UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2005
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 37-0911756 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices, including Zip Code)
Registrants Telephone Number, Including Area Code: 217-789-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of July 29, 2005, 42,926,628 shares of Common Stock, par value $0.001 per share, were outstanding, net of 17,503,371 shares of treasury stock.
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
INDEX
Page
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PART I - |
FINANCIAL INFORMATION | |||||
Item 1. Financial Statements | ||||||
Report of Independent Registered Public Accounting Firm | 1 | |||||
Consolidated Balance Sheets | 2 | |||||
Consolidated Statements of Operations and Comprehensive Income | 3 | |||||
Consolidated Statements of Changes in Shareholders Equity | 4 | |||||
Consolidated Statements of Cash Flows | 5 | |||||
Notes to Consolidated Financial Statements | ||||||
Note 1 - Basis of Presentation | 6 | |||||
Note 2 - Stock Based Compensation | 7 | |||||
Note 3 - Debt | 8 | |||||
Note 4 - Investments | 10 | |||||
Note 5 - Pension Plans and Other Postretirement Benefits | 11 | |||||
Note 6 - Reinsurance | 14 | |||||
Note 7 - Segment Information | 15 | |||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations | 16 | |||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 41 | |||||
Item 4. Controls and Procedures | 41 | |||||
PART II - |
OTHER INFORMATION | |||||
Item 4. Submission of Matters to a Vote of Security Holders | 43 | |||||
Item 5. Other Information | 43 | |||||
Item 6. Exhibits | 44 | |||||
45 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Horace Mann Educators Corporation:
We have reviewed the accompanying consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of June 30, 2005, and the related consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2005 and 2004, and the related consolidated statements of changes in shareholders equity and cash flows for the six-month periods ended June 30, 2005 and 2004. These consolidated financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2004, and the related consolidated statements of operations, changes in shareholders equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated March 31, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it was derived.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
August 9, 2005
1
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, 2005 |
December 31,
2004 |
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(Unaudited) | ||||||||
ASSETS | ||||||||
Investments |
||||||||
Fixed maturities, available for sale, at fair value (amortized cost, 2005, $3,533,208; 2004, $3,399,254) |
$ | 3,685,609 | $ | 3,541,255 | ||||
Short-term and other investments |
130,242 | 115,835 | ||||||
Short-term investments, loaned securities collateral |
301,088 | 142 | ||||||
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Total investments |
4,116,939 | 3,657,232 | ||||||
Accrued investment income and premiums receivable |
96,927 | 104,530 | ||||||
Deferred policy acquisition costs |
215,964 | 209,576 | ||||||
Goodwill |
47,396 | 47,396 | ||||||
Value of acquired insurance in force |
18,587 | 21,522 | ||||||
Other assets |
66,400 | 76,883 | ||||||
Variable annuity assets |
1,261,967 | 1,254,763 | ||||||
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Total assets |
$ | 5,824,180 | $ | 5,371,902 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Policy liabilities |
||||||||
Fixed annuity contract liabilities |
$ | 1,752,940 | $ | 1,688,075 | ||||
Interest-sensitive life contract liabilities |
606,115 | 593,694 | ||||||
Unpaid claims and claim expenses |
341,226 | 342,445 | ||||||
Future policy benefits |
180,221 | 181,648 | ||||||
Unearned premiums |
194,952 | 204,706 | ||||||
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Total policy liabilities |
3,075,454 | 3,010,568 | ||||||
Other policyholder funds |
146,049 | 142,634 | ||||||
Liability for securities lending agreements |
290,427 | | ||||||
Other liabilities |
224,983 | 218,011 | ||||||
Short-term debt |
| 25,000 | ||||||
Long-term debt |
190,872 | 144,720 | ||||||
Variable annuity liabilities |
1,261,967 | 1,254,763 | ||||||
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Total liabilities |
5,189,752 | 4,795,696 | ||||||
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Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued |
| | ||||||
Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2005, 60,397,449; 2004, 60,350,014 |
60 | 60 | ||||||
Additional paid-in capital |
343,946 | 343,178 | ||||||
Retained earnings |
545,797 | 494,665 | ||||||
Accumulated other comprehensive income (loss), net of taxes: |
||||||||
Net unrealized gains on fixed maturities and equity securities |
92,194 | 85,872 | ||||||
Minimum pension liability adjustment |
(14,992 | ) | (14,992 | ) | ||||
Treasury stock, at cost, 17,503,371 shares |
(332,577 | ) | (332,577 | ) | ||||
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Total shareholders equity |
634,428 | 576,206 | ||||||
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Total liabilities and shareholders equity |
$ | 5,824,180 | $ | 5,371,902 | ||||
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See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
2
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended
June 30, |
Six Months Ended June 30, |
|||||||||||||
2005
|
2004
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2005
|
2004
|
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Revenues |
||||||||||||||
Insurance premiums and contract charges earned |
$ | 168,202 | $ | 169,097 | $ | 336,520 | $ | 336,660 | ||||||
Net investment income |
48,449 | 46,877 | 96,009 | 95,473 | ||||||||||
Net realized investment gains (losses) |
4,300 | (811 | ) | 9,050 | 4,471 | |||||||||
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Total revenues |
220,951 | 215,163 | 441,579 | 436,604 | ||||||||||
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Benefits, losses and expenses |
||||||||||||||
Benefits, claims and settlement expenses |
94,969 | 106,973 | 197,973 | 218,428 | ||||||||||
Interest credited |
28,614 | 26,876 | 56,694 | 53,283 | ||||||||||
Policy acquisition expenses amortized |
18,887 | 17,404 | 37,168 | 33,783 | ||||||||||
Operating expenses |
30,653 | 34,524 | 60,943 | 68,131 | ||||||||||
Amortization of intangible assets |
1,316 | 1,128 | 3,088 | 2,454 | ||||||||||
Interest expense |
2,555 | 1,695 | 4,328 | 3,375 | ||||||||||
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Total benefits, losses and expenses |
176,994 | 188,600 | 360,194 | 379,454 | ||||||||||
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Income before income taxes |
43,957 | 26,563 | 81,385 | 57,150 | ||||||||||
Income tax expense |
10,450 | 7,626 | 21,230 | 16,522 | ||||||||||
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Net income |
$ | 33,507 | $ | 18,937 | $ | 60,155 | $ | 40,628 | ||||||
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Net income per share |
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Basic |
$ | 0.78 | $ | 0.44 | $ | 1.40 | $ | 0.95 | ||||||
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Diluted |
$ | 0.72 | $ | 0.41 | $ | 1.29 | $ | 0.89 | ||||||
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Weighted average number of shares and equivalent shares (in thousands) |
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Basic |
42,886 | 42,732 | 42,876 | 42,727 | ||||||||||
Diluted |
47,832 | 47,311 | 47,769 | 47,294 | ||||||||||
Comprehensive income (loss) |
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Net income |
$ | 33,507 | $ | 18,937 | $ | 60,155 | $ | 40,628 | ||||||
Other comprehensive income (loss), net of taxes: |
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Change in net unrealized gains on fixed maturities and equity securities |
47,313 | (17,276 | ) | 6,322 | (58,267 | ) | ||||||||
Change in minimum pension liability adjustment |
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Other comprehensive income (loss) |
47,313 | (17,276 | ) | 6,322 | (58,267 | ) | ||||||||
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Total |
$ | 80,820 | $ | 1,661 | $ | 66,477 | $ | (17,639 | ) | |||||
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See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
3
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
Six Months Ended June 30, |
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2005
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2004
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Common stock |
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Beginning balance |
$ | 60 | $ | 60 | ||||
Options exercised, 2005, 46,674 shares; 2004, 17,502 shares |
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Conversion of Director Stock Plan units, 2005, 761 shares; 2004, 20,511 shares |
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Ending balance |
60 | 60 | ||||||
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Additional paid-in capital |
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Beginning balance |
343,178 | 342,306 | ||||||
Options exercised and conversion of Director Stock Plan units |
768 | 665 | ||||||
Catastrophe-linked equity put option premium |
| (1,125 | ) | |||||
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Ending balance |
343,946 | 341,846 | ||||||
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Retained earnings |
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Beginning balance |
494,665 | 456,330 | ||||||
Net income |
60,155 | 40,628 | ||||||
Cash dividends, $0.21 per share |
(9,023 | ) | (8,981 | ) | ||||
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Ending balance |
545,797 | 487,977 | ||||||
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Accumulated other comprehensive income (loss), net of taxes: |
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Beginning balance |
70,880 | 64,356 | ||||||
Change in net unrealized gains on fixed maturities and equity securities |
6,322 | (58,267 | ) | |||||
Change in minimum pension liability adjustment |
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Ending balance |
77,202 | 6,089 | ||||||
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Treasury stock, at cost |
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Beginning and ending balance, 2005 and 2004, 17,503,371 shares |
(332,577 | ) | (332,577 | ) | ||||
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Shareholders equity at end of period |
$ | 634,428 | $ | 503,395 | ||||
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See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
4
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended June 30, |
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2005
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2004
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Cash flows - operating activities |
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Premiums collected |
$ | 343,387 | $ | 348,855 | ||||
Policyholder benefits paid |
(209,172 | ) | (218,651 | ) | ||||
Policy acquisition and other operating expenses paid |
(114,667 | ) | (103,923 | ) | ||||
Federal income taxes recovered (paid) |
1,096 | (3,933 | ) | |||||
Investment income collected |
95,588 | 94,408 | ||||||
Interest expense paid |
(4,098 | ) | (2,937 | ) | ||||
Other |
1,329 | 863 | ||||||
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Net cash provided by operating activities |
113,463 | 114,682 | ||||||
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Cash flows - investing activities |
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Fixed maturities |
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Purchases |
(565,174 | ) | (764,228 | ) | ||||
Sales |
295,710 | 431,027 | ||||||
Maturities |
142,179 | 166,010 | ||||||
Net cash provided by (used in) short-term and other investments |
(24,963 | ) | 8,582 | |||||
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Net cash used in investing activities |
(152,248 | ) | (158,609 | ) | ||||
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Cash flows - financing activities |
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Dividends paid to shareholders |
(9,023 | ) | (8,981 | ) | ||||
Principal repayments on Bank Credit Facility |
(25,000 | ) | | |||||
Exercise of stock options |
750 | 665 | ||||||
Catastrophe-linked equity put option premium |
| (1,125 | ) | |||||
Proceeds from issuance of Senior Notes due 2015 |
74,245 | | ||||||
Repurchase of Senior Notes due 2006 |
(29,077 | ) | | |||||
Annuity contracts, variable and fixed |
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Deposits |
159,473 | 170,027 | ||||||
Benefits and withdrawals |
(60,767 | ) | (46,497 | ) | ||||
Net transfer to variable annuity assets |
(61,202 | ) | (61,570 | ) | ||||
Net decrease in life policy account balances |
(2,248 | ) | (2,364 | ) | ||||
Change in bank overdrafts |
(8,366 | ) | (6,228 | ) | ||||
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Net cash provided by financing activities |
38,785 | 43,927 | ||||||
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Net increase (decrease) in cash |
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Cash at beginning of period |
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Cash at end of period |
$ | | $ | | ||||
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See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
5
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005 and 2004
(Dollars in thousands, except per share data)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (HMEC; and together with its subsidiaries, the Company or Horace Mann) have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The Company believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Companys consolidated financial position as of June 30, 2005, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2005 and the consolidated changes in shareholders equity and cash flows for the six months ended June 30, 2005 and 2004. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The subsidiaries of HMEC market and underwrite tax-qualified retirement annuities and private passenger automobile, homeowners, and life insurance products, primarily to educators and other employees of public schools and their families. The Companys principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds.
It is suggested that these financial statements be read in conjunction with the financial statements and the related notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.
The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year.
The Company has reclassified the presentation of certain prior period information to conform with the June 30, 2005 presentation.
6
Note 2 - Stock Based Compensation
The Company grants stock options to executive officers, other employees and directors. The exercise price of the option is equal to the fair market value of the Companys common stock on the date of grant. Additional information regarding the Companys stock-based compensation plans is contained in Notes to Consolidated Financial Statements Note 6 Shareholders Equity and Stock Options of the Companys Annual Report on Form 10-K for the year ended December 31, 2004. The Company accounts for stock option grants using the intrinsic value based method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants which have an exercise price equal to market price on the date of grant resulting in an intrinsic value of $0.
Alternatively, Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, allows companies to recognize compensation cost for stock-based compensation plans, determined based on the fair value at the grant dates. If the Company had applied this alternative accounting method, net income and net income per share would have been reduced to the pro forma amounts indicated below:
Three Months Ended
June 30, |
Six Months Ended
June 30, |
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2005
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2004
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2005
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2004
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Net income |
||||||||||||
As reported |
$ | 33,507 | $ | 18,937 | $ | 60,155 | $ | 40,628 | ||||
Add: Stock-based compensation expense, after tax, included in reported net income |
| | | | ||||||||
Deduct: Stock-based compensation expense, after tax, determined under the fair value based method for all awards (1) |
12 | 9,647 | 23 | 10,956 | ||||||||
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Pro forma |
$ | 33,495 | $ | 9,290 | $ | 60,132 | $ | 29,672 | ||||
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Net income per share basic |
||||||||||||
As reported |
$ | 0.78 | $ | 0.44 | $ | 1.40 | $ | 0.95 | ||||
Pro forma |
$ | 0.78 | $ | 0.22 | $ | 1.40 | $ | 0.69 | ||||
Net income per share diluted |
||||||||||||
As reported |
$ | 0.72 | $ | 0.41 | $ | 1.29 | $ | 0.89 | ||||
Pro forma |
$ | 0.72 | $ | 0.21 | $ | 1.29 | $ | 0.66 |
(1) | The fair value of each option grant was estimated on the date of grant using the Modified Roll-Geske option-pricing model with the following weighted average assumptions for 2005 and 2004, respectively: risk-free interest rates of 4.3% and 4.0%; dividend yield of 2.3% and 2.6%; expected lives of 7 and 10 years; and volatility of 19.4% and 25.1%. The six-month expense amounts represent one-half of the full year expense, reflecting options granted through June 30, 2005 and 2004, respectively, and vesting during the respective calendar years. The expense amounts for the three and six months ended June 30, 2004 also include the impact of accelerated vesting of stock options, as described in Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies Stock Based Compensation of the Companys Annual Report on Form 10-K for the year ended December 31, 2004. |
7
Indebtedness outstanding was as follows:
June 30,
2005 |
December 31,
2004 |
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Short-term debt: |
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Bank Credit Facility |
$ | | $ | 25,000 | ||
Long-term debt: |
||||||
1.425% Senior Convertible Notes, due May 14, 2032. Aggregate principal amount of $244,500 less unaccrued discount of $128,362 (3.0% imputed rate) |
116,138 | 116,138 | ||||
6.05% Senior Notes, due June 15, 2015. Aggregate principal amount of $75,000 less unaccrued discount of $266 (6.1% imputed rate) |
74,734 | | ||||
6 5 / 8 % Senior Notes, due January 15, 2006. Aggregate principal amount of $28,600 less unaccrued discount of $18 (6.7% imputed rate) |
| 28,582 | ||||
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Total |
$ | 190,872 | $ | 169,720 | ||
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The 1.425% Senior Convertible Notes due 2032 and 6 5 / 8 % Senior Notes due 2006 are described in Notes to Consolidated Financial Statements Note 5 Debt of the Companys Annual Report on Form 10-K for the year ended December 31, 2004.
Credit Agreement with Financial Institutions (Bank Credit Facility)
On May 31, 2005, the Company entered into a new Bank Credit Agreement which provides for unsecured borrowings of up to $100,000 (the Current Bank Credit Facility). The Current Bank Credit Facility expires on May 30, 2009. Interest accrues at varying spreads relative to corporate or eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate. The unused portion of the Current Bank Credit Facility is subject to a variable commitment fee, which was 0.175% on an annual basis at June 30, 2005. On May 31, 2005, the Company borrowed $25,000 and subsequently repaid this balance in full on June 13, 2005, utilizing a portion of the proceeds from the issuance of the Senior Notes due 2015, described below.
On May 29, 2002, Horace Mann Educators Corporation entered into a Bank Credit Agreement that was amended effective June 1, 2004, increasing the commitment amount to $35,000, and May 3, 2005, extending the commitment termination date to June 30, 2005 from the previous termination date of May 31, 2005 (the Previous Bank Credit Agreement). The Previous Bank Credit Agreement was terminated on May 31, 2005, when the Company entered into the Current Bank Credit Facility. The $25,000 balance outstanding under the Previous Bank Credit Agreement was repaid in full on May 31, 2005, utilizing the borrowing under the Current Bank Credit Facility, described above.
8
Note 3 Debt-(Continued)
6.05% Senior Notes due 2015 (Senior Notes due 2015)
On June 9, 2005, the Company issued $75,000 face amount of senior notes at an effective yield of 6.1%, which will mature on June 15, 2015. Interest on the Senior Notes due 2015 is payable semi-annually at a rate of 6.05%. The Senior Notes due 2015 are redeemable in whole or in part, at any time, at the Companys option, at a redemption price equal to the greater of (1) 100% of their principal amount or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semi-annual basis, at the Treasury yield (as defined in the indenture) plus 30 basis points, plus, in either of the above cases, accrued interest to the date of redemption.
As of June 30, 2005, the net proceeds from the sale of the Senior Notes due 2015 have been used to (1) repay the Current Bank Credit Facility and (2) redeem the Senior Notes due 2006, described below. As of the date of this Report on Form 10-Q, management anticipates utilizing the remaining proceeds to recapture the Companys life reinsurance agreement with the United States branch of Sun Life Assurance Company of Canada. See also Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Financial Resources Capital Resources.
6 5 / 8 % Senior Notes due 2006 (Senior Notes due 2006)
On June 30, 2005, the Company redeemed all of its outstanding Senior Notes due 2006, $28,600 aggregate principal amount, utilizing a portion of the proceeds from the issuance of the Senior Notes due 2015, described above. The aggregate cost of the repurchase was $29,107.
Universal Shelf Registration
To provide additional capital management flexibility, the Company filed a universal shelf registration on Form S-3 with the SEC in December 2003. The registration statement, which registers the offer and sale by the Company from time to time of up to $300,000 of various securities, which may include debt securities, preferred stock, common stock and/or depositary shares, was declared effective on December 30, 2003. The $75,000 face amount of Senior Notes due 2015 was issued utilizing this registration statement. No other securities associated with the registration statement have been issued as of the date of this Report on Form 10-Q.
Debt Retirement Charges
The repurchase of the Senior Notes due 2006 resulted in a pretax charge to income for the three and six months ended June 30, 2005 of $507, which was reported as a component of interest expense for these periods.
9
Fixed Maturity Securities
The following table presents the composition and value of the Companys fixed maturity securities portfolio by rating category. The Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
Percent of Fair Value
|
June 30, 2005
|
|||||||||||
Rating of Fixed Maturity Securities (1) |
June 30,
2005 |
December 31,
2004 |
Fair Value (2) |
Amortized
Cost |
||||||||
AAA |
41.9 | % | 42.0 | % | $ | 1,544,196 | $ | 1,519,373 | ||||
AA |
7.8 | 7.5 | 286,929 | 277,360 | ||||||||
A |
24.3 | 24.3 | 895,928 | 829,940 | ||||||||
BBB |
20.0 | 20.3 | 738,933 | 691,546 | ||||||||
BB |
2.4 | 1.8 | 87,431 | 87,044 | ||||||||
B |
3.4 | 3.7 | 125,390 | 123,553 | ||||||||
CCC or lower |
0.1 | 0.3 | 3,767 | 1,350 | ||||||||
Not rated (3) |
0.1 | 0.1 | 3,035 | 3,042 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total |
100.0 | % | 100.0 | % | $ | 3,685,609 | $ | 3,533,208 | ||||
|
|
|
|
|
|
|
|
(1) | Ratings are as assigned primarily by Standard & Poors Corporation (S&P) when available, with remaining ratings as assigned on an equivalent basis by Moodys Investors Service, Inc. (Moodys). Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. |
(2) | Fair values are based on quoted market prices, when available. Fair values for private placements and certain other securities that are infrequently traded are estimated by the Company with the assistance of its investment advisors utilizing recognized valuation methodology, including cash flow modeling. |
(3) | This category includes $3,035 of private placement securities not rated by either S&P or Moodys. The National Association of Insurance Commissioners (NAIC) has rated 100% of these private placement securities as investment grade. |
The following table presents the distribution of the Companys fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities by reflecting assumptions regarding borrowers utilization of the right to call or prepay obligations with or without call or prepayment penalties. Estimated expected maturities consider broker dealer survey values and are verified for consistency with the interest rate and economic environments.
Percent of Total
|
Fair Value
|
||||||||
June 30,
2005 |
December 31,
2004 |
June 30,
2005 |
|||||||
Due in 1 year or less |
8.6 | % | 7.9 | % | $ | 317,807 | |||
Due after 1 year through 5 years |
27.1 | 26.1 | 997,890 | ||||||
Due after 5 years through 10 years |
38.5 | 40.7 | 1,417,994 | ||||||
Due after 10 years through 20 years |
8.1 | 7.5 | 300,196 | ||||||
Due after 20 years |
17.7 | 17.8 | 651,722 | ||||||
|
|
|
|
|
|
||||
Total |
100.0 | % | 100.0 | % | $ | 3,685,609 | |||
|
|
|
|
|
|
The average option adjusted duration for the Companys fixed maturity securities was 5.6 years at June 30, 2005.
10
Note 4 - Investments-(Continued)
The Companys investment portfolio includes no derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics).
Securities Lending
The Company loans fixed income securities to third parties, primarily major brokerage firms. As of June 30, 2005 and December 31, 2004, fixed maturities with a fair value of $290,427 and $0, respectively, were on loan. Loans of securities are required at all times to be secured by collateral from borrowers at least equal to 100% of the market value of the securities loaned. The Company maintains effective control over the loaned securities and therefore reports them as Fixed Maturity Securities in the Consolidated Balance Sheets. Securities lending collateral is classified as investments with a corresponding liability in the Companys Consolidated Balance Sheets.
Note 5 - Pension Plans and Other Postretirement Benefits
The Company has the following retirement plans: a defined contribution plan; a 401(k) plan; a defined benefit plan for employees hired on or before December 31, 1998; and certain employees participate in a supplemental defined benefit plan or a supplemental defined contribution plan or both. Additional information regarding the Companys retirement plans is contained in Notes to Consolidated Financial Statements Note 10 Pension Plans and Postretirement Benefits of the Companys Annual Report on Form 10-K for the year ended December 31, 2004.
11
Note 5 - Pension Plans and Other Postretirement Benefits-(Continued)
The following table summarizes the components of net periodic pension cost recognized for the defined benefit plan and the supplemental defined benefit plans for the three and six months ended June 30, 2005 and 2004.
Defined Benefit Plan
|
Supplemental
Defined Benefit Plans |
|||||||||||||||
Three Months Ended
June 30, |
Three Months Ended
June 30, |
|||||||||||||||
2005
|
2004
|
2005
|
2004
|
|||||||||||||
Components of net periodic pension expense: |
||||||||||||||||
Service cost |
$ | | $ | | $ | (7 | ) | $ | (7 | ) | ||||||
Interest cost |
625 | 776 | 229 | 243 | ||||||||||||
Expected return on plan assets |
(594 | ) | (678 | ) | | | ||||||||||
Recognized net actuarial loss |
380 | 382 | 156 | 132 | ||||||||||||
Settlement loss |
412 | 523 | | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net periodic pension expense |
$ | 823 | $ | 1,003 | $ | 378 | $ | 368 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Defined Benefit Plan
|
Supplemental Defined Benefit Plans |
|||||||||||||||
Six Months Ended
June 30, |
Six Months Ended June 30, |
|||||||||||||||
2005
|
2004
|
2005
|
2004
|
|||||||||||||
Components of net periodic pension expense: |
||||||||||||||||
Service cost |
$ | | $ | | $ | (14 | ) | $ | (14 | ) | ||||||
Interest cost |
1,250 | 1,552 | 458 | 486 | ||||||||||||
Expected return on plan assets |
(1,188 | ) | (1,356 | ) | | | ||||||||||
Recognized net actuarial loss |
760 | 764 | 312 | 264 | ||||||||||||
Settlement loss |
824 | 1,047 | | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net periodic pension expense |
$ | 1,646 | $ | 2,007 | $ | 756 | $ | 736 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At the time of this Quarterly Report on Form 10-Q, the Company expects to contribute approximately $4,500 to the defined benefit plan and $1,035 to the supplemental defined benefit plans in 2005, of which $510 was contributed to the supplemental defined benefit plans during the six months ended June 30, 2005.
12
Note 5 - Pension Plans and Other Postretirement Benefits-(Continued)
In addition to providing pension benefits, the Company also provides certain health care and life insurance benefits to retired employees, who meet the eligibility requirements, and their eligible dependents. The following table summarizes the components of the net periodic benefit cost of postretirement benefits other than pension for the three and six months ended June 30, 2005 and 2004.
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
2005
|
2004
|
2005
|
2004
|
|||||||||||||
Components of net periodic cost: |
||||||||||||||||
Service cost |
$ | 22 | $ | 25 | $ | 44 | $ | 51 | ||||||||
Interest cost |
449 | 456 | 898 | 912 | ||||||||||||
Amortization of prior service cost |
(180 | ) | (179 | ) | (360 | ) | (359 | ) | ||||||||
Recognized net actuarial loss |
118 | 33 | 236 | 67 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net periodic benefit cost |
$ | 409 | $ | 335 | $ | 818 | $ | 671 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Consistent with disclosure in Notes to Consolidated Financial Statements Note 10 Pension Plans and Postretirement Benefits of the Companys Annual Report on Form 10-K for the year ended December 31, 2004, the Company expects to contribute $2,140 to the postretirement benefit plan in 2005, of which $831 was contributed during the six months ended June 30, 2005.
13
The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:
Three months ended June 30, 2005 |
Gross
Amount |
Ceded
|
Assumed
|
Net
|
||||||||
Premiums written and contract deposits |
$ | 251,089 | $ | 6,381 | $ | 2,594 | $ | 247,302 | ||||
Premiums and contract charges earned |
171,820 | 6,876 | 3,258 | 168,202 | ||||||||
Benefits, claims and settlement expenses |
98,721 | 6,367 | 2,615 | 94,969 | ||||||||
Three months ended June 30, 2004 |
||||||||||||
Premiums written and contract deposits |
$ | 257,967 | $ | 6,437 | $ | 4,504 | $ | 256,034 | ||||
Premiums and contract charges earned |
171,257 | 6,743 | 4,583 | 169,097 | ||||||||
Benefits, claims and settlement expenses |
109,134 | 5,599 | 3,438 | 106,973 | ||||||||
Six months ended June 30, 2005 |
||||||||||||
Premiums written and contract deposits |
$ | 489,182 | $ | 13,166 | $ | 5,036 | $ | 481,052 | ||||
Premiums and contract charges earned |
344,011 | 14,126 | 6,635 | 336,520 | ||||||||
Benefits, claims and settlement expenses |
202,330 | 9,486 | 5,129 | 197,973 | ||||||||
Six months ended June 30, 2004 |
||||||||||||
Premiums written and contract deposits |
$ | 503,662 | $ | 11,584 | $ | 8,774 | $ | 500,852 | ||||
Premiums and contract charges earned |
340,269 | 12,693 | 9,084 | 336,660 | ||||||||
Benefits, claims and settlement expenses |
221,202 | 9,349 | 6,575 | 218,428 |
14
The Company conducts and manages its business through four segments. The three operating segments, representing the major lines of insurance business, are: property and casualty insurance, principally personal lines automobile and homeowners products; annuity products, principally individual, tax-qualified fixed and variable deposits; and life insurance. The Company does not allocate the impact of corporate level transactions to the insurance segments, consistent with managements evaluation of the results of those segments, but classifies those items in the fourth segment, corporate and other. Historically, in addition to debt service, realized investment gains and losses and certain public company expenses, such charges have included restructuring charges, debt retirement costs, litigation charges and the provision for prior years taxes. Summarized financial information for these segments is as follows:
Three Months Ended
June 30, |
Six Months Ended June 30, |
|||||||||||||||
2005
|
2004
|
2005
|
2004
|
|||||||||||||
Insurance premiums and contract charges earned |
||||||||||||||||
Property and casualty |
$ | 139,291 | $ | 141,392 | $ | 279,556 | $ | 280,992 | ||||||||
Annuity |
4,408 | 4,116 | 8,726 | 8,273 | ||||||||||||
Life |
24,503 | 23,589 | 48,238 | 47,395 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
$ | 168,202 | $ | 169,097 | $ | 336,520 | $ | 336,660 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net investment income |
||||||||||||||||
Property and casualty |
$ | 8,414 | $ | 8,183 | $ | 16,437 | $ | 16,967 | ||||||||
Annuity |
27,929 | 26,777 | 55,616 | 54,192 | ||||||||||||
Life |
12,222 | 12,220 | 24,375 | 24,922 | ||||||||||||
Corporate and other |
168 | (15 | ) | 149 | (32 | ) | ||||||||||
Intersegment eliminations |
(284 | ) | (288 | ) | (568 | ) | (576 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
$ | 48,449 | $ | 46,877 | $ | 96,009 | $ | 95,473 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
||||||||||||||||
Property and casualty |
$ | 22,204 | $ | 15,236 | $ | 41,923 | $ | 28,309 | ||||||||
Annuity |
3,056 | 2,687 | 5,480 | 6,592 | ||||||||||||
Life |
4,878 | 3,233 | 8,109 | 6,330 | ||||||||||||
Corporate and other |
3,369 | (2,219 | ) | 4,643 | (603 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
$ | 33,507 | $ | 18,937 | $ | 60,155 | $ | 40,628 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Amortization of intangible assets, pretax (included in segment net income) |
||||||||||||||||
Value of acquired insurance in force |
||||||||||||||||
Annuity |
$ | 944 | $ | 738 | $ | 2,344 | $ | 1,674 | ||||||||
Life |
372 | 390 | 744 | 780 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
$ | 1,316 | $ | 1,128 | $ | 3,088 | $ | 2,454 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2005 |
December 31,
2004 |
|||||||
Assets |
||||||||
Property and casualty |
$ | 879,544 | $ | 870,627 | ||||
Annuity |
3,707,275 | 3,489,688 | ||||||
Life |
1,162,974 | 962,564 | ||||||
Corporate and other |
99,871 | 94,513 | ||||||
Intersegment eliminations |
(25,484 | ) | (45,490 | ) | ||||
|
|
|
|
|
|
|||
Total |
$ | 5,824,180 | $ | 5,371,902 | ||||
|
|
|
|
|
|
15
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share data)
Forward-looking Information
Statements made in the following discussion that state the Companys or managements intentions, hopes, beliefs, expectations or predictions of future events or the Companys future financial performance are forward-looking statements and involve known and unknown risks, uncertainties and other factors. Horace Mann is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that the Companys actual results could differ materially from those projected in forward-looking statements due to, among other risks and uncertainties inherent in the Companys business, the following important factors:
| Changes in the composition of the Companys assets and liabilities which may result from occurrences such as acquisitions, divestitures, impairment in asset values or changes in estimates of insurance reserves. |
| Fluctuations in the market value of securities in the Companys investment portfolio and the related after-tax effect on the Companys shareholders equity and total capital through either realized or unrealized investment losses. In addition, the impact of fluctuations in the financial markets on the Companys defined benefit pension plan assets and the related after-tax effect on the Companys operating expenses, shareholders equity and total capital. |
| The impact of fluctuations in the financial markets on the Companys variable annuity fee revenues, valuations of deferred policy acquisition costs and value of acquired insurance in force, and the level of guaranteed minimum death benefit reserves. |
| The impact of fluctuations in the capital markets on the Companys ability to refinance outstanding indebtedness or repurchase shares of the Companys common stock. |
| Defaults on interest or dividend payments in the Companys investment portfolio due to credit issues and the resulting impact on investment income. |
| Prevailing interest rate levels, including the impact of interest rates on (i) unrealized gains and losses in the Companys investment portfolio and the related after-tax effect on the Companys shareholders equity and total capital, (ii) the book yield of the Companys investment portfolio and (iii) the Companys ability to maintain appropriate interest rate spreads over the fixed rates guaranteed in the Companys life and annuity products. |
| The cyclicality of the insurance industry and the related effects of changes in price competition and industry-wide underwriting results. |
| The frequency and severity of catastrophes such as hurricanes, earthquakes, storms and wildfires and the ability of the Company to provide accurate estimates of ultimate catastrophe costs in its consolidated financial statements in light of such factors as: the proximity of the catastrophe occurrence date to the date of the consolidated financial statements, potential inflation of property repair costs in the affected area and the occurrence of multiple catastrophes in a geographic area over a relatively short period of time. |
| Based on property and casualty direct earned premiums for 2004, the Companys ten largest states represented 55% of the segment total. Included in this top ten group are certain states in which catastrophe occurrences are relatively common: California, Florida, North Carolina, South Carolina, Louisiana and Texas. |
16
| The ability of the Company to maintain a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables. |
| Adverse development of property and casualty loss experience and its impact on estimated claims and claim settlement expenses for losses occurring in prior years. |
| Business risks inherent in the Companys restructuring of its property and casualty claims operation. |
| Adverse changes in business persistency, policyholder mortality and morbidity rates and the resulting impact on both estimated reserves and the valuations of deferred policy acquisition costs and value of acquired insurance in force. |
| Changes in insurance regulations, including (i) those affecting the ability of the Companys insurance subsidiaries to distribute cash to the holding company and (ii) those impacting the Companys ability to profitably write property and casualty insurance policies in one or more states. |
| Changes in accounting or financial reporting standards issued by the FASB, SEC or other standard-setting bodies which may have an adverse effect on the Companys results of operations, financial condition and/or cost of doing business. |
| Changes in federal income tax laws and changes resulting from federal tax audits affecting corporate tax rates or taxable income. |
| Changes in federal and state laws and regulations which affect the relative tax and other advantages of the Companys life and annuity products to customers, including, but not limited to, adverse changes in IRS regulations governing 403(b) plans. |
| The resolution of legal proceedings and related matters including the potential adverse impact on the Companys reputation and charges against the Companys earnings resulting from legal defense costs, a settlement agreement and/or an adverse finding or findings against the Company from the proceedings. |
| The Companys ability to maintain favorable claims-paying ability, financial strength and debt ratings. |
| The competitive impact of new entrants such as mutual funds and banks into the tax-deferred annuity products markets, and the Companys ability to profitably expand its property and casualty business in highly competitive environments. |
| The Companys ability to develop and expand its agent force and its direct product distribution systems, as well as the Companys ability to maintain and secure product sponsorships by local, state and national education associations. |
| The risk related to the Companys dated and complex information systems, which are more prone to error than advanced technology systems. |
| Disruptions of the general business climate, investments, capital markets and consumer attitudes caused by geopolitical acts such as terrorism, war or other similar events. |
| The impact of a disaster or catastrophic event affecting the Companys employees or its home office facilities and the Companys ability to recover and resume its business operations on a timely basis. |
Executive Summary
For the six months ended June 30, 2005, the Companys net income increased compared to the same period in the prior year, primarily reflecting improved property and casualty segment earnings. This improvement was driven by aggressive underwriting and pricing actions taken in 2003 and 2004, ongoing improvements in claims processes, cost containment initiatives and a continuing low level of non-catastrophe claim frequency. Along with the rest of the insurance industry, the Company also benefited in the current period from a relatively low level of catastrophe losses.
