SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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1-16725
(Commission file number)
PRINCIPAL FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-1520346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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711 HIGH STREET, DES MOINES, IOWA 50392
(Address of principal executive offices)
(515) 247-5111
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding as of July 28, 2004 was 313,410,192.
PRINCIPAL FINANCIAL GROUP, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position at June
30, 2004 (Unaudited) and December 31, 2003........... 3
Unaudited Consolidated Statements of Operations for the
three months and six months ended June 30, 2004
and 2003............................................. 4
Unaudited Consolidated Statements of Stockholders'
Equity for the six months ended June 30, 2004
and 2003............................................. 6
Unaudited Consolidated Statements of Cash Flows for
the six months ended June 30, 2004 and 2003.......... 7
Notes to Unaudited Consolidated Financial Statements
- June 30, 2004...................................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 40
Item 3. Quantitative and Qualitative Disclosures about Market
Risk................................................. 94
Item 4. Controls and Procedures................................... 100
PART II - OTHER INFORMATION
Item 1. Legal proceedings........................................ 100
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities........................... 101
Item 4. Submission of Matters to a Vote of Security Holders...... 102
Item 6. Exhibits and Reports on Form 8-K......................... 103
Signature......................................................... 104
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(Unaudited) (Note 1)
(IN MILLIONS,
EXCEPT PER SHARE DATA)
ASSETS
Fixed maturities, available-for-sale........................................ $ 37,451.0 $ 37,418.4
Fixed maturities, trading................................................... 100.3 102.9
Equity securities, available-for-sale....................................... 687.9 699.2
Mortgage loans.............................................................. 11,327.6 11,251.6
Real estate................................................................. 1,046.7 1,526.1
Policy loans................................................................ 805.2 804.1
Other investments........................................................... 1,282.8 1,412.1
------------------ ------------------
Total investments........................................................ 52,701.5 53,214.4
Cash and cash equivalents................................................... 1,475.9 1,192.5
Accrued investment income................................................... 633.8 656.6
Premiums due and other receivables.......................................... 594.3 714.9
Deferred policy acquisition costs........................................... 1,740.3 1,568.9
Property and equipment...................................................... 436.4 445.2
Goodwill.................................................................... 231.8 175.8
Other intangibles........................................................... 156.8 121.0
Separate account assets..................................................... 46,412.4 43,407.8
Assets of discontinued operations........................................... 6,262.2 5,425.1
Other assets................................................................ 727.5 832.2
------------------ ------------------
Total assets............................................................. $ 111,372.9 $ 107,754.4
================== ==================
LIABILITIES
Contractholder funds........................................................ $ 30,130.2 $ 28,896.4
Future policy benefits and claims........................................... 15,578.5 15,450.8
Other policyholder funds.................................................... 634.7 709.1
Short-term debt............................................................. 626.2 702.8
Long-term debt.............................................................. 1,069.7 1,374.3
Income taxes payable........................................................ 123.9 113.9
Deferred income taxes....................................................... 950.6 1,198.9
Separate account liabilities................................................ 46,412.4 43,407.8
Liabilities of discontinued operations...................................... 4,917.4 4,575.3
Other liabilities........................................................... 3,790.2 3,925.5
------------------ ------------------
Total liabilities........................................................ 104,233.8 100,354.8
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share - 2,500.0 million shares
authorized, 378.0 million and 377.4 million shares issued, and 314.9
million and 320.7 million shares outstanding in 2004 and 2003,
respectively............................................................. 3.8 3.8
Additional paid-in capital.................................................. 7,211.9 7,153.2
Retained earnings........................................................... 943.7 630.4
Accumulated other comprehensive income...................................... 761.1 1,171.3
Treasury stock, at cost (63.1 million and 56.7 million shares in 2004 and
2003, respectively)...................................................... (1,781.4) (1,559.1)
------------------ ------------------
Total stockholders' equity.................................................. 7,139.1 7,399.6
------------------ ------------------
Total liabilities and stockholders' equity.................................. $ 111,372.9 $ 107,754.4
================== ==================
SEE ACCOMPANYING NOTES.
3
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
---------------- ---------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES
Premiums and other considerations.............. $ 892.6 $ 875.7 $1,813.0 $ 1,780.4
Fees and other revenues........................ 364.2 276.7 696.8 543.3
Net investment income.......................... 789.2 808.8 1,575.4 1,601.8
Net realized/unrealized capital losses......... (66.3) (9.7) (108.8) (84.2)
---------------- ---------------- --------------- ---------------
Total revenues.............................. 1,979.7 1,951.5 3,976.4 3,841.3
EXPENSES
Benefits, claims and settlement expenses....... 1,221.1 1,185.2 2,407.2 2,379.9
Dividends to policyholders..................... 74.4 73.9 147.7 154.0
Operating expenses............................. 521.1 490.3 1,050.6 975.6
---------------- ---------------- --------------- ---------------
Total expenses.............................. 1,816.6 1,749.4 3,605.5 3,509.5
---------------- ---------------- --------------- ---------------
Income from continuing operations before
income taxes................................ 163.1 202.1 370.9 331.8
Income taxes................................... 34.2 50.0 78.6 81.1
---------------- ---------------- --------------- ---------------
Income from continuing operations, net of
related income taxes........................ 128.9 152.1 292.3 250.7
Income (loss) from discontinued operations, net
of related income taxes..................... (9.2) 50.1 26.7 107.2
---------------- ---------------- --------------- ---------------
Income before cumulative effect of
accounting change........................... 119.7 202.2 319.0 357.9
Cumulative effect of accounting change, net of
related income taxes........................ - - (5.7) -
---------------- ---------------- --------------- ---------------
Net income..................................... $ 119.7 $ 202.2 $ 313.3 $ 357.9
================ ================ =============== ===============
4
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
--------------- ---------------- --------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
EARNINGS PER COMMON SHARE
Basic earnings per common share:
Income from continuing operations, net of
related income taxes....................... $ 0.41 $ 0.46 $ 0.92 $ 0.76
Income (loss) from discontinued operations,
net of related income taxes................ (0.03) 0.16 0.08 0.33
--------------- ---------------- --------------- ----------------
Income before cumulative effect of
accounting change.......................... 0.38 0.62 1.00 1.09
Cumulative effect of accounting change,
net of related income taxes................ - - (0.02) -
--------------- ---------------- --------------- ----------------
Net income................................... $ 0.38 $ 0.62 $ 0.98 $ 1.09
=============== ================ =============== ================
Diluted earnings per common share:
Income from continuing operations, net of
related income taxes....................... $ 0.40 $ 0.46 $ 0.91 $ 0.76
Income (loss) from discontinued operations,
net of related income taxes................ (0.03) 0.16 0.09 0.33
--------------- ---------------- --------------- ----------------
Income before cumulative effect of
accounting change.......................... 0.37 0.62 1.00 1.09
Cumulative effect of accounting change, net
of related income taxes.................... - - (0.02) -
--------------- ---------------- --------------- ----------------
Net income................................... $ 0.37 $ 0.62 $ 0.98 $ 1.09
=============== ================ =============== ================
SEE ACCOMPANYING NOTES.
5
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY SHARES
------------- ------------ ------------- ---------------- ----------- --------------- -----------
(IN MILLIONS) (IN THOUSANDS)
BALANCES AT JANUARY 1, 2003....... $3.8 $7,106.3 $ 29.4 $ 635.8 $(1,118.1) $6,657.2 334,419.3
Shares issued, net of call
options......................... - 11.7 - - - 11.7 441.7
Stock-based compensation.......... - 12.2 - - - 12.2
Treasury stock acquired and
sold, net....................... - 3.2 - - (288.0) (284.8) (9,779.2)
Comprehensive income:
Net income...................... - - 357.9 - - 357.9
Net unrealized gains............ - - - 1,147.0 - 1,147.0
Provision for deferred income
taxes......................... - - - (398.4) - (398.4)
Net foreign currency
translation adjustment........ - - - 36.2 - 36.2
--------------
Comprehensive income.............. 1,142.7
------------- ------------- ------------- ---------------- ----------- --------------- -----------
BALANCES AT JUNE 30, 2003......... $3.8 $7,133.4 $ 387.3 $1,420.6 $(1,406.1) $7,539.0 325,081.8
============= ============= ============= ================ =========== =============== ===========
BALANCES AT JANUARY 1, 2004....... $3.8 $7,153.2 $ 630.4 $1,171.3 $(1,559.1) $7,399.6 320,667.5
Shares issued..................... 27.2 - - - 27.2 545.9
Stock-based compensation and
additional related tax benefits. - 22.7 - - - 22.7
Tax benefits related to initial
public offering................. - 8.8 - - - 8.8
Treasury stock acquired........... - - - - (222.3) (222.3) (6,317.1)
Comprehensive loss:
Net income...................... - - 313.3 - - 313.3
Net unrealized losses........... - - - (596.2) - (596.2)
Provision for deferred income
tax benefit................... - - - 228.9 - 228.9
Net foreign currency
translation adjustment........ - - - (42.9) - (42.9)
--------------
Comprehensive loss................ (96.9)
------------- ------------- ------------- ---------------- ----------- --------------- -----------
BALANCES AT JUNE 30, 2004......... $3.8 $7,211.9 $ 943.7 $ 761.1 $(1,781.4) $7,139.1 314,896.3
============= ============= ============= ================ =========== =============== ===========
SEE ACCOMPANYING NOTES.
6
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------
2004 2003
----------------- ----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income............................................ $ 313.3 $ 357.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations, net of
related income taxes.............................. (26.7) (107.2)
Cumulative effect of accounting change,
net of related income taxes....................... 5.7 -
Amortization of deferred policy acquisition costs... 92.4 98.4
Additions to deferred policy acquisition costs...... (215.0) (166.5)
Accrued investment income........................... 22.8 1.4
Premiums due and other receivables.................. 33.8 (7.7)
Contractholder and policyholder liabilities
and dividends.................................... 744.8 1,064.9
Current and deferred income taxes (benefits)........ (5.3) 254.7
Net realized/unrealized capital losses.............. 108.8 84.2
Depreciation and amortization expense............... 54.5 51.2
Mortgage loans held for sale, acquired or
originated........................................ (423.9) (443.1)
Mortgage loans held for sale, sold or repaid,
net of gain....................................... 449.5 429.8
Real estate acquired through operating activities... (16.1) (9.3)
Real estate sold through operating activities....... 56.4 4.3
Stock-based compensation............................ 20.9 10.5
Other............................................... (223.1) 235.3
----------------- ----------------
Net adjustments....................................... 679.5 1,500.9
----------------- ----------------
Net cash provided by operating activities............. 992.8 1,858.8
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases......................................... (5,137.1) (5,341.6)
Sales............................................ 1,477.3 1,787.8
Maturities....................................... 2,802.0 1,916.2
Mortgage loans acquired or originated................. (949.6) (873.4)
Mortgage loans sold or repaid......................... 783.4 532.4
Real estate acquired.................................. (105.7) (152.4)
Real estate sold...................................... 131.7 31.5
Net change in property and equipment.................. (24.4) (8.5)
Net proceeds from sales of subsidiaries............... 14.9 33.6
Purchases of interest in subsidiaries, net of
cash acquired............................. (106.2) (88.1)
Net change in other investments....................... (65.5) (67.1)
----------------- ----------------
Net cash used in investing activities................. (1,179.2) (2,229.6)
7
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------
2004 2003
----------------- ----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock, net of call options........ 14.1 11.7
Acquisition of treasury stock........................ (222.3) (300.0)
Proceeds from financing element derivatives.......... 94.0 -
Payments for financing element derivatives........... (41.1) -
Issuance of long-term debt........................... 7.8 1.9
Principal repayments of long-term debt............... (221.1) (8.4)
Net proceeds of short-term borrowings................ 49.6 7.8
Investment contract deposits......................... 3,740.9 5,052.1
Investment contract withdrawals...................... (2,938.2) (4,081.5)
Net increase (decrease) in banking operation
deposits........................................... (13.9) 150.9
----------------- ----------------
Net cash provided by financing activities............ 469.8 834.5
----------------- ----------------
Net increase in cash and cash equivalents............ 283.4 463.7
Cash and cash equivalents at beginning of period..... 1,192.5 727.8
----------------- ----------------
Cash and cash equivalents at end of period........... $ 1,475.9 $ 1,191.5
================= ================
SEE ACCOMPANYING NOTES.
8
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Principal
Financial Group, Inc. ("PFG"), its majority-owned subsidiaries and, subsequent
to June 30, 2003, its consolidated variable interest entities ("VIE"), have been
prepared in conformity with accounting principles generally accepted in the U.S.
("U.S. GAAP") for interim financial statements and with the instructions to Form
10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months and
six months ended June 30, 2004, are not necessarily indicative of the results
that may be expected for the year ended December 31, 2004. These interim
unaudited consolidated financial statements should be read in conjunction with
our annual audited financial statements as of December 31, 2003, included in our
Form 10-K for the year ended December 31, 2003, filed with the United States
Securities and Exchange Commission ("SEC"). The accompanying consolidated
statement of financial position at December 31, 2003, has been derived from the
audited consolidated statement of financial position but does not include all of
the information and footnotes required by U.S. GAAP for complete financial
statements.
Reclassifications have been made to the December 31, 2003 and June 30, 2003
financial statements to conform to the June 30, 2004 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin ("SAB") 105,
APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN Commitments ("SAB 105"), in which
the SEC Staff expressed their view that the fair value of recorded loan
commitments, including interest rate lock commitments ("IRLCs"), that are
required to follow derivative accounting under Statement of Financial Accounting
Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, should not consider the expected future cash flows related to the
associated servicing of the loan. We record IRLCs at zero value at date of
issuance with subsequent gains or losses measured by changes in market interest
rates. Therefore, this SAB did not have a material impact on our consolidated
financial statements.
On December 24, 2003, the Financial Accounting Standards Board (the "FASB")
issued FASB Interpretation No. 46 (Revised 2003): CONSOLIDATION OF VARIABLE
INTEREST ENTITIES ("FIN 46R"), to clarify some of the provisions of FIN 46 and
to exempt certain entities from its requirements. We adopted FIN 46R effective
January 1, 2004, which did not have a material impact on our consolidated
financial statements.
On July 7, 2003, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 03-1, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS ("SOP 03-1"). This SOP addresses an insurance enterprise's accounting
for certain fixed and variable contract features not covered by other
authoritative accounting guidance. We adopted SOP 03-1 effective January 1,
2004, and recorded a cumulative effect of accounting change of $(5.7) million,
which is net of income tax benefits of $3.0 million. The accounting change
impacted our Life and Health Insurance, U.S. Asset Management and Accumulation
and International Asset Management and Accumulation segments.
A provision of SOP 03-1 relates to the classification of contracts and
calculation of an additional liability for contracts that contain significant
insurance features. The adoption of the guidance requires the recognition of a
liability in addition to the contract account value in cases where the insurance
benefit feature results in gains in early years followed by losses in later
years. The accrual and release of the additional liability also impacts the
9
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortization of deferred policy acquisition costs ("DPAC"). As of January 1,
2004, we increased future policyholder benefits due to our no lapse guarantee
feature of our universal life and variable universal life products within our
Life and Health Insurance segment and for variable annuities with guaranteed
minimum death benefits in our U.S. Asset Management and Accumulation segment.
This resulted in an after-tax cumulative effect of $(0.9) million in the Life
and Health Insurance segment and $(1.5) million in the U.S. Asset Management and
Accumulation segment.
We also had an after-tax cumulative effect related to an equity method
investment within our International Asset Management and Accumulation segment of
$(3.3) million, net of income taxes, as of January 1, 2004, for select deferred
annuity products, which include guaranteed annuitization purchase rates. The
guidance requires contracts which provide for potential benefits in addition to
the account balance that are payable only upon annuitization to establish an
additional liability if the present value of the annuitized benefits exceed the
expected account balance at the expected annuitization date.
In addition, the guidance clarifies the accounting and classification for sales
inducements. Although the valuation impacts were immaterial, we reclassified
$37.6 million of sales inducements from DPAC to other assets effective January
1, 2004.
SEPARATE ACCOUNTS
At June 30, 2004 and December 31, 2003, the separate accounts included a
separate account valued at $755.7 million and $833.9 million, respectively,
which primarily includes shares of our stock that were allocated and issued to
eligible participants of qualified employee benefit plans administered by us as
part of the policy credits issued under the demutualization. These shares are
included in both basic and diluted earnings per share calculations. The separate
account shares are recorded at fair value and are reported as separate account
assets and separate account liabilities in the consolidated statement of
financial position. Changes in fair value of the separate account shares are
reflected in both the separate account assets and separate account liabilities.
STOCK-BASED COMPENSATION
At June 30, 2004, we have four stock-based compensation plans. We applied the
fair value method to all stock-based awards granted subsequent to January 1,
2002. For stock-based awards granted prior to this date, we used the intrinsic
value method.
10
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Awards under our plans vest over periods ranging from one year to three years.
Therefore, the cost related to stock-based compensation included in the
determination of net income for the three months ended and six months ended June
30, 2004, is less than that which would have been recognized if the fair value
based method had been applied to all awards since the inception of our
stock-based compensation plans. Had compensation expense for our stock option
awards and employees' purchase rights been determined based upon fair values at
the grant dates for awards under the plans in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, our net income and earnings per share
would have been reduced to the pro forma amounts indicated below. For the
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------------------- ------------------------------
2004 2003 2004 2003
---------------- -------------- --------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net income, as reported...................... $ 119.7 $ 202.2 $ 313.3 $ 357.9
Add: Stock-based compensation expense
included in reported net income, net
of related tax effects..................... 9.2 6.1 12.6 9.1
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects........................ 10.1 6.9 14.3 10.8
---------------- -------------- --------------- --------------
Pro forma net income......................... $ 118.8 $ 201.4 $ 311.6 $ 356.2
================ ============== =============== ==============
Basic earnings per share:
As reported................................ $ 0.38 $ 0.62 $ 0.98 $ 1.09
Pro forma.................................. 0.37 0.62 0.98 1.08
Diluted earnings per share:
As reported................................ $ 0.37 $ 0.62 $ 0.98 $ 1.09
Pro forma.................................. 0.37 0.62 0.97 1.08
2. DISCONTINUED OPERATIONS
PRINCIPAL INTERNATIONAL ARGENTINA S.A.
On June 28, 2004, we entered into a definitive agreement for the sale of all the
stock of Principal International Argentina S.A. ("Argentina"), our subsidiary in
Argentina, and its wholly owned subsidiaries, Principal Life Compania de
Seguros, S.A. and Principal Retiro Compania de Seguros de Retiro, S.A. We closed
the transaction on July 2, 2004.
Our operations in Argentina qualify for discontinued operations treatment under
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
("SFAS 144"), therefore, the results of operations have been removed from our
results of continuing operations and cash flows for all periods presented. The
results of operations for Argentina are reported as other after-tax adjustments
in our International Asset Management and Accumulation segment.
