refrain from exercising any rights against the
Borrower, any Guarantor or others or otherwise act or refrain from acting;
(d) settle or compromise any of the Guaranteed Obligations, any
security therefor or any liability (including any of those hereunder)
incurred directly or indirectly in respect thereof or hereof, and may
subordinate the payment of all or any part thereof to the payment of any
liability (whether due or not) of the Borrower to creditors of the
Borrower;
(e) apply any sums by whomsoever paid or howsoever realized to any
liability or liabilities of the Borrower to the Bank regardless of what
liabilities or the Borrower remain unpaid;
(f) consent to or waive any breach of, or any act, omission or
default under the Loan Documents or any of the instruments or agreements
referred to therein, or otherwise amend, modify or supplement the Loan
Documents or any of such other instruments or agreements; and/or
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(g) act or fail to act in any manner referred to in this Guaranty
which may deprive such Guarantor of its right to subrogation against the
Borrower to recover full indemnity for any payments made pursuant to this
Guaranty.
9. No invalidity, irregularity or unenforceability of all or any part of
the Guaranteed Obligations or of any security therefor shall affect, impair or
be a defense to this Guaranty, and this Guaranty shall be primary, absolute and
unconditional notwithstanding the occurrence of any event or the existence of
any other circumstances which might constitute a legal or equitable discharge of
a surety or guarantor except payment in full of the Guaranteed Obligations.
10. This Guaranty is a continuing one and all liabilities to which it
applies or may apply under the terms hereof shall be conclusively presumed to
have been created in reliance hereon. No failure or delay on the part of Bank in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
expressly specified are cumulative and not exclusive of any rights or remedies
which the Bank would otherwise have. No notice to or demand on any Guarantor
in any case shall entitle such Guarantor to any other further notice or demand
in similar or other circumstances or constitute a waiver of the rights of Bank
to any other or further action in any circumstances without notice or demand. It
is not necessary for Bank to inquire into the capacity or powers of the Borrower
or any of its Subsidiaries or the officers, directors, partners or agents acting
or purporting to act on its behalf, and any indebtedness made or created in
reliance upon the professed exercise of such powers shall be guaranteed
hereunder.
11. Any indebtedness of the Borrower now or hereafter held by any
Guarantor is hereby subordinated to the indebtedness of the Borrower to the
Bank; and such indebtedness of the Borrower to any Guarantor, if the Bank,
after an Event of Default has occurred and is continuing, so requests, shall be
collected, enforced and received by such Guarantor as trustee for the Bank and
be paid over to the Bank on account of the indebtedness of the Borrower to the
Bank, but without affecting or impairing in any manner the liability of such
Guarantor under the other provisions of this Guaranty. Prior to the transfer by
any Guarantor of any note or negotiable instrument evidencing any indebtedness
of the Borrower to such Guarantor, such Guarantor shall mark such note or
negotiable instrument with a legend that the same is subject to this
subordination. Without limiting the generality of the foregoing, each Guarantor
hereby agrees with the Bank that it will not exercise any right of subrogation
which it may at any time otherwise have as a result of this Guaranty (whether
contractual, under Section 509 of the Bankruptcy Code or otherwise) until all
Guaranteed Obligations have been irrevocably paid in full in cash.
12. (a) Each Guarantor waives any right (except as shall be required by
applicable statute or law and cannot be waived) to require the Bank to: (i)
proceed against the Borrower, any other Guarantor, any other guarantor of the
Borrower or any other party; (ii) proceed against or exhaust any security held
from the Borrower, any other Guarantor, any other guarantor of the Borrower or
any other party; or (iii) pursue any other remedy in the Bank's power
whatsoever. Each Guarantor waives any (to the fullest extent permitted by
applicable law) defense based on or
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arising out of any defense of the Borrower, any other Guarantor, any other
guarantor of the Borrower or any other party other than payment in full of the
Guaranteed Obligations, including, without limitation, any defense based on or
arising out of the disability of the Borrower, any other Guarantor, any other
guarantor of the Borrower or any other party, or the unenforceability of the
Guaranteed Obligations or any part thereof from any cause, or the cessation from
any cause of the liability of the Borrower other than payment in full of the
Guaranteed Obligations. The Bank may, at its election, foreclose on any security
held by the Bank by one or more judicial or nonjudicial sales, whether or not
every aspect of any such sale is commercially reasonable (to the extent such
sale is permitted by applicable law), or exercise any other right or remedy the
Bank may have against the Borrower or any other party, or any security, without
affecting or impairing in any way the liability of any Guarantor hereunder
except to the extent the Guaranteed Obligations have been paid In full. Each
Guarantor waives any defense arising out of any such election by the Bank, even
though such election operates to impair or extinguish any right of reimbursement
or subrogation or other right or remedy of such Guarantor against the Borrower
or any other party or any security.
(b) Each Guarantor waives (to the fullest extent permitted by
applicable law) all presentments, demands for performance, protests and notices,
including, withoutout limitation, notices of nonperformance, notices of protest,
notices of dishonor, notices of acceptance of this Guaranty, and notices of the
existence, creation or incurring of new or additional indebtedness. Each
Guarantor assumes all responsibility for being and keeping itself informed of
the Borrower's financial condition and assets, and of all other circumstances
bearing upon the risk of nonpayment of the Guaranteed Obligations and the
nature, scope and extent of the risks which such Guarantor assumes and incurs
hereunder, and agrees that the Bank shall have no duty to advise any Guarantor
of information known to them regarding such circumstances or risks.
13. In order to induce the Bank to make Loans and issue Letters of Credit
pursuant to the Credit Agreement, each Guarantor represents, warrants and
covenants that:
(a) Such Guarantor and each of its Subsidiaries (i) is a duly
organized and validly existing corporation and is (if applicable) in good
standing under the laws of the jurisdiction of its organization, and has
the corporate power and authority to own its property and assets and to
transact the business in which it is engaged and presently proposes to
engage and (ii) is duly qualified and is authorized to do business and is
in good standing in all jurisdictions where it is required to be so
qualified, except for failures to be so qualified which, individually or in
the aggregate could not reasonably be expected to have a material adverse
effect on the business, assets, liabilities, operations, properties,
condition (financial or otherwise) or prospects of such Guarantor or such
Guarantor and its Subsidiaries taken as a whole.
(b) Such Guarantor has the corporate power and authority to execute,
deliver and carry out the terms and provisions of this Guaranty and each
other Loan Document to which it is a party and has taken all necessary
corporate action to authorize the execution, delivery and performance by it
of each such Loan Document. Such Guarantor has duly executed and delivered
this Guaranty and each other Loan Document to which it is a party
<PAGE>
and each such Loan Document constitutes the legal, valid and
binding obligation of such Guarantor enforceable in accordance with its
terms, except to the extent that the enforceability hereof or thereof may
be limited by applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws affecting creditors'
rights generally and by equitable principles (regardless of whether
enforcement is sought in equity or at law).
(c) Neither the execution, delivery or performance by such Guarantor
of this Guaranty or any other Loan Document to which it is a party, nor
compliance by it with the terms and provisions hereof or thereof (i) will
contravene any applicable provision of any law, statute, rule or
regulation, or any order, writ, injunction or decree of any court or
governmental instrumentality, (ii) will conflict or be inconsistent with or
result in any breach of, any of the terms, covenants, conditions or
provisions of, or constitute a default under, or (other than in favor of
the Bank) result in the creation or imposition of (or the obligation to
create or impose) any Lien upon any of the property or assets of such
Guarantor or any of its Subsidiaries pursuant to the terms of any
indenture, mortgage, deed of trust, loan agreement, credit agreement or any
other agreement or other instrument to which such Guarantor or any of its
Subsidiaries is a party or by which it or any of its property or assets is
bound or to which it may be subject or (iii) will violate any provision of
the articles or certificate of incorporation or by-laws or other governing
instrument) of such Guarantor or any of its Subsidiaries.
(d) No order, consent, approval, license, authorization or validation
of, or filing, recording or registration with (except as have been obtained
or made prior to the initial Advance and are in full force and effect), or
exemption by, any governmental or public body or authority, or any
subdivision thereof, is required to authorize, or is required in
connection with, (i) the execution, delivery and performance of this
Guaranty or any other Loan Document to which such Guarantor is a party, or
(ii) the legality, validity, binding effect or enforceability of this
Guaranty or any other Loan Document to which such Guarantor is a party.
