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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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.
Commission file number 1-11834
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UnumProvident Corporation
(Exact name of registrant as specified in its charter)
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DELAWARE 62-1598430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 FOUNTAIN SQUARE 2211 CONGRESS STREET
CHATTANOOGA, TENNESSEE 37402 PORTLAND, MAINE 04122
(Address of principal executive offices) (Address of principal executive offices)
423.755.1011 207.770.2211
(Registrant's telephone number, including (Registrant's telephone number, including
area code) area code)
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2211 CONGRESS STREET
PORTLAND, MAINE 04122
(Former name, former address and former fiscal year, if changed since last
report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Common stock, $0.10 par value New York Stock Exchange
8.8% Junior Subordinated Deferrable Interest New York Stock Exchange
Debentures, Series A, Due 2025
6.75% Notes, due 2028 New York Stock Exchange
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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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 20, 2000, there were 240,583,007 shares of the registrant's common
stock outstanding. The aggregate market value of the shares of common stock,
based on the closing price of those shares on the New York Stock Exchange, Inc.,
held by non-affiliates was approximately $3.0 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held May 19, 2000 are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
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Page
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Cautionary Statement Regarding Forward-Looking Statements............... 1
1. Business........................................................... 2
A. General......................................................... 2
B. Business Strategies............................................. 4
C. Reporting Segments.............................................. 5
D. Reinsurance..................................................... 10
E. Reserves........................................................ 10
F. Competition..................................................... 12
G. Regulation...................................................... 12
H. Risk Factors.................................................... 13
I. Selected Data of Segments....................................... 14
J. Employees....................................................... 14
2. Properties......................................................... 14
3. Legal Proceedings.................................................. 15
4. Submission of Matters to a Vote of Security Holders................ 15
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 16
6. Selected Financial Data............................................ 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 17
7A. Quantitative and Qualitative Information about Market Risk......... 37
8. Financial Statements and Supplementary Data........................ 38
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 91
PART III
10. Directors and Executive Officers of the Registrant................. 92
11. Executive and Director Compensation................................ 92
12. Security Ownership of Certain Beneficial Owners and Management..... 93
13. Certain Relationships and Related Transactions..................... 93
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 94
Signatures......................................................... 95
Index to Exhibits.................................................. 106
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PART I
Cautionary Statement Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
"safe-harbor" for forward-looking statements which are identified as such and
are accompanied by the identification of important factors which could cause
actual results to differ materially from the forward-looking statements.
UnumProvident Corporation (the Company) claims the protection afforded by the
safe harbor in the Act. Certain information contained in this discussion, or in
any other written or oral statements made by the Company, is or may be
considered as forward-looking. Examples of disclosures that contain such
information include, among others, sales estimates, income projections,
reserves and related assumptions, and the year 2000 date conversion. Forward-
looking statements are those not based on historical information, but rather
relate to future operations, strategies, financial results, or other
developments. These statements may be made directly in this document or may be
made part of this document by reference to other documents filed with the
Securities and Exchange Commission by the Company, which is known as
"incorporation by reference." You can find many of these statements by looking
for words such as "may," "should," "believes," "expects," "anticipates,"
"estimates," "intends," "projects," "goals," "objectives," or similar
expressions in this document or in documents incorporated herein.
These forward-looking statements are subject to numerous assumptions, risks,
and uncertainties. Factors that may cause actual results to differ materially
from those contemplated by the forward-looking statements include, among
others, the following possibilities:
. Competitive pressures in the insurance industry may increase
significantly through industry consolidation, competitor
demutualization, or otherwise.
. General economic or business conditions, both domestic and foreign,
whether relating to the economy as a whole or to particular sectors, may
be less favorable than expected, resulting in, among other things, lower
than expected revenues, and the Company could experience higher than
expected claims or claims with longer duration than expected.
. Insurance reserve liabilities can fluctuate as a result of changes in
numerous factors, and such fluctuations can have material positive or
negative effects on net income.
. Actual persistency may be lower than projected persistency, resulting in
lower than expected revenues and higher than expected amortization of
deferred policy acquisition costs.
. Reorganization of the Company's field sales force and integrated product
offerings may initially adversely impact new sales and renewals.
. Costs or difficulties related to the integration of the business of the
Company following the merger may be greater than expected, including
costs or difficulties related to the management of claims.
. Legislative or regulatory changes may adversely affect the businesses in
which the Company is engaged.
. Necessary technological changes may be more difficult or expensive to
make than anticipated, and subsequent non-compliance resulting from year
2000 data systems issues may occur.
. Adverse changes may occur in the securities market.
. Changes in the interest rate environment may adversely affect profit
margins and the Company's investment portfolio.
. The rate of customer bankruptcies may increase.
. Incidence and recovery rates may be influenced by, among other factors,
the emergence of new diseases, new trends and developments in medical
treatments, and the effectiveness of risk management programs.
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. Retained risks in the Company's reinsurance operations are influenced by
many factors and can fluctuate as a result of changes in these factors,
and such fluctuations can have material positive or negative effects on
net income.
For further discussion of risks and uncertainties which could cause actual
results to differ from those contained in the forward-looking statements, see
"Risk Factors" contained herein in Item 1.
All subsequent written and oral forward-looking statements attributable to
the Company or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
The Company does not undertake any obligation to release publicly any revisions
to such forward-looking statements to reflect events or circumstances after the
date of this document or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
General
The Company, a Delaware business corporation, is the parent holding company
for a group of insurance companies that collectively operate throughout North
America and in the United Kingdom, Japan, and Argentina. The Company's
principal operating subsidiaries are Unum Life Insurance Company of America
(Unum America), Provident Life and Accident Insurance Company (Accident), The
Paul Revere Life Insurance Company (Paul Revere Life), and Colonial Life &
Accident Insurance Company (Colonial). The Company, through its subsidiaries,
is the largest provider of group and individual disability insurance in North
America, the United Kingdom, and Japan. It also provides a complementary
portfolio of life insurance products, including long-term care insurance, life
insurance, employer- and employee-paid group benefits, and related services.
The Company is the surviving corporation in the merger on June 30, 1999 of
Provident Companies Inc. (Provident), the leading individual disability
insurance provider in North America, with Unum Corporation (Unum), the leading
group disability insurance provider. In the merger, Provident shareholders
received 0.73 shares of the Company's common stock for each Provident share,
and Unum shareholders received one share of the Company's common stock for each
Unum share.
During the years preceding the merger, both Provident and Unum pursued
strategies of divesting non-core businesses and leveraging their respective
disability insurance expertise.
In Provident's case, this strategy was the continuation of a new business
focus initiated by J. Harold Chandler after joining Provident in 1993.
Provident successfully undertook a number of major initiatives in pursuing this
strategy prior to the merger with Unum. Specifically, Provident (i) sold its
group medical business for $231.0 million in cash and stock, (ii) began winding
down its guaranteed investment contracts (GICs) business which carried high
capital requirements, (iii) reduced the annual dividend on the common stock to
preserve capital to fund future growth, (iv) simplified the corporate legal
structure and eliminated a dual class of common stock that had special voting
rights in order to present a more conventional corporate structure profile to
the investing market, (v)sold in six transactions $1,459.6 million in
commercial mortgage loans as part of repositioning its investment portfolio,
(vi) restructured its marketing and distribution channels, along with the
support areas of product development, underwriting, and claims, to better reach
and serve individual and employee benefits customers, (vii) strengthened its
claims management procedures in the disability income insurance business, and
(viii) began restructuring its disability income products to discontinue over a
reasonable period the sale of policies which combined noncancelable contracts
with long-term own-occupation provisions and to offer in their place an income
replacement contract with more reasonable limits and better pricing for
elective provisions.
In addition, Provident acquired The Paul Revere Corporation (Paul Revere)
and GENEX Services, Inc. (GENEX) in early 1997 and disposed of certain non-core
lines of business. These actions strengthened
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Provident's disability insurance capabilities and enabled Provident to offer a
comprehensive and well-focused portfolio of products and services to its
customers. From 1989 through 1997 Paul Revere was the largest provider of
individual disability insurance in North America on the basis of in-force
premiums. By combining Paul Revere's operations with those of Provident,
Provident realized significant operating efficiencies, including leveraging
both companies' knowledge of disability risks, specialized claims and
underwriting skills, and sales expertise. Provident also realized cost savings
as a result of combining the corporate, administrative, and financial
operations of the two companies. GENEX provides specialized skills in
disability case management and vocational rehabilitation that advance the goal
of providing products that enable disabled policyholders to return to work.
As it continued to assess acquisition opportunities that could complement
its core business, Provident also continued to assess and exit non-core lines.
In 1997, Provident transferred its dental business to another insurer. The
dental block, which was acquired in the Paul Revere acquisition, produced $39.2
million of premium income in 1997.
Effective January 1, 1998, Provident entered into an agreement with
Connecticut General Life Insurance Company (Connecticut General) for
Connecticut General to reinsure, on a 100% coinsurance basis, Provident's in-
force medical stop-loss insurance coverages sold to clients of CIGNA Healthcare
and its affiliates (CIGNA). This reinsured block constitutes substantially all
of Provident's medical stop-loss insurance business.
Effective April 30, 1998, Provident closed the sale of its in-force
individual and tax-sheltered annuity business to American General Annuity
Insurance Company and The Variable Annuity Life Insurance Company, affiliates
of American General Corporation (American General). American General also
acquired a number of miscellaneous group pension lines of business sold in the
1970s and 1980s which are no longer actively marketed. The sale did not include
Provident's block of GICs or group single premium annuities (SPAs), which will
continue in a run-off mode.
On July 15, 1997, the Board of Directors authorized Provident to repurchase
up to 1,000,000 shares (2,000,000 shares following a subsequent stock split) of
its common stock. In May 1998, Provident purchased 200,000 shares of common
stock under this repurchase program for a total price of $7.7 million and at an
average price of $38.43 per share. Provident discontinued this program in
anticipation of the merger with Unum.
In the years prior to the merger Unum also pursued a strategy it had adopted
after its demutualization in 1986 of focusing on its core disability
businesses. In March 1993, Unum merged with Colonial Companies, Inc., the
parent company of Colonial, a leader in payroll marketing of supplemental
insurance, focused on accident, cancer, and a range of life insurance products.
In October 1996, Unum closed the sale of its group tax-sheltered annuity (TSA)
businesses to two insurance subsidiaries of Lincoln National Corporation. The
sale involved approximately 1,700 group contractholders and assets under
management of approximately $3.3 billion. The contracts were initially
reinsured on an indemnity basis. Upon consent of the TSA contractholders and
participants, the contracts are considered reinsured on an assumption basis,
legally releasing Unum from future contractual obligation. As of December 31,
1999, consents for assumption reinsurance have been received relating to
substantially all assets under management.
Through the continued development of Unum Japan Accident Insurance Company
Limited (Unum Japan) and the purchase in 1997 of Boston Compania Argentina de
Seguros, SA in Argentina, Unum also furthered its expansion into foreign
disability markets that began with the acquisition in 1990 of Unum Limited, the
leading disability insurer in the United Kingdom.
In April 1999, Unum decided to exit its reinsurance operations, including
the reinsurance management operations of Duncanson & Holt, Inc. (D&H); risk
assumption by Unum America, including reinsurance pool participation, direct
reinsurance which includes accident and health (A&H), long-term care (LTC), and
long-term disability coverages; and Lloyd's of London (Lloyd's) syndicate
participations. On December 31, 1999 the
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Company completed the sale of certain divisions of the North American
reinsurance management operations of D&H and the reinsurance of the Company's
risk participation in these facilities. At this time, the Company plans to
continue to operate its North America long-term disability reinsurance
operation and to refocus it with the objective of improving profitability. With
respect to Lloyd's, the Company has decided to implement a strategy which
limits participation in year 2000 underwriting risks, ceases participation in
Lloyd's underwriting risks after year 2000, and manages the run-off of its risk
participation in open years of account of Lloyd's reinsurance syndicates. The
Company has also decided to discontinue its accident reinsurance business in
London beginning in year 2000. See Note 13 of the "Notes to Consolidated
Financial Statements" for further discussion.
Business Strategies
The Company's objective is to grow its business and improve its
profitability by following the three strategies set forth below.
Provide Integrated Product Choices
The Company offers a comprehensive portfolio of income protection products
and services. These coverage choices, available in the employee benefit,
individual, and voluntary market segments, meet the diverse needs of the
marketplace. The Company seeks to achieve a competitive advantage by offering
group, individual, and voluntary/work site products that can combine with
other coverages to provide integrated product solutions for customers.
Employees are increasingly turning to the workplace for access to quality
insurance protection. Through return-to-work expertise and a comprehensive
portfolio of basic employee benefits, as well as supplemental, voluntary, and
executive product offerings, the Company offers companies of all sizes highly
competitive benefits to protect the incomes and lifestyles of employees and
their families. Income protection solutions include integrated short-term and
long-term disability income protection plans with flexible coverage and
funding options. Lifestyle protection solutions include term and universal
life insurance and long-term care insurance.
The Company's broad portfolio also includes individual income protection
products that help protect individual customers and their families from the
financial effects of accidents or illnesses. The products feature choices
suited to different ages, incomes, family needs, and lifestyles. Also offered
are lifestyle protection solution products including long-term care insurance,
level term life insurance, and universal life insurance.
In order to give the appropriate focus to these three primary business
markets, the Company has established national practice groups to focus on
large employers, executive benefits, and voluntary benefits. These national
practice groups work with the Company's sales force to present coverage
solutions to potential customers and to manage existing customer accounts.
Provide Benefits Emphasizing Returning People to Work and to an Independent
Lifestyle
For corporate and individual customers, the Company offers expert resources
to help claimants recover their ability to earn an income and regain an
independent lifestyle. These resources include the following:
Benefits Management and Client Care
The Company's benefits organization is focused on helping customers who
have suffered an accident or illness to return to work and to an
independent lifestyle. The Company's extensive resources reflect the
significant investments which have been made in this area. This coordinated
effort focuses centralized home office knowledge and local case management
and support specialists across North America on making the best resources
available for each customer's specific situation.
Specialized Support
Once a customer submits a claim, it's immediately assigned to an expert
for handling based on the severity and type of condition. Specialized
claims representatives, rehabilitation specialists, nurse case managers,
and physicians work directly with each claimant and, where appropriate,
with the claimant's medical providers and employer. These specialized
resources may also be able to assist a claimant's medical provider in
developing treatment plans or return-to-work goals for the claimant. When a
claimant is ready to return to work, the Company offers reimbursement to
employers for eligible work site accommodations to enable an employee's
transition back to the workplace. If a claimant is unable to return to
work, the Company can provide employment counseling, vocational assessment,
analysis of skills, and assistance with education or retraining to help the
claimant find a new career.
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Social Security Disability Income Assistance
For those claimants who are not able to return to work for a
considerable time, the Company can help initiate the social security
application process by working with the claimants in the application and
appeals process to help seek benefits for which the claimant might be
eligible.
Returning to an Independent Lifestyle
For customers who experience accidents or illnesses and are not able to
return to work, the Company offers resources to enable a transition back to
the most independent lifestyle possible. The Company provides information
resources for customers and family members of those living with
disabilities and provides the assistance of claims specialists who fully
understand the dynamics of adjusting to life with longer-term impairments.
Integrated Information Services and Pre-Disability Planning
The Company helps employers identify disability patterns and provides
insight into how to better manage the total cost of disability, including
worker's compensation and other lost time expenses. The Company's managed
disability planning process and return-to-work dividend program can help
employers reduce absenteeism, increase the number of employees who return
to work following a disability, lower employee replacement and retraining
costs, reduce premiums for medical benefits, increase productivity, and
improve employee morale.
Provide Highly Responsive Service for Customers and their Advisors
The Company is committed to providing customers with easy access to the
Company's resources through increased use of technology and through a broad and
multi-channel distribution network. The Company offers work site enrollment and
marketing capabilities and provides advanced sales support to brokers, agents,
and other business partners.
For corporate customers, the Company offers programs to help companies
better understand the causes, cost, and impacts of disability; creative return-
to-work solutions; research initiatives and ongoing studies in the scientific
and human aspects of disability; claims professionals trained in the disabling
condition affecting the employee, with coordinated resources and information
focused on helping the individual return to work; local case management;
reimbursement for qualified workplace accommodations; information, support,
assistance, and referrals for living with a disabling condition; independent
financial counseling to assist family members after the death of an employee;
no-cost cash management services for life insurance beneficiaries immediately
on payment of a policy benefit; 24 hour access for employees to counselors
trained to help with personal problems; and assistance for people who suffer
accidents or illnesses away from home.
For individual customers, the Company offers personalized claim service from
professionals trained in the disabling condition affecting the claimant;
information, support, assistance, and referrals for living with a disabling
condition; 24 hour access to information on aging and long-term care; no-cost
cash management services for life insurance beneficiaries immediately on
payment of a policy benefit; and research initiatives and ongoing studies in
the scientific and human aspects of disability.
Reporting Segments
The Company is organized around its customers, with reporting segments that
reflect its major market segments: Employee Benefits, Individual, and Voluntary
Benefits. The Other segment includes products that the Company no longer
actively markets. The Corporate segment includes investment income on corporate
assets not specifically allocated to a line of business, corporate interest
expense, amortization of goodwill, and certain corporate expenses not allocated
to a line of business. The Employee Benefits segment includes group long-term
and short-term disability insurance, group life insurance, group long-term
care, accidental death and dismemberment coverages, and the results of managed
disability. The Company's Individual reporting segment
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includes individual disability, individual life, and individual long-term care.
The Voluntary Benefits segment includes products sold to employees through
payroll deduction at the work site. These products include life insurance and
health products, primarily disability, accident and sickness, and cancer. The
Other segment includes the results from reinsurance pools and management and
other products no longer actively marketed, including corporate-owned life
insurance, group pension, and individual annuities.
Employee Benefits
The Employee Benefits segment includes the results of group products sold to
employers for the benefit of employees and the results of managed disability,
primarily GENEX. Group long-term and short-term disability comprises the
majority of the segment, with $2,508.4 million of premium income in 1999. Group
life generated $1,158.2 million of premium income in 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7.
Group long-term disability insurance provides employees with insurance
coverage for loss of income in the event of extended work absences due to
sickness or injury. Services are offered to employers and insureds to encourage
and facilitate rehabilitation, retraining, and re-employment. Most policies
begin providing benefits following 90 or 180 day waiting periods and continue
providing benefits until the employee reaches a certain age between 65 and 70.
The benefits are limited to specified maximums as a percentage of income.
Premiums for this product are generally based on expected claims of a pool of
similar risks plus provisions for administrative expenses and profit. Some
cases, however, carry experience rating provisions. Premiums for experience
rated group disability business are based on the expected experience of the
client given their industry group, adjusted for the credibility of the specific
claim experience of the client. A few accounts are handled on an administrative
services only basis with responsibility for funding claim payments remaining
with the customer.
Group short-term disability insurance provides coverage from loss of income
due to injury or sickness, effective immediately for accidents, and after one
week for sickness, for up to 26 weeks, to specified maximums as a percentage of
income. Short-term disability is sold primarily on a basis permitting periodic
repricing to address the underlying claims experience and the interest rate
environment.
Profitability of group disability insurance is affected by deviations of
actual claims experience from expected claims experience, investment returns,
persistency, and the ability of the Company to control its administrative
expenses. Morbidity is an important factor in disability claims experience.
Also important is the general state of the economy; for example, during a
recession the incidence of claims tends to increase under this type of
insurance. In general, experience rated disability coverage for large groups
has narrower profit margins and represents less risk to the Company than
business of this type sold to small employers. This is because the Company must
bear all of the risk of adverse claims experience in small case coverages while
larger employers often bear much of this risk themselves. For disability
coverages, case management and rehabilitation activities with regard to claims,
along with appropriate pricing and expense control, are important factors
contributing to profitability.
Group life insurance consists primarily of renewable term life insurance
with the coverages frequently linked to employees' wages. Profitability in
group life is affected by deviations of actual claims experience from expected
claims experience, investment returns, persistency, and the ability of the
Company to control administrative expenses. The Company also markets several
group benefits products and services including accident and sickness indemnity
and accidental death and dismemberment policies.
Group long-term care insurance pays a benefit upon the loss of two or more
"activities of daily living" (e.g. bathing, dressing, feeding) and the
insured's requirement of standby assistance or cognitive impairment. Payment is
made on an indemnity basis, regardless of expenses incurred, up to a lifetime
maximum. Benefits start after an elimination period, generally 90 days or less.
Long-term care insurance is marketed on a
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guaranteed renewable basis. Profitability is affected by deviations of actual
claims experience from expected claims experience, investment returns,
persistency, and the ability of the Company to control administrative expenses.
GENEX provides specialized skills in disability case management and
vocational rehabilitation to assist disabled claimants to return to work. GENEX
provides a full range of disability management services, including work site
injury management, telephonic early intervention services for injured workers,
medical case management, vocational rehabilitation, and disability cost
analysis, to third party administrators, corporate clients, and insurance
companies. In addition to its historical focus on the workers' compensation
market, GENEX and the Company are working together to offer customized
disability programs for the employee benefits market that are intended to
integrate and simplify coverages, control costs, and improve efficiency for
employers with significant disability and related claims. GENEX plays an
increasingly significant role in helping the Company to manage its own exposure
to individual and group disability claims.
Individual
Individual disability comprises the majority of the Individual segment, with
$1,553.5 million of premium income in 1999. Individual life insurance products
generated $85.1 million of premium income in 1999, and individual long-term
care had premium income of $92.0 million.
Individual disability income insurance provides the insured with a portion
of earned income lost as a result of sickness or injury. Under an individual
disability income policy, monthly benefits generally are fixed at the time the
policy is written. The benefits typically range from 30 percent to 75 percent
of the insured's monthly earned income. Various options with respect to length
of benefit periods and waiting periods before payment begins are available and
permit tailoring of the policy to a specific policyholder's needs. The Company
also markets individual disability income policies which include payments for
transfer of business ownership and business overhead expenses. Individual
disability income products do not provide for the accumulation of cash values.
Premium rates for these products are varied by age, sex, and occupation
based on assumptions concerning morbidity, persistency, policy related
expenses, and investment income. The Company develops its assumptions based on
its own claims experience and published industry tables. The Company's
underwriters evaluate the medical and financial condition of prospective
policyholders prior to the issuance of a policy.
The majority of the Company's in-force individual disability income
insurance was written on a noncancelable basis. Under a noncancelable policy,
as long as the insured continues to pay the fixed annual premium for the
policy's duration, the policy cannot be canceled by the Company nor can the
premium be raised. Due to the noncancelable, fixed premium nature of the
policies marketed in the past, profitability of this part of the business of
Accident and Provident Life and Casualty Insurance Company (Casualty) is
largely dependent upon achieving the morbidity and interest rate assumptions
set in the 1993 loss recognition study with respect to the business written in
1993 and prior and those set in the pricing of business written after 1993. The
profitability of the Paul Revere business will be largely dependent upon
achieving the assumptions as to morbidity, persistency, interest earned rates,
and expense levels assumed when pricing the acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7.
In November 1994, the Company announced its intention to discontinue the
sale of individual disability products that combined lifetime benefits and
short elimination periods with own-occupation provisions (other than conversion
policies available under existing contractual arrangements). At the same time
the Company began introducing products that insured loss of earnings as opposed
to occupations, and these products generally contained more limited benefit
periods and longer elimination periods. Since the acquisition of Paul Revere in
March 1997, the Company has discontinued the sale of certain Paul Revere
products that are not consistent with the Company's strategic direction for its
product portfolio.
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In contrast to traditional noncancelable own-occupation policies, for which
benefits are determined based on whether the insured can work in his or her
original occupation, the loss of earnings policy requires the policyholder to
satisfy two conditions for benefits to begin: reduced ability to work due to
accident or sickness and earnings loss of at least 20 percent. These policies
are aimed at repositioning the individual disability income product by making
it more attractive to a broader market of individual consumers, including
middle to upper income individuals and corporate benefit buyers.
The Company also offers lifelong disability coverage for loss of income due
to injury or sickness on a guaranteed renewable basis, with the right to
reprice in-force policies subject to regulatory approval. Lifelong disability
coverage provides benefits and transitional support for moderate disabilities,
with richer benefits for severe disabilities. Common options include additional
coverage for catastrophic injury or illness and an option to convert to a long-
term care policy at retirement age.
The Company is developing a new portfolio of individual disability products
for release in the second half of 2000. This product line will consolidate the
current offerings of Provident, Paul Revere, and Unum into one new simplified
product portfolio. The new portfolio will utilize a modular approach offering
customers a range of product options and features. This portfolio has been
designed to combine the best features from prior Company offerings and will
include return-to-work incentives and optional long-term care conversion
benefits and/or benefits for catastrophic disabilities.
The Company's life insurance offerings include term, universal life, and
interest-sensitive life insurance products. Universal life products provide
permanent life insurance with adjustable interest rates applied to the cash
value and are designed to achieve specific policyholder objectives such as
higher accumulation values and/or flexibility with respect to amount of
coverage and premium payments. The principal difference between fixed premium
and universal life insurance policies centers around policy provisions
affecting the amount and timing of premium payments. Under universal life
policies, policyholders may vary the frequency and size of their premium
payments, and policy benefits may fluctuate accordingly. Premium payments under
the fixed premium policies are not variable by the policyholder and, as a
result, generally reflect lower administrative costs than universal life
products for which extensive monitoring of premium payments and policy benefits
is required.
Premium rates for the Company's life insurance products are based on
assumptions as to future mortality, investment yields, expenses, and lapses.
Although a margin for profit is included in setting premium rates, the actual
profitability of products is significantly affected by the variation of actual
experience from assumed experience. Profitability of fixed premium products is
also dependent upon investment income on reserves. The profitability of
interest-sensitive products is determined primarily by the ultimate
underwriting experience and the ability to maintain anticipated investment
spreads. The Company believes that the historical claims experience for these
products has been satisfactory.
From the Company's viewpoint, the risks involved with interest-sensitive
products include actual versus assumed mortality, achieving investment returns
that at least equal the current declared rate, competitive position of declared
rates on the policies, meeting the contractually guaranteed minimum crediting
rate, and recovery of policy acquisition costs. From the policyholder's
perspective, the risk involved with interest-sensitive products is whether or
not the declared rates on the policy will compare favorably with the returns
available elsewhere in the marketplace.
Individual long-term care is offered on a single customer basis and to
smaller employer groups and is marketed on a guaranteed renewable basis.
Individual long-term care insurance pays a benefit upon the loss of two or more
"activities of daily living" and the insured's requirement of standby
assistance or cognitive impairment. Payment is made on an indemnity basis,
regardless of expenses incurred, up to a lifetime maximum. Benefits start after
an elimination period, generally 90 days or less. Profitability is affected by
deviations of actual claims experience from expected claims experience,
investment returns, persistency, and the ability of the Company to control
administrative expenses.
8
<PAGE>
Voluntary Benefits
The Voluntary Benefits segment includes a broad line of products sold to
groups of employees through payroll deduction at the work site. These products
include life insurance and health products. Premium income for this segment
totaled $691.6 million in 1999.
The life insurance products principally include universal life, interest-
sensitive life, and whole life insurance. The Company markets accident and
sickness policies that provide benefit payments for disability income, death,
dismemberment, or major injury and are designed to supplement social security,
workers' compensation, and other insurance plans. The Company markets cancer
insurance policies designed to provide payments for hospitalization and
scheduled medical benefits. The accident and health products qualify as fringe
benefits that can be purchased with pre-tax employee dollars as part of a
flexible benefits program pursuant to Section 125 of the Internal Revenue Code.
Flexible benefits programs assist employers in managing benefit and
compensation packages and provide policyholders the ability to choose benefits
that best meet their needs. Congress could change the laws to limit or
eliminate fringe benefits available on a pretax basis, eliminating the
Company's ability to continue marketing its products this way. However, the
Company believes its products provide value to its policyholders, which will
remain even if the tax advantages offered by flexible benefit programs are
eliminated.
Profitability of voluntary benefits products is affected by the level of
employee participation, persistency, deviations of actual morbidity and
mortality experience from expected experience, investment returns, and the
ability of the Company to control administrative expenses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7.
Other
The Other operating segment includes results from reinsurance pools and
management and other products no longer actively marketed, including corporate-
owned life insurance, group pension products, and individual annuities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein in Item 7.
During 1999, the Company concluded that the reinsurance pools and management
operations were not solidly aligned with the Company's strength in the
disability insurance market. The Company decided to exit these operations
through a combination of a sale, reinsurance, and/or placing certain components
in run-off. No potential buyers expressed interest in acquiring the entire
domestic and international reinsurance management operations. However, in
October 1999, the Company entered into an agreement to sell the reinsurance
management operations of its A&H and LTC reinsurance facilities and to reinsure
the Company's risk participation in these facilities.
Because of the limited interest expressed by potential buyers in the
reinsurance management operations, the Company reevaluated its strategy to exit
the reinsurance operations. The Company decided to continue to operate its
North America long-term disability reinsurance operation and to refocus it with
the objective of improving profitability. With respect to Lloyd's, the Company
decided to implement a strategy which limits participation in year 2000
underwriting risks, ceases participation in Lloyd's underwriting risks after
year 2000, and manages the run-off of its risk participation in open years of
account of Lloyd's reinsurance syndicates. The Company also decided to
discontinue its accident reinsurance business in London beginning in year 2000.
See Note 13 of the "Notes to Consolidated Financial Statements" for further
discussion of the reinsurance businesses.
Corporate-owned life insurance is a tax-leveraged policy sold from 1983 to
1990, with most of the block having been sold before mid-1986. Beginning in
1986, Congress began to enact tax legislation that significantly reduced the
ability of policyholders to deduct policy loan interest on these products which
detracted from the internal rate of return which theretofore had been
available. In 1988, Congress went further by enacting legislation that had
adverse tax consequences for distributions/policy loans from modified endowment
contracts.
9
<PAGE>
Under this legislation, new sales of the majority of the Company's COLI
products would have been subject to adverse tax treatment as modified endowment
contracts due to their high premium level. As a consequence, many of these
products were withdrawn, and revised products which would not be considered
modified endowment contracts were introduced. Policies issued prior to the 1986
tax legislation, however, were grandfathered from the modified endowment
provisions. In 1996, Congress enacted tax legislation that generally eliminates
tax deductions for policy loan interest on corporate-owned life insurance
products issued subsequent to the 1986 tax legislation.
The Company no longer markets GICs, but continues to service its block of
existing business. The Company previously marketed GICs for use in corporate
tax-qualified retirement plans. Under GICs, the Company guarantees the
principal and interest to the contract holder for a specified period, generally
three to five years and derives profits on the spread between the amount of
interest earned on invested funds and the fixed rate guaranteed in the GIC.
Sales of group SPAs have also been discontinued. Group SPAs are used as funding
vehicles primarily when defined benefit pension plans are terminated. Under
SPAs, the Company received a one-time premium payment and in turn agreed to pay
a fixed monthly retirement benefit to specified employees. The Company
continues to adjust the investment portfolio to meet the obligations of the
scheduled maturities of the GICs.
As previously discussed, the Company sold its in-force individual and tax-
sheltered annuity business during 1998 and its group tax-sheltered annuity
business during 1996.
Corporate
The Corporate segment consists of revenue earned on corporate assets,
interest expense on corporate debt, amortization of goodwill, and certain
corporate expenses not allocated to a line of business.
Reinsurance
The Company routinely reinsures portions of its business with other
insurance companies. In a reinsurance transaction a reinsurer agrees to
indemnify another insurer for part or all of its liability under a policy or
policies it has issued for an agreed upon premium. The maximum amount of risk
retained by the Company and not reinsured is $500,000 on any group or
individual life insured and $500,000 on group and individual accidental death
insurance. The amount of risk retained by the Company on individual disability
income products varies by policy type and year of issue.
Since the ceding of reinsurance by the Company does not discharge its
primary liability to the policyholder, the Company has control procedures with
regard to reinsurance ceded. The Company evaluates the financial condition of
reinsurers and monitors concentration of credit risk to minimize this exposure.
These procedures include the exchange and review of financial statements filed
with regulatory authorities, exchange of Insurance Regulatory Information
System results, review of ratings by A.M. Best Company, determination of states
in which the reinsurer is licensed to do business, on-site visits before
entering a contract to assess the operations and management of the reinsurer,
consideration of the need for collateral, such as letters of credit, and audits
of the Company's reinsurance activities by its Internal Audit staff. The
Company also assumes reinsurance from other insurers. The reinsurance
receivable at December 31, 1999, relates to over 140 reinsurance relationships.
Of the six major relationships which account for approximately 75 percent of
the reinsurance receivable amount at December 31, 1999, all are with companies
rated A or better by A.M. Best Company or are fully securitized by investment-
grade fixed maturity securities held in trust.
See Note 13 of the "Notes to Consolidated Financial Statements" for further
discussion of the Company's reinsurance activities.
Reserves
The applicable insurance laws under which insurance companies operate
require that they report, as liabilities, policy reserves to meet future
obligations on their outstanding policies. These reserves are the
10
<PAGE>
amounts which, with the additional premiums to be received and interest thereon
compounded annually at certain assumed rates, are calculated to be sufficient
to meet the various policy and contract obligations as they mature. These laws
specify that the reserves shall not be less than reserves calculated using
certain specified mortality and morbidity tables, interest rates, and methods
of valuation. The reserves reported in the Company's financial statements
incorporated herein by reference are calculated based on generally accepted
accounting principles followed in the United States (GAAP) and differ from
those specified by the laws of the various states and carried in the statutory
financial statements of the life insurance subsidiaries. These differences
arise from the use of mortality and morbidity tables and interest assumptions
which are believed to be more representative of the actual business than those
required for statutory accounting purposes and from differences in actuarial
reserving methods.
The consolidated statements of operations include the annual change in
reserves for future policy and contract benefits. The change reflects a normal
accretion for premium payments and interest buildup and decreases for policy
terminations such as lapses, deaths, and benefit payments.
Prior to the merger, Unum's process and assumptions used to calculate the
discount rate for claim reserves of certain disability businesses differed from
that used by Provident. While Unum's and Provident's methods were both in
accordance with GAAP, management believed that the combined entity should have
consistent discount rate accounting policies and methods for applying those
policies for similar products. Unum's former methodology used the same
investment strategy for assets backing both liabilities and surplus.
Provident's methodology, which allows for different investment strategies for
assets backing surplus than those backing product liabilities, was determined
by management to be the more appropriate approach for the Company. Accordingly,
at June 30, 1999 the Company adopted Provident's method of calculating the
discount rate for claim reserves.
The unpaid claim reserves for these disability lines as of June 30, 1999
were $5,318.3 million using the former method for determining reserve discount
rates and $5,559.0 million using the current method. The impact on 1999
earnings related to the change in method of calculating the discount rate for
claim reserves was $240.7 million before tax and $156.5 million after tax
during the second quarter.
Subsequent to the merger date, the Company began to integrate the valuation
procedures of the two organizations to provide for a more effective linking of
pricing and reserving assumptions and to facilitate a more efficient process
for adjusting liabilities to emerging trends. Included in this integration
activity were a review and an update of assumptions that underlie policy and
contract benefit liabilities. The purpose of the study was to confirm or update
the assumptions which were viewed as likely to affect the ultimate liability
for contract benefits. Accordingly, as a result of the merger, the Company
accelerated the performance of its normal reviews of the assumptions underlying
reserves to determine the assumptions that the newly merged Company will use in
the future for pricing, performance management, and reserving.
The review resulted in an increase in the benefits and reserves for future
benefits for the Company's domestic and Canadian group long-term disability
unpaid claim liabilities. As a result of the review, the Company increased its
policy and contract benefit liabilities $359.2 million, which reduced 1999
earnings $359.2 million before tax and $233.5 million after tax. The increase
in policy and contract benefit liabilities primarily resulted from revisions to
assumptions in the following three key components: claim termination rates,
incurred but not reported factors, and discount rates. See Note 2 of the "Notes
to Consolidated Financial Statements" for further discussion of these reserve
changes.
During the fourth quarter of 1998, the Company recorded a $153.0 million
increase in the reserve for individual and group disability claims incurred as
of December 31, 1998. Incurred claims include claims known as of that date and
an estimate of those claims that have been incurred but not yet reported.
Claims that have been incurred but not yet reported are considered liabilities
of the Company. These claims are expected to be reported during 1999 and will
be affected by the claims operations integration activities. The $153.0 million
claim reserve increase represents the estimated value of cash payments to be
made to these claimants over the life of the claims as a result of the claims
operations integration activities.
11
<PAGE>
Management believes the reserve adjustment was required based upon the
integration plans it had in place and to which it had committed and based upon
its ability to develop a reasonable estimate of the financial impact of the
expected disruption to the claims management process. Claims management is an
integral part of the disability operations. Disruptions in that process can
create material, short-term increases in claim costs. The merger has had a
near-term adverse impact on the efficiency and effectiveness of the Company's
claims management function resulting in some delay in claim resolutions and
additional claim payments to policyholders. Claims personnel have been
distracted from normal claims management activities as a result of planning and
implementing the integration of the two companies' claims organizations. In
addition, employee turnover and additional training have reduced resources and
productivity. An important part of the claims management process is assisting
disabled policyholders with rehabilitation efforts. This complex activity is
important to the policyholders because it can assist them in returning to
productive work and lifestyles more quickly, and it is important to the Company
because it shortens the duration of claim payments and thereby reduces the
ultimate cost of settling claims.
The reserving process begins with the assumptions indicated by past
experience and modifies these assumptions for current trends and other known
factors. The Company anticipated the merger-related developments discussed
above would generate a significant change in claims department productivity,
reducing claim resolution rates, a key assumption when establishing reserves.
Management developed actions to mitigate the impact of the merger on claims
department productivity, and where feasible, management also planned to obtain
additional claims management resources through outsourcing. All such costs are
expensed in the period incurred and are not material in relation to results of
operations. Management reviewed its integration plans and the actions intended
to mitigate the impact of the integration with claims managers to determine the
extent of disruption in normal activities. The effect of integration activities
on new claim resolution rates is not expected to be material after December 31,
1999. See Note 7 of the "Notes to Consolidated Financial Statements" for a
complete discussion of the claim disruption reserve.
Competition
There is intense competition among insurance companies for the individual
and group insurance products of the types sold by the Company. At the end of
1999, there were over 2,000 legal reserve life insurance companies in the
United States, many offering one or more insurance products similar to those
marketed by the Company. In the individual and group disability markets, the
Company competes in the United States and Canada with a limited number of major
companies and regionally with other companies offering specialty products. The
Company's principal competitors in the voluntary benefits market and in the
employee benefits market for group life and long-term care products include the
largest insurance companies in the United States. In addition, in the
individual life market, the Company competes with banks, investment advisers,
mutual funds, and other financial entities for investment of savings and
retirement funds in general.
All areas of the employee benefits markets are highly competitive due to the
yearly renewable term nature of the products and the large number of insurance
companies offering products in this market. The Company competes with other
companies in attracting and retaining independent agents and brokers to
actively market its products. The principal competitive factors affecting the
Company's business are price and quality of service.
Regulation
The Company's insurance subsidiaries are subject to regulation and
supervision in jurisdictions in which they do business, primarily for the
protection of policyholders. Although the extent of such regulation varies,
insurance laws generally establish supervisory agencies with broad
administrative powers including: granting and revocation of licenses to
transact business; establishing reserve requirements; setting the form,
content, and frequency of required financial statements; the licensing of
agents; the approval of policy forms; prescribing the type and amount of
investments permitted; and, in general, the conduct of all insurance
activities. The Company's insurance subsidiaries must meet the standards and
tests for investments promulgated by insurance laws and regulations of the
jurisdictions in which they are domiciled. Insurance subsidiaries operate under
12
<PAGE>
insurance laws which require they establish and carry, as liabilities,
statutory reserves to meet obligations on their disability, life, accident and
health policies, and annuities. These reserves are verified periodically by
various regulators. The Company's domestic insurance subsidiaries are examined
periodically by examiners from their states of domicile and by other states in
which they are licensed to conduct business. See Note 18 of the "Notes to
Consolidated Financial Statements" for a discussion of permitted statutory
accounting practices.
The laws of the states of Maine, Tennessee, Massachusetts, South Carolina,
New York, and Delaware require the registration of and periodic reporting by
insurance companies domiciled within their jurisdiction which control or are
controlled by other corporations or persons so as to constitute a holding
company system. The Company is registered as a holding company system in Maine,
Tennessee, South Carolina, Massachusetts, New York, and Delaware. The holding
company statutes require periodic disclosure concerning stock ownership and
prior approval of certain intercompany transactions within the holding company
system. The Company may from time to time be subject to regulation under the
insurance and insurance holding company statutes of one or more additional
states.
The risk-based capital (RBC) standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners (NAIC),
establish an RBC ratio comparing adjusted surplus to required surplus for
United States domiciled insurance companies. If the RBC ratio falls within
certain ranges, regulatory action may be taken ranging from increased
information requirements to mandatory control by the domiciliary insurance
department. The RBC ratios for the Company's insurance subsidiaries, measured
at December 31, 1999, were above the ranges that would require regulatory
action. See further discussion under "Risk Factors--Capital Adequacy."
Risk Factors
Any one or more of the following factors may cause the Company's actual
results for various financial reporting periods to differ materially from those
expressed in any forward looking statements made by or on behalf of the
Company. See "Cautionary Statement Regarding Forward-Looking Statements"
contained herein on page 1.
Reserves
The Company maintains reserves for future policy benefits and unpaid claims
expenses which include policy reserves and claim reserves established for its
individual disability insurance, group insurance, and individual life insurance
products. Policy reserves represent the portion of premiums received which are
reserved to provide for future claims. Claim reserves are established for
future payments not yet due on claims already incurred, primarily relating to
individual disability and group disability insurance products. Reserves,
whether calculated under GAAP or statutory accounting practices, do not
represent an exact calculation of future benefit liabilities but are instead
estimates made by the Company using actuarial and statistical procedures. There
can be no assurance that any such reserves would be sufficient to fund future
liabilities of the Company in all circumstances. Future loss development could
require reserves to be increased, which would adversely affect earnings in
current and future periods. Adjustments to reserve amounts may be required in
the event of changes from the assumptions regarding future morbidity (the
incidence of claims and the rate of recovery, including the effects thereon of
inflation and other societal and economic factors), persistency, mortality, and
interest rates used in calculating the reserve amounts.
Capital Adequacy
The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by state insurance regulators, is considered important by
state insurance regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure to maintain
certain levels of statutory surplus could result in increased regulatory
scrutiny, action by state regulatory authorities, or a downgrade by the private
rating agencies.
13
<PAGE>
Effective in 1993, the NAIC adopted an RBC formula, which prescribes a
system for assessing the adequacy of statutory capital and surplus for all life
and health insurers. The basis of the system is a risk-based formula that
applies prescribed factors to the various risk elements in a life and health
insurer's business to report a minimum capital requirement proportional to the
amount of risk assumed by the insurer. The life and health RBC formula is
designed to measure annually (i) the risk of loss from asset defaults and asset
value fluctuation, (ii) the risk of loss from adverse mortality and morbidity
experience, (iii) the risk of loss from mismatching of asset and liability cash
flow due to changing interest rates, and (iv) business risks. The formula is to
be used as an early warning tool to identify companies that are potentially
inadequately capitalized. The formula is intended to be used as a regulatory
tool only and is not intended as a means to rank insurers generally.
Disability Insurance
Disability insurance may be affected by a number of social, economic,
governmental, competitive, and other factors. Changes in societal attitudes,
work ethics, motivation, stability, and mores can significantly affect the
demand for and underwriting results from disability products. Economic
conditions affect not only the market for disability products, but also
significantly affect the claims rates and length of claims. The climate and the
nature of competition in disability insurance have also been markedly affected
by the growth of social security, workers' compensation, and other governmental
programs in the workplace. The nature of that portion of the Company's
outstanding insurance business that consists of noncancelable disability
policies, whereby the policy is guaranteed to be renewable through the life of
the policy at a fixed premium, does not permit the Company to adjust its
premiums on business in-force on account of changes resulting from such
factors. Disability insurance products are important products for the Company.
To the extent that disability products are adversely affected in the future as
to sales or claims, the business or results of operations of the Company could
be materially adversely affected.
Industry Factors
All of the Company's businesses are highly regulated and competitive. The
Company's profitability is affected by a number of factors, including rate
competition, frequency and severity of claims, lapse rates, government
regulation, interest rates, and general business considerations. There are many
insurance companies which actively compete with the Company in its lines of
business, some of which are larger and have greater financial resources than
the Company, and there is no assurance that the Company will be able to compete
effectively against such companies in the future.
The modernization of the financial services industry as a result of the
Gramm-Leach-Bliley Act of 1999 is also likely to affect the future prospects of
the Company. This legislation eliminates many federal and state barriers to
affiliation among banks and securities firms, insurers, and their financial
service providers. At the same time, the legislation increases the separation
between financial service providers and other non-financial companies. The major
impacts, other than the potential for increased competition, include new federal
privacy rules, a requirement that states enact uniform laws and regulations
governing the licensure of individuals and entities authorized to solicit the
purchase of insurance within and outside a state, and authority given to
promulgate regulations granted to numerous federal agencies.
Selected Data of Segments
For information regarding the operations of segments, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7.
Employees
At December 31, 1999, the Company had approximately 11,900 full-time
employees. Some employees in Argentina, comprising less than 1 percent of the
Company's total workforce, are members of a union.
ITEM 2. PROPERTIES
The Company occupies over 3,000,000 square feet of space at four principal
operating centers in Chattanooga, Tennessee, Portland, Maine, Worcester,
Massachusetts, and Columbia, South Carolina. The Company occupies two connected
buildings totaling 840,000 square feet in Chattanooga, Tennessee. The office
building and substantially all of the surrounding 25 acres of land used for
employee parking are owned by the Company in fee along with a 27-unit apartment
building for corporate use.
14
<PAGE>
The Company occupies facilities in Portland, Maine, which are comprised of
eight owned facilities totaling 1,037,000 square feet of office space and 40
acres of associated land used primarily for parking. In addition, approximately
111,000 square feet of office space is leased and occupied in two buildings
with rents totaling $1.3 million per year.
The Company occupies facilities totaling 438,000 square feet in Worcester,
Massachusetts, with approximately 5.6 acres of surrounding property used
primarily for parking. In addition, the Company leases 15,000 square feet in
Springfield, Massachusetts, and 13,000 square feet in Auburn, Massachusetts.
The Company occupies approximately 547,000 square feet of office space in
Columbia, South Carolina. The buildings are located on approximately 47 acres
with a portion developed for employee parking.
The Company also owns office buildings in the United Kingdom and Argentina,
which serve as the home offices of Unum Limited and Boston Compania Argentina
de Seguros SA, respectively.
Additionally, the Company leases office space, for periods principally from
five to ten years, for use by its affiliates and sales forces.
ITEM 3. LEGAL PROCEEDINGS
Refer to Item 8 Note 17 of the "Notes to Consolidated Financial Statements"
for information on legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common stock of UnumProvident Corporation is traded on the New York Stock
Exchange. The stock symbol is UNM. Dividends in the following table have been
restated to reflect the merger of Unum Corporation and Provident Companies,
Inc. as if it had been completed at the beginning of the earliest period
presented.
<TABLE>
<CAPTION>
Market Price
------------------
High Low Dividend
-------- --------- --------
1999
<S> <C> <C> <C> <C> <C>
1st Quarter.................................. $62 1/2 $43 13/16 $0.1428
2nd Quarter.................................. 59 1/2 42 7/16 0.1428
3rd Quarter.................................. 56 7/8 28 3/8 0.1475
4th Quarter.................................. 36 3/16 26 0.1475
<CAPTION>
1998
<S> <C> <C> <C> <C> <C>
1st Quarter $55 9/16 $48 $0.1402
2nd Quarter.................................. 59 5/8 51 1/2 0.1428
3rd Quarter.................................. 59 3/8 44 0.1428
4th Quarter.................................. 60 1/16 42 0.1428
</TABLE>
As of March 1, 2000 there were 23,403 registered holders of common stock.
The Company's dividend reinvestment plan offers shareholders of Company common
stock a convenient way to purchase additional shares of common stock without
paying brokerage fees, commissions, or other bank service fees. More
information and an authorization form may be obtained by writing or calling the
Company's transfer agent, First Chicago Trust Company of New York. The toll-
free customer service number is 1-800-446-2617.
For information on restrictions relating to the Company's insurance
subsidiaries' ability to pay dividends to the Company see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7 and Item 8 Note 18 of the "Notes to Consolidated
Financial Statements."
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in millions, except share data)
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data
Premium Income.......... $ 6,843.2 $ 6,129.0 $ 5,293.1 $ 4,288.8 $ 4,147.6
Net Investment Income... 2,059.7 2,035.4 2,015.7 1,893.4 2,027.6
Net Realized Investment
Gains (Losses)......... 87.1 55.0 11.5 (5.2) 193.4
Other Income............ 339.6 299.9 357.0 148.2 187.1
---------- ---------- ---------- ---------- ----------
Total Revenue........... 9,329.6 8,519.3 7,677.3 6,325.2 6,555.7
Benefits and Expenses... 9,495.1 7,599.1 6,760.6 5,757.4 5,997.8
---------- ---------- ---------- ---------- ----------
Income (Loss) Before
Federal Income Taxes... (165.5) 920.2 916.7 567.8 557.9
Federal Income Taxes.... 17.4 302.8 299.1 184.2 161.2
---------- ---------- ---------- ---------- ----------
Net Income (Loss)....... $ (182.9) $ 617.4 $ 617.6 $ 383.6 $ 396.7
========== ========== ========== ========== ==========
Per Common Share
Information
Net Income (Loss)--
Basic.................. $ (0.77) $ 2.60 $ 2.62 $ 1.75 $ 1.81
Net Income (Loss)--
Assuming Dilution...... $ (0.77) $ 2.54 $ 2.57 $ 1.72 $ 1.80
Common Stockholders'
Equity at End of Year.. $ 20.73 $ 25.89 $ 23.46 $ 18.29 $ 17.89
Cash Dividends.......... $ 0.58 $ 0.57 $ 0.55 $ 0.53 $ 0.51
Weighted Average Common
Shares
Outstanding (000s)
--Basic............... 239,080.6 236,975.2 230,741.2 212,401.5 211,610.8
--Assuming Dilution... 239,080.6 242,348.9 235,818.2 215,301.1 212,988.8
Financial Position (at
End of Year)
Assets.................. $ 38,447.5 $ 38,602.2 $ 37,040.1 $ 30,813.8 $ 31,472.6
Long-term Debt,
Subordinated Debt
Securities, and
Preferred Stock........ $ 1,466.5 $ 1,525.2 $ 1,396.2 $ 927.0 $ 975.3
Stockholders' Equity.... $ 4,982.2 $ 6,146.2 $ 5,714.1 $ 4,001.7 $ 3,955.2
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
On June 30, 1999, Unum Corporation (Unum) merged with and into Provident
Companies, Inc. (Provident) under the name UnumProvident Corporation. The
merger was accounted for as a pooling of interests. The historical financial
results discussed herein give effect to the merger as if it had been completed
at the beginning of the earliest period presented. See Notes 1 and 2 of the
"Notes to Consolidated Financial Statements" for further discussion.
The following should be read in conjunction with the consolidated financial
statements and notes thereto contained herein in Item 8.
This discussion of consolidated operating results and operating results by
segment excludes net realized investment gains and losses from revenue and
income (loss) before taxes. The Company's investment focus has been on
investment income to support its insurance liabilities as opposed to the
generation of realized investment gains. Due to the nature of the Company's
business, a long-term focus is necessary to maintain profitability over the
life of the business. The realization of investment gains and losses will
impact future earnings levels as the underlying business is long-term in nature
and requires that the Company be able to sustain the assumed interest rates in
its liabilities. However, income excluding realized investment gains and losses
does not replace net income as a measure of the Company's profitability.
17
<PAGE>
Management believes that the trends in new annualized sales in the Employee
Benefits, Individual, and Voluntary Benefits segments are important for
investors to assess in their analysis of the Company's results of operations.
The trends in new sales are indicators of the Company's potential for growth in
its respective markets and the level of market acceptance of price changes and
new products. The Company has closely linked its various incentive compensation
programs to the achievement of its goals for new sales and renewals of existing
business. The Company's long-term financial objectives, which balance growth
and profitability, are to achieve sales growth of 10 to 12 percent per year,
earnings per share growth of 12 to 14 percent per year, and a return on equity
of 14 to 16 percent per year.
Accounting Policy Changes, Financial Statement Reclassifications, and Merger
Expenses
As a result of the merger, certain accounting policy changes and
reclassification adjustments were made during 1999. The following summarizes
these changes and reclassifications as well as the expenses related to the
merger and the early retirement offer to employees.
The Company values its available-for-sale fixed maturity and equity
securities at fair value, with unrealized holding gains and losses reported as
a component of comprehensive income. Companies are required to also adjust
deferred acquisition costs and/or certain policyholder liabilities to reflect
the changes that would have been necessary if the unrealized investment gains
and losses related to the available-for-sale securities had been realized.
Prior to the merger, Unum adjusted policyholder liabilities and Provident
adjusted deferred policy acquisition costs (DPAC) and value of business
acquired (VOBA) for those products where these assets existed. To present
financial information in a common reporting format, management has determined
that the combined entity will adjust policyholder liabilities rather than DPAC
and VOBA. Prior period financial statements have been restated to reflect this
reclassification. The reclassification did not change other comprehensive
income, accumulated other comprehensive income, or fixed maturity and equity
securities. The reclassification reflected in the December 31, 1998,
consolidated statement of financial condition resulted in an increase of $329.7
million in DPAC, $1.5 million in VOBA, and $331.2 million in reserves for
future policy and contract benefits.
Generally, because of the effort and time involved, reviews and updates of
assumptions related to benefit liabilities are periodically undertaken over
time and are reflected in the calculation of benefit liabilities as completed.
Many factors influence assumptions underlying reserves, and considerable
judgment is required to interpret current and historical experience underlying
all of the assumptions and to assess the future factors that are likely to
influence the ultimate cost of settling existing claims.
Prior to the June 30, 1999 merger, Unum's process and assumptions used to
calculate the discount rate for claim reserves of certain disability businesses
differed from that used by Provident. While Unum's and Provident's methods for
calculating the discount rate for disability claim reserves were both in
accordance with generally accepted accounting principles, management believed
that the combined entity should have consistent discount rate accounting
policies and methods for applying these policies for similar products. The
previous Unum methodology used the same investment strategy for assets backing
both liabilities and surplus. Provident's methodology, which allows for
different investment strategies for assets backing surplus than those backing
product liabilities, was determined by management to be the more appropriate
approach for the combined entity. Accordingly, at June 30, 1999, the Company
adopted Provident's method of calculating the discount rate for claim reserves.
The impact on 1999 earnings related to the change in method of calculating the
discount rate for claim reserves was $240.7 million before tax and $156.5
million after tax. The charge was reflected in the Employee Benefits,
Individual, and Other segments as an increase in benefits to policyholders of
$191.7 million, $38.9 million, and $10.1 million, respectively.
Subsequent to the merger date, the Company began to integrate the valuation
procedures of the two organizations to provide for a more effective linking of
pricing and reserving assumptions and to facilitate a more efficient process
for adjusting liabilities to emerging trends. Included in this integration
activity were a review and an update of assumptions that underlie policy and
contract benefit liabilities. The purpose of the
18
<PAGE>
study was to confirm or update the assumptions which were viewed as likely to
affect the ultimate liability for contract benefits. Accordingly, as a result
of the merger, the Company accelerated the performance of its normal reviews of
the assumptions underlying reserves to determine the assumptions that the newly
merged Company will use in the future for pricing, performance management, and
reserving.
The review resulted in an increase in the benefits and reserves for future
benefits for the Company's domestic group long-term disability unpaid claim
liabilities. As a result of the review, the Company increased its policy and
contract benefit liabilities $359.2 million in the third quarter of 1999, which
reduced 1999 results $359.2 million before tax and $233.5 million after tax.
See Note 2 of the "Notes to Consolidated Financial Statements" for further
discussion of these charges and "Liquidity and Capital Resources" for a
discussion of capital and financing needs.
Subsequent to the merger, the Company also completed a review of the
methodology and assumptions used for the capitalization and amortization of the
costs of acquiring new business. The result of the review was immaterial and
was reflected in 1999 operating earnings, which were increased approximately
$8.0 million during 1999 to reflect the application of the revised estimate.
The change in estimate was applied to amounts capitalized in 1999 and will be
applied to future years to reflect the combined entity's practices and pricing
assumptions. There was not a need to adjust amounts capitalized in years prior
to 1999, as those amounts are believed to be recoverable from the related
policies. A key element in the ability to recover amounts capitalized in prior
periods is the persistency of the business. The Company monitors persistency
and reflects adverse changes in persistency in the current year's amortization
of deferred acquisition costs. Actual persistency experienced during the fourth
quarter of 1999 for group disability and group life compared unfavorably to the
persistency expected, resulting in additional amortization of $5.2 million
during 1999. It is expected that persistency in 2000 will continue to be lower
than historical levels for group disability as well as group life, which will
unfavorably impact the level of amortization during 2000.
During 1999, the Company recorded before-tax expenses related to the merger
of approximately $184.7 million ($139.6 million after tax) for severance and
related costs, exit costs for duplicate facilities and asset abandonments, and
investment banking, legal, and accounting fees. The Company also recorded in
1999 a before-tax expense of approximately $125.9 million ($81.8 million after
tax) related to the early retirement offer to the Company's employees. These
expenses are reported in the Corporate segment as other operating expenses and
are further discussed in the section "Corporate Segment Operating Results."
Additionally, in 1999 the Company expensed $24.7 million ($16.1 million after
tax) of incremental costs associated with the merger. These incremental costs
consist primarily of compensation, training, integration, and licensing costs.
Consolidated Operating Results
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1999 % Change 1998 % Change 1997
-------- -------- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Premium Income................... $6,843.2 11.7% $6,129.0 15.8 % $5,293.1
Net Investment Income............ 2,059.7 1.2 2,035.4 1.0 2,015.7
Other Income..................... 339.6 13.2 299.9 (16.0) 357.0
-------- -------- --------
Total Revenue.................... 9,242.5 9.2 8,464.3 10.4 7,665.8
Benefits and Expenses............ 9,495.1 25.0 7,599.1 12.4 6,760.6
-------- -------- --------
Income (Loss) Before Federal
Income Taxes and Net Realized
Investment Gains................ (252.6) N.M. 865.2 (4.4) 905.2
Federal Income Taxes (Credit).... (12.9) N.M. 283.9 (3.8) 295.2
-------- -------- --------
Income (Loss) Before Net Realized
Investment Gains................ (239.7) N.M. 581.3 (4.7) 610.0
Net Realized Investment Gains.... 56.8 57.3 36.1 N.M. 7.6
-------- -------- --------
Net Income (Loss)................ $ (182.9) N.M. $ 617.4 N.M. $ 617.6
======== ======== ========
</TABLE>
- --------
N.M. = not a meaningful percentage
19
<PAGE>
The Company acquired The Paul Revere Corporation (Paul Revere) on March 27,
1997. The financial information contained herein includes the accounts and
operating results of Paul Revere from the date of acquisition.
In addition to the increases in benefit liabilities of $599.9 million and
the merger-related and early retirement offer expenses of $310.6 million
discussed in the previous section, during 1999 the Company recognized $327.8
million of before-tax charges related to its reinsurance operations. These
charges are as follows (in millions):
<TABLE>
<S> <C>
North American Reinsurance Operations:
Loss on Sale of A&H and LTC Reinsurance Management Operations
(includes write-off of $6.0 million of goodwill)................ $ 12.9
Loss on Reinsurance of A&H and LTC Risk Participations........... 12.7
Provision for Losses on Retained Business........................ 42.1
International Reinsurance Operations:
Provision for Losses on Lloyd's of London Syndicate
Participations.................................................. 186.5
Provision for Losses on Reinsurance Pool Participations Other
than Lloyd's.................................................... 21.9
Goodwill Impairment Excluding Amount Recognized on Sale.......... 51.7
------
Total Before-tax Charge........................................ $327.8
======
</TABLE>
See "Other Segment Operating Results" and Note 13 of the "Notes to
Consolidated Financial Statements" for further discussion of the Company's
reinsurance operations.
A portion of the losses recognized in 1999 relating to the Company's
reinsurance operations does not receive a tax benefit, which unfavorably
impacted the effective tax rate. Additionally, a portion of the 1999 expenses
related to the merger was non-deductible for federal income tax purposes,
resulting in a tax rate that was less than the U.S. federal statutory tax rate
of 35 percent.
In 1999, the Company recorded refunds from the Internal Revenue Service
relating to the final settlement of remaining issues for the 1986 through 1992
tax years. The refund of taxes was $30.4 million, and interest on the refunds
was $35.4 million. Overall, including interest and the tax provision thereon,
1999 results increased $36.8 million due to settlements of prior year tax
issues.
20
<PAGE>
In the following discussion of operating results by segment, "revenue"
includes premium income, net investment income, and other income. "Income" or
"loss" excludes net realized investment gains and losses and federal income
taxes.
Employee Benefits Segment Operating Results
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1999 % Change 1998 % Change 1997
-------- -------- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Premium Income
Group Long-term Disability................ $2,034.7 13.0% $1,800.7 17.3% $1,535.4
Group Short-term Disability............... 473.7 28.9 367.4 35.1 271.9
Group Life................................ 1,158.2 17.8 983.5 21.1 812.4
Accidental Death & Dismemberment.......... 190.7 3.6 184.1 8.9 169.0
Group Long-term Care...................... 42.9 49.5 28.7 34.1 21.4
-------- -------- --------
Total Premium Income....................... 3,900.2 15.9 3,364.4 19.7 2,810.1
Net Investment Income...................... 604.9 11.6 541.8 6.8 507.2
Other Income............................... 140.2 17.6 119.2 28.7 92.6
-------- -------- --------
Total Revenue.............................. 4,645.3 15.4 4,025.4 18.1 3,409.9
-------- -------- --------
Benefits and Change in Reserve............. 3,663.9 38.6 2,642.6 21.5 2,174.5
Deferral of Policy Acquisition Costs....... (249.2) 17.2 (212.6) 36.5 (155.8)
Amortization of Deferred Policy Acquisition
Costs..................................... 106.6 29.1 82.6 23.8 66.7
Other Operating Expenses................... 1,104.6 13.1 976.5 14.2 855.0
-------- -------- --------
Total Benefits and Expenses................ 4,625.9 32.6 3,489.1 18.7 2,940.4
-------- -------- --------
Income Before Federal Income Taxes and
Net Realized Investment Gains and Losses.. $ 19.4 N.M. $ 536.3 14.2 $ 469.5
======== ======== ========
</TABLE>
The Employee Benefits segment includes group long-term and short-term
disability insurance, group life insurance, accidental death and dismemberment
coverages, group long-term care, and the results of managed disability.
The increases in premium income result from strong sales trends over the
past several quarters as well as an emphasis on renewal of existing business.
However, the rate of growth for group disability and group life sales decreased
during 1999. Several factors contributed to the decrease in sales, including
rate increases, turnover in the field sales force, and merger-related
activities (training, office relocation, and new processes and systems). The
Company has a number of initiatives underway to help restore sales momentum,
including targeted incentive plans, organizational changes to create a greater
focus on the customer, and enhanced communication with producers. The Company
expects that these actions will favorably impact future sales growth, but
management intends to maintain pricing discipline to balance sales growth and
profitability which will likely lead to lower long-term sales growth than
historically experienced by the Company. Employee Benefits new annualized sales
decreased 2.9 percent to $952.5 million in 1999 from $981.1 million 1998. New
annualized sales were $804.2 million in 1997.
Premium persistency for group long-term and short-term disability in the
fourth quarter of 1999 was lower than historical levels due to several large
case terminations, the aggressive renewal program, and the disruption in the
field sales force. For both products, the terminated block was less profitable
than the total block. It is expected that persistency in 2000 will continue to
be lower than historical levels for group disability as well as group life.
Revenue from the managed disability line of business, which includes GENEX
Services, Inc. and Options and Choices, Inc., totaled $107.8 million in 1999
compared to $96.2 million in 1998 and $72.8 million in 1997. Both of these
companies were acquired during 1997.
21
<PAGE>
Group Disability
Group disability revenue increased to $3,029.0 million in 1999 compared to
$2,632.1 million in 1998. Premium income growth was driven primarily by prior
period sales. As previously discussed, the rate of growth in new sales declined
during 1999. New annualized sales for group long-term disability were $385.2
million in 1999 compared to $441.7 million in 1998. New annualized sales for
group short-term disability were $172.0 million in 1999 as compared to $176.2
million in 1998. A critical part of the Company's strategy for group disability
during 2000 involves executing an aggressive renewal program and managing
persistency, both of which management expects will have a positive impact on
future premium growth and profitability. However, the lower than historical
premium persistency experienced during the fourth quarter of 1999 will have a
negative impact on future premium income. The Company is implementing pricing
changes in the group disability line. Prices will increase or decrease by
market segment, as appropriate, to respond to current claim experience and
various other factors and assumptions.
Net investment income is expected to continue to increase due to the
increase in the level of invested assets allocated to this line of business and
also due to the portfolio restructuring, as discussed in "Investments."
Group disability reported a loss of $225.7 million for 1999, as compared
with $334.4 million of income for 1998. The loss was the result of the $191.7
million second quarter 1999 charge resulting from lowering the discount rate
used to calculate certain of Unum's disability claim reserves to conform with
Provident's process and assumptions and the $359.2 million third quarter 1999
charge resulting from the revision in the underlying assumptions used to
estimate the ultimate cost of unpaid group long-term disability claims, as
discussed in the preceding "Accounting Policy Changes, Financial Statement
Reclassifications, and Merger Expenses." Excluding the effect of these two
charges, this line reported an 83.5 percent benefit ratio for 1999. The benefit
ratio for 1998 was 79.4 percent, excluding the effect of the fourth quarter of
1998 claims disruption charge discussed in the following paragraphs. The
incidence rates for new claims submitted for long-term disability increased
during 1999 over the level experienced in 1998, but new claim incidence rates
in the third and fourth quarters of 1999 improved relative to levels
experienced in the first half of 1999 and the last half of 1998. Small case
business continues to perform well, and large case and mid-size business showed
improvement in 1999. The health services sector continues to experience higher
incidence levels than average, but improved in the last half of 1999. Incidence
levels for the manufacturing sector also improved, declining to the levels
experienced prior to the third quarter of 1998. The incidence rates for new
claims submitted for short-term disability improved during 1999 as compared to
1998. The level of claim incidence for long-term and short-term disability is
being taken into account in the pricing of new business and the renewal of
existing cases.
As explained in more detail below, the actual increase in claims durations
during 1999 was greater than the increase assumed in the fourth quarter of 1998
claims disruption charge, resulting in a negative impact on the 1999 benefit
ratio. Additionally, the 1998 benefit ratio was positively impacted by the
updated factors used in calculating social security offset amounts.
The amortization of deferred policy acquisition costs for 1999 includes $4.2
million of additional amortization due to the higher than expected level of
terminations for long-term and short-term disability experienced during the
fourth quarter of 1999. Also included in 1999 is $3.3 million of amortization
related to the write-off of the unamortized balance of deferred costs related
to certain discontinued products in the foreign operations.
Group disability revenue increased to $2,632.1 million in 1998 compared to
$2,245.1 million in 1997 primarily due to the increase in premium income.
Premium growth during 1998 for group long-term disability was driven by
favorable persistency, prior period sales, and strong new annualized sales,
which were $441.7 million in 1998 compared to $374.7 million in 1997. New
annualized sales for group short-term disability increased 30.4 percent to
$176.2 million in 1998 as compared to $135.1 million in 1997. This growth
reflected management's continuing efforts to cross-sell group short-term
disability products with other employee benefits products, as well as
increasing large case sales.
22
<PAGE>
Group disability reported income of $334.4 million in 1998 as compared with
$326.2 million in 1997. Long-term disability was unfavorably affected by a
higher benefit ratio in 1998, largely the result of increased levels of claims
incidence, an increase in the average size of claims, and a longer duration of
claims as compared with 1997. Positively impacting the benefit ratio in 1998
were updated factors used in calculating social security offset amounts. Short-
term disability also experienced increased claims incidence levels and larger
size cases in 1998 as compared with 1997.
In the fourth quarter of 1998, the Company recorded a $50.3 million charge
for the group long-term disability line of business in the Employee Benefits
segment for the expected increase in claims durations due to management's
expectation that productivity in the claims organization would be impacted as a
result of planning, consolidation, and integration efforts related to the
merger. Management expects the claims integration efforts to have some
benefits, primarily related to claims incurred in future periods, as well as
the potential for improved customer satisfaction and lower ultimate claim costs
as best practices in return-to-work and claims management are implemented. As
benefits related to the integration become known, reserve assumptions will be
revised, if appropriate. Insurance policies that are impacted by the temporary
change in claim resolution rates will not perform as anticipated when priced.
However, since the cause of the additional claim cost is of a temporary nature,
it is not anticipated to have an effect on future policy pricing. The
$50.3 million reserve increase was not considered material from a capital
adequacy position.
During 1999, the claim operations integration activities progressed as
assumed. At December 31, 1998, management assumed the revised group disability
claim resolution rates for the first, second, third, and fourth quarters of
1999 to be 90, 90, 81, and 86 percent of assumptions, respectively, before
adjusting for the impact of the claim operations integration activities. The
actual experience was 89 percent for the first quarter of 1999, 90 percent for
the second quarter, 67 percent for the third quarter, and 81 percent for the
fourth quarter. If the impact of merger-related claim operations integration
activities on claim durations had not been anticipated at December 31, 1998,
the 1999 loss for the group long-term disability line of business would have
been negatively impacted by $50.3 million. However, the shortfall of the actual
1999 experience below that assumed resulted in a negative effect on 1999
results of $18.1 million. As discussed in Note 2 of the "Notes to Consolidated
Financial Statements," claim resolution assumptions underlying existing claim
reserves were revised in the third quarter of 1999, resulting in an increase in
benefit liabilities of $194.8 million. In selecting the revised claim
resolution assumptions, consideration was given to claims operations
integration activities referenced here as well as other factors expected to
impact the future effectiveness of the claims operations. See Notes 2 and 7 of
the "Notes to Consolidated Financial Statements" for further discussion.
As discussed under "Cautionary Statement Regarding Forward-Looking
Statements," certain risks and uncertainties are inherent in the Company's
business. Components of claims experience, including but not limited to,
incidence levels and claims duration, may continue for some period of time at
or above the higher levels experienced in 1999 and 1998. Therefore, management
continues to monitor claims experience in group disability and responds to
changes by periodically adjusting prices, refining underwriting guidelines,
changing product features, and strengthening risk management policies and
procedures. The Company expects to price new business and re-price existing
business, at contract renewal dates, in an attempt to mitigate the effect of
these and other factors, including interest rates, on new claim liabilities.
However, given the competitive market conditions for the Company's disability
products, it is uncertain whether pricing actions can mitigate the entire
effect.
Group Life, Accidental Death and Dismemberment, and Long-term Care
Group life, accidental death and dismemberment, and long-term care reported
income of $239.5 million in 1999 compared to $197.5 million in 1998. The
increase resulted from the growth in premium income, which was driven by strong
prior period sales, and a lower operating expense ratio. The results also
benefited from higher net investment income and a higher volume of business.
There was a slight increase in the benefit ratio, from 72.7 percent in 1998 to
73.3 percent in 1999, primarily due to an increase in the average claim size in
the group life line of business.
23
<PAGE>
New annualized sales increased to $395.3 million in 1999 compared to $363.2
million in 1998. Premium persistency for group life in the latter part of 1999
was lower than historical levels, and it is expected that persistency in 2000
will continue to be lower than historical levels. The amortization of deferred
policy acquisition costs for 1999 includes $1.0 million of additional
amortization due to the higher than expected level of terminations.
