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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13654
LIBERTY FINANCIAL COMPANIES, INC.
(Exact name of registrant as specified in its charter)
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Massachusetts 04-3260640
(State of incorporation) (I.R.S. Employer Identification No.
600 Atlantic Avenue 02210-2214
Boston, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 722-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, Par Value $.01 per share New York Stock Exchange
Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 17, 1997 (based on the closing sale price of the
Common Stock on the New York Stock Exchange on such date) was approximately
$214.4 million.
There were 28,885,456 shares of the registrant's Common Stock, $.01 par
value, and 327,340 shares of the registrant's Series A Convertible Preferred
Stock, $0.01 par value, outstanding as of March 17, 1997.
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Documents Incorporated by Reference
Portions of the Company's 1996 Annual Report to Stockholders (Part I, Item
1(b), Part II, Items 6, 7 and 8, and Part IV - Item 14(a)1).
Portions of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on or about May 13, 1997 (Part III, Items 10, 11,
12, and 13).
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LIBERTY FINANCIAL COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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Part I Page
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Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant 16
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 19
Part III
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Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
</TABLE>
<PAGE>
PART I
Item 1. Business
Overview
Liberty Financial Companies, Inc. ("Liberty Financial" or the "Company")
is an asset accumulation and management company--that is, Liberty Financial
earns revenues by accumulating financial assets from investors and savers and
managing those assets. Liberty Financial accumulates assets by offering
multiple investment management and retirement-oriented insurance products
through multiple distribution channels.
The Company has two core product lines--retirement-oriented insurance
products (principally annuities) and investment management products (most
significantly mutual funds, as well as wealth management and institutional
asset management). The Company's insurance products primarily produce spread
income; the investment management products produce fee income. The Company
believes that these products have attractive growth prospects due to
important demographic and economic trends. These trends include the need for
the aging baby boom generation to increase savings and investment, lower
public confidence that government and employer-provided retirement benefits
will be adequate for future retirees, longer life expectancies, and rising
health care costs.
Liberty Financial's efforts to exploit these growth prospects are guided
by four interrelated strategies:
(bullet) Diversification. Within its two core product lines, the Company
sells a range of products that serve individuals at different
stages of their life and earnings cycle. This mix also is designed
to include products that will be in demand under a variety of
economic and market conditions. Similarly, the Company reaches
customers through a variety of distribution channels. The Company
believes that the diversification in its products and distribution
channels allows it to grow assets in different market cycles,
thereby reducing earnings volatility.
(bullet) Innovation. Liberty Financial believes that product and
distribution innovations are essential in order to grow its asset
base and meet the ever changing financial needs of its customers.
The Company has an impressive track record in such innovations.
(bullet) Integration. Liberty Financial is a holding company that conducts
business through several operating units that are wholly owned
subsidiaries. Liberty Financial promotes integration of its
operating units, with a view toward accumulating additional assets
or reducing expenses.
(bullet) Acquisition. Where appropriate, the Company seeks acquisitions that
provide additional assets, investment management capabilities,
distribution capabilities or other integration or diversification
opportunities in its core product areas.
The Company had total product sales of $8.6 billion in 1996 (including $1.0
billion of reinvested dividends and similar reinvested returns). Sixty-one
percent of these product sales were made through intermediary distributors
(including brokerage firms, banks, financial planners and insurance agents),
with the balance made directly to the investor.
At December 31, 1996, assets under management were $48.0 billion, consisting
of the following:
(bullet) $12.1 billion in annuities and other insurance products;
(bullet) $25.7 billion in mutual funds;
(bullet) $5.3 billion attributable to wealth management; and
(bullet) $4.9 billion attributable to institutional asset management.
Products producing spread income accounted for 65% of the Company's
operating earnings during 1996, while products producing fee income accounted
for the remaining 35%. Liberty Financial seeks to balance the spread and fee
components of its operating earnings. The Company has made progress in
achieving this goal since its acquisitions of The Colonial Group, Inc. and
Newport Pacific Management, Inc. in the first half of 1995.
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At March 17, 1997, approximately 80.6% of the combined voting power of
Liberty Financial's voting stock was indirectly owned by Liberty Mutual
Insurance Company ("Liberty Mutual").
Liberty Financial's principal executive offices are located at 600 Atlantic
Avenue, Boston, Massachusetts 02210-2214 and its telephone number is (617)
722-6000.
Industry Segment Information
Liberty Financial conducts business in two industry segments: annuity
insurance and asset management. For information on these industry segments,
see Note 11 to Liberty Financial's Consolidated Financial Statements in
Liberty Financial's 1996 Annual Report to Stockholders (the "1996 Annual
Report"), which information hereby is incorporated by reference into this
Report.
Retirement-Oriented Insurance Products
The Company sells a full range of retirement-oriented insurance products,
grouped by whether they provide fixed, indexed or variable returns to
policyholders. Substantially all of these products currently are annuities
that are written by Keyport Life Insurance Company ("Keyport"), an operating
unit of the Company. Annuities are insurance products designed to offer
individuals protection against the risk of outliving their income during
retirement. In addition to offering a tax-favored source of lifetime income,
annuities also are a tax-efficient means of accumulating savings for
retirement needs. The Company earns spread income from fixed and indexed
annuities; variable annuities primarily produce fee income for the Company.
Products
The Company's principal retirement-oriented insurance products are
categorized as follows:
(bullet) Fixed Annuities. The Company's principal fixed annuity products are
individual single premium deferred fixed annuities ("SPDAs"). An
SPDA policyholder typically makes a single premium payment at the
time of issuance. The Company obligates itself to credit interest
to the policyholder's account at a rate that is guaranteed for an
initial term (typically one year) and is reset annually thereafter,
subject to a guaranteed minimum rate. Interest crediting continues
until the policy is surrendered or the policyholder retires or
turns age 90. At December 31, 1996, the Company's fixed annuity
policyholder balances were $8.6 billion. The Company's SPDA sales
in 1996 were $492.6 million. The average premium payment for an
SPDA sold by the Company in 1996 was $32,353. In addition, in July,
1996 the Company completed a coinsurance agreement with Fidelity
and Guaranty Life Insurance Company under which the Company
acquired a $954 million block of SPDAs.
(bullet) Equity-Indexed Annuities. Equity-indexed annuities are an
innovative product first introduced to the marketplace in 1995 by
the Company when it began selling its KeyIndex(r) product. An
equity-indexed annuity credits interest to the policyholder at a
"participation rate" equal to a portion of the change in value of a
specified equity index. KeyIndex is currently offered for one, five
and seven-year terms with interest earnings based on a percentage
of the increase in the S&P 500 Index. With the five and seven-year
terms, the interest earnings are based on the highest policy
anniversary date value of the S&P 500 Index during the term.
KeyIndex also provides a guarantee of principal at the end of the
term. Thus, unlike a direct equity investment, even if the S&P 500
Index declines there is no risk to the policyholder's principal. In
1996, the Company introduced a market value adjusted ("MVA")
annuity product which offers a choice between an equity-indexed
account similar to KeyIndex and a fixed annuity-type interest
account. The MVA product offers terms for each account of one,
three, five, six and seven years, as well as a 10-year term for the
fixed interest account. The MVA shifts some investment risk to the
policyholder, since surrender of the policy before the end of the
policy term will result in increased or decreased account values
based on the change in rates of designated Treasury securities
since the beginning of the term. At December 31, 1996, the
Company's indexed annuity policyholder balances were $787.8
million. The Company's equity-indexed annuity sales in 1996 were
$655.2 million. The average premium payment for an indexed annuity
product sold by the Company in 1996 was $30,623. The Company is
continuing to develop new versions of the equity-indexed annuity.
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(bullet) Variable Annuities. Variable annuities offer a selection of
underlying investment alternatives which may satisfy a variety of
policyholder objectives. In a variable annuity, the policyholder
has the opportunity to select separate account investment options
(similar to mutual funds) which pass the investment risk directly
to the policyholder in return for the potential of higher returns.
Guaranteed fixed interest options also are available. The Company's
Keyport Advisor variable annuity currently offers 17 separate
account investment choices and four guaranteed fixed-interest
options. At December 31, 1996, the Company's variable annuity
policyholder balances were $1.1 billion (including $193.8 million
of fixed interest liabilities). The Company's variable annuity
sales in 1996 were $97.4 million. The average premium payment for a
variable annuity policy sold by the Company in 1996 was $47,154.
While the Company currently does not offer traditional life insurance
products, it manages a closed block of single premium whole life insurance
policies ("SPWLs"). SPWLs are a retirement-oriented tax- advantaged life
insurance product. The Company discontinued sales of SPWLs in response to
certain tax law changes. The Company had SPWL policyholder balances of $2.0
billion at December 31, 1996. In addition, at that date the Company had
variable life insurance policyholder balances of $170.9 million. SPWLs
produce spread income, and variable life policies produce fee income.
Under current law, returns credited on annuities and life insurance policies
during the accumulation period (the period during which interest is credited)
are not subject to federal or state income tax. Proceeds payable on death
from a life insurance policy are also free from such taxes. At the maturity
or payment date of an annuity policy, the policyholder is entitled to receive
the original deposit plus accumulated returns. The policyholder may elect to
take this amount in either a lump sum or an annuitized series of payments
over time. The return component of such payments is taxed at the time of
receipt as ordinary income.
The Company has two primary financial objectives for its retirement-oriented
insurance products: to increase policyholder balances through new sales and
asset retention and to earn required investment spreads on its fixed and
indexed return products.
The following table sets forth certain information regarding Keyport's
retirement-oriented insurance products and its reserves for the periods
indicated.
3
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As of or for the Year Ended
December 31,
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1996 1995 1994
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(dollars in millions, except
policy data)
<S> <C> <C> <C>
Fixed Annuities in Force:
Aggregate amount $ 8,630 $ 7,761 $ 7,061
Average policy amount $ 36,479 $ 34,611 $ 33,247
Number of policies 236,574 224,238 212,390
Aggregate amount subject to surrender charges $ 7,371 $ 6,904 $ 6,168
Indexed Annuities in Force:
Aggregate amount $ 788 $ 84 --
Average policy amount $ 32,591 $ 30,207 --
Number of policies 24,174 2,778 --
Aggregate amount subject to surrender charges $ 788 $ 84 --
Variable Annuities in Force:
Aggregate amount $ 1,083 $ 950 $ 812
Average policy amount $ 43,035 $ 37,941 $ 31,985
Number of policies 25,177 25,037 25,400
Life Insurance in Force:
Aggregate amount $ 2,127 $ 2,157 $ 2,217
Average policy amount $ 79,207 $ 75,728 $ 72,756
Number of policies 26,850 28,489 30,465
Premiums (statutory basis):
Fixed annuities $ 493 $ 977 $ 1,156
Indexed annuities $ 655 $ 84 --
Variable annuities $ 97 $ 80 $ 156
Life insurance (net of reinsurance) $ (0.4) $ (0.6) $ (0.5)
New Contracts and Policies:
Fixed annuities 11,358 30,043 45,557
Indexed annuities 21,396 2,778 --
Variable annuities 1,814 1,789 4,117
Withdrawals and Terminations (statutory basis):
Fixed annuities:
Death $ 25 $ 15 $ 16
Maturity $ 87 $ 76 $ 65
Surrender $ 966 $ 693 $ 826
Indexed annuities:
Death $ 0.1 -- --
Maturity -- -- --
Surrender $ 3 $ -- --
Variable Annuities:
Death $ 2 $ 0.4 $ 0.6
Maturity $ 21 $ 14 $ 16
Surrender $ 77 $ 92 $ 76
Life Insurance:
Death $ 53 $ 54 $ 49
Surrender $ 98 $ 95 $ 89
Policy and Separate Account Liabilities:
Fixed annuities $ 8,641 $ 7,772 $ 7,072
Indexed annuities $ 788 $ 84 --
Variable annuities $ 1,083 $ 950 $ 812
Life Insurance $ 2,142 $ 2,168 $ 2,224
</TABLE>
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As of or for the Year Ended
December 31,
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1996 1995 1994
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(dollars in millions, except
policy data)
<S> <C> <C> <C>
Surrender Rates:
Fixed annuities 11.79% 9.34% 12.34%
Indexed annuities 0.69% 0.12% --
Variable annuities 7.55% 10.46% 9.54%
Life Insurance 4.58% 4.36% 3.73%
</TABLE>
Sales and Asset Retention
New product sales are influenced primarily by overall market conditions
impacting the attractiveness of these products, and by product features,
including interest crediting and participation rates, and innovations and
services that distinguish the Company's products from those of its
competitors. Sales of SPDAs tend to be sensitive to prevailing interest
rates. Sales can be expected to increase in interest rate environments when
SPDA rates are higher than rates offered by competing conservative
fixed-return investments, such as bank certificates of deposit. SPDA sales
can be expected to decline in interest rate environments when this
differentiation in rates is not present.
The Company's insurance products include important features designed to
promote both sales and asset retention, including crediting rates and
surrender charges. Initial interest crediting and participation rates on
fixed and indexed products significantly influence the sale of new policies.
Resetting of rates on SPDAs impacts retention of SPDA assets, particularly on
policies where surrender penalties have expired. At December 31, 1996,
crediting rates on 92% of the Company's in force SPDA policy liabilities were
subject to reset during the succeeding 12 months. In setting crediting and
participation rates, the Company takes into account yield characteristics on
its investment portfolio, surrender rate assumptions and competitive industry
pricing. Interest crediting rates on the Company's in force SPDAs ranged from
4.0% to 8.0% at December 31, 1996. Such policies had guaranteed minimum rates
ranging from 3.0% to 4.5%. Initial interest crediting rates on new policies
issued in 1996 ranged from 4.65% to 7.15%. Guaranteed minimum rates on 1996
new policies ranged from 3.0% to 4.5%.
All of the Company's annuities permit the policyholder at anytime to
withdraw all or any part of the accumulated policy value. Premature
termination of an annuity policy results in the loss of anticipated future
earnings related to the annuity premium deposit and the accelerated
recognition of the expenses related to policy acquisition, principally
commissions (which otherwise are deferred and amortized over the life of the
policy). Surrender charges provide a measure of protection against premature
withdrawal of policy values. All of the Company's SPDAs currently are issued
with surrender charges. Such surrender charges typically start at 7% and then
decline to zero over a five- to seven-year period. At December 31, 1996,
85.4% of the Company's SPDAs remained in the surrender charge period.
Surrender charges generally do not apply to withdrawals by policyholders of
up to 10% per year of the then accumulated value. In addition, certain SPDAs
allow the policyholder to withdraw accumulated returns without a surrender
charge or may provide for charge-free withdrawals in certain circumstances.
SPDAs also are subject to "free look" risk (the legal right of the
policyholder to cancel the policy and receive back the initial premium
deposit, without interest, for a period ranging up to one year, depending
upon the state). While SPWLs also permit withdrawal, the withdrawal generally
would produce significant adverse tax consequences to the policyholder.
Keyport's strong financial ratings are important to its ability to
accumulate and retain assets. Keyport is rated "A+" (Superior) by A.M. Best,
"AA-" (excellent financial security) by Standard & Poor's, "A1" (good
financial strength) by Moody's and AA- (very high claims paying ability) by
Duff & Phelps. "A+" is A.M. Best's second highest rating. The S&P and Duff &
Phelps "-" modifier signifies that Keyport is at the lower end of the AA
category. These ratings are based upon information supplied to the rating
agency by Keyport. These ratings merely reflect the opinion of the rating
agency as to the relative financial strength of Keyport and Keyport's ability
to meet its contractual obligations to its policyholders; they are not
directed toward investors.
5
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Customer service also is essential to asset accumulation and retention. The
Company believes Keyport has a reputation for excellent service to its
distributors and its policyholders. Keyport has developed advanced technology
systems for immediate response to customer inquiries, and rapid processing of
policy issuances and commission payments (often at the point of sale). These
systems also play an important role in controlling costs. Keyport's
annualized operating expenses for 1996 were 0.44% of assets, making Keyport
one of the lowest cost operators in the annuity business.
General Account Investments
Premium deposits on fixed and indexed annuities are credited to Keyport's
general account investments (which at December 31, 1996 totaled $12.3
billion, including certain cash and cash equivalents). To achieve its
required investment spreads, the Company must earn returns on its general
account sufficiently in excess of the fixed or indexed returns credited to
policyholders. The key element of this investment process is asset/liability
management. Successful asset/liability management requires both a
quantitative assessment of overall policy liabilities (including maturities,
surrenders and crediting of interest) and prudent investment of general
account assets. The two most important tools in managing policy liabilities
are setting crediting rates and establishing surrender periods. The asset
side of the investment process requires portfolio techniques that earn
required yields while effectively managing both interest rate risk and credit
risk. The Company emphasizes a conservative approach to asset/liability
management, which is oriented toward reducing downside risk in adverse
markets, as opposed to maximizing spread in favorable markets. The approach
is also designed to reduce earnings volatility.
The bulk of the Company's general account is invested in fixed maturity
securities (87.1% at December 31, 1996). The Company's principal strategy for
managing interest rate risk is to closely match the duration of its
investment portfolio and its policyholder balances. At December 31, 1996, the
duration of its fixed income portfolio was 2.8 years. The Company also
employs hedging strategies to manage this risk, including interest rate swaps
and caps. In the case of equity-indexed products, the Company purchases S&P
500 call options to hedge its obligations to provide participation rate
returns. Credit risk is managed by careful credit analysis and monitoring. At
December 31, 1996, the Company's fixed maturity portfolio had an overall
average S&P rating of A+ and 92.0% of the Company's general account portfolio
consisted of investment grade securities. The balance was invested in below
investment grade securities to enhance overall portfolio yield. Below
investment grade securities pose greater risks than investment grade
securities. The Company actively manages its below investment grade portfolio
to optimize its risk/return profile. There were no non-income producing
investments in the Company's fixed maturity portfolio at December 31, 1996.
Investment Management
Liberty Financial has three core types of investment management products:
mutual funds, wealth management, and institutional asset management. The
Company has four separate operating units engaged in investment management:
The Colonial Group, Inc. ("Colonial"), Stein Roe & Farnham Incorporated
("Stein Roe"), Newport Pacific Management, Inc. ("Newport") and Liberty Asset
Management Company ("LAMCO").
Products and Services
(bullet) Mutual Funds. The Company sponsors 64 open-end mutual funds, as
well as seven closed-end funds. The open-end funds include the 35
intermediary-distributed Colonial mutual funds, the 18
direct-marketed Stein Roe funds and 11 other funds included among
the investment options under the Company's variable annuities. The
closed-end funds include five Colonial funds and two LAMCO funds.
At December 31, 1996, total mutual fund assets were $25.7 billion.
At that date 46.9% of these assets were invested in equity funds
(compared to 36.9% at December 31, 1995), 27.2% in taxable fixed
income funds and 25.9% in tax-exempt fixed income funds. The
Company seeks to continue to increase equity mutual fund assets.
(bullet) Wealth Management. At December 31, 1996, the Company managed $5.3
billion in investment portfolios for high net worth individuals and
families, all of which are managed by Stein Roe.
(bullet) Institutional Asset Management. At December 31, 1996, the Company
managed $4.9 billion of investment portfolios for institutional
investors such as insurance companies, public and private
6
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retirement funds, endowments, foundations and other institutions.
Most of these assets are managed by Stein Roe. At December 31, 1996
Stein Roe also managed $9.5 billion of Keyport's general account
assets supporting Keyport's insurance products.
The Company's investment management services center on managing the
investments of each client's portfolios in accordance with the client's
investment objectives and policies. The Company also provides related
administrative and support services to clients, such as portfolio pricing,
accounting and reporting. Client accounts are managed pursuant to a written
agreement which, with limited exceptions, is terminable at any time upon
relatively short notice (typically 30-60 days). Investment management fees
and related administrative and support fees generally are charged as a
percentage of assets under management.
In the case of mutual fund clients, all services provided by the Company are
subject to the supervision of the fund's Board of Trustees. Additional
administrative services provided to mutual funds include provision of office
space, other facilities and personnel, marketing and distribution services,
and transfer agency and other shareholder support services. Investment
management fees paid by a mutual fund must be approved annually by the fund's
Board of Trustees, including a majority of the independent Trustees. Any
increases in such fees also must be approved by fund shareholders.
The Company's direct-market mutual funds are sold without a sales load. Most
of the Company's intermediary-distributed mutual funds offer investors a
choice of two pricing options: a traditional front- end load option, in which
the investor pays a sales charge at the time of purchase, and a back-end load
option, in which the investor pays no sales charge at the time of purchase,
but is subject to an asset-based sales charge paid by the fund for eight
years after purchase and a declining contingent deferred sales charge paid by
the investor if shares are redeemed within six years after purchase. Certain
funds also offer a level-load option, in which the investor pays a small
initial sales charge, and is subject to an on-going asset-based sales charge
paid by the fund and a small contingent deferred sales charge paid by the
investor if shares are redeemed within one year after purchase.
The following tables present certain information regarding the Company's
assets under management as of or for each year in the three-year period ended
December 31, 1996. Such information includes Keyport's assets (including its
general account assets managed by Stein Roe, as well as loans to
policyholders and Keyport's general account assets managed by unaffiliated
investment managers). In addition, certain information is provided separately
for mutual fund assets.
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Total Assets Under Management
By Product Type
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as of December 31,
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1996 1995 1994
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Mutual Funds (dollars in billions)
Intermediary-distributed $16.1 $15.7 $ 1.3
Direct-marketed 6.6 4.8 4.5
Closed-End 1.9 1.8 0.8
Variable Annuity 1.1 1.0 0.8
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Total Mutual Funds 25.7 23.3 7.4
Wealth Management 5.3 4.5 4.1
Institutional 4.9 4.1 4.8
Retirement-Oriented Insurance Products 12.1 10.6 9.3
------- --------- --------
Total $48.0 $42.5 $25.6
======= ========= ========
Total Assets Under Management
By Asset Class(1)
------------------------------
as of December 31,
------------------------------
1996 1995 1994
--------- --------- ---------
(dollars in billions)
Equity Funds $16.1 $11.4 $ 7.2
Fixed Income Funds:
Taxable 25.2 23.8 17.1
Tax-Exempt 6.7 7.3 1.3
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Total $48.0 $42.5 $25.6
======= ========= ========
(1) Balance funds are classified as equity funds; all categories include cash
and other short-term investments.
Total Mutual Fund Assets Under
Management
By Asset Class(1)
------------------------------
as of December 31,
------------------------------
1996 1995 1994
--------- --------- ---------
(dollars in billions)
Equity Funds $12.1 $ 8.6 $3.6
Fixed Income Funds:
Taxable 7.0 7.4 2.5
Tax-Exempt 6.6 7.3 1.3
------- --------- --------
Total $25.7 $23.3 $7.4
======= ========= ========
(1) Balance funds are classified as equity funds; all categories include cash
and other short-term investments.
Total Assets Under Management
Asset Flow Summary
------------------------------
1996 1995 1994
--------- --------- ---------
(dollars in billions)
Beginning Assets Under Management $42.5 $25.6 $30.6
Sales and Reinvestments 8.6 5.8 3.7
Redemptions and Withdrawals (6.9) (9.4) (7.7)
Asset Acquisitions 1.2 14.9 --
General Account Investment Earnings 0.7 0.6 0.5
Market Action 1.9 5.0 (1.5)
------- --------- --------
Ending Assets Under Management $48.0 $42.5 $25.6
======= ========= ========
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Sales and Asset Retention
The Company's financial objectives with respect to its investment management
businesses are to increase assets under management in each of its three core
products, and to improve operating margins through increasing scale and cost
savings produced by integration. The investment management business,
particularly with respect to mutual funds, offers excellent opportunities to
grow operating profits and to achieve and attain attractive operating margins
for those participants whose asset base and investment and service
infrastructure reach critical mass. As a result of its acquisitions of
Colonial and Newport and subsequent integration steps, the Company generated
annual cost savings of $13.5 million through the consolidation of various
support and service functions in its mutual fund business.
The Company believes that the most important factors in accumulating and
retaining investment management assets are investment performance, customer
service and brand name recognition. Strong investment performance is crucial
to asset accumulation and retention, regardless of the product or
distribution channel. Performance is particularly important for mutual funds,
whether intermediary-distributed or direct-marketed. The Company believes
that currently the most important measure of performance influencing sales
(particular sales through intermediaries) is peer group rankings compiled by
Lipper Analytical Services, Inc. ("Lipper"). In the case of the Stein Roe
funds, 14 funds were in the top two quartiles of their respective Lipper peer
groups for the 12 months ended December 31, 1996. Based on figures for Class
A (front-end load) shares (or equivalents), 16 of the open-end Colonial funds
were in the top two quartiles of their respective Lipper peer groups for the
same period. The Company believes that another important performance measure
influencing sales (particularly in the direct channel) is the mutual fund
ratings published by Morningstar. Of the 11 Stein Roe funds rated by
Morningstar at March 1, 1997, five funds had an overall four-star rating and
one fund had the maximum overall five-star rating. Morningstar also named
Colonial as the "best overall manager of taxable bond funds" for 1996. The
Company believes that over time, more sophisticated tools, such as those
employed by consultants to institutional investors, will become available for
analyzing mutual fund performance and risk. The Company's investment
performance must remain competitive for the Company to continue to grow
investment management product sales and assets.
Excellent service to investors and distributors is a prerequisite to asset
retention. The Company acquired Colonial in part because of its reputation
for excellent service to its distributors. In November, 1996, Dalbar, Inc.,
an independent research and publishing company covering the mutual fund
industry, named Colonial the top-ranked mutual fund group for marketing and
operational support in its annual survey of broker-dealers.
The Company believes that, in light of the proliferation of mutual funds and
investment managers, strong brand name recognition in relevant distribution
channels is essential to asset accumulation and retention, particularly with
respect to mutual funds. The Company believes that the Colonial name carries
strong brand name recognition among brokers and other intermediaries selling
mutual funds, and that the Stein Roe name carries similar recognition in the
direct sales channel. Similarly, the Company believes that Stein Roe has a
franchise presence in the wealth management market, and that Newport is a
recognized leader in investments in the Asian markets.
Sales of mutual funds and other investment management products are subject
to market forces, such as changes in interest rates and stock market
performance. Sales of the Company's equity mutual funds benefited in 1996
from the continued strong performance of the U.S. stock market. Sales of the
Company's fixed income mutual funds were more modest in 1996, given
prevailing market conditions. Changes in the financial markets, including
significant increases or decreases in interest rates or stock prices, can
increase or decrease fund sales and redemptions, as well as the values of
fund portfolios, all of which can impact investment management fees.
9
<PAGE>
Distribution
Liberty Financial sells its products through multiple distribution channels.
Total product sales for 1996 were $8.6 billion (including $1.0 billion of
reinvested dividends and similar reinvested returns). Sixty-one percent of
these sales were made through intermediaries and the remaining 39% of sales
were made directly to the investor. Over 35,000 individual brokers and other
intermediaries sold Liberty Financial products in 1996.
Distribution Through Intermediaries
The Company sells both annuities and mutual funds through various
intermediaries, including national and regional brokerage firms, banks,
financial planners and insurance agents. The Company's annuities and mutual
funds are most often sold to middle and upper-middle class investors and
savers. Many of these individuals, busy with their own careers, families and
other interests, seek the help of an investment professional in selecting
investment and retirement income and savings products. In each of these
intermediary channels, the Company provides products, as well as promotional
materials and other support services.
Reflecting its diversification strategy, the Company maintains distribution
relationships with several different types of intermediaries.
Intermediary-distributed mutual funds and annuities historically have been
distributed through brokerage firms and insurance agents. In recent years
banks and financial planners also have become significant distributors of
these products. The Company was a pioneer in selling through banks, both in
terms of helping banks develop marketing programs and in establishing
wholesaling relationships with banks. Fee-based financial planners also have
emerged as an important distribution channel.
The Company employs wholesalers and other sales professionals to promote
sales of its intermediary-distributed products. These representatives meet
with intermediaries' sales forces to educate them on matters such as product
objectives, features, performance records and other key selling points. The
Company also produces marketing material designed to help intermediaries sell
the Company's products, and provides after-sale support to both the
intermediaries and their customers. The degree and mix of these services vary
with the requirements of the particular intermediary.
Liberty Financial operates a sales unit, Independent Financial Marketing
Group, Inc. ("Independent"), that sells mutual funds and annuities through
banks. The Company acquired Independent in March, 1996. Since the
acquisition, the Company has consolidated its prior bank sales unit, the
Liberty Financial Bank Group, with Independent. These businesses design and
implement programs that sell mutual funds and annuities products through
their client banks, license and train sales personnel, and provide related
financial services and administrative support. Program structures and the
degree of the Company's involvement vary widely depending upon the particular
needs of each bank. In some cases, the bank provides space in its branches
and the Company places its own sales representatives in that space and fully
operates the program. Products sold include the Company's proprietary
products, as well as non-proprietary products (including in some cases the
bank's proprietary mutual funds). In other cases, the Company's role may be
limited to functions such as licensing and training the bank's employees and
wholesaling products. At December 31, 1996, Independent had over 150 bank
relationships involving over 3,100 registered salespersons.
The sales practices and support needs of the Company's distributors are
constantly evolving. The Company must respond to these changes in order to
maintain and grow its intermediary distribution relationships. Pricing
structures in these channels, particularly with respect to mutual funds, are
evolving from one-time up-front sales loads to options that shift investors'
payments over time and move toward fee-based pricing. The Company's
intermediary-distributed mutual funds now are sold with alternate pricing
structures. Intermediaries also increasingly demand that product providers
supply new value-added services. The Company is developing innovative new
technology-based service and support tools, such as interactive asset
allocation models and on-line customer account management systems, designed
to provide value-added services to intermediaries and their customers. Some
distributors have begun to assess fee sharing payments or similar charges as
additional compensation for fund sales. The Company may be confronted with
the choice of absorbing these charges or limiting its access to certain
distributors.
10
<PAGE>
Direct Distribution
The Company's direct-marketed mutual funds, as well as its wealth management
and institutional asset management services, are sold directly to investors.
The Company's directed-marketed mutual funds are purchased predominantly by
middle and upper middle class investors and savers who choose to select their
own funds and who wish to avoid paying sales loads and similar fees. Wealth
management clients typically are high net worth individuals and families and
smaller institutional investors. Institutional asset management clients
typically are larger institutional investors managed by in-house professional
staffs that select and oversee asset managers, often with the advice of third
party consultants.
In each of the direct sales markets served by the Company, investment
performance is essential to generating sales and retaining customers. Mutual
fund sales also require robust marketing campaigns using print, radio and
television advertising and direct mail that highlight performance and other
selling points. The Company believes that certain of the technology-based
customer service and support tools it is developing, such as on-line account
access and interactive illustrative investment tools, can become important
devices in accumulating and retaining assets in the direct distribution
channels. Stein Roe's reputation as a high quality asset manager is the most
important factor in generating new wealth and institutional asset management
clients. Active management of the client relationship, including frequent
personal contacts, is necessary to retain these clients.
So-called "mutual fund supermarkets" have become an important source of
customers for direct-marketed mutual funds. In 1996, 60% of the total new
sales of the Stein Roe mutual funds were through mutual fund supermarkets and
similar arrangements. To gain access to these marketplaces, the Company pays
the supermarket sponsor a fee based upon a percentage of mutual fund assets
held by supermarket customers in return for certain services provided by the
supermarket sponsor, such as omnibus shareholder accounting. Financial
planners and similar unaffiliated advisors sometimes serve as sources of
referrals for wealth management clients, in some cases, in return for
referral fees or other compensation.
Diversification
The appeal of the Company's products varies according to an individual's
age, income, risk tolerance and financial goals. The Company's products vary
widely in financial objectives and risks. The Company's product diversity is
designed in part to serve individuals at various stages of their life and
earnings cycles, with an emphasis on retirement savings and income needs. The
Company also believes that its product mix will appeal to customers under a
variety of economic and market conditions. This diversification is designed
to smooth out the ebbs and flows of the financial markets. There are times
when equity mutual funds will sell more briskly than fixed income funds or
annuities, and vice versa. Similarly, diversification of distribution
channels allows the Company to reach many distinct segments of the
marketplace and lessens its dependence on any one source of assets. The
Company believes that the diversification in its products and distribution
channels allows it to grow assets in different market cycles, thereby
reducing earnings volatility.
Innovation
The Company believes that innovations creating new or enhanced products or
accessing new markets are essential in order to grow its asset base and meet
the ever-changing needs of its customers. Successful product innovation has
been critical to growth throughout the financial services industry. The
Company believes that, aside from excellent investment performance, new
products with compelling innovations are the best devices for generating new
sales. In addition, the Company believes that the distinctions which have
separated intermediary and direct distribution channels are blurring as a
result of the trend in intermediary channels toward fee-based pricing, the
introduction of asset allocation and other new value-added services and the
emergence of new sales mediums (such as mutual fund supermarkets and the
internet). This is particularly the case for products such as mutual funds
that are purchased by individual investors. To succeed in the future in
maintaining and expanding its client base and distribution relationships, the
Company will need to respond by developing new products, pricing structures
and technology-driven tools.
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<PAGE>
The Company has an impressive record in product and distribution
innovations. Keyport developed the first single premium whole life insurance
product. Liberty Financial was a pioneer in the business of distributing
mutual funds and annuities through banks. The Colonial Newport Tiger Fund was
the first U.S.-based mutual fund to focus exclusively on the "Tiger"
countries of Asia. The Stein Roe Young Investor Fund was the first mutual
fund to be coupled with an educational program to teach younger people about
investing, while at the same time offering parents an excellent device to
save for educational and other family needs. The Liberty ALL-STAR Equity Fund
was the first fund to bring institutional-style multiple management
techniques to retail investors. The Company's ability to create new products
continued with its introduction in 1995 of KeyIndex, the first equity-indexed
annuity introduced into the marketplace. In the first quarter of 1997 Liberty
Financial became the first mutual fund company to allow shareholders to
access accounts and conduct transactions on-line using digital certificate
security technology.
Integration
Liberty Financial is a holding company that conducts business through
several operating units that are wholly owned subsidiaries. Integration of
Liberty Financial's operating companies is a fundamental operating
philosophy. Leveragable talents and resources include product development and
design, distribution relationships, investment management, investor
servicing, and technology development and support. Where appropriate, the
Company seeks to leverage those resources across multiple operating units,
with a view toward accumulating additional assets or reducing expenses.
Examples of successfully implemented integration efforts include the
following:
(bullet) Upon the Company's acquisition of Newport in April, 1995, Colonial
assumed the marketing, sales, service and administration of
Newport's flagship Tiger Fund, which was re-branded under the
Colonial name. The Fund's asset growth has been exceptional, more
than tripling from $700 million in April, 1995 to $2.4 billion at
December 31, 1996. Colonial also has benefited because the
availability of the Colonial Newport Tiger Fund has facilitated
establishing new distribution arrangements with intermediaries.
(bullet) Stein Roe manages most of Keyport's general account fixed income
portfolio, and together with Colonial and Newport manages certain
of the funds underlying Keyport's variable annuity products.
(bullet) Colonial's transfer agency operations also perform these functions
for the Stein Roe funds.
(bullet) During 1996, the Company's bank distribution units were the largest
distributor of Keyport's annuities and the fourth largest
distributor of the Colonial funds, accounting for 11.3% and 5.1%,
respectively, of total sales of those products.
Acquisitions
Acquisitions are an integral part of Liberty Financial's business
strategy. Keyport, Colonial, Stein Roe, Newport, and, most recently,
Independent all joined Liberty Financial through acquisition. Where
appropriate, the Company continues to seek acquisitions that can provide
additional assets, investment management capabilities, distribution
capabilities, or other integration or diversification opportunities in its
core product areas. Current areas of focus for the Company's acquisition
efforts include the following:
(bullet) Mutual funds, with particular focus on equities and foreign
markets;
(bullet) Other new investment skills;
(bullet) Additional distribution capabilities;
(bullet) Wealth management firms that can become part of Stein Roe, and can
leverage and expand Stein Roe's franchise in the wealth management
market; and
(bullet) Blocks of annuity assets that can be purchased or co-insured.
12
<PAGE>
Regulation
Overview
The Company's business activities are extensively regulated. The following
briefly summarizes the principal regulatory requirements and certain related
matters.
The regulatory requirements applicable to the Company include, among other
things, (i) regulation of the form and in certain cases the content of the
Company's products, (ii) regulation of the manner in which those products are
sold and (iii) compliance oversight of the Company's business units,
including frequent reporting obligations to and inspections by regulators.
Annuity Insurance
The Company's retirement-oriented insurance products generally are issued
as individual policies. The policy is a contract between the issuing
insurance company and the policyholder. Policy forms, including all principal
contract terms, are regulated by state law. In most cases, the policy form
must be approved by the insurance department or similar agency of a state in
order for the policy to be sold in that state.
Keyport issues most of the Company's retirement-oriented insurance
products. Independence Life & Annuity Company ("Independence Life"), a
Keyport subsidiary, also issues certain policies. Keyport and Independence
Life are each charted in the state of Rhode Island, and the Rhode Island
Department of Business Regulation is their primary oversight regulator.
Keyport and Independence Life also must be licensed by the state insurance
regulators in each other jurisdiction in which they conduct business. They
currently are licensed to conduct business in 49 states (the exception being
New York), and in the District of Columbia. State insurance laws generally
provide regulators with broad powers related to issuing licenses to transact
business, regulating marketing and other trade practices, operating guaranty
associations, regulating certain premium rates, regulating insurance holding
company systems, establishing reserve requirements, prescribing the form and
content of required financial statements and reports, performing financial
and other examinations, determining the reasonableness and adequacy of
statutory capital and surplus, regulating the type and amount of investments
permitted, limiting the amount of dividends that can be paid and the size of
transactions that can be consummated without first obtaining regulatory
approval, and other related matters.
In recent years, various states have adopted new quantitative standards
promulgated by the National Association of Insurance Commissioners ("NAIC").
These standards are designed to reduce the risk of insurance company
insolvencies, in part by providing an early warning of financial or other
difficulties. These standards include the NAIC's risk-based capital ("RBC")
requirements. RBC requirements attempt to measure statutory capital and
surplus needs based on the risks in a company's mix of products and
investment portfolio. The requirements provide for four different levels of
regulatory attention which implement increasing levels of regulatory control
(ranging from development of an action plan to mandatory receivership). As of
December 31, 1996, Keyport's capital was 2.3 times the level at which the
lowest of these regulatory attention levels would be triggered.
Under the insurance guaranty fund laws existing in each state, insurers
can be assessed for certain obligations of insolvent insurance companies.
Because assessments typically are not made for several years after an insurer
fails, Keyport cannot accurately determine the precise amount or timing of
its exposure to known insurance company insolvencies at this time. For
certain information regarding Keyport's historical and estimated future
assessments in respect of insurance guaranty funds, see Note 15 to Liberty
Financial's Consolidated Financial Statements included in the 1996 Annual
Report.
Rhode Island law imposes prior approval requirements for certain
transactions with affiliates and generally regulates dividend payments by a
Rhode Island-chartered insurance subsidiary to its parent company. Keyport
may not make dividend payments in excess of the lesser of (i) 10% of its
statutory surplus as of the preceding December 31 or (ii) its statutory net
gain from operations for the preceding fiscal year without prior approval by
the Rhode Island Department of Business Regulation. As of December 31, 1996,
such restriction would limit dividends without such approval to $42.5
million. Keyport
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<PAGE>
has not paid any dividends since its acquisition in December, 1988. In
addition, no person or group may acquire, directly or indirectly, 10% or more
of the voting stock or voting power of Liberty Financial unless such person
has provided such required information to the Rhode Island Department of
Business Regulation and such acquisition is approved by the Department.
Asset Management Products
The primary sources of regulation of the Company's asset management
operations are the federal securities laws. Asset management products are
subject to the Investment Advisers Act of 1940 (the "Advisers Act"). The
mutual funds and closed-end funds sponsored by the Company also are subject
to the Investment Company Act of 1940 (the "Investment Company Act"). Mutual
fund shares are securities, and, as such, must be registered under the
federal securities laws. The foregoing laws impose various restrictions on
the Company's asset management products, including fee structures, the timing
and content of advertising, and, in the case of the funds, certain investment
restrictions. Mutual funds also must be managed to comply with certain other
investment restrictions imposed by the Internal Revenue Code. Accounts
subject to the Employee Retirement Income Security Act of 1974 ("ERISA") must
comply with certain investment and other restrictions imposed by ERISA.
The Company's subsidiaries directly engaged in asset management (including
Colonial, Stein Roe, Newport and LAMCO) are registered with the Securities
and Exchange Commission ("SEC") as investment advisers under the Advisers
Act. They are subject to the Investment Company Act insofar as it relates to
investment advisers to registered investment companies. These securities laws
and the regulations of the SEC require reporting, maintenance of books and
records in prescribed forms, mandatory custodial arrangements, approval of
employees and representatives and other compliance procedures. Possible
sanctions in the event of noncompliance include the suspension of individual
employees, limitations on the firm's engaging in business for specified
periods of time, revocation of the firm's registrations, censures and fines.
The Advisers Act and the Investment Company Act provide, in substance,
that if a change in control of the Company were to occur, each client
investment management agreement would terminate, unless the client consents
to the continuation of the agreement. In the case of mutual fund clients,
this would require approval of the fund's Board of Trustees (including a
majority of the independent Trustees) and shareholders. A person holding more
than 25% of the Company's voting stock is presumed to control the Company.
Sales by Liberty Mutual or other stockholders or new issuances of equity
securities by Liberty Financial, among other things, may raise issues
relating to a deemed assignment of the Company's investment advisory
agreements. The Restated Articles of Organization of the Company (the
"Restated Articles") provide that no person or group deemed to be a
beneficial owner (as defined therein) of Liberty Financial's Voting Stock (as
defined therein) may vote more than 20% of the total voting power of such
Voting Stock outstanding. These provisions of the Restated Articles do not
apply to Liberty Mutual, subsidiaries or affiliates of Liberty Mutual, direct
or indirect subsidiaries of the Company and certain employee plans maintained
by the Company. The Company's Board of Directors also may approve the
exemption of other persons or groups from these provisions. There can be no
assurance that this limitation would have the desired legal effect.
Distribution
Sale of the Company's annuities and mutual funds is subject to regulation
at the point of sale. Annuities must be sold through an entity registered as
an insurance agency in the particular state. The sales person must be an
insurance agent properly licensed under state law. Mutual fund shares must be
sold through an entity registered as a broker-dealer under the Securities
Exchange Act of 1934 and applicable state law. The sales person must be
registered with the National Association of Securities Dealers, Inc. ("NASD")
and the applicable state.
Various business units of the Company are registered as broker-dealers.
These include certain units which operate the Company's bank marketing
business, as well as other units through which mutual fund and certain
annuity sales are processed. Certain bank marketing units also are registered
as insurance agencies in states where they sell annuities. These laws
regulate the licensing of sales personnel and
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<PAGE>
sales practices. They impose minimum net capital requirements. They also
impose reporting, records maintenance, and other requirements, and provide
for penalties in the event of non-compliance, similar in scope to the
regulations applicable to asset managers.
Securities sales through the Company's bank marketing units are conducted
in accordance with the provisions of a "no-action" letter issued by the staff
of the SEC requiring, among other things, that securities sales activities be
conducted by sales personnel who are registered representatives of the
Company and are subject to its supervision and control. The letter limits the
functions of non-registered bank personnel to ministerial duties. The letter
is not binding, however, on the courts and no assurance can be given that the
SEC will not change its position.
Banks are an important distribution channel for the Company's annuities
and mutual funds. The recent growth in sales of mutual funds, annuities and
other investment and insurance products through or at banks and similar
institutions has prompted increased scrutiny by federal bank regulators and
the SEC. Regulations promulgated by federal banking authorities impose
additional restrictions and duties with respect to bank sales practices,
including obligations to disclose that the products are not subject to
deposit insurance.
Competition
The Company's businesses operate in extremely competitive markets. These
markets are highly fragmented, although in the case of annuities and mutual
funds, a few companies do have relatively substantial market shares. Certain
of the Company's competitors are significantly larger and have access to
significantly greater financial and other resources.
The Company's products compete with every other investment or savings
vehicle available to a prospective customer, including those offered by other
insurance companies, investment management firms and banks. The Company
believes that the most important competitive factor affecting the
marketability of its products is the degree to which they meet customer
expectations, both in terms of returns (after fees and expenses) and service.
These competitive pressures apply to competition for customers in general, as
well as competition to access and maintain distribution relationships, in the
case of products sold through intermediaries. Product and service innovations
also are important devices for generating new sales and maintaining
distribution relationships. The Company believes that, aside from excellent
investment performance, new products with compelling innovations are the best
devices for generating new sales. Sales of particular products may be
affected by conditions in the financial markets, such as increases or
decreases in interest rates or stock prices, as discussed above.
Product features of particular relevance to annuities include interest
crediting and participation rates, surrender charges, product flexibility and
innovation in product design. Maintenance of Keyport's strong financial
ratings also is important. The Company believes that the most important
factors affecting competition for investment management clients are
investment performance, customer service and brand name recognition. Pricing
policies and product innovations also are important competitive factors. The
Company's ability to increase and retain clients' assets could be materially
adversely affected if client accounts underperform the market or if key
investment managers leave the Company. The ability of the Company's
management subsidiaries to compete with other asset management firms also is
dependent, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions.
Employees
As of December 31, 1996, the Company had 1,957 full-time employees
summarized by activity as follows: 358 in annuity insurance operations; 1,127
in asset management activities; 419 employees in marketing and distribution
operations; and 53 in general corporate. The Company provides its employees
with a broad range of employee benefit programs. The Company believes that
its relations with its employees are excellent.
Item 2. Properties
As of December 31, 1996, the Company leased its various office facilities.
The Company's principal leasing arrangements can be summarized as follows:
The Company's principal executive offices occupy
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approximately 30,300 square feet in a single facility in downtown Boston
pursuant to a lease which expires in 2002. Keyport leases approximately
76,000 square feet in a single facility in downtown Boston pursuant to a
lease which expires in 2002. Colonial leases approximately 149,000 square
feet of office space in a single facility in downtown Boston under a lease
which expires in 2006 and approximately 21,700 square feet in Aurora,
Colorado under a lease which expires in November, 2000. Stein Roe leases
142,000 square feet in downtown Chicago pursuant to a lease which expires in
2009. Independent leases approximately 23,200 square feet in Purchase, New
York under a lease which expires in 2007.
Item 3. Legal Proceedings
The Company is from time to time involved in litigation incidental to its
businesses. In the opinion of Liberty Financial's management, the resolution
of such litigation is not expected to have a material adverse effect on the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gary L. Countryman 57 Chairman and Director
Kenneth R. Leibler 47 Chief Executive Officer, President and Director
John A. Benning 62 Senior Vice President, General Counsel and Clerk
Harold W. Cogger 61 Executive Vice President
Lindsay Cook 44 Executive Vice President
Stephen E. Gibson 43 President, The Colonial Group, Inc.
J. Scott Hansen 44 Senior Vice President, Corporate Development
J. Andy Hilbert 38 Senior Vice President and Chief Financial Officer
Denis Kaplan 53 Chief Executive Officer of Independent
C. Allen Merritt, Jr. 56 Executive Vice President and Treasurer
Porter P. Morgan 56 Senior Vice President, Marketing
John W. Rosensteel 56 President and Chief Executive Officer of Keyport
Hans P. Ziegler 56 Chief Executive Officer of Stein Roe
</TABLE>
Mr. Countryman has been Chief Executive Officer of Liberty Mutual and
Liberty Mutual Fire Insurance Company (an affiliate of Liberty Mutual) since
1986, and has been Chairman of both companies since 1991. He currently serves
as a director of the Company, Liberty Mutual and certain of its affiliates,
BankBoston Corporation, The First National Bank of Boston, Boston Edison
Company and Harcourt General, Inc.
Mr. Leibler became Chief Executive Officer of Liberty Financial on January
1, 1995, has been President of Liberty Financial since August, 1990, and was
Chief Operating Officer from August, 1990, until December, 1994. Mr. Leibler
currently serves as a director of the Company and the Boston Stock Exchange.
Mr. Benning has been Senior Vice President, General Counsel and Clerk of
Liberty Financial since October, 1989.
Mr. Cogger became an Executive Vice President and director of Liberty
Financial at the time it acquired Colonial in March, 1995. He was President
of Colonial from November, 1994 to December, 1996 and Chief Executive Officer
from March, 1995 to December, 1996. He was President of its principal
subsidiary, Colonial Management Associates, Inc. from 1993 to December, 1996,
and Chief Executive Officer from March, 1995 to December, 1996.
Mr. Cook became an Executive Vice President of Liberty Financial in
February, 1997. He became a Senior Vice President of Liberty Financial in
February, 1994, having been a Vice President prior to that time.
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Mr. Gibson joined Colonial in July, 1996 as Executive Vice President,
becoming President and Chief Executive Officer in December, 1996. Prior to
joining Colonial, Mr. Gibson held various senior marketing positions at
Putnam Investments.
Mr. Hansen became Senior Vice President, Corporate Development in May, 1996.
Prior to that time he was Vice President, Corporate Development.
Mr. Hilbert joined the Company as Senior Vice President and Chief Financial
Officer in March, 1997. From October 1995 until that time, he was Senior Vice
President and Chief Financial Officer of Paul Revere Corporation. Prior to
joining Paul Revere, Mr. Hilbert was a partner at Price Waterhouse.
Mr. Kaplan has been Chief Executive Officer of Independent since 1990.
Mr. Merritt became an Executive Vice President of Liberty Financial in
February, 1997. From March, 1993 until that time, he was Senior Vice
President of Liberty Financial. Prior to that time, he served as Senior Vice
President of its subsidiary, Liberty Financial Services, Inc.
Mr. Morgan has been Senior Vice President, Marketing of Liberty Financial
since 1991.
Mr. Rosensteel joined Keyport in 1992 as Chief Operating Officer. He was
appointed President and Chief Executive Officer of Keyport effective January
1, 1993.
Mr. Ziegler has been Chief Executive Officer of Stein Roe since June, 1994.
Mr. Ziegler was President of Stein Roe's Investment Counsel division from
July, 1993 to July, 1994. Prior to joining Stein Roe, Mr. Ziegler was
President and Chief Executive Officer of the Pitcairn Trust Company.
17
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "L". The Common Stock began trading on the NYSE on
March 27, 1995. The Common Stock is also listed on the Boston Stock Exchange.
Prior to March 27, 1995, there was no public market for the Company's Common
Stock.
The following table sets forth the high and low sales price for each
quarter during 1996 and 1995.
1996
Quarter High Low
----------------- ------------
January-March $32 3/8 $30
April-June 34 30 3/4
July-September 33 7/8 26 1/8
October-December 39 30 7/8
1995
Quarter High Low
----------------- ------------
January-March* $29 $27
April-June 27 1/2 23 7/8
July-September 29 1/4 25 3/8
October-December 30 1/4 27 1/8
* For period from March 27, 1995 (initial public trading day) through March
31, 1995.
The approximate number of stockholders of record of the Company's Common
Stock as of March 17, 1997 was 156.
The Company's practice has been to pay quarterly cash dividends of $0.15 per
share. The declaration and payment of any dividends on the Common Stock are
dependent upon the Company's results of operations, financial condition, cash
requirements, capital requirements, regulatory considerations and other
relevant factors, and in all events are subject to the discretion of the
Board of Directors and to any preferential dividend rights of the outstanding
Series A Convertible Preferred Stock ("Preferred Stock") of Liberty
Financial. The holders of the issued and outstanding shares of Preferred
Stock are entitled to receive cumulative cash dividends at the rate of $2.875
per annum per share, payable in equal quarterly installments. The terms of
the Preferred Stock preclude the payment of any dividends on the Common Stock
unless cumulative dividends on the outstanding Preferred Stock have been paid
or declared in full. Accordingly, there is no requirement, and no assurances
can be given, that dividends will be paid on the Common Stock.
The Company's Board of Directors established an optional dividend
reinvestment plan ("DRIP") for holders of Common Stock and Preferred Stock.
Liberty Mutual has participated in the DRIP during 1995 and 1996. Such
participation may be terminated at any time. Based upon Liberty Financial's
current expectations as to its liquidity and cash needs, Liberty Financial's
ability to pay dividends on the Common Stock may be dependent upon Liberty
Mutual's continued participation in the DRIP. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity" in
the 1996 Annual Report.
For a discussion of certain restrictions on the Company's ability to pay
dividends in cash on its Common stock, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity" in the
1996 Annual Report.
Sales of Unregistered Securities
Liberty Financial issued shares of its Common Stock during 1996 without
registration under the Securities Act of 1933 (the "Securities Act") in the
transactions described below.
On March 7, 1996, Liberty Financial issued an aggregate of 237,009 shares to
four individuals who were the shareholders of Independent (consisting of
Denis Kaplan, President and CEO of Independent
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and an executive officer of Liberty Financial, and three other senior
executives of Independent) and one institution which cancelled an option to
acquire shares of Independent as consideration for Liberty Financial's
acquisition of Independent. The acquisition agreement provides for various
subsequent payments of additional shares based upon certain conditions. On
July 16, 1996, Liberty Financial issued an additional 31,600 shares in the
aggregate to such persons in satisfaction of the first such payment. Such
issuances were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In addition, as of each of March 13, June 5, August 28 and November 27,
1996, Liberty Financial issued 111,579, 108,954, 111,656 and 95,466 shares of
Common Stock, respectively, to LFC Holdings, Inc., an indirect subsidiary of
Liberty Mutual, at prices of $30.975, $31.875, $31.25 and $36.725 per share,
respectively, as re-investments of cash dividends otherwise payable to LFC
Holdings, Inc. under Liberty Financial's former Dividend Reinvestment Plan.