(e) There are no actions, suits or proceedings pending or, to the
best knowledge of the Guarantor, threatened (i) with respect to this
Guaranty, (ii) with respect to any Indebtedness of the Guarantor or any of
its Subsidiaries, (iii) that could reasonably be expected to have a
material adverse effect on the business, assets, liabilities, operations,
properties, condition (financial or otherwise) or prospects of such
Guarantor or such Guarantor and its Subsidiaries taken as a whole, or (iv)
that could have a material adverse effect on the rights or remedies of the
Bank or on the ability of such Guarantor to perform its respective
obligations to the Bank hereunder and under the other Loan Documents to
which it is a party.
14. Each Guarantor covenants and agrees that on and after the date hereof
and until the termination of the Commitment and when no Note or Letter of Credit
remains outstanding and all Guaranteed Obligations have been paid in full, such
Guarantor shall take, or will refrain from taking, as the case may be, all
actions that are necessary to be taken or not taken so that no
<PAGE>
violation of any provision, covenant or agreement contained in the Credit
Agreement, and so that no Default or Event of Default, is caused by the actions
of such Guarantor or any of its Subsidiaries.
15. The Guarantors hereby jointly and severally agree to pay all
reasonable out-of-pocket costs and expenses of the Bank in connection with the
enforcement of this Guaranty and any amendment, waiver or consent relating
hereto (including, without limitation, the reasonable fees and disbursements of
counsel (including in-house counsel) employed by the Bank at trial and on
appeal).
16. This Guaranty shall be binding upon each Guarantor and its successors
and assigns and shall inure to the benefit of the Bank and its successors and
assigns.
17. Neither this Guaranty nor any provision hereof may be changed, waived,
discharged or terminated except with the written consent of each Guarantor
directly affected thereby and the Bank.
18. Each Guarantor acknowledges that an executed (or conformed) copy of
each of the Loan Documents has been made available to its principal executive
officers and such officers are familiar with the contents thereof.
19. In addition to any rights now or hereafter granted under applicable
law and not by way of limitation of any such rights, upon the occurrence and
during the continuance of an Event of Default (such term to mean and include any
"Event of Default" as defined in the Credit Agreement continuing after any
applicable grace period and shall in any event, include, without limitation, any
payment default on any of the Guaranteed Obligations after giving effect to any
grace period applicable thereto), the Bank is hereby authorized at any time or
from time to time, without notice to any Guarantor or to any other Person, any
such notice being expressly waived, to set off and to appropriate and apply any
and all deposits (general or special) and any other indebtedness at any time
held or owing by the Bank to or for the credit or the account of such Guarantor,
against and on account of the obligations and liabilities of such Guarantor to
the Bank under this Guaranty, irrespective of whether or not the Bank shall have
made any demand hereunder and although said obligations, liabilities, deposits
or claims, or any of them, shall be contingent or unmatured.
20. All notices, requests, demands or other communications pursuant hereto
shall be deemed to have been duly given or made when delivered to the Person to
which such notice, request, demand or other communication is required or
permitted to be given or made under this Guaranty, addressed to such party at
(i) in the case of the Bank, as provided in the Credit Agreement, and (ii) in
the case of any Guarantor, at its address set forth opposite its signature
below; or in any case at such other address as any of the Persons listed above
may hereafter notify the others in writing.
21. If claim is ever made upon the Bank for repayment or recovery of any
amount or amounts received in payment or on account of any of the Guaranteed
Obligations and the Bank
<PAGE>
repays all or part of said amount by reason of (i) any judgment, decree or order
of any court or administrative body having jurisdiction over such payee or any
of its property or (ii) any settlement or compromise of any such claim effected
by the Bank with any such claimant (including the Borrower), then and in such
event each Guarantor agrees that any such judgment, decree, order, settlement
or compromise shall be binding upon such Guarantor, nothwithstanding any
revocation hereof or the cancellation of any Note or other instrument evidencing
any liability of the Borrower, and such Guarantor shall be and remain liable to
the aforesaid payees hereunder for the amount so repaid or recovered to the same
extent as if such amount had never originally been received by any such payee.
22. Any acknowledgment or new promise, whether by payment of principal or
interest or otherwise and whether by the Borrower or other Persons liable in
respect of the Guaranteed Obligations (including any Guarantor), with respect
to any of the Guaranteed Obligations shall, if the statute of limitations in
favor of any Guarantor against the Bank shall have commenced to run, toll the
running of such statute of limitations, and if the period of such statute of
limitations shall have expired, prevent the operation of such statute of
limitations.
23. (a) THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE CREDITORS AND
OF THE UNDERSIGNED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAW OF THE STATE OF OREGON. Any legal action or proceeding with respect
to this Guaranty or any other Loan Document to which such Guarantor is a party
may be brought in the courts of the State of Oregon or of the United States of
America for the District of Oregon, and by execution and delivery of this
Guaranty, each Guarantor hereby irrevocably accepts for itself and in respect of
its property, generally and unconditionally, the exclusive jurisdiction of the
aforesaid courts. Each Guarantor hereby further irrevocably waives any claim
that any such courts lack jurisdiction over such Guarantor, and agrees not to
plead or claim, in any legal action or proceeding with respect to this Guaranty
or any other Loan Document to which such Guarantor is a party brought in any of
the aforesaid courts, that any such court lacks jurisdiction over such
Guarantor.
(b) Each Guarantor hereby irrevocably waives any objection which it
may now or hereafter have to the laying of venue of any of the aforesaid actions
or proceedings arising out of or in connection with this Guaranty or any other
Loan Document brought in the courts referred to in clause (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such court
that such action or proceeding brought in any such court has been brought in an
inconvenient forum.
24. This Guaranty may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.
25. Guarantor or Bank may require that any and all disputes, claims,
counterclaims, and defenses including those based on or arising from any alleged
torts relating in any way to this Guaranty be settled by binding arbitration in
accordance with Article XI of the Credit Agreement.
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26. WITHOUT LIMITING PARAGRAPH 25 ABOVE, EACH GUARANTOR HEREBY IRREVOCABLY
WAIVES ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS GUARANTY, THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
27. All payments made by any Guarantor hereunder will be made without
setoff, counterclaim or other defense.
28. (a) It is the desire and intent of each Guarantor and the Bank that
this Guaranty shall be enforced against each Guarantor to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought.
(b) If, however, and to the extent, that the obligations of any
Guarantor under this Guaranty shall be adjudicated to be invalid or
unenforceable for any reason (including, without limitation, because of any
applicable state or federal law relating to fraudulent conveyances or
transfers), then the amount of the Guaranteed Obligations of such Guarantor (but
not the Guaranteed Obligations of any other Guarantor unless such other
Guarantor or Guarantors are individually subject to the circumstances covered
by this Section 28) shall be deemed to be reduced and the affected Guarantor
shall pay the maximum amount of the Guaranteed Obligations which would be
permissible under applicable law.
29. If litigation or arbitration is commenced to enforce or construe any
term of this Guaranty, the prevailing party shall be entitled to recover from
the other party all costs thereof, including but not limited to such sums as the
court or arbitrator(s) may adjudge reasonable as attorney fees at trial, in any
appellate proceeding, proceeding under the bankruptcy code or receivership and
post-judgment attorney fees incurred in enforcing any judgment.
IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed
and delivered as of the date first above written.
<PAGE>
STANDARD INSURANCE COMPANY
By:____________________________________
Title:_________________________________
Address: 1100 SW Sixth Avenue
Portland, OR 97304-1093
Telephone: (503) 321-8616
Fax: (503) 321-7935
STANDARD MORTGAGE INVESTORS, LLC
By:____________________________________
Title:_________________________________
Address: 1100 SW Sixth Avenue
Portland, OR 97304-1093
Telephone: (503) 321-8616
Fax: (503) 321-7935
ACCEPTED AND AGREED TO:
U.S. BANK NATIONAL ASSOCIATION
By:____________________________________
Title:_________________________________
<PAGE>
EXHIBIT C
Compliance Certificate
This Compliance Certificate is executed and delivered by StanCorp Financial
Group, Inc. ("Borrower") to U.S. Bank National Association ("Bank") pursuant to
the requirements of the Credit Agreement dated as of June 30, 1999 between
Borrower and Bank ("Credit Agreement"). Any capitalized terms used herein and
not defined herein shall have the meanings given to such terms in the Credit
Agreement. This Compliance Certificate covers Borrower's fiscal ______________
ended ________________.