Group life, accidental death and dismemberment, and long-term care reported
income of $197.5 million in 1998 compared to $141.4 million in 1997. The
increase in 1998 income resulted from the growth in premium income, which was
driven by strong sales, and a favorable benefit ratio in the group life and
accidental death and dismemberment lines. New annualized sales were $363.2
million in 1998 and $294.4 million in 1997.
Individual Segment Operating Results
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1999 % Change 1998 % Change 1997
-------- -------- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Premium Income
Individual Disability..................... $1,553.5 1.6 % $1,528.7 13.1 % $1,351.8
Individual Life........................... 85.1 (0.5) 85.5 3.3 82.8
Individual Long-term Care................. 92.0 50.3 61.2 33.9 45.7
-------- -------- --------
Total Premium Income....................... 1,730.6 3.3 1,675.4 13.2 1,480.3
Net Investment Income...................... 873.1 5.5 827.8 19.5 692.7
Other Income............................... 68.2 1.2 67.4 (15.3) 79.6
-------- -------- --------
Total Revenue.............................. 2,671.9 3.9 2,570.6 14.1 2,252.6
-------- -------- --------
Benefits and Change in Reserve............. 1,719.9 2.2 1,682.1 17.9 1,426.7
Deferral of Policy Acquisition Costs....... (209.1) 14.3 (182.9) 28.8 (142.0)
Amortization of Deferred Policy Acquisition
Costs..................................... 89.5 20.0 74.6 8.4 68.8
Other Operating Expenses................... 781.7 1.0 774.2 17.5 659.0
-------- -------- --------
Total Benefits and Expenses................ 2,382.0 1.4 2,348.0 16.7 2,012.5
-------- -------- --------
Income Before Federal Income Taxes and
Net Realized Investment Gains and Losses.. $ 289.9 30.2 $ 222.6 (7.3) $ 240.1
======== ======== ========
</TABLE>
The Individual segment includes results from the individual disability,
individual life, and individual long-term care lines of business.
Individual Disability
New annualized sales in the individual disability income line of business
were $124.1 million in 1999 and $136.6 million in 1998. As discussed in the
"Employee Benefits Segment Operating Results," several factors contributed to
the decrease in sales, including rate increases, turnover in the sales force,
and merger-related activities. However, the persistency of existing individual
disability income business continued to be favorable during 1999. Management
expects that premium income in the individual disability income line will grow
on a year-over-year basis as the product transition produces increasing levels
of new sales of individual disability products and as a result of the sales
initiatives discussed under "Employee Benefits Segment Operating Results."
Income in the individual disability income line of business increased to
$256.7 million in 1999 from $190.0 million in 1998. As discussed in the
preceding "Accounting Policy Changes, Financial Statement Reclassifications,
and Merger Expenses," in the second quarter of 1999 the Company lowered the
discount rate used to calculate certain of Unum's disability claim reserves to
conform with Provident's process and assumptions, which decreased individual
disability income by $38.9 million in 1999.
24
<PAGE>
This line reported an increase in the benefit ratio in 1999 compared to
1998. The 1999 claim resolution rate compares unfavorably with 1998, but has
shown improvement throughout 1999. New claims for 1999 were fairly level with
1998. This line benefited from higher net investment income and a favorable
operating expense ratio for 1999 as compared to 1998.
Revenue for individual disability was $2,299.8 million in 1998 and $2,018.8
million in 1997. The growth in revenue in 1998 was driven primarily by the
growth in premium income as well as net investment income. New annualized sales
in the individual disability line of business were up 8.6 percent in 1998,
rising to $136.6 million from $125.8 million in 1997.
Income in the individual disability line of business decreased to $190.0
million in 1998 from $207.5 million in 1997. As noted in the "Employee Benefits
Segment Operating Results," claim resolution rates were revised downward in the
fourth quarter of 1998 for claim operations integration activities related to
the merger. The Company recorded a $100.3 million charge in the fourth quarter
of 1998 in the Individual segment related to the revised claim resolution rates
for individual disability. At December 31, 1998, management assumed the revised
individual disability claim resolution rates for the first, second, third, and
fourth quarters of 1999 to be 90, 90, 85, and 90 percent of assumptions, before
adjusting for the impact of the claim operations integration activities. The
actual experience for the Company was 89 percent in the first quarter, 90
percent in the second quarter, 93 percent in the third quarter, and 95 percent
in the fourth quarter of 1999. If the impact of merger-related claim operations
integration activities on claim durations had not been anticipated at
December 31, 1998, income for the individual disability line of business would
have been negatively impacted by $100.3 million in 1999. In addition, the
excess of the actual 1999 experience over that assumed resulted in a positive
effect on income of $25.6 million. The $100.3 million reserve increase in the
Individual segment was not considered material from a capital adequacy
position. See Note 7 of the "Notes to Consolidated Financial Statements" for
further discussion.
Individual Life and Long-term Care
The individual long-term care line of business reported increased premium
income for both 1999 and 1998 as compared to the previous year, primarily due
to new sales growth. New annualized sales were $40.0 million for 1999, an
increase of 70.2 percent over the $23.5 million reported in 1998. New
annualized sales were $14.8 million in 1997. The Company expects the strong
sales momentum in individual long-term care to continue.
Income in the individual life and long-term care lines of business increased
slightly to $33.2 million in 1999 from $32.6 million in 1998. The benefit ratio
and operating expense ratio for individual life improved in 1999 as compared to
1998. The 1999 operating expense ratio for long-term care also compares
favorably with 1998. Income in the individual life and long-term care lines of
business was $32.6 million in 1997. The increase in premium income for 1998 was
offset by a less favorable benefit ratio.
25
<PAGE>
Voluntary Benefits Segment Operating Results
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1999 % Change 1998 % Change 1997
------- -------- ------- -------- -------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Premium Income.................... $ 691.6 3.7 % $ 666.7 6.4 % $ 626.6
Net Investment Income............. 106.6 12.4 94.8 12.2 84.5
Other Income...................... 6.3 (29.2) 8.9 (5.3) 9.4
------- ------- -------
Total Revenue..................... 804.5 4.4 770.4 6.9 720.5
------- ------- -------
Benefits and Change in Reserve.... 392.7 6.3 369.4 4.3 354.2
Deferral of Policy Acquisition
Costs............................ (147.8) 1.4 (145.7) 14.5 (127.2)
Amortization of Deferred Policy
Acquisition Costs................ 113.0 13.7 99.4 13.2 87.8
Other Operating Expenses.......... 309.6 (2.1) 316.2 7.0 295.6
------- ------- -------
Total Benefits and Expenses....... 667.5 4.4 639.3 4.7 610.4
------- ------- -------
Income Before Federal Income Taxes
and Net Realized Investment Gains
and Losses....................... $ 137.0 4.5 $ 131.1 19.1 $ 110.1
======= ======= =======
</TABLE>
The Voluntary Benefits segment includes the results of products sold to
employees through payroll deduction at the work site. These products include
life insurance and health products, primarily disability, accident and
sickness, and cancer.
Revenue in the Voluntary Benefits segment increased to $804.5 million in
1999 from $770.4 million 1998. Sales growth and favorable persistency were the
primary factors contributing to the increase in premium income. New annualized
sales in this segment were $245.3 million in 1999, $233.8 million in 1998, and
$253.5 million in 1997. Management continues its efforts to increase sales
through the realignment of the sales organization and the enhancement of
collaborative sales. However, these sales are not necessarily indicative of the
levels that may be attained in the future.
Income in the Voluntary Benefits segment in 1999 was $137.0 million versus
$131.1 million in 1998. The increase in income for 1999 was primarily due to
the increase in premium income in all of the product lines and an increase in
investment income, partially offset by a slightly higher benefit ratio in the
life and the accident, sickness, and disability product lines.
Income for this segment increased for 1998 as compared with 1997, primarily
due to additional investment income and a reduced benefit ratio in the
accident, sickness, and disability product line, partially offset by an
increase in interest credited and a higher benefit ratio in the cancer product
line. The increase in investment income and interest credited is largely due to
the assumption of work site marketed universal life insurance under reinsurance
agreements entered into during 1998 and 1997. During 1998, management continued
to implement organizational changes to focus on specific distribution channels
to market Voluntary Benefits products.
Other Segment Operating Results
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1999 % Change 1998 % Change 1997
-------- -------- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
Premium Income............................... $ 520.8 23.3 % $ 422.5 12.3 % $ 376.1
Net Investment Income........................ 447.5 (17.1) 540.0 (23.3) 704.0
Other Income................................. 84.8 (18.2) 103.7 (40.1) 173.1
-------- -------- --------
Total Revenue................................ 1,053.1 (1.2) 1,066.2 (14.9) 1,253.2
Benefits and Expenses........................ 1,267.4 31.3 965.5 (11.9) 1,096.0
-------- -------- --------
Income (Loss) Before Federal Income Taxes and
Net Realized Investment Gains and Losses.... $ (214.3) N.M. $ 100.7 (35.9) $ 157.2
======== ======== ========
</TABLE>
26
<PAGE>
The Other operating segment includes results from reinsurance pools and
management and other products no longer actively marketed, including corporate-
owned life insurance, group pension products, and individual annuities. It is
expected that revenue and income in this segment will decline over time as
these business lines wind down. Management expects to reinvest the capital
supporting these lines of business in the future growth of the Employee
Benefits, Individual, and Voluntary Benefits segments. The closed blocks of
business have been segregated for reporting and monitoring purposes. During
1999, the Company recognized a charge of $270.1 million in the Other segment
related to its decision to exit the reinsurance operations.
Reinsurance Pools and Management
Premium income increased to $423.9 million in 1999 compared to $311.8
million in 1998 due primarily to increased participation in the Lloyd's of
London syndicates. The reinsurance pools and management reported a loss of
$279.7 million in 1999 compared to income of $10.0 million in 1998. Income in
the reinsurance pools and management line decreased $270.1 million in 1999 due
to the charges discussed below.
During the first quarter of 1999, the Company began a comprehensive
strategic review of its reinsurance operations to determine the appropriateness
of their fit within the context of the merged entity. These operations include
the reinsurance management operations of Duncanson & Holt, Inc. (D&H) and the
risk assumption, which includes reinsurance pool participation; direct
reinsurance which includes accident and health (A&H), long-term care (LTC), and
long-term disability coverages; and Lloyd's of London (Lloyd's) syndicate
participations. In April 1999, the strategic review was completed, and the
Company concluded that these operations were not solidly aligned with the
Company's strength in the disability insurance market. The Company decided to
exit these operations through a combination of a sale, reinsurance, and/or
placing certain components in run-off and recorded a first quarter charge of
$74.1 million in the Other segment. During the first and second quarters of
1999, the Company recorded $27.0 million and $2.0 million, respectively, in the
Corporate segment related to the write-off of goodwill.
During the third quarter of 1999, the Company continued its efforts to sell
its reinsurance management operations. No potential buyers expressed interest
in acquiring the entire domestic and international reinsurance management
operations. However, in October 1999, the Company entered into an agreement to
sell the reinsurance management operations of its A&H and LTC reinsurance
facilities and to reinsure the Company's risk participation in these
facilities.
Because of the limited interest expressed by potential buyers in the
reinsurance management operations, the Company reevaluated its strategy to exit
the reinsurance operations. The Company decided to continue to operate its
North America long-term disability reinsurance operation and to refocus it with
the objective of improving profitability. With respect to Lloyd's, the Company
decided to implement a strategy which limits participation in year 2000
underwriting risks, ceases participation in Lloyd's underwriting risks after
year 2000, and manages the run-off of its risk participation in open years of
account of Lloyd's reinsurance syndicates. The Company also decided to
discontinue its accident reinsurance business in London beginning in year 2000.
During the third quarter of 1999, the Company recognized a charge of $193.3
million in the Other segment and $28.7 million in the Corporate segment related
to the write-off of goodwill. An additional loss of $2.7 million was realized
in the fourth quarter of 1999 upon completion of the transaction to reinsure
the A&H and LTC risk participations. See Note 13 of the "Notes to Consolidated
Financial Statements" for further discussion of the 1999 charges related to the
reinsurance businesses.
As discussed in the preceding "Accounting Policy Changes, Financial
Statement Reclassifications, and Merger Expenses," the Company lowered the
discount rate used to calculate certain of Unum's disability claim reserves to
conform with Provident's process and assumptions, which decreased group long-
term disability reinsurance income by $10.1 million in 1999.
In the fourth quarter of 1998, the Company recorded a $2.4 million charge
related to the revised claim resolution rates for group long-term disability
reinsurance. If the impact of merger-related claim operations
27
<PAGE>
integration activities on claim duration had not been anticipated at December
31, 1998, 1999 income for the reinsurance pools and management line of business
would have been negatively impacted by $2.4 million. See Note 7 of the "Notes
to Consolidated Financial Statements" for further discussion.
During the fourth quarter of 1997, certain reinsurance pools managed by the
Company's reinsurance management operations received new claim information from
ceding insurance enterprises about certain older pool years and completed an
analysis of recent claims experience deterioration. As a result of these
factors, certain pools strengthened claim reserves. The impact to the Company
from these pool claim reserve increases was an $11.7 million reduction in other
income and a $6.7 million increase in benefits to policyholders, reducing 1997
before-tax income by $18.4 million. The $11.7 million reduction in other income
reflected lower profit commission levels in certain older pool years after the
pool claim reserve strengthening. The $6.7 million increase in benefits to
policyholders represented the amount of additional claim reserves the Company
recognized as a result of its participation in the pools that strengthened
claim reserves.
Corporate-Owned Life
Income from this line of business was $29.8 million in 1999, $27.9 million
in 1998, and $19.4 million in 1997. The 1999 results reflect slightly higher
premium income and wider spreads between interest earned and credited rates.
The increase in 1998 was due to wider spreads between interest earned and
credited rates and a decrease in commissions and operating expenses.
Group Pension
Income in the group pension line of business was $26.6 million in 1999,
$23.2 million in 1998, and $111.6 million in 1997. In the fourth quarter of
1996, the Company closed the sale of certain of Unum's group tax-sheltered
annuity businesses to affiliates of Lincoln National Corporation. The sale
resulted in a deferred before-tax gain of which $72.6 million was recognized in
income during 1997. Also contributing to the decrease in 1998 income was an
$8.0 million reserve strengthening for group single premium annuities and a
$1.9 million charge for guaranty fund assessments. The run-off of the group
pension line results in a decline in assets under management and, in turn, a
continued decline in the net investment income produced by the assets.
Individual Annuities
In 1998, the Company closed the sale of Provident's in-force individual and
tax-sheltered annuity business to affiliates of American General Corporation
(American General). The sale was effected by reinsurance in the form of 100
percent coinsurance agreements. The in-force business sold consisted primarily
of individual fixed annuities and tax-sheltered annuities. In addition,
American General acquired a number of miscellaneous group pension lines of
business sold in the 1970s and 1980s which were no longer actively marketed.
The sale did not include Provident's block of guaranteed investment contracts
or group single premium annuities, which will continue in a run-off mode. In
consideration for the transfer of the approximately $2.4 billion of statutory
reserves, American General paid the Company a ceding commission of
approximately $58.0 million. The before-tax gain included in other income for
1998 was $12.2 million.
Other
Effective January 1, 1998, the Company entered into an agreement with
Connecticut General Life Insurance Company (Connecticut General) for
Connecticut General to reinsure, on a 100 percent coinsurance basis, its in-
force medical stop-loss insurance coverages sold to clients of CIGNA Healthcare
and its affiliates (CIGNA). This reinsured block constitutes substantially all
of the Company's medical stop-loss insurance business. The small portion
remaining consists of medical stop-loss coverages sold to clients other than
those of CIGNA. The medical stop-loss business produced revenue of $14.1
million in 1998.
In 1997, the Company transferred its dental business to another insurer. The
dental block produced $39.2 million in premium income in 1997.
28
<PAGE>
Corporate Segment Operating Results
The Corporate segment includes investment income on corporate assets not
specifically allocated to a line of business, corporate interest expense,
amortization of goodwill, and certain corporate expenses not allocated to a
line of business.
Revenue in the Corporate segment was $67.7 million in 1999, $31.7 million in
1998, and $29.6 million in 1997. As previously discussed under "Consolidated
Operating Results," during 1999 the Company recorded refunds from the Internal
Revenue Service relating to the final settlement of remaining issues for the
1986 through 1992 tax years. The interest on the refunds was $35.4 million and
is included in 1999 revenue.
The Corporate segment reported losses of $484.6 million in 1999, $125.5
million in 1998, and $71.7 million in 1997. Interest and debt expense was
$137.8 million in 1999, $112.0 million in 1998, and $82.3 million in 1997. The
amortization of goodwill was $82.6 million in 1999, $28.0 million in 1998, and
$18.2 million in 1997. The Company recorded write-downs of goodwill of $57.7
million during 1999 related to its reinsurance operations. See previous
discussions under "Consolidated Operating Results" and "Other Segment Operating
Results" and Note 13 of the "Notes to Consolidated Financial Statements."
As discussed in "Accounting Policy Changes, Financial Statement
Reclassifications, and Merger Expenses," during 1999 the Company recognized
$310.6 million of before-tax expenses related to the merger and the early
retirement offer to employees. These expenses are as follows (in millions):
<TABLE>
<S> <C>
Employee related expense......................................... $ 77.7
Exit activities related to duplicate facilities/asset
abandonments.................................................... 67.4
Investment banking, legal, and accounting fees................... 39.6
------
Subtotal......................................................... 184.7
Expense related to the early retirement offer to employees....... 125.9
------
Subtotal......................................................... 310.6
Income tax benefit............................................... 89.2
------
Total............................................................ $221.4
======
</TABLE>
Employee related expense consists of employee severance costs, change in
control costs, restricted stock costs which fully vested upon stockholder
adoption of the merger agreement or upon completion of the merger, and
outplacement costs to assist employees who are involuntarily terminated.
Severance benefits and change in control costs are $60.2 million, and costs
associated with the vesting of restricted stock are $17.5 million. The Company
estimates that in total approximately 1,615 positions will be eliminated over a
twelve month period beginning June 30, 1999, 215 positions higher than the
original estimate of 1,400. Approximately 1,000 of these positions will be
eliminated through the early retirement offer. As of December 31, 1999,
approximately 800 and 580 positions had been eliminated as a result of the
early retirement offer and involuntary terminations, respectively, and $26.5
million of the estimated $60.2 million had been paid for severance benefits and
change in control costs.
Exit activities related to duplicate facilities/asset abandonments consist
of closing of duplicate offices and write-off of redundant computer hardware
and software. The Company currently expects to close approximately 90 duplicate
field offices over a period of one year after June 30, 1999. The cost
associated with these office closures is approximately $25.6 million, which
represents the cost of future minimum lease payments less any estimated amounts
recovered under subleases. As of December 31, 1999, $3.7 million of this
estimated liability had been paid. Also, certain physical assets, primarily
computer equipment, redundant systems, and systems incapable of supporting the
combined entity, have been abandoned as a result of the merger. This
abandonment resulted in a write-down of the assets' book values by
approximately $41.8 million during 1999.
29
<PAGE>
Approximately $27.7 million of assets were abandoned and removed from service
on the date the merger was consummated. Of the remaining $14.1 million of
identified abandonments, $13.2 million were abandoned and removed from service
during the last half of 1999.
Of the $39.6 million of investment banking, legal, and accounting fees,
$39.1 million was paid in 1999.
These expenses are $77.6 million higher on a before-tax basis than the
estimated expenses disclosed in the Joint Proxy Statement/Prospectus of Unum
and Provident dated June 2, 1999. This increase results from approximately 350
more employees than estimated accepting the early retirement offer,
approximately 215 additional positions which will be eliminated during the
twelve month post-merger period, additional change in control costs of $27.4
million, and the identification of additional software redundancies.
In addition to the expenses described above, in 1999, the Company expensed
$24.7 million of other incremental costs associated with the merger, $21.8
million of which are included in the Corporate segment. These expenses consist
primarily of compensation, training, integration, and licensing costs.
The financial statements do not reflect any benefit expected from revenue
enhancements or derived from potential cost savings related to the merger.
Although management anticipates revenue enhancements and costs savings will
result from the merger, there can be no assurance that these items will be
achieved. Economies of scale, the elimination of duplicative expenditures, and
the consistent use of the best practices of Provident and Unum are expected to
enable the Company to achieve annual cost savings of approximately $130
million in 2000. During 1999, the Company realized approximately $55 million
of cost savings.
Investments
Investment activities are an integral part of the Company's business, and
profitability is significantly affected by investment results. Invested assets
are segmented into portfolios, which support the various product lines.
Generally, the investment strategy for the portfolios is to match the
effective asset durations with related expected liability durations and to
maximize investment returns, subject to constraints of quality, liquidity,
diversification, and regulatory considerations. See Note 4 of the "Notes to
Consolidated Financial Statements" for further discussion of the Company's
investments.
During 1999, the Company actively pursued its strategy of extending the
duration of its investments and shifting the mix of assets for approximately
$2.1 billion of its investments. This program was approximately 81 percent
complete as of December 31, 1999, with total completion expected in the first
half of 2000. Management believes this strategy will reduce its vulnerability
to interest rate risk in the future and anticipates that, as a result,
investment income may increase on an annualized basis approximately $40
million.
The following table provides the distribution of invested assets for the
years indicated.
<TABLE>
<CAPTION>
December 31
------------
1999 1998
----- -----
<S> <C> <C>
Investment-Grade Fixed Maturity Securities.................. 76.1% 79.5%
Below-Investment-Grade Fixed Maturity Securities............ 8.1 5.3
Equity Securities........................................... 0.2 0.1
Mortgage Loans.............................................. 4.8 4.9
Real Estate................................................. 0.8 1.1
Policy Loans................................................ 8.7 8.2
Other Invested Assets....................................... 1.3 0.9
----- -----
Total..................................................... 100.0% 100.0%
===== =====
</TABLE>
30
<PAGE>
Fixed Maturity Securities
The Company's investment in mortgage-backed securities was approximately
$3.1 billion and $2.1 billion on an amortized cost basis at December 31, 1999
and 1998, respectively. At December 31, 1999, the mortgage-backed securities
had an average life of 11.1 years and effective duration of 10.1 years. The
mortgage-backed securities are valued on a monthly basis using valuations
supplied by the brokerage firms that are dealers in these securities. The
primary risk involved in investing in mortgage-backed securities is the
uncertainty of the timing of cash flows from the underlying loans due to
prepayment of principal. The Company uses models which incorporate economic
variables and possible future interest rate scenarios to predict future
prepayment rates. The Company has not invested in mortgage-backed derivatives,
such as interest-only, principal-only or residuals, where market values can be
highly volatile relative to changes in interest rates.
Below-investment-grade bonds are inherently more risky than investment-grade
bonds since the risk of default by the issuer, by definition and as exhibited
by bond rating, is higher. Also, the secondary market for certain below-
investment-grade issues can be highly illiquid. Management does not anticipate
any liquidity problem caused by the investments in below-investment-grade
securities, nor does it expect these investments to adversely affect its
ability to hold its other investments to maturity.
The Company's exposure to below-investment-grade fixed maturity securities
at December 31, 1999, was $2,147.4 million, representing 8.1 percent of
invested assets, below the Company's internal limit of 10.0 percent of invested
assets for this type of investment. The Company's exposure to below-investment-
grade fixed maturities totaled $1,452.6 million at December 31, 1998,
representing 5.3 percent of invested assets.
Mortgage Loans and Real Estate
The Company's mortgage loan portfolio was $1,278.1 million and $1,321.2
million at December 31, 1999, and 1998, respectively. The Company uses a
comprehensive rating system to evaluate the investment and credit risk of each
mortgage loan and to identify specific properties for inspection and
reevaluation. The Company establishes allowances for probable mortgage loan
losses based on a review of individual loans and the overall loan portfolio,
considering the value of the underlying collateral.
The mortgage loan portfolio is well diversified geographically and among
property types. The incidence of new problem mortgage loans and foreclosure
activity remained low in 1999 and 1998, reflecting improvements in overall
economic activity and improving real estate markets in the geographic areas
where the Company has mortgage loans. Management expects the level of
delinquencies and problem loans to remain low in the future.
At December 31, 1999 and 1998, impaired loans totaled $18.1 million and
$20.7 million, respectively. Included in the impaired loans at December 31,
1999 were $6.6 million of loans which had a related, specific allowance for
probable losses of $2.4 million and $11.5 million of loans which had no
related, specific allowance for probable losses. Impaired mortgage loans are
not expected to have a material impact on the Company's liquidity, financial
position, or results of operations.
Restructured mortgage loans totaled $8.7 million at December 31, 1999,
compared to $14.5 million at December 31, 1998, and represent loans that have
been refinanced with terms more favorable to the borrower. Interest lost on
restructured loans was immaterial for the years ended December 31, 1999, 1998,
and 1997.
Real estate was $211.2 million and $309.8 million at December 31, 1999 and
1998, respectively. Investment real estate is carried at cost less accumulated
depreciation. Real estate acquired through foreclosure is valued at fair value
at the date of foreclosure and may be classified as investment real estate if
it meets the Company's investment criteria. If investment real estate is
determined to be permanently impaired, the carrying amount of the asset is
reduced to fair value. Occasionally, investment real estate is reclassified to
real estate held for sale when it no longer meets the Company's investment
criteria. Real estate held for sale, which is valued net of a valuation
allowance that reduces the carrying value to the lower of cost or fair value
less estimated cost to sell, amounted to $79.4 million and $15.6 million at
December 31, 1999 and 1998, respectively.
31
<PAGE>
Allowances for probable losses on mortgage loans and real estate held for
sale are established based on a review of specific assets as well as on an
overall portfolio basis, considering the value of the underlying assets and
collateral. If a decline in value is considered to be other than temporary or
if the asset is deemed permanently impaired, the investment is reduced to
estimated net realizable value, and the reduction is recorded as a realized
investment loss. The allowance for probable losses on mortgage loans and real
estate was $32.9 million and $37.8 million, respectively, at December 31, 1999.
Management monitors the risk associated with the invested asset portfolio and
regularly reviews and adjusts the allowance for probable losses.
Other
The Company's exposure to non-current investments totaled $20.6 million at
December 31, 1999, or 0.1 percent of invested assets. These non-current
investments are foreclosed real estate held for sale and fixed income
securities and mortgage loans that became more than thirty days past due in
principal and interest payments.
The Company utilizes interest rate futures contracts, forward interest rate
swaps, interest rate forward contracts, and options on forward interest rate
swaps, forward treasuries, or specific fixed income securities to manage
duration and increase yield on cash flows expected from current holdings. All
transactions are hedging in nature and not speculative. Almost all transactions
are associated with the individual and group disability product portfolios. All
other product portfolios are periodically reviewed to determine if hedging
strategies would be appropriate for risk management purposes. See Note 5 of the
"Notes to Consolidated Financial Statements" for further discussion of the
Company's derivative financial instruments.
Liquidity and Capital Resources
The Company's liquidity requirements are met primarily by cash flows
provided from operations, principally in its insurance subsidiaries. Premium
and investment income, as well as maturities and sales of invested assets,
provide the primary sources of cash. Cash is applied to the payment of policy
benefits, costs of acquiring new business (principally commissions) and
operating expenses as well as purchases of new investments. The Company has
established an investment strategy that management believes will provide for
adequate cash flows from operations. Cash flows from operations were $1,566.7
million for the year ended December 31, 1999, as compared to $1,719.3 million
and $1,332.9 million for the comparable periods of 1998 and 1997, respectively.
The Company believes the cash flows from its operations will be sufficient
to meet its operating and financial cash flow requirements, excluding the
strain placed on capital as a result of the charges recorded in connection with
the merger. As a result of the effect on capital during 1999 of the merger
related charges, the Company raised approximately $500 million through the debt
markets during the fourth quarter of 1999 by securing $200 million of one-year
bank debt and by issuing commercial paper. The Company is exploring alternative
financing sources to further increase its financial flexibility. The Company
intends to file a shelf registration during the first half of 2000 in order to
provide funding flexibility through the issuance of debt and equity securities.
Any funding will be used to refinance short-term debt on a long-term basis and
to fund internal expansion, acquisitions, investment opportunities, and the
retirement of the Company's debt and equity. For all of 1999, the Company
raised approximately $700 million of capital in the debt markets.
The Company is dependent upon payments from its subsidiaries to pay
dividends to its stockholders and to pay its expenses. These payments by the
Company's insurance and non-insurance subsidiaries may take the form of
interest payments on amounts loaned to such subsidiaries by the Company,
operating and investment management fees, and/or dividends. At December 31,
1999, the Company had outstanding from its insurance subsidiaries a $150.0
million surplus debenture due in 2006 with a weighted average interest rate
during 1999 of 8.10 percent and a $100.0 million surplus debenture due in 2027
with a weighted average interest rate during 1999 of 8.25 percent. Semi-annual
interest payments are conditional upon the approval by the insurance department
of the state of domicile.
32
<PAGE>
Restrictions under applicable insurance laws limit the amount of dividends
that can be paid to the Company from its insurance subsidiaries without prior
approval by regulatory authorities. For life insurance subsidiaries domiciled
or commercially domiciled in the United States, generally prior approval is
necessary for any amount that exceeds the greater of: (i) ten percent of an
insurer's statutory surplus with respect to policyholders as of the preceding
year end; or (ii) the statutory net gain from operations, excluding realized
investment gains and losses, of the preceding year.
The payment of dividends to the Company from its insurance subsidiaries is
further limited to the amount of statutory unassigned surplus. The Company also
has the ability to draw a dividend from its United Kingdom-based affiliate,
Unum Limited. Such dividends are limited in amount, based on insurance company
law in the United Kingdom, which requires a minimum solvency margin. Based on
these restrictions under current law:
. in 1999, $303.3 million was available for the payment of dividends to
the Company from its domestic insurance subsidiaries, and approximately
$20.0 million was available for the payment of dividends from Unum
Limited, and
. in 2000, $267.6 million will be available for the payment of dividends
to the Company from its domestic insurance subsidiaries, and
approximately $24.9 million will be available for the payment of
dividends from Unum Limited.
The ability of the Company to continue to receive dividends from its
insurance subsidiaries without regulatory approval will be dependent upon the
level of earnings of its insurance subsidiaries as calculated under law. In
addition to regulatory restrictions, the amount of dividends that will be paid
by insurance subsidiaries will depend on additional factors, such as risk-based
capital ratios, funding growth objectives at an affiliate level, and
maintaining appropriate capital adequacy ratios to support the ratings desired
by the Company. Regulatory restrictions do not limit the amount of dividends
available for distribution to the Company from its non-insurance subsidiaries.
In March 1997, the Company consummated the acquisition of Paul Revere, which
was financed through common equity issuance to Zurich Insurance Company, a
Swiss insurer, and its affiliates, common equity issuance and cash to Paul
Revere stockholders, debt, and internally generated funds. The debt financing
was provided through an $800.0 million revolving bank credit facility with
various domestic and international banks. The revolving bank credit facility
was established in 1996 to provide partial financing for the purchase of Paul
Revere and GENEX Services, Inc., to refinance the existing bank term notes of
$200.0 million, and for general corporate uses. At December 31, 1997,
outstanding borrowings under the revolving bank credit facility were $725.0
million. The revolving bank credit facility was repaid on February 24, 1998.
The Company also redeemed its outstanding 8.10% cumulative preferred stock,
which had an aggregate value of $156.2 million, on February 24, 1998. The debt
repayment and preferred stock redemption were funded through short-term
borrowing.
On March 16, 1998, the Company completed a public offering of $200.0 million
of 7.25% senior notes due March 15, 2028. On March 16, 1998, Provident
Financing Trust I, a wholly-owned subsidiary trust of the Company, issued
$300.0 million of 7.405% capital securities in a public offering. These capital
securities, which mature on March 15, 2038, are fully and unconditionally
guaranteed by the Company, have a liquidation value of $1,000 per capital
security, and have a mandatory redemption feature under certain circumstances.
The Company issued $300.0 million of 7.405% junior subordinated deferrable
interest debentures, which mature on March 15, 2038, to the subsidiary trust in
connection with the capital securities offering. The sole assets of the
subsidiary trust are the junior subordinated debt securities.
In July 1998, the Company completed a public offering of $200.0 million of
6.375% senior notes due July 15, 2005, and $200.0 million of 7.0% senior notes
due July 15, 2018.
The proceeds from these offerings funded the repayment of the short-term
borrowing used for the February 1998 debt repayment and preferred stock
redemption.
33
<PAGE>
Cash flow requirements are also supported by a $500.0 million revolving
credit facility which expires October 31, 2000 and a $500.0 million revolving
credit facility which expires October 1, 2001. The Company's commercial paper
program, which was increased to $1.0 billion during 1999, is supported by the
revolving credit facilities and is available for general liquidity needs,
capital expansion, and acquisitions. The revolving credit facilities contain
certain covenants that, among other provisions, require maintenance of certain
levels of stockholders' equity and limits on debt levels.
In April 1998, the Company entered into a $150.0 million five-year revolving
credit facility and a $150.0 million 364-day revolving credit facility with
various domestic and international banks. The purpose of these two facilities
was for general corporate uses. These two facilities terminated in June 1999
with the close of the merger.
On December 15, 1998, the Company issued $250.0 million of senior notes,
which mature in 2028, under an omnibus shelf registration with the Securities
and Exchange Commission, which became effective August 2, 1996. The Company
used the proceeds to repay short-term debt and for general corporate purposes.
The shelf registration relates to $500.0 million of securities (including debt
securities, preferred stock, common stock, and other securities). On August 15,
1996, the Company established a $250.0 million medium-term note program under
the shelf registration.
In 1997, the Company borrowed $168.3 million through a private placement.
Under the terms of the agreement, the investor exercised the right to redeem
the private placement at par value during the second quarter of 1999. The
Company refinanced this debt by issuing $200.0 million of variable rate medium-
term notes in June 1999, due in June 2000. The notes had an interest rate of
6.12 percent at December 31, 1999.
At December 31, 1999, the Company had short-term and long-term debt totaling
$1,075.0 million and $1,166.5 million, respectively. At December 31, 1999,
approximately $396.0 million was available for additional financing under the
existing revolving credit facilities. Contingent upon market conditions and
corporate needs, management may refinance short-term notes payable for longer-
term securities.
In the fourth quarter of 1998, the Company rescinded its stock repurchase
program as a result of the pending merger. During 1998 and 1997, the Company
acquired approximately 1.4 million and 7.1 million shares, respectively, of its
common stock in the open market at an aggregate cost of $72.7 million and
$286.7 million, respectively.
Ratings
Standard & Poor's Corporation (S&P), Moody's Investors Service (Moody's),
Duff & Phelps Credit Rating Company (Duff & Phelps), and A.M. Best Company (AM
Best) are among the third parties that provide the Company assessments of its
overall financial position. Ratings from these agencies for financial strength
are available for the individual U.S. domiciled insurance company subsidiaries.
Financial strength ratings are based primarily on U.S. statutory financial
information for the individual U.S. domiciled insurance companies. Debt ratings
for the Company are based primarily on consolidated financial information
prepared using generally accepted accounting principles. Both financial
strength ratings and debt ratings incorporate qualitative analyses by rating
agencies on an ongoing basis.
The rating agencies reviewed and, in some instances, revised their ratings
to reflect the completion of the merger. During the fourth quarter of 1999,
Moody's placed the ratings on review for possible downgrade and subsequently
lowered the ratings by one notch, S&P placed its ratings on CreditWatch with
negative
34
<PAGE>
implications, and AM Best placed a negative rating outlook on its current
ratings. Duff & Phelps removed all ratings of the Company from its previous
Rating Watch-Up status and reaffirmed the ratings at their current levels.
On February 1, 2000, S&P removed the CreditWatch, reaffirmed the financial
strength ratings, and lowered the debt ratings by one notch. Should additional
downgrades occur, the Company does not expect that sales will be materially
impacted. The table below reflects the most recent debt ratings for the Company
and the financial strength ratings for the U.S. domiciled insurance company
subsidiaries.
<TABLE>
<CAPTION>
S&P Moody's Duff & Phelps AM Best
--- ------- ------------- -------
- -----------------------------------------------------------------------------------------------
UnumProvident Corporation
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Debt A- (Strong) A3 (Upper A- Not Rated
Medium Grade) (Investment Grade)
- -----------------------------------------------------------------------------------------------
Junior Subordinated Debt BBB (Good) Baa1 BBB+ Not Rated
(Medium Grade) (Investment Grade)
- -----------------------------------------------------------------------------------------------
Commercial Paper A-2 (Good) Prime-2 Not Rated Not Rated
(Strong Ability)
- -----------------------------------------------------------------------------------------------
<CAPTION>
U.S. Insurance Subsidiaries
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provident Life & Accident AA- A1 (Good AA-(Secure/ A+
(Very Strong) Financial Security) Investment Grade) (Superior)
- -----------------------------------------------------------------------------------------------
Provident Life & Casualty Not Rated Not Rated Not Rated A+
(Superior)
- -----------------------------------------------------------------------------------------------
Provident National Assurance Not Rated A1 (Good AA-(Secure/ A+
Financial Security) Investment Grade) (Superior)
- -----------------------------------------------------------------------------------------------
Unum Life of America AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
- -----------------------------------------------------------------------------------------------
First Unum Life AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
- -----------------------------------------------------------------------------------------------
Colonial Life & Accident AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
- -----------------------------------------------------------------------------------------------
Paul Revere Life AA- A1 (Good AA-(Secure/ A+
(Very Strong) Financial Security) Investment Grade) (Superior)
- -----------------------------------------------------------------------------------------------
Paul Revere Variable AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
- -----------------------------------------------------------------------------------------------
Paul Revere Protective AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
</TABLE>
Year 2000 Date Conversion
As are many other businesses in this country and abroad, the Company is
affected in numerous ways, both by its own computer information systems and by
third parties with which it has business relationships, in the processing of
date data relating to the year 2000 and beyond. Failure to have adequately
addressed and substantially resolved year 2000 issues could have had, and as to
mission critical systems in certain circumstances would have had, a material
adverse effect on the Company's business, results of operations, or financial
condition. While there can be no assurance as to its long-term success, the
Company completed a project which was intended and designed to avoid and/or
mitigate any such material adverse effect from year 2000 issues. The Company's
program for the year 2000 was organized into a number of phases for rectifying
its internal computer systems, including assessment, code remediation, testing,
and deployment. The program continues to monitor systems for year 2000 issues,
including the ability to properly handle the dates of
35
<PAGE>
February 29, March 31, June 30, October 10, and December 31, 2000 and February
28 and December 31, 2001. To date, no material issues have been identified.
There are numerous instances in which third parties having a relationship
with the Company had and may continue to have year 2000 issues to address and
resolve. These include, among others, vendors of hardware and software, holders
of group insurance policies, issuers of investment securities, financial
institutions, governmental agencies, and suppliers. An aspect of the Company's
year 2000 program was to assess its critical external dependencies and, as part
of its due diligence efforts, to contact certain third parties seeking written
assurance as to their expectancy to be year 2000 compliant. The nature of the
Company's follow up to its written requests to third parties depended upon its
assessment of the response and of the materiality of the effect of non-
compliance by the third party on the Company. In some instances the Company
performed site visits to certain third party businesses and tested their
systems for compliance. In addition, the Company tested external electronic
interfaces with certain critical business partners. The Company implemented
contingency plans to alleviate the potential business impact of third parties
not being year 2000 compliant. To date, no significant issues from critical
external dependencies have been identified; however, there can be no guarantee
that the computer systems of these third parties will continue to be year 2000
trouble free. As a result, the Company will continue to monitor these
dependencies for year 2000 problems.
The effort of internal business and systems personnel devoted to the project
has been considerable. Temporary personnel and subject matter consultants were
utilized, when appropriate, to assist full time personnel in some phases or
aspects of the project. The Company utilized compensation programs to retain
project personnel in order to keep the project on schedule. While the project
required systems management to more closely scrutinize the prioritization of
information technology projects, it is not believed that any deferral of
information technology projects has had a material impact on the Company. The
Company also had occasional contact with certain peer companies comparing
approaches to year 2000 issues. Monitoring for and responding to year 2000
issues is now an integral part of the regular assignments of systems personnel.
Although there was a broad range of possibilities that could have occurred
in connection with non-compliance with year 2000 that might have affected the
Company, particularly as a consequence of third parties, the Company
experienced no material problems before, on, or after January 2, 2000.
Consequently, the Company has not experienced any material adverse impact on
its business, results of operations, or financial condition from year 2000
issues. With regard to any subsequent non-compliance resulting from the
Company's systems, which the Company believes to be less likely than that
resulting from third parties, the Company will provide adequate financial and
personnel resources to remediate the problem as soon as possible. With regard
to non-compliance resulting from third party failure, the Company has
appropriate contingency arrangements that will minimize such impact; however,
given the range of possibilities, no assurance can be given that the Company's
efforts will be successful. In addition, the Company developed detailed plans
for activities for managing the year-end rollover period. This included plans
for appropriate backup of data, year-end processing schedules, limiting
installations of new code, and the availability of special response teams
tasked with identifying and resolving any issues which might occur during the
rollover period. These teams included both information technology and business
professionals. The rollover was conducted with no material issues arising.
The foregoing discussion of the year 2000 issue contains forward-looking
statements relating to such matters as financial performance and the business
of the Company. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order for the Company to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience relating to compliance
with year 2000 to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements concerning
year 2000 issues, which involve certain risks and uncertainties. These factors
include (i) the unanticipated material impact of a system fault of the Company
relating to year 2000, (ii) the failure to successfully remediate, in spite of
testing, material systems of the Company, (iii) the time it may take to
successfully remediate a failure once it occurs, as well as the resulting costs
and loss of revenues, and (iv) the failure of third parties to properly
remediate material year 2000 problems.
36
<PAGE>
Since inception of the project, the Company has expensed approximately $32.2
million through December 31, 1999, in connection with incremental cost of the
year 2000 project and estimates an additional $1.0 million of expense during
2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to various market risk exposures including interest
rate risk and foreign exchange rate risk. The following discussion regarding
the Company's risk management activities includes forward-looking statements
that involve risk and uncertainties. Estimates of future performance and
economic conditions are reflected assuming certain changes in market rates and
prices were to occur (sensitivity analysis). Caution should be used in
evaluating the Company's overall market risk from the information presented
below, as actual results may differ. The Company employs various derivative
programs to manage these material market risks. See Notes 4 and 5 of the "Notes
to Consolidated Financial Statements" for further discussions of the
qualitative aspects of market risk, including derivative financial instrument
activity.
Interest Rate Risk
The operations of the Company are subject to risk resulting from interest
rate fluctuations, primarily long-term U.S. interest rates. Changes in interest
rates and individuals' behavior affect the amount and timing of asset and
liability cash flows. Management continually models and tests asset and
liability portfolios to improve interest rate risk management and net yields.
Testing the asset and liability portfolios under various interest rate and
economic scenarios allows management to choose the most appropriate investment
strategy, as well as to prepare for disadvantageous outcomes. This analysis is
the precursor to the Company's activities in derivative financial instruments.
The Company uses interest rate swaps, interest rate forward contracts,
exchange-traded interest rate futures contracts, and options to hedge interest
rate risks and to match asset durations and cash flows with corresponding
liabilities.
Assuming an immediate increase of 100 basis points in interest rates from
year end levels, the net hypothetical decrease in stockholders' equity related
to financial and derivative instruments was estimated to be $0.7 billion and
$0.6 billion at December 31, 1999 and 1998, respectively. The fair values of
those assets currently reported in the consolidated statements of financial
condition at amortized cost or at the unpaid balance, namely mortgage loans,
held-to-maturity securities, and policy loans, would decrease by approximately
$80 million, $40 million, and $200 million, respectively, at December 31, 1999
and by approximately $70 million, $40 million, and $180 million, respectively,
at December 31, 1998. Assuming a 100 basis point decrease in long-term interest
rates from year end levels, the fair values of the Company's long-term debt and
company-obligated mandatorily redeemable preferred securities would increase
approximately $100 million and $30 million, respectively, at December 31, 1999
and approximately $140 million and $50 million, respectively, at December 31,
1998.
The effect of a change in interest rates on asset prices was determined
using a matrix pricing system whereby all securities are priced with the
resulting market rates and spreads assuming a change of 100 basis points. These
hypothetical prices were compared to the actual prices for the period to
compute the overall change in market value. The changes in the fair values of
long-term debt and company-obligated mandatorily redeemable preferred
securities were determined using discounted cash flows analyses. Because the
Company actively manages its investments and liabilities, actual changes could
be less than those estimated above.
Foreign Currency Risk
The Company is also subject to foreign exchange risk arising from its
foreign operations and certain investment securities dominated in those local
currencies. Foreign operations represented 8.9 percent and 8.3 percent of total
assets at December 31, 1999 and 1998, respectively, and 9.4 percent and 8.6
percent of total revenue for 1999 and 1998, respectively. Assuming foreign
exchange rates decreased 10 percent from the December 31, 1999 level, year end
1999 stockholders' equity would not be materially affected.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
UnumProvident Corporation and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of UnumProvident Corporation and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. The consolidated financial statements give retroactive effect to the
merger of Unum Corporation and Provident Companies, Inc. on June 30, 1999,
which has been accounted for using the pooling of interests method as described
in the notes to the consolidated financial statements. Our audits also included
the financial statement schedules listed in the index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits. We did not audit the financial
statements and schedules of the former Unum Corporation which statements
reflect total assets constituting 39% in 1998, and total revenues constituting
54% in 1998 and 1997 of the related consolidated totals. Those statements and
schedules were audited by other auditors whose report has been furnished to us,
and our opinion, in so far as it relates to data included for the former Unum
Corporation, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of UnumProvident
Corporation and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 after giving retroactive
effect to the merger of Unum Corporation, as described in the notes to the
consolidated financial statements, in conformity with accounting principles
generally accepted in the United States. Also in our opinion, based on our
audits and the report of other auditors, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Chattanooga, Tennessee
February 9, 2000, except for Note 17,
for which the date is March 7, 2000
38
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
UnumProvident Corporation and Subsidiaries
In our opinion, the consolidated balance sheets and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of the former
Unum Corporation and its subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Corporation's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Maine
February 2, 1999
39
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31
-------------------
1999 1998
--------- ---------
(in millions of
dollars)
<S> <C> <C>
Assets
Investments
Fixed Maturity Securities
Available-for-Sale--at fair value (amortized cost:
$22,142.4; $20,581.6).................................... $22,033.2 $22,732.2
Held-to-Maturity--at amortized cost (fair value: $318.8;
$352.5).................................................. 323.5 307.0
Equity Securities--at fair value (cost: $15.9; $24.0)...... 38.4 33.1
Mortgage Loans............................................. 1,278.1 1,321.2
Real Estate................................................ 211.2 309.8
Policy Loans............................................... 2,316.9 2,227.2
Other Long-term Investments................................ 26.5 10.4
Short-term Investments..................................... 321.5 245.1
--------- ---------
Total Investments........................................... 26,549.3 27,186.0
Other Assets
Cash and Bank Deposits..................................... 292.4 111.2
Premiums Receivable........................................ 764.7 570.1
Reinsurance Receivable..................................... 4,741.2 4,871.0
Deposit Assets............................................. 616.6 729.7
Accrued Investment Income.................................. 543.6 502.5
Deferred Policy Acquisition Costs.......................... 2,391.2 2,060.5
Value of Business Acquired................................. 534.1 570.5
Goodwill................................................... 706.4 814.7
Property and Equipment--at cost less accumulated
depreciation.............................................. 399.7 367.8
Miscellaneous.............................................. 449.2 405.2
Separate Account Assets.................................... 459.1 413.0
--------- ---------
Total Assets................................................ $38,447.5 $38,602.2
========= =========
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
<TABLE>
<CAPTION>
December 31
--------------------
1999 1998
--------- ---------
(in millions of
dollars)
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Policy and Contract Benefits............................ $ 1,722.1 $ 1,384.9
Reserves for Future Policy and Contract Benefits........ 23,339.1 22,130.3
Unearned Premiums....................................... 380.6 360.4
Other Policyholders' Funds.............................. 3,521.8 4,102.7
Federal Income Tax
Current................................................ 33.3 105.8
Deferred............................................... 238.3 864.0
Short-term Debt......................................... 1,075.0 323.7
Long-term Debt.......................................... 1,166.5 1,225.2
Other Liabilities....................................... 1,229.5 1,246.0
Separate Account Liabilities............................ 459.1 413.0
--------- ---------
Total Liabilities........................................ 33,165.3 32,156.0
--------- ---------
Commitments and Contingent Liabilities--Note 17
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debt Securities of the Company............. 300.0 300.0
--------- ---------
Stockholders' Equity--Note 11
Common Stock, $0.10 par
Authorized: 725,000,000 shares
Issued: 240,515,180 and 237,802,647 shares............. 24.1 23.8
Additional Paid-in Capital.............................. 1,028.6 959.2
Accumulated Other Comprehensive Income (Loss)
Net Unrealized Gains on Securities..................... 19.8 969.4
Foreign Currency Translation Adjustment................ (38.7) (54.7)
Retained Earnings....................................... 3,957.6 4,279.2
Treasury Stock--at cost: 176,295 shares................. (9.2) (9.2)
Deferred Compensation................................... -- (21.5)
--------- ---------
Total Stockholders' Equity............................... 4,982.2 6,146.2
--------- ---------
Total Liabilities and Stockholders' Equity............... $38,447.5 $38,602.2
========= =========
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions of dollars,
except share data)
<S> <C> <C> <C>
Revenue
Premium Income.................................. $6,843.2 $6,129.0 $5,293.1
Net Investment Income........................... 2,059.7 2,035.4 2,015.7
Net Realized Investment Gains................... 87.1 55.0 11.5
Other Income.................................... 339.6 299.9 357.0
-------- -------- --------
Total Revenue.................................... 9,329.6 8,519.3 7,677.3
-------- -------- --------
Benefits and Expenses
Policyholder Benefits........................... 6,787.6 5,449.7 4,856.1
Commissions..................................... 913.6 826.5 716.2
Interest and Debt Expense....................... 137.8 119.9 84.9
Deferral of Policy Acquisition Costs............ (809.3) (703.3) (537.3)
Amortization of Deferred Policy Acquisition
Costs.......................................... 474.8 377.5 301.3
Amortization of Value of Business Acquired and
Goodwill....................................... 120.9 66.6 52.7
Other Operating Expenses........................ 1,869.7 1,462.2 1,286.7
-------- -------- --------
Total Benefits and Expenses...................... 9,495.1 7,599.1 6,760.6
-------- -------- --------
Income (Loss) Before Federal Income Taxes........ (165.5) 920.2 916.7
Federal Income Taxes (Credit)
Current......................................... 141.2 128.3 192.3
Deferred........................................ (123.8) 174.5 106.8
-------- -------- --------
Total Federal Income Taxes....................... 17.4 302.8 299.1
-------- -------- --------
Net Income (Loss)................................ $ (182.9) $ 617.4 $ 617.6
======== ======== ========
Net Income (Loss) Per Common Share
Basic........................................... $ (0.77) $ 2.60 $ 2.62
Assuming Dilution............................... $ (0.77) $ 2.54 $ 2.57
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Retained Treasury Deferred
Stock Stock Capital Income (Loss) Earnings Stock Compensation Total
--------- ------ ---------- ------------- -------- -------- ------------ ---------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $156.2 $10.5 $ 367.7 $166.8 $3,311.1 $ -- $(10.6) $ 4,001.7
Comprehensive Income
Net Income............. 617.6 617.6
Change in Net
Unrealized Gains on
Securities (net of tax
expense of $351.0).... 662.5 662.5
Change in Foreign
Currency Translation
Adjustment (net of tax
credit of $7.8)....... (30.3) (30.3)
---------
Total Comprehensive
Income................. 1,249.8
---------
Shares Issued for the
Acquisition of
Business............... 1.5 736.0 737.5
Two-for-One Stock
Split.................. 11.9 (11.9) --
Common Stock Activity... (0.2) (137.0) (5.2) (142.4)
Treasury Stock
Acquired............... (1.5) (1.5)
Dividends to
Stockholders........... (131.0) (131.0)
------ ----- -------- ------ -------- ----- ------ ---------
Balance at December 31,
1997................... 156.2 23.7 954.8 799.0 3,797.7 (1.5) (15.8) 5,714.1
Comprehensive Income
Net Income............. 617.4 617.4
Change in Net
Unrealized Gains on
Securities (net of tax
expense of $67.2)..... 133.7 133.7
Change in Foreign
Currency Translation
Adjustment (net of tax
credit of $7.8)....... (18.0) (18.0)
---------
Total Comprehensive
Income................. 733.1
---------
Preferred Stock
Redeemed............... (156.2) (156.2)
Common Stock Activity... 0.1 4.4 (5.7) (1.2)
Treasury Stock
Acquired............... (7.7) (7.7)
Dividends to
Stockholders........... (135.9) (135.9)
------ ----- -------- ------ -------- ----- ------ ---------
Balance at December 31,
1998................... -- 23.8 959.2 914.7 4,279.2 (9.2) (21.5) 6,146.2
Comprehensive Loss
Net Loss............... (182.9) (182.9)
Change in Net
Unrealized Gains on
Securities (net of tax
credit of $519.5)..... (949.6) (949.6)
Change in Foreign
Currency Translation
Adjustment (net of tax
expense of $11.6)..... 16.0 16.0
---------
Total Comprehensive
Loss................... (1,116.5)
---------
Common Stock Activity... 0.3 69.4 21.5 91.2
Dividends to
Stockholders........... (138.7) (138.7)
------ ----- -------- ------ -------- ----- ------ ---------
Balance at December 31,
1999................... $ -- $24.1 $1,028.6 $(18.9) $3,957.6 $(9.2) $ -- $ 4,982.2
====== ===== ======== ====== ======== ===== ====== =========
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions of dollars)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss)............................ $ (182.9) $ 617.4 $ 617.6
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities
Policy Acquisition Costs Capitalized........ (809.3) (703.3) (537.3)
Amortization of Policy Acquisition Costs.... 474.8 377.5 301.3
Amortization of Value of Business Acquired
and Goodwill............................... 120.9 66.6 52.7
Depreciation................................ 58.0 47.9 45.3
Net Realized Investment Gains............... (87.1) (55.0) (11.5)
Reinsurance Receivable...................... 130.1 (48.9) (233.1)
Insurance Reserves and Liabilities.......... 2,391.1 1,475.4 1,322.4
Federal Income Taxes........................ (189.9) 211.5 76.3
Other....................................... (339.0) (269.8) (300.8)
--------- --------- ---------
Net Cash Provided by Operating Activities..... 1,566.7 1,719.3 1,332.9
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Investments
Available-for-Sale Securities............... 3,773.9 2,117.3 2,524.7
Proceeds from Maturities of Investments
Available-for-Sale Securities............... 1,023.8 1,513.1 1,628.2
Held-to-Maturity Securities................. 0.3 0.5 1.1
Proceeds from Sales and Maturities of Other
Investments................................. 268.3 217.7 623.7
Purchase of Investments
Available-for-Sale Securities............... (6,237.5) (3,849.2) (4,264.9)
Held-to-Maturity Securities................. (22.2) (1.9) (23.4)
Other Investments........................... (209.1) (532.7) (410.7)
Net (Purchases) Sales of Short-term
Investments................................. (76.8) (67.9) 403.8
Acquisition of Business...................... -- -- (860.3)
Disposition of Business...................... -- 58.0 --
Other........................................ (75.3) (73.3) (45.3)
--------- --------- ---------
Net Cash Used by Investing Activities......... (1,554.6) (618.4) (423.1)
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1999 1998 1997
------- --------- ---------
(in millions of dollars)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Deposits to Policyholder Accounts.............. 175.1 184.3 813.8
Maturities and Benefit Payments from
Policyholder Accounts......................... (613.0) (1,250.7) (2,409.1)
Net Short-term Debt Borrowings (Repayments).... 692.6 (74.5) 140.1
Issuance of Long-term Debt..................... -- 900.0 893.3
Long-term Debt Repayments...................... -- (793.1) (347.6)
Issuance of Company-Obligated Mandatorily
Redeemable Preferred Securities............... -- 300.0 --
Redemption of Preferred Stock.................. -- (156.2) --
Issuance of Common Stock....................... 69.7 11.9 389.8
Dividends Paid to Stockholders................. (138.9) (139.1) (139.2)
Repurchase of Common Stock..................... -- (72.7) (286.7)
Other.......................................... (18.6) 4.6 34.8
------- --------- ---------
Net Cash Provided (Used) by Financing
Activities..................................... 166.9 (1,085.5) (910.8)
------- --------- ---------
Effect of Foreign Exchange Rate Changes on
Cash........................................... 2.2 1.3 (1.7)
------- --------- ---------
Net Increase (Decrease) in Cash and Bank
Deposits....................................... 181.2 16.7 (2.7)
Cash and Bank Deposits at Beginning of Year..... 111.2 94.5 97.2
------- --------- ---------
Cash and Bank Deposits at End of Year........... $ 292.4 $ 111.2 $ 94.5
======= ========= =========
</TABLE>
See notes to consolidated financial statements.
45
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Significant Accounting Policies
Basis of Presentation: On June 30, 1999, Unum Corporation (Unum) merged
with and into Provident Companies, Inc. (Provident) under the name
UnumProvident Corporation (the Company). The merger was accounted for as a
pooling of interests. The historical financial results presented herein give
effect to the merger as if it had been completed at the beginning of the
earliest period presented.
The Company values its available-for-sale fixed maturity and equity
securities at fair value, with unrealized holding gains and losses reported as
a component of comprehensive income (loss). Companies are required to also
adjust deferred acquisition costs and/or certain policyholder liabilities to
reflect the changes that would have been necessary if the unrealized
investment gains and losses related to the available-for-sale securities had
been realized. Prior to the merger, Unum adjusted policyholder liabilities and
Provident adjusted deferred policy acquisition costs (DPAC) and value of
business acquired (VOBA) for those products where these assets existed. To
present financial information in a common reporting format, management has
determined that the combined entity will adjust policyholder liabilities
rather than DPAC and VOBA. Prior period financial statements have been
restated to reflect this reclassification. The reclassification did not change
other comprehensive income (loss), accumulated other comprehensive income
(loss), or fixed maturity and equity securities. The reclassification
reflected in the December 31, 1998 consolidated statement of financial
condition resulted in an increase of $329.7 million in DPAC, $1.5 million in
VOBA, and, $331.2 million in reserves for future policy and contract benefits.
Certain additional reclassification adjustments have been made to conform the
companies' presentations in the consolidated financial statements.
The accompanying consolidated financial statements have been prepared on
the basis of accounting principles generally accepted in the United States
(GAAP). Such accounting principles differ from statutory accounting practices
prescribed or permitted by state regulatory authorities (see Note 18). The
consolidated financial statements include the accounts of UnumProvident
Corporation and its subsidiaries. Material intercompany transactions have been
eliminated.
Operations: The Company does business primarily in North America and
operates principally in the life and health insurance business. The Employee
Benefits segment includes group long-term and short-term disability insurance,
group life insurance, accidental death and dismemberment coverages, group
long-term care, and the results of managed disability. The Individual segment
includes results from the individual disability, individual life, and
individual long-term care lines of business. The Voluntary Benefits segment
includes the results of products sold to employees through payroll deduction
at the work site. These products include life insurance and health products,
primarily disability, accident and sickness, and cancer. The Other operating
segment includes results from products no longer actively marketed, including
corporate-owned life insurance, group pension, health insurance, individual
annuities, and reinsurance pools and management. The Corporate segment
includes investment earnings on corporate assets not specifically allocated to
a line of business, corporate interest expense, amortization of goodwill, and
certain corporate expenses not allocated to a line of business. See Note 14
for further information on the operating segments.
Use of Estimates: The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information
becomes known, which could impact the amounts reported and disclosed herein.
Investments: Investments are reported in the consolidated statements of
financial condition as follows:
Available-for-Sale Fixed Maturity Securities are reported at fair value.
46
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Held-to-Maturity Fixed Maturity Securities are generally reported at
amortized cost.
Equity Securities are reported at fair value.
Mortgage Loans are generally carried at amortized cost less an allowance for
probable losses.
Real Estate classified as investment real estate is carried at cost less
accumulated depreciation. Real estate acquired through foreclosure is valued at
fair value at the date of foreclosure. If investment real estate is determined
to be permanently impaired, the carrying amount of the asset is reduced to fair
value. Occasionally, investment real estate is reclassified to real estate held
for sale when it no longer meets the Company's investment criteria. Real estate
held for sale is valued net of a valuation allowance that reduces the carrying
value to the lower of cost less accumulated depreciation or fair value less
estimated cost to sell. Accumulated depreciation on real estate was $42.8
million and $48.5 million as of December 31, 1999 and 1998, respectively.
Policy Loans are presented at unpaid balances.
Other Long-term Investments are carried at cost plus the Company's equity in
undistributed net earnings since acquisition.
Short-term Investments are carried at cost.
Fixed maturity securities include bonds and redeemable preferred stocks.
Equity securities include common stocks and nonredeemable preferred stocks.
Fixed maturity and equity securities not bought and held for the purpose of
selling in the near term but for which the Company does not have the positive
intent and ability to hold to maturity are classified as available-for-sale.
Fixed maturity securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity. The Company determines
the appropriate classification of fixed maturity securities at the time of
purchase.
Changes in the fair value of available-for-sale fixed maturity securities
and equity securities are reported as other comprehensive income (loss). These
amounts are net of deferred federal income taxes and valuation adjustments to
reserves for future policy and contract benefits which would have been recorded
had the related unrealized gains or losses on these securities been realized.
Realized investment gains and losses, which are reported as a component of
revenue in the consolidated statements of operations, are based upon specific
identification of the investments sold and do not include amounts allocable to
separate accounts. At the time a decline in the value of an investment is
determined to be other than temporary, a loss is recorded which is included in
realized investment gains and losses.
The Company discontinues the accrual of investment income on invested assets
when it is determined that collectability is doubtful. The Company recognizes
investment income on impaired loans when the income is received.
Derivative Financial Instruments: Interest Rate Swap Agreements are
agreements in which two parties agree to exchange, at specified intervals,
interest payment streams calculated on an agreed-upon notional principal
amount. The underlying notional principal is not exchanged between the parties
for agreements other than foreign currency swaps. The Company has certain
forward interest rate swap agreements where the exchange of interest payments
does not begin until a specified future date. The Company intends to settle the
forward interest rate swap agreements prior to the commencement of the exchange
of interest payment streams.
47
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair values of interest rate swap agreements which hedge available-for-
sale securities are reported in the consolidated statements of financial
condition as a component of fixed maturity securities. The fair values of
interest rate swap agreements which hedge liabilities are not reported in the
consolidated statements of financial condition. Amounts to be paid or received
pursuant to interest rate swap agreements are accrued and recognized in the
consolidated statements of operations as an adjustment to net investment income
for asset hedges or as an adjustment to policyholder benefits for liability
hedges.
The Company accounts for all of its interest rate swap agreements as hedges.
Accordingly, for anticipated transaction hedges, any gains or losses realized
on closed or terminated interest rate swap agreements are deferred and
amortized to net investment income for asset hedges or policyholder benefits
for liability hedges over the expected remaining life of the hedged item. The
Company also uses interest rate swap agreements to hedge existing assets. The
income payment streams generated by these swaps are recorded in the same manner
as the hedged asset income payment streams.
If the hedged item matures or terminates earlier than anticipated, the
remaining unamortized gain or loss is amortized to net investment income or
policyholder benefits in the current period. If the hedged asset is disposed,
the remaining unamortized gain or loss is recognized as an adjustment to net
realized investment gains and losses. Gains or losses realized on interest rate
swap agreements which are terminated when the hedged assets are sold or which
are terminated because the hedged anticipated transaction is no longer likely
to occur are reported in the consolidated statements of operations as a
component of net realized investment gains and losses.
The Company regularly monitors the effectiveness of its hedging programs. In
the event a hedge becomes ineffective, it is marked-to-market, resulting in a
charge or credit to net investment income or policyholder benefits.
Futures and Forwards Contracts are commitments to either purchase or sell a
financial instrument at a specific future date for a specified price. Changes
in the market value of contracts are generally settled on a daily basis. The
notional amounts of futures and forwards contracts represent the extent of the
Company's involvement but not the future cash requirements, as the Company
intends to close out open positions prior to settlement. All of the Company's
futures and forwards contracts are accounted for as hedges.
The fair values of futures and forwards which hedge available-for-sale
securities are reported in the consolidated statements of financial condition
as a component of fixed maturity securities. The fair values of open futures
and forwards which hedge liabilities are reported in the consolidated
statements of financial condition as a component of other liabilities. Gains or
losses realized on the termination of futures and forwards contracts are
accounted for in the same manner as interest rate swap agreements.
Option Contracts give the owner the right, but not the obligation, to buy or
sell a financial instrument at an agreed-upon price on or before a specific
date. The purchasing counterparty pays a premium to the selling counterparty
for this right. The notional amounts of contracts represent the Company's
involvement but not the future cash requirements, as the Company intends to
close out contracts prior to the expiration date when the market price of the
underlying financial instrument exceeds the option price or allow contracts to
expire if the option price exceeds the market price. All of the Company's
options contracts are accounted for as hedges. The book and fair values of
options contracts are reported in the consolidated statements of financial
condition in a manner similar to the underlying hedged item. Gains or losses on
the termination of options contracts are accounted for in the same manner as
interest rate swap agreements.
48
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Policy Acquisition Costs: Certain costs of acquiring new business
which vary with and are primarily related to the production of new business
have been deferred. Such costs include commissions, other agency compensation,
certain selection and policy issue expenses, and certain field expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing subsequent to the year of
issue.
Deferred policy acquisition costs related to traditional policies are
amortized over the premium paying period of the related policies in proportion
to the ratio of the present value of annual expected premium income to the
present value of total expected premium income. Adjustments are made each year
to recognize actual persistency experience as compared to assumed experience.
Deferred policy acquisition costs related to interest-sensitive policies are
amortized over the lives of the policies in relation to the present value of
estimated gross profits from surrender charges and mortality, investment, and
expense margins. Adjustments are made each year to reflect actual experience
for assumptions which deviate significantly compared to assumed experience.
Deferred policy acquisition costs for the Lloyd's of London (Lloyd's)
business are amortized proportionately over the period the premium is earned.
Adjustments are made periodically to reflect actual experience for assumptions
which deviate significantly compared to assumed experience.
Loss recognition is performed when, in the judgment of management, adverse
deviations from original assumptions have occurred and may be likely to
continue such that recoverability of deferred policy acquisition costs on a
line of business is questionable. Insurance contracts are grouped on a basis
consistent with the Company's manner of acquiring, servicing, and measuring
profitability of the contracts. If loss recognition testing indicates that
deferred policy acquisition costs are not recoverable, the deficiency is
charged to expense. Once a loss recognition adjustment is required, loss
recognition testing is generally performed on an annual basis using then
current assumptions until the line of business becomes immaterial or results
improve significantly. The assumptions used in loss recognition testing
represent management's best estimates of future experience.
Value of Business Acquired: Value of business acquired represents the
present value of future profits recorded in connection with the acquisition of
a block of insurance policies. The asset is amortized based upon expected
future premium income for traditional insurance policies and estimated future
gross profits for interest-sensitive insurance policies, with the accrual of
interest added to the unamortized balance at interest rates principally ranging
from 5.55 percent to 7.60 percent. The accumulated amortization for value of
business acquired was $133.2 million and $94.9 million as of December 31, 1999
and 1998, respectively. The Company periodically reviews the carrying amount of
value of business acquired using the same methods used to evaluate deferred
policy acquisition costs.
Goodwill: Goodwill is the excess of the amount paid to acquire a business
over the fair value of the net assets acquired. Goodwill is amortized on a
straight-line basis over a period not to exceed 40 years. The accumulated
amortization for goodwill was $64.1 million and $63.8 million as of December
31, 1999 and 1998, respectively. The carrying amount of goodwill is reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount might not be recoverable. If estimated future undiscounted net
cash flows expected to be generated from the operations to which the goodwill
relates are less than the carrying amount of the unamortized goodwill, the
carrying amount is reduced with a corresponding charge to expense.
49
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment: Property and equipment is depreciated on the
straight-line method over its estimated useful life. The accumulated
depreciation for property and equipment was $376.1 million and $319.5 million
as of December 31, 1999 and 1998, respectively.
Revenue Recognition: Traditional life and accident and health products are
long duration contracts, and premium income is recognized as revenue when due
from policyholders. If the contracts are experience rated, the estimated
ultimate premium is recognized as revenue over the period of the contract. The
estimated ultimate premium, which is revised to reflect current experience, is
based on estimated claim costs, expenses, and profit margins. For interest-
sensitive products, the amounts collected from policyholders are considered
deposits, and only the deductions during the period for cost of insurance,
policy administration, and surrenders are included in revenue. Policyholders'
funds represent funds deposited by contract holders and are not included in
revenue.
The Company follows the periodic method of accounting for its Lloyd's
business in which premiums are recognized as revenue over the policy term, and
claims, including an estimate of claims incurred but not reported, are
recognized as they occur. Premiums for the Lloyd's business are based on
participation in the individual syndicate underwriting years that generate
premiums over a three year period of time. The Company has participated in the
Lloyd's market for a number of years and uses its historical experience plus
information obtained from its managing agents to estimate revenues, losses,
expenses, and the related assets and liabilities. Additionally, an independent
actuarial review of the syndicates' open reserves is performed annually, and
management periodically reviews its estimates as information is received from
the Lloyd's syndicates. Any resulting adjustments to the estimates are
reflected in the current results.
Policy and Contract Benefits: Policy and contract benefits, principally
related to accident and health insurance policies, are based on reported losses
and estimates of incurred but not reported losses for traditional life and
accident and health products. For interest-sensitive products, benefits are the
amounts paid and expected to be paid on insured claims in excess of the
policyholders' policy fund balances.
Policy and Contract Benefits Liabilities: Active life reserves for future
policy and contract benefits on traditional life and accident and health
products have been provided on the net level premium method. The reserves are
calculated based upon assumptions as to interest, withdrawal, morbidity, and
mortality that were appropriate at the date of issue. Withdrawal assumptions
are based on actual Company experience. Morbidity and mortality assumptions are
based upon industry standards adjusted as appropriate to reflect actual Company
experience. The assumptions vary by plan, year of issue, and policy duration
and include a provision for adverse deviation.
Disabled lives reserves for future policy and contract benefits on
disability policies are calculated based upon assumptions as to interest and
claim termination rates that are currently appropriate. Claim termination rate
assumptions are based upon industry standards adjusted as appropriate to
reflect actual Company experience. The assumptions vary by year of claim
incurral and may include a provision for adverse deviation. The interest rate
assumptions used for discounting claim reserves are based on projected
portfolio yield rates, after consideration for defaults and investment
expenses, for the assets supporting the liabilities for the various product
lines. The assets for each product line are selected according to the specific
investment strategy for that product line to produce asset cash flows that
follow similar timing and amount patterns to those of the anticipated liability
payments.
Reserves for future policy and contract benefits on group single premium
annuities have been provided on a net single premium method. The reserves are
calculated based upon assumptions as to interest, mortality, and
50
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
retirement that were appropriate at the date of issue. Mortality assumptions
are based upon industry standards adjusted as appropriate to reflect actual
Company experience. The assumptions vary by year of issue and include a
provision for adverse deviation.
The interest rate assumptions used to calculate reserves for future policy
and contract benefits are as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Active Life Reserves--Current Year Issues
Traditional Life.......................... 6.75% to 8.75% 6.75% to 8.75%
Individual Disability..................... 5.50% to 9.00% 6.00% to 9.00%
Disabled Lives Reserves--Current Year
Claims
Individual Disability..................... 6.65% to 8.00% 5.50% to 8.00%
Group Disability.......................... 7.35% to 7.60% 7.40% to 8.95%
Disabled Lives Reserves--Prior Year Claims
Individual Disability..................... 6.65% to 8.00% 5.50% to 8.00%
Group Disability.......................... 7.35% to 7.60% 7.40% to 7.60%
</TABLE>
Interest assumptions for active life reserves are generally graded downward
over a period of years. Reserves for future policy and contract benefits on
interest-sensitive products are principally policyholder account values
determined on the retrospective deposit method.