17
In addition to the strong operating results, Horace Mann received refunds from the Internal Revenue Service (IRS) in April 2005, including amounts related to tax years 1996 and 1997, which are now deemed to be closed. This resulted in the elimination of the contingent tax liability related to those two years which reduced second quarter 2005 federal income tax expense by $2.7 million. In addition, $1.4 million of interest on the tax refund amounts was received and recorded as pretax income in the second quarter.
Premiums written and contract deposits decreased 4% compared to the first six months of 2004, due primarily to a reduction in new annuity single premium and rollover deposit receipts. In addition, property and casualty premiums written declined as increases in average voluntary automobile and homeowners premium per policy which were moderated to some extent by the improvement in quality in the books of business were more than offset by the decline in policies in force in these lines.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires the Companys management to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of the Companys consolidated assets, liabilities, shareholders equity and net income. Certain accounting estimates are particularly sensitive because of their significance to the Companys consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from managements judgements at the time the consolidated financial statements were prepared. Management has discussed with the Audit Committee the quality, not just the acceptability, of the Companys accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Companys accounting policies and their application, and the clarity and completeness of the Companys consolidated financial statements, which include related disclosures. For the Company, the areas most subject to significant management judgements include: liabilities for property and casualty claims and claim settlement expenses, liabilities for future policy benefits, deferred policy acquisition costs, value of acquired insurance in force for annuity and interest-sensitive life products, valuation of investments and valuation of assets and liabilities related to the defined benefit pension plan.
Liabilities for Property and Casualty Claims and Claim Settlement Expenses
Underwriting results of the property and casualty segment are significantly influenced by estimates of the Companys ultimate liability for insured events. There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims and claim settlement expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended period, often many years, that transpires between a loss event, receipt of related claims data from policyholders and ultimate settlement of the claim. Reserves for property and casualty claims include provisions for payments to be made on reported claims, claims incurred but not yet reported and associated settlement expenses. The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the Companys experience with similar cases and historical trends involving claim payments and related patterns, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes.
18
The Company continually updates loss estimates using both quantitative information from its reserving actuaries and qualitative information derived from other sources. Adjustments may be required as information develops which varies from experience, or, in some cases, augments data which previously were not considered sufficient for use in determining liabilities. The effects of these adjustments may be significant and are charged or credited to income for the period in which the adjustments are made. Detailed discussion of the impact of adjustments recorded during recent years is included in Notes to Consolidated Financial Statements Note 4 Property and Casualty Unpaid Claims and Claim Expenses of the Companys Annual Report on Form 10-K for the year ended December 31, 2004. Due to the nature of the Companys personal lines business, the Company has no exposure to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under homeowners insurance policies for environmentally related items such as mold.
The Company completes a detailed study of property and casualty reserves based on information available at the end of each quarter and year. Trends of reported losses (paid amounts and case reserves on claims reported to the Company) for each accident year are reviewed and ultimate loss costs for those accident years are estimated. The Company engages an independent property and casualty actuarial consulting firm to prepare an independent study of the Companys property and casualty reserves at June 30 and December 31 of each year.
Liabilities for Future Policy Benefits
Liabilities for future benefits on life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force. Liabilities for future policy benefits on certain life insurance policies are computed using the net level premium method and are based on assumptions as to future investment yield, mortality and withdrawals. Mortality and withdrawal assumptions for all policies have been based on actuarial tables which are consistent with the Companys own experience. Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. In the event actual experience varies from the estimated liabilities, adjustments are charged or credited to income for the period in which the adjustments are made.
Deferred Policy Acquisition Costs and Value of Acquired Insurance in Force for Annuity and Interest-Sensitive Life Products
Policy acquisition costs, consisting of commissions, policy issuance and other costs, which vary with and are primarily related to the production of business, are capitalized and amortized on a basis consistent with the type of insurance coverage. For investment (annuity) contracts, acquisition costs, and also the value of annuity business acquired in the 1989 acquisition of the Company (Annuity VIF), are amortized over 20 years in proportion to estimated gross margins. Capitalized acquisition costs for interest-sensitive life contracts are also amortized over 20 years in proportion to estimated gross margins.
The most significant assumptions that are involved in the estimation of annuity gross margins include future financial market performance, interest rate spreads, business surrender/lapse rates and the impact of realized investment gains and losses. For the variable deposit portion of the annuity segment, the Company amortizes policy acquisition costs and the
19
Annuity VIF utilizing a future financial market performance assumption of a 10% reversion to the mean approach with a 200 basis point corridor around the mean. At June 30, 2005, the ratio of capitalized annuity policy acquisition costs and the Annuity VIF asset to the total annuity accumulated cash value was approximately 4%.
In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material charge or credit to amortization expense for the period in which the adjustment is made. As noted above, there are a number of assumptions involved in the valuation of capitalized policy acquisition costs and the Annuity VIF. As one example of the volatility of this amortization, if all other assumptions are met, a 1% deviation from the targeted financial market performance for the underlying mutual funds of the Companys variable annuities would currently impact amortization between $0.1 million and $0.2 million. This result may change depending on the magnitude and direction of the deviation. Detailed discussion of the impact of adjustments to the amortization of capitalized acquisition costs and Annuity VIF is included in Results of Operations Amortization of Policy Acquisition Expenses and Intangible Assets.
Valuation of Investments
The Companys methodology of assessing other-than-temporary impairments is based on security-specific facts and circumstances as of the date of the reporting period. Based on these facts, if management believes it is probable that amounts due will not be collected according to the contractual terms of a debt security not impaired at acquisition, or if the Company does not have the ability or intent to hold a security with an unrealized loss until it matures or recovers in value, an other-than-temporary impairment shall be considered to have occurred. As a general rule, if the fair value of a debt security has fallen below 80% of book value for more than six months, this security will be reviewed for an other-than-temporary impairment. Additionally, if events become known that call into question whether the security issuer has the ability to honor its contractual commitments, whether or not such security has been trading above an 80% fair value to book value relationship, such security holding will be evaluated to determine whether or not such security has suffered an other-than-temporary decline in value.
The Company reviews the fair value of all investments in its portfolio on a monthly basis to assess whether an other-than-temporary decline in value has occurred. These reviews, in conjunction with the Companys investment managers monthly credit reports and relevant factors such as (1) the financial condition and near-term prospects of the issuer, (2) the Companys ability or intent to retain the investment long enough to allow for the anticipated recovery in fair value, (3) the stock price trend of the issuer, (4) the market leadership position of the issuer, (5) the debt ratings of the issuer and (6) the cash flows of the issuer, are all considered in the impairment assessment. A write-down of an investment is recorded when a decline in the fair value of that investment is deemed to be other-than-temporary, with a realized investment loss charged to income for the period.
A decline in fair value below amortized cost is not assumed to be other-than-temporary for fixed maturity investments with unrealized losses due to market conditions or industry-related events where there exists a reasonable expectation that fair value will recover versus historical cost and the Company has the intent and ability to hold the investment until maturity or a market recovery is realized. An other-than-temporary impairment loss will be recognized based upon all relevant facts and circumstances for each investment, as appropriate.
20
Valuation of Assets and Liabilities Related to the Defined Benefit Pension Plan
Effective April 1, 2002, participants stopped accruing benefits under the defined benefit pension plan but continue to retain the benefits they had accrued to date.
The Companys cost estimates for its defined benefit pension plan are determined annually based on assumptions which include the discount rate, expected return on plan assets, anticipated retirement rate and estimated lump sum distributions. A discount rate of 5.75% was used by the Company for estimating accumulated benefits under the plan at December 31, 2004, which was based on the average yield for long-term, high grade securities having maturities generally consistent with the defined benefit pension payout period. To set its discount rate, the Company looks to leading indicators, including Moodys Aa long-term bond index. The expected annual return on plan assets assumed by the Company at December 31, 2004 was 7.50%. The assumption for the long-term rate of return on plan assets was determined by considering actual investment experience during the lifetime of the plan, balanced with reasonable expectations of future growth considering the various classes of assets and percentage allocation for each asset class. Management believes that it has adopted realistic assumptions for investment returns, discount rates and other key factors used in the estimation of pension costs and asset values.
To the extent that actual experience differs from the Companys assumptions, subsequent adjustments may be required, with the effects of those adjustments charged or credited to income and/or shareholders equity for the period in which the adjustments are made. Generally, a change of 50 basis points in the discount rate would inversely impact pension expense and accumulated other comprehensive income (AOCI) by approximately $0.2 million and $2 million, respectively. In addition, for every $1 million increase in the value of pension plan assets, there is an equal increase in AOCI.
Results of Operations
Insurance Premiums and Contract Charges
Insurance Premiums Written and Contract Deposits
(Includes annuity and life contract deposits)
Six Months Ended
June 30, |
Increase (Decrease)
|
||||||||||||
2005
|
2004
|
Percent
|
Amount
|
||||||||||
Property & casualty |
|||||||||||||
Automobile and property (voluntary) |
$ | 268.8 | $ | 276.8 | -2.9 | % | $ | (8.0 | ) | ||||
Involuntary and other property & casualty |
1.3 | 1.3 | | | |||||||||
|
|
|
|
|
|
|
|||||||
Total property & casualty |
270.1 | 278.1 | -2.9 | % | (8.0 | ) | |||||||
Annuity deposits |
159.5 | 170.0 | -6.2 | % | (10.5 | ) | |||||||
Life |
51.5 | 52.8 | -2.5 | % | (1.3 | ) | |||||||
|
|
|
|
|
|
|
|||||||
Total |
$ | 481.1 | $ | 500.9 | -4.0 | % | $ | (19.8 | ) | ||||
|
|
|
|
|
|
|
21
Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)
Six Months Ended
June 30, |
Increase (Decrease)
|
||||||||||||
2005
|
2004
|
Percent
|
Amount
|
||||||||||
Property & casualty |
|||||||||||||
Automobile and property (voluntary) |
$ | 275.2 | $ | 276.9 | -0.6 | % | $ | (1.7 | ) | ||||
Involuntary and other property & casualty |
4.4 | 4.1 | 7.3 | % | 0.3 | ||||||||
|
|
|
|
|
|
|
|||||||
Total property & casualty |
279.6 | 281.0 | -0.5 | % | (1.4 | ) | |||||||
Annuity |
8.7 | 8.3 | 4.8 | % | 0.4 | ||||||||
Life |
48.2 | 47.4 | 1.7 | % | 0.8 | ||||||||
|
|
|
|
|
|
|
|||||||
Total |
$ | 336.5 | $ | 336.7 | -0.1 | % | $ | (0.2 | ) | ||||
|
|
|
|
|
|
|
For the first six months of 2005, the Companys premiums written and contract deposits decreased 4.0% compared to the prior year, primarily as a result of a reduced level of new annuity single premium and rollover deposit receipts. In addition, property and casualty premiums written declined as increases in average voluntary automobile and homeowners premium per policy which were moderated to some extent by the improvement in quality in the books of business were more than offset by the decline in policies in force in these lines. Voluntary property and casualty business represents policies sold through the Companys marketing organization and issued under the Companys underwriting guidelines. Involuntary property and casualty business consists of allocations of business from state mandatory insurance facilities and assigned risk business.
The Companys exclusive agent force totaled 837 at June 30, 2005, reflecting an increase of 4.6% compared to 800 agents at December 31, 2004 and an increase of 4.0% compared to 805 agents at June 30, 2004. Management currently anticipates additional growth in the size of the Companys exclusive agent force throughout the remainder of 2005, although at a more moderate rate than the first six months. During 2005, additional emphasis is being placed on further improvements in agent retention, as well as on hiring an increased number of quality candidates. Of the current period-end total, 264 agents were in their first 24 months with the Company, reflecting a decrease of 12.6% compared to June 30, 2004, largely due to the reduced number of new hires in 2004 and retention levels in the last six months of 2004. A greater number of new agents were hired in the first six months of 2005 compared to prior year. Terminations of agents in their first 24 months with the Company were approximately one-third of the level experienced in the first six months of the prior year. The number of experienced agents in the agent force, 573, increased 13.9% compared to a year earlier as a result of improved retention. In the first six months of 2005, average agent productivity was comparable to the same period in 2004 in total and for all product lines. Average agent productivity is measured as new sales premiums from the exclusive agent force per the average number of exclusive agents for the period.
For the first six months of 2005, total sales, which include the independent agent distribution channel, decreased 9.1% compared to a year earlier, largely due to a decrease in new annuity business. Compared to a record level of annuity sales in the prior year, total new annuity sales decreased 10.7% in the first six months of 2005. This decline was due primarily to a lower level of annuity new business from independent agents, reflecting the Companys desired shift in mix of business from this channel. While total career agent sales decreased in the current six month period compared to a year earlier in all product lines, second quarter results reduced the rate of decline for annuity, automobile and homeowners.
22
Total voluntary automobile and homeowners premium written decreased 2.9% in the first six months of 2005. While the quality of the Companys voluntary automobile and homeowners business continues to improve, the premium impact of increases in average premium per policy for both lines were more than offset by the decline in policies in force. Voluntary automobile insurance premium written decreased 4.8% ($9.7 million) compared to the first six months of 2004, while homeowners premium increased 2.3% ($1.7 million). Average written premium increased approximately 2% for voluntary automobile and approximately 8% for homeowners compared to the prior year. Average earned premium also increased 4% for voluntary automobile and 11% for homeowners compared to the first six months of 2004. Through June 30, 2005, approved rate increases for the Companys automobile and homeowners business were minimal compared to approved increases of 7% and 15%, respectively, during the first six months of 2004. As of June 30, 2005, automobile policies in force decreased by 12,000 compared to December 31, 2004 and 28,000 compared to June 30, 2004. The Company continues to increase educator business as a percentage of both new and total voluntary automobile policies. Homeowners policies in force decreased 5,000 compared to December 31, 2004 and 8,000 compared to June 30, 2004, reflecting expected reductions primarily in non-educator policies due to the Companys pricing and underwriting actions. At June 30, 2005, there were 533,000 voluntary automobile and 268,000 homeowners policies in force, for a total of 801,000 policies, compared to a total of 818,000 policies at December 31, 2004 and 837,000 policies at June 30, 2004. To curtail the decline in automobile policies in force, in 2005 the Company is implementing both short- and medium-term initiatives to increase new business and improve policy retention.
Based on policies in force, the total property and casualty 12-month retention rate for new and renewal policies was 84% at June 30, 2005, compared to 85% at June 30, 2004.
Due to rate limitations for coastal homeowners policies in Florida and to further reduce exposure to catastrophic losses, the Company has undertaken a reunderwriting program which is anticipated to result in non-renewal of approximately 3,300 homeowners policies. Following state mandated delays as a result of the four hurricanes that impacted Florida in 2004, the Companys non-renewal process resumed in the first quarter of 2005 and is expected to result in a full year reduction of approximately $3 million and $2 million in direct written premiums and direct earned premiums, respectively. In the Spring 2005 session, the Florida legislature implemented measures, including a single deductible per hurricane season and requiring up-front payment by insurance companies of full replacement cost, to address the impact of future and past multi-hurricane seasons. In addition, an independent financial audit has determined a $515 million deficit in the Citizens Property Insurance Corporations (Citizens) high-risk account as a result of the four hurricanes in Florida in 2004. Following their installation in August 2005, the new Citizens board of governors may address the need for a possible assessment to replenish the surplus of Citizens. If there is an industry assessment, the Company will in turn assess its Florida property policyholders. The impact on the Company of these measures and possible assessments is not determinable at the time of this Quarterly Report on Form 10-Q.
New annuity deposits decreased 6.2% compared to the first six months of 2004. The decline reflected a 6.9% increase in new scheduled annuity deposits offset by a 20.1% decrease in single premium and rollover deposits. While new deposits to fixed accounts decreased 12.1%, or $12.6 million, compared to the prior year due to the current low interest rate environment, new deposits to variable accounts increased 3.2%, or $2.1 million, compared to the first six months of 2004.
23
In 2001, the Company began building a nationwide network of independent agents who will comprise a second distribution channel for the Companys 403(b) tax-qualified annuity products. The independent agent distribution channel included 627 authorized agents at June 30, 2005. During the first six months of 2005, this channel generated $16.7 million in annualized new annuity sales for the Company compared to $26.5 million for the first six months of 2004 and $38.0 million for the full year 2004, with the lack of growth in the current period reflecting the Companys efforts to change the product mix from this channel to more tax-qualified and variable annuity sales.
Total annuity accumulated cash value of $3.2 billion at June 30, 2005 increased 8.6% compared to a year earlier, reflecting the increase from new business over the 12 months, continued favorable retention and improving financial markets compared to June 30, 2004. At June 30, 2005, the number of annuity contracts outstanding of 160,000 increased 0.6%, or 1,000 contracts, compared to December 31, 2004 and increased 2.6%, or 4,000 contracts, compared to June 30, 2004.
Variable annuity accumulated balances were 8.3% higher at June 30, 2005 than at June 30, 2004, while annuity segment contract charges earned increased 4.8%, or $0.4 million, compared to the first six months of 2004.
Life segment premiums and contract deposits declined 2.5%, or $1.3 million, compared to the first six months of 2004, primarily reflecting the shift in new business mix toward partner company products. The ordinary life insurance in force lapse ratio was 6.9% for the 12 months ended June 30, 2005, compared to 7.3% for the same period a year earlier.
Net Investment Income
Pretax investment income of $96.0 million for the six months ended June 30, 2005 increased 0.5%, or $0.5 million, (0.3%, or $0.2 million, after tax) compared to the prior year. Growth in the size of the investment portfolio more than offset a decrease of approximately $2.5 million pretax in prepayment income along with a decline in the portfolio yield. Average invested assets (excluding securities lending collateral) increased 8.7% over the past 12 months. The average pretax yield on the investment portfolio was 5.4% (3.7% after tax) for the first six months of 2005, compared to a pretax yield of 5.8% (4.0% after tax) for the same period in 2004.
Net Realized Investment Gains and Losses
Net realized investment gains were $9.0 million for the first six months of 2005 compared to net realized investment gains of $4.5 million in the prior year. There were no impairment charges from the Companys fixed income security portfolio in either period. Gains realized in the current period included $1.9 million from sales of securities for which impairment charges were recorded in 2003. The net gains in both years were realized from ongoing investment portfolio management activity.
24
The table below presents the Companys fixed maturity securities portfolio as of June 30, 2005 by major asset class, including the ten largest sectors of the Companys corporate bond holdings.
Fixed Maturity Securities
Number of
Issuers |
Fair
Value |
Amortized
Cost |
Pretax
Unrealized Gain |
|||||||||
Corporate bonds |
||||||||||||
Banking and Finance |
40 | $ | 406.9 | $ | 382.6 | $ | 24.3 | |||||
Energy |
48 | 224.6 | 204.6 | 20.0 | ||||||||
Utilities |
29 | 192.8 | 179.1 | 13.7 | ||||||||
Telecommunications |
21 | 140.4 | 129.7 | 10.7 | ||||||||
Food and Beverage |
26 | 121.4 | 115.1 | 6.3 | ||||||||
Insurance |
13 | 104.7 | 97.0 | 7.7 | ||||||||
Health Care |
23 | 95.8 | 92.1 | 3.7 | ||||||||
Transportation |
12 | 86.9 | 83.7 | 3.2 | ||||||||
Real Estate |
13 | 71.8 | 68.1 | 3.7 | ||||||||
Industry, Manufacturing |
20 | 60.2 | 54.6 | 5.6 | ||||||||
All Other Corporates (1) |
164 | 531.0 | 506.1 | 24.9 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total corporate bonds |
409 | 2,036.5 | 1,912.7 | 123.8 | ||||||||
Mortgage-backed securities |
||||||||||||
U.S. government and federally sponsored agencies |
439 | 693.8 | 689.5 | 4.3 | ||||||||
Other |
16 | 53.0 | 50.9 | 2.1 | ||||||||
Municipal bonds |
165 | 570.8 | 553.2 | 17.6 | ||||||||
Government bonds |
||||||||||||
U.S. |
7 | 214.1 | 213.7 | 0.4 | ||||||||
Foreign |
10 | 39.0 | 34.9 | 4.1 | ||||||||
Collateralized debt obligations (2) |
3 | 15.7 | 15.3 | 0.4 | ||||||||
Asset-backed securities |
10 | 62.7 | 63.0 | (0.3 | ) | |||||||
|
|
|
|
|
|
|
|
|||||
Total fixed maturity securities |
1,059 | $ | 3,685.6 | $ | 3,533.2 | $ | 152.4 | |||||
|
|
|
|
|
|
|
|
(1) | The All Other Corporates category contains 19 additional industry classifications. Automobiles; broadcasting and media; defense; building and materials; consumer products and paper represented $308.1 million of fair value at June 30, 2005, with the remaining 13 classifications each representing less than $34 million of the fair value at June 30, 2005. |
(2) | All of the securities were rated investment grade by Standard and Poors Corporation and/or Moodys Investors Service, Inc. at June 30, 2005. |
25
At June 30, 2005, the Companys diversified fixed maturity portfolio consisted of 1,261 investment positions, issued by 1,059 entities, and totaled approximately $3.7 billion in fair value. The portfolio was 94.0% investment grade, based on fair value, with an average quality rating of AA-. At June 30, 2005, the portfolio had $10.9 million pretax of total gross unrealized losses related to 271 positions. At December 31, 2004, the total pretax gross unrealized losses were $8.8 million related to 178 positions. The following table provides information regarding fixed maturity securities that had an unrealized loss at June 30, 2005, including the length of time that the securities have continuously been in an unrealized loss position.
Investment Positions With Unrealized Losses Segmented by Quality
and Period of Continuous Unrealized Loss
As of June 30, 2005
Number of
Positions |
Fair
Value |
Amortized
Cost |
Pretax
Unrealized Loss |
|||||||||
Investment grade |
||||||||||||
6 Months or less |
69 | $ | 360.7 | $ | 363.7 | $ | (3.0 | ) | ||||
7 through 12 months |
32 | 149.8 | 151.3 | (1.5 | ) | |||||||
13 through 24 months |
41 | 251.6 | 254.6 | (3.0 | ) | |||||||
25 through 36 months |
6 | 34.6 | 36.0 | (1.4 | ) | |||||||
37 through 48 months |
| | | | ||||||||
Greater than 48 months |
| | | | ||||||||
|
|
|
|
|
|
|
|
|||||
Total |
148 | $ | 796.7 | $ | 805.6 | $ | (8.9 | ) | ||||
|
|
|
|
|
|
|
|
|||||
Non-investment grade |
||||||||||||
6 Months or less |
92 | $ | 51.1 | $ | 52.8 | $ | (1.7 | ) | ||||
7 through 12 months |
24 | 9.9 | 10.2 | (0.3 | ) | |||||||
13 through 24 months |
3 | 1.2 | 1.2 | * | ||||||||
25 through 36 months |
| | | | ||||||||
37 through 48 months |
| | | | ||||||||
Greater than 48 months |
| | | | ||||||||
|
|
|
|
|
|
|
|
|||||
Total |
119 | $ | 62.2 | $ | 64.2 | $ | (2.0 | ) | ||||
|
|
|
|
|
|
|
|
|||||
Not rated |
||||||||||||
Total, all 25 through 36 months |
4 | $ | 2.4 | $ | 2.4 | * | ||||||
|
|
|
|
|
|
|
|
|||||
Grand total |
271 | $ | 861.3 | $ | 872.2 | $ | (10.9 | ) | ||||
|
|
|
|
|
|
|
|
* | Less than $(0.1) million |
Of the investment positions with unrealized losses, no issuers had pretax unrealized losses greater than $1.0 million. One security, redeemable preferred stock issued by the Federal National Mortgage Association (FNMA), was trading below 80% of book value (at 79.5% of the $2.7 million amortized cost) at June 30, 2005. This security was purchased in June 2003 when interest rates were at a 40 year low. The Company views the decrease in value of all of the securities with unrealized losses at June 30, 2005 as temporary, expects recovery in fair value, anticipates continued payments under the terms of the securities, and has the intent and ability to hold these securities until maturity or a recovery in fair value occurs. Therefore, no impairment of these securities was recorded at June 30, 2005. Future changes in circumstances related to these and other securities could require subsequent impairment in value. The Companys investment
26
guidelines generally limit single corporate issuer concentrations to 4.0% (after tax) of shareholders equity for AA or AAA rated securities, 2.5% (after tax) of shareholders equity for A rated securities, 2.0% (after tax) of shareholders equity for BBB rated securities, and 1.0% (after tax) of shareholders equity for non-investment grade securities.
Benefits, Claims and Settlement Expenses
Six Months Ended
June 30, |
Increase (Decrease)
|
|||||||||||||
2005
|
2004
|
Percent
|
Amount
|
|||||||||||
Property and casualty |
||||||||||||||
Before catastrophe losses |
$ | 172.8 | $ | 192.6 | -10.3 | % | $ | (19.8 | ) | |||||
Catastrophe losses |
4.0 | 3.7 | 8.1 | % | 0.3 | |||||||||
|
|
|
|
|
|
|
|
|||||||
Total property and casualty |
176.8 | 196.3 | -9.9 | % | (19.5 | ) | ||||||||
Annuity |
(0.1 | ) | 0.7 | (0.8 | ) | |||||||||
Life |
21.3 | 21.4 | -0.5 | % | (0.1 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||
Total |
$ | 198.0 | $ | 218.4 | -9.3 | % | $ | (20.4 | ) | |||||
|
|
|
|
|
|
|
|
Property and Casualty Claims and Claim Expenses
Six Months Ended
June 30, |
||||||||
2005
|
2004
|
|||||||
Incurred claims and claim expenses: |
||||||||
Claims occurring in the current year |
$ | 178.4 | $ | 196.3 | ||||
Decrease in estimated reserves for claims occurring in prior years (1): |
||||||||
Policies written by the Company |
(1.6 | ) | | |||||
Business assumed from state reinsurance facilities |
| | ||||||
|
|
|
|
|
|
|||
Total decrease |
(1.6 | ) | | |||||
|
|
|
|
|
|
|||
Total claims and claim expenses incurred |
$ | 176.8 | $ | 196.3 | ||||
|
|
|
|
|
|
|||
Property and casualty loss ratio: |
||||||||
Before catastrophe losses |
61.7 | % | 68.5 | % | ||||
After catastrophe losses |
63.3 | % | 69.9 | % |
(1) | Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs. |
For the six months ended June 30, 2005, the Companys benefits, claims and settlement expenses decreased compared to the prior year, primarily reflecting improvements in non-catastrophe property and casualty current accident year trends, particularly in claim frequencies. The Companys catastrophe losses were comparable for the two periods. Development of prior years property and casualty reserves had a minimal favorable effect on benefits, claims and settlement expenses for the six months ended June 30, 2005 and no effect for the same period in 2004.
For the six months ended June 30, 2005, the voluntary automobile loss ratio of 68.8% decreased by 3.4 percentage points compared to the same period a year earlier and improved 1.8 percentage points compared to the loss ratio of 70.6% for full year 2004. The Companys benefits, claims and settlement expenses also reflected improvements in the homeowners non-catastrophe loss ratio of 12.9 percentage points compared to the first six months of 2004 and 7.2 percentage
27
points compared to the 12 months ended December 31, 2004 as a result of the favorable impact of underwriting initiatives and rate increases on earned premiums, as well as the Companys claims initiatives, which have focused on loss and expense control.
The homeowners loss ratio of 47.5% for the six months ended June 30, 2005, including the effect of catastrophe losses, decreased 12.4 percentage points compared to a year earlier, reflecting an increase in average premium per policy and an improvement in non-catastrophe loss frequency as a result of loss containment initiatives such as tightened underwriting guidelines, deductible management, an aggressive reunderwriting program and benefits of the Companys claims initiatives.
The Companys GAAP guaranteed minimum death benefits (GMDB) reserve was $0.2 million at June 30, 2005, compared to $0.1 million at December 31, 2004 and zero at June 30, 2004.
Interest Credited to Policyholders
Six Months Ended
June 30, |
Increase (Decrease)
|
|||||||||||
2005
|
2004
|
Percent
|
Amount
|
|||||||||
Annuity |
$ | 39.7 | $ | 37.0 | 7.3 | % | $ | 2.7 | ||||
Life |
17.0 | 16.3 | 4.3 | % | 0.7 | |||||||
|
|
|
|
|
|
|||||||
Total |
$ | 56.7 | $ | 53.3 | 6.4 | % | $ | 3.4 | ||||
|
|
|
|
|
|
|
|
Compared to prior year, the current period increase in annuity segment interest credited reflected a 9.7% increase in average accumulated fixed deposits, partially offset by a 9 basis point decline in the average annual interest rate credited to 4.4%. Life insurance interest credited increased as a result of the growth in interest-sensitive life insurance reserves.
The net interest spread on fixed annuity account value on deposit measures the difference between the rate of income earned on the underlying invested assets and the rate of interest which policyholders are credited on their account values. Fixed annuity crediting rates were lowered throughout 2004 and 2003 to reflect the decline in the rate of income on invested assets caused by lower investment rates on new and reinvested funds. The annualized net interest spreads for the six months ended June 30, 2005 and 2004 were 136 basis points and 166 basis points, respectively. Excluding the benefit of prepayment income on a structured mortgage-backed security, the corresponding annualized net interest spreads were 134 and 152 basis points.
As of June 30, 2005, fixed annuity account values totaled $1.9 billion, including $1.6 billion of deferred annuities. Approximately 20% of the deferred annuity account values had minimum guaranteed interest rates ranging from 3.0% to 4.0% while approximately 77% of account values had minimum guaranteed rates of 4.5% or greater. For $1.5 billion of the deferred annuity account values, the credited interest rate was equal to the minimum guaranteed rate. Due to limitations on the Companys ability to further lower interest crediting rates, coupled with the potential for continued low interest rates and expected reductions in prepayment income in 2005, the Company expects to experience additional fixed annuity spread compression in future periods.
28
Operating Expenses
For the first six months of 2005, operating expenses decreased 10.9%, or $7.4 million, compared to the prior year, primarily reflecting benefits from the Companys expense control initiatives. The property and casualty expense ratio of 22.1% for the six months ended June 30, 2005 decreased 0.2 percentage point compared to the prior year, reflecting this segments portion of corporate-wide expense reductions.
The Company offers long-term care and variable and fixed interest rate universal life policies, with three third-party vendors underwriting and bearing the risk of such insurance (Life Partner Products) and the Company receiving a commission on the sale of that business. The volume of Life Partner Product sales by the Companys agents decreased slightly during the first six months of 2005. The amount of commissions received by the Company in the first six months of 2005 in excess of costs for agent commissions and commission related expenses was approximately $0.5 million, comparable to the same period in 2004.
Amortization of Policy Acquisition Expenses and Intangible Assets
For the six months ended June 30, 2005, the combined amortization of policy acquisition expenses and intangible assets was $40.3 million compared to $36.3 million recorded for the same period in the prior year. Amortization of intangible assets was $3.1 million for the six months ended June 30, 2005 compared to $2.5 million for the same period a year earlier. The June 30, 2005 valuation of Annuity VIF resulted in a $0.4 million increase in amortization compared to a $0.1 million decrease from a similar valuation at June 30, 2004.
Amortized policy acquisition expenses were $37.2 million for the first six months of 2005 compared to $33.8 million for the same period in 2004. The June 30, 2005 valuation of annuity deferred policy acquisition costs resulted in a $2.4 million increase in amortization compared to a $0.4 million decrease in amortization resulting from a similar valuation at June 30, 2004. For the life segment, the June 30, 2005 valuation of deferred policy acquisition costs resulted in a $0.5 million decrease in amortization compared to a $0.7 million increase from the 2004 valuation. The remaining increase in amortized policy acquisition costs was due to scheduled amortization of capitalized costs.
Income Tax Expense
The effective income tax rate on the Companys pretax income, including realized investment gains and losses, was 26.0% for the six months ended June 30, 2005 compared to 28.9% for the same period in 2004. Income from investments in tax-advantaged securities reduced the effective income tax rate 4.6 and 5.8 percentage points for the six months ended June 30, 2005 and 2004, respectively.