1. Financial Covenants. Attached are the calculations showing whether
Borrower was in compliance with sections 9.7, 9.11, and 9.12 of the Credit
Agreement as of the end of the fiscal period covered by this Compliance
Certificate. Each such calculation is derived from the books and records of
Borrower and correctly reflects whether Borrower is in compliance with the
applicable sections of the Credit Agreement.
2. Contingent Liabilities. Attached is a list of all contingent
obligations of Borrower and its Subsidiaries, including guaranties,
endorsements, undertakings or agreements to reimburse or indemnify issuers of
letters of credit, and agreements to maintain net worth or working capital of or
provide funds to satisfy any other financial test applicable to any other Person
(whether or not they should be classified as liabilities upon the obligor's
balance sheet, whether originally incurred or later assumed, and whether or not
incurred as a general partner or joint venturer of a partnership or joint
venture), but in any event excluding contingent obligations arising on account
of the endorsement of negotiable instruments for deposit or collection (or
similar transactions) in the ordinary course of business.
3. Claims Paying Ability Ratings. The most recent Claims Paying Ability
Rating assigned to SIC by A.M. Best is ______________, effective as of
__________, and by Standard & Poor's is _________, effective as of ____________.
4. Defaults. A review of the activities of Borrower during the fiscal
period covered by this Compliance Certificate has been made under the
supervision of the undersigned with a view to determining whether during such
fiscal period Borrower performed and observed all of its obligations under the
Credit Agreement. To the best knowledge of the undersigned after reasonable
investigation, all covenants and conditions of Borrower have been performed and
observed during such fiscal period and no Default has occurred and is continuing
under the Credit Agreement [with the exceptions set forth below in response to
which Borrower has taken or proposes to take the following actions:___________
_____________].
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5. Adverse Events. To the best knowledge of the undersigned after
reasonable investigation, no Adverse Event has occurred since the last
Compliance Certificate was delivered to the Bank [with the exceptions set forth
below: _________________________].
6. Date. This Compliance Certificate is executed on _____________________.
Borrower: StanCorp Financial Group, Inc.
By:_______________________________________
Title:____________________________________
<PAGE>
EXHIBIT D
Opinion of Counsel to the Borrower
To: U.S. Bank National Association
Ladies/Gentlemen:
We have acted as counsel for StanCorp Financial Group, Inc. (the
"Borrower"), and we are delivering to you this opinion of counsel upon which
you may rely, in connection with a Credit Agreement, dated as of June 30, 1999,
entered into among the Borrower and U.S. Bank National Association (the "Credit
Agreement"), and the transactions and other Loan Documents described therein.
Unless otherwise defined herein, capitalized terms used herein shall have the
respective meanings assigned to such terms in the Credit Agreement.
In so acting, we, as counsel for the Borrower, have made such factual
inquiries, and have examined or caused to be examined such questions of law, as
we have considered necessary or appropriate for the purposes of this opinion
and, upon the basis of such inquiries and examinations, advise you that, in our
opinion:
(1) The Borrower and each of its Subsidiaries are corporations duly
organized and validly existing under the laws of the state of their respective
incorporation, and each is duly qualified and in good standing as a foreign
corporation in all other jurisdictions in which its respective present
operations or properties require such qualification.
(2) The Borrower has full corporate power and authority to own and operate
its properties and assets, carry on its business as presently conducted, and
enter into and perform its obligations under the Loan Documents to which it is
a party.
(3) The execution and delivery of the Loan Documents to which the Borrower
is a party, the performance by the Borrower of its obligations thereunder, and
the borrowing by the Borrower under the Credit Agreement, have been duly
authorized by all necessary corporate action, and all of said Loan Documents
have been duly executed and delivered on behalf of the Borrower and constitute
valid and binding obligations of the Borrower, enforceable in accordance with
their respective terms.
(4) There is no provision in the Borrower's Articles of Incorporation or
By-Laws, nor any provision in any indenture, mortgage, contract or agreement to
which the Borrower is a party or by which it or its properties may be bound, nor
any law, statute, rule or regulation, nor any writ, order or decision of any
court or governmental instrumentality binding on the Borrower which would be
contravened by the execution and delivery of the Loan Documents to which the
Borrower is a party, nor do any of the foregoing prohibit the Borrower's
performance of any term, provision, condition, covenant or any other obligation
of the Borrower contained therein.
<PAGE>
(5) There are no actions, suits or proceedings pending or, to the best of
our knowledge after due inquiry, threatened against or affecting the Borrower
before any court or arbitrator or by or before any administrative agency or
government authority, which, if adversely determined, could constitute an
Adverse Event.
(6) Neither the making nor performance of the Loan Documents, nor the
borrowing(s) under the Credit Agreement, requires the consent or approval of
any governmental instrumentality.
(7) The Borrower is not a "holding company", a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company", within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
(8) The Borrower is not an "investment company" or a company "controlled"
by an "investment company", within the meaning of the Investment Company Act of
1940, as amended.
(9) The Borrower is not engaged in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of Regulation
U of the Board of Governors of the Federal Reserve System), and, to the best of
our knowledge after due inquiry, no part of the proceeds of any loan under the
Credit Agreement will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying any margin stock.
Very truly yours,
<PAGE>
Exhibit E
Material Action, Suits and Proceeding (Section 7.6)
There is no material actions, suits or proceedings pending against the Borrower
or its subsidiaries. However, on April 26, 1999, Standard Insurance Company
received notice from the San Francisco office of the U.S. Department of Labor
(the "Department") that it was conducting an investigation with respect to
Standard Insurance Company's employee benefit plan clients pursuant to (S)
504(a)(1) of the Employee Retirement Plan Security Act of 1974 ("ERISA", to
determine whether any person has violated or is about to violate any provision
of Title I of ERISA. Standard Insurance Company and certain of its employee
benefit plan clients are subject to ERISA in connection with, among other
things, certain policies sold by Standard Insurance Company's group insurance
division. The notice included a subpoena requesting that certain documents and
records be provided to the department. Standard Insurance Company intends to
fully cooperate with the Department. To date no claims or charges have been
asserted as a result of the investigation, and the Department states that its
investigation should not be construed as an indication that any violation of
ERISA has occurred or as a reflection upon any person involved. Management
believes that Standard Insurance Company's business practices comply in all
material respects with ERISA and that the investigation will not have a material
adverse effect on Standard Insurance Company's business, financial condition, or
results of operation.
<PAGE>
Exhibit F
Material Contingent Liabilities (Section 7.6)
The Borrower or its subsidiaries have no material contingent liability.
<PAGE>
Exhibit G
Subsidiaries (Section 7.16)
Standard Insurance Company
(As of June 30, 1999)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Company Name Incorporation Ownership Direct Parent/Equity Owner
Location Percentage
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Standard Insurance Company Oregon 100% StanCorp Financial Group Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Standard Management, Inc. Oregon 100% StanCorp Financial Group Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Standard Mortgage Investors, LLC (1) Oregon 99% StanCorp Financial Group Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Standard Real Estate Investors, LLC (1) Oregon 99% StanCorp Financial Group Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
400 Health Club, Inc. Oregon 100% Standard Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Standard Assigned Benefits, Inc. Oregon 100% Standard Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
StanWest Equities, Inc. Oregon 100% Standard Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Entities are corporations unless otherwise noted: (1) = Limited Liability
Company; (2) = Limited Partnership
<PAGE>
Exhibit H
Partnerships/Joint Ventures (Section 7.17)
Standard Insurance Company
(As of June 30, 1999)
<TABLE>
<CAPTION>
Company Name Incorporation Ownership Direct Parent/Equity Owner
Location Percentage
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alder House, LP (2) Oregon 33% Standard Insurance Company
- --------------------------------------------------------------------------------------------------------
Gold/West Henry Building, LP (2) Oregon 19.8% Standard Insurance Company
- --------------------------------------------------------------------------------------------------------
Oregon Equity Fund, LP (2) Oregon 24.8% Standard Insurance Company
- --------------------------------------------------------------------------------------------------------
Oregon Equity Fund II, LP (2) Oregon 29.1% Standard Insurance Company
- --------------------------------------------------------------------------------------------------------
Oregon Equity Fund III, LP (2) Oregon 19.2% Standard Insurance Company
- --------------------------------------------------------------------------------------------------------
Canyon Park Development (2) Washington 75% Standard Insurance Company
- --------------------------------------------------------------------------------------------------------
Hillsboro Hotel Association (2) Washington 21.6% Standard Insurance Company
- --------------------------------------------------------------------------------------------------------
Portland West CYM LLC (1) Washington 20.3% Standard insurance Company
- --------------------------------------------------------------------------------------------------------
</TABLE>
Entities are corporations unless otherwise noted: (1) = Limited Liability
Company; (2) = Limited Partnership
<PAGE>
[LOGO] WELLS FARGO
EXHIBIT 10.10
National Financial Services
MAC #6101-133 May 28, 1999
1300 S.W. 5th Avenue
P.O. Box 3131
Portland, OR 97204
Standard Insurance Company
1100 S.W. 6/th/ Avenue
Portland, Oregon 97201
Ladies and Gentlemen:
This letter is to confirm that Wells Fargo Bank, N. A. ("Bank"), subject to
all terms and conditions contained herein, has agreed to make available to
Standard Insurance Company ("Borrower") a revolving line of credit under which
Bank will make advances to Borrower from time to time up to and including May
26, 2000, not to exceed at any time the maximum principal amount of Ten Million
Dollars ($10,000,000) ("Line of Credit"), the proceeds of which shall be used to
fund timing differences between liquidation of existing investments and
acquisition of new investments.