Policyholders' Funds: Policyholders' funds represent customer deposits plus
interest credited at contract rates. The Company controls its interest rate
risk by investing in quality assets which have an aggregate duration that
closely matches the expected duration of the liabilities. For guaranteed
investment contracts (GICs), which are no longer marketed, the Company uses a
cash flow matching investment strategy.
Liabilities for Restructuring Activities: Liabilities for restructuring
activities are recorded when management, prior to the balance sheet date,
commits to execute an exit plan that will result in the incurral of costs that
have no future economic benefit or approves a plan of termination and
communicates sufficient detail of the plan to employees. Liabilities for
restructuring activities are included in other liabilities in the consolidated
statements of financial condition.
Federal Income Taxes: Deferred taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax purposes.
Deferred taxes have been measured using enacted statutory income tax rates and
laws that are currently in effect. A valuation allowance is established for
deferred tax assets when it is more likely than not that an amount will not be
realized.
Separate Accounts: The separate account amounts shown in the accompanying
consolidated financial statements represent contributions by contract holders
to variable-benefits and fixed-benefits pension plans. The contract purchase
payments and the assets of the separate accounts are segregated from other
Company funds for both investment and administrative purposes. Contract
purchase payments received under variable annuity contracts are subject to
deductions for sales and administrative fees. Also, the sponsoring companies of
the separate accounts receive management fees which are based on the net asset
values of the separate accounts.
Translation of Foreign Currency: Revenues and expenses of the Company's
foreign operations, principally Canada and the United Kingdom, are translated
at average exchange rates. Assets and liabilities are
51
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
translated at the rate of exchange on the balance sheet date. The translation
gain or loss is generally reported in accumulated other comprehensive income
(loss), net of deferred tax.
Accounting for Participating Individual Life Insurance: Participating
policies issued by the former Union Mutual Life Insurance Company (Union
Mutual) prior to its conversion to a stock life insurance company in 1986 will
remain participating as long as they remain in force. A Participation Fund
Account (PFA) was established for the benefit of all of Union Mutual's
individual participating life and annuity policies and contracts. The assets of
the PFA provide for the benefit, dividend, and certain expense obligations of
the participating individual life insurance policies and annuity contracts. The
experience of the PFA and its operations have been excluded from the
consolidated statements of operations. The PFA was $362.2 million and $371.1
million at December 31, 1999, and 1998, respectively, and represented
approximately 0.9 percent and 1.0 percent of consolidated assets and 1.1
percent and 1.2 percent of consolidated liabilities for December 31, 1999 and
1998, respectively.
Accounting for Stock-Based Compensation: The Company measures compensation
cost for stock-based compensation under the expense recognition provisions of
Accounting Principles Board Opinion No. 25 (Opinion 25), Accounting for Stock
Issued to Employees. Under this method, compensation cost is the excess, if
any, of the quoted market price at grant date or other measurement date over
the amount an employee must pay to acquire the stock.
Changes in Accounting Principles: Effective January 1, 1999, the Company
adopted the provisions of Statement of Position 97-3 (SOP 97-3), Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments. SOP 97-3
provides guidance for determining when an entity should recognize a liability
or an asset for insurance-related assessments and how to measure these items.
The Company fully adopted the provisions of Statement of Position 98-1 (SOP 98-
1), Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use, effective January 1, 1999. SOP 98-1 requires the capitalization
of certain costs incurred in connection with developing or obtaining software
for internal use. The effect of the adoptions of SOP 97-3 and SOP 98-1 on the
Company's financial position and results of operations was immaterial.
Accounting Pronouncements Outstanding:
Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities
In 1998, the FASB issued SFAS 133 which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and
measure those instruments at fair value. SFAS 133 specifies a special method of
accounting for certain hedging transactions, prescribes the type of items and
transactions that may be hedged, and provides the criteria which must be met in
order to qualify for hedge accounting.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation as follows:
Fair value hedge. Changes in the fair value of both the derivative and the
hedged item attributable to the risk being hedged are recognized in
operating earnings.
52
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash flow hedge. To the extent it is effective, changes in the fair value
of the derivative are recognized as a component of accumulated other
comprehensive income in stockholders' equity until the hedged item affects
earnings. Any ineffective portion must be recognized in operating earnings
at the same time the change in fair value is recognized on the statement of
financial condition.
Foreign currency exposures hedge. In a hedge of foreign currency exposures
in a net investment in a foreign operation, to the extent the hedge is
effective, the change in the fair value of the derivative is treated as a
translation gain or loss and recognized in accumulated other comprehensive
income offsetting other translation gains and losses arising in
consolidation. Any ineffective portion must be recognized in operating
earnings at the same time the change in fair value of the derivative is
recognized on the statement of financial condition.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in operating earnings in the period of change.
Statement of Financial Accounting Standards No. 137 (SFAS 137), Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133 was issued in June 1999. SFAS 137 defers for one
year the effective date of SFAS 133. The Company plans to adopt the provisions
of SFAS 133 effective January 1, 2001. At this time the Company has not
determined the effects that adoption of SFAS 133 will have on its financial
statements.
Statement of Position 98-7 (SOP 98-7), Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk
In 1998, the American Institute of Certified Public Accountants (AICPA)
issued SOP 98-7, which provides guidance on applying the deposit method of
accounting to insurance and reinsurance contracts that do not transfer
insurance risk. The Company is required to adopt SOP 98-7 effective January 1,
2000. The adoption of SOP 98-7 is not expected to have a material impact on the
Company's results of operations, liquidity, or financial position.
Note 2--Merger
On June 30, 1999, prior to the completion of the merger, each outstanding
share of Provident common stock was reclassified and converted into 0.73 of a
share of Provident common stock. Immediately after this reclassification, the
merger was completed, and each share of Unum common stock issued and
outstanding immediately prior to the merger was converted into one share of the
Company's common stock, and the par value was reduced from $1.00 to $0.10 per
share. In the merger, the shares of Provident common stock were not further
affected, but thereafter became shares of the Company's common stock. Unum
common stock held in treasury was retired. Stockholders' equity and per share
amounts have been adjusted to reflect these items.
53
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the second and third quarter of 1999, the Company recognized expenses
related to the merger and the early retirement offer to employees as follows
(in millions):
<TABLE>
<S> <C>
Employee related expense......................................... $ 77.7
Exit activities related to duplicate facilities/asset
abandonments.................................................... 67.4
Investment banking, legal, and accounting fees................... 39.6
------
Subtotal......................................................... 184.7
Expense related to the early retirement offer to employees....... 125.9
------
Subtotal......................................................... 310.6
Income tax benefit............................................... 89.2
------
Total............................................................ $221.4
======
</TABLE>
Employee related expense consists of employee severance costs, change in
control costs, restricted stock costs which fully vested upon stockholder
adoption of the merger agreement or upon completion of the merger, and
outplacement costs to assist employees who have been involuntarily terminated.
Severance benefits and change in control costs are $60.2 million, and costs
associated with the vesting of restricted stock are $17.5 million. The Company
estimates that in total approximately 1,615 positions will be eliminated over a
twelve month period beginning June 30, 1999. Approximately 1,000 of these
positions will be eliminated through the early retirement offer. As of December
31, 1999, approximately 800 and 580 positions have been eliminated as a result
of the early retirement offer and involuntary terminations, respectively, and
$26.5 million of the estimated $60.2 million has been paid for severance
benefits and change in control costs.
Exit activities related to duplicate facilities/asset abandonments consist
of closing of duplicate offices and write-off of redundant computer hardware
and software. The Company currently expects to close approximately 90 duplicate
field offices over a period of one year after June 30, 1999. The cost
associated with these office closures is approximately $25.6 million, which
represents the cost of future minimum lease payments less any estimated amounts
recovered under subleases. As of December 31, 1999, $3.7 million of this
estimated liability has been paid. Also, certain physical assets, primarily
computer equipment, redundant systems, and systems incapable of supporting the
combined entity, have been abandoned as a result of this merger. This
abandonment resulted in a write-down of the assets' book values by
approximately $41.8 million during 1999. Approximately $40.9 million of the
$41.8 million of assets have been removed from service as of December 31, 1999.
Of the $39.6 million of investment banking, legal, and accounting fees, $39.1
million has been paid in 1999.
The expenses related to the merger reduced 1999 earnings $184.7 million
before tax and $139.6 million after tax. The expense related to the early
retirement offer reduced earnings $125.9 million before tax and $81.8 million
after tax.
Additionally during 1999, 0.5 million shares of outstanding restricted stock
became unrestricted and stock options on 5.3 million shares became immediately
exercisable effective with the merger, in accordance with Unum's and
Provident's restricted stock and stock option plan provisions concerning a
change in control. The expense related to restricted stock vesting has been
included in merger related expenses. The Company applies Opinion 25 and related
interpretations in accounting for the stock option plans. Accordingly, no
compensation cost was recognized for stock option vesting.
Generally, because of the effort and time involved, reviews and updates of
assumptions related to benefit liabilities are periodically undertaken over
time and are reflected in the calculation of benefit liabilities as
54
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
completed. Many factors influence assumptions underlying reserves, and
considerable judgment is required to interpret current and historical
experience underlying all of the assumptions and to assess the future factors
that are likely to influence the ultimate cost of settling existing claims.
Prior to the merger, Unum's process and assumptions used to calculate the
discount rate for claim reserves of certain disability businesses differed from
that used by Provident. While Unum's and Provident's methods were both in
accordance with GAAP, management believed that the combined entity should have
consistent discount rate accounting policies and methods for applying those
policies for similar products. Unum's former methodology used the same
investment strategy for assets backing both liabilities and surplus.
Provident's methodology, which allows for different investment strategies for
assets backing surplus than those backing product liabilities, was determined
by management to be the more appropriate approach for the Company. Accordingly,
at June 30, 1999 the Company adopted Provident's method of calculating the
discount rate for claim reserves.
The discount rates affected by this change in Unum's methodology were as
follows:
<TABLE>
<CAPTION>
June 30, 1999
--------------
Current Former
Rates Rates
------- ------
<S> <C> <C>
Group Long-term Disability (North America)............... 6.75% 7.74%
Group Long-term Disability and Individual Disability
(United Kingdom)........................................ 7.45% 8.80%
Individual Disability (North America).................... 6.88% 7.37%
</TABLE>
The unpaid claim reserves for these disability lines as of June 30, 1999
were $5,318.3 million using the former method for determining reserve discount
rates and $5,559.0 million using the current method. The impact on 1999
earnings related to the change in method of calculating the discount rate for
claim reserves was $240.7 million before tax and $156.5 million after tax
during the second quarter.
Subsequent to the merger date, the Company began to integrate the valuation
procedures of the two organizations to provide for a more effective linking of
pricing and reserving assumptions and to facilitate a more efficient process
for adjusting liabilities to emerging trends. Included in this integration
activity were a review and an update of assumptions that underlie policy and
contract benefit liabilities. The purpose of the study was to confirm or update
the assumptions which were viewed as likely to affect the ultimate liability
for contract benefits. Accordingly, as a result of the merger, the Company
accelerated the performance of its normal reviews of the assumptions underlying
reserves to determine the assumptions that the newly merged Company will use in
the future for pricing, performance management, and reserving.
The review resulted in an increase in the benefits and reserves for future
benefits for the Company's domestic and Canadian group long-term disability
unpaid claim liabilities. As a result of the review, the Company increased its
policy and contract benefit liabilities $359.2 million, which reduced 1999
earnings $359.2 million before tax and $233.5 million after tax during the
third quarter.
The increase in policy and contract benefit liabilities primarily resulted
from revisions to assumptions in the following three key components: claim
termination rates, incurred but not reported (IBNR) factors, and discount
rates. These components and their effect on the reserve increase are summarized
and discussed below (in millions).
<TABLE>
<S> <C>
Claim termination rates........................................... $372.6
Incurred but not reported factors................................. 101.4
Discount rates.................................................... (114.8)
------
Net change........................................................ $359.2
======
</TABLE>
55
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assumptions concerning claim termination rates relate to changes in the
estimated average length of time a claim is open (duration) and the ultimate
cost of settling claims. Recent trends indicate the duration of a disability
claim is increasing. Claim termination rates are based on industry experience
adjusted for Company historical and anticipated experience, which considers
emerging trends and Company actions that would have a material effect on claim
termination rates.
The increase in policy and contract benefit liabilities that results from
the revised claim termination rates is attributable to two elements. The first
element is the claim resolution assumption, which is the portion of claim
terminations related to the disabled returning to work or the expiration of the
benefit period. The second element is the mortality assumption, which is the
portion of claim terminations that result from death of the disabled. The
effect of these two elements on the increase in policy and contract benefit
liabilities is discussed below.
Claim resolution assumptions have been determined considering both external
trends and the Company's current and planned actions which would have a
material effect on claim resolution rates. Due to the high variability in claim
resolution rates, considerable judgment is required in setting claim resolution
assumptions. Revised claim resolution assumptions have been determined after
consideration of the merger integration plans, including the short-term
disruption of the claims management process from integration activities. Other
factors considered included emerging external trends, such as the developing
trend for some claimants to remain on claim longer, current and historical
claim resolution experience, industry claim resolution experience, and changes
in planned actions, as well as the anticipated future effectiveness of the
claims operations in settling existing claims. The revised assumptions for
claim resolution rates resulted in an increase in benefit liabilities of
approximately $194.8 million. These estimates rely on the Company's ability to
complete integration and claims processing changes as planned and those changes
having the anticipated impact on claim recovery rates.
The review also examined assumptions for mortality. Revision of mortality
assumptions resulted in an increase in benefit liabilities of approximately
$177.8 million. Mortality is a critical factor influencing the length of time a
claimant receives monthly disability benefits. Mortality has been improving for
the general population, and this improvement is now considered permanent. Life
expectancy has been extended dramatically for individuals suffering from
acquired immune deficiency syndrome (AIDS). Early observations of this trend
and related medical literature raised questions concerning the long-term
sustainability of the mortality improvements. The Company also assumed that, if
the trend did continue, many of the individuals responding positively to
treatment could be returned to productive employment.
The previous review of mortality performed by the Company did not indicate a
need to change mortality assumptions. However, recent analysis indicates that
the improved mortality trend is sustainable and that rehabilitation of
afflicted individuals to return to work has been minimally successful to date.
AIDS related disabilities are approximately 2 percent of the Company's total
disability claims. In addition to the AIDS mortality trend, the recent review
demonstrates that survival from other frequently fatal diseases such as cancer
and heart disease has improved over recent periods and is now judged to be more
permanent due to advances in medical sciences and treatments. While the
treatment advances have lengthened life expectancies, they do not always result
in the claimant being able to return to work; thus, the ultimate level of
payments to be made on a disability claim increases. Of the total increase in
benefit liabilities for revised mortality assumptions, $85.4 million is related
to AIDS related disabilities and $92.4 million to cancer and other
disabilities.
The second component of the increase in benefit liabilities is the provision
for claims incurred but not yet reported, which resulted in an increase in
benefit liabilities of $101.4 million. This provision is an estimate of the
outstanding liability related to claims that have been incurred by individual
insureds as of the valuation date, but the claims have not yet been reported to
the Company. This liability is affected by the estimate of the
56
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
number of outstanding claims. Because of the long elimination periods,
generally 90 to 180 days or longer, the development of the factors must cover a
period of sufficient length to mitigate the effects of random fluctuations and
to establish the presence of trends. Recent trends indicate an increase in new
claim rates which results in an increase in the estimate of outstanding claims.
Another item affecting this liability is the estimate of the average cost of
each outstanding claim. The lengthening of time a claimant receives monthly
benefits resulting from the factors noted above also results in an increase in
the estimate of the average cost of each claim.
The third component of the change in benefit liabilities is the change in
the rate used to discount claim reserves, including IBNR reserves, which
resulted in a decrease of $114.8 million in benefit liabilities. Subsequent to
the merger, the Company significantly restructured the investment portfolio
backing these liabilities with the objective of improving asset and liability
management and improving yield. As part of this strategy, during the third
quarter of 1999, the Company sold $426.1 million of assets with a book yield of
5.98 percent and purchased $546.6 million of assets with a yield of 8.87
percent, improving the overall yield on the assets backing liabilities. As a
result of this investment restructuring and consistent with its policy, the
Company increased the rate used to discount claim reserves to 7.35 percent,
resulting in a decrease of $114.8 million in benefit liabilities.
The updated assumptions will be reflected in new and renewal pricing
actions, and a higher benefit ratio is expected over the next several quarters
until the effect of pricing actions is reflected in premium income. Actual
experience could fluctuate from these assumptions, and such fluctuations may
have a material positive or negative effect on earnings.
The results of operations for the separate companies and the combined
amounts for the periods prior to the merger were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
Six Months Ended ----------------------
June 30, 1999 1998 1997
---------------- ----------- -----------
(in millions of dollars)
<S> <C> <C> <C>
Revenue
Unum................................. $2,557.8 $4,581.3 $4,124.1
Provident............................ 1,988.9 3,938.0 3,553.2
-------- -------- --------
Combined Revenue..................... $4,546.7 $8,519.3 $7,677.3
======== ======== ========
Net Income (Loss)
Unum................................. $ (189.7) $ 363.4 $ 370.3
Provident............................ 87.8 254.0 247.3
-------- -------- --------
Combined Net Income (Loss)........... $ (101.9) $ 617.4 $ 617.6
======== ======== ========
</TABLE>
Included in Unum's net loss for the six months ended June 30, 1999, is
$131.8 million after tax for expenses related to the merger and the early
retirement offer to employees and $156.5 million after tax for the reserve
discount rate change. Unum's net loss for the six months ended June 30, 1999
also includes an after-tax first quarter charge of $88.0 million related to its
reinsurance businesses. Included in Provident's net income for the six months
ended June 30, 1999, is $62.0 million after tax for expenses related to the
merger and the early retirement offer to employees.
57
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Fair Values of Financial Instruments
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(in millions of dollars)
<S> <C> <C> <C> <C>
Assets
Fixed Maturity Securities:
Available-for-Sale............... $22,035.7 $22,035.7 $22,538.2 $22,538.2
Derivatives Hedging Available-
for-Sale........................ (2.5) (2.5) 194.0 194.0
Held-to-Maturity................. 323.5 318.8 307.0 352.5
Equity Securities................. 38.4 38.4 33.1 33.1
Mortgage Loans.................... 1,278.1 1,281.2 1,321.2 1,443.0
Policy Loans...................... 2,316.9 2,211.1 2,227.2 2,371.6
Short-term Investments............ 321.5 321.5 245.1 245.1
Cash and Bank Deposits............ 292.4 292.4 111.2 111.2
Deposit Assets.................... 616.6 616.6 729.7 729.7
Liabilities
Policyholders' Funds:
Deferred Annuity Products........ 2,014.6 2,014.6 2,487.2 2,487.2
Other............................ 538.7 551.3 833.0 862.5
Short-term Debt................... 1,075.0 1,075.0 323.7 323.7
Long-term Debt.................... 1,166.5 1,061.6 1,225.2 1,304.9
Company-Obligated Mandatorily
Redeemable Preferred Securities.. 300.0 268.5 300.0 312.4
Derivatives Hedging Liabilities... (5.9) (5.9) (4.2) (4.2)
</TABLE>
The following methods and assumptions were used by the Company in estimating
the fair values of its financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity securities
not actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments. See
Note 4 for the amortized cost and fair values of securities by security type
and by maturity date.
Equity Securities: Fair values for equity securities are based on quoted
market prices.
Mortgage Loans: Fair values for mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and maturities.
Mortgage loans with similar characteristics are aggregated for purposes of the
calculations.
Policy Loans: Fair values for policy loans are estimated using discounted
cash flow analyses, using interest rates currently being offered.
Short-term Investments, Cash and Bank Deposits, and Deposit Assets: Carrying
amounts for short-term investments, cash and bank deposits, and deposit assets
approximate fair value.
58
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Policyholders' Funds: The carrying amount for deferred annuity products
approximate fair value. Other policyholders funds include GICs and
supplementary contracts without life contingencies. Fair values for GICs are
estimated using discounted cash flow calculations, based on current market
interest rates available for similar contracts with maturities consistent with
those remaining for the contracts being valued. The carrying amount for
supplementary contracts without life contingencies approximates fair value.
Fair values for insurance contracts other than investment contracts are not
required to be disclosed. However, the fair values of liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance contracts.
Short-term Debt: The carrying amounts for short-term debt approximate fair
value.
Long-term Debt and Company-Obligated Mandatorily Redeemable Preferred
Securities: Fair values for long-term debt and company-obligated mandatorily
redeemable preferred securities were obtained from independent pricing services
or discounted cash flow analyses based on current incremental borrowing rates
for similar types of borrowing arrangements.
Derivatives: Fair values of derivative financial instruments are based on
market quotes or pricing models and represent the net amount of cash the
Company would have received or paid if the contracts had been settled or closed
on December 31.
Note 4--Investments
Securities
The amortized cost and fair values of securities by security type are as
follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions of dollars)
<S> <C> <C> <C> <C>
Available-for-Sale Securities
United States Government and
Government Agencies and
Authorities........................ $ 73.8 $ 2.8 $ 1.0 $ 75.6
States, Municipalities, and
Political Subdivisions............. 418.0 4.6 5.3 417.3
Foreign Governments................. 833.6 95.7 1.0 928.3
Public Utilities.................... 3,593.0 107.2 80.8 3,619.4
Mortgage-backed Securities.......... 2,831.4 30.3 97.0 2,764.7
All Other Corporate Bonds........... 14,265.3 411.2 607.6 14,068.9
Redeemable Preferred Stocks......... 127.3 47.8 16.1 159.0
--------- ------ ------ ---------
Total Fixed Maturity Securities.... 22,142.4 699.6 808.8 22,033.2
Equity Securities................... 15.9 23.4 0.9 38.4
--------- ------ ------ ---------
$22,158.3 $723.0 $809.7 $22,071.6
========= ====== ====== =========
Held-to-Maturity Securities
United States Government and
Government Agencies and
Authorities........................ $ 7.2 $ 0.6 $ -- $ 7.8
States, Municipalities, and
Political Subdivisions............. 2.1 0.1 -- 2.2
Mortgage-backed Securities.......... 298.0 2.7 7.5 293.2
All Other Corporate Bonds........... 16.2 -- 0.6 15.6
--------- ------ ------ ---------
$ 323.5 $ 3.4 $ 8.1 $ 318.8
========= ====== ====== =========
</TABLE>
59
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions of dollars)
<S> <C> <C> <C> <C>
Available-for-Sale Securities
United States Government and
Government Agencies and
Authorities........................ $ 248.2 $ 75.3 $ -- $ 323.5
States, Municipalities, and
Political Subdivisions............. 1,204.2 57.4 -- 1,261.6
Foreign Governments................. 868.3 203.4 0.1 1,071.6
Public Utilities.................... 3,814.5 447.1 19.4 4,242.2
Mortgage-backed Securities.......... 1,782.2 144.1 0.4 1,925.9
All Other Corporate Bonds........... 12,517.8 1,361.7 135.3 13,744.2
Redeemable Preferred Stocks......... 146.4 27.6 10.8 163.2
--------- -------- ------ ---------
Total Fixed Maturity Securities.... 20,581.6 2,316.6 166.0 22,732.2
Equity Securities................... 24.0 10.6 1.5 33.1
--------- -------- ------ ---------
$20,605.6 $2,327.2 $167.5 $22,765.3
========= ======== ====== =========
Held-to-Maturity Securities
United States Government and
Government Agencies and
Authorities........................ $ 13.5 $ 3.9 $ -- $ 17.4
States, Municipalities, and
Political Subdivisions............. 2.4 0.2 -- 2.6
Mortgage-backed Securities.......... 276.1 35.4 -- 311.5
All Other Corporate Bonds........... 15.0 6.0 -- 21.0
--------- -------- ------ ---------
$ 307.0 $ 45.5 $ -- $ 352.5
========= ======== ====== =========
</TABLE>
60
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and fair values of fixed maturity securities by maturity
date are shown below. The maturity dates have not been adjusted for possible
calls or prepayments.
<TABLE>
<CAPTION>
December 31, 1999
------------------------
Fair
Amortized Cost Value
-------------- ---------
(in millions of dollars)
<S> <C> <C>
Available-for-Sale Securities
1 year or less....................................... $ 251.3 $ 253.4
Over 1 year through 5 years.......................... 2,503.5 2,556.6
Over 5 years through 10 years........................ 5,687.3 5,650.7
Over 10 years........................................ 10,868.9 10,807.8
--------- ---------
19,311.0 19,268.5
Mortgage-backed Securities........................... 2,831.4 2,764.7
--------- ---------
$22,142.4 $22,033.2
========= =========
Held-to-Maturity Securities
1 year or less....................................... $ 0.9 $ 0.9
Over 1 year through 5 years.......................... 1.3 1.3
Over 5 years through 10 years........................ -- --
Over 10 years........................................ 23.3 23.4
--------- ---------
25.5 25.6
Mortgage-backed Securities........................... 298.0 293.2
--------- ---------
$ 323.5 $ 318.8
========= =========
</TABLE>
At December 31, 1999, the total investment in below-investment-grade fixed
maturity securities (securities rated below Baa3 by Moody's Investors Service
or an equivalent internal rating) was $2,147.4 million or 8.1 percent of
invested assets. The amortized cost of these securities was $2,205.3 million.
Deposit assets in the form of marketable securities held in trust are
reported in other assets in the consolidated statements of financial condition.
Unrealized gains (losses) on these securities were $(25.9) million and $211.6
million, respectively, at December 31, 1999 and 1998.
Adjustments to reserves for future policy and contract benefits that would
have been necessary if the unrealized investment gains and losses related to
the available-for-sale securities had been realized as of December 31, 1999 and
1998, were $(123.1) million and $891.7 million, respectively.
The components of the change in net unrealized gains on securities included
in other comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1999 1998 1997
--------- ------ --------
(in millions of dollars)
<S> <C> <C> <C>
Change in Net Unrealized Gains Before
Reclassification Adjustment..................... $(2,159.3) $244.6 $1,194.6
Reclassification Adjustment for Net Realized
Investment Gains................................ (87.1) (55.0) (11.5)
Change in Unrealized Gains on Deposit Assets..... (237.5) 83.9 127.8
Change in the Adjustment to Reserves for Future
Policy and Contract Benefits.................... 1,014.8 (72.6) (297.4)
Change in Deferred Tax........................... 519.5 (67.2) (351.0)
--------- ------ --------
Change in Net Unrealized Gains................. $ (949.6) $133.7 $ 662.5
========= ====== ========
</TABLE>
61
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage Loans
Mortgage loans are impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The recorded
investment in mortgage loans considered to be impaired was $18.1 million and
$20.7 million, respectively, at December 31, 1999 and 1998. Included in the
December 31, 1999 amount of $18.1 million were loans of $6.6 million which had
a related allowance for losses of $2.4 million and loans of $11.5 million which
had no related allowance for losses. Included in the December 31, 1998 amount
of $20.7 million were loans of $9.0 million which had a related allowance for
losses of $2.4 million and loans of $11.7 million which had no related
allowance for losses.
Investment Valuation Allowances
Additions to the investment valuation allowances represent realized
investment losses, and deductions represent the allowance released upon
disposal or restructuring of the related asset. Changes are as follows:
<TABLE>
<CAPTION>
Balance at Balance
Beginning at End
of Year Additions Deductions of Year
---------- --------- ---------- -------
(in millions of dollars)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Mortgage Loans......................... $38.7 $ 3.3 $ 7.1 $34.9
Real Estate............................ 36.3 10.6 6.2 40.7
----- ----- ----- -----
Total................................. $75.0 $13.9 $13.3 $75.6
===== ===== ===== =====
Year Ended December 31, 1998
Mortgage Loans......................... $34.9 $ 2.3 $ 4.4 $32.8
Real Estate............................ 40.7 10.5 -- 51.2
----- ----- ----- -----
Total................................. $75.6 $12.8 $ 4.4 $84.0
===== ===== ===== =====
Year Ended December 31, 1999
Mortgage Loans......................... $32.8 $ 0.1 $ -- $32.9
Real Estate............................ 51.2 -- 13.4 37.8
----- ----- ----- -----
Total................................. $84.0 $ 0.1 $13.4 $70.7
===== ===== ===== =====
</TABLE>
62
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Investment Income
Sources for net investment income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions of dollars)
<S> <C> <C> <C>
Fixed Maturity Securities....................... $1,712.7 $1,708.4 $1,659.8
Equity Securities............................... 0.1 0.4 0.4
Mortgage Loans.................................. 111.2 106.4 121.1
Real Estate..................................... 37.0 32.5 40.5
Policy Loans.................................... 222.3 206.5 198.7
Other Long-term Investments..................... 6.8 9.8 27.3
Short-term Investments.......................... 56.0 59.8 31.2
-------- -------- --------
Gross Investment Income........................ 2,146.1 2,123.8 2,079.0
Less Investment Expenses........................ 63.0 64.3 38.9
Less Investment Income on PFA Assets............ 23.4 24.1 24.4
-------- -------- --------
Net Investment Income.......................... $2,059.7 $2,035.4 $2,015.7
======== ======== ========
Realized Investment Gains and Losses
Realized investment gains (losses) are as follows:
<CAPTION>
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions of dollars)
<S> <C> <C> <C>
Fixed Maturity Securities
Gross Gains.................................... $ 82.6 $ 69.6 $ 80.8
Gross Losses................................... (99.9) (16.1) (60.2)
Equity Securities............................... 25.8 4.2 0.6
Mortgage Loans, Real Estate, and Other Invested
Assets......................................... 17.1 (4.5) (6.5)
Deposit Assets.................................. 61.4 1.4 --
Derivatives..................................... 0.1 0.4 (3.2)
-------- -------- --------
$ 87.1 $ 55.0 $ 11.5
======== ======== ========
</TABLE>
Note 5--Derivative Financial Instruments
The Company uses swaps, forwards, futures, and options to hedge interest
rate and currency risks and to match assets with its insurance liabilities.
Derivative Risks
The basic types of risks associated with derivatives are market risk (that
the value of the derivative will be adversely impacted by changes in the
market, primarily the change in interest and exchange rates) and credit risk
(that the counterparty will not perform according to the terms of the
contract). The market risk of the derivatives should generally offset the
market risk associated with the hedged financial instrument or liability.
To help limit the credit exposure of the derivatives, the Company has
entered into master netting agreements with its counterparties whereby
contracts in a gain position can be offset against contracts in a loss
63
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
position. The Company also typically enters into bilateral, cross-
collateralization agreements with its counterparties to help limit the credit
exposure of the derivatives. These agreements require the counterparty in a
loss position to submit acceptable collateral with the other counterparty in
the event the net loss position meets or exceeds an agreed upon amount. The
Company's current credit exposure on derivatives, which is limited to the value
of those contracts in a net gain position, was $12.5 million at December 31,
1999.
Hedging Activity
The table below summarizes by notional amounts the activity for each
category of derivatives.
<TABLE>
<CAPTION>
Swaps
--------------------------------
Receive Receive Receive
Variable/Pay Fixed/Pay Fixed/Pay
Fixed Fixed Variable Forwards Futures Options Total
------------ --------- --------- -------- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $300.0 $ -- $ 797.6 $ -- $ 188.2 $ -- $1,285.8
Acquisition of
Business--Note 15..... -- -- 9.4 390.0 -- -- 399.4
Additions.............. -- 168.3 420.0 -- 1,399.8 2,034.5 4,022.6
Terminations........... 300.0 -- 114.6 250.0 1,144.5 1,625.0 3,434.1
------ ------ -------- ------ -------- -------- --------
Balance at December 31,
1997................... -- 168.3 1,112.4 140.0 443.5 409.5 2,273.7
Additions.............. -- -- 90.0 -- 356.0 207.8 653.8
Terminations........... -- -- 122.4 140.0 688.5 405.0 1,355.9
------ ------ -------- ------ -------- -------- --------
Balance at December 31,
1998................... -- 168.3 1,080.0 -- 111.0 212.3 1,571.6
Additions.............. 8.2 12.3 406.0 82.9 325.0 459.0 1,293.4
Terminations........... -- 168.3 320.0 -- 436.0 370.0 1,294.3
------ ------ -------- ------ -------- -------- --------
Balance at December 31,
1999................... $ 8.2 $ 12.3 $1,166.0 $ 82.9 $ -- $ 301.3 $1,570.7
====== ====== ======== ====== ======== ======== ========
</TABLE>
Additions and terminations reported above for futures and options include
roll activity, which is the closing out of an old contract and initiation of a
new one when a contract is about to mature but the need for it still exists.
The following table summarizes the timing of anticipated settlements of
interest rate swaps outstanding at December 31, 1999, whereby the Company
receives a fixed rate and pays a variable rate. The weighted average interest
rates assume current market conditions.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2007 Total
------ ------ ------ ----- ------ --------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Variable:
Notional Value............... $530.0 $400.0 $150.0 $26.0 $ 60.0 $1,166.0
Weighted Average Receive
Rate........................ 7.33% 7.58% 7.54% 7.45% 13.37% 7.76%
Weighted Average Pay Rate.... 6.00% 6.00% 6.00% 6.00% 11.84% 6.30%
</TABLE>
Hedging programs for derivative activity are as follows:
Program 1
The Company has executed a series of cash flow hedges in the group
disability, individual disability, and the group single premium annuities
portfolios using interest rate swaps, forwards, futures, and options. The
purpose of these hedges is to lock in the reinvestment rates on future cash
flows and protect the Company from the potential adverse impact of declining
interest rates on the associated policy reserves. The Company uses
64
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
futures contracts to partially offset hedges on fixed maturity securities
purchased prior to the termination date of interest rate swaps and forwards.
The Company also uses futures contracts to replace terminated forwards and
interest rate swaps in order to maintain hedges until the fixed maturity
securities are purchased. The notional amount outstanding for these cash flow
hedges was $1,482.9 million, $1,285.0 million, and $1,528.5 million at December
31, 1999, 1998, and 1997, respectively. The deferred gain on these contracts
was $94.0 million, $63.7 million, and $37.6 million, at December 31, 1999,
1998, and 1997, respectively.
In 1999, 1998, and 1997, the Company amortized into net investment income
$3.1 million, $1.9 million, and $0.6 million, respectively, of the deferred
gains from this program. Realized investment gains and losses from this program
during 1999, 1998 and 1997 were immaterial.
At December 31, 1999 and 1998, the Company had an unrealized gain of $0.3
million and $194.0 million, respectively, on the open interest rate swaps,
forwards, and futures. These derivatives are scheduled to be terminated in the
years 2000 through 2003 as assets are purchased with the future anticipated
cash flows.
Future contracts to hedge anticipated cash flows have also been utilized for
other product portfolios. At December 31, 1999, the Company had no open
contracts for other product portfolios.
Program 2
In 1998 and 1997, the Company sold indexed annuity products whereby a
portion of the crediting rate on the annuity was based on the performance of
the S&P 500 stock index. In order to hedge this fluctuating credit rate, the
Company purchased options with the S&P 500 stock index as the underlying item.
These options will be settled with a net cash payment to the Company at the
expiration date if the S&P 500 index moves above the option contract's strike
price; otherwise, no cash payment will take place at expiration. At December
31, 1999, the outstanding notional amount of these options was $7.3 million,
and the fair value and carrying amount were $5.9 million.
Program 3
In 1999, the Company entered into a foreign currency interest rate swap to
hedge its currency risk in Japan. The notional amount of this swap is $8.2
million and is scheduled for termination in 2000. The unrealized loss on this
swap at December 31, 1999 was immaterial. Additionally, the Company entered
into a foreign currency interest rate swap to hedge the currency risk of
certain foreign currency denominated fixed income securities purchased in 1999.
The notional amount outstanding for this currency hedge was $12.3 million, and
the hedge is scheduled for termination in 2006. The unrealized gain on this
swap at December 31, 1999 was immaterial.
In 1997, the Company borrowed $168.3 million through a private placement
with an investor in the United Kingdom. Upon issuance of the borrowing, the
Company entered into foreign currency and interest rate swap agreements that
converted the principal amount to U.S. dollars and the interest obligation on
the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate.
The private placement issue was settled in 1999, and the hedging arrangement
was terminated.
Program 4
In 1999, the Company entered into an interest rate swap to convert a
variable rate security into a fixed rate security. The notional amount for this
interest rate swap is $60.0 million and is scheduled for termination in 2007.
Income from settlements of payment streams on this interest rate swap agreement
as reported in the consolidated statements of operations was $0.8 million. At
December 31, 1999, the Company had an unrealized loss of $2.9 million on this
swap.
65
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Program 5
In 1998 and 1997, the Company opened interest rate futures contracts and
wrote options on interest rate futures in order to hedge the borrowing rate on
the anticipated refinancing of long-term debt. The Company realized a $10.3
million before-tax investment loss when these contracts were terminated. The
loss on these contracts was deferred and is being amortized as an adjustment to
interest and debt expense.
At December 31, 1999, the Company had no open contracts under this program.
Program 6
The Company routinely uses forwards and futures to protect margins by
reducing the risk of changes in interest rates between the time of asset
purchase and the associated sale of an asset or sale of new business.
Gains or losses on termination of these forwards and futures are deferred
and reported as an adjustment of the carrying amount of the hedged asset or
liability and amortized into earnings over the lives of the hedged items. The
net deferred gain associated with this activity was $26.7 million and $28.9
million at December 31, 1999 and 1998, respectively.
The deferred gain amortized into earnings in the consolidated statements of
operations was $1.3 million, $1.3 million, and $2.0 million for the years ended
December 31, 1999, 1998, and 1997, respectively.
At December 31, 1999, the Company had no open contracts under this program.
Program 7
In 1994, the Company announced that it would discontinue the sale of
traditional GICs. At that time, the Company decided to convert from a duration
matching investment approach to a cash flow matching investment approach for
its GIC business. The Company hedged the risk that a rise in interest rates
would reduce the price on future sales of assets which would be necessary to
fund maturing liabilities by entering into forward interest rate swaps (receive
variable/pay fixed).
During 1997, the Company terminated the remaining $300.0 million of these
forward swaps as scheduled, realizing a $4.1 million before-tax investment
loss. In addition, the Company used offsetting futures contracts to partially
remove the hedge as fixed maturity securities were sold prior to the
termination date of the interest rate swaps. The Company realized a $0.1
million before-tax investment gain on the termination of these futures
contracts. The Company sold $302.0 million of fixed maturity securities
associated with this hedge, realizing a $4.3 million before-tax investment
gain.
At December 31, 1999, the Company had no open contracts under this program.
Note 6--Value of Business Acquired
A reconciliation of value of business acquired is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(in millions of
dollars)
<S> <C> <C> <C>
Balance at January 1.................................... $570.5 $699.0 $ 63.0
Acquisition of Business................................ -- 5.0 675.0
Disposition of Business................................ -- (90.6) --
Interest Accrued....................................... 40.4 43.2 37.6
Amortization........................................... (78.7) (81.8) (72.1)
Change in Foreign Currency Translation Adjustment...... 1.9 (4.3) (4.5)
------ ------ ------
Balance at December 31.................................. $534.1 $570.5 $699.0
====== ====== ======
</TABLE>
66
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated net amortization of value of business acquired for each of the
next five years is $37.1 million in 2000, $36.2 million in 2001, $35.3 million
in 2002, $34.3 million in 2003, and $33.2 million in 2004.
Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(in millions of dollars)
<S> <C> <C> <C>
Balance at January 1............................. $13,159.1 $11,979.3 $ 8,212.1
Less Reinsurance Recoverables................... 1,614.8 1,494.3 753.4
--------- --------- ---------
Net Balance at January 1......................... 11,544.3 10,485.0 7,458.7
Acquisition of Business--Note 15................. -- -- 2,295.4
Incurred Related to:
Current Year.................................... 4,853.8 4,220.9 3,434.9
Prior Years
Interest....................................... 705.4 646.6 585.5
Incurred....................................... 757.5 40.8 42.1
--------- --------- ---------
Total Incurred................................... 6,316.7 4,908.3 4,062.5
--------- --------- ---------
Paid Related to:
Current Year.................................... 1,538.2 1,266.7 959.4
Prior Years..................................... 3,066.2 2,582.3 2,372.2
--------- --------- ---------
Total Paid....................................... 4,604.4 3,849.0 3,331.6
--------- --------- ---------
Net Balance at December 31....................... 13,256.6 11,544.3 10,485.0
Plus Reinsurance Recoverables................... 2,087.9 1,614.8 1,494.3
--------- --------- ---------
Balance at December 31........................... $15,344.5 $13,159.1 $11,979.3
========= ========= =========
</TABLE>
The majority of the net balances are related to disabled lives claims with
long-tail payouts on which interest earned on assets backing liabilities is an
integral part of pricing and reserving. Interest accrued on prior year reserves
has been calculated on the opening reserve balance less one-half year's cash
payments at the average reserve discount rate used by the Company during 1999,
1998, and 1997. During 1999, unpaid claims incurred for prior years increased
primarily due to changes in reserves as disclosed in Notes 2 and 13.
It is the Company's policy to estimate the ultimate cost of settling claims
in each reporting period based upon the information available to management at
the time. Actual claim resolution results are monitored and compared to those
anticipated in claim reserve assumptions. Claim resolution rate assumptions are
based upon industry standards adjusted as appropriate to reflect actual Company
experience as well as Company actions which would have a material impact on
claim resolutions. Company actions for which plans have been established and
committed to by management are factors which would modify past experience in
establishing claim reserves. Adjustments to the reserve assumptions will be
made if expectations change. Given that insurance products contain inherent
risks and uncertainties, the ultimate liability may be more or less than such
estimates indicate.
During the fourth quarter of 1998, the Company recorded a $153.0 million
increase in the reserve for individual and group disability claims incurred as
of December 31, 1998. Incurred claims include claims known as of that date and
an estimate of those claims that have been incurred but not yet reported.
Claims that have
67
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been incurred but not yet reported are considered liabilities of the Company.
These claims are expected to be reported during 1999 and will be affected by
the claims operations integration activities. The $153.0 million claim reserve
increase represents the estimated value of cash payments to be made to these
claimants over the life of the claims as a result of the claims operations
integration activities.
Management believes the reserve adjustment was required based upon the
integration plans it had in place and to which it had committed and based upon
its ability to develop a reasonable estimate of the financial impact of the
expected disruption to the claims management process. Claims management is an
integral part of the disability operations. Disruptions in that process can
create material, short-term increases in claim costs. The merger has had a
near-term adverse impact on the efficiency and effectiveness of the Company's
claims management function resulting in some delay in claim resolutions and
additional claim payments to policyholders. Claims personnel have been
distracted from normal claims management activities as a result of planning and
implementing the integration of the two companies' claims organizations. In
addition, employee turnover and additional training have reduced resources and
productivity. An important part of the claims management process is assisting
disabled policyholders with rehabilitation efforts. This complex activity is
important to the policyholders because it can assist them in returning to
productive work and lifestyles more quickly, and it is important to the Company
because it shortens the duration of claim payments and thereby reduces the
ultimate cost of settling claims.
Immediately following the announcement of the merger and continuing into
December of 1998, senior management of the Company worked to develop the
strategic direction of the Company's claims organization. As part of the
strategic direction, senior management committed claims management personnel to
be involved in developing the detailed integration plans and implementing the
plans during 1999. Knowing that those involved in the claims operations
integration activities would not be available full time to perform their normal
claims management functions, management deemed it necessary to anticipate this
effect on the claim reserves at December 31, 1998. Prior to the merger, during
the first six months of 1999 approximately 90 claims managers and benefit
specialists spent nearly 40 percent of their time developing the detailed
integration plans. Effective with the merger, virtually all claims personnel
have been involved in the process of implementing the new work processes and
required training. The implementation and training efforts were estimated to
require an average of one month of productive time from each of the claims
staff between June 30, 1999 and December 31, 1999. Management now believes that
implementation and related systems conversions will continue into the second
quarter of 2000. However, due to actions taken by management to mitigate
effects on resolution rates, the effect on new claim resolution rates is not
anticipated to be material after the end of 1999. Actions by management to
mitigate the effect on resolution rates include aggressive hiring of new claims
staff, restrictions on early retirement elections, selective use of personnel
for integration planning, and significant communications with staff members.
The reserving process begins with the assumptions indicated by past
experience and is modified for current trends and other known factors. The
Company anticipated the merger-related developments discussed above would
generate a significant change in claims department productivity, reducing claim
resolution rates, a key assumption when establishing reserves. Management
developed actions to mitigate the impact of the merger on claims department
productivity, including the hiring of additional claims staff and the
restriction of early retirement elections by claims personnel. Where feasible,
management also planned to obtain additional claims management resources
through outsourcing. All such costs are expensed in the period incurred and are
not material in relation to results of operations. Management reviewed its
integration plans and the actions intended to mitigate the impact of the
integration with claims managers to determine the extent of disruption in
normal activities. Considering all of the above, the revised claim resolution
rates, as a percentage of original assumptions (i.e., before adjusting for the
effect of the claims operations integration activities), were 90 percent
68
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the first and second quarters of 1999, 84 percent for the third quarter,
and 89 percent for the fourth quarter of 1999. The revised claim resolution
rates for the third quarter and fourth quarter were lower than the first and
second quarters because all claims personnel were expected to be involved in
the implementation and training efforts. The effect of integration activities
on new claim resolution rates is not expected to be material after December 31,
1999.
In order to validate these assumptions, the Company also examined the
historical level and pattern of claims management effectiveness as reflected in
claim resolution rates for the insurance subsidiaries of The Paul Revere
Corporation (Paul Revere) which was acquired in 1997. Subsequent to the Paul
Revere acquisition and integration, management has been able to develop
experience studies for the Paul Revere business. These studies are prepared for
pricing purposes and to identify trends or changes in the business.
These studies, which were not available for the Paul Revere business at the
time of the acquisition, allowed management to gain a greater understanding of
the impact of the claims integration activities on the claim resolution rates
of the Paul Revere business. These studies show that the Paul Revere business
experienced a decline in its claim resolution rates from a base in 1995 of 100
percent to 90.4 percent in 1996 and 80.3 percent in 1997. Changes in morbidity
and other factors were considered and reviewed to determine that a primary
cause of the reduced claim resolution rates was the disruption caused by the
change in the claims management process. Although the circumstances of the
merger are very different from the Paul Revere acquisition, the claims
integration activities are similar, and the Paul Revere experience is relevant.
The primary circumstances that created claims disruption for Paul Revere were
the initial lack of clarity of the organization, process, and structure, the
need to plan for a significant transition to new claims processes, and the
training and implementation related to those changes. All of those elements
have impacted the Company as a result of the merger. One primary difference is
that the duration of the potential disruption in the merger is not expected to
be as long as was the case with the Paul Revere acquisition. The Company's
revised claim resolution rates assumed for the first two quarters of 1999 were
compared to the Paul Revere experience in 1996, the period preceding the
acquisition. It was determined that the revised assumptions appeared to be
reasonable. During the third and fourth quarters of 1999, the claims
integration plans provide for increased activity due to training and
implementation of new processes. The Company's revised claim resolution rates
for the third and fourth quarters of 1999 were compared to the Paul Revere
experience in 1997 during the implementation and training phase of the Paul
Revere claims organization when claims resolution rates declined to 80.3
percent of prior levels. Management judged that it was reasonable to assume
that the impact to the Company would be less than it was to Paul Revere since
some of the Company's claims management practices will not change. The
historical experience of Paul Revere provides a statistical reference for the
expected experience for the Company when adjusted for the projected effects of
the claims integration plans.
In order to evaluate the financial effect of merger-related integration
activities, the Company projected the ultimate cost of settling all claims
incurred as of December 31, 1998, using the revised claim resolution rates.
This projection was compared to the projection excluding the adjustment to the
claim resolution rates to obtain the amount of the charge. The Company reviewed
its estimates of the financial impact of the claims operations integration
activities with its actuaries and independent auditors.
Claim reserves at December 31, 1998 include $153.0 million as the estimated
value of projected additional claim payments resulting from these claims
operations integration activities. This 1998 reserve increase was reflected as
a $142.6 million increase in benefits and reserves for future benefits, and a
$10.4 million reduction in other income. The adverse impact of the claims
operations integration activities on new claim resolution rates is not expected
to be material after the end of 1999. As part of the periodic review of claim
reserves, management will review the status and execution of the claims
operations integration plans with the claims
69
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management on a quarterly basis. The review will consider claims operations
integration activities planned for future periods and evaluate whether the
future planned activities will result in claim resolution rates consistent with
those considered in the reserve established at December 31, 1998.
Quarterly information concerning the estimated and actual impact of the
claims operations integration activities is shown below. The $7.5 million
favorable variance from assumptions for the year was reflected in 1999
earnings.
<TABLE>
<CAPTION>
1999
---------------------------
1st 2nd 3rd 4th
------ ----- ----- -----
(in millions of dollars)
<S> <C> <C> <C> <C>
Revised Claim Resolution Rates at December
31, 1998.................................. 90% 90% 84% 89%
Actual Claim Resolution Rates for the
Period.................................... 89% 90% 84% 90%
Estimated Effect of Lower Claim Resolution
Rates at December 31, 1998................ $ 36.2 $36.2 $47.6 $33.0
Actual Effect of Lower Claim Resolution
Rates for the Period...................... $ 39.2 $36.2 $43.0 $27.1
Liability Remaining for Claims Operation
Integration Activities at End of Period... $116.8 $80.6 $33.0 $ --
</TABLE>
Management expects the remaining claims operations integration activities to
impact claim reserves as anticipated at December 31, 1998. The expected
disruption to the claims management process and the related increase to the
disability claim reserve was considered in the review and update of assumptions
underlying the group disability policy and contract benefit liabilities
completed in the third quarter of 1999. Management will continue to evaluate
the impact of the merger on disability claims experience and the assumptions
related to expected claim resolutions.
Note 8--Federal Income Taxes
A reconciliation of the income tax (benefit) attributable to continuing
operations computed at U.S. federal statutory tax rates to the income tax
expense (credit) as included in the consolidated statements of operations
follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1999 % 1998 % 1997 %
------ ----- ------ ---- ------ ----
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Statutory Income Tax (Credit)...... $(57.9) 35.0 % $322.1 35.0 % $320.8 35.0
Tax-exempt Investment Income....... (22.0) 13.3 (28.9) (3.1) (22.5) (2.5)
Income Tax Settlements............. (14.2) 8.6 -- -- -- --
Business Restructuring Charges..... 17.2 (10.4) -- -- -- --
Change in Valuation Allowance...... 65.7 (39.7) 1.2 0.1 (3.0) (0.3)
Goodwill........................... 25.9 (15.7) 14.9 1.6 5.6 0.6
Other Items, Net................... 2.7 (1.6) (6.5) (0.7) (1.8) (0.2)
------ ----- ------ ---- ------ ----
Effective Tax...................... $ 17.4 (10.5)% $302.8 32.9 % $299.1 32.6%
====== ===== ====== ==== ====== ====
</TABLE>
70
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income tax liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
---------------
1999 1998
------ --------
(in millions of
dollars)
<S> <C> <C>
Deferred Tax Liability
Deferred Policy Acquisition Costs............................. $433.4 $ 346.4
Bond Market Discount.......................................... 8.1 15.7
Net Unrealized Investment Gains............................... 0.9 520.4
Value of Business Acquired.................................... 184.6 200.1
Property and Equipment........................................ 22.0 28.3
Other......................................................... 20.9 16.1
------ --------
Gross Deferred Tax Liability.................................. 669.9 1,127.0
------ --------
Deferred Tax Asset
Net Operating Losses.......................................... 255.0 6.6
Alternative Minimum Tax Credits............................... 28.2 35.3
Accrued Liabilities........................................... 30.6 32.0
Reserves...................................................... -- 38.4
Realized Investment Gains and Losses.......................... 37.7 43.9
Postretirement Benefits....................................... 59.9 53.9
Other Employee Benefits....................................... 72.8 31.5
Other......................................................... 21.3 29.6
------ --------
Gross Deferred Tax Asset...................................... 505.5 271.2
Less Valuation Allowance...................................... 73.9 8.2
------ --------
Net Deferred Tax Asset........................................ 431.6 263.0
------ --------
Net Deferred Tax Liability.................................... $238.3 $ 864.0
====== ========
</TABLE>
Under the Life Insurance Company Tax Act of 1959, life companies were
required to maintain a policyholders' surplus account containing the
accumulated portion of current income which had not been subjected to income
tax in the year earned. The Deficit Reduction Act of 1984 requires that no
future amounts be added after 1983 to the policyholders' surplus account.
Further, any future distributions from the account would become subject to
federal income taxes at the general corporate federal income tax rate then in
effect. The amount of the policyholders' surplus account at December 31, 1999,
is approximately $233.4 million. Future distributions from the policyholders'
surplus account are deemed to occur if a statutorily prescribed maximum for the
account is less than the value of the account or if dividend distributions
exceed the total amount accumulated as currently taxable income in the year
earned. If the entire policyholders' surplus account were deemed distributed in
2000, this would result in a tax of approximately $81.7 million. No current or
deferred federal income taxes have been provided on these amounts because
management considers the conditions under which such taxes would be paid to be
remote.
71
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's consolidated statements of operations include the following
amounts of income (loss) subject to foreign taxation and the related foreign
income tax expense (credit):
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------- ----- -----
(in millions of
dollars)
<S> <C> <C> <C>
Income (Loss) Before Tax Subject to Foreign Taxation..... $(213.5) $76.5 $73.3
======= ===== =====
Foreign Income Tax Expense (Credit):
Current................................................ $ 38.0 $26.8 $26.5
Deferred............................................... (40.9) 0.3 (1.5)
------- ----- -----
Total................................................. $ (2.9) $27.1 $25.0
======= ===== =====
</TABLE>
During 1999, the Company reached a settlement with the Internal Revenue
Service (IRS) relating to its federal income tax liability for the 1986 through
1992 tax years, and the IRS continued its examination of subsequent years. For
most of the Company's subsidiaries, tax years through 1992 are closed to
further assessment by the IRS. Management believes any future adjustments that
may result from IRS examinations of tax returns will not have a material impact
on the financial position, liquidity, or results of operations of the Company.
During 1999, results increased $36.8 million due to settlements of prior year
tax issues with the IRS.
The Company's subsidiaries had net operating loss carryforwards of
approximately $725.0 million, alternative minimum tax credit carryforwards of
approximately $28.0 million, and foreign tax credit carryforwards of $4.0
million as of December 31, 1999. The majority of the net operating loss
carryforwards will begin to expire, if not utilized, in 2015; the alternative
minimum tax credits do not expire; the foreign tax credits begin expiring in
2003.
Federal income taxes paid during 1999, 1998, and 1997 were $77.8 million,
$104.8 million, and $192.8 million, respectively.
Note 9--Debt and Company-Obligated Mandatorily Redeemable Preferred Securities
Debt
Short-term debt consists of the following at December 31 (in millions):
<TABLE>
<CAPTION>
1999 1998
---------------------- ---------------------
Weighted Weighted
Average Average
Balance Interest Rate Balance Interest Rate
-------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Commercial Paper................. $ 597.8 6.3% $ 85.7 5.5%
Current Portion of Medium-term
Notes Payable................... 260.0 6.6 21.4 7.0
Private Placements............... 200.0 7.0 168.3 5.8
Reverse Repurchase Agreements.... -- -- 39.4 5.8
Other Short-term Debt............ 17.2 2.9 8.9 1.1
-------- ------
Total.......................... $1,075.0 $323.7
======== ======
</TABLE>
72
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C> <C>
Long-term debt consists of the following:
<CAPTION>
December 31
-----------------
<S> <C> <C>
<CAPTION>
1999 1998
-------- --------
(in millions of
dollars)
<S> <C> <C>
Notes @ 6.75% due 2028, callable at or above par............ $ 250.0 $ 250.0
Notes @ 7.25% due 2028, callable at or above par............ 200.0 200.0
Notes @ 7.0% due 2018, non-callable......................... 200.0 200.0
Notes @ 6.375% due 2005, non-callable....................... 200.0 200.0
Monthly Income Debt Securities @ 8.8% due 2025, callable in
2000 at par................................................ 172.5 172.5
Medium-term Notes @ 5.9% to 7.5% due 2002 to 2028, non-
callable................................................... 144.0 202.7
-------- --------
Total..................................................... $1,166.5 $1,225.2
======== ========
</TABLE>
Of the $1,166.5 million of long-term debt at December 31, 1999, $35.0
million will mature in 2002, $20.0 million will mature in 2003, and $1,111.5
million will mature in 2004 and thereafter.
The Company has a $500.0 million revolving credit facility which expires
October 31, 2000 and a $500.0 million revolving credit facility which expires
October 1, 2001. The Company's commercial paper program, which was increased to
$1.0 billion during 1999, is supported by the revolving credit facilities and
is available for general liquidity needs, capital expansion, and acquisitions.
The revolving credit facilities contain certain covenants that, among other
provisions, require maintenance of certain levels of stockholders' equity and
limits on debt levels. At December 31, 1999, approximately $396.0 million was
available for additional financing under the Company's existing revolving
credit facilities.
Interest paid on short-term and long-term debt during 1999, 1998, and 1997
was $115.2 million, $100.5 million, and $84.7 million, respectively.
Company-Obligated Mandatorily Redeemable Preferred Securities
In March 1998, Provident Financing Trust I, a wholly-owned subsidiary trust
of the Company, issued $300.0 million of 7.405% capital securities in a public
offering. These capital securities, which mature on March 15, 2038, are fully
and unconditionally guaranteed by the Company, have a liquidation value of
$1,000 per capital security, and have a mandatory redemption feature under
certain circumstances. The Company issued $300.0 million of 7.405% junior
subordinated deferrable interest debentures which mature on March 15, 2038, to
the subsidiary trust in connection with the capital securities offering. The
sole assets of the subsidiary trust are the junior subordinated debt
securities.
Interest costs related to these securities are reported in the consolidated
statements of operations as a component of interest and debt expense. Interest
paid on these securities during 1999 and 1998 was $22.2 million and $11.1
million, respectively.
73
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Pensions and Other Postretirement Benefits
The Company sponsors several defined benefit pension and postretirement
plans for its employees. The following tables provide the changes in the
benefit obligation and fair value of plan assets for the years ended December
31, 1999 and 1998, and statements of the funded status of the plans as of
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
(in millions of dollars)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Balance at January 1.................... $ 600.7 $ 538.6 $ 152.1 $ 125.5
Service Cost........................... 21.2 23.3 5.7 5.5
Interest Cost.......................... 43.0 38.3 11.4 9.5
Plan Amendments........................ -- -- (13.2) 8.7
Actuarial (Gain) Loss.................. (110.7) 19.1 (6.2) 9.8
Early Retirement--Note 2............... 95.2 -- 30.7 --
Benefits Paid.......................... (42.3) (18.6) (15.0) (6.9)
-------- -------- ------- -------
Balance at December 31.................. 607.1 600.7 165.5 152.1
-------- -------- ------- -------
Change in Fair Value of Plan Assets
Balance at January 1.................... 809.4 705.0 10.0 9.5
Actual Return on Plan Assets........... 159.8 110.2 1.7 0.5
Company Contributions.................. 0.4 12.8 14.5 6.8
Benefits Paid.......................... (42.3) (18.6) (15.0) (6.9)
-------- -------- ------- -------
Balance at December 31.................. 927.3 809.4 11.2 9.9
-------- -------- ------- -------
Funded (Underfunded) Status of the Plans
at December 31......................... 320.2 208.7 (154.3) (142.2)
Unrecognized Net Actuarial Gains........ (355.1) (179.5) (7.0) (1.4)
Unrecognized Prior Service Cost......... (18.4) (20.6) (26.0) (13.7)
Unrecognized Net Transition Obligation.. 1.2 1.7 -- --
-------- -------- ------- -------
Prepaid (Accrued) Benefit Cost.......... $ (52.1) $ 10.3 $(187.3) $(157.3)
-------- -------- ------- -------
</TABLE>
At December 31, 1999, the plan assets include 448,784 shares of the
Company's common stock with a fair value of $14.4 million. The amount of
dividends paid during 1999 was not material.
The weighted average assumptions used in the measurement of the Company's
benefit obligation as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------------- -----------------------
1999 1998 1999 1998
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Discount Rate........... 7.75% 6.75% 7.75% 6.75%
Expected Return on Plan
Assets................. 8.50 to 10.00% 8.50 to 9.25% 8.50% 8.50%
Rate of Compensation
Increase............... 4.00% 4.00 to 4.25% -- --
</TABLE>
For measurement purposes, the annual rate of increase in the per capita cost
of covered health care benefits assumed for 2000 was a range of 5.50 percent to
7.50 percent. The rate range was assumed to change gradually to a rate of 5.50
percent for 2006 and remain at that level thereafter.
74
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one percent change in the assumed health care cost trend
rate would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
(in millions of
dollars)
<S> <C> <C>
Effect on the Service and Interest Cost Components of
Net Periodic Postretirement Health Care Benefit Cost.. $ 1.8 $ (1.7)
Effect on the Health Care Component of the Accumulated
Postretirement Benefit Obligation..................... $10.7 $(10.0)
</TABLE>
The following table provides the components of the net periodic benefit cost
(credit) and early retirement cost for the plans during 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------------- -------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------- ------- -------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Service Cost............... $ 21.2 $ 23.3 $ 22.0 $ 5.7 $ 5.5 $ 4.1
Interest Cost.............. 43.0 38.3 35.7 11.4 9.5 8.4
Expected Return on Plan
Assets.................... (79.9) (62.8) (50.6) (0.9) (0.8) (0.7)
Net Amortization and
Deferral.................. (13.4) (9.2) (7.1) 2.4 (4.0) (5.3)
Early Retirement--Note 2... 95.2 -- -- 30.7 -- --
------ ------ ------ ------- ------- -------
$ 66.1 $(10.4) $ -- $ 49.3 $ 10.2 $ 6.5
====== ====== ====== ======= ======= =======
</TABLE>
Note 11--Stockholders' Equity and Earnings Per Share
Stockholders' Equity
In accordance with the restated certificate of incorporation, the Company
has 25,000,000 shares of preferred stock authorized with a par value of $0.10
per share. No preferred shares have been issued to date.
During February 1998, the Company redeemed its 8.10% cumulative preferred
stock outstanding of $156.2 million at $150 per share equivalent to $25 per
depositary share.
In March 1997 and July 1997, the Boards of Directors of Unum and Provident,
respectively, authorized two-for-one stock splits. These stock splits were
effected in the form of stock dividends distributed in 1997. As a result of
this action, $11.9 million was transferred from additional paid-in capital to
common stock. Historical share and per share amounts in the consolidated
financial statements and notes thereto reflect these stock splits.
75
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Common Share
The computations of earnings per common share and earnings per common share
assuming dilution are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1999 1998 1997
---------- ---------- ----------
(in millions, except share data)
<S> <C> <C> <C>
Numerator
Net Income (Loss)........................... $ (182.9) $ 617.4 $ 617.6
Preferred Stock Dividends................... -- 1.9 12.7
---------- ---------- ----------
Available to Common Stockholders............ $ (182.9) $ 615.5 $ 604.9
========== ========== ==========
Denominator (000s)
Weighted Average Common Shares--Basic....... 239,080.6 236,975.2 230,741.2
Dilution for Assumed Exercise of Stock
Options.................................... -- 5,373.7 5,077.0
---------- ---------- ----------
Weighted Average Common Shares--Assuming
Dilution................................... 239,080.6 242,348.9 235,818.2
========== ========== ==========
Net Income (Loss) Per Common Share
Basic....................................... $ (0.77) $ 2.60 $ 2.62
Assuming Dilution........................... $ (0.77) $ 2.54 $ 2.57
</TABLE>
In computing earnings per share assuming dilution, only potential common
shares that are dilutive (those that reduce earnings per share) are included.
Potential common shares are not used when computing earnings per share assuming
dilution if the results would be antidilutive, such as when a net loss is
reported or if options are out of the money. In-the-money options to purchase
approximately 3.1 million common shares for the year ended December 31, 1999,
were not considered dilutive due to net losses being reported for the period.
Approximately 3.7 million and 2.4 million options for the years ended December
31, 1999 and 1998, respectively, were not considered dilutive due to the
options being out of the money. Out-of-the-money options for the year ended
December 31, 1997 were immaterial.
Note 12--Incentive Compensation and Stock Purchase Plans
Annual Incentive Compensation
The Company has several annual incentive plans for certain employees and
executive officers that are designed to encourage achievement of certain goals.
Compensation cost recognized in the consolidated statements of operations for
annual incentive plans is $6.6 million, $38.1 million, and $43.6 million for
1999, 1998, and 1997, respectively.
Stock Plans
Under the Stock Plan of 1999 (Stock Plan), the Company has available up to
7,500,000 shares of common stock for awards to its employees, officers,
producers, and directors. Awards may be in the form of stock options, stock
appreciation rights, restricted stock awards, dividend equivalent awards, or
any other right or interest relating to stock. The number of shares available
to be issued as restricted stock or unrestricted stock awards is limited to
2,250,000 shares. The exercise price for stock options issued under the Stock
Plan shall not be less than the fair market value of the Company's stock as of
the grant date. The options have a maximum term of ten years after the date of
grant.
76
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior to the Stock Plan, the Company had various stock option and stock
award programs. For all stock option plans the exercise price of each option
was not less than the fair market value of the Company's stock at the date of
grant. In accordance with stock plan provisions, outstanding stock options and
restricted stock became immediately exercisable as a result of a change in
control (see Note 2).
Summaries of the Company's stock options issued under the various plans are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1....................... 15,023 $30.43 15,516 $26.01 13,833 $21.90
Granted................. 3,795 48.15 2,406 51.68 4,587 36.09
Exercised............... (3,460) 22.38 (2,402) 22.45 (2,028) 20.44
Forfeited or Expired.... (1,059) 44.43 (497) 34.89 (876) 27.92
------ ------ ------
Outstanding at December
31...................... 14,299 36.04 15,023 30.43 15,516 26.01
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------
Options
Options Outstanding Exercisable
--------------------------- ---------------
Weighted
Average
Remaining Weighted Weighted
Years Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices (000s) Life Price (000s) Price
- --------------- ------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$10 to 19........................... 1,792 3.1 $17.25 1,792 $17.25
20 to 29........................... 3,576 4.5 25.58 3,511 25.51
30 to 39........................... 3,923 6.2 35.18 3,916 35.18
40 to 49........................... 1,787 8.6 45.53 435 46.54
50 to 59........................... 3,221 7.8 53.87 2,250 53.31
------ ------
10 to 59........................... 14,299 6.1 36.04 11,904 33.47
====== ======
</TABLE>
The Company granted 392; 145,180; and 419,639 shares of restricted stock to
certain employees during 1999, 1998, and 1997 with a weighted average grant
date fair value of $56.65, $52.05, and $38.11 per common share, respectively.
Employee Stock Purchase Plan (ESPP)
Substantially all of the Company's employees are eligible to participate in
an ESPP. Under the plan, up to 1,460,000 shares of the Company's common stock
are authorized for issuance. Stock may be purchased at the end of each
financial quarter at a purchase price of 85 percent of the lower of its
beginning or end of quarter market prices. The Company sold 86,497, 75,575 and
79,423 shares to employees with a weighted average exercise price of $31.71,
$39.00, and $33.74 per share in 1999, 1998, and 1997, respectively.
Compensation Cost Under the Fair Value Approach (SFAS 123)
The Company applies Opinion 25 and related interpretations in accounting for
the stock option plans and ESPP. Accordingly, no compensation cost has been
recognized for these plans. Compensation cost for the Company's stock option
plans and ESPP under the fair value approach was estimated as of the grant date
using Black-Scholes option pricing models.
77
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average assumptions used in estimating compensation cost for
the Company during 1999 and for the Provident plans in 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Volatility...................................... 24.0% 17.9% 18.0%
Risk-free Rate of Return........................ 5.5% 5.6% 6.5%
Dividend Payout Rate Per Share.................. $ 0.59 $0.548 $0.493
Time of Exercise
Stock Option Plan.............................. 5.7 years 7.0 years 6.7 years
ESPP........................................... 3 months 3 months 3 months
Weighted Average Fair Value of Awards Granted
During the Year
Stock Option Plan.............................. $14.33 $14.59 $10.08
ESPP........................................... $10.77 $ 9.51 $ 7.70
</TABLE>
Assumptions used in estimating compensation cost for Unum plans during 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Volatility...................................... 23.8% to 26.4% 22.7% to 24.2%
Risk-free Rate of Return........................ 4.2% to 5.3% 5.7% to 6.8%
Dividend Payout Rate............................ 1.0% 1.0%
Time of Exercise................................ 4 to 8 years 4 to 8 years
Weighted Average Fair Value of Options Granted
During the Year................................ $12.88 $8.56
</TABLE>
Had compensation cost for these plans been determined in accordance with
the provisions of SFAS 123, the Company's net income (loss) and net income
(loss) per common share would have been as follows:
<TABLE>
<CAPTION>
Year Ended December
31
----------------------
1999 1998 1997
------- ------ ------
(in millions of
dollars, except share
data)
<S> <C> <C> <C>
Net Income (Loss)....................................... $(223.6) $608.5 $603.0
Net Income (Loss) Per Common Share
Basic.................................................. (0.94) 2.56 2.56
Assuming Dilution...................................... (0.94) 2.51 2.51
</TABLE>
Limited Stock Appreciation Rights (LSARs)
Between 1991 and 1994, certain officers of the Company were granted LSARs
in conjunction with their stock options for those years. An LSAR is meant to
compensate an officer if the associated option loses value due to a change in
control by allowing the officer to receive payment for the difference between
the option exercise price and the higher of (a) the highest price paid per
share in connection with the change in control or (b) the highest fair market
value per share as reported at any time during the 60 day period preceding the
change in control. As an underlying stock option is exercised, the LSARs are
automatically cancelled. The LSARs were amended such that the merger of Unum
and Provident would not be considered a change of control. At December 31,
1999 there were no LSARs outstanding. At December 1998 and 1997, there were
495,750, and 557,800 LSARs outstanding, respectively.
78
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Reinsurance
The Company routinely assumes and cedes reinsurance with other insurance
companies. The primary purpose of ceded reinsurance is to limit losses from
large exposures; however, if the assuming reinsurer is unable to meet its
obligations, the Company remains contingently liable. The Company evaluates the
financial condition of reinsurers and monitors concentration of credit risk to
minimize this exposure. The reinsurance receivable at December 31, 1999,
relates to over 140 reinsurance relationships. Of the six major relationships
which account for approximately 75 percent of the reinsurance receivable amount
at December 31, 1999, all are with companies rated A or better by A.M. Best
Company or are fully securitized by investment-grade fixed maturity securities
held in trust.
Reinsurance activity is accounted for on a basis consistent with the terms
of the reinsurance contracts and the accounting used for the original policies
issued. Premium income and policyholder benefits are presented in the
consolidated statements of operations net of reinsurance ceded. The total
amounts deducted for reinsurance ceded are as follows:
<TABLE>
<CAPTION>
Year Ended December
31
--------------------
1999 1998 1997
------ ------ ------
(in millions of
dollars)
<S> <C> <C> <C>
Premium Income............................................. $508.3 $544.5 $673.2
Policyholder Benefits...................................... 695.5 575.2 596.0
</TABLE>
Premium income assumed was $576.7 million, $489.0 million, and $453.9
million during 1999, 1998, and 1997, respectively.