Such issuances were exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.
Item 6. Selected Financial Data
The Selected Consolidated Financial Data, which appears on page 23 in the
1996 Annual Report, are incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Results of Operations and
Financial Condition, which appears beginning on page 24 in the 1996 Annual
Report, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements which appear beginning on
page 34 in the 1996 Annual Report, and the report thereon of Ernst & Young,
LLP as of and for the year ended December 31, 1996, which appears on page 55
in the 1996 Annual Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The consolidated financial statements of Liberty Financial for the year
ended December 31, 1996 have been audited and reported upon by Ernst & Young
("E&Y"). Similarly, E&Y will serve as the independent auditors of Liberty
Financial for 1997.
For fiscal years prior to 1996, the consolidated financial statements of
Liberty Financial were audited and reported on by KPMG Peat Marwick LLP
("KPMG"). On March 13, 1996, following a competitive proposal process,
Liberty Financial's Audit Committee terminated KPMG's appointment as Liberty
Financial's independent accountants effective March 14, 1996, and voted to
recommend to the Board of Directors that E&Y be appointed as Liberty
Financial's independent accountants for fiscal 1996. The Board of Directors
approved this recommendation on April 10, 1996.
In connection with the audits of Liberty Financial's consolidated
financial statements for the two fiscal years in the period ended December
31, 1995, and the subsequent interim period through March 14, 1996, there
were no disagreements between Liberty Financial and KPMG on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to KPMG's
satisfaction would have caused KPMG to make reference to the subject matter
of the disagreement in connection with KPMG's audit report on the
consolidated financial statements of Liberty Financial. In addition, the
audit reports of KPMG on the consolidated financial statements of Liberty
Financial as of and for the two fiscal years ended December 31, 1995 did not
contain any adverse opinion or disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope, or accounting
principles.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the executive officers of the registrant appears
under the caption "Executive Officers of the Registrant" included in Part I
of this Form 10-K following Item 4.
19
<PAGE>
Information relating to the directors of the registrant is incorporated
herein by reference from Liberty Financial's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on or about May 13, 1997 to be
mailed during April, 1997 (the "Proxy Statement") under the caption "Election
of Directors."
In addition, the information appearing in the Proxy Statement under the
caption "Security Ownership of Management and Certain Beneficial
Owners--Section 16(a) Beneficial Ownership Reporting Compliance" is
incorporated herein by reference.
Item 11. Executive Compensation
Information relating to executive compensation is incorporated herein by
reference from the Proxy Statement under the following captions:
"Compensation of Executive Officers" (excluding, however, the portions
thereof under the subcaptions "Compensation Committee Report on Executive
Compensation" and "Stockholder Return Comparisons") and "Election of
Directors--1996 Meetings and Standard Fee Arrangements."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference from the Proxy Statement
under the caption "Security Ownership of Management and Certain Beneficial
Owners" (excluding the material under the sub-caption "Section 16(a)
Beneficial Ownership Reporting Compliance").
Item 13. Certain Relationships and Related Transactions
Information relating to Certain Relationships and Related Transactions is
incorporated herein by reference from the Proxy Statement under the captions
"Certain Relationships and Related Transactions" and "Compensation of
Executive Officers--Certain Additional Information Regarding Executive
Officer Compensation--Employment Contract."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company, which appear
beginning on page 34 of the 1996 Annual Report, are incorporated herein by
reference:
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Income Statements for the Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are included as part of this
Report:
I Summary of Investments
II Condensed Financial Information of Registrant
III Supplementary Insurance Information
V Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or are not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
3. Exhibits
The exhibits filed as part of this Report are listed on the Exhibit Index
immediately following the financial statement schedules included in this
report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1996.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on March 24, 1997.
LIBERTY FINANCIAL COMPANIES, INC.
By: /s/ Kenneth R. Leibler
----------------------------------------
Kenneth R. Leibler
Chief Executive Officer,
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and as of the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kenneth R. Leibler
------------------------------- Chief Executive Officer, President and
Kenneth R. Leibler Director March 24, 1997
/s/ C. Allen Merritt, Jr. Executive Vice President and Treasurer
------------------------------- (Principal Financial and Accounting
C. Allen Merritt, Jr. Officer) March 24, 1997
/s/ Gary L. Countryman
-------------------------------
Gary L. Countryman Director March 24, 1997
/s/ Gregory H. Adamian
-------------------------------
Gregory J. Adamian Director March 24, 1997
/s/ Gerald E. Anderson
-------------------------------
Gerald E. Anderson Director March 24, 1997
-------------------------------
Michael J. Babcock Director March 24, 1997
/s/ Harold W. Cogger
-------------------------------
Harold W. Cogger Director March 24, 1997
/s/ Paul J. Darling, II
-------------------------------
Paul J. Darling, II Director March 24, 1997
/s/ C. Herbert Emilson
-------------------------------
C. Herbert Emilson Director March 24, 1997
/s/ David F. Figgins
-------------------------------
David F. Figgins Director March 24, 1997
/s/ John B. Gray
-------------------------------
John B. Gray Director March 24, 1997
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
------------------------------- ----------------------------------------- --------------------
<S> <C> <C>
/s/ John P. Hamill
-------------------------------
John P. Hamill Director March 24, 1997
/s/ Marian L. Heard
-------------------------------
Marian L. Heard Director March 24, 1997
/s/ Raymond H. Hefner, Jr.
-------------------------------
Raymond H. Hefner, Jr. Director March 24, 1997
/s/ Edmund F. Kelly
-------------------------------
Edmund F. Kelly Director March 24, 1997
/s/ Sabino Marinella
-------------------------------
Sabino Marinella Director March 24, 1997
/s/ Ray B. Mundt
-------------------------------
Ray B. Mundt Director March 24, 1997
/s/ Richard A. Smith
-------------------------------
Richard A. Smith Director March 24, 1997
/s/ Glenn P. Strehle
-------------------------------
Glenn P. Strehle Director March 24, 1997
/s/ Stephen J. Sweeney
-------------------------------
Stephen J. Sweeney Director March 24, 1997
/s/ Michael von Clemm
-------------------------------
Michael von Clemm Director March 24, 1997
/s/ Stanley A. Wainer
-------------------------------
Stanley A. Wainer Director March 24, 1997
</TABLE>
22
<PAGE>
Schedule I
LIBERTY FINANCIAL COMPANIES, INC.
SUMMARY OF INVESTMENTS
(in millions)
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------
Balance
Amortized Sheet
Type of Investment Cost Fair Value Amount
----------------- ------------ ------------- -----------
<S> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies $ 1,701.4 $ 1,734.3 $ 1,734.3
Obligations of states and political subdivisions 23.9 24.2 24.2
Foreign governments 246.3 257.5 257.5
Corporate and other securities 6,115.8 6,266.0 6.266.0
Mortgage backed securities 2,413.0 2,436.6 2,436.6
------- ------------- ---------
Total fixed maturities 10,500.4 10,718.6 10,718.6
Equity securities:
Common stocks:
Industrial, miscellaneous and all other 19.4 35.9 35.9
Mortgage loans on real estate (1) 67.0 73.4 67.0
Policy loans 532.8 532.8 532.8
Other long term investments 183.6 183.6 183.6
------------ ------------ ---------
Total investments $11,303.2 $11,544.3 $11,537.9
============ ============ =========
</TABLE>
1 Includes mortgage notes relating to certain investment property owned by
Liberty Mutual in the amount of $39.5 million at December 31, 1996.
23
<PAGE>
Schedule II
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions, except per share data)
Balance Sheets
December 31
-----------------------
1996 1995
----------- -----------
Assets:
Cash and cash equivalents $ 7.4 $ 9.7
Investments in subsidiaries 1,060.3 1,004.4
Notes receivable--subsidiaries 160.2 159.0
Accounts receivable--subsidiaries 15.2 1.8
Other assets 33.7 --
--------- -----------
$1,276.8 $1,174.9
========= ===========
Liabilities:
Note payable to parent $ 199.0 $ 199.0
Accounts payable and accrued expenses 12.6 6.5
--------- -----------
211.6 205.5
--------- -----------
Redeemable convertible preferred stock 13.8 13.0
--------- -----------
Stockholders' Equity:
Common stock 0.3 0.3
Additional paid-in capital 835.3 810.5
Net unrealized investment gains 74.4 87.1
Retained earnings 141.4 59.4
Unearned compensation -- (0.9)
--------- -----------
Total stockholders' equity 1,051.4 956.4
--------- -----------
$1,276.8 $1,174.9
========= ===========
Income Statements
Year Ended December 31
--------------------------
1996 1995 1994
-------- ----------------
Interest income, principally from subsidiaries $ 12.1 $ 12.0 $11.6
Operating expenses 16.3 15.1 12.4
------- -------- -----
Loss before income taxes (4.2) (3.1) (0.8)
Benefit for income taxes (21.9) (15.7) -
Equity in net income of subsidiaries 83.0 61.3 51.6
------- -------- -----
Net income $100.7 $ 73.9 $50.8
======= ======== =====
Earnings per share $ 3.36 $ 2.64 $2.15
======= ======== =====
See Notes to Consolidated Financial Statements contained in the 1996 Annual
Report incorporated herein by reference.
24
<PAGE>
Schedule II (continued)
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $100.7 $ 73.9 $ 50.8
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiaries (83.0) (61.3) (51.6)
Increase in notes receivable--subsidiaries (1.2) (24.6) (0.5)
Net change in accounts receivable--subsidiaries,
other assets and accounts payable (41.2) 8.6 8.1
------- --------- ------
Net cash provided by (used in) operating activities (24.7) (3.4) 6.8
------- --------- ------
Cash flows from investing activities:
Acquisitions (8.1) (106.4) --
Capital contributions to subsidiaries (8.0) (36.0) --
------- --------- ------
Net cash used in investing activities (16.1) (142.4) --
------- --------- ------
Cash flows from financing activities:
Dividends, net 36.1 20.1 --
Exercise of stock options 2.4 0.7 0.1
Debt borrowing from parent -- 124.0 --
------- --------- ------
Net cash provided by financing activities 38.5 144.8 0.1
------- --------- ------
Increase (decrease) in cash and cash equivalents (2.3) (1.0) 6.9
Cash and cash equivalents at beginning of year 9.7 10.7 3.8
------- --------- ------
Cash and cash equivalents at end of year $ 7.4 $ 9.7 $ 10.7
======= ========= ======
</TABLE>
See Notes to Consolidated Financial Statements contained in the 1996 Annual
Report incorporated herein by reference.
25
<PAGE>
Schedule III
LIBERTY FINANCIAL COMPANIES, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G
- -------- -------- -------- -------- -------- -------- --------
Deferred Policyholder Unearned Policy Insurance Net
policy account premiums contract revenues investment
acquisition balances and claims and income
costs future policy other
benefits policyholders'
funds
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Interest sensitive
products $250.4 $11,610.4 NA $27.1 $30.9 $796.4
====== ========= ===== ===== ======
December 31, 1995
Interest sensitive
products $179.7 $10,063.3 NA $21.1 $27.9 $761.8
====== ========= ===== ===== ======
December 31, 1994
Interest sensitive
products $439.2 $ 9,326.0 NA $18.1 $24.0 $695.1
====== ========= ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Column A Column H Column I Column J Column K
- -------- -------- -------- -------- --------
Interest Amortization Other Premiums
credited to of deferred operating written
policyholders policy expenses
and policy acquisition
benefits and costs
claims
<S> <C> <C> <C> <C>
December 31, 1996
Interest sensitive
products $576.2 $60.2 $55.1 NA
====== ===== =====
December 31, 1995
Interest sensitive
products $560.2 $58.5 $55.1 NA
====== ===== =====
December 31, 1994
Interest sensitive
products $486.8 $52.2 $72.4 NA
====== ===== =====
</TABLE>
26
<PAGE>
Schedule V
LIBERTY FINANCIAL COMPANIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1996
(in millions)
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at
Description Year Additions Deductions End of Year
- ----------- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Years Ended:
December 31, 1996
Fixed maturities:
Investment valuation reserve $ -- $-- $ -- $--
===== === ===== ===
December 31, 1995
Fixed maturities:
Investment valuation reserve $ -- $-- $ -- $--
===== === ===== ===
December 31, 1994(1)
Fixed maturities:
Investment valuation reserve $33.5 $-- $33.5 $--
===== === ===== ===
</TABLE>
1 Investment valuation reserve balance was eliminated upon adoption of SFAS
No. 115 as of January 1, 1994.
27
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1(1) Form of Restated Articles of Organization of the Company
3.2(1) Form of Certificate of Designation of Series A Convertible Preferred Stock of the Company
3.3 Restated By-laws of the Company, as amended
4.1(1) Form of Certificate for Common Stock of the Company
4.2(1) Form of Certificate for Series A Convertible Preferred Stock of the Company
10.1(1) Form of Intercompany Agreement between Liberty Mutual and the Company
10.2(2) Form of Registration Rights Agreement between Liberty Mutual and the Company
10.3(2) Form of Tax Sharing Agreement between Liberty Mutual and the Company
10.4(1) Form of 1990 Stock Option Plan of the Company, together with amendments 1 and 2 thereto
10.5(1) Form of Savings and Investment Plan and Trust of the Company
10.5.1(3) Amendment No. 1 to Savings and Investment Plan
10.6(1) Form of Amended and Restated Supplemental Savings Plan of the Company
10.7(1) Form of Stein Roe Profit Sharing Plan and amendments thereto
10.8(1) Form of Pension Plan of the Company
10.8.1(3) Amendment No. 1 to Pension Plan
10.9(1) Form of Amended and Restated Supplemental Pension Plan of the Company
10.10(1) Form of 1995 Stock Incentive Plan of the Company
10.11(2) Form of 1995 Employee Stock Purchase Plan of the Company
10.12(1) Form of Deferred Compensation Plan of the Company
10.12.1(1) Letters from the Company, setting forth additional retirement benefits for John A. Benning
and Sabino Marinella
10.13(1) Form of Keyport Deferred Compensation Plan
10.14(1) Form of Stein Roe Deferred Compensation Plan
10.14.1(1) Form of Stein Roe Non-Qualified Supplemental Retirement Plan
10.14.2(1) Form of Stein Roe Long Term Incentive Plan
10.15 Form of Promissory Note in the principal amount of $99.0 million dated April 5, 1995
10.16(1) Lease Agreement with respect to 600 Atlantic Avenue, Boston, Massachusetts
10.17(1) Lease Agreement with respect to 125 High Street, Boston, Massachusetts, as amended
10.18(1) Lease Agreement with respect to One South Wacker Drive, Chicago, Illinois, as amended
10.19(1) Unconditional Guarantee Agreement dated November 7, 1991 executed by Liberty Mutual and
related Mortgage Maintenance Agreement by and among LRE Properties, Inc., Atlantic Real
Estate Limited Partnership and Keyport Life Insurance Company
10.20(1) Administrative Services Agreement dated as of June 9, 1993 between Liberty Life Assurance
Company of Boston and Keyport Life Insurance Company
10.21 Lease Agreement with respect to One Financial Center, Boston, Massachusetts
10.22(1) $100 Million of Mortgage Notes owned by Keyport issued by indirect subsidiaries of Liberty
Mutual
10.23(2) Promissory Notes dated March 24, 1995 of the Company issued to Liberty Mutual and two of
its affiliates in the aggregate principal amount of $100.0 million
10.24(1) Form of Promissory Note dated January 29, 1995 of SteinRoe Services, Inc. in the principal
amount of $30.0 million
10.25(2) Form of Registration Rights Agreement among John A. McNeice, Jr., C. Herbert Emilson and
the Company
10.26(2) Form of Employment Agreement among the Company, Colonial and Harold W. Cogger
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.27(2) Credit agreement among Colonial and The First National Bank of Boston, as agent for itself
and certain other lenders named therein (and Amendments No. 1 and 2 thereto)
10.27.1(3) Amendment No. 3 to Credit Agreement
10.27.2 Amendment No. 4 to Credit Agreement
10.28(3) Colonial Profit Sharing Plan (and Amendment Nos. 1-3 thereto)
10.29(3) Colonial Split-Dollar Insurance Coverage description
10.30 Coinsurance Agreement between Fidelity and Guaranty Life Insurance Company and Keyport Life
Insurance Company, and first and second amendments thereto
11 Statement re computation of per share earnings
12 Statement re computation of ratios
13 Portions of Annual Report to Stockholders incorporated by reference into this Report
21 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Report and Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99.3(1) Form of Stockholders' Agreement among the Company, Liberty Mutual Insurance Company and
certain holders of the Company's Series A Convertible Preferred Stock
</TABLE>
(1) Incorporated by reference to the same Exhibit Number in the Company's
Registration Statement on Form S-4 (filed under the name NEW LFC, INC.)
(Registration No. 33-88824).
(2) Incorporated by reference to the same Exhibit Number in the Company's
1994 Annual Report on Form 10-K filed March 30, 1995.
(3) Incorporated by reference to the same Exhibit Number in the Company's
1995 Annual Report on Form 10-K filed March 29, 1996.
29
RESTATED BY-LAWS
of
LIBERTY FINANCIAL COMPANIES, INC.
(formerly known as New LFC, Inc.)
as amended through March, 1997
Section 1. ARTICLES OF ORGANIZATION
The name and purposes of the corporation shall be as set forth in the
Restated Articles of Organization of the corporation (the "Articles of
Organization"). These By-laws, the powers of the corporation and of its
directors and stockholders, or of any class of stockholders if there shall be
more than one class of stock, and all matters concerning the conduct and
regulation of the business and affairs of the corporation shall be subject to
such provisions in regard thereto, if any, as are set forth in the Articles of
Organization as from time to time in effect. Capitalized terms used in these
By-laws which are defined in the Articles of Organization are used in these
By-laws with the meanings so defined.
Section 2. STOCKHOLDERS
2.1. Annual Meeting. The annual meeting of stockholders shall be held at
11:00 a.m. on the second Wednesday in May in each year (unless that day be a
legal holiday at the place where the meeting is to be held, in which case the
meeting shall be held at the same hour on the next succeeding day not a legal
holiday) or at such other date and time as shall be determined from time to time
by the board of directors. Purposes for which an annual meeting is to be held,
additional to those prescribed by law, by the Articles of Organization or by
these By-laws, may be specified by the president or by the directors.
2.2. Special Meetings. A special meeting of the stockholders may be called
at any time by the chairman of the board of directors, the chief executive
officer, the president or the board of directors. A special meeting of the
stockholders shall be called by the clerk, or in the case of the death, absence,
incapacity or refusal of the clerk, by an assistant clerk or some other officer,
upon application of the chairman of the board of directors, the chief executive
officer, the president or a majority of the directors or the holders of shares
of Voting Stock representing not less than sixty-seven percent (67%) of the
combined voting power of the then outstanding shares of Voting Stock entitled to
vote generally in elections of directors (or such lesser percentage of shares
entitled by law which cannot be modified by these By-laws to call a special
meeting of the stockholders). Any such application shall state
<PAGE>
the purpose or purposes of the proposed meeting. Any such call shall state the
place, date, hour and purposes of the meeting.
2.3. Place of Meetings. All meetings of the stockholders shall be held at
the principal office of the corporation in Massachusetts or, to the extent
permitted by the Articles of Organization, at such other place within the United
States as shall be fixed by the chairman of the board of directors, the chief
executive officer, the president or the board of directors. Any adjourned
session of any meeting of the stockholders shall be held at the same city or
town as the initial session, or within Massachusetts, in either case at the
place designated in the vote of adjournment.
2.4. Notice of Meetings. Except as otherwise provided by law, a written
notice of each meeting of stockholders stating the place, day and hour thereof
and the purposes for which the meeting is called shall be given not less then
ten (10) nor more than sixty (60) days before the meeting to each stockholder
entitled to vote thereat, and to each stockholder who, by law, by the Articles
of Organization or by these By-laws, is entitled to notice, by leaving such
notice with him or at his residence or usual place of business, or by depositing
it in the United States mail, postage prepaid, and addressed to such stockholder
at his address as it appears in the records of the corporation. Such notice
shall be given by the clerk, or by an officer or person designated by the board
of directors. As to any adjourned session of any meeting of stockholders, notice
of the adjourned session of any meeting need not be given if the time and place
thereof are announced at the meeting at which the adjournment was taken except
that if the adjournment is for more than thirty (30) days or if after the
adjournment a new record date is set for the adjourned session, notice of any
such adjourned session of the meeting shall be given in the manner heretofore
described. No notice of any meeting of stockholders or any adjourned session
thereof need be given to a stockholder if a written waiver of notice, executed
before or after the meeting or such adjourned session by such stockholder, is
filed with the records of the meeting or if the stockholder attends such meeting
without objecting at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any meeting of the
stockholders or any adjourned session thereof need be specified in any written
waiver of notice.
2.5. Business at Meetings. Unless otherwise determined by the board of
directors prior to a meeting of the stockholders, the chairman of such meeting,
determined in accordance with these By-laws, shall determine the order of
business and shall have the
-2-
<PAGE>
authority in his discretion to regulate the conduct of such meeting, including,
without limitation, to impose restrictions on the persons (other than
stockholders of the corporation or their duly appointed proxies) who may attend
such meeting, to regulate and restrict the making of statements or asking of
questions at such meeting and to cause the removal from such meeting of any
person who has disrupted or appears likely to disrupt the proceedings at such
meeting. At a meeting of the stockholders, only such business shall be conducted
as shall have been properly brought before the meeting. If a stockholder is
entitled under applicable law to propose that an item of business be brought
before an annual meeting of stockholders, such stockholder shall be required to
make such proposal in accordance with the following procedures: The stockholder
shall give timely notice thereof in writing to the clerk of the corporation and
the stockholder must be a stockholder of record at the time such notice is
given. 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
sixty (60) days nor more than ninety (90) days prior to the meeting; provided,
however, that in the event that the date of the meeting is not publicly
announced by the corporation by mail, press release or otherwise more than
seventy (70) days prior to the meeting, notice by the stockholder to be timely
must be delivered to the clerk of the corporation not later than the close of
business on the tenth (10th) day following the day on which such announcement of
the date of the meeting was made. A stockholder's notice to the clerk shall set
forth as to each matter the stockholder proposes to bring before the meeting (a)
a brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the corporation's books, of the stockholder proposing
such business, (c) the class and number of shares of the corporation which are
beneficially owned by the stockholder, and (d) any material financial interest
of the stockholder in such business. As provided in Section 2.2 hereof, holders
of the requisite amount of shares of Voting Stock may apply to call a special
meeting of stockholders. Such application shall state, inter alia, the purpose
or purposes of the proposed meeting and the holders making such application
shall provide, with respect to each matter such holders propose to bring before
the meeting, the information specified by the second immediately preceding
sentence. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 2.5, 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. Notwithstanding the
foregoing provisions of this Section 2.5, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934,
-3-
<PAGE>
as amended, and the rules and regulations thereunder with respect to the matters
set forth in this Section 2.5.
2.6. Quorum of Stockholders. At any meeting of the stockholders, a quorum
as to any matter shall consist of a majority of the votes entitled to be cast on
the matter, except when a larger quorum is required by law, by the Articles of
Organization or by these By-laws. Stock owned directly or indirectly by the
corporation, if any, shall not be deemed outstanding for this purpose. Any
meeting may be adjourned from time to time by a majority of the votes properly
cast upon the question, whether or not a quorum is present, and the meeting may
be held as adjourned without further notice.
2.7. Action by Vote. When a quorum is present at any meeting, a plurality
of the votes properly cast for election to any office shall elect to such
office, and a majority of the votes properly cast upon any question other than
an election to an office shall decide the question, except when a larger vote is
required by law, by the Articles or Organization or by these By-laws. No ballot
shall be required for any election unless requested by a stockholder present or
represented at the meeting and entitled to vote in the election or unless
directed by the presiding officer at the meeting.
2.8. Voting. Stockholders entitled to vote shall have one vote for each
share of stock entitled to vote held by them of record according to the records
of the corporation, unless otherwise provided by the Articles of Organization.
The corporation shall not, directly or indirectly, vote any share of its own
stock.
2.9. Proxies. To the extent permitted by law, stockholders entitled to
vote may vote either in person or by proxy. Except to the extent permitted by
law, no proxy dated more than six (6) months before the meeting named therein
shall be valid. Unless otherwise specifically limited by their terms, such
proxies shall entitle the holders thereof to vote at any adjournment of such
meeting but shall not be valid after the final adjournment of such meeting.
Section 3. BOARD OF DIRECTORS
3.1. Number. Except as otherwise provided in the Articles of Organization,
a board of directors of not more than thirty (30) nor less than three (3)
directors, the exact number of directors to be determined from time to time by
the directors, divided into classes and elected for terms as provided in the
Articles of Organization, shall be elected at the annual meeting of the
stockholders by such stockholders as have the right to vote at such election.
Subject to the foregoing limitations and
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the requirements of the Articles of Organization, the number of directors may be
increased at any time or from time to time to any number of not more than thirty
(30) by the directors by vote of a majority of the directors then in office. The
number of directors may be decreased to any number not less than three (3) at
any time or from time to time by the directors by a vote of a majority of the
directors then in office, but only to eliminate vacancies existing by reason of
the death, resignation or removal of one or more directors.
3.2. Notification of Nominations. Except as otherwise provided in the
Articles of Organization, nominations for the election of directors may be made
by the board of directors or by any stockholder entitled to vote for the
election of directors. Any stockholder entitled to vote for the election of
directors at a meeting may nominate persons for election as directors by giving
timely notice thereof in proper written form to the clerk accompanied by a
petition signed by at least 100 record holders of capital stock of the
corporation which shows the class and number of shares held by each person and
which represent in the aggregate at least one percent (1%) of the combined
voting power of the then outstanding shares of Voting Stock entitled to vote
generally in the election of directors. To be timely, notice shall be delivered
to or mailed and received at the principal executive offices of the corporation
not less than sixty (60) days nor more than ninety (90) days prior to the
meeting; provided, however, that in the event that less than seventy (70) days'
notice or prior public disclosure of the date of the meeting is given or made to
the stockholders, to be timely, notice by the stockholder must be received at
the principal executive offices not later than the close of business on the
tenth (10th) day following the date on which such notice of the date of the
meeting was mailed or such public disclosure was made. To be in proper written
form, a stockholder's notice shall set forth in writing (i) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (or any successor rules or regulations), including,
without limitation, such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected, and (ii) as to
the stockholder giving the notice (x) the name and address, as they appear on
the corporation's books, of such stockholder, and (y) the class and number of
shares of the corporation which are beneficially owned by such stockholder. At
the request of the board of directors, any person nominated by the board of
directors for election as a director shall furnish to the clerk the information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee.
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In the event that a stockholder seeks to nominate one or more directors, the
clerk shall determine whether a stockholder has complied with this Section 3.2.
If the clerk shall determine that a stockholder has not complied with this
Section 3.2, the clerk shall direct the chairman of the meeting to declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by these By-laws, and the chairman of the meeting shall so declare to
the meeting and the defective nomination shall be disregarded.
3.3. Tenure. The directors shall hold office as provided in the Articles
of Organization.
3.4. Powers. Except as reserved to the stockholders by law, by the
Articles of Organization or by these By-laws, the business of the corporation
shall be managed by the directors who shall have and may exercise all the powers
of the corporation. In particular, and without limiting the generality of the
foregoing, the directors may at any time issue all or from time to time any part
of the unissued capital stock of the corporation from time to time authorized
under the Articles of Organization and may determine, subject to any
requirements of law, the consideration for which stock is to be issued and the
manner of allocating such consideration between capital and surplus.
3.5. Vacancies. Vacancies and any newly created directorships resulting
from any increase in the number of directors may be filled only by vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. When one or more directors shall resign from the board
of directors, effective at a future date, a majority of the directors then in
office, including those who have resigned, shall have power to fill such vacancy
or vacancies, the vote or action by writing thereon to take effect when such
resignation or resignations shall become effective. The directors shall have and
may exercise all their powers notwithstanding the existence of one or more
vacancies in their number, subject to any requirements of law or the Articles of
Organization or of these By-laws as to the number of directors required for a
quorum or for any vote or other actions.
3.6. Committees. The directors may, by vote of a majority of the directors
then in office, elect from their number such committees and delegate to such
committees some or all of the powers of the directors except those which by law,
by the Articles of Organization or by these By-Laws they are prohibited from
delegating. Such committees shall serve at the pleasure of the board of
directors. Except as the directors may otherwise determine, any committee of the
board of directors may make rules for the conduct of its business, but unless
otherwise provided by the directors or such rules, its business shall be
conducted as
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nearly as may be in the same manner as is provided by these By-laws for the
conduct of business by the directors.
3.7. Executive Committee. The board of directors may designate an
executive committee of the board of directors, which shall have and may
exercise, in the interval between meetings of the board of directors, all of the
powers of the board of directors and the management of the business and affairs
of the corporation, except that such committee shall not have such power or
authority in reference to amending the Articles of Organization, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or
revocation of a dissolution, or amending the by-laws of the corporation, or to
declare a dividend, to authorize the issuance of stock of the corporation, or to
authorize and affirm any action requiring the affirmative vote of more than a
majority of the directors then in office.
3.8. Compensation Committee. The board of directors may designate a
compensation committee of the board of directors, which shall be empowered to
fix the salaries and other compensation of the officers of the corporation and
shall have the powers and authority vested in it by any compensation or
incentive plan of the corporation with respect to officers and employees and
such other power and authority as determined by the board of directors.
3.9. Stock Option Plan Committee. The board of directors may designate a
stock option plan committee of the board of directors, which shall be empowered
to grant options to eligible directors, officers and key employees of the
corporation and its affiliates and determine the terms thereof and shall perform
such other duties as determined by the board of directors.
3.10. Audit Committee. The board of directors may designate an audit
committee of the board of directors, which shall be empowered to recommend to
the board of directors the selection of independent certified public
accountants, shall review the scope and terms of the audit and recommendations
of such accountant concerning the financial practices and procedures of the
corporation and shall report to the board of directors thereon and shall perform
such other duties as determined by the board of directors.
3.11. Regular Meetings. Regular meetings of the directors may be held
without call or notice at such places and at such times as the directors may
from time to time determine, provided that reasonable notice of the first
regular meeting following any such determination shall be given to absent
directors. A regular
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meeting of the directors may be held without call or notice immediately after
and at the same place as the annual meeting of the stockholders.
3.12. Special Meetings. Special meetings of the directors may be held at
any time and at any place designated in the call of the meeting, when called by
the chairman of the board, if any, the chief executive officer, the president or
the treasurer or by two or more directors, reasonable notice thereof being given
to each director by the secretary or an assistant secretary, or, if there be
none, by the clerk or an assistant clerk, or by the officer or one of the
directors calling the meeting.
3.13. Notice. It shall be sufficient notice to a director to send notice
by mail at least forty-eight hours or by telegram or facsimile transmission at
least twenty-four hours before the meeting addressed to him at his usual or last
known business or residence address or to give notice to him in person or by
telephone at least twenty-four hours before the meeting. Notice of a meeting
need not be given to any director if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
director who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. Neither notice of a meeting nor a waiver
of a notice need specify the purposes of the meeting.
3.14. Quorum. At any meeting of the directors a majority of the directors
then in office shall constitute a quorum. Any meeting may be adjourned from time
to time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice.
3.15. Action by Vote. When a quorum is present at any meeting, a majority
of the directors present may take any action, except when a larger vote is
required by law, by the Articles of Organization or by these By-laws.
3.16. Action by Writing. Unless the Articles of Organization otherwise
provide, any action required or permitted to be taken at any meeting of the
directors may be taken without a meeting if all the directors consent to the
action in writing and the written consents are filed with the records of the
meetings of the directors. Such consents shall be treated for all purposes as a
vote taken at a meeting.
3.17. Presence Through Communications Equipment. Unless otherwise provided
by law or the Articles of Organization, members of the board of directors may
participate in a meeting of such board by means of a conference telephone or
similar communications equipment by means of which all persons
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participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting.
Section 4. OFFICERS
4.1. Enumeration. The officers of the corporation shall consist of a
president, a treasurer and a clerk. The board of directors may select such
additional officers, including, without limitation, a chairman of the board of
directors, a chief executive officer, a chief financial officer, a controller, a
secretary and one or more executive vice presidents, vice presidents or
assistant vice presidents, assistant treasurers, assistant clerks, assistant
secretaries, and assistant controllers as the board of directors may from time
to time determine, and such additional officers shall have such authority and
perform such duties as may from time to time be prescribed by the board of
directors.
4.2 Qualifications. No officer need be a stockholder or a director. The
same person may hold at the same time one or more offices unless otherwise
provided by law. The clerk shall be a resident of Massachusetts unless the
corporation shall have a resident agent. Any officer may be required by the
board of directors to give a bond for the faithful performance of his duties in
such form and with such sureties as the board may determine.
4.3 Elections. The president, treasurer and clerk shall be elected
annually by the board of directors at its first meeting following the annual
meeting of the stockholders. All other officers shall be chosen or appointed by
the board of directors.
4.4 Term. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, the president, treasurer and clerk shall hold
office until the first meeting of the board of directors following the next
annual meeting of the stockholders and until their respective successors are
chosen and qualified. All other officers shall hold office until the first
meeting of the board of directors following the next annual meeting of the
stockholders, unless a shorter time is specified in the vote choosing or
appointing such officer or officers.
4.5 Certain Duties and Powers. The officers designated below, subject at
all times to these By-laws and to the direction and control of the board of
directors, shall have and may exercise the respective duties and powers set
forth below:
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The Chairman of the Board of Directors. The chairman of the
board of directors, if there be one, shall, when present, preside at all
meetings of the board of directors and shall perform such other duties as
may be imposed by law, these By-laws or by the board of directors.
The Chief Executive Officer. The chief executive officer
shall have general charge and oversight of the business and affairs of the
corporation and shall enforce and execute the orders and instructions of
the board of directors. In the absence of the chairman of the board of
directors, he shall, when present, preside at all meetings of the
stockholders, and, if a director, at all meetings of the board of
directors.
The President. The president shall be the chief operating
officer of the corporation and shall have general operating charge of its
business subject to the direction of the board of directors, the chairman
of the board of directors and the chief executive officer. In the absence
of the chairman of the board of directors and the chief executive officer,
he shall, when present, preside at all meetings of the stockholders, and,
if a director, at all meetings of the board of directors.
The Vice Presidents. The board of directors may designate any
vice president to exercise the powers and discharge the duties of the
chief executive officer or the chief operating officer during the absence
or inability to act of both the chairman of the board of directors and the
president. A vice president not specifically designated as aforesaid shall
have such powers and discharge such duties as may be from time to time
conferred or imposed upon him by the board of directors, the chairman of
the board of directors, the chief executive officer or the president.
The Treasurer. The treasurer shall cause to be kept accurate
books of account.
The Clerk. The clerk shall keep a record of all proceedings of
the stockholders and, if there be no secretary, shall also keep a record
of all proceedings of the board of directors. In the absence of the clerk
from any meeting of the stockholders or, if there be no secretary, from
any meeting of the board of directors, an assistant clerk, if there be
one, otherwise a clerk pro tempore designated by the person presiding at
the meeting, shall perform the duties of the clerk at such meeting.
The Secretary. The secretary, if there be one, shall keep a
record of all proceedings of the board of
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directors. In the absence of the secretary, if there be one, from any
meeting of the board of directors, an assistant secretary, if there be
one, otherwise a secretary pro tempore designated by the person presiding
at the meeting, shall perform the duties of the secretary at such meeting.
4.6 Other Duties and Powers. Each officer, subject at all times to these
By-laws and to the direction and control of the board of directors, shall have
and may exercise, in addition to the duties and powers specifically set forth in
these By-laws, such duties and powers as are prescribed by law, such duties and
powers as are commonly incident to his office and such duties and powers as the
board of directors may from time to time prescribe.
Section 5. RESIGNATIONS AND REMOVALS
Any director or officer may resign at any time by delivering his or her
resignation in writing to the chairman of the board of directors, if any, the
chief executive officer, the president, the treasurer or the clerk or to a
meeting of the directors. Such resignation shall be effective upon receipt
unless specified to be effective at some other time, and without in each case
the necessity of it being accepted unless the resignation shall so state. The
directors may be removed only as provided in the Articles of Organization. The
directors may remove any officer elected or appointed by them with or without
cause by the vote of a majority of the directors then in office. An officer may
be removed for cause only after a reasonable notice and opportunity to be heard
by the board of directors or by a standing or special committee of the board of
directors designated for the purpose. Except where a right to receive
compensation shall be expressly provided in a duly authorized written agreement
with the corporation, no director or officer resigning and no director or
officer removed shall have any right to any compensation as such director or
officer for any period following his or her resignation or removal, or any right
to damages on account of such removal, whether his or her compensation be by the
month or by the year or otherwise; unless, in the case of a resignation, the
directors, or in the case of a removal, the body acting on the removal, shall in
their or its discretion provide for compensation.
Section 6. VACANCIES
The directors shall elect a successor if the office of the president,
treasurer or clerk becomes vacant and may elect a successor if any other office
becomes vacant. Each such successor shall hold office for the unexpired term and
in the case of the president, treasurer and clerk until his successor is
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chosen and qualified, or in each case until he sooner dies, resigns, is removed
or becomes disqualified. Any vacancy of a directorship shall be filled as
specified in Section 3.5 of these By-laws.
Section 7. CAPITAL STOCK
7.1. Number and Par Value. The total number of shares and the par value,
if any, of each class of stock which the corporation is authorized to issue
shall be as stated in the Articles of Organization.
7.2. Shares Represented by Certificates and Uncertificated Shares. The
board of directors may provide by resolution that some or all of any or all
classes and series of shares shall be uncertificated shares. Unless such a
resolution has been adopted, a stockholder shall be entitled to a certificate
stating the number and the class and the designation of the series, if any, of
the shares held by him, in such form as shall, in conformity to law, be
prescribed from time to time by the directors. Such certificate shall be signed
by the chairman of the board of directors, if any, the chief executive officer,
the president or a vice president and by the treasurer or an assistant
treasurer. Such signatures may be facsimiles if the certificate is signed by a
transfer agent, or by a registrar, other than a director, officer or employee of
the corporation. In case any officer who has signed or whose facsimile signature
has been placed on such certificate shall have ceased to be such officer before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer at the time of its issue.
7.3. Loss of Certificates. In the case of the alleged loss or
destruction or the mutilation of a certificate of stock, a duplicate certificate
may be issued in place thereof, upon such conditions as the directors may
prescribe.
Section 8. TRANSFER OF SHARES OF STOCK
8.1. Transfer on Books. Subject to the restrictions, if any, stated or
noted on the stock certificates, shares of stock may be transferred on the books
of the corporation by the surrender to the corporation or its transfer agent of
the certificate therefor properly endorsed or accompanied by a written
assignment and power of attorney properly executed, with necessary transfer
stamps affixed, and with such proof of the authenticity of signature as the
directors or the transfer agent of the corporation may reasonably require.
Except as may be otherwise required by law, by the Articles of Organization or
by these By-laws, the corporation shall be entitled to treat the record holder
of stock as shown on its books as the owner of such
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stock for all purposes, including the payment of dividends and the right to
receive notice and to vote with respect thereto, regardless of any transfer,
pledge or other disposition of such stock until the shares have been transferred
on the books of the corporation in accordance with the requirements of these
By-laws.
It shall be the duty of each stockholder to notify the corporation of his
post office address.
8.2. Record Date and Closing Transfer Books. The directors may fix in
advance a time, which shall not be more than sixty (60) days before the date of
any meeting of stockholders or the date for the payment of any dividend or
making of any distribution to stockholders or the last date on which the consent
or dissent of stockholders may be effectively expressed for any purpose, as the
record date for determining the stockholders having the right to notice of and
to vote at such meeting and any adjournment thereof or the right to receive such
dividend or distribution or the right to give such consent or dissent, and in
such case only stockholders of record on such record date shall have such right,
notwithstanding any transfer of stock on the books of the corporation after the
record date; or without fixing such record date the directors may for any of
such purposes close the transfer books for all or any part of such period. If no
record date is fixed and the transfer books are not closed:
(1) the record date for determining stockholders having the right to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the date next preceding the day on which notice is given; and
(2) the record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors acts with respect thereto.
Section 9. CORPORATE SEAL
The seal of the corporation shall, subject to alteration by the directors,
consist of a flat-faced circular die with the word "Massachusetts", together
with the name of the corporation and the year of its organization, cut or
engraved thereon.
Section 10. EXECUTION OF PAPERS
Except as the directors may generally or in particular cases authorize the
execution thereof in some other manner, all deeds, leases, transfers, contracts,
bonds, notes, checks, drafts and other obligations made, accepted or endorsed by
the corporation
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shall be signed by the chairman of the board of directors, if any, the chief
executive officer, the president, a vice president or the treasurer.
Section 11. FISCAL YEAR
The fiscal year of the corporation shall end on December 31.
Section 12. BUSINESS COMBINATIONS
The provisions of Chapter 110F of the Massachusetts General Laws shall not
apply to any business combination (as defined in said Chapter 110F) involving
the corporation effected subsequent to March 24, 1996, or to any business
combination involving the corporation and Liberty Mutual.
Section 13. CONTROL SHARE ACQUISITIONS
The provisions of Chapter 110D of the Massachusetts General Laws shall not
apply to any control share acquisition (as defined in said Chapter 110D)
involving the corporation.
Section 14. AMENDMENTS
These By-laws may be altered, amended or repealed at any annual or special
meeting of the stockholders called for the purpose, of which the notice shall
specify the subject matter of the proposed alteration, amendment or repeal or
the sections to be affected thereby, by vote of the stockholders, or if there
shall be two or more classes or series of stock entitled to vote on the
question, by vote of each such class or series. The affirmative vote of a
majority of the total number of votes of the then outstanding shares of Voting
Stock, voting together as a single class shall be required for any alteration,
amendment or repeal of Section 2.2, Section 2.5, Section 3.1, Section 3.2,
Section 3.5, the third sentence of Section 5, Section 12, Section 13 or this
Section 14. These By-laws may also be altered, amended or repealed by vote of
the majority of the directors then in office, except with respect to any
provision which by law, the Articles of Organization or these By-laws requires
action by the stockholders. Action by the stockholders is required to amend,
alter or repeal this Section 14 so as to increase the power of the directors, or
to reduce the power of the stockholders, to amend, alter or repeal these
By-laws. The directors shall not take any action with respect to the alteration,
amendment or repeal of these By-laws which would provide for indemnification of
directors, unless permitted by law.
Any By-law altered, amended or repealed by the directors may be further
altered or amended or reinstated by the stockholders in the above manner.
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LIBERTY FINANCIAL COMPANIES, INC
PROMISSORY NOTE
$99,000,000.00 April 3, 1995
Liberty Financial Companies, Inc. (the "Borrower"), for value received, promises
to pay to the order of Liberty Mutual Capital Corporation (Boston) (the
"Lender") the principal sum of NINETY-NINE MILLION DOLLARS ($99,000,000.00) on
April 3, 2000 (the "Stated Maturity Date"), except to the extent redeemed prior
to the Stated Maturity Date, and to pay interest (computed on the basis of a
360-day year of twelve 30-day months) on the outstanding principal amount hereof
at an interest rate of 8% per annum from the date of this Note until the
principal hereof is paid. Interest shall be due semi-annually and payable hereon
on the last Business Day of each March and September. Payment of interest on the
last Business Day of such calendar month shall include payment of interest
through and including the last day of such calendar month. As used herein,
"Business Day" means any day that is not a Saturday or Sunday and that is not a
day on which the principal place of business of the Lender is closed or a day on
which banking institutions in the City of Boston are generally authorized or
obligated by law or executive order to close. All payments shall be made in
lawful currency of the United States of America in immediately available funds.
Except as otherwise provided in this paragraph, this Note is not subject to
redemption at the option of the Borrower or subject to repayment at the option
of the Lender prior to the Stated Maturity Date. This Note may be redeemed in
whole (but not in part) at the option of the Borrower on any Business Day before
maturity. Notice of the Borrower's option to elect redemption of this Note shall
be given to the Lender or holder not less than 30 days before the date which the
Borrower fixes for redemption (the "Redemption Date"). On the Redemption Date,
the Borrower shall pay the following redemption price (expressed as a percentage
of the principal amount hereof) during the 12-month period beginning on April 1
of the year indicated.
Year Redemption Price
1995 99.2665%
1996 99.1722%
1997 99.2028%
1998 99.3060%
1999 100.0000%
together with interest accured to the Redemption Date.
As used herein, "Event of Default" means any one or more of the following events
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administative or governmental body):
(1) the Borrower shall fail to pay when due any principal on this Note; or
(2) the Borrower shall fail to pay any interest on this Note for more than
5 Business Days after the date when due; or
(3) Liberty Mutual Insurance Company shall at any time and for any reason
cease to own and control (either directly or through one or more
<PAGE>
majority-owned subsidiaries), both legally and beneficially, with full
power to vote, more than 50% of the outstanding shares of common stock of
the Borrower;
(4) (a) the Borrower shall commence any case or proceeding seeking
liquidation, reorganization or other relief with respect to it or its debts
under any bankruptcy, insolvency or similar law, or seeking the appointment
of a trustee, receiver, liquidator, custodian or similar official of it or
any substantial part of its property, or the Borrower shall make a general
assignment for the benefit or creditors or shall generally fail to pay its
debts as they become due; of (b) an involuntary case or proceeding shall be
commenced against the Borrower seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or
similar law, or seeking the appointment of a trustee, receiver, liquidator,
custodian or similar official of it or any substantial part of its
property, and such case or proceeding shall remain undismissed and unstayed
for 60 days, or an order for relief shall be entered against the Borrower
under any bankruptcy, insolvency or similar law and such order shall remain
undismissed and unstayed for 60 days.
If an Event of Default occurs and is continuing, then and in every such case the
Lender may declare the principal of this Note, together with accrued interest
thereon, to be immediately due and payable, by notice to the Borrower, whereupon
such amounts shall become immediately due and payable.
The Borrower may treat the holder of this Note as the absolute onwer hereof for
the purpose of receiving payment of, or on account of, the principal and
interest due hereon and for all other purposes.
The Borrower hereby waives presentment, demand, notice of dishonor, protest and
all other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Note.
This Note shall have the effect of an instrument executed under seal and shall
be governed by the laws of the Commonwealth of Massachusetts.
LIBERTY FINANCIAL COMPANIES, INC.
(Borrower)
___________________________________
Name:
Title:
LEASE dated as of the 31st day of May, 1996, between DEWEY SQUARE TOWER
ASSOCIATES, a Massachusetts partnership having an office at One Financial
Center, Boston, Massachusetts, c/o Rose Associates of Massachusetts, Inc.
(referred to as "Landlord"), and COLONIAL MANAGEMENT ASSOCIATES, INC., a
Massachusetts corporation (referred to as "Tenant").
W I T N E S S E T H:
Landlord and Tenant hereby covenant and agree as follows:
ARTICLE 1
DEMISE, PREMISES, TERM, RENTS
Section 1.01. Landlord hereby leases to Tenant and Tenant hereby hires
from Landlord the premises hereinafter described in the building located at
Dewey Square, Boston, Massachusetts, known as One Financial Center (said
building is referred to as the "Building", and the Building, together with the
Land, as defined in Article 2, is referred to as the "Real Property"), at the
annual rental rate or rates set forth in Section 1.03, and upon and subject to
all of the terms, covenants and conditions contained in this Lease. The premises
leased to Tenant, together with all appurtenances, fixtures, improvements,
additions and other property attached thereto or installed therein at the
commencement of, or at any time during, the term of this Lease, other than
Tenant's Personal Property (as defined in Article 5), are referred to,
collectively, as the "Demised Premises". The various portions of the Demised
Premises, the agreed rentable area thereof and the designation used herein to
reference such portions are as follows:
"Primary Premises":
entire ninth (9th) floor (23,847 square feet)
entire tenth (10th) floor (23,847 square feet)
entire eleventh (11th) floor (23,847 square feet)
entire twelfth (12th) floor (23,854 square feet)
entire fourteenth (14th) floor (23,681 square feet)
portion of thirteenth (13th) floor (14,058 square feet)
"Seventh Floor Space":
portion of seventh (7th) floor (6,192 square feet)
"Expansion Area":
portion of thirteenth (13th) floor (9,623 square feet)
The location of any portion of the Demised Premises consisting of less than an
entire floor is shown on the plans attached hereto as Exhibit A and made a part
hereof.
Section 1.02. A. The Demised Premises are leased for a term (referred to
as the "Demised Term") to commence on the Commencement Date and to end on the
Expiration Date (as such terms are hereinafter defined), unless the Demised Term
shall sooner terminate pursuant to any of the terms, covenants or conditions of
this Lease or pursuant to law.
B. In the case of the Primary Premises, the Commencement Date shall be
June 1, 1996 and the Expiration Date shall be May 31, 2006.
C. In the case of the Seventh Floor Space, the Commencement Date shall be
September 11, 1996 and the Expiration Date shall be May 31, 2002. Tenant may, by
written notice to Landlord given on or before May 31, 2001, delay said
Expiration Date and extend the Demised Term applicable to the Seventh Floor
Space through May 31, 2006, on the same terms and conditions set forth herein.
Notwithstanding the foregoing, Landlord may, by notice to Tenant given on or
before November 30, 2000, rescind the foregoing option (despite the prior
exercise thereof by Tenant) in the event that the Seventh Floor Space is to be
leased to Federal Insurance Company, an Indiana corporation, or its successors
or assigns.
D. The Commencement Date applicable to the Expansion Area shall be the
date on which Landlord delivers possession thereof to Tenant free and clear of
other tenants and occupants, having substantially completed the Work described
in Schedule A attached hereto and made a part hereof, or such sooner date on
which Tenant first conducts business in any part of the Expansion Area. Tenant
shall be entitled to a credit of $1,186 (referred to as the "Delay Credit") for
each day after September 24, 1997 (referred to as the "Construction Deadline")
on which said Commencement Date shall not have occurred for reasons other than
(i) delays or defaults attributable to Tenant or (ii) delays attributable to the
inclusion, as part of such Work, of a stairway connecting the Expansion Area to
other portions of the Demised Premises. Any such credit shall be applied against
installments of Fixed Rent becoming due hereunder. Promptly following the
substantial completion of such Work, Landlord shall obtain from the Boston
Inspectional Services Department a certificate authorizing the use and occupancy
of the Expansion Area pursuant to the applicable provisions of the Massachusetts
State Building Code and deliver a copy of said certificate to Tenant. Landlord
further agrees to indemnify and save Tenant harmless of and from all loss,
liability, penalties, fines, costs and expenses (including without limitation
reasonable counsel fees) incurred as a result of Tenant's being forced by
governmental authorities to cease business operations in the Expansion Area
following the Commencement Date applicable thereto on account of Landlord's
failure to have obtained said certificate. After the determination of the
Commencement Date applicable to the Expansion Area, each party agrees, upon
demand of the other, to execute, acknowledge and deliver to the other an
instrument, in the form attached hereto as Exhibit B and made a part hereof,
setting forth said Commencement Date. Landlord shall notify Tenant at least
fifteen (15) days in advance of the date on which Landlord reasonably
anticipates that the Commencement Date applicable to the Expansion Area will
occur. Following such notice, Tenant may, at its risk and subject to all
applicable terms and conditions of this Lease, prepare the Expansion Area for
occupancy so long as Tenant does not thereby interfere with the performance of
Landlord's Work hereunder. The Expiration Date applicable to the Expansion Area
shall be May 31, 2006.
Section 1.03. A. Subject to application of the credit provided for in
Section 40.01, Tenant shall pay rent to Landlord at the annual rate (referred to
as "Fixed Rent") hereinafter set forth. In the case of the Primary Premises,
Fixed Rent shall be payable in accordance with the following schedule:
With respect to the Fixed Rent shall be payable
following period: at the annual rate of:
------------------- ---------------------------
June 1, 1996 - May 31, 2001 $3,994,020.00 ($30 psf)
June 1, 2001 - May 31, 2006 $4,326,855.00 ($32.50 psf)
In the case of the Seventh Floor Space, Fixed Rent shall be payable in
accordance with the following schedule:
With respect to the Fixed Rent shall be payable
following period: at the annual rate of:
------------------- ---------------------------
September 11, 1996 - May 31, 2001 $154,800.00 ($25 psf)
June 1, 2001 - May 31, 2006 $185,760.00 ($30 psf)
In the case of the Expansion Area, Fixed Rent shall be payable in accordance
with the following schedule:
With respect to the Fixed Rent shall be payable
following period: at the annual rate of:
------------------- ---------------------------
Through May 31, 2001 $288,690.00 ($30 psf)
June 1, 2001 - May 31, 2006 $312,747.60 ($32.50 psf)
As used herein, the abbreviation "psf" refers to a Fixed Rent rate expressed as
a specified amount per rentable square foot. Whenever any provision of this
Lease provides for a proportional or other partial abatement of Fixed Rent, such
abatement shall be calculated by reference to the Fixed Rent allocable hereunder
to the applicable portion of the Demised Premises.