LINE OF CREDIT:
Borrowing and Repayment. Borrower may from time to time during the term of
-----------------------
the Line of Credit borrow, partially or wholly repay its outstanding borrowings,
and reborrow as set forth in the Revolving Credit Note evidencing the Line of
Credit ("Revolving Credit Note"); provided however, that the total outstanding
borrowings under the Line of Credit shall not at any time exceed the maximum
principal amount available thereunder, as set forth above.
INTEREST/FEES:
Interest. The outstanding principal balance of the Line of Credit shall
--------
bear interest at the rates set forth in the Revolving Credit Note.
Commitment Fee. Borrower shall pay to Bank a fee equal to one-eighth
--------------
percent (1/8%) per annum (computed on the basis of a 360-day year, actual days
elapsed) on the amount of the Line of Credit (used or unused), which fee shall
be calculated on a quarterly basis by Bank and shall be due and payable by
Borrower in arrears on the last day of each August, November, February, and May.
<PAGE>
Standard Insurance Company
May 28, 1999
Page 2
REPRESENTATIONS AND WARRANTIES:
The Borrower is not in default on any obligation for borrowed money, any
purchase money obligation or any other material lease, commitment, contract,
instrument or obligation.
The representations and warranties contained herein and in the Revolving
Credit Note must be true on and as of the date Borrower accepts this letter and
on the date of each borrowing pursuant hereto, with the same effect as though
such representations and warranties had been made on and as of each such date.
CONDITIONS PRECEDENT:
Prior to Bank's extension to Borrower of any credit contemplated by this
letter, all of the following shall have occurred:
Corporate Resolution and Incumbency Certificate. Bank shall have received
-----------------------------------------------
copies of resolutions of the Board of Directors of the Borrower, in form and
substance satisfactory to Bank, approving execution and performance of this
letter and the Revolving Credit Note. Bank shall also have received an
incumbency certificate executed by the Secretary or an Assistant Secretary of
the Borrower, certifying the names and signatures of the officers of the
Borrower authorized to sign this letter and the Revolving Credit Note.
Loan Documents. Borrower shall have executed and delivered to Bank, any and
--------------
all promissory notes and other documents required by Bank to evidence Bank's
extension of credit pursuant to the terms and conditions of this letter, all of
which shall be in form and substance satisfactory to Bank and shall include, in
addition to the terms and conditions of this letter, such representations,
warranties, conditions, covenants, events of default and other provisions as
Bank deems appropriate.
Financial Condition. There shall have been no material adverse change, as
-------------------
determined by Bank, in the financial condition or business of Borrower, nor any
material decline, as determined by Bank, in the market value of a substantial or
material portion of the assets of Borrower.
COVENANTS:
As soon as available, but in any event within 120 days after the end of each
fiscal year of the Borrower:
(a) a copy of the Borrower's consolidated balance sheet of itself and its
consolidated subsidiaries as at the end of each fiscal year and the related
consolidated statements of income and retained earnings (or comparable
statement) employed in the business and changes in financial position and cash
flow for such fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, accompanied by an unqualified report and
opinion thereon of independent certified public accountants acceptable to the
Bank; all such financial statements to be complete and correct in all material
respects and to be prepared in reasonable detail acceptable to the Bank and in
accordance with generally acceptable accounting principles applied consistently
throughout the periods reflected therein (except as approved by such accountants
and disclosed therein); and
<PAGE>
Standard Insurance Company
May 28, 1999
Page 3
(b) the annual financial statements of the Borrower as of the end of such
fiscal year, as filed with (and in the form required under applicable law and
regulations of) the state or states licensing the Borrower, accompanied by or
including the opinion or statement of the Borrower's actuary required to be
filed with such annual financial statements.
As soon as available, but in any event within 45 days after the end of each
of the first three quarters of each fiscal year:
(a) the Borrower's unaudited consolidated balance sheet of itself and its
consolidated subsidiaries as at the end of each such period and the related
unaudited consolidated statements of income and retained earnings (or comparable
statement) and changes in financial position and cash flow for each such period
and year to date, setting forth in each case in comparative form the figures as
at the end of the previous fiscal year as to the balance sheet and the figures
for the previous corresponding period as to the other statements, certified by a
duly authorized officer of the Borrower as being fairly stated in all material
respects subject to year end adjustments; all such financial statements to be
complete and correct in all material respects and to be prepared in reasonable
detail acceptable to the Bank and in accordance with generally accepted
accounting principles applied consistently throughout the periods reflected
therein; and
(b) the quarterly financial statements of the Borrower as of the end of each
such period, as filed with (and in the form required under applicable law and
regulations of) the state or states licensing the Borrower, accompanied by or
including the opinion or statement of the Borrower's actuary required to be
filed with such quarterly financial statements.
ADDITIONAL TERMS AND PROVISIONS:
Whether or not any credit is extended to Borrower or any documents are
agreed to and executed, Borrower shall be liable for and shall pay to Bank,
immediately upon demand, the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel) expended or
incurred by Bank in connection with the negotiation and/or preparation of this
letter, and any contracts, instruments and documents required hereunder or
thereunder.
Borrower shall perform all acts reasonably necessary to ensure that (i)
Borrower and any business in which Borrower holds a substantial interest, and
(ii) all customers, suppliers and vendors that are material to Borrower's
business, become Year 2000 Compliant in a timely manner. Such acts shall
include, without limitation, performing a comprehensive review and assessment of
all of Borrower's systems and adopting a detailed plan, with itemized budget,
for the remediation, monitoring and testing of such systems. As used in this
paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. Borrower shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance with the terms of this
paragraph as Bank may from time to time require.
This letter shall be governed by and construed in accordance with the laws
of the State of California. Upon the demand of any party, any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, arising under or in any way pertaining to this
letter or any extensions of credit or other activities, transactions or
<PAGE>
Standard Insurance Company
May 28, 1999
Page 4
obligations of any kind related hereto, shall be resolved by binding
arbitration administered by the American Arbitration Association ("AAA") in
accordance with the AAA Commercial Arbitration Rules and the Federal Arbitration
Act (Title 9 of the United States Code), notwithstanding any conflicting choice
of law provision herein. Bank's current standard provision governing arbitration
of disputes is deemed incorporated herein as though set forth in full and shall
be included in full in the contracts, instruments and documents required hereby.
Any party who fails or refuses to submit to arbitration following a lawful
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration.
The commitment set forth herein is personal to Borrower and may not be
transferred or assigned without the prior written consent of Bank. Neither this
letter, nor any portions hereof, may be disclosed or exhibited to any person or
entity without the prior written consent of Bank.
Bank reserves the right to terminate this commitment at any time prior to
receipt by Bank of a copy of this letter executed below by Borrower.