11
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Selected financial information for the discontinued operations of Argentina is
as follows:
AS OF
-------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(IN MILLIONS)
ASSETS
Total investments................. $33.4 $31.3
All other assets.................. 8.6 10.9
------------------ ------------------
Total assets.................... $42.0 $42.2
================== ==================
LIABILITIES
Policyholder liabilities.......... $31.4 $31.1
All other liabilities............. 1.4 2.1
------------------ ------------------
Total liabilities............... $32.8 $33.2
================== ==================
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ----------- ------------ ------------
(IN MILLIONS)
Total revenues............................... $3.6 $ 5.6 $5.8 $ 5.7
============= =========== ============ ============
Income (loss) from discontinued operations:
Income (loss) before income taxes.......... $0.5 $(1.1) $0.3 $(2.6)
Income taxes............................... 0.2 0.5 0.1 -
------------- ----------- ------------ ------------
Income (loss) from discontinued
operations, net of related income taxes.. $0.3 $(1.6) $0.2 $(2.6)
============= =========== ============ ============
PRINCIPAL RESIDENTIAL MORTGAGE, INC.
On May 11, 2004, we entered into a definitive agreement for the sale of
Principal Residential Mortgage, Inc. ("Principal Residential Mortgage") to
CitiMortgage, Inc. We closed the sale on July 1, 2004.
Our Mortgage Banking segment, which includes Principal Residential Mortgage, is
accounted for as a discontinued operation, under SFAS 144 and therefore, the
results of operations (excluding corporate overhead) have been removed from our
results of continuing operations and cash flows for all periods presented.
Corporate overhead allocated to our Mortgage Banking segment does not qualify
for discontinued operations treatment under SFAS 144 and therefore is still
included in our results of continuing operations. The results of operations
(excluding corporate overhead) are reported as other after-tax adjustments.
12
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Selected financial information for the discontinued operations of our Mortgage
Banking segment is as follows:
AS OF
-------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(IN MILLIONS)
ASSETS
Mortgage loans....................... $2,784.4 $2,256.5
Mortgage loan servicing rights....... 2,210.7 1,951.9
Cash and cash equivalents............ 631.4 674.6
All other assets..................... 839.7 675.8
------------------ ------------------
Total assets....................... $6,466.2 $5,558.8
================== ==================
LIABILITIES
Short-term debt (1).................. $2,501.1 $1,450.9
Long-term debt....................... 1,393.0 1,393.0
All other liabilities................ 2,027.7 2,242.8
------------------ ------------------
Total liabilities.................. $5,921.8 $5,086.7
================== ==================
- ----------------------
(1) We were not in compliance with one of the covenants under a short-term debt
agreement at June 30, 2004. We obtained a waiver from the unaffiliated
entity.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ----------- ------------ ------------
(IN MILLIONS)
Total revenues.............................. $190.6 $452.5 $ 446.1 $ 857.0
============= =========== ============ ============
Loss from continuing operations, net of
related income taxes (corporate
overhead)................................. $ (5.4) $ (4.5) $ (10.3) $ (8.4)
Income (loss) from discontinued operations:
Income (loss) before income taxes......... (5.7) 80.1 48.3 170.5
Income taxes (benefits)................... (2.2) 30.5 18.3 64.7
------------- ----------- ------------ ------------
Income (loss) from discontinued
operations, net of related income
taxes................................... (3.5) 49.6 30.0 105.8
------------- ----------- ------------ ------------
Net income (loss) ......................... $ (8.9) $ 45.1 $ 19.7 $ 97.4
============= =========== ============ ============
Our U.S. Asset Management and Accumulation segment held $1,142.0 million and
$804.8 million of residential mortgage banking escrow deposits (reported as
other liabilities) as of June 30, 2004 and December 31, 2003, respectively,
which were transferred as a result of the sale. U.S. Asset Management and
Accumulation segment revenues from this arrangement reclassified to discontinued
operations for the three months ended June 30, 2004 and 2003, were $(9.5)
million and $7.0 million, respectively. Revenues reclassified to discontinued
13
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
operations, for the six months ended June 30, 2004 and 2003, were $(5.6) million
and $13.1 million, respectively. Income (loss) from discontinued operations net
of related income taxes, for the three months ended June 30, 2004 and 2003, was
$(6.0) million and $2.5 million, respectively. Income (loss) from discontinued
operations, net of related income taxes, for the six months ended June 30, 2004
and 2003, was $(3.5) million and $5.1 million, respectively.
3. FEDERAL INCOME TAXES
The effective income tax rate on income from continuing operations for the three
months and six months ended June 30, 2004 and 2003, is lower than the prevailing
corporate federal income tax rate primarily due to income tax deductions allowed
for corporate dividends received and interest exclusion from taxable income. The
effective income tax rate for the six months ended June 30, 2004 was also
reduced due to a tax benefit associated with the sale of a foreign investment.
4. EMPLOYEE AND AGENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME):
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------------- ----------------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(IN MILLIONS)
Service cost.......................... $ 12.8 $ 12.3 $ 2.3 $ 3.1
Interest cost......................... 18.3 16.7 3.9 4.5
Expected return on plan assets........ (21.5) (18.7) (6.8) (6.4)
Amortization of prior service
cost (benefit)...................... 0.5 0.4 (0.7) (0.8)
Amortization of transition asset...... - (0.1) - -
Recognized net actuarial loss......... 4.0 4.4 0.1 0.6
------------- -------------- ------------- --------------
Net periodic benefit cost (income).... $ 14.1 $ 15.0 $(1.2) $ 1.0
============= ============== ============= ==============
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------------- ----------------------------
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(IN MILLIONS)
Service cost.......................... $ 25.6 $ 24.5 $ 4.5 $ 6.2
Interest cost......................... 36.6 33.5 7.7 8.9
Expected return on plan assets........ (43.1) (37.4) (13.6) (12.9)
Amortization of prior service
cost (benefit)...................... 0.9 0.8 (1.4) (1.6)
Amortization of transition asset...... - (0.2) - -
Recognized net actuarial loss......... 8.2 8.9 0.3 1.4
------------- -------------- ------------- --------------
Net periodic benefit cost (income).... $ 28.2 $ 30.1 $(2.5) $ 2.0
============= ============== ============= ==============
14
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
4. EMPLOYEE AND AGENT BENEFITS (CONTINUED)
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. This Act introduces a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree health benefits. On May 19, 2004, the FASB issued
Staff Position No. 106-2, ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE
MEDICARE PRESCRIPTION DRUG MODERNIZATION ACT OF 2003 ("FSP 106-2"). FSP 106-2
provides guidance on the accounting for the effects of the Act. In accordance
with the deferral provision of FSP106-2, our benefit obligations and net
periodic postretirement benefit costs do not reflect any amount associated with
the subsidy as we have not determined that the benefits provided by the plan are
actuarially equivalent to Medicare. The Centers of Medicare and Medicaid
Services ("CMS") are expected to issue guidance on the definition of actuarially
equivalent retiree health coverage later this year. This specific authoritative
guidance, when issued, could require us to change previously reported
The new Act will be reflected once the plan is amended or actuarial equivalence
is determined.
CONTRIBUTIONS
We anticipate contributing $1.4 million in 2004 to fund our other postretirement
benefit plans. We contributed approximately $0.4 million during the three months
ended and six months ended June 30, 2004. Our funding policy for the qualified
pension plan is to fund the plan annually in an amount at least equal to the
minimum annual contribution required under ERISA and, generally, not greater
than the maximum amount that can be deducted for federal income tax purposes. We
don't anticipate that we will be required to fund a minimum annual contribution
under ERISA for the qualified pension plan. At this time, it is too early to
estimate the amount that may be contributed, but it is possible that we may fund
the plans in 2004 in the range of $30 million to $50 million for both the
qualified and nonqualified plans. During the three months ended and six months
ended June 30, 2004, $10.5 million was contributed to the plans.
15
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows (in millions):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS):
Net income............................... $ 119.7 $ 202.2 $ 313.3 $ 357.9
Net change in unrealized gains and
losses on fixed maturities,
available-for-sale..................... (1,411.7) 978.4 (773.4) 1,385.2
Net change in unrealized gains and
losses on equity securities,
available-for-sale..................... (19.7) 16.6 (10.5) 14.0
Net change in unrealized gains and
losses on equity method subsidiaries
and minority interest adjustments...... 5.6 (2.8) (8.1) (5.3)
Adjustments for assumed changes in
amortization patterns:
Deferred policy acquisition costs...... 122.9 (90.8) 80.3 (138.9)
Sales inducements...................... 6.2 - 3.1 -
Unearned revenue reserves.............. (6.1) 4.0 (4.8) 6.1
Net change in unrealized gains and
losses on derivative instruments....... 36.4 3.7 39.0 18.1
Adjustments to unrealized gains for
Closed Block policyholder dividend
obligation............................. 133.1 (94.0) 78.2 (132.2)
Provision for deferred income tax
benefit (expense)...................... 401.6 (281.4) 228.9 (398.4)
Change in net foreign currency
translation adjustment................. (46.8) 45.4 (42.9) 36.2
-------------- ------------- ------------- -------------
Comprehensive income (loss).............. $ (658.8) $ 781.3 $ (96.9) $1,142.7
============== ============= ============= =============
16
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
6. DEBT
LONG-TERM DEBT
The components of long-term debt as of June 30, 2004 and December 31, 2003, were as follows (in millions):
AS OF AS OF
JUNE 30, DECEMBER 31,
2004 2003
------------------- -------------------
7.95% notes payable, due 2004....................................... $ 200.0 $ 200.0
8.2% notes payable, due 2009........................................ 464.0 464.0
7.875% surplus notes payable, due 2024.............................. - 199.0
8% surplus notes payable, due 2044.................................. 99.2 99.2
Nonrecourse mortgages and notes payable............................. 246.4 340.7
Other mortgages and notes payable................................... 60.1 71.4
------------------- -------------------
Total long-term debt................................................ $ 1,069.7 $ 1,374.3
=================== ===================
The amounts included above are net of the discount and direct costs associated
with issuing these notes, which are being amortized to expense over their
respective terms using the interest method.
On March 10, 1994, our subsidiary, Principal Life Insurance Company ("Principal
Life") issued $300.0 million of surplus notes, including $200.0 million due
March 1, 2024, at a 7.875% annual interest rate and the remaining $100.0 million
due March 1, 2044, at an 8% annual interest rate. Subject to the Commissioner of
Insurance of the State of Iowa (the "Commissioner") approval, the surplus notes
due March 1, 2024, were optionally redeemable at Principal Life's election on or
after March 1, 2004, in whole or in part at a redemption price of approximately
103.6% of par. We elected, with the Commissioner's approval, to redeem on March
1, 2004, the entire outstanding $200.0 million principal amount of surplus notes
due March 1, 2024, at a redemption price of 103.6%. Total cash paid for the
surplus note redemption on March 1, 2004, was $207.2 million.
7. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS
LITIGATION
We are regularly involved in litigation, both as a defendant and as a plaintiff
but primarily as a defendant. Litigation naming us as a defendant ordinarily
arises out of our business operations as a provider of asset management and
accumulation products and services, life, health and disability insurance and
mortgage banking. Some of the lawsuits are class actions, or purport to be, and
some include claims for punitive damages. In addition, regulatory bodies, such
as state insurance departments, the SEC, the National Association of Securities
Dealers, Inc., the Department of Labor and other regulatory bodies regularly
make inquiries and conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, ERISA and
laws governing the activities of broker-dealers.
While the outcome of any pending or future litigation cannot be predicted,
management does not believe that any pending litigation will have a material
adverse effect on our business, financial position or net income. The outcome of
litigation is always uncertain, and unforeseen results can occur. It is possible
that such outcomes could materially affect net income in a particular quarter or
annual period.
17
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
7. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)
GUARANTEES AND INDEMNIFICATIONS
In the normal course of business, we have provided guarantees to third parties
primarily related to a former subsidiary, joint ventures and industrial revenue
bonds. These agreements generally expire from 2004 through 2019. The maximum
exposure under these agreements as of June 30, 2004, was approximately $170.0
million; however, we believe the likelihood is remote that material payments
will be required and therefore have not accrued for a liability on our
consolidated statements of financial position. Should we be required to perform
under these guarantees, we generally could recover a portion of the loss from
third parties through recourse provisions included in agreements with such
parties, the sale of assets held as collateral that can be liquidated in the
event that performance is required under the guarantees or other recourse
generally available to us, minimizing the impact to net income. The fair value
of such guarantees issued after January 1, 2003, was insignificant.
In connection with the 2002 sale of BT Financial Group, we agreed to indemnify
the purchaser, Westpac Banking Corporation ("Westpac"), for among other things,
the costs associated with potential late filings made by BT Financial Group in
New Zealand prior to Westpac's ownership, up to a maximum of A$250.0 million
Australian dollars (approximately U.S. $175.0 million as of June 30, 2004). New
Zealand securities regulations allow Australian issuers to issue their
securities in New Zealand provided that certain documents are appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to constitutions and compliance plans be filed in
New Zealand. In April 2003, the New Zealand Securities Commission opined that
such late filings would result in certain New Zealand investors having a right
to return of their investment plus interest at 10% per annum from the date of
investment. We view these potential late filings as a technical matter as we
believe investors received the information that is required to be provided
directly to them. This technical issue affected many in the industry. On April
15, 2004, the New Zealand government enacted legislation that will provide
issuers, including BT Financial Group, the opportunity for retroactive relief
from such late filing violations. The law allows issuers to apply for judicial
validation of non-compliant issuances resulting from late filings. The law
further provides that judicial relief is mandatory and unconditional unless an
investor was materially prejudiced by the late filing. A related judicial action
is pending. Although we cannot predict the outcome of this matter or reasonably
estimate losses, we do not believe that it would result in a material adverse
effect on our business or financial position. It is possible, however, that it
could have a material adverse effect on net income in a particular quarter or
annual period.
We are also subject to various other indemnification obligations issued in
conjunction with certain transactions, primarily the sale of BT Financial Group
and other divestitures, the sale of residential mortgage loans and servicing
rights in our mortgage banking business, acquisitions and financing transactions
whose terms range in duration and often are not explicitly defined. Certain
portions of these indemnifications may be capped, while other portions are not
subject to such limitations. Generally, a maximum obligation is not explicitly
stated; therefore, the overall maximum amount of the obligation under the
indemnifications cannot be reasonably estimated. While we are unable to estimate
with certainty the ultimate legal and financial liability with respect to these
indemnifications, we believe the likelihood is remote that material payments
would be required under such indemnifications and therefore such
indemnifications would not result in a material adverse effect on our business,
financial position or net income. The fair value of such indemnifications issued
after January 1, 2003, was insignificant.
18
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION
We provide financial products and services through the following segments: U.S.
Asset Management and Accumulation, International Asset Management and
Accumulation, Life and Health Insurance and Mortgage Banking. In addition, there
is a Corporate and Other segment. The segments are managed and reported
separately because they provide different products and services, have different
strategies or have different markets and distribution channels.
The U.S. Asset Management and Accumulation segment provides retirement and
related financial products and services primarily to businesses, their employees
and other individuals and provides asset management services to our asset
accumulation business, the life and health insurance operations, the Corporate
and Other segment and third-party clients.
The International Asset Management and Accumulation segment offers retirement
products and services, annuities, long-term mutual funds and life insurance
through subsidiaries in Argentina, Chile, Mexico, and Hong Kong and joint
ventures in Brazil, India, Japan and Malaysia. On June 28, 2004, we entered into
a definitive agreement for the sale of all the stock of our Argentine companies,
described further in Note 2. Consequently, the results of operations for
Argentina are reported as other after-tax adjustments for all periods presented.
The Life and Health insurance segment provides individual life insurance, group
health insurance and specialty benefits, which consists of group dental and
vision insurance, individual and group disability insurance, and group life
insurance, throughout the U.S.
The Mortgage Banking segment originates and services residential mortgage loan
products for customers in the U.S. On May 11, 2004, we entered into a definitive
agreement for the sale of Principal Residential Mortgage to CitiMortgage, Inc.,
described further in Note 2. Consequently, the results of operations (excluding
corporate overhead) for Mortgage Banking are reported as other after-tax
adjustments for all periods presented.
The Corporate and Other segment manages the assets representing capital that has
not been allocated to any other segment. Financial results of the Corporate and
Other segment primarily reflect our financing activities (including interest
expense), income on capital not allocated to other segments, intersegment
eliminations, income tax risks and certain income, expenses and other after-tax
adjustments not allocated to the segments based on the nature of such items.
Management uses segment operating earnings for goal setting, determining
employee compensation, and evaluating performance on a basis comparable to that
used by securities analysts. We determine segment operating earnings by
adjusting U.S. GAAP net income for net realized/unrealized capital gains and
losses, as adjusted, and other after-tax adjustments which management believes
are not indicative of overall operating trends. Net realized/unrealized capital
gains and losses, as adjusted, are net of income taxes, related changes in the
amortization pattern of deferred policy acquisition and sales inducement costs,
recognition of front-end fee revenues for sales charges on pension products and
services, net realized capital gains and losses distributed, minority interest
capital gains and losses and certain market value adjustments to fee revenues.
Segment operating revenues exclude net realized/unrealized capital gains and
their impact on recognition of front-end fee revenues and certain market value
adjustments to fee revenues. While these items may be significant components in
understanding and assessing the consolidated financial performance, management
believes the presentation of segment operating earnings enhances the
understanding of our results of operations by highlighting earnings attributable
to the normal, ongoing operations of the business.
19
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
The accounting policies of the segments are consistent with the accounting
policies for the consolidated financial statements, with the exception of income
tax allocation. The Corporate and Other segment functions to absorb the risk
inherent in interpreting and applying tax law. The segments are allocated tax
adjustments consistent with the positions we took on our tax returns. The
Corporate and Other segment results reflect any differences between the tax
returns and the estimated resolution of any disputes.
The following tables summarize selected financial information on a continuing
basis by segment and reconcile segment totals to those reported in the
consolidated financial statements:
AS OF JUNE 30, AS OF DECEMBER 31,
2004 2003
---------------------- ---------------------
(IN MILLIONS)
ASSETS:
U.S. Asset Management and Accumulation ............... $ 87,733.0 $ 83,904.8
International Asset Management and Accumulation....... 3,123.9 3,011.4
Life and Health Insurance............................. 12,472.5 12,171.8
Mortgage Banking...................................... 6,466.2 5,558.8
Corporate and Other .................................. 1,577.3 3,107.6
---------------------- ---------------------
Total consolidated assets........................... $ 111,372.9 $ 107,754.4
====================== =====================
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN MILLIONS)
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and
Accumulation............................ $ 906.8 $ 862.0 $ 1,800.1 $1,741.9
International Asset Management and
Accumulation............................ 122.3 106.2 235.3 180.7
Life and Health Insurance................. 1,030.7 1,001.8 2,066.0 2,014.1
Corporate and Other....................... (11.9) (2.0) (10.3) 1.0
-------------- -------------- -------------- --------------
Total segment operating revenues........ 2,047.9 1,968.0 4,091.1 3,937.7
Net realized/unrealized capital losses,
including recognition of front-end fee
revenues and certain market value
adjustments to fee revenues............. (68.2) (16.5) (114.7) (96.4)
-------------- -------------- -------------- --------------
Total revenue per consolidated
statements of operations.............. $ 1,979.7 $1,951.5 $ 3,976.4 $3,841.3
============== ============== ============== ==============
20
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN MILLIONS)
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ... $ 121.7 $ 105.7 $ 241.2 $ 200.6
International Asset Management and
Accumulation............................ 9.3 11.9 17.9 18.5
Life and Health Insurance................. 56.9 62.9 131.7 122.0
Mortgage Banking.......................... (5.4) (4.5) (10.3) (8.4)
Corporate and Other ...................... (9.1) (10.4) (20.6) (15.4)
-------------- -------------- -------------- --------------
Total segment operating earnings........ 173.4 165.6 359.9 317.3
Net realized/unrealized capital losses,
as adjusted............................. (44.5) (13.5) (67.6) (66.6)
Other after-tax adjustments (1)........... (9.2) 50.1 21.0 107.2
-------------- -------------- -------------- --------------
Net income per consolidated
statements of operations................ $ 119.7 $ 202.2 $ 313.3 $ 357.9
============== ============== ============== ==============
- --------------------------
(1) For the three months ended June 30, 2004, other after-tax adjustments of
$(9.2) million included the negative effect of a loss from discontinued
operations of Principal Residential Mortgage ($9.5 million) and the
positive effect of income from discontinued operations of Argentina ($0.3
million).