The Company records contingent tax liabilities for exposures from uncertain tax filing positions based upon managements assessment of the amounts that are probable of being sustained upon Internal Revenue Service (IRS) audit. These liabilities are reevaluated routinely and are adjusted appropriately based upon changes in facts or law. The Company has no unrecorded contingent tax exposures.
29
At June 30, 2005, the Company had federal income tax returns for the 1998 through 2004 tax years still open and subject to adjustment upon IRS examination. The Company has recorded $9.4 million of contingent tax liabilities related to those open tax years.
In April 2005, the Company received refunds for tax years 1996 through 2001 from the IRS totaling $8.1 million, an amount consistent with the Companys tax refund accruals related to those years. In addition to the refund amounts, interest of $1.4 million was received, which was recorded by the Company as pretax income in the second quarter of 2005. Furthermore, as a result of the receipt of IRS refunds for tax years 1996 and 1997, which are now deemed to be closed, the contingent tax liability related to those two years was eliminated, which resulted in a decrease in federal income tax expense of $2.7 million in the second quarter of 2005. The remaining refunds received relate to tax years that are still considered open and subject to potential adjustment upon IRS examination. Pending an examination or a request to extend the statutes of limitations of the remaining tax years by the IRS, an additional reduction in the contingent tax liability of up to approximately $6 million may be recorded in the third quarter of 2005.
Net Income
For the six months ended June 30, 2005, the Companys net income increased compared to the prior year, primarily reflecting improved property and casualty segment earnings. This improvement was driven by aggressive underwriting and pricing actions taken in 2003 and 2004, ongoing improvements in claims processes, cost containment initiatives and continuing favorable non-catastrophe claims frequency trends. Along with the rest of the insurance industry, the Company also benefited in the current period from a relatively low level of catastrophe losses.
30
Net income by segment and net income per share were as follows:
Six Months Ended
June 30, |
Increase (Decrease)
|
||||||||||||||
2005
|
2004
|
Percent
|
Amount
|
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Analysis of net income by segment: |
|||||||||||||||
Property and casualty |
|||||||||||||||
Before catastrophe costs |
$ | 44.8 | $ | 30.7 | 45.9 | % | $ | 14.1 | |||||||
Catastrophe costs, after tax |
(2.9 | ) | (2.4 | ) | (0.5 | ) | |||||||||
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Total including catastrophe costs |
41.9 | 28.3 | 48.1 | % | 13.6 | ||||||||||
Annuity |
5.5 | 6.6 | -16.7 | % | (1.1 | ) | |||||||||
Life |
8.1 | 6.3 | 28.6 | % | 1.8 | ||||||||||
Corporate and other (1) |
4.7 | (0.6 | ) | 5.3 | |||||||||||
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|
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Net income |
$ | 60.2 | $ | 40.6 | 48.3 | % | $ | 19.6 | |||||||
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|
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Diluted: |
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Net income per share |
$ | 1.29 | $ | 0.89 | 44.9 | % | $ | 0.40 | |||||||
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Weighted average number of shares and equivalent shares (in millions) |
47.8 | 47.3 | 1.1 | % | 0.5 | ||||||||||
Property and casualty combined ratio: |
|||||||||||||||
Before catastrophe costs |
83.7 | % | 90.8 | % | -7.1 | % | |||||||||
After catastrophe costs |
85.4 | % | 92.2 | % | -6.8 | % |
(1) | The corporate and other segment includes interest expense on debt, realized investment gains and losses, certain public company expenses and other corporate level items. The Company does not allocate the impact of corporate level transactions to the insurance segments, consistent with managements evaluation of the results of those segments. |
For the six months ended June 30, 2005, net income for the property and casualty segment increased as described above.
Compared to the first six months of 2004, annuity segment net income for the current period decreased primarily as a result of the negative impact of valuations of deferred policy acquisition costs and Annuity VIF. Annuity segment net income for the current period also reflected a decline in the interest margin, which was partially offset by lower operating expenses.
Life segment net income increased compared to the first half of 2004, also due primarily to lower expenses, including a favorable impact from the valuation of deferred policy acquisition costs between periods.
The change in net income for the corporate and other segment compared to the first half of 2004 included differences in the amount of realized investment gains and a $2.7 million reduction in federal income tax expense in the current period from the elimination of the contingent tax liability for the 1996 and 1997 tax years.
Return on shareholders equity based on net income was 13% and 9% for the trailing 12 months ended June 30, 2005 and 2004, respectively.
31
Based on results for the first half of the year, at the time of this Quarterly Report on Form 10-Q, management anticipates that 2005 full year net income before realized investment gains and losses will be within a range of $1.80 to $1.90 per share. In addition to the second quarter 2005 tax refund benefit, this projection reflects managements anticipation of continued favorable property and casualty underwriting trends, while remaining appropriately cautious regarding potential catastrophe losses in the last six months of the year. As described in Critical Accounting Policies, certain of the Companys significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to managements current estimate. A projection of net income is not accessible on a forward-looking basis because it is not possible to provide a reliable forecast of realized investment gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.
Liquidity and Financial Resources
Special Purpose Entities
At June 30, 2005 and 2004, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.
Related Party Transactions
The Company does not have any contracts or other transactions with related parties that are required to be reported under the applicable securities laws and regulations.
Ariel Capital Management, Inc., HMECs largest shareholder with 24% of the common shares outstanding per their SEC filing on Form 13G as of March 31, 2005, is the investment adviser for two of the mutual funds offered to the Companys annuity customers. In addition, T. Rowe Price Associates, Inc., HMECs third largest shareholder with 5% of the common shares outstanding per their SEC filing on Form 13G as of March 31, 2005, is the investment advisor for three of the mutual funds offered to the Companys annuity customers.
Investments
Information regarding the Companys investment portfolio, which is comprised primarily of investment grade, fixed income securities, is located in Results of Operations Net Realized Investment Gains and Losses and in the Notes to Consolidated Financial Statements Note 4 Investments.
Cash Flow
The short-term liquidity requirements of the Company, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet the Companys operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, retire short-term
32
debt, pay dividends to shareholders and repurchase shares of the Companys common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance policy claims and benefits and retirement of long-term debt.
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMECs insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries. For the first six months of 2005, net cash provided by operating activities decreased slightly compared to the same period in 2004 primarily reflecting timing of operating expense payments.
Payment of principal and interest on debt, fees related to the catastrophe-linked equity put option and reinsurance agreement, dividends to shareholders and parent company operating expenses, as well as the share repurchase program, are dependent upon the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. Dividends which may be paid by the insurance subsidiaries to HMEC during 2005 without prior approval are approximately $73 million, of which $8 million was paid during the six months ended June 30, 2005. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for HMECs capital needs.
Investing Activities
HMECs insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity and reinvest the proceeds in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as available for sale.
Financing Activities
Financing activities include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, repurchases of the Companys common stock, fluctuations in bank overdraft balances and borrowings, repayments and repurchases related to its debt facilities. Fees related to the catastrophe-linked equity put option and reinsurance agreement, which through May 7, 2005 augmented the Companys traditional reinsurance program, were charged directly to additional paid-in capital.
In June 2005, the Company issued $75.0 million aggregate principal amount of 6.05% senior notes which will mature on June 15, 2015 (Senior Notes due 2015) at a discount of 0.05%. As of June 30, 2005, the net proceeds from the sale of the Senior Notes due 2015 have been used to (1) repay the $25.0 million balance outstanding on the Bank Credit Facility and (2) redeem all of the Senior Notes due 2006 at an aggregate cost of $29.1 million. As of the date of this report on Form 10-Q, management anticipates utilizing the remaining proceeds to recapture the Companys
33
life reinsurance agreement with the United States branch of Sun Life Assurance Company of Canada. See also Capital Resources for additional description of the Senior Notes due 2015 and the recapture of the life reinsurance agreement.
For the six months ended June 30, 2005, receipts from annuity contracts decreased 6.2%. Annuity contract benefits and withdrawals increased 30.8% compared to the prior year. Cash value retentions for variable and
fixed annuity options were 92.4% and 95.1%, respectively, for the 12 month period ended June 30, 2005, each slightly lower than the respective retention level for the 12 month period ended June 30, 2004. Net transfers to variable annuity accumulated
Contractual Obligations
Payments Due By Period As of June 30, 2005 |
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Total
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Less Than
1 Year (2005)(1) |
1 - 3 Years
(2006 and 2007) |
3 - 5 Years
(2008 and 2009) |
More Than
5 Years (2010 and beyond) |
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Short-term Debt Obligations (2): |
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Bank Credit Facility (expires May 30, 2009) (3) |
| | | | | ||||||||||
Long-Term Debt Obligations (2): |
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Senior Convertible Notes Due May 14, 2032 |
$ | 251.4 | $ | 1.7 | $ | 5.2 | | $ | 244.5 | ||||||
Senior Notes Due June 15, 2015 (4) |
120.4 | 2.3 | 9.1 | $ | 9.1 | 99.9 | |||||||||
Senior Notes Due January 15, 2006 (5) |
| | | | | ||||||||||
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Total |
$ | 371.8 | $ | 4.0 | $ | 14.3 | $ | 9.1 | $ | 344.4 | |||||
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(1) | July 1, 2005 through December 31, 2005. |
(2) | Includes principal and interest. |
(3) | Repaid on June 13, 2005. See also Capital Resources. |
(4) | Issued on June 9, 2005. See also Capital Resources. |
(5) | Redeemed on June 30, 2005. See also Capital Resources. |
As of June 30, 2005, the Company had purchase obligations of approximately $2 million to be completed in the following 12 months. The Company has entered into various operating lease agreements, primarily for computer equipment, computer software and real estate (agency and claims offices across the country and portions of the home office complex). These leases have varying commitment periods with most in the 1 to 3 year range. Payments on these leases were approximately $10 million in 2004. It is anticipated that the Companys payments under operating leases for the full year 2005 will be comparable to the 2004 payments. The Company does not have any other arrangements that expose it to material liability that are not recorded in the financial statements.
34
Capital Resources
The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (NAIC). Historically, the Companys insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes. Management anticipates that the Companys sources of capital will continue to generate capital in excess of the needs for business growth, debt interest payments and shareholder dividends.
The total capital of the Company was $825.3 million at June 30, 2005, including $190.9 million of long-term debt and no short-term debt outstanding. Total debt represented 26.0% of capital excluding unrealized investment gains and losses (23.1% including unrealized investment gains and losses) at June 30, 2005, slightly above the Companys long-term target of 25%.
Shareholders equity was $634.4 million at June 30, 2005, including a net unrealized gain in the Companys investment portfolio of $92.2 million after taxes and the related impact on deferred policy acquisition costs and the value of acquired insurance in force associated with annuity and interest-sensitive life policies. The market value of the Companys common stock and the market value per share were $807.3 million and $18.82, respectively, at June 30, 2005. Book value per share was $14.79 at June 30, 2005 ($12.64 excluding investment fair value adjustments).
As of June 30, 2005, the Company had outstanding $244.5 million aggregate principal amount of 1.425% Senior Convertible Notes (Senior Convertible Notes), which will mature on May 14, 2032, issued at a discount of 52.5% resulting in an effective yield of 3.0%. Interest on the Senior Convertible Notes is payable semi-annually at a rate of 1.425% from November 14, 2002 until May 14, 2007. After that date, cash interest will not be paid on the Senior Convertible Notes prior to maturity unless contingent cash interest becomes payable. From May 15, 2007 through maturity of the Senior Convertible Notes, interest will be recognized at the effective rate of 3.0% and will represent the accrual of discount, excluding any contingent cash interest that may become payable. Contingent cash interest becomes payable if the average market price of a Senior Convertible Note for a five trading day measurement period preceding the applicable six-month period equals 120% or more of the sum of the Senior Convertible Notes issue price, accrued original issue discount and accrued cash interest, if any, for such Senior Convertible Note. The contingent cash interest payable per Senior Convertible Note with respect to any quarterly period within any six-month period will equal the then applicable conversion rate multiplied by the greater of (1) $0.105 or (2) any regular cash dividends paid by the Company per share on HMECs common stock during that quarterly period.
The Senior Convertible Notes will be convertible at the option of the holders into shares of HMECs common stock at a conversion price of $26.74 if the conditions for conversion are satisfied. The Senior Convertible Notes are potentially convertible into 4,343,054 shares (17.763 shares per $1 thousand face amount) and with the implementation of the Financial Accounting Standards Boards Emerging Issues Task Force (EITF) consensus on issue 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share, these shares are included in the calculation of diluted earnings per share to the extent dilutive. The Company may elect to pay holders surrendering notes cash or a combination of cash and shares of HMECs common stock for the notes surrendered. Holders may also surrender Senior Convertible Notes for conversion
35
during any period in which the credit rating assigned to the Senior Convertible Notes is Ba2 or lower by Moodys or BB+ or lower by S&P, the Senior Convertible Notes are no longer rated by either Moodys or S&P, or the credit rating assigned to the Senior Convertible Notes has been suspended or withdrawn by either Moodys or S&P. The Senior Convertible Notes will cease to be convertible pursuant to this credit rating criteria during any period or periods in which all of the credit ratings are increased above such levels. The Senior Convertible Notes are redeemable by HMEC in whole or in part, at any time on or after May 14, 2007, at redemption prices equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the applicable redemption date. The holders of the Senior Convertible Notes may require HMEC to purchase all or a portion of their Senior Convertible Notes on either May 14, 2007, 2012, 2017, 2022, or 2027 at stated prices plus accrued cash interest, if any, to the purchase date. HMEC may pay the purchase price in cash or shares of HMEC common stock or in a combination of cash and shares of HMEC common stock.
The Senior Convertible Notes have an investment grade rating from Standard & Poors Corporation (S&P) (BBB), Moodys Investors Service, Inc. (Moodys) (Baa3), A.M. Best Company, Inc. (A.M. Best) (bbb-) and Fitch Ratings, Ltd. (Fitch) (BBB+). Also see Financial Ratings. The Senior Convertible Notes are traded in the open market (HMN 1.425).
On June 9, 2005, the Company issued $75.0 million face amount of senior notes at an effective yield of 6.1%, which will mature on June 15, 2015 (Senior Notes due 2015). Interest on the Senior Notes due 2015 is payable semi-annually at a rate of 6.05%. The Senior Notes due 2015 are redeemable in whole or in part, at any time, at the Companys option, at a redemption price equal to the greater of (1) 100% of their principal amount or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semi-annual basis, at the Treasury yield (as defined in the indenture) plus 30 basis points, plus, in either of the above cases, accrued interest to the date of redemption. For information regarding the use of proceeds, see Liquidity and Financial Resources Cash Flow Financing Activities.
The Senior Notes due 2015 have an investment grade rating from S&P (BBB), Moodys (Baa3), A.M. Best (bbb-) and Fitch (BBB+). Also see Financial Ratings. The Senior Notes due 2015 are traded in the open market (HMN 6.05).
On June 30, 2005, the Company redeemed all of its outstanding $28.6 million aggregate principal amount of 6 5 / 8 % Senior Notes due 2006 (Senior Notes due 2006). For information regarding the funding of the redemption, see Liquidity and Financial Resources Cash Flow Financing Activities.)
As of June 30, 2005, the Company had no balance outstanding under its Bank Credit Agreement. On May 31, 2005, the Company entered into a new Bank Credit Agreement which provides for unsecured borrowings of up to $100.0 million (the Current Bank Credit Facility). The Current Bank Credit Facility expires on May 30, 2009. Interest accrues at varying spreads relative to corporate or eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate. The unused portion of the Current Bank Credit Facility is subject to a variable commitment fee, which was 0.175% on an annual basis at June 30, 2005. On May 31, 2005, the Company borrowed $25.0 million and subsequently repaid this balance in full on June 13, 2005 utilizing a portion of the proceeds from the issuance of the Senior Notes due 2015.
36
On May 29, 2002, Horace Mann Educators Corporation entered into a Bank Credit Agreement that was amended effective June 1, 2004, increasing the commitment amount to $35.0 million, and May 3, 2005, extending the commitment termination date to June 30, 2005 from the previous termination date of May 31, 2005 (the Previous Bank Credit Agreement). The Previous Bank Credit Agreement was terminated on May 31, 2005, when the Company entered into the Current Bank Credit Facility. The $25.0 million balance outstanding under the Previous Bank Credit Agreement was repaid in full on May 31, 2005 utilizing the borrowing under the Current Bank Credit Facility, described above.
To provide additional capital management flexibility, the Company filed a universal shelf registration on Form S-3 with the SEC in December 2003. The registration statement, which registers the offer and sale by the Company from time to time of up to $300 million of various securities, which may include debt securities, preferred stock, common stock and/or depositary shares, was declared effective on December 30, 2003. The $75.0 million face amount of Senior Notes due 2015 was issued utilizing this registration statement. No other securities associated with the registration statement have been issued as of the date of this Quarterly Report on Form 10-Q.
The Companys ratio of earnings to fixed charges for the six months ended June 30, 2005 was 19.9x, compared to 17.8x for the same period in 2004.
Total shareholder dividends were $9.0 million for the six months ended June 30, 2005. In March and June 2005, the Board of Directors announced regular quarterly dividends of $0.105 per share.
Information regarding the reinsurance program for the Companys property and casualty segment is located in Business Property and Casualty Segment Property and Casualty Reinsurance of the Companys Annual Report on Form 10-K for the year ended December 31, 2004. In addition to the Companys excess and catastrophe reinsurance program, the Companys predominant insurance subsidiary for property and casualty business written in Florida reinsures 90% of hurricane losses in that state above an estimated retention of $14.0 million up to $66.2 million with the Florida Hurricane Catastrophe Fund (FHCF), based on the FHCFs financial resources. The FHCF contract is a 12-month contract, beginning on June 1. Effective June 1, 2005, each company will be required to keep a full retention on the two largest hurricane loss occurrences and will be reimbursed by the FHCF on a retention equal to one-third of the full retention for all other occurrences within the contract period. For the contract period June 1, 2004 through May 31, 2005, the Companys predominant insurance subsidiary for property and casualty business written in Florida was able to reinsure 90% of hurricane losses in that state above an estimated retention of $15.6 million up to $73.3 million with the FHCF. Prior to June 1, 2005, retention limits were required to be met for each hurricane occurrence. Effective May 7, 2002, the Company entered into a 36-month equity put and reinsurance agreement with a subsidiary of Swiss Reinsurance Company, which provided a source of up to $75 million of contingent capital for catastrophe losses above the Companys reinsurance coverage limits. Due to relatively unfavorable pricing and terms, the Company elected not to renew this agreement on the May 7, 2005 expiration date. Management believes that the Companys current catastrophe protection as well as other potential sources of capital would be sufficient in the event of excessive catastrophe losses.
37
Information regarding the interest-sensitive life reinsurance program for the Companys life segment is located in Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Financial Resources Capital Resources of the Companys Annual Report on Form 10-K for the year ended December 31, 2004. As of the date of this Report on Form 10-Q, management has delivered notice of its intention to utilize a portion of the proceeds from the issuance of the Senior Notes due 2015 for an early recapture of the reinsurance agreement with the United States branch of Sun Life Assurance Company of Canada. It is expected that this agreement will be terminated during the third quarter of 2005. This early recapture will result in the reduction of total anticipated pretax fees of approximately $1.2 million, including $0.2 million over the balance of 2005, $0.5 million in 2006 and the remainder over subsequent years.
Financial Ratings
The Companys principal insurance subsidiaries are rated by Standard & Poors Corporation (S&P), Moodys Investors Service, Inc. (Moodys), A.M. Best Company, Inc. (A.M. Best) and Fitch Ratings, Ltd. (Fitch). These rating agencies have also assigned ratings to the Companys long-term debt securities.
Assigned ratings as of August 1, 2005 were as follows (the insurance financial strength ratings for the Companys property and casualty insurance subsidiaries and the Companys principal life insurance subsidiary are the same):
Insurance
Financial Strength Ratings (Outlook) |
Debt Ratings
(Outlook) |
|||
As of August 1, 2005 |
||||
S&P (1) |
A (stable) | BBB (stable) | ||
Moodys (1) |
A3 (stable) | Baa3 (stable) | ||
A.M. Best |
A- (stable) | bbb- (stable) | ||
Fitch |
A+ (negative) | BBB+ (negative) |
(1) | This agency has not yet rated Horace Mann Lloyds. |
The ratings above were unchanged from the disclosure in the Companys Annual Report on Form 10-K for 2004. In June 2005, each of the rating agencies affirmed the above debt ratings as they assigned a rating to the Senior Notes due 2015. In April 2005, Fitch affirmed the Companys insurance financial strength and debt ratings and the accompanying Negative outlook. While acknowledging the insurance subsidiaries solid risk-based capitalization, high-quality liquid investment portfolios, well-defined niche in the educators market and Fitchs heightened comfort with the Companys reserve adequacy, Fitchs rating outlook reflects their continuing concerns about the Companys ability to generate run-rate underwriting profitability supportive of its current ratings and their belief that the Companys level of catastrophe-related losses in 2004 raises concerns about the Companys comparatively high operating leverage and risk management capabilities.
38
Market Value Risk
Market value risk, the Companys primary market risk exposure, is the risk that the Companys invested assets will decrease in value. This decrease in value may be due to a change in (1) the yields realized on the Companys assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also Results of Operations Net Realized Investment Gains and Losses.
Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Companys investments and the credited interest rates on the Companys insurance liabilities.
The Company manages its market value risk by coordinating the projected cash outflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of the Companys exposure to market value risks and the management of those risks is presented in Managements Discussion and Analysis of Financial Condition and Results of Operations Market Value Risk and Results of Operations for the Three Years Ended December 31, 2004 Interest Credited to Policyholders of the Companys Annual Report on Form 10-K for the year ended December 31, 2004.
Recent Accounting Changes
SFAS No. 154
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections. This standard will be effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. SFAS No. 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes, and FASB SFAS No. 3, Reporting Changes in Interim Financial Statements. SFAS No. 154 changes the accounting for, and reporting of, a change in accounting principle and also requires retrospective application to prior periods financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. At the time of this Quarterly Report on Form 10-Q, management is not aware of outstanding circumstances that would result in a currently quantifiable impact on the Companys operating results or financial position.
39
SFAS No. 123 (revised 2004) (SFAS No. 123(R)), SAB 107 and SEC Release 34-51558
In April 2005, the Securities and Exchange Commission (SEC) issued Release No. 34-51558, Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for SFAS No. 123 (Revised 2004), Share-Based Payment. This amendment to Regulation S-X states that each registrant that is not a small business issuer will be required to adopt the provisions of FASB SFAS No. 123 (revised 2004), Share-Based Payment beginning with the first interim or annual reporting period of the registrants first fiscal year beginning on or after June 15, 2005, which for the Company will be January 1, 2006. Release No. 34-51558 does not change the accounting required by SFAS No. 123 (R); it changes only the dates for compliance with the Standard.
In March 2005, the SEC released Staff Accounting Bulletin (SAB) No. 107 which summarizes the views of the SEC staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the SEC staffs views regarding the valuation of share-based payment arrangements for public companies.
In December 2004, the FASB issued SFAS No. 123(R) and, as issued by the FASB, this standard was to be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 for public entities that do not file as small business issuers, which for the Company was to be July 1, 2005. See discussion above regarding the delay in the effective date. This statement revises SFAS No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and identifies required disclosures for share-based payment arrangements. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. In addition, the statement addresses the accounting and financial statement presentation for income tax benefits resulting from share-based payments.
This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award. That cost will be recognized as expense in the Consolidated Statement of Operations over the period during which an employee is required to provide service in exchange for the award.
The Company has accounted for share-based payments using the intrinsic value based method in accordance with APB Opinion No. 25 and, accordingly, recognized no compensation expense for awards representing options to purchase shares of the Companys common stock which have an exercise price equal to market price on the date of grant resulting in an intrinsic value of $0. Disclosures regarding the pro forma effect of stock-based compensation expense have been included in the Companys quarterly and annual consolidated financial statements in compliance with SFAS No. 123. Excluding the acceleration of stock option vesting which occurred in 2004, pro forma pretax stock-based compensation expense was approximately $7 million to $8 million in each of the three years ended December 31, 2004. Although the evaluation of the impact of SFAS No. 123(R) is not yet complete, at the time of this Report on Form 10-Q management anticipates that the impact of adopting SFAS No. 123(R) will be comparable to the historical pro forma expense assuming that the number and characteristics of equity instruments granted in the future are similar to past awards.
40
FASB Staff Position Regarding EITF Issue No. 03-1
In September 2004, the Financial Accounting Standards Board issued a FASB Staff Position (FSP) to delay the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of the Emerging Issues Task Force (EITF) Consensus regarding EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The delay resulting from FSP No. EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments , will be superseded concurrent with the final issuance of FSP EITF Issue 03-1-a. This FSP did not have a material impact on the Companys operating results or financial position.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 305 of Regulation S-K is contained in Managements Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.
Item 4: Controls and Procedures
Managements Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (the Exchange Act), as of June 30, 2005 pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were not effective as of June 30, 2005 due to the two material weaknesses disclosed in Item 9A. Controls and Procedures of the Companys Annual Report on Form 10-K for the year ended December 31, 2004. No additional material weaknesses in the Companys disclosure controls and procedures were identified in the current evaluation.
41
Changes in Internal Control Over Financial Reporting
The following changes have been made subsequent to December 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Income Tax Financial Reporting
While the Company has not fully remediated the material weakness in its internal control over income tax deferred assets and liabilities, management is in the process of implementing the following remedial actions, the status of which is reviewed periodically with the Companys Audit Committee:
| A remediation plan to compute and reconcile the book to tax basis differences at an asset and liability transaction level, including documentation and testing of enhanced processes and procedures by November 30, 2005; |
| A qualified tax officer was employed by the Company in March 2005 to allow for appropriate segregation of duties and to strengthen processes related to the preparation and review of tax asset and liability documentation and an additional tax accountant will be hired as soon as practicable to assist in the reconciliation process; and |
| A tax consulting firm was engaged to review the Companys first quarter and second quarter 2005 federal income tax provisions, along with related reconciliations and supporting documentation, for validity and consistency and will perform such reviews on a quarterly basis during 2005 and annually, if warranted, thereafter. |
Reporting of Cash Balances
While the Company has not fully remediated the material weakness in its internal control over the reporting of cash balances, management is in the process of implementing the following remedial actions, the status of which is reviewed periodically with the Companys Audit Committee:
Bank Account and Suspense Account Reconciliations
| A remediation plan to reconcile and clear all suspense accounts on a timely basis, including a review of staffing levels and proficiencies, training, documentation and testing of enhanced processes and procedures by November 30, 2005; |
| A remediation plan to enhance and document processes and procedures for the timely completion, review and testing of bank account reconciliations, including a review of staffing levels, proficiencies and training by November 30, 2005; and |
| Initial phases of the remediation plan to address controller department staffing and training needs have been initiated, including redeployment and retraining of existing staff and increased utilization of temporary employees. Additional full-time employees will be hired and trained as soon as practicable. |
Accounting Policy for Outstanding Check Amounts
| Documentation of processes and procedures, along with appropriate training, to ensure that the Companys accounting policy, which has been corrected to conform with U.S. generally accepted accounting principles, is consistently applied on a going forward basis has been completed. |
42
Item 4: Submission of Matters to a Vote of Security Holders
The Companys Annual Meeting of Shareholders was held on May 26, 2005. The results of the matters submitted to a vote of security holders are shown in the table below.
Votes For |
Votes Against |
Abstentions
|
||||
Votes representing 39,867,785 shares of Common Stock were represented and cast regarding Proposal 1. | ||||||
Election of the following nominees to hold the office of Director until the next Annual Meeting of Shareholders and until their respective successors have been duly elected and qualified: |
||||||
William W. Abbott |
38,441,162 | 1,426,623 | | |||
Mary H. Futrell |
38,493,410 | 1,374,375 | | |||
Stephen J. Hasenmiller |
39,543,556 | 324,229 | | |||
Louis G. Lower II |
39,469,552 | 398,233 | | |||
Joseph J. Melone |
38,440,879 | 1,426,906 | | |||
Jeffrey L. Morby |
39,398,452 | 469,333 | | |||
Shaun F. OMalley |
39,518,059 | 349,726 | | |||
Charles A. Parker |
39,520,304 | 347,481 | | |||
Votes representing 39,867,786 shares of Common Stock were represented and cast regarding Proposal 2. | ||||||
Approval of the Companys Amended and Restated 2002 Incentive Compensation Plan. |
31,513,582 | 5,552,251 | 2,801,953 | |||
Votes representing 39,867,785 shares of Common Stock were represented and cast regarding Proposal 3. | ||||||
Ratification of the appointment of KPMG LLP, an independent registered public accounting firm, as the Companys auditors for the year ended December 31, 2005. |
39,266,333 | 554,363 | 47,089 |
The Company is not aware of any information required to be disclosed in a report on Form 8-K during the six months ended June 30, 2005 which has not been filed with the SEC.
43
44
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION | ||
(Registrant) | ||
Date August 9, 2005 |
/s/ Louis G. Lower II |
|
Louis G. Lower II | ||
President and Chief Executive Officer | ||
Date August 9, 2005 |
/s/ Peter H. Heckman |
|
Peter H. Heckman | ||
Executive Vice President and Chief Financial Officer |
||
Date August 9, 2005 |
/s/ Bret A. Conklin |
|
Bret A. Conklin | ||
Senior Vice President and Controller |
45
HORACE MANN EDUCATORS CORPORATION
EXHIBITS
To
FORM 10-Q
For the Quarter Ended June 30, 2005
VOLUME 1 OF 1
The following items are filed as Exhibits to Horace Mann Educators Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. Management contracts and compensatory plans are indicated by an asterisk (*).