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Unless accepted or terminated, this commitment
shall expire on June 15, 1999. If the loan documentation required by Bank
hereunder is not completed and the credit contemplated hereby has not been
extended by Bank to Borrower for any reason by June 28, 1999, then this
commitment shall expire on said date.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ John R. Bean
-------------------------------
Name: John R. Bean
--------------------------
Title: Assistant Vice President
-------------------------
Acknowledged and accepted as of 6/24/99:
STANDARD INSURANCE COMPANY
By: /s/ Eric E. Parsons
--------------------------------
Name: Eric E. Parsons
-----------------------------
Title: Sr. Vice President & CFO
-----------------------------
By: /s/ Patricia J. Brown
--------------------------------
Name: Patricia J. Brown
---------------------------
Title: AVP, Controller & Treasurer
---------------------------
<PAGE>
REVOLVING CREDIT NOTE
(Eurodollar, LIBO & Fed Funds Rates)
$10,000,000 May 28, 1999
Los Angeles, California
On May 26, 2000 (the "Maturity Date"), for value received, the undersigned
(the "Borrower") hereby promises to pay to the order of WELLS FARGO BANK, N.A.
(the "Bank") at its offices at 707 Wilshire Boulevard, 16/th/ Floor, Los
Angeles, California 90017, the principal amount of Ten Million Dollars
($10,000,000) (the "Revolving Commitment"), or so much thereof as shall be
outstanding on said date. If at any time the amount outstanding under this Note
shall exceed the Revolving Commitment, the Borrower shall immediately repay the
Loans in an amount sufficient to reduce the outstanding balance hereunder to an
amount not in excess of the Revolving Commitment. Any such repayment shall first
be applied against outstanding Eurodollar Rate Loans.
The Bank agrees, on the terms and conditions set forth herein, to make
Loans to the Borrower from time to time during the period from the date hereof
to and including the Maturity Date in an aggregate amount not to exceed the
Revolving Commitment. Loans (other than Fed Funds Loans) shall be in a minimum
amount of One Million Dollars ($1,000,000) or an integral multiple of One
Hundred Thousand Dollars ($100,000) above such amount. Fed Funds Loans shall be
in a minimum amount of Five Million Dollars ($5,000,000) or an integral multiple
of One Hundred Thousand Dollars ($100,000) above such amount.
Interest on the unpaid principal balance shall accrue from the date of this
Note as set forth herein. Prior to maturity and provided there is no default
hereunder, the Borrower may borrow, repay and reborrow hereunder so long as the
aggregate amount of advances does not exceed, after taking into consideration
any proposed Loan, the Revolving Commitment.
The following capitalized terms are defined as set forth below:
"Applicable Margin": One and one-quarter percent (1 1/4%).
"Business Day": A day other than a Saturday, Sunday or any day on which
commercial banks in California are authorized or required by law to close.
"Eurodollar Business Day": A day which is a Business Day and on which
dealings in dollar deposits may be carried out in the Eurodollar interbank
market.
"Eurodollar Loans": Loans hereunder at such time as the accruing interest
is based upon the Eurodollar Rate.
<PAGE>
"Eurodollar Rate": for each Interest Period the sum of (a) (i) the
prevailing rate of interest per annum determined by the Bank to be the rate at
which dollar deposits for the relevant Interest Period would be offered to the
Lender in the approximate amount of the relevant Eurodollar Loan in the
Eurodollar interbank market upon request of the Bank for delivery on the first
day of such Interest Period, divided by (ii) a number equal to 1.00 minus the
aggregate (but without duplication) of the rates (expressed as a decimal
fraction) of reserve requirements in effect on the day on which the pricing for
the relevant Eurodollar Loan is set (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the
Board of Governors of the Federal Reserve System or other governmental
authority having jurisdiction with respect thereto, as in effect at the time the
Bank quotes the rate to the Borrower) for Eurocurrency funding of domestic
assets (currently referred to as "Eurocurrency liabilities" in Regulation D of
such Board) which are required to be maintained by a member bank of such System
(such rate to be adjusted to the next higher 1/16 of 1%), plus (b) a margin
determined by the Bank.
"Fed Funds Loans": Loans hereunder at such time as the accruing interest is
based upon the Fed Funds Rate.
"Fed Funds Rate": for any day an interest rate per annum (rounded upwards,
if necessary, to the nearest 1/100th of 1%) equal to the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers on any day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding such
Business Day, provided that (a) if the day for which such rate is to be
determined is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (b) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate charged to the Bank on such day on such transactions as calculated by the
Bank and presented in reasonable detail to Borrower.
"Interest Payment Date": The last day of each Interest Period of a Loan and
the Maturity Date. Interest on Prime Rate Loans and Fed Funds Loans is payable
on demand.
"Interest Period":
(i) initially, the period commencing on, as the case may be, the borrowing
or conversion date with respect to such Loan and ending one, two, or three
month(s) thereafter as selected by the Borrower in its notice of borrowing or
its notice of conversion, as provided hereafter, and
(ii) thereafter, each period commencing on the last day of the next
preceding Interest Period applicable to such Loan and ending one, two, or three
month(s)
2
<PAGE>
thereafter as selected by the Borrower in its notice of continuation as provided
hereafter;
provided, that all of the foregoing provisions relating to Interest Periods are
subject to the following:
(a) if any Interest Period for a LIBO Rate Loan would otherwise end on a day
which is not a LIBO Business Day, that Interest Period shall be extended to the
next succeeding LIBO Business Day unless the result of such extension would be
to carry such Interest Period into another calendar month in which event such
Interest Period shall end on the immediately preceding LIBO Business Day;
(b) if any Interest Period for a Eurodollar Loan would otherwise end on a
day which is not a Eurodollar Business Day, that Interest Period shall be
extended to the next succeeding Eurodollar Business Day unless the result of
such extension would be to carry such Interest Period into another calendar
month in which event such Interest Period shall end on the immediately preceding
Eurodollar Business Day.
(c) the Borrower may not select an Interest Period with respect to any
portion of principal of a Loan which extends beyond the Maturity Date or a date
on which the Borrower is required to make a scheduled payment of part or all of
that at portion of principal; and
(d) there shall be no more than six Interest Periods for Eurodollar Loans and
LIBO Rate Loans outstanding at any time.
Each day constitutes an Interest Period for Prime Rate Loans and Fed Funds
Loans.
"LIBO Business Day": A day which is a Business Day and on which dealings in
dollar deposits may be carried out in the London interbank market.
"LIBO Rate": For each Interest Period (i) the rate of interest determined by
the Bank at which deposits for the relevant Interest Period would be offered to
it in the approximate amount of the relevant LIBO Rate Loan in the London
interbank market upon request of the Bank at 11:00 A.M. (London time) on the
day which is two LIBO Business Days prior to the first day of such Interest
Period, divided by (ii) a number equal to 1.00 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day which is two LIBO Business Days prior to the
beginning of such Interest Period (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other governmental authority
having jurisdiction with respect thereto, as in effect at the time the Bank
quotes the rate to the Borrower) for Eurocurrency funding of domestic assets
(currently referred to as "Eurocurrency liabilities" in Regulation D of such
Board) which
3
<PAGE>
are required to be maintained by a member bank of such System (such rate to be
adjusted to the next higher 1/16 of 1%).
"LIBO Rate Loans": Loans hereunder at such time as the accruing interest is
based upon the LIBO Rate.
"Loan(s)": Collectively and severally each portion of the principal amount
outstanding hereunder which, as determined by the interest rate applicable to
it, is a Eurodollar Loan, LIBO Rate Loan, Fed Funds Loan or Prime Rate Loan.
"Prime Rate": A base rate that the Bank from time to time establishes and
which serves as the basis upon which effective rates of interest are calculated
for those loans making reference thereto.
"Prime Rate Loans": Loans hereunder at such time as the accruing interest is
based upon the Prime Rate.
Loans which are LIBO Rate Loans shall bear interest for each Interest Period
with respect thereto on the unpaid principal amount thereof at a rate per annum
equal to the LIBO Rate determined for such Interest Period, plus the Applicable
Margin. Loans which are Eurodollar Loans shall bear interest for each Interest
Period with respect thereto on the unpaid principal amount thereof at a rate per
annum equal to the Eurodollar Rate determined for such Interest Period. Loans
which are Fed Funds Loans shall bear interest for each Interest Period with
respect thereto on the unpaid principal amount thereof at a rate per annum equal
to the Fed Funds Rate determined for such Interest Period, plus the Applicable
Margin. Loans which are Prime Rate Loans shall bear interest for each Interest
Period with respect thereto on the unpaid principal amount thereof at a rate
per annum equal to the Prime Rate determined for such Interest Period. Interest
with respect to each Loan shall be payable in arrears on each Interest Payment
Date for such Loan. In no event shall interest on a Loan exceed the maximum rate
permitted by applicable law.