B. The Fixed Rent and any additional rent payable pursuant to the
provisions of this Lease shall be payable by Tenant to Landlord at its office
(or at such other place as Landlord may designate in a notice to Tenant) in
lawful money of the United States which shall be legal tender in payment of all
debts and dues, public and private, at the time of payment, without prior demand
therefor and without any offset or deduction whatsoever except as otherwise
specifically provided in this Lease. The Fixed Rent shall be payable in equal
monthly installments in advance, on the first (1st) day of each month during the
Demised Term (except as otherwise provided in subsection C of this Section).
C. Fixed Rent shall be prorated in the case of any month during which the
Commencement Date or the last day of the Demised Term occurs.
Section 1.04. Tenant covenants (i) to pay the Fixed Rent and any
additional rent payable pursuant to the provisions of this Lease, and (ii) to
observe and perform, and to permit no violation of, the terms, covenants and
conditions of this Lease on Tenant's part to be observed and performed.
ARTICLE 2
DEFINITIONS
Section 2.01. As used in this Lease, the following terms shall have the
following respective meanings:
Alterations: As defined in Section 4.01.
Annual Expenses: As defined in Section 23.01.
Authority: As defined in Section 8.01.
Base Expenses: As defined in Section 23.01.
Building: As defined in Section 1.01.
Building Rules: As defined in Section 35.01.
business days: All days other than Saturdays, Sundays and holidays, as
defined in this Article.
Commencement Date: As defined in Section 1.02.
Commonwealth Lease: As defined in Section 8.01.
Deficiency: As defined in Section 19.01.
Demised Premises: As defined in Section 1.01.
Demised Term: As defined in Section 1.02.
Electrical Inclusion Factor:
The Electrical Inclusion
With respect to the: Factor shall be:
------------------- ---------------
Primary Premises $133,134
Seventh Floor Space $6,192
Expansion Area $9,623
Escalation Year: As defined in Section 23.01.
Events of Default: As defined in Section 17.01.
Expiration Date: As defined in Section 1.02.
FHWA: As defined in Section 14.01.
Fixed Rent: As defined in Section 1.03.
Holidays: All days (i) observed as legal holidays by either the City of
Boston, the Commonwealth of Massachusetts or the Federal Government, and (ii)
designated as holidays in any union contract covering building service employees
in the Building.
HVAC: As defined in Section 31.02.
Included Improvements: As defined in Section 23.01.
Land: The land on which the Building is located, including that portion
thereof affected by the Commonwealth Lease, as defined in said Section 8.01,
including, without limitation, that portion of the land affected by the
Commonwealth Lease which is reserved to the Landlord thereunder and is included
in the term "Non-Leased Premises", as defined therein, and upon which structural
supports for a portion of the Building are located.
Land Disposition Agreement: As defined in Section 8.01.
Landlord's Escalation Statement: As defined in Section 23.01.
Monthly Escalation Installment Notice: As defined in Section 23.01.
Mortgage: As defined in Section 8.01.
Non-Leased Premises: (See definition of Land, above).
Operating Expenses: As defined in Section 23.01.
Overtime Periods: As defined in Section 31.06.
Partnership Tenant: As defined in Section 28.01.
Person or persons: Shall include natural persons, firms, corporations,
associations, and any other private or public entities, whether any of the
foregoing are acting on their own behalf or in a representative capacity.
Prime Rate: The rate of interest announced by State Street Bank and Trust
Company or its successor from time to time as its "Prime Rate".
Real Property: As defined in Section 1.01.
Subletting Profit: As defined in Section 12.03.
Taxes: As defined in Section 23.01.
Tenant's Personal Property: As defined in Section 5.01.
Tenant's Proportionate Share: As defined in Section 23.01.
ARTICLE 3
USE AND OCCUPANCY
Section 3.01. Tenant shall use and occupy the Demised Premises for general
office purposes.
Section 3.02. Tenant shall not use or occupy, or permit the use or
occupancy of, the Demised Premises or any part thereof, for any purpose other
than the purpose specifically set forth in Section 3.01, or in any manner which,
in Landlord's reasonable judgment, (a) shall adversely affect or interfere with
(i) any services required to be furnished by Landlord to Tenant or to any other
tenant or occupant of the Building, or (ii) the proper rendition of any such
service or the cost thereof, or (iii) the use or enjoyment of any part of the
Building by any other tenant or occupant, or (b) shall tend to impair the
character or dignity of the Building.
ARTICLE 4
ALTERATIONS
Section 4.01. Tenant shall not make or perform, or permit the making or
performance of, any alterations, installations, improvements, additions or other
physical changes in or about the Demised Premises (referred to collectively, as
"Alterations", which term shall exclude the Work to be performed by Landlord
pursuant to Schedule A) without Landlord's prior consent. Landlord agrees not to
unreasonably withhold or delay its consent to any nonstructural Alterations
proposed to be made by Tenant to adapt the Demised Premises for Tenant's
business purposes. Such consent shall not be required in the case of any
repainting or similar work of a purely cosmetic or decorative nature.
Notwithstanding the foregoing provisions of this Section or Landlord's consent
to any Alterations, all Alterations shall be made and performed in conformity
with and subject to the following provisions: All Alterations shall be made and
performed at Tenant's sole cost and expense and at such time and in such manner
as Landlord may, from time to time, reasonably designate; all Alterations shall,
when completed, be of such a character as not to materially reduce the economic
value of the Building below its value immediately before such Alterations; no
Alterations shall diminish or reduce the structural integrity of the Building;
Alterations shall be made only by contractors or mechanics approved by Landlord,
such approval not unreasonably to be withheld or delayed (notwithstanding the
foregoing, all Alterations requiring mechanics in trades with respect to which
Landlord has adopted or may hereafter adopt a list or lists of approved
contractors shall be made only by contractors selected by Tenant from such list
or lists, but only to the extent that such contractors offer competitive
pricing); no Alteration shall affect any part of the Building other than the
Demised Premises or adversely affect any service required to be furnished by
Landlord to Tenant or to any other tenant or occupant of the Building or reduce
the value or utility of the Building; no Alteration shall affect the outside
appearance of the Building or the color or style of any venetian blinds (except
that Tenant may remove any venetian blinds provided that they are promptly
replaced by Tenant with blinds of a similar type, material and color); all
business machines and mechanical equipment shall be placed and maintained by
Tenant in settings sufficient, in Landlord's reasonable judgment, to absorb and
prevent vibration perceptible outside the Demised Premises or noise or annoyance
to other tenants or occupants of the Building; Tenant shall submit to Landlord
reasonably detailed plans and specifications (including layout, architectural,
mechanical and structural drawings) for each proposed Alteration; prior to the
commencement of each Alteration, Tenant shall have procured and paid for, and
exhibited to Landlord, so far as the same may be required from time to time, all
permits and authorizations of all municipal departments and governmental
subdivisions and authorities having or claiming jurisdiction; prior to the
commencement of each proposed Alteration, Tenant shall furnish to Landlord
duplicate original policies of worker's compensation insurance covering all
persons to be employed in connection with such Alteration, including those to be
employed by all contractors and subcontractors, and of comprehensive public
liability insurance (including property damage coverage) in which Landlord, its
agents and any lessor under any ground or underlying lease shall be named as
parties insured, which policies shall be issued by companies, and shall be in
form and amounts, reasonably satisfactory to Landlord and shall be maintained by
Tenant until the completion of such Alteration; all Alterations in or to the
electrical facilities in or serving the Demised Premises shall be subject to the
provisions of subsection B of Section 31.04; all fireproof wood test reports,
electrical and air conditioning certificates, and all other permits, approvals
and certificates required by all governmental authorities shall be timely
obtained by Tenant and submitted to Landlord; all Alterations, once commenced,
shall be made promptly and in a good and workmanlike manner; notwithstanding
Landlord's approval of plans and specifications for any Alteration, all
Alterations shall be made and performed in full compliance with all applicable
laws, orders and regulations (including, but not limited to, the energy
conservation provisions of the Massachusetts Building Code) of Federal, State,
County and Municipal authorities and with all directions of all public officers,
and with all applicable rules, orders, regulations and requirements of the
Boston Board of Fire Underwriters and the New England Fire Insurance Rating
Organization or any similar body; all Alterations shall be made and performed in
accordance with the Building Rules; all materials and equipment to be installed,
incorporated or located in the Demised Premises as a result of any Alteration
shall be of first quality and condition; no such materials or equipment shall be
subject to any lien, encumbrance, chattel mortgage or title retention or
security agreement of any kind; in the event Landlord or its agents employ any
independent architect or engineer to examine any plans or specifications
submitted by Tenant to Landlord in connection with any proposed Alteration,
Tenant agrees to pay to Landlord a sum equal to any reasonable fees charged by
such architect or engineer to Landlord in connection therewith. Any consent or
approval required from Landlord pursuant to the provisions of this Section shall
be deemed to have been granted unless Landlord notifies Tenant to the contrary
within thirty (30) days following receipt of Tenant's written request therefor
so long as such request expressly and conspicuously recites the effect of
Landlord's failure to respond thereto as aforesaid.
Section 4.02. In the event of any dispute between Landlord and Tenant as
to the reasonability of Landlord's failure or refusal to grant any consent or
approval requested by Tenant pursuant to the provisions of Section 4.01 with
respect to which Landlord has agreed to act reasonably, such dispute shall be
determined by arbitration in accordance with the provisions of Article 33.
Section 4.03. Nothing in this Lease shall be deemed or construed in any
way as constituting the consent or request of Landlord, express or implied, by
inference or otherwise, to any contractor, subcontractor, laborer or
materialman, for the performance of any labor or the furnishing of any material
for any specific Alteration to, or repair of, the Demised Premises, the
Building, or any part of either. Any mechanic's or other lien filed against the
Demised Premises or the Building or the Real Property for work claimed to have
been done for, or materials claimed to have been furnished to, Tenant, or based
upon any act or omission or alleged act or omission of Tenant (excluding any
lien arising from the performance of the Work pursuant to Schedule A), shall be
discharged by Tenant, at Tenant's sole cost and expense, by filing any bond
required by law or otherwise, within ten (10) days after notice of the filing of
such lien.
Section 4.04. Tenant shall not, at any time prior to or during the Demised
Term, directly or indirectly employ, or permit the employment of, any
contractor, mechanic or laborer in the Demised Premises, whether in connection
with any Alteration or otherwise, if such employment will interfere or cause any
labor conflict with other contractors, mechanics, or laborers engaged in the
construction, maintenance or operation of the Building by Landlord, Tenant or
others. In the event of any such interference or conflict, Tenant, upon demand
of Landlord, shall cause all contractors, mechanics or laborers causing such
interference or conflict to leave the Building immediately.
ARTICLE 5
OWNERSHIP OF IMPROVEMENTS
Section 5.01. All appurtenances, fixtures, improvements, additions and
other property attached to or installed in the Demised Premises, whether by
Landlord or Tenant or others, and whether at Landlord's expense, or Tenant's
expense, or the joint expense of Landlord and Tenant, shall be and remain the
property of Landlord. Notwithstanding the foregoing, any such fixtures,
improvements, additions and other property installed at the sole expense of
Tenant with respect to which Tenant has not been granted any credit or allowance
by Landlord, whether pursuant to Schedule A or otherwise, and which are
removable without material damage to the Demised Premises, shall be and remain
the property of Tenant and are referred to as "Tenant's Personal Property". Any
replacements of any property of Landlord, whether made at Tenant's expense or
otherwise, shall be and remain the property of Landlord.
ARTICLE 6
REPAIRS
Section 6.01. Tenant shall take good care of the Demised Premises
(excluding those areas reserved to Landlord pursuant to the provisions of
Section 14.02) and, at Tenant's sole cost and expense, shall make all repairs
and replacements, structural and otherwise, ordinary and extraordinary, foreseen
and unforeseen, as and when needed to preserve the Demised Premises in good and
safe working order and in first class repair and condition, except for damage by
fire or other casualty for which Tenant is not otherwise liable and except
further that Tenant shall not be required to make any such structural repairs or
structural replacements to the Demised Premises unless necessitated or
occasioned by the acts, omissions or negligence of Tenant or any person claiming
through or under Tenant, or any of their servants, employees, contractors,
agents, visitors or licensees, or by the use or occupancy or manner of use or
occupancy of the Demised Premises by Tenant or any such person. Without
affecting Tenant's obligations set forth in the preceding sentence, Tenant, at
Tenant's sole cost and expense, shall also (i) make all replacements, as and
when necessary, to the lamps, tubes, ballasts, and starters in the lighting
fixtures installed in the Demised Premises, (ii) make all repairs and
replacements, as and when necessary, to Tenant's Personal Property and to any
Alterations made or performed by or on behalf of Tenant or any person claiming
through or under Tenant, and (iii) if the Demised Premises shall include any
space on any ground, street, mezzanine or basement floor in, or facing the
atrium or any public portion of, the Building, make all replacements, as and
when necessary, to all windows and plate and other glass in, on or about such
space, and obtain and maintain, throughout the Demised Term, plate glass
insurance policies issued by companies, and in form and amounts, reasonably
satisfactory to Landlord, in which Landlord, its agents and any lessor under any
ground or underlying lease shall be named as parties insured, and (iv) perform
all maintenance and make all repairs and replacements, as and when necessary, to
any air conditioning equipment, private elevators, escalators, conveyors or
mechanical systems (other than the Building's standard equipment and systems)
which may be installed in the Demised Premises by Landlord, Tenant or others.
The provisions of the foregoing sentence shall not, in and of themselves, be
deemed to give to Tenant any right to install air conditioning equipment,
elevators, escalators, conveyors or mechanical systems. All repairs and
replacements made by or on behalf of Tenant or any person claiming through or
under Tenant shall be made and performed in conformity with, and subject to the
provisions of, Section 4.01 and shall be at least equal in quality and class to
the original work or installation. The necessity for, and adequacy of, repairs
and replacements pursuant to this Article 6 shall be measured by the standard
which is appropriate for first class office buildings of similar construction
and class in the Boston, Massachusetts area. In no event shall Tenant be
obligated to make any repair to the Demised Premises to the extent necessitated
by the acts, omissions or negligence of Landlord or any of Landlord's servants,
employees, contractors or agents. Subject to Tenant's obligations hereunder and
except as otherwise herein provided in the case of damage by fire or other
casualty or as a result of an eminent domain taking, Landlord shall, within a
reasonable time, make all repairs and replacements necessary to maintain in good
condition the roof, exterior walls, floor slabs, foundations and other
structural components of the Building as well as all lavatories, elevators,
sanitary, electrical, heating and air conditioning systems and other common
areas and facilities of the Building serving the Demised Premises. Landlord
shall further be responsible for removing snow and ice from any exterior
passageways on the Property and maintaining any landscaped areas outside the
Building.
ARTICLE 7
COMPLIANCE WITH LAWS
Section 7.01. Tenant, at Tenant's sole cost and expense, shall comply with
all present and future laws, orders and regulations (including, but not limited
to, the Americans with Disabilities Act and the energy conservation provisions
of the Massachusetts Building Code) of Federal, State, County and Municipal
authorities, and with all directions, requirements, orders and notices of
violation thereof, issued by all public officers, which shall impose any duty
upon Landlord or Tenant with respect to the particular manner in which Tenant or
any person claiming through or under Tenant makes use of the Demised Premises,
or arising out of acts, omissions, or negligence of Tenant or any such person or
any of their servants, employees, contractors, agents, visitors or licensees,
whether ordinary or extraordinary, foreseen or unforeseen. Landlord shall be
responsible for such compliance (i) relative to the common areas and facilities
of the Building and (ii) to the extent necessary in order to allow the continued
use of the Demised Premises for general office purposes. Any work or
installations made or performed by or on behalf of Tenant or any person claiming
through or under Tenant pursuant to the provisions of this Article shall be made
in conformity with, and subject to the provisions of, Section 4.01.
Section 7.02. Tenant shall not do anything, or permit anything to be done,
in or about the Demised Premises which shall (i) invalidate or be in conflict
with the provisions of any fire or other insurance policies covering the
Building or any property located therein, or (ii) result in a refusal by fire
insurance companies of good standing to insure the Building or any such property
in amounts satisfactory to Landlord, or (iii) subject Landlord to any liability
or responsibility for injury to any person or property by reason of any business
operation being conducted in the Demised Premises, or (iv) cause any increase in
the fire insurance rates applicable to the Building or property located therein
at the beginning of the Demised Term or at any time thereafter. Tenant, at
Tenant's expense, shall comply with all present and future rules, orders,
regulations and requirements of the Boston Board of Fire Underwriters and the
New England Fire Insurance Rating Organization or any similar body and the
issuer of any insurance obtained by Landlord covering the Building and/or the
Real Property, whether ordinary or extraordinary, foreseen or unforeseen.
Section 7.03. In any action or proceeding wherein Landlord and Tenant are
parties, a schedule or "make up" of rates applicable to the Building or property
located therein issued by I.S.O. Commercial Risk Services, Inc., or other
similar body fixing such fire insurance rates, shall be conclusive evidence of
the facts therein stated and of the several items and charges in the fire
insurance rates then applicable to the Building or property located therein.
ARTICLE 8
SUBORDINATION, ATTORNMENT, ETC.
Section 8.01. A. This Lease and all rights of Tenant under this Lease are,
and shall remain, unconditionally subject and subordinate in all respects to (a)
all ground or underlying leases now or hereafter affecting the Real Property or
any portion thereof, including, without limitation, a certain amended and
restated lease (the "Commonwealth Lease"), dated May 6th, 1982, between the
Commonwealth of Massachusetts, as landlord, and Bostrose Associates, L.P., as
tenant, affecting a portion of the Land, and (b) all mortgages which may now or
hereafter affect such leases or the Real Property, including, without
limitation, certain mortgages and security agreements (collectively the
"Mortgage"), between Dewey Square Tower Associates, as mortgagor, and
Metropolitan Life Insurance Company, as mortgagee, and to all advances made or
hereafter to be made under such mortgages, and to all renewals, modifications,
consolidations, correlations, replacements and extensions of, and substitutions
for, such leases and mortgages, and (c) the Urban Renewal Plan - Central
Business District South Station Urban Renewal Area, Project No. Mass. R-82C,
dated May, 1968 and as approved by the City Council on February 24, 1969, a copy
of which is recorded at Suffolk Registry of Deeds in Book 8632, Page 602, as
amended by a Proclaimer of Minor Modification approved by the Boston
Redevelopment Authority (the "Authority") on August 6, 1981, and recorded with
said Deeds on May 4, 1982 as Instrument #163, and (d) a certain Amended and
Restated Land Disposition Agreement (the "Land Disposition Agreement"), dated
May 3rd, 1982, between the Authority, Rose Associates and Bostrose Associates,
L.P. Landlord warrants and represents that none of the instruments hereinabove
specified prohibits the making of this Lease or materially impairs Tenant's
ability to make use of the Demised Premises as herein permitted. The foregoing
provisions of this Section shall be self-operative and no further instrument of
subordination shall be required. In confirmation of such subordination, Tenant
shall execute and deliver promptly any certificate or other instrument which
Landlord, or any lessor under any ground or underlying lease, or any holder of
any such mortgage or the Authority may reasonably request. No act or failure to
act on the part of Landlord which would entitle Tenant under the terms of this
Lease, or by law, to be relieved of Tenant's obligations hereunder (except to
the extent permitted by Section 45.02) or to terminate this Lease (except as
herein provided in the case of damage by fire or other casualty or as a result
of an eminent domain taking) shall result in a release or termination of such
obligations or a termination of this Lease unless (i) Tenant shall have first
given written notice of Landlord's act or failure to act to the holder of the
Mortgage and to the holder or holders of any other mortgage of whom Tenant has
been given written notice specifying the act or failure to act on the part of
Landlord which could or would give basis to Tenant's rights; and (ii) the holder
or holders of such mortgages, after receipt of such notice, have failed or
refused to correct or cure the condition complained of within a reasonable time
thereafter; but nothing contained in this sentence shall be deemed to impose any
obligation on any such holders to correct or cure any such condition.
"Reasonable time" as used above means and includes a reasonable time to obtain
possession of the Building if any such holder elects to do so and a reasonable
time to correct or cure the condition if such condition is determined to exist,
provided that such Mortgagee shall investigate the condition complained of
within thirty (30) days after notice thereof and thereafter pursue any required
corrective action with all due diligence.
B. Notwithstanding the provisions of subsection A of this Section 8.01,
the holder of any mortgage to which the Lease is subject and subordinate, as
provided in said subsection A, shall have the right, at its sole option, to
subordinate and subject its mortgage, in whole or in part, to this Lease by
recording a unilateral declaration to such effect.
Section 8.02. If, at any time prior to the expiration of the Demised Term,
any ground or underlying lease under which Landlord then shall be the lessee
shall terminate or be terminated for any reason, Tenant agrees, at the election
and upon demand of any owner of the Real Property, or of the holder of any
mortgage in possession of the Real Property or the Building, or of any lessee
under any other ground or underlying lease covering premises which include the
Demised Premises, to attorn, from time to time, to any such owner, holder, or
lessee, upon the then executory terms and conditions of this Lease, for the
remainder of the term originally demised in this Lease, provided that such
owner, holder or lessee, as the case may be, shall then be entitled to
possession of the Demised Premises. The provisions of this Section shall enure
to the benefit of any such owner, holder, or lessee, shall apply notwithstanding
that, as a matter of law, this Lease may terminate upon the termination of any
such ground or underlying lease, shall be self-operative upon any such demand,
and no further instrument shall be required to give effect to said provisions.
Tenant, however, upon demand of any such owner, holder, or lessee, agrees to
execute, from time to time, instruments in confirmation of the foregoing
provisions of this Section, satisfactory to any such owner, holder, or lessee,
acknowledging such attornment and setting forth the terms and conditions of its
tenancy. Nothing contained in this Section shall be construed to impair any
right otherwise exercisable by any such owner, holder, or lessee.
Section 8.03. From time to time, within ten (10) days next following
Landlord's request, Tenant shall deliver to Landlord a written statement
executed and acknowledged by Tenant, in form satisfactory to Landlord, (i)
stating that this Lease is then in full force and effect and has not been
modified (or, if modified, setting forth the specific nature of all
modifications), and (ii) setting forth the date to which the Fixed Rent has been
paid, and (iii) stating whether or not, to the best knowledge of Tenant,
Landlord is in default under this Lease, and, if Landlord is in default, setting
forth the specific nature of all such defaults. Tenant acknowledges that any
statement delivered pursuant to this Section may be relied upon by any purchaser
or owner of the Building, or the Real Property or any part thereof, or
Landlord's interest in the Building or the Real Property or any ground or
underlying lease, or by any mortgagee, or by any assignee of any mortgagee, or
by any lessee under any ground or underlying lease.
Section 8.04. If Landlord assigns its interest in this Lease, or the rents
payable hereunder, to the holder of any mortgage or the lessor of any ground or
underlying lease, whether the assignment shall be conditional in nature or
otherwise, Tenant agrees that (a) the execution thereof by Landlord and the
acceptance by such holder or lessor shall not be deemed an assumption by such
holder or lessor of any of the obligations of the Landlord under this Lease
unless such holder or lessor shall, by written notice sent to Tenant,
specifically otherwise elect; and (b) except as aforesaid, such holder or lessor
shall be treated as having assumed Landlord's obligations hereunder only upon
the foreclosure of such holder's mortgage or the termination of such lessor's
lease and the taking of possession of the Demised Premises by such holder or
lessor, as the case may be.
Section 8.05. The provisions of this Article relating to the subordination of
this Lease to any future mortgage or ground lease and Tenant's attornment to the
mortgagee or lessee thereunder (referred to in this Section as the "holder")
shall be subject to the execution and delivery to Tenant of an agreement, in the
holder's customary form, in which the holder agrees to recognize the provisions
of Tenant hereunder in the event that the holder succeeds to Landlord's interest
in this Lease. Nothing contained herein shall be deemed to affect the prior
rights of the holder with respect to any insurance proceeds or condemnation
awards or to render the holder:
(a) liable for any act or omission of a prior lessor
(including Landlord);
(b) subject to any offsets or defenses which Tenant may have
against any prior lessor (including Landlord);
(c) bound by any rent or other sum which Tenant may have
paid in advance to any prior lessor (including Landlord);
(d) bound by any amendment or other modification of this
Lease made without the prior consent of the holder;
(e) liable for the performance of the Work pursuant to
Schedule A or, in the event of any casualty or taking more
particularly described in Articles 10 and 11, for any repairs,
replacements, rebuilding or restoration except as can reasonably be
accomplished from the net proceeds of insurance or the net
condemnation award actually received by or made available to the
holder; or
(f) liable for the return of any security deposit not
actually received by the holder.
In addition, Landlord shall arrange to have the holder of the Mortgage join in
the execution and delivery of an agreement in the form attached hereto as
Exhibit C and made a part hereof.
ARTICLE 9
PROPERTY LOSS, ETC.
Section 9.01. Any Building employee to whom any property shall be
entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's
agent with respect to such property and neither Landlord nor Landlord's agents
shall be liable for any loss of or damage to any such property by theft or
otherwise. Neither (i) the performance by Landlord, Tenant or others of any
decorations, repairs, alterations, additions or improvements in or to the
Building or the Demised Premises, nor (ii) the failure of Landlord or others to
make any such decorations, repairs, alterations, additions or improvements, nor
(iii) any damage to the Demised Premises or to the property of Tenant, nor any
injury to any persons, caused by other tenants or persons in the Building, or by
operations in the construction of any private, public or quasi-public work, or
by any other cause, nor (iv)(subject to Landlord's repair obligations hereunder)
any latent defect in the Building or in the Demised Premises, nor (v) any
closing, darkening or bricking up of any windows of the Demised Premises for any
reason whatsoever (unless closed, darkened or bricked up, other than on a
temporary basis for not more than five (5) consecutive days or such longer
period as may be appropriate in circumstances of the type described in Article
26, by Landlord), nor (vi) any inconvenience or annoyance to Tenant or injury to
or interruption of Tenant's business by reason of any of the events of
occurrences referred to in the foregoing subdivisions (i) through (v), shall
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent (except as may be otherwise set
forth in Section 45.02), or relieve Tenant from any of its obligations under
this Lease, or impose any liability upon Landlord, or its agents, or any lessor
under any ground or underlying lease, other than such liability as may be
imposed upon Landlord by law for Landlord's negligence or the negligence of
Landlord's agents, servants or employees in the operation or maintenance of the
Building or for the breach by Landlord of any express covenant of this Lease on
Landlord's part to be performed.
ARTICLE 10
DESTRUCTION -- FIRE OR OTHER CASUALTY
Section 10.01. If the Demised Premises shall be damaged by fire or other
casualty, Tenant shall give prompt notice to Landlord of such damage and
Landlord, at Landlord's expense, shall repair such damage. For purposes hereof,
damage to the Demised Premises shall be deemed to include instances wherein the
Demised Premises have been rendered untenantable or inaccessible on account of a
fire or other casualty occurring elsewhere in the Building. However, Landlord
shall have no obligation to repair any damage to, or to replace, Tenant's
Personal Property or any other property or effects of Tenant. If the entire
Demised Premises shall be rendered untenantable by reason of any such damage,
the Fixed Rent shall abate for the period from the date of such damage to the
date when such damage shall have been repaired, and if only a part of the
Demised Premises shall be so rendered untenantable, the Fixed Rent shall abate
for such period in the proportion which the area of the part of the Demised
Premises so rendered untenantable bears to the total area of the Demised
Premises. However, if, prior to the date when all of such damage shall have been
repaired, any part of the Demised Premises so damaged shall be rendered
tenantable and shall be used or occupied by Tenant or any person or persons
claiming through or under Tenant, then the amount by which the Fixed Rent shall
abate shall be equitably apportioned for the period from the date of any such
use or occupancy to the date when all such damage shall have been repaired. The
provisions of this Article 10 shall be considered an express agreement governing
any instance of damage or destruction to the Building or the Demised Premises by
fire or other casualty, and any law now or hereafter in force providing for such
a contingency in the absence of express agreement shall have no application.
Notwithstanding the foregoing provisions of this Section, if, prior to or during
the Demised Term, (i) the Demised Premises shall be totally damaged or rendered
wholly untenantable by fire or other casualty occurring at such time as less
than one (1) year remains in the Demised Term, or (ii) the Building shall be so
damaged by fire or other casualty that, in Landlord's opinion, substantial
alteration, demolition, or reconstruction of the Building shall be required
(whether or not the Demised Premises shall have been damaged or rendered
untenantable), then, in any of such events, Landlord, at Landlord's option, may
give to Tenant, within ninety (90) days after such fire or other casualty, a
thirty (30) days' notice of termination of this Lease and, in the event such
notice is given, this Lease and the Demised Term shall come to an end and expire
(whether or not said term shall have commenced) upon the expiration of said
thirty (30) days with the same effect as if the date of expiration of said
thirty (30) days were the Expiration Date, the Fixed Rent shall be apportioned
as of such date and any prepaid portion of Fixed Rent for any period after such
date shall be refunded by Landlord to Tenant.
Section 10.02. Landlord shall keep in force casualty insurance with
respect to the Building in an amount approximately equal to the full replacement
cost thereof. Such insurance shall afford protection against fire and the other
perils customarily covered by a so-called "all risk" policy. Landlord shall
obtain and maintain, throughout the Demised Term, in Landlord's fire insurance
policies covering the Building, provisions (so long as the same are commercially
available) to the effect that such policies shall not be invalidated should the
insured waive, in writing, prior to a loss, any or all right of recovery against
any party for loss occurring to the Building. In the event that at any time
Landlord's fire insurance carriers shall exact an additional premium for the
inclusion of such or similar provisions, Landlord shall give Tenant notice
thereof. In such event, if Tenant agrees, in writing, to reimburse Landlord for
such additional premium for the remainder of the Demised Term, Landlord shall
require the inclusion of such or similar provisions by Landlord's fire insurance
carriers. As long as such or similar provisions are included in Landlord's fire
insurance policies then in force, Landlord hereby waives (i) any obligation on
the part of Tenant to make repairs to the Demised Premises necessitated or
occasioned by fire or other casualty that is an insured risk under such
policies, and (ii) any right of recovery against Tenant, any other permitted
occupant of the Demised Premises, and any of their servants, employees, agents
or contractors, for any loss occasioned by fire or other casualty that is an
insured risk under such policies. In the event that at any time Landlord's fire
insurance carriers shall not include such or similar provisions in Landlord's
fire insurance policies, the waivers set forth in the foregoing sentence shall,
upon notice given by Landlord to Tenant, be deemed of no further force or
effect.
Section 10.03. Except to the extent expressly provided in Section 10.02,
nothing contained in this Lease shall relieve Tenant of any liability to
Landlord or to its insurance carriers which Tenant may have under law or the
provisions of this Lease in connection with any damage to the Demised Premises
or the Building by fire or other casualty.
Section 10.04. Tenant acknowledges that it has been advised that
Landlord's insurance policies do not cover the Tenant's property in the Demised
Premises; accordingly, it shall be Tenant's obligation to obtain and maintain
insurance covering its property in the Demised Premises. Tenant shall obtain and
maintain, throughout the Demised Term, in Tenant's fire insurance policies
covering Tenant's property in the Demised Premises (and shall cause any other
permitted occupants of the Demised Premises to obtain and maintain, in similar
policies), provisions (so long as the same are commercially available) to the
effect that such policies shall not be invalidated should the insured waive, in
writing, prior to a loss, any or all right of recovery against any party for
loss occasioned by fire or other casualty which is an insured risk under such
policies. In the event that at any time the fire insurance carriers issuing such
policies shall exact an additional premium for the inclusion of such or similar
provisions, Tenant shall give Landlord notice thereof. In such event, if
Landlord agrees, in writing, to reimburse Tenant or any person claiming through
or under Tenant, as the case may be, for such additional premium for the
remainder of the Demised Term, Tenant shall require the inclusion of such or
similar provisions by such fire insurance carriers. As long as such or similar
provisions are included in such fire insurance policies then in force, Tenant
hereby waives (and agrees to cause any other permitted occupants of the Demised
Premises to execute and deliver to Landlord written instruments waiving) any
right of recovery against Landlord, any lessors under any ground or underlying
leases, any other tenants or occupants of the Building, and any servants,
employees, agents or contractors of Landlord or of any such lessor, or of any
such other tenants or occupants, for any loss occasioned by fire or other
casualty which is an insured risk under such policies. In the event that at any
time such fire insurance carriers shall not include such or similar provisions
in any such fire insurance policy, the waiver set forth in the foregoing
sentence shall, upon notice given by Tenant to Landlord, be deemed of no further
force or effect with respect to any insured risks under such policy from and
after the giving of such notice. During any period while the foregoing waiver of
right of recovery is in effect, Tenant, or any other permitted occupant of the
Demised Premises, as the case may be, shall look solely to the proceeds of such
policies to compensate Tenant or such other permitted occupant for any loss
occasioned by fire or other casualty which is an insured risk under such
policies.
Section 10.05. In the event that Landlord becomes obligated to undertake
any repair or restoration work with respect to the Demised Premises pursuant to
this Article as a consequence of damage by fire or other casualty, Landlord
shall furnish to Tenant as soon as practicable an estimate of the time
reasonably required to substantially complete such work. If (a) no such estimate
is furnished within sixty (60) days following such casualty, or (b) according to
such estimate, such work is not expected to be substantially completed within
twelve (12) months following such casualty, or (c) such work is not in fact
substantially completed within twelve (12) months following such casualty (which
period may be extended for not more than three (3) additional months on account
of delays of the type described in Article 26), or (d) the Demised Premises are
substantially damaged by any such casualty occurring at such time as less than
one (1) year remains in the Demised Term, Tenant may elect to terminate this
Lease by notice given to Landlord within thirty (30) days after the expiration
of said sixty (60) day period, or the furnishing of such estimate, or the
expiration of said twelve (12) month period (extended as aforesaid), or the
occurrence of said substantial casualty damage, as the case may be, whereupon
this Lease and the Demised Term shall come to an end with the same force and
effect as if the date of such notice were the Expiration Date.
ARTICLE 11
EMINENT DOMAIN
Section 11.01. If the whole of the Demised Premises shall be acquired or
condemned for any public or quasi-public use or purpose, this Lease and the
Demised Term shall end as of the date of the vesting of title with the same
effect as if said date were the Expiration Date. If only a part of the Demised
Premises shall be so acquired or condemned then, except as otherwise provided in
this Section, this Lease and the Demised Term shall continue in force and effect
but, from and after the date of the vesting of title, the Fixed Rent shall be
reduced in the proportion which the area of the part of the Demised Premises so
acquired or condemned bears to the total area of the Demised Premises
immediately prior to such acquisition or condemnation. If only a part of the
Real Property shall be so acquired or condemned, then (i) whether or not the
Demised Premises shall be affected thereby (unless only an insubstantial part of
the Real Property is so acquired or condemned), Landlord, at Landlord's option,
may give to Tenant, within sixty (60) days next following the date upon which
Landlord shall have received notice of vesting of title, a thirty (30) days'
notice of termination of this Lease, and (ii) if the part of the Real Property
so acquired or condemned shall contain more than ten (10%) percent of the total
area of the Demised Premises immediately prior to such acquisition or
condemnation, or if, by reason of such acquisition or condemnation, Tenant no
longer has reasonable means of access to the Demised Premises, Tenant, at
Tenant's option, may give to Landlord, within sixty (60) days next following the
date upon which Tenant shall have received notice of vesting of title, a thirty
(30) days' notice of termination of this Lease. In the event any such thirty
(30) days' notice of termination is given, by Landlord or Tenant, this Lease and
the Demised Term shall come to an end and expire upon the expiration of said
thirty (30) days with the same effect as if the date of expiration of said
thirty (30) days were the Expiration Date. If a part of the Demised Premises
shall be so acquired or condemned and this Lease and the Demised Term shall not
be terminated pursuant to the foregoing provisions of this Section, Landlord, at
Landlord's expense, shall restore that part of the Demised Premises not so
acquired or condemned to a self-contained rental unit. In the event of any
termination of this Lease and the Demised Term pursuant to the provisions of
this Section, the Fixed Rent shall be apportioned as of the date of such
termination and any prepaid portion of Fixed Rent for any period after such date
shall be refunded by Landlord to Tenant.
Section 11.02. In the event of any such acquisition or condemnation of all
or any part of the Real Property, Landlord shall be entitled to receive the
entire award for any such acquisition or condemnation, Tenant shall have no
claim against Landlord or the condemning authority for the value of any
unexpired portion of the Demised Term and Tenant hereby expressly assigns to
Landlord all of its rights in and to any such award. Nothing contained in this
Section shall be deemed to prevent Tenant from making a claim in any
condemnation proceeding for the value of any items of Tenant's Personal Property
which are compensable, in law, as trade fixtures, or for moving and relocation
damages separately payable to Tenant.
ARTICLE 12
ASSIGNMENT AND SUBLETTING
Section 12.01. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, covenants that,
without the prior consent of Landlord in each instance, it shall not, subject to
the applicable provisions of Sections 12.03 and 12.04, (i) assign, whether by
consolidation, merger or otherwise, mortgage or encumber its interest in this
Lease, in whole or in part, or (ii) sublet, or permit the subletting of, the
Demised Premises or any part thereof, or (iii) permit the Demised Premises or
any part thereof to be occupied, or used for desk space, mailing privileges or
otherwise, by any person other than Tenant or a parent, subsidiary or affiliate
of Tenant. The sale, pledge, transfer or other alienation of (a) a majority
interest in the issued and outstanding capital stock of any corporate Tenant
(unless such stock is publicly traded on any recognized security exchange or
over-the-counter market), or (b) any controlling interest in any partnership or
joint venture Tenant, however accomplished, and whether in a single transaction
or in a series of related or unrelated transactions (referred to as an "Indirect
Assignment"), shall be deemed, for the purposes of this Section, an assignment
of this Lease.
Section 12.02. If Tenant's interest in this Lease is assigned, whether or
not in violation of the provisions of this Article, Landlord may collect rent
from the assignee; if the Demised Premises or any part thereof are sublet to, or
occupied by, or used by, any person other than Tenant, whether or not in
violation of this Article, Landlord, after default beyond the applicable grace
period by Tenant under this Lease, may collect rent from the subtenant, user or
occupant. In either case, Landlord shall apply the net amount collected to the
rents reserved in this Lease, but neither any such assignment, subletting,
occupancy, or use, whether with or without Landlord's prior consent, nor any
such collection or application, shall be deemed a waiver of any term, covenant
or condition of this Lease or the acceptance by Landlord of such assignee,
subtenant, occupant or user as Tenant. The consent by Landlord to any
assignment, subletting, occupancy or use shall not relieve Tenant from its
obligation to obtain the express prior consent of Landlord to any further
assignment, subletting, occupancy or use. The listing of any name other than
that of Tenant on any door of the Demised Premises or on any directory or in any
elevator in the Building or otherwise, shall not operate to vest in the person
so named any right or interest in this Lease or in the Demised Premises or the
Building, or be deemed to constitute, or serve as a substitute for, any prior
consent required under this Article, and it is understood that any such listing
shall constitute a privilege extended by Landlord which shall be revocable at
Landlord's will by notice to Tenant. Tenant agrees to pay to Landlord reasonable
counsel fees incurred by Landlord in connection with any proposed assignment of
Tenant's interest in this Lease or any proposed subletting of the Demised
Premises or any part thereof (provided however that such fees shall not exceed
$1,000 in the case of each such transaction). Neither any assignment of Tenant's
interest in this Lease nor any subletting, occupancy or use of the Demised
Premises or any part thereof by any person other than Tenant, nor any collection
of rent by Landlord from any person other than Tenant as provided in this
Section, nor any application of any such rent as provided in this Section,
shall, in any circumstances, relieve Tenant of its obligation fully to observe
and perform the terms, covenants and conditions of this Lease on Tenant's part
to be observed and performed.
Section 12.03. As long as Tenant is not in default beyond the applicable
grace period under any of the terms, covenants or conditions of this Lease on
Tenant's part to be observed or performed, Landlord agrees not unreasonably to
withhold Landlord's prior consent to sublettings by Tenant of all or parts of
the Demised Premises, it being specifically understood and agreed that Landlord
may withhold such consent if, in Landlord's reasonable judgment, the occupancy
of the proposed subtenant will tend to impair the character or dignity of the
Building or impose any additional burden upon Landlord in the operation of the
Building. Tenant acknowledges that it has been advised that the consent of the
holder of the Mortgage is required for any such subletting, and Tenant agrees
that Landlord shall have no obligation to consent to any subletting if the
holder of such Mortgage refuses to consent thereto (provided however that
Landlord shall use diligent efforts to obtain such consent whenever Landlord is
prepared to grant its own consent as aforesaid). Each such subletting shall be
for undivided occupancy by the subtenant of that part of the Demised Premises
affected thereby, for the use permitted in this Lease, and at no time shall
there be more than five (5) occupants, including Tenant, on any one floor.
Neither such subtenant nor its heirs, distributees, executors, administrators,
legal representatives, successors or assigns, without the prior consent of
Landlord and the holder of the Mortgage shall (i) assign, whether by merger,
consolidation or otherwise, mortgage or encumber its interest in any sublease,
in whole or in part, or (ii) sublet, or permit the subletting of, that part of
the Demised Premises affected by such subletting or any part thereof, or (iii)
permit such part of the Demised Premises affected by such subletting or any part
thereof to be occupied or used for desk space, mailing privileges or otherwise,
by any person other than such subtenant. The sale, pledge, transfer or other
alienation of (a) a majority interest in the issued and outstanding capital
stock of any corporate subtenant (unless such stock is publicly traded on any
recognized security exchange or over-the-counter market) or (b) any controlling
interest in any partnership or joint venture subtenant, however accomplished,
and whether in a single transaction or in a series of related or unrelated
transactions, shall be deemed, for the purposes of this Section, an assignment
of such sublease. Without Landlord's prior consent, Tenant shall not (a)
negotiate or enter into a proposed subletting with any tenant, subtenant or
occupant of any space in the Building other than an Eligible Subtenant (as
hereinafter defined), or (b) list or otherwise publicly advertise the Demised
Premises or any part thereof for subletting at a rental rate lower than the
rental rate at which Landlord is then offering to rent comparable space in the
Building (provided however that the preceding clause (b) shall not be deemed to
prohibit such subletting at such lower rental rate without public disclosure
thereof). For purposes hereof, an "Eligible Subtenant" shall be a tenant,
subtenant or occupant occupying space in the Building at such time as Landlord
is not able to deliver to such tenant, subtenant or occupant, for a period
beginning on or before or within six (6) months after the date on which the term
of the proposed subletting would commence and continuing through the date on
which said term would end, space elsewhere in the Building comparable in size to
the proposed sublet area. Landlord shall, whenever requested in writing by
Tenant with respect to a prospective subletting, advise Tenant as to whether the
proposed subtenant is an Eligible Subtenant. Said proposed subtenant shall be
deemed an Eligible Subtenant unless Landlord notifies Tenant to the contrary
within fourteen (14) days after receipt of such request so long as such request
expressly and conspicuously recites the effect of Landlord's failure to respond
thereto as aforesaid. Prior to any proposed subletting, Tenant shall submit to
Landlord a statement containing the name and address of the proposed subtenant
and all of the principal terms and conditions of the proposed subletting
including, but not limited to, the proposed commencement and expiration dates of
the term thereof. Unless the proposed sublet area shall constitute an entire
floor or floors, such statement shall be accompanied by a floor plan delineating
the proposed sublet area. In the event of any dispute between Landlord and
Tenant as to the reasonableness of Landlord's failure or refusal to consent to
any subletting, such dispute shall be submitted to arbitration, in accordance
with the provisions of Article 33. Landlord shall be deemed to have granted its
consent to the proposed subletting unless Landlord notifies Tenant to the
contrary within the Review Period (as such term is hereinafter defined)
commencing upon receipt of such statement so long as such statement expressly
and conspicuously recites the effect of Landlord's failure to respond thereto as
aforesaid. For purposes hereof, the "Review Period" shall be fourteen (14) days
if the proposed sublet area consists of all or some portion of a particular
floor of the Building, and twenty-one (21) days in all other cases. Landlord and
Tenant agree that, to the extent hereinafter set forth, (xx) any increase in the
rental value of the Demised Premises over and above the Fixed Rent payable
pursuant to the provisions of this Lease, as such Fixed Rent may be increased
from time to time pursuant to the provisions of this Lease, and (yy) any
consideration paid to Tenant or any subtenant or other person claiming through
or under Tenant in connection with an assignment of Tenant's interest in this
Lease or the interest of any subtenant or other person claiming through or under
Tenant under any sublease, whether or not such assignment shall be effected with
court approval in a proceeding of the types described in subsection 17.01(c) or
(d), or in any similar proceeding, or otherwise, shall accrue to the benefit of
Landlord and not to the benefit of Tenant, or of any subtenant or other person
claiming through or under Tenant, or of the creditors of Tenant or of any such
subtenant or other person claiming through or under Tenant. Accordingly, it is
agreed that Tenant shall pay to Landlord, as and when received, a sum equal to
50% of any Subletting Profit, as such term is hereinafter defined. All rentals
and other sums paid by any subtenant to Tenant or to any subtenant or other
person claiming through or under Tenant in connection with (i) any subletting of
the entire Demised Premises in excess of the Fixed Rent then payable by Tenant
to Landlord under this Lease, or (ii) any subletting of a portion of the Demised
Premises in excess of that proportion of the Fixed Rent payable by Tenant to
Landlord under this Lease which the area of the portion of the Demised Premises
so sublet bears to the total area of the Demised Premises, are referred to, in
the aggregate, as "Subletting Profit"; in computing any Subletting Profit with
respect to any period of time, there shall first be deducted any out-of-pocket
costs (including brokerage commissions, attorneys' fees and the cost of
preparing the sublet area for occupancy) reasonably incurred by Tenant or any
such subtenant or other person claiming through or under Tenant in connection
with such subletting. Landlord and Tenant agree that if Tenant, or any subtenant
or other person claiming through or under Tenant, shall assign or have assigned
its interest as Tenant under this Lease or its interest as subtenant under any
sublease, as the case may be, whether or not such assignment, shall be effected
with court approval in a proceeding of the types described in subsections
17.01(c) or (d), or in any similar proceeding, or otherwise, Tenant shall pay to
Landlord a sum equal to 50% of any consideration paid to Tenant or any subtenant
or other person claiming through or under Tenant for such assignment, less any
out-of-pocket costs (including brokerage commissions, attorneys' fees and the
cost of improvements made on behalf of the assignee) reasonably incurred by such
payee in connection with such assignment. All sums payable hereunder by Tenant
shall be paid to Landlord as additional rent immediately upon such sums being
paid to Tenant or to any subtenant or other person claiming through or under
Tenant and, if requested by Landlord, Tenant shall promptly enter into a written
agreement with Landlord setting forth the amount of such sums to be paid to
Landlord; however, neither Landlord's failure to request the execution of such
agreement nor Tenant's failure to execute such agreement shall vitiate the
provisions of this Section. Neither Landlord's consent to any subletting nor
anything contained in this Section shall be deemed to grant to any subtenant or
other person claiming through or under Tenant the right to sublet all or any
portion of the Demised Premises or to permit the occupancy of all or any portion
of the Demised Premises by others.
Section 12.04. Notwithstanding any other provision of this Article to the
contrary, Tenant may, following notice to Landlord but without the requirement
of obtaining Landlord's consent, and provided Tenant shall not then be in
default beyond the applicable grace period in the observance or performance of
any term, covenant or condition of this Lease on Tenant's part to be performed
or observed, assign this Lease or sublet the Demised Premises to any entity
which is a parent, subsidiary or affiliate of Tenant or assign this Lease to any
entity with which Tenant may merge or consolidate or to which Tenant may sell
all or substantially all of its assets as a going concern (such entity with
which Tenant may merge or consolidate or to which Tenant may sell all or
substantially all of its assets as aforesaid being hereinafter referred to as a
"Successor"), provided however that, forthwith upon any assignment allowed
pursuant to this Section (including an Indirect Assignment), Tenant shall
deliver to Landlord an agreement in form and substance reasonably satisfactory
to Landlord which contains an appropriate covenant of assumption by such
assignee, and provided further that in the case of any such assignment to a
Successor, such Successor shall, following such assignment, have financial
resources and a general business reputation comparable to those of Tenant as of
the time of such assignment.
ARTICLE 13
RENOVATION OF PRIMARY PREMISES
Section 13.01. Tenant proposes to undertake certain renovations within the
Primary Premises in accordance with Article 4 and all other applicable
provisions of this Lease. In consideration thereof and as a contribution toward
the cost of such work, Landlord shall provide a credit in the amount of $532,536
to be applied against installments of Fixed Rent becoming due hereunder on and
after February 1, 1997. Tenant shall engage the services of Rose Associates of
Massachusetts, Inc. (or such other entity as Landlord may designate) to manage
such work pursuant to the provisions of a Construction Management Agreement
substantially in the form of Exhibit D attached hereto and made a part hereof.
Said manager shall be compensated for its services under said Agreement by
payment of a fee equal to three percent (3%) of the cost of such work.
ARTICLE 14
ACCESS TO DEMISED PREMISES
Section 14.01. Subject to the applicable provisions of this Article,
Landlord and its agents shall have the following rights in and about the Demised
Premises after (except in case of emergency) prior oral or written notice and
affording Tenant an opportunity to have one or more of its employees present:
(i) to enter into the Demised Premises at all reasonable times to examine the
Demised Premises or for any of the purposes set forth in this Article or for the
purpose of performing any obligation of Landlord under this Lease or exercising
any right or remedy reserved to Landlord in this Lease, and if Tenant, its
officers, partners, agents or employees shall not be personally present or shall
not open and permit an entry into the Demised Premises at any time when such
entry shall be necessary or permissible, to use a master key to enter the
Demised Premises; (ii) to erect, install, use and maintain pipes, ducts and
conduits (concealed, where practicable, above the finished ceiling, behind
finished walls or beneath the finished floor) in and through the Demised
Premises without diminishing (except to a de minimis extent) the usable area
thereof; (iii) to exhibit the Demised Premises to others (including prospective
tenants, but only during the final twelve (12) months of the Demised Term); (iv)
to make such decorations, repairs, alterations, improvements or additions, or to
perform such maintenance, including, but not limited to, the maintenance of all
heating, air conditioning, elevator, plumbing, electrical and other mechanical
facilities, as Landlord may reasonably deem necessary or desirable; and (v) to
take all materials into and upon the Demised Premises that may be required in
connection with any such decorations, repairs, alterations, improvements,
additions or maintenance. The holders of any mortgages affecting the Building or
the Real Property shall have the right (subject to the same provisions hereof
governing access by Landlord) to enter the Demised Premises from time to time
through their respective employees, agents, representatives and architects to
inspect the same or to cure any default of Landlord or Tenant relating thereto.
The landlord under the Commonwealth Lease and representatives of the Federal
Highway Administration ("FHWA") shall have the right to enter the Demised
Premises to inspect the same or for the purpose of enabling the Department of
Public Works of the Commonwealth of Massachusetts, together with representatives
of the FHWA to perform any activities necessary for the construction,
maintenance, repair, inspection, security, observation, removal or like
operations with respect to any such landlord's facilities within the Non-Leased
Premises, as defined in the Commonwealth Lease. The Authority, the City of
Boston and the United States of America shall also have the right to enter the
Demised Premises from time to time to inspect the same. Landlord shall have the
right, from time to time, to change the name, number or designation by which the
Building is commonly known, which right shall include, without limitation, the
right to name the Building after any tenant. Notwithstanding the foregoing and
provided that Tenant is conducting its permitted business activities in portions
of the Demised Premises having an aggregate rentable area (determined in
accordance with Landlord's standard method of measurement) of not less than
100,000 square feet, Landlord shall not, without the prior written consent of
Tenant, include as part of the name of the Building the name of any of the
following firms (unless a particular such firm, or an entity which is a parent,
subsidiary or affiliate thereof, holds an ownership interest in the Real
Property):
Fidelity Investments
Putman Investments
Pioneer Fund
Scudder, Stevens & Clark
Mutual Funds Service Company
State Street Research & Management Company
Charles Schwab & Co.
Keystone Investments
Eaton Vance Funds
Section 14.02. All parts (except surfaces facing the interior of the
Demised Premises) of all walls, windows and doors bounding the Demised Premises
(including exterior Building walls, core corridor walls, doors and entrances),
all balconies, terraces and roofs adjacent to the Demised Premises, all space in
or adjacent to the Demised Premises used for shafts, stacks, stairways, chutes,
pipes, conduits, ducts, fan rooms, heating, air conditioning, plumbing,
electrical, telecommunication and other mechanical facilities and closets,
service closets and other Building facilities, and the use thereof, as well as
access thereto through the Demised Premises (subject to the provisions of
Section 14.01) for the purposes of operation, maintenance, alteration and
repair, are hereby reserved to Landlord. Landlord also reserves the right at any
time to change the arrangement or location of entrances, passageways, doors,
doorways, corridors, elevators, stairs, toilets and other public parts of the
Building, provided any such change does not unreasonably impede Tenant's access
to the Demised Premises or the common areas appurtenant thereto. Nothing
contained in this Article shall impose any obligation upon Landlord with respect
to the operation, maintenance, alteration or repair of the Demised Premises or
the Building.