Centre Life Reinsurance Limited
In 1996, the Company executed a definitive reinsurance agreement with Centre
Life Reinsurance Limited (Centre Re), a Bermuda-based reinsurance specialist,
for reinsurance coverage of the existing United States non-cancellable
individual disability active life reserves of one of the Company's insurance
subsidiaries, Unum Life Insurance Company of America. This agreement reinsures
all claims incurred on or after January 1, 1996. The Company has the right, but
no obligation, to recapture the business after six years without penalty. Under
the agreement, Centre Re has an obligation to absorb losses within a defined
risk layer. The Company retains the risk for all experience up to Centre Re's
defined risk layer, or attachment point. Once the attachment point is reached,
Centre Re assumes the risk for all experience up to a contractually defined
risk limit. Any experience above Centre Re's defined risk limit reverts back to
the Company. As of December 31, 1999, the attachment point had not been
reached.
The following discloses the various layers in the agreement at December 31,
1999 (in millions):
<TABLE>
<S> <C>
Net GAAP Reserves.................................................... $ 602
Experience Layer..................................................... 325
------
Attachment Point.................................................... 927
Centre Re's Defined Risk Layer....................................... 185
------
Defined Risk Limit.................................................. $1,112
======
</TABLE>
Under this agreement, the Company funds a trust account equal to the amount
of the Company's exposure. This trust account provides security for amounts due
by the Company prior to reaching the attachment point. The Company controls the
management of the business, including premium collection and claims management,
79
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under this agreement. All premiums, less amounts for management expenses and
claim payments, are transferred to the trust account on a quarterly basis. The
Company also acts as the investment manager for 80 percent of the assets in the
trust with Centre Re managing the remaining 20 percent.
This reinsurance agreement transfers risk and is accounted for as a long-
duration reinsurance contract in accordance with the provisions of Statement of
Financial Accounting Standard No. 113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts. The underlying operating results
of this contract are reflected in other income, and any realized gains or
losses from sales of assets are reflected as realized investment gains and
losses in the Company's consolidated statements of operations.
Included in deposit assets in the consolidated statements of financial
condition at December 31, 1999, is a deposit asset for this reinsurance
arrangement of approximately $321.1 million. The deposit asset is comprised of
the Company's experience layer and unrealized gains or losses on the marketable
securities held in the trust. Unrealized gains or losses on marketable
securities held in the trust and the related effects on claim reserves are
included in other comprehensive income (loss) in the equity section of the
Company's consolidated statements of financial condition.
Other Reinsurance Operations
During the first quarter of 1999, the Company began a comprehensive
strategic review of its reinsurance operations to determine the appropriateness
of their fit within the context of the merged entity. These operations include
the reinsurance management operations of the Company's subsidiary Duncanson &
Holt, Inc. (D&H) and the risk assumption, which includes reinsurance pool
participation; direct reinsurance which includes accident and health (A&H),
long-term care (LTC), and long-term disability coverages; and Lloyd's syndicate
participations. In April 1999, the strategic review was completed, and the
Company concluded that these operations were not solidly aligned with the
Company's strength in the disability insurance market. The Company decided to
exit these operations through a combination of a sale, reinsurance, and/or
placing certain components in run-off.
During 1999, the Company recognized $327.8 million of before-tax charges
related to its reinsurance operations. The breakdown of these charges by
quarter is as follows:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
------ ---- ------ ---- ------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
North American Reinsurance Operations:
Loss on Sale of A&H and LTC Reinsurance
Management Operations (includes write-off of
$6.0 million of goodwill)...................... $ -- $ -- $ 12.9 $ -- $ 12.9
Loss on Reinsurance of A&H and LTC Risk Partici-
pations........................................ -- -- 10.0 2.7 12.7
Provision for Losses on Retained Business....... 28.6 -- 13.5 -- 42.1
International Reinsurance Operations:
Provision for Losses on Lloyd's of London
Syndicate Participations....................... 45.5 -- 141.0 -- 186.5
Provision for Losses on Reinsurance Pool
Participations Other than Lloyd's.............. -- -- 21.9 -- 21.9
Goodwill Impairment Excluding Amount Recognized
on Sale........................................ 27.0 2.0 22.7 -- 51.7
------ ---- ------ ---- ------
Total Before-Tax Charge....................... $101.1 $2.0 $222.0 $2.7 $327.8
====== ==== ====== ==== ======
</TABLE>
80
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's first quarter charge of $101.1 million before tax and $88.0
million after tax consisted of the following:
North American Reinsurance Operations:
Provision for Losses on Retained Business--As a result of the review
performed on the Lloyd's syndicates discussed above and other third party
publicized reinsurance exposures, the Company undertook a periodic review
of certain other reinsurance facilities related to new information
regarding the ultimate cost of settling claims. The reinsurance pool
business consists of more than 20 different pool facilities, the majority
of which are managed by D&H and a few pools which are managed by third
parties. Reserve assumptions are periodically reviewed to support the
determination of the ultimate cost of settling claims for certain
reinsurance pools. During the first quarter of 1999, the Company reviewed
the actuarial assumptions used to set reserves for certain reinsurance
facilities based on the most current information available from the
reinsurance pool managers. The Company also received new information
pertaining to a reinsurance pool managed by a third party that indicated a
reserve increase was required. The Company relied primarily on the third
party pool manager's judgement and recorded its portion of the reserve as
reflected in the reinsurance pool statement from the third party pool
manager. The new information received from the managed facilities and the
third party facility indicated deterioration in loss experience, primarily
related to a longer duration of claims and increased incidence of new
claims in certain facilities. The result of these reviews was an increase
to claim reserves of $28.6 million, which was recorded in the first quarter
of 1999. The Company determined that the increase to reserves was needed
based on revised actuarial assumptions to reflect current and expected
trends in claims experience and expenses.
International Reinsurance Operations:
Provision for Losses on Lloyd's of London Syndicate Participations--The
periodic method of accounting is followed for Lloyd's syndicate
participation, which requires the premiums be recognized as revenue over
the policy term and claims, including the estimate of claims incurred but
not reported, to be recognized as incurred. During the first quarter of
1999, the Company received more information about the Lloyd's market from
various sources, including managing agents/underwriters syndicate reports
and published information from Moody's Investors Service. The information
received indicated significant deterioration in the loss experience of open
years of account primarily related to significant losses in certain
syndicates (space and aviation, accident and health, and other non-marine
classes of business) and continued pressure on the pricing of insurance
coverage provided by the Lloyd's market. In addition, the Company discussed
projected results of the Lloyd's market with the underwriters of the
syndicates that are managed through a subsidiary of the Company. These
projected results also indicated future deterioration of the open years of
account. Using this information and recent experience with prior revisions
of estimated losses in this business, the Company performed a review of its
claim reserve liabilities related to its open years of account.
The review of estimates related to open years of account was performed
based on a periodic review of these estimates as information was received
from the Lloyd's syndicates. The review resulted in revised best estimates
of the expected ultimate profit or loss for each open year of account,
which were significantly below the levels estimated in 1998. The resulting
charge to earnings in the amount of $44.0 million was reflected in the
Company's income in the first quarter of 1999 for the open years of account
1996 through 1999. In addition to the risk participation charge, the
Company recorded a charge of $1.5 million, which represented the reduction
of previously recognized profit commissions related to the Lloyd's
management company operations.
81
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill Impairment:
When an event or change in circumstance occurs that indicates the
recoverability of an asset should be assessed for impairment, a
recoverability test is performed to determine if an impairment has
occurred. Following the poor results of the reinsurance operations in the
first quarter of 1999, the Company updated the goodwill recoverability test
using the most current results and forecasts. The goodwill recoverability
test used the held-for-use model that compares the undiscounted cash flows
of these operations to determine whether those cash flows can recover the
unamortized goodwill. After factoring in the first quarter results and
current revised forecasts due to recent poor performance for these
operations, future undiscounted cash flows were insufficient to recover the
entire goodwill amount, indicating that the goodwill was impaired. Goodwill
recoverability testing of these operations performed prior to March 31,
1999 had indicated that the goodwill was not impaired.
As a result of the impairment, the Company calculated the estimated fair
value of these operations. In estimating the fair value, two valuation
techniques were utilized, a discount free cash flow model and a multiple of
earnings model. The Company believed that these valuation techniques were
appropriate for this type of business as these techniques were what the
Company would use in evaluating a potential acquisition of this type of
business. The results of the two valuation techniques created a range of
fair values from $47.0 million to $64.0 million. The Company evaluated the
range of values produced by the valuation techniques and using internal
management judgement of the potential liquidation value, the Company
determined its best estimate of fair value of its investment to be the
midpoint of the range, or $55.0 million. The estimated fair value of $55.0
million was compared to $82.0 million of book value for the investment,
resulting in a write-down of goodwill in the amount of $27.0 million in the
first quarter of 1999.
In the second quarter of 1999, the Company stated its intent to sell its
reinsurance management operations, assuming the transaction would achieve the
Company's financial objectives. The Company estimated the fair value of the
operations using the held-for-sale model, which compares the carrying value of
the asset with the fair value less costs to sell the asset. This resulted in an
additional write-down of goodwill in the amount of $2.0 million before and
after tax.
During the third quarter of 1999, the Company continued its efforts to sell
its reinsurance management operations. No potential buyers expressed interest
in acquiring the entire domestic and international reinsurance management
operations. However, in October, the Company entered into an agreement to sell
the reinsurance management operations of its A&H and LTC reinsurance facilities
and to reinsure the Company's risk participation in these facilities.
Because of the limited interest expressed by potential buyers in the
reinsurance management operations, the Company reevaluated its strategy to exit
the reinsurance operations. At that time, the Company intended to continue to
operate its North America long-term disability reinsurance operation and to
refocus it with the objective of improving profitability. With respect to
Lloyd's, the Company decided to implement a strategy which limits participation
in year 2000 underwriting risks, ceases participation in Lloyd's underwriting
risks after year 2000, and manages the run-off of its risk participation in
open years of account of Lloyd's reinsurance syndicates. The Company also
decided to discontinue its accident reinsurance business in London beginning in
year 2000. During the third quarter, the Company recognized a charge of $222.0
million before tax and $204.3 million after tax related to its strategy for the
reinsurance operations. The charge consisted of the following:
82
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
North American Reinsurance Operations:
Loss on Sale of A&H and LTC Reinsurance Management Operations--In the
third quarter of 1999 the Company entered into an agreement with American
United Life Insurance Company (AUL) to sell the reinsurance management
operations of its A&H and LTC reinsurance facilities and to reinsure the
Company's risk participation in these facilities. Certain risks related to
prior operations have not been assumed by AUL. The terms of the sale
require the Company to continue to participate in certain of the
reinsurance facilities in year 2000, thereby assuming underwriting risks.
The sale closed effective January 1, 2000. A before-tax loss of $12.9
million was recognized in the third quarter of 1999 based upon the terms
and conditions of the definitive agreement. The loss includes the write-off
of $6.0 million of goodwill related to this portion of the operations.
Provision for Loss on Reinsurance of A&H and LTC Risk Participations--
The Company entered into a separate indemnity reinsurance agreement with
AUL whereby AUL will assume the Company's existing risk participation in
the A&H and LTC reinsurance facilities. As a result, the Company recognized
a third quarter before-tax loss of $10.0 million.
Provision for Losses on Retained Business--The Company updated its
review of reserves related to the retained pool participations. Based upon
the most recent information available, the Company increased its reserves
by $10.5 million, principally related to the long-term disability business.
Also included in this provision is $3.0 million to recognize the estimated
cost of potential uncollectible reinsurance recoveries for two reinsurers
who reinsure certain of the Company's reinsurance facilities and who, as
the losses have increased, have experienced financial difficulties.
International Reinsurance Operations:
Provision for Losses on Lloyd's of London Syndicate Participations--
During the third quarter of 1999, underwriters of syndicates provided to
Lloyd's updated estimates of their expected ultimate profit or loss for
each open year of account. These estimates were significantly below earlier
estimates. Market conditions are not expected to improve dramatically in
the near term.
Consistent with overall market trends, the loss estimates received from
the underwriters of syndicates managed by a subsidiary of the Company
indicated significant deterioration in the loss experience of open years of
account from their previous estimate. This information was discussed with
underwriters and used by the Company to update its review of liabilities
related to its open syndicate years of account. The review resulted in
revised estimates of the expected ultimate loss for each open year of
account, which were significantly worse than the levels estimated in the
first quarter of 1999. The resulting $141.0 million charge for the open
syndicate years of account 1997 through 1999 was reflected in the Company's
before-tax earnings in the third quarter of 1999.
During the third quarter of 1999, the Company entered into a non-binding
agreement to sell one of its managed syndicates, and a definitive agreement
is being negotiated. Unamortized goodwill of $2.4 million was written off
in connection with this planned transaction. Under the terms of the
agreement, the new owner will manage the syndicate for year 2000 and will
manage the open syndicate years of account. The Company retains the
underwriting risk on open syndicate years and agreed to provide up to $24.7
million ((Pounds)15 million) of capacity for year 2000, down from $36.2
million ((Pounds)22 million) in 1999.
In December 1999, the Company closed the remaining four Lloyd's
syndicates. These syndicates have been placed in run-off whereby claims on
past policies will be paid but no new business will be accepted.
83
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Provision for Losses on Reinsurance Pool Participations Other than
Lloyd's--In connection with the development of the cost of exiting the
reinsurance operations, the Company updated its review of reserves related
to non Lloyd's reinsurance operations as well as future costs associated
with managing the run-off of the retained reinsurance pools liabilities.
Based upon the most recent information available, the Company increased
reserves related to its participation in certain managed and non-managed
reinsurance facilities by $21.9 million.
Goodwill Impairment:
Prior to the third quarter 1999 charge, the Company's unamortized
goodwill related to its reinsurance operations was $53.7 million. Of the
$31.0 million unamortized balance attributable to the A&H and LTC business
being sold, $6.0 million was determined to be unrecoverable and was written
off in the third quarter and is included in the loss on sale reported
above. The balance of $25.0 million was recovered through the sales
proceeds when the sale closed. The remaining unamortized balance of $22.7
million (including the balance of $2.4 million related to one of the
Lloyd's syndicates for which the Company has entered into an agreement to
sell) was determined to be unrecoverable based on revised earnings
forecasts for the reinsurance operations and was also written off in the
third quarter of 1999.
Retained Risks:
The Company has provided its best estimate of the cost of known losses.
Under this exit strategy, the Company retained certain risks, including the
exposure associated with disputes arising from reinsurance pools disclosed in
Note 17. Presently, it is not reasonably possible to determine the liability
for the retained risks.
An additional loss of $2.7 million before tax ($1.8 million after tax) was
realized in the fourth quarter of 1999 upon completion of the transaction to
reinsure the A&H and LTC risk participations.
Effective January 1, 2000, a subsidiary of the Company reinsured the inforce
individual disability income block of business of the New York Life Insurance
Company through a 100 percent indemnity modified coinsurance agreement. The
Company paid a ceding commission of $88.0 million which will be amortized as
earnings emerge from the business assumed.
84
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14--Segment Information
Selected data by segment is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions of dollars)
<S> <C> <C> <C>
Premium Income
Employee Benefits.............................. $3,900.2 $3,364.4 $2,810.1
Individual..................................... 1,730.6 1,675.4 1,480.3
Voluntary Benefits............................. 691.6 666.7 626.6
Other.......................................... 520.8 422.5 376.1
-------- -------- --------
6,843.2 6,129.0 5,293.1
Net Investment Income and Other Income
Employee Benefits.............................. 745.1 661.0 599.8
Individual..................................... 941.3 895.2 772.3
Voluntary Benefits............................. 112.9 103.7 93.9
Other.......................................... 532.3 643.7 877.1
Corporate...................................... 67.7 31.7 29.6
-------- -------- --------
2,399.3 2,335.3 2,372.7
Total Revenue (Excluding Net Realized Investment
Gains and Losses)
Employee Benefits.............................. 4,645.3 4,025.4 3,409.9
Individual..................................... 2,671.9 2,570.6 2,252.6
Voluntary Benefits............................. 804.5 770.4 720.5
Other.......................................... 1,053.1 1,066.2 1,253.2
Corporate...................................... 67.7 31.7 29.6
-------- -------- --------
9,242.5 8,464.3 7,665.8
Benefits and Expenses
Employee Benefits.............................. 4,625.9 3,489.1 2,940.4
Individual..................................... 2,382.0 2,348.0 2,012.5
Voluntary Benefits............................. 667.5 639.3 610.4
Other.......................................... 1,267.4 965.5 1,096.0
Corporate...................................... 552.3 157.2 101.3
-------- -------- --------
9,495.1 7,599.1 6,760.6
Income (Loss) Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Employee Benefits.............................. 19.4 536.3 469.5
Individual..................................... 289.9 222.6 240.1
Voluntary Benefits............................. 137.0 131.1 110.1
Other.......................................... (214.3) 100.7 157.2
Corporate...................................... (484.6) (125.5) (71.7)
-------- -------- --------
(252.6) 865.2 905.2
Net Realized Investment Gains................... 87.1 55.0 11.5
-------- -------- --------
Income (Loss) Before Federal Income Taxes....... (165.5) 920.2 916.7
Federal Income Taxes............................ 17.4 302.8 299.1
-------- -------- --------
Net Income (Loss)............................... $ (182.9) $ 617.4 $ 617.6
======== ======== ========
</TABLE>
85
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in benefits and expenses above is amortization of deferred policy
acquisition costs, value of business acquired, and goodwill. Amortization of
these items by segment is as follows:
<TABLE>
<CAPTION>
Year Ended December
31
--------------------
1999 1998 1997
------ ------ ------
(in millions of
dollars)
<S> <C> <C> <C>
Employee Benefits.......................................... $109.1 $ 85.2 $ 69.3
Individual................................................. 122.9 108.4 95.8
Voluntary Benefits......................................... 115.4 101.6 88.3
Other...................................................... 165.7 120.9 82.4
Corporate.................................................. 82.6 28.0 18.2
------ ------ ------
$595.7 $444.1 $354.0
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31
-------------------
1999 1998
--------- ---------
(in millions of
dollars)
<S> <C> <C>
Assets
Employee Benefits........................................... $ 9,984.0 $ 9,275.7
Individual.................................................. 15,453.9 15,887.7
Voluntary Benefits.......................................... 2,103.8 2,057.3
Other....................................................... 9,215.6 9,610.2
Corporate................................................... 1,690.2 1,771.3
--------- ---------
$38,447.5 $38,602.2
========= =========
</TABLE>
Note 15--Acquisition of Business
GENEX Services, Inc.
On February 28, 1997, the Company acquired GENEX Services, Inc. and GENEX
Services of Canada, Inc. (GENEX) at a price of $70.0 million. GENEX is a
provider of case management, vocational rehabilitation, and related services to
corporations, third party administrators, and insurance companies. These
services are utilized in the management of disability and worker's compensation
cases. The acquisition, financed through borrowings on the Company's revolving
credit facility, was accounted for by the purchase method. The fair values of
the assets acquired and liabilities assumed were $17.9 million and $8.9
million, respectively. The purchase price has been allocated to goodwill and
will be amortized on a straight-line basis over a 25 year period. The
consolidated financial statements include the operating results of GENEX from
March 1, 1997.
The Paul Revere Corporation
On March 27, 1997, the Company acquired Paul Revere, a provider of life and
disability insurance products, at a price of approximately $1.2 billion. The
transaction was financed through common equity issued to Zurich Insurance
Company, a Swiss insurer, and its affiliates in the amount of $300.0 million
(13.9 million shares of common stock), common equity of $437.5 million (17.0
million shares of common stock) and cash of $2.5 million issued to Paul Revere
shareholders, internally generated funds of $145.0 million, and borrowings on
the Company's revolving credit facility of $305.0 million. The acquisition was
accounted for by the purchase method. The fair values of the assets acquired
and liabilities assumed were $6,667.9 million and $6,809.1 million,
respectively. The purchase price has been allocated principally to the value of
business acquired with the remainder being allocated to goodwill. The interest
rate used to determine the value of
86
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
business acquired for traditional products was the reserve discount rate. The
interest rate used for interest-sensitive products was based on the current
interest rate credited on account values. The value of business acquired will
be amortized with interest based on premium income for the traditional
individual life and disability products and on the estimates of future gross
profits for interest-sensitive individual life products. Goodwill will be
amortized on a straight-line basis over a 40 year period. The consolidated
financial statements include the operating results of Paul Revere from April 1,
1997.
Pro Forma Results
The following pro forma results of operations for the year ended December
31, 1997 give effect to the acquisitions and the related financing
arrangements, including the acquisition of debt and issuance of common stock
equity. The pro forma results of operations, prepared from historical financial
results of operations of the Company, Paul Revere, and GENEX, with such
adjustments as are necessary to present the results of operations as if the
acquisitions had occurred as of the beginning of the year, are as follows for
the year ended December 31, 1997 (in millions, except share data):
<TABLE>
<S> <C>
Revenue Excluding Net Realized Investment Gains................... $8,085.8
Revenue Including Net Realized Investment Gains................... 8,133.7
Income Before Net Realized Investment Gains And Federal Income
Taxes............................................................ 917.2
Income Before Federal Income Taxes................................ 965.1
Net Income........................................................ 646.6
Net Income Per Common Share
Basic............................................................ 2.66
Assuming Dilution................................................ 2.61
</TABLE>
Note 16--Sales of Portions of Lines of Business
In 1999, the Company sold certain portions of its reinsurance management
operations to AUL. See Note 13 for further discussion.
In December 1997, the Company entered into an agreement with American
General Corporation (American General) under which various affiliates of
American General agreed to acquire certain assets and assume certain
liabilities of Provident's individual and tax-sheltered annuity business. In
addition, American General acquired a number of miscellaneous group pension
lines of business which were no longer actively marketed by Provident. The sale
was completed during the second quarter of 1998.
In consideration for the transfer of statutory reserves, American General
paid the Company a ceding commission of $58.0 million. In connection with the
sale, the Company wrote off $18.7 million of goodwill associated with the
annuity business acquired from Paul Revere. Total liabilities of $2,518.9
million were assumed by American General, and total assets, excluding the
resulting reinsurance receivable, decreased $2,506.7 million. The gain
recognized at the time of the sale increased 1998 operating earnings by
$12.2 million before tax and $1.4 million after tax. Total revenue and income
before federal income taxes for the annuity business sold were $152.7 million
and $23.7 million, respectively, in 1997. Included in these amounts were net
realized investment gains of $8.0 million in 1997.
In the fourth quarter of 1996, the Company sold certain of Unum's tax-
sheltered annuity businesses to various affiliates of Lincoln National
Corporation (Lincoln). To effect the sale of this business, the Company
transferred assets of approximately $2,690.0 million into a trust account held
for the benefit of Lincoln. The sale resulted in a deferred before-tax gain of
$80.8 million, of which $72.6 million before tax and $47.0 million after tax
was recognized during 1997.
87
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17--Commitments and Contingent Liabilities
In 1997 two alleged class action lawsuits were filed in Superior Court in
Worcester, Massachusetts (Superior Court) against the Company--one purporting
to represent all career agents of subsidiaries of Paul Revere whose employment
relationships ended on June 30, 1997 and were offered contracts to sell
insurance policies as independent producers and the other purporting to
represent independent brokers who sold certain Paul Revere individual
disability income policies with benefit riders. Motions filed by the Company to
dismiss most of the counts in the complaints, which allege various breach of
contract and statutory claims, have been denied, but the cases remain at a
preliminary stage. A hearing to determine class certification was heard on
December 20, 1999 in Massachusetts state court. The court certified a class for
the independent brokers and has denied class certification for the career
agents. The Company will appeal the class certification for the independent
brokers. The Company has filed a conditional counterclaim in each action which
requests a substantial return of commissions should the Superior Court agree
with the plaintiff's interpretation of the contracts. The Company believes that
it has strong defenses to both lawsuits and plans to vigorously defend its
position and resist certification of the classes. In addition, the same
plaintiff's attorney who has filed the purported class action lawsuits has
filed 44 individual lawsuits on behalf of current and former Paul Revere sales
managers alleging various breach of contract claims. The Company has filed a
motion in federal court to compel arbitration for 16 of the plaintiffs who are
licensed by the National Association of Securities Dealers and have executed
the Uniform Application for Registration or Transfer in the Securities Industry
(Form U-4). The federal court has denied 14 of those motions and granted two.
Three additional former general managers have filed similar lawsuits. The
Company believes that it has strong defenses and plans to vigorously defend its
position in these cases. Although the alleged class action lawsuits and
individual lawsuits are in the early stages, management does not currently
expect these suits to materially affect the financial position or results of
operations of the Company.
During September and October 1999, the Company and several of its officers
were named as defendants in five class action lawsuits filed in the United
States District Court for the District of Maine. On January 3, 2000, the Maine
district court appointed a lead class action plaintiff and ordered plaintiffs
to file a consolidated amended complaint. On January 27, 2000, a sixth
complaint against the same defendants was filed in the Southern District of New
York. On March 7, 2000, the sixth action was transferred to the District of
Maine. On February 23, 2000, two consolidated amended class action complaints
were filed against the same defendants. The first amended class action
complaint asserts a variety of claims under the Securities Exchange Act of
1934, as amended, on behalf of a putative class of shareholders who purchased
or otherwise acquired stock in the Company or Unum between February 4, 1998 and
February 9, 2000. The second amended complaint asserts a variety of claims
under the Securities Act of 1933 and the Securities Exchange Act of 1934, as
amended, on behalf of a putative class of shareholders who exchanged the common
stock of Unum or Provident for the Company's stock pursuant to the joint
proxy/registration statement issued in connection with the merger between Unum
and Provident. The complaints allege that the defendants made false and
misleading public statements concerning, among other things, Unum's and the
Company's reserves for disability insurance and pricing policies, the Company's
merger costs, and the adequacy of the due diligence reviews performed in
connection with the merger. The complaints seek money damages on behalf of all
persons who purchased or otherwise acquired Company or Unum stock in the class
period or who were issued Company stock pursuant to the merger. To date, no
class has been certified, and no defendant has answered any complaint. The
Company disputes the claims alleged in the complaint and plans to vigorously
contest them.
In certain reinsurance pools associated with the Company's reinsurance
businesses there are disputes among the pool members and reinsurance
participants concerning the scope of their obligations and liabilities
88
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
within the complex pool arrangements, including pools for which subsidiaries of
the Company acted either as pool managers or underwriting agents, as pool
members or as reinsurers. The Company's subsidiaries either have been or may in
the future be brought into disputes, arbitration proceedings, or litigation
with other pool members or reinsurers of the pools in the process of resolving
the various claims, but it is unclear what exposure Company or its subsidiaries
may ultimately have to share in the losses of pool members or reinsurers
because of the subsidiaries' activities in placing insurance or otherwise.
Various other lawsuits against the Company have arisen in the normal course
of its business. Contingent liabilities that might arise from such other
litigation are not deemed likely to materially affect the financial position or
results of operations of the Company.
Note 18--Statutory Financial Information
Statutory Net Income (Loss), Capital and Surplus, and Dividends
The Company's insurance subsidiaries' statutory net income (loss), as
reported in conformity with statutory accounting practices prescribed by state
regulatory authorities, for the years ended December 31, 1999, 1998, and 1997,
was $(233.7) million, $227.0 million, and $298.2 million, respectively.
Statutory capital and surplus at December 31, 1999 and 1998, was $2,718.1
million and $2,582.1 million, respectively. Excluding the expenses related to
the merger and early retirement offer and the changes in reserves as discussed
in Note 2, the federal income tax refund activity, and the reinsurance
operation charges, the Company's insurance subsidiaries' statutory net gain
from operations was $21.0 million for the year ended 1999.
Regulatory restrictions limit the amount of dividends available for
distribution to the Company from its insurance subsidiaries, without prior
approval by regulatory authorities, to the greater of ten percent of an
insurer's statutory surplus as regards policyholders as of the preceding year
end or the statutory net gain from operations, excluding realized investment
gains and losses, of the preceding year. The payment of dividends is further
limited to the amount of statutory unassigned surplus. Based on these
restrictions, $267.6 million will be available for the payment of dividends to
the Company from its top-tier domestic insurance subsidiaries during 2000. The
Company also has the ability to draw a dividend from its United Kingdom
subsidiary, Unum Limited. Such dividends are limited in amount, based on
insurance company legislation in the United Kingdom, which requires a minimum
solvency margin. The amount available under current law for payment of
dividends to the Company from Unum Limited during 2000 is approximately $24.9
million. Regulatory restrictions do not limit the amount of dividends available
for distribution to the Company from its non-insurance subsidiaries.
Permitted Statutory Accounting Practices
The Company's insurance subsidiaries prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the National Association of Insurance Commissioners (NAIC) and the applicable
state regulatory authorities. Prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a variety
of publications of the NAIC. Permitted statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ
from state to state, may differ from company to company within a state, and may
change in the future. At December 31, 1999, the Company had not applied any
permitted accounting practices that differed from prescribed statutory
accounting practices that had a material impact on the financial position or
results of operations of the insurance subsidiaries.
89
<PAGE>
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, the NAIC approved a codification of statutory accounting practices
effective January 1, 2001, which will serve as a comprehensive and standardized
guide to statutory accounting principles. Following implementation, statutory
accounting principles will continue to be governed by individual state laws and
permitted practices until adoption by the various states. Accordingly, before
codification becomes effective for the Company's insurance subsidiaries, their
states of domicile must adopt codification as the prescribed basis of
accounting. The adoption of the codification will change, to some extent, the
accounting practices that the Company's insurance subsidiaries use to prepare
their statutory financial statements. At this time, the Company has not
determined the effects that codification will have on its insurance
subsidiaries' statutory financial statements.
Deposits
At December 31, 1999, the Company's insurance subsidiaries had on deposit
with regulatory authorities securities with a book value of $1,277.0 million
held for the protection of policyholders.
Note 19--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for
1999 and 1998:
<TABLE>
<CAPTION>
1999
--------------------------------------
<S> <C> <C> <C> <C>
4th 3rd 2nd 1st
-------- -------- -------- --------
(in millions of dollars, except
share data)
Premium Income......................... $1,738.1 $1,736.2 $1,687.4 $1,681.5
Net Investment Income.................. 528.7 513.4 518.0 499.6
Net Realized Investment Gains
(Losses).............................. (2.2) 77.9 4.2 7.2
Total Revenue.......................... 2,349.8 2,433.1 2,277.6 2,269.1
Income (Loss) Before Federal Income
Taxes................................. 208.7 (262.8) (274.6) 163.2
Net Income (Loss)...................... 136.0 (217.0) (191.2) 89.3
Net Income (Loss) Per Common Share.....
Basic................................. .57 (.91) (.80) .38
Assuming Dilution..................... .56 (.91) (.80) .37
<CAPTION>
1998
--------------------------------------
<S> <C> <C> <C> <C>
4th 3rd 2nd 1st
-------- -------- -------- --------
(in millions of dollars, except
share data)
Premium Income......................... $1,569.8 $1,560.5 $1,506.1 $1,492.6
Net Investment Income.................. 502.4 494.4 513.5 525.1
Net Realized Investment Gains.......... 24.2 16.4 5.1 9.3
Total Revenue.......................... 2,165.2 2,144.9 2,107.1 2,102.1
Income Before Federal Income Taxes..... 131.5 275.9 265.5 247.3
Net Income............................. 93.0 186.3 173.5 164.6
Net Income Per Common Share............
Basic................................. .39 .79 .73 .69
Assuming Dilution..................... .39 .77 .71 .67
</TABLE>
Included in the amounts in the preceding table were various items related to
merger and early retirement costs (see Note 2), changes in reserves (see Notes
2 and 7), federal income tax refund activity (see Note 8), reinsurance
operation changes (see Note 13), and the sales of portions of lines of business
(see Note 16).
90
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
91
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information required by this Item with respect to directors is included
under the caption "Information Concerning the Nominees" of the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2000,
and is incorporated herein by reference.
Executive Officers of the Registrant
The executive officers of the Company, all of whom are also executive
officers of its principal subsidiaries, were elected to serve in their
respective offices for one year or until their successors are chosen and
qualified.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
J. Harold Chandler...... 50 Chairman, President, Chief Executive Officer, and Director
Thomas R. Watjen........ 45 Executive Vice President, Finance and Risk Management
Elaine D. Rosen......... 47 Executive Vice President, Customer Development
F. Dean Copeland........ 60 Executive Vice President and General Counsel
</TABLE>
Mr. Chandler originally became Chairman of the Company on April 28, 1996;
and President and Chief Executive Officer of the Company's predecessor,
Provident Life and Accident Insurance Company of America, effective November 8,
1993. On June 30, 1999, in connection with the merger with Unum, he became
President and Chief Operating Officer of the Company, relinquishing the offices
of Chairman and CEO. He reassumed the offices of chairman and CEO of the
Company on November 1, 1999 following the retirement of James F. Orr, III.
Mr. Watjen became Executive Vice President, Finance of the Company on June
30, 1999 and assumed additional responsibilities for Risk Management on
November 1, 1999. Prior to the merger with Unum, he was Vice Chairman effective
March 26, 1997. He became Executive Vice President and Chief Financial Officer
on July 1, 1994. Prior to joining the Company, he served as a Managing Director
of the insurance practice of the investment banking firm, Morgan Stanley & Co.,
which he joined in 1987.
Mr. Copeland became Executive Vice President and General Counsel of the
Company on May 12, 1997. Prior to joining the Company, he had been a partner
since 1972 in the law firm of Alston & Bird, where he concentrated primarily on
matters related to consolidation within the financial services industry.
Ms. Rosen became Executive Vice President of the Company on June 30, 1999.
Prior to that time she had served as Executive Vice President of Unum
Corporation since May 1998 and president of Unum Life Insurance Company of
America (Unum America) since January 1997. Previously she served as Executive
Vice President of Unum America from May 1995 to December 1996.
ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION
The information required by this Item is included under the captions
"Compensation of Directors" and "Executive Compensation" of the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 2000,
and is incorporated herein by reference.
92
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Beneficial Ownership of Company Securities" and under the caption "Security
Ownership of Directors and Officers" of the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held May 19, 2000, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the caption "Certain
Transactions" of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 19, 2000, and is incorporated herein by reference.
93
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) List of Documents filed as part of this report: Page
(1) Financial Statements
The following report and consolidated financial statements of
UnumProvident Corporation and Subsidiaries are included in
Item 8.
Report of Ernst & Young LLP, Independent Auditors............. 38
Report of PriceWaterhouseCoopers LLP, Independent Auditors...... 39
Consolidated Statements of Financial Condition at December 31,
1999 and 1998.................................................. 40
Consolidated Statements of Operations for the three years ended
December 31, 1999.............................................. 42
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1999.................................. 43
Consolidated Statements of Cash Flows for the three years ended
December 31, 1999.............................................. 44
Notes to Consolidated Financial Statements...................... 46
(2) Schedules Supporting Financial Statements
I. Summary of Investments--Other than Investments in Related
Parties...................................................... 97
II. Condensed Financial Information of Registrant................ 98
III. Supplementary Insurance Information.......................... 102
IV. Reinsurance.................................................. 104
V. Valuation and Qualifying Accounts............................ 105
Schedules not referred to have been omitted as inapplicable or
because they are not required by Regulation S-X.
(3) Exhibits
See Index to Exhibits on page 106 of this report.
(b) Reports on Form 8-K:
Form 8-K filed on November 3, 1999, reporting third quarter 1999 financial
results.
</TABLE>
94
<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 on March 29, 2000.
UnumProvident Corporation
(Registrant)
By: /s/ J. Harold Chandler
--------------------------------
J. Harold Chandler
Chairman, President, and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Harold Chandler Chairman, President, and March 29, 2000
- --------------------------------- Chief Executive Officer and
J. Harold Chandler a Director
/s/ Thomas R. Watjen Executive Vice President, March 29, 2000
- --------------------------------- Finance and Risk Management
Thomas R. Watjen
/s/ Ralph A. Rogers, Jr. Senior Vice President, March 29, 2000
- --------------------------------- Financial Resources
Ralph A. Rogers, Jr.
* Director March 29, 2000
- ---------------------------------
William L. Armstrong
* Director March 29, 2000
- ---------------------------------
Ronald E. Goldsberry
* Director March 29, 2000
- ---------------------------------
Hugh O. Maclellan, Jr.
* Director March 29, 2000
- ---------------------------------
A. S. MacMillan
* Director March 29, 2000
- ---------------------------------
George J. Mitchell
* Director March 29, 2000
- ---------------------------------
Cynthia A. Montgomery
* Director March 29, 2000
- ---------------------------------
James L. Moody, Jr.
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director March 29, 2000
_________________________________
C. William Pollard
* Director March 29, 2000
_________________________________
Lawrence R. Pugh
Director March 29, 2000
_________________________________
Steven S Reinemund
* Director March 29, 2000
_________________________________
Lois D. Rice
* Director March 29, 2000
_________________________________
John W. Rowe
* Director March 29, 2000
_________________________________
Burton E. Sorensen
/s/ Susan N. Roth
*By: ____________________________ For all of the Directors March 29, 2000
Susan N. Roth
Attorney-in-Fact
</TABLE>
96
<PAGE>
SCHEDULE I--SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
UnumProvident Corporation and Subsidiaries
December 31, 1999
<TABLE>
<CAPTION>
Amount at which
shown in the
Fair statement
Type of Investment Cost Value of financial position
------------------ --------- --------- ---------------------
<S> <C> <C> <C>
(in millions of dollars)
Available-for-Sale Fixed Maturity
Securities:
Bonds
United States Government and
Government Agencies and
Authorities....................... $ 73.8 $ 75.6 $ 75.6
States, Municipalities, and
Political Subdivisions............ 418.0 417.3 417.3
Foreign Governments................ 833.6 928.3 928.3
Public Utilities................... 3,586.2 3,614.1 3,614.1
Mortgage-backed Securities......... 2,831.4 2,764.7 2,764.7
Convertible Bonds.................. 100.8 98.8 98.8
All Other Corporate Bonds.......... 14,171.3 13,975.4 13,975.4
Redeemable Preferred Stocks......... 127.3 159.0 159.0
--------- --------- ---------
Total............................. 22,142.4 $22,033.2 22,033.2
--------- ========= ---------
Held-to-Maturity Fixed Maturity
Securities:
Bonds
United States Government and
Government Agencies and
Authorities....................... 7.2 $ 7.8 7.2
States, Municipalities, and
Political Subdivisions............ 2.1 2.2 2.1
Mortgage-backed Securities......... 298.0 293.2 298.0
All Other Corporate Bonds.......... 16.2 15.6 16.2
--------- --------- ---------
Total............................. 323.5 $ 318.8 323.5
--------- ========= ---------
Equity Securities:
Common Stocks....................... 14.7 $ 37.4 37.4
Nonredeemable Preferred Stocks...... 1.2 1.0 1.0
--------- --------- ---------
Total............................. 15.9 $ 38.4 38.4
--------- ========= ---------
Mortgage Loans....................... 1,311.0 1,278.1*
Real Estate Acquired in Satisfaction
of Debt............................. 43.6 35.9*
Other Real Estate.................... 205.4 175.3*
Policy Loans......................... 2,316.9 2,316.9
Other Long-term Investments.......... 26.5 26.5
Short-term Investments............... 321.5 321.5
--------- ---------
$26,706.7 $26,549.3
========= =========
</TABLE>
- --------
* Difference between cost and carrying value results from certain valuation
allowances and other temporary declines in value.
97
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UnumProvident Corporation (Parent Company)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31
------------------
1999 1998
-------- --------
(in millions of
dollars)
<S> <C> <C>
ASSETS
Fixed Maturity Securities Available-for-Sale--at fair
value (cost: $9.6; $9.6)................................. $ 10.0 $ 11.4
Short-term Investments.................................... 3.1 --
Investment in Subsidiaries................................ 7,060.8 6,803.0
Short-term Notes Receivable from Subsidiaries............. 214.8 16.1
Surplus Notes of Subsidiaries............................. 250.0 250.0
Other Assets.............................................. 174.5 133.5
-------- --------
Total Assets............................................. $7,713.2 $7,214.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term Debt from Subsidiaries......................... $ 26.6 $ 32.4
Short-term Debt........................................... 1,059.4 --
Long-term Debt............................................ 1,166.5 600.0
Other Liabilities......................................... 178.5 135.4
-------- --------
Total Liabilities........................................ 2,431.0 767.8
-------- --------
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debt Securities of the Company............... 300.0 300.0
-------- --------
STOCKHOLDERS' EQUITY
Common Stock.............................................. 24.1 23.8
Additional Paid-in Capital................................ 1,028.6 959.2
Accumulated Other Comprehensive Income (Loss)............. (18.9) 914.7
Retained Earnings......................................... 3,957.6 4,279.2
Treasury Stock............................................ (9.2) (9.2)
Deferred Compensation..................................... -- (21.5)
-------- --------
Total Stockholders' Equity............................... 4,982.2 6,146.2
-------- --------
Total Liabilities and Stockholders' Equity............... $7,713.2 $7,214.0
======== ========
</TABLE>
See notes to condensed financial information.
98
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
UnumProvident Corporation (Parent Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31
----------------------
1999 1998 1997
------- ------ ------
(in millions of
dollars)
<S> <C> <C> <C>
Dividends from Subsidiaries............................ $ 97.0 $ 77.9 $109.9
Interest from Subsidiaries............................. 24.9 21.3 17.1
Other Income........................................... 12.8 10.4 1.3
------- ------ ------
Total Revenue......................................... 134.7 109.6 128.3
------- ------ ------
Interest and Debt Expense.............................. 110.3 62.7 38.7
Other Expenses......................................... 49.6 2.6 4.3
------- ------ ------
Total Expenses........................................ 159.9 65.3 43.0
------- ------ ------
Income (Loss) Before Federal Income Taxes and Equity in
Undistributed Earnings (Losses) of Subsidiaries....... (25.2) 44.3 85.3
Federal Income Taxes (Credit).......................... (38.5) 8.1 (7.3)
------- ------ ------
Income Before Equity in Undistributed Earnings (Losses)
of Subsidiaries....................................... 13.3 36.2 92.6
Equity in Undistributed Earnings (Losses) of
Subsidiaries.......................................... (196.2) 581.2 525.0
------- ------ ------
Net Income (Loss)...................................... $(182.9) $617.4 $617.6
======= ====== ======
</TABLE>
See notes to condensed financial information.
99
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
UnumProvident Corporation (Parent Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1999 1998 1997
------- ------- -------
(in millions of
dollars)
<S> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES............... $ 26.0 $ 11.6 $ 105.8
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Sales of Short-term Investments................ 2.8 13.3 108.2
Acquisition of Business and Business Combinations.. -- 146.0 (495.9)
Cash Distribution (to) from Subsidiaries........... (492.3) 13.3 (5.0)
Short-term Notes Receivable from Subsidiaries...... (14.3) 20.5 (29.5)
Surplus Notes Issued to Subsidiaries............... -- -- (100.0)
Other.............................................. (15.9) (24.2) (0.1)
------- ------- -------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES........ (519.7) 168.9 (522.3)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Short-term Borrowings from Subsidiaries........ (27.8) 7.7 24.7
Net Short-term Borrowings.......................... 602.4 -- --
Issuance of Long-term Debt......................... -- 600.0 725.0
Long-term Debt Repayments.......................... -- (725.0) (299.1)
Issuance of Company-Obligated Mandatorily
Redeemable Preferred Securities................... -- 300.0 --
Redemption of Preferred Stock...................... -- (156.2) --
Issuance of Common Stock........................... 69.7 11.9 389.8
Dividends Paid to Stockholders..................... (138.9) (139.1) (139.2)
Repurchase of Common Stock......................... -- (72.7) (286.7)
Other.............................................. -- (6.6) 2.0
------- ------- -------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES........ 505.4 (180.0) 416.5
------- ------- -------
INCREASE IN CASH.................................... $ 11.7 $ 0.5 $ --
======= ======= =======
</TABLE>
See notes to condensed financial information.
100
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
UnumProvident Corporation (Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION
Note 1--Basis of Presentation
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
UnumProvident Corporation and Subsidiaries.
Note 2--Surplus Notes of Subsidiaries
At December 31, 1999 and 1998, UnumProvident Corporation (Parent Company)
held from its insurance subsidiaries a $150.0 million surplus debenture due in
2006, and a $100.0 million surplus debenture due in 2027. Semi-annual interest
payments are conditional upon the approval by the insurance departments of the
subsidiaries' state of domicile. The weighted average interest rate for surplus
notes of subsidiaries was 8.2 percent, 8.1 percent, and 7.1 percent in 1999,
1998, and 1997, respectively.
101
<PAGE>
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
UnumProvident Corporation and Subsidiaries
<TABLE>
<CAPTION>
Future Policy
Deferred Benefits, Other Policy
Policy Losses, Claims and
Acquisition Claims, and Unearned Benefits
Segment Costs Loss Expenses Premiums Payable
------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C>
(in millions of dollars)
Year Ended December 31, 1999
Employee Benefits............. $ 826.3 $ 5,558.6 $ 15.1 $ 949.7
Individual.................... 985.7 11,484.8 269.6 377.9
Voluntary Benefits............ 438.0 868.0 16.4 99.7
Other......................... 141.2 5,427.7 79.5 294.8
-------- --------- ------ --------
Total........................ $2,391.2 $23,339.1 $380.6 $1,722.1
======== ========= ====== ========
Year Ended December 31, 1998
(1)
Employee Benefits............. $ 683.4 $ 5,181.0 $ 11.7 $ 595.4
Individual.................... 862.8 11,162.5 257.7 531.9
Voluntary Benefits............ 403.2 863.5 15.4 62.8
Other......................... 111.1 4,923.3 75.6 194.8
-------- --------- ------ --------
Total........................ $2,060.5 $22,130.3 $360.4 $1,384.9
======== ========= ====== ========
</TABLE>
(Continued on following page)
102
<PAGE>
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
UnumProvident Corporation and Subsidiaries
(continued from preceding page)
<TABLE>
<CAPTION>
Benefits, Amortization
Claims, of Deferred
Net Losses and Policy Other
Premium Investment Settlement Acquisition Operating Premiums
Segment Revenue Income (2) Expenses Costs Expenses (3) Written (4)
------- -------- ---------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(in millions of dollars)
Year Ended December 31,
1999
Employee Benefits....... $3,900.2 $ 604.9 $3,663.9 $106.6 $ 855.4 $2,783.6
Individual.............. 1,730.6 873.1 1,719.9 89.5 572.6 1,660.2
Voluntary Benefits...... 691.6 106.6 392.7 113.0 161.8 514.3
Other................... 520.8 447.5 1,011.1 165.7 90.6 495.0
Corporate............... -- 27.6 -- -- 552.3
-------- -------- -------- ------ --------
Total.................. $6,843.2 $2,059.7 $6,787.6 $474.8 $2,232.7
======== ======== ======== ====== ========
Year Ended December 31,
1998
Employee Benefits....... $3,364.4 $ 541.8 $2,642.6 $ 82.6 $ 763.9 $2,353.7
Individual.............. 1,675.4 827.8 1,682.1 74.6 591.3 1,595.9
Voluntary Benefits...... 666.7 94.8 369.4 99.4 170.5 499.4
Other................... 422.5 540.0 755.6 120.9 89.0 410.9
Corporate............... -- 31.0 -- -- 157.2
-------- -------- -------- ------ --------
Total.................. $6,129.0 $2,035.4 $5,449.7 $377.5 $1,771.9
======== ======== ======== ====== ========
Year Ended December 31,
1997
Employee Benefits....... $2,810.1 $ 507.2 $2,174.5 $ 66.7 $ 699.2 $1,974.2
Individual.............. 1,480.3 692.7 1,426.7 68.7 517.1 1,399.7
Voluntary Benefits...... 626.6 84.5 354.2 87.8 168.4 482.7
Other................... 376.1 704.0 900.7 78.1 117.2 305.0
Corporate............... -- 27.3 -- -- 101.3
-------- -------- -------- ------ --------
Total.................. $5,293.1 $2,015.7 $4,856.1 $301.3 $1,603.2
======== ======== ======== ====== ========
</TABLE>
- --------
(1) Information for 1998 has been reclassified to conform to the 1999
presentation.
(2) Net investment income is allocated based upon segmentation. Each segment
has its own specifically identified assets and receives the investment
income generated by those assets.
(3) Other operating expenses are allocated to each segment based on activity
levels, time information, and usage statistics.
(4) Excludes life insurance.
103
<PAGE>
SCHEDULE IV--REINSURANCE
UnumProvident Corporation and Subsidiaries
<TABLE>
<CAPTION>
Percentage
Ceded Assumed Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(in millions of dollars)
Year Ended December 31,
1999
Life Insurance in
Force.................. $564,730.4 $24,936.0 $2,484.5 $542,278.9 0.5%
========== ========= ======== ==========
Premium Income:
Life Insurance......... $ 1,505.4 $ 69.9 $ 16.9 $ 1,452.4 1.2%
Accident and Health
Insurance............. 5,269.4 438.4 559.8 5,390.8 10.4%
---------- --------- -------- ----------
Total................. $ 6,774.8 $ 508.3 $ 576.7 $ 6,843.2 8.4%
========== ========= ======== ==========
Year Ended December 31,
1998 (1)
Life Insurance in
Force.................. $471,209.2 $21,235.0 $2,562.1 $452,536.3 0.6%
========== ========= ======== ==========
Premium Income:
Life Insurance......... $ 1,318.3 $ 66.6 $ 18.6 $ 1,270.3 1.5%
Accident and Health
Insurance............. 4,866.2 477.9 470.4 4,858.7 9.7%
---------- --------- -------- ----------
Total................. $ 6,184.5 $ 544.5 $ 489.0 $ 6,129.0 8.0%
========== ========= ======== ==========
Life Insurance in
Force.................. $398,169.2 $22,221.2 $2,256.1 $378,204.1 0.6%
========== ========= ======== ==========
Year Ended December 31,
1997 (1)
Life Insurance......... $ 1,122.6 $ 60.2 $ 10.2 $ 1,072.6 1.0%
Accident and Health
Insurance............. 4,389.8 613.0 443.7 4,220.5 10.5%
---------- --------- -------- ----------
Total................. $ 5,512.4 $ 673.2 $ 453.9 $ 5,293.1 8.6%
========== ========= ======== ==========
</TABLE>
Premium Income:
- --------
(1)Information for 1998 and 1997 has been reclassified to conform to the 1999
presentation.
104
<PAGE>
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
UnumProvident Corporation and Subsidiaries
<TABLE>
<CAPTION>
Deductions for
Balance Additions Additions Amounts Applied
at Charged to Charged to to Specific Loan Balance at
Beginning Costs and Other at Time of Sale/ End of
Description of Period Expenses Accounts Foreclosure Period
----------- --------- ---------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
(in millions of dollars)
Year Ended December 31,
1999
Mortgage loan loss
reserve (1)............ $32.8 $ 0.1 $ -- $ -- $32.9
Real estate reserve..... $51.2 $ -- $ -- $13.4 $37.8
Allowance for doubtful
accounts (deducted from
premiums Receivable and
miscellaneous Assets).. $ 2.9 $ 0.9 $ -- $ -- $ 3.8
Year Ended December 31,
1998
Mortgage loan loss
reserve (1)............ $34.9 $ 2.3 $ -- $ 4.4 $32.8
Real estate reserve
(1).................... $40.7 $10.5 $ -- $ -- $51.2
Allowance for doubtful
accounts (deducted from
premiums Receivable and
miscellaneous Assets).. $ 2.7 $ 0.2 $ -- $ -- $ 2.9
Year Ended December 31,
1997
Mortgage loan loss
reserve (1)............ $38.7 $ 3.3 $ -- $ 7.1 $34.9
Real estate reserve
(1).................... $36.3 $10.6 $ -- $ 6.2 $40.7
Allowance for doubtful
accounts (deducted from
premiums Receivable and
miscellaneous
Assets) (2)............ $ 1.2 $ 0.5 $1.0 $ -- $ 2.7
</TABLE>
- --------
(1) Amounts shown in additions charged to cost and expenses represent realized
investment losses.
(2) Amounts shown in additions charged to other accounts represent reserves
related to acquired business.
105
<PAGE>
UnumProvident Corporation and Subsidiaries
INDEX TO EXHIBITS
(2.1) Agreement and Plan of Share Exchange between Provident Companies, Inc.
(Provident) and Provident Life and Accident Insurance Company of
America (America) (incorporated by reference to Exhibit 2.1 of
Provident's Form 10-K filed for fiscal year ended December 31, 1995).
(2.2) Amended and Restated Agreement and Plan of Merger dated as of April 29,
1996 by and among Patriot Acquisition Corporation, The Paul Revere
Corporation, and Provident (including exhibits thereto), (incorporated
by reference to Exhibit 2.1 of Provident's Form 10-Q and Form 10-Q/A
filed for fiscal quarter ended September 30, 1996).
(2.3) Agreement and Plan of Merger, dated as of November 22, 1998, between
Unum Corporation (Unum) and Provident (incorporated by reference to
Exhibit 1 of Provident's Form 8-K filed November 24, 1998).
(3.1) Amended and Restated Certificate of Incorporation, (incorporated by
reference to Exhibit 3.1 of Provident's Form 10-K for fiscal year ended
December 31, 1995, as amended by Certificate of Amendment).
(3.2) Amended and Restated Bylaws of the Company.
(4.1) Articles of Share Exchange (incorporated by reference to Provident's
Form 10-K for fiscal year ended December 31, 1995).
(10.1) Asset and Stock Purchase Agreement by and between Healthsource and
America and its subsidiaries dated December 21, 1994. (incorporated by
reference to Exhibit 10.3 of Provident's Form 10-K for fiscal year
ended December 31, 1995).
(10.2) Annual Management Incentive Compensation Plan (MICP), adopted by
stockholders May 4, 1994 (incorporated by reference to Exhibit 10.5 of
America's From 10-K for fiscal year ended December 31, 1994), and
amended by stockholders May 1, 1996 (incorporated by reference to
Exhibit 10.4 of Provident's Form 10-K for fiscal year ended December
31, 1996) and as amended by stockholders May 7, 1997 (incorporated by
reference to Provident's Proxy Statement for the Annual Meeting of
Stockholders held May 7, 1997) and as Restated and amended by
stockholders May 6, 1998 (incorporated by reference to Provident's Form
10-Q for fiscal quarter ended June 30, 1998).*
(10.3) Stock Option Plan, adopted by stockholders May 3, 1989, as amended by
the Compensation Committee on January 10, 1990, and October 29, 1991
(incorporated by reference to Exhibit 10.6 of America's From 10-K for
fiscal year ended December 31, 1991); and as amended by the
Compensation Committee on March 17, 1992 and by the stockholders on May
6, 1992 (incorporated by reference to the registrant's Form 10-K filed
for the fiscal year ended December 31, 1992). Terminated effective
December 31, 1993.
(10.4) Provident Life and Accident Insurance Company (Accident) and
Subsidiaries Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10.8 of Provident Life Capital Corporation
(Capital's) Registration Statement on Form S-1, Registration No. 33-
17017).*
(10.5) Form of Surplus Note, dated December 1, 1996, in the amount of $150.0
million executed by Accident in favor of Provident (incorporated by
reference to Exhibit 10.7 of Provident's Form 10-K filed for fiscal
year ended December 31, 1996).
(10.6) Description of Compensation Plan for Non-Employee Directors Plan
(incorporated by reference to Amendment No. 1 to registrant's Form 10-K
filed January 27, 1993 on Form 8), and amended by the Board of
Directors on February 8, 1994 (incorporated by reference to Exhibit
10.15 of America's Form 10-K filed for fiscal year ended December 31,
1993). Discontinued May 1998.
(10.7) Stock Option Plan, originally adopted by stockholders May 5, 1993, as
amended by stockholders on May 1, 1996 (incorporated by reference to
Exhibit 10.2 of Provident's Form 10-Q for fiscal quarter ended June 30,
1996) and as amended by stockholders on May 7, 1997 (incorporated by
reference to Provident's Proxy Statement for the Annual Meeting of
Stockholders held May 7, 1997).*
<PAGE>
(10.8) Employee Stock Purchase Plan (of 1995) adopted by stockholders June 13,
1995 (incorporated by reference to Provident's Form 10-K for fiscal
year ended December 31, 1995).*
(10.9) Amended and Restated common stock Purchase Agreement between Provident
and Zurich Insurance Company dated as of May 31, 1996 Plan
(incorporated by reference to Exhibit 10.15 of Provident's From 10-K
for fiscal year ended December 31, 1996).
(10.10) Amended and Restated Relationship Agreement between Provident and
Zurich Insurance Company dated as of May 31, 1996 Plan (incorporated by
reference to Exhibit 10.16 of Provident's From 10-K for fiscal year
ended December 31, 1996).
(10.11) Amended and Restated Registration Rights Agreement between Provident
and Zurich Insurance Company dated as of May 31, 1996 (incorporated by
reference to Exhibit 10.17 of Provident's Form 10-K for fiscal year
ended December 31, 1996.)
(10.12) Provident Stock Plan of 1999, adopted by stockholders May 6, 1998
(incorporated by reference to Provident's Form 10-Q for fiscal quarter
ended June 30, 1998) as amended.*
(10.13) Provident Non-Employee Director Compensation Plan of 1998, adopted by
stockholders May 6, 1998 (incorporated by reference to Provident's 10-Q
for fiscal quarter ended June 30, 1998).*
(10.14) Agreement between Provident and certain subsidiaries and American
General Corporation and certain subsidiaries dated as of December 8,
1997 (incorporated by reference to Exhibit 3.2 of Provident's Form 10-Q
for fiscal quarter ended September 30, 1998).
(10.15) Employment Agreement between the Company and J. Harold Chandler
(incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999).
(10.16) Employment Agreement between the Company and F. Dean Copeland
(incorporated by reference to Exhibit 10.3 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999).*
(10.17) Employment Agreement between the Company and Elaine D. Rosen
(incorporated by reference to Exhibit 10.4 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999).*
(10.18) Employment Agreement between the Company and Thomas R. Watjen
(incorporated by reference to Exhibit 10.5 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999).*
(10.19) Employment Agreement between the Company and James F. Orr, III
(incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999) as amended by the Agreement
dated November 1, 1999 between the Company and Mr. Orr.*
(10.20) Form of Change in Control Severance Agreement (incorporated by
reference to Exhibit 10.1 of the Company's Form 10-Q for fiscal quarter
ended September 30, 1999).*
(10.21) Unum Deferred Compensation Plan (incorporated by reference to Exhibit
10.1 of Unum 's Form 10-K for fiscal year ended December 31, 1995).*
(10.22) Incentive Compensation Plan for Designated Executive Officers
(incorporated by reference to Exhibit 10.2 of Unum's Form 10-K for
fiscal year ended December 31, 1996).*
(10.23) 1990 Unum Long Term Stock Incentive Plan (incorporated by reference to
Exhibit 10.4 of Unum's Form 10-K for fiscal year ended December 31,
1998).*
(10.24) 1996 Long Term Stock Incentive Plan (incorporated by reference to
Exhibit 10.5 of Unum's Form 10-K for fiscal year ended December 31,
1998).*
(10.25) Supplemental Executive Retirement Plan (incorporated by reference to
Exhibit 10.4 to Unum's Registration Statement on Form S-1 dated June
18,1986).*
(10.26) $500.0 million Credit Agreement dated as of November 2, 1999 among the
Company, the Banks listed therein, and Bank of America, National
Association as Administration Agent.
(10.27) $500.0 million Revolving Credit Agreement dated October 29, 1996
between Unum and Morgan Guaranty Trust Company of New York (assumed by
the Company as of June 30, 1999, in connection with the Merger).
(11) Statement re computation of per share earnings (incorporated herein by
reference to "Note 11 of the Notes to Consolidated Financial
Statements").
<PAGE>
(21) Subsidiaries of the Company.
(23.1) Consent of Independent Auditors.
(23.2) Consent of Independent Auditors.
(24) Powers of Attorney.
(27) Financial Data Schedule.
__________________________
* Management contract or compensatory plan required to be filed as an exhibit
to this form pursuant to Item 14(c) of Form 10-K.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10 percent of
the total assets of the Company and its consolidated subsidiaries. The Company
will furnish copies of any such instrument to the Securities and Exchange
Commission upon request.
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
of
UNUMPROVIDENT CORPORATION
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders for the election
of directors or for any other purpose shall be held at such time and place,
either within or without the State of Delaware as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting or in
a duly executed waiver of notice thereof.
SECTION 2. ANNUAL MEETINGS. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meetings, at which
meetings the stockholders shall elect by a plurality vote the directors to be
elected at such meetings, and transact such other business as may properly be
brought before the meetings. Written notice of the Annual Meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not less than ten nor more than sixty days before the
date of the meeting.
SECTION 3. SPECIAL MEETINGS. Unless otherwise prescribed by law or by the
Certificate of Incorporation, Special Meetings of Stockholders, for any purpose
or purposes, may be called by either (i) the Chairman, if there be one, (ii) the
Chief Executive Officer or (iii) the President, and shall be called by any such
officer at the request in writing of a majority of the Board of Directors. Such
request shall state the purpose or purposes of the proposed meeting. Written
notice of a Special Meeting stating the place, date and hour of the meeting and
the purpose or purposes for which the meeting is called shall be given not less
than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at such meeting.
SECTION 4. QUORUM. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and
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entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business. If, however, such quorum shall not be present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat, present
in person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally noticed. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder entitled to vote at the meeting. The
foregoing provisions shall be subject to the voting rights of holders of any
Preferred Stock of the Corporation and any quorum requirements relating thereto.
SECTION 5. VOTING. Unless otherwise required by law, applicable stock
exchange rules or regulations, the Certificate of Incorporation or these By-
Laws, any question brought before any meeting of stockholders shall be decided
by a majority of the votes entitled to be cast by the holders of stock
represented and entitled to vote thereat and each stockholder represented at a
meeting of stockholders shall be entitled to cast one vote for each share of the
capital stock entitled to vote thereat held by such stockholder. Such votes may
be cast in person or by proxy but no proxy shall be voted on or after three
years from its date, unless such proxy provides for a longer period. The Board
of Directors, in its discretion, or the officer of the Corporation presiding at
a meeting of stockholders, in his discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
SECTION 6. PROPER BUSINESS AT ANNUAL MEETINGS. At any annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before such meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, or otherwise properly
brought before the meeting by or at the direction of the Board of Directors, or
otherwise properly brought before the meeting by a stockholder. For business to
be properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation, must be a stockholder of the Corporation of record at the time of
the delivery of said notice and must be entitled to vote at the meeting. To be
timely, a stockholder's notice must be delivered to, or mailed and received at,
the principal executive offices of the Corporation, not less than 60 days nor
more than 90 days prior to the annual meeting; provided, however, that in the
event that less than 75 days' notice or prior public disclosure of the date of
such meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 15th day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was first made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting, including the
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complete text of any resolutions to be presented at the meeting with respect to
such business, and the reasons for conducting such business at the annual
meeting, (ii) the name and address of record of the stockholder proposing such
business and the beneficial owner, if any, on whose behalf the proposal is made,
(iii) the class and number of shares of the Corporation which are beneficially
owned by the stockholder and such beneficial owner, (iv) any material interest
of the stockholder and such beneficial owner in such business and (v) are
presentation that the stockholder is a holder of record of shares of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to propose such business. The chairman of an annual
meeting shall, if the facts warrant, determine and declare to the meeting that
such business was not properly brought before the meeting in accordance with
these provisions, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
SECTION 7. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
SECTION 8. STOCK LEDGER. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 9. (a) ORGANIZATION. Meetings of stockholders shall be presided
over by the Chairman of the Board, if any, or in his absence by the Vice
Chairman of the Board, if any, or in his absence by the Chief Executive Officer,
or in his absence by the President, or in his absence by a Vice President, or in
the absence of the foregoing persons by a chairman designated by the Board of
Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary shall act as secretary of the meeting, but in his absence
the chairman of the meeting may appoint any person to act as secretary of the
meeting.
(b) CONDUCT OF MEETINGS. The date and time of the opening and the closing
of the polls for each matter upon which the stockholders will vote at a meeting
shall be
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announced at the meeting by the person presiding over the meeting. The Board of
Directors may adopt by resolution such rules and regulations for the conduct of
the meeting of stockholders as it shall deem appropriate. Except to the extent
inconsistent with such rules and regulations as adopted by the Board of
Directors, the chairman of any meeting of stockholders shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may
include, without limitation, the following: (i) the establishment of an agenda
or order of business for the meeting; (ii) rules and procedures for maintaining
order at the meeting and the safety of those present; (iii) limitations on
attendance at or participation in the meeting to stockholders of record of the
corporation, their duly authorized and constituted proxies or such other persons
as the chairman of the meeting shall determine; (iv) restrictions on entry to
the meeting after the time fixed for the commencement thereof and (v)
limitations on the time allotted to questions or comments by participants.
Unless and to the extent determined by the Board of Directors or the chairman of
the meeting, meetings of stockholders shall not be required to be held in
accordance with the rules of parliamentary procedure.
ARTICLE III DIRECTORS
SECTION 1. NUMBER AND ELECTION OF DIRECTORS. The number of directors
constituting the Board of Directors shall be fixed from time to time by the
Board of Directors in the manner prescribed in the Certificate of Incorporation.
Except as provided in Section 3 of this Article, the directors to be elected at
each Annual Meeting of Stockholders shall be elected by a plurality of the votes
cast at such Annual Meeting of Stockholders, and each director so elected shall
hold office until the third Annual Meeting following such election and until his
successor is duly elected and qualified, or until his earlier resignation,
retirement or removal. No person elected or re-elected a director shall, after
such person's seventy-second birthday, serve as a director of the Corporation
beyond the date of the Corporation's annual meeting ending the term for which
such person has been elected; PROVIDED, that, no person shall be required to
retire because of their age prior to such date. Any director may resign at any
time upon notice to the Corporation. Directors need not be stockholders.
SECTION 2. NOMINATION PROCEDURES. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors, by any nominating committee or person appointed by the
Board of Directors or by any stockholder of the Corporation entitled to vote for
the election of Directors at the meeting. Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation by a stockholder of
the Corporation of record at the time of the delivery of said notice who is
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entitled to vote at the meeting. To be timely, a stockholder's notice shall be
delivered to, or mailed and received at, the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 75 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was first made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, (i) the name,
age, business address and residence address of the person, (ii) the principal
occupation or employment of the person, (iii) the class and number of shares of
the Corporation which are beneficially owned by the person, (iv) a description
of all arrangements, understandings or relationships between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder and (v) any other information relating to the person that is
required to be disclosed in solicitations of proxies for election of Directors
pursuant to Rule 14(a) under the Securities Exchange Act of 1934, as amended
(the "Act"), and any other applicable laws or rules or regulations of any
governmental authority or of any national securities exchange or similar body
overseeing any trading market on which shares of the Corporation are traded, and
(b) as to the stockholder giving the notice (i) the name and address of record
of the stockholder and the beneficial owner, if any, on whose behalf the
nomination is made, and (ii) the class and number of shares of the Corporation
which are beneficially owned by the stockholder and such beneficial owner and
(iii) a representation that the stockholder is a holder of record of shares of
the Corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
SECTION 3. VACANCIES. Subject to the provisions of the Certificate of
Incorporation, vacancies and newly created directorships resulting from any
increase in the authorized number of directors shall only be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and qualified,
or until their earlier resignation or removal.
SECTION 4. DUTIES AND POWERS. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.
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SECTION 5. MEETINGS. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the state of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, if there be one, the Chief Executive Officer, the President, or
any three directors. Notice thereof stating the place, date and hour of the
meeting shall be given to each director either by mail not less than forty-eight
(48) hours before the date of the meeting, by telephone or telegram on twenty-
four (24) hours' notice, or on much shorter notice as the person or persons
calling such meeting may deem necessary or appropriate in the circumstances.
SECTION 6. QUORUM. Except as may be otherwise specifically provided by law,
the Certificate of Incorporation or these By-Laws, at all meetings of the Board
of Directors, a majority of the entire Board of Directors shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
SECTION 7. ACTIONS OF BOARD. Unless otherwise provided by the Certificate
of Incorporation or these By-Laws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may betaken
without a meeting, if all the members of the Board of Directors or committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or committee.
SECTION 8. MEETINGS BY MEANS OF CONFERENCE TELEPHONE OR SIMILAR
COMMUNICATIONS EQUIPMENT. Unless otherwise provided by the Certificate of
Incorporation or these By-Laws, members of the Board of Directors of the
Corporation, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or such committee by means of
a conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 8 shall constitute presence in person at such
meeting.
SECTION 9. COMMITTEES. The Board of Directors may, by resolution passed by
a majority of the entire Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. In the absence or disqualification of a member of
a committee, and in the absence of a designation
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by the Board of Directors of an alternate member to replace the absent or
disqualified member, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member. Any committee, to the
extent allowed by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation.
Each committee shall keep regular minutes and report to the Board of Directors
when required.
SECTION 10. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
shareholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the shareholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
SECTION 11. [Section 11 was deleted by action of the Board of Directors on
December 17, 1999.]
ARTICLE IV OFFICERS
SECTION 1. GENERAL. The officers of the Corporation shall be chosen by the
Board of Directors and shall be a Chief Executive Officer, a President, a
Secretary and a Treasurer. The Board of Directors, in its discretion, may also
choose a Chairman of the Board of Directors (who must be a director) and one or
more Vice-Presidents, Assistant Secretaries, Assistant Treasurers and other
officers. Any number of offices may be held by the same person, unless otherwise
prohibited by law, the Certificate of Incorporation or these By-Laws. The
officers of the Corporation need not be stockholders of the Corporation nor,
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except in the case of the Chairman of the Board of Directors, need such officers
be directors of the Corporation.
SECTION 2. ELECTION. The Board of Directors shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors.
SECTION 3. VOTING SECURITIES OWNED BY THE CORPORATION. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by the Chief Executive Officer, the President or any
Vice-President and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to vote
in person or by proxy at any meeting of security holders of any corporation in
which the Corporation may own securities and at any such meeting shall possess
and may exercise any and all rights and power incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The Board of Directors may, by resolution, from time
to time confer like powers upon any other person or persons.
SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of
Directors, if there be one, shall preside at all meetings of the stockholders
and of the Board of Directors. Except where by law the signature of the Chief
Executive Officer or the President is required, the Chairman of the Board of
Directors shall possess the same power as the Chief Executive Officer or the
President to sign all contracts, certificates and other instruments of the
Corporation which may be authorized by the Board of Directors. During the
absence or disability of the Chief Executive Officer and the President, the
Chairman of the Board of Directors shall exercise all the powers and discharge
all the duties of the Chief Executive Officer or the President. The Chairman of
the Board of Directors shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him by these By-Laws
or by the Board of Directors.
SECTION 5. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall,
subject to the control of the Board of Directors, have general supervision of
the business of the Corporation and shall see that all orders and resolutions of
the Board of Directors are carried into effect. He shall execute all bonds,
mortgages, contracts and other instruments of the Corporation requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except that the other officers of the
Corporation may sign and execute documents when so authorized by these By-Laws,
the
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Board of Directors, the Chief Executive Officer or the President. In the absence
or disability of the Chairman of the Board of Directors, or if there be none,
the Chief Executive Officer shall preside at all meetings of the stockholders
and the Board of Directors. The Chief Executive Officer shall also perform such
other duties and may exercise such other powers as from time to time may be
assigned to him by these By-Laws or by the Board of Directors.
SECTION 6. PRESIDENT. The President shall, subject to the control of the
Board of Directors and the Chief Executive Officer, have general supervision of
the business of the Corporation and shall see that all orders and resolutions of
the Board of Directors are carried into effect. He shall execute all bonds,
mortgages, contracts and other instruments of the Corporation requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except that the other officers of the
Corporation may sign and execute documents when so authorized by these By-Laws,
the Board of Directors, the Chief Executive Officer or the President. In the
absence or disability of the Chairman of the Board of Directors and the Chief
Executive Officer, or if neither shall exist, the President shall preside at all
meetings of the stockholders and the Board of Directors. The President shall
also perform such other duties and may exercise such other powers as from time
to time may be assigned to him by these By-Laws or by the Board of Directors.