For the three months ended June 30, 2003, other after-tax adjustments of
$50.1 million included the positive effect of income from discontinued
operations of Principal Residential Mortgage ($52.1 million); and the
negative effects of: (1) a loss from discontinued operations of Argentina
($1.6 million) and (2) a change in the estimated loss on disposal of BT
Financial Group ($0.4 million).
For the six months ended June 30, 2004, other after tax adjustments of
$21.0 million included the positive effects of: (1) income from
discontinued operations of Principal Residential Mortgage ($26.5 million)
and (2) income from discontinued operations of Argentina ($0.2 million);
and the negative effect from a cumulative change in accounting principle
related to the implementation of SOP 03-1 ($5.7 million).
For the six months ended June 30, 2003, other after-tax adjustments of
$107.2 million included the positive effect of income from discontinued
operations of Principal Residential Mortgage ($110.9 million); and the
negative effects of: (1) a loss from discontinued operations of Argentina
($2.6 million) and a change in the estimated loss on disposal of BT
Financial Group ($1.1 million).
9. STOCKHOLDERS' EQUITY
In May 2004, our board of directors authorized the repurchase of up to $700.0
million of our outstanding common stock. The repurchases will be made in the
open market or through privately negotiated transactions, from time to time,
depending on market conditions.
21
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
10. EARNINGS PER SHARE
The computations of the basic and diluted per share amounts for our continuing
operations were as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
----------------- ---------------- ----------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Income from continuing
operations, net of related
income taxes................ $128.9 $152.1 $ 292.3 $ 250.7
================= ================ ================= ================
Weighted-average shares
outstanding:
Basic....................... 317.9 326.9 319.4 329.1
Dilutive effect:
Stock options............. 1.1 0.5 1.1 0.5
Restricted stock units.... 0.2 - 0.1 -
----------------- ---------------- ----------------- ----------------
Diluted..................... 319.2 327.4 320.6 329.6
================= ================ ================= ================
Income from continuing
operations per share:
Basic..................... $ 0.41 $ 0.46 $ 0.92 $ 0.76
================= ================ ================= ================
Diluted................... $ 0.40 $ 0.46 $ 0.91 $ 0.76
================= ================ ================= ================
The calculation of diluted earnings per share for the three months and six
months ended June 30, 2004 and 2003, excludes the incremental effect related to
certain stock-based compensation grants due to their anti-dilutive effect.
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Principal Life has established special purpose entities to issue secured
medium-term notes. Under the program, the payment obligations of principal and
interest on the notes are secured by funding agreements issued by Principal
Life. Principal Life's payment obligations on the funding agreements are fully
and unconditionally guaranteed by PFG. All of the outstanding stock of Principal
Life is indirectly owned by PFG and PFG is the only guarantor of the payment
obligations of the funding agreements.
The following tables set forth condensed consolidating financial information of
Principal Life and PFG as of June 30, 2004 and December 31, 2003, and for the
six months ended June 30, 2004 and 2003.
22
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
JUNE 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities...... $ - $ 48,705.9 $ 5,192.7 $ (1,367.5) $ 52,531.1
Investment in unconsolidated
entities..................... 6,474.2 852.4 4,365.8 (11,522.0) 170.4
Cash and cash equivalents....... 263.7 53.5 1,366.8 (208.1) 1,475.9
Other intangibles............... - 4.2 152.6 - 156.8
Separate account assets......... - 45,725.1 687.3 - 46,412.4
Assets of discontinued
operations................... - - 6,508.2 (246.0) 6,262.2
All other assets................ 402.5 3,921.0 1,284.8 (1,244.2) 4,364.1
-------------- ---------------- -------------------- ----------------- ---------------
Total assets................. $ 7,140.4 $ 99,262.1 $ 19,558.2 $(14,587.8) $ 111,372.9
============== ================ ==================== ================= ===============
LIABILITIES
Contractholder funds............ $ - $ 30,283.9 $ 6.2 $ (159.9) $ 30,130.2
Future policy benefits and
claims....................... - 14,141.1 1,437.4 - 15,578.5
Other policyholder funds........ - 631.9 2.8 - 634.7
Short-term debt................. - (0.5) 818.5 (191.8) 626.2
Long-term debt.................. - 210.7 1,098.1 (239.1) 1,069.7
Income taxes currently
payable................... 1.4 111.2 31.4 (20.1) 123.9
Deferred income taxes........... (0.4) 746.0 217.8 (12.8) 950.6
Separate account liabilities.... - 45,725.1 687.3 - 46,412.4
Liabilities of discontinued
operations................... - - 5,218.5 (301.1) 4,917.4
Other liabilities............... 0.3 1,741.4 3,565.9 (1,517.4) 3,790.2
-------------- ---------------- -------------------- ----------------- ---------------
Total liabilities............ 1.3 93,590.8 13,083.9 (2,442.2) 104,233.8
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 2.5 - (2.5) 3.8
Additional paid-in capital...... 7,211.9 5,085.3 6,831.8 (11,917.1) 7,211.9
Retained earnings (deficit)..... 943.7 (203.7) (1,118.8) 1,322.5 943.7
Accumulated other comprehensive
income....................... 761.1 787.2 761.3 (1,548.5) 761.1
Treasury stock, at cost......... (1,781.4) - - - (1,781.4)
-------------- ---------------- -------------------- ----------------- ---------------
Total stockholders' equity... 7,139.1 5,671.3 6,474.3 (12,145.6) 7,139.1
-------------- ---------------- -------------------- ----------------- ---------------
Total liabilities and
stockholders' equity......... $ 7,140.4 $ 99,262.1 $ 19,558.2 $(14,587.8) $ 111,372.9
============== ================ ==================== ================= ===============
- ---------------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
23
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities...... $ - $48,156.9 $ 6,247.5 $ (1,357.2) $ 53,047.2
Investment in unconsolidated
entities..................... 7,234.0 793.8 5,693.3 (13,553.9) 167.2
Cash and cash equivalents....... 173.8 640.5 684.2 (306.0) 1,192.5
Other intangibles............... - 4.5 116.5 - 121.0
Separate account assets......... - 42,753.4 632.2 22.2 43,407.8
Assets of discontinued
operations................... - - 5,601.1 (176.0) 5,425.1
All other assets................ 1.7 3,825.7 766.5 (200.3) 4,393.6
-------------- ---------------- -------------------- ----------------- ---------------
Total assets................. $7,409.5 $96,174.8 $ 19,741.3 $(15,571.2) $ 107,754.4
============== ================ ==================== ================= ===============
LIABILITIES
Contractholder funds............ $ - $29,040.4 $ 5.8 $ (149.8) $ 28,896.4
Future policy benefits and
claims....................... - 14,025.3 1,425.5 - 15,450.8
Other policyholder funds........ - 706.2 2.9 - 709.1
Short-term debt................. - - 888.8 (186.0) 702.8
Long-term debt.................. - 423.3 1,237.7 (286.7) 1,374.3
Income taxes currently
payable...................... - 160.0 28.2 (74.3) 113.9
Deferred income taxes........... 8.2 974.0 221.8 (5.1) 1,198.9
Separate account liabilities.... - 42,753.4 632.2 22.2 43,407.8
Liabilities of discontinued
operations................... - - 4,834.1 (258.8) 4,575.3
Other liabilities............... 1.7 1,226.1 3,230.4 (532.7) 3,925.5
-------------- ---------------- -------------------- ----------------- ---------------
Total liabilities............ 9.9 89,308.7 12,507.4 (1,471.2) 100,354.8
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 2.5 - (2.5) 3.8
Additional paid-in capital...... 7,153.2 5,052.1 6,796.9 (11,849.0) 7,153.2
Retained earnings (deficit)..... 630.4 594.6 (734.4) 139.8 630.4
Accumulated other comprehensive
income....................... 1,171.3 1,216.9 1,171.4 (2,388.3) 1,171.3
Treasury stock, at cost......... (1,559.1) - - - (1,559.1)
-------------- ---------------- -------------------- ----------------- ---------------
Total stockholders' equity... 7,399.6 6,866.1 7,233.9 (14,100.0) 7,399.6
-------------- ------------------------------------- ----------------- ---------------
Total liabilities and
stockholders' equity......... $7,409.5 $96,174.8 $ 19,741.3 $(15,571.2) $ 107,754.4
============== ================ ==================== ================= ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
24
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
Premiums and other
considerations............... $ - $ 1,694.1 $ 118.9 $ - $ 1,813.0
Fees and other revenues......... - 493.2 321.2 (117.6) 696.8
Net investment income........... 1.2 1,416.8 144.5 12.9 1,575.4
Net realized/unrealized
capital losses............... - (100.2) (14.1) 5.5 (108.8)
-------------- ---------------- -------------------- ----------------- ---------------
Total revenues............... 1.2 3,503.9 570.5 (99.2) 3,976.4
EXPENSES
Benefits, claims, and settlement
expenses..................... - 2,249.2 163.1 (5.1) 2,407.2
Dividends to policyholders...... - 147.7 - - 147.7
Operating expenses.............. 4.8 786.2 360.9 (101.3) 1,050.6
-------------- ---------------- -------------------- ----------------- ---------------
Total expenses............... 4.8 3,183.1 524.0 (106.4) 3,605.5
-------------- ---------------- -------------------- ----------------- ---------------
Income (loss) from continuing
operations before income
taxes........................ (3.6) 320.8 46.5 7.2 370.9
Income taxes (benefits)......... (1.3) 72.8 4.8 2.3 78.6
Equity in the net income of
subsidiaries, excluding
discontinued operations and
cumulative effect of
accounting change............ 294.6 53.3 252.9 (600.8) -
-------------- ---------------- -------------------- ----------------- ---------------
Income from continuing
operations, net of related
income taxes................. 292.3 301.3 294.6 (595.9) 292.3
Income (loss) from discontinued
operations, net of related
income taxes................. 26.7 (3.3) 26.7 (23.4) 26.7
-------------- ---------------- -------------------- ----------------- ---------------
Income before cumulative effect
of accounting change......... 319.0 298.0 321.3 (619.3) 319.0
Cumulative effect of accounting
change, net of related income
taxes........................ (5.7) (2.5) (5.7) 8.2 (5.7)
-------------- ---------------- -------------------- ----------------- ---------------
Net income...................... $ 313.3 $ 295.5 $ 315.6 $ (611.1) $ 313.3
============== ================ ==================== ================= ===============
- ------------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
25
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
REVENUES
Premiums and other
considerations................ $ - $ 1,692.2 $ 88.2 $ - $ 1,780.4
Fees and other revenues.......... - 397.8 231.8 (86.3) 543.3
Net investment income............ 1.7 1,470.6 127.1 2.4 1,601.8
Net realized/unrealized capital
gains (losses)................ - (83.6) 13.4 (14.0) (84.2)
-------------- ---------------- -------------------- ----------------- ---------------
Total revenues................ 1.7 3,477.0 460.5 (97.9) 3,841.3
EXPENSES
Benefits, claims, and settlement
expenses...................... - 2,259.3 124.2 (3.6) 2,379.9
Dividends to policyholders....... - 154.0 - - 154.0
Operating expenses............... 4.5 764.8 280.0 (73.7) 975.6
-------------- ---------------- -------------------- ----------------- ---------------
Total expenses................. 4.5 3,178.1 404.2 (77.3) 3,509.5
-------------- ---------------- -------------------- ----------------- ---------------
Income (loss) from continuing
operations before income
taxes......................... (2.8) 298.9 56.3 (20.6) 331.8
Income taxes (benefits).......... (1.0) 66.0 21.2 (5.1) 81.1
Equity in the net income of
subsidiaries, excluding
discontinued operations....... 252.5 89.7 217.4 (559.6) -
-------------- ---------------- -------------------- ----------------- ---------------
Income from continuing
operations, net of related
income taxes.................. 250.7 322.6 252.5 (575.1) 250.7
Income (loss) from discontinued
operations, net of related
income taxes.................. 107.2 (3.1) 107.2 (104.1) 107.2
-------------- ---------------- -------------------- ----------------- ---------------
Net income....................... $ 357.9 $ 319.5 $ 359.7 $(679.2) $ 357.9
============== ================ ==================== ================= ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
26
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities........ $ (2.2) $ 958.8 $ (83.5) $ 119.7 $ 992.8
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases................... - (4,335.7) (810.9) 9.5 (5,137.1)
Sales....................... - 750.8 726.5 - 1,477.3
Maturities.................. - 2,222.5 579.5 - 2,802.0
Mortgage loans acquired or
originated.................. - (967.5) (18.3) 36.2 (949.6)
Mortgage loans sold or repaid.. - 806.0 57.2 (79.8) 783.4
Real estate acquired........... - (87.2) (18.5) - (105.7)
Real estate sold............... - 83.0 48.7 - 131.7
Net change in property and
equipment................... - (20.2) (4.2) - (24.4)
Net proceeds from sale of
subsidiaries................ - - 14.9 - 14.9
Purchases of interest in
subsidiaries, net of cash
acquired.................... - - (106.2) - (106.2)
Dividends received from
unconsolidated entities..... 300.0 26.0 557.2 (883.2) -
Net change in other
investments................. 0.3 (171.7) 45.7 60.2 (65.5)
-------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
investing activities........ 300.3 (1,694.0) 1,071.6 (857.1) (1,179.2)
27
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ 14.1 - - - 14.1
Acquisition of treasury stock... (222.3) - - - (222.3)
Proceeds from financing element
derivatives.................. - 94.0 - - 94.0
Payments for financing element
derivatives.................. - (41.1) - - (41.1)
Issuance of long-term debt...... - 4.7 3.1 - 7.8
Principal repayments of long-
debt......................... - (218.1) (50.7) 47.7 (221.1)
Net proceeds of short-term
borrowings................... - - 56.0 (6.4) 49.6
Dividends paid to parent........ - (494.0) (300.0) 794.0 -
Investment contract deposits.... - 3,740.9 - - 3,740.9
Investment contract
withdrawals.................. - (2,938.2) - - (2,938.2)
Net decrease in banking
operation deposits........... - - (13.9) - (13.9)
-------------- --------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
financing activities......... (208.2) 148.2 (305.5) 835.3 469.8
-------------- --------------- -------------------- ----------------- -----------------
Net increase (decrease) in cash
and cash equivalents......... 89.9 (587.0) 682.6 97.9 283.4
Cash and cash equivalents at
beginning of year............ 173.8 640.5 684.2 (306.0) 1,192.5
-------------- --------------- -------------------- ----------------- -----------------
Cash and cash equivalents at
end of year.................. $ 263.7 $ 53.5 $1,366.8 $(208.1) $ 1,475.9
============== =============== ==================== ================= =================
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
28
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities......... $ (1.5) $1,101.5 $ 815.7 $ (56.9) $ 1,858.8
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases................... - (4,555.6) (812.7) 26.7 (5,341.6)
Sales....................... - 1,559.8 228.0 - 1,787.8
Maturities.................. - 1,693.0 223.2 - 1,916.2
Net cash flows from trading
securities................... - - 2.0 (2.0) -
Mortgage loans acquired or
originated................... - (801.2) (87.3) 15.1 (873.4)
Mortgage loans sold or repaid... - 421.2 131.0 (19.8) 532.4
Real estate acquired............ - (143.2) (9.2) - (152.4)
Real estate sold................ - 20.9 10.6 - 31.5
Net change in property and
equipment.................... - (6.2) (2.3) - (8.5)
Net proceeds from sales of
subsidiaries................. - - 33.6 - 33.6
Purchases of interest in
subsidiaries, net of cash
acquired..................... - (26.0) (62.1) - (88.1)
Dividends received from
(contributions to)
unconsolidated entities...... 300.0 73.3 (68.8) (304.5) -
Net change in other investments. - (74.4) (91.8) 99.1 (67.1)
-------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
investing activities......... 300.0 (1,838.4) (505.8) (185.4) (2,229.6)
29
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ 11.7 - - - 11.7
Acquisition of treasury stock... (300.0) - - - (300.0)
Issuance of long-term debt...... - - 1.9 - 1.9
Principal repayments of long-
debt......................... - (11.4) (1.7) 4.7 (8.4)
Net proceeds of short-term
borrowings................... - - 5.7 2.1 7.8
Dividends paid to parent........ - - (300.0) 300.0 -
Investment contract deposits.... - 5,052.1 - - 5,052.1
Investment contract
withdrawals.................. - (4,081.5) - - (4,081.5)
Net increase in banking
operation deposits........... - - 150.9 - 150.9
-------------- --------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
financing activities......... (288.3) 959.2 (143.2) 306.8 834.5
-------------- --------------- -------------------- ----------------- -----------------
Net increase in cash and cash
equivalents.................. 10.2 222.3 166.7 64.5 463.7
Cash and cash equivalents at
beginning of year........... 332.1 585.7 391.9 (581.9) 727.8
-------------- --------------- -------------------- ----------------- -----------------
Cash and cash equivalents at
end of year.................. $ 342.3 $ 808.0 $ 558.6 $(517.4) $ 1,191.5
============== =============== ==================== ================= =================
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
30
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
On June 30, 2004, our shelf registration statement with the Securities and
Exchange Commission was effective. We now have the ability to issue up to $3.0
billion of debt securities, preferred stock, common stock, warrants, stock
purchase contracts and stock purchase units of PFG and trust preferred
securities of three subsidiary trusts. If we issue securities, we intend to use
the proceeds from the sale of the securities offered by the prospectus,
including the corresponding junior subordinated debentures issued to the trusts
in connection with their investment of all the proceeds from the sale of
preferred securities, for general corporate purposes, including working capital,
capital expenditures, investments in subsidiaries, acquisitions and refinancing
of debt, including commercial paper and other short-term indebtedness. Principal
Financial Services, Inc. unconditionally guarantees our obligations with respect
to one or more series of debt securities described in the shelf registration
statement.
The following tables set forth condensed consolidating financial information of
Principal Financial Services, Inc. and Principal Financial Group, Inc. as of
June 30, 2004 and December 31, 2003, and for the six months ended June 30, 2004
and 2003.