EXHIBIT INDEX
Exhibit No. |
Description
|
|||
(10) |
Material contracts: | |||
10.1 | Credit Agreement dated as of May 31, 2005 among HMEC, certain financial institutions named therein and Bank of America, N.A., as administrative agent (the Agent). | |||
10.2* | Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan. | |||
(11) |
Statement re computation of per share earnings. | |||
(15) |
KPMG LLP letter regarding unaudited interim financial information. | |||
(31) |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.1 | Certification by Louis G. Lower II, Chief Executive Officer of HMEC. | |||
31.2 | Certification by Peter H. Heckman, Chief Financial Officer of HMEC. | |||
(32) |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
32.1 | Certification by Louis G. Lower II, Chief Executive Officer of HMEC. | |||
32.2 | Certification by Peter H. Heckman, Chief Financial Officer of HMEC. | |||
(99.1) |
Glossary of Selected Terms |
Exhibit 10.1
CREDIT AGREEMENT
Dated as of May 31, 2005
among
HORACE MANN EDUCATORS CORPORATION,
as the Borrower,
BANK OF AMERICA, N.A.,
as Administrative Agent,
JPMORGAN CHASE BANK, N.A.,
as Co-Syndication Agent,
NATIONAL CITY BANK OF THE MIDWEST,
as Co-Syndication Agent
and
The Other Lenders Party Hereto
BANC OF AMERICA SECURITIES LLC,
as
Sole Lead Arranger and Sole Book Manager
TABLE OF CONTENTS
Page
|
||||
ARTICLE I DEFINITIONS |
1 | |||
SECTION 1.01 |
Definitions |
1 | ||
SECTION 1.02 |
Use of Defined Terms |
15 | ||
SECTION 1.03 |
Cross References; Headings |
16 | ||
SECTION 1.04 |
Other Definitional Provisions |
16 | ||
SECTION 1.05 |
Rounding |
16 | ||
SECTION 1.06 |
Times of Day |
16 | ||
ARTICLE II THE COMMITMENTS AND LOANS |
16 | |||
SECTION 2.01 |
Loans |
16 | ||
SECTION 2.02 |
Borrowings, Conversions and Continuations of Loans |
17 | ||
SECTION 2.03 |
Prepayments |
18 | ||
SECTION 2.04 |
Termination or Reduction of Commitments |
18 | ||
SECTION 2.05 |
Repayment of Loans |
19 | ||
SECTION 2.06 |
Interest |
19 | ||
SECTION 2.07 |
Fees |
20 | ||
SECTION 2.08 |
Computation of Interest and Fees |
20 | ||
SECTION 2.09 |
Evidence of Debt |
20 | ||
SECTION 2.10 |
Payments Generally; Administrative Agents Clawback |
21 | ||
SECTION 2.11 |
Sharing of Payments by Lender |
22 | ||
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY |
23 | |||
SECTION 3.01 |
Taxes |
23 | ||
SECTION 3.02 |
Illegality |
25 | ||
SECTION 3.03 |
Inability to Determine Rates |
25 | ||
SECTION 3.04 |
Increased Costs |
26 | ||
SECTION 3.05 |
Compensation for Losses |
27 | ||
SECTION 3.06 |
Mitigation Obligations; Replacement of Lenders |
28 | ||
SECTION 3.07 |
Survival |
28 | ||
ARTICLE IV CONDITIONS PRECEDENT TO LOANS |
28 | |||
SECTION 4.01 |
Conditions of Initial Loan |
28 |
i
TABLE OF CONTENTS
(continued)
Page
|
||||
SECTION 4.02 |
Conditions to all Loans |
30 | ||
ARTICLE V REPRESENTATIONS AND WARRANTIES |
31 | |||
SECTION 5.01 |
Due Organization, Authorization, Etc. |
31 | ||
SECTION 5.02 |
Statutory Financial Statements |
31 | ||
SECTION 5.03 |
GAAP Financial Statements |
32 | ||
SECTION 5.04 |
Litigation and Contingent Liabilities |
33 | ||
SECTION 5.05 |
Investment Company Act |
33 | ||
SECTION 5.06 |
Regulations T, U and X |
34 | ||
SECTION 5.07 |
Proceeds |
34 | ||
SECTION 5.08 |
Insurance |
34 | ||
SECTION 5.09 |
Accuracy of Information |
34 | ||
SECTION 5.10 |
Subsidiaries |
34 | ||
SECTION 5.11 |
Insurance Licenses |
34 | ||
SECTION 5.12 |
Taxes |
34 | ||
SECTION 5.13 |
Compliance with Laws |
35 | ||
SECTION 5.14 |
No Default |
35 | ||
SECTION 5.15 |
Ownership of Property; Liens |
35 | ||
ARTICLE VI COVENANTS |
35 | |||
SECTION 6.01 |
Reports, Certificates and Other Information |
36 | ||
SECTION 6.02 |
Corporate Existence; Foreign Qualification |
40 | ||
SECTION 6.03 |
Books, Records and Inspections |
40 | ||
SECTION 6.04 |
Insurance |
40 | ||
SECTION 6.05 |
Taxes and Liabilities |
40 | ||
SECTION 6.06 |
Compliance with Laws |
41 | ||
SECTION 6.07 |
Conduct of Business |
41 | ||
SECTION 6.08 |
Maintenance of Properties |
41 | ||
ARTICLE VII NEGATIVE COVENANTS |
41 | |||
SECTION 7.01 |
Consolidated Debt to Total Capitalization |
41 | ||
SECTION 7.02 |
A.M. Best Rating |
41 |
ii
TABLE OF CONTENTS
(continued)
Page
|
||||
SECTION 7.03 |
Net Worth |
41 | ||
SECTION 7.04 |
Mergers, Consolidations and Sales |
41 | ||
SECTION 7.05 |
Regulations T, U and X |
42 | ||
SECTION 7.06 |
Other Agreements |
42 | ||
SECTION 7.07 |
Transactions with Affiliates |
42 | ||
SECTION 7.08 |
Liens |
42 | ||
SECTION 7.09 |
Subsidiary Debt |
42 | ||
ARTICLE VIII EVENTS OF DEFAULT AND THEIR EFFECT |
43 | |||
SECTION 8.01 |
Events of Default |
43 | ||
SECTION 8.02 |
Effect of Event of Default |
46 | ||
ARTICLE IX ADMINISTRATIVE AGENT |
46 | |||
SECTION 9.01 |
Appointment and Authority |
46 | ||
SECTION 9.02 |
Rights as a Lender |
46 | ||
SECTION 9.03 |
Exculpatory Provisions |
46 | ||
SECTION 9.04 |
Reliance by Administrative Agent |
47 | ||
SECTION 9.05 |
Delegation of Duties |
48 | ||
SECTION 9.06 |
Resignation of Administrative Agent |
48 | ||
SECTION 9.07 |
Non-Reliance on Administrative Agent and Other Lenders |
48 | ||
SECTION 9.08 |
No Other Duties, Etc. |
49 | ||
SECTION 9.09 |
Administrative Agent May File Proofs of Claim |
49 | ||
ARTICLE X MISCELLANEOUS |
50 | |||
SECTION 10.01 |
Amendments, Etc. |
50 | ||
SECTION 10.02 |
Notices; Effectiveness; Electronic Communication |
51 | ||
SECTION 10.03 |
No Waiver; Cumulative Remedies |
52 | ||
SECTION 10.04 |
Expenses; Indemnity; Damage Waiver |
53 | ||
SECTION 10.05 |
Payments Set Aside |
54 | ||
SECTION 10.06 |
Successors and Assigns |
55 | ||
SECTION 10.07 |
Treatment of Certain Information; Confidentiality |
57 | ||
SECTION 10.08 |
Right of Setoff |
58 |
iii
TABLE OF CONTENTS
(continued)
Page
|
||||
SECTION 10.09 |
Interest Rate Limitation |
59 | ||
SECTION 10.10 |
Counterparts; Integration; Effectiveness |
59 | ||
SECTION 10.11 |
Survival of Representations and Warranties |
59 | ||
SECTION 10.12 |
Severability |
59 | ||
SECTION 10.13 |
Replacement of Lenders |
60 | ||
SECTION 10.14 |
Governing Law; Jurisdiction; Etc. |
60 | ||
SECTION 10.15 |
Waiver of Jury Trial |
61 | ||
SECTION 10.16 |
USA PATRIOT Act Notice |
61 |
iv
SCHEDULES AND EXHIBITS
SCHEDULE 2.01 | Commitments | |
SCHEDULE 5.01 | Jurisdictions | |
SCHEDULE 5.02(a) | SAP Exceptions | |
SCHEDULE 5.04 | Litigation | |
SCHEDULE 5.10 | Subsidiaries | |
SCHEDULE 5.11 | Insurance Licenses | |
SCHEDULE 5.12 | Taxes | |
SCHEDULE 10.02 | Addresses | |
SCHEDULE 10.06 | Processing Fee |
EXHIBIT A | Loan Notice | |
EXHIBIT B | Note | |
EXHIBIT C | Compliance Certificate | |
EXHIBIT D | Opinion of Counsel | |
EXHIBIT E | Assignment and Assumption |
v
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of May 31, 2005, is entered into by and among HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the Borrower ), various financial institutions which are parties hereto (the Lenders ), and BANK OF AMERICA, N.A., as administrative agent for the Lenders (in such capacity, the Administrative Agent ).
W I T N E S S E T H :
WHEREAS, the Lenders have agreed to make available to the Borrower a revolving credit facility upon the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 Definitions . When used herein the following terms shall have the following meanings:
Administrative Agent means (a) Bank of America, N.A., in its capacity as administrative agent for the Lenders, and (b) each other Person as shall have subsequently been appointed as the successor Administrative Agent pursuant to Section 9.06 .
Administrative Agents Office means the office identified as such on Schedule 10.02 .
Administrative Questionnaire means an administrative questionnaire in a form supplied by the Administrative Agent.
Affiliate of any Person means any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person (excluding any trustee under, or any committee with responsibility for administering, any Plan). A Person shall be deemed to be:
(a) controlled by any other Person if such other Person possesses, directly or indirectly, power:
(i) to vote 10% or more of the securities having at the time of any determination hereunder voting power for the election of directors of such Person; or
(ii) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; or
(b) controlled by or under common control with such other Person if such other Person is the executor, administrator, or other personal representative of such Person.
Agent-Related Persons means the Administrative Agent, together with its Affiliates, and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates.
Aggregate Commitments means the Commitments of all the Lenders.
Agreement means this Credit Agreement as from time to time amended, modified, supplemented, restated, refunded or renewed and in effect.
Annual Statement means the annual financial statement of any Insurance Subsidiary as required to be filed with the insurance commissioner (or similar authority) of such Insurance Subsidiarys state of domicile, together with all exhibits or schedules filed therewith, prepared in conformity with SAP. References to amounts on particular exhibits, schedules, lines, pages and columns of the Annual Statement are based on the format promulgated by the NAIC for 2004 Annual Statements. If such format is changed in future years so that different information is contained in such items or they no longer exist, it is understood that the reference is to information consistent with that reported in the referenced item in the 2004 Annual Statement of such Insurance Subsidiary.
Applicable Percentage means with respect to any Lender at any time, the percentage (carried out to the ninth decimal place) of the Aggregate Commitments represented by such Lenders Commitment at such time. If the commitment of each Lender to make Loans has been terminated pursuant to Section 8.02 or if the Aggregate Commitments have expired, then the Applicable Percentage of each Lender shall be determined based on the Applicable Percentage of such Lender most recently in effect, giving effect to any subsequent assignments. The initial Applicable Percentage of each Lender is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable.
Applicable Rate means, from time to time, the following percentages per annum, based upon the Debt Rating as set forth below:
2
Pricing Level |
Debt Ratings S&P/Moodys
|
Commitment Fee
|
Eurodollar Rate +
|
|||
1 |
A-/A3 or better | 0.10% | 0.50% | |||
2 |
BBB+/Baa1 | 0.125% | 0.65% | |||
3 |
BBB/Baa2 | 0.175% | 0.875% | |||
4 |
BBB-/Baa3 | 0.225% | 1.125% | |||
5 |
Less than BBB-/Baa3 | 0.30% | 1.50% |
Debt Rating means, as of any date of determination, the rating as determined by either S&P or Moodys (collectively, the Debt Ratings) of the Borrowers non-credit-enhanced, senior unsecured long-term debt; provided that if a Debt Rating is issued by each of the foregoing rating agencies, then the higher of such Debt Ratings shall apply (with the Debt Rating for Pricing Level 1 being the highest and the Debt Rating for Pricing Level 5 being the lowest), unless there is a split in Debt Ratings of more than one level, in which case the Pricing Level that is one level higher than the Pricing Level of the lower Debt Rating shall apply.
Initially, the Applicable Rate shall be determined based upon the Debt Rating specified in the certificate delivered pursuant to Section 4.01(a)(vii) . Thereafter, each change in the Applicable Rate resulting from a publicly announced change in the Debt Rating shall be effective during the period commencing on the date of the public announcement thereof and ending on the date immediately preceding the effective date of the next such change.
Approved Fund means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
Arranger means Banc of America Securities LLC, in its capacity as sole lead arranger and sole book manager.
Assignee Group means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.
Assignment and Assumption means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 10.06(b) , and accepted by the Administrative Agent, in substantially the form of Exhibit E or any other form approved by the Administrative Agent.
Attributable Indebtedness means, on any date, (a) in respect of any capital lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease
3
Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a capital lease.
Availability Period means the period from and including the Closing Date to the earliest of (a) the Maturity Date, (b) the date of termination of the Aggregate Commitments pursuant to Section 2.04 , and (c) the date of termination of the commitment of each Lender to make Loans pursuant to Section 8.02 .
Bank of America means Bank of America, N.A. and its successors.
Base Rate means for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate. The prime rate is a rate set by Bank of America based upon various factors including Bank of Americas costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change.
Base Rate Loan means a Loan that bears interest based on the Base Rate.
Borrower has the meaning specified in the Preamble .
Borrower Materials has the meaning specified in Section 6.02 .
Borrowing means a borrowing consisting of simultaneous Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Lenders pursuant to Section 2.01 .
Business Day means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where the Administrative Agents Office is located and, if such day relates to any Eurodollar Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market.
Capitalized Lease shall mean, as to any Person, any lease which is or should be capitalized on the balance sheet in accordance with GAAP, together with any other lease which is in substance a financing lease, including, without limitation, any lease under which (a) such Person has or will have an option to purchase the property subject thereto at a nominal amount or an amount less than a reasonable estimate of the fair market value of such property as of the date the lease is entered into or (b) the term of the lease approximates or exceeds the expected useful life of the property leased thereunder.
Change in Control shall be deemed to have occurred if (a) there shall be consummated (i) any consolidation or merger of the Borrower in which the Borrower is not the continuing or surviving corporation, or pursuant to which shares of the Borrowers common
4
stock would be converted into cash, securities or other property, other than a merger of the Borrower in which no Borrower shareholders ownership percentage in the surviving corporation immediately after the merger is less than such shareholders ownership percentage in the Borrower immediately prior to such merger by ten percent (10%) or more, or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Borrower; (b) the shareholders of the Borrower approve any plan or proposal for the liquidation or dissolution of the Borrower; (c) any person or group as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), is or becomes, directly or indirectly, the beneficial owner, as defined in Rule 13d-3 under the Exchange Act, of securities of the Borrower that represent 51% or more of the combined voting power of the Borrowers then outstanding securities; or (d) a majority of the members of the Borrowers Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated by the Borrower for election by its shareholders.
Change in Law means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any Governmental Authority.
Closing Date means the first date all the conditions precedent in Section 4.01 are satisfied or waived in accordance with Section 10.01 .
Code means the Internal Revenue Code of 1986, as amended and any successor statute of similar import, together with the regulations thereunder, as amended, reformed or otherwise modified and in effect from time to time. References to sections of the Code shall be construed to also refer to successor sections.
Commitment means, as to each Lender, its obligation to make Loans to the Borrower pursuant to Section 2.01 in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lenders name on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement.
Compliance Certificate means a certificate substantially in the form of Exhibit C but with such changes as the Administrative Agent may from time to time request for purposes of monitoring the Borrowers compliance herewith.
Consolidated Debt means the consolidated Debt of the Borrower and its consolidated Subsidiaries, including without limitation the principal amount of the Loans.
Contingent Liability means any agreement, undertaking or arrangement by which any Person (outside the ordinary course of business) guarantees, endorses, acts as surety for or otherwise becomes or is contingently liable for (by direct or indirect agreement, contingent or
5
otherwise, to provide funds for payment by, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the debt, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or for the payment of dividends or other distributions upon the shares of any other Person or undertakes or agrees (contingently or otherwise) to purchase, repurchase, or otherwise acquire or become responsible for any Debt, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, or other financial condition of any other Person, or to make payment or transfer property to any other Person other than for fair value received; provided , however , that obligations of each of the Insurance Subsidiaries under insurance policies, annuities, or surety contracts issued by it or to which it is a party, reinsurance treaties, certificates or other agreements of each of the Insurance Subsidiaries which are entered into in the ordinary course of business (including security posted by each of the Insurance Subsidiaries in the ordinary course of its business to secure obligations thereunder) shall not be deemed to be Contingent Liabilities of such Insurance Subsidiary or the Borrower for the purposes of this Agreement. The amount of any Persons obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the debt, obligation or other liability guaranteed or supported thereby.
Contractual Obligation means, relative to any Person, any obligation, commitment or undertaking under any agreement or other instrument to which such Person is a party or by which it or any of its property is bound or subject.
Controlled Group means the Borrower and any corporation, trade or business that is, along with the Borrower, a member of a controlled group of corporations or a controlled group of trades or businesses as described in sections 414(b) and 414(c), respectively, of the Code or in section 4001 of ERISA.
Debt means, with respect to any Person, at any date, without duplication, (a) all obligations of such Person for borrowed money or in respect of loans or advances; (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations in respect of letters of credit which have been drawn but not reimbursed by the Person for whose account such letter of credit was issued, and bankers acceptances issued for the account of such Person; (d) all obligations in respect of Capitalized Leases and Synthetic Lease Obligations of such Person; (e) all Hedging Obligations of such Person; (f) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services; (g) Debt of such Person secured by a Lien on property owned or being purchased by such Person (including Debt arising under conditional sales or other title retention agreements) whether or not such Debt is limited in recourse; (h) any Debt of another Person secured by a Lien on any assets of such first Person, whether or not such Debt is assumed by such first Person; (i) any Debt of a partnership in which such Person is a general partner; and (j) all Contingent Liabilities of such Person whether or not in connection with the foregoing. The amount of any net obligation under any Hedging Obligation on any date shall be deemed to be the Swap Termination Value thereof as of such date. The amount of any
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capital lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date.
Debt Rating has the meaning specified in the definition of Applicable Rate.
Debtor Relief Laws means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
Default means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default.
Default Rate means an interest rate equal to (a) the Base Rate plus (b) 3% per annum; provided , however , that with respect to a Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Rate) otherwise applicable to such Loan plus 3% per annum.
Defaulting Lender means any Lender that (a) has failed to fund any portion of the Loans required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.
Department has the meaning specified in Section 5.02(a) .
Dollar(s) and the sign $ means lawful money of the United States of America.
Eligible Assignee means (a) a Lender; (b) an Affiliate of a Lender; (c) an Approved Fund; and (d) any other Person (other than a natural person) approved by (i) the Administrative Agent, and (ii) unless an Event of Default has occurred and is continuing, the Borrower (each such approval not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, Eligible Assignee shall not include the Borrower or any of the Borrowers Affiliates or Subsidiaries.
ERISA means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations promulgated thereunder and under the Code, in each case as in effect from time to time. References to sections of ERISA also refer to successor sections.
Eurodollar Base Rate has the meaning specified in the definition of Eurodollar Rate.
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Eurodollar Rate means for any Interest Period with respect to any Eurodollar Rate Loan, a rate per annum determined by the Administrative Agent pursuant to the following formula:
Eurodollar Rate = | Eurodollar Base Rate | |||
1.00 Eurodollar Reserve Percentage |
Where,
Eurodollar Base Rate means, for such Interest Period, the rate per annum equal to the British Bankers Association LIBOR Rate ( BBA LIBOR ), as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period. If such rate is not available at such time for any reason, then the Eurodollar Base Rate for such Interest Period shall be the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by Bank of America and with a term equivalent to such Interest Period would be offered by Bank of Americas London Branch to major banks in the London interbank eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period.
Eurodollar Reserve Percentage means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, carried out to five decimal places) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as Eurocurrency liabilities ). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage.
Eurodollar Rate Loan means a Loan that bears interest at a rate based on the Eurodollar Rate.
Excluded Taxes means, with respect to the Administrative Agent, any Lender, or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) taxes imposed on or measured by its overall net income (however denominated), and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable Lending Office is located, (b) any branch profits taxes imposed by the United States or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section
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10.13 ), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party hereto (or designates a new Lending Office) or is attributable to such Foreign Lenders failure or inability (other than as a result of a Change in Law) to comply with Section 3.01(e) , except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new Lending Office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 3.01(a) .
Executive Officer means, as to any Person, the president, the chief financial officer, the chief executive officer, the senior vice president-finance, the general counsel, the treasurer or the secretary.
Existing Credit Agreement means the Credit Agreement dated as of May 29, 2002 among the Borrower, certain lenders and the Administrative Agent, as amended.
Federal Funds Rate means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent.
Fee Letter means the letter agreement, dated April 15, 2005, among the Borrower, the Administrative Agent and the Arranger.
Fiscal Quarter means any quarter of a Fiscal Year.
Fiscal Year means any period of twelve consecutive calendar months ending on the last day of December.
Foreign Lender means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is resident for tax purposes. For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
FRB means the Board of Governors of the Federal Reserve System of the United States.
Fund means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
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GAAP means generally accepted accounting principles in the United States of America as in effect from time to time.
Governmental Authority means any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
Hedging Obligations means, with respect to any Person, the net liability of such Person under Swap Contracts.
Indemnified Taxes means Taxes other than Excluded Taxes.
Indemnitees has the meaning specified in Section 10.04(b) .
Information has the meaning specified in Section 10.07 .
Insurance Code means, with respect to any Insurance Subsidiary, the Insurance Code of such Insurance Subsidiarys state of domicile and any successor statute of similar import, together with the regulations thereunder, as amended or otherwise modified and in effect from time to time. References to sections of the Insurance Code shall be construed to also refer to successor sections.
Insurance Policies means policies purchased from insurance companies by any of the Borrower or its Subsidiaries, for its own account to insure against its own liability and property loss (including, without limitation, casualty, liability and workers compensation insurance), other than Reinsurance Agreements and Surplus Relief Reinsurance Agreements.
Insurance Subsidiary means any Life Subsidiary or any P/C Subsidiary.
Interest Payment Date means, (a) as to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan and the Maturity Date; provided , however , that if any Interest Period for a Eurodollar Rate Loan exceeds three months, the respective dates that fall every three months after the beginning of such Interest Period shall also be Interest Payment Dates; and (b) as to any Base Rate Loan, the last Business Day of each March, June, September and December and the Maturity Date.
Interest Period means as to each Eurodollar Rate Loan, the period commencing on the date such Eurodollar Rate Loan is disbursed or (in the case of any Eurodollar Rate Loan) converted to or continued as a Eurodollar Rate Loan and ending on the date one, two, three or six months thereafter, as selected by the Borrower in its Loan Notice; provided that:
(i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Rate Loan, such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day;
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(ii) any Interest Period pertaining to a Eurodollar Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and
(iii) no Interest Period shall extend beyond the Maturity Date.
Laws means, collectively, all international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.
Lease Obligations means, at any date, the rental commitments of any person under leases for real and/or personal property (including taxes, insurance, maintenance and similar expenses which any Person is obligated to pay under the terms of said leases) on such date, whether or not such obligations are reflected as liabilities or commitments on a balance sheet of such Person or in the notes thereto, excluding, however, obligations under Capitalized Leases.
Lenders has the meaning specified in the Preamble .
Lending Office means, as to any Lender, the office or offices of such Lender described as such in such Lenders Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.
License(s) has the meaning specified in Section 5.11 .
Lien means, when used with respect to any Person, any interest in any real or personal property, asset or other right held, owned or being purchased or acquired by such Person for its own use, consumption or enjoyment which secures payment or performance of any obligation and shall include any mortgage, lien, pledge, encumbrance, charge, retained title of a conditional vendor or lessor, or other security agreement, mortgage, deed of trust, chattel mortgage, assignment, pledge, retention of title, financing or similar statement or notice, or other encumbrance arising as a matter of law, judicial process or otherwise.
Life Subsidiary means any Subsidiary of the Borrower that is engaged in the business of providing life insurance and/or annuities, and related services.
Loan has the meaning specified in Section 2.01 .
Loan Documents means this Agreement, any Note and the Fee Letter.
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Loan Notice means a notice of (a) a Borrowing, (b) a conversion of Loans from one Type to the other, or (c) a continuation of Eurodollar Rate Loans, pursuant to Section 2.02(a) , which, if in writing, shall be substantially in the form of Exhibit A .
Material Adverse Effect means, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), a materially adverse effect on:
(a) the assets, business, financial condition, operations or prospects of the Borrower or any Subsidiary; or
(b) the ability of the Borrower or any Subsidiary to perform any of its payment or other material obligations under any of the Loan Documents.
Material Insurance Subsidiary means, at any time, an Insurance Subsidiary having (on a consolidated basis with its Subsidiaries) at such time either (a) gross revenues for the most recent four Fiscal Quarter period in excess of 5% of the gross revenues of the Borrower and its Subsidiaries for such Four Fiscal Quarter period or (b) total assets, as of the last day of the preceding Fiscal Quarter, having a net book value in excess of 5% of the total assets of the Borrower and its Subsidiaries as of such day, in each case, based upon the Borrowers most recent annual or quarterly financial statements delivered to the Administrative Agent under Section 6.01 .
Maturity Date means May 30, 2009.
Minimum Net Worth has the meaning specified in Section 7.03 .
Moodys means Moodys Investors Service, Inc. and any successor thereto.
Multiemployer Plan means a multiemployer plan as defined in section 4001(a)(3) of ERISA, and to which the Borrower or any of the Subsidiaries is making, or is obligated to make, contributions, or has made, or has been obligated to make, contributions.
NAIC means the National Association of Insurance Commissioners, or any successor thereto.
Net Worth means the consolidated net worth, calculated in accordance with GAAP, of the Borrower and its consolidated Subsidiaries, excluding unrealized gains and losses as calculated in accordance with FASB 115.
Note means a promissory note made by the Borrower in favor of a Lender evidencing Loans made by such Lender, substantially in the form of Exhibit B .
Obligations means all obligations and liabilities of the Borrower and its Subsidiaries to the Administrative Agent or any of the Lenders, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, primary or secondary, joint or several, recourse or nonrecourse or now or hereafter existing or due or to become due, whether
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for principal, interest, fees, expenses, lease obligations, claims, indemnities or otherwise, under or in connection with this Agreement or any other Loan Document and including any Hedging Obligations to the Administrative Agent or any of the Lenders.
Ordinary Course Litigation has the meaning specified in Section 5.04 .
Other Taxes means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.
Outstanding Amount means the aggregate outstanding principal amount of all Loans after giving effect to any borrowings and prepayments or repayments of Loans occurring on such date.
Participant has the meaning specified in Section 10.06(d) .
PBGC means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions.
P/C Subsidiary means any Subsidiary of the Borrower that is engaged in the business of providing property and casualty insurance and related services.
Person means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
Plan means any employee pension benefit plan, as such term is defined in ERISA, which is subject to Title IV of ERISA (other than a Multiemployer Plan), and as to which any entity in the Controlled Group has or may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA for any time within the preceding five years or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA.
Platform has the meaning specified in Section 6.02 .
Quarterly Statement means the quarterly financial statement of any Insurance Subsidiary as required to be filed with the insurance commissioner (or similar authority) of such Insurance Subsidiarys state of domicile, together with all exhibits or schedules filed therewith, prepared in conformity with SAP.
Register has the meaning specified in Section 10.06(c) .
Reinsurance Agreements means any agreement, contract, treaty, certificate or other arrangement (other than a Surplus Relief Reinsurance Agreement) whereby any Insurance Subsidiary agrees to transfer or cede to another insurer all or part of the liability assumed by such Insurance Subsidiary under a policy or policies of insurance reinsured by such Insurance Subsidiary.
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Related Parties means, with respect to any Person, such Persons Affiliates and the partners, directors, officers, employees, agents and advisors of such Person and of such Persons Affiliates.
Required Lenders means, as of any date of determination, Lenders having more than 50% of the Aggregate Commitments or, if the commitment of each Lender to make Loans has been terminated pursuant to Section 8.02 , Lenders holding in the aggregate more than 50% of the Total Outstandings; provided that the Commitment of, and the portion of the Total Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders.
Requirement of Law for any Person means the corporate charter and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule, ordinance or regulation or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
Responsible Officer means the chief executive officer, president, chief financial officer, senior vice president-finance or treasurer of the Borrower. Any document delivered hereunder that is signed by a Responsible Officer of the Borrower shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of the Borrower and such Responsible Officer shall be conclusively presumed to have acted on behalf of the Borrower.
SAP means, as to each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority) in such Insurance Subsidiarys state of domicile for the preparation of Annual Statements and other financial reports by insurance corporations of the same type as such Insurance Subsidiary.
S&P means Standard & Poors Rating Services, a division of The McGraw-Hill Companies, Inc. and any successor thereto.
Statutory Financial Statements has the meaning specified in Section 6.02 .
Statutory Liabilities means, as to any Person, as of any date, with respect to (a) any Life Subsidiary, the amount reported on page 3, line 28, column 1 of its Annual Statement, and (b) any P/C Subsidiary, the amount reported on page 3, line 26, column 1 of its Annual Statement; or an amount determined in a consistent manner for any date other than one as of which an Annual Statement is prepared.
Surplus Relief Reinsurance Agreements means any agreement whereby any Insurance Subsidiary assumes or cedes business under a reinsurance agreement that would be considered a financing-type reinsurance agreement and (a) with respect to any P/C Subsidiary, which is entered into solely for the purpose of affecting the income statement of such P/C Subsidiary as the same may be amended from time to time, and (b) with respect to any Life Subsidiary, as determined in the Fourth Edition of the AICPA Audit Guide for Stock Life Insurance Companies on pp. 91-92 thereof as the same may be amended from time to time.
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Swap Contract means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a Master Agreement ), including any such obligations or liabilities under any Master Agreement.
Swap Termination Value means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender).
Synthetic Lease Obligation means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).
Taxes means all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
Total Outstandings means the aggregate Outstanding Amount of all Loans.
Type means with respect to a Loan, its character as a Base Rate Loan or a Eurodollar Rate Loan.
2004 Annual Statement has the meaning specified in Section 5.02(b) .
2005 Quarterly Statement has the meaning specified in Section 5.02(b) .
SECTION 1.02 Use of Defined Terms . Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such
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meanings when used in the Schedules hereto, the Loan Documents, the Exhibits and any other communications delivered from time to time in connection with this Agreement.
SECTION 1.03 Cross References; Headings . The words hereof, herein and hereunder and words of similar import when used in this Agreement or in any of the Loan Documents shall refer to this Agreement or such Loan Document as a whole and not to any particular provision of this Agreement or such Loan Document. Section, Schedule and Exhibit references contained in this Agreement are references to Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified. Any reference in any Section or definition to any clause is, unless otherwise specified, to such clause of such Section or definition. The various headings in this Agreement and the Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such Loan Document or any provision hereof or thereof.
SECTION 1.04 Other Definitional Provisions . Unless otherwise defined or the context otherwise requires, all financial and accounting terms used herein or in any of the Loan Documents or any certificate or other document made or delivered pursuant hereto shall be defined in accordance with GAAP or SAP, as the context may require. When used in this Agreement, the term financial statements shall include the notes and schedules thereto. In addition, when used herein, the terms best knowledge of or to the best knowledge of any Person shall mean matters within the actual knowledge of such Person (or an Executive Officer or general partner of such Person) or which should have been known by such Person after reasonable inquiry.
SECTION 1.05 Rounding . Any financial ratios required to be maintained by the Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
SECTION 1.06 Times of Day . Unless otherwise specified, all references herein to times of day shall be references to Eastern time (daylight or standard, as applicable).
ARTICLE II
THE COMMITMENTS AND LOANS
SECTION 2.01 Loans . Subject to the terms and conditions set forth herein, each Lender severally agrees to make loans (each such loan, a Loan ) to the Borrower from time to time, on any Business Day during the Availability Period, in an aggregate amount not to exceed at any time outstanding the amount of such Lenders Commitment; provided , however , that after giving effect to any Borrowing, (i) the Total Outstandings shall not exceed the Aggregate Commitments, and (ii) the aggregate Outstanding Amount of the Loans of any Lender shall not exceed such Lenders Commitment. Within the limits of each Lenders Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section
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2.01 , prepay under Section 2.06 , and reborrow under this Section 2.01 . Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided herein.
SECTION 2.02 Borrowings, Conversions and Continuations of Loans .
(a) Each Borrowing, each conversion of Loans from one Type to the other, and each continuation of Eurodollar Rate Loans shall be made upon the Borrowers irrevocable notice to the Administrative Agent, which may be given by telephone. Each such notice must be received by the Administrative Agent not later than 11:00 a.m. (i) three Business Days prior to the requested date of any Borrowing of, conversion to or continuation of Eurodollar Rate Loans or of any conversion of Eurodollar Rate Loans to Base Rate Loans, and (ii) on the requested date of any Borrowing of Base Rate Loans. Each telephonic notice by the Borrower pursuant to this Section 2.02(a) must be confirmed promptly by delivery to the Administrative Agent of a written Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower. Each Borrowing of, conversion to or continuation of Eurodollar Rate Loans shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof. Each Borrowing of or conversion to Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof. Each Loan Notice (whether telephonic or written) shall specify (i) whether the Borrower is requesting a Borrowing, a conversion of Loans from one Type to the other, or a continuation of Eurodollar Rate Loans, (ii) the requested date of the Borrowing, conversion or continuation, as the case may be (which shall be a Business Day), (iii) the principal amount of Loans to be borrowed, converted or continued, (iv) the Type of Loans to be borrowed or to which existing Loans are to be converted, and (v) if applicable, the duration of the Interest Period with respect thereto. If the Borrower fails to specify a Type of Loan in a Loan Notice or if the Borrower fails to give a timely notice requesting a conversion or continuation, then the applicable Loans shall be made as, or converted to, Base Rate Loans. Any such automatic conversion to Base Rate Loans shall be effective as of the last day of the Interest Period then in effect with respect to the applicable Eurodollar Rate Loans. If the Borrower requests a Borrowing of, conversion to, or continuation of Eurodollar Rate Loans in any such Loan Notice, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month.
(b) Following receipt of a Loan Notice, the Administrative Agent shall promptly notify each Lender of the amount of its Applicable Percentage of the applicable Loans, and if no timely notice of a conversion or continuation is provided by the Borrower, the Administrative Agent shall notify each Lender of the details of any automatic conversion to Base Rate Loans described in the preceding subsection. Each Lender shall make the amount of its Loan available to the Administrative Agent in immediately available funds at the Administrative Agents Office not later than 1:00 p.m. on the Business Day specified in the applicable Loan Notice. Upon satisfaction of the applicable conditions set forth in Section 4.02 (and, if such Borrowing is the initial Loan, Section 4.01 ), the Administrative Agent shall make all funds so received available to the Borrower in like funds as received by the Administrative Agent either by (i) crediting the account of the Borrower on the books of the Administrative Agent with the amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Administrative Agent by the Borrower.
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(c) Except as otherwise provided herein, a Eurodollar Rate Loan may be continued or converted only on the last day of an Interest Period for such Eurodollar Rate Loan. During the existence of a Default, no Loans may be requested as, converted to or continued as Eurodollar Rate Loans without the consent of the Required Lenders.
(d) The Administrative Agent shall promptly notify the Borrower and the Lenders of the interest rate applicable to any Interest Period for Eurodollar Rate Loans upon determination of such interest rate. At any time that Base Rate Loans are outstanding, the Administrative Agent shall notify the Borrower and the Lenders of any change in Bank of Americas prime rate used in determining the Base Rate promptly following the public announcement of such change.
(e) After giving effect to all Borrowings, all conversions of Loans from one Type to the other, and all continuations of Loans as the same Type, there shall not be more than five Interest Periods in effect with respect to Loans.
SECTION 2.03 Prepayments .
(a) The Borrower may, upon notice to the Administrative Agent, at any time or from time to time voluntarily prepay Loans in whole or in part without premium or penalty; provided that (i) such notice must be received by the Administrative Agent not later than 11:00 a.m. (A) two Business Days prior to any date of prepayment of Eurodollar Rate Loans and (B) on the date of prepayment of Base Rate Loans; (ii) any prepayment of Eurodollar Rate Loans shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof; and (iii) any prepayment of Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof or, in each case, if less, the entire principal amount thereof then outstanding. Each such notice shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Administrative Agent will promptly notify each Lender of its receipt of each such notice, and of the amount of such Lenders Applicable Percentage of such prepayment. If such notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. Any prepayment of a Eurodollar Rate Loan shall be accompanied by all accrued interest on the amount prepaid, together with any additional amounts required pursuant to Section 3.05 . Each such prepayment shall be applied to the Loans of the Lenders in accordance with their respective Applicable Percentages.
(b) If for any reason the Total Outstandings at any time exceed the Aggregate Commitments then in effect, the Borrower shall immediately prepay Loans in an aggregate amount equal to such excess.