Section 14.03. Landlord and its agents shall have the right to permit
access to the Demised Premises, whether or not Tenant shall be present, to any
sheriff, marshal or court officer or any representative of the fire, police,
building, sanitation or other department of the City, County, State or Federal
Governments entitled to, or reasonably purporting (based upon a display of
identification) to be entitled to, such access for the purpose of taking
possession of, or removing, any property of Tenant or any other occupant of the
Demised Premises, or for any other lawful purpose. Neither anything contained in
this Section, nor any action taken by Landlord under this Section, shall be
deemed to constitute recognition by Landlord that any person other than Tenant
has any right or interest in this Lease or the Demised Premises. Landlord shall
endeavor to give Tenant oral or written notice of any access to the Demised
Premises under this Section unless prohibited from doing so by the person making
such demand.
Section 14.04. The exercise by Landlord or its agents, or by the holder of
any mortgage affecting the Building or the Real Property, or by the Commonwealth
of Massachusetts or its Department of Public Works, or by the FHWA or the
Authority, of any right reserved in this Article shall not constitute an actual
or constructive eviction, in whole or in part, or entitle Tenant to any
abatement or diminution of rent (except as may be otherwise set forth in Section
45.02), or relieve Tenant from any of its obligations under this Lease, or
impose any liability upon Landlord, or its agents, or upon any lessor under any
ground or underlying lease, or upon the holder of any such mortgage, the FHWA or
the Authority, by reason of inconvenience or annoyance to Tenant, or injury to
or interruption of Tenant's business, or otherwise. Whenever exercising any
right reserved in this Article, Landlord shall use reasonable efforts to
minimize any interference with the conduct of Tenant's business, provided
however that Landlord shall not be obligated to employ labor at so-called
"overtime" or other premium pay rates unless (except in case of emergency)
Tenant would otherwise be able to conduct none of its permitted business
activities in any particular portion of the Demised Premises having a rentable
area (determined in accordance with Landlord's standard method of measurement)
of at least 11,924 square feet on account of the disruptive nature of any work
which Landlord proposes to perform therein.
ARTICLE 15
VAULT SPACE
Section 15.01. The Demised Premises do not contain any vaults, vault space
or other space outside the boundaries of the Real Property.
ARTICLE 16
CERTIFICATE OF OCCUPANCY
Section 16.01. Tenant will not at any time use or occupy, or permit the
use or occupancy of, the Demised Premises in violation of any Certificate of
Occupancy covering the Demised Premises. Landlord warrants and represents that
the use of the Demised Premises for general office purposes is presently
permitted by applicable law.
ARTICLE 17
DEFAULT
Section 17.01. Upon the occurrence, at any time prior to or during the
Demised Term, of any one or more of the following events (referred to as "Events
of Default"):
(a) if Tenant shall default in the payment when due of any
installment of Fixed Rent or in the payment when due of any additional
rent and Tenant shall fail to remedy such default within ten (10) days
after notice by Landlord to Tenant of such default; or
(b) if Tenant shall default in the observance or performance of any
term, covenant or condition of this Lease on Tenant's part to be observed
or performed (other than the covenants for the payment of Fixed Rent and
additional rent) and Tenant shall fail to remedy such default within
thirty (30) days after notice by Landlord to Tenant of such default, or if
such default is of such a nature that it cannot be completely remedied
within said period of thirty (30) days and Tenant shall not commence
within said period of thirty (30) days, or shall not thereafter diligently
prosecute to completion, all steps necessary to remedy such default; or
(c) if Tenant shall file a voluntary petition in bankruptcy or
insolvency, or shall be adjudicated a bankrupt or insolvent, or shall file
any petition or answer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief
under the present or any future federal bankruptcy act or any other
present or future applicable federal, state or other statute or law, or
shall make an assignment for the benefit of creditors or shall seek or
consent or to acquiesce in the appointment of any trustee, receiver or
liquidator of Tenant or of all or any part of Tenant's property; or
(d) if, within ninety (90) days after the commencement of any
proceeding against Tenant, whether by the filing of a petition or
otherwise, seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the present
or any future federal bankruptcy act or any other present or future
applicable federal, state or other statute or law, such proceeding shall
not have been dismissed, or if, within ninety (90) days after the
appointment of any trustee, receiver or liquidator of Tenant, or of all or
any part of Tenant's property, without the consent or acquiescence of
Tenant, such appointment shall not have been vacated or otherwise
discharged, or if any execution or attachment shall be issued against
Tenant or any of Tenant's property pursuant to which the Demised Premises
shall be taken or occupied or attempted to be taken or occupied; or
(e) if Tenant's interest in this Lease shall devolve upon or pass to
any person, whether by operation of law or otherwise, except as expressly
permitted under Article 12,
then, upon the occurrence, at any time prior to or during the Demised Term, of
any one or more such Events of Default, Landlord, at any time thereafter, at
Landlord's option, may give to Tenant a five (5) days' notice of termination of
this Lease and, in the event such notice is given, this Lease and the Demised
Term shall come to an end and expire (whether or not said term shall have
commenced) upon the expiration of said five (5) days with the same effect as if
the date of expiration of said five (5) days were the Expiration Date, but
Tenant shall remain liable for damages and all other sums payable pursuant to
the provisions of Article 19.
Section 17.02. If, at any time, (i) Tenant shall be comprised of two (2)
or more persons, or (ii) Tenant's obligations under this Lease shall have been
guaranteed by any person other than Tenant, or (iii) Tenant's interest in this
Lease shall have been assigned, the word "Tenant", as used in subsections
17.01(c) and (d), shall be deemed to mean any one or more of the persons
primarily or secondarily liable for Tenant's obligations under this Lease. Any
monies received by Landlord from or on behalf of Tenant during the pendency of
any proceeding of the types referred to in said subsections 17.01(c) and (d)
shall be deemed paid as compensation for the use and occupation of the Demised
Premises and the acceptance of any such compensation by Landlord shall not be
deemed an acceptance of rent or a waiver on the part of Landlord of any rights
under Section 17.01.
ARTICLE 18
REMEDIES
Section 18.01. If this Lease and the Demised Term shall expire and come to
an end as provided in Article 17:
(a) Landlord and its agents and servants may at any time after the
date upon which this Lease and the Demised Term shall expire and come to
an end, re-enter the Demised Premises or any part thereof, without notice,
either by summary proceedings or by any other applicable legal action or
proceeding or otherwise (without being liable to indictment, prosecution
or damages therefor), and may repossess the Demised Premises and
dispossess Tenant and any other persons from the Demised Premises and
remove any and all of their property and effects from the Demised
Premises; and
(b) Landlord, at Landlord's option, may relet the whole or any part
or parts of the Demised Premises from time to time, either in the name of
Landlord or otherwise, to such tenant or tenants, for such term or terms
ending before, on or after the Expiration Date, at such rental or rentals
and upon such other conditions, which may include concessions and free
rent periods, as Landlord, in its reasonable discretion, may determine.
Landlord shall have no obligation to relet the Demised Premises or any
part thereof and shall in no event be liable for refusal or failure to
relet the Demised Premises or any part thereof, or, in the event of any
such reletting, for refusal or failure to collect any rent due upon any
such reletting, and no such refusal or failure shall operate to relieve
Tenant of any liability under this Lease or otherwise to affect any such
liability so long as Landlord endeavors in good faith to mitigate damages
payable by Tenant pursuant to subsection (b) of Section 19.01; Landlord,
at Landlord's option, may make such repairs, replacements, alterations,
additions, improvements, decorations and other physical changes in and to
the Demised Premises as Landlord, in its reasonable discretion, considers
advisable or necessary in connection with any such reletting or proposed
reletting, without relieving Tenant of any liability under this Lease or
otherwise affecting any such liability.
Section 18.02. Tenant, on its own and on behalf of all persons claiming
through or under Tenant, including all creditors, does hereby waive any and all
rights which Tenant and all such persons might otherwise have under any present
or future law to redeem the Demised Premises, or to re-enter or repossess the
Demised Premises, or to restore the operation of this Lease, after (i) Tenant
shall have been dispossessed by a judgment or by warrant of any court or judge,
or (ii) any re-entry by Landlord, or (iii) any expiration or termination of this
Lease and the Demised Term, whether such dispossession, re-entry, expiration or
termination shall be by operation of law or pursuant to the provisions of this
Lease. The words "re-enter", "re-entry" and "re-entered" as used in this Lease
shall not be deemed to be restricted to their technical legal meanings. In the
event of a breach or threatened breach by Tenant, or any persons claiming
through or under Tenant, of any term, covenant or condition of this Lease on
Tenant's part to be observed or performed, Landlord shall have the right to
enjoin such breach and the right to invoke any other remedy allowed by law or in
equity as if re-entry, summary proceedings and other special remedies were not
provided in this Lease for such breach. The right to invoke the remedies
hereinbefore set forth are cumulative and shall not preclude Landlord from
invoking any other remedy allowed at law or in equity.
ARTICLE 19
DAMAGES
Section 19.01. If this Lease and the Demised Term shall expire and come to
an end as provided in Article 17, or by or under any summary proceeding or any
other action or proceeding, or if Landlord shall re-enter the Demised Premises
as provided in Article 18, or by or under any summary proceeding or any other
action or proceeding, then, in any of said events:
(a) Tenant shall pay to Landlord all Fixed Rent, additional rent and
other charges payable under this Lease by Tenant to Landlord to the date
upon which this Lease and the Demised Term shall have expired and come to
an end or to the date of re-entry upon the Demised Premises by Landlord,
as the case may be; and
(b) Tenant shall also be liable for and shall pay to Landlord, as
damages, any deficiency (referred to as "Deficiency") between the Fixed
Rent reserved in this Lease for the period which otherwise would have
constituted the unexpired portion of the Demised Term and the net amount,
if any, of rents collected under any reletting effected pursuant to the
provisions of Section 18.01 for any part of such period (first deducting
from the rents collected under any such reletting all of Landlord's
reasonable expenses in connection with the termination of this Lease or
Landlord's re-entry upon the Demised Premises and with such reletting
including, but not limited to, all reasonable repossession costs,
brokerage commissions, legal expenses, attorneys' fees, alteration costs
and other reasonable expenses of preparing the Demised Premises for such
reletting, provided however that any such reletting expenses shall for
purposes hereof be amortized on a straight line basis over the term of the
applicable lease and Tenant shall not be responsible for any portion of
such expenses properly allocable to the period after the date on which the
Expiration Date had been scheduled to occur). Any such Deficiency shall be
paid in monthly installments by Tenant on the days specified in this Lease
for payment of installments of Fixed Rent. Landlord shall be entitled to
recover from Tenant each monthly Deficiency as the same shall arise, and
no suit to collect the amount of the Deficiency for any month shall
prejudice Landlord's right to collect the Deficiency for any subsequent
month by a similar proceeding (solely for the purposes of this subsection
(b), the term "Fixed Rent" shall mean the Fixed Rent in effect immediately
prior to the date upon which this Lease and the Demised Term shall have
come to an end, or the date of re-entry upon the Demised Premises by
Landlord, as the case may be, adjusted, from time to time, to reflect any
increases which would have been payable pursuant to Article 23 if this
Lease and the term hereof had not been terminated); and
(c) At any time after the Demised Term shall have expired and come
to an end or Landlord shall have re-entered upon the Demised Premises, as
the case may be, whether or not Landlord shall have collected any monthly
Deficiencies as aforesaid, Landlord shall be entitled to recover from
Tenant, and Tenant shall pay to Landlord, on demand, as and for liquidated
and agreed final damages, a sum equal to the amount by which the Fixed
Rent reserved in this Lease for the period which otherwise would have
constituted the unexpired portion of the Demised Term exceeds the then
fair and reasonable rental value of the Demised Premises for the same
period, both reasonably discounted to present worth. Solely for the
purposes of this subsection (c), the term "Fixed Rent" shall mean the
Fixed Rent in effect immediately prior to the date upon which this Lease
and the Demised Term shall have expired and come to an end, or the date of
re-entry upon the Demised Premises by Landlord, as the case may be,
adjusted to reflect any increases pursuant to the provisions of Article 23
for the Escalation Year immediately preceding such event.
Section 19.02. If the Demised Premises, or any part thereof, shall be
relet together with other space in the Building, the rents collected or reserved
under any such reletting and the expenses of any such reletting shall be
equitably apportioned for the purposes of this Article 19. Tenant shall in no
event be entitled to any rents collected or payable under any reletting, whether
or not such rents shall exceed the Fixed Rent reserved in this Lease. Nothing
contained in Articles 17, 18 or this Article shall be deemed to limit or
preclude the recovery by Landlord from Tenant of the maximum amount allowed to
be obtained as damages by any statute or rule of law, or of any sums or damages
to which Landlord may be entitled in addition to the damages set forth in
Section 19.01.
ARTICLE 20
FEES AND EXPENSES; INDEMNITY
Section 20.01. Upon the occurrence of an Event of Default (or sooner in
case of emergency), Landlord may, for Tenant's account and at Tenant's
reasonable expense, remedy any failure by Tenant to observe or perform any term,
covenant or condition of this Lease on Tenant's part to be observed or performed
without thereby waiving any other rights or remedies of Landlord with respect to
such failure.
Section 20.02. Tenant agrees to indemnify and save Landlord harmless of
and from all loss, cost, liability, damage and expense including, but not
limited to, reasonable counsel fees, penalties and fines, incurred in connection
with or arising from (i) any default by Tenant in the observance or performance
of any of the terms, covenants or conditions of this Lease on Tenant's part to
be observed or performed (other than an Event of Default, as to which the other
applicable provisions of this Lease shall govern) or (ii) the breach or failure
of any representation or warranty made by Tenant in this Lease, or (iii) the use
or occupancy or manner of use or occupancy of the Demised Premises by Tenant or
any person claiming through or under Tenant, or (iv) any acts, omissions or
negligence of Tenant or any such person, or the contractors, agents, servants,
employees, visitors or licensees of Tenant or any such person, in or about the
Demised Premises or the Building either prior to, during, or (until Tenant has
quit and surrendered the Demised Premises to Landlord in accordance with the
provisions of Article 21) after the expiration of, the Demised Term including,
but not limited to, any acts, omissions or negligence in the making or
performing of any Alterations. Tenant further agrees to indemnify and save
harmless Landlord, Landlord's agents, and the lessor or lessors under all ground
or underlying leases, of and from all loss, cost, liability, damage and expense
including, but not limited to, reasonable counsel fees, incurred in connection
with or arising from any claims by any persons by reason of injury to persons or
damage to property to the extent occasioned by any use, occupancy, act, omission
or negligence referred to in the preceding sentence. If any action or proceeding
shall be brought against Landlord or Landlord's agents, or the lessor or lessors
under any ground or underlying lease, based upon any such claim and if Tenant,
upon notice from Landlord, shall cause such action or proceeding to be defended
at Tenant's expense by counsel acting for Tenant's insurance carriers in
connection with such defense or by other counsel reasonably satisfactory to
Landlord, without any disclaimer of liability by Tenant or such insurance
carriers in connection with such claim, Tenant shall not be required to
indemnify Landlord, Landlord's agents, or any such lessor for counsel fees in
connection with such action or proceeding. Tenant shall maintain comprehensive
public liability insurance against any claims by reason of personal injury,
death and property damage occurring in or about the Demised Premises covering,
without limitation, the operation of any private air conditioning equipment and
any private elevators, escalators or conveyors in or serving the Demised
Premises or any part thereof, whether installed by Landlord, Tenant, or others,
and shall furnish to Landlord duplicate original policies or certificates of
such insurance at least ten (10) days prior to the Commencement Date and at
least ten (10) days prior to the expiration of the term of any such policy
previously furnished by Tenant, in which policies Landlord, its agents and any
lessor under any ground or underlying lease shall be named as additional parties
insured, which policies shall be issued by companies, and shall be in form
reasonably satisfactory to Landlord. The amount of coverage afforded under such
policies shall be not less than $100,000 for property damage and not less than
$2,000,000 for personal injury to or death of one or more persons in a single
occurrence, or such higher limits as may from time to time be reasonably
required by Landlord and are customarily carried by responsible office tenants
in the greater Boston, Massachusetts area. Any insurance which Tenant is
obligated to maintain hereunder may be carried under any combination of
so-called "blanket" and/or "umbrella" policies so long as the coverage
applicable to the Demised Premises is separately stated therein. Landlord shall
keep in force liability insurance for its own benefit without any obligation to
include Tenant as a named or additional insured party and without in any way
limiting Tenant's obligations hereunder. The amount of coverage afforded by such
insurance shall be not less than $100,000 for property damage and not less than
$2,000,000 for personal injury to or death of one or more persons in a single
occurrence. Any insurance maintained by Tenant pursuant to this Section shall be
primary and non-contributing with respect to any insurance carried by Landlord.
Section 20.03. Tenant shall pay to Landlord, within thirty (30) days next
following rendition by Landlord to Tenant of bills or statements therefor: (i)
sums equal to all expenditures reasonably made and monetary obligations
reasonably incurred by Landlord including, but not limited to, reasonable
counsel fees, pursuant to the provisions of Section 20.01; (ii) sums equal to
all losses, costs, liabilities, damages and expenses referred to in Section
20.02; (iii) sums equal to all expenditures reasonably made and monetary
obligations reasonably incurred by Landlord including, but not limited to,
reasonable counsel fees, in collecting or attempting to collect the Fixed Rent,
any additional rent or any other sum of money accruing under this Lease or in
enforcing or attempting to enforce any rights of Landlord under this Lease or
pursuant to law, whether by the institution and prosecution of summary
proceedings or otherwise; and (iv) all other sums of money (other than Fixed
Rent) accruing from Tenant to Landlord under the provisions of this Lease. Any
sum of money (other than Fixed Rent) accruing from Tenant to Landlord pursuant
to any provision of this Lease including, but not limited to, the provisions of
Schedule A, whether prior to or after the Commencement Date, may, at Landlord's
option, be deemed additional rent, and Landlord shall have the same remedies for
Tenant's failure to pay any item of additional rent when due as for Tenant's
failure to pay any installment of Fixed Rent when due. Tenant's obligations
under this Article shall survive the expiration or sooner termination of the
Demised Term.
Section 20.04. If Tenant shall fail to make payment of any installment of
Fixed Rent or any additional rent within ten (10) days after the date when such
payment is due (so long as Tenant shall have received notice of such obligation
in the form of a bill or other invoice) Tenant shall pay to Landlord, in
addition to such installment of Fixed Rent or such additional rent, as the case
may be, as a late charge and as additional rent, a sum equal to two (2%) percent
per annum above the then current Prime Rate, as defined in Article 2, of the
amount unpaid computed from the date such payment was due to and including the
date of payment, provided however that such late charge shall be waived if no
such failure has occurred on any prior occasion during the preceding three (3)
year period.
Section 20.05. Landlord shall pay to Tenant, within thirty (30) days next
following rendition by Tenant to Landlord of bills and statements therefor
together with reasonably satisfactory supporting documentation, any reasonable
counsel fees and court costs incurred by Tenant in enforcing or attempting to
enforce any rights of any Tenant under this Lease or pursuant to law on account
of any default by Landlord hereunder.
ARTICLE 21
END OF TERM
Section 21.01. On the date upon which the Demised Term shall expire and
come to an end, whether pursuant to any of the provisions of this Lease or by
operation of law, and whether on or prior to the Expiration Date, Tenant, at
Tenant's sole cost and expense, (i) shall quit and surrender the Demised
Premises to Landlord, broom clean and in good order and condition except for
ordinary wear and tear, damage by fire or other casualty for which Tenant is not
otherwise liable and damage caused by the acquisition or condemnation of all or
any part of the Demised Premises for any public or quasi-public use or purpose,
and (ii) shall remove all of Tenant's Personal Property and all other property
and effects of Tenant and all persons claiming through or under Tenant from the
Demised Premises and the Building, and (iii) shall repair all damage to the
Demised Premises occasioned by such removal. Notwithstanding the foregoing,
Tenant shall not be required to so remove any wires or cables concealed above
the finished ceiling, behind finished walls or beneath the finished floor so
long as such wiring or cabling is suitably capped. Landlord shall have the right
to retain any property and effects which shall remain in the Demised Premises
after the expiration or sooner termination of the Demised Term (so long as
Tenant has otherwise relinquished possession of the Demised Premises), and any
net proceeds from the sale thereof, without waiving Landlord's rights with
respect to any default by Tenant under the foregoing provisions of this Section.
To the extent legally permissible, Tenant expressly waives, for itself and for
any person claiming through or under Tenant, any rights which Tenant or any such
person may have under the provisions of any present or future law then in force,
to apply for or obtain any stay or extension of its right to remain in
possession of the Demised Premises or any part thereof in connection with any
holdover summary proceeding or any other action or proceeding which Landlord may
institute to enforce the foregoing provisions of this Article. If said date upon
which the Demised Term shall expire and come to an end shall fall on a Sunday or
holiday, then Tenant's obligations under the first sentence of this Section
shall be performed on or prior to the Saturday or business day immediately
preceding such Sunday or holiday. Tenant's obligations under this Section shall
survive the expiration or sooner termination of the Demised Term. Tenant shall
pay to Landlord, for each month (or fraction thereof) during which Tenant fails
to comply with such obligations (referred to as the "Holdover Period") a sum
equal to 150% of the Fixed Rent payable for the month immediately preceding the
Expiration Date. Such payments (referred to as "Holdover Payments") are
acknowledged to be a reasonable approximation of the damages which will be
incurred by Landlord on account of such failure. In no event shall the demand
for or receipt of any Holdover Payments be deemed to preclude Landlord from
seeking to have Tenant evicted from the Demised Premises during the Holdover
Period or pursuing any other available remedy on account of Tenant's failure to
comply with Tenant's obligations under this Section, provided however that
Tenant shall not be liable to Landlord for the payment of damages in excess of
the Holdover Payments for the initial thirty (30) days included as part of the
Holdover Period.
ARTICLE 22
QUIET ENJOYMENT
Section 22.01. Landlord covenants and agrees with Tenant that upon Tenant
paying the Fixed Rent and additional rent reserved in this Lease and observing
and performing all of the terms, covenants and conditions of this Lease on
Tenant's part to be observed and performed, Tenant may peaceably and quietly
enjoy the Demised Premises during the Demised Term, subject, however, to the
terms, covenants and conditions of this Lease including, but not limited to, the
provisions of Section 39.01, and subject to the Land Disposition Agreement and
the Urban Renewal Plan and the ground and underlying leases and mortgages
referred to in Section 8.01.
ARTICLE 23
ESCALATION
Section 23.01. In the determination of any increase in the Fixed Rent
under the provisions of this Article, Landlord and Tenant agree as follows:
A. The term "Escalation Year" shall mean each calendar year which shall
include any part of the Demised Term.
B. The term "Taxes" shall be deemed to include all real estate taxes and
assessments, special or otherwise, upon or with respect to the Real Property
(including, without limitation, taxes on the buildings and other things erected
or constructed on the premises affected by the Commonwealth Lease by or on
behalf of the tenant thereunder, whether or not constructed on the premises
demised under such lease) imposed by the City of Boston or any other taxing
authority. If, due to any change in the method of taxation, any franchise,
income, profit, sales, rental, use and occupancy or other tax shall be
substituted for or levied against Landlord or any owner or lessee of the
Building or the Real Property, in lieu of any real estate taxes or assessments
upon or with respect to the Real Property, such tax shall be included in the
term "Taxes" for the purposes of this Article. In the event that Landlord is
required to pay any monies to the City of Boston in lieu of real estate taxes
pursuant to the provisions of the Commonwealth Lease, such monies shall be
included in the term "Taxes" for the purposes of this Article.
C. The term "Tenant's Proportionate Share" shall be defined as follows:
Tenant's Proportionate Share
With respect to the: shall be:
------------------- ----------------------------
Primary Premises 12.345%
Seventh Floor Space 0.574%
Expansion Area 0.892%
D. The term "Operating Expenses" shall mean the aggregate cost and expense
incurred by Landlord in the operation, maintenance and management of the Real
Property and any plazas, sidewalks and curbs adjacent thereto and the public
park area immediately across Summer Street from the Building and bounded by
Purchase Street, Summer Street, Atlantic Avenue and Congress Street (with
respect to such park, Landlord is sharing costs and expenses with others)
including, without limitation, the cost and expense of the following: salaries,
wages, medical, surgical and general welfare and other so-called "fringe"
benefits (including group insurance and retirement benefits) for employees of
Landlord to the extent engaged in the cleaning, operation, maintenance or
management of the Real Property, and payroll taxes and workmen's compensation
insurance premiums relating thereto, gas, steam, fuel oil, water, sewer rental,
electricity, utility taxes, rubbish removal, fire, casualty, liability, rent and
other insurance carried by Landlord, repairs, repainting, replacement,
maintenance of grounds, Building supplies, uniforms and cleaning thereof, snow
removal, window cleaning, service contracts with independent contractors for any
of the foregoing (including, but not limited to, elevator and air conditioning
maintenance), management fees (whether or not paid to any person, firm or
corporation having an interest in or under common ownership with Landlord or any
of the persons, firms or corporations comprising Landlord), reasonable legal
fees and expenses, including, without limitation, reasonable legal fees and
expenses incurred in connection with any application or proceeding brought for
reduction of the assessed valuation of the Real Property or any part thereof,
auditing fees and all other costs and expenses incurred in connection with the
operation, maintenance and management of the Real Property and any plazas,
sidewalks and curbs adjacent thereto, but excluding, nevertheless, the cost and
expense of the following:
(i) leasing commissions;
(ii) management fees in excess of generally prevailing rates charged
by independent third party management companies in the City of
Boston for buildings of like class and character;
(iii) salaries and benefits (including insurance) paid to executives
above the grade of building manager;
(iv) capital improvements and replacements which under generally
accepted accounting principles and practice would be classified as
capital expenditures, except the cost and expense of any
improvement, alteration, replacement or installation made or
performed after completion of the construction of the Building which
is either (a) required by law (but only to the extent that the
applicable requirement is imposed after the Commencement Date), or
(b) designed, in Landlord's reasonable judgment (as set forth in
calculations to be furnished to Tenant if Tenant so requests), to
result in equivalent savings or reductions in Operating Expenses
over the anticipated useful life thereof (any such improvement,
alteration, replacement or installation is referred to as "Included
Improvements"); the cost and expense of Included Improvements shall
be included in Operating Expenses for any Escalation Year to the
extent of (x) the annual amortization or depreciation of the cost
and expense to Landlord of such Included Improvements, as deducted
by Landlord for Federal income tax purposes for any such Escalation
Year plus (y) an annual charge for interest upon the unamortized or
undepreciated portions of such cost and expense at the average Prime
Rate during the Escalation Year in question;
(v) any other item (including reserves) which under generally
accepted accounting principles and practice would not be regarded as
an operating, maintenance or management expense;
(vi) any item for which Landlord is compensated through proceeds of
insurance or otherwise (except by tenants pursuant to cost sharing
provisions comparable hereto), it being understood and agreed that
Landlord will use reasonable efforts to obtain such compensation
whenever available;
(vii) advertising and promotion;
(viii) legal and auditing fees other than reasonable legal and auditing
fees incurred in connection with the operation, maintenance and
management of the Building;
(ix) payments of principal, interest and any other amounts related to
mortgages or any other indebtedness;
(x) the cost of work done by Landlord for a particular tenant
(including without limitation architectural, legal or engineering
costs relating thereto);
(xi) depreciation (except as hereinabove permitted);
(xii) ground rent;
(xiii) attorneys' and other professional fees, costs and disbursements and
other expenses incurred in connection with negotiations or disputes
with existing or prospective tenants or other occupants of the
Property or the sale or mortgaging of the Property or the
syndication of any interest in the entity comprising Landlord, and
unrelated in any such case to the operation, maintenance or
management of the Property;
(xiv) general overhead of Landlord and its subsidiaries and affiliates;
(xv) advertising and promotional expenditures;
(xvi) any fines or penalties incurred on account of violations by
Landlord of any governmental rule or requirement;
(xvii) rentals and other related expenses incurred in leasing air
conditioning systems, elevators or other equipment ordinarily
considered part of the basic facilities of an office building,
except equipment which is used in providing janitorial or other
services and is not permanently affixed to the Building;
(xviii) costs and expenses incurred by Landlord in the performance of its
obligations with respect to any environmental laws or the removal of
hazardous substances from the Property;
(xix) the cost of special services provided to particular tenants of the
Building which are not provided to Tenant or which are provided to
Tenant subject to payment of an additional charge;
(xx) costs paid directly by individual tenants to suppliers, including
(where applicable) tenant electricity, telephone and other utility
costs;
(xxi) the cost of operating any specialty services or commercial
concessions, including restaurants and clubs;
(xxii) the cost of operating the Garage referenced in Article 42 (provided
however that Operating Expenses shall include the cost of
maintaining and repairing any structural components, standard
equipment or common systems of the Building located within the
Garage);
(xxiii) costs of repairs or other work necessitated by fire or other
casualty or by the exercise of eminent domain;
(xxiv) amounts paid to subsidiaries or affiliates of Landlord for services
rendered to the Property, to the extent such amounts exceed the
competitive costs of such services; and
(xxv) the costs of decorating the lobby or other common areas of the
Property, including without limitation the cost of acquiring
sculpture, paintings or other objects of art.
Solely for the purpose of defining Operating Expenses, the cost and expense
incurred by Landlord for electricity in any Escalation Year shall be deemed to
be the total cost and expense to Landlord of purchasing electricity for the
Building in such Escalation Year in excess of the sum of $1,059,653.
E. The term "Annual Expenses" shall mean the sum of Taxes and Operating
Expenses for any Escalation Year.
F. The term "Base Expenses" shall mean Annual Expenses incurred with
respect to the calendar year ending December 31, 1996.
G. The term "Landlord's Escalation Statement" shall mean a statement
containing a computation of any increase in the Fixed Rent pursuant to the
provisions of this Article.
H. The term "Monthly Escalation Installment" shall mean a sum equal to
one-twelfth (1/12) of the increase in the Fixed Rent payable pursuant to the
provisions of subsection 23.02A for the Escalation Year with respect to which
Landlord has most recently rendered a Landlord's Escalation Statement,
appropriately adjusted to reflect, (i) in the event such Escalation Year is a
partial calendar year, the increase in the Fixed Rent which would have been
payable for such Escalation Year if it had been a full calendar year, and (ii)
current Taxes and current Operating Expenses, as reasonably estimated by
Landlord, rather than Taxes and Operating Expenses as reflected in such
Landlord's Statement, and (iii) any net credit balance to which Tenant may be
entitled pursuant to the provisions of subsection 23.03C.
I. The term "Monthly Escalation Installment Notice" shall mean a notice
given by Landlord to Tenant which sets forth the current Monthly Escalation
Installment; such notice may be contained in a regular monthly rent bill, in a
Landlord's Escalation Statement, or otherwise, and may be given from time to
time, at Landlord's election.
Section 23.02. A. If Annual Expenses in any Escalation Year shall be in
such an amount as shall constitute an increase above Base Expenses, the Fixed
Rent for such Escalation Year shall be increased by a sum equal to Tenant's
Proportionate Share of any such increase.
B. Unless the Commencement Date shall occur on a January 1st, any increase
in the Fixed Rent pursuant to the provisions of subsection A of this Section
23.02, for the Escalation Year in which the Commencement Date shall occur shall
be apportioned in that percentage which the number of days in the period from
the Commencement Date to December 31st of such Escalation Year, both inclusive,
shall bear to the total number of days in such Escalation Year. Unless the
Demised Term shall expire on a December 31st, any increase in the Fixed Rent
pursuant to the provisions of subsection A of this Section 23.02 for the
Escalation Year in which the date of the expiration of the Demised Term shall
occur shall be apportioned in that percentage which the number of days in the
period from January 1st of such Escalation Year to such date of expiration, both
inclusive, shall bear to the total number of days in such Escalation Year.
Section 23.03. A. Landlord shall render to Tenant, either in accordance
with the provisions of Article 27 or by personal delivery at the Demised
Premises, a Landlord's Escalation Statement with respect to each Escalation Year
on or before the next succeeding October 1st. Landlord's failure to render a
Landlord's Escalation Statement with respect to any Escalation Year shall excuse
Tenant from any obligation to make further payments hereunder for such Year but
shall not prejudice Landlord's right to render a Landlord's Escalation Statement
with respect to any subsequent Escalation Year. The obligations of Tenant under
the provisions of this Article with respect to any increase in the Fixed Rent
shall survive the expiration or any sooner termination of the Demised Term.
Following Tenant's request, made by notice given to Landlord within ninety (90)
days after the rendition of a Landlord's Escalation Statement pursuant hereto,
Landlord shall make available for inspection by Tenant such data in Landlord's
possession as may be reasonably necessary to enable Tenant to verify any
computation set forth in such Statement.
B. Within thirty (30) days next following rendition of the first
Landlord's Escalation Statement which shows an increase in the Fixed Rent for
any Escalation Year, Tenant shall pay to Landlord the entire amount of such
increase. In order to provide for current payments on account of future
potential increases in the Fixed Rent which may be payable by Tenant pursuant to
the provisions of subsection 23.02A, Tenant shall also pay to Landlord at such
time, provided Landlord has given to Tenant a Monthly Escalation Installment
Notice, a sum equal to the product of (i) the Monthly Escalation Installment set
forth in such Notice multiplied by (ii) the number of months or partial months
which shall have elapsed between January 1st of the Escalation Year in which
such payment is made and the date of such payment; thereafter, Tenant shall make
payment of a Monthly Escalation Installment throughout each month of the Demised
Term. Monthly Escalation Installments shall be added to and payable as part of
each monthly installment of Fixed Rent.
C. Following rendition of each subsequent Landlord's Escalation Statement,
a reconciliation shall be made as follows: Tenant shall be debited with any
increase in the Fixed Rent shown on such Landlord's Escalation Statement and
credited with the aggregate amount, if any, paid by Tenant in accordance with
the provisions of subsection B of this Section on account of potential future
increases in the Fixed Rent pursuant to subsection 23.02A which has not
previously been credited against increases in the Fixed Rent shown on Landlord's
Escalation Statements. Tenant shall pay any net debit balance to Landlord within
thirty (30) days next following rendition by Landlord, in accordance with the
provisions of Article 27, of an invoice for such net debit balance; any net
credit balance shall be applied as an adjustment against the next accruing
Monthly Escalation Installments as provided in subsection H of Section 23.01.
All sums payable by Tenant under this Article shall be collectible by Landlord
in the same manner as Fixed Rent. Such credit shall be payable to Tenant in the
event the Demised Term shall have ended.
Section 23.04. A. In the determination of any increase in the Fixed Rent
pursuant to the foregoing provisions of this Article 23, (i) if, during any
Escalation Year, the Building shall not have been fully occupied or Landlord
shall not have supplied all tenants of the Building with the same services being
supplied hereunder, Operating Expenses for such Escalation Year shall be
equitably adjusted (by including such additional expenses as Landlord would have
incurred) to the extent, if any, required to reflect full occupancy and the
supplying of equivalent services. A comparable adjustment shall be made in the
determination of Base Expenses.
B. If, as a result of any application or proceeding brought by or on
behalf of Landlord for reduction of the assessed valuation of the Real Property,
there shall be a decrease in Taxes for any Escalation Year with respect to which
Landlord shall have previously rendered a Landlord's Escalation Statement,
Landlord's Escalation Statement next following such decrease shall include an
adjustment of the Fixed Rent for such Escalation Year reflecting a credit to
Tenant equal to the amount by which (i) the Fixed Rent actually paid by Tenant
with respect to such Escalation Year (as increased pursuant to the provisions of
subsection A of Section 23.02) shall exceed (ii) the Fixed Rent payable with
respect to such Escalation Year (as increased pursuant to the operation of the
provisions of subsection A of Section 23.02) based upon such reduction of the
assessed valuation.
Section 23.05. A. In the event of any dispute between Landlord and Tenant
arising out of the application of the provisions of this Article, such dispute
shall be determined by arbitration in accordance with the provisions of Article
33. Notwithstanding any dispute and submission to arbitration, any increase in
the Fixed Rent shown upon any Landlord's Escalation Statement or any Monthly
Escalation Installment Notice shall be payable by Tenant within the time
limitation set forth in this Article. If the determination in such arbitration
shall be adverse to Landlord, any amount paid by Tenant to Landlord in excess of
the amount determined to be properly payable shall be credited against the next
accruing installments of Fixed Rent due under this Lease.
B. In the event Tenant disagrees with any computation or other matter
contained in any Landlord's Escalation Statement or any Monthly Escalation
Installment Notice, Tenant shall have the right to give notice to Landlord
within ninety (90) days next following rendition of such Statement or Notice
setting forth the particulars of such disagreement. If the matter is not
resolved within ninety (90) days next following the giving of such notice by
Tenant, it shall be deemed a dispute which either party may submit to
arbitration pursuant to the provisions of subsection A of this Section. If (i)
Tenant does not give a timely notice to Landlord in accordance with the
foregoing provisions of this subsection disagreeing with any computation or
other matter contained in any Landlord's Escalation Statement or any Monthly
Escalation Installment Notice, or (ii) if any such timely notice shall have been
given by Tenant, the matter shall not have been resolved and neither party shall
have submitted the dispute to arbitration within ninety (90) days next following
the giving of such notice by Tenant, Tenant shall be deemed conclusively to have
accepted such Landlord's Escalation Statement or Monthly Escalation Installment
Notice, as the case may be, and shall have no further right to dispute the same.
ARTICLE 24
NO WAIVER
Section 24.01. Neither any option granted to Tenant in this Lease to renew
or extend the Demised Term, nor the exercise of any such option by Tenant, shall
prevent Landlord from exercising any option or right granted or reserved to
Landlord in this Lease or which Landlord may have by virtue of any law, to
terminate this Lease and the Demised Term or any renewal or extension of the
Demised Term either during the original Demised Term or during the renewed or
extended term on account of any Event of Default. Any such termination of this
Lease and the Demised Term shall serve to terminate any such renewal or
extension of the Demised Term and any right of Tenant to any such renewal or
extension, whether or not Tenant shall have exercised any such option to renew
or extend the Demised Term. Any such option or right on the part of Landlord to
terminate this Lease shall continue during any extension or renewal of the
Demised Term. No option granted to Tenant to renew or extend the Demised Term
shall be deemed to give Tenant any further option to renew or extend.
Section 24.02. No act or thing done by Landlord or Landlord's agents
during the Demised Term shall constitute a valid acceptance of a surrender of
the Demised Premises or any remaining portion of the Demised Term except a
written instrument accepting such surrender, executed by Landlord. No employee
of Landlord or of Landlord's agents shall have any authority to accept the keys
of the Demised Premises prior to the termination of this Lease and the Demised
Term, and the delivery of such keys to any such employee shall not operate as a
termination of this Lease or a surrender of the Demised Premises; however, if
Tenant desires to have Landlord sublet the Demised Premises for Tenant's
account, Landlord or Landlord's agents are authorized to receive said keys for
such purposes without releasing Tenant from any of its obligations under this
Lease. The failure of either party to seek redress for breach or violation of,
or to insist upon the strict performance of, any term, covenant or condition of
this Lease on the part of the other party to be observed or performed, shall not
prevent a subsequent act or omission which would have originally constituted a
breach or violation of any such term, covenant or condition from having all the
force and effect of an original breach or violation. The receipt by Landlord of
rent with knowledge of the breach or violation by Tenant of any term, covenant
or condition of this Lease on Tenant's part to be observed or performed shall
not be deemed a waiver of such breach or violation. Landlord's failure to
enforce any Building Rule, as defined in Article 35, against Tenant or against
any other tenant or occupant of the Building shall not be deemed a waiver of any
such Building Rule. No provision of this Lease shall be deemed to have been
waived by either party unless such waiver shall be set forth in a written
instrument executed by such party. No payment by Tenant or receipt by Landlord
of a lesser amount than the aggregate of all Fixed Rent and additional rent then
due under this Lease shall be deemed to be other than on account of the first
accruing of all such items of Fixed Rent and additional rent then due. No
endorsement or statement on any check and no letter accompanying any check or
other rent payment in any such lesser amount and no acceptance of any such check
or other such payment by Landlord shall constitute an accord and satisfaction,
and Landlord may accept any such check or payment without prejudice to
Landlord's right to recover the balance of such rent or to pursue any other
legal remedy.
ARTICLE 25
MUTUAL WAIVER OF TRIAL BY JURY
Section 25.01. Landlord and Tenant hereby waive trial by jury in any
action, proceeding or counterclaim brought by Landlord or Tenant against the
other on any matter whatsoever arising out of or in any way connected with this
Lease, the relationship of landlord and tenant, the use or occupancy of the
Demised Premises by Tenant or any person claiming through or under Tenant, any
claim of injury or damage, and any emergency or other statutory remedy; however,
the foregoing waiver shall not apply to any action for personal injury or
property damage. The provisions of the foregoing sentence shall survive the
expiration or any sooner termination of the Demised Term. If Landlord commences
any action or proceeding for nonpayment of rent, Tenant agrees not to interpose
any counterclaim of whatever nature or description in any such action or
proceeding, except to the extent that Tenant's failure to do so would preclude
Tenant from asserting the same claim in a separate action.
ARTICLE 26
INABILITY TO PERFORM
Section 26.01. If, by reason of strikes or other labor disputes, fire or
other casualty (or reasonable delays in adjustment of insurance), accidents,
orders or regulations of any Federal, State, County or Municipal authority, or
any other cause beyond Landlord's reasonable control, whether or not such other
cause shall be similar in nature to those hereinbefore enumerated, Landlord is
unable to furnish or is delayed in furnishing any utility or service required to
be furnished by Landlord under the provisions of Article 31 or any other Article
of this Lease or any collateral instrument, or is unable to perform or make or
is delayed in performing or making any installations, decorations, repairs,
alterations, additions or improvements, whether or not required to be performed
or made under this Lease or under any collateral instrument, or is unable to
fulfill or is delayed in fulfilling any of Landlord's other obligations under
this Lease or any collateral instrument, no such inability or delay shall
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution or rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Landlord or its
agents by reason of inconvenience or annoyance to Tenant, or injury to or
interruption of Tenant's business, or otherwise.
ARTICLE 27
NOTICES
Section 27.01. Except as otherwise expressly provided in this Lease, any
bills, statements, notices, demands, requests or other communications given or
required to be given under this Lease shall be effective only if rendered or
given in writing (whether or not the applicable provision so specifies), sent by
certified mail (return receipt requested), addressed (a) to Tenant at the
Demised Premises, or (b) to Landlord at Landlord's address set forth in this
Lease, or (c) addressed to such other address as either Landlord or Tenant may
designate as its new address for such purpose by notice given to the other in
accordance with the provisions of this Section. Any such bill, statement,
notice, demand, request or other communication shall be deemed to have been
rendered or given on the date when it shall have been mailed as provided in this
Section.
ARTICLE 28
PARTNERSHIP TENANT
Section 28.01. If Tenant is a partnership (or is comprised of two (2) or
more persons, individually and as co-partners of a partnership) or if Tenant's
interest in this Lease shall be assigned to a partnership (or to two (2) or more
persons, individually and as co-partners of a partnership) pursuant to Article
12 (any such partnership and such persons are referred to in this Section as
"Partnership Tenant"), the following provisions of this Section shall apply to
such Partnership Tenant: (i) the liability of each of the persons comprising
Partnership Tenant shall be joint and several, individually and as a partner,
and (ii) each of the persons comprising Partnership Tenant, whether or not such
person shall be one of the persons comprising Tenant at the time in question,
hereby consents in advance to, and agrees to be bound by, any written instrument
which may hereafter be executed, changing, modifying or discharging this Lease,
in whole or in part, or surrendering all or any part of the Demised Premises to
Landlord, and by any notices, demands, requests or other communications which
may hereafter be given, by Partnership Tenant or by any of the persons
comprising Partnership Tenant, and (iii) any bills, statements, notices,
demands, requests or other communications given or rendered to Partnership
Tenant or to any of the persons comprising Partnership Tenant shall be deemed
given or rendered to Partnership Tenant and to all such persons and shall be
binding upon Partnership Tenant and all such persons, and (iv) if Partnership
Tenant shall admit new partners, all of such new partners shall, by their
admission to Partnership Tenant, be deemed to have assumed performance of all of
the terms, covenants and conditions of this Lease on Tenant's part to be
observed and performed, and shall be liable for such performance, together with
all other partners, jointly or severally, individually and as a partner, and (v)
Partnership Tenant shall give prompt notice to Landlord of the admission of any
such new partners, and upon demand of Landlord, shall cause each such new
partner to execute and deliver to Landlord an agreement in form satisfactory to
Landlord, wherein each such new partner shall so assume performance of all of
the terms, covenants and conditions of this Lease on Tenant's part to be
observed and performed (but neither Landlord's failure to request any such
agreement nor the failure of any such new partner to execute or deliver any such
agreement to Landlord shall vitiate the provisions of subdivision (iv) of this
Section.) The provisions of Section relating to the partners of Partnership
Tenant shall not be deemed to apply to limited partners otherwise exempt from
liability for the debts and other obligations of Partnership Tenant.
ARTICLE 29
CIVIL RIGHTS
Section 29.01. To the extent required by the provisions of the Land
Disposition Agreement and the Commonwealth Lease, Tenant agrees (i) not to
discriminate on the basis of race, creed, color, sex, disability or national
origin in the use or occupancy of the Demised Premises, and (ii) to use the
Demised Premises in compliance with all other requirements imposed by or
pursuant to Title 49, Code of Federal Regulations, Department of Transportation,
Subtitle A, Office of the Secretary, Part 21, Nondiscrimination in
Federally-assisted programs of the Department of Transportation-Effectuation of
Title VI of the Civil Rights Act of 1964, and as said Regulations may be
amended. To the fullest extent permitted by law and equity, the foregoing
covenants shall be binding for the benefit and in favor of, and enforceable by,
the Authority and the United States of America, and it is intended and agreed
that the Authority and the United States of America shall be deemed to be the
beneficiaries of the foregoing covenants, both for and in their own rights and
also for the purpose of protecting the interests of the community and other
parties, public or private, in whose favor and for whose benefit such covenants
have been provided.
ARTICLE 30
SPECIAL WAIVER OF CLAIMS
Section 30.01. Tenant shall not have or make any claim against Landlord or
the landlord under the Commonwealth Lease for or by reason of the ownership, use
or occupancy of the Non-Leased Premises, or on account of noise, vibration,
fumes, odor or air quality or like effects resulting from the ownership, use,
occupancy, construction or maintenance of the Non-Leased Premises by said
landlord under the Commonwealth Lease, except that the foregoing provision shall
not release said landlord under the Commonwealth Lease from any claims for
damage or injury caused by the negligence of said landlord or its agents,
servants, employees, contractors or licensees.
ARTICLE 31
UTILITIES AND SERVICES
Section 31.01. Landlord, at Landlord's expense, shall furnish necessary
elevator facilities on business days from 8:00 A.M. to 6:00 P.M. and shall have
a passenger elevator subject to call at all other times. At any time or times
all or any of the elevators in the Building may, at Landlord's option, be
automatic elevators, and Landlord shall not be required to furnish any operator
service for automatic elevators. If Landlord shall, at any time, elect to
furnish operator service for any automatic elevators, Landlord shall have the
right to discontinue furnishing such service with the same effect as if Landlord
had never elected to furnish such service. Landlord shall not dedicate for the
exclusive use of any tenant any of the elevators presently servicing the floors
of the Building on which portions of the Demised Premises are located.
Section 31.02. Landlord, at Landlord's expense, shall furnish and
distribute to the Demised Premises through the Building heating, ventilating and
air conditioning (referred to as "HVAC") system, when required for the
comfortable occupancy of the Demised Premises in accordance with standards
generally prevailing in the case of office buildings of similar construction and
class in the Boston, Massachusetts area, heated, cooled and outside air, at
reasonable temperatures, pressures and degrees of humidity and in reasonable
volumes and velocities, on a year round basis, from 8:00 A.M. to 6:00 P.M. on
business days. For purposes of this Section, the term "business days" shall be
deemed to include any day on which the New York Stock Exchange is open for the
conduct of regular business. Notwithstanding the foregoing provisions of this
Section, Landlord shall not be responsible if the normal operation of the
Building HVAC system shall fail to provide conditioned air at reasonable
temperatures, pressures or degrees of humidity or in reasonable volumes or
velocities in any portions of the Demised Premises (a) which shall have an
electrical load in excess of six (6) watts per square foot of usable area for
all purposes (including lighting and power), or which shall have a human
occupancy factor in excess of one person per 100 square feet of usable area (the
average electrical load and human occupancy factors for which the Building HVAC
system has been designed) or (b) because of any rearrangement of partitioning or
other Alterations made or performed by or on behalf of Tenant or any person
claiming through or under Tenant to the extent that any of the foregoing
adversely affect the operation of the Building HVAC system. Notwithstanding such
design of the Building HVAC system, Tenant acknowledges that the electrical load
in the Demised Premises which shall conform to the energy conservation
provisions of the Massachusetts Building Code and may accordingly be less than
six (6) watts per square foot of usable area for all purposes (including
lighting and power). Whenever said HVAC system is in operation, Tenant agrees to
cause all windows of the Demised Premises to be kept closed and to cause the
venetian blinds in the Demised Premises to be kept closed if necessary because
of the position of the sun. Tenant agrees to cause all the windows of the
Demised Premises to be closed whenever the Demised Premises are not occupied.
Tenant shall cooperate fully with Landlord at all times and abide by all
regulations and requirements which Landlord may reasonably prescribe for the
proper functioning and protection of the HVAC system.
Section 31.03. A. Provided Tenant shall keep the Demised Premises in
reasonable order, Landlord, at Landlord's expense, shall cause the office areas
of the Demised Premises to be cleaned, in accordance with the standards set
forth in Schedule C, all of the terms, covenants and conditions of which are
incorporated in this Lease by reference and shall be deemed a part of this
Lease, as though fully set forth in the body of this Lease. Tenant acknowledges
that Landlord's obligation to cause the office areas of the Demised Premises to
be cleaned excludes, except to the extent of emptying wastepaper baskets, damp
mopping hard flooring and carpet sweeping carpeted areas, any portions of the
Demised Premises not used as office areas (e.g., storage, mail and computer
areas, private lavatories and areas used for the storage, preparation, service
or consumption of food or beverages). Tenant shall pay to Landlord the cost of
removal from the Building of any of Tenant's refuse or rubbish which Landlord is
not obligated to remove hereunder, and Tenant, at Tenant's expense, shall cause
all portions of the Demised Premises not used as office areas to be cleaned
regularly (except to the extent of Landlord's obligations hereunder) in a manner
reasonably satisfactory to Landlord. Tenant also shall cause all portions of the
Demised Premises used for the storage, preparation or consumption of food or
beverages to be exterminated against infestation by vermin, roaches or rodents
regularly and, in addition, whenever there shall be evidence of any infestation.
Tenant shall contract independently with Landlord or its cleaning services
contractor for the removal of such other refuse and rubbish and for cleaning
services in addition to those furnished by Landlord and for the purpose of
providing extermination services required to be performed by Tenant, but only to
the extent that such contract provides for competitive pricing.
B. Tenant acknowledges and is aware that the cleaning services to be
furnished by Landlord pursuant to this Section may be furnished by a contractor
or contractors employed by Landlord and agrees that Landlord shall not be deemed
in default of any of its obligations under this Section 31.03 unless such
default shall continue beyond such time as is reasonably required to cure such
default after notice from Tenant to Landlord setting forth the specific nature
of such default (so long as Landlord commences within ten (10) days after such
notice, and thereafter diligently prosecutes to completion, all action necessary
to cure such default).
Section 31.04. A. Landlord, at Landlord's expense, shall redistribute or
furnish electrical energy to or for the use of Tenant in the Demised Premises
for the operation of the lighting fixtures and the electrical receptacles in
accordance with the provisions of this Lease. There shall be no specific charge
by way of measuring such electrical energy on any meter or otherwise, as the
charge for the service of redistributing or furnishing such electrical energy
has been included in the Fixed Rent on a so-called "rent inclusion" basis. If
either the quantity or character of electrical service is changed by the public
utility corporation supplying electrical service to the Building or is no longer
available or suitable for Tenant's requirements for reasons other than the
negligence or wilful misconduct of Landlord, no such change, unavailability or
unsuitability shall constitute an actual or constructive eviction, in whole or
in part, or entitle Tenant to any abatement or diminution of rent, or relieve
Tenant from any of its obligations under this Lease, or impose any liability,
upon Landlord, or its agents, by reason of inconvenience or annoyance to Tenant,
or injury to or interruption of Tenant's business, or otherwise.
B. Tenant covenants that (i) at no time shall the use of electrical energy
in the Demised Premises exceed the capacity of the existing feeders or wiring
installations then serving the Demised Premises, (ii) notwithstanding anything
to the contrary which may be contained in Article 4, it shall use the electrical
receptacles in the Demised Premises only for lamps, typewriters, word processing
machines, photocopiers and similar ordinary and usual office equipment and
machinery as well as for appliances included as part of any kitchen facilities
installed in accordance with the provisions of this Lease, and (iii) it shall
not connect any computers (other than customary desk-top computers) or other
high electrical consuming machines without the prior consent of Landlord in each
instance (which consent shall not be unreasonably withheld or delayed). Tenant
shall not make or perform, or permit the making or performance of, any
Alterations to wiring installations or other electrical facilities in or serving
the Demised Premises or any material additions to the business machines, office
equipment or other appliances in the Demised Premises which utilize electrical
energy without the prior consent of Landlord in each instance (which consent
shall not be unreasonably withheld or delayed). Any such Alterations, additions
or consent by Landlord shall be subject to the provisions of this Lease
including, but not limited to, the provisions of Article 4.