Notwithstanding anything to the contrary contained herein, if all or a
portion of the principal amount of any of the Loans made hereunder or any
interest accrued thereon shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise), any such overdue amount shall bear
interest at a rate per annum which is equal to the greater of: two percent (2%)
above the rate applicable from time to time to the Loan and two percent (2%)
above the Prime Rate. In addition, such Loan shall be converted to a Prime
Rate Loan at the end of the then current Interest Period.
Interest shall be calculated on the basis of a three hundred sixty (360) day
year for the actual days elapsed.
The Borrower acknowledges that interest rates may vary daily and during the
day and that, as a result, the interest rate applicable to principal for one
Interest Period or
4
<PAGE>
Loan may differ from the interest rate applicable to principal for another
Interest Period or Loan. The Borrower agrees that any notice of an interest rate
election given to the Bank is irrevocable and that, therefore, the Borrower is
"at risk" to the extent that the Borrower and the Bank will not know the actual
interest rate the Borrower must pay until the date the interest rate commences
or is otherwise set. The Borrower acknowledges that any quote provided by the
Bank prior to the date of applicability is only an estimate and shall not be
binding as to the actual rate.
Notwithstanding anything to the contrary contained in this Note except the
paragraphs limiting the availability of certain interest rate options, a Fed
Funds Rate, a Eurodollar Rate or LIBO Rate may be selected by the Borrower to
apply to a Loan only prior to the Maturity Date and provided there is no default
hereunder or under any agreement with the Bank involving an extension of credit,
and so long as no event exists which, with the giving of notice or passage of
time, or both, would constitute a default hereunder. Each borrowing, conversion
or continuation notice shall be a representation and warranty by the Borrower
that there exists as of the date of the notice no default or event as set forth
in the immediately preceding sentence.
The Borrower may borrow under the Revolving Commitment on any Business Day
if the Loan is to consist of a Fed Funds Loan or a Prime Rate Loan, on any
Eurodollar Business Day if the Loan is to consist of a Eurodollar Loan, and on
any LIBO Business Day if the Loan is to consist of a LIBO Rate Loan, provided
that the Borrower shall give the Bank irrevocable notice (which notice must be
received by the Bank prior to 11:00 A.M., Los Angeles time) (i) on the Business
Day which is the requested borrowing date in the case of a Fed Funds Loan or a
Prime Rate Loan, (ii) on the Eurodollar Business Day which is the requested
borrowing date in the case of a Eurodollar Loan, and (iii) three LIBO Business
Days prior to the requested borrowing date in the case of a LIBO Rate Loan,
specifying (a) the amount of the proposed Loan, (b) the requested date of the
Loan, (c) whether the Loan is to consist of a Fed Funds Loan, Prime Rate Loan,
Eurodollar Loan or LIBO Rate Loan, and (d) if the Loan is to be a Eurodollar
Loan or LIBO Rate Loan, the length of the Interest Period therefor. The proceeds
of the Loan will then be made available to the Borrower by the Bank on the
requested date of the Loan by crediting the account of the Borrower on the books
of the Bank, or as otherwise directed by the Borrower.
The Borrower may elect from time to time to convert an outstanding Loan
from a Loan bearing interest at a rate determined by reference to one basis to a
Loan bearing interest at a rate determined by reference to an alternative basis
by giving the Bank (i) prior irrevocable notice (which must be received by Bank
prior to 11:00 A.M., Los Angeles time) on the Business Day of the conversion, of
an election to convert a Loan to a Fed Funds Loan, (ii) at least three LIBO
Business Days' prior irrevocable notice (which notice must be received by the
Bank prior to 11:00 A.M., Los Angeles time) of an election to convert a Loan to
a LIBO Rate Loan, and (iii) prior irrevocable notice (which notice must be
received by the Bank prior to 11:00 A.M., Los Angeles time) on the Eurodollar
Business Day of the conversion, of an election to convert a Loan to a
5
<PAGE>
Eurodollar Loan, provided that any conversion of a Loan shall only be made on
the last day of the Interest Period with respect thereto. The Borrower may elect
from time to time to continue its outstanding Fed Funds Loans, Eurodollar Loans
and LIBO Rate Loans upon the expiration of the Interest Period(s) applicable
thereto by giving to the Bank (i) prior irrevocable notice of continuation
(which must be received by Bank prior to 11:00 A.M., Los Angeles time) on the
Business Day of the continuation of a Fed Funds Loan, (ii) at least three LIBO
Business Days' prior irrevocable notice of continuation (which must be received
by Bank prior to 11:00 A.M., Los Angeles time) of a LIBO Rate Loan and (iii)
prior irrevocable notice of continuation (which must be received by Bank prior
to 11:00 A.M., Los Angeles time) on the Eurodollar Business Day of the
continuation of a Eurodollar Loan. Each notice electing to convert or continue a
Loan shall specify: (i) the proposed conversion/continuation date; (ii) the
amount of the Loan to be converted/continued; (iii) the nature of the proposed
continuation/conversion; and (iv) the requested Interest Period. On the date on
which such conversion or continuation is being made the Bank shall take such
action as is necessary to effect such conversion or continuation. Subject to the
limitations set forth in this Note, all or any part of outstanding Loans may be
converted or continued as provided herein, provided that partial conversions or
continuations shall be in the same amounts as set forth for new Loans in the
beginning paragraphs of this Note.
Notices of borrowing, conversion or continuation may be given orally
(including telephonically) or in writing (including telex or facsimile
transmissions) and any conflict applicable to any Loan shall be determined by
the Bank's books and records. The Bank's failure to receive any notice regarding
a particular Loan shall not relieve the Borrower of its obligations to repay the
Loan made and to pay interest thereon. The Bank shall not incur any liability to
the Borrower in acting upon any notice of borrowing which the Bank believes in
good faith to have been given by a person duly authorized to borrow on behalf of
the Borrower. Upon failure of the Bank to receive timely notice from the
Borrower selecting a particular interest rate option with respect to a proposed
Loan request, conversion or continuation, such Loan shall be a Prime Rate Loan.
The Borrower may at its option pay the Loans, in whole or in part, at any
time and from time to time, provided the Bank shall have received from the
Borrower notice of any such payment at least one Business Day prior to the date
of the proposed payment if such date is not the last day of the then current
Interest Period for such loan, in each case specifying the date and the amount
of payment. Partial payments hereunder shall be in an aggregate principal amount
of the lesser of (a) Fifty Thousand Dollars ($50,000) or any integral multiple
thereof and (b) the balance of the Loan being paid.
The Borrower agrees to indemnify and to hold the Bank harmless from any loss
or expense, including, but not limited to, any such loss or expense arising from
interest or fees payable by the Bank to lenders of funds obtained by it in order
to maintain its Eurodollar Loans or LIBO Rate Loans hereunder, which the Bank
may sustain or incur as a consequence of (i) default by the Borrower in payment
when due of the principal amount of or interest on the Eurodollar Loans or LIBO
Rate Loans of the Bank, (ii)
6
<PAGE>
default by the Borrower in making a conversion or continuation after the
Borrower has given a notice of such conversion or continuation, (iii) default by
the Borrower in making any payment after the Borrower has given a notice of
payment, or (iv) the Borrower making any payment of a Eurodollar Loan or LIBO
Rate Loan on a day other than the last day of the then current Interest Period
for such Loan. It shall be assumed that the Bank had funded or would have
funded, as the case may be, 100% of the Eurodollar Loans in the Eurodollar
interbank market, or one hundred percent (100%) of the LIBO Rate Loans in the
London interbank market for a corresponding amount and term. In the event of a
payment set forth in (iv) above, the Borrower shall be credited with a
reinvestment interest rate equal to one-sixteenth of one percent (.0625%) less
than the rate of interest generally available to the Bank at the time of the
payment for a period of time approximately equal to the period remaining on the
then applicable Interest Period and for an amount approximately equal to the
amount of the payment. The determination of such amount by the Bank shall be
presumed correct in the absence of manifest error. This covenant shall survive
payment of this Note.