SECTION 2.04 Termination or Reduction of Commitments . The Borrower may, upon notice to the Administrative Agent, terminate the Aggregate Commitments, or from time to time permanently reduce the Aggregate Commitments; provided that (i) any such notice shall be received by the Administrative Agent not later than 11:00 a.m. five Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $10,000,000 or any whole multiple of $1,000,000 in excess thereof, and (iii) the Borrower
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shall not terminate or reduce the Aggregate Commitments if, after giving effect thereto and to any concurrent prepayments hereunder, the Total Outstandings would exceed the Aggregate Commitments. The Administrative Agent will promptly notify the Lenders of any such notice of termination or reduction of the Aggregate Commitments. Any reduction of the Aggregate Commitments shall be applied to the Commitment of each Lender according to its Applicable Percentage. All fees accrued until the effective date of any termination of the Aggregate Commitments shall be paid on the effective date of such termination.
SECTION 2.05 Repayment of Loans . The Borrower shall repay to the Lenders on the Maturity Date the aggregate principal amount of Loans outstanding on such date.
SECTION 2.06 Interest .
(a) Subject to the provisions of subsection (b) below, (i) each Eurodollar Rate Loan shall bear interest on the outstanding principal amount thereof for each Interest Period at a rate per annum equal to the Eurodollar Rate for such Interest Period plus the Applicable Rate; and (ii) each Base Rate Loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate.
(b) (i) If any amount of principal of any Loan is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(ii) If any amount (other than principal of any Loan) payable by the Borrower under any Loan Document is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, then upon the request of the Required Lenders, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(iii) Upon the request of the Required Lenders, while any Event of Default exists, the Borrower shall pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(iv) Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.
(c) Interest on each Loan shall be due and payable in arrears on each Interest Payment Date applicable thereto and at such other times as may be specified herein. Interest hereunder shall be due and payable in accordance with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law.
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SECTION 2.07 Fees .
(a) Commitment Fee . The Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Applicable Percentage, a commitment fee equal to the Applicable Rate times the actual daily amount by which the Aggregate Commitments exceed the Outstanding Amount of Loans. The commitment fee shall accrue at all times during the Availability Period, including at any time during which one or more of the conditions in Article IV is not met, and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing with the first such date to occur after the Closing Date, and on the Maturity Date. The commitment fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Rate during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect.
(b) Other Fees . (i) The Borrower shall pay to the Arranger and the Administrative Agent for their own respective accounts fees in the amounts and at the times specified in the Fee Letter. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever.
The Borrower shall pay to the Lenders such fees as shall have been separately agreed upon in writing in the amounts and at the times so specified. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever.
SECTION 2.08 Computation of Interest and Fees . All computations of interest for Base Rate Loans when the Base Rate is determined by Bank of Americas prime rate shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year). Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall, subject to Section 2.10(a) , bear interest for one day. Each determination by the Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.
SECTION 2.09 Evidence of Debt . The Loans made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Loans made by the Lenders to the Borrower and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender made through the Administrative Agent, the Borrower shall
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execute and deliver to such Lender (through the Administrative Agent) a Note, which shall evidence such Lenders Loans in addition to such accounts or records. Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with respect thereto.
SECTION 2.10 Payments Generally; Administrative Agents Clawback .
(a) General . All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the Administrative Agents Office in Dollars and in immediately available funds not later than 2:00 p.m. on the date specified herein. The Administrative Agent will promptly distribute to each Lender its Applicable Percentage (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lenders Lending Office. All payments received by the Administrative Agent after 2:00 p.m. shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. If any payment to be made by the Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.
(b) (i) Funding by Lenders; Presumption by Administrative Agent . Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing of Eurodollar Rate Loans (or, in the case of any Borrowing of Base Rate Loans, prior to 12:00 noon on the date of such Borrowing) that such Lender will not make available to the Administrative Agent such Lenders share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with Section 2.02 (or, in the case of a Borrowing of Base Rate Loans, that such Lender has made such share available in accordance with and at the time required by Section 2.02 ) and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount in immediately available funds with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (A) in the case of a payment to be made by such Lender, the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and (B) in the case of a payment to be made by the Borrower, the interest rate applicable to Base Rate Loans. If the Borrower and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrower the amount of such interest paid by the Borrower for such period. If such Lender pays its share of the applicable Borrowing to the Administrative Agent, then the amount so paid shall constitute such Lenders Loan included in such Borrowing. Any payment by the Borrower shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make such payment to the Administrative Agent.
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(ii) Payments by Borrower; Presumptions by Administrative Agent . Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
A notice of the Administrative Agent to any Lender or the Borrower with respect to any amount owing under this subsection (b) shall be conclusive, absent manifest error.
(c) Failure to Satisfy Conditions Precedent . If any Lender makes available to the Administrative Agent funds for any Loan to be made by such Lender as provided in the foregoing provisions of this Article II , and such funds are not made available to the Borrower by the Administrative Agent because the conditions to the applicable Loan set forth in Article IV are not satisfied or waived in accordance with the terms hereof, the Administrative Agent shall return such funds (in like funds as received from such Lender) to such Lender, without interest.
(d) Obligations of Lenders Several . The obligations of the Lenders hereunder to make Loans and to make payments pursuant to Section 10.04(c) are several and not joint. The failure of any Lender to make any Loan, to fund any such participation or to make any payment under Section 10.04(c) on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan, to purchase its participation or to make its payment under Section 10.04(c) .
(e) Funding Source . Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner.
SECTION 2.11 Sharing of Payments by Lender . If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of the Loans made by it resulting in such Lenders receiving payment of a proportion of the aggregate amount of such Loans and accrued interest thereon greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with
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the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, provided that:
(i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations or subparticipations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and
(ii) the provisions of this Section shall not be construed to apply to (x) any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or (y) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary thereof (as to which the provisions of this Section shall apply).
The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
SECTION 3.01 Taxes .
(a) Payments Free of Taxes . Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without reduction or withholding for any Indemnified Taxes or Other Taxes, provided that if the Borrower shall be required by applicable law to deduct any Indemnified Taxes (including any Other Taxes) from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall timely pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.
(b) Payment of Other Taxes by the Borrower . Without limiting the provisions of subsection (a) above, the Borrower shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.
(c) Indemnification by the Borrower . The Borrower shall indemnify the Administrative Agent and each Lender, within 10 days after demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative
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Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.
(d) Evidence of Payments . As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(e) Status of Lenders . Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is resident for tax purposes, or any treaty to which such jurisdiction is a party, with respect to payments hereunder or under any other Loan Document shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements.
Without limiting the generality of the foregoing, in the event that the Borrower is resident for tax purposes in the United States, any Foreign Lender shall deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of the Borrower or the Administrative Agent, but only if such Foreign Lender is legally entitled to do so), whichever of the following is applicable:
(i) duly completed copies of Internal Revenue Service Form W-8BEN claiming eligibility for benefits of an income tax treaty to which the United States is a party,
(ii) duly completed copies of Internal Revenue Service Form W-8ECI,
(iii) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under section 881(c) of the Code, (x) a certificate to the effect that such Foreign Lender is not (A) a bank within the meaning of section 881(c)(3)(A) of the Code, (B) a 10 percent shareholder of the Borrower within the meaning of section 881(c)(3)(B) of the Code, or (C) a controlled foreign corporation
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described in section 881(c)(3)(C) of the Code and (y) duly completed copies of Internal Revenue Service Form W-8BEN, or
(iv) any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in United States Federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower to determine the withholding or deduction required to be made.
(f) Treatment of Certain Refunds . If the Administrative Agent or any Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section, it shall pay to the Borrower an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This subsection shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Borrower or any other Person.
SECTION 3.02 Illegality . If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Eurodollar Rate Loans, or to determine or charge interest rates based upon the Eurodollar Rate, or any Governmental Authority has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, any obligation of such Lender to make or continue Eurodollar Rate Loans or to convert Base Rate Loans to Eurodollar Rate Loans shall be suspended until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower shall, upon demand from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Eurodollar Rate Loans of such Lender to Base Rate Loans, either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Rate Loans. Upon any such prepayment or conversion, the Borrower shall also pay accrued interest on the amount so prepaid or converted.
SECTION 3.03 Inability to Determine Rates . If the Required Lenders determine that for any reason in connection with any request for a Eurodollar Rate Loan or a conversion to or continuation thereof that (a) Dollar deposits are not being offered to banks in the London interbank eurodollar market for the applicable amount and Interest Period of such Eurodollar Rate Loan, (b) adequate and reasonable means do not exist for determining the Eurodollar Base
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Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan, or (c) the Eurodollar Base Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to such Lenders of funding such Loan, the Administrative Agent will promptly so notify the Borrower and each Lender. Thereafter, the obligation of the Lenders to make or maintain Eurodollar Rate Loans shall be suspended until the Administrative Agent (upon the instruction of the Required Lenders) revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending request for a Borrowing of, conversion to or continuation of Eurodollar Rate Loans or, failing that, will be deemed to have converted such request into a request for a Borrowing of Base Rate Loans in the amount specified therein.
SECTION 3.04 Increased Costs .
(a) Increased Costs Generally . If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement reflected in the Eurodollar Rate);
(ii) subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Eurodollar Rate Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Indemnified Taxes or Other Taxes covered by Section 3.01 and the imposition of, or any change in the rate of, any Excluded Tax payable by such Lender); or
(iii) impose on any Lender or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Rate Loans made by such Lender;
and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Rate Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or any other amount) then, upon request of such Lender, the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.
(b) Capital Requirements . If any Lender determines that any Change in Law affecting such Lender or any Lending Office of such Lender or such Lenders holding company, if any, regarding capital requirements has or would have the effect of reducing the rate of return on such Lenders capital or on the capital of such Lenders holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or the Loans made by such Lender to a level below that which such Lender or such Lenders holding company could have achieved but for such Change in Law (taking into consideration such Lenders policies and the policies of such Lenders holding company with respect to capital adequacy), then from time to
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time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lenders holding company for any such reduction suffered.
(c) Certificates for Reimbursement . A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as specified in subsection (a) or (b) of this Section and delivered to the Borrower shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.
(d) Delay in Requests . Failure or delay on the part of any Lender to demand compensation pursuant to the foregoing provisions of this Section shall not constitute a waiver of such Lenders right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender pursuant to the foregoing provisions of this Section for any increased costs incurred or reductions suffered more than nine months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lenders intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof).
(e) Payment for Credits . If the Borrower is required to pay any Lender for any increased costs or any reduction of any rate of return, and if any Lender, in good faith, determines that it has received or been granted a credit against or relief or remission for or repayment of any tax paid or payable by it, it shall, to the extent that it could do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to the borrower such amount as any Lender shall, in good faith, have determined to be attributable to such payment by the Borrower.
SECTION 3.05 Compensation for Losses . Upon demand of any Lender (with a copy to the Administrative Agent) from time to time, the Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:
(a) any continuation, conversion, payment or prepayment of any Loan other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise);
(b) any failure by the Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow, continue or convert any Loan other than a Base Rate Loan on the date or in the amount notified by the Borrower; or
(c) any assignment of a Eurodollar Rate Loan on a day other than the last day of the Interest Period therefor as a result of a request by the Borrower pursuant to Section 10.13 ;
including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate
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the deposits from which such funds were obtained. The Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing.
For purposes of calculating amounts payable by the Borrower to the Lenders under this Section 3.05 , each Lender shall be deemed to have funded each Eurodollar Rate Loan made by it at the Eurodollar Base Rate used in determining the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the London interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan was in fact so funded.
SECTION 3.06 Mitigation Obligations; Replacement of Lenders .
(a) Designation of a Different Lending Office . If any Lender requests compensation under Section 3.04 , or the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01 , or if any Lender gives a notice pursuant to Section 3.02 , then such Lender shall use reasonable efforts to designate a different Lending Office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.01 or 3.04 , as the case may be, in the future, or eliminate the need for the notice pursuant to Section 3.02 , as applicable, and (ii) in each case, would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.
(b) Replacement of Lenders . If any Lender requests compensation under Section 3.04 , or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01 , the Borrower may replace such Lender in accordance with Section 10.13 .
SECTION 3.07 Survival . All of the Borrowers obligations under this Article III shall survive termination of the Aggregate Commitments and repayment of all other Obligations hereunder.
ARTICLE IV
CONDITIONS PRECEDENT TO LOANS
SECTION 4.01 Conditions of Initial Loan . The obligation of each Lender to make its initial Loan hereunder is subject to satisfaction of the following conditions precedent:
(a) The Administrative Agents receipt of the following, each of which shall be originals or telecopies (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer, each dated the Closing Date (or, in the case of certificates of governmental officials, a recent date before the Closing Date) and each in form and substance satisfactory to the Administrative Agent and each of the Lenders:
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(i) executed counterparts of this Agreement, sufficient in number for distribution to the Administrative Agent, each Lender and the Borrower;
(ii) a Note executed by the Borrower in favor of each Lender requesting a Note;
(iii) such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers as the Administrative Agent may require evidencing the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Agreement and the other Loan Documents;
(iv) such documents and certifications as the Administrative Agent may reasonably require to evidence that the Borrower is duly organized or formed, and that the Borrower is validly existing, in good standing and qualified to engage in business in each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect;
(v) a favorable opinion of the general counsel of the Borrower, addressed to the Administrative Agent and each Lender, as to the matters set forth in Exhibit D and such other matters concerning the Borrower and the Loan Documents as the Required Lenders may reasonably request;
(vi) a certificate of a Responsible Officer either (A) attaching copies of all consents, licenses and approvals required in connection with the execution, delivery and performance by the Borrower and the validity against the Borrower of the Loan Documents, and such consents, licenses and approvals shall be in full force and effect, or (B) stating that no such consents, licenses or approvals are so required;
(vii) a certificate signed by a Responsible Officer certifying (A) that the conditions specified in Sections 4.02(a) and (b) have been satisfied, (B) that there has been no event or circumstance since the date of the Audited Financial Statements that has had or could be reasonably expected to have, either individually or in the aggregate, a Material Adverse Effect, and (C) the current Debt Ratings;
(viii) evidence that the Existing Credit Agreement has been or concurrently with the Closing Date is being terminated; and
(ix) such other assurances, certificates, documents, consents or opinions as the Administrative Agent or the Required Lenders reasonably may require.
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(b) Any fees required to be paid on or before the Closing Date shall have been paid.
(c) Unless waived by the Administrative Agent, the Borrower shall have paid all fees, charges and disbursements of counsel to the Administrative Agent to the extent invoiced prior to or on the Closing Date, plus such additional amounts of such fees, charges and disbursements as shall constitute its reasonable estimate of such fees, charges and disbursements incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude a final settling of accounts between the Borrower and the Administrative Agent).
Without limiting the generality of the provisions of Section 9.04 , for purposes of determining compliance with the conditions specified in this Section 4.01 , each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.
SECTION 4.02 Conditions to all Loans . The obligation of each Lender to honor any Loan Notice (other than a Loan Notice requesting only a conversion of Loans to the other Type, or a continuation of Eurodollar Rate Loans) is subject to the following conditions precedent:
(a) The representations and warranties of the Borrower contained in Article V or any other Loan Document, or which are contained in any document furnished at any time under or in connection herewith or therewith, shall be true and correct on and as of the date of such Loan, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date, and except that for purposes of this Section 4.02 , the representations and warranties contained in subsection (a) of Section 5.02 and subsections (a) and (b) of Section 5.03 shall be deemed to refer to the most recent statements furnished pursuant to clauses (c), (a) and (b), respectively, of Section 6.01 .
(b) No Default shall exist, or would result from such proposed Loan or from the application of the proceeds thereof.
(c) The Administrative Agent shall have received a Loan Notice in accordance with the requirements hereof.
(d) Each Loan Notice (other than a Loan Notice requesting only a conversion of Loans to the other Type or a continuation of Eurodollar Rate Loans) submitted by the Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 4.02(a) and (b) have been satisfied on and as of the date of the applicable Loan.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants to each Lender that:
SECTION 5.01 Due Organization, Authorization, Etc. Each of the Borrower and each Subsidiary (a) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (b) is duly qualified to do business and in good standing in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, which jurisdictions are set forth with respect to the Borrower and each Subsidiary on Schedule 5.01 , (c) has the requisite corporate power and authority and the right to own and operate its properties, to lease the property it operates under lease, and to conduct its business as now and proposed to be conducted, and (d) has obtained all material licenses, permits, consents or approvals from or by, and has made all filings with, and given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct (including, without limitation, the consummation of the transactions contemplated by this Agreement) as to each of the foregoing except where the failure to do so would not have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. The execution, delivery and performance by the Borrower of this Agreement and the consummation of the transactions contemplated hereby and thereby are within its corporate powers, have been duly authorized by all necessary corporate action (including, without limitation, shareholder approval, if required) and do not contravene or conflict with the Borrowers articles of incorporation or bylaws. Each of the Borrower and its Subsidiaries has received all material governmental and other consents and approvals (if any shall be required) necessary for such execution, delivery and performance, and such execution, delivery and performance do not and will not contravene or conflict with, or create a Lien or right of termination or acceleration under, any Requirement of Law or Contractual Obligation binding upon the Borrower or such Subsidiaries. This Agreement and each of the Loan Documents is (or when executed and delivered will be) the legal, valid, and binding obligation of the Borrower enforceable against the Borrower in accordance with its respective terms; provided that the Borrower assumes for purposes of this Section 5.01 that this Agreement and the other Loan Documents have been validly executed and delivered by each of the parties thereto other than the Borrower.
SECTION 5.02 Statutory Financial Statements . (a) The Annual Statement of each of the Insurance Subsidiaries (including, without limitation, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and Statutory Liabilities) as filed with the appropriate Governmental Authority of its state of domicile (the Department ) and delivered to each Lender prior to the execution and delivery of this Agreement, as of and for the 2004 Fiscal Year and as of and for the Fiscal Quarter ended March 31, 2005 (collectively, the Statutory Financial Statements ), have been prepared in accordance with SAP applied on a consistent basis (except as noted therein). Each such Statutory Financial Statement was in material compliance with applicable law when filed. The Statutory Financial Statements fairly present the financial position, the results of operations,
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changes in equity and changes in financial position of each such Insurance Subsidiary as of and for the respective dates and periods indicated therein in accordance with SAP applied on a consistent basis, except as set forth in the notes thereto or on Schedule 5.02(a) . Except for liabilities and obligations, including, without limitation, reserves, policy and contract claims and Statutory Liabilities (all of which have been computed in accordance with SAP), disclosed or provided for in the Statutory Financial Statements, the Insurance Subsidiaries did not have, as of the respective dates of each of such financial statements, any material liabilities or obligations (whether absolute or contingent and whether due or to become due) which, in conformity with SAP, applied on a consistent basis, would have been required to be or should be disclosed or provided for in such financial statements. All books of account of each of the Insurance Subsidiaries fully and fairly disclose all of the transactions, properties, assets, investments, liabilities and obligations of such Insurance Subsidiary and all of such books of account are in the possession of each such Insurance Subsidiary and are true, correct and complete in all material respects.
(b) The investments of Insurance Subsidiaries reflected in the Annual Statements filed with the respective Departments with respect to the 2004 Fiscal Year (the 2004 Annual Statement ) and the March 31, 2005 Quarterly Statement (the 2005 Quarterly Statement ) comply in all material respects with all applicable requirements of the Department with respect to each such Insurance Subsidiary as well as those of any other applicable jurisdiction relating to investments in respect of which it may invest its funds.
(c) The provisions made by each Insurance Subsidiary in its 2004 Annual Statement and in its 2005 Quarterly Statement for reserves, policy and contract claims and Statutory Liabilities are in compliance in all material respects with the requirements of the applicable Department as well as those of any other applicable jurisdiction, and have been computed in accordance with SAP.
(d) Marketable securities and short term investments reflected in the 2004 Annual Statement and in the 2005 Quarterly Statement of each Insurance Subsidiary are valued at cost, amortized cost or market value, as required by applicable law.
(e) There has been no event or occurrence which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole, since December 31, 2004.
SECTION 5.03 GAAP Financial Statements .
(a) The Borrower has furnished to the Administrative Agent and each of the Lenders (i) a copy of the unaudited consolidated balance sheets of the Borrower and its Subsidiaries, and the balance sheet of the Borrower on an unconsolidated basis as of March 31, 2005 and the related consolidated statements of income and cash flows for that portion of the Fiscal Year ending as of the close of March 31, 2005 and (ii) a copy of the unaudited consolidated statement of income of the Borrower and its Subsidiaries, and the statement of income of the Borrower on an unconsolidated basis, for March 31, 2005, all prepared in accordance with GAAP (subject to normal year-end adjustments and except that footnote and
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schedule disclosures are abbreviated) which financial statements are complete and correct and present fairly in accordance with GAAP (subject to normal year-end adjustments) consolidated or unconsolidated, as the case may be results of operations and cash flows of the Borrower as of March 31, 2005 and the period then ended.
(b) The Borrower has provided to the Administrative Agent and each of the Lenders a copy of the annual audited consolidated financial statements of the Borrower and its Subsidiaries, consisting of consolidated balance sheets and consolidated statements of income and retained earnings and cash flows, setting forth in comparative form in each case the consolidated figures for the year ended December 31, 2004, which financial statements have been prepared in accordance with GAAP and certified without material qualification by KPMG LLP. Such financial statements are complete and correct and present fairly in accordance with GAAP the consolidated financial position and the consolidated results of operations and cash flows of the Borrower and its Subsidiaries as at the end of such year and for the period then ended.
(c) With respect to any representation and warranty which is deemed to be made after the date hereof by the Borrower, the balance sheet and statements of operations, of shareholders equity and of cash flow, which as of such date shall most recently have been furnished by or on behalf of the Borrower to each Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby, shall have been prepared in accordance with GAAP consistently applied (except as disclosed therein), and shall present fairly the consolidated financial condition of the corporations covered thereby as at the dates thereof for the periods then ended, subject, in the case of quarterly financial statements, to normal year-end audit adjustments.
SECTION 5.04 Litigation and Contingent Liabilities . Except as set forth (including estimates of the dollar amounts involved) in Schedule 5.04 hereto and (b) except for claims which are covered by Insurance Policies, coverage for which has not been denied in writing, or which relate to insurance policies or surety contracts issued by the Borrower or to which it is a party, reinsurance treaties, reinsurance certificates, or any other such agreements entered into by the Borrower in the ordinary course of business (referred to herein as Ordinary Course Litigation ), no claim, litigation (including, without limitation, derivative actions), arbitration, governmental investigation or proceeding or inquiry is pending or threatened against the Borrower or any of its Subsidiaries (i) which would, if adversely determined, have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole or (ii) which relates to any of the transactions contemplated hereby, and there is no basis known to the Borrower for any of the foregoing. Other than any liability incident to such claims, litigation or proceedings, the Borrower has no material Contingent Liabilities not provided for or referred to in the financial statements delivered pursuant to Section 5.03 .
SECTION 5.05 Investment Company Act . Other than Horace Mann Investors, Inc., neither the Borrower nor any of its Subsidiaries is an investment company or a company controlled by an investment company, within the meaning of the Investment Company Act of 1940, as amended.
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SECTION 5.06 Regulations T, U and X . Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. None of the Borrower, any of its Subsidiaries or any Person acting on their behalf has taken or will take action to cause the execution, delivery or performance of this Agreement or the Note, the making or existence of the Loans or the use of proceeds of the Loans to violate Regulations T, U or X of the FRB.
SECTION 5.07 Proceeds . The proceeds of the Loans will be used for general corporate purposes. None of such proceeds will be used in violation of applicable law, and none of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any margin stock as defined in Regulation U of the FRB.
SECTION 5.08 Insurance . The Borrower and its Subsidiaries maintain Insurance Policies to such extent and against such hazards and liabilities as is required by law or customarily maintained by prudent companies similarly situated.
SECTION 5.09 Accuracy of Information . All factual written information furnished heretofore or contemporaneously herewith by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or the Lenders for purposes of or in connection with this Agreement or any of the transactions contemplated hereby, as supplemented to the date hereof, is and all other such factual written information hereafter furnished by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or the Lenders will be, true and accurate in every material respect on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information not misleading.
SECTION 5.10 Subsidiaries . Schedule 5.10 contains a complete list of the Borrowers Subsidiaries.
SECTION 5.11 Insurance Licenses . Except as set forth on Schedule 5.11 , to the best of the Borrowers knowledge, no license (including, without limitation, licenses or certificates of authority from applicable insurance departments), permits or authorizations to transact insurance and reinsurance business (collectively, the Licenses ) is the subject of a proceeding for suspension or revocation or any similar proceedings, there is no sustainable basis for such a suspension or revocation, and no such suspension or revocation is threatened by any state insurance department.
SECTION 5.12 Taxes . The Borrower and each of its Subsidiaries has filed all material tax returns that are required to be filed by it, and has paid or provided adequate reserves for the payment of all material taxes, including, without limitation, all payroll taxes and federal and state withholding taxes, and all assessments payable by it that have become due, other than those that are not yet delinquent or that are disclosed on Schedule 5.12 and are being contested in good faith by appropriate proceedings and with respect to which reserves have been established, and are being maintained, in accordance with GAAP. Except as set forth in Schedule 5.12 , there is no ongoing audit or, to the Borrowers knowledge, other governmental investigation of the tax
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liability of the Borrower or any of its Subsidiaries and there is no unresolved claim by a taxing authority concerning the Borrowers or any such Subsidiarys tax liability, for any period for which returns have been filed or were due. As used in this Section 5.12 , the term taxes includes all taxes of any nature whatsoever and however denominated, including, without limitation, excise, import, governmental fees, duties and all other charges, as well as additions to tax, penalties and interest thereon, imposed by any government or instrumentality, whether federal, state, local, foreign or other.
SECTION 5.13 Compliance with Laws . Neither the Borrower nor any of its Subsidiaries is in violation of any law, ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental Authority (including, without limitation, ERISA or environmental laws), if the effect of such violation could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole and, to the best of the Borrowers knowledge, no such violation has been alleged and each of the Borrower and its Subsidiaries (a) has filed in a timely manner all reports, documents and other materials required to be filed by it with any Governmental Authority, if such failure to so file could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole; and the information contained in each of such filings is true, correct and complete in all material respects and (b) has retained all records and documents required to be retained by it pursuant to any law, ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental Authority, if the failure to so retain such records and documents could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole.
SECTION 5.14 No Default . Neither the Borrower nor any Subsidiary is in default under or with respect to any Contractual Obligation that could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document.
SECTION 5.15 Ownership of Property; Liens . Each of the Borrower and each Subsidiary has good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The property of the Borrower and its Subsidiaries is subject to no Liens, other than Liens permitted by Section 7.08 .
ARTICLE VI
COVENANTS
Until the Loans and all other Obligations are paid in full, and until the Maturity Date, the Borrower agrees that, unless at any time the Required Lenders shall otherwise expressly consent in writing, it will:
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SECTION 6.01 Reports, Certificates and Other Information . Furnish or cause to be furnished to the Administrative Agent and the Lenders:
(a) GAAP Financial Statements :
(i) Within 50 days after the close of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, a copy of its Form 10Q filed with the Securities and Exchange Commission and accompanied by the certification of the chief executive officer, chief financial officer or treasurer of the Borrower that the financial statements set forth therein are complete and correct and present fairly in accordance with GAAP (subject to normal year-end adjustments) the consolidated, or unconsolidated, as the case may be, results of operations and cash flows of the Borrower as at the end of such Fiscal Quarter and for the period then ended.
(ii) Within 95 days after the close of each Fiscal Year, a copy of the annual audited consolidated financial statements of the Borrower and its Subsidiaries, consisting of consolidated balance sheets and consolidated statements of income and retained earnings and cash flows, setting forth in comparative form in each case the consolidated figures for the previous Fiscal Year, which financial statements shall be prepared in accordance with GAAP, certified without material qualification by the independent certified public accountants regularly retained by the Borrower, or any other firm of independent certified public accountants of recognized national standing selected by the Borrower and reasonably acceptable to the Required Lenders that all such financial statements are complete and correct and present fairly in accordance with GAAP the consolidated financial position and the consolidated results of operations and cash flows of the Borrower and its Subsidiaries as at the end of such year and for the period then ended.
(b) Tax Returns . If requested by the Administrative Agent, copies of all federal, state, local and foreign tax returns and reports in respect of income, franchise or other taxes on or measured by income (excluding sales, use or like taxes) filed by the Borrower or any of its Subsidiaries.
(c) SAP Financial Statements :
Within 5 days after the applicable regulatory filing date for each of its Fiscal Quarters, but in any event within 50 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of each Insurance Subsidiary a copy of the Quarterly Statement of such Insurance Subsidiary for such Fiscal Quarter, all prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer of each Insurance Subsidiary that all such financial statements are complete and correct and present fairly in accordance with SAP the financial position of such Insurance Subsidiary for the periods then ended.
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(ii) Within 5 days after the applicable regulatory filing date for each of its Fiscal Years, but in any event within 60 days after the end of each Fiscal Year of each Insurance Subsidiary a copy of the Annual Statement of each Insurance Subsidiary for such Fiscal Year prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer of each Insurance Subsidiary that such financial statement is complete and correct and presents fairly in accordance with SAP the financial position of such Insurance Subsidiary for the period then ended.
(iii) Within 5 days after the applicable regulatory filing date for each of its Fiscal Years, but in any event within 95 days after the close of each Fiscal Year of each Insurance Subsidiary a copy of each Insurance Subsidiarys Statement of Actuarial Opinion which is provided to the applicable Department (or equivalent information should the Department no longer require such a statement) as to the adequacy of loss reserves of such Insurance Subsidiary. Such opinion shall be in the format prescribed by the applicable Insurance Code.
(d) Notice of Default, etc . Immediately after an Executive Officer of the Borrower knows or has reason to know of the existence of any Default, or any development or other information which would have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole, telephonic notice specifying the nature of such Default or development or information, including the anticipated effect thereof, which notice shall be promptly confirmed in writing within two (2) Business Days.
(e) Other Information . The following certificates and other information related to the Borrower:
(i) Promptly after completion of each such item but in no event later than the first day of April of each Fiscal Year of the Borrower, a copy of the Borrowers (A) operating budget and (B) new business plans, if any, which are in the form approved by the Board of Directors of the Borrower.
(ii) Within five (5) Business Days of receipt, a copy of any financial examination reports by a Governmental Authority with respect to the Insurance Subsidiaries relating to the insurance business of the Insurance Subsidiaries (when, and if, prepared); provided , the Borrower shall only be required to deliver any interim report hereunder at such time as Borrower has knowledge that a final report will not be issued and delivered to the Administrative Agent within 90 days of any such interim report.
(iii) Copies of all Insurance Holding Company System Act filings with Governmental Authorities, with respect to any occurrence which might reasonably be expected to have a Material Adverse Effect, by the Borrower or any Subsidiary not later than five (5) Business Days after such filings are made, including, without limitation, filings which seek approval of Governmental Authorities with respect to transactions between the Borrower or such Subsidiary and its Affiliates.
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(iv) Within five (5) Business Days of such notice, notice of actual suspension, termination or revocation of any material License of the Insurance Subsidiaries by any Governmental Authority or of receipt of notice from any Governmental Authority notifying the Borrower of a hearing (which is not withdrawn within ten (10) days) relating to such a suspension, termination or revocation, including any request by a Governmental Authority which commits the Borrower to take, or refrain from taking, any action or which otherwise materially and adversely affects the authority of the Borrower to conduct its business.
(v) Within five (5) Business Days of such notice, notice of any pending or threatened investigation or regulatory proceeding (other than routine periodic investigations or reviews) by any Governmental Authority concerning the business, practices or operations of the Borrower, including any agent or managing general agent thereof.
(vi) Promptly upon any change in the Debt Rating, notice of such change.
(vii) Promptly, such additional financial and other information as the Administrative Agent or any Lender may from time to time reasonably request.
(viii) Promptly, notice of any actual or, to the best of the Borrowers knowledge, proposed material changes in the Insurance Code governing the investment or dividend practices of any Insurance Subsidiary.
(ix) Promptly upon effectiveness, notice of any change of accounting or financial reporting practices.
(f) Compliance Certificates . Concurrently with the later to occur of delivery to the Administrative Agent of the GAAP financial statements and delivery to the Administrative Agent of the SAP financial statements under Sections 6.01(a) and 6.01(c) , for each Fiscal Quarter and Fiscal Year of the Borrower, and at any other time no later than thirty (30) Business Days following a written request of the Administrative Agent, a duly completed Compliance Certificate, signed by the chief financial officer or treasurer of the Borrower, containing, among other things, a computation of, and showing compliance with, each of the applicable financial ratios and restrictions contained in Sections 7.01 through 7.03 , and to the effect that, to the best of such officers knowledge, as of such date no Default has occurred and is continuing.
(g) Reports to SEC and to Shareholders . Promptly upon the filing or making thereof (i) copies of each filing and report made by the Borrower or any of its Subsidiaries with or to any securities exchange or the Securities and Exchange Commission and (ii) of each communication from the Borrower to shareholders generally; provided that only those items described in clauses (i) and (ii) of this Section 6.01(g) which are material to the interest of the Lenders hereunder shall be provided to the Administrative Agent and the Lenders hereunder.