C. Landlord may, at any time, elect to discontinue the redistribution or
furnishing of electrical energy to the Building in its entirety. In the event of
any such election by Landlord, (i) Landlord agrees to give reasonable advance
notice of any such discontinuance to Tenant sufficient to enable Tenant to
prevent any interruption of electrical service to the Demised Premises; (ii)
Landlord agrees to permit Tenant to receive electrical service directly from the
public utility corporation supplying electrical service to the Building and to
permit the existing feeders, risers, wiring and other electrical facilities
serving the Demised Premises to be used by Tenant for such purpose to the extent
they are suitable and safely capable; (iii) Landlord agrees to pay such charges
and costs, if any, as such public utility corporation may impose in connection
with the installation of Tenant's meters; (iv) the Fixed Rent shall be
decreased, as of the date of such discontinuance, by the Electrical Inclusion
Factor to reflect such discontinuance; (v) the last sentence of subsection D of
Section 23.01 shall be deemed revised to read as follows: "Solely for the
purpose of defining Operating Expenses, the cost and expense incurred by
Landlord for electricity shall be deemed to be the reasonably-estimated total
cost and expense of Landlord for purchasing electricity for the common areas and
facilities of the Building."; and (vi) this Lease shall remain in full force and
effect and such discontinuance shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of rent except as expressly provided in subdivision (iv) of this subsection C,
or relieve Tenant from any of its obligations under this Lease or impose any
liability upon Landlord or its agents by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business, or otherwise.
Section 31.05. Landlord shall furnish water to the Demised Premises for
ordinary lavatory and drinking purposes to the extent required to service
facilities installed in accordance with the provisions of this Lease. If Tenant
requires, uses or consumes water for any other purpose, Landlord may install a
hot water meter and a cold water meter and thereby measure Tenant's consumption
of water for all purposes. Tenant shall pay to Landlord the cost of any such
meters and their installation, and Tenant shall keep any such meters and any
such installation equipment in good working order and repair, at Tenant's cost
and expense. Tenant agrees to pay for water consumed as shown on said meters and
sewer charges, taxes and any other governmental charges thereon, as and when
bills are rendered. In addition to any sums required to be paid by Tenant for
hot water consumed and sewer charges thereon under the foregoing provisions of
this Section, Tenant agrees to pay to Landlord, for the heating of said hot
water, an amount equal to three (3x) times the total of said sums required to be
paid by Tenant for hot water and sewer charges, taxes and any other governmental
charges thereon. For the purposes of determining the amount of any sums required
to be paid by Tenant under this Section, all hot and cold water consumed during
any period when said meters are not in good working order shall be deemed to
have been consumed at the rate of consumption of such water during the most
comparable period when such meters were in good working order.
Section 31.06. The Fixed Rent does not reflect or include any charge to
Tenant for the furnishing or distributing of any freight elevator or HVAC
services to the Demised Premises during periods (referred to as "Overtime
Periods") other than the hours and days set forth above in this Article for the
furnishing and distributing of such services. Accordingly, if Landlord shall
furnish any such freight elevator or HVAC services to the Demised Premises at
the request of Tenant during Overtime Periods, Tenant shall pay Landlord for
such services at the standard rates then fixed by Landlord for the Building. The
standard Building rate currently fixed by Landlord for HVAC service during
Overtime Periods, as applied to each floor of the Building on which the Demised
Premises are located, is currently $52.00 per hour and shall be subject to
increase hereafter only to the extent required to allow for reimbursement of any
increase in the costs incurred by Landlord to provide such service (it being
understood and agreed that all such costs presently incurred have been included
as part of said current rate). Landlord shall not be required to furnish any
such services during Overtime Periods unless Landlord has received reasonable
advance notice from Tenant requesting such services. If Tenant fails to give
Landlord reasonable advance notice requesting such services during any Overtime
Periods, then, whether or not the Demised Premises are habitable during such
Periods, failure by Landlord to furnish or distribute any such services during
such Periods shall not constitute an actual or constructive eviction, in whole
or in part, or entitle Tenant to any abatement or diminution of rent, or relieve
Tenant from any of its obligations under this Lease, or impose any liability
upon Landlord or its agents by reason of inconvenience or annoyance to Tenant,
or injury to or interruption of Tenant's business, or otherwise. Tenant shall be
deemed to have given reasonable advance notice requesting such services during a
particular Overtime Period if such notice is given to Landlord's managing agent
(a) in the case of any such Overtime Period commencing on a business day, no
later than Noon on such day or (b) in the case of any such Overtime Period
commencing on a day other than a business day, no later than Noon on the
immediately preceding business day.
Section 31.07. Landlord reserves the right to stop the service of the
HVAC, elevator, plumbing, electrical or other mechanical systems or facilities
in the Building when necessary by reason of accident or emergency, or (after
prior notice to Tenant) for repairs, alterations, replacements or improvements,
which, in the judgment of Landlord are desirable or necessary, until said
repairs, alterations, replacements or improvements shall have been completed.
The exercise of such right by Landlord shall not constitute an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of rent (except as may be otherwise set forth in Section 45.02),
or relieve Tenant from any of its obligations under this Lease, or impose any
liability upon Landlord or its agents by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business, or otherwise,
provided however that Landlord shall (without any obligation to employ labor at
so-called "overtime" or other premium pay rates) use reasonable efforts to
minimize such inconvenience, annoyance, injury and interruption.
Section 31.08. Tenant shall have, appurtenant to the Demised Premises, the
non-exclusive right to use the loading dock and freight elevator servicing the
Building. Landlord shall endeavor to assure that Tenant has access to such
facilities at reasonable times as set forth in a proposed schedule to be
furnished from time to time by Tenant. Such usage shall be without charge except
during Overtime Periods. In no event shall Landlord be subject to liability on
account of delays in the availability of such facilities.
Section 31.09. Landlord currently arranges for security personnel to be
present in the lobby of the Building between the hours of 6:00 P.M. and 8:00
A.M. on business days and at all hours on Saturdays, Sundays and holidays in
order to monitor access to the Building and deter the unauthorized removal of
property belonging to tenants. Landlord shall not substantially reduce the level
of security presently afforded by such personnel. The foregoing provisions shall
in no event be construed as a covenant by Landlord as to the adequacy of any
particular security program, and Tenant acknowledges its responsibility to take
whatever additional precautions may be advisable to safeguard the Demised
Premises and restrict the removal of property therefrom.
Section 31.10. Landlord shall keep lit all common areas of the Building
used by Tenant to obtain access to the Demised Premises. Such access shall be
available at all times, subject to Landlord's reasonable security requirements.
Section 31.11. If any portion of the common areas of the Building become
infested with vermin, Landlord shall arrange for the extermination thereof.
ARTICLE 32
CAPTIONS
Section 32.01. The captions preceding the Articles of this Lease have been
inserted solely as a matter of convenience and such captions in no way define or
limit the scope or intent of any provision of this Lease.
ARTICLE 33
ARBITRATION, ETC.
Section 33.01. Any dispute with respect to (i) the reasonability of any
failure or refusal of Landlord to grant its consent or approval to any request
for such consent or approval pursuant to the provisions of Sections 4.01 or
12.03 with respect to which request Landlord has agreed, in such Sections, not
unreasonably to withhold such consent or approval, or (ii) arising out of the
application of the provisions of Articles 23 or 35, which is submitted to
arbitration shall be finally determined by arbitration in the City of Boston in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association or its successor. Any such determination shall be final and binding
upon the parties, whether or not a judgment shall be entered in any court. In
making their determination, the arbitrators shall not subtract from, add to, or
otherwise modify any of the provisions of this Lease. Landlord and Tenant may,
at their own expense, be represented by counsel and employ expert witnesses in
any such arbitration. Any dispute with respect to the reasonability of any
failure or refusal of Landlord to grant its consent or approval to any request
for such consent or approval pursuant to any of the provisions of this Lease
(other than Sections 4.01 and 12.03) with respect to which Landlord has
covenanted not unreasonably to withhold such consent or approval, shall be
determined by applicable legal proceedings. If the determination of any such
legal proceedings, or of any arbitration held pursuant to the provisions of this
Section with respect to disputes arising under Sections 4.01 and 12.03, shall be
adverse to Landlord, Landlord shall be deemed to have granted the requested
consent or approval, but that shall be Tenant's sole remedy in such event and
Landlord shall not be liable to Tenant for a breach of Landlord's covenant not
unreasonably to withhold such consent or approval, or otherwise.
ARTICLE 34
ADJACENT EXCAVATION
Section 34.01. If an excavation shall be made upon land adjacent to the
Building, or shall be authorized to be made, Tenant shall, to the extent that
Landlord is required so to do, afford to the person causing or authorized to
cause such excavation, license (subject to the same provisions applicable
hereunder in the case of work to be performed by Landlord) to enter upon the
Demised Premises for the purpose of doing such work as said person shall deem
necessary to preserve the walls and other portions of the Building from injury
or damage and to support the same by proper foundations and no such entry shall
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution or rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Landlord or said
person.
ARTICLE 35
BUILDING RULES
Section 35.01. Tenant shall observe faithfully, and comply with, and shall
not permit the violation of, the Building Rules set forth in Schedule B annexed
to and made a part of this Lease and such additional reasonable Building Rules
as Landlord may, from time to time, adopt (so long as Tenant has been notified
thereof). All of the terms, covenants and conditions of Schedule B are
incorporated in this Lease by reference and shall be deemed part of this Lease
as though fully set forth in the body of this Lease. The term "Building Rules"
as used in this Lease shall include those set forth in Schedule B and those
hereafter made or adopted as provided in this Section. In case Tenant disputes
the reasonableness of any additional Building Rule hereafter adopted by Landlord
such dispute shall be determined by arbitration in accordance with the
provisions of Article 33. Tenant's rights to dispute the reasonableness of any
additional Building Rule shall be deemed waived unless asserted by service of a
notice upon Landlord within thirty (30) days after the date upon which Landlord
shall give notice to Tenant of the adoption of any such additional Building
Rule. All Building Rules shall be applied uniformly to other tenants whose
permitted business activities are comparable to those of Tenant hereunder,
provided however that Landlord's failure or refusal to enforce any Building
Rule, or any term, covenant or condition of any other lease, against any other
tenant or occupant of the Building shall not constitute an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of rent, or relieve Tenant from any of its obligations under this
Lease, or impose any liability upon Landlord or its agents by reason of
inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's
business, or otherwise.
ARTICLE 36
BROKER
Section 36.01. Each party represents and warrants that McCall & Almy
(whose fee shall be payable by Landlord pursuant to a separate agreement) is the
sole broker with whom such party has negotiated or otherwise dealt in connection
with the Demised Premises or in bringing about this Lease. Each party shall
indemnify and save the other harmless of and from all loss, cost, liability,
damage and expense, including, but not limited to, reasonable counsel fees,
arising on account of any such negotiations or dealings by such party.
ARTICLE 37
SEVERABILITY
Section 37.01. If any term of this Lease, or the application thereof to
any person or circumstances, shall to any extent be invalid or unenforceable,
the remainder of this Lease, or the application of such term to persons or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby, and each term of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
ARTICLE 38
ENTIRE AGREEMENT
Section 38.01. This Lease contains the entire agreement between the
parties and all prior negotiations and agreements are merged in this Lease.
Neither Landlord nor Landlord's agents have made any representations or
warranties with respect to the Demised Premises, the Building, the Real Property
or this Lease except as expressly set forth in this Lease and no rights,
easements or licenses are or shall be acquired by Tenant by implication or
otherwise unless expressly set forth in this Lease. This Lease may not be
changed, modified or discharged, in whole or in part, orally and no executory
agreement shall be effective to change, modify or discharge, in whole or in
part, Lease or any obligations under this Lease, unless such agreement is set
forth in a written instrument executed by the party against whom enforcement of
the change, modification or discharge is sought. Wherever in this Lease it is
provided that Landlord's consent or approval is required, Landlord shall have
the right to withhold such consent or approval arbitrarily unless otherwise
specifically provided to the contrary. All references in this Lease to the
consent or approval of Landlord shall be deemed to mean the written consent of
Landlord or the written approval of Landlord, as the case may be, and no consent
or approval of Landlord shall be effective for any purpose unless such consent
or approval is set forth in a written instrument executed by Landlord.
ARTICLE 39
PARTIES BOUND
Section 39.01. The terms, covenants and conditions contained in this Lease
shall bind and inure to the benefit of Landlord and Tenant and, except as
otherwise provided in this Lease, their respective heirs, distributees,
executors, administrators, successors and assigns. However, the obligations of
Landlord under this Lease shall no longer be binding upon Landlord named herein
after the sale, assignment or transfer by Landlord named herein (or upon any
subsequent Landlord after the sale, assignment or transfer by such subsequent
Landlord) of its interest in the Building as owner or lessee, and in the event
of any such sale, assignment or transfer, such obligations shall thereafter be
binding upon the grantee, assignee or other transferee of such interest, and any
such grantee, assignee or transferee, by accepting such interest, shall be
deemed to have assumed such obligations. Notwithstanding the foregoing, Landlord
shall not be relieved from liability hereunder with respect to matters arising
prior to such sale, assignment or transfer. A lease of the entire Building shall
be deemed a transfer within the meaning of the foregoing sentence. Tenant shall
look solely to the estate and interest of Landlord, its successors and assigns,
in the Real Property and Building for the collection or satisfaction of any
judgment recovered against Landlord based upon the breach by Landlord of any of
the terms, conditions or covenants of this Lease on the part of Landlord to be
performed, and no other property or assets of Landlord shall be subject to levy,
execution or other enforcement procedure for the satisfaction of Tenant's
remedies under or with respect to either this Lease, the relationship of
landlord and tenant hereunder, or Tenant's use and occupancy of the Demised
Premises.
ARTICLE 40
EXISTING LEASE
Section 40.01. The existing Lease between the parties dated February 15,
1985, as from time to time amended, is hereby terminated with the same force and
effect as if the date hereof were the Expiration Date thereunder. To the extent
that Tenant has made payments to Landlord pursuant to said Lease in excess of
the amounts due hereunder for the period commencing June 1, 1996, Tenant shall
be entitled to a credit in the amount of such excess (which the parties
acknowledge to be $1,241,418), to be applied against installments of Fixed Rent
becoming due hereunder on and after February 1, 1997.
ARTICLE 41
EXTENSION OF DEMISED TERM
Section 41.01. A. Provided Tenant shall not then be in default beyond the
applicable grace period in the observance or performance of any term, covenant
or condition of this Lease on Tenant's part to be observed or performed, Tenant
may extend the Demised Term for three (3) additional periods of five (5) years
each by written notice to Landlord given at least twelve (12) months prior to
the commencement of the applicable extension period (referred to as the
"Exercise Deadline"), on the same terms and conditions set forth herein, except
that Tenant shall have no further option to extend said Term and except further
that rent payable with respect to each such extension period shall be
established by Landlord after receipt of Tenant's notice exercising its option
hereunder, in an amount equivalent to the fair market rental value of the
Demised Premises during said extension period, as determined by Landlord subject
to Tenant's right to object thereto as hereinafter set forth. Such determination
is hereafter referred to as "Landlord's Proposal".
B. In the event that Tenant objects to Landlord's Proposal with respect to
a particular extension period and notifies Landlord of such objection within ten
(10) days following receipt of such Proposal, said value shall be determined by
appraisers, one to be chosen by Landlord, one to be chosen by Tenant, and a
third to be selected by the two first chosen. Said determination shall take into
account, among other relevant considerations, the condition of the Demised
Premises (without regard to any breach by Tenant of its maintenance and repair
obligations hereunder) and any free rent, construction allowances, assumptions
of existing tenant lease obligations, signing bonuses, complimentary special
services and other concessions and inducements being offered in connection with
the leasing of comparable space in the so-called "Financial District" of Boston.
The unanimous written decision of the two first chosen, without selection and
participation of a third appraiser, or otherwise the written decision of a
majority of three appraisers chosen and selected as aforesaid, shall be
conclusive and binding upon Landlord and Tenant. Landlord and Tenant shall each
notify the other of its chosen appraiser within ten (10) days following Tenant's
notice of objection as hereinabove provided, and unless such two appraisers
shall have reached a unanimous decision within sixty (60) days following such
ten (10) day period they shall within a further fifteen (15) days elect a third
appraiser and notify Landlord and Tenant thereof. Landlord and Tenant shall each
bear the expense of the appraiser chosen by it and shall equally bear the
expense of the third appraiser (if any). All appraisers chosen or elected
hereunder shall have received the M.A.I. (Member Appraisal Institute)
designation from the American Institute of Real Estate Appraisers and shall have
had at least five (5) years of experience in appraising office space comparable
to the Demised Premises. If, as contemplated herein, the rent payable with
respect to a particular extension period shall not have been determined prior
thereto, then said extension period shall nevertheless commence, and Tenant
shall continue to make payments of rent at the then current rate, subject to
retroactive adjustment in conformity with and within ten (10) days following
such determination. In no event shall the provisions of this paragraph be deemed
to permit a reduction of rent below the amount payable by Tenant immediately
prior to the commencement of a particular extension period or an increase in
rent above the amount set forth in Landlord's Proposal.
C. If Tenant so requests in writing in the case of a particular extension
period (without thereby committing to exercise the foregoing option) during the
three (3) month period prior to the Exercise Deadline, Landlord shall render
Landlord's Proposal within twenty (20) days following receipt of such request.
D. The provisions of this Article shall apply to the Seventh Floor Space
only after the Expiration Date with respect to said Space has been extended
through May 31, 2006 pursuant to Section 1.02.C. without rescission by Landlord
of Tenant's option thereunder.
ARTICLE 42
PARKING
Section 42.01. Tenant shall have the right, throughout the Demised Term
and subject to the provisions hereof, to use twenty-four (24) unreserved parking
spaces (referred to as the "Spaces") in the garage located in the Building
(referred to as the "Garage"). In the event that and at such time as any
rentable area is added to or eliminated from the Demised Premises pursuant to
the provisions of this Lease, the Spaces shall be proportionately increased or
decreased in number (rounding off any fraction to the next lowest integer). The
Spaces may be used only by employees of Tenant working in the Building or, to
the extent that the Spaces are not being so used, by clients or other guests of
Tenant during visits to the Demised Premises. Tenant shall pay for the use of
the Spaces at the prevailing monthly rate established from time to time. Such
payments shall be deemed additional rent for purposes of this Lease. Tenant
shall comply with all rules and regulations promulgated from time to time with
respect to the use of the Garage. To the fullest extent permitted by law,
Landlord shall not be liable for any injury to persons or theft of or damage to
property in the Garage. Tenant may, effective as of the first day of any
calendar month and upon at least sixty (60) days' prior notice to Landlord,
eliminate any Space to which Tenant is then entitled. Any Space so eliminated
need not thereafter again be made available to Tenant pursuant to the provisions
of this Section or otherwise.
ARTICLE 43
ADDITIONAL SPACE; RIGHT OF FIRST OFFER
43.01. For purposes of this Paragraph, the term "Additional Space" shall
mean those areas on the third (3rd), fifth (5th), sixth (6th), seventh (7th),
eighth (8th) and fifteenth (15th) floors of the Building designated as Areas 1
through 7 on the schedule attached hereto as Exhibit E and made a part hereof.
In the event that any Additional Space becomes or is to become vacant and
Landlord desires to lease said Space other than to its then-current occupant (if
any), Landlord shall, so long as this Lease remains in full force and effect
without default by Tenant beyond the applicable grace period, make a written
offer to lease said Space to Tenant, stating the rent that Landlord will accept
as well as all other material terms and conditions of the proposed lease (which
rent and other material terms and conditions shall be generally consistent with
transactions then being entered into by Landlord for comparable space in the
Building). Tenant shall have a right of first refusal to lease said Space by
giving written notice to Landlord accepting such offer within ten (10) days
after such offer was made. If such notice is not so given by Tenant, then
Landlord shall be free to lease said Space to anyone on such terms and
conditions as Landlord may elect, in which case Tenant shall have no further
recourse with respect thereto. In any case in which Tenant shall have waived
said right of first refusal or said right shall have expired, then Tenant shall,
on request of Landlord, execute and deliver in recordable form an instrument
indicating such waiver or expiration, which instrument shall be conclusive in
favor of all persons relying thereon in good faith. Tenant's right of first
refusal hereunder shall not apply to the initial leasing after the date hereof
of Areas 2, 3 and/or 6 designated on Exhibit E.
ARTICLE 44
TENANT'S ELIMINATION OPTION
44.01. Tenant shall have the option, on a single occasion, to eliminate
from the Primary Premises the entire portion thereof located on one or two
floors of the Building (hereinafter referred to as the "Elimination Space"). If
Tenant wishes to exercise such option, Tenant shall so notify Landlord in
writing no later than twelve (12) months prior to the date (hereinafter referred
to as the "Elimination Date") on which such elimination is to become effective.
The Elimination Date shall be either May 31, 1998 or the last day of any
calendar month during the period commencing on January 1, 1999 and ending on
December 31, 2003. On or before the Elimination Date, Tenant shall pay to
Landlord, in addition to all rent and other amounts due under this Lease, the
Elimination Premium, which shall be calculated in accordance with the provisions
of Exhibit F attached hereto and made a part hereof. Tenant shall surrender the
Elimination Space to Landlord on the Elimination Date in the same manner and
with the same force and effect as if such Date were the Expiration Date.
Following the Elimination Date, the Fixed Rent, Tenant's Proportionate Share and
the Electrical Inclusion Factor, as such terms are defined herein with respect
to the Primary Premises, shall each be reduced in the proportion which the area
of the Elimination Space bears to the total area of the Primary Premises
immediately prior to the Elimination Date.
ARTICLE 45
MISCELLANEOUS
Section 45.01. Landlord shall include Tenant's name and floor location in
any directory maintained by Landlord in the ground floor lobby of the Building.
Landlord shall further affix, in the lobby of any floor on which the Demised
Premises and other rentable area not leased to Tenant are located, Building
standard signage directing visitors to Tenant's offices on said floor.
Section 45.02. Notwithstanding any other provision of this Lease to the
contrary, if Landlord fails to comply with Landlord's obligations under the
terms of this Lease to furnish services or to operate any Building system
serving the Demised Premises, and if on account of such failure Tenant is able
for a period of ten (10) consecutive business days to conduct none of its
permitted business activities in the Demised Premises, then in such event Fixed
Rent shall equitably abate thereafter so long as such inability continues.
Section 45.03. Tenant shall not bring or permit to be brought or kept in
or on the Demised Premises or elsewhere in the Building any hazardous wastes or
hazardous substances, as such terms may be defined by any applicable federal,
state or local statute, ordinance, by-law, rule or regulation, including without
limitation the Massachusetts Oil and Hazardous Material Release Prevention and
Response Act (M.G.L. c. 21E), the Comprehensive Environmental Response,
Compensation and Liability Act, as amended (42 U.S.C. ss.ss.9601 et seq.), and
the Resource Conservation and Recovery Act, as amended (42 U.S.C. ss.ss.6901 et
seq.). Except as hereinabove set forth, Tenant shall have no responsibility for
the care, removal, transportation, handling or storage of any such hazardous
wastes or hazardous substances found in, on, under or about the Demised Premises
and Landlord shall be responsible for the proper remediation thereof. The
provisions of this Section shall not prohibit the use of customary,
commercially-produced office supplies so long as the same are stored and handled
in a proper fashion consistent with applicable legal standards.
Section 45.04. Landlord agrees to indemnify and save Tenant harmless of
and from all loss, cost, liability, damage and expense including, but not
limited to, reasonable counsel fees, penalties and fines, incurred in connection
with or arising from any negligence or wilful misconduct of Landlord or any
contractors, agents, servants or employees of Landlord occurring during the
Demised Term and any claims by any persons by reason of personal injury or
property damage resulting therefrom. If any action or proceeding shall be
brought against Tenant based upon any such cause, Tenant shall so notify
Landlord forthwith, and if Landlord, upon such notice, shall cause such action
or proceeding to be defended at Landlord's expense by counsel acting for
Landlord's insurance carriers in connection with such defense or by other
counsel reasonably satisfactory to Tenant, without any disclaimer of liability
by Landlord or such insurance carriers in connection with such claim, Landlord
shall not be required to indemnify Tenant for counsel fees in connection with
such action or proceeding.
Section 45.05. Whenever any provision hereof requires the consent or
approval of either party, such party may, unless such provision expressly
stipulates otherwise, withhold such consent or approval in its sole and absolute
discretion. Whenever any provision hereof stipulates that the consent or
approval of either party shall not be unreasonably withheld and/or delayed, such
provision shall be construed to prohibit the granting of such consent or
approval subject to unreasonable conditions.
ARTICLE 46
NOTICE OF LEASE
Section 46.01. Neither party shall record this Lease in any Registry of
Deeds or Registry District, provided however that either party shall at the
request of the other execute and deliver a recordable notice of this Lease in
the form prescribed by applicable law.
ARTICLE 47
TELECOMMUNICATIONS EQUIPMENT
Section 47.01. To the extent that space is available for such purpose,
Landlord will allow Tenant, subject to the same terms and conditions (including
without limitation the payment of license fees) afforded to other tenants, to
install, maintain and connect to the Demised Premises telecommunications
equipment on the roof of the Building. In no event shall the provisions of this
Section be construed as an option, right of first refusal or other entitlement
in Tenant's favor.
ARTICLE 48
TENANT'S EXPANSION OPTION
Section 48.01. So long as this Lease remains in full force and effect
without default by Tenant beyond the applicable grace period, Tenant may add to
the Demised Premises, pursuant and subject to the provisions hereof, that
portion of the fifteenth (15th) floor of the Building shown on the plan attached
hereto as Exhibit G and made a part hereof (referred to as the "Option Space").
The rentable area of the Option Space is agreed to consist of 10,208 square
feet. The foregoing option may be exercised by notice given by Tenant to
Landlord on or before May 1, 1997. Except as otherwise set forth herein, all
terms, covenants and conditions of the Lease generally applicable to the Demised
Premises shall be deemed to apply to the Option Space. The provisions of Section
1.02.D and Schedule A relative to the Expansion Area shall likewise pertain to
the Option Space, except that the Commencement Date applicable to the Option
Space shall not occur prior to October 1, 1997. The Option Space is currently
leased to Jager, Smith, Stetler & Arata, P.C., a Massachusetts professional
corporation. Landlord shall, on or before April 1, 1997, notify Tenant of the
date on which the term of said lease, as the same may hereafter be extended, is
scheduled to expire (referred to as the "Current Lease Expiration Date"). In no
event may the Current Lease Expiration Date be earlier than June 30, 1997 or
later than January 31, 1998. Tenant shall pay Fixed Rent to Landlord pursuant to
Section 1.03 with respect to the Option Space in accordance with the following
schedule:
With respect to the Fixed Rent shall be payable
following period: at the annual rate of:
------------------- ---------------------------
Through May 31, 2001 $306,240.00 ($30 psf)
June 1, 2001 - May 31, 2006 $331,760.04 ($32.50 psf)
As used with respect to the Option Space, the following Lease terms shall be
defined as hereinafter set forth:
Electrical Inclusion Factor: $10,208
Tenant's Proportionate Share: 0.946%
Construction Deadline: The 243rd day following the
Plan Approval Date
Delay Credit: $1,259
Landlord's Construction
Contribution: $326,656
Plan Approval Date: The thirtieth (30th) day prior to the
Current Lease Expiration Date
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and
sealed this Lease as of the day and year first above written.
Witness: DEWEY SQUARE TOWER ASSOCIATES
By: Rose Associates of Massachusetts,
Inc., Agent
By
Landlord
(CORP. SEAL)
Witness/ COLONIAL MANAGEMENT ASSOCIATES, INC.
Attest:
By
Its ________________________________
title (duly-authorized)
Tenant
(CORP. SEAL)
<PAGE>
EXHIBIT A
[PLANS SHOWING LOCATION OF PORTIONS OF DEMISED
PREMISES CONSISTING OF LESS THAN ENTIRE FLOOR]
<PAGE>
EXHIBIT B
ACKNOWLEDGEMENT OF COMMENCEMENT DATE
Reference is made to the lease dated May 31, 1996 between DEWEY SQUARE
TOWER ASSOCIATES, a Massachusetts partnership, and COLONIAL MANAGEMENT
ASSOCIATES, INC., a California corporation, with respect to certain premises
contained in the building known as One Financial Center, Boston, Massachusetts.
The parties hereby acknowledge that the Commencement Date applicable to the
Expansion Area (as such terms are defined in said lease) occurred on ___________
__, 19__. In all other respects, said lease is hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties have executed this instrument as of the
___ day of ____________, 19__.
DEWEY SQUARE TOWER ASSOCIATES
By Rose Associates of Massachusetts, Inc., Agent
By____________________________
COLONIAL MANAGEMENT ASSOCIATES, INC.
By____________________________
Its____________________________
title (duly-authorized)
<PAGE>
EXHIBIT C
MORTGAGEE'S NON-DISTURBANCE AGREEMENT
AND
LESSEE'S AGREEMENT TO ATTORN
THIS AGREEMENT, made as of this ____ day of ___________, 199_, by and
between METROPOLITAN LIFE INSURANCE COMPANY, a corporation organized and
existing under the laws of the State of New York, having its principal place of
business and a mailing address at One Madison Avenue, New York, New York 10010
(hereinafter referred to as "Mortgagee") and ______________________, a
______________ organized and existing under the laws of the State of
____________, having a place of business and a mailing address at
_________________________________ (hereinafter referred to as "Lessee").
WHEREAS, Lessee has entered into a certain lease, dated _______________,
between Dewey Square Tower Associates, as landlord, and Lessee, as tenant,
covering certain space (hereinafter referred to as the "Demised Premises"), in
the building located at One Financial Center, Boston, Massachusetts, as further
described in the lease (the said lease being hereinafter referred to as the
"Lease"); and
WHEREAS, Mortgagee is the holder of a certain Mortgage and Consolidation
Agreement dated February 26, 1988, recorded with Suffolk County Registry of
Deeds at Book 14513, Page 1 and filed with the Suffolk Registry District of the
Land Court as Document No. 435451, as from time to time amended, and including
all prior mortgage liens consolidated therein, which covers the building
<PAGE>
and land of which the Demised Premises form a part (hereinafter referred to as
the "Mortgage"); and
WHEREAS, Lessee has requested that Mortgagee agree not to disturb Lessee's
possessory rights in the Demised Premises in the event Mortgagee should
foreclose the Mortgage provided the Lessee: (i) is not then in default under the
Lease beyond any applicable notice and cure period; (ii) complies with this
Agreement; and (iii) attorns to Mortgagee or the purchaser at the foreclosure
sale; and
WHEREAS, Mortgagee is willing to accommodate Lessee and to so agree
thereto on the terms and conditions hereinafter provided;
NOW, THEREFORE, in consideration of the premises, the foregoing recitals,
the mutual covenants contained herein and TEN ($10.00) DOLLARS and other good
and valuable consideration each to the other in hand paid, receipt of which is
hereby acknowledged, Mortgagee and Lessee, intending to be legally bound, hereby
agree as follows:
The Lease is and shall be subject and subordinate in all respects to the
Mortgage and to any renewal, modification, replacement or extension of the same
and to any subsequent mortgage(s) with which the Mortgage may be spread and
consolidated.
That, provided Lessee complies with this Agreement and is not in default
under the terms of the Lease in the payment of rent or additional rent or the
performance of any of the terms, conditions, covenants, clauses or agreements on
its part to be performed under the Lease, beyond any applicable notice and cure
period, as of the date Mortgagee files a lis pendens in, or otherwise commences
a foreclosure action, or at any time thereafter, no default under the Mortgage,
as modified, extended, increased, spread or consolidated, and no proceeding to
foreclose the same, will disturb Lessee's possession under the Lease and the
Lease will not be affected or cut off thereby (except to the extent that
Lessee's right to receive or set off any moneys or obligations owed or to be
performed by Mortgagee's predecessor(s) in title shall not be enforceable
thereafter against Mortgagee or any subsequent owner of the real property of
which the Demised Premises form a part) and notwithstanding any such foreclosure
or other acquisition of the real property of which the Demised Premises form a
part by Mortgagee, the Lease will be recognized as a direct lease from Mortgagee
or any other party acquiring the real property of which the Demised Premises
form a part upon the foreclosure sale on the same terms and conditions as set
forth in the Lease, except that Mortgagee, or any subsequent owner of the real
property of which the Demised Premises form a part, shall not: (a) be liable for
any previous act or omission of landlord under the Lease; (b) be subject to any
offset which shall theretofore have accrued to Lessee against landlord; (c) have
any obligation with respect to any security deposited under the Lease unless
such security has been physically delivered to Mortgagee or any such subsequent
owner; or (d) be bound by any previous modification of the Lease or by any
previous prepayment of fixed rent for a period greater than (1) month, unless
such modification or prepayment shall have been expressly approved in writing by
Mortgagee.
Any provision of this Agreement to the contrary notwithstanding, Mortgagee
shall have no obligation, nor incur any liability, with respect to the erection
and completion of the building in which the Demised Premises are located or for
completion of the Demised Premises or any improvements for Lessee's use and
occupancy. Lessee certifies that the term of the Lease has commenced and that
the Lease is presently in full force and effect and unmodified; that Lessee has
accepted possession of the Demises Premises and that any improvements required
by the terms of the Lease have either been completed to the satisfaction of
Lessee or provisions, satisfactory to Lessee, are contained in the Lease to
assure the completion thereof; that no rent under the Lease has been paid more
than one (1) month in advance of its due date; that Lessee, as of the date
hereof, has no charge, lien or claim of offset under the Lease, or otherwise,
against the rents or other charges due or to become due thereunder.
That if Mortgagee elects to accept from the then Mortgagor a deed in lieu
of foreclosure, Lessee's right to receive or set off any moneys or obligations
owed or to be performed by the then landlord shall not be enforceable thereafter
against Mortgagee or any subsequent owner of the real property of which the
Demised Premises form a part.
That Lessee will, if requested by Mortgagee, or any subsequent owner of
the real property of which the Demised Premises form a part, execute a written
agreement whereunder Lessee: (1) attorns to, and agrees to recognize as landlord
under the Lease, Mortgagee or any such subsequent owner; (ii) affirms Lessee's
obligations under the Lease; and (iii) agrees to pay all rentals and charges
then due or to become due as they become due to Mortgagee or such subsequent
owner, in accordance with the terms and provisions of the Lease. Lessee, from
and after the date hereof, shall send a copy of any notice or statement under
the Lease to Mortgagee at the same time such notice or statement is sent to the
landlord under the Lease.
Lessee hereby agrees that, from and after the date hereof, in the event of
any act or omission by landlord under the Lease (other than any such act or
omission which is not capable of being remedied by landlord under the Lease
within a reasonable period) which would give Lessee the right, either
immediately or after the lapse of a period of time, to terminate the Lease, or
to claim a partial or total eviction, Lessee will not exercise any such right:
(i) until it has given written notice of such act or omission to Mortgagee by
delivering such notice of such act or omission, by certified or registered mail,
return receipt requested, or by a nationally recognized air courier which
delivers by 10:30 a.m., local time of the recipient thereof and which provides
written evidence of delivery thereof (such as, by way of illustration and not
limitation, Federal Express), addressed to Mortgagee, at Mortgagee's address as
given herein (Attention: Senior Vice-President, Real Estate Investments), or at
the last address of Mortgagee, furnished to Lessee in writing; and (ii) until a
reasonable period of time for remedying such act or omission following the
giving of such notice and the time within which Mortgagee may be entitled
pursuant to the Mortgage to remedy the same, shall have elapsed; provided,
Mortgagee, at its option, shall, following its receipt of such notice, has
elected to commence and continue to remedy such act or omission or to cause the
same to be remedied.
Lessee will neither offer nor make prepayment of rent (for a period in
excess of one month) nor further change the terms, covenants, conditions and
agreements of the Lease in any manner without the express consent in writing of
Mortgagee.
Nothing contained in this Agreement shall in any way impair or affect the
lien created by the Mortgage, except as specifically set forth herein.
No modification, amendment, waiver or release of any provision of this
Agreement or of any right, obligation, claim or cause of action arising
hereunder shall be valid or binding, for any purpose whatsoever, unless in
writing and duly executed by the party against whom the same is sought to be
asserted.
This Agreement shall inure to the benefit of the parties hereto, their
successors and assigns; provided, however, that in the event of the assignment
or transfer of the interest of Mortgagee, all obligations and liabilities of
Mortgagee under this Agreement shall terminate, and thereupon all such
obligations and liabilities shall be the responsibility of the party to whom
Mortgagee's interest is assigned or transferred; and provided further the
interest of Lessee under this Agreement may not be assigned or transferred.
Lessee acknowledged and agrees that this Agreement fully complies with,
and satisfies in all respects, any condition or requirement in the Lease
relating to the obtainment and granting of a non-disturbance agreement.
Lessee acknowledges that it has notice that the Lease and the rent and all
other sums due thereunder have been assigned to Mortgagee as part of the
security for the note secured by the Mortgage. In the event that Mortgagee
notifies Lessee of a default under the Mortgage and demands that Lessee pay to
Mortgagee Lessee's rent and all other sums due under the Lease, Lessee agrees
that it will, and Mortgagor, as landlord under the Lease, hereby authorizes and
directs Lessee to honor such demand and pay Lessee's rent and all other sums due
under the Lease directly to Mortgagee.
Mortgagee shall have no responsibility to provide any additional space for
which Lessee has any option or right under the Lease unless Mortgagee, at its
option, elects to provide the same. Lessee hereby releases Mortgagee from any
obligation to provide the same, if any, and Lessee acknowledges and agrees that
it shall have no right to cancel the Lease nor have any claim against Mortgagee
as a result of the failure to provide any such option space.
Lessee represents and covenants that it has no right or option of any
nature whatsoever, whether pursuant to the Lease or otherwise, to purchase the
Demised Premises or the real property of which the Demised Premises form a part,
or any portion thereof, or any interest therein, and to the extent that Lessee
has had, or hereafter acquires any such right or option, the same is hereby
acknowledged to be subject and subordinate in all respects to the Mortgage and
is hereby waived and released as against Mortgagee.
Mortgagee shall have no obligation, nor incur any liability, with respect
to any warranties of any nature whatsoever, whether pursuant to the Lease or
otherwise, including, without limitation, any warranties respecting use,
compliance with zoning, lessor's title, lessor's authority, habitability, and/or
fitness for purpose or possession.
Anything herein or in the Lease to the contrary notwithstanding, in the
event that Mortgagee shall acquire title to the Demised Premises or the real
property of which the Demised Premises form a part, Lessee agrees that Mortgagee
shall have no obligation, nor incur any liability, beyond Mortgagee's then
interest, if any, in the Demised Premises or the real property of which the
Demised Premises form a part. Lessee further agrees to look exclusively to such
interest of Mortgagee, if any, in the Demised Premises or the real property of
which the Demised Premises form a part, for the payment and discharge of any
obligations imposed upon Mortgagee hereunder or under the Lease and Mortgagee is
hereby released or relieved of any other obligations hereunder and under the
Lease. Lessee also agrees that with respect to any money judgment which may be
obtained or secured by Lessee against Mortgagee, Lessee shall look solely to the
estate or interest owned by Mortgagee in the Demised Premises or the real
property of which the Demised Premises form a part, or any portion thereof, or
interest therein, and Lessee will not collect, nor attempt to collect, any such
judgment out of any other assets of Mortgagee.
IN WITNESS WHEREOF, the parties hereto have respectively executed, or
caused to be executed by their respective duly authorized representative(s),
this Agreement as of the day and year first above written. MORTGAGEE:
ATTEST/WITNESS: METROPOLITAN LIFE INSURANCE
COMPANY
___________________________ By_______________________________
Its______________________________
title (duly-authorized)
LESSEE:
ATTEST/WITNESS: ________________________________
____________________________ By______________________________
Its_____________________________
title (duly-authorized)
STATE OF NEW YORK
New York, ss: _____________ __, 199__
Then personally appeared the above-named ____________________ and
acknowledged the foregoing instrument to be his free act and deed and the free
act and deed of Metropolitan Life Insurance Company, before me
_____________________________
Notary Public
My Commission Expires:
STATE OF ___________________
County of _____________, ss: _____________ __, 199__
Then personally appeared the above-named _____________________ and
acknowledged the foregoing instrument to be his free act and deed and the free
act and deed of ________________________, before me
____________________________
Notary Public
My Commission Expires:
<PAGE>
Dewey Square Tower Associates, as landlord under the Lease and as Mortgagor
under the Mortgage, agrees for itself and its successors and assigns, that: (i)
the within Agreement does not (a) constitute a waiver by Mortgagee of any of its
rights under the Mortgage, and/or (b) in any way release Mortgagor from its
obligation to comply with the terms, provisions, conditions, covenants,
agreements and clauses of the Mortgage; (ii) the provisions of the Mortgage
remain in full force and effect and must be complied with by Mortgagor; and
(iii) in the event that Mortgagee notifies Lessee of a default under the
Mortgage and demands that Lessee pay to Mortgagee its rent and all other sums
due under the Lease, such demand by Mortgagee on Lessee shall be sufficient
warrant to Lessee to pay its rent and all other sums due under the Lease to
Mortgagee without necessity for consent by Mortgagor or any further evidence of
a default under the Mortgage and notwithstanding any claim by Mortgagor to the
contrary, and Lessee can, and Mortgagor hereby irrevocably authorizes and
directs Lessee to, pay its rent and all other sums due under the lease directly
to Mortgagee, as provided in the within Agreement, until further notice by
Mortgagee authorizing Lessee to resume rent payments to Mortgagor. Mortgagor, by
its execution hereof, hereby expressly acknowledged and agrees that Lessee, in
reliance upon Mortgagor's authorization and direction, as herein set forth, will
not be deemed, nor declared, in default under the Lease, nor shall Mortgagor
make or have any claim against Lessee for any amounts paid by Lessee to
Mortgagee pursuant hereto.
MORTGAGOR/LANDLORD:
ATTEST/WITNESS: DEWEY SQUARE TOWER ASSOCIATES
By Rose Associates of Massachusetts, Inc.,
agent
____________________________ By____________________________
STATE OF NEW YORK
New York, ss: ______________ __, 199__
Then personally appeared the above-named Daniel Rose and acknowledged the
foregoing instrument to be his free act and deed and the free act and deed of
Rose Associates of Massachusetts, Inc. as agent for Dewey Square Tower
Associates, before me
------------------------------
Notary Public
My Commission Expires:
<PAGE>
EXHIBIT D
CONSTRUCTION MANAGEMENT AGREEMENT
This Agreement is made as of the _____ day of ___________, 19__, between
the Tenant:
__________________________________________ ("Tenant"), and the Construction
Manager: Rose Associates of Massachusetts, Inc. ("Manager") for the following
Project:
_______________________________________________________________________________
_______________________________________________________________________________
I. Scope of Services: Manager shall provide the following services:
A. Pre-Construction Services
-------------------------
1. Manager shall review information furnished by
Tenant to ascertain the requirements of the Project and shall
arrive at a mutual understanding of such requirements with
Tenant.
1. Manager shall provide an evaluation of Tenant's
schedule and construction budget requirements, each in terms of
the other.
1. Manager shall review design documents during
their development and advise on selection of materials,
building systems and equipment, and methods of Project
delivery.
1. Manager shall advise on the division of the
Project into individual contracts for various categories of
work, including the method to be used for selecting
contractors and awarding contracts.
1. Manager shall submit a list of prospective bidders for
Tenant's approval.
1. Manager shall issue bidding documents to bidders and
conduct pre-bid conferences with prospective bidders.
1. Manager shall receive bids, prepare bid analyses and
make recommendations to Tenant for Tenant's award of contracts or
rejection of bids.
1. Manager shall assist Tenant in preparing construction
contracts and advise Tenant on the acceptability of subcontractors
and material suppliers proposed by contractors.
<PAGE>
1. Manager shall assist Tenant in obtaining building permits,
except for permits required to be obtained directly by the various
contractors. Manager shall assist Tenant in connection with Tenant's
responsibility for filing documents required for the approvals of
governmental authorities having jurisdiction over the Project.
A. Construction Management Services
--------------------------------
1. Manager shall provide administration of the contracts
for construction in cooperation with Tenant, including attending
meetings, endeavoring to obtain satisfactory performance from each
of the contractors, and implementing procedures for the review and
processing of applications by contractors for progress and final
payments.
1. Manager shall determine in general that the work of
each contractor is being performed in accordance with the
requirements of the contract documents, endeavoring to guard
against defects and deficiencies.
1. When Manager considers each contractor's work
substantially complete, Manager shall, jointly with the
contractor, prepare for Tenant a list of incomplete or
unsatisfactory items and a schedule for their completion.
1. Manager shall secure and transmit to Tenant warranties and
similar submittals required by the contract documents.
I. Basis of Compensation to Manager: Tenant shall compensate
Manager for its services hereunder as follows:
Manager shall submit invoices to Tenant from time to time and payment
shall be made within fifteen (15) days thereafter.
I. Tenant Responsibilities: Tenant shall do the following in a timely manner
so as not to delay the services to be provided by Manager:
A. Designate in writing a person to act as Tenant's representative with
respect to the services to be rendered under this Agreement. Such person shall
have complete authority to transmit instructions, receive information, and
interpret and define Tenant's policies and decisions with respect to Manager's
services for the Project.
A. Provide all criteria and full information and documentation requested by
Manager or necessary for the performance of Manager's Services.
A. Give prompt written notice to Manager whenever Tenant observes or
otherwise becomes aware of any circumstance that affects the scope or timing
of Manager's services.
A. Establish and update an overall budget for the Project based on
consultation with Manager, which shall include construction cost, Tenant's
other costs and reasonable contingencies.
I. Independent Contractor Status: Manager shall be a fully
independent contractor in performing its services hereunder and shall not
act as an agent or employee of Tenant.
I. Changed Conditions and Additional Services: If occurrences or discoveries
not known, anticipated, or contemplated by the parties arise during the
course of Manager's services, including but not limited to delay, which, in
Manager's judgment, require additional work outside the scope of such services,
or if Tenant, at any time, by written order, makes changes within the general
scope of this Agreement in the services to be performed by Manager causing an
increase in Manager's cost, or time required for performance, of any services
under this Agreement, an equitable adjustment of Contractor's compensation shall
be made, and this Agreement shall be modified in writing accordingly.
I. Cost Estimates: Since Manager has no control over the cost of labor,
materials, equipment or services furnished by others, or over competitive
bidding or market conditions, any opinion of construction cost provided for
herein is to be made on the basis of Manager's experience and qualifications and
represents Manager's best judgment; but Manager cannot and does not guarantee
that proposals, bids or actual construction costs will not vary from estimates
of probable cost given by Manager.
I. Termination: Either party shall have the right to terminate this
agreement with respect to the Project for cause if the other party commits a
material breach of this Agreement and fails to cure such breach within the time
period hereinafter described. A Notice of Default, containing specific reasons
for termination, shall be sent to the defaulting party. Termination shall not be
effective if the breach has been remedied within ten (10) days after the
defaulting party's receipt of the Notice of Default or such later date specified
in the Notice of Default, or, if the defaulting party has begun to cure such
default within such period and diligently prosecutes curing such default to
completion (except that such provision shall not apply to Tenant's failure to
pay an invoice). In the event of termination for cause, the parties shall have
their remedies at law as to any other rights and obligations between them,
subject to the other terms and conditions of this Agreement.
I. Limitation of Liability: To the fullest extent permitted by law, the
total liability, in the aggregate, of Manager and Manager's officers, directors,
employees, agents, and independent professional associates and consultants, or
any of them, to Tenant and anyone claiming by, through or under Tenant, for any
and all injuries, claims, losses, expenses, or damages whatsoever arising out of
or in any way related to Manager's services, the Project or this Agreement shall
not exceed the total compensation received by Manager hereunder.
I. Notices: Any notice required or permitted hereunder shall be in writing
and shall be sent by registered or certified mail addressed to Manager at
One Financial Center, Boston, Massachusetts 02111 or to Tenant at
_____________________________ __________________________. Either party may
change its respective address by notice to the other.
I. Relationship to Landlord: The Project site consists of premises
leased by Tenant from Dewey Square Tower Associates ("Landlord"). In no
or omissions or the performance of Manager's duties hereunder, nor shall
the provisions of this Agreement be deemed to limit Landlord's right to
enforce the provisions of said lease.
I. Applicable State Law: This Agreement shall be governed and
construed in accordance with the laws of the Commonwealth of Massachusetts.
I. Waiver: A waiver of any breach or omission hereunder shall not
constitute a waiver of any subsequent breach or omission unless specifically
agreed to in writing by the parties.
WITNESS the execution hereof under seal as of the day and year first above
written.
ROSE ASSOCIATES OF
MASSACHUSETTS, INC.
By By__________________________________
Its_________________________________
title (duly authorized)
<PAGE>
EXHIBIT E
ADDITIONAL SPACE
The various Areas included in the Additional Space and the agreed rentable area
thereof are as follows:
1 Entire third (3rd) floor (23,717 square feet)
2 Entire fifth (5th) floor (23,847 square feet)
3 Entire sixth (6th) floor (23,377 square feet)
4 Portion of seventh (7th) floor (17,359 square feet)
5 Entire eighth (8th) floor (23,847 square feet)
6 Portion of fifteenth (15th) floor (8,153 square feet)
7 Portion of fifteenth (15th) floor (5,802 square feet)
The location of any such Area consisting of less than an entire floor is shown
on the plans attached hereto as Exhibit E-1 and made a part hereof.
<PAGE>
EXHIBIT F
CALCULATION OF ELIMINATION PREMIUM
The Elimination Premium shall be the amount calculated by Multiplying the
rentable area of the Elimination Space times the Elimination Factor in effect
when the Elimination Date occurs. With respect to the period ending on January
31, 1999, the Elimination Factor shall be $37.50. The Elimination Factor shall
be reduced by 31.25 cents effective as of the first day of February, 1999 and
each succeeding calendar month through and including January 2003 such that the
Elimination Factor will be $22.50 effective as of January 1, 2003 and will
thereafter be subject to no further reduction.
<PAGE>
EXHIBIT G
[PLAN SHOWING OPTION SPACE]
<PAGE>
SCHEDULE A
LANDLORD'S CONSTRUCTION
I. A. Tenant shall submit to Landlord a plan ("Tenant's Plan") for
the renovation of the Expansion Area, including without limitation
selection of wall coverings, paint colors and carpeting (the "Work").
Tenant's Plan shall also include as many requests for pricing of
alternatives as Tenant wishes to consider prior to authorizing
Landlord to commence the work pursuant to Paragraph III below and
shall designate any additional contractors from whom Tenant wishes
Landlord to solicit proposals in addition to contractors designated by
Landlord (all of which contractors, whether designated by Landlord or
Tenant, which are deemed to be qualified and financially capable of
completing the work in the reasonable judgment of Landlord, are
hereinafter referred to as "Designated Contractors"). Landlord
agrees to cooperate with Tenant and Tenant's agents, employees
and contractors in all respects during the development of Tenant's
Plan and shall make available to Tenant, at Tenant's cost, promptly
after request therefor, copies of all plans and Building contract
specifications directly related thereto.
B. Tenant's Plan shall be subject to Landlord's approval in
accordance with the criteria set forth in Article 4 of this Lease. It
shall be Tenant's responsibility to assure that Tenant's Plan has been
so approved on or before January 24, 1997 (the "Plan Approval Date").
Such approval shall be deemed to have been granted unless Landlord
notifies Tenant to the contrary within five (5) days after the receipt
of Tenant's written request for such approval so long as such request
expressly and conspicuously recites the effect of Landlord's failure to
respond thereto as aforesaid.
II. Upon Landlord's approval of Tenant's Plan, Landlord will promptly
solicit proposals from all Designated Contractors for the Work,
including such alternative prices as are specified on such Plan.
Based upon proposals submitted to Landlord by such Contractors,
Landlord shall submit to Tenant Landlord's price to construct the Work,
which price shall be based upon the proposal submitted by the
Designated Contractor which submitted the lowest total price for such
Work, plus an amount equal to three percent (3%) of such Contractor's
price as a construction management fee (hereinafter collectively
referred to in each such case as "Landlord's Preliminary Price").
Landlord's Preliminary Price, and those prices for alternates specified
on Tenant's Plan, shall be submitted to Tenant for review and approval
within ten (10) days following receipt by Landlord of all proposals for
the Work, together with a copy of each Designated Contractor's
proposal.
III. Tenant shall have ten (10) days in which to (a) review such material,
(b) either (i) approve such Landlord's Preliminary Price, or (ii)
approve some alternative combination of work and the price therefor
(including the construction management fee computed pursuant to
Paragraph II) based on the proposal submitted by the Designated
Contractor selected by Landlord or another Designated Contractor whom
Tenant prefers to select, and (c) and authorize Landlord to commence
the Work. Landlord's Preliminary Price, as adjusted pursuant to the
preceding sentence, is hereinafter referred to as "Landlord's
Construction Price".