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
JUNE 30, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities...... $ - $ 14.2 $ 52,516.9 $ - $ 52,531.1
Investment in unconsolidated
entities..................... 6,474.2 6,601.5 170.4 (13,075.7) 170.4
Cash and cash equivalents....... 263.7 1,104.3 226.5 (118.6) 1,475.9
Other intangibles............... - - 156.8 - 156.8
Separate account assets......... - - 46,412.4 - 46,412.4
Assets of discontinued
operations.................. - - 6,262.2 6,262.2
All other assets................ 402.5 672.2 4,315.7 (1,026.3) 4,364.1
-------------- ---------------- -------------------- ----------------- -----------------
Total assets................ $ 7,140.4 $8,392.2 $ 110,060.9 $ (14,220.6) $ 111,372.9
============== ================ ==================== ================= =================
31
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION (CONTINUED)
JUNE 30, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
LIABILITIES
Contractholder funds........... $ - $ - $ 30,130.2 $ - $ 30,130.2
Future policy benefits and
claims....................... - - 15,578.5 - 15,578.5
Other policyholder funds....... - - 634.7 - 634.7
Short-term debt................ - 475.0 151.2 - 626.2
Long-term debt................. - 664.1 405.6 - 1,069.7
Income taxes currently
payable...................... 1.4 12.5 123.4 (13.4) 123.9
Deferred income taxes.......... (0.4) 17.7 940.8 (7.5) 950.6
Separate account liabilities... - - 46,412.4 - 46,412.4
Liabilities of discontinued
operations................... - - 4,917.4 - 4,917.4
Other liabilities.............. 0.3 748.7 4,165.2 (1,124.0) 3,790.2
-------------- ---------------- -------------------- ----------------- -----------------
Total liabilities............ 1.3 1,918.0 103,459.4 (1,144.9) 104,233.8
STOCKHOLDERS' EQUITY
Common stock................... 3.8 - 16.8 (16.8) 3.8
Additional paid-in capital..... 7,211.9 6,831.8 5,914.2 (12,746.0) 7,211.9
Retained earnings (deficit).... 943.7 (1,118.8) (90.2) 1,209.0 943.7
Accumulated other
comprehensive income......... 761.1 761.2 760.7 (1,521.9) 761.1
Treasury stock, at cost........ (1,781.4) - - - (1,781.4)
-------------- ---------------- -------------------- ----------------- -----------------
Total stockholders' equity... 7,139.1 6,474.2 6,601.5 (13,075.7) 7,139.1
-------------- ---------------- -------------------- ----------------- -----------------
Total liabilities and
stockholders' equity....... $ 7,140.4 $ 8,392.2 $ 110,060.9 $ (14,220.6) $ 111,372.9
============== ================ ==================== ================= =================
32
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities....... $ - $ 150.5 $ 52,896.7 $ - $ 53,047.2
Investment in unconsolidated
entities...................... 7,234.0 7,771.7 167.2 (15,005.7) 167.2
Cash and cash equivalents....... 173.8 872.7 369.7 (223.7) 1,192.5
Other intangibles............... - - 121.0 - 121.0
Separate account assets......... - - 43,407.8 - 43,407.8
Assets of discontinued
operations.................... - - 5,425.1 - 5,425.1
All other assets................ 1.7 186.1 4,223.3 (17.5) 4,393.6
-------------- ---------------- -------------------- ----------------- -----------------
Total assets................. $ 7,409.5 $ 8,981.0 $ 106,610.8 $ (15,246.9) $ 107,754.4
============== ================ ==================== ================= =================
LIABILITIES
Contractholder funds............ $ - $ - $ 28,896.4 $ - $ 28,896.4
Future policy benefits and
claims........................ - - 15,450.8 - 15,450.8
Other policyholder funds........ - - 709.1 - 709.1
Short-term debt................. - 399.9 313.6 (10.7) 702.8
Long-term debt.................. - 664.0 710.3 - 1,374.3
Income taxes currently
payable....................... - 14.1 100.5 (0.7) 113.9
Deferred income taxes........... 8.2 20.7 1,170.0 - 1,198.9
Separate account liabilities.... - - 43,407.8 - 43,407.8
Liabilities of discontinued
operations.................... - - 4,575.3 - 4,575.3
Other liabilities............... 1.7 648.3 3,505.3 (229.8) 3,925.5
-------------- ---------------- -------------------- ----------------- -----------------
Total liabilities............. 9.9 1,747.0 98,839.1 (241.2) 100,354.8
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 - 64.4 (64.4) 3.8
Additional paid-in capital...... 7,153.2 6,796.9 5,851.8 (12,648.7) 7,153.2
Retained earnings (deficit)..... 630.4 (734.3) 685.6 48.7 630.4
Accumulated other
comprehensive income.......... 1,171.3 1,171.4 1,169.9 (2,341.3) 1,171.3
Treasury stock, at cost......... (1,559.1) - - - (1,559.1)
-------------- ---------------- -------------------- ----------------- -----------------
Total stockholders' equity.... 7,399.6 7,234.0 7,771.7 (15,005.7) 7,399.6
-------------- ---------------- -------------------- ----------------- -----------------
Total liabilities and
stockholders' equity........ $ 7,409.5 $ 8,981.0 $ 106,610.8 $ (15,246.9) $ 107,754.4
============== ================ ==================== ================= =================
33
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
REVENUES
Premiums and other
considerations................ $ - $ - $ 1,813.0 $ - $ 1,813.0
Fees and other revenues......... - - 697.5 (0.7) 696.8
Net investment income........... 1.2 6.6 1,567.0 0.6 1,575.4
Net realized/unrealized
capital losses................ - (25.0) (83.8) - (108.8)
-------------- ---------------- -------------------- ----------------- -----------------
Total revenues................ 1.2 (18.4) 3,993.7 (0.1) 3,976.4
EXPENSES
Benefits, claims, and settlement
expenses...................... - - 2,407.2 - 2,407.2
Dividends to policyholders...... - - 147.7 - 147.7
Operating expenses.............. 4.8 30.0 1,015.9 (0.1) 1,050.6
-------------- ---------------- -------------------- ----------------- -----------------
Total expenses................ 4.8 30.0 3,570.8 (0.1) 3,605.5
-------------- ---------------- -------------------- ----------------- -----------------
Income (loss) from continuing
operations before income
taxes......................... (3.6) (48.4) 422.9 - 370.9
Income taxes (benefits)......... (1.3) (18.4) 98.3 - 78.6
Equity in the net income of
subsidiaries, excluding
discontinued operations and
cumulative effect of
accounting change............. 294.6 324.6 - (619.2) -
-------------- ---------------- -------------------- ----------------- -----------------
Income from continuing
operations, net of related
income taxes.................. 292.3 294.6 324.6 (619.2) 292.3
Income (loss) from discontinued
operations, net of related
income taxes.................. 26.7 26.7 10.3 (37.0) 26.7
-------------- ---------------- -------------------- ----------------- -----------------
Income before cumulative effect
of accounting change.......... 319.0 321.3 334.9 (656.2) 319.0
Cumulative effect of accounting
change, net of related income
taxes......................... (5.7) (5.7) (5.7) 11.4 (5.7)
-------------- ---------------- -------------------- ----------------- -----------------
Net income...................... $ 313.3 $315.6 $ 329.2 $(644.8) $ 313.3
============== ================ ==================== ================= =================
34
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
REVENUES
Premiums and other
considerations................ $ - $ - $ 1,780.4 $ - $ 1,780.4
Fees and other revenues......... - - 543.8 (0.5) 543.3
Net investment income........... 1.7 12.4 1,587.3 0.4 1,601.8
Net realized/unrealized capital
gains (losses)................ - 8.7 (92.9) - (84.2)
-------------- ---------------- -------------------- ----------------- -----------------
Total revenues................ 1.7 21.1 3,818.6 (0.1) 3,841.3
EXPENSES
Benefits, claims, and settlement
expenses...................... - - 2,379.9 - 2,379.9
Dividends to policyholders...... - - 154.0 - 154.0
Operating expenses.............. 4.5 30.2 941.0 (0.1) 975.6
-------------- ---------------- -------------------- ----------------- -----------------
Total expenses................ 4.5 30.2 3,474.9 (0.1) 3,509.5
-------------- ---------------- -------------------- ----------------- -----------------
Income (loss) from continuing
operations before income
taxes......................... (2.8) (9.1) 343.7 - 331.8
Income taxes (benefits)......... (1.0) (3.5) 85.6 - 81.1
Equity in the net income of
subsidiaries, excluding
discontinued operations....... 252.5 258.1 - (510.6) -
-------------- ---------------- -------------------- ----------------- -----------------
Income from continuing
operations, net of related
income taxes.................. 250.7 252.5 258.1 (510.6) 250.7
Income from discontinued
operations, net of related
income taxes.................. 107.2 107.2 73.2 (180.4) 107.2
-------------- ---------------- -------------------- ----------------- -----------------
Net income...................... $ 357.9 $ 359.7 $ 331.3 $(691.0) $ 357.9
============== ================ ==================== ================= =================
35
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities.......... $ (2.2) $ (160.8) $ 1,019.7 $136.1 $ 992.8
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases..................... - (218.0) (4,919.1) - (5,137.1)
Sales......................... - 168.8 1,308.5 - 1,477.3
Maturities.................... - - 2,802.0 - 2,802.0
Mortgage loans acquired or
originated.................... - - (949.6) - (949.6)
Mortgage loans sold or repaid... - - 783.4 - 783.4
Real estate acquired............ - - (105.7) - (105.7)
Real estate sold................ - - 131.7 - 131.7
Net change in property and
equipment..................... - - (24.4) - (24.4)
Net proceeds from sale of
subsidiaries.................. - 9.3 5.6 - 14.9
Purchases of interest in
subsidiaries, net of cash
acquired...................... - (25.7) (80.5) - (106.2)
Dividends received from
unconsolidated entities....... 300.0 527.9 - (827.9) -
Net change in other investments. 0.3 155.1 (202.2) (18.7) (65.5)
-------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
investing activities.......... 300.3 617.4 (1,250.3) (846.6) (1,179.2)
36
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL LIFE
PRINCIPAL PRINCIPAL INSURANCE PRINCIPAL
FINANCIAL FINANCIAL COMPANY AND FINANCIAL
GROUP, INC. SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ 14.1 - - - 14.1
Acquisition of treasury stock... (222.3) - - - (222.3)
Proceeds from financing element
derivatives................... - - 94.0 - 94.0
Payments for financing element
derivatives................... - - (41.1) - (41.1)
Issuance of long-term debt...... - - 7.8 - 7.8
Principal repayments of
long-term debt................ - - (221.1) - (221.1)
Net proceeds (repayments) of
short-term borrowings......... - 75.0 (36.1) 10.7 49.6
Dividends paid to parent........ - (300.0) (504.9) 804.9 -
Investment contract deposits.... - - 3,740.9 - 3,740.9
Investment contract withdrawals. - - (2,938.2) - (2,938.2)
Net decrease in banking
operation deposits............ - - (13.9) - (13.9)
-------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
financing activities.......... (208.2) (225.0) 87.4 815.6 469.8
-------------- ---------------- -------------------- ----------------- -----------------
Net increase (decrease) in cash
and cash equivalents.......... 89.9 231.6 (143.2) 105.1 283.4
Cash and cash equivalents at
beginning of year............. 173.8 872.7 369.7 (223.7) 1,192.5
-------------- ---------------- -------------------- ----------------- -----------------
Cash and cash equivalents at end
of year....................... $ 263.7 $1,104.3 $ 226.5 $(118.6) $ 1,475.9
============== ================ ==================== ================= =================
37
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL PRINCIPAL LIFE
FINANCIAL PRINCIPAL INSURANCE PRINCIPAL
GROUP, INC. FINANCIAL COMPANY AND FINANCIAL
PARENT SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities.......... $(1.5) $178.1 $ 1,639.3 $ 42.9 $ 1,858.8
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases..................... - 88.5 (5,430.1) - (5,341.6)
Sales......................... - 10.4 1,777.4 - 1,787.8
Maturities.................... - - 1,916.2 - 1,916.2
Mortgage loans acquired or
originated.................... - - (873.4) - (873.4)
Mortgage loans sold or repaid... - - 532.4 - 532.4
Real estate acquired............ - - (152.4) - (152.4)
Real estate sold................ - - 31.5 - 31.5
Net change in property and
equipment..................... - - (8.5) - (8.5)
Net proceeds from sales of
subsidiaries.................. - - 33.6 - 33.6
Purchases of interest in
subsidiaries, net of cash
acquired...................... - - (88.1) - (88.1)
Dividends received from
unconsolidated entities....... 300.0 (67.9) 81.3 (313.4) -
Net change in other investments. - (46.6) (61.1) 40.6 (67.1)
-------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
investing activities.......... 300.0 (15.6) (2,241.2) (272.8) (2,229.6)
38
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL PRINCIPAL LIFE
FINANCNIAL PRINCIPAL INSURANCE PRINCIPAL
GROUP, INC. FINANCIAL COMPANY AND FINANCIAL
PARENT SERVICES, INC. OTHER SUBSIDIARIES GROUP, INC.
ONLY ONLY COMBINED ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ 11.7 - - - 11.7
Acquisition of treasury stock... (300.0) - - - (300.0)
Issuance of long-term debt...... - 0.1 1.9 (0.1) 1.9
Principal repayments of
long-term debt................ - - (8.4) - (8.4)
Net proceeds of short-term
borrowings.................... - (7.5) 26.9 (11.6) 7.8
Dividends paid to parent........ - (300.0) (4.0) 304.0 -
Investment contract deposits.... - - 5,052.1 - 5,052.1
Investment contract withdrawals. - - (4,081.5) - (4,081.5)
Net increase in banking
operation deposits............ - - 150.9 - 150.9
------------ ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
financing activities.......... (288.3) (307.4) 1,137.9 292.3 834.5
------------ ---------------- -------------------- ----------------- -----------------
Net increase (decrease) in cash
and cash equivalents.......... 10.2 (144.9) 536.0 62.4 463.7
Cash and cash equivalents at
beginning of year............. 332.1 977.7 (9.4) (572.6) 727.8
------------ ---------------- -------------------- ----------------- -----------------
Cash and cash equivalents at end
of year....................... $ 342.3 $ 832.8 $ 526.6 $ (510.2) $1,191.5
============ ================ ==================== ================= =================
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis discusses our financial condition as of June 30, 2004,
compared with December 31, 2003, and our consolidated results of operations for
the three months and six months ended June 30, 2004 and 2003, prepared in
conformity with accounting principles generally accepted in the U.S. ("U.S.
GAAP"). The discussion and analysis includes, where appropriate, factors that
may affect our future financial performance. The discussion should be read in
conjunction with our Form 10-K, for the year ended December 31, 2003, filed with
the United States Securities and Exchange Commission and the unaudited
consolidated financial statements and the related notes to the financial
statements and the other financial information included elsewhere in this Form
10-Q.
FORWARD-LOOKING INFORMATION
Our narrative analysis below contains forward-looking statements intended to
enhance the reader's ability to assess our future financial performance.
Forward-looking statements include, but are not limited to, statements that
represent our beliefs concerning future operations, strategies, financial
results or other developments, and contain words and phrases such as
"anticipate," "believe," "plan," "estimate," "expect," "intend," and similar
expressions. Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects on us. Such forward-looking statements are not guarantees of future
performance.
Actual results may differ materially from those included in the forward-looking
statements as a result of risks and uncertainties including, but not limited to
the following: (1) a decline or increased volatility in the securities markets
could result in investors withdrawing from the markets or decreasing their rates
of investment, either of which could reduce our net income, revenues and assets
under management; (2) our investment portfolio is subject to several risks which
may diminish the value of our invested assets and affect our sales,
profitability and the investment returns credited to our customers; (3)
competition from companies that may have greater financial resources, broader
arrays of products, higher ratings and stronger financial performance may impair
our ability to retain existing customers, attract new customers and maintain our
profitability; (4) a downgrade in Principal Life Insurance Company's ("Principal
Life") financial strength ratings may increase policy surrenders and
withdrawals, reduce new sales and terminate relationships with distributors and
cause some of our existing liabilities to be subject to acceleration, additional
collateral support, changes in terms, or creation of additional financial
obligations; (5) our efforts to reduce the impact of interest rate changes on
our profitability and surplus may not be effective; (6) if we are unable to
attract and retain sales representatives and develop new distribution sources,
sales of our products and services may be reduced; (7) our international
businesses face political, legal, operational and other risks that could reduce
our profitability in those businesses; (8) our reserves established for future
policy benefits and claims may prove inadequate, requiring us to increase
liabilities; (9) our ability to pay stockholder dividends and meet our
obligations may be constrained by the limitations on dividends Iowa insurance
laws impose on Principal Life; (10) we may need to fund deficiencies in our
closed block ("Closed Block") assets which benefit only the holders of Closed
Block policies; (11) changes in laws, regulations or accounting standards may
reduce our profitability; (12) litigation and regulatory investigations may harm
our financial strength and reduce our profitability; (13) fluctuations in
foreign currency exchange rates could reduce our profitability; (14) applicable
laws and our stockholder rights plan, certificate of incorporation and by-laws
may discourage takeovers and business combinations that our stockholders might
consider in their best interests; and (15) a downgrade in our debt ratings may
adversely affect our ability to secure funds and cause some of our existing
liabilities to be subject to acceleration, additional collateral support,
changes in terms, or creation of additional financial obligations.
OVERVIEW
We provide financial products and services through the following segments:
o U.S. Asset Management and Accumulation, which consists of our asset
accumulation operations, which provide products and services, including
retirement savings and related investment products and services, and our
asset management operations conducted through Principal Global Investors.
40
We provide a comprehensive portfolio of asset accumulation products and
services to businesses and individuals in the U.S., with a concentration on
small and medium-sized businesses, which we define as businesses with fewer
than 1,000 employees. We offer to businesses products and services for
defined contribution pension plans, including 401(k) and 403(b) plans,
defined benefit pension plans and non-qualified executive benefit plans. We
also offer annuities, mutual funds and bank products and services to the
employees of our business customers and other individuals.
o International Asset Management and Accumulation, which consists of
Principal International, offers retirement products and services,
annuities, long-term mutual funds and life insurance through subsidiaries
in Argentina, Chile, Mexico and Hong Kong and joint ventures in Brazil,
India, Japan, and Malaysia. On June 28, 2004, we entered into a definitive
agreement for the sale of all the stock of our Argentine companies.
Consequently, the results of operations for Argentina are reported as other
after-tax adjustments for all periods presented. Prior to October 31, 2002,
the segment included BT Financial Group, an Australia based asset manager.