(h) Notice of Litigation, License and ERISA Matters . Upon learning of the occurrence of any of the following, written notice thereof, describing the same and the steps
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being taken by the Borrower with respect thereto: (i) the institution of, or any adverse determination in, any litigation, arbitration proceeding or governmental proceeding (including any Internal Revenue Service or Department of Labor proceeding with respect to any Plan or Welfare Plan) which could, if adversely determined, be reasonably expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole and which is not Ordinary Course Litigation, (ii) the failure of any Person in the Controlled Group to make a required contribution to any Plan if such failure is sufficient to give rise to a Lien under section 302(f)(1) of ERISA, (iii) the institution of any steps by any entity in the Controlled Group to withdraw from, or the institution of any steps by the Borrower or any other Person to terminate under a distress termination, any Plan or the taking of any action with respect to a Plan which could result in the requirement that the Borrower or any of its Subsidiaries furnish a bond or other security to such Plan, or the occurrence of any event with respect to any Plan which could result in the incurrence by the Borrower or any of its Subsidiaries of any material liability (other than a liability for contributions or premiums), fine or penalty, (iv) the commencement of any dispute which might lead to the modification, transfer, revocation, suspension or termination of this Agreement or any Loan Document or (v) any event which could be reasonably expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole.
(i) Other Information . From time to time such other information concerning the Borrower or any Subsidiary as the Administrative Agent or any Lender may reasonably request.
Documents required to be delivered pursuant to Section 6.01(a) or Section 6.01(g) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrowers website on the Internet at the website address listed on Schedule 10.02 ; or (ii) on which such documents are posted on the Borrowers behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) the Borrower shall notify the Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions ( i.e. , soft copies) of such documents. Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the Compliance Certificates required by Section 6.01(f) to the Administrative Agent. Except for such Compliance Certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.
The Borrower hereby acknowledges that (a) the Administrative Agent and/or the Arranger will make available to the Lenders materials and/or information provided by or on
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behalf of the Borrower hereunder (collectively, Borrower Materials ) by posting the Borrower Materials on IntraLinks or another similar electronic system (the Platform ) and (b) certain of the Lenders may be public-side Lenders ( i.e., Lenders that do not wish to receive material non-public information with respect to the Borrower or its securities) (each, a Public Lender ). The Borrower hereby agrees that so long as the Borrower is the issuer of any outstanding debt or equity securities that are registered or issued pursuant to a private offering or is actively contemplating issuing any such securities (w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked PUBLIC which, at a minimum, shall mean that the word PUBLIC shall appear prominently on the first page thereof; (x) by marking Borrower Materials PUBLIC, the Borrower shall be deemed to have authorized the Administrative Agent, the Arranger and the Lenders to treat such Borrower Materials as not containing any material non-public information with respect to the Borrower or its securities for purposes of United States Federal and state securities laws ( provided , however , that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 10.07 ); (y) all Borrower Materials marked PUBLIC are permitted to be made available through a portion of the Platform designated Public Investor; and (z) the Administrative Agent and the Arranger shall be entitled to treat any Borrower Materials that are not marked PUBLIC as being suitable only for posting on a portion of the Platform not designated Public Investor. Notwithstanding the foregoing, the Borrower shall be under no obligation to mark any Borrower Materials PUBLIC.
SECTION 6.02 Corporate Existence; Foreign Qualification . Do and cause to be done at all times all things necessary to (a) maintain and preserve the corporate existence of the Borrower, (b) be, and ensure that each Subsidiary of the Borrower is, duly qualified to do business and be in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary, and (c) do or cause to be done all things necessary to preserve and keep in full force and effect the Borrowers corporate existence.
SECTION 6.03 Books, Records and Inspections . (a) Maintain, and cause each of its Subsidiaries to maintain, materially complete and accurate books and records, (b) permit, and cause each of its Subsidiaries to permit, access at reasonable times by the Administrative Agent to its books and records, (c) permit, and cause each of its Subsidiaries to permit, the Administrative Agent or its designated representative to inspect at reasonable times its properties and operations, and (d) permit, and cause each of its Subsidiaries to permit, the Administrative Agent to discuss its business, operations and financial condition with its officers.
SECTION 6.04 Insurance . Maintain, and cause each of its Subsidiaries to maintain, Insurance Policies to such extent and against such hazards and liabilities as is required by law or customarily maintained by prudent companies similarly situated.
SECTION 6.05 Taxes and Liabilities . Pay, and cause each of its Subsidiaries to pay, when due all material taxes, assessments and other material liabilities except as contested in good faith and by appropriate proceedings with respect to which reserves have been established, and are being maintained, in accordance with GAAP if and so long as such contest could not reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole.
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SECTION 6.06 Compliance with Laws . Comply, and cause each of its Subsidiaries to comply, (a) with all federal, state and local laws, rules and regulations related to its businesses (including, without limitation, the establishment of all insurance reserves required to be established under SAP and applicable laws restricting the investments of the Borrower), and (b) with all Contractual Obligations binding upon such entity, except where failure so to comply would not in the aggregate have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole.
SECTION 6.07 Conduct of Business . Engage on a consolidated basis with its Subsidiaries primarily in the same business in which the Borrower and its Subsidiaries are engaged on the date hereof.
SECTION 6.08 Maintenance of Properties . Maintain, preserve and protect and cause each of its Subsidiaries to maintain, preserve and protect, all of its material properties and equipment necessary in the operation of its business in good working order and condition, ordinary wear and tear excepted.
ARTICLE VII
NEGATIVE COVENANTS
Until the Loans and all other Obligations are paid in full, and until the Maturity Date, the Borrower agrees that, unless at any time the Required Lenders shall otherwise expressly comment in writing, it will:
SECTION 7.01 Consolidated Debt to Total Capitalization . Not permit the ratio of (a) the principal amount of Consolidated Debt to (b) the sum of (i) Net Worth plus (ii) Consolidated Debt to exceed 0.35 to 1.0 at any time.
SECTION 7.02 A.M. Best Rating . Not permit the A.M. Best rating of any of its Material Insurance Subsidiaries to be less than A-.
SECTION 7.03 Net Worth . Not permit its Net Worth at any time to be less than the Minimum Net Worth. Minimum Net Worth means $410,403,000 plus 50% of equity contributions after the date hereof; provided that on each March 31, commencing March 31, 2006, if 80% of the consolidated net worth of the Borrower and its Subsidiaries, calculated in accordance with GAAP, is greater than the Minimum Net Worth, the Minimum Net Worth shall be increased to such greater amount.
SECTION 7.04 Mergers, Consolidations and Sales . Not, and not permit any of its Subsidiaries to, (a) merge or consolidate, or purchase or otherwise acquire all or substantially all of the assets or stock of any class of, or any partnership or joint venture interest in, any other Person, other than mergers or acquisitions where the corporate existence of the Borrower is not affected by such merger or acquisition and, subsequent to such merger or acquisition, the Borrower is in compliance with all the provisions of this Agreement and no Default shall exist, or (b) sell, transfer, convey or lease all or any substantial part of its assets or sell or assign with
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or without recourse any receivables, other than any sale, transfer, conveyance or lease in the ordinary course of business.
SECTION 7.05 Regulations T, U and X . Not, and not permit any of its Subsidiaries to, use or permit any proceeds of the Loans to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying margin stock, as defined in Regulation U of the FRB.
SECTION 7.06 Other Agreements . Not, and not permit any of its Subsidiaries to, enter into any agreement containing any provision which would be violated or breached by the performance of obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith.
SECTION 7.07 Transactions with Affiliates . Not, and not permit any Subsidiary to, enter into, or cause, suffer or permit to exist, directly or indirectly, any arrangement, transaction or contract with any of its Affiliates unless such arrangement, transaction or contract is in the ordinary course of business, reasonably intended to satisfy the reasonable business requirements of the Borrower or such Subsidiary, and on terms and conditions at least as favorable to the Borrower or such Subsidiary as the terms and conditions which would apply in a similar arrangement, transaction or contract with a Person or entity not an Affiliate; provided that transactions between the Borrower and any wholly-owned Subsidiary of the Borrower or between any wholly-owned Subsidiaries of the Borrower shall be excluded from the restrictions set forth in this Section 7.07 .
SECTION 7.08 Liens . Not, and not permit any of its Subsidiaries to, create or permit to exist any Lien with respect to any assets now or hereafter existing or acquired, except the following: (a) Liens for current taxes not delinquent or for taxes being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, (b) Liens arising in the ordinary course of business or by operation of law for sums being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, or for sums not due, and in either case not involving any deposits or advances for borrowed money or the deferred purchase price of property or services, (c) Liens in connection with the acquisition of fixed assets after the date hereof and attaching only to the property being acquired, (d) Liens incurred in the ordinary course of business in connection with workers compensation, unemployment insurance or other forms of governmental insurance or benefits, (e) mechanics, workers, materialmens and other like Liens arising in the ordinary course of business in respect of obligations which are not delinquent or which are being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, and (f) other Liens securing Debt which Debt does not in the aggregate exceed $5,000,000; provided , however , that, no Lien shall be permitted to exist on the shares of stock of any of its Subsidiaries.
SECTION 7.09 Subsidiary Debt . Not permit the aggregate amount of Debt of its Subsidiaries at any time outstanding to exceed $20,000,000.
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ARTICLE VIII
EVENTS OF DEFAULT AND THEIR EFFECT
SECTION 8.01 Events of Default . Each of the following shall constitute an Event of Default under this Agreement:
(a) Non-Payment of Loan . Default in the payment when due of any principal on the Loans.
(b) Non-Payment of Interest, Fees, etc. Default, and continuance thereof for three (3) Business Days, in the payment when due of interest on the Loans or of any other amount payable hereunder or under the Loan Documents.
(c) Non-Payment of Other Debt . (a) Default in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any other Debt of, or guaranteed by, the Borrower or any of its Subsidiaries if the aggregate amount of Debt of the Borrower and/or any of its Subsidiaries which is accelerated or due and payable, or which may be accelerated or otherwise become due and payable, by reason of such default or defaults is $10,000,000 or more, or (b) default in the performance or observance of any obligation or condition with respect to any such other Debt of, or guaranteed by, the Borrower and/or any of its Subsidiaries if the effect of such default or defaults is to accelerate the maturity of any such Debt of $10,000,000 or more in the aggregate or to permit the holder or holders of such Debt of $10,000,000 or more in the aggregate, or any trustee or agent for such holders, to cause such Debt to become due and payable prior to its expressed maturity.
(d) Other Material Obligations . Except for obligations covered under other provisions of this Article VIII , default in the payment when due, or in the performance or observance of, any material obligation of, or material condition agreed to by, the Borrower or any of its Subsidiaries with respect to any material purchase or Lease Obligation (except only to the extent that the existence of any such default is being contested by the Borrower in good faith and by appropriate proceedings and the Borrower has established, and is maintaining, adequate reserves therefor in accordance with GAAP) which default continues for a period of 30 days.
(e) Bankruptcy, Insolvency, etc. (a) (i) The Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay, debts as they become due; or (ii) the Borrower applies for, consents to, or acquiesces in the appointment of, a trustee, receiver or other custodian or similar Person for the Borrower or any property of any thereof, or makes a general assignment for the benefit of creditors; or (iii) in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian or similar Person is appointed for the Borrower or for a substantial part of the property of any thereof, unless (A) the Borrower institutes appropriate proceedings to contest or discharge such appointment within 30 days and thereafter continuously and diligently prosecutes such proceedings and (B) such appointment is in fact discharged
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within 60 days of such appointment; or (iv) any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding is commenced in respect of the Borrower, unless (A) such case or proceeding is not commenced by the Borrower, (B) such case or proceeding is not consented to or acquiesced in by the Borrower, (C) the Borrower institutes appropriate proceedings to dismiss such case or proceeding within 30 days and thereafter continuously and diligently prosecutes such proceedings, and (D) such case or proceeding is in fact dismissed within 60 days after the commencement thereof; or (E) the Borrower takes any action to authorize, or in furtherance of, any of the foregoing; or (b) (i) there shall be commenced against any Insurance Subsidiary any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, supervision, conservatorship, liquidation, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, rehabilitation, conservation, supervision, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, obligations or liabilities, or (B) seeking appointment of a receiver, trustee, custodian, rehabilitator, conservator, supervisor, liquidator or other similar official for it or for all or any substantial part of its assets, in each case which (1) results in the entry of an order for relief or any such adjudication or appointment or (2) remains undismissed, undischarged or unbonded for a period of 60 days; or (ii) there shall be commenced against any of such Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iii) any of such Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause(b)(i) or (ii) above; or (iv) any Governmental Authority shall issue any order of conservation, supervision or any other order of like effect relating to any of such Subsidiaries.
(f) Non-compliance With Certain Provisions . Failure of the Borrower to comply with the provisions of each of Sections 6.01(d) , 6.01(h) , 6.02(a) , 7.01 through 7.04 , 7.07 , 7.08 or 7.09 .
(g) Non-compliance With Other Provisions . Failure by the Borrower to comply with or to perform any provision of this Agreement or the other Loan Documents (and not constituting an Event of Default under any of the other provisions of this Article VIII ) and continuance of such failure for 30 days after notice thereof from the Administrative Agent to the Borrower.
(h) Warranties and Representations . Any warranty or representation made by or on behalf of the Borrower or any Subsidiary herein is inaccurate or incorrect or is breached or false or misleading in any material respect as of the date such warranty or representation is made; or any schedule, certificate, financial statement, report, notice, or other instrument furnished by or on behalf of Borrower or any Subsidiary to the
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Administrative Agent or the Lenders is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified.
(i) Employee Benefit Plans . A contribution failure occurs with respect to any Plan sufficient to give rise to a Lien against the Borrower or any of its Subsidiaries under section 302(f)(1) of ERISA; or withdrawal by one or more companies in the Controlled Group from one or more Multiemployer Plans to which it or they have an obligation to contribute and the withdrawal liability (without unaccrued interest) to multiemployer plans as a result of such withdrawal or withdrawals (including any outstanding withdrawal liability that the Controlled Group has incurred on the date of such withdrawal) is material.
(j) Change in Control . A Change in Control occurs.
(k) Litigation . (a) There shall be entered against the Borrower or any of its Subsidiaries one or more judgments, awards or decrees, or orders of attachment, garnishment or any other writ, which exceed ten percent (10%) of Net Worth at any one time outstanding, excluding judgments, awards, decrees, orders or writs (i) for which there is insurance, but only to the extent there is actual insurance coverage, (ii) for which there is indemnification (upon terms and from creditworthy indemnitors which are satisfactory to Administrative Agent), but only to the extent there is actual indemnification, (iii) which have been in force for less than the applicable period for filing an appeal so long as execution is not levied thereunder (or in respect of which the Borrower or its appropriate Subsidiary shall at the time in good faith be prosecuting an appeal or proceeding for review and in respect of which a stay of execution or appropriate appeal bond shall have been obtained pending such appeal or review), (iv) which constitute Ordinary Course Litigation, or (v) which are reserved for, to the actual extent of reserves or (b) there has been a final judgment or final judgments for the payment of money exceeding, in the aggregate, ten percent (10%) of Net Worth rendered against the Borrower or any of its Subsidiaries by a court of competent jurisdiction and such judgment(s) remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days after such judgment(s) become final and nonappealable.
(l) Change in Law . Any change is made in the Insurance Code which affects the dividend practices of any Insurance Subsidiary and which is reasonably likely to have a Material Adverse Effect on the ability of the Borrower to perform its obligations under the Agreement and such circumstances shall continue for 120 days.
(m) Invalidity of Loan Documents . Any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all the Obligations, ceases to be in full force and effect; or the Borrower or any other Person contests in any manner the validity or enforceability of any Loan Document; or the Borrower denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document.
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SECTION 8.02 Effect of Event of Default . If any Event of Default described in Section 8.01(e) shall occur, the Loans and the Note and all other Obligations shall become immediately due and payable and the Commitments shall be terminated, all without notice of any kind; and, in the case of any other Event of Default, the Administrative Agent may, and upon the written request of the Required Lenders shall, terminate the Commitments hereunder and declare all or any portion of the Loans and all or such portion of the Note and all other Obligations to be due and payable, whereupon the Commitment shall terminate and all or such portion of the Loans and all or such portion of the Note and all other Obligations shall become immediately due and payable, all without further notice of any kind. The Administrative Agent shall promptly advise the Borrower of any such declaration but failure to do so shall not impair the effect of such declaration. Notwithstanding the foregoing, the effect as an Event of Default of any event described in Section 8.01(a) may not be waived except by consent of all of the Lenders in writing.
ARTICLE IX
ADMINISTRATIVE AGENT
SECTION 9.01 Appointment and Authority . Each of the Lenders hereby irrevocably appoints Bank of America to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Administrative Agent and the Lenders, and the Borrower shall not have rights as a third party beneficiary of any of such provisions.
SECTION 9.02 Rights as a Lender . The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term Lender or Lenders shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.
SECTION 9.03 Exculpatory Provisions . The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, the Administrative Agent:
(a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
(b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated
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hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law; and
(c) shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.
The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 10.01 and 8.02 ) or (ii) in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Administrative Agent by the Borrower or a Lender.
The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
SECTION 9.04 Reliance by Administrative Agent . The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for
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any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
SECTION 9.05 Delegation of Duties . The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.
SECTION 9.06 Resignation of Administrative Agent . The Administrative Agent may resign upon 30 days notice to the Lenders and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may on behalf of the Lenders, appoint a successor Administrative Agent meeting the qualifications set forth above; provided that if the Administrative Agent shall notify the Borrower that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (1) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents and (2) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this Section. Upon the acceptance of a successors appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring Administrative Agents resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 10.04 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent.
SECTION 9.07 Non-Reliance on Administrative Agent and Other Lenders . Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance
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upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.
SECTION 9.08 No Other Duties, Etc. Anything herein to the contrary notwithstanding, none of the Bookrunners, Arrangers or Co-Syndication Agents listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent or a Lender hereunder.
SECTION 9.09 Administrative Agent May File Proofs of Claim . In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Borrower, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise
(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 2.07 and 10.04 ) allowed in such judicial proceeding; and
(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.07 and 10.04 .
Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.
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ARTICLE X
MISCELLANEOUS
SECTION 10.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower therefrom, shall be effective unless in writing signed by the Required Lenders and the Borrower and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided , however , that no such amendment, waiver or consent shall:
(a) waive any condition set forth in Section 4.01(a) without the written consent of each Lender;
(b) extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.02 ) without the written consent of such Lender;
(c) postpone any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby;
(d) reduce the principal of, or the rate of interest specified herein on, any Loan or (subject to clause [(ii)] of the second proviso to this Section 10.01 ) any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby; provided , however , that only the consent of the Required Lenders shall be necessary to amend the definition of Default Rate or to waive any obligation of the Borrower to pay interest at the Default Rate;
(e) change Section 2.11 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender; or
(f) change any provision of this Section or the definition of Required Lenders or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender;
and, provided further , that (i) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender.
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SECTION 10.02 Notices; Effectiveness; Electronic Communication .
(a) Notices Generally . Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:
(i) if to the Borrower or the Administrative Agent, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 10.02 ; and
(ii) if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire.
Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).
(b) Electronic Communications . Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.
Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the senders receipt of an acknowledgement from the intended recipient (such as by the return receipt requested function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
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(c) The Platform . THE PLATFORM IS PROVIDED AS IS AND AS AVAILABLE. THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Administrative Agent or any of its Related Parties (collectively, the Agent Parties ) have any liability to the Borrower, any Lender or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Borrowers or the Administrative Agents transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided , however , that in no event shall any Agent Party have any liability to the Borrower, any Lender or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages).
(d) Change of Address, Etc. Each of the Borrower and the Administrative Agent may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto. Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower and the Administrative Agent. In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.
(e) Reliance by Administrative Agent and Lenders . The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices (including telephonic Loan Notices) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify the Administrative Agent, each Lender and the Related Parties of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.
SECTION 10.03 No Waiver; Cumulative Remedies . No failure by any Lender or the Administrative Agent to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further
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exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
SECTION 10.04 Expenses; Indemnity; Damage Waiver .
(a) Costs and Expenses . The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent), in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender (including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender), and shall pay all fees and time charges for attorneys who may be employees of the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this Section, or (B) in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans.
(b) Indemnification by the Borrower . The Borrower shall indemnify the Administrative Agent (and any sub-agent thereof) and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an Indemnitee ) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee), and shall indemnify and hold harmless each Indemnitee from all fees and time charges and disbursements for attorneys who may be employees of any Indemnitee, incurred by any Indemnitee or asserted against any Indemnitee by any third party or by the Borrower arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder, the consummation of the transactions contemplated hereby or thereby, or, in the case of the Administrative Agent (and any sub-agent thereof) and its Related Parties only, the administration of this Agreement and the other Loan Documents, (ii) any Loan or the use or proposed use of the proceeds therefrom, or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower, and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee or (y) result from a claim brought by the Borrower against an Indemnitee for breach in bad faith of such Indemnitees obligations hereunder or under any other Loan Document, if the Borrower has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction.
53
(c) Reimbursement by Lenders . To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under subsection (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof) or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), or such Related Party, as the case may be, such Lenders Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent) in connection with such capacity. The obligations of the Lenders under this subsection (c) are subject to the provisions of Section 2.13(d) .
(d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof. No Indemnitee referred to in subsection (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby.
(e) Payments . All amounts due under this Section shall be payable not later than ten Business Days after demand therefor.
(f) Survival . The agreements in this Section shall survive the resignation of the Administrative Agent, the replacement of any Lender, the termination of the Aggregate Commitments and the repayment, satisfaction or discharge of all the other Obligations.
SECTION 10.05 Payments Set Aside . To the extent that any payment by or on behalf of the Borrower is made to the Administrative Agent or any Lender, or the Administrative Agent or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of the Lenders under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement.
54
SECTION 10.06 Successors and Assigns .
(a) Successors and Assigns Generally . The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) Assignments by Lenders . Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that
(i) except in the case of an assignment of the entire remaining amount of the assigning Lenders Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if Trade Date is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided , however , that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met;
(ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lenders rights and obligations under this Agreement with respect to the Loans or the Commitment assigned;
(iii) any assignment of a Commitment must be approved by the Administrative Agent, unless the Person that is the proposed assignee is itself a Lender
55
(whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); and
(iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount, if any, required as set forth in Schedule 10.06 , and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lenders rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3.01 , 3.04 , 3.05 , and 10.04 with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.
(c) Register . The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agents Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the Register ). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower at any reasonable time and from time to time upon reasonable prior notice. In addition, at any time that a request for a consent for a material or substantive change to the Loan Documents is pending, any Lender may request and receive from the Administrative Agent a copy of the Register.
(d) Participations . Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrowers Affiliates or Subsidiaries) (each, a Participant ) in all or a portion of such Lenders rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lenders obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the Lenders shall continue to deal solely
56
and directly with such Lender in connection with such Lenders rights and obligations under this Agreement.
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 10.01 that affects such Participant. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.01 , 3.04 and 3.05 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.11 as though it were a Lender.
(e) Limitations upon Participant Rights . A Participant shall not be entitled to receive any greater payment under Section 3.01 or 3.04 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrowers prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.01 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 3.01(e) as though it were a Lender.
(f) Certain Pledges . Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
(g) Electronic Execution of Assignments . The words execution, signed, signature, and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
SECTION 10.07 Treatment of Certain Information; Confidentiality . Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information
57
confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower.
For purposes of this Section, Information means all information received from the Borrower or any Subsidiary relating to the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the Borrower or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
Each of the Administrative Agent and the Lenders acknowledges that (a) the Information may include material non-public information concerning the Borrower or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with applicable Law, including Federal and state securities Laws.
SECTION 10.08 Right of Setoff . If an Event of Default shall have occurred and be continuing, each Lender and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender or any such Affiliate to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement or any other Loan Document to such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borrower may be contingent or unmatured or are owed to a branch or office of such Lender different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each Lender and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender or its Affiliates may have. Each Lender agrees to notify the Borrower and the Administrative Agent
58
promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.
SECTION 10.09 Interest Rate Limitation . Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the Maximum Rate ). If the Administrative Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.
SECTION 10.10 Counterparts; Integration; Effectiveness . This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01 , this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.
SECTION 10.11 Survival of Representations and Warranties . All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default at the time of any Loan, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied.
SECTION 10.12 Severability . If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
59
SECTION 10.13 Replacement of Lenders . If any Lender requests compensation under Section 3.04 , or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01 , or if any Lender is a Defaulting Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 10.06 ), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:
(a) the Borrower shall have paid to the Administrative Agent the assignment fee specified in Section 10.06(b) ;
(b) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 3.05 ) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);
(c) in the case of any such assignment resulting from a claim for compensation under Section 3.04 or payments required to be made pursuant to Section 3.01 , such assignment will result in a reduction in such compensation or payments thereafter; and
(d) such assignment does not conflict with applicable Laws.
A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
SECTION 10.14 Governing Law; Jurisdiction; Etc.
(a) GOVERNING LAW . THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS.
(b) SUBMISSION TO JURISDICTION . THE BORROWER IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS SITTING IN COOK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE NORTHERN DISTRICT OF ILLINOIS, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE
60
HEARD AND DETERMINED IN SUCH ILLINOIS STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT THE ADMINISTRATIVE AGENT, ANY LENDER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST THE BORROWER OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.
(c) WAIVER OF VENUE . THE BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (B) OF THIS SECTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
(d) SERVICE OF PROCESS . EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 10.02 . NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.
SECTION 10.15 Waiver of Jury Trial . EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 10.16 USA PATRIOT Act Notice . Each Lender that is subject to the Act (as hereinafter defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the Act ), it is required to
61
obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Act.
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Delivered at Chicago, Illinois, as of the day and year first above written.
HORACE MANN EDUCATORS CORPORATION | ||
By: |
Peter H. Heckman |
|
Title: |
Executive Vice President & Chief Financial Officer | |
By: |
Dwayne D. Hallman |
|
Title: |
Senior Vice President Finance |
S-1
BANK OF AMERICA, N.A., as
|
||
By: |
Debra Basler |
|
Title: |
Senior Vice President |
S-2
BANK OF AMERICA, N.A., as a Lender |
||
By: |
Debra Basler |
|
Title: |
Senior Vice President |
S-3
JPMORGAN CHASE BANK, N.A. |
||
By: |
Thomas A. Kiepura |
|
Title: |
Vice President |
S-4
NATIONAL CITY BANK OF THE MIDWEST |
||
By: |
Steve Vilatte |
|
Title: |
Vice President |
S-5
COMERICA BANK |
||
By: |
Felicia M. Maxwell |
|
Title: |
Vice President |
S-6
FIFTH THIRD BANK (CHICAGO), a Michigan Banking Corporation | ||
By: |
Kim Puszczewicz |
|
Title: |
Assistant Vice President |
S-7
LASALLE BANK NATIONAL ASSOCIATION | ||
By: |
Brandon S. Allison |
|
Title: |
Assistant Vice President |
S-8
PNC BANK N.A. | ||
By: |
Edward J. Chidiac |
|
Title: |
Managing Director |
S-9
STATE STREET BANK AND TRUST COMPANY | ||
By: |
Anne W. Muita |
|
Title: |
Assistant Vice President |
S-10
ILLINOIS NATIONAL BANK | ||
By: |
Jeffrey L. Raes |
|
Title: |
Senior Vice President |
S-11
SCHEDULE 2.01
COMMITMENTS
AND APPLICABLE PERCENTAGES
Lender |
Commitment
|
Applicable
Percentage |
||||
Bank of America, N.A. |
$ | 14,000,000 | 14.000000000 | % | ||
JPMorgan Chase Bank, N.A. |
$ | 12,500,000 | 12.500000000 | % | ||
National City Bank of the Midwest |
$ | 12,500,000 | 12.500000000 | % | ||
Comerica Bank |
$ | 12,000,000 | 12.000000000 | % | ||
Fifth Third Bank (Chicago) |
$ | 12,000,000 | 12.000000000 | % | ||
LaSalle Bank National Association |
$ | 12,000,000 | 12.000000000 | % | ||
PNC Bank N.A. |
$ | 10,000,000 | 10.000000000 | % | ||
State Street Bank and Trust Company |
$ | 10,000,000 | 10.000000000 | % | ||
Illinois National Bank |
$ | 5,000,000 | 5.000000000 | % | ||
Total |
$ | 100,000,000 | 100.000000000 | % |
1
SCHEDULE 5.01
* - Notes state of domicile | A.12/K.2. |
(TIC redomesticated from Delaware to Illinois 12-23-88. HMIC redomesticated from Florida to Illinois 12-23-88.)
CERTIFICATES OF AUTHORITY BY STATE AND DATE ISSUED
STATE |
HMIC
|
TIC
|
HMP&CIC
|
HMLIC
|
ALIC
|
HMEBCC
|
HMSC
|
ELICA
|
||||||||
Alabama |
12-19-66 | 04-18-73 | 08-20-03 | 12-15-58 | 06-28-85 | X | ||||||||||
Alaska |
01-31-64 | 03-26-73 | 12-22-87 | 02-02-62 | 03-09-01 | X | ||||||||||
Arizona |
05-27-59 | 11-12-74 | 06-09-80 | 07-15-59 | 08-21-57 | 10-28-86 | X | 03-18-64* | ||||||||
Arkansas |
01-31-64 | 10-06-77 | 11-19-75 | 05-06-50 | 09-13-88 | X | ||||||||||
California |
01-31-64 | 03-25-65* | 08-18-67 | 12-22-00 | X | |||||||||||
Colorado |
06-05-64 | 09-05-73 | 11-13-81 | 11-02-56 | 12-31-84 | 12-04-87 | X | |||||||||
Connecticut |
06-28-74 | 11-18-99 | 11-18-99 | 11-20-78 | 11-25-86 | X | ||||||||||
Delaware |
06-02-59 | 03-02-71 | 09-25-98 | 12-08-55 | 09-18-86 | X | ||||||||||
Dist. of Col. |
08-20-59 | 01-30-73 | 05-01-97 | 12-03-65 | Pending | X | ||||||||||
Florida |
09-23-63 | 08-19-76 | 07-16-62 | 08-15-66 | 11-07-85 | X | ||||||||||
Georgia |
01-31-64 | 02-09-78 | 04-05-61 | 03-30-83 | X | |||||||||||
Hawaii |
08-25-87 | 02-01-85 | ||||||||||||||
Idaho |
12-16-68 | 04-16-73 | 05-26-88 | 05-09-60 | 12-07-87 | X | ||||||||||
Illinois |
01-31-64* | 03-09-77* | 04-25-75 | 08-09-49* | 12-31-84* | 10-19-79* | 08-13-73* | |||||||||
Indiana |
05-01-68 | 12-01-77 | 01-15-98 | 05-01-57 | 12-19-00 | X | ||||||||||
Iowa |
12-29-64 | 05-04-73 | 11-26-74 | 08-01-52 | 05-15-85 | X | ||||||||||
Kansas |
01-31-64 | 09-13-96 | 12/21/99 | 11-12-61 | 12-29-87 | X | ||||||||||
Kentucky |
01-31-64 | 08-02-64 | 11-01-99 | 02-21-69 | 12-20-00 | X |
1
STATE |
HMIC
|
TIC
|
HMP&CIC
|
HMLIC
|
ALIC
|
HMEBCC
|
HMSC
|
ELICA
|
||||||||
Louisiana |
12-23-58 | 11-14-73 | 09-30-99 | 05-16-61 | 09-03-85 | X | ||||||||||
Maine |
06-01-70 | 05-04-88 | 12-30-98 | 09-02-60 | 12-16-85 | X | ||||||||||
Maryland |
01-10-68 | 10-29-91 | 03-31-98 | 06-26-56 | 12-16-85 | X | ||||||||||
Massachusetts |
10-25-68 | 02-12-81 | 09-09-68 | pending | X | |||||||||||
Michigan |
03-19-59 | 12-14-77 | 02-23-99 | 10-27-59 | 12-21-00 | X | ||||||||||
Minnesota |
02-11-64 | 06-01-74 | 08-19-98 | 10-08-56 | 12-16-85 | X | ||||||||||
Mississippi |
06-01-58 | 07-19-74 | 06-01-97 | 10- -61 | 07-26-85 | X | ||||||||||
Missouri |
03-01-64 | 07-19-88 | 11-25-74 | 06-27-60 | 12-16-86 | X | ||||||||||
Montana |
01-31-64 | 06-01-73 | 02-26-88 | 01-02-54 | 12-16-87 | X | ||||||||||
Nebraska |
08-30-60 | 12-15-76 | 06-24-97 | 10-29-59 | 09-28-61 | 09-18-86 | X | |||||||||
Nevada |
02-12-68 | 06-14-99 | 06-17-99 | 05-10-60 | 02-04-83 | 02-25-87 | X | |||||||||
New Hampshire |
04-09-69 | 11-15-76 | 03-19-01 | 07-13-61 | 12-15-86 | X | ||||||||||
New Jersey |
Cancelled
05-30-96 |
12-22-00 | X | |||||||||||||
New Mexico |
03-01-64 | 08-15-73 | 01-03-03 | 05-21-56 | 02-03-87 | X | ||||||||||
New York |
01-31-64 | 06-17-02 | 03-27-00 | pending | X | |||||||||||
North Carolina |
10-18-68 | 07-01-74 | 03-05-98 | 07-10-59 | 04-21-83 | X | ||||||||||
North Dakota |
05-08-62 | 03-22-73 | 06-21-88 | 05-29-62 | 09-23-86 | X | ||||||||||
Ohio |
02-07-64 | 12-03-84 | 12-31-96 | 12-02-59 | 10-09-84 | 12-28-00 | X | |||||||||
Oklahoma |
03-01-68 | 11-25-74 | 11-07-74 | 12-07-60 | 08-02-66 | 12-07-87 | X | |||||||||
Oregon |
07-15-70 | 09-01-73 | 11-15-74 | 11-01-53 | 06-05-57 | 12-08-87 | X | |||||||||
Pennsylvania |
12-29-63 | 04-16-81 | 12-20-99 | 09-01-49 | 01-09-01 | X |
2
STATE |
HMIC
|
TIC
|
HMP&CIC
|
HMLIC
|
ALIC
|
HMEBCC
|
HMSC
|
ELICA
|
||||||||
Rhode Island |
01-23-70 | 12-13-73 | 01-12-98 | 09-05-61 | 11-24-86 | 09-10-73 | ||||||||||
South Carolina |
10-02-58 | 02-08-74 | 05-04-82 | 08-14-61 | 09-06-83 | X | ||||||||||
South Dakota |
05-01-62 | 01-22-74 | 09-14-88 | 08-03-53 | 10-23-86 | X | ||||||||||
Tennessee |
01-31-64 | 09-07-77 | 11-19-97 | 03-28-56 | 01-14-83 | X | ||||||||||
Texas |
01-31-64 | 12-29-78 | 05-29-75 | 07-14-60 | 06-26-68 | 08-02-85 | 09-10-73 | |||||||||
Utah |
03-01-64 | 06-14-73 | 04-05-88 | 11-22-55 | 12-20-00 | X | ||||||||||
Vermont |
10-01-68 | 08-25-99 | 08-25-97 | 04-18-56 | 12-19-00 | X | ||||||||||
Virginia |
02-03-64 | 03-19-91 | 03-30-99 | 04-18-56 | 06-21-83 | X | ||||||||||
Washington |
02-10-64 | 12-28-73 | 12-31-98 | 11-13-58 | 09-20-57 | 12-24-87 | X | |||||||||
West Virginia |
01-23-64 | 10-23-89 | 03-29-99 | 12-28-60 | 08-08-85 | X | ||||||||||
Wisconsin |
01-31-64 | 09-14-73 | 06-27-74 | 11-22-68 | 08-01-85 | X | ||||||||||
Wyoming |
12-24-58 | 07-23-87 | 01-18-88 | 03-24-53 | 12-10-87 | X | ||||||||||
Puerto Rico |
08-15-00 |
HMIC: | Horace Mann Insurance Company | |
TIC: | Teachers Insurance Company | |
HMP&CIC: | Horace Mann Property & Casualty Insurance Company | |
HMLIC: | Horace Mann Life Insurance Company | |
ALIC: | Allegiance Life Insurance Company | |
HMEBCC: | Horace Mann Educator Benefits Consulting Corporation | |
HMSC: | Horace Mann Service Corporation | |
ELICA: | Educators Life Insurance Company of America |
3
SCHEDULE 5.02(a)
SAP Exception
NONE
1
SCHEDULE 5.04
Litigation
NONE
1
SCHEDULE 5.10
Horace Mann Educators Corporation Delaware Corporation 100%
AIC Acquisition Corporation Delaware Corporation
Allegiance Life Insurance Company Illinois Corporation 100%
Horace Mann Life Insurance Company Illinois Corporation
Educators Life Insurance Company of America Arizona Corporation
Horace Mann Educator Benefits Consulting Corporation Illinois Corporation
Horace Mann Insurance Company Illinois Corporation 100%
Horace Mann General Agency, Inc. Texas Corporation
Horace Mann Investors, Inc. Maryland Corporation
Horace Mann Lloyds Management Corporation Texas Corporation 100%
Horace Mann Lloyds Texas Corporation
Horace Mann Property & Casualty Insurance Company California Corporation
Horace Mann Service Corporation Illinois Corporation
Horace Mann MGA and Brokerage of Florida, Inc. Florida Corporation
Senior Marketing Insurance Service Corporation Delaware Corporation
Teachers Insurance Company Illinois Corporation 100%
Insuror Management Company California Corporation
Well-Care, Inc. Illinois Corporation
Horace Mann Educators Corporation is a publicly held company.