<PAGE>
IV. Landlord agrees to contribute towards the cost of the Work an
amount not to exceed $307,936 ("Landlord's Construction Contribution").
Landlord's Construction Contribution shall be applied against the
statements rendered by Landlord to Tenant pursuant to the provisions
hereof until such Landlord's Construction Contribution shall have been
exhausted. Any unused balance of Landlord's Construction Contribution
shall be applied as a credit on account of installments of Fixed Rent
becoming due under this Lease or may, at Tenant's option, be used to
reimburse costs (which shall be evidenced by receipts, invoices and
other supporting material reasonably satisfactory to Landlord) incurred
by Tenant in connection with the preparation of Tenant's Plan and the
leasing of the Expansion Area.
V. A. Landlord shall perform the Work in a good and workmanlike
manner conforming to applicable law and shall use diligent efforts to
substantially complete such Work on or before the Construction
Deadline. Tenant shall be deemed to have agreed that Landlord has
satisfactorily performed all of its obligations with respect to the
Work unless Tenant notifies Landlord to the contrary, specifying the
respects in which the Work is incomplete or defective, within one
hundred eighty (180) days following notice from Landlord that the Work
has been substantially completed. Landlord shall correct any incomplete
or defective items of Work of which Tenant has notified Landlord as
aforesaid promptly after receipt of such notice. In addition, Landlord
shall (i) at Landlord's expense, use reasonable efforts to enforce on
Tenant's behalf any warranties received by Landlord in connection with
the Work and (ii) remain responsible throughout the Demised Term for
any repairs which Landlord is otherwise obligated to perform pursuant
to the provisions of this Lease.
B. After application of Landlord's Construction Contribution, Tenant
shall pay to Landlord from time to time as the Work progresses and
within thirty (30) days next following the rendition of a statement by
Landlord to Tenant, sums equal to the remainder of Landlord's
Construction Price.
VI. Tenant may from time to time propose revisions to Tenant's Plan. Such
revisions shall be subject to Landlord's approval in accordance with
the criteria set forth in Article 4 of this Lease, provided however
that Landlord shall in no event be obligated to approve any such
revision which might tend to delay completion of the Work. To the
extent that Tenant's Plan is revised hereunder so as to result in any
increase or decrease in Landlord's Construction Price, the amount of
such increase shall be added to and the amount of such decrease shall
be subtracted from the amount which Tenant is obligated to contribute
pursuant to Paragraph V.B.
VIII. Landlord shall be authorized to rely, in connection with any approval
or other action to be taken on behalf of Tenant pursuant to this
Schedule, only on instructions given by Mark W. Ahern, Manager of
Corporate Services, or such other person whom Tenant may from time to
time designate by written notice to Landlord.
IX. Landlord shall, if so requested in writing by Tenant, make available
for inspection by Tenant such data in Landlord's possession as may be
reasonably necessary to enable Tenant to verify the computation of any
payment due from Tenant hereunder.
Execution Counterpart
THE COLONIAL GROUP, INC.
CREDIT AGREEMENT
Amendment No. 4
This Agreement, dated as of April 11, 1996, is among The Colonial Group,
Inc., a Massachusetts corporation (the "Company"), The First National Bank of
Boston and the other Lenders (as defined below) and The First National Bank of
Boston, as agent (the "Agent") for itself and the other Lenders. The parties
agree as follows:
1. Reference to Credit Agreement; Definitions. Reference is made to the
Credit Agreement dated as of May 5, 1993, as amended and restated as of December
17, 1993 (as amended, modified and in effect from time to time, the "Credit
Agreement"), among the Company, the Lenders and the Agent. Terms defined in the
Credit Agreement as amended hereby (the "Amended Credit Agreement") and not
otherwise defined herein are used herein with the meanings so defined. Except as
the context otherwise explicitly requires, the capitalized terms "Section" and
"Exhibit" refer to sections hereof and exhibits hereto.
2. Amendments to Credit Agreement. Subject to all of the
terms and conditions hereof and in reliance upon the representations and
warranties set forth in Section 3, the Credit Agreement is amended as follows,
effective upon the date (the "Amendment Date") that the conditions specified in
Section 4 are satisfied, which conditions must be satisfied no later than April
12, 1996:
2.1. Amendment to Section 1.44. Section 1.44 of the Credit Agreement
is amended to read in its entirety as follows:
"1.44. "Conversion Date" means April 11, 1997 or such later
date as determined in accordance with Section 2.5."
2.2. Amendment to Section 1.67. Section 1.67 of the Credit Agreement
is amended to read in its entirety as follows:
"1.67. "Final Maturity Date" means April 11, 2002 or such
later date as determined in accordance with Section 2.5."
2.3. Amendment to Section 1.91. Section 1.91 of the Credit Agreement
is amended to read in its entirety as follows:
"1.91. "Maximum Amount of Credit" means, on any date, the
least of:
(a) $80,000,000;
<PAGE>
(b) the Consolidated Unreimbursed Sales Commissions as
reported for the most recent Tuesday for which such report is required to be
furnished to the Lenders in accordance with Section 6.4.3;
(c) the Consolidated Contingent Redemption Amount
as reported for the most recent month for which such report is required to be
furnished to the Lenders in accordance with Section 6.4.3;
(d) the Distribution Fees Collectible as reported for
the most recent month for which such report is required to be furnished to the
Lenders in accordance with Section 6.4.3; and
(e) to the extent less than the Maximum Amount of Credit
then in effect, such amount (in a minimum amount of $10,000,000 and an integral
multiple of $1,000,000) specified by irrevocable notice from the Company to the
Lenders."
2.4. Amendment to Section 6.5.2. Section 6.5.2 of the Credit Agreement
is amended to read in its entirety as follows:
"6.5.2. Consolidated Net Worth. Consolidated Net Worth shall
at all times equal or exceed $50,000,000."
2.5. Amendment to Section 10.1. The table in Section 10.1 of the
Credit Agreement is amended to read in its entirety as follows:
Maximum Principal Percentage
"Lender Amount Interest
------ ----------------- ----------
The First National
Bank of Boston $15,555,520 19.4444%
Bank of America Illinois $13,333,280 16.6666%
The Bank of New York $10,222,240 12.7778%
Credit Lyonnais
Cayman Island Branch $10,222,240 12.7778%
Deutsche Bank AG
New York and/or
Cayman Island Branch $10,222,240 12.7778%
Fleet National Bank
of Massachusetts $10,222,240 12.7778%
Mellon Bank, N.A. $10,222,240 12.7778%
----------- --------
Total $80,000,000 100.0000%"
2.6. Amendment to Exhibit 6.16. Exhibit 6.16 to the Credit
Agreement is amended to read in its entirety as set forth in Exhibit 6.16
hereto.
3. Representations and Warranties. In order to induce the
<PAGE>
Lenders to enter into this Agreement, the Company represents and warrants to
each of the Lenders that:
3.1. Legal Existence, Organization. Each of the Company and the
Subsidiaries is duly organized and validly existing and in good standing under
the laws of the jurisdiction of its incorporation, with all power and authority,
corporate or otherwise, necessary to (a) enter into and perform this Agreement,
the Amended Credit Agreement and each other Credit Document to which it is party
and (b) own its properties and carry on the business now conducted or proposed
to be conducted by it. Each of the Company and the Subsidiaries has taken, or
shall have taken on or prior to the Amendment Date, all corporate or other
action required to make the provisions of this Agreement, the Amended Credit
Agreement and each other Credit Document to which it is party the valid and
enforceable obligations they purport to be.
3.2. Enforceability. The Company has duly executed and delivered this
Agreement. Each of this Agreement and the Amended Credit Agreement is the legal,
valid and binding obligation of the Company and is enforceable in accordance
with its terms.
3.3. No Legal Obstacle to Agreements. Neither the execution, delivery or
performance of this Agreement, nor the performance of the Amended Credit
Agreement, nor the consummation of any other transaction referred to in or
contemplated by this Agreement, nor the fulfillment of the terms hereof or
thereof, has constituted or resulted in or will constitute or result in:
(a) any breach or termination of the provisions of any agreement,
instrument, deed or lease to which the Company or any Subsidiary is a party or
by which it is bound, or of the Charter or By-laws of the Company or any
Subsidiary;
(b) the violation of any law, judgment, decree or governmental
order, rule or regulation applicable to the Company or any Subsidiary;
(c) the creation under any agreement, instrument, deed or lease
of any Lien upon any of the assets of the Company or any Subsidiary; or
(d) any redemption, retirement or other repurchase obligation of the
Company or any Subsidiary under any Charter, By-law, agreement, instrument, deed
or lease.
No approval, authorization or other action by, or declaration to or filing
with, any governmental or administrative authority or any other Person is
required to be obtained or made by the Company or any Subsidiary in connection
with the execution, delivery and performance of this Agreement or the
performance of the Amended Credit Agreement, or the consummation of the
transactions contemplated hereby or thereby.
<PAGE>
3.4. No Default. Immediately before and after giving effect to the
amendments set forth in Section 2, no Default will exist.
3.5. Incorporation of Representations and Warranties. The representations
and warranties set forth in Section 7 of the Amended Credit Agreement are true
and correct on the date hereof as if originally made on and as of the date
hereof (except to the extent any representation or warranty refers to a specific
earlier date).
4. Conditions. The effectiveness of this Agreement shall be subject to the
satisfaction of the following conditions:
4.1. Officer's Certificate. The representations and warranties contained
in Section 3 shall be true and correct as of the Amendment Date with the same
force and effect as though originally made on and as of such date; no Default
shall exist on the Amendment Date prior to or immediately after giving effect to
this Agreement; as of the Amendment Date, no Material Adverse Change shall have
occurred; and the Company shall have furnished to the Agent on the Amendment
Date a certificate to these effects, in substantially the form of Exhibit 4.1,
signed by an Executive Officer or a Financial Officer.
4.2. Legal Opinion. On the Amendment Date, the Lenders shall have received
from the general counsel to the Company and the Subsidiaries, hereby authorized
and directed by the Company and the Subsidiaries, his opinion with respect to
this Agreement, the Amended Credit Agreement and the transactions contemplated
hereby and thereby, which opinion shall be in form and substance satisfactory to
the Agent.
4.3. Proper Proceedings. All proper corporate proceedings shall have been
taken by each of the Company and the Subsidiaries to authorize this Agreement,
the Amended Credit Agreement and the transactions contemplated hereby and
thereby. The Agent shall have received copies of all documents, including legal
opinions of counsel and records of corporate proceedings which the Agent may
have requested in connection therewith, such documents, where appropriate, to be
certified by proper corporate or governmental authorities.
4.4. Execution by Lenders. Each of the Lenders shall have executed and
delivered this Agreement to the Company.
5. Further Assurances. Each of the Company and the Subsidiaries will, promptly
upon request of the Agent from time to time, execute, acknowledge and deliver,
and file and record, all such instruments and notices, and take all such action,
as the Agent deems necessary or advisable to carry out the intent and purposes
of this Agreement.
6. General. The Amended Credit Agreement and all of the other Credit Documents
are each confirmed as being in full force and effect. This Agreement, the
Amended Credit Agreement and the
<PAGE>
other Credit Documents referred to herein or therein constitute the entire
understanding of the parties with respect to the subject matter hereof and
thereof and supersede all prior and current understandings and agreements,
whether written or oral, with respect to such subject matter. The invalidity or
unenforceability of any provision hereof shall not affect the validity or
enforceability of any other term or provision hereof. The headings in this
Agreement are for convenience of reference only and shall not alter, limit or
otherwise affect the meaning hereof. Each of this Agreement and the Amended
Credit Agreement is a Credit Document and may be executed in any number of
counterparts, which together shall constitute one instrument, and shall bind and
inure to the benefit of the parties and their respective successors and assigns,
including as such successors and assigns all holders of any Note. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS (OTHER THAN THE
CONFLICT OF LAWS RULES) OF THE COMMONWEALTH OF MASSACHUSETTS.
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
date first above written.
THE COLONIAL GROUP, INC.
By Richard A. Silver
Title: Treasurer
THE FIRST NATIONAL BANK OF BOSTON
By John T. Daley
Title: Vice President
Financial Institutions Division
100 Federal Street - 15th Floor
Boston, Massachusetts 02110
Telecopy: (617) 434-1537
Telex: 940581
BANK OF AMERICA ILLINOIS
By [Illegible]
Title: Vice President
231 South LaSalle Street
Chicago, Illinois 60697
Telecopy:
Telex:
THE BANK OF NEW YORK
By [Illegible]
Title: AVP
<PAGE>
One Wall Street
Securities Industry Division
New York, New York 10286
Telecopy: (212) 809-9566
Telex:
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By Sebastian Rocco
Authorized Signature
c/o Credit Lyonnais
Representative Office
53 State Street Exchange Place
Boston, Massachusetts 02109
Telecopy: (617) 723-4803
Telex:
DEUTSCHE BANK AG
New York and/or Cayman Island Branch
By F. Dabney Giles
Title: Assistant Vice President
By Peter J. Bassler
Title: Associate
31 W. 52nd Street
New York, New York 10019
FLEET NATIONAL BANK
By [Illegible]
Title: Vice President
75 State Street
Boston, Massachusetts 02109 Telecopy:
Telex:
MELLON BANK, N.A.
By [Illegible]
Title: Vice President
One Mellon Bank Center
Room 350
Pittsburgh, Pennsylvania 15258
Telecopy: (412) 234-8087
Telex:
<PAGE>
Exhibit 4.1
-----------
OFFICER'S CERTIFICATE
Pursuant to Section 4.1 of Amendment No. 4 to the Credit Agreement dated as of
April __, 1996 (the "Amendment") among The Colonial Group, Inc., a Massachusetts
corporation (the "Company"), the Lenders and the First National Bank of Boston,
as agent (the "Agent") for itself and the other Lenders, which amends the Credit
Agreement dated as of May 5, 1993, as amended and restated as of December 17,
1993, and as further amended and in effect on the Amendment Date (the "Credit
Agreement"), among the Company, the Lenders and the Agent, the Company hereby
certifies that the representations and warranties contained in Section 3 of the
Amendment are true and correct on and as of the Amendment Date with the same
force and effect as though originally made on and as of the Amendment Date; no
Default exists on the Amendment Date or will exist immediately after giving
effect to the Amendment; and as of the Amendment Date, no Material Adverse
Change has occurred.
Terms defined in the Amendment and not otherwise defined herein are used herein
with the meanings so defined.
This certificate has been executed by a duly authorized Executive Officer or
Financial Officer this ____ day of April, 1996.
THE COLONIAL GROUP, INC.
By ________---______________
Title:
Exhibit 6.16
Class B Shares are shares designated as such in a CDSC Fund prospectus and which
were sold prior to the Conversion Date. CDSC Funds may have five Class B Share
fee structures. The B1 structure is standard and applies to es in the majority
of CDSC funds. The B2B4 structures may be implemented at a future date as a
standard addition to the B1 structure on Class B Share purchases at various
breakpoints between $100,000 and $1,000,000. The B5 structure presently applies
to all Class B Share purchases in a minority of CDSC funds. After the number of
years set forth below, Class B Shares convert to Class A Shares with no further
Distribution Fee or Redemption Fee. The five fee structures and CDSC Funds to
which each is presently applicable follows:
Type of Fee Structure: B1 B2 B3 B4 B5
Commission Paid: 4.00% 3.25% 2.25% 1.75% 3.00%
Distribution Fee: 0.75% 0.75% 0.75% 0.75% 0.65
Number of Years Before
Conversion to
<PAGE>
Class A Shares: 8.0 5.5 4.0 3.0 8.0
Redemption Fee:
Year 1 5% 4% 3% 2% 4%
2 4 3 2 2 3
3 3 2 1 1 2
4 3 2 0 1
5 2 1 0
6 1 0 0
7 0 0
8 0 0
CDSC Funds Presently Utilizing B1 Structure:
Tax-Exempt Funds
California Tax-Exempt
Connecticut Tax-Exempt
Florida Tax-Exempt
High Yield Municipal
Massachusetts Tax-Exempt
Michigan Tax-Exempt
Minnesota Tax-Exempt
New York Tax-Exempt
North Carolina Tax-Exempt
Ohio Tax-Exempt Tax-Exempt
Tax-Exempt Insured
Municipal Money Market
Texas Tax-Exempt
Balanced Funds
Strategic Balanced
Equity Funds
Global Equity
Growth Shares
International Fund for Growth
Global Natural Resources
Small Stock
The Colonial Fund
U.S. Fund For Growth
Utilities
Global Utilities
Newport Japan
Newport Tiger
Newport Tiger Cub
Aggressive Growth
Equity Income
International Equity
Taxable Fixed-Income Funds
Federal Securities
High Yield Securities
High Income & Utilities Income
Government Money Market
Strategic Income
U.S. Government
CDSC Funds Presently Utilizing B5 Structure:
Adjustable Rate U.S. Government
Intermediate Tax-Exempt
<PAGE>
CDSC Funds shall include each Fund utilizing the B1-B4 structure or the B5
structure.
EXECUTION COPY
COINSURANCE AGREEMENT
by and between
FIDELITY AND GUARANTY LIFE INSURANCE COMPANY
and
KEYPORT LIFE INSURANCE COMPANY
Dated as of July 26, 1996
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . 1
ARTICLE II REINSURANCE COVERAGE. . . . . . . . . . . . . . 7
ARTICLE III GENERAL PROVISIONS. . . . . . . . . . . . . . . 8
ARTICLE IV REINSURANCE PREMIUMS; CEDING COMMISSION . . . . 13
ARTICLE V RESERVES. . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI EXPENSE ALLOWANCE . . . . . . . . . . . . . . . 15
ARTICLE VII DEATH BENEFITS, ANNUITY PAYMENTS AND OTHER
PAYMENTS. . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII ACCOUNTING AND SETTLEMENT . . . . . . . . . . . 19
ARTICLE IX DURATION, RECAPTURE AND TERMINATION . . . . . . 22
ARTICLE X INSOLVENCY. . . . . . . . . . . . . . . . . . . 25
ARTICLE XI ARBITRATION . . . . . . . . . . . . . . . . . . 26
ARTICLE XII SECURITY. . . . . . . . . . . . . . . . . . . . 28
ARTICLE XIII REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE COMPANY. . . . . . . . . . . . . . . . . 33
ARTICLE XIV REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE REINSURER. . . . . . . . . . . . . . . . 36
ARTICLE XV CONDITIONS TO CLOSING . . . . . . . . . . . . . 39
ARTICLE XVI MISCELLANEOUS PROVISIONS. . . . . . . . . . . . 41
SCHEDULES
SCHEDULE A - REINSURED SPDAs
SCHEDULE B - QUARTERLY PERIOD REINSURANCE REPORTS
SCHEDULE C - ANNUAL REINSURANCE REPORTS
SCHEDULE D - POLICYHOLDER SERVICES TO BE PROVIDED
SCHEDULE E - CONSERVATION AND COMMISSION PAYMENT SERVICES TO BE
PROVIDED AND ASSOCIATED FEES
SCHEDULE F - LIST OF AGENCY AND DISTRIBUTION AGREEMENTS
SCHEDULE G - CONSENTS AND APPROVALS REQUIRED BY THE COMPANY
SCHEDULE H - CONSENTS AND APPROVALS REQUIRED BY THE REINSURER
SCHEDULE I - FORM OF OPINION OF SENIOR VICE PRESIDENT AND
GENERAL COUNSEL FOR THE REINSURER
SCHEDULE J - JOINT ELECTION UNDER IRC REGULATION 1.848-2(g)(8)
COINSURANCE AGREEMENT
THIS COINSURANCE AGREEMENT (this "Agreement"), dated as of July 26,
1996, is made and entered into by and between FIDELITY AND GUARANTY LIFE
INSURANCE COMPANY, a life insurance company organized under the laws of the
State of Maryland (the "Company"), and KEYPORT LIFE INSURANCE COMPANY, a life
insurance company organized under the laws of the State of Rhode Island (the
"Reinsurer").
WHEREAS, the Company has agreed to cede to the Reinsurer, on a
coinsurance basis, the Reinsured SPDAs (as defined below), and the Reinsurer has
agreed to reinsure all liabilities and obligations of the Company arising under
the Reinsured SPDAs, subject to the exclusions set forth in Section 2.03 below.
NOW, THEREFORE, in consideration of the mutual covenants and promises
and upon the terms and conditions set forth herein, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings (definitions are applicable to both the singular and the
plural forms of each term defined in this Article):
"Account Values" means the account value, as defined in the Reinsured SPDAs,
which is not reduced for surrender charges.
"Accounting Period" means a calendar quarter, except that the initial Accounting
Period shall be the period commencing with the Effective Date and ending with
the last day of the then current calendar quarter, and the final Accounting
Period shall be the period commencing with the first day of the calendar quarter
that includes the Termination Date and ending on the Termination Date.
"Act" shall have the meaning specified in Section 13.07(b).
"Annual Report" means the report required to be prepared in accordance with
Section 8.03 and providing the data as shown on Schedule C.
"Benefits" shall have the meaning specified in Section 7.01.
"Blended Rate" means the percentage rate equal to the sum of (i) two-thirds of
the one year Treasury Note rate as of the close of business on the Business Day
immediately preceding the Closing Date plus (ii) one-third of the three year
Treasury Note rate as of the close of business on the Business Day immediately
preceding the Closing Date.
"Business Day" means any day that is not a Saturday or a Sunday or a day on
which banks in the State of New York are authorized or required by law to close.
"Cash Equivalents" means, as of any particular date, money market funds,
marketable obligations issued or guaranteed by the United States Government,
certificates of deposit, bankers' acceptances and other similar liquid
investments, in each case, with a maturity date of not more than 90 days from
the date on which any such instrument is transferred pursuant to the terms of
this Agreement, the market value of which on the date of transfer will be
counted as equivalent to cash for purposes of satisfying the aggregate amount of
cash and Cash Equivalents required to be transferred under this Agreement.
"Ceding Commission" shall have the meaning specified in Section 4.02.
"Closing" means the closing of the transactions under this Agreement on the
Closing Date.
"Closing Date" means the date which is three Business Days following the receipt
of all required governmental and regulatory consents and approvals, including
the expiration of any applicable waiting periods, in connection with the
reinsurance of the Reinsured SPDAs, which date shall not be earlier than August
1, 1996 or later than October 31, 1996.
"Commissions and Expenses" means (i) all sales commissions, production bonuses
or other payments in cash or kind payable to duly licensed insurance agents or
other persons with respect to any Reinsured SPDAs, whether issued by the Company
prior to the Effective Date or issued by the Company, with the consent of the
Reinsurer, on or subsequent to the Effective Date, (ii) an administration
services fee of $2.00 per month per Reinsured SPDA in force at the beginning of
each month during the term of this Agreement for providing the policyholder
services listed on Schedule D with respect to the Reinsured SPDAs, (iii) the
fees listed on Schedule E for providing the conservation and commission payment
services included therein, and (iv) all direct expenses incurred in connection
with the Reinsured SPDAs, including, but not limited to (a) guaranty fund
assessments relating to premiums written on or subsequent to the Effective Date,
(b) premium or other taxes and (c) any charges and assessments imposed directly
on or with respect to the Reinsured SPDAs.
"Daily Interest Amount" shall have the meaning specified in Section 7.01(b).
"Effective Date" shall have the meaning specified in Section 2.01.
"Endorsements" means any endorsements to the SPDAs in force on the Effective
Date and issued pursuant to an offer from the Company which has been accepted by
an owner of a Reinsured SPDA providing for a new interest rate guarantee period
and the reimposition of surrender charges upon termination of the initial
six-year surrender charge period.
"Extracontractual Liabilities" means all liabilities for consequential,
exemplary, punitive or similar damages which relate to or arise in connection
with any alleged or actual act, error or omission by the Company, its directors,
officers, employees, agents or any of the Company's affiliates, whether
intentional or otherwise, or from any alleged or actual reckless conduct or bad
faith by the Company, its directors, officers, employees, agents or any of the
Company's affiliates, in connection with the handling of any claim under any of
the Reinsured SPDAs or in connection with the issuance, delivery, cancellation
or administration of any of the Reinsured SPDAs.
"First Commission Rate" means the percentage rate equal to the sum of (i) 2.6
percent plus (ii) the product of (a) 1.4 and (b) the difference between (1) the
Blended Rate and (2) 6.06 percent.
"Governmental Authority" means any foreign, federal, state, local or other
court, arbitrator, administrative agency, commission or division, insurance or
securities regulatory or self-regulatory body or securities or commodities
exchange.
"Initial Reinsurance Premium" shall have the meaning specified in Section 4.01.
"Investment Assets" means the assets that are transferred to the Reinsurer in
connection with the Initial Reinsurance Premium.
"NAIC" means the National Association of Insurance Commissioners.
"Qualified Financial Institution" shall have the meaning specified in Section
09.30.97.08 of the Code of Maryland Regulations.
"Quarterly Report" means the report required to be prepared in accordance with
Section 8.02 and providing the data as shown on Schedule B.
"Quarterly Settlement" means the net amount due and payable to either party with
respect to any Accounting Period.
"Recapture Event" shall have the meaning specified in Section 9.03.
"Reinsured SPDAs" means (i) the SPDAs, including any Endorsements thereto, and
(ii) any single premium deferred annuity contracts replacing SPDAs and any
endorsements to SPDAs issued by the Company on or subsequent to the Effective
Date with the consent of the Reinsurer. Reinsured SPDAs shall not include
Retained Asset Account Funds in existence on the Effective Date.
"Reserves" means the statutory reserves established by the Company with respect
to the liabilities arising under the Reinsured SPDAs, including, but not limited
to, excess interest reserves, claim reserves and other statutory liabilities
required to be reported by the Company on its NAIC Annual Statement Blank filed
with the State of Maryland.
"Retained Asset Account Funds" means death benefit funds on deposit with the
Company but not yet paid out or annuitized under a settlement option at the
request of the beneficiary or the estate, with regard to the Reinsured SPDAs.
"Second Commission Rate" means the percentage rate equal to the sum of (i) 1.8
percent plus (ii) the product of (a) 1.4 and (b) the difference between (1) the
Blended Rate and (2) 6.06 percent.
"Short Term Rate" means the sum of (i) the Blended Rate and (ii) 1.0 percent.
"SPDAs" means the single premium deferred annuity contracts in force on the
Effective Date and issued by the Company on the policy forms listed on Schedule
A attached hereto.
"Terminal Accounting and Settlement" shall have the meaning specified in Section
9.07.
"Termination Date" means the date on which any complete termination of this
Agreement, as provided in Article IX, is effective, either as a result of an
event described in Article IX, or as designated by the terminating party or
parties.
"Termination Report" means the report required to be prepared in accordance with
Section 9.08 and providing the calculations for the Terminal Accounting and
Settlement.
"Third Commission Rate" means the percentage rate equal to the sum of (i) 3.0
percent plus (ii) the product of (a) 1.4 and (b) the difference between (1) the
Blended Rate and (2) 6.06 percent.
"Trust" or "Trust Account" shall mean the Trust or Trust Account established
pursuant to Article XII.
ARTICLE II
REINSURANCE COVERAGE
2.01. Coverage. Upon the terms and subject to the conditions and other
provisions of this Agreement and any required governmental and regulatory
consents and approvals, effective as of 12:01 a.m., Eastern Time, on the Closing
Date or, if the Closing Date is not the first day of the month, then such date
to be the first day of the month in which the Closing Date occurs (the
"Effective Date"), the Company hereby cedes to the Reinsurer, and the Reinsurer
hereby assumes, on a coinsurance basis, all liabilities and obligations of the
Company arising under the Reinsured SPDAs, subject to the exclusions set forth
in Section 2.03. The liability of the Reinsurer with respect to the Reinsured
SPDAs shall begin on the Effective Date.
2.02. Conditions. The reinsurance hereunder is subject to the same
limitations, terms and conditions as the Reinsured SPDAs, except as otherwise
provided in this Agreement.
2.03. Exclusions. This Agreement does not apply to and specifically
excludes from coverage hereunder:
(a) any insurance policy or annuity contract issued by the
Company other than the Reinsured SPDAs; or
(b) any Extracontractual Liabilities.
2.04. Plan of Reinsurance. This reinsurance shall be on a one hundred
percent (100%) coinsurance basis.
2.05. Retrocession. The Reinsurer retains the right to retrocede all
or any portion of the risk on any Reinsured SPDA.
2.06. Other Reinsurance. During the term of this Agreement, the
Company shall not, without the prior written consent of the Reinsurer, enter
into any reinsurance agreement of any type, other than this Agreement, with
respect to the Reinsured SPDAs.
ARTICLE III
GENERAL PROVISIONS
3.01. Administration and Expenses. The Company or its designated
administrator shall continue to perform or have performed all policyholder
services as more fully described on Schedule D and the conservation and
commission payment services with respect to the Reinsured SPDAs as more fully
described on Schedule E. The Reinsurer shall pay all administration and
accounting expenses and other expenses related to maintenance of the Reinsured
SPDAs, as part of Commissions and Expenses payable pursuant to the provisions of
Section 6.01 of this Agreement.
3.02. Voluntary Contract Changes or Reserve Assumption Changes. The
Company, on its own initiative, shall not without the prior consent of the
Reinsurer change (i) the terms and conditions of any Reinsured SPDAs, or (ii)
the assumptions, including the statutory reserve accumulation rate assumption
and the interpretation of NAIC regulations and guidelines relating to the
calculation of statutory reserves, used by the Company to establish the Reserves
with respect to the Reinsured SPDAs. The Reinsurer shall share, according to the
percentage specified in Section 2.04 of this Agreement, in any contract changes
or Reserve changes required by any regulatory authority having jurisdiction over
the Company in the ordinary course of exercising its powers or otherwise
required by law. In the event of an increase in the Reserves directly caused by
changes in the Company's interpretation, on its own initiative, of NAIC
regulations and guidelines relating to the calculation of the Reserves, the
Company and the Reinsurer shall attempt in good faith to determine the cost of
holding the additional amount of Reserves required by such changes; provided,
however, that if the Company and the Reinsurer are unable to resolve any
disagreement with respect to such cost, then the matter shall be referred to
arbitration pursuant to the terms of Article XI, at the initiative of either
party.
3.03. Inspection.
(a) Subject to reasonable advance notice to the Company, the Reinsurer or
its designated representative may inspect, at the offices of the Company or its
designated representative or wherever such records are located, any and all
books, documents or records of the Company reasonably relating to the Reinsured
SPDAs during normal business hours for such period as this Agreement is in
effect or for as long thereafter as the Company seeks performance by the
Reinsurer pursuant to the terms of this Agreement. While performing any such
inspection, the Reinsurer or its designated representative shall use its best
efforts to minimize any disruption to the Company's normal business operations.
Upon the Reinsurer's reasonable request, copies of such records shall be
furnished to the Reinsurer, at the expense of the Reinsurer. The information
obtained by the Reinsurer shall be treated as confidential material and
proprietary to the Company and shall be used by the Reinsurer only for purposes
relating to reinsurance of the Reinsured SPDAs under this Agreement. The
Reinsurer's rights under this Section shall survive termination of this
Agreement.
(b) Subject to reasonable notice to the Reinsurer, the Company or its
designated representative may inspect, at the offices of the Reinsurer or its
designated representative or wherever such records are located, any and all
books, documents, or records of the Reinsurer reasonably relating to the
Reinsured SPDAs during normal business hours for such period as this Agreement
is in effect or for as long thereafter as Reinsurer seeks performance by the
Company pursuant to the terms of this Agreement. While performing any such
inspection, the Company or its designated representative shall use its best
efforts to minimize any disruption to the Reinsurer's normal business
operations. Upon the Company's reasonable request, copies of such records shall
be furnished to the Company, at the expense of the Company. The information
obtained by the Company shall be treated as confidential material and
proprietary to the Reinsurer and shall be used by the Company only for purposes
relating to reinsurance of the Reinsured SPDAs under this Agreement. The
Company's rights under this Section shall survive termination of this Agreement.
3.04. Misunderstandings and Oversights. If any delay, omission, error or
failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company and the Reinsurer will adjust the situation to what it would have been
had the misunderstanding or oversight not occurred and the reinsurance provided
hereunder shall not be invalidated. The party first discovering such
misunderstanding or oversight, or act resulting from the misunderstanding or
oversight, will notify the other party in writing promptly upon discovery
thereof, and the parties shall act to correct such misunderstanding or oversight
within twenty (20) Business Days of receipt of such notice. However, this
Section shall not be construed as a waiver by either party of its right to
enforce strictly the terms of this Agreement.
3.05. Reinstatements. If a Reinsured SPDA that is or has been reduced,
terminated, or lapsed is reinstated while this Agreement is in force, the
reinsurance for such Reinsured SPDA shall be reinstated automatically to the
amount that would be in force if the Reinsured SPDA had not been reduced,
terminated, or lapsed. The Company will pay to the Reinsurer all amounts
received or charged by the Company in connection with the reinstatement.
3.06. Setoff and Recoupment. Any debts or credits, matured or unmatured,
liquidated or unliquidated, regardless of when they arose or were incurred, in
favor of or against either the Company or the Reinsurer with respect to this
Agreement are deemed mutual debts or credits, as the case may be, and shall be
setoff from any amounts due to the Company or the Reinsurer hereunder, as the
case may be, and only the net balance shall be allowed or paid. This setoff
provision (to the extent permitted by law) shall not be modified or reconstrued
due to the insolvency, liquidation, rehabilitation, conservatorship, or
receivership of either party.
3.07. Payments. All payments made pursuant to this Agreement (other than
the transfer of Investment Assets in connection with the Initial Reinsurance
Premium described in Section 4.01 of this Agreement) shall be in cash or Cash
Equivalents and shall be made in immediately available funds or assets
acceptable to the Company (at market value) as agreed by the parties. If a
transfer of assets is agreed upon, the party making the transfer shall deliver
the assets to the other party along with such deeds, bills of sale,
endorsements, assignments and other good and sufficient instruments of
conveyance and transfer reasonably acceptable to the parties as shall be
effective to vest in the party receiving the assets all of the right, title and
interest of the transferring party in and to the assets.
3.08. Age, Sex and Other Adjustments. If the Company's liability under any
of the Reinsured SPDAs is changed because of a misstatement of age or sex or any
other material facts, the Reinsurer shall share, according to the percentage
specified in Section 2.04 of this Agreement, in any such change.
ARTICLE IV
REINSURANCE PREMIUMS; CEDING COMMISSION
4.01. Initial Reinsurance Premium. As consideration for the assumption by
the Reinsurer of the liabilities under this Agreement, on the Closing Date, the
Company shall transfer to the Reinsurer (i) Investment Assets with an aggregate
fair market value to the Company equal to one hundred percent (100%) of the
Reserves with respect to the Reinsured SPDAs as of the close of business on the
Business Day immediately preceding the Effective Date plus (ii) an amount equal
to the Short Term Rate per annum on such Investment Assets from the Effective
Date until the close of business on the Business Day immediately preceding the
Closing Date (the "Initial Reinsurance Premium"). The Company shall deliver to
the Reinsurer possession of the Investment Assets and such deeds, bills of sale,
endorsements, assignments and other good and sufficient instruments of
conveyance and transfer in form and substance reasonably acceptable to the
parties as shall be effective to vest in the Reinsurer all of the right, title
and interest of the Company in and to the Investment Assets. Payment of the
Initial Reinsurance Premium shall be a condition precedent of reinsurance
coverage hereunder.
4.02. Ceding Commission. On the Closing Date, the Reinsurer shall pay
a ceding commission (the "Ceding Commission") to the Company in an amount equal
to the sum of:
(i) the product of (a) the Reserves as of the close of business on the
Business Day immediately preceding the Effective Date allocated to the
SPDAs with sixth year anniversary dates on or prior to the date which is 45
days prior to the Effective Date and (b) the First Commission Rate;
(ii) the product of (a) the Reserves as of the close of business on the
Business Day immediately preceding the Effective Date allocated to the
SPDAs with sixth year anniversary dates subsequent to the date which is 45
days prior to the Effective Date for which Endorsements have not been
issued and (b) the Second Commission Rate;
(iii) the product of (a) the Reserves as of the close of business on the
Business Day immediately preceding the Effective Date allocated to the
SPDAs for which Endorsements have been issued prior to the Effective Date
and (b) the Third Commission Rate; and
(iv) an amount equal to the Short Term Rate per annum on the sum of the
amounts calculated pursuant to subsections (i), (ii) and (iii) above from
the Effective Date until the close of business on the Business Day
immediately preceding the Closing Date.
Such amount shall be paid in cash or Cash Equivalents by the Reinsurer and shall
be netted against the Initial Reinsurance Premium in accordance with Section
3.06.
ARTICLE V
RESERVES
5.01. Reserves and Reserve Credits. The Reinsurer shall establish and
maintain adequate Reserves with respect to the Reinsured SPDAs as necessary to
enable the Company to take full reinsurance reserve credit contemplated by this
Agreement on its statutory balance sheet filed with the Insurance Department of
all states in which the Company files its annual statement.
ARTICLE VI
EXPENSE ALLOWANCE
6.01. Expense Allowance. The Reinsurer shall pay the Company, in accordance
with Section 8.01(a), an expense allowance equal to 100.14% of the Commissions
and Expenses incurred and paid by the Company during the term of this Agreement
with respect to the Reinsured SPDAs; provided, however, the Reinsurer expressly
agrees that the Company's right to receive reimbursement for guaranty fund
assessments as part of Commissions and Expenses shall survive the termination of
this Agreement.
ARTICLE VII
DEATH BENEFITS, ANNUITY PAYMENTS AND OTHER PAYMENTS
7.01. Death Benefits, Annuity Payments and Surrender or
Withdrawal Payments.
(a) The Reinsurer shall reimburse the Company, in accordance with Sections
7.01(b) and 8.01(b), for an amount equal to 100.14% of the sum of all (i) death
benefits, (ii) surrender or withdrawal payments and (iii) periodic payments
under annuity settlement options elected by the owner, and paid by the Company,
with respect to Reinsured SPDAs that become due on or after the Effective Date
(such death benefits and other payments referred to in the foregoing clause (i),
(ii) and (iii) are referred to collectively as "Benefits"). The reimbursement
for Benefits shall be net of surrender charges pursuant to the terms of the
relevant Reinsured SPDAs.
(b) On the Closing Date, the Reinsurer shall reimburse the Company for an
amount equal to the sum of:
(i) 100.14% of any Benefits paid by the Company in respect of Reinsured
SPDAs from the Effective Date until the close of business on the Business
Day immediately preceding the Closing Date; and
(ii) an amount equal to the sum of the Daily Interest Amount for each day
from and including the Effective Date until the close of business on the
Business Day immediately preceding the Closing Date. For purposes of this
Section, the Daily Interest Amount means the product of (a) the cumulative
amount of Benefits paid as of the close of business on each day on or
subsequent to the Effective Date and (b) the Short Term Rate per annum.
The amount calculated pursuant to this Section 7.01(b) shall be paid in cash or
Cash Equivalents by the Reinsurer and shall be netted against the Initial
Reinsurance Premium in accordance with Section 3.06.
7.02. Liability and Payment. Unless the Reinsurer has made the election
provided in Section 7.03 to participate in the contest, compromise or litigation
of a claim, the Reinsurer will accept the decision of the Company on payment of
a claim on a Reinsured SPDA. The Reinsurer will pay claims (including expenses
incurred in connection with such claims) for Benefits (other than for the
payment of periodic annuity payments if elected by the owner or annuitant)
attributable to Reinsured SPDAs in a lump sum to the Company without regard to
the form of claim settlement payable by the Company.
7.03. Contested Claims. The Company will provide notice to the Reinsurer of
its intention to contest, compromise, or litigate a claim (including
interpleader actions) with respect to a Reinsured SPDA. Within ten (10) Business
Days after receipt of such notice, the Reinsurer may elect to participate in
contesting a claim attributable to a Reinsured SPDA by submitting a notice of
such election to the Company. The Reinsurer shall be deemed to have elected to
not participate in such contest if it fails to make such election within ten
(10) Business Days. If the Reinsurer elects not to participate in such contest,
it may discharge its liability by payment to the Company of the lesser of the
full amount of the claim or the full amount of the Reinsured SPDA relating to
such claim. In no event shall the Reinsurer indemnify the Company for any
Extracontractual Liabilities arising with respect to any Reinsured SPDA, unless
such Extracontractual Liabilities result from an action caused, or specifically
consented to, by the Reinsurer; provided, however, that the Reinsurer's election
to participate in the contest, compromise or litigation of a claim with respect
to a Reinsured SPDA shall not automatically be deemed to be an action
specifically consented to by the Reinsurer for purposes of the immediately
preceding clause. The Company and the Reinsurer agree to cooperate in the
prosecution of any claim contest.
ARTICLE VIII
ACCOUNTING AND SETTLEMENT
8.01. Amounts Due the Reinsurer or the Company.
(a) The payments required to be made under Section 6.01 shall be paid in
cash or Cash Equivalents and shall be made monthly by wire transfer of funds to
an account designated by the Company by 11 a.m. on the second Business Day
following the end of each month with respect to the Commissions and Expenses
incurred as of the close of business on the last day of each month (or partial
month) during the term of this Agreement; provided, that the Company notifies
the Reinsurer by 2 p.m. on the first Business Day following the end of each
month of the amounts due from the Reinsurer with respect to such month.
(b) The payments required to be made under Section 7.01 (other than the
payment on the Closing Date pursuant to Section 7.01(b)) shall be paid in cash
or Cash Equivalents and shall be made weekly by wire transfer of funds to an
account designated by the Company by 11 a.m. on each Thursday following the
Closing Date with respect to the Benefits paid as of the close of business on
the second Business Day next preceding such Thursday; provided, that the Company
notifies the Reinsurer by 2 p.m. on the Business Day prior to such Thursday of
the amounts due from the Reinsurer with respect to such week.
(c) If amounts due to be paid by the Reinsurer to the Company pursuant to
Section 8.01(a) or 8.01(b) above cannot be determined at such dates on an exact
basis, such payments may be determined on an estimated basis, and any
adjustments subsequently required to reflect actual data shall be made on the
weekly or monthly payment date, as applicable, following the date that such
actual data is available.
(d) Except as otherwise specifically provided herein, all other amounts due
to be paid to either the Reinsurer or the Company under this Agreement shall be
determined on a net basis, giving full effect to Section 3.06 hereof, as of the
last day of each Accounting Period. Any net amount due from the Company to the
Reinsurer shall be paid in cash or Cash Equivalents no later than the day on
which the Quarterly Report showing such net amount, as described in Section
8.02, is due. Any net amount due from the Reinsurer to the Company shall be paid
no later than ten (10) Business Days following the receipt of such Quarterly
Report from the Company. If amounts due to be paid cannot be determined at such
dates on an exact basis, such payments may be determined on an estimated basis,
and any adjustments subsequently required to reflect actual data shall be made
at the date upon which any amended report, based on actual data, is due to be
provided pursuant to Section 8.04.
8.02. Quarterly Reports. Within ten (10) Business Days of the end of each
Accounting Period the Company shall supply the Reinsurer with a report that
shall provide the data required in Schedule B (the "Quarterly Report"), which
shall show the net amount due, if any, by the Company or the Reinsurer, as
appropriate.
8.03. Annual Reports. Within twenty (20) Business Days after the end of
each calendar year the Company shall supply the Reinsurer with a report that
shall provide the data required in Schedule C (the "Annual Report").
8.04. Best Efforts to Supply Actual Data. In preparing all reports required
in this Agreement, the Company and the Reinsurer shall make their best efforts
to supply the actual data. If the actual data cannot be supplied with the
appropriate report, the Company shall produce best estimates, and shall provide
amended reports based on actual data no more than twenty (20) Business Days
after such report was originally due.
8.05. Tax Reserves. In connection with the Annual Report described in
Section 8.03, the Company shall supply the Reinsurer with information with
respect to tax reserves relating to the Reinsured SPDAs.
8.06. Interest on Delayed Payments. Should any payment due to either the
Reinsurer or the Company be delayed, such delayed payment (including any amount
constituting a difference between an estimated and actual amount, as described
in Section 8.01, shall accrue interest for the period that payment is overdue at
an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of
1%) at which dollar deposits approximately equal in amount to the overdue
payments hereunder for a comparable interest period are offered by the principal
London office of Citibank, N.A. in immediately available funds in the London
Interbank Market at approximately 11 a.m., London time, two Business Days prior
to the commencement of such interest period; each change in such interest rate
shall be effective on the date such change is announced as effective.
ARTICLE IX
DURATION, RECAPTURE AND TERMINATION
9.01. Duration. Except as otherwise provided herein, this Agreement
shall be unlimited in duration.
9.02. Reinsurer's Liability. The Reinsurer's liability with respect to any
Reinsured SPDA will terminate on the earliest of: (i) the date the Reinsured
SPDA is recaptured; (ii) the date the Company's liability on such Reinsured SPDA
is terminated; or (iii) the date this Agreement is terminated. In no event
should any interpretation of this Section 9.02 imply a unilateral right of the
Reinsurer to terminate this Agreement.
9.03. Termination Due to Recapture. The Company shall have the right, on
five (5) Business Days' written notice to the Reinsurer (the "Recapture Election
Notice"), to terminate this Agreement and recapture the Reinsured SPDAs in full,
such recapture and termination to be effective as of the next Business Day
following the end of such notice period, in the event that (i) the Standard &
Poor's Corporation Claims-Paying Ability rating of the Reinsurer becomes less
than BBB- (or other equivalent rating used by Standard & Poor's Corporation) or
the Moody's Investors Service, Inc. Financial Strength rating of the Reinsurer
becomes less than Baa3 (or other equivalent rating used by Moody's Investors
Service, Inc.), or (ii) the Reinsurer files a Risk-Based Capital Report with the
Commissioner of Insurance of the State of Rhode Island (or the then current
state of domicile of the Reinsurer) which indicates that its Total Adjusted
Capital is less than 150 percent of its Company Action Level RBC (as such
capitalized terms are defined in the NAIC Life Risk-Based Capital Report
Including Overview and Instructions for Companies, dated as of December 31,
1994), or (iii) the Reinsurer fails to be duly licensed to conduct a life
insurance business or accredited to act as a reinsurer in the Company's state of
domicile or in any other state or jurisdiction where failure of the Reinsurer to
be so licensed or accredited would cause the Company to be ineligible for
reserve credit for the reinsurance ceded under this Agreement, unless the
Reinsurer provides security for its obligations under this Agreement pursuant to
the provisions of Article XII, or (iv) the Reinsurer is the subject of an
insolvency, liquidation, supervision, conservation, rehabilitation or other
similar proceeding (each a "Recapture Event"). The Reinsurer shall provide
written notice to the Company within one Business Day of the occurrence of any
Recapture Event.
9.04. Automatic Termination. If, at the end of an Accounting Period, none
of the Reinsured SPDAs are in force, this Agreement shall automatically
terminate.
9.05. Termination Due to Nonpayment. Either party may terminate this
Agreement if the other party fails to pay, when due, any amounts due under this
Agreement, provided that the non-delinquent party has given at least twenty (20)
Business Days prior written notice of its intent to terminate for that reason.
The delinquent party may avoid termination pursuant to this Section 9.05 by
paying all amounts that are delinquent and then due, including any interest
owing thereon pursuant to Section 8.06, on or before the Termination Date
specified in the written notice.
9.06. Termination by Mutual Agreement. The parties may mutually agree to
terminate this Agreement at any time.
9.07. Payments on Termination. In the event that this Agreement is
terminated pursuant to this Article IX, a net accounting and settlement as to
any balance due under this Agreement shall be undertaken by the parties to this
Agreement (the "Terminal Accounting and Settlement"). Any net payment required
under the Terminal Accounting and Settlement will become due as of the
Termination Date, and shall be paid in cash or Cash Equivalents by the Reinsurer
or the Company, as appropriate, no later than the day on which the Termination
Report described in Section 9.08 is due to be provided. Net payments required
under the Terminal Accounting and Settlement shall consist of:
(i) the Quarterly Settlement for the final Accounting Period,
calculated as of the Termination Date, plus any interest due pursuant to
Section 8.06; plus
(ii) the payment by the Reinsurer to the Company of an amount equal
to the Reserves as of the day immediately prior to the Termination Date
with respect to the Reinsured SPDAs; plus
(iii) in the event of a termination of this Agreement by the Reinsurer
under Section 9.05, the payment by the Company to the Reinsurer of an
amount equal to the product of (a) a fraction, the numerator of which is
the Reserves as of the Termination Date and the denominator of which is the
Reserves as of the Effective Date and (b) the Ceding Commission.
9.08. Termination Report. Within ten (10) Business Days after the
Termination Date, the Company shall supply the Reinsurer with a report that
shall show the Terminal Accounting and Settlement (the "Termination Report"). In
the event that, subsequent to the Terminal Accounting and Settlement, an
adjustment is made with respect to any amount taken into account pursuant to
Schedule B, a supplementary accounting shall take place in accordance with the
procedures set out in Sections 8.04 and 9.07. Any net amount owed to the
Reinsurer or the Company by reason of such supplemental accounting, plus any
interest due pursuant to Section 8.06, shall be paid within ten (10) Business
Days after the completion of such Termination Report or supplementary
accounting, as appropriate.
ARTICLE X
INSOLVENCY
10.01. Payments by Reinsurer. In the event of insolvency, liquidation or
rehabilitation of the Company, the Reinsurer hereby agrees that, as to all
reinsurance made, ceded or otherwise becoming effective hereunder, the
reinsurance shall be payable to the Company, or to its conservator, receiver,
liquidator or statutory successor on the basis of the liability of the Company
under the Reinsured SPDAs, without diminution because of the insolvency of the
Company or because the conservator, receiver, liquidator or statutory successor
of the Company has failed to pay all or a portion of any claim.
10.02. Claims. It is agreed that the conservator, receiver, liquidator or
statutory successor of the Company shall give written notice to the Reinsurer of
the pendency or submission of a claim under any Reinsured SPDAs within a
reasonable time after such claim is filed in the insolvency, liquidation or
rehabilitation proceeding. During the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense available to the Company or
its conservator, receiver, liquidator or statutory successor. The expense thus
incurred by the Reinsurer pursuant to this Section 10.02 shall be chargeable,
subject to the approval of the court, against the Company as a part of the
expense of insolvency, liquidation or rehabilitation to the extent of a
proportionate share of the benefit which accrues to the Company solely as a
result of the defense undertaken by the Reinsurer.
10.03. No Waiver of Defenses. Nothing in this Article X shall preclude the
Reinsurer from asserting any excuse or defense to payment of this reinsurance
other than the excuses or defenses of the insolvency of the Company and the
failure of the Company's conservator, receiver, liquidator or statutory
successor to pay all or a portion of any claim.
ARTICLE XI
ARBITRATION
11.01. Appointment of Arbitrators. In the event of any disputes or
differences arising hereafter between the contracting parties with reference to
any transaction under or relating in any way to this Agreement as to which
agreement between the parties hereto cannot be reached, the same shall be
decided by arbitration. Three arbitrators will decide any dispute or difference.
The arbitrators must be disinterested officers or retired officers of life
insurance or life reinsurance companies other than the two parties to this
Agreement or their affiliates. Each of the contracting parties agrees to appoint
one of the arbitrators with the third, the "Umpire," to be chosen by the two
appointed arbitrators. In the event that either party should fail to choose an
arbitrator within twenty (20) Business Days following a written request by the
other party to do so, the requesting party may choose the second arbitrator
before entering upon arbitration. In the event that the two arbitrators shall
not be able to agree on the choice of the Umpire within twenty (20) Business
Days following their appointment, each arbitrator shall nominate five candidates
within five Business Days thereafter. Each arbitrator shall decline four of the
candidates nominated by the other arbitrator. The Umpire shall be chosen from
the two remaining candidates by drawing lots. Should the chosen Umpire decline
to serve, the candidate whose lot was not drawn shall be appointed. This process
shall continue until a candidate has agreed to serve.
11.02. Proceedings. The parties will cooperate in good faith in the
voluntary, prompt and informal exchange of non- privileged information relevant
to the arbitration. The parties will make every effort to conclude the
information exchange process within 30 days after notice that the Umpire has
been selected. Within 14 days after the Umpire is selected, the parties will
provide to each other copies of all documents in their possession or control on
which they will or may rely in support of their position. On the request of
either party, the arbitrators will conduct a conference for the purpose of
determining additional information to be exchanged. If the arbitrators determine
that the requesting party has a reasonable need for the information and that the
request is not overly burdensome to the opposing party, the arbitrators may
order the exchange of the additional information.
11.03. Decision. Within 60 days following the appointment of the Umpire,
each party must present its case to the arbitrators. The arbitrators shall
consider customary and standard practices in the life reinsurance business.
Within sixty (60) days after the arbitration hearing, a decision shall be
reached by a majority vote of the arbitrators. There shall be no appeal from
their written decision, which shall be final and binding upon the parties.
Judgment may be entered on the decision of the arbitrators by any court having
jurisdiction.
11.04. Expenses of Arbitration. Each party shall bear the expense of its
own arbitrator (whether selected by that party, or by the other party pursuant
to the procedures set out in Section 11.01) and related outside attorneys' fees,
and shall jointly and equally bear with the other party the expenses of the
third arbitrator.
11.05. Applicable Law. Any arbitration instituted pursuant to this Article
shall be held in the City of Baltimore, State of Maryland, and the laws of the
State of Maryland and, to the extent applicable, the Federal Arbitration Act
shall govern the interpretation and application of this Agreement.