We sold substantially all of BT Financial Group, effective October 31,
2002. See "Transactions Affecting Comparability of Results of Operations"
for further information about these two dispositions.
o Life and Health Insurance, which provides individual life insurance, health
insurance as well as specialty benefits throughout the U.S. Our individual
life insurance products include universal and variable universal life and
traditional life. Our health insurance products include group medical
insurance and fee-for-service. Our specialty benefit products include group
dental and vision insurance, individual and group disability insurance, and
group life insurance.
o Mortgage Banking, which engages in originating, purchasing, selling and
servicing residential mortgage loans in the U.S. On May 11, 2004, we
entered into a definitive agreement for the sale of Principal Residential
Mortgage, Inc. ("Principal Residential Mortgage") to CitiMortgage, Inc.,
described further in "Transactions Affecting Comparability of Results of
Operations". As a result, the results of operations (excluding corporate
overhead) for Mortgage Banking are reported as other after-tax adjustments
for all periods presented.
o Corporate and Other, which manages the assets representing capital that has
not been allocated to any other segment. Financial results of the Corporate
and Other segment primarily reflect our financing activities (including
interest expense), income on capital not allocated to other segments,
intersegment eliminations, income tax risks and certain income, expenses
and other after-tax adjustments not allocated to the segments based on the
nature of such items.
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS
ACQUISITIONS
We acquired the following businesses, among others, during 2004 and 2003:
DAO HENG FUND MANAGEMENT. On January 31, 2004, our wholly owned subsidiary,
Principal Asset Management Company (Asia) Limited, purchased a 100% ownership of
Dao Heng Fund Management ("DHFM") in Hong Kong from Guoco Group Limited
("Guoco"). The acquisition of DHFM increases our presence in the Hong Kong
defined contribution pension market and increases the potential of our long-term
mutual fund operations. Effective January 31, 2004, the operations of DHFM are
reported in our International Asset Management and Accumulation segment.
MOLLOY COMPANIES. On December 17, 2003, we signed an agreement to acquire the
Molloy Companies. The Molloy Companies consist of J.F. Molloy & Associates,
Inc., Molloy Medical Management, Inc., Molloy Actuarial and Consulting
Corporation and Molloy Wellness Company. The Molloy Companies offer companies
and organizations consultative, administrative and claims services for insured
and self-funded health plans through top benefit brokers and consultants.
Effective January 2, 2004, the operations of the Molloy Companies are reported
in our Life and Health segment.
41
POST ADVISORY GROUP. On August 21, 2003, we agreed to purchase approximately 68%
of Post Advisory Group ("Post Advisory") for approximately $101.6 million.
Effective October 15, 2003, we owned 23% of Post Advisory and purchased an
additional 45% on, January 5, 2004. Our assets under management have increased
$5.3 billion as a result of the acquisition. Effective October 15, 2003, the
operations of Post Advisory are reported in our U.S. Asset Management and
Accumulation segment.
PRINCIPAL PNB ASSET MANAGEMENT COMPANY. On August 31, 2003, we announced that
our wholly owned subsidiary, Principal Financial Group (Mauritius) Ltd., had
entered into a joint venture agreement with Punjab National Bank ("PNB") and
Vijaya Bank, two large Indian commercial banks, to sell long-term mutual funds
and related financial services in India. The new company will be called
Principal PNB Asset Management Company. As part of this transaction, we will
roll our existing fund management company, Principal Asset Management Company,
into the joint venture. We will retain 65% of the new company, selling 30% to
PNB, who will merge its own PNB funds into the new company, and 5% to Vijaya
Bank. We closed the transaction on May 5, 2004.
On June 24, 2003, Principal Financial Group (Mauritius) Ltd. purchased an
additional 50% ownership of IDBI - Principal Asset Management Company in India
from Industrial Development Bank of India ("IDBI") for 940 million Indian Rupees
("INR") (approximately U.S. $20.3 million). This transaction gave Principal
Financial Group (Mauritius) Ltd. 100% ownership of IDBI - Principal Asset
Management Company. Upon completion of the transaction, IDBI - Principal Asset
Management Company was renamed to Principal Asset Management Company.
As part of our International Asset Management and Accumulation segment, we
account for Principal PNB Asset Management Company's statements of financial
position using the full consolidation method of accounting. Activity that
affected our statements of operations before our acquisition of majority
ownership of the subsidiary is accounted for using the equity method of
accounting.
AFORE TEPEYAC S.A. DE C.V. On February 28, 2003, we purchased a 100% ownership
of AFORE Tepeyac S.A. de C.V. ("AFORE Tepeyac") in Mexico from Mapfre American
Vida, Caja Madrid and Mapfre Tepeyac for MX$590.0 million Mexican Pesos ("MX$")
(approximately U.S. $53.5 million). The operations of AFORE Tepeyac have been
integrated into Principal International, Inc., as a part of our International
Asset Management and Accumulation segment.
DISPOSITIONS
PRINCIPAL INTERNATIONAL ARGENTINA S.A. On June 28, 2004, we entered into a
definitive agreement for the sale of all the stock of Principal International
Argentina S.A. ("Argentina"), our subsidiary in Argentina, and its wholly owned
subsidiaries, Principal Life Compania de Seguros, S.A. and Principal Retiro
Compania de Seguros de Retiro, S.A. We closed the transaction on July 2, 2004.
Our operations in Argentina qualify for discontinued operations treatment under
Statement of Financial Accounting Standard No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), therefore, the results
of operations have been removed from our results of continuing operations and
cash flows for all periods presented. The results of operations for Argentina
are reported as other after-tax adjustments in our International Asset
Management and Accumulation segment.
42
Selected financial information for the discontinued operations of Argentina is
as follows:
AS OF,
-------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(IN MILLIONS)
ASSETS
Total investments................... $33.4 $31.3
All other assets.................... 8.6 10.9
------------------ ------------------
Total assets...................... $42.0 $42.2
================== ==================
LIABILITIES
Policyholder liabilities............ $31.4 $31.1
All other liabilities............... 1.4 2.1
------------------ ------------------
Total liabilities................... $32.8 $33.2
================== ==================
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ----------------------------
2004 2003 2004 2003
----------------- ----------- ------------ ------------
(IN MILLIONS)
Total revenues.......................... $3.6 $ 5.6 $5.8 $ 5.7
================= =========== ============ ============
Income (loss) from discontinued
operations:
Income (loss) before income taxes... $0.5 $(1.1) $0.3 $ (2.6)
Income taxes........................ 0.2 0.5 0.1 -
----------------- ----------- ------------ ------------
Income (loss) from discontinued
operations, net of related income
taxes............................. $0.3 $(1.6) $0.2 $ (2.6)
================= =========== ============ ============
PRINCIPAL RESIDENTIAL MORTGAGE, INC. On May 11, 2004, we entered into a
definitive agreement for the sale of Principal Residential Mortgage to
CitiMortgage, Inc. We closed the sale on July 1, 2004.
Our Mortgage Banking segment, which includes Principal Residential Mortgage, is
accounted for as a discontinued operation, under SFAS 144 and therefore, the
results of operations (excluding corporate overhead) have been removed from our
results of continuing operations and cash flows for all periods presented.
Corporate overhead allocated to our Mortgage Banking segment does not qualify
for discontinued operations treatment under SFAS 144 and therefore is still
included in our results of continuing operations. The results of operations
(excluding corporate overhead) are reported as other after-tax adjustments.
43
Selected financial information for the discontinued operations of Our Mortgage
Banking segment is as follows:
AS OF,
-------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(IN MILLIONS)
ASSETS
Mortgage loans......................... $2,784.4 $2,256.5
Mortgage loan servicing rights......... 2,210.7 1,951.9
Cash and cash equivalents.............. 631.4 674.6
All other assets....................... 839.7 675.8
------------------ ------------------
Total assets......................... $6,466.2 $5,558.8
================== ==================
AS OF,
-------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(IN MILLIONS)
LIABILITIES
Short-term debt........................ $2,501.1 $1,450.9
Long-term debt......................... 1,393.0 1,393.0
All other liabilities.................. 2,027.7 2,242.8
------------------ ------------------
Total liabilities.................... $5,921.8 $5,086.7
================== ==================
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ----------- ------------ ------------
(IN MILLIONS)
Total revenues.......................... $190.6 $ 452.5 $446.1 $ 857.0
============= =========== ============ ============
Loss from continuing operations, net of
related income taxes (corporate
overhead)........................... $ (5.4) $ (4.5) $(10.3) $ (8.4)
Income (loss) from discontinued
operations:
Income (loss) before income taxes... (5.7) 80.1 48.3 170.5
Income taxes (benefits)............. (2.2) 30.5 18.3 64.7
------------- ----------- ------------ ------------
Income (loss) from discontinued
operations, net of related
income taxes..................... (3.5) 49.6 30.0 105.8
------------- ----------- ------------ ------------
Net income (loss) ...................... $ (8.9) $ 45.1 $ 19.7 $ 97.4
============= =========== ============ ============
Our U.S. Asset Management and Accumulation segment held $1,142.0 million and
$804.8 million of residential mortgage banking escrow deposits (reported as
other liabilities) as of June 30, 2004 and December 31, 2003, respectively,
which were transferred as a result of the sale. U.S. Asset Management and
Accumulation segment revenues from this arrangement reclassified to discontinued
operations for the three months ended June 30, 2004 and 2003, were $(9.5)
million and $7.0 million, respectively. Revenues reclassified to discontinued
operations, for the six months ended June 30, 2004 and 2003, were $(5.6) million
and $13.1 million, respectively. Income (loss) from discontinued operations net
of related income taxes, for the three months ended June 30, 2004 and 2003, was
$(6.0) million and $2.5 million, respectively. Income (loss) from discontinued
operations, net of related income taxes, for the six months ended June 30, 2004
and 2003, was $(3.5) million and $5.1 million, respectively.
BT FINANCIAL GROUP. On October 31, 2002, we sold substantially all of BT
Financial Group to Westpac Banking Corporation ("Westpac"). As of June 30, 2004,
we have received proceeds of A$958.9 million Australian dollars ("A$") (U.S.
44
$537.4 million) from Westpac, with future contingent proceeds in 2004 of up to
A$150.0 million (approximately U.S. $105.0 million). The contingent proceeds
will be based on Westpac's future success in growing retail funds under
management. We do not anticipate receiving the contingent proceeds.
Excluding contingent proceeds, our total after-tax proceeds from the sale were
approximately U.S. $890.0 million. This amount includes cash proceeds from
Westpac, expected tax benefits, and gain from unwinding the hedged asset
associated with our investment in BT Financial Group.
As of December 31, 2002, we accrued for an estimated after-tax loss on disposal
of $208.7 million. During the three months ended and six months ended June 30,
2003, we incurred an additional after-tax loss of $0.4 million and $1.1 million,
respectively. These losses are recorded in the loss from discontinued operations
in the consolidated statements of operations. During the three months ended and
six months ended June 30, 2004, we did not incur any after-tax gain or loss
associated with the loss on disposal of BT Financial Group.
BT Financial Group is accounted for as a discontinued operation and therefore,
the results of operations and cash flows have been removed from our results of
continuing operations for all periods presented.
In connection with the 2002 sale of BT Financial Group, we agreed to indemnify
the purchaser, Westpac for, among other things, the costs associated with
potential late filings made by BT Financial Group in New Zealand prior to
Westpac's ownership, up to a maximum of A$250.0 million Australian dollars
(approximately U.S. $175.0 million as of June 30, 2004). New Zealand securities
regulations allow Australian issuers to issue their securities in New Zealand
provided that certain documents are appropriately filed with the New Zealand
Registrar of Companies. Specifically, the regulations required that any
amendments to constitutions and compliance plans be filed in New Zealand. In
April 2003, the New Zealand Securities Commission opined that such late filings
would result in certain New Zealand investors having a right to return of their
investment plus interest at 10% per annum from the date of investment. We view
these potential late filings as a technical matter as we believe investors
received the information that is required to be provided directly to them. This
technical issue affected many in the industry. On April 15, 2004, the New
Zealand government enacted legislation that will provide issuers, including BT
Financial Group, the opportunity for retroactive relief from such late filing
violations. The law allows issuers to apply for judicial validation of
non-compliant issuances resulting from late filings. The law further provides
that judicial relief is mandatory and unconditional unless an investor was
materially prejudiced by the late filing. A related judicial action is pending.
Although we cannot predict the outcome of this matter or reasonably estimate
losses, we do not believe that it would result in a material adverse effect on
our business or financial position. It is possible, however, that it could have
a material adverse effect on net income in a particular quarter or annual
period.
OTHER TRANSACTIONS
SYNTHETIC FUEL PRODUCTION FACILITY. In June 2004, we acquired a significant
variable interest in a coal-based synthetic fuel production facility where we
are not the primary beneficiary. Our minority ownership interest was acquired in
exchange for consideration of $37.0 million, which is primarily comprised of a
non-recourse note payable for $36.0 million, as well as a commitment to fund our
pro-rata share of the operations. We have also agreed to make additional
payments to the seller based on our pro-rata allocation of the tax credits
generated by the facility. The synthetic fuel produced at the facility through
2007 qualifies for tax credits pursuant to Section 29 of the Internal Revenue
Code (currently credits are not available for fuel produced after 2007). Our
obligation to support the entity's future operations is, therefore, limited to
the tax benefit we expect to receive.
SALE OF RETAIL FIELD MORTGAGE LENDING BRANCH OFFICES. On February 4, 2003,
Principal Residential Mortgage signed a definitive agreement to sell the retail
field mortgage lending branches to American Home Mortgage, Inc. ("American Home
Mortgage"), an independent retail mortgage banking company. American Home
Mortgage has paid Principal Residential Mortgage a guaranteed profit margin on
45
its application pipeline that existed as of February 4, 2003, and has purchased
the assets of the branch network and assumed related liabilities.
PRINCIPAL RESIDENTIAL MORTGAGE CAPITAL RESOURCES, LLC. As a result of the
implementation of Financial Accounting Standards Board (the "FASB")
Interpretation No. 46: CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46"),
effective July 1, 2003, Mortgage Banking assets and liabilities include the full
consolidation of Principal Residential Mortgage Capital Resources, LLC
("PRMCR"), which provides a source of funding for our residential mortgage loan
production. On May 11, 2004, we entered into a definitive agreement for the sale
of Principal Residential Mortgage to CitiMortgage, Inc, which was completed on
July 1, 2004.
FLUCTUATIONS IN FOREIGN CURRENCY TO U.S. DOLLAR EXCHANGE RATES
Fluctuations in foreign currency to U.S. dollar exchange rates for countries in
which we have operations can affect reported financial results. In years when
foreign currencies weaken against the U.S. dollar, translating foreign
currencies into U.S. dollars results in fewer U.S. dollars to be reported. When
foreign currencies strengthen, translating foreign currencies into U.S. dollars
results in more U.S. dollars to be reported.
Foreign currency exchange rate fluctuations create variances in our financial
statement line items but have not had a material impact on our consolidated
income from continuing operations. Our consolidated income from continuing
operations was positively impacted $0.5 million and negatively impacted $2.8
million for the three months ended June 30, 2004 and 2003 and positively
impacted $1.1 million and negatively impacted $4.9 million for the six months
ended June 30, 2004 and 2003, respectively, as a result of fluctuations in
foreign currency to U.S. dollar exchange rates. For a discussion of our
approaches to foreign currency exchange rate risk, see Item 3. "Quantitative and
Qualitative Disclosures about Market Risk."
PENSION AND OTHER POSTRETIREMENT BENEFIT EXPENSE
The 2004 annual pension benefit expense for substantially all of our employees
and certain agents is approximately $56.4 million pre-tax, which is a $3.8
million decrease from the 2003 pre-tax pension expense of $60.2 million.
Approximately $14.1 million and $28.2 million of pre-tax pension expense was
reflected in the determination of net income for the three months and six months
ended June 30, 2004, respectively. In addition, approximately $14.1 million of
pre-tax pension expense will be reflected in each of the following two quarters
for 2004. This decrease in expense over 2003 is primarily due to the plan's
liability experience, an increase in the plan's turnover assumption, and the
plan's asset performance. The discount rate used to determine the 2004 expense
was 6.25%, which is down from the 6.5% discount rate used to calculate the 2003
expense. The expected long-term return on assets assumption used for the 2004
pension expense remained at 8.5%.
The divestiture of Principal Residential Mortgage will result in curtailment
accounting under the pension and other postretirement benefit plans. We
anticipate the curtailment will result in a gain, which will be included in the
discontinued operations in third quarter 2004. Estimates are not available at
this time, but we do not expect the gain will have a material impact on net
income. The pension and other postretirement benefit plan expense for fourth
quarter is anticipated to be lower than previous quarters as the result of the
curtailment.
RECENT ACCOUNTING PRONOUNCEMENTS
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin ("SAB") 105,
APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS ("SAB 105"), in which
the SEC Staff expressed their view that the fair value of recorded loan
commitments, including interest rate lock commitments ("IRLCs"), that are
required to follow derivative accounting under Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
should not consider the expected future cash flows related to the associated
servicing of the loan. We record IRLCs at zero value at the date of issuance
46
with subsequent gains or losses measured by change in market interest rates.
Therefore, this SAB did not have a material impact on our consolidated financial
statements.
On December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised 2003):
CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46R"), to clarify some of the
provisions of FIN 46 and to exempt certain entities from its requirements. We
adopted FIN 46R effective January 1, 2004, which did not have a material impact
on our consolidated financial statements.
On July 7, 2003, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 03-1, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS ("SOP 03-1"). This SOP addresses an insurance enterprise's accounting
for certain fixed and variable contract features not covered by other
authoritative accounting guidance. We adopted SOP 03-1 effective January 1,
2004, and recorded a cumulative effect of accounting change of $(5.7) million,
which is net of income tax benefits of $3.0 million. The accounting change
impacted our Life and Health Insurance, U.S. Asset Management and Accumulation
and International Asset Management and Accumulation segments.
A provision of SOP 03-1 relates to the classification of contracts and
calculation of an additional liability for contracts that contain significant
insurance features. The adoption of the guidance requires the recognition of a
liability in addition to the contract account value in cases where the insurance
benefit feature results in gains in early years followed by losses in later
years. The accrual and release of the additional liability also impacts the
amortization of deferred policy acquisition costs ("DPAC"). As of January 1,
2004, we increased future policyholder benefits due to our no lapse guarantee
feature of our universal life and variable universal life products within our
Life and Health Insurance segment and for variable annuities with guaranteed
minimum death benefits in our U.S. Asset Management and Accumulation segment.
This resulted in an after-tax cumulative effect of $(0.9) million in the Life
and Health Insurance segment and $(1.5) million in the U.S. Asset Management and
Accumulation segment.
We also had an after-tax cumulative effect related to an equity method
investment within our International Asset Management and Accumulation segment of
$(3.3) million, net of income taxes, as of January 1, 2004, for select deferred
annuity products, which include guaranteed annuitization purchase rates. The
guidance requires contracts which provide for potential benefits in addition to
the account balance that are payable only upon annuitization to establish an
additional liability if the present value of the annuitized benefits exceed the
expected account balance at the expected annuitization date.
In addition, the guidance clarifies the accounting and classification for sales
inducements. Although the valuation impacts were immaterial, we reclassified
$37.6 million of sales inducements from DPAC to other assets effective January
1, 2004.