1
SCHEDULE 5.11
Insurance Licenses
NONE
1
SCHEDULE 5.12
Taxes
NONE
1
SCHEDULE 10.02
ADMINISTRATIVE AGENTS OFFICE;
CERTAIN ADDRESSES FOR NOTICES
HORACE MANN EDUCATORS CORPORATION:
Horace Mann Educators Corporation
1 Horace Mann Plaza
Springfield, Illinois 62715-0001
Attention: Ann Caparros
Telephone: 217.788.5757
Telecopier: 217.788.5776
Electronic Mail: caparra1@mail.horacemann.com
ADMINISTRATIVE AGENT:
Administrative Agents Office
(for payments and Requests for Credit Extensions):
Bank of America, N.A.
2001 Clayton Rd.
Building B
Mail Code: CA4-702-02-25
Concord, CA 94520-2405
Attention: Geralyn D. Hair
Telephone: 925.675.7338
Telecopier: 888.969.9235
Electronic Email: geralyn.d.hair@bankofamerica.com
Account Name: Credit Services West #5996
Account No.: 375 083 64 79
Ref: Horace Mann Educators Corporation
ABA# 111 000 012
Other Notices as Administrative Agent:
Bank of America, N.A.
Agency Management Group East (NY)
335 Madison Avenue, 4th Floor
Mail Code: NY1-503-04-03
New York, New York 10017
Attention: Don B. Pinzon
Telephone: 212.503.8326
Telecopier: 212.901.7843
Electronic Mail: don.b.pinzon@bankofamerica.
1
SCHEDULE 10.06
PROCESSING AND RECORDATION FEES
The Administrative Agent will charge a processing and recordation fee (an Assignment Fee ) in the amount of $2,500 for each assignment; provided , however , that in the event of two or more concurrent assignments to members of the same Assignee Group (which may be effected by a suballocation of an assigned amount among members of such Assignee Group) or two or more concurrent assignments by members of the same Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group), the Assignment Fee will be $2,500 plus the amount set forth below:
Transaction |
Assignment Fee
|
||
First four concurrent assignments or suballocations to members of an Assignee Group (or from members of an Assignee Group, as applicable) |
-0- | ||
Each additional concurrent assignment or suballocation to a member of such Assignee Group (or from a member of such Assignee Group, as applicable) |
$ | 500 |
1
EXHIBIT A
FORM OF LOAN NOTICE
Date: ,
To: | Bank of America, N.A., as Administrative Agent |
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement, dated as of May , 2005 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the Agreement ; the terms defined therein being used herein as therein defined), among Horace Mann Educators Corporation, a Delaware corporation (the Borrower ), the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent.
The undersigned hereby requests (select one):
¨ A Borrowing of Loans |
¨ A conversion or continuation of Loans |
1. | On (a Business Day). |
2. | In the amount of $ . |
3. | Comprised of . |
[Type of Loan requested]
4. | For Eurodollar Rate Loans: with an Interest Period of months. |
The Borrowing, if any, requested herein complies with the proviso to the first sentence of Section 2.01 of the Agreement.
HORACE MANN EDUCATORS CORPORATION | ||
By: |
||
Name: |
||
Title: |
A-1
EXHIBIT B
FORM OF NOTE
May , 2005
FOR VALUE RECEIVED, the undersigned (the Borrower ), hereby promises to pay to or registered assigns (the Lender ), in accordance with the provisions of the Agreement (as hereinafter defined), the principal amount of each Loan from time to time made by the Lender to the Borrower under that certain Credit Agreement, dated as of May , 2005 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the Agreement ; the terms defined therein being used herein as therein defined), among the Borrower, the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent.
The Borrower promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such principal amount is paid in full, at such interest rates and at such times as provided in the Agreement. All payments of principal and interest shall be made to the Administrative Agent for the account of the Lender in Dollars in immediately available funds at the Administrative Agents Office. If any amount is not paid in full when due hereunder, such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Agreement.
This Note is one of the Notes referred to in the Agreement, is entitled to the benefits thereof and may be prepaid in whole or in part subject to the terms and conditions provided therein. Upon the occurrence and continuation of one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable all as provided in the Agreement. Loans made by the Lender shall be evidenced by one or more loan accounts or records maintained by the Lender in the ordinary course of business. The Lender may also attach schedules to this Note and endorse thereon the date, amount and maturity of its Loans and payments with respect thereto.
The Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and non-payment of this Note.
B-1
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS
HORACE MANN EDUCATORS CORPORATION | ||
By: |
||
Name: |
||
Title: |
B-2
LOANS AND PAYMENTS WITH RESPECT THERETO
Date
|
Type of
Loan Made |
Amount of
Loan Made |
End of
Interest Period |
Amount of
Principal or Interest Paid This Date |
Outstanding
Principal Balance This Date |
Notation
Made By |
||||||
B-3
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
Date: , 20
TO: | Bank of America, N.A., |
as Administrative Agent, and
the Lenders under the
Credit Agreement referred
to below
Re: Horace Mann Educators Corporation
Please refer to that certain Credit Agreement (as heretofore amended, modified, supplemented, restated, refunded or renewed and as currently in effect, herein called the Agreement ), dated as of May , 2005, among Horace Mann Educators Corporation (the Borrower ), the Lenders referred to therein, and Bank of America, N.A., as Administrative Agent.
Terms defined in the Agreement shall have the same meanings when used herein.
In accordance with Section 6.01(f) of the Agreement, the Borrower hereby certifies that the statements and calculations set forth below are true and correct as of , 20 (the Calculation Date):
I. | Section 7.01 - Consolidated Debt to Capital . |
A. | Consolidated Debt $ |
B. | Net Worth $ |
C. | Sum of Item A plus Item B $ |
D. | Ratio of Item A to Item C |
[Item D is not permitted to exceed 0.35 to 1.0 at any time]
II. | Section 7.02 - A.M. Best Rating |
[List Material Insurance Subsidiaries and A.M. Best Rating]
The A.M. Best Rating for each Material Insurance Subsidiary is not permitted to be less than A-.
C-1
III. | Section 7.03 - Net Worth . |
A. Net Worth |
$ | |
B. Required Net Worth |
$ |
The undersigned officer further certifies that, to the best of his/her knowledge, no Default had occurred and was continuing as of the Calculation Date.
HORACE MANN EDUCATORS CORPORATION |
||
By | ||
Title |
** |
** | To be executed by Responsible Officer. |
C-2
EXHIBIT D
FORM OPINION OF BORROWERS COUNSEL
May , 2005
To: | Bank of America, N.A., as |
Administrative Agent, and
the Lenders referred to below
231 South LaSalle Street
Chicago, Illinois 60697
Re: | Horace Mann Educators Corporation |
Ladies and Gentlemen:
I refer to that certain Credit Agreement, dated as of May , 2005 (the Credit Agreement), between Horace Mann Educators Corporation, a Delaware corporation (the Borrower), various financial institutions which are, or may become, parties thereto (the Lenders) and Bank of America, N.A., as Administrative Agent for the Lenders (the Administrative Agent). I am the General Counsel of the Borrower and have represented the Borrower in connection with the preparation, execution and delivery of the Credit Agreement and the transactions contemplated thereby.
This opinion is delivered to you pursuant to Section 4.01(a)(iv) of the Credit Agreement. Capitalized terms not otherwise defined herein shall have the definitions assigned to such terms in the Credit Agreement, unless the context otherwise requires.
I have examined such matters of law and such certificates, documents and records of public officials and of officers of the Borrower and its Subsidiaries as I have deemed necessary for purposes of this opinion, including, but not limited to, the Credit Agreement and the other Loan Documents. As to questions of fact material to such opinions, I have relied on certificates of officers of the Borrower and its Subsidiaries.
In rendering this opinion, I have made the following assumptions:
(a) | All documents submitted to or reviewed by me are accurate and complete and if not originals are true and correct copies of the originals. The signatures on each of such documents by the parties thereto (other than the Borrower) are genuine. Each individual who signed such documents on behalf of any Person (other than the Borrower) had the legal capacity to do so. All individuals who signed such documents on behalf of a corporation (other than the Borrower) were duly authorized to do so. |
(b) |
The Lenders and the Administrative Agent have the corporate power and authority to execute and deliver the Credit Agreement and other Loan Documents |
D-1
to which they are parties and to perform their obligations under the Credit Agreement and the other Loan Documents. |
(c) | The execution and delivery by the Administrative Agent and the Lenders of the Credit Agreement and the other Loan Documents to which they are parties have been duly authorized by all requisite corporate action and such documents have been duly executed and delivered by the Administrative Agent and the Lenders. |
Based upon the foregoing and subject to the limitations, qualifications and exceptions set forth herein, I am of opinion that:
1. | Each of the Borrower and each Subsidiary (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (ii) is duly qualified to do business and in good standing in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, (iii) has the requisite corporate power and authority and the right to own and operate its properties, to lease the property it operate under lease, and to conduct its business as now and proposed to be conducted and (iv) has obtained all material licenses, permits, consents or approvals from or by, and has made all filings with, and given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct (including, without limitation, the consummation of the transactions contemplated by the Credit Agreement and the other Loan Documents) as to each of the foregoing except where the failure to do so would not have a Material Adverse Effect on the Borrower and its Subsidiaries taken as a whole. |
2. | The execution, delivery and performance by the Borrower of the Credit Agreement and the consummation of the transactions contemplated thereby are within its corporate powers and have been duly authorized by all necessary corporate action (including, without limitation, shareholder approval, if required). |
3. | Each of the Borrower and its Subsidiaries has received all material governmental and other consents and approvals (if any shall be required) necessary for such execution, delivery and performance, and such execution, delivery and performance do not and will not contravene or conflict with, or create a Lien or right of termination or acceleration under, any Requirement of Law or Contractual Obligation binding upon the Borrower or such Subsidiaries. |
4. | The Credit Agreement and the other Loan Documents to which it is a party have been executed by the Borrower and constitute the legal, binding and enforceable obligations of Borrower enforceable against the Borrower in accordance with their respective terms. |
5. | Other than Horace Mann Investors, Inc., neither the Borrower nor any of its Subsidiaries is an investment company or a company controlled by an investment company, within the meaning of the Investment Company Act of 1940, as amended. |
D-2
6. | (a) Except as set forth in Schedule 5.04 of the Credit Agreement and (b) except for claims which are covered by Insurance Policies, coverage for which has not been denied in writing, or which relate to Ordinary Course Litigation, no claim, litigation (including, without limitation, derivative actions), arbitration, governmental investigation or proceeding or inquiry is pending or threatened against the Borrower or any of its Subsidiaries (i) which would, if adversely determined, have a Material Adverse Effect on the Borrower or its Subsidiaries taken as a whole or (ii) which relates to any of the transactions contemplated hereby, and there is no basis known to the Borrower for any of the foregoing. |
The opinions expressed herein are limited (i) to the extent that general equitable principles limit the availability of equitable remedies, including but not limited to the remedy of specific performance, injunctive relief, the appointment of a receiver, and rights of acceleration; and (ii) to the extent that the enforceability of the Credit Agreement and the other Loan Documents is limited by applicable bankruptcy, insolvency, and other debtor relief laws of general applicability.
This opinion is based on my knowledge of the law and facts as of the date hereof. I assume no duty to update or supplement this opinion to reflect any facts or circumstances which may hereafter come to my attention or to reflect any changes in any law which may hereafter occur or become effective.
Respectfully submitted, |
D-3
EXHIBIT E
ASSIGNMENT AND ASSUMPTION
This Assignment and Assumption (this Assignment and Assumption ) is dated as of the Effective Date set forth below and is entered into by and between [ Insert name of Assignor ] (the Assignor ) and [ Insert name of Assignee ] (the Assignee ). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (the Credit Agreement ), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of the Assignors rights and obligations as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as, the Assigned Interest ). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.
1. Assignor: |
__________________________ |
|||
2. Assignee: |
__________________________ |
[and is an |
||
Affiliate/Approved Fund of [ identify Lender ] 1 ] |
||||
3. Borrower: |
Horace Mann Educators Corporation |
|||
4. Administrative Agent: Bank of America, N.A., as the administrative agent under the Credit Agreement |
||||
5. Credit Agreement: Credit Agreement, dated as of May ___, 2005, among Horace Mann Educators Corporation, the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent |
1 | Select as applicable. |
1
6. | Assigned Interest: |
Aggregate Amount of Commitment for all Lenders* |
Amount of Commitment Assigned* |
Percentage Assigned of Commitment 2 |
CUSIP Number
|
|||||
$ ________________ |
$ | ________________ | ______________ | % |
[7. | Trade Date: ] 3 |
Effective Date: , 20 [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]
The terms set forth in this Assignment and Assumption are hereby agreed to:
ASSIGNOR |
||
[NAME OF ASSIGNOR] |
||
By: | ||
Title: |
ASSIGNEE |
||
[NAME OF ASSIGNEE] |
||
By: | ||
Title: |
Consented to and Accepted: |
||
BANK OF AMERICA, N.A., as
|
||
By: | ||
Title: |
Consented to: 4 |
||
By: | ||
Title: |
* | Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. |
2 | Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder. |
3 | To be completed if the Assignor and the Assignee intend that the minimum assignment amount is to be determined as of the Trade Date. |
4 | To be added only if the consent of the Borrower is required by the terms of the Credit Agreement. |
2
ANNEX 1 TO ASSIGNMENT AND ASSUMPTION
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION
1. Representations and Warranties .
1.1. Assignor . The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.
1.2. Assignee . The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets all requirements of an Eligible Assignee under the Credit Agreement (subject to receipt of such consents as may be required under the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.01 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Foreign Lender, attached hereto is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.
2. Payments . From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.
3
3. General Provisions . This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of Illinois.
4
Exhibit 10.2
HORACE MANN EDUCATORS CORPORATION
Amended and Restated 2002 Incentive Compensation Plan
HORACE MANN EDUCATORS CORPORATION
Amended and Restated 2002 Incentive Compensation Plan
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1. | Purpose | 1 | ||
2. | Definitions | 1 | ||
3. | Administration | 4 | ||
4. | Stock Subject to Plan | 5 | ||
5. | Eligibility; Per-Person Award Limitations | 6 | ||
6. | Specific Terms of Awards | 7 | ||
7. | Performance Awards, Including Annual Incentive Awards | 11 | ||
8. | Certain Provisions Applicable to Awards | 14 | ||
9. | Change of Control | 15 | ||
10. | Additional Award Forfeiture Provisions | 16 | ||
11. | General Provisions | 16 |
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HORACE MANN EDUCATORS CORPORATION
Amended and Restated 2002 Incentive Compensation Plan
1. Purpose . The purpose of this 2002 Incentive Compensation Plan, as amended and restated (the Plan), is to aid Horace Mann Educators Corporation, a Delaware corporation (the Company), in attracting, retaining, motivating and rewarding employees, non-employee directors, and other persons who provide substantial services to the Company or its subsidiaries or affiliates, to provide for equitable and competitive compensation opportunities, to encourage long-term service, to recognize individual contributions and reward achievement of Company goals, and promote the creation of long-term value for shareholders by closely aligning the interests of Participants with those of shareholders. The Plan authorizes stock-based and cash-based incentives for Participants.
2. Definitions . In addition to the terms defined in Section 1 above and elsewhere in the Plan, the following capitalized terms used in the Plan have the respective meanings set forth in this Section:
(a) Annual Incentive Award means a type of Performance Award granted to a Participant under Section 7(c) representing a conditional right to receive cash, Stock or other Awards or payments, as determined by the Committee, based on performance in a performance period of one fiscal year or a portion thereof.
(b) Award means any Option, SAR, Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another award, Dividend Equivalent, Other Stock Based Award, Performance Award or Annual Incentive Award, together with any related right or interest, granted to a Participant under the Plan.
(c) Beneficiary means the individual or entity designated by the Participant to receive the benefits specified under the Participants Award upon such Participants death. If no such designation is made, or if the designated individual predeceases the Participant or the entity no longer exists, then the Beneficiary shall be the Participants estate.
(d) Beneficial Owner has the meaning specified in Rule 13d-3 under the Exchange Act.
(e) Board means the Companys Board of Directors.
(f) Change of Control means, unless otherwise defined in an Award Agreement, any one or more of the following:
(i) Approval by the shareholders of the Company of a merger, reorganization, consolidation, or similar transaction, in which the Company is not the continuing or the surviving corporation, or pursuant to which Shares would be converted into cash, securities or other property, other than a merger of the Company in which no
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Company shareholders ownership percentage in the surviving corporation immediately after the merger is less than such shareholders ownership percentage in the Company immediately prior to such merger by ten percent (10%) or more (unless such change results from elimination of an odd lot that represented less than 0.1% of the outstanding of Stock); or (2) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or
(ii) The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company which is part of a sale of assets, merger, or reorganization of the Company or other similar transaction; or
(iii) Any person, as such term is defined in Sections 13(d) and 14(d) of the Exchange Act, is or becomes, directly or indirectly, the beneficial owner as defined in Rule 13d-3 under the Exchange Act, of securities of the Company that represent more than 50% of the combined voting power of the Companys then outstanding securities entitled to vote generally in the election of directors; or
(iv) The Incumbent Directors (determined using the Effective Date as the baseline date) cease for any reason to constitute at least a majority of the directors of the Company then serving.
(g) Code means the Internal Revenue Code of 1986, as amended. References to any provision of the Code or regulation thereunder shall include any successor provisions and regulations, proposed regulations and other applicable guidance or pronouncement of the Department of the Treasury and Internal Revenue Service.
(h) Committee means the Compensation Committee of the Board of Directors, the composition and governance of which is established in the Committees Charter as approved from time to time by the Board and subject to Section 303A.05 of the Listed Company Manual of the New York Stock Exchange, and other corporate governance documents of the Company. No action of the Committee shall be void or deemed to be without authority due to the failure of any member, at the time the action was taken, to meet any qualification standard set forth in the Committee Charter or this Plan. The full Board may perform any function of the Committee hereunder except to the extent limited under Section 303A.05 of the Listed Company Manual, in which case the term Committee shall refer to the Board.
(i) Covered Employee means an Eligible Person who is a Covered Employee as specified in Section 11(j).
(j) Deferred Stock means a right, granted to a Participant under Section 6(e), to receive Stock or other Awards or a combination thereof at the end of a specified deferral period.
(k) Dividend Equivalent means a right, granted to a Participant under Section 6(g), to receive cash, Stock, other Awards or other property equal in value to all or a specified portion of the dividends paid with respect to a specified number of shares of Stock.
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(l) Effective Date means the effective date specified in Section 11(r).
(m) Eligible Person has the meaning specified in Section 5.
(n) Exchange Act means the Securities Exchange Act of 1934, as amended. References to any provision of the Exchange Act or rule (including a proposed rule) thereunder shall include any successor provisions and rules.
(o) Fair Market Value means the fair market value of Stock, Awards or other property as determined in good faith by the Committee or under such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of Stock as of any date shall be (A) the mean between the highest and lowest trading prices of the Stock on such date on the New York Stock Exchange Composite Transactions Tape (or, if no sale of Stock was reported for such date, on the next preceding date on which a sale of Stock was reported) or (B) if the Stock is not listed on the New York Stock Exchange, the mean of the highest and lowest trading prices of Stock on such other national exchange on which the Stock is principally traded or as reported by the National Market System, or other similar organization; or (C) in the event that there shall be no public market for the Stock, the fair market value of the Stock as determined by the Committee. Fair Market Value relating to the exercise price or grant price of any Non-409A Option or SAR shall conform to requirements under Code Section 409A.
(p) 409A Awards means Awards that constitute a deferral of compensation under Code Section 409A and regulations thereunder. Non-409A Awards means Awards other than 409A Awards; an Award granted before January 1, 2005 which is eligible for grandfathering under Code Section 409A (generally such an Award must be vested before January 1, 2005 in order to be grandfathered) constitutes a Non-409A Award unless the Committee instead designates it as a 409A Award. Although the Committee retains authority under the Plan to grant Options, SARs and Restricted Stock on terms that will qualify those Awards as 409A Awards, Options, SARs exercisable for Stock, and Restricted Stock will be Non-409A Awards (with conforming terms, as provided in Section 11(k)) unless otherwise expressly specified by the Committee.
(q) Incentive Stock Option or ISO means any Option designated as an incentive stock option within the meaning of Code Section 422 or any successor provision thereto and qualifying thereunder.
(r) Incumbent Directors means, as of any specified baseline date, individuals then serving as members of the Board who were members of the Board as of the date immediately preceding such baseline date; provided that any subsequently-appointed or elected member of the Board whose election, or nomination for election by shareholders of the Company or the Surviving Corporation, as applicable, was approved by a vote or written consent of a majority of the directors then comprising the Incumbent Directors shall also thereafter be considered an Incumbent Director, unless the initial assumption of office of such subsequently-elected or appointed director was in connection with (i) an actual or threatened election contest, including a consent solicitation, relating to the election or removal of one or more members of the Board, (ii)
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a tender offer (as such term is used in Section 14(d) of the Exchange Act), or (iii) a proposed reorganization transaction.
(s) Option means a right, granted to a Participant under Section 6(b), to purchase Stock or other Awards at a specified price during specified time periods.
(t) Other Stock-Based Awards means Awards granted to a Participant under Section 6(h).
(u) Participant means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person.
(v) Performance Award means a conditional right, granted to a Participant under Sections 6(i) and 7, to receive cash, Stock or other Awards or payments, as determined by the Committee, based upon performance criteria specified by the Committee.
(w) Preexisting Plans mean the Companys 2001 Stock Incentive Plan and 1991 Stock Incentive Plan.
(x) Restricted Stock means Stock granted to a Participant under Section 6(d) which is subject to certain restrictions and to a risk of forfeiture.
(y) Rule 16b3 means Rule 16b-3, as from time to time in effect and applicable to Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act.
(z) Stock means the Companys Common Stock, and any other equity securities of the Company that may be substituted or resubstituted for Stock pursuant to Section 11(c).
(aa) Stock Appreciation Rights or SAR means a right granted to a Participant under Section 6(c).
3. Administration .
(a) Authority of the Committee. The Plan shall be administered by the Committee, which shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants; to grant Awards; to determine the type and number of Awards, the dates on which Awards may be exercised and on which the risk of forfeiture or deferral period relating to Awards shall lapse or terminate, the acceleration of any such dates, the expiration date of any Award, whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Stock, other Awards, or other property, and other terms and conditions of, and all other matters relating to, Awards; to prescribe documents evidencing or setting terms of Awards (such Award documents need not be identical for each Participant), amendments thereto, and rules and regulations for the administration of the Plan and amendments thereto; to construe and interpret the Plan and Award documents and correct defects, supply omissions or reconcile inconsistencies therein; and to make all other decisions and determinations as the Committee
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may deem necessary or advisable for the administration of the Plan. Decisions of the Committee with respect to the administration and interpretation of the Plan shall be final, conclusive, and binding upon all persons interested in the Plan, including Participants, Beneficiaries, transferees under Section 11(b) and other persons claiming rights from or through a Participant, and shareholders. The foregoing notwithstanding, the Board shall perform the functions of the Committee for purposes of granting Awards under the Plan to non-employee directors (authority with respect to other aspects of non-employee director awards is not exclusive to the Board, however).
(b) Manner of Exercise of Committee Authority. The Committee may act through subcommittees, including for purposes of perfecting exemptions under Rule 16b-3 or qualifying Awards under Code Section 162(m) as performance-based compensation, in which case the subcommittee shall be subject to and have authority under the charter applicable to the Committee, and the acts of the subcommittee shall be deemed to be acts of the Committee hereunder. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any subsidiary or affiliate, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the fullest extent permitted under Section 157 and other applicable provisions of the Delaware General Corporation Law.
(c) Limitation of Liability . The Committee and each member thereof, and any person acting pursuant to authority delegated by the Committee, shall be entitled, in good faith, to rely or act upon any report or other information furnished by any executive officer, other officer or employee of the Company or a subsidiary or affiliate, the Companys independent auditors, consultants or any other agents assisting in the administration of the Plan. Members of the Committee, any person acting pursuant to authority delegated by the Committee, and any officer or employee of the Company or a subsidiary or affiliate acting at the direction or on behalf of the Committee or a delegee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination.
4. Stock Subject to Plan .
(a) Overall Number of Shares Available for Delivery. Subject to adjustment as provided in Section 11(c), the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be (i) the number of shares that, immediately prior to the Effective Date, remain available for issuance under the Preexisting Plans plus (ii) the number of shares subject to awards under the Preexisting Plans which become available in accordance with Section 4(b) after the Effective Date; provided, however, that the total number of shares with respect to which ISOs may be granted shall not exceed the number specified under clauses (i) above. Of these shares, 100% may be delivered in connection with full-value Awards, meaning Awards other than Options, SARs, or Awards for which the Participant pays the intrinsic value directly or by foregoing a right to receive a cash payment from the Company. Any
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shares of Stock delivered under the Plan shall consist of authorized and unissued shares or treasury shares.
(b) Share Counting Rules. The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award. Shares subject to an Award or an award under a Preexisting Plan that is canceled, expired, forfeited, settled in cash or otherwise terminated or settled without delivery of the full number of shares subject to such Award to the Participant will again be available for Awards, and shares withheld in payment of the exercise price or taxes relating to an Award or Preexisting Plan award and shares equal to the number surrendered in payment of any exercise price or taxes relating to an Award or Preexisting Plan award shall be deemed to constitute shares not delivered to the Participant and shall be deemed to again be available for Awards under the Plan; provided, however, that shares shall not become available under this Section 4(b) in an event that would constitute a material revision of the Plan subject to shareholder approval under then applicable rules of the New York Stock Exchange. In addition, in the case of any Award granted in substitution for an award of a company or business acquired by the Company or a subsidiary or affiliate, shares issued or issuable in connection with such substitute Award shall not be counted against the number of shares reserved under the Plan, but shall be available under the Plan by virtue of the Companys assumption of the plan or arrangement of the acquired company or business. This Section 4(b) shall apply to the number of shares reserved and available for ISOs only to the extent consistent with applicable regulations relating to ISOs under the Code. Because shares will count against the number reserved in Section 4(a) upon delivery (or later vesting) and subject to the share counting rules under this Section 4(b), the Committee may determine that Awards may be outstanding that relate to more shares than the aggregate remaining available under the Plan, so long as Awards will not result in delivery and vesting of shares in excess of the number then available under the Plan.
5. Eligibility; Per Person Award Limitations . Awards may be granted under the Plan only to Eligible Persons. For purposes of the Plan, an Eligible Person means an employee of the Company or any subsidiary or affiliate, including any executive officer, a non-employee director of the Company, a consultant or other person who provides substantial services to the Company or a subsidiary or affiliate, and any person who has been offered employment by the Company or a subsidiary or affiliate, provided that such prospective employee may not receive any payment or exercise any right relating to an Award until such person has commenced employment with the Company or a subsidiary or affiliate. An employee on leave of absence, including for a disability that has not resulted in termination of employment, may be considered as still in the employ of the Company or a subsidiary or affiliate for purposes of eligibility for participation in the Plan. For purposes of the Plan, a joint venture in which the Company or a subsidiary has a substantial direct or indirect equity investment shall be deemed an affiliate, if so determined by the Committee. In each calendar year during any part of which the Plan is in effect, an Eligible Person may be granted Awards intended to qualify as performance-based compensation under Code Section 162(m) under Section 6 relating to up to his or her Annual Limit. A Participants Annual Limit, in any year during any part of which the Participant is then eligible under the Plan, shall equal 500,000 shares plus the amount of the Participants unused Annual Limit relating to the same type
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of Award as of the close of the previous year, subject to adjustment as provided in Section 11(c). In the case of a cash-denominated Award for which the limitation set forth in the preceding sentence would not operate as an effective limitation satisfying Treasury Regulation 1.162-27(e)(4) (including a cash Performance Award under Section 7), an Eligible Person may not be granted Awards authorizing the earning during any calendar year of an amount that exceeds the Participants Annual Limit, which for this purpose shall equal $2.5 million plus the amount of the Participants unused cash Annual Limit as of the close of the previous year (this limitation is separate and not affected by the number of Awards granted during such calendar year subject to the limitation in the preceding sentence). For this purpose, (i) earning means satisfying performance conditions so that an amount becomes payable, without regard to whether it is to be paid currently or on a deferred basis or continues to be subject to any service requirement or other non-performance condition, and (ii) a Participants Annual Limit is used to the extent a cash amount or number of shares may be potentially earned or paid under an Award, regardless of whether such amount or shares are in fact earned or paid.
6. Specific Terms of Awards .
(a) General. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 11(e) and 11(k)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment or service by the Participant and terms permitting a Participant to make elections relating to his or her Award. The Committee shall retain full power and discretion with respect to any term or condition of an Award that is not mandatory under the Plan. The Committee shall require the payment of lawful consideration for an Award to the extent necessary to satisfy the requirements of the Delaware General Corporation Law, and may otherwise require payment of consideration for an Award except as limited by the Plan.
(b) Options. The Committee is authorized to grant Options to Participants on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock purchasable under an Option (including both ISOs and non-qualified Options) shall be determined by the Committee, provided that such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option, subject to Sections 6(f) and 8(a).
(ii) Option Term; Time and Method of Exercise. The Committee shall determine the term of each Option, which in no event shall exceed a period of ten years from the date of grant. The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid and the form of such payment (subject to Sections 11(k) and (l)), including, without limitation, cash, Stock (including Stock deliverable upon exercise, if such
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withholding will not result in additional accounting expense to the Company), other Awards or awards granted under other plans of the Company or any subsidiary or affiliate, or other property (including through cashless exercise arrangements, to the extent permitted by applicable law), and the methods by or forms in which Stock will be delivered or deemed to be delivered in satisfaction of Options to Participants (including in the case of 409A Awards deferred delivery of shares subject to the Option as mandated by the Committee, with such deferred shares subject to any vesting, forfeiture or other terms as the Committee may specify).
(iii) ISOs. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Code Section 422.