SECTION 7. VICE-PRESIDENTS. At the request of the Chief Executive Officer
or the President or in the event of either of their absences or inability or
refusal to act (and if there be no Chairman of the Board of Directors), the
Vice-President or the Vice-Presidents if there is more than one (in the order
designated by the Board of Directors) shall perform the duties of the Chief
Executive Officer and President, and when so acting, shall have all the powers
of and be subject to all the restrictions upon the Chief Executive Officer and
President. Each Vice-President shall perform such other duties and have such
other powers as the Board of Directors from time to time may prescribe. If there
be no Chairman of the Board of Directors and no Vice-President, the Board of
Directors shall designate the officer of the Corporation who, in the absence of
the Chief Executive Officer and President or in the event of the inability or
refusal of the Chief Executive Officer and President to act, shall perform the
duties of the Chief Executive Officer and President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the Chief
Executive Officer and President.
SECTION 8. SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors, the Chief Executive Officer or
President, under whose supervision he shall be. If the Secretary shall be unable
or shall refuse to cause to be given notice of all meetings of the stockholders
and
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special meetings of the Board of Directors, and if there be no Assistant
Secretary, then either the Board of Directors, the Chief Executive Officer or
the President may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary or
any Assistant Secretary, if there be one, shall have authority to affix the same
to any instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any such Assistant Secretary.
The Board of Directors may give general authority to any other officer to affix
the seal of the Corporation and to attest the affixing by his signature. The
Secretary shall see that all books, reports, statements, certificates and other
documents and records required by law to be kept or filed are properly kept or
filed, as the case may be.
SECTION 9. TREASURER. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Chief Executive Officer, the President and the Board of Directors, at its
regular meetings, or when the Board of Directors so requires, an account of all
his transactions as Treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, the Treasurer shall give the Corporation
a bond in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of his office
and for the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the Corporation.
SECTION 10. ASSISTANT SECRETARIES. Except as may be otherwise provided in
these By-Laws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the Chief Executive Officer, the President, any Vice-President, if
there be one, or the Secretary, and in the absence of the Secretary or in the
event of his disability or refusal to act, shall perform the duties of the
Secretary, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Secretary.
SECTION 11. ASSISTANT TREASURERS. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the Chief Executive Officer, the
President, any Vice-President, if there be one, or the Treasurer, and in the
absence of the Treasurer or in the event of his disability or refusal to act,
shall perform the duties of the Treasurer, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the Treasurer. If
required by the Board of Directors, an Assistant Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of
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Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
SECTION 12. OTHER OFFICERS. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
SECTION 13. [Section 13 was deleted by action of the Board of Directors on
December 17, 1999.]
ARTICLE V STOCK
SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman of the Board of Directors, the Chief Executive Officer, the
President or a Vice-President and (ii) by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation,
certifying the number of shares owned by him in the Corporation.
SECTION 2. SIGNATURES. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
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SECTION 4. TRANSFERS. Stock of the Corporation shall be transferable in the
manner prescribed by law and in these By-Laws. Transfers of stock shall be made
on the books of the Corporation only by the person named in the certificate or
by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
SECTION 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty days nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 6. BENEFICIAL OWNERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI NOTICES
SECTION 1. NOTICES. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
or by telegram, telex, cable, facsimile or overnight courier.
SECTION 2. WAIVERS OF NOTICE. Whenever any notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
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ARTICLE VII GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, and may be
paid in cash, in property, or in shares of the capital stock. Before payment of
any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, deems proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for any proper purpose, and the Board of
Directors may modify or abolish any such reserve.
SECTION 2. DISBURSEMENTS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
SECTION 4. CORPORATE SEAL. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII INDEMNIFICATION
SECTION 1. INDEMNIFICATION IN ACTIONS, SUITS, OR PROCEEDINGS OTHER THAN
THOSE BY OR IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify each person who is or was, or is
threatened to be made, a party to or witness in any threatened, pending or
completed action, suit, proceeding or claim, whether civil, criminal,
administrative or investigative (other than one by or in the right of the
Corporation), by reason of the fact that he is or was a director, officer or
employee of the Corporation or of Union Mutual Life Insurance Company, a Maine
mutual insurance company (the "Mutual Company"), or is or was serving at the
request of the Corporation or the Mutual Company as a director, officer,
employee or trustee of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorney's fees and expenses), judgments, fines, penalties, and amounts paid in
settlement, incurred by him in connection with defending, investigating,
preparing to defend, or being or preparing to be a witness in, such action,
suit, proceeding or claim, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
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SECTION 2. INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE
RIGHT OF THE CORPORATION. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify each person who is or was, or is threatened to be
made, a party to or witness in any threatened, pending or completed action,
suit, proceeding or claim by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer or employee of the Corporation or of the Mutual Company or is or was
serving at the request of the Corporation or the Mutual Company as a director,
officer, employee or trustee of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees and expenses), and, if and to the extent permitted by applicable
law, judgments, penalties and amounts paid in settlement, incurred by him in
connection with defending, investigating, preparing to defend, or being or
preparing to be a witness in, such action, suit, proceeding or claim, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation; provided, however, that no
indemnification shall be made in respect of any such claim or any issue or
matter in any such action, suit or proceeding as to which such person shall have
been adjudged to be liable to the Corporation unless (and only to the extent
that) the Court of Chancery or the court in which such claim, action, suit or
proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnification for such expenses
and amounts which the Court of Chancery or such other court shall deem proper.
SECTION 3. AUTHORIZATION OF INDEMNIFICATION. (a) Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the person seeking indemnification is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 1 or 2 of this Article VIII, as the case may be. Such determination (and
determinations under Sections 5 and 6 of this Article VIII) shall be made (i) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to the action, suit, proceeding or claim with respect to
which indemnification is sought ("disinterested directors"), or (ii) if such a
quorum is not obtainable, or if a quorum of disinterested directors so directs,
in a written opinion of independent legal counsel chosen by the Board of
Directors, or (iii) by the stockholders; provided, however, that if a Change in
Control (as defined in this Section 3) has occurred and the person seeking
indemnification so requests, such determination (and determination under
Sections 5 and 6 of this Article VIII) shall be made in a written opinion
rendered by independent legal counsel chosen by the person seeking
indemnification and not reasonably objected to by the Board of Directors (whose
fees and expenses shall be paid by the Corporation). To the extent, however,
that a director, officer, employee or trustee or former director, officer,
employee or trustee has been successful on the merits or otherwise in defense of
any action, suit, proceeding or claim described above, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorney's fees and expenses) incurred by him in connection
therewith, without the necessity of
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<PAGE>
authorization in the specific case. (b) For purposes of the proviso to the
second sentence of Section 3(a), "independent legal counsel" shall mean legal
counsel other than an attorney, or a firm having associated with it an attorney,
who has been retained by or who has performed services for the Corporation, the
Mutual Company or the person seeking indemnification within the previous three
years. (c) A "Change in Control" shall mean a change in control of the
Corporation of a nature that would be required to be reported in response to
Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Act, whether
or not the Corporation is then subject to such reporting requirement; provided
that, without limitation, such a change in control shall be deemed to have
occurred if (i) any "person" (as such term is used in sections 13(d) and 14(d)
of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Act), directly or indirectly, of securities of the Corporation representing
35% or more of the combined voting power of the Corporation's then outstanding
securities without the prior approval of at least two-thirds of the members of
the Board of Directors in office immediately prior to such acquisition, or (ii)
the Corporation is a party to a merger, consolidation, sale of assets or other
reorganization, or proxy contest, as a consequence of which members of the Board
of Directors in office immediately prior to such transaction or event constitute
less than a majority of the Board of Directors thereafter, or (iii) during any
period of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors (including for this purpose any new director
whose election or nomination for election by the Corporation's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period) cease for any reason to
constitute at least a majority of the Board of Directors.
SECTION 4. GOOD FAITH DEFINED, ETC. (a) For purposes of any determination
under Section 3 of this Article VIII, a person shall be deemed to have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if such person relied on the records or books of account of the Corporation, the
Mutual Company or another enterprise, or on information supplied to him by the
officers of the Corporation, the Mutual Company or another enterprise, or on
information or records given or reports made to the Corporation, the Mutual
Company or another enterprise by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the
Corporation, the Mutual Company or another enterprise. The term "another
enterprise" as used in this Section 4(a) shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise of
which such person is or was serving at the request of the Corporation or the
Mutual Company as a director, officer, employee or trustee. (b) The termination
of any action, suit, proceeding or claim by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, that he had no reasonable cause to believe that his conduct
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<PAGE>
was unlawful. (c) References in this Article VIII to "penalties" include any
excise taxes assessed on a person with respect to an employee benefit plan;
references in this Article VIII to "serving at the request of the Corporation or
the Mutual Company" include any service as a director, officer or employee or
former director, officer or employee of the Corporation or the Mutual Company
which imposes duties on, or involves services by, such person with respect to an
employee benefit plan or its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the participants or beneficiaries of such an
employee benefit plan shall be deemed to have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation. (d) The provisions of this Section 4 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth in Section 1 or
2 of this Article VIII, as the case may be.
SECTION 5. RIGHT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON
APPLICATION; ETC. Except as otherwise provided in the proviso to Section 2 of
this Article VIII: (a) Any indemnification under Section 1 or 2 of this Article
VIII shall be made no later than 45 days after receipt by the Corporation of the
written request of the director, officer, employee or trustee or former
director, officer, employee or trustee unless a determination is made within
said 45-day period in accordance with Section 3 of this Article VIII that such
person has not met the applicable standard of conduct set forth in Section 1 or
2 of this Article VIII. (b) The right to indemnification under Section 1 or 2 of
this Article VIII or advances under Section 6 of this Article VIII shall be
enforceable by the director, officer, employee or trustee or former director,
officer, employee or trustee in any court of competent jurisdiction. Following a
Change in Control, the burden of proving that indemnification is not appropriate
shall be on the Corporation. Neither the absence of any prior determination that
indemnification is proper in the circumstances, nor a prior determination that
indemnification is not proper in the circumstances, shall be a defense to the
action or create a presumption that the director, officer, employee or trustee
or former director, officer, employee or trustee has not met the applicable
standard of conduct. The expenses (including attorney's fees and expenses)
incurred by the director, officer, employee or trustee or former director,
officer, employee or trustee in connection with successfully establishing his
right to indemnification, in whole or in part, in any such action (or in any
action or claim brought by him to recover under any insurance policy or policies
referred to in Section 9 of this Article VIII) shall also be indemnified by the
Corporation. (c) If any person is entitled under any provision of this Article
VIII to indemnification by the Corporation for some or a portion of expenses,
judgments, fines, penalties or amounts paid in settlement incurred by him, but
not, however, for the total amount thereof, the Corporation shall nevertheless
indemnify such person for the portion of such expenses, judgments, fines,
penalties and amounts to which he is entitled.
SECTION 6. EXPENSES PAYABLE IN ADVANCE. Expenses (including attorney's fees
and expenses) incurred by a director, officer, employee or trustee or a former
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<PAGE>
director, officer, employee or trustee in defending, investigating, preparing to
defend, or being or preparing to be a witness in, a threatened or pending
action, suit, proceeding or claim against him, whether civil or criminal, may be
paid by the Corporation in advance of the final disposition of such action,
suit, proceeding or claim upon receipt by the Corporation of a written request
therefor and a written undertaking by or on behalf of the director, officer,
employee or trustee or former director, officer, employee or trustee to repay
such amounts if it shall be determined in accordance with Section 3 of this
Article VIII that he is not entitled to be indemnified by the Corporation;
provided, however, that if he seeks to enforce his rights in a court of
competent jurisdiction pursuant to Section 5(b) of this Article VIII, said
undertaking to repay shall not be applicable or enforceable unless and until
there is a final court determination that he is not entitled to indemnification
as to which all rights of approval have been exhausted or have expired.
SECTION 7. CERTAIN PERSONS NOT ENTITLED TO INDEMNIFICATION. Notwithstanding
any other provision of this Article VIII, no person shall be entitled to
indemnification under this Article VIII or to advances under Section 6 of this
Article VIII with respect to any action, suit, proceeding or claim brought or
made by him against the Corporation or the Mutual Company, other than an action,
suit, proceeding or claim seeking, or defending such person's right to,
indemnification and/or expense advances pursuant to this Article VIII or
otherwise.
SECTION 8. NON-EXCLUSIVITY AND SURVIVAL OF INDEMNIFICATION. The provisions
of this Article VIII shall not be deemed exclusive of any other rights to which
the person seeking indemnification or expense advances may be entitled under any
agreement, contract, or vote of stockholders or disinterested directors, or
pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. Except as otherwise
provided in Section 7 of this Article VIII, but notwithstanding any other
provision of this Article VIII, it is the policy of the Corporation that
indemnification of and expense advances to the persons specified in Sections 1
and 2 of this Article VIII shall be made to the fullest extent permitted by law,
and, accordingly, in the event of any change in law, by legislation or
otherwise, permitting greater indemnification of and/or expense advances to any
such person, the provisions of this Article VIII shall be construed so as to
require such greater indemnification and/or expense advances. The provisions of
this Article VIII shall not be deemed to preclude the indemnification of any
person who is not specified in Section 1 or 2 of this Article VIII but whom the
Corporation has the power to indemnify under the provisions of the General
Corporation Law of the State of Delaware or otherwise. The provisions of this
Article VIII shall continue as to a person who has ceased to be a director,
officer, employee or trustee and shall inure to the benefit of the heirs,
executors and administrators of such person.
SECTION 9. INSURANCE. The Corporation may purchase and maintain at its
expense insurance on behalf of any person who is or was a director, officer or
employee of
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the Corporation or the Mutual Company or is or was serving at the request of the
Corporation or the Mutual Company as a director, officer, employee or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability or expense asserted against or incurred
by him in any such capacity, or arising out of his status as such, whether or
not the Corporation would have the power or the obligation to indemnify him
against such liability or expense under the provisions of this Article VIII or
the provisions of Section 145 of the General Corporation Law of the State of
Delaware. The Company shall not be obligated under this Article VIII to make any
payment in connection with any claim made against any person if and to the
extent that such person has actually received payment therefor under any
insurance policy or policies.
SECTION 10. SUCCESSORS; MEANING OF "CORPORATION". This Article VIII shall
be binding upon and enforceable against any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of the
business and/or assets of the Corporation. For purposes of this Article VIII,
but subject to the provisions of any agreement relating to any merger or
consolidation of the kind referred to in clause (i) below or of any agreement
relating to the acquisition of any corporation of the kind referred to in clause
(ii) below, references to "the Corporation" shall include (i) any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger with the Corporation which, if its separate existence
had continued, would have had power and authority to indemnify its directors,
officers and employees, so that any person who is or was a director, officer or
employee of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall stand in the same position under the provisions of this
Article VIII with respect to the Corporation as he would have with respect to
such constituent corporation if its separate existence had continued; and (ii)
any corporation of which at least a majority of the voting power (as represented
by its outstanding stock having voting power generally in the election of
directors) is owned directly or indirectly by the Corporation.
SECTION 11. SEVERABILITY. The provisions of this Article VIII shall be
severable in the event that any provision hereof (including any provision within
a single section, subsection, clause, paragraph or sentence) is held invalid,
void or otherwise unenforceable on any ground by any court of competent
jurisdiction. In the event of any such holding, the remaining provisions of this
Article VIII shall continue in effect and be enforceable to the fullest extent
permitted by law.
ARTICLE IX AMENDMENTS
SECTION 1. POWER TO AMEND. The Board of Directors shall have concurrent
power with the stockholders as set forth in the By-Laws and the Certificate of
Incorporation to make, alter, amend, change, add to or repeal the By-Laws.
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SECTION 2. REQUIRED VOTE. The Board of Directors may amend the By-Laws upon
the affirmative vote of the number of directors which shall constitute, under
the terms of the By-Laws, the action of the Board of Directors. Stockholders may
not amend the By-Laws except upon the affirmative vote of at least eighty
percent (80%) of the votes entitled to be cast by the holders of all outstanding
shares of Voting Stock (as such term is defined in the Certificate of
Incorporation) voting together as a single class.
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EXHIBIT 10.19
AGREEMENT
This Agreement dated as of November 1, 1999 is by and between UnumProvident
Corporation, a Delaware corporation and its predecessors (the "Company"), and
James F. Orr III (the "Executive").
WHEREAS, the Company (as successor-in-interest to Unum Corporation and
Provident Companies, Inc.) and the Executive have previously executed an amended
and restated Employment Agreement dated as of May 25, 1999 (the "Employment
Agreement") providing for the compensation, benefits and terms and conditions of
the Executive's employment with the Company; and
WHEREAS, it has been mutually agreed that Executive's employment with the
Company will cease on November 1, 1999, and the Executive and the Company agree
that such termination shall be treated as a termination pursuant to Section 5(a)
of the Employment Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1 The terms of the Employment Agreement shall be followed in all respects,
except as such terms are modified herein. Capitalized terms not defined
herein shall have the meanings ascribed to such terms in the Employment
Agreement.
2 Subject to the Company's satisfaction of its obligations under this
Agreement, the Executive agrees to release the Company from all
compensation and benefit related claims arising during his employment
with the Company that are not provided for in the Employment Agreement,
as modified by this Agreement.
3 The Executive and the Company each agrees that Executive's last day of
employment with the Company will be November 1, 1999 (which shall be the
"Date of Termination" for purposes of Section 4(e) of the Employment
Agreement without the need to provide "Notice of Termination" under
Section 4(d) of the Employment Agreement), and Executive and Company
each agrees that
a. Executive will continue to receive his current Annual Base Salary
through November 1, 1999, and payment therefor will be paid on
normal payroll dates as a part of customary Company practice;
b. In full settlement of the provisions of Section 5(a)(i)A of the
Employment Agreement concerning payment of a lump sum within thirty
days after the
1
<PAGE>
Date of Termination, the Company shall pay Executive nine million
dollars ($9,000,000) in cash according to the following schedule:
(1) $6,000,000 to be paid on March 31, 2000; (2) the remaining
$3,000,000 to be paid in four equal installments of $750,000 on each
of July 3, 2000, October 2, 2000, January 2, 2001 and April 2, 2001;
c. Executive will not receive any payment of a partial bonus for 1999
as provided for in Section 5(a) (i)B(y) of the Employment Agreement;
d. In full satisfaction of (1) the Retirement Benefit specified in
Section 3(b)(v) of the Employment Agreement, (2) all benefits
accrued under all nonqualified defined benefit retirement plans
maintained by the Company and (3) the provisions of Section 5(a)(i)C
of the Employment Agreement (concerning payment in a lump sum thirty
days after the Date of Termination of the actuarial present value of
the Retirement Benefit), the Company shall pay Executive on March
31, 2000 an amount in cash equal to eleven million four hundred and
forty-four thousand seven hundred and eighty-six dollars
($11,444,786). The Executive's accrued benefit under the Company's
tax-qualified defined benefit plan will be paid in accordance with
the elections available under such tax-qualified defined benefit
plan; and
e. Executive and his spouse shall receive the medical and dental
benefits provided in Section 5(a) (ii) of the Employment Agreement,
including the limitation that premium payments for such coverage
shall not exceed in the aggregate one million dollars ($1,000,000).
4 As to the incentive awards provided for in Section 3(b)(iii) of the
Employment Agreement, the Company and Executive agree as follows:
a. The issuance to Executive of 250,000 shares of the Company's common
stock as Restricted Stock immediately after the Effective Date of
the Merger is forfeited; and
b. The terms of the grant to Executive of options to purchase 500,000
shares of the Company's common stock at $55.1799 per share (the
market price specified under the Stock Option Plan on June 30,1999)
for a term of ten years from the date of grant are as set forth in
the Non-Qualified Stock Option Agreement attached hereto as Exhibit
A; provided, that such options shall be fully vested and immediately
--------
exercisable as of November 1, 1999, and shall remain exercisable for
the remainder of the term of the grant; provided, further, that this
-------- -------
Agreement shall be considered incorporated into and form a part of
the Employment Agreement for purposes of such Non-Qualified Stock
Option Agreement.
2
<PAGE>
5 Company and Executive agree that as of November 1, 1999 there are no
other amounts or benefits due Executive through such date or thereafter
from or under any other plan, program, policy or agreement of the
Company as contemplated in Section 5(a)(iv) of the Employment Agreement
that have not been paid, except as set forth on Exhibit B hereto.
6 For the avoidance of doubt, the Company acknowledges its obligations to
pay any gross-up amount required by Section 8 of the Employment
Agreement.
7 Executive agrees to resign as a member of the Company's Board of
Directors, as Chairman of the Board of Directors and as Chairman of the
Executive Committee of the Board of Directors effective November 1, 1999
pursuant to the letter attached hereto as Exhibit C and such letter of
resignation is hereby accepted effective on such date.
8 Company shall continue to provide Executive with staff support through
December 31, 1999 and with membership privileges and usage consistent
with past practice in the Cumberland Club in Portland, Maine through
December 31, 1999.
9 Company shall pay Executive's reasonable attorneys fees and expenses
incurred in connection with the negotiation and execution of this
Agreement.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the
Company has caused this Agreement to be executed in its name and on its behalf,
all as of the date first written above.
EXECUTIVE
--------------------------
James F. Orr III
UnumProvident Corporation
By:
-----------------------
--------------------------
Secretary
3
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
4
<PAGE>
EXHIBIT B
AMOUNTS DUE UNDER OTHER COMPANY PLANS
1. $3,491,000 payable to Executive under deferred compensation arrangements
with the Company as of October 31, 1999 and including credited interest
through December 31, 1999 will be paid on January 3, 2000.
2. On March 31, 2000, (a) the amount of $348,000, representing the scheduled
payment due from Executive pursuant to the terms of the Collateral
Assignment Split-Dollar Agreement and Release, dated December 20, 1995, by
and among the Company, the Executive and the Executive's spouse and the
Collateral Assignment, dated December 20, 1995, by and between the same
parties (collectively, the "Insurance Agreements") will be waived in
accordance with Section 3(b)(v) of the Employment Agreement and the Company
acknowledges its obligation under such section to gross up the amount
forgiven for applicable federal, state and local taxes which are estimated
to total approximately $341,791 and (b) the Company shall release any claims
under the Insurance Agreements and the Policy (as defined in the Insurance
Agreements).
3. Amounts due under any tax-qualified retirement plan in which Executive has
accrued but unpaid benefits.
4. $10,000 retiree life insurance policy (provided by the Company at no cost to
the Executive).
5. Ability to convert Executive's group life insurance coverage obtained by the
Company to an individual policy with all future premiums to be paid by
Executive.
5
<PAGE>
EXHIBIT C
[LETTER OF RESIGNATION]
November 1, 1999
To: Board of Directors
UnumProvident Corporation
By this letter I am resigning as a member of the Board of Directors of
UnumProvident Corporation and all positions I currently hold on the Board of
Directors or with committees thereof effective November 1, 1999.
Sincerely,
-----------------------------
James F. Orr III
6
<PAGE>
Exhibit 10.26
$500,000,000
CREDIT AGREEMENT
dated as of
November 2, 1999
among
UNUMPROVIDENT CORPORATION
The BANKS Listed Herein
and
BANK OF AMERICA, NATIONAL ASSOCIATION
as Administrative Agent
ARRANGED BY
BANC OF AMERICA SECURITIES LLC,
as Sole Lead Arranger and Sole Book Manager
<PAGE>
CREDIT AGREEMENT
AGREEMENT dated as of November 2, 1999 among UNUMPROVIDENT CORPORATION, the
BANKS listed on the signature pages hereof and BANK OF AMERICA, NATIONAL
ASSOCIATION, as Administrative Agent.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. The following terms, as used herein, have the
-----------
following meanings:
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.
"Affiliate" means any Person which directly or indirectly controls, or is
under common control with, or is controlled by, the Borrower. As used in this
definition, "control" (including, with its correlative meanings, "controlled by"
and "under common control with") means possession, directly or indirectly, of
power to direct or cause the direction of management or policies (whether
through ownership of securities or partnership or other ownership interests, by
contract or otherwise), provided that, in any event, any Person which owns
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directly or indirectly 15% or more of the securities having ordinary voting
power for the election of directors or other governing body of a corporation or
15% or more of the partnership or other ownership interests of any other Person
(other than as a limited partner of such other Person) will be rebuttably
presumed to control such corporation or other Person, such presumption to be
rebutted only if the Required Banks agree in writing that such Person does not
control such corporation or other Person. Notwithstanding the foregoing, (i) no
individual shall be deemed to be an Affiliate of any Person solely by reason of
his or her being an officer of such Person and (ii) the Borrower and the
Restricted Subsidiaries shall not be deemed to be Affiliates of each other.
"Agent" means Bank of America, National Association in its capacity as
administrative agent for the Banks hereunder, and its successors in such
capacity.
"Agent Related Persons" means the Agent (including any successor agent),
together with its Affiliates (including, in the case of Agent, the Arranger),
and the officers, directors,
<PAGE>
employees, agents and attorneys-in-fact of such Persons and Affiliates.
"Applicable Facility Fee Rate" has the meaning specified in Schedule I hereto.
"Applicable Insurance Regulatory Authority" means, when used with respect to
any Restricted Insurance Subsidiary, the insurance commission, department or
similar regulatory authority or agency located in the jurisdiction in which such
Restricted Insurance Subsidiary is domiciled.
"Applicable Lending Office" means, with respect to any Bank, (i) in the case
of its Base Rate Loans, its Domestic Lending Office, and (ii) in the case of its
Euro-Dollar Loans, its Euro-Dollar Lending Office.
"Applicable Margin" has the meaning set forth in Schedule I hereto; provided,
however, that during the period from the date hereof to and including January
15, 2000 the Applicable Margin as set forth in Schedule I shall be increased by
1.50%.
"Applicable Utilization Fee Rate" has the meaning specified in Schedule I
hereto.
"Arranger" means Banc of America Securities LLC, as sole lead arranger and
sole book manager.
"Assignee" has the meaning set forth in Section 9.6 (c).
"Bank" means each bank listed on the signature pages hereof, each Assignee
which becomes a Bank pursuant to Section 9.6(c), and their respective
successors.
"Bank of America" means Bank of America, National Association.
"Base Rate" means a fluctuating rate per annum equal to the higher of (a) the
Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for
such day as publicly announced from time to time by Bank of America as its
"prime rate." Such rate is a rate set by Bank of America based upon various
factors including Bank of America's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans, which may be priced at, above, or below such announced rate. Any change
in such rate announced by Bank of America shall take effect at the opening of
business on the day specified in the public announcement of such change.
"Base Rate Loan" means a Loan to be made by a Bank as a Base Rate Loan in
accordance with the applicable Notice of Borrowing or pursuant to Article VIII.
"Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained
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<PAGE>
or otherwise contributed to by any member of the ERISA Group.
"Borrower" means UnumProvident Corporation, a Delaware corporation, and its
successors.
"Borrower's 1998 Form 10-K" means the Borrower's annual report on Form 10-K
for 1998, as filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
"Borrowing" has the meaning set forth in Section 1.3.
"Capitalized Lease Obligations" means, as to any Person, the obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property, which obligations are
required to be classified and accounted for as a capital lease on the balance
sheet of such Person under generally accepted accounting principles (including
Statement of Financial Accounting Standards No. 13 of the Financial Accounting
Standards Board) and, for purposes of this Agreement, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with generally accepted accounting principles (including such Statement No. 13).
"Commitment" means, with respect to each Bank, the amount set forth opposite
the name of such Bank on the signature pages hereof, as such amount may be
reduced from time to time pursuant to Sections 2.8 and 2.9.
"Confidential Information" has the meaning set forth in Section 9.10.
"Consolidated Subsidiary" means at any date any Subsidiary or other entity the
accounts of which would be consolidated with those of the Borrower in its
consolidated financial statements if such statements were prepared as of such
date in accordance with generally accepted accounting principles.
"Default" means any condition or event which constitutes an Event of Default
or which with the giving of notice or lapse of time or both would, unless cured
or waived, become an Event of Default.
"Deferrable Interest Debentures" mean the Borrower's $300,000,000 of 7.405%
junior subordinated deferrable interest debentures which mature on March 15,
2038.
"Domestic Business Day" means any day except a Saturday, Sunday or other day
on which commercial banks in Chicago or New York City are authorized by law to
close.
"Domestic Lending Office" means, as to each Bank, its office located at its
address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its
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<PAGE>
Domestic Lending Office) or such other office as such Bank may hereafter
designate as its Domestic Lending Office by notice to the Borrower and the
Agent.
"Effective Date" means the date this Agreement becomes effective in accordance
with Section 3.1.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended,
or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which commercial
banks are open for international business (including dealings in dollar
deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch or
affiliate located at its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire as its Euro-Dollar Lending
Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower
and the Agent.
"Euro-Dollar Loan" means a Loan to be made by a Bank as a Euro-Dollar Loan in
accordance with the applicable Notice of Borrowing.
"Euro-Dollar Reserve Percentage" means for any day that percentage (expressed
as a decimal) which is in effect on such day, as prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for determining the
maximum reserve requirement for a member bank of the Federal Reserve System in
New York City with deposits exceeding five billion dollars in respect of
"Eurocurrency liabilities" (or in respect of any other category of liabilities
which includes deposits by reference to which the interest rate on Euro-Dollar
Loans is determined or any category of extensions of credit or other assets
which includes loans by a non-United States office of any Bank to United States
residents).
"Event of Default" has the meaning set forth in Section 6.1.
"Federal Funds Rate" means, for any day, the rate per annum (rounded upwards
to the nearest 1/100 of 1%) equal to the weighted average of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers on such day, as published by the Federal
Reserve Bank on the Business Day next succeeding such day, provided that (a) if
--------
such day is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day as so
published on the next
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<PAGE>
succeeding Business Day, and (b) if no such rate is so published on such next
succeeding Business Day, the Federal Funds Rate for such day shall be the
average rate charged to Bank of America on such day on such transactions as
determined by the Agent.
"Fee Letter" has the meaning specified in Section 2.7(c).
"Funded Indebtedness" means, for the Borrower and the Restricted Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles, Indebtedness that (i) matures more than one year from the
date of its creation or (ii) matures on or within one year from the date of its
creation but is renewable or extendable at the option of the obligor thereof to
a date more than one year from the date of its creation, provided that, for
--------
purposes of this definition, Indebtedness shall be deemed to be renewable or
extendable at the option of the obligor thereof if it arises under a credit or
other similar agreement that obligates the lender or lenders thereunder to
extend credit to such obligor notwithstanding that the ability of such obligor
to renew or extend such Indebtedness is subject to the satisfaction of
conditions precedent.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Indebtedness of any other
Person and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such
Indebtedness (whether arising by virtue of partnership arrangements, by
agreement to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or (ii)
entered into for the purpose of assuring in any other manner the obligee of such
Indebtedness of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part), provided that the term Guarantee shall
--------
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Home Office Properties" means any building in which the principal office of
the Borrower or any Restricted Subsidiary of the Borrower is located.
"Indebtedness" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of
business, (iv) all Capitalized Lease Obligations of such Person, (v) all
Indebtedness secured by a Lien on any asset of such Person, whether or not such
Indebtedness is otherwise an obligation of such Person, (vi) all obligations of
such Person to purchase securities (or other property) which arise out of or in
connection with the sale of the same or substantially similar securities or
property, (vii) all non-contingent obligations of such Person to reimburse any
bank or other Person in respect of amounts paid under a letter of credit or
similar instrument and (viii) all Indebtedness of others Guaranteed by such
Person. For purposes of this definition,
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<PAGE>
Indebtedness shall not include the Deferrable Interest Debentures to the extent
such Deferrable Interest Debentures constitute 15% or less of Total Capital. If
the Deferrable Interest Debentures constitute more than 15% of Total Capital,
then the portion of the Deferrable Interest Debentures exceeding 15% will be
included in Indebtedness.
"Indemnified Liabilities" has the meaning specified in Section 9.3(b).
"Indemnitee" has the meaning set forth in Section 9.3(b).
"Insurance Subsidiary" means a Subsidiary that is a Restricted Insurance
Subsidiary or would be a Restricted Insurance Subsidiary if it were a Restricted
Subsidiary.
"Interest Period" means: with respect to each Euro-Dollar Borrowing, the
period commencing on the date of such Borrowing and ending one, two, three or
six months thereafter, as the Borrower may elect in the applicable Notice of
Borrowing; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
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, subject to clause (c) below, end on the last Euro-
Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended,
or any successor statute.
"Investment" means any investment in any Person whether by means of share
purchase, capital contribution, loan, time deposit or otherwise, provided that,
--------
in the case of any investment in any Unrestricted Subsidiary, the definition of
"Investment" shall not include investments resulting from (i) the provision of
administrative services by the Borrower or any Restricted Subsidiary to such
Unrestricted Subsidiary, which services are provided in the ordinary course of
the business of the Borrower or such Restricted Subsidiary, as the case may be,
and of such Unrestricted Subsidiary, (ii) the operation of the cash management
system of the Borrower and its Subsidiaries so long as it is operated in the
ordinary course of their business or (iii) transfers made, or accounts created,
in connection with any tax sharing agreement to which the Borrower or any
Restricted Subsidiary, as the case may be, and such Unrestricted Subsidiary is a
party.
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<PAGE>
"Level I Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least A+
from S&P or at least A1 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such evidence to be satisfactory to the Required Banks,
to the effect that if the Borrower had any such Indebtedness outstanding on such
date, such Indebtedness would be rated at least A+ from S&P or at least A1 from
Moody's.
"Level II Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least A
from S&P or at least A2 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such evidence to be satisfactory to the Required Banks,
to the effect that if the Borrower had any such Indebtedness outstanding on such
date, such Indebtedness would be rated at least A from S&P or at least A2 from
Moody's.
"Level III Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least A-
from S&P or at least A3 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such evidence to be satisfactory to the Required Banks,
to the effect that if the Borrower had any such Indebtedness outstanding on such
date, such Indebtedness would be rated at least A- from S&P or at least A3 from
Moody's.
"Level IV Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least BBB+
from S&P or at least Baa1 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such evidence to be satisfactory to the Required Banks,
to the effect that if the Borrower had any such Indebtedness outstanding on such
date, such Indebtedness would be rated at least BBB+ from S&P or at least Baa1
from Moody's.
"Level V Status" exists on any date if neither Level I nor Level II nor Level
III nor Level IV exists on such date.
"Lien" means, with respect to any asset owned by any Person, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such asset. For the purposes of this Agreement, any Person shall be deemed to
own subject to a Lien any asset which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset.
"Loan" means a Base Rate Loan or a Euro-Dollar Loan and "Loans" means Base
Rate Loans or Euro-Dollar Loans or a combination of the foregoing.
"Loan Documents" means this Agreement, the Note and all other documents and
instruments delivered in connection herewith.
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<PAGE>
"London Interbank Offered Rate" has the meaning set forth in Section 2.6(b).
"Material Indebtedness" means Indebtedness (other than the Notes) of the
Borrower and/or one or more of its Subsidiaries, arising in one or more related
or unrelated transactions, in an aggregate principal amount exceeding
$10,000,000.
"Material Plan" means at any time a Plan or Plans having aggregate Unfunded
Liabilities in excess of $20,000,000.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means at any time an employee pension benefit plan within
the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA
Group is then making or accruing an obligation to make contributions or has
within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"Notes" means promissory notes of the Borrower, substantially in the form of
Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans,
and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" has the meaning specified in Section 2.2.
"Parent" means, with respect to any Bank, any Person controlling such Bank.
"Participant" has the meaning set forth in Section 9.6(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding
to any or all of its functions under ERISA.
"Person" means an individual, a corporation, limited liability company, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
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<PAGE>
"Refunding Borrowing" means a Borrowing which, after application of the
proceeds thereof, results in no net increase in the outstanding principal amount
of the Loans.
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"Regulation X" means Regulation X of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks having at least a majority of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least a majority of the aggregate unpaid
principal amount of the Loans.
"Restricted Insurance Subsidiary" means a Restricted Subsidiary that is
licensed, authorized or admitted to carry on or transact the business of
insurance.
"Restricted Subsidiary" means: (i) the Subsidiaries listed as such on Schedule
II hereto and (ii) any Subsidiary acquired or organized after the Effective Date
and any Unrestricted Subsidiary in each case that is duly designated by the
Borrower, pursuant to Section 5.10, to be a Restricted Subsidiary; provided that
--------
any such Subsidiary included solely within clause (ii) shall cease being a
Restricted Subsidiary if and when it is duly designated by the Borrower,
pursuant to Section 5.10, as an Unrestricted Subsidiary.
"S&P" means Standard & Poor's, a division of the McGraw-Hill Companies, Inc.
"Status" means, at any date, whichever of Level I Status, Level II Status,
Level III Status, Level IV Status or Level V Status exists at such date.
"Subsidiary" means any corporation or other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Borrower.
"Termination Date" means October 31, 2000, or, if such day is not a Euro-
Dollar Business Day, the Termination Date shall be on the next preceding Euro-
Dollar Business Day.
"Total Assets" means the total assets of the Borrower and the Restricted
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles, less the excess (if any) of (i) any Investment
----
of the Borrower or any Restricted Subsidiary in any Unrestricted Subsidiary to
the extent that such Investment appears on the consolidated balance sheet of the
Borrower and the Restricted Subsidiaries used in the calculation of Total Assets
over (ii) the amount of such Investment in such Unrestricted Subsidiary which
constitutes Indebtedness of, or other amounts receivable from, such Unrestricted
Subsidiary to the extent
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<PAGE>
that the amount referred to above in this clause (ii) does not exceed the
consolidated stockholders, equity of such Unrestricted Subsidiary and its
consolidated subsidiaries.
"Total Capital" means the sum of Funded Indebtedness, Total Stockholders'
Equity and Deferrable Interest Debentures.
"Total Stockholders' Equity" means the total stockholders' equity of the
Borrower and the Restricted Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles, (1) plus any
----
unrealized holding losses (or less any unrealized holding gains) on account of
----
available-for-sale debt securities to the extent reflected therein in accordance
with Statement of Financial Accounting Standards No. 115 of the Financial
Accounting Standards Board, as amended from time to time, or any successor
provision thereto, together with other appropriate adjustments in accordance
therewith, and (2) less the excess (if any) of (i) any Investment of the
----
Borrower or any Restricted Subsidiary in any Unrestricted Subsidiary to the
extent that such Investment appears on the consolidated balance sheet of the
Borrower and the Restricted Subsidiaries used in the calculation of Total
Stockholders' Equity over (ii) the amount of such Investment in such
Unrestricted Subsidiary which constitutes Indebtedness of, or other amounts
receivable from, such Unrestricted Subsidiary to the extent that the amount
referred to above in this clause (ii) does not exceed the consolidated
stockholders' equity of such Unrestricted Subsidiary and its consolidated
subsidiaries.
"Unrestricted Subsidiary" means: (i) the Subsidiaries listed on Schedule II
hereto which are not listed therein as Restricted Subsidiaries and (ii) any
Subsidiary acquired or organized after the Effective Date that has not been duly
designated by the Borrower as a Restricted Subsidiary; provided that any such
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Subsidiary shall cease being an Unrestricted Subsidiary if and when it is duly
designated by the Borrower, pursuant to Section 5.10 hereof, as a Restricted
Subsidiary.
"Utilization" means at any date the percentage equivalent of a fraction
(i) the numerator of which is the aggregate outstanding principal amount of the
Loans at such date, after giving effect to any borrowing or payment on such
date, and (ii) the denominator of which is the aggregate amount of the
Commitments at such date, after giving effect to any reduction of the
Commitments on such date. For purposes of Section 2.7(b), if for any reason any
Loans remain outstanding after termination of the Commitments, the Utilization
for each date on or after the date of such termination shall be deemed to be
greater than 33%.
SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most recent audited consolidated
financial statements of the Borrower and its Consolidated Subsidiaries delivered
to the Banks; provided that, if the Borrower notifies
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<PAGE>
the Agent that the Borrower wishes to amend any covenant in Article V to
eliminate the effect of any change in generally accepted accounting principles
on the operation of such covenant (or if the Agent notifies the Borrower that
the Required Banks wish to amend Article V for such purpose), then the
Borrower's compliance with such covenant shall be determined on the basis of
generally accepted accounting principles in effect immediately before the
relevant change in generally accepted accounting principles became effective,
until either such notice is withdrawn or such covenant is amended in a manner
satisfactory to the Borrower and the Required Banks.
SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the
-------------------
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article II on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement by reference to the pricing of Loans
comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
-----
comprised of Euro-Dollar Loans).
SECTION 1.4. Basis for Ratings. The credit ratings to be utilized in the
-----------------
determination of a Status and for purposes of Section 5.5(c) are the ratings
assigned to senior unsecured long-term Indebtedness of the Borrower without
third party credit support; ratings assigned to any such Indebtedness which is
secured or which has the benefit of third party credit support shall be
disregarded.
SECTION 1.5. Split Ratings. For purposes of determining the relevant Level
-------------
Status: (i) if at any date the rating of any senior unsecured long term debt
securities by Moody's shall be higher or lower than the comparable rating by S&P
by one rating level (it being understood that for these purposes an S&P rating
of A+ is comparable to a Moody's rating of A1, an S&P rating of A is comparable
to a Moody's rating of A2, and so forth), then the rating of such debt
securities by each of Moody's and S&P shall be deemed to be the higher of the
two ratings; and (ii) if at any date the rating of any such senior unsecured
long term debt securities by Moody's shall be higher or lower than the
comparable rating by S&P by two or more rating levels (it being understood that
for these purposes an S&P rating of A+ is comparable to a Moody's rating of A1,
an S&P rating of A is comparable to a Moody's rating of A2, and so forth), then
the rating of such debt securities by each of Moody's and S&P shall be deemed to
be the rating which is one level below the higher of the two ratings.
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ARTICLE II
THE CREDITS
SECTION 2.1. Commitments to Lend. During the period from and including the
-------------------
Effective Date to but excluding the Termination Date, each Bank severally
agrees, on the terms and conditions set forth in this Agreement, to make loans
to the Borrower pursuant to this Section from time to time in amounts such that
the aggregate principal amount of Loans by such Bank at any one time outstanding
shall not exceed the amount of its Commitment. Each Borrowing under this
Section shall be in an aggregate principal amount of $10,000,000 or any larger
multiple of $1,000,000 (except that any such Borrowing may be in the aggregate
amount available in accordance with Section 3.2(b)) and shall be made from the
several Banks ratably in proportion to their respective Commitments. Within the
foregoing limits, the Borrower may borrow under this Section, repay, or to the
extent permitted by Section 2.10, prepay Loans and reborrow at any time prior to
the Termination Date under this Section.
SECTION 2.2. Notice of Borrowing. The Borrower shall give the Agent notice
-------------------
(a "Notice of Borrowing") not later than 10:00 A.M. (New York City time) on (x)
the date of each Base Rate Borrowing and (y) the third Euro-Dollar Business
Day before each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business Day in the
case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a
Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing are to be Base Rate Loans or
Euro-Dollar Loans, and
(d) in the case of a Euro-Dollar Loan, the duration of the Interest Period
applicable thereto, subject to the provisions of the definition of Interest
Period.
SECTION 2.3. Notice to Banks; Funding of Loans.
---------------------------------
(a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each
Bank of the contents thereof and of such Bank's share of such Borrowing and
such Notice of Borrowing shall not thereafter be revocable by the Borrower.
(b) Not later than 12:00 Noon (New York City time) on the date of each
Borrowing, each Bank participating therein shall (except as provided in
subsection (c) of this Section) make available its share of such Borrowing,
in Federal or other funds immediately available in New York City, to the
Agent at its address referred to in Section 9.1. Unless the Agent
determines that
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<PAGE>
any applicable condition specified in Article III has not been satisfied,
the Agent will make the funds so received from the Banks available to the
Borrower at the Agent's aforesaid address.
(c) If any Bank makes a new Loan hereunder on a day on which the Borrower is to
repay all or any part of an outstanding Loan from such Bank, such Bank
shall apply the proceeds of its new Loan to make such repayment and only an
amount equal to the difference (if any) between the amount being borrowed
and the amount being repaid shall be made available by such Bank to the
Agent as provided in subsection (b), or remitted by the Borrower to the
Agent as provided in Section 2.11, as the case may be.
(d) Unless the Agent shall have received notice from a Bank prior to the date
of any Borrowing that such Bank will not make available to the Agent such
Bank's share of such Borrowing, the Agent may assume that such Bank has
made such share available to the Agent on the date of such Borrowing in
accordance with subsections (b) and (c) of this Section 2.3 and the Agent
may, in reliance upon such assumption, make available to the Borrower on
such date a corresponding amount. If and to the extent that such Bank
shall not have so made such share available to the Agent, such Bank and the
Borrower severally agree to repay to the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the
date such amount is made available to the Borrower until the date such
amount is repaid to the Agent, at (i) in the case of the Borrower, a rate
per annum equal to the higher of the Federal Funds Rate and the interest
rate applicable thereto pursuant to Section 2.6 and (ii) in the case of
such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent
such corresponding amount, such amount so repaid shall constitute such
Bank's Loan included in such Borrowing for purposes of this Agreement.
SECTION 2.4. Notes. (a) The Loans of each Bank shall be evidenced by a
-----
single Note payable to the order of such Bank for the account of its Applicable
Lending Office in an amount equal to the aggregate unpaid principal amount of
such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Agent, request that its
Loans of a particular type be evidenced by a separate Note in an amount
equal to the aggregate unpaid principal amount of such Loans. Each such
Note shall be in substantially the form of Exhibit A hereto with
appropriate modifications to reflect the fact that it evidences solely
Loans of the relevant type. Each reference in this Agreement to the "Note"
of such Bank shall be deemed to refer to and include any or all of such
Notes, as the context may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.1(b), the Agent
shall mail such Note to such Bank. Each Bank shall record the date,
amount, type and maturity of each Loan made by it and the date and amount
of each payment of principal made by the Borrower with respect thereto, and
prior to any transfer of its Note shall endorse on the schedule forming a
part thereof appropriate notations to evidence the foregoing information
with respect to each such Loan then outstanding; provided that the failure
--------
of any Bank to make any such recordation or endorsement shall not affect
the obligations of the Borrower hereunder or under the Notes. Each
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<PAGE>
Bank is hereby irrevocably authorized by the Borrower so to endorse its
Note and to attach to and make a part of its Note a continuation of any
such schedule as and when required.
SECTION 2.5. Maturity of Loans. Each Loan included in any Borrowing shall
-----------------
mature, and the principal amount thereof shall be due and payable, on the last
day of the Interest Period applicable to such Borrowing and no later than the
Termination Date.
SECTION 2.6. Interest Rates. (a) Each Base Rate Loan shall bear interest
--------------
on the outstanding principal amount thereof, for each day from the date such
Loan is made until it becomes due, at a rate per annum equal to the Base Rate
plus the Applicable Margin for such day. Such interest shall be payable on the
last day thereof. Any overdue principal of or interest on any Base Rate Loan
shall bear interest, payable on demand, for each day until paid at a rate per
annum equal to the sum of 2% plus the Applicable Margin plus the Base Rate for
such day.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding principal
amount thereof, for the Interest Period applicable thereto, at a rate per
annum equal to the sum of the Applicable Margin plus the applicable London
Interbank Offered Rate. Such interest shall be payable for each Interest
Period on the last day thereof and, if such Interest Period is longer than
three months, at intervals of three months after the first day thereof.
The "London Interbank Offered Rate" applicable to any Interest Period means
(i) the rate per annum (carried out to the fifth decimal place) equal to the
rate determined by Agent to be the offered rate that appears on the page of the
Telerate Screen that displays an average British Bankers Association Interest
Settlement Rate for deposits in Dollars (for delivery on the first day of such
Interest Period) with a term equivalent to such Interest Period, determined as
of approximately 11:00 a.m. (London time) two Business Days prior to the first
day of such Interest Period, or
(ii) in the event the rate referenced in the preceding subsection (a) does not
appear on such page or service or such page or service shall cease to be
available, the rate per annum (carried out to the fifth decimal place) equal to
the rate determined by Agent to be the offered rate on such other page or other
service that displays an average British Bankers Association Interest Settlement
Rate for deposits in U.S. dollars (for delivery on the first day of such
Interest Period) with a term equivalent to such Interest Period, determined as
of approximately 11:00 a.m. (London time) two Euro-Dollar Business Days prior to
the first day of such Interest Period, or
(iii) in the event the rates referenced in the preceding subsections (a) and
(b) are not available, the rate per annum determined by Agent as the rate of
interest at which U.S. dollar deposits (for delivery on the first day of such
Interest Period) in same day funds in the approximate amount of the applicable
Euro-Dollar Loan and with a term equivalent to such Interest Period would be
offered by its London Branch to major banks in the offshore U.S. dollar market
at their request at approximately 11:00 a.m. (London time) two Euro-Dollar
Business Days prior to the first day of such Interest Period.
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<PAGE>
(c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear
interest, payable on demand, for each day from and including the date
payment thereof was due to but excluding the date of actual payment, at a
rate per annum equal to the sum of 2% plus the higher of (i) the sum of the
Applicable Margin for Euro-Dollar Loans plus the London Interbank Offered
Rate applicable to such Loan and (ii) the Applicable Margin for Base Rate
Loans, plus the Base Rate.
(d) The Agent shall determine each interest rate applicable to the Loans
hereunder. The Agent shall give prompt notice to the Borrower and the
Banks of each rate of interest so determined, and its determination thereof
shall be conclusive in the absence of manifest error.
SECTION 2.7. Fees.
----
(a) Facility Fee. The Borrower shall pay to the Agent for the account of the
------------
Banks ratably a facility fee at the Applicable Facility Fee Rate. Such
facility fee shall accrue for each day (i) from and including the Effective
Date to but excluding the Termination Date (or earlier date of termination
of the Commitments in their entirety), on the aggregate amount of the
Commitments (whether used or unused) and (ii) from and including the
Termination Date (or earlier date of termination of the Commitments in
their entirety) to but excluding the date the Loans shall be repaid in
their entirety, on the aggregate amount of the Commitments.
(b) Utilization Fee. The Borrower shall pay to the Agent for the account of
---------------
the Banks ratably a utilization fee at the Applicable Utilization Fee Rate.
Such utilization fee shall accrue for each day that the principal amount of
the outstanding Loans equals or exceeds 33% of the aggregate Commitments
(i) from and including the Effective Date to but excluding the Termination
Date (or earlier date of termination of the Commitments in their entirety),
on the aggregate amount of the Commitments (whether used or unused) and
(ii) from and including the Termination Date (or earlier date of
termination of the Commitments in their entirety) to but excluding the date
the Loans shall be repaid in their entirety, on the aggregate outstanding
principal amount of the Loans.
(c) Agent's and Arranger's Fee. The Borrower shall pay to the Agent for its
--------------------------
own account and for the account of the Arranger fees in the amounts and at
the times previously agreed upon between the Borrower, the Agent and the
Arranger pursuant to a letter (the "Fee Letter") dated October 22, 1999.
(d) Payments. Accrued fees under this Section shall be payable quarterly on
--------
the last Domestic Business Day of each March, June, September and December
and upon the date of termination of the Commitments in their entirety (and,
if later, the date the Loans shall be repaid in their entirety).
SECTION 2.8. Optional Termination or Reduction of Commitments. The
------------------------------------------------
Borrower may,
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<PAGE>
upon at least three Domestic Business Days' notice to the Agent, (i) terminate
the Commitments at any time, if no Loans are outstanding at such time or (ii)
ratably reduce from time to time by an aggregate amount of $10,000,000 or any
larger multiple of $1,000,000, the aggregate amount of the Commitments in excess
of the aggregate outstanding principal amount of the Loans.
SECTION 2.9. Mandatory Termination of Commitments. The Commitments shall
------------------------------------
terminate on the Termination Date, and any Loans then outstanding (together with
accrued interest thereon) shall be due and payable on such date.
SECTION 2.10. Optional Prepayments. (a) The Borrower may (i) upon at least
--------------------
one Domestic Business Day's notice to the Agent, prepay any Base Rate Borrowing
and (ii) upon at least three Euro-Dollar Business Days' notice to the Agent,
subject to Section 2.12, prepay any Euro-Dollar Borrowing, in whole at any time,
or from time to time in part in amounts aggregating $10,000,000 or any larger
multiple of $1,000,000, by paying the principal amount to be prepaid together
with accrued interest thereon to the date of prepayment. Each such optional
prepayment shall be applied to prepay ratably the Loans of the several Banks
included in such Borrowing.
(b) Upon receipt of a notice of prepayment pursuant to this Section, the Agent
shall promptly notify each Bank of the contents thereof and of such Bank's
ratable share (if any) of such prepayment and such notice shall not
thereafter be revocable by the Borrower.
SECTION 2.11. General Provisions as to Payments. (a) The Borrower shall
---------------------------------
make each payment of principal of, and interest on, the Loans and of fees
hereunder, not later than 12:00 Noon (New York City time) on the date when due,
in Federal or other funds immediately available in New York City, to the Agent
at its address referred to in Section 9.1. The Agent will promptly distribute to
each Bank its ratable share of each such payment received by the Agent for the
account of the Banks. Whenever any payment of principal of, or interest on, the
Base Rate Loans or of fees shall be due on a day which is not a Domestic
Business Day, the date for payment thereof shall be extended to the next
succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-
Dollar Business Day, the date for payment thereof shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls
in another calendar month, in which case the date for payment thereof shall be
the next preceding Euro-Dollar Business Day. If the date for any payment of
principal is extended by operation of law or otherwise, interest thereon shall
be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower prior to the
date on which any payment is due to the Banks hereunder that the Borrower
will not make such payment in full, the Agent may assume that the Borrower
has made such payment in full to the Agent on such date and the Agent may,
in reliance upon such assumption, cause to be distributed to each Bank on
such due date an amount equal to the amount then due such Bank. If and to
the extent that the Borrower shall not have so made such payment, each Bank
shall repay to the
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<PAGE>
Agent forthwith on demand such amount distributed to such Bank together
with interest thereon, for each day from the date such amount is
distributed to such Bank until the date such Bank repays such amount to the
Agent, at the Federal Funds Rate.
SECTION 2.12. Funding Losses. If the Borrower makes any payment of
--------------
principal with respect to any Euro-Dollar Loan (pursuant to Section 2.10 or
Article VI or VIII or otherwise) on any day other than the last day of the
Interest Period applicable thereto, or if the Borrower fails to borrow any Euro-
Dollar Loans after notice has been given to any Bank in accordance with Section
2.3(a), or if the Borrower fails to prepay after giving notice thereof under
Section 2.10, the Borrower shall reimburse each Bank within 15 days after demand
for any resulting loss or expense incurred by it (or by an existing or
prospective Participant in the related Loan), including (without limitation) any
loss incurred in obtaining, liquidating or employing deposits from third
parties, but excluding loss of margin for the period after any such payment or
failure to borrow, provided that such Bank shall have delivered to the Borrower
--------
a certificate as to the amount of such loss or expense, which certificate shall
be conclusive in the absence of manifest error.
SECTION 2.13. Computation of Interest and Fees. Interest based on the
--------------------------------
"prime rate" hereunder shall be computed on the basis of a year of 365 days (or
366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.14. Withholding Tax Exemption. At least five Domestic Business
-------------------------
Days prior to the first date on which interest or fees are payable hereunder for
the account of any Bank, each Bank that is not incorporated under the laws of
the United States of America or a state thereof agrees that it will deliver to
each of the Borrower and the Agent two duly completed copies of United States
Internal Revenue Service Form 1001 or 4224, certifying in either case that such
Bank is entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes. Each Bank
which so delivers a Form 1001 or 4224 further undertakes to deliver to each of
the Borrower and the Agent two additional copies of such form (or a successor
form) on or before the date that such form expires or becomes obsolete or after
the occurrence of any event requiring a change in the most recent form so
delivered by it, and such amendments thereto or extensions or renewals thereof
as may be reasonably requested by the Borrower or the Agent, in each case
certifying that such Bank is entitled to receive payments under this Agreement
and the Notes without deduction or withholding of any United States federal
income taxes, unless an event (including without limitation any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Bank from duly completing and delivering any such
form with respect to it and such Bank advises the Borrower and the Agent that it
is not capable of receiving payments without any deduction or withholding of
United States federal income tax.
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<PAGE>
SECTION 2.15. Regulation D Compensation. For so long as any Bank maintains
-------------------------
reserves against "Eurocurrency liabilities" (or any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of such Bank to United
States residents), and as a result the cost to such Bank (or its Euro-Dollar
Lending Office) of making or maintaining its Euro-Dollar Loans is increased,
then such Bank may require the Borrower to pay, contemporaneously with each
payment of interest on the Euro-Dollar Loans, additional interest on the related
Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the
excess of (i) (A) the applicable London Interbank Offered Rate divided by (B)
one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London
-----
Interbank Offered Rate. Any Bank wishing to require payment of such additional
interest (x) shall so notify the Borrower and the Agent, in which case such
additional interest on the Euro-Dollar Loans of such Bank shall be payable to
such Bank at the place indicated in such notice with respect to each Interest
Period commencing at least three Euro-Dollar Business Days after the giving of
such notice and (y) shall furnish to the Borrower at least five Euro-Dollar
Business Days prior to each date on which interest is payable on the Euro-Dollar
Loans an officer's certificate setting forth the amount to which such Bank is
then entitled under this Section (which shall be consistent with such Bank's
good faith estimate of the level at which the related reserves are maintained by
it). Each such certificate shall be accompanied by such information as the
Borrower may reasonably request as to the computation set forth therein.
ARTICLE III
CONDITIONS
SECTION 3.1. Effectiveness. This Agreement shall become effective on the
-------------
date that each of the following conditions shall have been satisfied (or waived
in accordance with Section 9.5):
(a) receipt by the Agent of counterparts hereof signed by each of the parties
hereto (or, in the case of any party as to which an executed counterpart
shall not have been received, receipt by the Agent in form satisfactory to
it of telegraphic, telex or other written confirmation from such party of
execution of a counterpart hereof by such party);
(b) receipt by the Agent for the account of each Bank of a duly executed Note
dated on or before the Effective Date complying with the provisions of
Section 2.4;
(c) receipt by the Agent of an opinion of F. Dean Copeland, General Counsel of
the Borrower, substantially in the form of Exhibit B hereto and covering
such additional matters relating to the transactions contemplated hereby as
the Required Banks may reasonably request;
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<PAGE>
(d) receipt by the Agent of all documents it may reasonably request relating to
the existence of the Borrower, the corporate authority for and the validity
and enforceability of this Agreement and the Notes, and any other matters
relevant hereto, all in form and substance satisfactory to the Agent; and
(e) payment by the Borrower of all fees required under the Fee Letter and, to
the extent invoiced, under Section 9.3;
provided that this Agreement shall not become effective or be binding on any
- --------
party hereto unless all of the foregoing conditions are satisfied not later than
November 15, 1999. The Agent shall promptly notify the Borrower and the Banks
of the Effective Date, and such notice shall be conclusive and binding on all
parties hereto.
SECTION 3.2. Borrowings. The obligation of any Bank to make a Loan on the
----------
occasion of any Borrowing is subject to the satisfaction of the following
conditions:
(a) receipt by the Agent of a Notice of Borrowing as required by Section 2.2;
(b) the fact that, immediately after such Borrowing, the aggregate outstanding
principal amount of the Loans will not exceed the aggregate amount of the
Commitments;
(c) the fact that, immediately before and after such Borrowing, no Default
shall have occurred and be continuing; and
(d) the fact that, except for the representations and warranties contained in
Section 4.4(i) as of any date other than the Effective Date, the
representations and warranties of the Borrower contained in this Agreement
(and except, in the case of a Refunding Borrowing, the representations and
warranties set forth in Section 4.5 as to any matter which has theretofore
been disclosed in writing by the Borrower to the Banks) shall be true on
and as of the date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(b), (c) and (d) of this Section.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
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<PAGE>
SECTION 4.1. Corporate Existence and Power. The Borrower is a corporation
-----------------------------
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, and has all corporate powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted.
SECTION 4.2. Corporate and Governmental Authorization; No Contravention.
----------------------------------------------------------
The execution, delivery and performance by the Borrower of this Agreement and
the Notes (1) are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action, require no action by or in respect
of, or filing with, any governmental body, agency or official, (2) do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the certificate of incorporation or by-laws of the Borrower or
any Restricted Subsidiary or of any agreement, judgment, injunction, order,
decree or other instrument binding upon the Borrower or any Restricted
Subsidiary or result in the creation or imposition of any Lien on any asset of
the Borrower or any Restricted Subsidiary and (3) do not contravene, or
constitute a default under, any provision of applicable law or regulation or of
the certificate of incorporation or bylaws of any Unrestricted Subsidiary or of
any agreement, judgment, injunction, order, decree or other instrument binding
upon any Unrestricted Subsidiary or result in the creation or imposition of any
Lien on any asset of any Unrestricted Subsidiary, where there is a reasonable
possibility that such contravention or default or creation or imposition of a
Lien, together with any contraventions and/or defaults and/or Liens so created
or imposed and in each case referred to in clauses (1) through (3), inclusive,
above, could materially adversely affect the business, consolidated financial
position or consolidated results of operations of the Borrower and the
Restricted Subsidiaries, taken as a whole.
SECTION 4.3. Binding Effect. This Agreement constitutes a valid and
--------------
binding agreement of the Borrower and the Notes, when executed and delivered in
accordance with this Agreement, will constitute valid and binding obligations of
the Borrower.
SECTION 4.4. Financial Information.
---------------------
(a) The consolidated statements of income, stockholders' equity and of cash
flows of UNUM Corporation and the Restricted Subsidiaries which were
Subsidiaries of UNUM Corporation for the fiscal year ended December 31,
1998 and the related consolidated balance sheets as at the end of such
period, a copy of which has been delivered to each of the Banks, fairly
present, in all material respects and in conformity with generally accepted
accounting principles, the consolidated financial condition of UNUM
Corporation and such Restricted Subsidiaries as of such date and their
consolidated results of operations and cash flows for such period.
(b) The consolidated statements of income, stockholders' equity and of cash
flows of Provident Companies, Inc. and its Consolidated Subsidiaries for
the fiscal year ended December 31, 1998 and the related consolidated
balance sheets as at the end of such period set forth in Form 10K/A of
Provident Companies, Inc. filed with the Securities and Exchange
Commission, a
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<PAGE>
copy of which has been delivered to each of the Banks, fairly present, in
all material respects and in conformity with generally accepted accounting
principles, the consolidated financial condition of Provident Companies,
Inc. and its Consolidated Subsidiaries as of such date and their
consolidated results of operations and cash flows for such period.
(c) The consolidated statements of income, stockholders' equity and of cash
flows of Unum Corporation and its Consolidated Subsidiaries for the fiscal
year ended December 31, 1998 and the related consolidated balance sheets as
at the end of each period, set forth in the 1998 Form 10-K/A Unum
Corporation as filed with the Securities and Exchange Commission, a copy of
which has been delivered to each of the Banks, fairly present, in all
material respects and in conformity with generally accepted accounting
principles, the consolidated financial condition of Unum Corporation and
its Consolidated Subsidiaries and their consolidated results of operations
and cash flows for such period.
(d) The Joint Proxy Statement/Prospectus dated June 2, 1999, as filed with the
Securities and Exchange Commission, a copy of which has been delivered to
each of the Banks, fairly presents the information set forth therein.
(e) The Form 8K of the Borrower dated August 31, 1999, as filed with the
Securities and Exchange Commission, a copy of which has been delivered to
each of the Banks, fairly presents the information set forth therein.
(f) The consolidated statements of income and of cash flows of the Borrower and
the Consolidated Subsidiaries for the six months ended June 30, 1999 and
the related consolidated balance sheets as at the end of such period, set
forth in the Borrower's quarterly report for the fiscal quarter ended June
30, 1999 as filed with the Securities and Exchange Commission on Form 10-Q,
a copy of which has been delivered to each of the Banks, fairly present, in
all material respects and in conformity with generally accepted accounting
principles, the consolidated financial condition of the Borrower and the
Consolidated Subsidiaries as of such date and their consolidated results of
operations and cash flows for such six-month period (subject to normal
year-end adjustments).
(g) The Annual Statement of each Restricted Insurance Subsidiary for the fiscal
year ended December 31, 1998, as filed with the Applicable Insurance
Regulatory Authority of such Restricted Insurance Subsidiary, a copy of
which has been delivered to each of the Banks, presents the statutory
financial condition of such Restricted Insurance Subsidiary in accordance
with statutory accounting practices required or permitted by such
Applicable Insurance Regulatory Authority, and the amounts carried in the
balance sheet referred to therein on account of the actuarial items
referred to in clauses (1) through (5), inclusive, of the statement of the
corporate actuary contained therein (i) are computed in accordance with
commonly accepted actuarial standards consistently applied and are fairly
stated in accordance with sound actuarial principles, (ii) are based on
actuarial assumptions that produce reserves at least as great as those
called for in any contract provision and are in accordance with all other
contract provisions, (iii)
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<PAGE>
meet the requirements of the insurance laws and regulations of the State in
which such Restricted Insurance Subsidiary is domiciled, (iv) make a good
and sufficient provision for all unmatured obligations of such Restricted
Insurance Subsidiary guaranteed under the terms of its policies, and (v)
include provisions for all actuarial reserves and related statement items
that ought to be established, and such actuarial methods, considerations
and analyses conform to the appropriate Standards of Practice as
promulgated by the Actuarial Standards Board, which standards form the
basis of this statement of opinion.
(h) The Quarterly Statement of each Restricted Insurance Subsidiary for the six
months ended June 30, 1999, as filed with the Applicable Insurance
Regulatory Authority of such Restricted Insurance Subsidiary, a copy of
which has been delivered to each of the Banks, presents the statutory
financial condition of such Restricted Insurance Subsidiary in accordance
with statutory accounting practices required or permitted by such
Applicable Insurance Regulatory Authority.
(i) Since June 30, 1999 there has been no material adverse change in the
business, financial position, results of operations or prospects of the
Borrower and the Restricted Subsidiaries, considered as a whole, except as
disclosed in the Form 8K of the Borrower to be dated November 2, 1999, a
copy of which has been delivered to each of the Banks.
SECTION 4.5. Litigation. Except as set forth in Schedule 4.5, there is no
---------- ------------
action, suit or proceeding pending against, or to the knowledge of the Borrower
threatened against or affecting, the Borrower or any of its Subsidiaries before
any court or arbitrator or any governmental body, agency or official in which
there is a reasonable possibility of an adverse decision which could materially
adversely affect the business, consolidated financial position or consolidated
results of operations of the Borrower and the Restricted Subsidiaries, taken as
a whole, or which in any manner draws into question the validity or
enforceability of this Agreement or the Notes.
SECTION 4.6. Compliance with ERISA. Each member of the ERISA Group has
---------------------
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which has resulted or could result in the imposition of a Lien or the posting of
a bond or other security under ERISA or the Internal Revenue Code or (iii)
incurred any liability under Title IV of ERISA other than a liability to the
PBGC for premiums under Section 4007 of ERISA.
SECTION 4.7. Taxes. The Borrower and the Restricted Subsidiaries have
-----
filed all United States Federal income tax returns and all other material tax
returns which are required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment
-22-
<PAGE>
received by the Borrower or any Restricted Subsidiary. The charges, accruals and
reserves on the books of the Borrower and the Restricted Subsidiaries in respect
of taxes or other governmental charges are, in the opinion of the Borrower,
adequate. There has been no failure by any Unrestricted Subsidiary to file any
tax return required to be filed by it or to pay any tax when due which failure,
together with any other failures referred to in this Section 4.7, could
materially adversely affect the business, consolidated financial position or
consolidated results of operations of the Borrower and the Restricted
Subsidiaries, taken as a whole.
SECTION 4.8. Subsidiaries. Each of the Restricted Subsidiaries is a
------------
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation, and has all corporate powers and all
material governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted.
SECTION 4.9. Not an Investment Company. Neither the Borrower nor any
-------------------------
Restricted Subsidiary is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
SECTION 4.10. Full Disclosure. All information heretofore furnished by the
---------------
Borrower to the Agent or any Bank for purposes of or in connection with this
Agreement or any transaction contemplated hereby is, and all such information
hereafter furnished by the Borrower to the Agent or any Bank will be, true and
accurate in all material respects on the date as of which such information is
stated or certified. The Borrower has disclosed to the Banks in writing any and
all facts known to it which materially and adversely affect or may affect (to
the extent the Borrower can now reasonably foresee), the business, operations or
financial condition of the Borrower and the Restricted Subsidiaries, taken as a
whole, or the ability of the Borrower to perform its obligations under this
Agreement.
SECTION 4.11. Year 2000. The Borrower has (a) initiated a review and
---------
assessment of all areas within its and each of its Restricted Subsidiaries'
business and operations (including those affected by customers and vendors) that
could be adversely affected by the "Year 2000 Problem" (that is, the risk that
computer applications and devices containing imbedded computer chips used by the
Borrower or any of its Restricted Subsidiaries (or their respective customers
and vendors) may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999), (b) developed a plan and timeline for addressing the Year 2000 Problem on
a timely basis, and (c) to date, implemented that plan in accordance with that
timetable. Based on the foregoing, the Borrower believes that all computer
applications and devices containing imbedded computer chips (including those of
its and its Restricted Subsidiaries' customers and vendors) that are material to
its or any of its Restricted Subsidiaries' business and operations are
reasonably expected on a timely basis to be able to perform properly date-
sensitive functions for all dates before and after January 1, 2000 (that is, be
"Year 2000 Compliant"), except to the extent that a failure to do so could not
reasonably be expected to have a material adverse effect on the business,
financial positions, results of operations or prospects of the Borrower and its
Restricted
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<PAGE>
Subsidiaries taken as a whole.