47
RESULTS OF OPERATIONS
The following table presents summary consolidated financial information for the
periods indicated:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2004 2003 2004 2003
------------- ------------ ------------ -----------
(IN MILLIONS)
INCOME STATEMENT DATA:
Revenues:
Premiums and other considerations............... $ 892.6 $ 875.7 $ 1,813.0 $ 1,780.4
Fees and other revenues......................... 364.2 276.7 696.8 543.3
Net investment income........................... 789.2 808.8 1,575.4 1,601.8
Net realized/unrealized capital losses.......... (66.3) (9.7) (108.8) (84.2)
------------- ------------ ------------ -----------
Total revenues................................ 1,979.7 1,951.5 3,976.4 3,841.3
Expenses:
Benefits, claims and settlement expenses........ 1,221.1 1,185.2 2,407.2 2,379.9
Dividends to policyholders...................... 74.4 73.9 147.7 154.0
Operating expenses.............................. 521.1 490.3 1,050.6 975.6
------------- ------------ ------------ -----------
Total expenses................................ 1,816.6 1,749.4 3,605.5 3,509.5
------------- ------------ ------------ -----------
Income from continuing operations before income
taxes........................................... 163.1 202.1 370.9 331.8
Income taxes...................................... 34.2 50.0 78.6 81.1
------------- ------------ ------------ -----------
Income from continuing operations, net of
related income taxes............................ 128.9 152.1 292.3 250.7
Income (loss) from discontinued operations, net
of related income taxes......................... (9.2) 50.1 26.7 107.2
------------- ------------ ------------ -----------
Income before cumulative effect of accounting
change.......................................... 119.7 202.2 319.0 357.9
Cumulative effect of accounting change, net of
related income taxes............................ - - (5.7) -
------------- ------------ ------------ -----------
Net income ..................................... $ 119.7 $ 202.2 $ 313.3 $ 357.9
============= ============ ============ ===========
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Premiums and other considerations increased $16.9 million, or 2%, to $892.6
million for the three months ended June 30, 2004, from $875.7 million for the
three months ended June 30, 2003. The increase reflected a $12.5 million
increase from the Life and Health segment primarily due to growth in our
specialty benefits business partially offset by the shift in customer preference
from individual traditional life insurance products to individual universal and
variable universal life insurance products. In addition, the increase was due to
a $2.7 million increase from the U.S. Asset Management and Accumulation segment,
primarily a result of an increase in pension full-service payout sales of single
premium group annuities with life contingencies, which are typically used to
fund defined benefit plan terminations. The premium income received from these
contracts fluctuates due to the variability in the number and size of pension
plan terminations, the interest rate environment and the ability to attract new
sales.
Fees and other revenues increased $87.5 million, or 32%, to $364.2 million for
the three months ended June 30, 2004, from $276.7 million for the three months
ended June 30, 2003. The increase was largely due to a $66.6 million increase
from the U.S. Asset Management and Accumulation segment primarily related to
increased fees from our separate accounts, due to improvements in the equity
markets and net cash flow from customers, which have led to higher account
values. In addition, Life and Health Insurance fees and other revenues increased
$19.6 million primarily due to growth in the universal life and variable
universal life insurance business and the acquisition of the Molloy Companies
effective January 2, 2004.
48
Net investment income decreased $19.6 million, or 2%, to $789.2 million for the
three months ended June 30, 2004, from $808.8 million for the three months ended
June 30, 2003. The decrease was primarily related to a decrease in annualized
investment yields. The annualized yield on average invested assets and cash was
5.8% for the three months ended June 30, 2004, compared to 6.2% for the three
months ended June 30, 2003. This reflects lower yields on invested assets due in
part to a lower interest rate environment. Partially offsetting the decrease was
a $2,447.4 million, or 5%, increase in average invested assets and cash.
Net realized/unrealized capital losses increased $56.6 million to $66.3 million
for the three months ended June 30, 2004, from $9.7 million for the three months
ended June 30, 2003. The increase in net realized losses was primarily due to
the mark to market of certain seed money investments and the realized loss
related to the sale of a foreign investment.
The following table highlights the contributors to net realized/unrealized
capital gains and losses for the three months ended June 30, 2004.
FOR THE THREE MONTHS ENDED JUNE 30, 2004
----------------------------------------------------------------------------
NET REALIZED NET REALIZED/
GAINS UNREALIZED
(LOSSES) ON HEDGING CAPITAL GAINS
IMPAIRMENTS DISPOSAL ADJUSTMENTS (LOSSES)
---------------- ------------------- ----------------- ---------------------
(IN MILLIONS)
Fixed maturity securities (1)... $ (14.8) $ (7.1) $ (58.0) $ (79.9)
Equity securities (2)........... (0.2) 1.2 - 1.0
Mortgage loans on real
estate (3).................... (11.1) - - (11.1)
Real estate..................... - 0.4 - 0.4
Derivatives..................... - - 68.9 68.9
Other (4)....................... - (30.7) (14.9) (45.6)
---------------- ------------------- ----------------- ---------------------
Total......................... $ (26.1) $ (36.2) $ (4.0) $ (66.3)
================ =================== ================= =====================
- -----------------------
(1) Impairments include $7.4 million in recoveries on the sale of previously
impaired assets and $22.2 million of impairment losses. Net realized gains
(losses) on disposal includes gross realized gains of $7.5 million and
gross realized losses of $14.6 million, excluding the impact of hedging.
(2) Impairments include $0.2 million of impairment losses. Net realized gains
(losses) on disposal includes gross realized gains of $2.1 million and
gross realized losses of $0.9 million.
(3) Includes $9.8 million in realized losses due to sale, foreclosure, or
impairment write-down of commercial mortgage loans and a $1.3 million
increase in commercial mortgage valuation allowance.
(4) Net realized gains (losses) on disposal includes $9.9 million in losses on
seed money and $20.1 million in losses related to the sale of a foreign
investment.
Benefits, claims and settlement expenses increased $35.9 million, or 3%, to
$1,221.1 million for the three months ended June 30, 2004, from $1,185.2 million
for the three months ended June 30, 2003. The increase resulted from a $31.8
million increase in the Life and Health Insurance segment due to health
insurance reserve refinements, increased health insurance claim costs per member
and growth in our specialty benefits business.
Dividends to policyholders increased $0.5 million, or 1%, to $74.4 million for
the three months ended June 30, 2004, from $73.9 million for the three months
ended June 30, 2003. The increase was attributable to a $2.0 million increase
from the U.S. Management and Accumulation segment, resulting from an increase in
dividends for our participating pension full-service accumulation products.
Partially offsetting this increase was a $1.5 million decrease in dividends to
policyholders for the Life and Health Insurance segment due to changes in the
49
individual life insurance dividend crediting rates resulting from a declining
interest rate environment.
Operating expenses increased $30.8 million, or 6%, to $521.1 million for the
three months ended June 30, 2004, from $490.3 million for the three months ended
June 30, 2003. The increase was largely due to a $24.9 million increase from the
U.S Asset Management and Accumulation segment due to our acquisition of Post
Advisory in the third quarter of 2003 and to a lesser extent an increase in
management fees.
Income taxes decreased $15.8 million, or 32%, to $34.2 million for the three
months ended June 30, 2004 from $50.0 million for the three months ended June
30, 2003. The effective income tax rate was 21% for the three months ended June
30, 2004 and 25% for the three months ended June 30, 2003. The effective income
tax rates for the three months ended June 30, 2004 and 2003 were lower than the
corporate income tax rate of 35% primarily due to income tax deductions allowed
for corporate dividends received and interest exclusion from taxable income. The
decrease in the effective tax rate to 21% for the three months ended June 30,
2004, from 25% for the three months ended June 30, 2003, was primarily due to
reduced pre-tax net income relative to a moderate increase in expected permanent
tax differences.
As a result of the foregoing factors and the inclusion of income (loss) from
discontinued operations, net income decreased $82.5 million, or 41%, to $119.7
million for the three months ended June 30, 2004, from $202.2 million for the
three months ended June 30, 2003. The income (loss) from discontinued operations
was related to our sale of Principal Residential Mortgage and Argentine
companies in 2004 and a change in the estimated loss on disposal of BT Financial
Group in 2003
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Premiums and other considerations increased $32.6 million, or 2%, to $1,813.0
million for the six months ended June 30, 2004, from $1,780.4 million for the
six months ended June 30, 2003. The increase reflected a $30.6 million increase
from the International Asset Management and Accumulation segment, primarily a
result of an increase in Chile due to the strengthening of the Chilean peso
versus the U.S. dollar and record sales of single premium annuities with life
contingencies in 2004 following a year of decreased sales due to market
contraction. In addition, Life and Health segment premiums increased $24.2
million primarily due to growth in our specialty benefits business partially
offset by the shift in customer preference from individual traditional life
insurance products to individual universal and variable universal life insurance
products. The increases were partially offset by a $22.2 million decrease from
the U.S. Asset Management and Accumulation segment, resulting from a decrease in
individual payout annuity sales, primarily related to increased competitive
pressures and decrease in our pension full-service payout sales of single
premium group annuities with life contingencies.
Fees and other revenues increased $153.5 million, or 28%, to $696.8 million for
the six months ended June 30, 2004, from $543.3 million for the six months ended
June 30, 2003. The increase was largely due to a $113.0 million increase from
the U.S. Asset Management and Accumulation segment primarily related to fees
from our separate accounts, due to improvements in the equity markets and net
cash flow from customers, which have led to higher account values. In addition,
Life and Health Insurance fees and other revenues increased $32.8 million
primarily due to the acquisition of the Molloy Companies effective January 2,
2004 and due to growth in the universal life and variable universal life
insurance business.
Net investment income decreased $26.4 million, or 2%, to $1,575.4 million for
the six months ended June 30, 2004, from $1,601.8 million for the six months
ended June 30, 2003. The decrease was primarily related to a decrease in
annualized investment yields. The annualized yield on average invested assets
and cash was 5.8% for the six months ended June 30, 2004, compared to 6.2% for
the six months ended June 30, 2003. This reflects lower yields on invested
assets due in part to a lower interest rate environment. Partially offsetting
the decrease was a $2,953.2 million, or 6%, increase in average invested assets
and cash.
Net realized/unrealized capital losses increased $24.6 million, or 29%, to
$108.8 million for the six months ended June 30, 2004, from $84.2 million for
the six months ended June 30, 2003. The increase in net realized losses was
50
primarily due to the mark to market of certain seed money investments, an
increase in commercial mortgage losses, and a realized loss related to the sale
of a foreign investment offset by lower other than temporary impairments on
fixed maturity securities.
The following table highlights the contributors to net realized/unrealized
capital gains and losses for the six months ended June 30, 2004.
FOR THE SIX MONTHS ENDED JUNE 30, 2004
----------------------------------------------------------------------------
NET REALIZED NET REALIZED/
GAINS UNREALIZED
(LOSSES) ON HEDGING CAPITAL GAINS
IMPAIRMENTS DISPOSAL ADJUSTMENTS (LOSSES)
------------------ ----------------- ------------------- -------------------
(IN MILLIONS)
Fixed maturity securities (1)... $ (36.6) $ (1.9) $ (30.0) $ (68.5)
Equity securities (2)........... (4.2) 5.1 - 0.9
Mortgage loans on real
estate (3).................... (22.8) - - (22.8)
Real estate..................... (3.3) 4.4 - 1.1
Derivatives..................... - - (4.0) (4.0)
Other (4)....................... - (7.1) (8.4) (15.5)
------------------ ----------------- ------------------- -------------------
Total......................... $ (66.9) $ 0.5 $ (42.4) $ (108.8)
================== ================= =================== ===================
- -----------------------
(1) Impairments include $9.8 million in recoveries on the sale of previously
impaired assets and $46.4 million of impairment losses. Net realized gains
(losses) on disposal includes gross realized gains of $17.3 million and
gross realized losses of $19.2 million, excluding the impact of hedging.
(2) Impairments include $4.2 million of impairment losses. Net realized gains
(losses) on disposal includes gross realized gains of $7.1 million and
gross realized losses of $2.0 million.
(3) Includes $15.4 million in realized losses due to sale, foreclosure, or
impairment write-down of commercial mortgage loans and a $7.4 million
increase in commercial mortgage valuation allowance.
(4) Net realized gains (losses) on disposal includes $7.5 million in gains on
seed money and $20.0 million in losses related to the sale of a foreign
investment.
Benefits, claims and settlement expenses increased $27.3 million, or 1%, to
$2,407.2 million for the six months ended June 30, 2004, from $2,379.9 million
for the six months ended June 30, 2003. The increase was primarily due to a
$39.0 million increase from the International Asset Management and Accumulation
segment, primarily a result of an increase in Chile due to the strengthening of
the Chilean peso versus the U.S. dollar and higher reserve expenses due to
record sales of single premium annuities with life contingencies in 2004
following a year of decreased sales due to market contraction. In addition, the
Life and Health Insurance segment benefits, claims, and settlement expense
increased $30.1 million due to growth in our specialty benefits business, health
insurance reserve refinements, and increased health insurance claim costs per
member. Partially offsetting these increases was a $40.3 million decrease for
the U.S. Asset Management and Accumulation segment, reflecting a decrease in our
pension full-service accumulation products due to lower interest credited on our
non-participating deposit type business and to a lesser extent due to decreases
in cost of interest credited on declining business from our participating block.
Dividends to policyholders decreased $6.3 million, or 4%, to $147.7 million for
the six months ended June 30, 2004, from $154.0 million for the six months ended
June 30, 2003. The decrease was attributable to a $5.0 million decrease from the
Life and Health Insurance segment, resulting from changes in the individual life
insurance dividend crediting rates due to a declining interest rate environment.
In addition, U.S. Management and Accumulation dividends to policyholders
decreased $1.3 million resulting from a decrease in dividends for our
participating pension full-service accumulation products.
51
Operating expenses increased $75.0 million, or 8%, to $1,050.6 million for the
six months ended June 30, 2004, from $975.6 million for the six months ended
June 30, 2003. The increase was largely due to a $42.0 million increase from the
U.S Asset Management and Accumulation segment due to our acquisition of Post
Advisory in the third quarter of 2003 and to a lesser extent an increase in
investment management expenses. In addition, the International Asset Management
and Accumulation segment operating expenses increased $12.0 million partially
due to an increase in Mexico primarily due to the acquisition of Genera in July
2003 and an increase in Chile primarily due to non-deferrable commissions on
record sales of single premium annuities with life contingencies and the
strengthening of the Chilean peso versus the U.S. dollar. Also, the operating
expenses for the Life and Health Insurance segment increased $11.1 million due
to the acquisition of the Molloy Companies and increased non-deferrable
production related expenses due to growth in the business.
Income taxes decreased $2.5 million, or 3%, to $78.6 million for the six months
ended June 30, 2004 from $81.1 million for the six months ended June 30, 2003.
The effective income tax rate was 21% for the six months ended June 30, 2004 and
24% for the six months ended June 30, 2003. The effective income tax rate for
the six months ended June 30, 2004 was lower than the corporate income tax rate
of 35% primarily due to income tax deductions allowed for corporate dividends
received, a tax benefit associated with the sale of a foreign investment and
interest exclusion from taxable income. The effective income tax rate for the
six months ended June 30, 2003 was lower than the corporate income tax rate of
35% primarily due to income tax deductions allowed for corporate dividends
received and interest exclusion from taxable income. The decrease in the
effective tax rate to 21% for the six months ended June 30, 2004, from 24% for
the six months ended June 30, 2003, was primarily due to a tax benefit
associated with the sale of a foreign investment.
As a result of the foregoing factors and the inclusion of income (loss) from
discontinued operations and the cumulative change in accounting principle, net
of related income taxes, net income decreased $44.6 million, or 12%, to $313.3
million for the six months ended June 30, 2004, from $357.9 million for the six
months ended June 30, 2003. The income (loss) from discontinued operations was
related to our sale of Principal Residential Mortgage and Argentine companies in
2004 and a change in the estimated loss on disposal of BT Financial Group in
2003. The cumulative effect of accounting change was related to our
implementation of SOP 03-1.
RESULTS OF OPERATIONS BY SEGMENT
We use operating earnings, which excludes the effect of net realized/unrealized
capital gains and losses, as adjusted, and other after-tax adjustments, for goal
setting, determining employee compensation, and evaluating performance on a
basis comparable to that used by securities analysts. Segment operating earnings
are determined by adjusting U.S. GAAP net income for net realized/unrealized
capital gains and losses, as adjusted, and other after-tax adjustments we
believe are not indicative of overall operating trends. Note that after-tax
adjustments have occurred in the past and could recur in future reporting
periods. While these items may be significant components in understanding and
assessing our consolidated financial performance, we believe the presentation of
segment operating earnings enhances the understanding of our results of
operations by highlighting earnings attributable to the normal, ongoing
operations of our businesses.
52
The following table presents segment information as of or for the periods
indicated:
AS OF OR FOR THE THREE AS OF OR FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- -------------- -------------
(IN MILLIONS)
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation........ $ 906.8 $ 862.0 $ 1,800.1 $ 1,741.9
International Asset Management and
Accumulation............................... 122.3 106.2 235.3 180.7
Life and Health Insurance..................... 1,030.7 1,001.8 2,066.0 2,014.1
Mortgage Banking.............................. - - - -
Corporate and Other (1)....................... (11.9) (2.0) (10.3) 1.0
-------------- ------------- -------------- -------------
Total segment operating revenues............ 2,047.9 1,968.0 4,091.1 3,937.7
Net realized/unrealized capital losses,
including recognition of front-end fee
revenues and certain market value
adjustments to fee revenues(2).............. (68.2) (16.5) (114.7) (96.4)
-------------- ------------- -------------- -------------
Total revenue per consolidated statements
of operations.............................. $ 1,979.7 $ 1,951.5 $ 3,976.4 $ 3,841.3
============== ============= ============== =============
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ....... $ 121.7 $ 105.7 $ 241.2 $ 200.6
International Asset Management and
Accumulation............................... 9.3 11.9 17.9 18.5
Life and Health Insurance..................... 56.9 62.9 131.7 122.0
Mortgage Banking.............................. (5.4) (4.5) (10.3) (8.4)
Corporate and Other .......................... (9.1) (10.4) (20.6) (15.4)
-------------- ------------- -------------- -------------
Total segment operating earnings............ 173.4 165.6 359.9 317.3
Net realized/unrealized capital losses, as
adjusted(2)................................ (44.5) (13.5) (67.6) (66.6)
Other after-tax adjustments(3)................ (9.2) 50.1 21.0 107.2
-------------- ------------- -------------- -------------
Net income per consolidated statements of
operations............................... $ 119.7 $ 202.2 $ 313.3 $ 357.9
============== ============= ============== =============
TOTAL ASSETS BY SEGMENT:
U.S. Asset Management and Accumulation (4).... $ 87,733.0 $ 77,647.6 $ 87,733.0 $ 77,647.6
International Asset Management and
Accumulation............................... 3,123.9 2,531.3 3,123.9 2,531.3
Life and Health Insurance..................... 12,472.5 11,857.0 12,472.5 11,857.0
Mortgage Banking (5).......................... 6,466.2 4,119.5 6,466.2 4,119.5
Corporate and Other (6)....................... 1,577.3 2,466.3 1,577.3 2,466.3
-------------- ------------- -------------- -------------
Total assets................................ $ 111,372.9 $ 98,621.7 $ 111,372.9 $ 98,621.7
============== ============= ============== =============
- -----------------------
(1) Includes inter-segment eliminations primarily related to internal
investment management fee revenues and commission fee revenues paid to U.S.
Asset Management and Accumulation agents for selling Life and Health
Insurance segment insurance products.