In the event that the Bank shall have determined (which determination shall be
conclusive and binding upon the Borrower) that adequate and reasonable means do
not exist for ascertaining the Eurodollar Rate or LIBO Rate applicable for any
Interest Period with respect to a requested Loan or that such rate of interest
is not generally available to the Bank or does not adequately cover the cost of
funding such Loan, the Bank shall forthwith give notice of such determination to
the Borrower not later than 1:00 P.M., Los Angeles time, on the requested
borrowing date, the requested conversion date or the last day of an Interest
Period of a Loan which was to be continued as a Eurodollar Loan or LIBO Rate
Loan. If such notice is given and has not been withdrawn (i) any requested
Eurodollar Loan or LIBO Rate Loan as the case may be, shall be made as a Prime
Rate Loan, or, at the Borrower's option, such Loan shall not be made, (ii) any
Loan that was to have been converted to a Eurodollar Loan or a LIBO Rate Loan,
as the case may be, shall be continued as, or converted into, a Prime Rate Loan
and (iii) any outstanding Eurodollar Loan or LIBO Rate Loan, as the case may be,
shall be converted, on the last day of the then current Interest Period with
respect thereto, to a Prime Rate Loan. Until such notice has been withdrawn by
the Bank, no further Eurodollar Loans or LIBO Rate Loans, as the case may be,
shall be made and the Borrower shall not have the right to convert a Loan to a
Eurodollar Loan or LIBO Rate Loan, as the case may be. The Bank will review the
circumstances affecting the Eurodollar interbank market and the London interbank
market, as the case may be, from time to time and the Bank will withdraw such
notice at such time as it shall determine that the circumstances giving rise to
said notice no longer exist.
In the event that any law, regulation or directive or any change therein or in
the interpretation or application thereof or compliance by the Bank with any
request or directive (whether or not having the force of law) from any central
bank or other governmental authority, agency or instrumentality:
7
<PAGE>
(a) does or shall subject the Bank to any tax of any kind whatsoever with
respect to this Note or any Loan made hereunder, or change the basis of
taxation of payments to the Bank of principal, interest or any other amount
payable hereunder (except for changes in the rate of tax on the overall net
income of the Bank);
(b) does or shall impose, modify or hold applicable any reserve,
assessment rate, special deposit, compulsory loan or other requirement against
assets held by, or deposits or other liabilities in or for the account of,
advances or loans by or other credit extended by, or any other acquisition of
funds by, any office of the Bank which are not otherwise included in the
determination of any Eurodollar Rate or the LIBO Rate at the time a Loan was
originally extended;
(c) does or shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or other requirement against commitments to extend
credit;
(d) does or shall impose on the Bank any other condition; and the result
of any of the foregoing is to increase the cost to the Bank of making, renewing
or maintaining its Revolving Commitment, Eurodollar Loans or LIBO Rate Loans or
to reduce any amount receivable thereunder (which increase in cost shall be
determined by the Bank's reasonable allocation of the aggregate of such cost
increases resulting from such events), then, in any such case, the Borrower
shall pay to the Bank, within three Business Days of its demand, any additional
amounts necessary to compensate the Bank for such additional cost or reduced
amount receivable as determined by the Bank with respect to this Agreement. If
the Bank becomes entitled to claim any additional amounts pursuant to this
paragraph, it shall notify the Borrower of the event by reason of which it has
become so entitled. A statement incorporating the calculation as to any
additional amounts payable pursuant to the foregoing sentence, submitted by the
Bank to the Borrower, shall be conclusive in the absence of manifest error.
Notwithstanding any other provision herein, if any law, regulation treaty or
directive or any change therein or in the interpretation or application thereof,
shall make it unlawful, impossible or impracticable for the Bank to make or
maintain Eurodollar Loans or LIBO Rate Loans as contemplated by this Agreement,
(a) the commitment of the Bank hereunder to make Eurodollar Loans or LIBO Rate
Loans or convert Loans to Eurodollar Loans or LIBO Rate Loans shall forthwith be
cancelled and (b) the Bank's Loans then outstanding as Eurodollar Loans or LIBO
Rate Loans, if any, shall be converted automatically to Prime Rate Loans on the
last day of the then existing Interest Period or within such earlier period as
required by law. The Borrower hereby agrees to pay the Bank, within three
Business Days of its demand, any additional amounts necessary to compensate
the Bank for any costs incurred by the Bank in making any conversion in
accordance with this paragraph, including but not limited to any interest or
fees payable by the Bank to lenders of funds obtained by it in order to make or
maintain its Eurodollar Loans or LIBO Rate Loans hereunder (the Bank's
8
<PAGE>
notice of such costs, as certified to the Borrower, to be conclusive absent
manifest error).
The books and records of the Bank shall be conclusive evidence of any
advance or payment hereunder and computation by the Bank of interest due shall
be conclusive, absent manifest error.
Both principal and interest on this Note are payable in lawful currency of
the United States of America without deduction for or on account of any present
or future taxes, duties or other charges levied or imposed on this Note. The
Borrower will pay the amounts necessary such that the gross amount of principal
and interest received by the Bank shall not be less than that required under
this Note. All stamp and documentary taxes shall be paid by the Borrower. If,
notwithstanding the foregoing, the Bank pays any such tax, the Borrower will
reimburse the Bank upon demand for the amount so paid.
Any of the following shall constitute an event of default under this Note:
(a) The nonpayment when due of principal or interest under this Note or
any other obligation of any nature or description owed by the Borrower to the
Bank;
(b) The dissolution or termination of business of the Borrower;
(c) The filing of any petition in bankruptcy or the commencement of any
proceeding under bankruptcy, insolvency or other laws relating to the relief of
debtors, or the readjustment of any indebtedness, either through reorganization,
composition, extension or otherwise, by the Borrower;
(d) The making of an assignment for the benefit of creditors by the
Borrower;
(e) The appointment of a receiver of any property of the Borrower;
(f) Any seizure vesting of rights, or intervention by or under any
authority, of any government in the Borrower or any of its property;
(g) The entry of a judgment which, in the Bank's opinion, materially
impairs the ability of the Borrower to meet its obligations to the Bank;
(h) The failure of the Borrower to furnish any financial information upon
the request of the Bank;
(i) Any material misrepresentation of the Borrower to the Bank in
obtaining credit or the breach of any agreement of the Borrower with the Bank
arising from or in connection with any extension of credit; or
9
<PAGE>
(j) The institution of any proceeding against the Borrower for which
forfeiture of any property is a potential penalty.
Upon the occurrence of any event set forth in (c) above, this Note and any other
obligation owed to the Bank by the Borrower shall become due and payable in full
and the Revolving Commitment shall terminate. At any time after the occurrence
of any other event of default set forth above, this Note and any other
obligation owed to the Bank by the Borrower may, at the Bank's discretion,
become immediately due and payable in full and the Bank may immediately
terminate the Revolving Commitment.
If this Note is placed in the hands of an attorney for collection, the
Borrower, each endorser and each guarantor agrees to pay all costs and expenses
of the Bank, including reasonable attorneys' fees whether or not a suit is
brought. "Reasonable attorneys' fees" shall include reasonable attorneys' fees
and allocated costs of in-house counsel incurred in any and all judicial,
bankruptcy and other proceedings (including appellate level proceedings) whether
such proceedings arise before or after entry of a final judgment.
The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The right to plead any and all statutes of
limitation as a defense to this Note or to any agreement to pay the same, is
hereby expressly waived by such parties to the fullest extent permitted by
law.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF CALIFORNIA.
ARBITRATION
(a) Arbitration. Upon the demand of any party, any Dispute shall be
-----------
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of these provisions. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, this Note, or any past, present or
future extensions of credit and other activities, transactions or obligations of
any kind related directly or indirectly to this Note, including without
limitation, any of the foregoing arising in connection with the exercise of any
self-help, ancillary or other remedies pursuant to this Note. Any party may by
summary proceedings bring an action in court to compel arbitration of a Dispute.
Any party who fails or refuses to submit to arbitration following a lawful
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by the
---------------
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All
10
<PAGE>
Disputes submitted to arbitration shall be resolved in accordance with the
Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any
conflicting choice of law provision in this Note. The arbitration shall be
conducted at a location in California selected by the AAA or other
administrator. If there is any inconsistency between the terms hereof and any
such rules, the terms and procedures set forth herein shall control. All
statutes of limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to matters
directly relevant to the Dispute being arbitrated. Judgment upon any award
rendered in an arbitration may be entered in any court having jurisdiction;
provided however, that nothing contained herein shall be deemed to be a waiver
by any party that is a bank of the protections afforded to it under 12 U.S.C.