ARTICLE V
COVENANTS
The Borrower agrees that so long as any Bank has any Commitment hereunder or
any amount payable under any Note remains unpaid:
SECTION 5.1. Financial Statements. The Borrower shall deliver to each of
--------------------
the Banks:
(a) INTENTIONALLY LEFT BLANK
(b) as soon as available and in any event within 100 days after the end of each
fiscal year of the Borrower, consolidated statements of income,
stockholders' equity and of cash flows of the Borrower and the Restricted
Subsidiaries for such year and the related consolidated balance sheets as
at the end of such year, setting forth in each case in comparative form the
corresponding figures for the preceding fiscal year, and accompanied by an
opinion thereon of independent certified public accountants of recognized
national standing, which opinion shall state that said financial statements
fairly present, in all material respects, the consolidated financial
condition and results of operations and cash flows of the Borrower and the
Restricted Subsidiaries as at the end of, and for, such fiscal year, and a
certificate of such accountants stating that, in making the audit necessary
for their opinion, they obtained no knowledge, except as specifically
stated, of any Default;
(c) as soon as available and in any event within 60 days after the end of each
of the first three fiscal quarterly periods of each fiscal year of the
Borrower, consolidated statements of income and of cash flows of the
Borrower and the Consolidated Subsidiaries for such period and for the
period from the beginning of the respective fiscal year to the end of such
period, and the related consolidated balance sheets as at the end of such
period, setting forth in each case in comparative form the corresponding
figures for the corresponding periods in the preceding fiscal year,
accompanied by a certificate of a senior financial officer of the Borrower,
which certificate shall state that said financial statements fairly
present, in all material respects, the consolidated financial condition and
results of operations and cash flows of the Borrower and the Consolidated
Subsidiaries in accordance with generally accepted accounting principles,
consistently applied, as at the end of, and for, such periods (subject to
normal year-end audit adjustments);
(d) as soon as available and in any event within 100 days after the end of each
fiscal year of the Borrower, consolidated statements of income,
stockholders' equity and
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<PAGE>
of cash flows of the Borrower and the Consolidated Subsidiaries for such
year and the related consolidated balance sheets as at the end of such
year, setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, and accompanied by an opinion
thereon of independent certified public accountants of recognized national
standing, which opinion shall state that said financial statements fairly
present, in all material respects, the consolidated financial condition and
results of operations and cash flows of the Borrower and the Consolidated
Subsidiaries as at the end of, and for, such fiscal year;
(e) as soon as available and in any event not later than 90 days after the end
of each fiscal year of each Restricted Insurance Subsidiary, (i) the Annual
Statements of such Restricted Insurance Subsidiary (prepared in accordance
with the statutory accounting practices required or permitted by its
Applicable Insurance Regulatory Authority) for such fiscal year as filed
with such Applicable Insurance Regulatory Authority, together with the
opinion thereon of a senior financial officer of such Restricted Insurance
Subsidiary stating that such Annual Statements present the statutory
financial condition of such Restricted Insurance Subsidiary in accordance
with statutory accounting practices required or permitted by such
Applicable Insurance Regulatory Authority, and (ii) a certificate of the
corporate actuary of such Restricted Insurance Subsidiary affirming that
the amounts carried in the balance sheet referred to therein on account of
the actuarial items referred to in clauses (1) through (5), inclusive, of
such certificate (i) are computed in accordance with commonly accepted
actuarial standards consistently applied and are fairly stated in
accordance with sound actuarial principles, (ii) are based on actuarial
assumptions that produce reserves at least as great as those called for in
any contract provision and are in accordance with all other contract
provisions, (iii) meet the requirements of the insurance laws and
regulations of the State in which such Restricted Insurance Subsidiary is
domiciled, (iv) make a good and sufficient provision for all unmatured
obligations of such Restricted Insurance Subsidiary guaranteed under the
terms of its policies, (v) are computed on the basis of assumptions
consistent with those used in computing the corresponding items in the
Annual Statement of such Restricted Insurance Subsidiary for the preceding
fiscal year, except as noted in the notes thereto and (vi) include
provisions for all actuarial reserves and related statement items that
ought to be established, and affirming that such actuarial methods,
considerations and analyses conform to the appropriate Standards of
Practice as promulgated by the Actuarial Standards Board, which Standards
of Practice form the basis of this certification;
(f) as soon as available and in any event within 60 days after the end of each
fiscal quarter of each Restricted Insurance Subsidiary (except for the
fourth fiscal quarter of any fiscal year), (i) quarterly statutory
financial statements of such Restricted Insurance Subsidiary (prepared in
accordance with statutory accounting practices required or permitted by its
Applicable Insurance Regulatory Authority) for such fiscal quarter as filed
with such Applicable Insurance Regulatory Authority, together with the
opinion
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<PAGE>
thereon of a senior financial officer of such Restricted Insurance
Subsidiary stating that such statutory financial statements present the
statutory financial condition of such Restricted Insurance Subsidiary in
accordance with statutory accounting practices required or permitted by
such Applicable Insurance Regulatory Authority;
(g) promptly upon their becoming available, copies of all registration
statements and regular periodic reports (including, without limitation,
Form 8-K), if any, which the Borrower shall have filed with the Securities
and Exchange Commission (or any governmental agency substituted therefor)
or any national securities exchange;
(h) promptly upon the mailing thereof to the shareholders of the Borrower
generally, copies of all financial statements, reports and proxy statements
so mailed;
(i) if and when any member of the ERISA Group (i) gives or is required to give
notice to the PBGC of any "reportable event" (as defined in Section 4043 of
ERISA) with respect to any Plan which might constitute grounds for a
termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any
such reportable event, a copy of the notice of such reportable event given
or required to be given to the PBGC; (ii) receives notice of complete or
partial withdrawal liability under Title IV of ERISA or notice that any
Multiemployer Plan is in reorganization, is insolvent or has been
terminated, a copy of such notice; (iii) receives notice from the PBGC
under Title IV of ERISA of an intent to terminate, impose liability (other
than for premiums under Section 4007 of ERISA) in respect of, or appoint a
trustee to administer any Plan, a copy of such notice; (iv) applies for a
waiver of the minimum funding standard under Section 412 of the Internal
Revenue Code, a copy of such application; (v) gives notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such notice
and other information filed with the PBGC; (vi) gives notice of withdrawal
from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or
(vii) fails to make any payment or contribution to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which has resulted or could
result in the imposition of a Lien or the posting of a bond or other
security, a certificate of the chief financial officer or the chief
accounting officer of the Borrower setting forth details as to such
occurrence and action, if any, which the Borrower or applicable member of
the ERISA Group is required or proposes to take;
(j) promptly after the Borrower knows that any Default has occurred, a notice
of such Default describing the same in reasonable detail and, together with
such notice or as soon thereafter as possible, a description of the action
that the Borrower has taken and proposes to take with respect thereto;
(k) promptly upon the occurrence of any change in the rating of any obligation
of the Borrower by either Moody's or S&P, a notice setting forth the
details thereof; and
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<PAGE>
(l) from time to time such other information regarding the business, affairs or
financial condition of the Borrower or any of the Subsidiaries as the
Agent, at the request of any Bank, may reasonably request, if the
requesting Bank in good faith determines that such information is or may be
necessary or useful to it to determine or monitor the Borrower's compliance
with the provisions of this Agreement.
The Borrower will furnish to each Bank, at the time it furnishes each set of
financial statements pursuant to paragraphs (b), (c) or (d) above, a certificate
of a senior financial officer of the Borrower (i) to the effect that no Default
has occurred and is continuing (or, if any Default has occurred and is
continuing, describing the same in reasonable detail and describing the action
that the Borrower has taken and proposes to take with respect thereto) and (ii)
setting forth in reasonable detail the computations necessary to determine
whether the Borrower is in compliance with Sections 5.8 and 5.9 as of the end of
the respective fiscal quarter or fiscal year.
The Borrower shall be deemed to have delivered the financial statements
referred to in subsection (c) and (d) above when it has (i) posted such
financials on the Internet website of the Securities and Exchange Commission
(http://www.sec.gov) or on the Internet website of the Borrower as it shall have
previously provided to the Banks, and (ii) notified the Banks of such posting;
provided if a Bank requests the financial statements to be delivered in hard
copies, the Borrower shall furnish to the Bank such statements accordingly.
SECTION 5.2. Litigation. The Borrower shall promptly give to each Bank
----------
notice of all legal or arbitral actions, suits and proceedings, and of all
actions, suits and proceedings by or before any governmental or regulatory
authority or agency, affecting the Borrower or any Subsidiary, except actions,
suits and proceedings which in the aggregate, if adversely determined, would
not, in the judgment of the Borrower, have a material adverse effect on the
business, consolidated financial condition or consolidated results of operations
of the Borrower and the Restricted Subsidiaries, taken as a whole.
SECTION 5.3. Corporate Existence, Etc. Except as provided in Section 5.5,
-------------------------
the Borrower shall, and shall cause each Restricted Subsidiary to: preserve and
maintain its corporate existence and all of its material rights, privileges and
franchises; comply with the requirements of all applicable laws, rules,
regulations and orders of governmental or regulatory authorities if failure to
comply with such requirements would materially and adversely affect the
consolidated financial condition or operations, or the business taken as a
whole, of the Borrower and the Restricted Subsidiaries; pay and discharge all
taxes, assessments and governmental charges or levies imposed on it or on its
income or profits or on any of its property prior to the date on which penalties
attach thereto, except for any such tax, assessment, charge or levy the payment
of which is being contested in good faith and by proper proceedings and against
which adequate reserves are being maintained; maintain all of its properties
used or useful in its business in good working order and condition, ordinary
wear and tear excepted; permit one or more representatives acting on behalf of
all of the Banks, during normal business hours, to examine,
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<PAGE>
copy and make extracts from its books and records, to inspect its properties,
and to discuss its business and affairs with its officers, all to the extent
reasonably requested by the Required Banks for the purposes described in Section
5.1(l), provided that such representatives shall have the right to copy and make
--------
extracts from such books and records only after the occurrence and during the
continuance of a Default; and keep insured by financially sound and reputable
insurers all property of a character usually insured by corporations engaged in
the same or similar business similarly situated against loss or damage of the
kinds and in the amounts customarily insured against by such corporations and
carry such other insurance as is usually carried by such corporations and/or
self insure all property, in a manner and in amounts, in accordance with
generally accepted actuarial and accounting principles.
SECTION 5.4. Use of Proceeds. The Borrower shall use the proceeds of the
---------------
Loans hereunder to finance general corporate activities (including, without
limitation, commercial paper back up) in compliance with all applicable legal
and regulatory requirements, including, without limitation, the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
including, without limitation, Regulations U and X.
SECTION 5.5. Prohibition of Fundamental Changes. The Borrower shall not,
----------------------------------
nor shall it permit any Restricted Subsidiary to, enter into any transaction of
merger or consolidation or amalgamation, or liquidate, wind up or dissolve
itself (or suffer any liquidation or dissolution), convey, sell, lease, transfer
or otherwise dispose of, in one transaction or a series of transactions, all or
a substantial part of its business or assets, whether now owned or hereafter
acquired (including, without limitation, receivables and leasehold interests,
but excluding (i) any inventory or other assets sold or disposed of in the
ordinary course of business according to ordinary business terms and (ii)
obsolete or worn-out property) or make any material change in its present method
of conducting business except that:
(a) any Restricted Subsidiary may merge with or consolidate into (i) the
Borrower if the Borrower shall be the surviving corporation or (ii) any
other Restricted Subsidiary;
(b) any Restricted Subsidiary may sell, lease, transfer or otherwise dispose of
any or all of its assets (upon voluntary liquidation or otherwise) to the
Borrower or another Restricted Subsidiary;
(c) (I) the Borrower may merge with or consolidate into any other Person if the
Borrower is the surviving corporation; (II) the Borrower may merge with or
consolidate into any other Person where the Borrower is not the surviving
corporation and may transfer substantially all its assets as an entirety to
any other Person, if, but only if (i) the corporation into which the
Borrower is merged or formed by such consolidation or the Person which
acquires substantially all the Borrower's assets as an entirety is a
corporation organized and existing under the laws of the United States or
any State thereof, and shall expressly assume, by an agreement executed and
delivered to the Agent
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<PAGE>
and the Banks and in form and substance satisfactory to the Agent and the
Banks, the due and punctual payment of the principal of, and interest on,
all Loans then outstanding or thereafter made hereunder and the due and
punctual payment of all other amounts then outstanding or thereafter
required to be paid hereunder and the performance of every covenant and
agreement contained herein, (ii) after giving effect to such merger,
consolidation or transfer, no Default shall exist hereunder, (iii) the
corporation referred to in clause (i) above shall have outstanding senior
unsecured long-term Indebtedness rated at least A- by S&P and at least A3
by Moody's or, if no such Indebtedness is outstanding, the Borrower shall
have provided written evidence from S&P and Moody's to the Banks, such
evidence to be satisfactory to the Required Banks, that, if such
corporation had such Indebtedness outstanding, such Indebtedness would be
rated at least A- by S&P and at least A3 by Moody's, and (iv) at the time
of such merger, consolidation or transfer the Borrower and its Restricted
Subsidiaries would be permitted to incur at least $1.00 of additional
Funded Indebtedness under Section 5.9, provided that no such
--------
transfer shall have the effect of releasing the Borrower from any of its
obligations hereunder or under the Notes; and (III) a Restricted Subsidiary
may merge or consolidate with or into or transfer substantially all its
assets as an entirety to any other Person if the surviving or transferee
corporation is or contemporaneously therewith becomes a Restricted
Subsidiary; provided that in each case, after giving effect to such merger,
--------
consolidation or transfer, (i) no Default shall exist hereunder, (ii) the
Borrower's outstanding senior unsecured long-term Indebtedness shall be
rated at least A- by S&P and at least A3 by Moody's or, if no such
Indebtedness is outstanding, if the Borrower provides written evidence from
S&P and Moody's to the Banks, such evidence to be satisfactory to the
Required Banks, to the effect that, if the Borrower had any such
Indebtedness outstanding at such time, such Indebtedness would be rated at
least A- by S&P and at least A3 by Moody's and (iii) the Borrower and its
Restricted Subsidiaries would be permitted to incur at least $1.00 of
additional Funded Indebtedness under Section 5.9;
(d) the Borrower or any Restricted Subsidiary may change its present lines of
business or, in connection therewith, may abandon or otherwise dispose of
any material rights, privileges and franchises, or its present method of
conducting business if such change, abandonment or disposition will not, in
the Borrower's Board of Directors' good faith judgment, have a material
adverse effect on the business, operations, property, financial or other
condition of the Borrower and the Restricted Subsidiaries, taken as a
whole;
(e) the Borrower or any Restricted Subsidiary may, in any fiscal quarter of the
Borrower, convey, sell, lease, transfer or otherwise dispose of assets (not
otherwise permitted under this Section 5.5 to be disposed of) which,
together with all other assets (not otherwise permitted under this Section
5.5 to be disposed of) theretofore so disposed of in such fiscal quarter
and in the immediately preceding three consecutive fiscal quarters of the
Borrower, have a book value not exceeding in the aggregate 20% of Total
Assets as at the first day of such period of three consecutive fiscal
quarters so long as (i)
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<PAGE>
any such conveyance, sale, lease, transfer or other disposition, together
with all such conveyances, sales, leases, transfers or other dispositions
since the first day of such period of three consecutive fiscal quarters,
will not, in the Borrower's Board of Directors' good faith judgment, have a
material adverse effect on the business, operations, property or financial
or other condition of the Borrower and the Restricted Subsidiaries, taken
as a whole and (ii) after giving effect to such conveyance, sale, lease,
transfer or other disposition, no Default exists and the Borrower and its
Restricted Subsidiaries would be permitted to incur at least $1.00 of
additional Funded Indebtedness under Section 5.9; provided that the
--------
aggregate book value of all assets conveyed, sold, leased, transferred or
otherwise disposed of during such fiscal quarter and the immediately
preceding three consecutive fiscal quarters shall not exceed 10% of Total
Assets as at such first day except to the extent that such assets were
first acquired by the Borrower or any Restricted Subsidiary, taken
together, not earlier than one year prior to such conveyance, sale, lease,
transfer or other disposition; and
(f) the Borrower or any Restricted Subsidiary may sell, lease, transfer or
otherwise dispose of real property (and personal property necessary to the
use thereof) acquired by the Borrower or such Restricted Subsidiary, as the
case may be, pursuant to foreclosure proceedings or by deed in lieu of
foreclosure;
provided that none of the foregoing shall prevent the Borrower or any Restricted
- --------
Subsidiary from conveying, selling, leasing, transferring or otherwise disposing
of any Home Office Properties the fair market value of which in the aggregate
does not exceed $100,000,000.
SECTION 5.6. Limitation on Liens. The Borrower shall not, nor shall it
-------------------
permit any Restricted Subsidiary to, create, incur, assume or suffer to exist,
any Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, except:
(a) Liens, not otherwise excepted hereunder, existing on the date of this
Agreement, which Liens do not secure Indebtedness in an aggregate principal
amount in excess of $20,000,000;
(b) Liens arising in the ordinary course of its business which (i) do not
secure Indebtedness, (ii) in the case of any judgment or order for the
payment of money, do not secure any judgment or order for the payment of
money in an amount exceeding $10,000,000 and (iii) do not in the aggregate
materially detract from the value of its assets or materially impair the
use thereof in the operation of its business;
(c) Liens on assets of corporations which become Restricted Subsidiaries after
the date of this Agreement, provided that such Liens are in existence at
--------
the time the respective corporations become Restricted Subsidiaries and
were not created in anticipation thereof;
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<PAGE>
(d) Liens upon real and/or tangible personal property acquired after the date
hereof (by purchase, construction or otherwise) by the Borrower or any
Restricted Subsidiary, each of which Liens either (A) existed on such
property before the time of its acquisition and was not created in
anticipation thereof, or (B) was created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund, the
cost (including the cost of construction) of the respective property;
provided that no such Lien shall extend to or cover any property of the
--------
Borrower or such Restricted Subsidiary other than the respective property
so acquired and improvements thereon and no such Lien shall secure any
additional Indebtedness; and provided further that the principal amount of
-------- -------
Indebtedness secured by any such Lien shall at no time exceed the cost of
the respective property at the time it was acquired (by purchase,
construction or otherwise);
(e) Liens created after the Effective Date upon real and/or personal property
securing Indebtedness incurred after the Effective Date, provided that the
--------
aggregate Indebtedness secured thereby shall not at any time exceed 7.5% of
Total Stockholders' Equity; and
(f) any extension, renewal or replacement of the foregoing, provided, however,
-------- -------
that the Liens permitted hereunder shall not secure any additional
Indebtedness (if applicable) or cover any additional property; and
(g) Liens on (i) marketable direct obligations issued or unconditionally
guaranteed or insured by the United States of America or any agency or
instrumentality thereof and backed by the full faith and credit of the
United States of America sold by the Borrower or any of its Subsidiaries
under a repurchase agreement with a bank or a primary dealer of United
States government securities (a "Repo Counterparty") maturing within 90
days from the date of sale, provided that the terms of such agreement
--------
comply with the guidelines set forth in the Federal Financial Institutions
Examination Council Supervisory Policy -- Repurchase Agreements of
Depositary Institutions With Securities Dealers and Others, as adopted by
the Comptroller of the Currency on October 31, 1985 (or any successor
guidelines) and (ii) other marketable debt securities under a repurchase
agreement and/or securities lending agreement with a bank or a primary
dealer of such securities (the "Counterparty") maturing within 90 days from
the date of sale if the terms of such agreement comply with such
guidelines; provided that, in the case of any mortgage-backed security
--------
subject to such an arrangement, the Counterparty thereof may, in lieu of
returning such security, return another mortgaged-backed security of the
same value, yield and rating, and otherwise having comparable economic
terms; provided further that the Borrower and its Subsidiaries will
--------
continue their policies in effect on the date thereof requiring collateral
from their Repo Counterparties and Counterparties.
SECTION 5.7. Transactions with Affiliates. The Borrower will not, nor will
----------------------------
it permit any Restricted Subsidiary to, directly or indirectly, enter into any
transaction with or for the benefit of
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<PAGE>
any Affiliate (including, without limitation, transfers of assets to or from an
Affiliate and guarantees and assumptions of obligations of an Affiliate) other
than transactions with Affiliates (i) otherwise permitted by this Agreement or
(ii) (x) entered into on an arm's length basis, on terms no more favorable to
such Affiliate than would be available to unrelated Persons and (y) after giving
effect to which the Borrower and its Restricted Subsidiaries would be permitted
to incur at least $1.00 of additional Funded Indebtedness under Section 5.9.
SECTION 5.8. Minimum Total Stockholders' Equity. The Borrower shall not
----------------------------------
permit at any time Total Stockholders' Equity to be less than 10% of Total
Assets.
SECTION 5.9. Ratio of Funded Indebtedness to Total Capital. The Borrower
---------------------------------------------
shall not, nor shall it permit any Restricted Subsidiary to, incur or otherwise
become liable in respect of Funded Indebtedness unless, after giving effect
thereto, the ratio of (i) the aggregate principal amount of Funded Indebtedness
to (ii) Total Capital shall not exceed 0.35 to 1.
SECTION 5.10. Restricted and Unrestricted Subsidiaries. The Borrower may
----------------------------------------
at any time by resolution of its Board of Directors designate any Subsidiary
prospectively as a Restricted Subsidiary or as an Unrestricted Subsidiary if,
after giving effect to such designation, no Default would exist and the Borrower
and the Restricted Subsidiaries would be permitted to incur at least $1.00 of
additional Funded Indebtedness under Section 5.9; provided, however, that no
-------- -------
Subsidiary designated by an asterisk on Schedule II hereof as a Restricted
Subsidiary may be designated as an Unrestricted Subsidiary; provided further
-------- -------
that, if any Unrestricted Subsidiary listed on Schedule I hereof is duly
designated pursuant to this Section 5.10 as a Restricted Subsidiary, it may not
at any time thereafter be designated as an Unrestricted Subsidiary; and provided
--------
further that any designation under this Section 5.10 must remain unchanged over
- -------
the last day of at least two consecutive fiscal quarters of the Borrower. A
certified copy of such resolution, together with a pro forma consolidated
balance sheet of the Borrower and the Restricted Subsidiaries as at a date not
more than 30 days prior to the effective date of (but giving effect to) such
designation, shall be delivered to each Bank no later than five Domestic
Business Days prior to the effective date of such designation.
SECTION 5.11. Payment of Taxes. The Borrower shall pay and discharge, and
----------------
cause its Restricted Subsidiaries to pay and discharge, when due all taxes,
assessments and governmental charges, or levies imposed on the Borrower or its
Restricted Subsidiaries or on its income or profits or any of its property.
SECTION 5.12. Maintenance of Properties. The Borrower shall, and shall
-------------------------
cause its Restricted Subsidiaries to, maintain, preserve and protect all of its
material properties and equipment necessary in the operation of its business in
good order and condition, subject to wear and tear in the ordinary course of
business, and not permit any waste of its properties.
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ARTICLE VI
DEFAULTS
SECTION 6.1. Events of Default. If one or more of the following events
-----------------
("Events of Default") shall have occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal of any Loan, or the
Borrower shall fail to pay within five days of the due date thereof any
interest on any Loan, any fees or any other amount payable hereunder;
(b) the Borrower shall fail to observe or perform any covenant contained in
Sections 5.4 to 5.10, inclusive, provided that, if a failure to observe the
--------
covenant contained in Section 5.8 occurs and, but only so long as, Total
Stockholders' Equity is at least 7% of Total Assets, then the failure to
observe such covenant shall not be an Event of Default unless such failure
continues for 30 days;
(c) the Borrower shall fail to observe or perform any covenant or agreement
contained in this Agreement (other than those covered by clause (a) or (b)
above) for 30 days after written notice thereof has been given to the
Borrower by the Agent at the request of any Bank;
(d) any representation, warranty, certification or statement made by the
Borrower in this Agreement or in any certificate, financial statement or
other document delivered pursuant to this Agreement shall prove to have
been incorrect in any material respect when made (or deemed made);
(e) the Borrower or any Restricted Subsidiary or any Insurance Subsidiary shall
fail to make any payment in respect of any Material Indebtedness when due
or within any applicable grace period;
(f) any event or condition shall occur which results in the acceleration of the
maturity of any Material Indebtedness of the Borrower or any Restricted
Subsidiary or any Insurance Subsidiary or enables the holder of such
Material Indebtedness or any Person acting on such holder's behalf to
accelerate the maturity thereof;
(g) the Borrower or any Restricted Subsidiary or any Insurance Subsidiary shall
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under
any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or shall make a
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general assignment for the benefit of creditors, or shall fail generally to
pay its debts as they become due, or shall take any corporate action to
authorize any of the foregoing;
(h) an involuntary case or other proceeding shall be commenced against the
Borrower or any Restricted Subsidiary or any Insurance Subsidiary seeking
liquidation, reorganization or other relief with respect to it or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days; or an order for relief
shall be entered against the Borrower or any Restricted Subsidiary or any
Insurance Subsidiary under the federal bankruptcy laws as now or hereafter
in effect;
(i) any member of the ERISA Group shall fail to pay when due an amount or
amounts aggregating in excess of $10,000,000 which it shall have become
liable to pay under Title IV of ERISA; or notice of intent to terminate a
Material Plan shall be filed under Title IV of ERISA by any member of the
ERISA Group, any plan administrator or any combination of the foregoing; or
the PBGC shall institute proceedings under Title IV of ERISA to terminate,
to impose liability (other than for premiums under Section 4007 of ERISA)
in respect of, or to cause a trustee to be appointed to administer any
Material Plan; or a condition shall exist by reason of which the PBGC would
be entitled to obtain a decree adjudicating that any Material Plan must be
terminated; or there shall occur a complete or partial withdrawal from, or
a default, within the meaning of Section 4219(c)(5) of ERISA, with respect
to, one or more Multiemployer Plans which could cause one or more members
of the ERISA Group to incur a current payment obligation in excess of
$10,000,000;
(j) a judgment or order for the payment of money in excess of $10,000,000 shall
be rendered against the Borrower or any Restricted Subsidiary or any
Insurance Subsidiary and such judgment or order shall continue unsatisfied
and unstayed for a period of 30 days; or
(k) any person or group of persons (within the meaning of Section 13 or 14 of
the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 25% or more of the
outstanding shares of common stock of the Borrower; or, during any period
of twelve consecutive calendar months, individuals who were directors of
the Borrower on the first day of such period shall cease to constitute a
majority of the board of directors of the Borrower;
then, and in every such event, the Agent shall, (i) if requested by the Required
Banks, by notice to the Borrower, terminate the Commitments and they shall
thereupon terminate and (ii) if requested by the Required Banks, by notice to
the Borrower declare the Notes (together with
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accrued interest thereon) to be, and the Notes shall thereupon become,
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby waived by the Borrower; provided that in
--------
the case of any of the Events of Default specified in clause (g) or (h) above
with respect to the Borrower, without any notice to the Borrower or any other
act by the Agent or the Banks, the Commitments shall thereupon terminate and the
Notes (together with accrued interest thereon) shall become immediately due and
payable without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by the Borrower.
SECTION 6.2. Notice of Default. The Agent shall give notice to the
-----------------
Borrower under Section 6.1(c) promptly upon being requested to do so by any Bank
and shall thereupon notify all the Banks thereof.
ARTICLE VII
THE AGENT
SECTION 7.1. Appointment and Authorization of Agent.
--------------------------------------
Each Bank hereby irrevocably (subject to Section 7.9) appoints, designates and
-----------
authorizes Agent to take such action on its behalf under the provisions of this
Agreement and each other Loan Document and to exercise such powers and perform
such duties as are expressly delegated to it by the terms of this Agreement or
any other Loan Document, together with such powers as are reasonably incidental
thereto. Notwithstanding any provision to the contrary contained elsewhere in
this Agreement or in any other Loan Document, Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall Agent have
or be deemed to have any fiduciary relationship with any Bank, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Agreement or any other Loan Document or otherwise exist
against Agent. Without limiting the generality of the foregoing sentence, the
use of the term "agent" in this Agreement with reference to Agent is not
intended to connote any fiduciary or other implied (or express) obligations
arising under agency doctrine of any applicable law. Instead, such term is used
merely as a matter of market custom, and is intended to create or reflect only
an administrative relationship between independent contracting parties.
SECTION 7.2. Delegation of Duties. Agent may execute any of its duties
--------------------
under this Agreement or any other Loan Document by or through agents, employees
or attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. Agent shall not be responsible to any Banks
for the negligence or misconduct of any agent or attorney-in-fact that it
selects with reasonable care.
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SECTION 7.3. Liability of Administrative Agent. None of the Agent Related
---------------------------------
Persons shall (i) be liable to any Banks for any action taken or omitted to be
taken by any of them under or in connection with this Agreement or any other
Loan Document or the transactions contemplated hereby (except for its own gross
negligence or willful misconduct), or (ii) be responsible in any manner to any
Banks for any recital, statement, representation or warranty made by Borrower or
any Subsidiary or Affiliate of Borrower, or any officer thereof, contained in
this Agreement or in any other Loan Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by
Administrative Agent under or in connection with, this Agreement or any other
Loan Document, or the validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement or any other Loan Document, or for any failure of
Borrower or any other party to any Loan Document to perform its obligations
hereunder or thereunder. No Agent Related Person shall be under any obligation
to any Banks to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or any
other Loan Document, or to inspect the properties, books or records of Borrower
or any of Borrower's Subsidiaries or Affiliates.
SECTION 7.4. Reliance by Agent.
-----------------
(a) Agent shall be entitled to rely, and shall be fully protected in relying,
upon any writing, resolution, representation, notice, consent, certificate,
affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons, and upon advice and statements of legal counsel (including counsel
to Borrower), independent accountants and other experts selected by Agent.
Agent shall be fully justified in failing or refusing to take any action
under any other Loan Document unless it shall first receive such advice or
concurrence of Required Banks as it deems appropriate and, if it so
requests, it shall first be indemnified to its satisfaction by Banks
against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. Agent shall in all
cases be fully protected in acting, or in refraining from acting, under
this Agreement or any other Loan Document in accordance with a request or
consent of Required Bankers or all Bankers, if required hereunder, and such
request and any action taken or failure to act pursuant thereto shall be
binding upon all of Banks. Where this Agreement expressly permits or
prohibits an action unless Required Banks otherwise determine, and in all
other instances, Agent may, but shall not be required to, initiate any
solicitation for the consent or a vote of Bankers.
(b) For purposes of determining compliance with the conditions specified in
Section 3.1, each Bank that has executed this Agreement shall be deemed to
-----------
have consented to, approved or accepted or to be satisfied with, each
document or other matter either sent by Agent to such Bank for consent,
approval, acceptance or satisfaction, or required thereunder to be
consented to or approved by or acceptable or satisfactory to such Bank.
SECTION 7.5. Notice of Default. Agent shall not be deemed to have
-----------------
knowledge or notice of the occurrence of any Default, except with respect to
defaults in the payment of principal,
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interest and fees required to be paid to Agent for the account of Banks, unless
Agent shall have received written notice from a Bank or Borrower referring to
this Agreement, describing such Default and stating that such notice is a
"notice of default". Agent will notify Banks of its receipt of any such notice.
Agent shall take such action with respect to such Default or Event of Default as
may be directed by Required Banks in accordance with Section 6.1; provided,
--------
however, that unless and until Agent has received any such direction, Agent may
- -------
(but shall not be obligated to) take such action, or refrain from taking such
action, with respect to such Default as it shall deem advisable or in the best
interest of Banks.
SECTION 7.6. Credit Decision; Disclosure of Information by Agent. Each
---------------------------------------------------
Bank acknowledges that none of Agent Related Persons has made any representation
or warranty to it, and that no act by Agent hereinafter taken, including any
consent to and acceptance of any assignment or review of the affairs of Borrower
and its Subsidiaries, shall be deemed to constitute any representation or
warranty by any Agent Related Person to any Bank as to any matter; including
whether Agent Related Persons have disclosed material information in their
possession. Each Bank, including any Bank by assignment, represents to Agent
that it has, independently and without reliance upon any Agent Related Person
and based on such documents and information as it has deemed appropriate, made
its own appraisal of and investigation into the business, prospects, operations,
property, financial and other condition and creditworthiness of Borrower and its
Subsidiaries, and all applicable bank regulatory laws relating to the
transactions contemplated hereby, and made its own decision to enter into this
Agreement and to extend credit to Borrower hereunder. Each Bank also represents
that it will, independently and without reliance upon any Agent Related Person
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigations as it deems necessary to inform itself as to the
business, prospects, operations, property, financial and other condition and
creditworthiness of Borrower. Except for notices, reports and other documents
expressly required to be furnished to Banks by Agent herein, Agent shall not
have any duty or responsibility to provide any Bank with any credit or other
information concerning the business, prospects, operations, property, financial
and other condition or creditworthiness of Borrower or any of its Subsidiaries
which may come into the possession of any Agent Related Persons.
SECTION 7.7. Indemnification of Agent. Whether or not the transactions
------------------------
contemplated hereby are consummated, Banks shall indemnify upon demand each
Agent Related Person (to the extent not reimbursed by or on behalf of Borrower
and without limiting the obligation of Borrower to do so), pro rata, and hold
harmless each Agent Related Person from and against any and all Indemnified
Liabilities incurred by it; provided, however, that no Bank shall be liable for
-------- -------
the payment to any Agent Related Person of any portion of such Indemnified
Liabilities resulting from such Person's gross negligence or willful misconduct;
provided, however, that no action taken in accordance with the directions of
- -------- -------
Required Banks shall be deemed to constitute gross negligence or willful
misconduct for purposes of this Section. Without limitation of the foregoing,
each Bank shall reimburse Agent upon demand for its
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<PAGE>
ratable share of any costs or out-of-pocket expenses (including Attorney Costs)
incurred by Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement, any other Loan Document, or
any document contemplated by or referred to herein, to the extent that Agent is
not reimbursed for such expenses by or on behalf of Borrower. The undertaking in
this Section shall survive the payment of all obligations hereunder and the
resignation or replacement of Agent.
SECTION 7.8. Agent in Individual Capacity. Bank of America and its
----------------------------
Affiliates may make loans to, issue letters of credit for the account of, accept
deposits from, acquire equity interests in and generally engage in any kind of
banking, trust, financial advisory, underwriting or other business with Borrower
and its Subsidiaries and Affiliates as though Bank of America were not Agent
hereunder and without notice to or consent of Banks. Lenders acknowledge that,
pursuant to such activities, Bank of America or its Affiliates may receive
information regarding Borrower or its Affiliates (including information that may
be subject to confidentiality obligations in favor of Borrower or such
Affiliate) and acknowledge that Agent shall be under no obligation to provide
such information to then. With respect to its Loans, Bank of America shall have
the same rights and powers under this Agreement as any other Bank and may
exercise the same as though it were not Agent.
SECTION 7.9. Successor Agent. Agent may, and at the request of Required
---------------
Banks shall, resign as Agent upon 30 days' notice to Banks. If Agent resigns
under this Agreement, Required Banks shall appoint from among Banks a successor
administrative agent for Banks which successor administrative agent shall be
approved by Borrower. If no successor administrative agent is appointed prior
to the effective date of the resignation of Agent, Agent may appoint, after
consulting with Banks and Borrower, a successor administrative agent from among
Banks. Upon the acceptance of its appointment as successor administrative agent
hereunder, such successor administrative agent shall succeed to all the rights,
powers and duties of the retiring Agent and the term "Agent" shall mean such
successor administrative agent and the retiring Agent's appointment, powers and
duties as Agent shall be terminated. After any retiring Agent's resignation
hereunder as Agent, the provisions of this Section 7 and Section 9.3 shall inure
--------- -----------
to its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement. If no successor administrative agent has accepted
appointment as Agent by the date which is 30 days following a retiring Agent's
notice of resignation, the retiring Agent's resignation shall nevertheless
thereupon become effective and Banks shall perform all of the duties of Agent
hereunder until such time, if any, as Required Banks appoint a successor agent
as provided for above.
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<PAGE>
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If
--------------------------------------------------------
on or prior to the first day of any Interest Period for any Euro-Dollar
Borrowing:
(a) the Agent determines that deposits in dollars (in the applicable amounts)
are not being offered to the Agent in the relevant market for such Interest
Period, or
(b) Banks having 50% or more of the aggregate amount of the Commitments advise
the Agent that the London Interbank Offered Rate as determined by the Agent
will not adequately and fairly reflect the cost to such Banks of funding
their Euro-Dollar Loans for such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, the obligations of the Banks to make
Euro-Dollar Loans shall be suspended. Unless the Borrower notifies the Agent at
least two Domestic Business Days before the date of any Euro-Dollar Rate
Borrowing for which a Notice of Borrowing has previously been given that it
elects not to borrow on such date, such Borrowing shall instead be made as a
Base Rate Borrowing.
SECTION 8.2. Illegality. If, on or after the date of this Agreement, the
----------
adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Euro-Dollar Lending Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency shall make it unlawful or impossible for any Bank (or its
Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and
such Bank shall so notify the Agent, the Agent shall forthwith give notice
thereof to the other Banks and the Borrower, whereupon until such Bank notifies
the Borrower and the Agent that the circumstances giving rise to such suspension
no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be
suspended. Before giving any notice to the Agent pursuant to this Section, such
Bank shall designate a different Euro-Dollar Lending Office if such designation
will avoid the need for giving such notice and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine
that it may not lawfully continue to maintain and fund any of its outstanding
Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower
shall immediately prepay in full the then outstanding principal amount of each
such Euro-Dollar Loan, together with accrued interest thereon. Concurrently
with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate
Loan in an equal principal amount from such Bank (on which interest and
principal shall be payable contemporaneously with the related Euro-Dollar Loans
of
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<PAGE>
the other Banks), and such Bank shall make such a Base Rate Loan.
SECTION 8.3. Increased Cost and Reduced Return. (a) If on or after the
---------------------------------
date hereof, the adoption of any applicable law, rule or regulation, or any
change in any applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or its Applicable Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency:
(i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty
or other charge with respect to its Euro-Dollar Loans, its Note or its
obligation to make Euro-Dollar Rate Loans, or shall change the basis of
taxation of payments to any Bank (or its Applicable Lending Office) of the
principal of or interest on its Euro-Dollar Rate Loans or any other amounts
due under this Agreement in respect of its Euro-Dollar Rate Loans or its
obligation to make Euro-Dollar Rate Loans (except for changes in the rate
of tax on the overall net income of such Bank or its Applicable Lending
Office imposed by the jurisdiction in which such Bank's principal executive
office or Applicable Lending Office is located); or
(ii) shall impose, modify or deem applicable any reserve (including, without
limitation, any such requirement imposed by the Board of Governors of the
Federal Reserve System, but excluding with respect to any Euro-Dollar Loan,
any such requirement with respect to which such Bank is entitled to
compensation during the relevant Interest Period under Section 2.15),
special deposit, insurance assessment or similar requirement against assets
of, deposits with or for the account of, or credit extended by, any Bank
(or its Applicable Lending Office) or shall impose on any Bank (or its
Applicable Lending Office) or on the United States market for certificates
of deposit or the London interbank market any other condition affecting its
Euro-Dollar Rate Loans, its Note or its obligation to make Euro-Dollar Rate
Loans;
and the result of any of the foregoing is to increase the cost to such Bank (or
its Applicable Lending Office) of making or maintaining any Euro-Dollar Rate
Loan, or to reduce the amount of any sum received or receivable by such Bank (or
its Applicable Lending Office) under this Agreement or under its Note with
respect thereto, by an amount deemed by such Bank to be material, then, within
15 days after demand by such Bank (with a copy to the Agent), the Borrower shall
pay to such Bank such additional amount or amounts as will compensate such Bank
for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date hereof, the adoption
of any applicable law, rule or regulation regarding capital adequacy, or
any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration
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<PAGE>
thereof, or any request or directive regarding capital adequacy (whether or
not having the force of law) of any such authority, central bank or
comparable agency has or would have the effect of reducing the rate of
return on capital of such Bank (or its Parent) as a consequence of such
Bank's obligations hereunder to a level below that which such Bank (or its
Parent) could have achieved but for such adoption, change, request or
directive (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by such Bank to be material, then from time
to time, within 15 days after demand by such Bank (with a copy to the
Agent), the Borrower shall pay to such Bank such additional amount or
amounts as will compensate such Bank (or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent of any event of
which it has knowledge, occurring after the date hereof, which will entitle
such Bank to compensation pursuant to this Section and will designate a
different Applicable Lending Office if such designation will avoid the need
for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A
certificate of any Bank claiming compensation under this Section and
setting forth the additional amount or amounts to be paid to it hereunder
(and, to the extent deemed feasible by such Bank, setting forth the
calculation thereof) shall be conclusive in the absence of manifest error.
In determining such amount, such Bank may use any reasonable averaging and
attribution methods.
SECTION 8.4. Base Rate Loans Substituted for Affected Euro-Dollar Loans.
----------------------------------------------------------
If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended
pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section
8.3(a) and the Borrower shall, by at least five Euro-Dollar Business Days' prior
notice to such Bank through the Agent, have elected that the provisions of this
Section shall apply to such Bank, then, unless and until such Bank notifies the
Borrower that the circumstances giving rise to such suspension or demand for
compensation no longer exist:
(a) all Loans which would otherwise be made by such Bank as Euro-Dollar Loans
shall be made instead as Base Rate Loans (on which interest and principal
shall be payable contemporaneously with the related Euro-Dollar Loans of
the other Banks), and
(b) after each Euro-Dollar Loan has been repaid, all payments of principal
which would otherwise be applied to repay such Euro-Dollar Loans shall be
applied to repay its Base Rate Loans instead.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other communications to
-------
any party
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<PAGE>
hereunder shall be in writing (including bank wire, telecopier, facsimile
transmission or similar writing) and shall be given to such party: (x) in the
case of the Borrower or the Agent, at its address or telecopy number set forth
an the signature pages hereof, (y) in the case of any Bank, at its address or
telecopy number set forth in its Administrative Questionnaire or (z) in the case
of any party, such other address or telecopy number as such party may hereafter
specify for the purpose by notice to the Agent and the Borrower. Each such
notice, request or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified in
this Section and is received, (ii) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or, (iii) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the Agent under
--------
Article II or Article VIII shall not be effective until received.
SECTION 9.2. No Waivers. No failure or delay by the Agent or any Bank in
----------
exercising any right, power or privilege hereunder or under any Note shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.3. Expenses; Documentary Taxes; Indemnification. (a) The
--------------------------------------------
Borrower shall pay (i) all reasonable out-of-pocket expenses of the Agent,
including fees and disbursements of Mayer, Brown & Platt, special counsel for
the Agent, in connection with the preparation and administration of this
Agreement, any waiver or consent hereunder or any amendment hereof or any
Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of-
pocket expenses incurred by the Agent and each Bank, including fees and
disbursements of counsel, in connection with such Event of Default and
collection, bankruptcy, insolvency and other enforcement proceedings resulting
therefrom. The Borrower shall indemnify each Bank against any transfer taxes,
documentary taxes, assessments or charges made by any governmental authority by
reason of the execution and delivery of this Agreement or the Notes.
(b) The Borrower agrees to indemnify the Agent and each Bank, their respective
affiliates and the respective directors, officers, agents and employees of
the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from
and against any and all liabilities, losses, damages, costs and expenses
("Indemnified Liabilities") of any kind, including, without limitation, the
reasonable fees and disbursements of counsel, which may be incurred by such
Indemnitee in connection with any investigative, administrative or judicial
proceeding (whether or not such Indemnitee shall be designated a party
thereto) brought or threatened relating to or arising out of this Agreement
or any actual or proposed use of proceeds of Loans hereunder; provided that
--------
no Indemnitee shall have the right to be indemnified hereunder for such
Indemnitee's own gross negligence or willful misconduct as determined by a
court of competent jurisdiction.
SECTION 9.4. Sharing of Set-Offs. Each Bank agrees that if it shall, by
-------------------
exercising any
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right of set-off or counterclaim or otherwise, receive payment of a proportion
of the aggregate amount of principal and interest due with respect to any Note
held by it which is greater than the proportion received by any other Bank in
respect of the aggregate amount of principal and interest due with respect to
any Note held by such other Bank, the Bank receiving such proportionately
greater payment shall purchase such participations in the Notes held by the
other Banks, and such other adjustments shall be made, as may be required so
that all such payments of principal and interest with respect to the Notes held
by the Banks shall be shared by the Banks pro rata; provided that nothing
--------
in this Section shall impair the right of any Bank to exercise any right
of set-off or counterclaim it may have and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness under the Notes. The Borrower agrees, to the fullest extent it may
effectively do so under applicable law, that any holder of a participation in a
Note, whether or not acquired pursuant to the foregoing arrangements, may
exercise rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Borrower in the amount of such participation.
SECTION 9.5. Amendments and Waivers. Any provision of this Agreement or
----------------------
the Notes may be amended or waived if, but only if, such amendment or waiver is
in writing and is signed by the Borrower and the Required Banks (and, if the
rights or duties of the Agent are affected thereby, by the Agent); provided that
--------
no such amendment or waiver shall, unless signed by all the Banks (and the
Borrower and, if and to the extent provided above, the Agent), (i) increase or
decrease the Commitment of any Bank (except for a ratable decrease in the
Commitments of all Banks) or subject any Bank to any additional obligation, (ii)
reduce the principal of or rate of interest on any Loan or any fees hereunder,
(iii) postpone the date fixed for any payment of principal of or interest on any
Loan or any fees hereunder or for any reduction or termination of any Commitment
or (iv) change the percentage of the Commitments or of the aggregate unpaid
principal amount of the Notes, or the number of Banks, which shall be required
for the Banks or any of them to take any action under this Section or any other
provision of this Agreement.
SECTION 9.6. Successors and Assigns. (a) The provisions of this Agreement
----------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, except that the Borrower may not
assign or otherwise transfer any of its rights under this Agreement without the
prior written consent of all Banks, and no Bank may grant participating
interests in its Commitment or any of its Loans or assign all or any of its
rights and obligations under this Agreement and the Notes in violation of
subsections (b) and (c) below, taking into account the applicability of the last
sentence of such subsection (b).
(b) Any Bank may at any time grant to one or more banks or other institutions
(each a "Participant") participating interests in its Commitment or any or
all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Agent, such Bank shall remain responsible for the
performance of its obligations hereunder, and the Borrower and the Agent
shall continue to deal solely and directly with such Bank in connection
with such Bank's rights and obligations under this Agreement.
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Any agreement pursuant to which any Bank may grant such a participating
interest shall provide that such Bank shall retain the sole right and
responsibility to enforce the obligations of the Borrower hereunder,
including, without limitation, the right to approve any amendment,
modification or waiver of any provision of this Agreement; provided that
--------
such participation agreement may provide that such Bank will not agree to
any modification, amendment or waiver of this Agreement described in clause
(i), (ii) or (iii) of Section 9.5 without the consent of the Participant.
The Borrower agrees that each Participant shall, to the extent provided in
its participation agreement and subject to subsection (e) below, be
entitled to the benefits of Article VIII and Section 2.15 with respect to
its participating interest. An assignment or other transfer which is not
permitted by subsection (c) or (d) below shall be given effect for purposes
of this Agreement only to the extent of a participating interest granted in
accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other institutions
(each an "Assignee") all, or a proportionate part of all, of its rights and
obligations under this Agreement and the Notes, and such Assignee shall
assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement in substantially the form of Exhibit C hereto executed
by such Assignee and such transferor Bank, with (and subject to) the
subscribed consent of the Borrower and the Agent; provided that if an
--------
Assignee is an affiliate of such transferor bank, no such consent shall be
required; and provided further that such assignment shall be in a principal
-------- -------
amount not less than $10,000,000. Upon execution and delivery of such
instrument and payment by such Assignee to such transferor Bank of an
amount equal to the purchase price agreed between such transferor Bank and
such Assignee, such Assignee shall be a Bank party to this Agreement and
shall have all the rights and obligations of a Bank with a Commitment as
set forth in such instrument of assumption, and the transferor Bank shall
be released from its obligations hereunder to a corresponding extent, and
no further consent or action by any party shall be required. Upon the
consummation of any assignment pursuant to this subsection (c), the
transferor Bank, the Agent and the Borrower shall make appropriate
arrangements so that, if required, a new Note is issued to the Assignee.
In connection with any such assignment, the transferor Bank shall pay to
the Agent an administrative fee for processing such assignment in the
amount of $3,500. If the Assignee is not incorporated under the laws of
the United States of America or a state thereof, it shall, prior to the
first date on which interest or fees are payable hereunder for its account,
deliver to the Borrower and the Agent certification as to exemption from
deduction or withholding of any United States federal income taxes in
accordance with Section 2.14.
(d) Any Bank may at any time assign all or any portion of its rights under this
Agreement and its Note to a Federal Reserve Bank. No such assignment shall
release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights shall be
entitled to receive any greater payment under Section 8.3 than such Bank
would have been entitled to receive with respect to the rights transferred,
unless such transfer is made with the Borrower's
-44-
<PAGE>
prior written consent or by reason of the provisions of Section 8.2 or 8.3
requiring such Bank to designate a different Applicable Lending Office
under certain circumstances or at a time when the circumstances giving rise
to such greater payment did not exist.
SECTION 9.7. Collateral. Each of the Banks represents to the Agent and
----------
each of the other Banks that it in good faith is not relying upon any "margin
stock" (as defined in Regulation U) as collateral in the extension or
maintenance of the credit provided for in this Agreement.
SECTION 9.8. Governing Law; Submission to Jurisdiction. This Agreement and
-----------------------------------------
each Note shall be governed by and construed in accordance with the laws of the
State of New York. The Borrower hereby submits to the nonexclusive jurisdiction
of the United States District Court for the Southern District of New York and of
any New York State court sitting in New York City for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Borrower irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
forum.
SECTION 9.9. Counterparts; Integration. This Agreement may be signed in
-------------------------
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement constitutes the entire agreement and understanding among the
parties hereto and supersedes any and all prior agreements and understandings,
oral or written, relating to the subject matter hereof.
SECTION 9.10. Confidentiality. The Agent and each Bank agree that they
---------------
will maintain the confidentiality of any material information provided under, or
in connection with, this Agreement by or on behalf of the Borrower that has been
identified by the Borrower as confidential or that the Agent or such Bank knows,
or has reason to know, is confidential (hereinafter collectively called
"Confidential Information"), subject to the Agent's and each Bank's (a)
obligation to disclose any such Confidential Information pursuant to a request
or order under applicable laws and regulations or pursuant to a subpoena or
other legal process, (b) right to disclose any such Confidential Information to
its bank examiners, auditors, counsel and other professional advisors and to
other Banks, [(c) right to disclose any such Confidential Information to its
Affiliates,] (d) right to disclose any such Confidential Information in
connection with any litigation or dispute involving one or more of the Banks or
the Agent and the Borrower, provided that the Banks so involved or the Agent, as
--------
the case may be, shall provide the Borrower with reasonable notice of the
disclosure of such Confidential Information solely to enable the Borrower to
attempt to obtain a court order limiting the disclosure thereof outside of the
scope of such litigation or dispute but only if such notice is not prejudicial
to such Banks or the Agent and (e) right to provide such information to
participants, prospective participants or prospective assignees pursuant to
Section 9.6 if such participant, prospective participant or prospective assignee
agrees in writing to maintain the confidentiality of such information on terms
substantially similar to those of this Section 9.10 as if it were a "Bank" party
hereto.
-45-
<PAGE>
Notwithstanding the foregoing, any such information supplied to a Bank,
participant, prospective participant or prospective assignee under this
Agreement shall cease to be Confidential Information if it is or becomes known
to such Person by other than unauthorized disclosure, or if it becomes a matter
of public knowledge.
SECTION 9.11. Severability. The illegality or unenforceability of any
------------
provision of this Agreement or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Agreement or any instrument or agreement required
hereunder.
SECTION 9.12. Waiver of Jury Trial. THE BORROWER, THE BANKS AND THE AGENT
--------------------
EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR ANY AGENT RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER
WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER, THE
BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE
TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE
PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED
BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
-46-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
UNUMPROVIDENT CORPORATION
By s/John M. Lang, Jr.
-------------------
Title: Senior Vice President & Treasurer
2211 Congress Street
Portland, Maine 04122
Telecopy Number: 207-770-4013
-47-
<PAGE>
Commitments
- -----------
$500,000,000 BANK OF AMERICA, NATIONAL ASSOCIATION
By s/Elizabeth F. W. Bishop
---------------------------------
Title: Vice President
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Elizabeth Bishop
Telephone: 312-828-6550
Facsimile: 312-987-0889
Total Commitments
$500,000,000
===========
BANK OF AMERICA, NATIONAL ASSOCIATION, as
Administrative Agent
By
----------------------------------
Title:
901 Main Street
Dallas, Texas 75202
Attention: Karyn L. Rogers
Telephone: 214-209-2136
Facsimile: 214-290-9472
-48-
<PAGE>
SCHEDULE I
PRICING GRID
On any day, the Facility Fee Rate, the Applicable Margin and the
Utilization Fee Rate shall be, at any time, the rate per annum set forth in the
table below opposite applicable Level.
<TABLE>
<CAPTION>
Applicable Applicable
Facility Applicable Margin for Applicable Margin for
Level Fee Rate Euro-Dollar Loans Utilization Fee Rate Base Rate Loans
- ------------ --------------- --------------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
Level I 7.0 18.0 12.5 0.0
Level II 8.0 29.5 12.5 0.0
Level III 10.0 40.0 12.5 0.0
Level IV 12.5 62.5 12.5 0.0
Level V 17.5 82.5 25.0 7.5
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE II
Certain Subsidiaries
<PAGE>
EXHIBIT A
NOTE
, 1999
For value received, UnumProvident Corporation, a [Delaware] corporation
(the "Borrower"), promises to pay to the order of _________ (the "Bank"), for
the account of its Applicable Lending Office, the unpaid principal amount of
each Loan made by the Bank to the Borrower pursuant to the Credit Agreement
referred to below on the last day of the Interest Period relating to such Loan.
The Borrower promises to pay interest on the unpaid principal amount of each
such Loan on the dates and at the rate or rates provided for in the Credit
Agreement. All such payments of principal and interest shall be made in lawful
money of the United States in Federal or other immediately available funds at
the office of Bank of America, National Association, [address].
All Loans made by the Bank, the respective types and maturities thereof and
all repayments of the principal thereof shall be recorded by the Bank and, prior
to any transfer hereof, appropriate notations to evidence the foregoing
information with respect to each such Loan then outstanding shall be endorsed by
the Bank on the schedule attached hereto, or on a continuation of such schedule
attached to and made a part hereof; provided that the failure of the Bank to
--------
make any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under the Credit Agreement.
This note is one of the Notes referred to in the Credit Agreement dated as
of November 2, 1999 among the Borrower, the banks listed on the signature pages
thereof and Bank of America, National Association, as Administrative Agent (as
the same may be amended from time to time, the "Credit Agreement"). Terms
defined in the Credit Agreement are used herein with the same meanings.
Reference is made to the Credit Agreement for provisions for the prepayment
hereof and the acceleration of the maturity hereof.
UNUMPROVIDENT CORPORATION
By
--------------------------------
Title:
A-1
<PAGE>
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
- --------------------------------------------------------------------------------
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-2
<PAGE>
EXHIBIT B
OPINION OF
COUNSEL FOR THE BORROWER
------------------------
[Effective Date]
To the Banks and the Agent
Referred to Below
c/o Bank of America, National
Association, as Administrative Agent
[Address]
Dear Sirs:
I am General Counsel of UnumProvident Corporation. This opinion is being
rendered to you pursuant to Section 3.1(c) of the Credit Agreement (the "Credit
Agreement") dated as of November 2, 1999 among the Borrower, the banks listed on
the signature pages thereof and Bank of America, National Association, as
Administrative Agent. Terms defined in the Credit Agreement are used herein as
therein defined.
I have examined originals or copies, certified or otherwise identified to our
satisfaction, of such documents, corporate records, certificates of public
officials and other instruments and have conducted such other investigations of
fact and law as I have deemed necessary or advisable for purposes of this
opinion.
Upon the basis of the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly incorporated, validly existing and in
good standing under the laws of Delaware, and has all corporate powers and all
material governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted.
2. The execution, delivery and performance by the Borrower of the Credit
Agreement and the Notes are within the Borrower's corporate powers, have been
duly authorized by all necessary corporate action, require no action by or in
respect of, or filing with, any governmental body, agency or official and do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the certificate of incorporation or by-laws of the Borrower or
any Restricted Subsidiary or of any agreement, judgment, injunction, order,
decree or other instrument binding upon the Borrower or any Restricted
Subsidiary or result in the creation or imposition of any Lien on any asset of
the Borrower or any Restricted Subsidiary.
B-1
<PAGE>
3. The Credit Agreement constitutes a valid and binding agreement of the
Borrower, and the Notes constitute valid and binding obligations of the
Borrower, in each case enforceable in accordance with their respective terms
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and (ii) rights
of acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
4. Except as set forth in Schedule 4.5 of the Credit Agreement, there is no
------------
action, suit or proceeding pending against, or to the best of my knowledge
threatened against or affecting, the Borrower or any of its Subsidiaries before
any court or arbitrator or any governmental body, agency or official, in which
there is a reasonable possibility of an adverse decision which could materially
adversely affect the business, consolidated financial position or consolidated
results of operations of the Borrower and the Restricted Subsidiaries, taken as
a whole, or which in any manner draws into question the validity or
enforceability of the Credit Agreement or the Notes.
5. Each of the Restricted Subsidiaries is a corporation validly existing and
in good standing under the laws of its jurisdiction of incorporation, and has
all corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
6. Neither the Borrower nor any Restricted Subsidiary is an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
Very truly yours,
B-2
<PAGE>
EXHIBIT C
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of __________, 1999 among [ASSIGNOR] (the "Assignor"),
[ASSIGNEE] (the "Assignee"), UNUMPROVIDENT CORPORATION (the "Borrower") and BANK
OF AMERICA, NATIONAL ASSOCIATION, as Administrative Agent (the "Agent").
W I T N E S S E T H
-------------------
WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to
the Credit Agreement dated as of November 2, 1999 among the Borrower, the
Assignor and the other Banks party thereto, as Banks, and the Agent (the "Credit
Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment
to make Loans to the Borrower in an aggregate principal amount at any time
outstanding not to exceed $_________;
WHEREAS, Loans made to the Borrower by the Assignor under the Credit Agreement
in the aggregate principal amount of $________ are outstanding at the date
hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of
the Assignor under the Credit Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $_________ (the "Assigned Amount"),
together with a corresponding portion of its outstanding Loans, and the Assignee
proposes to accept assignment of such rights and assume the corresponding
obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined herein
-----------
shall have the respective meanings set forth in the Credit Agreement.
SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee
----------
all of the rights of the Assignor under the Credit Agreement to the extent of
the Assigned Amount, and the Assignee hereby accepts such assignment from the
Assignor and assumes all of the obligations of the Assignor under the Credit
Agreement to the extent of the Assigned Amount, including the purchase from the
Assignor of the corresponding portion of the principal amount of the Loans made
by the Assignor outstanding at the date hereof. Upon the execution and delivery
C-1
<PAGE>
hereof by the Assignor, the Assignee, the Borrower and the Agent and the payment
of the amounts specified in Section 3 required to be paid on the date hereof (i)
the Assignee shall, as of the date hereof, succeed to the rights and be
obligated to perform the obligations of a Bank under the Credit Agreement with a
Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of
the Assignor shall, as of the date hereof, be reduced by a like amount and the
Assignor released from its obligations under the Credit Agreement to the extent
such obligations have been assumed by the Assignee. The assignment provided for
herein shall be without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
--------
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
date hereof in Federal funds the amount heretofore agreed between them.* It is
understood that commitment and/or facility fees accrued to the date hereof are
for the account of the Assignor and such fees accruing from and including the
date hereof are for the account of the Assignee. Each of the Assignor and the
Assignee hereby agrees that if it receives any amount under the Credit Agreement
which is for the account of the other party hereto, it shall receive the same
for the account of such other party to the extent of such other party's interest
therein and shall promptly pay the same to such other party.
* Amount should combine principal together with accrued interest and breakage
compensation, if any, to be paid by the Assignee, net of any portion of any
upfront fee to be paid by the Assignor to the Assignee. It may be preferable in
an appropriate case to specify these amounts generically or by formula rather
than as a fixed sum.
[SECTION 4. Consent of the Borrower and the Agent. This Agreement is
-------------------------------------
conditioned upon the consent of the Borrower and the Agent pursuant to Section
9.6(c) of the Credit Agreement. The execution of this Agreement by the Borrower
and the Agent is evidence of this consent. Pursuant to Section 9.6(c) the
Borrower agrees to execute and deliver a Note payable to the order of the
Assignee to evidence the assignment and assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or
------------------------
warranty in connection with, and shall have no responsibility with respect to,
the solvency, financial condition, or statements of the Borrower, or the
validity and enforceability of the obligations of the Borrower in respect of the
Credit Agreement or any Note. The Assignee acknowledges that it has,
independently and without reliance on the Assignor, and based on such documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and will continue to be responsible for
making its own independent appraisal of the business, affairs and financial
condition of the Borrower.
SECTION 6. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any number of
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered by their duly authorized officers as of the date first above written.
C-2
<PAGE>
[ASSIGNOR]
By
--------------------------------
Title:
[ASSIGNEE]
By
--------------------------------
Title:
UNUMPROVIDENT CORPORATION
By
--------------------------------
Title:
BANK OF AMERICA, NATIONAL ASSOCIATION
By
--------------------------------
Title:
C-3
<PAGE>
TABLE OF CONTENTS*
Page
----
ARTICLE I DEFINITIONS
SECTION 1.1................................................... Definitions 1
SECTION 1.2........................... Accounting Terms and Determinations 11
SECTION 1.3........................................... Types of Borrowings 11
SECTION 1.4............................................. Basis for Ratings 11
SECTION 1.5................................................. Split Ratings 11
ARTICLE II THE CREDITS
SECTION 2.1........................................... Commitments to Lend 12
SECTION 2.2........................................... Notice of Borrowing 12
SECTION 2.3............................. Notice to Banks; Funding of Loans 12
SECTION 2.4......................................................... Notes 13
SECTION 2.5............................................. Maturity of Loans 14
SECTION 2.6................................................ Interest Rates 14
SECTION 2.7.......................................................... Fees 15
SECTION 2.8.............. Optional Termination or Reduction of Commitments 16
SECTION 2.9.......................... Mandatory Termination of Commitments 16
SECTION 2.10......................................... Optional Prepayments 16
SECTION 2.11............................ General Provisions as to Payments 16
SECTION 2.12............................................... Funding Losses 17
SECTION 2.13............................. Computation of Interest and Fees 17
SECTION 2.14.................................... Withholding Tax Exemption 17
SECTION 2.15.................................... Regulation D Compensation 18
ARTICLE III CONDITIONS
SECTION 3.1................................................. Effectiveness 19
SECTION 3.2.................................................... Borrowings 19
ARTICLE IV REPRESENTATIONS AND WARRANTIES
SECTION 4.1................................. Corporate Existence and Power 20
SECTION 4.2.... Corporate and Governmental Authorization; No Contravention 20
SECTION 4.3................................................ Binding Effect 21
- --------------
* The Table of Contents is not a part of this Agreement.
-1-
<PAGE>
Page
----
SECTION 4.4......................................... Financial Information 21
SECTION 4.5.................................................... Litigation 23
SECTION 4.6......................................... Compliance with ERISA 23
SECTION 4.7......................................................... Taxes 23
SECTION 4.8.................................................. Subsidiaries 23
SECTION 4.9..................................... Not an Investment Company 24
SECTION 4.10.............................................. Full Disclosure 24
SECTION 4.11.................................................... Year 2000 24
ARTICLE V COVENANTS
SECTION 5.1.......................................... Financial Statements 24
SECTION 5.2.................................................... Litigation 28
SECTION 5.3..................................... Corporate Existence, Etc. 28
SECTION 5.4............................................... Use of Proceeds 29
SECTION 5.5............................ Prohibition of Fundamental Changes 29
SECTION 5.6........................................... Limitation on Liens 31
SECTION 5.7.................................. Transactions with Affiliates 32
SECTION 5.8............................ Minimum Total Stockholders' Equity 33
SECTION 5.9................. Ratio of Funded Indebtedness to Total Capital 33
SECTION 5.10..................... Restricted and Unrestricted Subsidiaries 33
SECTION 5.11............................................. Payment of Taxes 33
SECTION 5.12.................................... Maintenance of Properties 33
ARTICLE VI DEFAULTS
SECTION 6.1............................................. Events of Default 33
SECTION 6.2............................................. Notice of Default 36
ARTICLE VII THE AGENT
SECTION 7.1........................ Appointment and Authorization of Agent 36
SECTION 7.2.......................................... Delegation of Duties 36
SECTION 7.3............................. Liability of Administrative Agent 36
SECTION 7.4............................................. Reliance by Agent 37
SECTION 7.5............................................. Notice of Default 37
SECTION 7.6........... Credit Decision; Disclosure of Information by Agent 38
SECTION 7.7...................................... Indemnification of Agent 38
SECTION 7.8.................................. Agent in Individual Capacity 39
SECTION 7.9............................................... Successor Agent 39
-3-
<PAGE>
Page
----
ARTICLE VIII CHANGE IN CIRCUMSTANCES
SECTION 8.1..... Basis for Determining Interest Rate Inadequate or Unfair 39
SECTION 8.2................................................... Illegality 40
SECTION 8.3............................ Increased Cost and Reduced Return 40
SECTION 8.4... Base Rate Loans Substituted for Affected Euro-Dollar Loans 42
ARTICLE IX MISCELLANEOUS
SECTION 9.1...................................................... Notices 42
SECTION 9.2................................................... No Waivers 43
SECTION 9.3................. Expenses; Documentary Taxes; Indemnification 43
SECTION 9.4.......................................... Sharing of Set-Offs 43
SECTION 9.5....................................... Amendments and Waivers 44
SECTION 9.6....................................... Successors and Assigns 44
SECTION 9.7................................................... Collateral 46
SECTION 9.8.................... Governing Law; Submission to Jurisdiction 46
SECTION 9.9.................................... Counterparts; Integration 46
SECTION 9.10............................................. Confidentiality 46
SECTION 9.11................................................ Severability 47
SECTION 9.12........................................ Waiver of Jury Trial 47
-3-
<PAGE>
Page
----
Schedule I - Pricing List
Schedule II - Certain Subsidiaries
Schedule 4.5 - Litigation
Exhibit A - Note
Exhibit B - Opinion of the General Counsel of the Borrower
Exhibit C - Assignment and Assumption Agreement
-4-
<PAGE>
EXHIBIT 10.27
CONFORMED COPY
$500,000,000
CREDIT AGREEMENT
dated as of
October 29, 1996
among
UNUM CORPORATION
The BANKS Listed Herein
and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS*
Page
----
ARTICLE I
DEFINITIONS
<S> <C>
SECTION 1.01. Definitions................................ 1
-----------
SECTION 1.02. Accounting Terms and Determinations........ 16
-----------------------------------
SECTION 1.03. Types of Borrowings........................ 17
-------------------
SECTION 1.04. Basis for Ratings.......................... 17
-----------------
SECTION 1.05. Split Ratings.............................. 17
-------------
ARTICLE II
THE CREDITS
SECTION 2.01. Commitments to Lend........................ 18
-------------------
SECTION 2.02. Notice of Committed Borrowing.............. 18
-----------------------------
SECTION 2.03. Money Market Borrowings.................... 19
-----------------------
SECTION 2.04. Notice to Banks; Funding of Loans.......... 23
---------------------------------
SECTION 2.05. Notes...................................... 24
-----
SECTION 2.06. Maturity of Loans.......................... 25
-----------------
SECTION 2.07. Interest Rates............................. 25
--------------
SECTION 2.08. Fees....................................... 29
----
SECTION 2.09. Optional Termination or Reduction of
------------------------------------
Commitments................................ 29
-----------
SECTION 2.10. Mandatory Termination of Commitments....... 30
------------------------------------
SECTION 2.11. Optional Prepayments....................... 30
--------------------
SECTION 2.12. General Provisions as to Payments.......... 30
---------------------------------
SECTION 2.13. Funding Losses............................. 31
--------------
SECTION 2.14. Computation of Interest and Fees........... 31
--------------------------------
SECTION 2.15. Withholding Tax Exemption.................. 32
-------------------------
SECTION 2.16. Regulation D Compensation.................. 32
-------------------------
</TABLE>
*The Table of Contents is not a part of this Agreement.
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE III
CONDITIONS
<S> <C>
SECTION 3.01. Effectiveness.............................. 33
-------------
SECTION 3.02. Borrowings................................. 34
----------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Corporate Existence and Power.............. 35
-----------------------------
SECTION 4.02. Corporate and Governmental Authorization;
-----------------------------------------
No Contravention........................... 35
----------------
SECTION 4.03. Binding Effect............................. 36
--------------
SECTION 4.04. Financial Information...................... 36
---------------------
SECTION 4.05. Litigation................................. 38
----------
SECTION 4.06. Compliance with ERISA...................... 38
---------------------
SECTION 4.07. Taxes...................................... 39
-----
SECTION 4.08. Subsidiaries............................... 39
------------
SECTION 4.09. Not an Investment Company.................. 39
-------------------------
SECTION 4.10. Full Disclosure............................ 39
---------------
ARTICLE V
COVENANTS
SECTION 5.01. Financial Statements....................... 40
--------------------
SECTION 5.02. Litigation................................. 44
----------
SECTION 5.03. Corporate Existence, Etc................... 45
------------------------
SECTION 5.04. Use of Proceeds............................ 45
---------------
SECTION 5.05. Prohibition of Fundamental Changes......... 46
----------------------------------
SECTION 5.06. Limitation on Liens........................ 48
-------------------
SECTION 5.07. Transactions with Affiliates............... 50
----------------------------
SECTION 5.08. Minimum Total Stockholders' Equity......... 50
----------------------------------
SECTION 5.09. Ratio of Funded Indebtedness to Total
-------------------------------------
Capital.................................... 50
-------
SECTION 5.10. Restricted and Unrestricted Subsidiaries... 50
----------------------------------------
ARTICLE VI
DEFAULTS
SECTION 6.01. Events of Default.......................... 51
-----------------
SECTION 6.02. Notice of Default.......................... 53
-----------------
</TABLE>
ii
<PAGE>
ARTICLE VII
THE AGENT
<TABLE>
<S> <C>
SECTION 7.01. Appointment and Authorization.............. 54
-----------------------------
SECTION 7.02. Agent and Affiliates....................... 54
--------------------
SECTION 7.03. Action by Agent............................ 54
---------------
SECTION 7.04. Consultation with Experts.................. 54
-------------------------
SECTION 7.05. Liability of Agent......................... 54
------------------
SECTION 7.06. Indemnification............................ 55
---------------
SECTION 7.07. Credit Decision............................ 55
---------------
SECTION 7.08. Successor Agent............................ 55
---------------
SECTION 7.09. Agent's Fee................................ 56
-----------
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate
-----------------------------------
Inadequate or Unfair....................... 56
--------------------
SECTION 8.02. Illegality................................. 57
----------
SECTION 8.03. Increased Cost and Reduced Return.......... 57
---------------------------------
SECTION 8.04. Base Rate Loans Substituted for Affected
----------------------------------------
Fixed Rate Loans........................... 59
----------------
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Notices.................................... 60
-------
SECTION 9.02. No Waivers................................. 60
----------
SECTION 9.03. Expenses; Documentary Taxes;
----------------------------
Indemnification............................ 61
---------------
SECTION 9.04. Sharing of Set-Offs........................ 61
-------------------
SECTION 9.05. Amendments and Waivers..................... 62
----------------------
SECTION 9.06. Successors and Assigns..................... 62
----------------------
SECTION 9.07. Collateral................................. 64
----------
SECTION 9.08. Governing Law; Submission to Jurisdiction.. 64
-----------------------------------------
SECTION 9.09. Counterparts; Integration ................. 65
-------------------------
SECTION 9.10. Confidentiality............................ 65
---------------
</TABLE>
Schedule I - Certain Subsidiaries
Exhibit A - Note
Exhibit B - Money Market Quote Request
iii
<PAGE>
Page
----
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E - Opinion of the General Counsel of the Borrower
Exhibit F - Opinion of Special Counsel for the Agent
Exhibit G - Assignment and Assumption Agreement
iv
<PAGE>
CREDIT AGREEMENT
AGREEMENT dated as of October 29, 1996 among UNUM CORPORATION, the BANKS
listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Agent.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have the
-----------
following meanings:
"Absolute Rate Auction" means a solicitation of Money Market Quotes setting
forth Money Market Absolute Rates pursuant to Section 2.03.
"Adjusted CD Rate" has the meaning set forth in Section 2.07(b).
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.
"Affiliate" means any Person which directly or indirectly controls, or is
under common control with, or is controlled by, the Borrower. As used in this
definition, "control" (including, with its correlative meanings, "controlled by"
and "under common control with") means possession, directly or indirectly, of
power to direct or cause the direction of management or policies (whether
through ownership of securities or partnership or other ownership interests, by
contract or otherwise), provided that, in any event, any Person which owns
--------
directly or indirectly 15% or more of the securities having ordinary voting
power for the election of directors or other governing body of a corporation or
15% or more of the partnership or other ownership interests of any other Person
(other than as a limited partner of such other Person) will be rebuttably
presumed to control such corporation or other Person, such presumption to be
rebutted only if the Required Banks agree in writing that such Person does not
control such corporation or other Person. Notwithstanding the
<PAGE>
foregoing, (i) no individual shall be deemed to be an Affiliate of any Person
solely by reason of his or her being an officer of such Person and (ii) the
Borrower and the Restricted Subsidiaries shall not be deemed to be Affiliates of
each other.