(2) In addition to sales activity and other than temporary impairments, net
realized/unrealized capital gains (losses) include unrealized gains
(losses) on mark to market changes of certain seed money investments and
investments classified as trading securities, as well as unrealized gains
(losses) on certain derivatives. Net realized/unrealized capital gains
(losses), as adjusted, are net of income taxes, net realized capital gains
and losses distributed, minority interest capital gains and losses, related
changes in the amortization pattern of deferred policy acquisition and
sales inducement costs, recognition of front-end fee revenues for sales
charges on pension products and services and certain market value
adjustments to fee revenues.
53
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(IN MILLIONS)
Net realized/unrealized capital losses........... $ (66.3) $ (9.7) $ (108.8) $ (84.2)
Certain market value adjustments to fee revenues (2.9) (6.7) (5.8) (16.5)
Recognition of front-end fee revenues............ 1.0 (0.1) (0.1) 4.3
------------- -------------- ------------- --------------
Net realized/unrealized capital losses,
including recognition of front-end fee
revenues and certain market value
adjustments to fee revenues ................. (68.2) (16.5) (114.7) (96.4)
Amortization of deferred policy acquisition and
sales inducement costs related to net
realized/unrealized capital gains
(losses) .................................... 0.5 (0.4) 2.6 3.3
Capital (gains) losses distributed............... 0.8 (1.9) (1.2) (1.0)
Minority interest capital (gains) losses......... (0.1) 0.4 (0.2) 0.3
------------- -------------- ------------- --------------
Net realized/unrealized capital losses,
including recognition of front-end fee
revenues and certain market value
adjustments to fee revenues, net of related
amortization of deferred policy acquisition
and sales inducement costs, capital gains
(losses) distributed and minority capital
gains (losses)............................... (67.0) (18.4) (113.5) (93.8)
Income tax effect ............................... 22.5 4.9 45.9 27.2
------------- -------------- ------------- --------------
Net realized/unrealized capital losses, as
adjusted..................................... $ (44.5) $ (13.5) $ (67.6) $ (66.6)
============= ============== ============= ==============
(3)For the three months ended June 30, 2004, other after-tax adjustments of
$9.2 million included (1) the negative effect of a loss from discontinued
operations of Principal Residential Mortgage ($9.5 million) and (2) the
positive effect of income from discontinued operations of Argentina ($0.3
million). For the three months ended June 30, 2003, other after-tax
adjustments of $50.1 million included (1) the positive effect of income from
discontinued operations of Principal Residential Mortgage ($52.1 million) and
(2) the negative effects of: (a) a loss from discontinued operations of
Argentina ($1.6 million) and (b) a change in the estimated loss on disposal
of BT Financial Group ($0.4 million). For the six months ended June 30, 2004,
other after-tax adjustments of $21.0 included (1) the positive effects of:
(a) income from discontinued operations of Principal Residential Mortgage
($26.5 million) and (b) income from discontinued operations of Argentina
($0.2 million) and (2) the negative effect from a cumulative effect of an
accounting change, a result of our implementation of SOP 03-1 ($5.7 million).
For the six months ended June 30, 2003, other after-tax adjustments of $107.2
million included (1) the positive effect of income from discontinued
operations of Principal Residential Mortgage ($110.9 million) and (2) the
negative effects of: (a) a loss from discontinued operations of Argentina
($2.6 million) and (b) a change in the estimated loss on disposal of BT
Financial Group ($1.1 million).
(4)U.S. Asset Management and Accumulation separate account assets include
shares of Principal Financial Group stock allocated to a separate account, a
result of our demutualization. The value of the separate account was $755.7
million at June 30, 2004, and $927.8 million at June 30, 2003. Changes in
fair value of the separate account are reflected in both separate account
assets and separate account liabilities.
(5)As a result of our implementation of FIN 46, effective July 1, 2003,
Mortgage Banking assets include the full consolidation of PRMCR, which
provides a source of funding for our residential mortgage loan production.
PRMCR held $2.3 billion in mortgage loans held for sale as of June 30, 2004,
which are reported as assets of discontinued operations on our consolidated
statements of financial position.
(6)Includes inter-segment elimination amounts related to an internal line of
credit, long-term borrowings, and internally generated mortgage loans. The
Corporate and Other segment managed a revolving line of credit used by other
segments. The U.S. Asset Management and Accumulation segment provides a
54
source of funding for the Mortgage Banking segment's mortgage servicing
rights. The U.S. Asset Management and Accumulation segment and the Life and
Health Insurance segment reported mortgage loan assets issued for real estate
joint ventures. These mortgage loans were reported as liabilities in the
Corporate and Other segment.
U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT
The following table presents certain summary financial data relating to the U.S.
Asset Management and Accumulation segment for the periods indicated:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
(IN MILLIONS)
OPERATING EARNINGS DATA:
Operating revenues(1):
Premiums and other considerations..... $ 77.1 $ 74.4 $ 166.0 $ 188.2
Fees and other revenues............... 255.2 193.5 485.0 378.3
Net investment income................. 574.5 594.1 1,149.1 1,175.4
-------------- ------------- ------------- -------------
Total operating revenues............ 906.8 862.0 1,800.1 1,741.9
Expenses:
Benefits, claims and settlement
expenses, including dividends to
policyholders....................... 504.1 508.6 1,002.7 1,044.2
Operating expenses.................... 241.5 216.9 479.9 439.8
-------------- ------------- ------------- -------------
Total expenses...................... 745.6 725.5 1,482.6 1,484.0
-------------- ------------- ------------- -------------
Pre-tax operating earnings.............. 161.2 136.5 317.5 257.9
Income taxes............................ 39.5 30.8 76.3 57.3
-------------- ------------- ------------- -------------
Operating earnings...................... 121.7 105.7 241.2 200.6
Net realized/unrealized capital losses,
as adjusted .......................... (20.3) (29.0) (57.5) (60.1)
Other after-tax adjustments............. (6.0) 2.5 (5.0) 5.1
-------------- ------------- ------------- -------------
U. S. GAAP REPORTED:
Net income.............................. $ 95.4 $ 79.2 $ 178.7 $ 145.6
============== ============= ============= =============
- --------------------------
(1) Excludes net realized/unrealized capital losses and their impact on
recognition of front-end fee revenues and certain market value adjustments
to fee revenues.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Premiums and other considerations increased $2.7 million, or 4%, to $77.1
million for the three months ended June 30, 2004, from $74.4 million for the
three months ended June 30, 2003. The increase primarily resulted from an $11.9
million increase in pension full-service payout sales of single premium group
annuities with life contingencies, which are typically used to fund defined
benefit plan terminations. The premium income received from these contracts
fluctuates due to the variability in the number and size of pension plan
terminations, the interest rate environment and the ability to attract new
sales. Offsetting this increase was a $9.2 million decrease in individual payout
annuity sales, primarily related to increased competitive pressures.
Fees and other revenues increased $61.7 million, or 32%, to $255.2 million for
the three months ended June 30, 2004, from $193.5 million for the three months
ended June 30, 2003. Pension full-service accumulation fees and other revenue
55
increased $36.5 million primarily due to an increase in fees from our separate
accounts, due to improvements in the equity markets and net cash flow from
customers, which have led to higher account values. In addition, Principal
Global Investors fees and other revenues increased $22.5 million primarily due
to increased management fees stemming from our acquisition of Post Advisory in
third quarter of 2003 and an increase in assets under management.
Net investment income decreased $19.6 million, or 3%, to $574.5 million for the
three months ended June 30, 2004, from $594.1 million for the three months ended
June 30, 2003. The decrease primarily resulted from a decrease in the average
annualized yield on invested assets and cash, which was 5.6% for the three
months ended June 30, 2004, compared to 6.1% for the three months ended June 30,
2003. This reflects lower yields on cash and fixed maturity securities and
commercial mortgages due in part to a lower interest rate environment. The
decrease was partially offset by a $1,840.3 million, or 5%, increase in average
invested assets and cash.
Benefits, claims and settlement expenses, including dividends to policyholders,
decreased $4.5 million, or 1%, to $504.1 million for the three months ended June
30, 2004, from $508.6 million for the three months ended June 30, 2003. The
decrease primarily resulted from an $11.1 decrease in our pension full-service
accumulation business due to lower interest credited on our non-participating
deposit type business. Also contributing to the decrease was a $6.1 million
decrease from individual payout annuity, which resulted largely from the lower
sales of individual payout life annuities. Partially offsetting the overall
decrease was a $12.1 million increase in our pension full-service payout
business as a result of increased sales of single premium group annuities with
life contingencies.
Operating expenses increased $24.6 million, or 11%, to $241.5 million for the
three months ended June 30, 2004, from $216.9 million for the three months ended
June 30, 2003. The increase primarily resulted from an $11.3 million increase in
Principal Global Investors due to our acquisition of Post Advisory in the third
quarter of 2003 and to a lesser extent an increase in investment management
expenses. In addition, pension full-service accumulation expenses increased $6.1
million primarily due to an increase in amortization of DPAC and non-deferrable
expenses. Furthermore, individual fixed annuity expenses increased $5.4 million
primarily due to our growing block of fixed deferred annuity business.
Income taxes increased $8.7 million, or 28%, to $39.5 million for the three
months ended June 30, 2004, from $30.8 million for the three months ended June
30, 2003. The effective income tax rate for this segment was 25% for the three
months ended June 30, 2004, and 23% for the three months ended June 30, 2003.
The effective income tax rates for the three months ended June 30, 2004 and
2003, were lower than the corporate income tax rate of 35% primarily due to
income tax deductions allowed for the corporate dividends received and other
tax-exempt income. The increase in the effective tax rate was primarily due to a
greater increase in pre-tax operating earnings relative to the increase in
permanent tax differences.
As a result of the foregoing factors, operating earnings increased $16.0
million, or 15%, to $121.7 million for the three months ended June 30, 2004 from
$105.7 million for the three months ended June 30, 2003.
Net realized/unrealized capital losses, as adjusted, decreased $8.7 million, or
30%, to $20.3 million for the three months ended June 30, 2004, from $29.0
million for the three months ended June 30, 2003. The decrease is primarily due
to fewer mark to market losses related to hedging activities partially offset by
losses on sales of other fixed maturity securities compared to gains on sale in
2Q 03.
As a result of the foregoing factors and the inclusion of other after-tax
adjustments, net income increased $16.2 million, or 20%, to $95.4 million for
the three months ended June 30, 2004, from $79.2 million for the three months
ended June 30, 2003. For the three months ended June 30, 2004, net income
included the negative effect of other after-tax adjustments totaling $6.0
million related to a loss from discontinued operations associated with the sale
of Principal Residential Mortgage. For the three months ended June 30, 2003, net
income included the positive effect of other after-tax adjustments totaling $2.5
million related to income from discontinued operations associated with the sale
of Principal Residential Mortgage.
56
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Premiums and other considerations decreased $22.2 million, or 12%, to $166.0
million for the six months ended June 30, 2004, from $188.2 million for the six
months ended June 30, 2003. The decrease primarily resulted from a $14.3 million
decrease in individual payout annuity sales, primarily related to increased
competitive pressures. Also contributing to the decrease was a $7.9 million
decrease in pension full-service payout sales of single premium group annuities
with life contingencies, which are typically used to fund defined benefit plan
terminations. The premium income received from these contracts fluctuates due to
the variability in the number and size of pension plan terminations, the
interest rate environment and the ability to attract new sales.
Fees and other revenues increased $106.7 million, or 28%, to $485.0 million for
the six months ended June 30, 2004, from $378.3 million for the six months ended
June 30, 2003. Pension full-service accumulation fees and other revenue
increased $57.6 million primarily due to an increase in fees from our separate
accounts, due to improvements in the equity markets and net cash flow from
customers, which have led to higher account values. In addition, Principal
Global Investors fees and other revenues increased $37.1 million primarily due
to increased management fees stemming from our acquisition of Post Advisory in
third quarter of 2003 and an increase in assets under management.
Net investment income decreased $26.3 million, or 2%, to $1,149.1 million for
the six months ended June 30, 2004, from $1,175.4 million for the six months
ended June 30, 2003. The decrease primarily resulted from a decrease in the
average annualized yield on invested assets and cash, which was 5.7% for the six
months ended June 30, 2004, compared to 6.2% for the six months ended June 30,
2003. This reflects lower yields on fixed maturity securities and commercial
mortgages due in part to a lower interest rate environment. The decrease was
partially offset by a $2,343.6 million, or 6%, increase in average invested
assets and cash.
Benefits, claims and settlement expenses, including dividends to policyholders,
decreased $41.5 million, or 4%, to $1,002.7 million for the six months ended
June 30, 2004, from $1,044.2 million for the six months ended June 30, 2003. The
decrease primarily resulted from a $20.3 million decrease in our pension
full-service accumulation products due to lower interest credited on our
non-participating deposit type business and to a lesser extent due to decreases
in cost of interest credited on declining business from our participating block.
Also contributing to the decrease was a $10.7 million decrease from individual
payout annuity, which resulted largely from the lower sales of individual payout
life annuities. In addition, pension full-service payout decreased $8.7 million
primarily due to decreased sales of single premium group annuities with life
contingencies.
Operating expenses increased $40.1 million, or 9%, to $479.9 million for the six
months ended June 30, 2004, from $439.8 million for the six months ended June
30, 2003. The increase primarily resulted from a $20.1 million increase in
Principal Global Investors due to our acquisition of Post Advisory in the third
quarter of 2003 and to a lesser extent an increase in investment management
expenses. In addition, pension full-service accumulation expenses increased
$12.5 million primarily due to an increase in non-deferrable expenses.
Income taxes increased $19.0 million, or 33%, to $76.3 million for the six
months ended June 30, 2004, from $57.3 million for the six months ended June 30,
2003. The effective income tax rate for this segment was 24% for the six months
ended June 30, 2004, and 22% for the six months ended June 30, 2003. The
effective income tax rates for the six months ended June 30, 2004 and 2003, were
lower than the corporate income tax rate of 35% primarily due to income tax
deductions allowed for the corporate dividends received and other tax-exempt
income. The increase in the effective tax rate was primarily due to a greater
increase in pre-tax operating earnings relative to the increase in permanent tax
differences.
As a result of the foregoing factors, operating earnings increased $40.6
million, or 20%, to $241.2 million for the six months ended June 30, 2004 from
$200.6 million for the six months ended June 30, 2003.
57
Net realized/unrealized capital losses, as adjusted, decreased $2.6 million, or
4%, to $57.5 million for the six months ended June 30, 2004, from $60.1 million
for the six months ended June 30, 2003. The decrease is primarily due to lower
other than temporary declines in the value of certain fixed maturity securities
and fewer mark to market losses related to hedging activities partially offset
by an increase in commercial mortgage losses and losses on sale of fixed
maturity securities compared to gains in 2003.
As a result of the foregoing factors and the inclusion of other after-tax
adjustments, net income increased $33.1 million, or 23%, to $178.7 million for
the six months ended June 30, 2004, from $145.6 million for the six months ended
June 30, 2003. For the six months ended June 30, 2004, net income included the
negative effect of other after-tax adjustments totaling $5.0 million related to:
(1) a loss from discontinued operations associated with the sale of Principal
Residential Mortgage ($3.5 million) and (2) a cumulative effect of accounting
change due to our implementation of SOP 03-1 ($1.5 million). For the six months
ended June 30, 2003, net income included the positive effect of other after-tax
adjustments totaling $5.1 million related to income from discontinued operations
associated with the sale of Principal Residential Mortgage.
INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT
The following table presents certain summary financial data relating to the
International Asset Management and Accumulation segment for the periods
indicated:
58
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ------------------------------
2004 2003 2004 2003
------------- -------------- ------------ -------------
(IN MILLIONS)
OPERATING EARNINGS DATA:
Operating revenues (1):
Premiums and other consideration... $ 52.3 $ 50.6 $ 111.1 $ 80.5
Fees and other revenues............ 21.2 16.9 42.2 30.9
Net investment income.............. 48.8 38.7 82.0 69.3
------------- -------------- ------------ -------------
Total operating revenues......... 122.3 106.2 235.3 180.7
Expenses:
Benefits, claims and settlement
expenses......................... 84.0 72.4 158.3 119.3
Operating expenses................ 26.2 20.8 51.7 40.3
------------- -------------- ------------ -------------
Total expenses................ 110.2 93.2 210.0 159.6
------------- -------------- ------------ -------------
Pre-tax operating earnings........... 12.1 13.0 25.3 21.1
Income taxes......................... 2.8 1.1 7.4 2.6
------------- -------------- ------------ -------------
Operating earnings................... 9.3 11.9 17.9 18.5
Net realized/unrealized capital gains
(losses), as adjusted............ 0.2 (0.5) 4.0 (3.9)
Other after-tax adjustments.......... 0.3 (2.0) (3.1) (3.7)
------------- -------------- ------------ -------------
U.S. GAAP REPORTED:
Net income........................... $ 9.8 $ 9.4 $ 18.8 $ 10.9
============= ============== ============ =============
OTHER DATA:
Operating earnings:
Principal International........... $ 9.3 $ 11.9 $ 17.9 $ 18.5
BT Financial Group................ - - - -
Net income (loss):
Principal International.......... $ 9.8 $ 9.8 $ 18.8 $ 12.0
BT Financial Group............... - (0.4) - (1.1)
- ----------------------------
(1) Excludes net realized/unrealized capital gains (losses).
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Premiums and other considerations increased $1.7 million, or 3%, to $52.3
million for the three months ended June 30, 2004, from $50.6 million for the
three months ended June 30, 2003. An increase of $4.8 million in Mexico was
primarily due to additional premiums on single premium annuities with life
contingencies. Partially offsetting this increase was a decrease of $3.2 million
in Chile primarily a result of lower sales of single premium annuities with life
contingencies, offset partially by the strengthening of the Chilean peso versus
the U.S. dollar.
Fees and other revenues increased $4.3 million, or 25%, to $21.2 million for the
three months ended June 30, 2004, from $16.9 million for the three months ended
June 30, 2003. An increase of $1.8 million in Hong Kong was primarily a result
of an increase in assets under management due to the acquisition of Dao Heng
Fund Management in 2004. An increase of $1.6 million in India was primarily a
result of accounting for Principal PNB Asset Management Company using the full
consolidation method of accounting due to our majority ownership beginning third
quarter 2003; prior to third quarter 2003, results were reported using equity
method of accounting. In addition, an increase of $1.2 million in Mexico was
59
primarily due to the acquisition of Principal Genera, S.A. de C.V., Operadora de
Fondos de Inversion ("Genera") in July 2003.
Net investment income increased $10.1 million, or 26%, to $48.8 million for the
three months ended June 30, 2004, from $38.7 million for the three months ended
June 30, 2003. The increase was primarily due to a $433.1 million, or 28%,
increase in average invested assets and cash, excluding our equity investment in
subsidiaries. The increase was partially offset by a decrease in investment
yields. The annualized yield on average invested assets and cash, excluding our
equity investment in subsidiaries, was 9.3% for the three months ended June 30,
2004, compared to 9.6% for the three months ended June 30, 2003.