11.06 Survival of Article. This Article shall survive termination of this
Agreement.
11.07. Enforcement. The parties intend this Article to be enforceable in
accordance with the Federal Arbitration Act (9 U.S.C. Section 1 et seq., as
amended). In the event that either party refuses to submit to arbitration as
required by this Article, the other party may request that a United States
District Court compel arbitration in accordance with the Federal Arbitration
Act. Both parties consent to the jurisdiction of such a court to enforce this
Article and to confirm and enforce the performance of an award of the
arbitrators.
ARTICLE XII
SECURITY
12.01. Security. If required in order to give the Company full reinsurance
reserve credit, the Reinsurer shall comply with any necessary financial security
requirements imposed by insurance laws and regulations of the State of Maryland
and of any other state or jurisdiction with respect to which the Company is
ineligible for reserve credit for the reinsurance ceded under this Agreement.
12.02. Establishment of Trust. If credit for reinsurance, as required under
this Article XII, is not otherwise available to the Company with respect to the
reinsurance hereunder, the Reinsurer shall enter into a trust agreement (the
"Trust Agreement") and establish a trust account for the benefit of the Company
with respect to the Reserves on or before the date of filing of the first
financial statement of the Company for which such credit for reinsurance is
required, with a bank or other financial institution acceptable to the Company,
which shall be a Qualified Financial Institution.
12.03. Purpose of Trust. The Reinsurer agrees to deposit, on or before the
date set forth in Section 12.02, and maintain in said Trust Account assets to be
held in trust by the Trustee for the benefit of the Company as security for the
payment of the Reinsurer's obligations to the Company under this Agreement. Such
assets shall initially be in an amount that is equal to or exceeds the Reserves,
with respect to the Reinsured SPDAs, shown on the Company's statutory financial
statements as of the date set forth in Section 12.02, and shall be increased or
decreased, as appropriate, for each Accounting Period in accordance with the
terms of this Agreement and the terms of the
Trust Agreement.
12.04. Trust Assets. The Reinsurer agrees that the assets so deposited, and
assets held in the trust account thereafter, shall consist only of cash (United
States legal tender), certificates of deposit (issued by a United States bank
and payable in United States legal tender), and investments of the types
permitted by Section 09.30.97.08 of the Code of Maryland Regulations.
12.05. Title of Assets. The Reinsurer, prior to depositing assets with the
Trustee, shall execute all assignments and endorsements in blank, and transfer
legal title to the Trustee of all shares, obligations or any other assets
requiring assignments, in order that the Company, or the Trustee upon direction
of the Company, may whenever necessary negotiate any such assets without consent
or signature from the Reinsurer or any other entity.
12.06. Settlements. All settlements of account under the Trust Agreement
between the Company and the Reinsurer shall be made in cash or Cash Equivalents.
12.07. Withdrawals by the Company. The Reinsurer and the Company agree that
the assets in the Trust Account may be withdrawn by the Company at any time,
notwithstanding any other provisions in this Agreement, provided such assets are
applied and utilized by the Company or any successor of the Company by operation
of law, including, without limitation, any liquidator, rehabilitator, receiver
or conservator of the Company, without diminution because of the insolvency of
the Company or the Reinsurer, only for the following purposes:
(i) to reimburse the Company for the Reinsurer's share of surrenders,
withdrawals, death benefits or other amounts specified in Section 7.01 of
this Agreement that have been paid by the Company pursuant to the
provisions of the Reinsured SPDAs;
(ii) to fund an account with the Company in an amount at least equal
to the deduction, for reinsurance ceded, from the Company's liabilities
under Reinsured SPDAs ceded under this Agreement. Such account shall
include, but not be limited to, amounts for policy reserves, claims and
losses incurred (including losses incurred but not reported), and unearned
premium reserves; and
(iii) to pay any other amounts the Company claims are due under
this Agreement.
12.08 Withdrawals by the Reinsurer. The Reinsurer shall have the right to
seek the Company's approval to withdraw all or any part of the assets from the
Trust Account and transfer such assets to the Reinsurer, provided that:
(i) the Reinsurer shall, at the time of withdrawal, replace the
withdrawn assets with other assets of a type permitted hereunder having a
market value equal to the market value of the assets withdrawn, so as to
maintain the Trust Account in the required amount; or
(ii) after such withdrawal and transfer, the market value of the Trust
Account is no less than 102% of the required amount.
In the event that the Reinsurer seeks the Company's approval hereunder, the
Company shall not unreasonably or arbitrarily withhold its approval.
12.09. Return of Assets. In the event that the Company withdraws assets
from the Trust Account for the purposes set forth in Section 12.07(i) or (ii) in
excess of actual amounts required to meet the Reinsurer's obligations to the
Company, or in excess of amounts determined to be due under Section 12.07(iii),
the Company shall return such excess to the Reinsurer, plus interest at the
prime (or base) rate of interest as set forth in Section 8.06 of this Agreement.
In the event of a dispute arising under this Article XII, the arbitration panel
established pursuant to Article XI of this Agreement shall have the right to
award interest at a rate that it determines to be equitable, and may award
attorney's fees, arbitration costs and other expenses.
12.10. Letters of Credit. At the option of the Reinsurer, letters of credit
meeting the requirements of Section 09.30.97.08 of the Code of Maryland
Regulations may be substituted in whole or in part for the Trust Account in
order to provide the credit for reinsurance required hereunder. The letter of
credit will be procured from a Qualified Financial Institution, and may be drawn
down at any time by the Company, only for the purposes set forth in Section
12.07(i), (ii) or (iii) of this Agreement, without diminution because of the
insolvency of the Company or the Reinsurer. If the letter of credit is drawn
down, the provisions of Section 12.09 shall apply to the amount so drawn.
12.11. Expenses. All expenses of establishing and maintaining the Trust
Account or letter of credit shall be paid by the Reinsurer.
ARTICLE XIII
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
13.01. Organization, Standing and Authority of the Company. The Company is
a life insurance company duly organized, validly existing and in good standing
under the laws of the State of Maryland and has all requisite corporate power
and authority to carry on the operations of its business as they are now being
conducted. The Company has all requisite corporate power and authority to own
and transfer ownership of the Investment Assets that are to be transferred in
connection with the Initial Reinsurance Premium.
13.02. Authorization. The Company has all requisite corporate power and
authority to enter into this Agreement and to perform its obligations hereunder.
The execution and delivery by the Company of this Agreement, and the performance
by the Company of its obligations under this Agreement, have been duly
authorized by all necessary corporate action. This Agreement, when duly executed
and delivered by the Company, subject to the due execution and delivery by the
Reinsurer, will be a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
13.03. Assets. With respect to each of the Investment Assets, no consent or
other approval is required to be obtained by the Company to permit the Company
to convey, transfer and sell the Investment Assets to the Reinsurer pursuant to
this Agreement.
13.04. No Conflict or Violation. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby in
accordance with the respective terms and conditions hereof will not (a) violate
any provision of the Articles of Incorporation or Bylaws of the Company, or (b)
violate any order, judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory body against, or binding upon, or any
agreement with, or condition imposed by, any governmental or regulatory body,
foreign or domestic, binding upon the Company.
13.05. Intermediaries and Financial Advisors. Except for Oppenheimer & Co.,
Inc., no reinsurance intermediary or broker or other advisor has acted directly
or indirectly as such for, or is entitled to any compensation from, the Company
in connection with this Agreement.
13.06. Investigations. The Company will notify the Reinsurer immediately,
in writing, of any and all investigations of the Company or its directors,
principal officers or shareholders conducted by any Federal, state or local
governmental or regulatory agency other than routine state insurance department
examinations.
13.07. Approvals of Governmental Authorities.
(a) Except as set forth on Schedule G hereto, no consent, waiver, license,
approval, order or authorization of, or registration, filing or declaration
with, or notices to, any person, entity or Governmental Authority is required to
be obtained, made or given by or with respect to the Company in connection with
(i) the execution and delivery of this Agreement by the Company, or (ii) the
consummation by the Company of the transactions contemplated hereby.
(b) Except as provided below, the Company shall take, and shall cause its
affiliates to take, all reasonable steps necessary or appropriate, and shall
use, and shall cause its affiliates to use, all commercially reasonable efforts,
to obtain as promptly as practicable all consents, waivers, licenses, approvals,
orders and authorizations of, or to make as promptly as practicable all
registrations, filings or declarations with, or notices to, any person, entity
or Governmental Authority listed on Schedule G attached hereto and required to
be obtained by the Company or any of its affiliates in connection with the
consummation of the transactions contemplated by this Agreement. Within five
Business Days of the earlier of (i) receipt of an interpretation from the
Premerger Notification Office that the transaction anticipated by this Agreement
is not exempt from the regulatory requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder (the "Act") and (ii) August 2, 1996, the Company shall take, and
shall cause its affiliates to take, all reasonable steps necessary and
appropriate to make all necessary submissions and filings under the Act and
shall request early termination of the waiting periods under the Act.
(c) The Company shall cooperate with the Reinsurer and its affiliates in
seeking to obtain all such consents, waivers, licenses, approvals, orders and
authorizations, and to make all such registrations, filings, declarations and
notices and shall provide, and shall cause its affiliates to provide, such
information and communications to any person, entity or Governmental Authority
as such person, entity or Governmental Authority may reasonably request in
connection therewith.
ARTICLE XIV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE REINSURER
14.01. Organization, Standing and Authority of the Reinsurer. The Reinsurer
is a life insurance company duly organized, validly existing and in good
standing under the laws of the State of Rhode Island and has all requisite
corporate power and authority to own, lease and operate its properties and
assets and to carry on the operations of its business as they are now being
conducted. The Reinsurer is duly licensed and admitted as an insurer or
accredited as a reinsurer under the laws of all States and jurisdictions of the
United States where failure of the Reinsurer to be so licensed and admitted or
accredited would cause the Company to be ineligible for reserve credit for the
reinsurance ceded under this Agreement, and is authorized under the laws and
regulations of said States and jurisdictions to reinsure the Reinsured SPDAs
under this Agreement.
14.02. Authorization. The Reinsurer has all requisite corporate power and
authority to enter into this Agreement and to perform its obligations hereunder.
The execution and delivery by the Reinsurer of this Agreement, and the
performance by the Reinsurer of its obligations under this Agreement, have been
duly authorized by all necessary corporate action. This Agreement, when duly
executed and delivered by the Reinsurer, subject to the due execution and
delivery by the Company, will be a valid and binding obligation of the
Reinsurer, enforceable against the Reinsurer in accordance with its terms.
14.03. No Conflict or Violation. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby will
not (a) violate any provision of the Articles of Incorporation, Bylaws or other
charter or organizational document of the Reinsurer, or (b) violate any order,
judgment, injunction, award or decree of any court, arbitrator or governmental
or regulatory body against, or binding upon, or any agreement with, or condition
imposed by, any governmental or regulatory body, foreign or domestic, binding
upon the Reinsurer.
14.04 Intermediaries and Financial Advisors. No reinsurance intermediary or
broker or other advisor has acted directly or indirectly as such for, or is
entitled to any compensation from, the Reinsurer in connection with this
Agreement.
14.05. Investigations. The Reinsurer will notify the Company immediately,
in writing, of any and all investigations of the Reinsurer or its directors,
principal officers or shareholders conducted by any Federal, state or local
governmental or regulatory agency other than routine state insurance department
examinations.
14.06. Approvals of Governmental Authorities.
(a) Except as set forth on Schedule H hereto, no consent, waiver, license,
approval, order or authorization of, or registration, filing or declaration
with, or notices to, any person, entity or Governmental Authority is required to
be obtained, made or given by or with respect to the Reinsurer in connection
with (i) the execution and delivery of this Agreement by the Reinsurer, or (ii)
the consummation by the Reinsurer of the transactions contemplated hereby.
(b) Except as provided below, the Reinsurer shall take, and shall cause its
affiliates to take, all reasonable steps necessary or appropriate, and shall
use, and shall cause its affiliates to use, all commercially reasonable efforts,
to obtain as promptly as practicable all consents, waivers, licenses, approvals,
orders and authorizations of, or to make as promptly as practicable all
registrations, filings or declarations with, or notices to, any person, entity
or Governmental Authority listed on Schedule H attached hereto and required to
be obtained by the Reinsurer or any of its affiliates in connection with the
consummation of the transactions contemplated by this Agreement. In addition,
within two days after execution of this Agreement, the Reinsurer shall submit,
or cause to be submitted, a letter to the Premerger Notification Office
requesting an interpretation as to whether the transaction contemplated by this
Agreement is exempt from the reporting requirements of the Act. Within five
Business Days of the earlier of (i) receipt of an interpretation from the
Premerger Notification Office that the transaction anticipated by this Agreement
is not exempt from the regulatory requirements of the Act and (ii) August 2,
1996, the Reinsurer shall take, and shall cause its affiliates to take, all
reasonable steps necessary and appropriate to make all necessary submissions and
filings under the Act and shall request early termination of the waiting periods
under the Act.
(c) The Reinsurer shall cooperate with the Company and its affiliates in
seeking to obtain all such consents, waivers, licenses, approvals, orders and
authorizations, and to make all such registrations, filings, declarations and
notices and shall provide, and shall cause its affiliates to provide, such
information and communications to any person, entity or Governmental Authority
as such person, entity or Governmental Authority may reasonably request in
connection therewith.
14.07. Agency and Distribution Agreements. From the date of this Agreement
through the Termination Date, the Reinsurer shall not, and shall not permit any
of its affiliates to, take any action or omit to take any action that would
cause the Company to be in breach of or to violate any term or provision of any
of the Agency and Distribution Agreements listed on Schedule F hereto. The
Reinsurer shall indemnify the Company and its officers, directors, employees,
affiliates, agents, successors and assigns (the "indemnified parties") against,
and hold the indemnified parties harmless from all losses, claims, damages and
liabilities and shall reimburse the indemnified parties for all expenses of any
kind or nature whatsoever (including reasonable attorneys' fees) as incurred,
that are based upon or arise out of the breach by the Reinsurer of its covenants
and obligations provided for in this Section 14.07.
ARTICLE XV
CONDITIONS TO CLOSING
15.01. Conditions Precedent to Obligation of the Reinsurer. The obligation
of the Reinsurer to consummate the Closing is subject to satisfaction of the
following conditions at or prior to the Closing (unless expressly waived in
writing by the Reinsurer at or prior to the Closing):
(a) All of the terms, covenants and conditions of this Agreement to be
complied with and performed by the Company at or prior to the Closing shall have
been complied with and performed by it, and the representations and warranties
made by the Company in this Agreement shall be true and correct at and as of the
Closing, with the same force and effect as though such representations and
warranties had been made at and as of the Closing.
(b) The Reinsurer shall have received from the Company a certificate dated
the Closing Date and signed by an executive officer of the Company certifying
that the conditions specified in subsection (a) above have been fulfilled.
(c) All consents, waivers, licenses, approvals, orders and authorizations
of, and registrations, filings and declarations with, and notices to, any
person, entity or Governmental Authority listed on Schedule H required in
connection with the consummation of the transactions contemplated hereby shall
have been duly obtained, made or given, including the expiration of any
applicable waiting periods, and shall be in full force and effect at the
Closing.
(d) The Company shall have duly executed and delivered to the Reinsurer the
Form of Joint Election Under IRC Regulation 1.848-2(g)(8) substantially in the
form attached hereto as Exhibit J.
15.02. Conditions Precedent to Obligation of the Company. The obligation of
the Company to consummate the Closing is subject to satisfaction of the
following conditions at or prior to the Closing (unless expressly waived in
writing by the Company at or prior to the Closing):
(a) All of the terms, covenants and conditions of this Agreement to be
complied with and performed by the Reinsurer at or prior to the Closing shall
have been complied with and performed by it, and the representations and
warranties made by the Reinsurer in this Agreement shall be true and correct at
and as of the Closing, with the same force and effect as though such
representations and warranties had been made at and as of the Closing.
(b) The Company shall have received from the Reinsurer a certificate dated
the Closing Date and signed by an executive officer of the Reinsurer certifying
that the conditions specified in subsection (a) above have been fulfilled.
(c) All consents, waivers, licenses, approvals, orders and authorizations
of, and registrations, filings and declarations with, and notices to, any
person, entity or Governmental Authority listed on Schedule G required in
connection with the consummation of the transactions contemplated hereby shall
have been duly obtained, made or given, including the expiration of any
applicable waiting periods, and shall be in full force and effect.
(d) The Reinsurer shall have duly executed and delivered to the Company the
Form of Joint Election Under IRC Regulation 1.848-2(g)(8) substantially in the
form attached hereto as Exhibit J.
(e) The Company shall have received the opinion, dated the Closing Date, of
Bernard R. Beckerlegge, Senior Vice President and General Counsel of the
Reinsurer, in form and substance acceptable to the Company, substantially in the
form attached hereto as Exhibit I.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
16.01. Headings and Schedules. Headings used herein are not a part of this
Agreement and shall not affect the terms hereof. The attached Schedules are a
part of this Agreement.
16.02. Notices. All notices and communications hereunder shall be in
writing and shall be deemed given if received three (3) days after mailing, or
if by telefax or by hand, when received, and if by overnight mail, on the next
day. Any written notice shall be by either certified or registered mail, return
receipt requested, or overnight delivery service (providing for delivery
receipt) or delivered by hand. All notices or communications with the Reinsurer
under this Agreement shall be addressed as follows:
Keyport Life Insurance Company
125 High Street
Boston, Massachusetts
Attention: Paul H. LeFevre, Jr.
Fax No.: (617) 526-1618
All notices and communications with the Company under this Agreement from the
date hereof until September 3, 1996 shall be directed to:
Fidelity and Guaranty Life Insurance Company
6255 Smith Avenue
Baltimore, Maryland 21209-3653
Attention: Chief Actuary
Fax No.: (410) 205-0629
All notices and communications with the Company under this Agreement after
September 3, 1996 shall be directed to:
Fidelity and Guaranty Life Insurance Company
100 East Pratt Street
Baltimore, Maryland 21201
Attention: Chief Actuary
with copies to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
Attention: Michael Groll
Fax No.: (212) 424-8500
Changes in notice addresses or recipients may be made by the Reinsurer
or the Company by following the procedure specified in this section rather than
the procedure for amendment of this Agreement.
16.03. Severability and Governing Law. If any term or provision of this
Agreement shall be held void, illegal, or unenforceable, the validity of the
remaining portions or provisions shall not be affected thereby. This Agreement
shall be governed by the laws of the State of Maryland, without giving effect to
principles of conflicts of law thereof.
16.04. Successors and Assigns. This Agreement may not be assigned by either
party without the prior written consent of the other. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns as permitted herein.
16.05. Execution in Counterparts. This Agreement may be executed by the
parties hereto in any number of counterparts, and by each of the parties hereto
in separate counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.
16.06. Currency. All payments and accounts shall be made in United States
Dollars, and all fractional amounts shall be rounded to the nearest whole
dollar.
16.07. Entire Agreement. This Agreement supersedes all prior discussions
and written and oral agreements and constitutes the sole and entire agreement
between the parties with respect to the subject matter hereof.
16.08. Amendment or Waiver. No amendment or waiver of any provision of this
Agreement shall be effective unless set forth in writing, signed by duly
authorized officers of the parties hereto. A waiver shall constitute a waiver
only with respect to the particular circumstance for which it is given and not a
waiver of any future circumstance.
16.09. Interpretation. For purposes of this Agreement, the words "hereof,"
"herein," "hereby," and other words of similar import refer to this Agreement as
a whole unless otherwise indicated. Whenever the words "include," "includes," or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." Whenever the singular is used herein, the same
shall include the plural, and whenever the plural is used herein, the same shall
include the singular, where appropriate.
16.10. Survival of Representations, Warranties and Agreements. The
Reinsurer or the Company, as the case may be, has the right to rely fully upon
the representations, warranties, covenants and agreements of the Company or the
Reinsurer, as the case may be, contained in this Agreement. All representations
and warranties made by the Company or the Reinsurer in this Agreement shall
survive the execution and delivery hereof. The provisions of Section 3.03,
Section 14.07 and Article XI shall survive the termination of this Agreement.
16.11. No Third-Party Beneficiaries. Nothing in this Agreement is intended
or shall be construed to give any person, other than the parties hereto, their
successors and permitted assigns, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
16.12. Termination of Agreement.
(a) This Agreement may be terminated at any time prior to the Closing Date:
(i) by mutual consent of the Company and the Reinsurer or (ii) by either the
Company or the Reinsurer, if the Closing Date shall not have occurred on or
before October 31, 1996; provided, however, that the right to terminate this
Agreement under this Section 16.12 will not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Closing Date to occur on or before such date.
(b) If this Agreement is terminated pursuant to Section 16.12(a), this
Agreement shall become void and of no effect with no liability on the part of
any party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written by their duly authorized
representatives.
FIDELITY AND GUARANTY LIFE INSURANCE COMPANY
By /s/ Michel Perreault
Name: Michel Perreault
Title: Vice President Chief Actuary
KEYPORT LIFE INSURANCE COMPANY
By /s/ Paul LeFevre
Name: Paul LeFevre
Title: Senior Vice President and Chief
Financial Officer
<PAGE>
AMENDMENT NO. 1 TO COINSURANCE AGREEMENT
AMENDMENT NO. 1 TO COINSURANCE AGREEMENT, dated as of
August 8, 1996 (this "Amendment No. 1"), by and between FIDELITY
AND GUARANTY LIFE INSURANCE COMPANY, a life insurance company
organized under the laws of the State of Maryland (the
"Company"), and KEYPORT LIFE INSURANCE COMPANY, a life insurance
company organized under the laws of the State of Rhode Island
(the "Reinsurer").
WHEREAS, the Company and the Reinsurer have entered
into the Coinsurance Agreement, dated as of July 26, 1996 (the
"Coinsurance Agreement"); and
WHEREAS, the Company and the Reinsurer desire to amend
and modify the Coinsurance Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
Company and the Reinsurer hereby agree that the Coinsurance
Agreement shall be, and hereby is, amended and modified as
follows:
1. The definition of "Blended Rate" in ARTICLE I is hereby
amended and replaced in its entirety to read as follows:
"Blended Rate" means the percentage rate equal to the
sum of (i) two-thirds of the one year Treasury Note
rate as of 3 p.m. on the Business Day which is two days
prior to the Closing Date plus (ii) one-third of the
three year Treasury Note rate as of 3 p.m. on the
Business Day which is two days prior to the Closing
Date.
2. This Amendment No. 1 shall be effective when executed
and delivered by the parties hereto.
3. Except as amended and modified by this Amendment No. 1,
all other terms of the Coinsurance Agreement shall remain
unchanged.
4. This Amendment No. 1 may be executed in two or more
counterparts, each of which shall be deemed to be an original,
but all of which shall constitute one and the same instrument.
5. This Amendment No. 1 shall be governed by the laws of
the State of Maryland, without giving effect to principles of
conflicts of law thereof.
IN WITNESS WHEREOF, each of the Company and the
Reinsurer has caused this Amendment No. 1 to be executed on its
behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
FIDELITY AND GUARANTY LIFE
INSURANCE COMPANY
/s/ Michel Perreault
By ____________________________
Name: Michel Perreault
Title: Vice President-Actuary
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
/s/ Paul LeFevre
By ____________________________
Name: Paul LeFevre
Title: Senior Vice President
and CFO
<PAGE>
AMENDMENT NO. 2 TO COINSURANCE AGREEMENT
AMENDMENT NO. 2 TO COINSURANCE AGREEMENT, dated as of November ______, 1996
(this "Amendment No. 2"), by and between FIDELITY AND GUARANTY LIFE INSURANCE
COMPANY, a life insurance company organized under the laws of the State of
Maryland (the "Company"), and KEYPORT LIFE INSURANCE COMPANY, a life insurance
company organized under the laws of the State of Rhode Island (the "Reinsurer").
WHEREAS, the Company and the Reinsurer have entered into the Coinsurance
Agreement, dated as of July 26, 1996, as amended by Amendment No. 1, dated as of
August 8, 1996 (as so amended, the "Coinsurance Agreement"); and
WHEREAS, the Company and the Reinsurer desire to amend and modify the
Coinsurance Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Reinsurer
hereby agree that the Coinsurance Agreement shall be, and hereby is, amended and
modified as follows:
1. The following definition of "Internal Replacement" is hereby added in
ARTICLE I:
"Internal Replacement" means any instance in which a Reinsured
SPDA is surrendered and another annuity contract that is written by
the company is issued to the owner of the Reinsured SPDA as part of a
direct exchange.
2. The definition of "Reinsured SPDA" in ARTICLE I is hereby amended and
replaced in its entirety to read as follows:
"Reinsured SPDAs" means (I) the SPDAs, including any
Endorsements thereto and (ii) any single premium deferred annuity
contracts replacing SPDAs and any endorsements to SPDAs issued by the
Company on or subsequent to the Effective Date with the consent of the
Reinsurer. Reinsured SPDAs shall not include (i) Retained Asset
Account Funds in existence on the Effective Date and (ii) Internal
Replacements issued in accordance with the terms of Section 9.09 of
this Agreement.
3. Section 7.01(a) is hereby amended and replaced in its entirety to read
as follows:
(a) The Reinsurer shall reimburse the Company, in accordance with
Sections 7.01(b) and 8.01(b), for an amount equal to:
(i) 100.14% of the sum of all (A) death benefits, (B) surrender
or (C) withdrawal payments and periodic payments under annuity
settlement options elected by the owner, and paid by the Company, with
respect to Reinsured SPDAs that become due on or after the Effective
Date; and
(ii) 99% of the Surrender Value as of the date of exchange with
respect to Reinsured SPDAs that are surrendered as an Internal
Replacement on or after the Effective Date (such Account Values,
together with the death benefits and other payments referred to in the
foregone clause (i)(A), (i)(B) and (i)(C) above, are referred to
collectively as "Benefits").
<PAGE>
The reimbursement for Benefits shall be net of surrender charges
pursuant to the terms of the relevant Reinsured SPDAs.
4. ARTICLE IX is hereby retitled, "DURATION, RECAPTURE, TERMINATION AND
INTERNAL REPLACEMENTS."
5. Section 9.09 is hereby added in ARTICLE IX to read as follows:
"Section 9.09. Internal Replacements. The Company shall request,
on five (5) Business Days' written notice to the Reinsurer, the right
to issue an Internal Replacement upon exchange of Reinsured SPDAs. Any
Reinsured SPDA that is surrendered or exchanged in connection with an
Internal Replacement shall be treated as surrendered and the Reinsurer
shall pay to the Company, in accordance with Sections 7.01(a)(ii) and
8.01(b), an amount equal to 99% of the Surrender Value as of the date
of such exchange in respect of such Reinsured SPDA. The other annuity
or insurance contract to which a Reinsured SPDA is converted or for
which it is exchanged as an Internal Replacement, shall not be a
Reinsured SPDA under this Agreement."
6. This Amendment No. 2 shall be effective when executed and
delivered by the parties hereto.
7. Except as amended and modified by this Amendment No. 2, all other terms
of the Coinsurance Agreement shall remain unchanged.
8. This Amendment No. 2 may be executed in two or more counterparts, each
of which shall be deemed to be an original, but all of which shall
constitute one and the same instrument.
9. This Amendment No. 2 shall be governed by the laws of the State of
Maryland, without giving effect to principles of conflicts of law thereof.
IN WITNESS WHEREOF, each of the Company and the Reinsurer has caused this
Amendment No. 2 to be executed on its behalf by it officers thereunto duly
authorized, all as of the day and year first above written.
FIDELITY AND GUARANTY
LIFE INSURANCE COMPANY
/s/ Michel Perreault
By: _______________________________________
Michel Perreault
Vice President, Chief Actuary
KEYPORT LIFE INSURANCE COMPANY
/s/ Paul LeFevre
By: _______________________________________
Paul LeFevre
Senior Vice President and Chief Financial
Officer
Exhibit 11
LIBERTY FINANCIAL COMPANIES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in millions, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Primary net income per common share:
Net income $ 100.7 $ 73.9 $ 50.8
Less: cumulative preferred dividends 0.9 0.7 --
----------- ----------- -----------
Net income available for common shareholders $ 99.8 $ 73.2 $ 50.8
=========== =========== ===========
Weighted average shares outstanding 28,235,951 26,430,481 22,814,204
Common stock equivalents 1,410,083 1,265,228 818,073
----------- ----------- -----------
Total 29,646,034 27,695,709 23,632,277
=========== =========== ===========
Primary net income per common share $ 3.36 $ 2.64 $ 2.15
=========== =========== ===========
Fully diluted net income per common share:
Net income $ 100.7 $ 73.9 $ 50.8
Less: cumulative preferred dividends -- 0.7 --
----------- ----------- -----------
Net income available for common shareholders $ 100.7 $ 73.2 $ 50.8
=========== =========== ===========
Weighted average shares outstanding 28,235,951 26,430,481 22,814,204
Common stock equivalents 1,662,915 1,403,314 818,073
Convertible preferred stock 346,008 -- --
----------- ----------- -----------
Total 30,244,874 27,833,795 23,632,277
=========== =========== ===========
Fully diluted net income per common share $ 3.33 $ 2.63 $ 2.15
=========== =========== ===========
</TABLE>
Exhibit 12
LIBERTY FINANCIAL COMPANIES, INC.
STATEMENT RE COMPUTATION OF RATIOS
($ in millions)
Year Ended
December 31
------------------
1996 1995
-------- ---------
Earnings:
Income before income taxes $150.3 $113.8
Add fixed charges:
Interest on indebtedness 19.7 16.2
Portion of rent representing the interest factor 4.0 3.7
Preferred stock dividends 0.9 0.7
Accretion to face value of redeemable convertible
preferred stock 0.9 0.6
------- ---------
Income as adjusted $175.8 $135.0
======= =========
Fixed charges:
Interest on indebtedness $ 19.7 $ 16.2
Portion of rent representing the interest factor 4.0 3.7
Preferred stock dividends 0.9 0.7
Accretion to face value of redeemable convertible
preferred stock 0.9 0.6
------- ---------
Total fixed charges $ 25.5 $ 21.2
======= =========
Ratio of earnings to fixed charges 6.89x 6.39x
======= =========
Information prior to 1995 pertaining to the computation of ratios is not
presented since the Company's redeemable convertible preferred stock was
issued during 1995.
- ---------------------------------------------------
S E L E C T E D F I N A N C I A L D A T A
- ---------------------------------------------------
Selected Consolidated Financial Data
(in millions, except per share data)
<TABLE>
<CAPTION>
As Of Or For The Year Ended December 31 1996 1995(1) 1994 1993 1992(2)
..............................................................................................................
<S> <C> <C> <C> <C> <C>
Income Statement Data
Investment income $ 796.4 $ 761.8 $ 695.1 $ 675.3 $ 710.0
Interest credited to policyholders (572.7) (555.8) (481.9) (504.2) (571.0)
-------- -------- -------- -------- -------
Investment spread 223.7 206.0 213.2 171.1 139.0
-------- -------- -------- -------- -------
Net realized investment gains (losses) 8.0 (4.0) (8.2) 11.4 3.1
-------- -------- -------- -------- -------
Fee income:
Investment advisory and administrative fees 196.4 155.8 95.9 98.9 88.0
Distribution and service fees 44.9 28.9 -- -- --
Transfer agency fees 43.9 30.8 4.0 5.4 5.0
Surrender charges and net commissions 34.7 23.4 20.0 22.9 24.2
Separate account fees 16.0 13.2 12.5 8.0 5.0
-------- -------- -------- -------- -------
Total fee income 335.9 252.1 132.4 135.2 122.2
-------- -------- -------- -------- -------
Expenses:
Operating expenses (277.9) (225.1) (174.9) (178.9) (175.8)
Amortization of deferred policy acquisition costs (60.2) (58.5) (52.2) (41.0) (17.0)
Amortization of deferred distribution costs (33.9) (18.8) -- -- --
Amortization of value of insurance in force (10.2) (9.5) (17.0) (22.4) (32.4)
Amortization of intangible assets (15.4) (12.2) (5.8) (15.0) (42.3)
Interest expense (19.7) (16.2) (4.2) -- --
-------- -------- -------- -------- -------
Total expenses (417.3) (340.3) (254.1) (257.3) (267.5)
-------- -------- -------- -------- -------
Pretax income (loss) 150.3 113.8 83.3 60.4 (3.2)
Income tax expense (49.6) (39.9) (32.5) (29.1) (9.3)
-------- -------- -------- -------- -------
Net income (loss) $ 100.7 $ 73.9 $ 50.8 $ 31.3 $ (12.5)
======== ======== ======== ======== =======
Per Share Data
Net income (loss) $ 3.36 $ 2.64 $ 2.15 $ 1.32 $ (0.55)
Cash dividends on common stock(3) 0.60 0.45 -- -- --
Dividends on convertible preferred stock 2.88 2.21 -- -- --
Book value 36.63 34.55 27.38 28.00 26.87
Balance Sheet Data
Total investments $11,537.9 $10,144.7 $8,590.2 $8,411.7 $8,151.6
Intangible assets 205.4 192.3 29.3 35.2 50.2
Total assets 14,427.7 12,749.4 10,968.8 10,324.6 9,798.3
Notes payable to affiliates 229.0 229.0 75.0 -- --
Series A redeemable convertible preferred stock 13.8 13.0 -- -- --
Stockholders' equity 1,051.4 956.4 624.7 638.8 612.7
Common stock outstanding 28.7 27.7 22.8 22.8 22.8
</TABLE>
- ------------
1 Amounts for 1995 include data for The Colonial Group, Inc. which was acquired
on March 24, 1995. See Note 2 of Notes to the Consolidated Financial
Statements.
2 In 1992, the Company changed its estimate of the carrying value of certain
intangible assets in its asset management business, resulting in additional
amortization expense of $21.0 million. In addition, in 1992 the Company
accrued $28.2 million for anticipated guaranty fund assessments in its annuity
insurance business in connection with the failure of certain insurance
companies.
3 Amount for 1995 does not include a non-cash dividend of $30.0 million to an
affiliate of Liberty Mutual. See Note 5 of Notes to the Consolidated Financial
Statements.
23
<PAGE>
- ---------------------------------------------------
M A N A G E M E N T ' S D I S C U S S I O N
- ---------------------------------------------------
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of Operations
Net Income was $100.7 million or $3.36 per share in 1996 compared to $73.9
million or $2.64 per share in 1995 and $50.8 million or $2.15 per share in 1994.
The improvement of $26.8 million in 1996 compared to 1995 resulted from higher
investment spread, higher fee income and net realized investment gains in 1996
compared to net realized investment losses in 1995. Partially offsetting these
items were increased operating expenses, amortization expense, interest expense
and income tax expense. The full-period consolidation of the 1995 Colonial and
Newport acquisitions resulted in an $8.9 million increase in 1996 net income
compared to 1995. The improvement of $23.1 million in 1995 compared to 1994
primarily resulted from higher fee income associated with the Colonial and
Newport acquisitions and lower net realized investment losses in 1995. Partially
offsetting these items were decreased investment spread and increased operating
expenses, amortization expense, interest expense and income tax expense.
Pretax Income was $150.3 million in 1996 compared to $113.8 million in 1995
and $83.3 million in 1994. The higher pretax income in 1996 compared to 1995
resulted from higher investment spread, higher fee income, and net realized
investment gains in 1996 compared to net realized investment losses in 1995. The
full-period consolidation of the 1995 Colonial and Newport acquisitions resulted
in an $11.9 million increase in 1996 pretax income compared to 1995. The higher
pretax income in 1995 compared to 1994 was primarily due to the Colonial and
Newport acquisitions, and to lower net realized investment gains. Partially
offsetting these increases in both years were the higher expenses referred to
above.
Investment Spread is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $223.7 million in 1996 compared to $206.0 million in 1995
and $213.2 million in 1994. The amount by which the average yield on investments
exceeds the average interest credited rate on policyholder balances is the
investment spread percentage. Such investment spread percentage in 1996 was
1.89% compared to 1.90% for 1995 and 2.17% for 1994. Assuming a constant
interest rate environment, the Company anticipates that the investment spread
percentage in 1997 will be comparable to 1996.
Investment income was $796.4 million in 1996 compared to $761.8 million in
1995 and $695.1 million in 1994. Investment income increased in 1996 compared to
1995 primarily as a result of the higher level of average invested assets,
24
<PAGE>
partially offset by a decrease in the average investment yield. The average
investment yield was 7.21% in 1996 compared to 7.57% in 1995. The decreased
investment yield in 1996 reflects the lower interest rates prevailing during the
latter half of 1995 and early 1996 and to amortization of S&P 500 Index options.
Investment income increased in 1995 compared to 1994 primarily as a result of
the higher level of average invested assets. The investment yield increased
slightly during 1995. The average investment yield was 7.53% in 1994.
Interest credited to policyholders totaled $572.7 million in 1996 compared
to $555.8 million in 1995 and $481.9 million in 1994. Interest credited to
policyholders increased in 1996 compared to 1995 primarily as a result of a
higher level of average policyholder balances, partially offset by a decrease in
the average interest credited rate. Policyholder balances averaged $10.8 billion
in 1996 compared to $9.8 billion in 1995. The average interest credited rate was
5.32% in 1996 compared to 5.67% in 1995. Interest credited to policyholders
increased in 1995 compared to 1994 primarily as a result of the higher level of
average policyholder balances and to an increase in the average interest
credited rate. Policyholder balances averaged $9.8 billion in 1995 compared to
$9.0 billion in 1994. The average interest credited rate was 5.36% in 1994.
Average Investments (computed without giving effect to SFAS 115), including
a portion of the Company's cash and cash equivalents, were $11.0 billion in 1996
compared to $10.1 billion in 1995 and $9.2 billion in 1994. The increase of $0.9
billion in 1996 compared to 1995 was primarily due to the coinsurance agreement
entered into with Fidelity & Guaranty Life Insurance during the third quarter
(the "F&G Life transaction") and sales of the Company's fixed and indexed
annuities offset, in part, by withdrawals of $1.1 billion. Fixed and indexed
annuity premiums totaled $1.2 billion for 1996 compared to $1.1 billion for 1995
and $1.2 billion in 1994. The increase in premiums in 1996 compared to 1995 was
primarily attributable to the sales of indexed annuities which were introduced
during 1995. Sales of indexed annuities in 1996 totaled $655.2 million compared
to $83.9 million in 1995. The decrease in total premiums in 1995 compared to
1994 was primarily due to lower interest rates prevailing during the latter half
of 1995, making fixed income products less competitive.
Net Realized Investment Gains were $8.0 million in 1996 compared to net
realized investment losses of $4.0 million in 1995 and net realized investment
losses of $8.2 million in 1994. The net realized investment gains in 1996 were
primarily attributable to sales of Keyport fixed maturity investments and sales
of investments received in the F&G Life transaction which were made to maximize
total return. The net realized investment losses in 1995 were attributable to
sales of Keyport fixed maturity investments which were made to maximize total
return. The net realized investment losses in 1994 were primarily due to
write-downs of investments whose declines in value were determined to be other
than temporary.
Investment Advisory and Administrative Fees are based on the market value
of assets managed for mutual funds, wealth management and institutional
investors. Investment advisory and administrative fees were $196.4 million in
1996 compared to $155.8 million in 1995 and $95.9 million in 1994. The increase
of $40.6 million in 1996 compared to 1995 primarily reflects a higher level of
average fee-based assets under management due to the full year consolidation of
25
<PAGE>
Colonial and Newport. A substantial portion of the $59.9 million increase in
1995 compared to 1994 was related to the fee income attributable to the assets
acquired in the Colonial acquisition in March 1995 and the Newport acquisition
in April 1995.
The amount of fee-based assets under management are affected by product
sales and redemptions and by changes in the market values of such assets under
management. Fee-based assets under management and changes in such assets are set
forth in the tables below (in billions).
Fee-Based Assets Under Management
As of December 31
--------------------------------
1996 1995 1994
.............................................................................
Mutual Funds:
Broker-distributed $16.1 $15.7 $1.3
Direct-marketed 6.6 4.8 4.5
Closed-end 1.9 1.8 0.8
Variable annuity 1.1 1.0 0.8
------ ------ -----
25.7 23.3 7.4
Wealth Management 5.3 4.5 4.1
Institutional 4.9 4.1 4.8
------ ------ -----
Total Fee-Based Assets Under Management $35.9 $31.9 $16.3
====== ====== =====
Changes in Fee-Based Assets Under Management
Year Ended December 31
--------------------------------
1996 1995 1994
................................................................................
Fee-based assets under management--beginning $31.9 $16.3 $21.7
Sales and reinvestments 7.5 4.8 2.6
Redemptions and withdrawals (5.7) (8.5) (6.7)
Acquisitions 0.3 14.9 --
Market appreciation (depreciation) 1.9 4.4 (1.3)
----- ----- -----
Fee-based assets under management--ending $35.9 $31.9 $16.3
===== ===== =====
Average fee-based assets under management were $33.9 billion in 1996
compared to $27.2 billion in 1995 and $19.7 billion in 1994. The increase of
$6.7 billion during 1996 compared to 1995 was primarily due to the full year
inclusion of the assets acquired in the Colonial and Newport acquisitions, net
mutual fund sales and market appreciation. The increase of $7.5 billion in 1995
compared to 1994 was due to the Colonial and Newport acquisitions and to market
appreciation. Investment advisory and administrative fees were 0.58% of average
fee-based assets under management in 1996, 0.57% in 1995 and 0.49% in 1994.
These increases in the effective fee rate in 1996 and 1995 were primarily due to
the increased proportion of higher fee-based mutual fund assets under
management.
Distribution and Service Fees are based on the market value of the
Company's broker-distributed mutual funds. Distribution fees of 0.75% are earned
on the average assets attributable to such funds sold without front-end sales
loads, and service fees of 0.25% (net of amounts passed on to selling brokers)
are earned on the total of such average mutual
26
<PAGE>
fund assets. These fees totaled $44.9 million in 1996 compared to $28.9 million
in 1995. There were no such fees prior to the acquisition of Colonial. The
increase of $16.0 million in 1996 compared to 1995 was primarily attributable to
the higher asset levels of mutual funds without front-end sales loads. As a
percentage of weighted average assets, distribution and service fees
approximated 0.69% in each of 1996 and 1995.
Transfer Agency Fees are based on the market value of assets managed in the
Company's broker-distributed and direct-
marketed mutual funds. Such fees were $43.9 million on average assets of $22.6
billion in 1996, $30.8 million on average assets of $17.4 billion in 1995 and
$4.0 million on average assets of $5.6 billion in 1994. The increase of $13.1
million in 1996 compared to 1995 was primarily due to higher average assets in
direct-marketed mutual funds. The revenue increase of $26.8 million in 1995
compared to 1994 was due to the acquisition of Colonial. As a percentage of
total average mutual fund assets under management, transfer agency fees were
approximately 0.19%, 0.18% and 0.07% in 1996, 1995 and 1994, respectively.
Surrender Charges and Net Commissions are revenues earned on: a) the early
withdrawal of fixed, indexed and variable annuity policyholder balances, and
redemptions of the broker-distributed mutual funds which were sold without
front-end sales loads; b) the distribution of the Company's broker-distributed
mutual funds (net of the substantial portion of such commissions that is passed
on to the selling brokers); and c) the sales of non-proprietary investment
products in the Company's bank marketing businesses (net of such commissions
that are paid to the Company's client banks and brokers). Total surrender
charges and net commissions were $34.7 million in 1996 compared to $23.4 million
in 1995 and $20.0 million in 1994.
Surrender charges on fixed, indexed and variable annuity withdrawals
generally are assessed at declining rates applied to policyholder withdrawals
during the first five to seven years of the contract; contingent deferred sales
charges on mutual fund redemptions are assessed at declining rates on amounts
redeemed during the first six years. Such charges totaled $19.8 million, $18.4
million and $11.5 million in 1996, 1995 and 1994, respectively. The increase in
1996 compared to 1995 was primarily attributable to the full-period
consolidation of Colonial. The increase in 1995 compared to 1994 was
attributable to the Colonial acquisition and higher earlier withdrawals subject
to surrender charges for annuity policyholders. Total fixed, indexed and
variable annuity withdrawals represented 11.6%, 9.9%, and 12.6% of the total
average annuity policyholder and separate account balances in 1996, 1995 and
1994, respectively.
Net commissions were $14.9 million in 1996, $5.0 million in 1995 and $8.5
million in 1994. The increase in 1996 compared to 1995 was primarily
attributable to the acquisition of Independent in March 1996. The decrease in
1995 compared to 1994 was primarily attributable to lower sales of investment
and insurance products in the Company's bank marketing business.
27
<PAGE>
Separate Account Fees are primarily mortality and expense charges earned on
variable annuity and variable life policyholder balances. These fees, which are
based on the market values of the assets supporting the contracts in separate
accounts, were $16.0 million in 1996 compared to $13.2 million in 1995 and $12.5
million in 1994. Such fees represented 1.68%, 1.61%, and 1.63% of average
variable annuity and variable life separate account balances in 1996, 1995 and
1994, respectively.
Operating Expenses primarily represent compensation, marketing and other
general and administrative expenses. These expenses were $277.9 million in 1996
compared to $225.1 million in 1995 and $174.9 million in 1994. The increase in
1996 compared to 1995 was primarily due to increases in compensation and
marketing expenses relating to mutual fund sales and to the acquisition of
Independent. The increase in 1995 compared to 1994 includes $66.5 million of
operating expenses related to Colonial and Newport, offset, in part, by
decreases in guaranty fund association expense, stock option plan compensation
expense and certain other operating expenses. Operating expenses expressed as a
percent of average total assets under management were 0.61%, 0.59% and 0.59% in
1996, 1995, and 1994, respectively.
Amortization of Deferred Policy Acquisition Costs was $60.2 million in 1996
compared to $58.5 million in 1995 and $52.2 million in 1994. The increase in
amortization in 1996 compared to 1995 was primarily due to a decrease in
estimated amortization periods determined in the last quarter of 1995 due to
shorter average policy lives, and to the growth of business in force associated
with fixed, indexed and variable annuity sales. The increase in 1995 compared to
1994 was primarily attributable to a decrease in the estimated amortization
periods and lower projected fixed annuity surrender charges; in addition, this
increase was attributable to the growth in business in force during 1995 and
1994. Amortization expense represented 0.51%, 0.55% and 0.53% of the total
average policyholder and separate account balances in 1996, 1995 and 1994,
respectively.
Amortization of Deferred Distribution Costs relates to the deferred sales
commissions acquired in connection with the Colonial acquisition and the
distribution of mutual fund shares sold without front-end sales loads.
Amortization was $33.9 million in 1996 compared to $18.8 million in 1995. There
was no such expense prior to the acquisition of Colonial. The increase in 1996
was primarily attributable to the full period consolidation of Colonial, the
continuing sales of such fund shares during 1996 and 1995 and a $3.8 million
charge in the fourth quarter of 1996 relating to a reduction in the amortization
period.
Amortization of Value of Insurance in Force totaled $10.2 million in 1996
compared to $9.5 million in 1995 and $17.0 million in 1994. The increase in
amortization in 1996 compared to 1995 was primarily due to $2.7 million of
amortization recorded in 1996 relating to the F&G Life transaction, partially
offset by lower amortization in 1996 due to an increase in estimated
amortization periods in the last quarter of 1995 of the Company's closed block
of single premium whole life insurance. The decrease in amortization in 1995
compared to 1994 of $7.5 million was primarily related to the actual persistency
experience and higher expected future profits relating to the Company's closed
block of single premium whole life insurance.
28
<PAGE>
Amortization of Intangible Assets was $15.4 million in 1996 compared to
$12.2 million in 1995 and $5.8 million in 1994. These increases were
attributable to the acquisitions of Independent, Colonial and Newport.
Interest Expense was $19.7 million in 1996 compared to $16.2 million in
1995 and $4.2 million in 1994. These increases are primarily attributable to the
$100.0 million note issued in connection with the Colonial acquisition, the
$24.0 million note issued in connection with the Newport acquisition and the
$30.0 million note issued in 1995 to an affiliate of Liberty Mutual.
Income Tax Expense was $49.6 million or 33.0% of pretax income in 1996
compared to $39.9 million, or 35.1% of pretax income in 1995, and $32.5 million,
or 39.0% of pretax income in 1994. The lower effective tax rates in 1996 and
1995 were attributable primarily to reductions in the deferred tax asset
valuation reserve. There was no such reduction prior to the acquisition of
Colonial in 1995. For all periods, substantially all the federal income tax
expense related to the Company's annuity insurance business.
Financial Condition
Stockholders' Equity as of December 31, 1996 was $1.05 billion compared to
$0.96 billion as of December 31, 1995. Net income in 1996 was $100.7 million,
and cash dividends on the Company's preferred and common stock totaled $3.9
million. Common stock totaling $8.5 million and $2.4 million was issued in
connection with the acquisition of Independent and upon the exercise of stock
options, respectively. A decrease in net unrealized investment gains during the
period decreased stockholders' equity by $12.7 million.
Book Value Per Share amounted to $36.63 at December 31, 1996 compared to
$34.55 at December 31, 1995. Excluding net unrealized gains on investments, book
value per share amounted to $34.04 at December 31, 1996 and $31.40 at December
31, 1995. As of December 31, 1996, there were 28.7 million common shares
outstanding compared to 27.7 million shares as of December 31, 1995.
Investments not including cash and cash equivalents, totaled $11.5 billion
at December 31, 1996 compared to $10.1 billion at December 31, 1995. This
increase reflects the investments received in the F&G Life transaction, fixed
and indexed annuity sales in 1996, withdrawals and a decrease in net unrealized
investment gains.
The Company manages the substantial majority of its invested assets
internally. The Company's general investment policy is to hold fixed maturity
assets for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and appropriate
tax planning, the Company classifies its entire fixed maturities investments as
"available for sale" and accordingly carries such investments at fair value.
29
<PAGE>
The Company's total investments at December 31, 1996 reflected net
unrealized gains of $229.8 million relating to its fixed maturity and equity
portfolios. At December 31, 1995, such net unrealized investment gains were
$308.5 million. The decrease in net unrealized gains in 1996 principally
reflects the higher interest rates at the end of 1996.
Approximately $10.7 billion, or 99.8%, of the fixed maturities investments
at December 31, 1996, was rated by Standard & Poor's Corporation, Moody's
Investors Service or under comparable statutory rating guidelines established by
the National Association of Insurance Commissioners ("NAIC"). At December 31,
1996, the carrying value of investments in below investment grade securities
totaled $987.0 million, or 8.0% of total investments (including certain cash and
cash equivalents) of $12.3 billion. Below investment grade securities generally
provide higher yields and involve greater risks than investment grade securities
because their issuers typically are more highly leveraged and more vulnerable to
adverse economic conditions than investment grade issuers. In addition, the
trading market for these securities may be more limited than for investment
grade securities.
Management of the Company's Investments
Asset-liability duration management is utilized by the Company to minimize
the risks of interest rate fluctuations and disintermediation. The Company
believes that its fixed and indexed policyholder balances should be backed by
investments, principally comprised of fixed maturities, that generate
predictable rates of return. The Company does not have a specific target rate of
return. Instead, its rates of return vary over time depending on the current
interest rates, the slope of the yield curve and the excess at which fixed
maturities are priced over the yield curve. Its portfolio strategy is designed
to achieve adequate risk-adjusted returns consistent with the investment
objectives of effective asset-liability duration management, liquidity and
credit quality.
The Company conducts its investment operations to closely match the
duration of the assets in its investment portfolio to its policyholder balances.
The Company seeks to achieve a predictable spread between what it earns on its
assets and what it pays on its policyholder balances by investing principally in
fixed maturities. The Company's fixed-rate and equity indexed products
incorporate surrender charges to encourage persistency, discourage withdrawals
and make the cost of its policyholder balances more predictable. Approximately
85.4% of the Company's fixed and indexed annuity policyholder balances were
subject to surrender charges at December 31, 1996.
As part of its asset-liability management discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view toward maintaining a desired investment spread between
the yield on portfolio assets and the rate paid on policyholder balances under a
variety of possible future interest rate scenarios. At December 31, 1996, the
effective duration of the Company's fixed maturities investments (including
certain cash and cash equivalents) was approximately 2.8 years.
30
<PAGE>
As a component of its investment strategy, the Company utilizes interest
rate swap agreements ("swap agreements") to match assets more closely to
liabilities. Swap agreements are agreements to exchange with a counterparty
interest rate payments of differing character (e.g. fixed-rate payments
exchanged for variable-rate payments) based on an underlying principal balance
(notional principal) to hedge against interest rate changes. The Company
currently utilizes swap agreements to reduce asset duration and to better match
interest rates earned on longer-term fixed rate assets with interest rates
credited to policyholders. At December 31, 1996, the Company had 39 outstanding
swap agreements with an aggregate notional principal amount of $2.3 billion.
These agreements mature in various years through 2001. In addition, with respect
to the Company's indexed annuity, the Company buys call options on the S&P 500
Index to manage its obligation to provide returns based upon this Index. At
December 31, 1996, the Company had call options with an estimated fair value of
$109.6 million.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap
agreements is the risk associated with counterparty nonperformance. The Company
believes that the counterparties to its swap agreements are financially
responsible and that the counterparty risk associated with these transactions is
minimal. In addition, swap agreements have interest rate risk. However, these
swap agreements hedge fixed-rate assets; any interest rate movements that
adversely affect the market value of swap agreements would be more than offset
by changes in the market values of such fixed rate assets.