(SS)91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
----------------------------------------------------------
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
--------------------------------------------
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered
to resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary, in
---------------
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is
11
<PAGE>
not supported by substantial evidence or which is based on legal error, (ii) an
award shall not be binding upon the parties unless the findings of fact are
supported by substantial evidence and the conclusions of law are not erroneous
under the substantive law of the state of California, and (iii) the parties
shall have in addition to the grounds referred to in the Federal Arbitration Act
for vacating, modifying or correcting an award the right to judicial review of
(A) whether the findings of fact rendered by the arbitrators are supported by
substantial evidence, and (B) whether the conclusions of law are erroneous under
the substantive law of the state of California. Judgment confirming an award in
such a proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error under the
substantive law of the state of California.
(f) Miscellaneous. To the maximum extent practicable, the AAA, the
-------------
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to this Note or the subject matter of the Dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of this Note or any relationship between the parties.
STANDARD INSURANCE COMPANY
By: /s/ Eric E. Parsons
----------------------------------
Name: Eric E. Parsons
----------------------------
Title: Sr. Vice President & CFO
----------------------------
By: /s/ Patricia J. Brown
----------------------------------
Name: Patricia J. Brown
-----------------------------
Title: AVP, Controller & Treasurer
----------------------------
Address 1100 SW Sixth Avenue
-------------------------------
Portland, Oregon 97204
- --------------------------------------
______________________________________
12
<PAGE>
[LOGO OF WELLS FARGO]
National Financial Services
MAC #6101-133
1300 SW. 5th Avenue May 28, 1999
P.O. Box 3131
Portland, OR 97204
Standard Insurance Company
1100 SW. 6/th/ Avenue
Portland, Oregon 97201
Ladies and Gentlemen:
Reference is made to the letter agreement of even date herewith (the
"Letter Agreement") between Wells Fargo Bank, N.A. ("WFB") as lender and
Standard Insurance Company ("Borrower") as borrower, and the Revolving
Credit Note of even date herewith (the "Note") executed by Borrower in
favor of WFB.
Notwithstanding anything to the contrary in the Letter Agreement or the
Note, as a condition to WFB's making any advance to Borrower under the
Letter Agreement and the Note, Borrower shall, concurrently with each
request for an advance thereunder, provide WFB with a certificate, in the
form of Exhibit A attached hereto and executed by the Secretary of
Borrower, certifying to WFB that the requested advance meets the conditions
for authorization set forth in the Short-Term Borrowing Resolution dated
April 29, 1998 previously provided to WFB.
Except as modified by this letter, the terms of the Letter Agreement and
the Note remain in full force and effect.
If the above terms and conditions are acceptable to you, please indicate by
signing and returning, the enclosed copy of this letter and the original
note.
We sincerely appreciate the opportunity to continue to provide you with
this competitive source of short-term funding.
WELLS FARGO BANK, N. A.
By: /s/ John R. Bean
----------------------------------
John R. Bean
-------------------------------------
Name
Assistant Vice President
-------------------------------------
Title
Accepted By:
STANDARD INSURANCE COMPANY
By: /s/ Eric E. Parsons
-------------------------------------
Name
Sr. Vice President & CFO
-------------------------------------
Title
By: /s/ Patricia J. Brown
-------------------------------------
Patricia J. Brown
-------------------------------------
Name
AVP, Controller & Treasurer
--------------------------------------
Title
<PAGE>
May 28, 1999
Page 2
EXHIBIT A
FORM OF CERTIFICATE
The undersigned Secretary of Standard Insurance Company (the "Company") hereby
certifies that as of the date hereof and as of the date of the requested
advance, WFB is one of Company's principal banks of deposit, that such advance
constitutes a "short-term borrowing" of Company and that such advance together
with all other borrowings authorized by the Short-Term Borrowing Resolution
dated April 29, 1998 previously provided to WFB does not exceed six percent of
Company's total assets rounded out to the nearest million dollars.
Dated: ______________, 19
______________________________
J.Greg Ness, Secretary
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF STANCORP FINANCIAL GROUP
<TABLE>
<CAPTION>
Incorporation
Company Name Location
------------ -------------
<S> <C>
1. Standard Insurance Company................................ Oregon
2. Standard Management, Inc. ................................ Oregon
3. StanCorp Mortgage Investors, LLC.......................... Oregon
4. StanCorp Real Estate Investors, LLC....................... Oregon
5. StanWest Equities, Inc. .................................. Oregon
</TABLE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-
78379 of StanCorp Financial Group, Inc., on Form S-8, of our report dated
February 2, 2000 (February 23, 2000 as to Note 14), appearing in the Annual
Report on Form 10-K of StanCorp Financial Group, Inc. for the year ended
December 31, 1999.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 13, 2000
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 1st day of March, 2000.
/s/ Virginia L. Anderson
----------------------------------------------
Virginia L. Anderson
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 6th day of March, 2000.
/s/ Frederick W. Buckman
---------------------------------------------
Frederick W. Buckman
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 2000.
/s/ John E. Chapoton
--------------------------------------------
John E. Chapoton
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 8th day of March, 2000.
/s/ Barry J. Galt
---------------------------------------------
Barry J. Galt
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 2nd day of March, 2000.
/s/ Richard Geary
-------------------------------------------
Richard Geary
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 2nd day of March, 2000.
/s/ Peter T. Johnson
-----------------------------------------------
Peter T. Johnson
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 6 day of March, 2000.
/s/ Peter O. Kohler
-----------------------------------------------
Peter O. Kohler M.D.
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 7th day of March, 2000.
/s/ Jerome J. Meyer
-------------------------------------------
Jerome J. Meyer
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 7th day of March, 2000.
/s/ Ralph R. Peterson
------------------------------------------
Ralph R. Peterson
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 1 day of March, 2000.
/s/ E. Kay Stepp
----------------------------------------------
E. Kay Stepp
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 1 day of March, 2000.
/s/ William Swindells
-----------------------------------------
William Swindells
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 7th day of March, 2000.
/s/ Mike Thorne
--------------------------------------
Mike Thorne
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 6th day of March, 2000.
/s/ Franklin E. Ulf
------------------------------------------
Franklin E. Ulf
<PAGE>
POWER OF ATTORNEY
The undersigned, a director and/or officer of StanCorp Financial Group,
Inc., an Oregon corporation (the "Company"), hereby constitutes and appoints
Ronald E. Timpe, Eric E. Parsons and Dwight L. Cramer, and each of them, true
and lawful attorney and agent, to do any and all acts and things and execute in
the name of the undersigned as a director or officer of the Company the Annual
Report on Form 10-K for the year ended December 31, 1999 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
and the undersigned ratifies and confirms all that the attorneys and agents and
each of them shall do or cause to be done under this power of attorney. Any one
of the attorneys or agents shall have, and may exercise, all powers conferred.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 25/th/ day of February, 2000.
/s/ Benjamin R. Whiteley
---------------------------------------------
Benjamin R. Whiteley
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STANCORP
FINANCIAL GROUP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 2,064,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 1,779,100
<REAL-ESTATE> 98,500
<TOTAL-INVEST> 3,962,800
<CASH> 38,900
<RECOVER-REINSURE> 4,200
<DEFERRED-ACQUISITION> 54,200
<TOTAL-ASSETS> 5,857,100
<POLICY-LOSSES> 1,643,400
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,538,600
<NOTES-PAYABLE> 0
0
0
<COMMON> 819,700
<OTHER-SE> 20,200
<TOTAL-LIABILITY-AND-EQUITY> 5,857,100
914,400
<INVESTMENT-INCOME> 306,700
<INVESTMENT-GAINS> 500
<OTHER-INCOME> 12,900<F1>
<BENEFITS> 756,000
<UNDERWRITING-AMORTIZATION> (1,300)<F2>
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 123,400
<INCOME-TAX> 39,000
<INCOME-CONTINUING> 84,400
<DISCONTINUED> 0
<EXTRAORDINARY> 4,500
<CHANGES> 0
<NET-INCOME> 79,900
<EPS-BASIC> 2.37<F3>
<EPS-DILUTED> 2.37<F3>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> INCLUDES CONTRIBUTION FROM CLOSED BLOCK.
<F2> CONTAINS DEFERRED POLICY ACQUISITION COSTS AND RELATED AMORTIZATION.
<F3> PRO FORMA
</FN>
</TABLE>