"Agent" means Morgan Guaranty Trust Company of New York in its capacity as
agent for the Banks hereunder, and its successors in such capacity.
"Applicable Insurance Regulatory Authority" means, when used with respect
to any Restricted Insurance Subsidiary, the insurance commission, department or
similar regulatory authority or agency located in the jurisdiction in which such
Restricted Insurance Subsidiary is domiciled.
"Applicable Lending Office" means, with respect to any Bank, (i) in the
case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its
Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its
Money Market Loans, its Money Market Lending Office.
"Applicable Margin" has the meaning set forth in Section 2.07(h).
"Assessment Rate" has the meaning set forth in Section 2.07(b).
"Assignee" has the meaning set forth in Section 9.06(c).
"Bank" means each bank listed on the signature pages hereof, each Assignee
which becomes a Bank pursuant to Section 9.06(c), and their respective
successors.
"Base Rate" means, for any day, a rate per annum equal to the higher of (i)
the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds
Rate for such day.
"Base Rate Loan" means a Committed Loan to be made by a Bank as a Base Rate
Loan in accordance with the applicable Notice of Committed Borrowing or pursuant
to Article VIII.
"Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained or otherwise contributed to by any member of the ERISA
Group.
2
<PAGE>
"Borrower" means UNUM Corporation, a Delaware corporation, and its
successors.
"Borrower's 1995 Form 10-K" means the Borrower's annual report on Form 10-K
for 1995, as filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
"Borrowing" has the meaning set forth in Section 1.03.
"Capitalized Lease Obligations" means, as to any Person, the obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property, which obligations are
required to be classified and accounted for as a capital lease on the balance
sheet of such Person under generally accepted accounting principles (including
Statement of Financial Accounting Standards No. 13 of the Financial Accounting
Standards Board) and, for purposes of this Agreement, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with generally accepted accounting principles (including such Statement No. 13).
"CD Base Rate" has the meaning set forth in Section 2.07(b).
"CD Loan" means a Committed Loan to be made by a Bank as a CD Loan in
accordance with the applicable Notice of Committed Borrowing.
"CD Reference Banks" means ABN Amro Bank N.V., New York Branch, Wachovia
Bank of Georgia, N.A., and Morgan Guaranty Trust Company of New York.
"Commitment" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature pages hereof, as such amount may
be reduced from time to time pursuant to Sections 2.09 and 2.10.
"Committed Loan" means a loan made by a Bank pursuant to Section 2.01.
"Confidential Information" has the meaning set forth in Section 9.10.
"Consolidated Subsidiary" means at any date any Subsidiary or other entity
the accounts of which would be consolidated with those of the Borrower in its
consolidated financial statements if such statements were prepared as of
3
<PAGE>
such date.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Domestic Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in New York City are authorized by law to close.
"Domestic Lending Office" means, as to each Bank, its office located at its
address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent; provided that any Bank may so designate
--------
separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and
its CD Loans, on the other hand, in which case all references herein to the
Domestic Lending Office of such Bank shall be deemed to refer to either or both
of such offices, as the context may require.
"Domestic Loans" means CD Loans or Base Rate Loans or both.
"Domestic Reserve Percentage" has the meaning set forth in Section 2.07(b).
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 3.01.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch or
affiliate located at its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire
4
<PAGE>
(or identified in its Administrative Questionnaire as its Euro-Dollar Lending
Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower
and the Agent.
"Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a Euro-
Dollar Loan in accordance with the applicable Notice of Committed Borrowing.
"Euro-Dollar Reference Banks" means the principal London offices of ABN
Amro Bank N.V., New York Branch, Wachovia Bank of Georgia, N.A., and Morgan
Guaranty Trust Company of New York.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents).
"Event of Default" has the meaning set forth in Section 6.01.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, 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 such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
--------
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty Trust Company of New
York on such day on such transactions as determined by the Agent.
"Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market
Loans (excluding Money Market
5
<PAGE>
LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(a)) or
any combination of the foregoing.
"Funded Indebtedness" means, for the Borrower and the Restricted
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles, Indebtedness that (i) matures more than one year
from the date of its creation or (ii) matures on or within one year from the
date of its creation but is renewable or extendable at the option of the obligor
thereof to a date more than one year from the date of its creation, provided
--------
that, for purposes of this definition, Indebtedness shall be deemed to be
renewable or extendable at the option of the obligor thereof if it arises under
a credit or other similar agreement that obligates the lender or lenders
thereunder to extend credit to such obligor notwithstanding that the ability of
such obligor to renew or extend such Indebtedness is subject to the satisfaction
of conditions precedent.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Indebtedness of any other
Person and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such
Indebtedness (whether arising by virtue of partnership arrangements, by
agreement to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or (ii)
entered into for the purpose of assuring in any other manner the obligee of such
Indebtedness of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part), provided that the term Guarantee shall
--------
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Home Office Properties" means any building in which the principal office
of the Borrower or any Restricted Subsidiary of the Borrower is located.
"Indebtedness" of any Person means at any date, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of
business, (iv) all Capitalized Lease Obligations of such Person, (v) all
Indebtedness secured by a Lien on any asset
6
<PAGE>
of such Person, whether or not such Indebtedness is otherwise an obligation of
such Person, (vi) all obligations of such Person to purchase securities (or
other property) which arise out of or in connection with the sale of the same or
substantially similar securities or property, (vii) all non-contingent
obligations of such Person to reimburse any bank or other Person in respect of
amounts paid under a letter of credit or similar instrument and (viii) all
Indebtedness of others Guaranteed by such Person.
"Indemnitee" has the meaning set forth in Section 9.03(b).
"Insurance Subsidiary" means a Subsidiary that is a Restricted Insurance
Subsidiary or would be a Restricted Insurance Subsidiary if it were a Restricted
Subsidiary.
"Interest Period" means: (1) with respect to each Euro-Dollar Borrowing,
the period commencing on the date of such Borrowing and ending one, two, three
or six months thereafter, as the Borrower may elect in the applicable Notice of
Borrowing; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is not a
Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar
Business Day unless such Euro-Dollar Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar 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, subject to clause (c) below, end on the last Euro-Dollar Business Day
of a calendar month; and
(c) any Interest Period which would otherwise end after the Termination
Date shall end on the Termination Date;
(2) with respect to each CD Borrowing, the period commencing on the date of such
Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower
may elect in the applicable Notice of Borrowing; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is not a
Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar
Business Day; and
7
<PAGE>
(b) any Interest Period which would otherwise end after the Termination
Date shall end on the Termination Date;
(3) with respect to each Base Rate Borrowing, the period commencing on the date
of such Borrowing and ending 30 days thereafter; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is not a
Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar
Business Day; and
(b) any Interest Period which would otherwise end after the Termination
Date shall end on the Termination Date;
(4) with respect to each Money Market LIBOR Borrowing, the period commencing on
the date of such Borrowing and ending such whole number of months thereafter as
the Borrower may elect in accordance with Section 2.03; provided that :
--------
(a) any Interest Period which would otherwise end on a day which is not a
Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar
Business Day unless such Euro-Dollar Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar 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, subject to clause (c) below, end on the last Euro-Dollar Business Day
of a calendar month; and
(c) any Interest Period which would otherwise end after the Termination
Date shall end on the Termination Date; and
(5) with respect to each Money Market Absolute Rate Borrowing, the period
commencing on the date of such Borrowing and ending such number of days
thereafter (but not less than 7 days) as the Borrower may elect in accordance
with Section 2.03; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is not a
Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar
Business
8
<PAGE>
Day; and
(b) any Interest Period which would otherwise end after the Termination
Date shall end on the Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"Investment" means any investment in any Person whether by means of share
purchase, capital contribution, loan, time deposit or otherwise, provided that,
--------
in the case of any investment in any Unrestricted Subsidiary, the definition of
"Investment" shall not include investments resulting from (i) the provision of
administrative services by the Borrower or any Restricted Subsidiary to such
Unrestricted Subsidiary, which services are provided in the ordinary course of
the business of the Borrower or such Restricted Subsidiary, as the case may be,
and of such Unrestricted Subsidiary, (ii) the operation of the cash management
system of the Borrower and its Subsidiaries so long as it is operated in the
ordinary course of their business or (iii) transfers made, or accounts created,
in connection with any tax sharing agreement to which the Borrower or any
Restricted Subsidiary, as the case may be, and such Unrestricted Subsidiary is a
party.
"Level I Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least AA-
from S&P or at least Aa3 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such evidence to be satisfactory to the Required Banks,
to the effect that if the Borrower had any such Indebtedness outstanding on such
date, such Indebtedness would be rated at least AA- from S&P or at least Aa3
from Moody's. For purposes of this definition, the provisions in clause (2) in
the preceding sentence shall not apply for more than 365 consecutive days after
the first date of the written evidence most recently provided by the Borrower
from S&P or Moody's to the Banks, which evidence was relied on by the Required
Banks to establish that the provisions of such clause (2) were then operative.
"Level II Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least A+
from S&P or at least A1 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such
9
<PAGE>
evidence to be satisfactory to the Required Banks, to the effect that if the
Borrower had any such Indebtedness outstanding on such date, such Indebtedness
would be rated at least A+ from S&P or at least A1 from Moody's. For purposes of
this definition, the provisions in clause (2) in the preceding sentence shall
not apply for more than 365 consecutive days after the first date of the written
evidence most recently provided by the Borrower from S&P or Moody's to the
Banks, which evidence was relied on by the Required Banks to establish that the
provisions of such clause (2) were then operative.
"Level III Status" exists on any date (1) if, on such date, the Borrower
has outstanding senior unsecured long-term Indebtedness which is rated at least
A from S&P or at least A2 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such evidence to be satisfactory to the Required Banks,
to the effect that if the Borrower had any such Indebtedness outstanding on such
date, such Indebtedness would be rated at least A from S&P or at least A2 from
Moody's. For purposes of this definition, the provisions in clause (2) in the
preceding sentence shall not apply for more than 365 consecutive days after the
first date of the written evidence most recently provided by the Borrower from
S&P or Moody's to the Banks, which evidence was relied on by the Required Banks
to establish that the provisions of such clause (2) were then operative.
"Level IV Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least A-
from S&P or at least A3 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such evidence to be satisfactory to the Required Banks,
to the effect that if the Borrower had any such Indebtedness outstanding on such
date, such Indebtedness would be rated at least A- from S&P or at least A3 from
Moody's. For purposes of this definition, the provisions in clause (2) in the
preceding sentence shall not apply for more than 365 consecutive days after the
first date of the written evidence most recently provided by the Borrower from
S&P or Moody's to the Banks, which evidence was relied on by the Required Banks
to establish that the provisions of such clause (2) were then operative.
"Level V Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least BBB+
from S&P
10
<PAGE>
or at least Baa1 from Moody's or (2) in the case that no such Indebtedness is
outstanding, if the Borrower provides written evidence from S&P or Moody's to
the Banks, such evidence to be satisfactory to the Required Banks, to the effect
that if the Borrower had any such Indebtedness outstanding on such date, such
Indebtedness would be rated at least BBB+ from S&P or at least Baa1 from
Moody's. For purposes of this definition, the provisions in clause (2) in the
preceding sentence shall not apply for more than 365 consecutive days after the
first date of the written evidence most recently provided by the Borrower from
S&P or Moody's to the Banks, which evidence was relied on by the Required Banks
to establish that the provisions of such clause (2) were then operative.
"Level VI Status" exists on any date (1) if, on such date, the Borrower has
outstanding senior unsecured long-term Indebtedness which is rated at least BBB
from S&P or at least Baa2 from Moody's or (2) in the case that no such
Indebtedness is outstanding, if the Borrower provides written evidence from S&P
or Moody's to the Banks, such evidence to be satisfactory to the Required Banks,
to the effect that if the Borrower had any such Indebtedness outstanding on such
date, such Indebtedness would be rated at least BBB from S&P or at least Baa2
from Moody's. For purposes of this definition, the provisions in clause (2) in
the preceding sentence shall not apply for more than 365 consecutive days after
the first date of the written evidence most recently provided by the Borrower
from S&P or Moody's to the Banks, which evidence was relied on by the Required
Banks to establish that the provisions of such clause (2) were then operative.
"Level VII Status" exists on any date if neither Level I nor Level II nor
Level III nor Level IV nor Level V nor Level VI exists on such date.
"LIBOR Auction" means a solicitation of Money Market Quotes setting forth
Money Market Margins based on the London Interbank Offered Rate pursuant to
Section 2.03.
"Lien" means, with respect to any asset owned by any Person, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such asset. For the purposes of this Agreement, any Person shall be deemed to
own subject to a Lien any asset which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset.
"Loan" means a Domestic Loan or a Euro-Dollar Loan
11
<PAGE>
or a Money Market Loan and "Loans" means Domestic Loans or Euro-Dollar Loans or
Money Market Loans or any combination of the foregoing.
"London Interbank Offered Rate" has the meaning set forth in Section
2.07(c).
"Material Indebtedness" means Indebtedness (other than the Notes) of the
Borrower and/or one or more of its Subsidiaries, arising in one or more related
or unrelated transactions, in an aggregate principal amount exceeding
$10,000,000.
"Material Plan" means at any time a Plan or Plans having aggregate Unfunded
Liabilities in excess of $20,000,000.
"Money Market Absolute Rate" has the meaning set forth in Section 2.03(d).
"Money Market Absolute Rate Loan" means a loan to be made by a Bank
pursuant to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each Bank, its Domestic Lending
Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the Borrower
and the Agent; provided that any Bank may from time to time by notice to the
Borrower and the Agent designate separate Money Market Lending Offices for its
Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate
Loans, on the other hand, in which case all references herein to the Money
Market Lending Office of such Bank shall be deemed to refer to either or both of
such offices, as the context may require.
"Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a
LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant
to Section 8.01(a)).
"Money Market Loan" means a Money Market LIBOR Loan or a Money Market
Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in Section 2.03(d).
"Money Market Quote" means an offer by a Bank to make a Money Market Loan
in accordance with Section 2.03.
"Moody's" means Moody's Investors Service, Inc.
12
<PAGE>
"Multiemployer Plan" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"Notes" means promissory notes of the Borrower, substantially in the form
of Exhibit A hereto, evidencing the obligation of the Borrower to repay the
Loans, and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" means a Notice of Committed Borrowing (as defined in
Section 2.02) or a Notice of Money Market Borrowing (as defined in Section
2.03(f)).
"Parent" means, with respect to any Bank, any Person
controlling such Bank.
"Participant" has the meaning set forth in Section 9.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"Prime Rate" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
13
<PAGE>
"Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference
Banks, as the context may require, and "Reference Bank" means any one of such
Reference Banks.
"Refunding Borrowing" means a Committed Borrowing which, after application
of the proceeds thereof, results in no net increase in the outstanding principal
amount of Committed Loans made by any Bank.
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"Regulation X" means Regulation X of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks having at least a majority of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least a majority of the aggregate unpaid
principal amount of the Loans.
"Restricted Insurance Subsidiary" means a Restricted Subsidiary that is
licensed, authorized or admitted to carry on or transact the business of
insurance.
"Restricted Subsidiary" means: (i) the Subsidiaries listed as such on
Schedule I hereto and (ii) any Subsidiary acquired or organized after the
Effective Date and any Unrestricted Subsidiary in each case that is duly
designated by the Borrower, pursuant to Section 5.10, to be a Restricted
Subsidiary; provided that any such Subsidiary included solely within clause (ii)
--------
shall cease being a Restricted Subsidiary if and when it is duly designated by
the Borrower, pursuant to Section 5.10, as an Unrestricted Subsidiary.
"S&P" means Standard & Poor's, a division of the McGraw-Hill Companies,
Inc.
"Status" means, at any date, whichever of Level I Status, Level II Status,
Level III Status, Level IV Status, Level V Status, Level VI Status, or Level VII
Status exists at such date.
"Subsidiary" means any corporation or other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Borrower.
14
<PAGE>
"Termination Date" means October 1, 2001, or, if such day is not a Euro-
Dollar Business Day, the next succeeding Euro-Dollar Business Day unless such
Euro-Dollar Business Day falls in another calendar month, in which case the
Termination Date shall be on the next preceding Euro-Dollar Business Day.
"Total Assets" means the total assets of the Borrower and the Restricted
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles, less the excess (if any) of (i) any Investment
----
of the Borrower or any Restricted Subsidiary in any Unrestricted Subsidiary to
the extent that such Investment appears on the consolidated balance sheet of the
Borrower and the Restricted Subsidiaries used in the calculation of Total Assets
over (ii) the amount of such Investment in such Unrestricted Subsidiary which
constitutes Indebtedness of, or other amounts receivable from, such Unrestricted
Subsidiary to the extent that the amount referred to above in this clause (ii)
does not exceed the consolidated stockholders' equity of such Unrestricted
Subsidiary and its consolidated subsidiaries.
"Total Capital" means the sum of Funded Indebtedness and Total
Stockholders' Equity.
"Total Stockholders' Equity" means the total stockholders' equity of the
Borrower and the Restricted Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles, (1) plus any
----
unrealized holding losses (or less any unrealized holding gains) on account of
----
available-for-sale debt securities to the extent reflected therein in accordance
with Statement of Financial Accounting Standards No. 115 of the Financial
Accounting Standards Board, as amended from time to time, or any successor
provision thereto, together with other appropriate adjustments in accordance
therewith, and (2) less the excess (if any) of (i) any Investment of the
----
Borrower or any Restricted Subsidiary in any Unrestricted Subsidiary to the
extent that such Investment appears on the consolidated balance sheet of the
Borrower and the Restricted Subsidiaries used in the calculation of Total
Stockholders' Equity over (ii) the amount of such Investment in such
Unrestricted Subsidiary which constitutes Indebtedness of, or other amounts
receivable from, such Unrestricted Subsidiary to the extent that the amount
referred to above in this clause (ii) does not exceed the consolidated
stockholders' equity of such Unrestricted Subsidiary and its consolidated
subsidiaries.
15
<PAGE>
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"Unrestricted Subsidiary" means: (i) the Subsidiaries listed on Schedule I
hereto which are not listed therein as Restricted Subsidiaries and (ii) any
Subsidiary acquired or organized after the Effective Date that has not been duly
designated by the Borrower as a Restricted Subsidiary; provided that any such
--------
Subsidiary shall cease being an Unrestricted Subsidiary if and when it is duly
designated by the Borrower, pursuant to Section 5.10 hereof, as a Restricted
Subsidiary.
"Utilization" means at any date the percentage equivalent of a fraction (i)
the numerator of which is the aggregate outstanding principal amount of the
Loans at such date, after giving effect to any borrowing or payment on such
date, and (ii) the denominator of which is the aggregate amount of the
Commitments at such date, after giving effect to any reduction of the
Commitments on such date. For purposes of Section 2.07(h), if for any reason any
Loans remain outstanding after termination of the Commitments, the Utilization
for each date on or after the date of such termination shall be deemed to be
greater than 50%.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most recent audited consolidated
financial statements of the Borrower and its Consolidated Subsidiaries delivered
to the Banks; provided that, if the Borrower notifies the Agent that the
--------
Borrower wishes to amend any covenant in Article V to eliminate the effect of
any change in generally accepted accounting principles on the operation of such
covenant (or
16
<PAGE>
if the Agent notifies the Borrower that the Required Banks wish to amend Article
V for such purpose), then the Borrower's compliance with such covenant shall be
determined on the basis of generally accepted accounting principles in effect
immediately before the relevant change in generally accepted accounting
principles became effective, until either such notice is withdrawn or such
covenant is amended in a manner satisfactory to the Borrower and the Required
Banks.
SECTION 1.03. Types of Borrowings. The term "Borrowing" denotes the
-------------------
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article II on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement either by reference to the pricing of
Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
----
comprised of Euro-Dollar Loans) or by reference to the provisions of Article II
under which participation therein is determined (i.e., a "Committed Borrowing"
----
is a Borrowing under Section 2.01 in which all Banks participate in proportion
to their Commitments, while a "Money Market Borrowing" is a Borrowing under
Section 2.03 in which the Bank participants are determined on the basis of their
bids in accordance therewith).
SECTION 1.04. Basis for Ratings. The credit ratings to be utilized in the
-----------------
determination of a Status and for purposes of Section 5.05(c) are the ratings
assigned to senior unsecured long-term Indebtedness of the Borrower without
third party credit support; ratings assigned to any such Indebtedness which is
secured or which has the benefit of third party credit support shall be
disregarded.
SECTION 1.05. Split Ratings. For purposes of determining the relevant Level
-------------
status: (i) if at any date the rating of any senior unsecured long term debt
securities by Moody's shall be higher or lower than the comparable rating by S&P
by one rating level (it being understood that for these purposes an S&P rating
of A+ is comparable to a Moody's rating of A1, an S&P rating of A is comparable
to a Moody's rating of A2, and so forth), then the rating of such debt
securities by each of Moody's and S&P shall be deemed to be the higher of the
two ratings; and (ii) if at any date the rating of any such senior unsecured
long term debt securities by Moody's shall be higher or lower than the
comparable rating by S&P by two or more rating levels (it being understood that
for these purposes an S&P rating of A+ is comparable to a Moody's rating of A1,
an S&P rating of A is comparable to a Moody's rating of A2, and so forth), then
the rating of such debt securities by each of Moody's and
17
<PAGE>
S&P shall be deemed to be the comparable S&P and Moody's ratings at the midpoint
between the two actual ratings, or, if there shall be no rating at the midpoint,
the next higher rating from the midpoint between the two actual ratings. For
example, if such debt securities are rated BBB by S&P and Ba1 by Moody's, such
debt securities shall be deemed to be rated BBB- by S&P and Baa3 by Moody's; and
if such debt securities are rated BBB+ by S&P and Ba1 by Moody's, such debt
securities shall be deemed to be rated BBB by S&P and Baa2 by Moody's.
ARTICLE II
THE CREDITS
SECTION 2.01. Commitments to Lend. During the period from and including the
-------------------
Effective Date to but excluding the Termination Date, each Bank severally
agrees, on the terms and conditions set forth in this Agreement, to make loans
to the Borrower pursuant to this Section from time to time in amounts such that
the aggregate principal amount of Committed Loans by such Bank at any one time
outstanding shall not exceed the amount of its Commitment. Each Borrowing under
this Section shall be in an aggregate principal amount of $10,000,000 or any
larger multiple of $1,000,000 (except that any such Borrowing may be in the
aggregate amount available in accordance with Section 3.02(b)) and shall be made
from the several Banks ratably in proportion to their respective Commitments.
Within the foregoing limits, the Borrower may borrow under this Section, repay,
or to the extent permitted by Section 2.11, prepay Loans and reborrow at any
time prior to the Termination Date under this Section.
SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give the
-----------------------------
Agent notice (a "Notice of Committed Borrowing") not later than 10:00 A.M. (New
York City time) on (x) the date of each Base Rate Borrowing, (y) the second
Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar
Business Day before each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business Day in
the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of
a Euro-Dollar Borrowing,
18
<PAGE>
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing are to be CD Loans, Base
Rate Loans or Euro-Dollar Loans, and
(d) in the case of a Fixed Rate Borrowing, the duration of the Interest
Period applicable thereto, subject to the provisions of the definition of
Interest Period.
SECTION 2.03. Money Market Borrowings.
-----------------------
(a) The Money Market Option. In addition to Borrowings pursuant to Section
-----------------------
2.01, the Borrower may, as set forth in this Section, request the Banks at any
time prior to the Termination Date to make offers to make Money Market Loans to
the Borrower. The Banks may, but shall have no obligation to, make such offers
and the Borrower may, but shall have no obligation to, accept any such offers in
the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request offers
--------------------------
to make Money Market Loans under this Section, it shall transmit to the Agent by
telex or facsimile transmission a Money Market Quote Request substantially in
the form of Exhibit B hereto so as to be received no later than 10:00 A.M. (New
York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of
Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic
Business Day next preceding the date of Borrowing proposed therein, in the case
of an Absolute Rate Auction (or, in either case, such other time or date as the
Borrower and the Agent shall have mutually agreed and shall have notified to the
Banks not later than the date of the Money Market Quote Request for the first
LIBOR Auction or Absolute Rate Auction for which such change is to be effective)
specifying:
(i) the proposed date of Borrowing, which shall be a Euro-
Dollar Business Day in the case of a LIBOR Auction or a Domestic
Business Day in the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$10,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto,
subject to the provisions of the
19
<PAGE>
definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set forth
a Money Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or such other
number of days as the Borrower and the Agent may agree) of any other Money
Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt
----------------------------------
of a Money Market Quote Request, the Agent shall send to the Banks by telex or
facsimile transmission an Invitation for Money Market Quotes substantially in
the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the Money
Market Loans to which such Money Market Quote Request relates in accordance with
this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each
----------------------------------------------
Bank may submit a Money Market Quote containing an offer or offers to make Money
Market Loans in response to any Invitation for Money Market Quotes. Each Money
Market Quote must comply with the requirements of this subsection (d) and must
be submitted to the Agent by telex or facsimile transmission at its offices
specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York
City time) on the fourth Euro-Dollar Business Day prior to the proposed date of
Borrowing, in the case of a LIBOR Auction or (y) 9:15 A.M. (New York City time)
on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or,
in either case, such other time or date as the Borrower and the Agent shall have
mutually agreed and shall have notified to the Banks not later than the date of
the Money Market Quote Request for the first LIBOR Auction or Absolute Rate
Auction for which such change is to be effective); provided that Money Market
--------
Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of
a Bank may be submitted, and may only be submitted, if the Agent or such
affiliate notifies the Borrower of the terms of the offer or offers contained
therein not later than (x) one hour prior to the deadline for the other Banks,
in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the
other Banks, in the case of an Absolute Rate Auction. Subject to Articles III
and VI, any Money Market Quote so made shall be irrevocable except with the
written consent of the Agent given on the instructions of
20
<PAGE>
the Borrower.
(ii) Each Money Market Quote shall be in substantially the
form of Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which
each such offer is being made, which principal amount (w) may be greater
than or less than the Commitment of the quoting Bank, (x) must be
$5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the
principal amount of Money Market Loans for which offers were requested
and (z) may be subject to an aggregate limitation as to the principal
amount of Money Market Loans for which offers being made by such quoting
Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin above or below
the applicable London Interbank Offered Rate (the "Money Market Margin")
offered for each such Money Market Loan, expressed as a percentage
(specified to the nearest 1/10,000th of 1%) to be added to or subtracted
from such base rate,
(D) in the case of an Absolute Rate Auction, the rate of
interest per annum (specified to the nearest 1/10,000th of 1%) (the
"Money Market Absolute Rate") offered for each such Money Market Loan,
and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto
or does not specify all of the information required by subsection
(d)(ii);
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Money Market Quotes; or
21
<PAGE>
(D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly notify the
------------------
Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is
in accordance with subsection (d) and (y) of any Money Market Quote that amends,
modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request. Any
such subsequent Money Market Quote shall be disregarded by the Agent unless such
subsequent Money Market Quote is submitted solely to correct a manifest error in
such former Money Market Quote. The Agent's notice to the Borrower shall specify
(A) the aggregate principal amount of Money Market Loans for which offers have
been received for each Interest Period specified in the related Money Market
Quote Request, (B) the respective principal amounts and Money Market Margins or
Money Market Absolute Rates, as the case may be, so offered and (C) if
applicable, limitations on the aggregate principal amount of Money Market Loans
for which offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:00
---------------------------------
A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed
date of Borrowing, in the case of an Absolute Rate Auction (or, in either case,
such other time or date as the Borrower and the Agent shall have mutually agreed
and shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first LIBOR Auction or Absolute Rate Auction for which
such change is to be effective), the Borrower shall notify the Agent of its
acceptance or non-acceptance of the offers so notified to it pursuant to
subsection (e). In the case of acceptance, such notice (a "Notice of Money
Market Borrowing") shall specify the aggregate principal amount of offers for
each Interest Period that are accepted. The Borrower may accept any Money Market
Quote in whole or in part; provided that:
--------
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the
related Money Market Quote Request,
(ii) the principal amount of each Money Market Borrowing must
be $10,000,000 or a larger multiple of $1,000,000,
(iii) acceptance of offers may only be made on the
22
<PAGE>
basis of ascending Money Market Margins or Money Market Absolute
Rates, as the case may be, and
(iv) the Borrower may not accept any offer that is described in
subsection (d)(iii) or that otherwise fails to comply with the
requirements of this Agreement.
(g) Allocation by Agent. If offers are made by two or more
-------------------
Banks with the same Money Market Margins or Money Market Absolute Rates, as the
case may be, for a greater aggregate principal amount than the amount in respect
of which such offers are accepted for the related Interest Period, the principal
amount of Money Market Loans in respect of which such offers are accepted shall
be allocated by the Agent among such Banks as nearly as possible (in multiples
of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate
principal amounts of such offers. Determinations by the Agent of the amounts of
Money Market Loans shall be conclusive in the absence of manifest error.
SECTION 2.04. Notice to Banks; Funding of Loans.
---------------------------------
(a) Upon receipt of a Notice of Borrowing, the Agent shall
promptly notify each Bank of the contents thereof and of such Bank's share (if
any) of such Borrowing and such Notice of Borrowing shall not thereafter be
revocable by the Borrower.
(b) Not later than 12:00 Noon (New York City time) on the date
of each Borrowing, each Bank participating therein shall (except as provided in
subsection (c) of this Section) make available its share of such Borrowing, in
Federal or other funds immediately available in New York City, to the Agent at
its address referred to in Section 9.01. Unless the Agent determines that any
applicable condition specified in Article III has not been satisfied, the Agent
will make the funds so received from the Banks available to the Borrower at the
Agent's aforesaid address.
(c) If any Bank makes a new Loan hereunder on a day on which
the Borrower is to repay all or any part of an outstanding Loan from such Bank,
such Bank shall apply the proceeds of its new Loan to make such repayment and
only an amount equal to the difference (if any) between the amount being
borrowed and the amount being repaid shall be made available by such Bank to the
Agent as provided in subsection (b), or remitted by the Borrower to the Agent as
provided in Section 2.12, as the case may be.
23
<PAGE>
(d) Unless the Agent shall have received notice from a Bank
prior to the date of any Borrowing that such Bank will not make available to the
Agent such Bank's share of such Borrowing, the Agent may assume that such Bank
has made such share available to the Agent on the date of such Borrowing in
accordance with subsections (b) and (c) of this Section 2.04 and the Agent may,
in reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Agent, such Bank and the Borrower severally agree to
repay to the Agent forthwith on demand such corresponding amount together with
interest thereon, for each day from the date such amount is made available to
the Borrower until the date such amount is repaid to the Agent, at (i) in the
case of the Borrower, a rate per annum equal to the higher of the Federal Funds
Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii)
in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to
the Agent such corresponding amount, such amount so repaid shall constitute such
Bank's Loan included in such Borrowing for purposes of this Agreement.
SECTION 2.05. Notes. (a) The Loans of each Bank shall be
-----
evidenced by a single Note payable to the order of such Bank for the account of
its Applicable Lending Office in an amount equal to the aggregate unpaid
principal amount of such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Agent,
request that its Loans of a particular type be evidenced by a separate Note in
an amount equal to the aggregate unpaid principal amount of such Loans. Each
such Note shall be in substantially the form of Exhibit A hereto with
appropriate modifications to reflect the fact that it evidences solely Loans of
the relevant type. Each reference in this Agreement to the "Note" of such Bank
shall be deemed to refer to and include any or all of such Notes, as the context
may require.
(c) Upon receipt of each Bank's Note pursuant to Section
3.01(b), the Agent shall mail such Note to such Bank. Each Bank shall record the
date, amount, type and maturity of each Loan made by it and the date and amount
of each payment of principal made by the Borrower with respect thereto, and
prior to any transfer of its Note shall endorse on the schedule forming a part
thereof appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding; provided that the failure of any Bank to
--------
make any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under
24
<PAGE>
the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to
endorse its Note and to attach to and make a part of its Note a continuation of
any such schedule as and when required.
SECTION 2.06. Maturity of Loans. Each Loan included in any
-----------------
Borrowing shall mature, and the principal amount thereof shall be due and
payable, on the last day of the Interest Period applicable to such Borrowing.
SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall
--------------
bear interest on the outstanding principal amount thereof, for each day from the
date such Loan is made until it becomes due, at a rate per annum equal to the
Base Rate for such day. Such interest shall be payable for each Interest Period
on the last day thereof. Any overdue principal of or interest on any Base Rate
Loan shall bear interest, payable on demand, for each day until paid at a rate
per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate
Loans for such day.
(b) Each CD Loan shall bear interest on the outstanding
principal amount thereof, for the Interest Period applicable thereto, at a rate
per annum equal to the sum of the Applicable Margin plus the applicable Adjusted
CD Rate; provided that if any CD Loan or any portion thereof shall, as a result
--------
of clause (2)(b) of the definition of Interest Period, have an Interest Period
of less than 30 days, such portion shall bear interest during such Interest
Period at the rate applicable to Base Rate Loans during such period. Such
interest shall be payable for each Interest Period on the last day thereof and,
if such Interest Period is longer than 90 days, at intervals of 90 days after
the first day thereof. Any overdue principal of or interest on any CD Loan shall
bear interest, payable on demand, for each day until paid at a rate per annum
equal to the sum of 2% plus the higher of (i) the sum of the Applicable Margin
plus the Adjusted CD Rate applicable to such Loan and (ii) the rate applicable
to Base Rate Loans for such day.
The "Adjusted CD Rate" applicable to any Interest Period means
a rate per annum determined pursuant to the following formula:
25
<PAGE>
[ CDBR ]*
ACDR = [ ---------- ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
__________
* The amount in brackets being rounded upward, if necessary, to the next higher
1/100 of 1%
The "CD Base Rate" applicable to any Interest Period is the
rate of interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid
at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the
first day of such Interest Period by two or more New York certificate of deposit
dealers of recognized standing for the purchase at face value from each CD
Reference Bank of its certificates of deposit in an amount comparable to the
principal amount of the CD Loan of such CD Reference Bank to which such Interest
Period applies and having a maturity comparable to such Interest Period.
"Domestic Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without limitation any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new nonpersonal time deposits in dollars in New York City having a
maturity comparable to the related Interest Period and in an amount of $100,000
or more. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve Percentage.
"Assessment Rate" means for any day the annual assessment rate
in effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. (S) 327.3(e) (or any successor provision) to the Federal Deposit
Insurance Corporation (or any successor) for such Corporation's (or such
successor's)
26
<PAGE>
insuring time deposits at offices of such institution in the United States. The
Adjusted CD Rate shall be adjusted automatically on and as of the effective date
of any change in the Assessment Rate.
(c) Each Euro-Dollar Loan shall bear interest on the
outstanding principal amount thereof, for the Interest Period applicable
thereto, at a rate per annum equal to the sum of the Applicable Margin plus the
applicable London Interbank Offered Rate. Such interest shall be payable for
each Interest Period on the last day thereof and, if such Interest Period is
longer than three months, at intervals of three months after the first day
thereof.
The "London Interbank Offered Rate" applicable to any Interest
Period means the average (rounded upward, if necessary, to the next higher 1/16
of 1%) of the respective rates per annum at which deposits in dollars are
offered to each of the Euro-Dollar Reference Banks in the London interbank
market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days
before the first day of such Interest Period in an amount approximately equal to
the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank
to which such Interest Period is to apply and for a period of time comparable to
such Interest Period.
(d) Any overdue principal of or interest on any Euro-Dollar
Loan shall bear interest, payable on demand, for each day from and including the
date payment thereof was due to but excluding the date of actual payment, at a
rate per annum equal to the sum of 2% plus the higher of (i) the sum of the
Applicable Margin plus the London Interbank Offered Rate applicable to such Loan
and (ii) the Applicable Margin plus the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per
annum at which one day (or, if such amount due remains unpaid more than three
Euro-Dollar Business Days, then for such other period of time not longer than
six months as the Agent may select) deposits in dollars in an amount
approximately equal to such overdue payment due to each of the Euro-Dollar
Reference Banks are offered to such Euro-Dollar Reference Bank in the London
interbank market for the applicable period determined as provided above by (y)
1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances
described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum
equal to the sum of 2% plus the rate applicable to Base Rate Loans for such
day).
(e) Subject to Section 8.01(a), each Money Market
27
<PAGE>
LIBOR Loan shall bear interest on the outstanding principal amount thereof, for
the Interest Period applicable thereto, at a rate per annum equal to the sum of
the London Interbank Offered Rate for such Interest Period (determined in
accordance with Section 2.07(c) as if the related Money Market LIBOR Borrowing
were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin
quoted by the Bank making such Loan in accordance with Section 2.03. Each Money
Market Absolute Rate Loan shall bear interest on the outstanding principal
amount thereof, for the Interest Period applicable thereto, at a rate per annum
equal to the Money Market Absolute Rate quoted by the Bank making such Loan in
accordance with Section 2.03. Such interest shall be payable for each Interest
Period on the last day thereof and, if such Interest Period is longer than three
months, at intervals of three months after the first day thereof. Any overdue
principal of or interest on any Money Market Loan shall bear interest, payable
on demand, for each day until paid at a rate per annum equal to the sum of 2%
plus the Base Rate for such day.
(f) The Agent shall determine each interest rate applicable to
the Loans hereunder. The Agent shall give prompt notice to the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(g) Each Reference Bank agrees to use its best efforts to
furnish quotations to the Agent as contemplated by this Section. If any
Reference Bank does not furnish a timely quotation, the Agent shall determine
the relevant interest rate on the basis of the quotation or quotations furnished
by the remaining Reference Bank or Banks or, if none of such quotations is
available on a timely basis, the provisions of Section 8.01 shall apply.
(h) The "Applicable Margin" with respect to any Euro-Dollar
Loan or CD Loan at any date is the applicable percentage amount set forth in the
table below based on the Utilization and Status on such day:
28
<PAGE>
<TABLE>
<CAPTION>
Level I Level II Level III Level IV Level V Level VI Level VII
Status Status Status Status Status Status Status
-------- --------- ---------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
If Utilization
is equal to or
less than 50%:
Euro-Dollar Loans 0.1600% 0.1800% 0.1950% 0.2000% 0.2250% 0.3500% 0.4000%
CD Loans 0.2850% 0.3050% 0.3200% 0.3250% 0.3500% 0.4750% 0.5250%
If Utilization is
greater than 50%:
Euro-Dollar Loans 0.2100% 0.2300% 0.2450% 0.2500% 0.2750% 0.4500% 0.5000%
CD Loans 0.3350% 0.3550% 0.3700% 0.3750% 0.4000% 0.5750% 0.6250%
</TABLE>
SECTION 2.08. Fees.
(a) Facility Fee. The Borrower shall pay to the Agent for the
------------
account of the Banks ratably a facility fee at the rate of (i) 0.0650% per annum
for each day on which Level I Status shall exist, (ii) 0.0700% per annum for
each day on which Level II Status shall exist, (iii) 0.0800% per annum for each
day on which Level III Status shall exist and (iv) 0.1000% per annum for each
day on which Level IV Status shall exist, (v) 0.125% per annum for each day on
which Level V Status shall exist, (vi) 0.2000% per annum for each day on which
Level VI Status shall exist, and (vii) 0.2500% per annum for each day on which
Level VII shall exist. Such facility fee shall accrue for each day (i) from and
including the Effective Date to but excluding the Termination Date (or earlier
date of termination of the Commitments in their entirety), on the aggregate
amount of the Commitments (whether used or unused) and (ii) from and including
the Termination Date (or earlier date of termination of the Commitments in their
entirety) to but excluding the date the Loans shall be repaid in their entirety,
on the aggregate outstanding principal amount of the Loans.
(b) Payments. Accrued fees under this Section shall be
--------
payable quarterly on each March 1, June 1, September 1 and December 1 and upon
the date of termination of the Commitments in their entirety (and, if later, the
date the Loans shall be repaid in their entirety).
SECTION 2.09. Optional Termination or Reduction of Commitments.
------------------------------------------------
The Borrower may, upon at least three Domestic Business Days' notice to the
Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at
such time or (ii) ratably reduce from time to time by an aggregate amount of
$10,000,000 or any larger multiple of $1,000,000, the aggregate amount of the
Commitments in excess of the aggregate outstanding principal amount of the
Loans.
29
<PAGE>
SECTION 2.10. Mandatory Termination of Commitments. The
------------------------------------
Commitments shall terminate on the Termination Date, and any Loans then
outstanding (together with accrued interest thereon) shall be due and payable on
such date.
SECTION 2.11. Optional Prepayments. (a) The Borrower may (i)
--------------------
upon at least one Domestic Business Days' notice to the Agent, prepay any Base
Rate Borrowing (or any Money Market Borrowing bearing interest at the Base Rate
pursuant to Section 8.01(a)) or, subject to Section 2.13, any CD Borrowing and
(ii) upon at least three Euro-Dollar Business Days' notice to the Agent, subject
to Section 2.13, prepay any Euro-Dollar Borrowing, in whole at any time, or from
time to time in part in amounts aggregating $10,000,000 or any larger multiple
of $1,000,000, by paying the principal amount to be prepaid together with
accrued interest thereon to the date of prepayment. Each such optional
prepayment shall be applied to prepay ratably the Loans of the several Banks
included in such Borrowing.
(b) Except as provided in clause (i) of subsection (a) above,
the Borrower may not prepay all or any portion of the principal amount of any
Money Market Loan prior to the maturity thereof.
(c) Upon receipt of a notice of prepayment pursuant to this
Section, the Agent shall promptly notify each Bank of the contents thereof and
of such Bank's ratable share (if any) of such prepayment and such notice shall
not thereafter be revocable by the Borrower.
SECTION 2.12. General Provisions as to Payments. (a) The
Borrower shall make each payment of principal of, and interest on, the Loans and
of fees hereunder, not later than 12:00 Noon (New York City time) on the date
when due, in Federal or other funds immediately available in New York City, to
the Agent at its address referred to in Section 9.01. The Agent will promptly
distribute to each Bank its ratable share of each such payment received by the
Agent for the account of the Banks. Whenever any payment of principal of, or
interest on, the Domestic Loans or of fees shall be due on a day which is not a
Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-
Dollar Business Day, the date for payment thereof shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls
in another calendar month, in which case the date
30
<PAGE>
for payment thereof shall be the next preceding Euro-Dollar Business Day.
Whenever any payment of principal of, or interest on, the Money Market Loans
shall be due on a day which is not a Euro-Dollar Business Day, the date for
payment thereof shall be extended to the next succeeding Euro-Dollar Business
Day. If the date for any payment of principal is extended by operation of law or
otherwise, interest thereon shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Banks hereunder
that the Borrower will not make such payment in full, the Agent may assume that
the Borrower has made such payment in full to the Agent on such date and the
Agent may, in reliance upon such assumption, cause to be distributed to each
Bank on such due date an amount equal to the amount then due such Bank. If and
to the extent that the Borrower shall not have so made such payment, each Bank
shall repay to the Agent forthwith on demand such amount distributed to such
Bank together with interest thereon, for each day from the date such amount is
distributed to such Bank until the date such Bank repays such amount to the
Agent, at the Federal Funds Rate.
SECTION 2.13. Funding Losses. If the Borrower makes any payment
--------------
of principal with respect to any Fixed Rate Loan (pursuant to Section 2.11 or
Article VI or VIII or otherwise) on any day other than the last day of the
Interest Period applicable thereto, or the last day of an applicable period
fixed pursuant to Section 2.07(d), or if the Borrower fails to borrow any Fixed
Rate Loans after notice has been given to any Bank in accordance with Section
2.04(a), or if the Borrower fails to prepay after giving notice thereof under
Section 2.11, the Borrower shall reimburse each Bank within 15 days after demand
for any resulting loss or expense incurred by it (or by an existing or
prospective Participant in the related Loan), including (without limitation) any
loss incurred in obtaining, liquidating or employing deposits from third
parties, but excluding loss of margin for the period after any such payment or
failure to borrow, provided that such Bank shall have delivered to the Borrower
--------
a certificate as to the amount of such loss or expense, which certificate shall
be conclusive in the absence of manifest error.
SECTION 2.14. Computation of Interest and Fees. Interest based
--------------------------------
on the Prime Rate hereunder and fees shall be computed on the basis of a year of
365 days (or 366 days in a leap year) and paid for the actual number of days
elapsed (including the first day but excluding the last day). All other interest
shall be computed on the basis of a year of
31
<PAGE>
360 days and paid for the actual number of days elapsed (including the first day
but excluding the last day).
SECTION 2.15. Withholding Tax Exemption. At least five Domestic
-------------------------
Business Days prior to the first date on which interest or fees are payable
hereunder for the account of any Bank, each Bank that is not incorporated under
the laws of the United States of America or a state thereof agrees that it will
deliver to each of the Borrower and the Agent two duly completed copies of
United States Internal Revenue Service Form 1001 or 4224, certifying in either
case that such Bank is entitled to receive payments under this Agreement and the
Notes without deduction or withholding of any United States federal income
taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to
deliver to each of the Borrower and the Agent two additional copies of such form
(or a successor form) on or before the date that such form expires or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent form so delivered by it, and such amendments thereto or extensions or
renewals thereof as may be reasonably requested by the Borrower or the Agent, in
each case certifying that such Bank is entitled to receive payments under this
Agreement and the Notes without deduction or withholding of any United States
federal income taxes, unless an event (including without limitation any change
in treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Bank from duly completing and delivering any such
form with respect to it and such Bank advises the Borrower and the Agent that it
is not capable of receiving payments without any deduction or withholding of
United States federal income tax.
SECTION 2.16. Regulation D Compensation. For so long as any
-------------------------
Bank maintains reserves against "Eurocurrency liabilities" (or any other
category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Loans is determined or any category of extensions
of credit or other assets which includes loans by a non-United States office of
such Bank to United States residents), and as a result the cost to such Bank (or
its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans
is increased, then such Bank may require the Borrower to pay, contemporaneously
with each payment of interest on the Euro-Dollar Loans, additional interest on
the related Euro-Dollar Loan of such Bank at a rate per annum up to but not
exceeding the excess of (i) (A) the applicable London Interbank Offered Rate
divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the
-----
32
<PAGE>
applicable London Interbank Offered Rate. Any Bank wishing to require payment of
such additional interest (x) shall so notify the Borrower and the Agent, in
which case such additional interest on the Euro-Dollar Loans of such Bank shall
be payable to such Bank at the place indicated in such notice with respect to
each Interest Period commencing at least three Euro-Dollar Business Days after
the giving of such notice and (y) shall furnish to the Borrower at least five
Euro-Dollar Business Days prior to each date on which interest is payable on the
Euro-Dollar Loans an officer's certificate setting forth the amount to which
such Bank is then entitled under this Section (which shall be consistent with
such Bank's good faith estimate of the level at which the related reserves are
maintained by it). Each such certificate shall be accompanied by such
information as the Borrower may reasonably request as to the computation set
forth therein.
ARTICLE III
CONDITIONS
SECTION 3.01. Effectiveness. This Agreement shall become
-------------
effective on the date that each of the following conditions shall have been
satisfied (or waived in accordance with Section 9.05):
(a) receipt by the Agent of counterparts hereof signed by
each of the parties hereto (or, in the case of any party as to which
an executed counterpart shall not have been received, receipt by the
Agent in form satisfactory to it of telegraphic, telex or other
written confirmation from such party of execution of a counterpart
hereof by such party);
(b) receipt by the Agent for the account of each Bank of a
duly executed Note dated on or before the Effective Date complying
with the provisions of Section 2.05;
(c) receipt by the Agent of an opinion of Kevin J. Tierney,
Esq., General Counsel of the Borrower, substantially in the form of
Exhibit E hereto and covering such additional matters relating to
the transactions contemplated hereby as the Required Banks may
reasonably request;
(d) receipt by the Agent of an opinion of Davis
33
<PAGE>
Polk & Wardwell, special counsel for the Agent, substantially in the
form of Exhibit F hereto and covering such additional matters
relating to the transactions contemplated hereby as the Required
Banks may reasonably request;
(e) receipt by the Agent of evidence satisfactory to it of
the payment of all principal of and interest on any loans
outstanding under, and of all other amounts payable under, the
Credit Agreement dated as of December 13, 1994, as amended, among
the Borrower, the banks listed on the signature pages thereof and
Morgan Guaranty Trust Company of New York, as agent (the "Existing
Credit Agreement"); and
(f) receipt by the Agent of all documents it may reasonably
request relating to the existence of the Borrower, the corporate
authority for and the validity and enforceability of this Agreement
and the Notes, and any other matters relevant hereto, all in form
and substance satisfactory to the Agent;
provided that this Agreement shall not become effective or be binding on any
- --------
party hereto unless all of the foregoing conditions are satisfied not later than
November 30, 1996. The Agent shall promptly notify the Borrower and the Banks of
the Effective Date, and such notice shall be conclusive and binding on all
parties hereto. The Banks that are parties to the Existing Credit Agreement,
comprising the "Required Banks" as defined therein, and the Borrower agree that
the commitments under the Existing Credit Agreement shall terminate in their
entirety simultaneously with and subject to the effectiveness of this Agreement
and that the Borrower shall be obligated to pay the accrued facility fees
thereunder to but excluding the date of such effectiveness.
SECTION 3.02. Borrowings. The obligation of any Bank to make a
----------
Loan on the occasion of any Borrowing is subject to the satisfaction of the
following conditions:
(a) receipt by the Agent of a Notice of Borrowing as required
by Section 2.02 or 2.03, as the case may be;
(b) the fact that, immediately after such Borrowing, the
aggregate outstanding principal amount of the Loans will not exceed
the aggregate amount of the Commitments;
(c) the fact that, immediately before and after such
Borrowing, no Default shall have occurred and be
34
<PAGE>
continuing; and
(d) the fact that, except for the representations and
warranties contained in Section 4.04(g) as of any date other than
the Effective Date, the representations and warranties of the
Borrower contained in this Agreement (and except, in the case of a
Refunding Borrowing, the representations and warranties set forth in
Section 4.05 as to any matter which has theretofore been disclosed
in writing by the Borrower to the Banks) shall be true on and as of
the date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and
warranty by the Borrower on the date of such Borrowing as to the facts
specified in clauses (b), (c) and (d) of this Section.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 4.01. Corporate Existence and Power. The Borrower is a
-----------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted.
SECTION 4.02. Corporate and Governmental Authorization; No
--------------------------------------------
Contravention. The execution, delivery and performance by the Borrower of this
- -------------
Agreement and the Notes (1) are within the Borrower's corporate powers, have
been duly authorized by all necessary corporate action, require no action by or
in respect of, or filing with, any governmental body, agency or official, (2) do
not contravene, or constitute a default under, any provision of applicable law
or regulation or of the certificate of incorporation or by-laws of the Borrower
or any Restricted Subsidiary or of any agreement, judgment, injunction, order,
decree or other instrument binding upon the Borrower or any Restricted
Subsidiary or result in the creation or imposition of any Lien on any asset of
the Borrower or any Restricted Subsidiary and (3) do not contravene, or
constitute a default under, any provision of applicable law or regulation or of
the certificate of incorporation or by-
35
<PAGE>
laws of any Unrestricted Subsidiary or of any agreement, judgment, injunction,
order, decree or other instrument binding upon any Unrestricted Subsidiary or
result in the creation or imposition of any Lien on any asset of any
Unrestricted Subsidiary, where there is a reasonable possibility that such
contravention or default or creation or imposition of a Lien, together with any
contraventions and/or defaults and/or Liens so created or imposed and in each
case referred to in clauses (1) through (3), inclusive, above, could materially
adversely affect the business, consolidated financial position or consolidated
results of operations of the Borrower and the Restricted Subsidiaries, taken as
a whole.
SECTION 4.03. Binding Effect. This Agreement constitutes a
--------------
valid and binding agreement of the Borrower and the Notes, when executed and
delivered in accordance with this Agreement, will constitute valid and binding
obligations of the Borrower.
SECTION 4.04. Financial Information.
---------------------
(a) The consolidated statements of income, stockholders' equity
and of cash flows of the Borrower and the Restricted Subsidiaries for the fiscal
year ended December 31, 1995 and the related consolidated balance sheets as at
the end of such period, a copy of which has been delivered to each of the Banks,
fairly present, in all material respects and in conformity with generally
accepted accounting principles, the consolidated financial condition of the
Borrower and the Restricted Subsidiaries as of such date and their consolidated
results of operations and cash flows for such period.
(b) The consolidated statements of income and of cash flows of
the Borrower and the Restricted Subsidiaries for the six months ended June 30,
1996 and the related consolidated balance sheets as at the end of such period, a
copy of which has been delivered to each of the Banks, fairly present, in all
material respects and in conformity with generally accepted accounting
principles applied on a basis consistent with the financial statements referred
to in subsection (a) above, the consolidated financial condition of the Borrower
and the Restricted Subsidiaries as of such date and their consolidated results
of operations and cash flows for such six-month period (subject to normal year-
end adjustments).
(c) The consolidated statements of income, stockholders' equity
and of cash flows of the Borrower and the Consolidated Subsidiaries for the
fiscal year ended
36
<PAGE>
December 31, 1995 and the related consolidated balance sheets as at the end of
such period, reported on by Ernst & Young and set forth in the Borrower's 1995
Form 10-K, a copy of which has been delivered to each of the Banks, fairly
present, in all material respects and in conformity with generally accepted
accounting principles, the consolidated financial condition of the Borrower and
the Consolidated Subsidiaries as of such date and their consolidated results of
operations and cash flows for such period.
(d) The consolidated statements of income and of cash flows of
the Borrower and the Consolidated Subsidiaries for the six months ended June 30,
1996 and the related consolidated balance sheets as at the end of such period,
set forth in the Borrower's quarterly report for the fiscal quarter ended June
30, 1996 as filed with the Securities and Exchange Commission on Form 10-Q, a
copy of which has been delivered to each of the Banks, fairly present, in all
material respects and in conformity with generally accepted accounting
principles applied on a basis consistent with the financial statements referred
to in subsection (c) above, the consolidated financial condition of the Borrower
and the Consolidated Subsidiaries as of such date and their consolidated results
of operations and cash flows for such six-month period (subject to normal year-
end adjustments).
(e) The Annual Statement of each Restricted Insurance
Subsidiary for the fiscal year ended December 31, 1995, as filed with the
Applicable Insurance Regulatory Authority of such Restricted Insurance
Subsidiary, a copy of which has been delivered to each of the Banks, presents
the statutory financial condition of such Restricted Insurance Subsidiary in
accordance with statutory accounting practices required or permitted by such
Applicable Insurance Regulatory Authority, and the amounts carried in the
balance sheet referred to therein on account of the actuarial items referred to
in clauses (1) through (5), inclusive, of the statement of the Corporate Actuary
contained therein (i) are computed in accordance with commonly accepted
actuarial standards consistently applied and are fairly stated in accordance
with sound actuarial principles, (ii) are based on actuarial assumptions that
produce reserves at least as great as those called for in any contract provision
and are in accordance with all other contract provisions, (iii) meet the
requirements of the insurance laws and regulations of the State in which such
Restricted Insurance Subsidiary is domiciled, (iv) make a good and sufficient
provision for all unmatured obligations of such Restricted Insurance Subsidiary
guaranteed under the terms of its policies, (v) are computed on the basis of
assumptions consistent with those used in computing the corresponding items in
the
37
<PAGE>
Annual Statement of such Restricted Insurance Subsidiary for the fiscal year
ended December 31, 1990, except as noted in the notes thereto and (vi) include
provisions for all actuarial reserves and related statement items that ought to
be established, and such actuarial methods, considerations and analyses conform
to the appropriate Standards of Practice as promulgated by the Actuarial
Standards Board, which standards form the basis of this statement of opinion.
(f) The Quarterly Statement of each Restricted Insurance
Subsidiary for the six months ended June 30, 1996, as filed with the Applicable
Insurance Regulatory Authority of such Restricted Insurance Subsidiary, a copy
of which has been delivered to each of the Banks, presents the statutory
financial condition of such Restricted Insurance Subsidiary in accordance with
statutory accounting practices required or permitted by such Applicable
Insurance Regulatory Authority.
(g) Since June 30, 1996 there has been no material adverse
change in the business, financial position, results of operations or prospects
of the Borrower and the Restricted Subsidiaries, considered as a whole.
SECTION 4.05. Litigation. There is no action, suit or
----------
proceeding pending against, or to the knowledge of the Borrower threatened
against or affecting, the Borrower or any of its Subsidiaries before any court
or arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could materially adversely
affect the business, consolidated financial position or consolidated results of
operations of the Borrower and the Restricted Subsidiaries, taken as a whole, or
which in any manner draws into question the validity or enforceability of this
Agreement or the Notes.
SECTION 4.06. Compliance with ERISA. Each member of the ERISA
---------------------
Group has fulfilled its obligations under the minimum funding standards of ERISA
and the Internal Revenue Code with respect to each Plan and is in compliance in
all material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which has resulted or could result in the imposition of a Lien or the posting of
a bond or other security under ERISA or the Internal Revenue Code or (iii)
incurred any liability
38
<PAGE>
under Title IV of ERISA other than a liability to the PBGC for premiums under
Section 4007 of ERISA.
SECTION 4.07. Taxes. United States Federal income tax returns
-----
of the Borrower and its Subsidiaries have been examined and closed through the
fiscal year ended December 31, 1988. The Borrower and the Restricted
Subsidiaries have filed all United States Federal income tax returns and all
other material tax returns which are required to be filed by them and have paid
all taxes due pursuant to such returns or pursuant to any assessment received by
the Borrower or any Restricted Subsidiary. The charges, accruals and reserves on
the books of the Borrower and the Restricted Subsidiaries in respect of taxes or
other governmental charges are, in the opinion of the Borrower, adequate. There
has been no failure by any Unrestricted Subsidiary to file any tax return
required to be filed by it or to pay any tax when due which failure, together
with any other failures referred to in this Section 4.07, could materially
adversely affect the business, consolidated financial position or consolidated
results of operations of the Borrower and the Restricted Subsidiaries, taken as
a whole.
SECTION 4.08. Subsidiaries. Each of the Restricted Subsidiaries
------------
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation, and has all corporate powers and
all material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted.
SECTION 4.09. Not an Investment Company. Neither the Borrower
-------------------------
nor any Restricted Subsidiary is an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
SECTION 4.10. Full Disclosure. All information heretofore
---------------
furnished by the Borrower to the Agent or any Bank for purposes of or in
connection with this Agreement or any transaction contemplated hereby is, and
all such information hereafter furnished by the Borrower to the Agent or any
Bank will be, true and accurate in all material respects on the date as of which
such information is stated or certified. The Borrower has disclosed to the Banks
in writing any and all facts known to it which materially and adversely affect
or may affect (to the extent the Borrower can now reasonably foresee), the
business, operations or financial condition of the Borrower and the Restricted
Subsidiaries, taken as a whole, or the ability of the Borrower to perform its
obligations under this Agreement.
39
<PAGE>
ARTICLE V
COVENANTS
The Borrower agrees that so long as any Bank has any Commitment
hereunder or any amount payable under any Note remains unpaid:
SECTION 5.01. Financial Statements. The Borrower shall
deliver to each of the Banks:
(a) as soon as available and in any event within 60 days after
the end of each of the first three fiscal quarterly periods of each
fiscal year of the Borrower, consolidated statements of income and
of cash flows of the Borrower and the Restricted Subsidiaries for
such period and for the period from the beginning of the respective
fiscal year to the end of such period, and the related consolidated
balance sheets as at the end of such period, setting forth in each
case in comparative form the corresponding figures for the
corresponding periods in the preceding fiscal year, accompanied by a
certificate of a senior financial officer of the Borrower, which
certificate shall state that said financial statements fairly
present, in all material respects, the consolidated financial
condition and results of operations and cash flows of the Borrower
and the Restricted Subsidiaries in accordance with generally
accepted accounting principles, consistently applied, as at the end
of, and for, such periods (subject to normal year-end audit
adjustments);
(b) as soon as available and in any event within 100 days
after the end of each fiscal year of the Borrower, consolidated
statements of income, stockholders' equity and of cash flows of the
Borrower and the Restricted Subsidiaries for such year and the
related consolidated balance sheets as at the end of such year,
setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, and accompanied by an opinion
thereon of independent certified public accountants of recognized
national standing, which opinion shall state that said financial
statements fairly present, in all material respects, the
consolidated financial condition and results of operations and cash
flows of the Borrower and the Restricted Subsidiaries as at the end
of, and
40
<PAGE>
for, such fiscal year, and a certificate of such accountants stating
that, in making the audit necessary for their opinion, they obtained
no knowledge, except as specifically stated, of any Default;
(c) as soon as available and in any event within 60 days after
the end of each of the first three fiscal quarterly periods of each
fiscal year of the Borrower, consolidated statements of income and
of cash flows of the Borrower and the Consolidated Subsidiaries for
such period and for the period from the beginning of the respective
fiscal year to the end of such period, and the related consolidated
balance sheets as at the end of such period, setting forth in each
case in comparative form the corresponding figures for the
corresponding periods in the preceding fiscal year, accompanied by a
certificate of a senior financial officer of the Borrower, which
certificate shall state that said financial statements fairly
present, in all material respects, the consolidated financial
condition and results of operations and cash flows of the Borrower
and the Consolidated Subsidiaries in accordance with generally
accepted accounting principles, consistently applied, as at the end
of, and for, such periods (subject to normal year-end audit
adjustments);
(d) as soon as available and in any event within 100 days
after the end of each fiscal year of the Borrower, consolidated
statements of income, stockholders' equity and of cash flows of the
Borrower and the Consolidated Subsidiaries for such year and the
related consolidated balance sheets as at the end of such year,
setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, and accompanied by an opinion
thereon of independent certified public accountants of recognized
national standing, which opinion shall state that said financial
statements fairly present, in all material respects, the
consolidated financial condition and results of operations and cash
flows of the Borrower and the Consolidated Subsidiaries as at the
end of, and for, such fiscal year;
(e) as soon as available and in any event not later than 90
days after the end of each fiscal year of each Restricted Insurance
Subsidiary, (i) the Annual Statements of such Restricted Insurance
Subsidiary (prepared in accordance with the statutory accounting
practices required or permitted by its Applicable Insurance
Regulatory Authority) for such fiscal year as
41
<PAGE>
filed with such Applicable Insurance Regulatory Authority, together
with the opinion thereon of a senior financial officer of such
Restricted Insurance Subsidiary stating that such Annual Statements
present the statutory financial condition of such Restricted
Insurance Subsidiary in accordance with statutory accounting
practices required or permitted by such Applicable Insurance
Regulatory Authority, and (ii) a certificate of the Corporate
Actuary of such Restricted Insurance Subsidiary affirming that the
amounts carried in the balance sheet referred to therein on account
of the actuarial items referred to in clauses (1) through (5),
inclusive, of such certificate (i) are computed in accordance with
commonly accepted actuarial standards consistently applied and are
fairly stated in accordance with sound actuarial principles, (ii)
are based on actuarial assumptions that produce reserves at least as
great as those called for in any contract provision and are in
accordance with all other contract provisions, (iii) meet the
requirements of the insurance laws and regulations of the State in
which such Restricted Insurance Subsidiary is domiciled, (iv) make a
good and sufficient provision for all unmatured obligations of such
Restricted Insurance Subsidiary guaranteed under the terms of its
policies, (v) are computed on the basis of assumptions consistent
with those used in computing the corresponding items in the Annual
Statement of such Restricted Insurance Subsidiary for the preceding
fiscal year, except as noted in the notes thereto and (vi) include
provisions for all actuarial reserves and related statement items
that ought to be established, and affirming that such actuarial
methods, considerations and analyses conform to the appropriate
Standards of Practice as promulgated by the Actuarial Standards
Board, which Standards of Practice form the basis of this
certification;
(f) as soon as available and in any event within 60 days after
the end of each fiscal quarter of each Restricted Insurance
Subsidiary (except for the fourth fiscal quarter of any fiscal
year), (i) quarterly statutory financial statements of such
Restricted Insurance Subsidiary (prepared in accordance with
statutory accounting practices required or permitted by its
Applicable Insurance Regulatory Authority) for such fiscal quarter
as filed with such Applicable Insurance Regulatory Authority,
together with the opinion thereon of a senior financial officer of
such Restricted Insurance Subsidiary stating that such statutory
financial statements present the statutory financial condition of
such Restricted Insurance Subsidiary in
42
<PAGE>
accordance with statutory accounting practices required or permitted
by such Applicable Insurance Regulatory Authority;
(g) promptly upon their becoming available, copies of all
registration statements and regular periodic reports (including,
without limitation, Form 8-K), if any, which the Borrower shall have
filed with the Securities and Exchange Commission (or any
governmental agency substituted therefor) or any national securities
exchange;
(h) promptly upon the mailing thereof to the shareholders of
the Borrower generally, copies of all financial statements, reports
and proxy statements so mailed;
(i) if and when any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as
defined in Section 4043 of ERISA) with respect to any Plan which
might constitute grounds for a termination of such Plan under Title
IV of ERISA, or knows that the plan administrator of any Plan has
given or is required to give notice of any such reportable event, a
copy of the notice of such reportable event given or required to be
given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any
Multiemployer Plan is in reorganization, is insolvent or has been
terminated, a copy of such notice; (iii) receives notice from the
PBGC under Title IV of ERISA of an intent to terminate, impose
liability (other than for premiums under Section 4007 of ERISA) in
respect of, or appoint a trustee to administer any Plan, a copy of
such notice; (iv) applies for a waiver of the minimum funding
standard under Section 412 of the Internal Revenue Code, a copy of
such application; (v) gives notice of intent to terminate any Plan
under Section 4041(c) of ERISA, a copy of such notice and other
information filed with the PBGC; (vi) gives notice of withdrawal
from any Plan pursuant to Section 4063 of ERISA, a copy of such
notice; or (vii) fails to make any payment or contribution to any
Plan or Multiemployer Plan or in respect of any Benefit Arrangement
or makes any amendment to any Plan or Benefit Arrangement which has
resulted or could result in the imposition of a Lien or the posting
of a bond or other security, a certificate of the chief financial
officer or the chief accounting officer of the Borrower setting
forth details as to such occurrence and action, if any, which the
Borrower or applicable member of the
43
<PAGE>
ERISA Group is required or proposes to take;
(j) promptly after the Borrower knows that any Default has
occurred, a notice of such Default describing the same in reasonable
detail and, together with such notice or as soon thereafter as
possible, a description of the action that the Borrower as taken and
proposes to take with respect thereto;
(k) promptly upon the occurrence of any change in the rating
of any obligation of the Borrower by either Moody's or S&P, a notice
setting forth the details thereof; and
(l) from time to time such other information regarding the
business, affairs or financial condition of the Borrower or any of
the Subsidiaries as the Agent, at the request of any Bank, may
reasonably request, if the requesting Bank in good faith determines
that such information is or may be necessary or useful to it to
determine or monitor the Borrower's compliance with the provisions
of this Agreement.
The Borrower will furnish to each Bank, at the time it furnishes each set
of financial statements pursuant to paragraph (a), (b), (c) or (d) above, a
certificate of a senior financial officer of the Borrower (i) to the effect that
no Default has occurred and is continuing (or, if any Default has occurred and
is continuing, describing the same in reasonable detail and describing the
action that the Borrower has taken and proposes to take with respect thereto)
and (ii) setting forth in reasonable detail the computations necessary to
determine whether the Borrower is in compliance with Sections 5.08 and 5.09 as
of the end of the respective fiscal quarter or fiscal year.
SECTION 5.02. Litigation. The Borrower shall promptly give to
----------
each Bank notice of all legal or arbitral actions, suits and proceedings, and of
all actions, suits and proceedings by or before any governmental or regulatory
authority or agency, affecting the Borrower or any Subsidiary, except actions,
suits and proceedings which in the aggregate, if adversely determined, would
not, in the judgment of the Borrower, have a material adverse effect on the
business, consolidated financial condition or consolidated results of operations
of the Borrower and the Restricted Subsidiaries, taken as a whole.
SECTION 5.03. Corporate Existence, Etc. Except as provided in
------------------------
Section 5.05, the Borrower shall, and shall cause each Restricted Subsidiary to:
preserve and maintain
44
<PAGE>
its corporate existence and all of its material rights, privileges and
franchises; comply with the requirements of all applicable laws, rules,
regulations and orders of governmental or regulatory authorities if failure to
comply with such requirements would materially and adversely affect the
consolidated financial condition or operations, or the business taken as a
whole, of the Borrower and the Restricted Subsidiaries; pay and discharge all
taxes, assessments and governmental charges or levies imposed on it or on its
income or profits or on any of its property prior to the date on which penalties
attach thereto, except for any such tax, assessment, charge or levy the payment
of which is being contested in good faith and by proper proceedings and against
which adequate reserves are being maintained; maintain all of its properties
used or useful in its business in good working order and condition, ordinary
wear and tear excepted; permit one or more representatives acting on behalf of
all of the Banks, during normal business hours, to examine, copy and make
extracts from its books and records, to inspect its properties, and to discuss
its business and affairs with its officers, all to the extent reasonably
requested by the Required Banks for the purposes described in Section 5.01(l),
provided that such representatives shall have the right to copy and make
- --------
extracts from such books and records only after the occurrence and during the
continuance of a Default; and keep insured by financially sound and reputable
insurers all property of a character usually insured by corporations engaged in
the same or similar business similarly situated against loss or damage of the
kinds and in the amounts customarily insured against by such corporations and
carry such other insurance as is usually carried by such corporations and/or
self insure all property, in a manner and in amounts, in accordance with
generally accepted actuarial and accounting principles.
SECTION 5.04. Use of Proceeds. The Borrower shall use the
---------------
proceeds of the Loans hereunder to finance general corporate activities
(including, without limitation, the repurchase of stock of the Borrower and the
purchase of stock of other companies) in compliance with all applicable legal
and regulatory requirements, including, without limitation, the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
including, without limitation, Regulations U and X.