(c) Stock Appreciation Rights. The Committee is authorized to grant SARs to Participants on the following terms and conditions:
(i) Right to Payment. An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise (or, in the case of a Limited SAR, the Fair Market Value determined by reference to the Change of Control price or value, as defined in the applicable Award agreement) over (B) the grant price of the SAR as determined by the Committee, which grant price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such SAR.
(ii) Other Terms. The Committee shall determine the term of each SAR, provided that in no event shall the term of an SAR exceed a period of ten years from the date of grant. The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which an SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Participants, whether or not an SAR shall be free-standing or in tandem or combination with any other Award, and whether or not the SAR will be a 409A Award or Non-409A Award (cash SARs will in all cases be 409A Awards). Limited SARs that may only be exercised in connection with a Change of Control, termination of service following a Change in Control or other event as specified by the Committee may be granted on such terms, not inconsistent with this Section 6(c), as the Committee may determine. The Committee may require that an outstanding Option be exchanged for an SAR exercisable for Stock having vesting, expiration, and other terms substantially the same as the Option, so long as such exchange will not result in additional accounting expense to the Company.
(d) Restricted Stock. The Committee is authorized to grant Restricted Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the
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Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise and under such other circumstances as the Committee may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the Plan and any Award document relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee).
(ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee may provide, by rule or regulation or in any Award document, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will lapse in whole or in part, including in the event of terminations resulting from specified causes.
(iii) Certificates for Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of an Award of Restricted Stock, the Committee may require that any dividends paid on a share of Restricted Stock shall be either (A) paid with respect to such Restricted Stock at the dividend payment date in cash, in kind, or in a number of shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) automatically reinvested in additional Restricted Stock or held in kind, which shall be subject to the same terms as applied to the original Restricted Stock to which it relates, or (C) deferred as to payment, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in shares of Deferred Stock, other Awards or other investment vehicles, subject to such terms as the Committee shall determine or permit a Participant to elect. Unless otherwise determined by the Committee, Stock distributed in connection with a Stock split or Stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed.
(e) Deferred Stock. The Committee is authorized to grant Deferred Stock to Participants, which are rights to receive Stock, other Awards, or a combination thereof at the end of a specified deferral period, subject to the following terms and conditions:
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(i) Award and Restrictions. Issuance of Stock will occur upon expiration of the deferral period specified for an Award of Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, and under such other circumstances as the Committee may determine at the date of grant or thereafter. Deferred Stock may be satisfied by delivery of Stock, other Awards, or a combination thereof (subject to Section 11(l)), as determined by the Committee at the date of grant or thereafter.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award document evidencing the Deferred Stock), all Deferred Stock that is at that time subject to such forfeiture conditions shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award document, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock will lapse in whole or in part, including in the event of terminations resulting from specified causes. Deferred Stock subject to a risk of forfeiture may be called restricted stock units or otherwise designated by the Committee.
(iii) Dividend Equivalents. Unless otherwise determined by the Committee, Dividend Equivalents on the specified number of shares of Stock covered by an Award of Deferred Stock shall be either (A) paid with respect to such Deferred Stock at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such Deferred Stock, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in additional Deferred Stock, other Awards or other investment vehicles having a Fair Market Value equal to the amount of such dividends, as the Committee shall determine or permit a Participant to elect.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of obligations of the Company or a subsidiary or affiliate to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements, subject to such terms as shall be determined by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to a Participant, entitling the Participant to receive cash, Stock, other Awards, or other property equivalent to all or a portion of the dividends paid with respect to a specified number of shares of Stock. Dividend Equivalents may be awarded on a freestanding basis or in connection with another Award. The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to restrictions on transferability, risks of forfeiture and such other terms as the Committee may specify.
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(h) Other Stock Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock or factors that may influence the value of Stock, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or business units thereof or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified subsidiaries or affiliates or other business units. The Committee shall determine the terms and conditions of such Awards. Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 6(h).
(i) Performance Awards. Performance Awards, denominated in cash or in Stock or other Awards, may be granted by the Committee in accordance with Section 7.
7. Performance Awards, Including Annual Incentive Awards .
(a) Performance Awards Generally. The Committee is authorized to grant Performance Awards on the terms and conditions specified in this Section 7. Performance Awards may be denominated as a cash amount, number of shares of Stock, or specified number of other Awards (or a combination) which may be earned upon achievement or satisfaction of performance conditions specified by the Committee. In addition, the Committee may specify that any other Award shall constitute a Performance Award by conditioning the right of a Participant to exercise the Award or have it settled, and the timing thereof, upon achievement or satisfaction of such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Sections 7(b) and 7(c) in the case of a Performance Award intended to qualify as performance-based compensation under Code Section 162(m).
(b) Performance Awards Granted to Covered Employees. If the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as performance-based compensation for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of a preestablished performance goal and other terms set forth in this Section 7(b).
(i) Performance Goal Generally. The performance goal for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 7(b). The performance goal shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder (including Regulation 1.16227 and successor regulations thereto), including the requirement that the level or
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levels of performance targeted by the Committee result in the achievement of performance goals being substantially uncertain. The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants.
(ii) Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries or affiliates, other business units, or lines of business of the Company shall be used by the Committee in establishing performance goals for such Performance Awards: (1) insurance premiums written, contract deposits, contract charges earned, or contracts in force; (2) income before realized investment gains and losses (operating income), before or after taxes, and income before or after interest, depreciation, amortization, or extraordinary or special items; (3) income before realized investment gains and losses (operating income) per common share (basic or diluted), and income before realized investment gains and losses (operating income) from continuing operations per common share (basic or diluted); (4) return on equity, return on assets (gross or net), return on investment, or return on capital; (5) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (6) net interest margin; (7) annuity accumulated value and annuity accumulated value persistency; (8) net investment income and realized investment gains or losses (including on a per share basis); (9) economic value created; (10) operating margin or profit margin; (11) expense ratios; (12) stock price or total shareholder return; (13) dividends, including as a percentage of net income; and (14) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration or geographic business expansion goals, cost targets, customer satisfaction, employee satisfaction, management of employment practices and employee benefits, sales units, agent growth and goals relating to acquisitions, divestitures or joint ventures. The targeted level or levels of performance with respect to such business criteria may be established at such levels and in such terms as the Committee may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies.
(iii) Performance Period; Timing for Establishing Performance Goals; Per-Person Limit. Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to one year or more than one year, as specified by the Committee. A performance goal shall be established not later than the earlier of (A) 90 days after the beginning of any performance period applicable to such Performance Award or (B) the time 25% of such performance period has elapsed. In all cases, the maximum Performance Award of any Participant shall be subject to the limitation set forth in Section 5.
(iv) Performance Award Pool. The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring
12
performance of the Company in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) during the given performance period, as specified by the Committee in accordance with Section 7(b)(iv). The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria.
(v) Settlement of Performance Awards; Other Terms. Settlement of such Performance Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, increase or reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Performance Award subject to this Section 7(b). Any settlement which changes the form of payment from that originally specified shall be implemented in a manner such that the Performance Award and other related Awards do not, solely for that reason, fail to qualify as performance-based compensation for purposes of Code Section 162(m). The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant or other event (including a Change of Control) prior to the end of a performance period or settlement of such Performance Awards.
(c) Annual Incentive Awards Granted to Designated Covered Employees. The Committee may grant an Annual Incentive Award to an Eligible Person who is designated by the Committee as likely to be a Covered Employee. Such Annual Incentive Award will be intended to qualify as performance-based compensation for purposes of Code Section 162(m), and therefore its grant, exercise and/or settlement shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 7(c).
(i) Grant of Annual Incentive Awards . Not later than the earlier of 90 days after the beginning of any performance period applicable to such Annual Incentive Award or the time 25% of such performance period has elapsed, the Committee shall determine the Covered Employees who will potentially receive Annual Incentive Awards, and the amount(s) potentially payable thereunder, for that performance period. The amount(s) potentially payable shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) in the given performance period, as specified by the Committee. The Committee may designate an annual incentive award pool as the means by which Annual Incentive Awards will be measured, which pool shall conform to the provisions of Section 7(b)(iv). In such case, the portion of the Annual Incentive Award pool potentially payable to each Covered Employee shall be preestablished by the Committee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the limitation set forth in Section 5.
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(ii) Payout of Annual Incentive Awards . After the end of each performance period, the Committee shall determine the amount, if any, of the Annual Incentive Award for that performance period payable to each Participant. The Committee may, in its discretion, determine that the amount payable to any Participant as a final Annual Incentive Award shall be reduced from the amount of his or her potential Annual Incentive Award, including a determination to make no final Award whatsoever, but may not exercise discretion to increase any such amount. The Committee shall specify the circumstances in which an Annual Incentive Award shall be paid or forfeited in the event of termination of employment by the Participant or other event (including a Change of Control) prior to the end of a performance period or settlement of such Annual Incentive Award.
(d) Written Determinations. Determinations by the Committee as to the establishment of performance goals, the amount potentially payable in respect of Performance Awards and Annual Incentive Awards, the level of actual achievement of the specified performance goals relating to Performance Awards and Annual Incentive Awards, and the amount of any final Performance Award and Annual Incentive Award shall be recorded in writing in the case of Performance Awards intended to qualify under Section 162(m). Specifically, the Committee shall certify in writing, in a manner conforming to applicable regulations under Section 162(m), prior to settlement of each such Award granted to a Covered Employee, that the performance objective relating to the Performance Award and other material terms of the Award upon which settlement of the Award was conditioned have been satisfied.
8. Certain Provisions Applicable to Awards.
(a) Stand Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary or affiliate, or any business entity to be acquired by the Company or a subsidiary or affiliate, or any other right of a Participant to receive payment from the Company or any subsidiary or affiliate; provided, however, that a 409A Award may not be granted in tandem with a Non-409A Award. Awards granted in addition to or in tandem with other Awards or awards may be granted either as of the same time as or a different time from the grant of such other Awards or awards. Subject to Sections 11(k) and (l), the Committee may determine that, in granting a new Award, the in-the-money or fair value of any surrendered Award or award may be applied to reduce the exercise price of any Option, grant price of any SAR, or purchase price of any other Award.
(b) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee, subject to the express limitations set forth in Sections 6(b)(ii) and 6(c)(ii).
(c) Form and Timing of Payment under Awards; Deferrals. Subject to the terms of the Plan (including Sections 11(k) and (l)) and any applicable Award document, payments to be made by the Company or a subsidiary or affiliate upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, Stock, other Awards or other property, and may be made in a single
14
payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Stock in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events (subject to Sections 11(k) and (l)). Installment or deferred payments may be required by the Committee (subject to Section 11(e)) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock. In the case of any 409A Award that is vested and no longer subject to a risk of forfeiture (within the meaning of Code Section 83), such Award will be distributed to the Participant, upon application of the Participant, if the Participant has had an unforeseeable emergency within the meaning of Code Sections 409A(a)(2)(A)(vi) and 409A(a)(2)(B)(ii), in accordance with Section 409A(a)(2)(B)(ii).
(d) Exemptions from Section 16(b) Liability. With respect to a Participant who is then subject to the reporting requirements of Section 16(a) of the Exchange Act in respect of the Company, the Committee shall implement transactions under the Plan and administer the Plan in a manner that will ensure that each transaction with respect to such a Participant is exempt from liability under Rule 16b-3 or otherwise not subject to liability under Section 16(b)), except that this provision shall not limit sales by such a Participant, and such a Participant may engage in other non-exempt transactions under the Plan. The Committee may authorize the Company to repurchase any Award or shares of Stock deliverable or delivered in connection with any Award (subject to Section 11(l)) in order to avoid a Participant who is subject to Section 16 of the Exchange Act incurring liability under Section 16(b). Unless otherwise specified by the Participant, equity securities or derivative securities acquired under the Plan which are disposed of by a Participant shall be deemed to be disposed of in the order acquired by the Participant.
9. Change of Control.
(a) Effect of Change of Control on Non-Performance Based Awards . In the event of a Change of Control, the provisions of this Section 9(a) shall apply to non-performance based Awards, including Awards as to which performance conditions previously have been satisfied or are deemed satisfied under Section 9(b) and the applicable terms of the Award agreement, unless otherwise provided by the Committee in the Award agreement. In such case, if a Participant has a termination of employment or service during the period commencing immediately prior to the Change of Control and ending on the first anniversary of the Change of Control (Change of Control Period), which termination is initiated by the Company or a subsidiary other than for Cause (as defined below), then:
(i) Any Award subject to forfeiture based on failure to satisfy a condition requiring continued employment or service shall thereupon become nonforfeitable;
(ii) Any Award (other than an Award the exercise of which is within the control of the Participant without penalty, including under subparagraph (iii) hereof) subject to deferral of settlement shall be settled as promptly as practicable upon such termination, provided that, in the case of a 409A Award, such settlement shall be
15
subject to Section 11(k) (including any requirement for a six month delay in settlement in the case of a key employee; and
(iii) Any unexercised Option or SAR or other Award potentially exercisable by the Participant, whether or not exercisable by its terms on the date of such termination, shall thereupon be fully exercisable and may be exercised, in whole or in part for the greater of three (3) months following such termination or such longer period as may be provided under the applicable Option agreement (but only during the stated term of the Option), except, in the case of a 409A Award, to the extent such settlement would not be permitted under Code Section 409A.
(b) Effect of Change of Control on Performance-Based Awards . In the event of a Change of Control, with respect to an outstanding Award subject to achievement of performance goals and conditions, such performance goals and conditions shall be deemed to be met or exceeded if and to the extent so provided by the Committee in the Award document governing such Award or other agreement with the Participant.
(c) Cause. For purposes of this Section 9, the term Cause shall mean, unless otherwise defined in an Award agreement or employment or Change-of-Control agreement between the Company or a subsidiary and the Participant then in effect:
(i) A Participants conviction of any felony under federal law or the law of the state in which the act occurred;
(ii) Dishonesty by the Participant in the course of fulfilling his or her employment duties or service duties to the Company or a subsidiary; or
(iii) Willful and deliberate failure on the part of the Participant to perform his or her employment or service duties to the Company or a subsidiary in any material respect, after reasonable notice of the non-performance and opportunity to correct it.
10. Additional Award Forfeiture Provisions. The Committee may condition a Participants right to receive a grant of an Award, to exercise the Award, to retain Stock acquired in connection with an Award, or to retain the profit or gain realized by a Participant in connection with an Award, including cash received upon sale of Stock acquired in connection with an Award, upon compliance by the Participant with specified conditions relating to non-competition, confidentiality of information relating to the Company, non-solicitation of customers, suppliers, and employees of the Company, cooperation in litigation, non-disparagement of the Company and its officers, directors and affiliates, and other requirements applicable to the Participant, including during specified periods following termination of employment or service to the Company.
11. General Provisions.
(a) Compliance with Legal and Other Requirements. The Company may, to the extent deemed necessary or advisable by the Committee and subject to Section 11(k), postpone the issuance or
16
delivery of Stock or payment of other benefits under any Award until completion of such registration or qualification of such Stock or other required action under any federal or state law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Stock or other securities of the Company are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change of Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of Stock or payment of benefits under any Award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on a Participant than existed on the 90th day preceding the Change of Control.
(b) Limits on Transferability; Beneficiaries. No Award or other right or interest of a Participant under the Plan shall be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any party (other than the Company or a subsidiary or affiliate thereof), or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution or to a Beneficiary upon the death of a Participant, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative, except that Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred to one or more transferees during the lifetime of the Participant, and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent such transfers are permitted by the Committee, subject to any terms and conditions which the Committee may impose thereon (which may include limitations the Committee may deem appropriate in order that offers and sales under the Plan will meet applicable requirements of registration forms under the Securities Act of 1933 specified by the Securities and Exchange Commission). A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award document applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee.
(c) Adjustments. In the event that any large, special and non-recurring dividend or other distribution (whether in the form of cash or property other than Stock), recapitalization, forward or reverse split, Stock dividend, reorganization, merger, consolidation, spinoff, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Stock such that an adjustment is determined by the Committee to be appropriate or, in the case of any outstanding Award, necessary in order to prevent dilution or enlargement of the rights of the Participant, then the Committee shall, in an equitable manner as determined by the Committee, adjust any or all of (i) the number and kind of shares of Stock which may be delivered in connection with Awards granted thereafter, (ii) the number and kind of shares of Stock by which annual per person Award limitations are measured under Section 5, (iii) the
17
number and kind of shares of Stock subject to or deliverable in respect of outstanding Awards and (iv) the exercise price, grant price or purchase price relating to any Award or, if deemed appropriate, the Committee may make provision for a payment of cash or property to the holder of an outstanding Option (subject to Section 11(l)). In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards and performance goals and any hypothetical funding pool relating thereto) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or affiliate or other business unit, or the financial statements of the Company or any subsidiary or affiliate, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committees assessment of the business strategy of the Company, any subsidiary or affiliate or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that the existence of such authority (i) would cause Options, SARs, or Performance Awards granted under Section 8 to Participants designated by the Committee as Covered Employees and intended to qualify as performance-based compensation under Code Section 162(m) and regulations thereunder to otherwise fail to qualify as performance-based compensation under Code Section 162(m) and regulations thereunder, or (ii) would cause the Committee to be deemed to have authority to change the targets, within the meaning of Treasury Regulation 1.162-27(e)(4)(vi), under the performance goals relating to Options or SARs granted to Covered Employees and intended to qualify as performance-based compensation under Code Section 162(m) and regulations thereunder; and provided further, that adjustments to Non-409A Awards will be made only to the extent permitted under 409A.
(d) Tax Provisions.
(i) Withholding . The Company and any subsidiary or affiliate is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participants withholding obligations, either on a mandatory or elective basis in the discretion of the Committee, or in satisfaction of other tax obligations if such withholding will not result in additional accounting expense to the Company. Other provisions of the Plan notwithstanding, only the minimum amount of Stock deliverable in connection with an Award necessary to satisfy statutory withholding requirements will be withheld, unless withholding of any additional amount of Stock will not result in additional accounting expense to the Company.
(ii) Required Consent to and Notification of Code Section 83(b) Election . No election under Section 83(b) of the Code (to include in gross income in the year of transfer
18
the amounts specified in Code Section 83(b)) or under a similar provision of the laws of a jurisdiction outside the United States may be made unless expressly permitted by the terms of the Award document or by action of the Committee in writing prior to the making of such election. In any case in which a Participant is permitted to make such an election in connection with an Award, the Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b) or other applicable provision.
(iii) Requirement of Notification Upon Disqualifying Disposition Under Code Section 421(b) . If any Participant shall make any disposition of shares of Stock delivered pursuant to the exercise of an ISO under the circumstances described in Code Section 421(b) (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten days thereof.
(e) Changes to the Plan. The Board may amend, suspend or terminate the Plan or the Committees authority to grant Awards under the Plan without the consent of shareholders or Participants; provided, however, that any amendment to the Plan shall be submitted to the Companys shareholders for approval not later than the earliest annual meeting for which the record date is at or after the date of such Board action if the Board determines that such shareholder approval is required by any federal or state law or regulation or the rules of the New York Stock Exchange or any other stock exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other amendments to the Plan to shareholders for approval; and provided further, that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any outstanding Award (for this purpose, actions that alter the timing of federal income taxation of a Participant will not be deemed material unless such action results in an income tax penalty on the Participant). Without the approval of shareholders, the Committee will not amend or replace previously granted Options in a transaction that constitutes a repricing, as such term is used in Section 303A.08 of the Listed Company Manual of the New York Stock Exchange. With regard to other terms of Awards, the Committee shall have no authority to waive or modify any such Award term after the Award has been granted to the extent the waived or modified term would be mandatory under the Plan for any Award newly granted at the date of the waiver or modification.
(f) Right of Setoff . The Company or any subsidiary or affiliate may, to the extent permitted by applicable law, deduct from and set off against any amounts the Company or a subsidiary or affiliate may owe to the Participant from time to time, including amounts payable in connection with any Award, owed as wages, fringe benefits, or other compensation owed to the Participant, such amounts as may be owed by the Participant to the Company, including but not limited to amounts owed under Section 10, although the Participant shall remain liable for any part of the Participants payment obligation not satisfied through such deduction and setoff. By accepting any Award granted hereunder, the Participant agrees to any deduction or setoff under this Section 11(f).
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an unfunded plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Stock pursuant to an Award, nothing contained in the Plan or
19
any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Stock, other Awards or other property, or make other arrangements to meet the Companys obligations under the Plan. Such trusts or other arrangements shall be consistent with the unfunded status of the Plan unless the Committee otherwise determines with the consent of each affected Participant.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements, apart from the Plan, as it may deem desirable, including incentive arrangements and awards which do not qualify under Code Section 162(m), and such other arrangements may be either applicable generally or only in specific cases.
(i) Payments in the Event of Forfeitures; Fractional Shares. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash consideration, the Participant shall be repaid the amount of such cash consideration. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(j) Compliance with Code Section 162(m) . It is the intent of the Company that Options and SARs granted to Covered Employees and other Awards designated as Awards to Covered Employees subject to Section 7 shall constitute qualified performance-based compensation within the meaning of Code Section 162(m) and regulations thereunder, unless otherwise determined by the Committee at the time of allocation of an Award. Accordingly, the terms of Sections 7(b), (c), and (d), including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee as likely to be a Covered Employee with respect to a specified fiscal year. If any provision of the Plan or any Award document relating to a Performance Award that is designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and no provision shall be deemed to confer upon the Committee or any other person discretion to increase the amount of compensation otherwise payable in connection with any such Award upon attainment of the applicable performance objectives.
(k) Certain Limitations on Awards to Ensure Compliance with Section 409A. For purposes of this Plan, references to an Award term or event (including any authority or right of the Company or a Participant) being permitted under Section 409A mean, for a 409A Award, that the term or event will not cause the Participant to be liable for payment of interest or a tax penalty under Section 409A and, for a Non-409A Award, that the term or event will not cause the Award to be treated as subject to Section 409A. Other provisions of the Plan notwithstanding, the terms of
20
any 409A Award and any Non-409A Award, including any authority of the Company and rights of the Participant with respect to the Award, shall be limited to those terms permitted under Section 409A, and any terms not permitted under Section 409A shall be automatically modified and limited to the extent necessary to conform with Section 409A. For this purpose, other provisions of the Plan notwithstanding, the Company shall have no authority to accelerate distributions relating to 409A Awards in excess of the authority permitted under Section 409A, any distribution subject to Section 409A(a)(2)(A)(i) (separation from service) to a key employee as defined under Section 409A(a)(2)(B)(i), shall not occur earlier than the earliest time permitted under Section 409A(a)(2)(B)(i), and any authorization of payment of cash to settle a Non-409A Award shall apply only to the extent permitted under Section 409A for such Award. Non-409A Awards that are grandfathered under Section 409A and that, but for such grandfathered status, would be deemed 409A Awards shall be subject to the terms and conditions of the Plan as amended and restated at May 26, 2005 other than Sections 6(b)(ii) and 6(c)(ii), provided that if any provision adopted by amendment to the Plan or an Award Agreement after October 3, 2004, would constitute a material modification of a grandfathered Non-409A Award, such provision will not be effective as to such Award unless so stated by the Committee in writing with specific reference to this last sentence of Section 11(k).
(l) Certain Limitations Relating to Accounting Treatment of Awards . The Company intends that stock-denominated Awards (other than SARs) will qualify for fixed accounting under Accounting Principles Board Opinion 25 (APB 25), with the compensation measurement date for accounting purposes to occur at the date of grant or the date performance conditions are met if an Award is fully contingent on achievement of performance goals, unless the Committee specifically determines otherwise. Therefore, other provisions of the Plan notwithstanding, in order to preserve this fundamental objective of the Plan, if any authority granted to the Committee hereunder or any provision of the Plan or an Award agreement would result, under APB 25, in variable accounting or a measurement date other than the date of grant or the date such performance conditions are met, if the Committee was not specifically aware of such accounting consequence at the time such Award was granted or provision otherwise became effective, such authority shall be limited and such provision shall be automatically modified and reformed to the extent necessary to preserve the accounting treatment of the award intended by the Committee, subject to Section 11(e) of the Plan. This provision shall cease to be effective if and at such time as the Company elects to no longer account for equity compensation under APB 25.
(m) Governing Law. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan and any Award document shall be determined in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of laws, and applicable provisions of federal law.
(n) Awards to Participants Outside the United States . The Committee may modify the terms of any Award under the Plan made to or held by a Participant who is then resident or primarily employed outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that such Award shall conform to laws, regulations, and customs of the country in which the Participant is then resident or primarily employed, or so that the value and other benefits of the Award to the Participant, as affected by foreign tax laws and other restrictions applicable as a result of the Participants residence or employment abroad shall be comparable to the value of such an Award to a
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Participant who is resident or primarily employed in the United States. An Award may be modified under this Section 11(n) in a manner that is inconsistent with the express terms of the Plan, so long as such modifications will not contravene any applicable law or regulation or result in actual liability under Section 16(b) for the Participant whose Award is modified.
(o) Limitation on Rights Conferred under Plan. Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or a subsidiary or affiliate, (ii) interfering in any way with the right of the Company or a subsidiary or affiliate to terminate any Eligible Persons or Participants employment or service at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees, or (iv) conferring on a Participant any of the rights of a shareholder of the Company unless and until the Participant is duly issued or transferred shares of Stock in accordance with the terms of an Award or an Option is duly exercised. Except as expressly provided in the Plan and an Award document, neither the Plan nor any Award document shall confer on any person other than the Company and the Participant any rights or remedies thereunder.
(p) Severability; Entire Agreement . If any of the provisions of this Plan or any Award document is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability, and the remaining provisions shall not be affected thereby; provided, that, if any of such provisions is finally held to be invalid, illegal, or unenforceable because it exceeds the maximum scope determined to be acceptable to permit such provision to be enforceable, such provision shall be deemed to be modified to the minimum extent necessary to modify such scope in order to make such provision enforceable hereunder. The Plan and any Award documents contain the entire agreement of the parties with respect to the subject matter thereof and supersede all prior agreements, promises, covenants, arrangements, communications, representations and warranties between them, whether written or oral with respect to the subject matter thereof.
(q) Preexisting Plans . Upon shareholder approval of the Plan as provided under Section 11(r), no further grants of Awards will be made under any Preexisting Plan.
(r) Plan Effective Date and Termination. The Plan became effective at March 6, 2002, and was approved by shareholders on May 14, 2002. The amendment and restatement of the Plan was approved by shareholders on May 26, 2005. Unless earlier terminated by action of the Board of Directors, the Plan will remain in effect until such time as no Stock remains available for delivery under the Plan and the Company has no further rights or obligations under the Plan with respect to outstanding Awards under the Plan.
22
Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Three and Six Months Ended June 30, 2005 and 2004
(Amounts in thousands, except per share data)
Three Months Ended
June 30, |
Six Months Ended
June 30, |
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2005
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2004
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2005
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2004
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Basic - assumes no dilution: |
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Net income for the period |
$ | 33,507 | $ | 18,937 | $ | 60,155 | $ | 40,628 | ||||
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Weighted average number of common shares outstanding during the period |
42,886 | 42,732 | 42,876 | 42,727 | ||||||||
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Net income per share basic |
$ | 0.78 | $ | 0.44 | $ | 1.40 | $ | 0.95 | ||||
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Diluted - assumes full dilution: |
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Net income for the period |
$ | 33,507 | $ | 18,937 | $ | 60,155 | $ | 40,628 | ||||
Interest expense, net of tax, on dilutive Senior Convertible Notes |
685 | 685 | 1,369 | 1,369 | ||||||||
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Adjusted net income for the period |
$ | 34,192 | $ | 19,622 | $ | 61,524 | $ | 41,997 | ||||
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Weighted average number of common shares outstanding during the period |
42,886 | 42,732 | 42,876 | 42,727 | ||||||||
Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: |
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Stock options |
84 | 58 | 101 | 46 | ||||||||
Common stock units related to Deferred Equity Compensation Plan for Directors |
184 | 151 | 184 | 151 | ||||||||
Common stock units related to Deferred Compensation Plan for Employees |
146 | 27 | 146 | 27 | ||||||||
Restricted common stock units related to Incentive Compensation Plan |
189 | | 119 | | ||||||||
Weighted average number of common equivalent shares to reflect the dilutive effect of Senior Convertible Notes |
4,343 | 4,343 | 4,343 | 4,343 | ||||||||
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Total common and common equivalent shares adjusted to calculate diluted earnings per share |
47,832 | 47,311 | 47,769 | 47,294 | ||||||||
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Net income per share diluted |
$ | 0.72 | $ | 0.41 | $ | 1.29 | $ | 0.89 | ||||
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Exhibit 15
Horace Mann Educators Corporation
Springfield, Illinois
Re: Registration Statements on Form S-3 (No. 333-111234) and Form S-8 (No. 33-47066, No. 33-45152, No. 333-16473, No. 333-74686 and No. 333-98917)
With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated August 9, 2005, related to our review of interim financial information.
Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
August 9, 2005
Exhibit 31.1
Chief Executive Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Louis G. Lower II, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2005 of Horace Mann Educators Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors:
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
/s/ Louis G. Lower II |
Louis G. Lower II, Chief Executive Officer |
Horace Mann Educators Corporation |
Date: August 9, 2005
Exhibit 31.2
Chief Financial Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Peter H. Heckman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2005 of Horace Mann Educators Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors:
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
/s/ Peter H. Heckman |
Peter H. Heckman, Chief Financial Officer |
Horace Mann Educators Corporation |
Date: August 9, 2005
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Horace Mann Educators Corporation (the Company) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Louis G. Lower II, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Louis G. Lower II |
Louis G. Lower II |
Chief Executive Officer |
Date: August 9, 2005
A signed original of this written statement required by Section 906 has been provided to Horace
Mann Educators Corporation and will be retained by Horace Mann Educators Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Horace Mann Educators Corporation (the Company) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Peter H. Heckman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Peter H. Heckman |
Peter H. Heckman |
Chief Financial Officer |
Date: August 9, 2005 |
A signed original of this written statement required by Section 906 has been provided to Horace
Mann Educators Corporation and will be retained by Horace Mann Educators Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.1
Glossary of Selected Terms
The following measures are used by the Companys management to evaluate performance against historical results and establish targets on a consolidated basis. A number of these measures are components of net income but, in some cases, may be considered non-GAAP financial measures under applicable SEC rules because they are not displayed as separate line items in the Consolidated Statement of Operations, and in some cases, require inclusion or exclusion of certain items not ordinarily included or excluded in a GAAP financial measure. In the opinion of the Companys management, a discussion of these measures is meaningful to provide investors with an understanding of the significant factors that comprise the Companys periodic results of operations.
Agent - A licensed representative of an insurer in marketing insurance products.
| Career agents - Agents under contract with the Company to market only the Companys products and limited additional third-party vendor products authorized by the Company. |
| Experienced agents - Career Agents with more than two years of experience with the Company. Their compensation is comprised of commissions and incentives. |
| Financed agents - Career Agents in their first two years of employment with the Company. Their compensation is comprised of a base salary (subsidy) and commissions, with the base salary (subsidy) component declining as the agent gains more experience. Financed Agents are also eligible for incentives. |
| Independent agents - Agents who are under contract with the Company to market the Companys annuity products but who are not restricted to writing only the Companys products and products authorized by the Company. |
Catastrophe costs - The sum of catastrophe losses and property and casualty catastrophe reinsurance reinstatement premiums.
Catastrophe losses - In categorizing property and casualty claims as being from a catastrophe, the Company utilizes the designations of the Insurance Services Office, Inc. (ISO) and reports loss and loss adjustment expense amounts net of reinsurance recoverables. A catastrophe is a severe loss resulting from natural and man-made events within a particular territory, including risks such as fire, earthquake, windstorm, explosion, terrorism and other similar events, that causes $25 million or more in insured property and casualty losses for the industry and affects a significant number of property and casualty insurers and policyholders. Each catastrophe has unique characteristics. Catastrophes are not predictable as to timing or amount in advance, and therefore their effects are not included in earnings or claim and claim adjustment expense reserves prior to occurrence. In the opinion of the Companys management, a discussion of the impact of catastrophes is meaningful for investors to understand the variability in periodic earnings.
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Net Reserves - Property and casualty unpaid claim and claim expense reserves net of anticipated reinsurance recoverables and after reduction of checks issued and outstanding.
Prior Years Reserve Development - A measure which the Company reports for its property and casualty segment which identifies the increase or decrease in net incurred claim and claim adjustment expense reserves at successive valuation dates for claims which occurred in previous calendar years. In the opinion of the Companys management, a discussion of prior years loss reserve development is useful to investors as it allows them to assess the impact on current period earnings of incurred claims experience from the current calendar year and previous calendar years.
Property and casualty operating statistics - Operating measures utilized by the Company and the insurance industry regarding the relative profitability of property and casualty underwriting results.
| Loss Ratio or Loss and Loss Adjustment Expense Ratio - The ratio of (1) the sum of net incurred losses and loss adjustment expenses to (2) net earned premiums. |
| Expense Ratio - The ratio of (1) the sum of operating expenses and the amortization of policy acquisition costs to (2) net earned premiums. |
| Combined Ratio - The sum of the Loss Ratio and the Expense Ratio. A Combined Ratio less than 100% generally indicates profitable underwriting prior to the consideration of investment income. |
Return on equity - The ratio of (1) trailing 12-month net income to (2) the average of ending shareholders equity for the current quarter end and the preceding four quarter ends.
Sales or Annualized New Sales - Sales represent the amount of new business sold during the period and exclude renewal of policies sold in previous periods. Sales are measured by the Company as premiums and deposits to be collected over the 12 months following the sale of a new policy, and this time period may extend into the following calendar year. Sales should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance companies, and the Companys definition of sales might differ from that used by other companies. The Company utilizes sales information as a performance measure that indicates the productivity of Career Agents and Independent Agents. Sales are also a leading indicator of future revenue trends.
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