The Company routinely reviews its portfolio of investment securities. The
Company identifies monthly any investments that require additional monitoring,
and carefully reviews the carrying value of such investments at least quarterly
to determine whether specific investments should be placed on a nonaccrual basis
and to determine declines in value that may be other than temporary. In making
these reviews, the Company principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent financial
performance, news reports, and other externally generated information concerning
the borrower's affairs. In the case of publicly traded fixed maturities
investments, management also considers market value quotations if available.
Liquidity
The Company is a holding company whose liquidity needs include the
following: (i) operating expenses; (ii) debt service; (iii) dividends on
preferred stock and common stock; (iv) acquisitions; and (v) working capital
where needed to its operating subsidiaries. The Company's principal sources of
cash are dividends from its operating subsidiaries, and, in the case of funding
for acquisitions and certain long-term capital needs of its subsidiaries,
long-term borrowings (which to date have been from affiliates of Liberty
Mutual).
31
<PAGE>
Regulatory authorities permit dividend payments from Keyport to the Company
up to the lesser of (i) 10% of statutory surplus as of the preceding December 31
or (ii) the net gain from operations for the preceding fiscal year. As of
December 31, 1996, Keyport could pay dividends of up to $42.5 million without
the approval of the Department of Business Regulation of the State of Rhode
Island. As of December 31, 1996 under its credit facility, Colonial could pay
dividends of up to $44.7 million.
Based upon the historical cash flow of the Company, the Company's current
financial condition and the Company's expectation that there will not be a
material adverse change in the results of operations of the Company and its
subsidiaries during the next twelve months, the Company believes that cash flow
provided by operating activities over this period will provide sufficient
liquidity for the Company to meet its working capital, capital investment and
other operational cash needs, its debt service obligations, its obligations to
pay dividends on the Preferred Stock, and (assuming Liberty Mutual continues to
participate in 1997 in the Dividend Reinvestment Plan) its intentions to pay
dividends on the Common Stock. The Company's cash flow may be influenced by,
among other things, general economic conditions, realized investment gains and
losses, the interest rate environment, the level of assets under management,
market changes, regulatory changes and tax law changes.
Each of the Company's business segments has its own liquidity needs and
financial resources. In the Company's asset management business, liquidity needs
and financial resources pertain to the investment management and distribution of
mutual funds, wealth management and institutional accounts. In the Company's
annuity insurance operations, liquidity needs and financial resources pertain to
the management of the general account assets and policyholder balances.
Keyport uses cash for the payment of annuity and life insurance benefits,
operating expenses and policy acquisition costs, and the purchase of
investments. Keyport generates cash from net investment income, annuity premiums
and deposits, and from maturities of fixed investments. Annuity premiums,
maturing investments and net investment income have historically been sufficient
to meet Keyport's cash requirements. Keyport monitors cash and cash equivalents
in an effort to maintain sufficient liquidity and has strategies in place to
maintain sufficient liquidity in changing interest rate environments. Consistent
with the nature of its obligations, Keyport has invested a substantial amount of
its general account assets in readily marketable securities. As of December 31,
1996, $8.8 billion of Keyport's investments, including short-term investments,
are considered readily marketable.
To the extent that unanticipated surrenders cause Keyport to sell for
liquidity purposes a material amount of securities prior to their maturity, such
surrenders could have a material adverse effect on the Company. However, Keyport
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or investment
securities in its short duration portfolio, thereby precluding the sale of fixed
maturity investments in a potentially unfavorable market.
32
<PAGE>
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated
results of operations. The Company manages its investment portfolio in part to
reduce its exposure to interest rate fluctuations. In general, the market value
of the Company's fixed maturity portfolio increases or decreases in inverse
relationship with fluctuations in interest rates, and the Company's net
investment income increases or decreases in direct relationship with interest
rate changes. (If interest rates decline the Company's fixed maturity
investments generally will increase in market value, while net investment income
will decrease as fixed maturity investments mature or are sold and the proceeds
are reinvested at reduced rates.) However, inflation may result in increased
operating expenses that may not be readily recoverable in the prices of the
services charged by the Company.
33
<PAGE>
- -----------------------------------------------------------------------
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
- -----------------------------------------------------------------------
Liberty Financial Companies, Inc.
Consolidated Balance Sheets
($ in millions)
<TABLE>
<CAPTION>
December 31 1996 1995
........................................................................................................... .
Assets
<S> <C> <C>
Assets:
Investments $11,537.9 $10,144.7
Cash and cash equivalents 875.8 875.3
Accrued investment income 146.8 132.9
Deferred policy acquisition costs 250.4 179.7
Value of insurance in force 70.8 44.0
Deferred distribution costs 114.4 114.6
Intangible assets 205.4 192.3
Other assets 134.7 106.7
Separate account assets 1,091.5 959.2
---------- ---------
$14,427.7 $12,749.4
========== =========
Liabilities and Stockholders' Equity
Liabilities:
Policy liabilities $11,637.5 $10,084.4
Notes payable to affiliates 229.0 229.0
Revolving credit facility 52.5 61.0
Payable for investments loaned 211.2 317.7
Other liabilities 172.1 149.2
Net deferred tax liability 42.5 49.6
Separate account liabilities 1,017.7 889.1
---------- ---------
Total liabilities 13,362.5 11,780.0
---------- ---------
Series A redeemable convertible preferred stock, par value $.01; authorized,
issued and outstanding 327,340 shares in 1996 and 327,741 shares in 1995 13.8 13.0
---------- ---------
Stockholders' Equity:
Common stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 28,705,015 shares in 1996 and 27,682,536 shares in 1995 0.3 0.3
Additional paid-in capital 835.3 810.5
Net unrealized investment gains 74.4 87.1
Retained earnings 141.4 59.4
Unearned compensation -- (0.9)
---------- ---------
Total stockholders' equity 1,051.4 956.4
---------- ---------
$14,427.7 $12,749.4
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
Liberty Financial Companies, Inc.
Consolidated Income Statements
(in millions, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
..............................................................................................
<S> <C> <C> <C>
Investment income $ 796.4 $ 761.8 $ 695.1
Interest credited to policyholders (572.7) (555.8) (481.9)
------- ------- -------
Investment spread 223.7 206.0 213.2
------- ------- -------
Net realized investment gains (losses) 8.0 (4.0) (8.2)
------- ------- -------
Fee income:
Investment advisory and administrative fees 196.4 155.8 95.9
Distribution and service fees 44.9 28.9 --
Transfer agency fees 43.9 30.8 4.0
Surrender charges and net commissions 34.7 23.4 20.0
Separate account fees 16.0 13.2 12.5
------- ------- -------
Total fee income 335.9 252.1 132.4
------- ------- -------
Expenses:
Operating expenses (277.9) (225.1) (174.9)
Amortization of deferred policy acquisition costs (60.2) (58.5) (52.2)
Amortization of deferred distribution costs (33.9) (18.8) --
Amortization of value of insurance in force (10.2) (9.5) (17.0)
Amortization of intangible assets (15.4) (12.2) (5.8)
Interest expense (19.7) (16.2) (4.2)
------- ------- -------
Total expenses (417.3) (340.3) (254.1)
------- ------- -------
Pretax income 150.3 113.8 83.3
Income tax expense (49.6) (39.9) (32.5)
------- ------- -------
Net income $ 100.7 $ 73.9 $ 50.8
======= ======= =======
Net income per share $ 3.36 $ 2.64 $ 2.15
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
Liberty Financial Companies, Inc.
Consolidated Statements of Stockholders' Equity
(in millions)
<TABLE>
<CAPTION>
Net
Additional Unrealized Total
Common Paid-In Investment Retained Treasury Unearned Stockholders'
Stock Capital Gains Earnings Stock Compensation Equity
--------- ------------- ------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $0.2 $659.8 $ 0.5 $ (21.7) $ 638.8
Adjustment to beginning
balance for change in
accounting principle, net of
taxes 41.6 41.6
------- --------
Proceeds from exercise of stock
options 0.1 0.1
Change in net unrealized
investment gains (106.6) (106.6)
Net income 50.8 50.8
---- ------ ------- ---- --------
Balance, December 31, 1994 0.2 659.9 (64.5) 29.1 624.7
Common stock issued in
Colonial merger 0.1 117.3 117.4
Proceeds from exercise of stock
options 0.7 0.7
Reclassification of accrued
option compensation liability 22.4 $ (2.1) 20.3
Contribution of treasury stock 7.1 $(7.1)
Unearned compensation 1.2 1.2
Accretion to face value of
preferred stock (0.6) (0.6)
Common stock dividends 3.1 (12.3) 7.1 (2.1)
Note issued in connection with
common stock dividend (30.0) (30.0)
Preferred stock dividends (0.7) (0.7)
Change in net unrealized
investment gains 151.6 151.6
Net income 73.9 73.9
---- ------ ------- ---- ---- --------
Balance, December 31, 1995 0.3 810.5 87.1 59.4 (0.9) 956.4
Common stock issued in
Independent acquisition 8.5 8.5
Proceeds from exercise of stock
options 2.4 2.4
Unearned compensation 0.9 0.9
Accretion to face value of
preferred stock (0.9) (0.9)
Common stock dividends 13.9 (16.9) (3.0)
Preferred stock dividends (0.9) (0.9)
Change in net unrealized
investment gains (12.7) (12.7)
Net income 100.7 100.7
---- ------ ------- ------- ------ ------ --------
Balance, December 31, 1996 $0.3 $835.3 $ 74.4 $ 141.4 $ -- $ -- $1,051.4
==== ====== ======= ======= ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
Liberty Financial Companies, Inc.
Consolidated Statements of Cash Flows
(in millions)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
................................................................................................. .
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 100.7 $ 73.9 $ 50.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 74.3 51.6 30.9
Interest credited to policyholders 572.7 555.8 481.9
Net realized investment (gains) losses (8.0) 4.0 8.2
Net amortization (accretion) on investments (29.1) 9.7 12.2
Change in deferred policy acquisition costs (24.4) (24.6) (38.8)
Change in current and deferred income taxes 4.9 13.3 7.7
Net change in other assets and liabilities (81.8) (59.7) (16.1)
--------- --------- ---------
Net cash provided by operating activities 609.3 624.0 536.8
--------- --------- ---------
Cash flows from investing activities:
Investments purchased held to maturity -- -- (277.6)
Investments purchased available for sale (4,493.2) (2,851.0) (2,625.4)
Investments sold held to maturity -- 14.9 10.6
Investments sold available for sale 1,714.0 605.2 950.9
Investments matured held to maturity -- 317.8 576.0
Investments matured available for sale 1,387.7 906.5 854.4
Increase in policy loans, net (34.5) (21.0) (35.1)
Decrease in mortgage loans, net 7.5 55.0 26.5
Acquisitions, net of cash acquired (41.5) (106.0) --
--------- --------- ---------
Net cash used in investing activities (1,460.0) (1,078.6) (519.7)
--------- --------- ---------
Cash flows from financing activities:
Withdrawals from policyholder accounts (1,154.1) (933.8) (1,034.5)
Deposits to policyholder accounts 2,134.5 1,116.9 1,202.1
Securities lending (119.2) 317.7 --
Borrowings from affiliates -- 124.0 --
Repayments under revolving credit (8.5) (19.5) --
Exercise of stock options 2.4 0.7 --
Dividends paid (3.9) (2.8) --
--------- --------- ---------
Net cash provided by financing activities 851.2 603.2 167.6
--------- --------- ---------
Increase in cash and cash equivalents 0.5 148.6 184.7
Cash and cash equivalents at beginning of year 875.3 726.7 542.0
--------- --------- ---------
Cash and cash equivalents at end of year $ 875.8 $ 875.3 $ 726.7
========= ========= =========
</TABLE>
Noncash Investing Activities: The Company made several acquisitions during 1995
using $106.0 million of cash, net of cash acquired. The fair value of assets
acquired was $352.6 million; total liabilities assumed were $108.8 million.
Noncash Financing Activities: Noncash financing activities relate to dividends
paid to an affiliate of Liberty Mutual in the amount of $13.9 million and $10.2
million in 1996 and 1995, respectively, pursuant to the Company's dividend
reinvestment plan with Liberty Mutual and, in 1995, $30.0 million in the form of
an 8.0% note due in 2000.
See accompanying notes to consolidated financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
- --------------------------------------------------------------------------------
Liberty Financial Companies, Inc.
Notes to Consolidated Financial Statements
1. Accounting Policies
Organization
Liberty Financial Companies, Inc. ("the Company") is an asset accumulation
and management company providing investment management products and
retirement-oriented insurance products through multiple distribution channels.
The Company is a majority owned subsidiary of Liberty Mutual Insurance
Company ("Liberty Mutual").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, including Keyport Life Insurance Company ("Keyport"),
Stein Roe & Farnham Incorporated ("Stein Roe"), and, from the date of
acquisition: The Colonial Group, Inc. ("Colonial"), Newport Pacific Management,
Inc. ("Newport") and Independent Holdings, Inc. ("Independent"). All significant
intercompany balances and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Investments in debt and equity securities classified as
available for sale are carried at fair value, and after-tax unrealized gains and
losses (net of adjustments to deferred policy acquisition costs and value of
insurance in force) are reported as a separate component of stockholders'
equity. Realized investment gains and losses are calculated on a first-in,
first-out basis.
On December 31, 1995, pursuant to the "Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities," the
Company made a one-time reclassification of certain fixed maturity
38
<PAGE>
securities from held to maturity to available for sale. The amortized cost of
those securities at the time of transfer was $1.4 billion, and the unrealized
gain of $13.9 million was recorded net of taxes in stockholders' equity.
For the mortgage-backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments over the estimated economic life of the security.
When actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments; and any resulting adjustment is included in
investment income.
Mortgage loans are carried at amortized cost. Policy loans are carried at
the unpaid principal balances plus accrued interest.
Fee Income
Fees from asset management and investment advisory services and from
transfer agent, bookkeeping, distribution and service fees are recognized as
revenues when services are provided. Revenues from single premium deferred
annuities and single premium whole life policies include mortality charges,
surrender charges, policy fees and contract fees and are recognized when earned
under the respective contracts. Net commission revenue is recognized on the
trade date.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new annuity business. Such
costs include commissions, costs of policy issuance and underwriting and selling
expenses. These costs are deferred and amortized in relation to the present
value of estimated gross profits from mortality, investment and expense margins.
Deferred policy acquisition costs are adjusted for amounts relating to
unrealized gains and losses on fixed maturity and equity securities the Company
has designated as available for sale. This adjustment, net of tax, is included
with the change in net unrealized gains or losses that is credited or charged
directly to stockholders' equity. Deferred policy acquisition costs were
decreased by $103.7 million at December 31, 1996 and $151.4 million at December
31, 1995, respectively, relating to this adjustment.
Value of Insurance in Force
Value of insurance in force represents the actuarially-determined present
value of projected future gross profits from policies in force at the date of
their acquisition. This amount is amortized in proportion to the projected
emergence of profits over periods not exceeding 15 years for annuities and 25
years for life insurance.
The value of insurance in force is adjusted for amounts relating to the
recognition of unrealized investment gains and losses. This adjustment, net of
tax, is included with the change in net unrealized gains or losses that is
credited or charged directly to stockholders' equity. Value of insurance in
force was decreased by $26.0 million and $32.5 million at December 31, 1996 and
1995, respectively, relating to this adjustment.
Deferred Distribution Costs
Sales commissions and other direct costs related to the sale of
Company-sponsored broker-distributed funds which do not charge front-end sales
commissions are recorded as deferred distribution costs. Amortization is
provided on a straight-
39
<PAGE>
line basis over periods up to six years to match the estimated period in which
distribution fees will be earned. Contingent deferred sales charges (back-end
loads) received are applied to deferred distribution costs to the extent of the
estimated unamortized portion of such costs, with the remainder recognized as
additional distribution fee income.
Intangible Assets
Intangible assets consist of goodwill and certain identifiable intangible
assets arising from business combinations accounted for as a purchase.
Amortization is provided on a straight-line basis over estimated lives of the
acquired intangibles which range from 5 to 25 years. The carrying value of
intangible assets is adjusted when the expected present value of future gross
profits attributable to such assets is less than their carrying value.
Separate Account Assets and Liabilities
The assets and liabilities resulting from variable annuity and variable
life policies are segregated in separate accounts. Separate account assets,
which are carried at fair value, consist principally of investments in mutual
funds. Investment income and changes in asset values are allocated to the
policyholders, and therefore, do not affect the operating results of the
Company. The Company provides administrative services and bears the mortality
risk related to these contracts. Keyport also classified as separate account
assets investments in Company-sponsored mutual funds of $73.8 million and $72.5
million at December 31, 1996 and 1995, respectively.
Policy Liabilities
Policy liabilities consist of deposits received plus interest credited,
less accumulated policyholder charges, assessments, and withdrawals related to
deferred annuities and single premium whole life policies. Policy benefits that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Income Taxes
The Company is included in the consolidated federal income tax return filed
by Liberty Mutual. Income taxes have been provided using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," and are calculated as if the Company filed its own
consolidated income tax return.
40
<PAGE>
Earnings Per Share
The calculation of earnings per share is based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
each period as follows: 29.65 million in 1996, 27.70 million in 1995, and 23.63
million in 1994.
Cash Equivalents
Short-term investments having an original maturity of three months or less
are classified as cash equivalents.
Recent Accounting Pronouncement
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). The
relevant provisions of SFAS 125 relating to securities lending, dollar rolls and
other similar secured transactions become effective after December 31, 1997. It
is not expected that the adoption of SFAS 125 will have a material effect on the
Company's consolidated financial position or results of operations.
2. Acquisitions
In March 1996, the Company acquired all the outstanding common stock of
Independent, a distributor of annuity and investment products through banks. In
April 1996, the Company acquired all the outstanding capital stock of KJMM
Investment Management Company, Inc., a registered investment advisor primarily
in the wealth management business. The purchase price for these two transactions
has totaled $18.7 million in cash and common stock, and the Company may be
obligated to make additional cash or stock payments through approximately 2000
based upon the attainment of certain performance objectives. These acquisitions
are not material to the financial condition or results of operation of the
Company.
In March 1995, the Company completed the acquisition of Colonial, an
investment advisor, distributor and transfer agent to mutual funds. The purchase
price was $264.8 million, consisting of $100.0 million in cash, 328,209 shares
of redeemable convertible preferred stock and 4,677,808 shares of common stock.
In April 1995 and September 1995, respectively, the Company acquired
Newport and American Asset Management Company, each a registered investment
advisor. The purchase price for these two transactions has totaled $27.8 million
in cash. In addition, at the time of the Newport acquisition the Company made a
capital contribution to Newport in the amount of $3.5 million. The Company may
be obligated in each transaction to make contingent additional cash payments
through approximately 1999 based upon the attainment of certain performance
objectives.
The above transactions were recorded using the purchase method of
accounting and resulted in the recording of intangible assets of $190.7 million,
including goodwill of $92.1 million. Each company's results of operations are
included in the Company's consolidated financial statements from the dates of
their acquisition. The following table
41
<PAGE>
discloses 1995 pro forma results of operations (in millions) for the Company had
the 1995 acquisition occurred as of January 1, 1995. These pro forma results of
operations are not necessarily indicative of actual results which might have
occurred had the Company owned these companies since those dates.
Year Ended December 31 1995
...............................................................................
Revenues $1,044.5
Net income 79.0
Net income per share 2.72
In addition to the above acquisitions, in August 1996, Keyport entered into
a 100 percent coinsurance agreement for a $954.0 million block of single premium
deferred annuities issued by Fidelity & Guaranty Life Insurance Company ("F&G
Life"). Under this transaction, the investment risk of the annuity policies was
transferred to Keyport. However, F&G Life will continue to administer the
policies and will remain contractually liable for the performance of all policy
obligations. This transaction increased investments by $923.1 million and value
of insurance in force by $30.9 million.
3. Investments
Investments, all of which pertain to the Company's annuity insurance
operations, were comprised of the following (in millions):
December 31 1996 1995
...............................................................................
Fixed maturities $10,718.6 $9,536.0
Mortgage loans 67.0 74.5
Policy loans 532.8 498.3
Other invested assets 183.6 10.7
Equity securities 35.9 25.2
---------- ---------
$11,537.9 $10,144.7
========== =========
As of December 31, 1996, the Company did not have a material concentration
of financial instruments in a single investee, industry or geographic location
and no investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of stockholders'
equity.
As of December 31, 1996, $987.0 million of fixed maturities were below
investment grade. These securities represented 8.0% of the Company's total
investments, including certain cash and cash equivalents.
Fixed Maturities
As of December 31, 1996 and 1995, the Company did not hold any investments
in fixed maturities that were classified as held to maturity or as trading
securities. The amortized cost, gross unrealized gains and losses and fair value
of fixed maturity securities are as follows (in millions):
42
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
December 31, 1996 Cost Gains Losses Fair Value
............................................................................................................... .
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 35.3 $ 0.2 $ (0.1) $ 35.4
Mortgage backed securities of U.S. government
corporations and agencies 1,666.1 41.4 (8.6) 1,698.9
Obligations of states and political subdivisions 23.9 0.4 (0.1) 24.2
Debt securities issued by foreign governments 246.3 11.7 (0.5) 257.5
Corporate securities 4,093.5 153.4 (12.3) 4,234.6
Other mortgage backed securities 2,413.0 47.6 (24.0) 2,436.6
Asset backed securities 1,736.0 15.5 (6.4) 1,745.1
Senior secured loans 286.3 -- -- 286.3
--------- ------ ------ ---------
Total fixed maturities $10,500.4 $270.2 $(52.0) $10,718.6
========= ====== ====== =========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
December 31, 1995 Cost Gains Losses Fair Value
............................................................................................................... .
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 360.2 $ 9.0 $ (0.2) $ 369.0
Mortgage backed securities of U.S. government
corporations and agencies 1,585.5 58.8 (5.2) 1,639.1
Obligations of states and political subdivisions 26.7 1.3 -- 28.0
Debt securities issued by foreign governments 57.4 4.3 -- 61.7
Corporate securities 3,479.6 224.3 (7.3) 3,696.6
Other mortgage backed securities 1,951.5 66.6 (71.8) 1,946.3
Asset backed securities 1,543.9 29.8 (1.5) 1,572.2
Senior secured loans 223.1 -- -- 223.1
-------- ------ ------ --------
Total fixed maturities $9,227.9 $394.1 $(86.0) $9,536.0
======== ====== ====== ========
</TABLE>
At December 31, 1996, gross unrealized gains on equity securities, interest
rate cap agreements and investments in separate accounts aggregated $29.9
million, and gross unrealized losses aggregated $5.3 million, respectively. At
December 31, 1995, gross unrealized gains on equity securities, interest rate
cap agreements and investments in separate accounts aggregated $16.9 million,
and gross unrealized losses aggregated $9.3 million, respectively.
Contractual Maturities
The amortized cost and estimated fair value of fixed maturities by
contractual maturity as of December 31, 1996 are as follows (in millions):
Amortized Fair
December 31, 1996 Cost Value
..................................................................
Due in one year or less $ 487.4 $ 489.1
Due after one year through five years 1,522.4 1,559.8
Due after five years through ten years 2,013.4 2,084.9
Due after ten years 662.1 704.1
--------- --------
4,685.3 4,837.9
Mortgage and asset backed securities 5,815.1 5,880.7
--------- --------
$10,500.4 $10,718.6
========= ========
Actual maturities may differ from those shown above because borrowers may
have the right to call or prepay obligations.
43
<PAGE>
Net Investment Income
Net investment income is summarized as follows (in millions):
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
..................................................................................
<S> <C> <C> <C>
Fixed maturities $737.4 $682.0 $636.0
Policy loans 30.2 28.5 26.3
Equity securities 4.5 4.8 2.1
Mortgage loans and other invested assets 11.4 12.9 15.4
Cash and cash equivalents 36.1 41.6 20.7
------ ------ ------
Gross investment income 819.6 769.8 700.5
Investment expenses (6.7) (5.0) (4.6)
Amortization of options and interest rate caps (16.5) (3.0) (0.8)
------ ------ ------
Net investment income $796.4 $761.8 $695.1
====== ====== ======
</TABLE>
There were no non-income producing fixed maturity investments as of
December 31, 1996 or 1995.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) on the investments in the Company's
annuity insurance operations are summarized as follows (in millions):
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
................................................................................................... .
<S> <C> <C> <C>
Fixed maturities held to maturity:
Gross gains $ -- $ 1.3 $ 3.5
Gross losses -- (0.1) (0.8)
Fixed maturities available for sale:
Gross gains 24.3 8.2 26.0
Gross losses (17.8) (16.0) (26.8)
Equity securities 0.9 1.3 (0.8)
Interest rate swaps -- (0.9) --
Other (0.2) -- (0.8)
Impairment writedowns -- -- (11.5)
------ ------ ------
Gross realized investment gains (losses) 7.2 (6.2) (11.2)
------ ------ ------
Amortization adjustments of deferred policy acquisition costs
and value of insurance in force (1.7) 2.2 3.0
------ ------ ------
Net realized investment gains (losses) $ 5.5 $ (4.0) $ (8.2)
====== ====== ======
</TABLE>
Proceeds from sales of fixed maturities available for sale were $1.7
billion, $565.4 million and $927.8 million in 1996, 1995 and 1994, respectively.
In addition to the net realized investment gains (losses) shown above,
additional gains of $2.5 million were realized in 1996 relating to sales of
general corporate securities in the Company's asset management operations.
4. Off Balance Sheet Financial Instruments
The Company's primary objective in acquiring off balance sheet financial
instruments is the management of interest rate risk. Interest rate risk results
from a mismatch in the timing and amount of invested asset and policyholder
liability cash flows. The Company seeks to manage this risk through various
asset/liability management strategies such as the setting of renewal rates and
by investment portfolio actions designed to address the interest rate
sensitivity of asset cash flows in
44
<PAGE>
relation to liability cash flows. Portfolio actions used to manage interest rate
risk primarily include managing the effective duration of portfolio securities
and utilizing interest rate swaps and caps. Outstanding off balance sheet
financial instruments, shown in notional amounts along with their carrying value
and estimated fair values, are as follows (in millions):
<TABLE>
<CAPTION>
Assets (Liabilities)
----------------------------------------------------
1996 1995
------------------------ ---------------------------
Notional Amounts
----------------------- Carrying Fair Carrying Fair
December 31 1996 1995 Value Value Value Value
............................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Interest rate cap agreements $ 450.0 $ 450.0 $ 6.2 $ 1.4 $ 8.8 $ 1.5
Interest rate swaps 2,275.0 1,975.0 (8.8) (8.8) (64.1) (64.1)
Indexed call options -- -- 109.6 109.6 7.8 7.8
</TABLE>
The interest rate cap agreements, which expire in 1997 through 2000,
entitle the Company to receive payments from the counterparties on specified
future dates, contingent on future interest rates. For each cap, the amount of
such payment, if any, is determined by the excess of a market interest rate over
a specified cap rate times the notional amount. The premium paid for the
interest rate caps is included in other invested assets and is being amortized
over the terms of the agreements and is included in net investment income.
Interest rate contracts relating to investments designated as available for sale
are adjusted to fair value with the resulting unrealized gains and losses
included in stockholders' equity. Fair values for these contracts are based on
current settlement values. The current settlement values are based on quoted
market prices and brokerage quotes, which utilize pricing models or formulas
using current assumptions.
The Company uses indexed call options for purposes of hedging its
equity-indexed products. The call options hedge the interest credited on these 1
and 5 year term products, which is based on the changes in the Standard & Poor's
500 Composite Stock Price Index ("S&P Index"). Premiums paid on the call options
are amortized to interest expense over the terms of the underlying
equity-indexed products using the straight line method. Gains and losses, if
any, resulting from the early termination of the call options are deferred and
amortized to interest credited over the remaining term of the underlying
equity-indexed products.
At December 31, 1996 the Company had approximately $73.1 million of
unamortized premium in call option contracts. The call options' maturities range
from 1997 to 2001. The Company carries its S&P Index call options at market
value.
Deferred losses of $7.9 million and $10.6 million as of December 31, 1996
and 1995, respectively, resulting from terminated interest rate swap agreements
are included with the related fixed maturity securities to which the hedge
applied and are being amortized over the life of such securities.
The Company is exposed to potential credit loss in the event of
nonperformance by counterparties on interest rate cap agreements and interest
rate swaps. Nonperformance is not anticipated and, therefore, no collateral is
held or pledged. The credit risk associated with these agreements is minimized
by purchasing such agreements from investment-grade counterparties.
45
<PAGE>
5. Indebtedness
The Company has notes payable to affiliates as follows (in millions):
December 31 1996 1995
.............................................................
8.0% promissory note due April 3, 2000 $99.0 $99.0
8.0% promissory note due March 31, 2000 30.0 30.0
8.5% promissory note due March 24, 2005 100.0 100.0
------ ------
$229.0 $229.0
====== ======
The $100 million 8.5% promissory note becomes due and payable in the event
Liberty Mutual ceases to own more than a 50% interest in the Company. The $30
million 8.0% promissory note was issued in connection with the payment of a
dividend to an affiliate of Liberty Mutual.
The Company has available an $80.0 million revolving credit facility (the
"Facility") which is utilized to finance deferred sales commissions paid in
connection with the distribution of mutual fund shares sold with no up-front
sales charges. This Facility is subject to annual renewal. If not renewed,
effective April 11, 1997, this Facility converts to a term loan which matures on
April 11, 2002. As of December 31, 1996 and 1995, balances of $52.5 million and
$61.0 million were outstanding under the Facility. Upon conversion to a term
loan, minimum quarterly payments of principal equal to 5% of outstanding
borrowings as of the conversion date are required. Interest accrues on the
outstanding borrowings of the Facility at floating rates based upon LIBOR
options plus 0.225%. The Facility contains certain covenants. The Company was in
compliance with these covenants at December 31, 1996.
Interest paid was $22.9 million, $19.2 million and $4.6 million in 1996,
1995 and 1994, respectively.
6. Income Taxes
Incomes tax expense is summarized as follows (in millions):
Year Ended December 31 1996 1995 1994
..............................................................
Current $ 54.8 $39.3 $18.5
Deferred (5.2) 0.6 14.0
---- ------ ------
$ 49.6 $39.9 $32.5
==== ====== ======
46
<PAGE>
A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as follows
(in millions):
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
..........................................................................................................
<S> <C> <C> <C>
Expected income tax expense $ 52.6 $ 39.9 $ 29.1
Increase (decrease) in income taxes resulting from:
Nontaxable investment income (1.2) (1.7) (2.2)
Change in deferred tax asset valuation allowance (6.7) (8.3) 1.0
Amortization of goodwill and other intangible assets 2.0 2.0 4.0
State taxes, net of federal tax benefit 2.5 1.0 0.3
Stock option plan compensation 0.8 6.0 --
Other, net (0.4) 1.0 0.3
---- ---- ----
Income tax expense $ 49.6 $ 39.9 $ 32.5
==== ==== ====
</TABLE>
The components of deferred federal income taxes are as follows (in
millions):
<TABLE>
<CAPTION>
December 31 1996 1995
......................................................................................
<S> <C> <C>
Deferred tax assets:
Policy liabilities $ 171.3 $ 141.0
Guaranty fund expense 6.3 7.7
Stock option plan compensation 3.8 4.9
Deferred compensation and other benefit plans 6.4 6.3
Excess of book over tax basis depreciation and amortization 1.6 1.6
Deferred gain on interest rate swaps -- 0.3
Net operating loss carryforwards 27.6 26.0
Distribution fees 14.8 10.9
Other 7.8 6.4
------- -------
Total deferred tax assets 239.6 205.1
Less: valuation allowance (17.0) (23.7)
------- -------
Net deferred tax assets 222.6 181.4
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs (63.1) (44.5)
Value of insurance in force and intangible assets (20.5) (7.2)
Excess of book over tax basis of investments (125.7) (130.5)
Deferred loss on interest rate swaps -- (3.7)
Deferred revenue (2.0) (1.5)
Amortization of deferred distribution costs (49.8) (41.9)
Other (4.0) (1.7)
------- -------
Total deferred tax liabilities (265.1) (231.0)
------- -------
Net deferred tax liability $ (42.5) $ (49.6)
======= =======
</TABLE>
As of December 31, 1996, the Company had net operating loss carryforwards
relating to certain of the Company's non-insurance operations of $71.1 million.
Utilization of these net operating losses is limited to use against future
taxable profits in these non-insurance operations. As of December 31, 1996, the
Company had approximately $7.6 million of purchased net operating loss
carryforwards (relating to an acquisition in its insurance operations).
Utilization of these net operating loss carryforwards, which expire through
2006, is limited to use against future profits in a component of the Company's
insurance operations. The Company believes that it is more likely than not that
it will realize the benefits of its net deferred tax asset.
47
<PAGE>
Income taxes paid were $45.7 million, $43.2 million and $29.4 million in
1996, 1995 and 1994, respectively.
7. Redeemable Convertible Preferred Stock
The Series A Redeemable Convertible Preferred Stock (the "Preferred
Stock"), with a $50 face value, has an annual cumulative cash dividend rate of
$2.875 per share and is convertible into shares of Company Common Stock at a
rate of 1.0559 for each share of such Preferred Stock. The Preferred Stock is
redeemable at the option of the Company anytime after March 24, 1998 provided
that the market value of the Company's Common Stock exceeds a specified amount.
The Preferred Stock may also be put to the Company by the holders of such
Preferred Stock after March 24, 2000, for a period of sixty days, at face value
plus cumulative unpaid dividends. Each share of Preferred Stock is entitled to
that number of votes equal the number of common shares into which it is
convertible. The difference between the face value of the Preferred Stock and
its fair value at the time of its issuance is being added to the carrying value
of the Preferred Stock ratably over a five year period by a direct charge to
retained earnings.
8. Retirement Plans
The Company maintains a noncontributory defined benefit pension plan (the
"Plan") covering its employees (except employees of Stein Roe and Colonial, who
participate in separate profit sharing plans, and except employees of
Independent.) It is the Company's practice to fund amounts for the Plan
sufficient to meet the minimum requirements of the Employee Retirement Income
Security Act of 1974. Additional amounts are contributed from time to time when
deemed appropriate by the Company. Under the Plan, all employees are vested
after five years of service. Benefits are based on years of service, the
employee's average pay for the highest five consecutive years during the last
ten years of employment and the employee's estimated social security retirement
benefit. The Company also has an unfunded nonqualified Supplemental Pension Plan
("Supplemental Plan"), collectively with the Plan, (the "Plans"), to replace
benefits lost due to limits imposed on Plan benefits under the Internal Revenue
Code. Plan assets consist of investments in certain Company-sponsored mutual
funds.
The following table sets forth the Plans' funded status (in millions) as of
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
December 31 1996 1995
..........................................................................................
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations $ 16.5 $ 13.7
Accumulated benefit obligation 1.8 1.9
------ ------
$ 18.3 $ 15.6
====== ======
Projected benefit obligation $ 23.4 $ 20.7
Plan assets at fair value (11.7) (10.2)
------ ------
Projected benefit obligation in excess of the Plans' assets 11.7 10.5
Unrecognized net actuarial loss (2.0) (2.8)
Prior service cost not yet recognized in net periodic pension cost (3.1) (3.6)
Adjustment for minimum liability -- 1.3
------ ------
Accrued pension cost $ 6.6 $ 5.4
====== ======
</TABLE>
48
<PAGE>
Pension cost includes the following components (in millions):
Year Ended December 31 1996 1995 1994
................................................................................
Service cost benefits earned during the period $ 1.6 $ 1.3 $ 1.6
Interest cost on projected benefit obligation 1.6 1.3 1.2
Actual return on Plan assets (1.3) (1.7) 0.1
Net amortization and deferred amounts 1.1 1.5 (0.1)
----- ----- -----
Total net periodic pension cost $ 3.0 $ 2.4 $ 2.8
===== ===== =====
The assumptions used to develop the actuarial present value of the
projected benefit obligation, and the expected long-term rate of return on plan
assets are as follows:
Year Ended December 31 1996 1995 1994
...........................................................................
Discount rate 7.50% 7.25% 8.25%
Rate of increase in compensation level 5.25% 5.25% 5.25%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
The Company provides various other funded and unfunded defined contribution
plans, which include savings and investment plans, supplemental savings plans,
profit sharing plans, and supplemental profit sharing plans. Expenses related to
these defined contribution plans totaled $7.6 million, $5.4 million and $3.8
million in 1996, 1995 and 1994, respectively.
9. Stock Option Plans
The Company has two stock-based compensation plans, the 1990 Stock Option
Plan (the "1990 Plan") and the 1995 Stock Incentive Plan (the "1995 Plan"). The
1990 Plan provided for grants of incentive and nonqualified stock options, which
were issued from 1990 through 1994. The 1995 Plan provides for grants of
incentive and nonqualified stock options, stock appreciation rights, restricted
stock, unrestricted stock and performance shares, as well as cash and other
awards. To date, only stock options have been granted under the 1995 Plan. A
maximum of 3,145,558 shares of the Company's common stock may be issued under
the 1990 and 1995 Plans. This amount does not include 607,800 nonqualified
options at prices ranging from $1.00 to $31.50 that were assumed by the Company
in connection with the Colonial acquisition.
All options granted under the 1990 Plan were granted at a price not less
than the fair market value of the Company's common stock (determined by the
valuation provisions of the 1990 Plan). All options granted under the 1995 Plan
have been granted at the market price of the Company's common stock on the grant
date. All granted options provide for vesting in four equal annual installments,
beginning one year after the date of grant, and expire 10 years after the grant
date. Compensation expense associated with these plans was $0.9 million, $1.3
million and $6.9 million in 1996, 1995 and 1994, respectively.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. As provided for
under SFAS 123, the fair value for these options was estimated using a
Black-Scholes option pricing model with the following assumptions for 1996 and
49
<PAGE>
1995: risk free interest rate--6.26%; dividend yield--1.99%; expected volatility
of the market price of the Company's common stock--15%; and the weighted average
life of the options--6 years.
For pro forma disclosure purposes, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in millions, except for earnings per share
information):
1996 1995
...................................................
Pro forma net income $99.3 $73.6
Pro forma net income per share 3.33 2.63
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998.
A summary of the stock option activity, and related information for the
years ended December 31 follows (in thousands, except price data):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise- Exercise- Exercise-
Options Price Options Price Options Price
...............................................................................................
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of year 2,755 $ 14.37 2,121 $ 11.96 2,282 $ 10.24
Granted 612 33.00 481 25.75 306 22.96
Assumed -- -- 607 10.24 -- --
Exercised for shares (326) (7.21) (100) (6.80) (4) (10.09)
Forfeited or cashed out (52) (26.92) (354) (10.66) (463) (10.30)
------ ------- ------ ------- ------ -------
Outstanding--end of year 2,989 $ 18.74 2,755 $ 14.37 2,121 $ 11.96
====== ======= ====== ======= ====== =======
Exercisable--end of year 1,806 $ 12.90 1,727 $ 10.88 1,254 $ 10.19
====== ======= ====== ======= ====== =======
Available for grant 349 891
====== ======
Weighted-average fair
value of options granted
during year $ 7.97 $ 6.24
====== ======
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$1.00 to $33.00. The weighted-average remaining contractual life of these
options is 6.75 years.
10. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments. The
aggregate fair value amounts presented herein do not necessarily represent the
underlying value of the Company, and accordingly, care should be exercised in
deriving conclusions about the Company's business or financial condition based
on the fair value information presented herein.
50
<PAGE>
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
Fixed maturities and equity securities: Fair values for fixed maturity
securities are based on quoted market prices, where available. For fixed
maturities not actively traded, the estimated fair values are determined
using values from independent pricing services, or, in the case of private
placements, are determined by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality, and maturity of
the securities. The estimated fair values for equity securities are based on
quoted market prices.
Mortgage loans: The estimated fair value of mortgage loans are determined by
discounting future cash flows to the present at current market rates, using
expected prepayment rates.
Policy loans: The carrying value of policy loans approximates fair value.
Policy liabilities: Deferred annuity contracts are assigned fair value equal
to current net surrender value. Annuitized contracts are valued based on the
present value of the future cash flows at current pricing rates.
Other invested assets, Cash: The carrying value for assets classified as
other invested assets and cash in the accompanying balance sheets
approximates their fair value.
Notes payable to affiliates, Revolving credit facility: Fair values for debt
are estimated using discounted cash flow analyses based on the Company's
incremental borrowing rate for similar types of borrowing arrangements.
The estimated fair values and carrying values of the Company's financial
instruments are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
----------------------------- ---------------------------
Carrying Fair Carrying Fair
December 31 Value Value Value Value
........................................................................................
<S> <C> <C> <C> <C>
Assets:
Fixed maturity securities $10,718.6 $10,718.6 $9,536.0 $9,536.0
Equity securities 35.9 35.9 25.2 25.2
Mortgage loans 67.0 73.4 74.5 79.7
Policy loans 532.8 532.8 498.3 498.3
Other invested assets 183.6 183.6 10.7 10.7
Cash and cash equivalents 875.8 875.8 875.3 875.3
Liabilities:
Policy liabilities 11,637.5 11,127.4 10,084.4 9,650.1
Note payable to affiliates 229.0 229.0 229.0 229.0
Revolving credit facility 52.5 52.5 61.0 61.0
</TABLE>
51
<PAGE>
11. Industry Segment Information
The Company's operations are classified in two business segments: annuity
and asset management. Annuity operations relate principally to the issuance of
fixed, indexed and variable annuity products and a closed block of
investment-oriented life insurance products. Asset management includes mutual
funds, wealth management, and institutional asset management. Information by
industry segment for 1996, 1995 and 1994 is shown below (in millions).
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
.............................................................................................
<S> <C> <C> <C>
Statement of Operations Data
Revenues:
Annuity:
Unaffiliated $ 840.8 $ 790.1 $ 719.0
Intersegment (8.6) (7.7) (6.7)
-------- -------- --------
Total annuity 832.2 782.4 712.3
-------- -------- --------
Asset management:
Unaffiliated 299.5 219.8 100.3
Intersegment 8.6 7.7 6.7
-------- -------- --------
Total asset management 308.1 227.5 107.0
-------- -------- --------
Total revenues $1,140.3 $1,009.9 $ 819.3
======== ======== ========
Income before income taxes:
Annuity:
Income before amortization of intangible assets $ 132.6 $ 101.6 $ 91.4
Amortization of intangible assets (1.1) (1.2) (1.3)
-------- -------- --------
Subtotal annuity 131.5 100.4 90.1
-------- -------- --------
Asset management:
Income before amortization of intangible assets 71.5 55.4 19.3
Amortization of intangible assets (14.1) (10.8) (4.3)
-------- -------- --------
Subtotal asset management 57.4 44.6 15.0
-------- -------- --------
Corporate:
Income before amortization of intangible assets (38.4) (31.0) (21.6)
Amortization of intangible assets (0.2) (0.2) (0.2)
-------- -------- --------
Subtotal corporate (38.6) (31.2) (21.8)
-------- -------- --------
Total income before income taxes $ 150.3 $ 113.8 $ 83.3
======== ======== ========
December 31 1996 1995 1994
............................................................................................... .
Balance Sheet Data
Identifiable Assets:
Annuity $13,924.6 $12,279.2 $10,873.6
Asset management 484.0 469.3 74.3
Corporate 22.0 17.2 28.2
Intercompany eliminations (2.9) (16.3) (7.3)
-------- -------- --------
Total $14,427.7 $12.749.4 $10.968.8
======== ======== ========
</TABLE>
52
<PAGE>
12. Quarterly Financial Data, in Millions, Except Per Share Amounts (unaudited)
<TABLE>
<CAPTION>
March June September December
Quarter Ended 1996 31 30 30 31
............................................................................................
<S> <C> <C> <C> <C>
Investment income $ 189.2 $ 189.8 $ 201.7 $ 215.7
Interest credited to policyholders (138.1) (136.2) (146.0) (152.4)
------- ------- ------- -------
Investment spread 51.1 53.6 55.7 63.3
Net realized investment gains (losses) 3.8 (1.7) 0.7 5.2
Fee income 78.6 83.7 85.9 87.7
Pretax income 36.3 34.0 36.4 43.6
Net income 23.8 23.1 24.7 29.1
Net income per share 0.81 0.77 0.82 0.96
</TABLE>
<TABLE>
<CAPTION>
March June September December
Quarter Ended 19951 31 30 30 31
............................................................................................
<S> <C> <C> <C> <C>
Investment income $ 185.2 $ 190.9 $ 191.2 $ 194.5
Interest credited to policyholders (130.9) (139.2) (143.3) (142.4)
------- ------- ------- -------
Investment spread 54.3 51.7 47.9 52.1
Net realized investment gains (losses) (5.7) (0.7) 1.4 1.0
Fee income 33.3 70.0 72.6 76.2
Pretax income 18.2 32.3 32.7 30.6
Net income 10.1 21.1 21.9 20.8
Net income per share 0.42 0.72 0.76 0.71
</TABLE>
- ------------
1 Includes the results of operations of Colonial since its acquisition date in
March 1995.
13. Statutory Information
Keyport is domiciled in Rhode Island and prepares its statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the Department of Business Regulation of the State of Rhode Island.
Statutory surplus differs from shareholders' equity reported in accordance with
GAAP primarily because policy acquisition costs are expensed when incurred,
investment reserves and policy liabilities are based on different assumptions,
and income tax expense reflects only taxes paid or currently payable. Keyport's
statutory net income and surplus are as follows:
Year Ended December 31 1996 1995 1994
..........................................................
Statutory surplus $567.7 $535.2 $546.4
Statutory net income 40.2 38.3 23.4
14. Transactions with Affiliated Companies
Liberty Mutual from time to time provides management, legal, audit and
financial services to the Company. Reimbursements to Liberty Mutual for these
services totaled $0.6 million in 1996 and $0.9 million in 1995 and 1994. These
reimbursements are based on direct and indirect costs incurred by Liberty Mutual
and are allocated to the Company primarily based upon the amount of time spent
by Liberty Mutual's employees on the Company's behalf. The Company believes that
this allocation methodology is reasonable.
The Company provided asset management services to real estate limited
partnerships for which an affiliate of Liberty Mutual served as the general
partner. The affiliate paid the Company fees for such services which totaled
$6.7 million and $5.7 million in 1995 and 1994, respectively. These limited
partnerships were liquidated in 1995.
53
<PAGE>
During 1996, the Company sold to a wholly owned subsidiary of Liberty
Mutual a wholly owned subsidiary which had provided real estate management
services to certain affiliates of Liberty Mutual. The sales price was $2.1
million, the net book value of the transferred subsidiary.
Regulatory authorities permit dividend payments from Keyport to the Company
up to the lesser of (i) 10% of statutory surplus as of the preceding December 31
or (ii) the net gain from operations for the preceding fiscal year. As of
December 31, 1996, Keyport could pay dividends of up to $42.5 million without
the approval of the Department of Business Regulation of the State of Rhode
Island. As of December 31, 1996 under its credit facility, Colonial could pay
dividends of up to $44.7 million.
15. Commitments and Contingencies
Leases: The Company leases data processing equipment, furniture and certain
office facilities from others under operating leases expiring in various years
through 2009. Rental expense (in millions) amounted to $16.0 million, $14.7
million and $10.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 1996, the following are the minimum future rental payments under
noncancelable operating leases having remaining terms in excess of one year (in
millions):
Year Payments
.....................
1997 $13.4
1998 12.8
1999 12.7
2000 12.7
2001 13.0
Thereafter 37.3
Legal Matters: The Company is involved at various times in litigation
common to its business. In the opinion of management, the resolution of any such
litigation is not expected to have a material adverse effect on the Company's
financial condition or its results of operations.
Regulatory Matters: Under existing guaranty fund laws in all states,
insurers licensed to do business in those states can be assessed for certain
obligations of insolvent insurance companies to policyholders and claimants. The
actual amount of such assessments will depend upon the final outcome of
rehabilitation proceedings and will be paid over several years. In 1996, 1995
and 1994, Keyport was assessed $10.0 million, $8.1 million, and $7.7 million,
respectively. During 1996, 1995 and 1994, Keyport recorded $1.0 million, $2.0
million, and $7.2 million respectively, of provisions for state guaranty fund
association expense. At December 31, 1996 and 1995, the reserve for such
assessments was $12.9 million and $21.9 million, respectively.
54
<PAGE>
- -----------------------------------------------------------------
R E P O R T O F I N D E P E N D E N T A U D I T O R S
- -----------------------------------------------------------------
[ERNST & YOUNG LLP LOGO]
Shareholders and Board of Directors
Liberty Financial Companies, Inc.
We have audited the accompanying consolidated balance sheet of Liberty Financial
Companies, Inc. as of December 31, 1996, and the related consolidated statements
of income, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Liberty Financial Companies, Inc. for the
years ended December 31, 1995 and 1994, were audited by other auditors whose
report dated February 16, 1996, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Liberty
Financial Companies, Inc. at December 31, 1996, and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 5, 1997
55
Exhibit 21
LIBERTY FINANCIAL COMPANIES, INC.
SUBSIDIARIES OF THE COMPANY
Subsidiary Immediate Parent
- ---------- ----------------
The Colonial Group, Inc. ("CGI")* The Company
Liberty Newport Holdings, Limited ("LNHL") The Company
Liberty Financial Services, Inc. ("LFS")* The Company
Independent Holdings, Inc. ("IHI") The Company
SteinRoe Services, Inc. ("SSI")* The Company
Liberty Real Estate Group, Inc. The Company
The PAMCO Group, Inc. The Company
Stein Roe & Farnham Incorporated ("Stein Roe")* SSI
Keyport Life Insurance Company ("Keyport")* SSI
SteinRoe Futures, Inc. Stein Roe
Keyport Financial Services Corp. Keyport
Keyport Advisory Services Corp. Keyport
Independence Life & Annuity Company* Keyport
Colonial Advisory Services, Inc. CGI
Colonial Management Associates, Inc. ("CMA")* CGI
Colonial Investors Service Center, Inc.* CGI
Colonial Investment Services, Inc.* CGI
Newport Pacific Management, Inc. ("NPMI")* LNHL
Newport Fund Management, Inc.* NPMI
Liberty Asset Management Company LFS
Liberty Investment Services, Inc. ("LIS") LFS
Copley Venture Capital, Inc. LFS
Liberty Financial Advisors, Inc. LIS
Liberty Securities Corporation* LIS
LSC Insurance Agency of Arizona, Inc. LIS
LSC Insurance Agency of Maine, Inc. LIS
LSC Insurance Agency of New Mexico, Inc. LIS
LSC Insurance Agency of Nevada, Inc. LIS
Financial Centre Insurance Agency, Inc. LIS
Independent Financial Marketing Group, Inc. ("IFMG")* IHI
Independent Financial Securities, Inc. IFMG
IFS Agencies, Inc. IFMG
IFS Agencies of Alabama, Inc. IFMG
IFS Agencies of New Mexico, Inc. IFMG
IFMG of Maine, Inc. IFMG
* Significant Subsidiaries, as defined in SEC Regulation S-X.
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Liberty Financial Companies, Inc. of our report dated February 5,
1997, included in the 1996 Annual Report to Shareholders of Liberty Financial
Companies, Inc.
Our audit also included the 1996 financial statement schedules of Liberty
Financial Companies, Inc. listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audit. In our opinion, the 1996 financial statement
schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-90626) pertaining to the Liberty Financial
Companies, Inc. 1990 Stock Option Plan, the Liberty Financial Companies, Inc.
1995 Stock Incentive Plan and the Liberty Financial Companies, Inc. 1995
Employee Stock Purchase Plan and in the Registration Statement (Form S-3 No.
333-20067) pertaining to the Liberty Financial Companies, Inc. Dividend
Reinvestment Plan of our report dated February 5, 1997 with respect to the
1996 consolidated financial statements incorporated herein by reference, and
our report included in the preceding paragraph with respect to the 1996
financial statement schedules included in this Annual Report (Form 10-K) of
Liberty Financial Companies, Inc.
Ernst & Young LLP
Boston, Massachusetts
March 26, 1997
Exhibit 23.2
REPORT AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Liberty Financial Companies, Inc.:
Under date of February 16, 1996, we reported on the consolidated balance
sheet of Liberty Financial Companies, Inc. as of December 31, 1995, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the two-year period then ended as contained in
the 1995 annual report to stockholders. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedules as of December 31, 1995, and for each of the
years in the two-year period ended December 31, 1995, listed in Item 14(a)2
of the Form 10-K for 1996. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to
the consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to incorporation by reference in the registration statement (No.
33-90626) on Form S-8 pertaining to the Liberty Financial Companies, Inc.
1990 Stock Option Plan, the Liberty Financial Companies, Inc. 1995 Stock
Incentive Plan and the Liberty Financial Companies, Inc. 1995 Employee Stock
Purchase Plan and in the registration statement (No. 333-20067) on Form S-3
pertaining to the Liberty Financial Companies, Inc. Dividend Reinvestment
Plan of our report dated February 16, 1996, relating to the 1995 consolidated
financial statements incorporated herein by reference, and our report
included in the preceding paragraph with respect to the 1995 financial
statement schedules included in this annual report on Form 10-K of Liberty
Financial Companies, Inc.
KPMG Peat Marwick LLP
Boston, Massachusetts,
March 26, 1997
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