45
<PAGE>
SECTION 5.05. Prohibition of Fundamental Changes. The Borrower
----------------------------------
shall not, nor shall it permit any Restricted Subsidiary to, enter into any
transaction of merger or consolidation or amalgamation, or liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution), convey, sell, lease,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or a substantial part of its business or assets, whether now
owned or hereafter acquired (including, without limitation, receivables and
leasehold interests, but excluding (i) any inventory or other assets sold or
disposed of in the ordinary course of business according to ordinary business
terms and (ii) obsolete or worn-out property) or make any material change in its
present method of conducting business except that:
(a) any Restricted Subsidiary may merge with or consolidate
into (i) the Borrower if the Borrower shall be the surviving
corporation or (ii) any other Restricted Subsidiary;
(b) any Restricted Subsidiary may sell, lease, transfer or
otherwise dispose of any or all of its assets (upon voluntary
liquidation or otherwise) to the Borrower or another Restricted
Subsidiary;
(c) (I) the Borrower may merge with or consolidate into any
other Person if the Borrower is the surviving corporation; (II) the
Borrower may merge with or consolidate into any other Person where
the Borrower is not the surviving corporation and may transfer
substantially all its assets as an entirety to any other Person, if,
but only if (i) the corporation into which the Borrower is merged or
formed by such consolidation or the Person which acquires
substantially all the Borrower's assets as an entirety is a
corporation organized and existing under the laws of the United
States or any State thereof, and shall expressly assume, by an
agreement executed and delivered to the Agent and the Banks and in
form and substance satisfactory to the Agent and the Banks, the due
and punctual payment of the principal of, and interest on, all Loans
then outstanding or thereafter made hereunder and the due and
punctual payment of all other amounts then outstanding or thereafter
required to be paid hereunder and the performance of every covenant
and agreement contained herein, (ii) after giving effect to such
merger, consolidation or transfer, no Default shall exist hereunder,
(iii) the corporation referred to in clause (i) above shall have
outstanding senior unsecured long-term Indebtedness
46
<PAGE>
rated at least A- by S&P and at least A3 by Moody's or, if no such
Indebtedness is outstanding, the Borrower shall have provided
written evidence from S&P and Moody's to the Banks, such evidence to
be satisfactory to the Required Banks, that, if such corporation had
such Indebtedness outstanding, such Indebtedness would be rated at
least A- by S&P and at least A3 by Moody's and (iv) at the time of
such merger, consolidation or transfer the Borrower and the
Restricted Subsidiaries would be permitted to incur at least $1.00
of additional Funded Indebtedness under Section 5.09, provided that
--------
no such transfer shall have the effect of releasing the Borrower
from any of its obligations hereunder or under the Notes; and (III)
a Restricted Subsidiary may merge or consolidate with or into or
transfer substantially all its assets as an entirety to any other
Person if the surviving or transferee corporation is or
contemporaneously therewith becomes a Restricted Subsidiary;
provided that in each case, after giving effect to such merger,
--------
consolidation or transfer, (i) no Default shall exist hereunder,
(ii) the Borrower's outstanding senior unsecured long-term
Indebtedness shall be rated at least A- by S&P and at least A3 by
Moody's or, if no such Indebtedness is outstanding, if the Borrower
provides written evidence from S&P and Moody's to the Banks, such
evidence to be satisfactory to the Required Banks, to the effect
that, if the Borrower had any such Indebtedness outstanding at such
time, such Indebtedness would be rated at least A- by S&P and at
least A3 by Moody's and (iii) the Borrower and the Restricted
Subsidiaries would be permitted to incur at least $1.00 of
additional Funded Indebtedness under Section 5.09;
(d) the Borrower or any Restricted Subsidiary may change its
present lines of business or, in connection therewith, may abandon
or otherwise dispose of any material rights, privileges and
franchises, or its present method of conducting business if such
change, abandonment or disposition will not, in the Borrower's Board
of Directors' good faith judgment, have a material adverse effect on
the business, operations, property, financial or other condition of
the Borrower and the Restricted Subsidiaries, taken as a whole;
(e) the Borrower or any Restricted Subsidiary may, in any
fiscal quarter of the Borrower, convey, sell, lease, transfer or
otherwise dispose of assets (not otherwise permitted under this
Section 5.05 to be disposed of) which, together with all other
assets (not otherwise permitted under this Section 5.05 to be
47
<PAGE>
disposed of) theretofore so disposed of in such fiscal quarter and
in the immediately preceding three consecutive fiscal quarters of
the Borrower, have a book value not exceeding in the aggregate 20%
of Total Assets as at the first day of such period of three
consecutive fiscal quarters so long as (i) any such conveyance,
sale, lease, transfer or other disposition, together with all such
conveyances, sales, leases, transfers or other dispositions since
the first day of such period of three consecutive fiscal quarters,
will not, in the Borrower's Board of Directors' good faith judgment,
have a material adverse effect on the business, operations, property
or financial or other condition of the Borrower and the Restricted
Subsidiaries, taken as a whole and (ii) after giving effect to such
conveyance, sale, lease, transfer or other disposition, no Default
exists and the Borrower and the Restricted Subsidiaries would be
permitted to incur at least $1.00 of additional Funded Indebtedness
under Section 5.09; provided that the aggregate book value of all
--------
assets conveyed, sold, leased, transferred or otherwise disposed of
during such fiscal quarter and the immediately preceding three
consecutive fiscal quarters shall not exceed 10% of Total Assets as
at such first day except to the extent that such assets were first
acquired by the Borrower or any Restricted Subsidiary, taken
together, not earlier than one year prior to such conveyance, sale,
lease, transfer or other disposition; and
(f) the Borrower or any Restricted Subsidiary may sell,
lease, transfer or otherwise dispose of real property (and personal
property necessary to the use thereof) acquired by the Borrower or
such Restricted Subsidiary, as the case may be, pursuant to
foreclosure proceedings or by deed in lieu of foreclosure;
provided that none of the foregoing shall prevent the Borrower or any Restricted
- --------
Subsidiary from conveying, selling, leasing, transferring or otherwise disposing
of any Home Office Properties the fair market value of which in the aggregate
does not exceed $100,000,000.
SECTION 5.06. Limitation on Liens. The Borrower shall not, nor
-------------------
shall it permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist, any Lien upon any of its property, assets or revenues, whether now owned
or hereafter acquired, except:
(a) Liens, not otherwise excepted hereunder, existing on the
date of this Agreement, which Liens do
48
<PAGE>
not secure Indebtedness in an aggregate principal amount in excess
of $20,000,000;
(b) Liens arising in the ordinary course of its business
which (i) do not secure Indebtedness, (ii) in the case of any
judgment or order for the payment of money, do not secure any
judgment or order for the payment of money in an amount exceeding
$10,000,000 and (iii) do not in the aggregate materially detract
from the value of its assets or materially impair the use thereof in
the operation of its business;
(c) Liens on assets of corporations which become Restricted
Subsidiaries after the date of this Agreement, provided that such
--------
Liens are in existence at the time the respective corporations
become Restricted Subsidiaries and were not created in anticipation
thereof;
(d) Liens upon real and/or tangible personal property
acquired after the date hereof (by purchase, construction or
otherwise) by the Borrower or any Restricted Subsidiary, each of
which Liens either (A) existed on such property before the time of
its acquisition and was not created in anticipation thereof, or (B)
was created solely for the purpose of securing Indebtedness
representing, or incurred to finance, refinance or refund, the cost
(including the cost of construction) of the respective property;
provided that no such Lien shall extend to or cover any property of
--------
the Borrower or such Restricted Subsidiary other than the respective
property so acquired and improvements thereon and no such Lien shall
secure any additional Indebtedness; and provided further that the
-------- -------
principal amount of Indebtedness secured by any such Lien shall at
no time exceed the cost of the respective property at the time it
was acquired (by purchase, construction or otherwise);
(e) Liens created after the Effective Date upon real and/or
personal property securing Indebtedness incurred after the Effective
Date, provided that the aggregate Indebtedness secured thereby shall
--------
not at any time exceed 7.5% of Total Stockholders' Equity; and
(f) any extension, renewal or replacement of the foregoing,
provided, however, that the Liens permitted hereunder shall not
-------- -------
secure any additional Indebtedness (if applicable) or cover any
additional property.
SECTION 5.07. Transactions with Affiliates. The
----------------------------
49
<PAGE>
Borrower will not, nor will it permit any Restricted Subsidiary to,
directly or indirectly, enter into any transaction with or for the
benefit of any Affiliate (including, without limitation, transfers of
assets to or from an Affiliate and guarantees and assumptions of
obligations of an Affiliate) other than transactions with Affiliates (i)
otherwise permitted by this Agreement or (ii) (x) entered into on an
arm's length basis, on terms no more favorable to such Affiliate than
would be available to unrelated Persons and (y) after giving effect to
which the Borrower and the Restricted Subsidiaries would be permitted to
incur at least $1.00 of additional Funded Indebtedness under Section
5.09.
SECTION 5.08. Minimum Total Stockholders' Equity. The
----------------------------------
Borrower shall not permit at any time Total Stockholders' Equity to be
less than 10% of Total Assets.
SECTION 5.09. Ratio of Funded Indebtedness to Total Capital.
---------------------------------------------
The Borrower shall not, nor shall it permit any Restricted Subsidiary to,
incur or otherwise become liable in respect of any Funded Indebtedness
(including, without limitation the borrowing of Loans hereunder) unless,
after giving effect thereto, the ratio of (i) the aggregate principal
amount of Funded Indebtedness to (ii) Total Capital will not exceed 0.35
to 1.
SECTION 5.10. Restricted and Unrestricted Subsidiaries. The
----------------------------------------
Borrower may at any time by resolution of its Board of Directors
designate any Subsidiary prospectively as a Restricted Subsidiary or as
an Unrestricted Subsidiary if, after giving effect to such designation,
no Default would exist and the Borrower and the Restricted Subsidiaries
would be permitted to incur at least $1.00 of additional Funded
Indebtedness under Section 5.09; provided however, that no Subsidiary
-------- -------
designated by an asterisk on Schedule I hereof as a Restricted Subsidiary
may be designated as an Unrestricted Subsidiary; provided further that,
-------- -------
if any Unrestricted Subsidiary listed on Schedule I hereof is duly
designated pursuant to this Section 5.10 as a Restricted Subsidiary, it
may not at any time thereafter be designated as an Unrestricted
Subsidiary; and provided further that any designation under this Section
-------- -------
5.10 must remain unchanged over the last day of at least two consecutive
fiscal quarters of the Borrower. A certified copy of such resolution,
together with a pro forma consolidated balance sheet of the Borrower and
the Restricted Subsidiaries as at a date not more than 30 days prior to
the effective date of (but giving effect to) such designation, shall be
delivered to each Bank no later than five Domestic Business Days prior to
the effective date of
50
<PAGE>
such designation.
ARTICLE VI
DEFAULTS
SECTION 6.01. Events of Default. If one or more of the
-----------------
following events ("Events of Default") shall have occurred and be
continuing:
(a) the Borrower shall fail to pay when due any principal of
any Loan, or the Borrower shall fail to pay within five days of the
due date thereof any interest on any Loan, any fees or any other
amount payable hereunder;
(b) the Borrower shall fail to observe or perform any
covenant contained in Sections 5.04 to 5.10, inclusive, provided
--------
that, if a failure to observe the covenant contained in Section 5.08
occurs and, but only so long as, Total Stockholders' Equity is at
least 7% of Total Assets, then the failure to observe such covenant
shall not be an Event of Default unless such failure continues for
30 days;
(c) the Borrower shall fail to observe or perform any
covenant or agreement contained in this Agreement (other than those
covered by clause (a) or (b) above) for 30 days after written notice
thereof has been given to the Borrower by the Agent at the request
of any Bank;
(d) any representation, warranty, certification or statement
made by the Borrower in this Agreement or in any certificate,
financial statement or other document delivered pursuant to this
Agreement shall prove to have been incorrect in any material respect
when made (or deemed made);
(e) the Borrower or any Restricted Subsidiary or any
Insurance Subsidiary shall fail to make any payment in respect of
any Material Indebtedness when due or within any applicable grace
period;
(f) any event or condition shall occur which results in the
acceleration of the maturity of any Material Indebtedness of the
Borrower or any Restricted Subsidiary or any Insurance Subsidiary or
enables the
51
<PAGE>
holder of such Material Indebtedness or any Person acting on such
holder's behalf to accelerate the maturity thereof;
(g) the Borrower or any Restricted Subsidiary or any
Insurance Subsidiary shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment
for the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any corporate action to
authorize any of the foregoing;
(h) an involuntary case or other proceeding shall be
commenced against the Borrower or any Restricted Subsidiary or any
Insurance Subsidiary seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of 60 days; or an order
for relief shall be entered against the Borrower or any Restricted
Subsidiary or any Insurance Subsidiary under the federal bankruptcy
laws as now or hereafter in effect;
(i) any member of the ERISA Group shall fail to pay when due
an amount or amounts aggregating in excess of $10,000,000 which it
shall have become liable to pay under Title IV of ERISA; or notice
of intent to terminate a Material Plan shall be filed under Title IV
of ERISA by any member of the ERISA Group, any plan administrator or
any combination of the foregoing; or the PBGC shall institute
proceedings under Title IV of ERISA to terminate, to impose
liability (other than for premiums under Section 4007 of ERISA) in
respect of, or to cause a trustee to be appointed to administer any
Material Plan; or a condition shall exist by reason of which the
PBGC would be entitled to obtain a decree adjudicating that any
Material Plan must be terminated;
52
<PAGE>
or there shall occur a complete or partial withdrawal from, or a
default, within the meaning of Section 4219(c)(5) of ERISA, with
respect to, one or more Multiemployer Plans which could cause one or
more members of the ERISA Group to incur a current payment
obligation in excess of $10,000,000;
(j) a judgment or order for the payment of money in excess of
$10,000,000 shall be rendered against the Borrower or any Restricted
Subsidiary or any Insurance Subsidiary and such judgment or order
shall continue unsatisfied and unstayed for a period of 30 days; or
(k) any person or group of persons (within the meaning of
Section 13 or 14 of the Securities Exchange Act of 1934, as amended)
shall have acquired beneficial ownership (within the meaning of Rule
13d-3 promulgated by the Securities and Exchange Commission under
said Act) of 25% or more of the outstanding shares of common stock
of the Borrower; or, during any period of twelve consecutive
calendar months, individuals who were directors of the Borrower on
the first day of such period shall cease to constitute a majority of
the board of directors of the Borrower;
then, and in every such event, the Agent shall, (i) if requested by Banks
having more than 50% in aggregate amount of the Commitments, by notice to
the Borrower terminate the Commitments and they shall thereupon terminate
and (ii) if requested by Banks holding Notes evidencing more than 50% in
aggregate principal amount of the Loans, by notice to the Borrower
declare the Notes (together with accrued interest thereon) to be, and the
Notes shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower; provided that in the case of any of
--------
the Events of Default specified in clause (g) or (h) above with respect
to the Borrower, without any notice to the Borrower or any other act by
the Agent or the Banks, the Commitments shall thereupon terminate and the
Notes (together with accrued interest thereon) shall become immediately
due and payable without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrower.
SECTION 6.02. Notice of Default. The Agent shall give notice
-----------------
to the Borrower under Section 6.01(c) promptly upon being requested to do
so by any Bank and shall thereupon notify all the Banks thereof.
53
<PAGE>
ARTICLE VII
THE AGENT
SECTION 7.01. Appointment and Authorization. Each Bank
-----------------------------
irrevocably appoints and authorizes the Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement and the Notes as are
delegated to the Agent by the terms hereof or thereof, together with all such
powers as are reasonably incidental thereto.
SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust
--------------------
Company of New York shall have the same rights and powers under this Agreement
as any other Bank and may exercise or refrain from exercising the same as though
it were not the Agent, and Morgan Guaranty Trust Company of New York and its
affiliates may accept deposits from, lend money to, and generally engage in any
kind of business with the Borrower or any Subsidiary or affiliate of the
Borrower as if it were not the Agent hereunder.
SECTION 7.03. Action by Agent. The obligations of the Agent
---------------
hereunder are only those expressly set forth herein. Without limiting the
generality of the foregoing, the Agent shall not be required to take any action
with respect to any Default, except as expressly provided in Article VI.
SECTION 7.04. Consultation with Experts. The Agent may consult
-------------------------
with legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.05. Liability of Agent. Neither the Agent nor any of
------------------
its affiliates nor any of their respective directors, officers, agents or
employees shall be liable for any action taken or not taken by it in connection
herewith (i) with the consent or at the request of the Required Banks or (ii) in
the absence of its own gross negligence or willful misconduct. Neither the Agent
nor any of its affiliates nor any of their respective directors, officers,
agents or employees shall be responsible for or have any duty to ascertain,
inquire into or verify (i) any statement, warranty or representation made in
connection with this Agreement or any borrowing hereunder; (ii) the performance
54
<PAGE>
or observance of any of the covenants or agreements of the Borrower; (iii) the
satisfaction of any condition specified in Article III, except receipt of items
required to be delivered to the Agent; or (iv) the validity, effectiveness or
genuineness of this Agreement, the Notes or any other instrument or writing
furnished in connection herewith. The Agent shall not incur any liability by
acting in reliance upon any notice, consent, certificate, statement, or other
writing (which may be a bank wire, telex or similar writing) believed by it to
be genuine or to be signed by the proper party or parties.
SECTION 7.06. Indemnification. Each Bank shall, ratably in
---------------
accordance with its initial Commitment, indemnify the Agent, its affiliates and
their respective directors, officers, agents and employees (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from such indemnitees' gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this Agreement or any action
taken or omitted by such indemnitees hereunder.
SECTION 7.07. Credit Decision. Each Bank acknowledges that it
---------------
has, independently and without reliance upon the Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 7.08. Successor Agent. The Agent may resign at any time
by giving notice thereof to the Banks and the Borrower, and such notice shall be
effective on the date specified therein (unless otherwise stated therein)
whether or not a successor Agent is appointed and accepts such appointment as
provided below. Upon any such resignation, the Required Banks shall have the
right to appoint a successor Agent with the consent of the Borrower. If no such
successor Agent shall have been so appointed, and shall have accepted such
appointment, within 30 days after the retiring Agent gives notice of
resignation, then the retiring Agent may, on behalf of the Banks, appoint a
successor Agent, which shall be a commercial bank organized or licensed under
the laws of the United States of America or of any State thereof and having a
combined capital and
55
<PAGE>
surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations hereunder.
After any retiring Agent's resignation hereunder as Agent, the provisions of
this Article shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent.
SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent
-----------
for its own account fees in the amounts and at the times previously agreed upon
between the Borrower and the Agent.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or
-------------------------------------------------
Unfair. If on or prior to the first day of any Interest Period for any Fixed
- ------
Rate Borrowing:
(a) the Agent is advised by the Reference Banks that deposits
in dollars (in the applicable amounts) are not being offered to the
Reference Banks in the relevant market for such Interest Period, or
(b) in the case of a Committed Borrowing, Banks having 50% or
more of the aggregate amount of the Commitments advise the Agent
that the Adjusted CD Rate or the London Interbank Offered Rate, as
the case may be, as determined by the Agent will not adequately and
fairly reflect the cost to such Banks of funding their CD Loans or
Euro-Dollar Loans, as the case may be, for such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, the obligations of the Banks to make CD
Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the
Borrower notifies the Agent at least two Domestic Business Days before the date
of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been
given that it elects not to borrow on such date, (i) if such Fixed Rate
Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a
Base
56
<PAGE>
Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR
Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear
interest for each day from and including the first day to but excluding the last
day of the Interest Period applicable thereto at the Base Rate for such day.
SECTION 8.02. Illegality. If, on or after the date of this
----------
Agreement, the adoption of any applicable law, rule or regulation, or any change
in any applicable law, rule or regulation, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by any Bank (or its Euro-Dollar Lending Office) with any request or
directive (whether or not having the force of law) of any such authority,
central bank or comparable agency shall make it unlawful or impossible for any
Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-
Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith
give notice thereof to the other Banks and the Borrower, whereupon until such
Bank notifies the Borrower and the Agent that the circumstances giving rise to
such suspension no longer exist, the obligation of such Bank to make Euro-Dollar
Loans shall be suspended. Before giving any notice to the Agent pursuant to this
Section, such Bank shall designate a different Euro-Dollar Lending Office if
such designation will avoid the need for giving such notice and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank
shall determine that it may not lawfully continue to maintain and fund any of
its outstanding Euro-Dollar Loans to maturity and shall so specify in such
notice, the Borrower shall immediately prepay in full the then outstanding
principal amount of each such Euro-Dollar Loan, together with accrued interest
thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower
shall borrow a Base Rate Loan in an equal principal amount from such Bank (on
which interest and principal shall be payable contemporaneously with the related
Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate
Loan.
SECTION 8.03. Increased Cost and Reduced Return. (a) If on or
---------------------------------
after (x) the date hereof, in the case of any Committed Loan or any obligation
to make Committed Loans or (y) the date of the related Money Market Quote, in
the case of any Money Market Loan, the adoption of any applicable law, rule or
regulation, or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority,
57
<PAGE>
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency:
(i) shall subject any Bank (or its Applicable Lending
Office) to any tax, duty or other charge with respect to its Fixed
Rate Loans, its Note or its obligation to make Fixed Rate Loans, or
shall change the basis of taxation of payments to any Bank (or its
Applicable Lending Office) of the principal of or interest on its
Fixed Rate Loans or any other amounts due under this Agreement in
respect of its Fixed Rate Loans or its obligation to make Fixed Rate
Loans (except for changes in the rate of tax on the overall net
income of such Bank or its Applicable Lending Office imposed by the
jurisdiction in which such Bank's principal executive office or
Applicable Lending Office is located); or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any such requirement imposed by the
Board of Governors of the Federal Reserve System, but excluding (A)
with respect to any CD Loan any such requirement included in an
applicable Domestic Reserve Percentage and (B) with respect to any
Euro-Dollar Loan, any such requirement with respect to which such
Bank is entitled to compensation during the relevant Interest Period
under Section 2.16), special deposit, insurance assessment
(excluding, with respect to any CD Loan, any such requirement
reflected in an applicable Assessment Rate) or similar requirement
against assets of, deposits with or for the account of, or credit
extended by, any Bank (or its Applicable Lending Office) or shall
impose on any Bank (or its Applicable Lending Office) or on the
United States market for certificates of deposit or the London
interbank market any other condition affecting its Fixed Rate Loans,
its Note or its obligation to make Fixed Rate Loans;
and the result of any of the foregoing is to increase the cost to such Bank (or
its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or
to reduce the amount of any sum received or receivable by such Bank (or its
Applicable Lending Office) under this Agreement or under its Note with respect
thereto, by an amount deemed by such Bank to be material, then, within 15 days
after demand by such Bank (with a copy to the Agent), the Borrower shall pay to
such Bank such additional amount or amounts as will
58
<PAGE>
compensate such Bank for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date
hereof, the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency has or would have the effect of reducing the rate of return on
capital of such Bank (or its Parent) as a consequence of such Bank's obligations
hereunder to a level below that which such Bank (or its Parent) could have
achieved but for such adoption, change, request or directive (taking into
consideration its policies with respect to capital adequacy) by an amount deemed
by such Bank to be material, then from time to time, within 15 days after demand
by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank
such additional amount or amounts as will compensate such Bank (or its Parent)
for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent
of any event of which it has knowledge, occurring after the date hereof, which
will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate
of any Bank claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder (and, to the extent
deemed feasible by such Bank, setting forth the calculation thereof) shall be
conclusive in the absence of manifest error. In determining such amount, such
Bank may use any reasonable averaging and attribution methods.
SECTION 8.04. Base Rate Loans Substituted for Affected Fixed
----------------------------------------------
Rate Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been
- ----------
suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation
under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar
Business Days' prior notice to such Bank through the Agent, have elected that
the provisions of this Section shall apply to such Bank, then, unless and until
such Bank notifies the Borrower that the circumstances giving rise to such
suspension or demand for compensation no longer exist:
59
<PAGE>
(a) all Loans which would otherwise be made by such Bank as
CD Loans or Euro-Dollar Loans, as the case may be, shall be made
instead as Base Rate Loans (on which interest and principal shall be
payable contemporaneously with the related Fixed Rate Loans of the
other Banks), and
(b) after each of its CD Loans or Euro-Dollar Loans, as the
case may be, has been repaid, all payments of principal which would
otherwise be applied to repay such Fixed Rate Loans shall be applied
to repay its Base Rate Loans instead.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and other
-------
communications to any party hereunder shall be in writing (including bank wire,
telecopier, facsimile transmission or similar writing) and shall be given to
such party: (x) in the case of the Borrower or the Agent, at its address or
telecopy number set forth on the signature pages hereof, (y) in the case of any
Bank, at its address or telecopy number set forth in its Administrative
Questionnaire or (z) in the case of any party, such other address or telecopy
number as such party may hereafter specify for the purpose by notice to the
Agent and the Borrower. Each such notice, request or other communication shall
be effective (i) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified in this Section and is received, (ii) if given by
mail, 72 hours after such communication is deposited in the mails with first
class postage prepaid, addressed as aforesaid or (iii) if given by any other
means, when delivered at the address specified in this Section; provided that
--------
notices to the Agent under Article II or Article VIII shall not be effective
until received.
SECTION 9.02. No Waivers. No failure or delay by the Agent or
----------
any Bank in exercising any right, power or privilege hereunder or under any Note
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
60
<PAGE>
SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a)
--------------------------------------------
The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Agent,
including fees and disbursements of Davis Polk & Wardwell, special counsel for
the Agent, in connection with the preparation and administration of this
Agreement, any waiver or consent hereunder or any amendment hereof or any
Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of-
pocket expenses incurred by the Agent and each Bank, including fees and
disbursements of counsel, in connection with such Event of Default and
collection, bankruptcy, insolvency and other enforcement proceedings resulting
therefrom. The Borrower shall indemnify each Bank against any transfer taxes,
documentary taxes, assessments or charges made by any governmental authority by
reason of the execution and delivery of this Agreement or the Notes.
(b) The Borrower agrees to indemnify the Agent and each Bank,
their respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel, which may be incurred by such Indemnitee in connection
with any investigative, administrative or judicial proceeding (whether or not
such Indemnitee shall be designated a party thereto) brought or threatened
relating to or arising out of this Agreement or any actual or proposed use of
proceeds of Loans hereunder; provided that no Indemnitee shall have the right to
--------
be indemnified hereunder for such Indemnitee's own gross negligence or willful
misconduct as determined by a court of competent jurisdiction.
SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it
-------------------
shall, by exercising any right of set-off or counterclaim or otherwise, receive
payment of a proportion of the aggregate amount of principal and interest due
with respect to any Note held by it which is greater than the proportion
received by any other Bank in respect of the aggregate amount of principal and
interest due with respect to any Note held by such other Bank, the Bank
receiving such proportionately greater payment shall purchase such
participations in the Notes held by the other Banks, and such other adjustments
shall be made, as may be required so that all such payments of principal and
interest with respect to the Notes held by the Banks shall be shared by the
Banks pro rata; provided that nothing in this Section shall impair the right of
--------
any Bank to exercise any right of
61
<PAGE>
set-off or counterclaim it may have and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness under the Notes. The Borrower agrees, to the fullest extent it may
effectively do so under applicable law, that any holder of a participation in a
Note, whether or not acquired pursuant to the foregoing arrangements, may
exercise rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Borrower in the amount of such participation.
SECTION 9.05. Amendments and Waivers. Any provision of this
----------------------
Agreement or the Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Borrower and the Required Banks
(and, if the rights or duties of the Agent are affected thereby, by the Agent);
provided that no such amendment or waiver shall, unless signed by all the Banks
- --------
(and the Borrower and, if and to the extent provided above, the Agent), (i)
increase or decrease the Commitment of any Bank (except for a ratable decrease
in the Commitments of all Banks) or subject any Bank to any additional
obligation, (ii) reduce the principal of or rate of interest on any Loan or any
fees hereunder, except as provided below, (iii) postpone the date fixed for any
payment of principal of or interest on any Loan or any fees hereunder or for any
reduction or termination of any Commitment or (iv) change the percentage of the
Commitments or of the aggregate unpaid principal amount of the Notes, or the
number of Banks, which shall be required for the Banks or any of them to take
any action under this Section or any other provision of this Agreement.
SECTION 9.06. Successors and Assigns. (a) The provisions of
----------------------
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, except that the
Borrower may not assign or otherwise transfer any of its rights under this
Agreement without the prior written consent of all Banks, and no Bank may grant
participating interests in its Commitment or any of its Loans or assign all or
any of its rights and obligations under this Agreement and the Notes in
violation of subsections (b) and (c) below, taking into account the
applicability of the last sentence of such subsection (b).
(b) Any Bank may at any time grant to one or more banks or
other institutions (each a "Participant") participating interests in its
Commitment or any or all of its Loans. In the event of any such grant by
a Bank of a
62
<PAGE>
participating interest to a Participant, whether or not upon notice to
the Borrower and the Agent, such Bank shall remain responsible for the
performance of its obligations hereunder, and the Borrower and the Agent
shall continue to deal solely and directly with such Bank in connection
with such Bank's rights and obligations under this Agreement. Any
agreement pursuant to which any Bank may grant such a participating
interest shall provide that such Bank shall retain the sole right and
responsibility to enforce the obligations of the Borrower hereunder
including, without limitation, the right to approve any amendment,
modification or waiver of any provision of this Agreement; provided that
--------
such participation agreement may provide that such Bank will not agree to
any modification, amendment or waiver of this Agreement described in
clause (i), (ii) or (iii) of Section 9.05 without the consent of the
Participant. The Borrower agrees that each Participant shall, to the
extent provided in its participation agreement and subject to subsection
(e) below, be entitled to the benefits of Article VIII and Section 2.16
with respect to its participating interest. An assignment or other
transfer which is not permitted by subsection (c) or (d) below shall be
given effect for purposes of this Agreement only to the extent of a
participating interest granted in accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or
other institutions (each an "Assignee") all, or a proportionate part of
all, of its rights and obligations under this Agreement and the Notes,
and such Assignee shall assume such rights and obligations, pursuant to
an Assignment and Assumption Agreement in substantially the form of
Exhibit G hereto executed by such Assignee and such transferor Bank, with
(and subject to) the subscribed consent of the Borrower and the Agent;
provided that if an Assignee is an affiliate of such transferor Bank, no
--------
such consent shall be required; provided further that such assignment
-------- -------
may, but need not, include rights of the transferor Bank in respect of
outstanding Money Market Loans; and provided further that such assignment
-------- -------
shall be in a principal amount not less than $10,000,000. Upon execution
and delivery of such instrument and payment by such Assignee to such
transferor Bank of an amount equal to the purchase price agreed between
such transferor Bank and such Assignee, such Assignee shall be a Bank
party to this Agreement and shall have all the rights and obligations of
a Bank with a Commitment as set forth in such instrument of assumption,
and the transferor Bank shall be released from its obligations hereunder
to a corresponding extent, and no further consent or action by any party
shall be required. Upon the consummation of any assignment pursuant to
this
63
<PAGE>
subsection (c), the transferor Bank, the Agent and the Borrower shall
make appropriate arrangements so that, if required, a new Note is issued
to the Assignee. In connection with any such assignment, the transferor
Bank shall pay to the Agent an administrative fee for processing such
assignment in the amount of $2,000. If the Assignee is not incorporated
under the laws of the United States of America or a state thereof, it
shall, prior to the first date on which interest or fees are payable
hereunder for its account, deliver to the Borrower and the Agent
certification as to exemption from deduction or withholding of any United
States federal income taxes in accordance with Section 2.15.
(d) Any Bank may at any time assign all or any portion of its
rights under this Agreement and its Note to a Federal Reserve Bank. No
such assignment shall release the transferor Bank from its obligations
hereunder.
(e) No Assignee, Participant or other transferee of any Bank's
rights shall be entitled to receive any greater payment under Section
8.03 than such Bank would have been entitled to receive with respect to
the rights transferred, unless such transfer is made with the Borrower's
prior written consent or by reason of the provisions of Section 8.02 or
8.03 requiring such Bank to designate a different Applicable Lending
Office under certain circumstances or at a time when the circumstances
giving rise to such greater payment did not exist.
SECTION 9.07. Collateral. Each of the Banks represents to the
----------
Agent and each of the other Banks that it in good faith is not relying upon any
"margin stock" (as defined in Regulation U) as collateral in the extension or
maintenance of the credit provided for in this Agreement.
SECTION 9.08. Governing Law; Submission to Jurisdiction. This
-----------------------------------------
Agreement and each Note shall be governed by and construed in accordance with
the laws of the State of New York. The Borrower hereby submits to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement or the transactions contemplated hereby. The Borrower irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum.
SECTION 9.09. Counterparts; Integration. This
-------------------------
64
<PAGE>
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
SECTION 9.10. Confidentiality. The Agent and each Bank agree
---------------
that they will maintain the confidentiality of any material information provided
under, or in connection with, this Agreement by or on behalf of the Borrower
that has been identified by the Borrower as confidential or that the Agent or
such Bank knows, or has reason to know, is confidential (hereinafter
collectively called "Confidential Information"), subject to the Agent's and each
Bank's (a) obligation to disclose any such Confidential Information pursuant to
a request or order under applicable laws and regulations or pursuant to a
subpoena or other legal process, (b) right to disclose any such Confidential
Information to its bank examiners, auditors, counsel and other professional
advisors and to other Banks, (c) right to disclose any such Confidential
Information in connection with any litigation or dispute involving one or more
of the Banks or the Agent and the Borrower, provided that the Banks so involved
--------
or the Agent, as the case may be, shall provide the Borrower with reasonable
notice of the disclosure of such Confidential Information solely to enable the
Borrower to attempt to obtain a court order limiting the disclosure thereof
outside of the scope of such litigation or dispute but only if such notice is
not prejudicial to such Banks or the Agent and (d) right to provide such
information to participants, prospective participants or prospective assignees
pursuant to Section 9.06 if such participant, prospective participant or
prospective assignee agrees in writing to maintain the confidentiality of such
information on terms substantially similar to those of this Section 9.10 as if
it were a "Bank" party hereto. Notwithstanding the foregoing, any such
information supplied to a Bank, participant, prospective participant or
prospective assignee under this Agreement shall cease to be Confidential
Information if it is or becomes known to such Person by other than unauthorized
disclosure, or if it becomes a matter of public knowledge.
65
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
UNUM CORPORATION
By /s/ Timothy W. Ludden
----------------------------
Title:Vice President & Treasurer
2211 Congress Street
Portland, Maine 04122
Telecopy number: 207-770-4387
66
<PAGE>
Commitments
-----------
$48,000,000 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By /s/ Jerry J. Fall
----------------------------
Title: Vice President
$46,000,000 ABN AMRO BANK N.V.,
NEW YORK BRANCH
By /s/ David B. Martens
----------------------------
Title: Vice President
By /s/ David W. Eastep
----------------------------
Title: Asst. Vice President
$46,000,000 THE BANK OF NEW YORK
By /s/ Lizanne T. Eberle
----------------------------
Title: Vice President
$46,000,000 BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By /s/ Margaret Sunier
-------------------------------
Title: Vice President & Manager
$46,000,000 FLEET BANK OF MAINE
By /s/ Tracy L. Hawkins
----------------------------
Title: Vice President
67
<PAGE>
Commitments
-----------
$46,000,000 MELLON BANK, N.A.
By /s/ Susan M. Whitewood
----------------------------
Title: Asst. Vice President
$46,000,000 WACHOVIA BANK OF GEORGIA, N.A.
By /s/ Terence A. Snellings
----------------------------
Title: Senior Vice President
$23,000,000 THE FIRST NATIONAL BANK OF BOSTON
By /s/ Stewart P. Neff
----------------------------
Title: Managing Director
$23,000,000 THE CHASE MANHATTAN BANK
By /s/ Peter W. Platten
----------------------------
Title: Vice President
$23,000,000 CIBC INC.
By /s/ David B. Walsh
----------------------------
Title: Managing Director
$23,000,000 THE DAI-ICHI KANGYO BANK, LTD.,
NEW YORK BRANCH
By /s/ Kim P. Leary
----------------------------
Title: Vice President
68
<PAGE>
Commitments
-----------
$23,000,000 THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Frances A. Melville
----------------------------
Title: Corp. Banking Officer
$23,000,000 THE INDUSTRIAL BANK OF JAPAN,
By /s/ Takuya Honjo
----------------------------
Title: Senior Vice President
$23,000,000 THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By /s/ Yoshinori Kawamura
----------------------------
Title: Joint General Manager
$15,000,000 CREDIT LYONNAIS NEW YORK BRANCH
By /s/ Sebastian Rocco
----------------------------
Title: First Vice President
_________________
Total Commitments
$500,000,000
=================
69
<PAGE>
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By /s/ Jerry J. Fall
---------------------------
Title: Vice President
60 Wall Street
New York, New York 10260-0060
Attention: Jerry J. Fall
Telecopy number: 212-648-9956
70
<PAGE>
EXHIBIT A
NOTE
New York, New York
, 19
For value received, UNUM Corporation, a Delaware corporation
(the "Borrower"), promises to pay to the order of
(the "Bank"), for the account of its Applicable Lending Office, the unpaid
principal amount of each Loan made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below on the last day of the Interest Period
relating to such Loan. The Borrower promises to pay interest on the unpaid
principal amount of each such Loan on the dates and at the rate or rates
provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or other
immediately available funds at the office of Morgan Guaranty Trust Company of
New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types and maturities
thereof and all repayments of the principal thereof shall be recorded by the
Bank and, prior to any transfer hereof, appropriate notations to evidence the
foregoing information with respect to each such Loan then outstanding shall be
endorsed by the Bank on the schedule attached hereto, or on a continuation of
such schedule attached to and made a part hereof; provided that the failure of
--------
the Bank to make any such recordation or endorsement shall not affect the
obligations of the Borrower hereunder or under the Credit Agreement.
This note is one of the Notes referred to in the Credit
Agreement dated as of October 29, 1996 among the Borrower, the banks listed on
the signature pages thereof and Morgan Guaranty Trust Company of New York, as
Agent (as the same may be amended from time to time, the "Credit
<PAGE>
Agreement"). Terms defined in the Credit Agreement are used herein with the same
meanings. Reference is made to the Credit Agreement for provisions for the
prepayment hereof and the acceleration of the maturity hereof.
UNUM CORPORATION
By________________________
Title:
2
<PAGE>
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
__________________________________________________________________
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
3
<PAGE>
EXHIBIT B
Form of Money Market Quote Request
----------------------------------
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: UNUM Corporation
Re: Credit Agreement (the "Credit Agreement") dated as of October 29,
1996 among the Borrower, the Banks listed on the signature
pages thereof and the Agent
We hereby give notice pursuant to Section 2.03 of the Credit
Agreement that we request Money Market Quotes for the following proposed
Money Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount* Interest Period**
- ---------------- ---------------
$
Such Money Market Quotes should offer a Money Market [Margin]
[Absolute Rate]. [The applicable base rate is the London Interbank Offered
Rate.]
- --------------
* Amount must be $10,000,000 or a larger multiple of $1,000,000.
** Not less than one month (LIBOR Auction) or not less than 7 days (Absolute
Rate Auction), subject to the provisions of the definition of Interest
Period.
<PAGE>
Terms used herein have the meanings assigned to them in the Credit
Agreement.
UNUM CORPORATION
By________________________
Title:
2
<PAGE>
EXHIBIT C
Form of Invitation for Money Market Quotes
------------------------------------------
To: [Name of Bank]
Re: Invitation for Money Market Quotes to UNUM
Corporation (the "Borrower")
Pursuant to Section 2.03 of the Credit Agreement dated as of October 29,
1996 among the Borrower, the Banks parties thereto and the undersigned, as
Agent, we are pleased on behalf of the Borrower to invite you to submit Money
Market Quotes to the Borrower for the following proposed Money Market
Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
- ---------------- ---------------
$
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Please respond to this invitation by no later than [2:00 P.M.] [9:15
A.M.] (New York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By______________________
Authorized Officer
<PAGE>
EXHIBIT D
Form of Money Market Quote
--------------------------
To: Morgan Guaranty Trust Company of New York,
as Agent
Re: Money Market Quote to UNUM Corporation (the "Borrower")
In response to your invitation on behalf of the Borrower dated
_____________, 19__, we hereby make the following Money Market Quote on
the following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank:
_____________________________
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the following
principal amounts, for the following Interest Periods and at the
following rates:
Principal Interest Money Market
Amount/**/ Period/***/ [Margin/****/] [Absolute Rate/*****/]
----------- ----------- -------------------------------------
$
$
[Provided, that the aggregate principal amount of Money Market Loans
for which the above offers may be accepted shall not exceed
$____________.]/**/
____________________
/*/As specified in the related Invitation.
/**/Principal amount bid for each Interest Period may not exceed
principal amount requested. Specify aggregate limitation if the sum of
the individual offers exceeds the amount the Bank is willing to lend.
Bids must be made for $5,000,000 or a larger multiple of $1,000,000.
(notes continued on following page)
<PAGE>
We understand and agree that the offer(s) set forth above,
subject to the satisfaction of the applicable conditions set forth in the
Credit Agreement dated as of October 29, 1996 among the Borrower, the
Banks listed on the signature pages thereof and yourselves, as Agent,
irrevocably obligates us to make the Money Market Loan(s) for which any
offer(s) are accepted, in whole or in part.
Very truly yours,
[NAME OF BANK]
Dated:_______________ By:__________________________
Authorized Officer
____________________
/***/Not less than one month or not less than 7 days, as specified in the
related Invitation. No more than five bids are permitted for each
Interest Period.
/****/Margin over or under the London Interbank Offered Rate determined
for the applicable Interest Period. Specify percentage (to the nearest
1/10,000 of 1%) and specify whether "PLUS" or "MINUS".
/*****/Specify rate of interest per annum (to the nearest 1/10,000th of
1%).
2
<PAGE>
EXHIBIT E
OPINION OF
COUNSEL FOR THE BORROWER
------------------------
[Effective Date]
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
I am General Counsel of UNUM Corporation. This opinion is
being rendered to you pursuant to Section 3.01(c) of the Credit Agreement
(the "Credit Agreement") dated as of October 29, 1996 among the Borrower,
the banks listed on the signature pages thereof and Morgan Guaranty Trust
Company of New York, as Agent. Terms defined in the Credit Agreement are
used herein as therein defined.
I have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments and have conducted
such other investigations of fact and law as I have deemed necessary or
advisable for purposes of this opinion.
Upon the basis of the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware, and has all
corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now
conducted.
2. The execution, delivery and performance by the Borrower of
the Credit Agreement and the Notes are within the Borrower's corporate
powers, have been duly authorized by all necessary corporate action,
require no action by or in respect of, or filing with, any governmental
body, agency or official and do not contravene, or constitute a default
<PAGE>
under, any provision of applicable law or regulation or of the
certificate of incorporation or by-laws of the Borrower or any Restricted
Subsidiary or of any agreement, judgment, injunction, order, decree or
other instrument binding upon the Borrower or any Restricted Subsidiary
or result in the creation or imposition of any Lien on any asset of the
Borrower or any Restricted Subsidiary.
3. The Credit Agreement constitutes a valid and binding
agreement of the Borrower, and the Notes constitute valid and binding
obligations of the Borrower, in each case enforceable in accordance with
their respective terms except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (ii) rights of acceleration and the availability of
equitable remedies may be limited by equitable principles of general
applicability.
4. There is no action, suit or proceeding pending against, or
to the best of my knowledge threatened against or affecting, the Borrower
or any of its Subsidiaries before any court or arbitrator or any
governmental body, agency or official, in which there is a reasonable
possibility of an adverse decision which could materially adversely
affect the business, consolidated financial position or consolidated
results of operations of the Borrower and the Restricted Subsidiaries,
taken as a whole, or which in any manner draws into question the validity
or enforceability of the Credit Agreement or the Notes.
5. Each of the Restricted Subsidiaries is a corporation
validly existing and in good standing under the laws of its jurisdiction
of incorporation, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted.
6. Neither the Borrower nor any Restricted Subsidiary is an
"investment company" within the meaning of the Investment Company Act of
1940, as amended.
Although I am not admitted to the Bar of the State of New York,
I am competent to give this opinion.
Very truly yours,
2
<PAGE>
EXHIBIT F
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE AGENT
--------------------------------------
[Effective Date]
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the Credit Agreement
(the "Credit Agreement") dated as of October 29, 1996 among UNUM
Corporation, a Delaware corporation (the "Borrower"), the banks listed on
the signature pages thereof (the "Banks") and Morgan Guaranty Trust
Company of New York, as Agent (the "Agent"), and have acted as special
counsel for the Agent for the purpose of rendering this opinion pursuant
to Section 3.01(d) of the Credit Agreement. Terms defined in the Credit
Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments and have conducted
such other investigations of fact and law as we have deemed necessary or
advisable for purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The execution, delivery and performance by the Borrower of
the Credit Agreement and the Notes are within the Borrower's corporate
powers and have been duly authorized by all necessary corporate action.
2. The Credit Agreement constitutes a valid and binding
agreement of the Borrower, and the Notes constitute
<PAGE>
valid and binding obligations of the Borrower, in each case enforceable
in accordance with their respective terms except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
We are members of the Bar of the State of New York and the
foregoing opinion is limited to the laws of the State of New York, the
federal laws of the United States of America and the General Corporation
Law of the State of Delaware. In giving the foregoing opinion, we
express no opinion as to the effect (if any) of any law of any
jurisdiction (except the State of New York) in which any Bank is located
which limits the rate of interest that such Bank may charge or collect.
This opinion is rendered solely to you in connection with the
above matter. This opinion may not be relied upon by you for any other
purpose or relied upon by or furnished to any other person without our
prior written consent.
Very truly yours,
2
<PAGE>
EXHIBIT G
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of _________, 19__ among [ASSIGNOR] (the
"Assignor"), [ASSIGNEE] (the "Assignee"), UNUM CORPORATION (the
"Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"Agent").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, this Assignment and Assumption Agreement (the
"Agreement") relates to the Credit Agreement dated as of October 29, 1996
among the Borrower, the Assignor and the other Banks party thereto, as
Banks, and the Agent (the "Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor
has a Commitment to make Loans to the Borrower in an aggregate principal
amount at any time outstanding not to exceed $__________;
WHEREAS, Committed Loans made to the Borrower by the Assignor
under the Credit Agreement in the aggregate principal amount of
$__________ are outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of
the rights of the Assignor under the Credit Agreement in respect of a
portion of its Commitment thereunder in an amount equal to $__________
(the "Assigned Amount"), together with a corresponding portion of its
outstanding Committed Loans, and the Assignee proposes to accept
assignment of such rights and assume the corresponding obligations from
the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the
mutual agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise
-----------
defined herein shall have the respective meanings set forth in the Credit
Agreement.
SECTION 2. Assignment. The Assignor hereby
----------
<PAGE>
assigns and sells to the Assignee all of the rights of the Assignor under
the Credit Agreement to the extent of the Assigned Amount, and the
Assignee hereby accepts such assignment from the Assignor and assumes all
of the obligations of the Assignor under the Credit Agreement to the
extent of the Assigned Amount, including the purchase from the Assignor
of the corresponding portion of the principal amount of the Committed
Loans made by the Assignor outstanding at the date hereof. Upon the
execution and delivery hereof by the Assignor, the Assignee, the Borrower
and the Agent and the payment of the amounts specified in Section 3
required to be paid on the date hereof (i) the Assignee shall, as of the
date hereof, succeed to the rights and be obligated to perform the
obligations of a Bank under the Credit Agreement with a Commitment in an
amount equal to the Assigned Amount, and (ii) the Commitment of the
Assignor shall, as of the date hereof, be reduced by a like amount and
the Assignor released from its obligations under the Credit Agreement to
the extent such obligations have been assumed by the Assignee. The
assignment provided for herein shall be without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and
--------
sale contemplated in Section 2 hereof, the Assignee shall pay to the
Assignor on the date hereof in Federal funds the amount heretofore agreed
between them. It is understood that commitment and/or facility fees
accrued to the date hereof are for the account of the Assignor and such
fees accruing from and including the date hereof are for the account of
the Assignee. Each of the Assignor and the Assignee hereby agrees that
if it receives any amount under the Credit Agreement which is for the
account of the other party hereto, it shall receive the same for the
account of such other party to the extent of such other party's interest
therein and shall promptly pay the same to such other party.
[SECTION 4. Consent of the Borrower and the Agent. This
-------------------------------------
Agreement is conditioned upon the consent of the Borrower and the Agent
pursuant to Section 9.06(c) of the Credit Agreement. The execution of
this Agreement by the Borrower and the Agent is evidence of this consent.
Pursuant to Section 9.06(c) the Borrower agrees to execute
- ------------------
* Amount should combine principal together with accrued interest and
breakage compensation, if any, to be paid by the Assignee, net of any
portion of any upfront fee to be paid by the Assignor to the Assignee. It
may be preferable in an appropriate case to specify these amounts
generically or by formula rather than as a fixed sum.
2
<PAGE>
and deliver a Note payable to the order of the Assignee to evidence the
assignment and assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
------------------------
representation or warranty in connection with, and shall have no
responsibility with respect to, the solvency, financial condition, or
statements of the Borrower, or the validity and enforceability of the
obligations of the Borrower in respect of the Credit Agreement or any
Note. The Assignee acknowledges that it has, independently and without
reliance on the Assignor, and based on such documents and information as
it has deemed appropriate, made its own credit analysis and decision to
enter into this Agreement and will continue to be responsible for making
its own independent appraisal of the business, affairs and financial
condition of the Borrower.
SECTION 6. Governing Law. This Agreement shall be governed by
-------------
and construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any
------------
number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered by their duly authorized officers as of the
date first above written.
[ASSIGNOR]
By_________________________
Title:
[ASSIGNEE]
By__________________________
Title:
3
<PAGE>
UNUM CORPORATION
By__________________________
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By__________________________
Title:
4
<PAGE>
CONFORMED COPY
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT dated as of June 30, 1997 (the "Amendment") to the Credit
Agreement dated as of October 29, 1996 (the "Credit Agreement") among UNUM
CORPORATION (the "Borrower"), the BANKS listed therein (the "Banks") and MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
W I T N E S S E T H :
WHEREAS, the parties hereto desire to amend the Credit Agreement to allow
the Borrower to present quarterly financial information consolidated in
accordance with GAAP when certain conditions are satisfied;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
has the meaning assigned to such term in the Credit Agreement. Each reference
to "hereof", "hereunder", "herein" and "hereby" and each other similar
reference and each reference to "this Agreement" and each other similar
reference contained in the Credit Agreement shall, after this Amendment becomes
effective, refer to the Credit Agreement as amended hereby.
Section 2. Financial Information. (a) Section 5.01(a) of the Credit
Agreement is deleted in its entirety.
<PAGE>
(b) Section 5.01 of the Credit Agreement is further hereby amended by
adding a new sentence at the end of thereof to read as follows:
"The Borrower shall be deemed to have delivered the financial statements
referred to in subsection (c) and (d) above when it has (i) posted such
financials on the Internet website of the Securities and Exchange Commission
(http://www.sec.gov) or on the Internet website of the Borrower as it shall have
previously provided to the Banks, and (ii) notified the Banks of such posting;
provided if a Bank requests the financial statements to be delivered in hard
copies, the Borrower shall furnish to the Bank such statements accordingly."
Section 3. Representations of Borrower. The Borrower represents and
warrants that (i) the representations and warranties of the Borrower set forth
in Article 4 of the Credit Agreement are true and (ii) no Default has occurred
and is continuing.
Section 4. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
Section 5. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
Section 6. Effectiveness. This Amendment shall become effective as of
the date hereof when the Agent shall have received (on or prior to August 22,
1997) from each of the Borrower and the Required Banks a counterpart hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
UNUM CORPORATION
By:/s/ Timothy W. Ludden
----------------------------------
Name: Timothy W. Ludden
Title: Vice President and
Corporate Treasurer
2211 Congress Street
Portland, Maine 04122
Telecopy Number: 207-770-4387
3
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By:/s/ Jerry J. Fall
---------------------------------
Name: Jerry J. Fall
Title: Vice President
ABN AMRO BANK N.V., NEW YORK BRANCH
By:/s/ Bruce D. Ballentine
----------------------------------
Name: Bruce D. Ballentine
Title: Vice President
By:/s/ Victor J. Fennon
----------------------------------
Name: Victor J. Fennon
Title: Vice President
THE BANK OF NEW YORK
By:/s/ Lizanne T. Eberle
---------------------------------
Name: Lizanne T. Eberle
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
4
<PAGE>
By:/s/ J. Beckwith
---------------------------------
Name: J. Beckwith
Title: Vice President
FLEET BANK OF MAINE
By:/s/ Tracy L. Hawkins
--------------------------------
Name: Tracy L. Hawkins
Title: Vice President
MELLON BANK, N.A.
By:/s/ Joanna Patterson
--------------------------------
Name: Joanna Patterson
Title: Officer
WACHOVIA BANK OF GEORGIA, N.A.
By:/s/ Kathleen H. Reedy
--------------------------------
Name: Kathleen H. Reedy
Title: Vice President
BANKBOSTON, N.A.
By:/s/ Karen A. Gallagher
5
<PAGE>
---------------------------------
Name: Karen A. Gallagher
Title: Vice President
THE CHASE MANHATTAN BANK
By:
---------------------------------
Name:
Title:
CIBC INC.
By:/s/ Edward C. Neu
--------------------------------
Name: Edward C. Neu
Title: Authorized Signatory
THE DAI-ICHI KANGYO BANK, LTD., NEW YORK BRANCH
By:/s/ Masaaki Ishikura
-------------------------------
Name: Masaaki Ishikura
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By:/s/ S. W. Bridges
6
<PAGE>
------------------------------------
Name: S.W. Bridges
Title: First Vice President
THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK BRANCH
By:/s/ Masahiro Ito
-------------------------------------
Name: Masahiro Ito
Title: Senior Vice President
THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH
By:/s/ John C. Kissinger
-------------------------------------
Name: John C. Kissinger
Title: Joint General Manager
CREDIT LYONNAIS NEW YORK BRANCH
By:/s/ Sebastian Rocco
-----------------------------------
Name: Sebastian Rocco
Title: First Vice President
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
7
<PAGE>
as Agent
By:/s/ Ann E. Darby
----------------------------------
Name: Ann E. Darby
Title: Vice President
60 Wall Street
New York, New York 10260-0060
Attention: Ann E. Darby
Telecopy number: 212-648-5249
8
<PAGE>
CONFORMED COPY
AMENDMENT NO. 2 TO CREDIT AGREEMENT
AMENDMENT dated as of June 17, 1999 to the Credit Agreement dated as of
October 29, 1996 (as heretofore amended, the "Credit Agreement") among UNUM
CORPORATION (the "Borrower"), the BANKS party thereto (the "Banks") and MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
W I T N E S S E T H :
WHEREAS, the Borrower proposes to merge (the "Merger") with and into
Provident Companies, Inc., a Delaware corporation, which would substantially
simultaneously therewith change its name to UNUMProvident Corporation;
WHEREAS, the parties hereto desire to modify the Agreement to accommodate
the Merger;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
has the meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement shall, after this Amendment becomes effective,
refer to the Credit Agreement as amended hereby.
Section 2. Approval of Instrument of Assumption. The Agent and the Banks
approve the form and substance of Exhibit A hereto for purposes of Section
5.05(c)(II)(i) of the Credit Agreement.
Section 3. Amendment to Limitation on Liens. Section 5.06 of the Credit
Agreement is amended by adding a new subsection (g) at the end thereof as
follows:
"(g) Liens on (i) marketable direct obligations issued or unconditionally
guaranteed or insured by the United States of America or any agency or
<PAGE>
instrumentality thereof and backed by the full faith and credit of the United
States of America sold by the Borrower or any of its Subsidiaries under a
repurchase agreement with a bank or a primary dealer of United States government
securities (a "Repo Counterparty") maturing within 90 days from the date of
sale, provided that the terms of such agreement comply with the guidelines set
--------
forth in the Federal Financial Institutions Examination Council Supervisory
Policy -- Repurchase Agreements of Depositary Institutions With Securities
Dealers and Others, as adopted by the Comptroller of the Currency on October 31,
1985 (or any successor guidelines) and (ii) other marketable debt securities
under a repurchase agreement and/or securities lending agreement with a bank or
a primary dealer of such securities (the "Counterparty") maturing within 90 days
from the date of sale if the terms of such agreement comply with such
guidelines; provided that, in the case of any mortgage-backed security subject
--------
to such an arrangement, the Counterparty thereof may, in lieu of returning such
security, return another mortgaged-backed security of the same value, yield and
rating, and otherwise having comparable economic terms; provided further that
--------
the Borrower and its Subsidiaries will continue their policies in effect on the
date hereof requiring collateral from their Repo Counterparties and
Counterparties."
Section 4. Amendment to Events of Default. Section 6.01(k) of the Credit
Agreement is amended by the addition of the phrase "commencing on or after the
effective date of the merger between UNUM Corporation and Provident Companies,
Inc." immediately following the phrase "during any period of twelve consecutive
calendar months".
Section 5. Updated Representations. (a) Each reference to "1995" in the
definition of "Borrower's 1995 Form 10-K" and in Sections 4.04(a), 4.04(c) and
4.04(e) of the Credit Agreement is replaced with "1998".
(b) Each reference to "June 30, 1996" in Sections 4.04(b), 4.04(d), 4.04(f)
and 4.04(g) of the Credit Agreement is replaced with "March 31, 1999".
(c) Each reference to "six" in Sections 4.04(b), 4.04(d) and 4.04(f) of the
Credit Agreement is replaced with "three".
Section 6. Representations of Borrower. The Borrower represents and
warrants that (i) the representations and warranties of the Borrower set forth
in Article 4 of the Credit Agreement will be true on and as of the Amendment
Effective Date and (ii) no Default will have occurred and be continuing on such
date.
Section 7. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
2
<PAGE>
Section 8. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
Section 9. Effectiveness. This Amendment shall become effective as of the
effective date of the Merger (the "Amendment Effective Date") subject to receipt
by the Agent of (i) duly executed counterparts hereof signed by the Borrower and
the Required Banks (or, in the case of any party as to which an executed
counterpart shall not have been received, the Agent shall have received
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such party); (ii) a duly executed Assumption Agreement
substantially in the form of Exhibit A hereto; (iii) an opinion of counsel for
the Borrower satisfactory to the Agent as to compliance with Section 5.05 of the
Credit Agreement and as to such other matters relating to the transactions
contemplated by this Amendment as the Agent may reasonably request, such opinion
to be in form and substance satisfactory to the Agent; and (iv) all documents
the Agent may reasonably request relating to the existence of the Borrower, the
corporate authority for and the validity of this Amendment and the Merger.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
UNUM CORPORATION
By: /s/ Timothy W. Ludden
--------------------------
Title: Vice President and Treasurer
<PAGE>
REVOLVING COMMITMENT VEHICLE
CORPORATION
By: Morgan Guaranty Trust Company of
New York, as Attorney-in-fact for
Revolving Commitment Vehicle
Corporation
By: /s/ David Weintrob
--------------------------
Title: Vice President
<PAGE>
ABN AMRO BANK N.V.,
NEW YORK BRANCH
By: /s/ Parker H. Douglas
--------------------------
Title: Group Vice President
By: /s/ Robert L. Chevlin
--------------------------
Title: Vice President
<PAGE>
THE BANK OF NEW YORK
By: /s/ Robert V. Masi
--------------------------
Title: Vice President
<PAGE>
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By: /s/ John E. Beckwith
--------------------------
Title: Vice President and Manager
<PAGE>
FLEET BANK OF MAINE
By: /s/ Tracy L. Hawkins
--------------------------
Title: Vice President
<PAGE>
MELLON BANK, N.A.
By: /s/ Susan M. Whitewood
--------------------------
Title: Vice President
<PAGE>
WACHOVIA BANK OF GEORGIA, N.A.
By: /s/ Kathleen H. Reedy
--------------------------
Title: Senior Vice President
<PAGE>
BANKBOSTON, N.A.
By: /s/ Stewart P. Neff
--------------------------
Title: Managing Director
<PAGE>
THE CHASE MANHATTAN BANK
By: /s/ Lawrence M. Karp
--------------------------
Title: Vice President
<PAGE>
CIBC INC.
By:
--------------------------
Title:
-----------------------
<PAGE>
THE DAI-ICHI KANGYO BANK, LTD.,
NEW YORK BRANCH
By: /s/ Masaaki Ishikura
--------------------------
Title: Vice President
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Samuel W. Bridges
--------------------------
Title: First Vice President
<PAGE>
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By: /s/ Takuya Honjo
--------------------------
Title: Senior Vice President
<PAGE>
THE SUMITOMO BANK, LIMITED, NEW
YORK BRANCH
By: /s/ C. Michael Garrido
--------------------------
Title: Senior Vice President
<PAGE>
BANK OF MONTREAL,
CHICAGO BRANCH
By: /s/ Brian L. Banke
--------------------------
Title: Director
<PAGE>
FIRST UNION NATIONAL BANK
By: /s/ Thomas L. Stitchberry
--------------------------
Title: Senior Vice President
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Agent
By: /s/ Maria H. Dell'Aquila
--------------------------
Title: Vice President
<PAGE>
EXHIBIT A
ASSUMPTION AGREEMENT
UNUMProvident Corporation, a Delaware corporation ("UNUMProvident"), the
surviving corporation of the merger on the date hereof of UNUM Corporation, a
Delaware corporation ("UNUM"), with and into UNUMProvident, hereby expressly
assumes, and agrees to perform and discharge, all of the terms, covenants and
agreements of the Borrower under the Credit Agreement (as amended, the "Credit
Agreement") dated as of October 29, 1996 among UNUM, the Banks party thereto and
Morgan Guaranty Trust Company of New York, as Agent (as such Credit Agreement
may from time to time be in effect) and the Notes, including, without
limitation, the due and punctual payment of the principal of and interest on the
Loans and of all other amounts payable by the Borrower under the Credit
Agreement. All references in the Credit Agreement to the "Borrower" shall
hereafter refer to UNUMProvident and its successors. All capitalized terms not
otherwise defined herein shall have the respective meanings set forth in the
Credit Agreement.
IN WITNESS WHEREOF, UNUMProvident has caused its duly authorized officer to
execute and deliver this Assumption Agreement as of ______________, 1999,
simultaneously with the effectiveness of the merger referred to above.
UNUMProvident Corporation,
formerly Provident Companies,
Inc.
<PAGE>
By
--------------------------
Title:
-----------------------
<PAGE>
[CONFORMED COPY]
AMENDMENT NO. 3 TO CREDIT AGREEMENT
AMENDMENT dated as of March 1, 2000 to the Credit Agreement dated as of
October 29, 1996 (as heretofore amended, the "Credit Agreement") among
UNUMPROVIDENT CORPORATION (successor to UNUM Corporation) (the "Borrower"), the
BANKS party thereto (the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent (the "Agent").
The parties hereto agree as follows:
Section a. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
has the meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement shall, after this Amendment becomes effective,
refer to the Credit Agreement as amended hereby.
Section b. Amendment. The phrase "within 100 days" in Section 5.01(b) of
the Credit Agreement is amended to read "within (x) 130 days, in the case of the
fiscal year ended December 31, 1999, and (y) 100 days, in the case of any
subsequent fiscal year,".
Section c. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
Section d. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
Section e. Effectiveness. This Amendment shall become effective as of
the date hereof upon receipt by the Agent of duly executed counterparts hereof
signed by the Borrower and the Required Banks (or, in the case of any party as
to which an executed counterpart shall not have been received, the Agent shall
have received telegraphic, telex or other written confirmation from such party
of execution of a counterpart hereof by such party).
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
UNUMPROVIDENT CORPORATION
By: /s/ John M. Lang Sr.
---------------------------
Title: Senior Vice President &
Treasurer
REVOLVING COMMITMENT VEHICLE
CORPORATION
By: Morgan Guaranty Trust Company of
New York, as Attorney-in-fact for
Revolving Commitment Vehicle
Corporation
By: /s/ David P. Weintrob
--------------------------
Title: Vice President
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent
By: /s/ Maria H. Dell'Aquila
--------------------------
Title: Vice President
2
<PAGE>
ABN AMRO BANK N.V., NEW YORK
BRANCH
By:
--------------------------
Title:
-----------------------
By:
--------------------------
Title:
-----------------------
THE BANK OF NEW YORK
By: /s/ Robert V. Masi
--------------------------
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By: /s/ Sally Morse
--------------------------
Title: Vice President
FLEET BANK OF MAINE
3
<PAGE>
By: /s/ Tracy L. Hawkins
--------------------------
Title: Vice President
MELLON BANK, N.A.
By: /s/ Karla K. Maloof
--------------------------
Title: Vice President
WACHOVIA BANK OF GEORGIA, N.A.
By: /s/ Jeffrey A. Simpson
--------------------------
Title: Senior Vice President
FLEET NATIONAL BANK
(f/k/a BANKBOSTON, N.A.)
By: /s/ Tracy L. Hawkins
--------------------------
Title: Loan Officer
THE CHASE MANHATTAN BANK
By: /s/ Heather A. Lindstrom
--------------------------
Title: Vice President
4
<PAGE>
CIBC INC.
By: /s/ Robert Mendeles
--------------------------
Title: Executive Director
THE DAI-ICHI KANGYO BANK, LTD.,
NEW YORK BRANCH
By: /s/ Anne Marie Heverin
--------------------------
Title: Credit Officer
BANK ONE, NA
By: /s/ Samuel W. Bridges
--------------------------
Title: First Vice President
5
<PAGE>
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By: /s/ Takuya Honjo
--------------------------
Title: Deputy General Manager
THE SUMITOMO BANK, LIMITED, NEW
YORK BRANCH
By:
--------------------------
Title:
-----------------------
BANK OF MONTREAL
By: /s/ Kanu Modi
--------------------------
Title: Director
FIRST UNION NATIONAL BANK
By: /s/ Thomas L. Stitchberry
--------------------------
Title: Senior Vice President
6
<PAGE>
Exhibit 21
State or Other
Subsidiaries of the Registrant Jurisdiction of Incorporation
- ------------------------------ -----------------------------
Unum Holding Company Delaware
Unum Life Insurance Company of America Maine
SP Administrator, LLC California
First Unum Life Insurance Company New York
Unum Sales Corporation Delaware
Claims Service International, Inc. Delaware
Unum Development Corporation Maine
Unum International Underwriters Inc. Delaware
Unum European Holding Company Limited United Kingdom
Unum General Company Limited United Kingdom
Unum Management Company Limited United Kingdom
Unum Limited United Kingdom
Claims Service International Limited United Kingdom
Open Door VAC Limited United Kingdom
Mindtask Limited United Kingdom
Duncanson & Holt, Inc. New York
Duncanson & Holt Underwriters Ltd. United Kingdom
Duncanson & Holt Syndicate Management Ltd. United Kingdom
LRG Services Limited United Kingdom
Trafalgar Underwriting Agencies Ltd. United Kingdom
Duncanson & Holt Europe Ltd. United Kingdom
Duncanson & Holt Agencies, Ltd. United Kingdom
Duncanson & Holt Services Inc. Maine
Duncanson & Holt Canada Ltd. Canada
TRI-CAN Reinsurance, Inc. Canada
Duncanson & Holt Asia PTE Ltd. Singapore
Colonial Companies, Inc. Delaware
Colonial Life & Accident Insurance Company South Carolina
Benefit America Inc. South Carolina
Unum Japan Accident Insurance Company Limited Japan
Unum International Ltd. Bermuda
Continental National Life Insurance Company Delaware
Continental International Life Insurance Company Delaware
Boston Compania Argentina de Seguros S.A. Argentina
Boston Sequros de Retiro S.A. Argentina
Boston Sequros de Vida S.A. Argentina
Fibos S.A. Argentina
Options and Choices, Inc. Wyoming
The Paul Revere Corporation Massachusetts
The Paul Revere Life Insurance Company Massachusetts
The Paul Revere Protective Life
Insurance Company Delaware
The Paul Revere Variable Annuity
Insurance Company Massachusetts
The Paul Revere Equity Sales Company Massachusetts
PR Land Corp. Delaware
PR Land Corp. II Delaware
GENEX Services, Inc. Pennsylvania
GENEX Services of Canada, Inc. Ontario
Primecor, Inc. Pennsylvania
Provident Life and Accident Insurance Company Tennessee
Provident National Assurance Company Tennessee
Provident Life and Casualty Insurance Company Tennessee
Provident Investment Management, LLC Delaware
Provident Investment Management, LLC Tennessee
Volunteer Assistance Company Tennessee
Provident International Ltd. Bermuda
Provident Insurance Agency, LLC Delaware
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-47551, Form S-8 No. 33-88108, Form S-8 No. 333-40219, Form S-8
No. 33-62231, Form S-8 No. 333-81669 and Form S-8 No. 333-81969) of Provident
Companies, Inc. pertaining to the Provident Life and Accident Insurance Company
MoneyMaker, A Long-Term 401(k) Retirement Savings Plan, the Provident Life and
Accident Insurance Company Stock Purchase Plan of 1994, the Provident Life and
Accident Insurance Company Employee Stock Purchase Plan of 1995, the Provident
Life and Accident Insurance Company Management Incentive Compensation Plan of
1994, The Paul Revere Savings Plan, Provident Companies, Inc. Stock Plan of
1999, Provident Companies, Inc, Non-Employee Director Compensation Plan of 1998,
Employee Stock Option Plan of 1998, Amended and Restated Annual Management
Incentive Compensation Plan of 1994, the UnumProvident Corporation 1987
Executive Stock Option Plan, UnumProvident Corporation 1990 Long-Term Stock
Incentive Plan, UnumProvident Corporation Plan 1996 Long-Term Stock Incentive
Plan and UnumProvident Corporation 1998 Goals Stock Option Plan, and in the
Registration Statement (Form S-3 No. 333-17849) of Provident Companies, Inc. for
the registration of 9,523,810 shares of its common stock of our report dated
February 9, 2000 with respect to the consolidated financial statements and
schedules of UnumProvident Corporation and subsidiaries, included in its Annual
Report on Form 10-K for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Chattanooga, Tennessee
March 28, 2000
<PAGE>
Exhibit 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference into the Registration
Statements on Form S-8 (File Nos. 33-47551, 33-88108, 333-40219, 33-62231,
333-81669 and 333-81969) and on Form S-3 (File No. 333-17849) of UnumProvident
Corporation of our report dated February 2, 1999 relating to the consolidated
financial statements of the former UNUM Corporation and subsidiaries for the
year ended December 31, 1998 and for each of the two years in the period ended
December 31, 1998 which are included in UnumProvident's Annual Report on
Form 10-K for the year ended December 31, 1999. Such financial statements of the
former UNUM Corporation are not separately included in this document.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Maine
March 28, 2000
<PAGE>
Exhibit 24
POWER OF ATTORNEY OF DIRECTORS OF
UNUMPROVIDENT CORPORATION
The undersigned directors of UnumProvident Corporation, a Delaware
Corporation, which proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, an Annual Report on
Form 10-K for the year ended December 31, 1999 each hereby constitutes and
appoints J. Harold Chandler, F. Dean Copeland, or Susan N. Roth, as his/her true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution to do any and all acts and things and execute, for him/her and in
his/her name, place and stead, said form and any and all amendments thereto and
to file the same, with all exhibits thereto, and any and all such other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he/she might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has each executed this Power of
Attorney as of March 29, 2000.
/s/William L. Armstrong /s/J. Harold Chandler
- ----------------------- ---------------------
William L. Armstrong J. Harold Chandler
/s/Ronald E. Goldsberry /s/Hugh O. Maclellan, Jr.
- ----------------------- -------------------------
Ronald E. Goldsberry Hugh O. Maclellan, Jr.
/s/A. S. MacMillan /s/George J. Mitchell
- ------------------ ---------------------
A.S. MacMillan George J. Mitchell
/s/Cynthia A. Montgomery /s/James L. Moody, Jr.
- ------------------------ -----------------------
Cynthia A. Montgomery James L. Moody, Jr.
/s/C. William Pollard /s/Lawrence R. Pugh
- --------------------- -------------------
C. William Pollard Lawrence R. Pugh
/s/Lois D. Rice
___________________ ---------------
Steven S Reinemund Lois D. Rice
/s/John W. Rowe /s/Burton E. Sorensen
- --------------- ---------------------
John W. Rowe Burton E. Sorensen
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of UnumProvident Corporation for the year ended
December 31, 1999.
</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> 22,033,200
<DEBT-CARRYING-VALUE> 323,500
<DEBT-MARKET-VALUE> 318,800
<EQUITIES> 38,400
<MORTGAGE> 1,278,100
<REAL-ESTATE> 211,200
<TOTAL-INVEST> 26,549,300
<CASH> 292,400
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,391,200
<TOTAL-ASSETS> 38,447,500
<POLICY-LOSSES> 23,339,100
<UNEARNED-PREMIUMS> 380,600
<POLICY-OTHER> 1,722,100
<POLICY-HOLDER-FUNDS> 3,521,800
<NOTES-PAYABLE> 2,241,500
0
0
<COMMON> 24,100
<OTHER-SE> 4,958,100
<TOTAL-LIABILITY-AND-EQUITY> 38,447,500
6,843,200
<INVESTMENT-INCOME> 2,059,700
<INVESTMENT-GAINS> 87,100
<OTHER-INCOME> 339,600
<BENEFITS> 6,787,600
<UNDERWRITING-AMORTIZATION> 474,800
<UNDERWRITING-OTHER> 2,232,700
<INCOME-PRETAX> (165,500)
<INCOME-TAX> 17,400
<INCOME-CONTINUING> (182,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (182,900)
<EPS-BASIC> (0.77)
<EPS-DILUTED> (0.77)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