Benefits, claims and settlement expenses increased $11.6 million, or 16%, to
$84.0 million for the three months ended June 30, 2004, from $72.4 million for
the three months ended June 30, 2003. An increase of $7.3 million in Chile was
primarily a result of the strengthening of the Chilean peso versus the U.S.
dollar, offset partially by decreased reserve expenses due to lower sales of
single premium annuities with life contingencies. In addition, an increase of
$4.4 million in Mexico was primarily a result of higher reserve expenses due to
additional premiums on single premium annuities with life contingencies.
Operating expenses increased $5.4 million, or 26%, to $26.2 million for the
three months ended June 30, 2004, from $20.8 million for the three months ended
June 30, 2003. An increase of $2.6 million in Mexico was partially due to the
acquisition of Genera in 2003. An increase of $1.4 million in India was
primarily a result of accounting for Principal PNB Asset Management Company
using the full consolidation method of accounting due to our majority ownership
beginning third quarter 2003; prior to third quarter 2003, results were reported
using equity method of accounting. In addition, an increase of $1.1 million in
Hong Kong was primarily a result of increased marketing efforts and higher
investment management expense caused by an increase in assets under management
due to the acquisition of Dao Heng Fund Management in 2004.
Income taxes increased $1.7 million to $2.8 million for the three months ended
June 30, 2004, from $1.1 million for the three months ended June 30, 2003. The
increase was partially a result of an increase in deferred taxes related to a
Brazilian equity method investment, coupled with a tax benefit in Mexico that
was received in 2003.
As a result of the foregoing factors, operating earnings decreased $2.6 million,
or 22%, to $9.3 million for the three months ended June 30, 2004, from $11.9
million for the three months ended June 30, 2003.
Net realized/unrealized capital gains, as adjusted, increased $0.7 million to
$0.2 million of net realized/unrealized capital gains for the three months ended
June 30, 2004, from $0.5 million of net realized/unrealized capital losses for
the three months ended June 30, 2003. An increase of $2.6 million in Hong Kong
was primarily due to a change in the fair value of embedded derivatives.
Partially offsetting this increase was a decrease of $1.9 million in Chile
primarily due to losses realized on the sale of fixed maturity securities.
As a result of the foregoing factors and the inclusion of other after-tax
adjustments, net income increased $0.4 million, or 4%, to $9.8 million for the
three months ended June 30, 2004, from $9.4 million for the three months ended
June 30, 2003. For the three months ended June 30, 2004, net income included the
positive effect of other after-tax adjustments totaling $0.3 million related to
income from discontinued operations of Argentina. For the three months ended
June 30, 2003, net income included the negative effect of other after-tax
adjustments totaling $2.0 million, related to: (1) the loss from discontinued
operations of Argentina ($1.6 million) and (2) the change in the estimated loss
on disposal of BT Financial Group ($0.4 million).
60
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Premiums and other considerations increased $30.6 million, or 38%, to $111.1
million for the six months ended June 30, 2004, from $80.5 million for the six
months ended June 30, 2003. An increase of $27.0 million in Chile was primarily
a result of the strengthening of the Chilean peso versus the U.S. dollar and
record sales of single premium annuities with life contingencies in 2004
following a year of decreased sales due to market contraction.
Fees and other revenues increased $11.3 million, or 37%, to $42.2 million for
the six months ended June 30, 2004, from $30.9 million for the six months ended
June 30, 2003. An increase of $4.1 million in Mexico was primarily a result of
an increase in the number of retirement plan participants due to the acquisition
of AFORE Tepeyac in February 2003 and the acquisition of Genera in July 2003. An
increase of $4.0 million in Hong Kong was primarily a result of an increase in
assets under management due to the acquisition of Dao Heng Fund Management in
2004. In addition, an increase of $2.7 million in India was primarily a result
of accounting for Principal PNB Asset Management Company using the full
consolidation method of accounting due to our majority ownership beginning third
quarter 2003; prior to third quarter 2003, results were reported using equity
method of accounting.
Net investment income increased $12.7 million, or 18%, to $82.0 million for the
six months ended June 30, 2004, from $69.3 million for the six months ended June
30, 2003. The increase was primarily due to a $433.1 million, or 28%, increase
in average invested assets and cash, excluding our equity investment in
subsidiaries. The increase was partially offset by a decrease in investment
yields. The annualized yield on average invested assets and cash, excluding our
equity investment in subsidiaries, was 7.5% for the six months ended June 30,
2004, compared to 8.6% for the six months ended June 30, 2003.
Benefits, claims and settlement expenses increased $39.0 million, or 33%, to
$158.3 million for the six months ended June 30, 2004, from $119.3 million for
the six months ended June 30, 2003. An increase of $32.8 million in Chile was
primarily a result of the strengthening of the Chilean peso versus the U.S.
dollar and higher reserve expenses due to record sales of single premium
annuities with life contingencies in 2004 following a year of decreased sales
due to market contraction.
Operating expenses increased $11.4 million, or 28%, to $51.7 million for the six
months ended June 30, 2004, from $40.3 million for the six months ended June 30,
2003. An increase of $3.6 million in Mexico was primarily due to the acquisition
of Genera in 2003. An increase of $3.2 million in Chile was primarily due to
non-deferrable commissions on record sales of single premium annuities with life
contingencies and the strengthening of the Chilean peso versus the U.S. dollar.
An increase of $2.1 million in Hong Kong was primarily a result of increased
marketing efforts and higher investment management fees caused by an increase in
assets under management due to the acquisition of Dao Heng Fund Management in
2004. In addition, an increase of $2.1 million in India was primarily a result
of accounting for Principal PNB Asset Management Company using the full
consolidation method of accounting due to our majority ownership beginning third
quarter 2003; prior to third quarter 2003, results were reported using equity
method of accounting.
Income taxes increased $4.8 million to $7.4 million for the six months ended
June 30, 2004, from $2.6 million for the six months ended June 30, 2003. The
increase was primarily a result of an increase in deferred taxes related to our
Brazilian equity method investment.
As a result of the foregoing factors, operating earnings decreased $0.6 million,
or 3%, to $17.9 million for the six months ended June 30, 2004, from $18.5
million for the six months ended June 30, 2003.
Net realized/unrealized capital gains, as adjusted, increased $7.9 million to
$4.0 million of net realized/unrealized capital gains for the six months ended
June 30, 2004, from $3.9 million of net realized/unrealized capital losses for
the six months ended June 30, 2003. An increase of $7.2 million in Hong Kong was
primarily due to a change in the fair value of embedded derivatives.
61
As a result of the foregoing factors and the inclusion of other after-tax
adjustments, net income increased $7.9 million, or 72%, to $18.8 million for the
six months ended June 30, 2004, from $10.9 million for the six months ended June
30, 2003. For the six months ended June 30, 2004, net income included the effect
of other after-tax adjustments totaling $3.1 million, related to: (1) the
negative effect of cumulative effect of an accounting change related to the
implementation of SOP 03-1 ($3.3 million) and (2) the positive effect of income
from discontinued operations of Argentina ($0.2 million). For the six months
ended June 30, 2003, net income included the negative effect of other after-tax
adjustments totaling $3.7 million, related to: (1) the loss from discontinued
operations of Argentina ($2.6 million) and (2) the change in the estimated loss
on disposal of BT Financial Group ($1.1 million).
LIFE AND HEALTH INSURANCE SEGMENT
Beginning January 1, 2004, we strategically realigned products and services of
the Life and Health segment to better reflect how we manage our business. The
new divisions of the Life and Health segment are individual life insurance,
health insurance and specialty benefits. Our individual life insurance products
include universal and variable universal life insurance and traditional life
insurance. Our health insurance products include group medical insurance and
fee-for-service. Our specialty benefit products include group dental and vision
insurance, individual and group disability insurance, and group life insurance.
The following table presents certain summary financial data relating to the Life
and Health Insurance segment for the periods indicated:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------ ------------
(IN MILLIONS)
OPERATING EARNINGS DATA:
Operating Revenues(1):
Premiums and other considerations........ $ 763.2 $ 750.7 $ 1,535.9 $ 1,511.7
Fees and other revenues.................. 103.2 83.6 200.8 168.0
Net investment income.................... 164.3 167.5 329.3 334.4
-------------- ------------- ------------ ------------
Total operating revenues.............. 1,030.7 1,001.8 2,066.0 2,014.1
Expenses:
Benefits, claims and settlement expenses. 636.5 604.7 1,252.6 1,222.5
Dividends to policyholders............... 73.1 74.6 145.1 150.1
Operating expenses....................... 236.0 227.3 469.6 457.4
-------------- ------------- ------------ ------------
Total expenses........................ 945.6 906.6 1,867.3 1,830.0
-------------- ------------- ------------ ------------
Pre-tax operating earnings................. 85.1 95.2 198.7 184.1
Income taxes............................... 28.2 32.3 67.0 62.1
-------------- ------------- ------------ ------------
Operating earnings......................... 56.9 62.9 131.7 122.0
Net realized/unrealized capital losses, as
adjusted................................. (5.9) (1.1) (7.8) (10.4)
Other after-tax adjustments................ - - (0.9) -
-------------- ------------- ------------ ------------
U.S. GAAP REPORTED:
Net income................................. $ 51.0 $ 61.8 $ 123.0 $ 111.6
============== ============= ============ ============
- -----------
(1) Excludes net realized/unrealized capital gains (losses).
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Premiums and other considerations increased $12.5 million, or 2%, to $763.2
million for the three months ended June 30, 2004, from $750.7 million for the
three months ended June 30, 2003. Specialty benefits insurance premiums
62
increased $21.3 million primarily due to growth in the business. In addition,
health insurance premiums increased $2.3 million, primarily due to rate increase
partially offset by a decrease in average covered medical members and the
establishment of a premium refund accrual for pending litigation related to a
business exited in the 1990's. Partially offsetting these increases was a
decrease of $11.1 million in individual life insurance premiums, primarily a
result of the continued shift of customer preference from traditional life
insurance products to fee-based universal and variable universal life insurance
products.
Fees and other revenues increased $19.6 million, or 23%, to $103.2 million for
the three months ended June 30, 2004, from $83.6 million for the three months
ended June 30, 2003. Fee revenues from our individual life insurance business
increased $11.0 million, primarily due to the continued shift in customer
preference to fee-based universal and variable universal life insurance
products. Fee revenues from our health insurance business increased $9.0
million, primarily a result of the acquisition of the Molloy Companies effective
January 2, 2004.
Net investment income decreased $3.2 million, or 2%, to $164.3 million for the
three months ended June 30, 2004, from $167.5 million for the three months ended
June 30, 2003. The decrease primarily relates to a decrease in the average
annualized yield on invested assets and cash, which was 6.5% for the three
months ended June 30, 2004, compared to 6.8% for the three months ended June 30,
2003. This reflects lower yields on invested assets due in part to a lower
interest rate environment. The decrease was partially offset by a $361.0
million, or 4%, increase in average invested assets and cash for the segment.
Benefits, claims and settlement expenses increased $31.8 million, or 5%, to
$636.5 million for the three months ended June 30, 2004, from $604.7 million for
the three months ended June 30, 2003. Health insurance benefits, claims and
settlement expenses increased $19.7 million, primarily due to reserve
refinements and increased claim costs per member. Specialty benefit insurance
benefits, claims and settlement expenses increased $15.6 million, primarily due
to growth in the business.
Dividends to policyholders decreased $1.5 million, or 2%, to $73.1 million for
the three months ended June 30, 2004, from $74.6 million for the three months
ended June 30, 2003. The decrease is primarily related to a decrease in the
individual life insurance dividend crediting rates resulting from a declining
interest rate environment.
Operating expenses increased $8.7 million, or 4%, to $236.0 million for the
three months ended June 30, 2004, from $227.3 million for the three months ended
June 30, 2003. Health insurance operating expenses increased $5.3 million,
primarily a result of the acquisition of the Molloy Companies partially offset
by a reduction in salary and benefit related expenses. Specialty benefits
operating expenses increased $4.5 million primarily resulting from increased
non-deferrable production related expenses due to growth in the business and
from increased DPAC amortization.
Income taxes decreased $4.1 million, or 13%, to $28.2 million for the three
months ended June 30, 2004, from $32.3 million for the three months ended June
30, 2003. The effective income tax rate for the segment was 33% for the three
months ended June 30, 2004 and 34% for the three months ended June 30, 2003. The
effective income tax rates for the three months ended June 30, 2004 and 2003
were lower than the corporate income tax rate of 35% primarily due to tax-exempt
income.
As a result of the foregoing factors, operating earnings decreased $6.0 million,
or 10%, to $56.9 million for the three months ended June 30, 2004, from $62.9
million for the three months ended June 30, 2003.
Net realized/unrealized capital losses, as adjusted, increased $4.8 million to
$5.9 million for the three months ended June 30, 2004, from $1.1 million for the
three months ended June 30, 2003. The increase is primarily the result of higher
capital losses on other than temporary declines in the value of certain fixed
maturity securities.
As a result of the foregoing factors, net income decreased $10.8 million, or
17%, to $51.0 million for the three months ended June 30, 2004, from $61.8
million for the three months ended June 30, 2003.
63
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Premiums and other considerations increased $24.2 million, or 2%, to $1,535.9
million for the six months ended June 30, 2004, from $1,511.7 million for the
six months ended June 30, 2003. Specialty benefits insurance premiums increased
$41.5 million primarily due to growth in the business. In addition, health
insurance premiums increased $3.6 million, primarily due to rate increase
partially offset by a decrease in average covered medical members and the
establishment of a premium refund accrual for pending litigation related to a
business exited in the 1990's. Partially offsetting these increases was a
decrease of $20.9 million in individual life insurance premiums, primarily a
result of the continued shift of customer preference from traditional life
insurance products to fee-based universal and variable universal life insurance
products.
Fees and other revenues increased $32.8 million, or 20%, to $200.8 million for
the six months ended June 30, 2004, from $168.0 million for the six months ended
June 30, 2003. Fee revenues from our health insurance business increased $17.0
million, primarily a result of the acquisition of the Molloy Companies effective
January 2, 2004. Fee revenues from our individual life insurance business
increased $15.6 million, primarily due to the continued shift in customer
preference to fee-based universal and variable universal life insurance
products.
Net investment income decreased $5.1 million, or 2%, to $329.3 million for the
six months ended June 30, 2004, from $334.4 million for the six months ended
June 30, 2003. The decrease primarily relates to a decrease in the average
annualized yield on invested assets and cash, which was 6.6% for the six months
ended June 30, 2004, compared to 6.9% for the six months ended June 30, 2003.
This reflects lower yields on invested assets due in part to a lower interest
rate environment. The decrease was partially offset by a $287.5 million, or 3%,
increase in average invested assets and cash for the segment.
Benefits, claims and settlement expenses increased $30.1 million, or 2%, to
$1,252.6 million for the six months ended June 30, 2004, from $1,222.5 million
for the six months ended June 30, 2003. Specialty benefit insurance benefits,
claims and settlement expenses increased $25.4 million, primarily due to growth
in the business. Health insurance benefits, claims and settlement expenses
increased $17.2 million, primarily due to reserve refinements and increased
claim costs per member. Partially offsetting these increases was a $12.5 million
decrease in the individual life insurance benefits, claims and settlement
expenses, primarily due to the impact of decreased premium and lower death
claims.
Dividends to policyholders decreased $5.0 million, or 3%, to $145.1 million for
the six months ended June 30, 2004, from $150.1 million for the six months ended
June 30, 2003. The decrease is primarily related to a decrease in the individual
life insurance dividend crediting rates resulting from a declining interest rate
environment.
Operating expenses increased $12.2 million, or 3%, to $469.6 million for the six
months ended June 30, 2004, from $457.4 million for the six months ended June
30, 2003. Health insurance operating expenses increased $9.7 million, primarily
a result of the acquisition of the Molloy Companies partially offset by a
decrease in premium tax related expenses and lower salary and benefit related
expenses. Specialty benefits operating expenses increased $9.1 million primarily
resulting from increased non-deferrable production related expenses due to
growth in the business and increased DPAC amortization. Individual life
insurance operating expenses decreased $6.6 million primarily due to lower DPAC
amortization resulting from the impact of updating the mortality assumptions in
the DPAC models for universal life and variable universal life insurance
products.
Income taxes increased $4.9 million, or 8%, to $67.0 million for the six months
ended June 30, 2004, from $62.1 million for the six months ended June 30, 2003.
The effective income tax rate for the segment was 34% for the six months ended
June 30, 2004 and 2003. The effective income tax rates for the six months ended
June 30, 2004 and 2003 were lower than the corporate income tax rate of 35%
primarily due to tax-exempt income.
64
As a result of the foregoing factors, operating earnings increased $9.7 million,
or 8%, to $131.7 million for the six months ended June 30, 2004, from $122.0
million for the six months ended June 30, 2003.
Net realized/unrealized capital losses, as adjusted, decreased $2.6 million, or
25%, to $7.8 million for the six months ended June 30, 2004, from $10.4 million
for the six months ended June 30, 2003. The decrease is primarily the result of
lower capital losses on other than temporary declines in the value of certain
fixed maturity securities.
As a result of the foregoing factors and the inclusion of other after-tax
adjustments, net income increased $11.4 million, or 10%, to $123.0 million for
the six months ended June 30, 2004, from $111.6 million for the six months ended
June 30, 2003. For the six months ended June 30, 2004, net income included the
negative effect of other after-tax adjustments totaling $0.9 million, due to a
cumulative effect of accounting change, a result of our implementation of SOP
03-1.
MORTGAGE BANKING SEGMENT
The following table presents certain summary financial data relating to the
Mortgage Banking segment for the periods indicated:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -----------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
(IN MILLIONS)
OPERATING EARNINGS DATA:
Operating Revenues:
Total operating revenues.................. $ - $ - $ - $ -
Expenses:
Total expenses............................ 8.8 7.4 16.7 13.7
----------- ----------- ------------ ------------
Pre-tax operating loss...................... (8.8) (7.4) (16.7) (13.7)
Income tax benefits......................... (3.4) (2.9) (6.4) (5.3)
----------- ----------- ------------ ------------
Operating loss.............................. (5.4) (4.5) (10.3) (8.4)
Net realized/unrealized capital losses,
as adjusted .............................. - - - -
Other after-tax adjustments................. (3.5) 49.6 30.0 105.8
------------ ----------- ------------ ------------
U. S. GAAP REPORTED:
Net income (loss)........................... $(8.9) $ 45.1 $19.7 $ 97.4
============ =========== ============ ============
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Total expenses represent corporate overhead allocated to the Mortgage Banking
segment and do not qualify for discontinued operations treatment.
Income tax benefits increased $0.5 million, or 17%, to $3.4 million for the
three months ended June 30, 2004, from $2.9 million for the three months ended
June 30, 2003. The increase is due to the increase in corporate overhead
allocated to the Mortgage Banking segment.
As a result of the foregoing factors, operating loss increased $0.9 million, or
20%, to $5.4 million for the three months ended June 30, 2004, from $4.5 million
for the three months ended June 30, 2003.
65
Net loss increased $54.0 million to $8.9 million of net loss for the three
months ended June 30, 2004, from $45.1 million of net income for the three
months ended June 30, 2003. Residential mortgage loan production net loss
increased $142.2 million, which was primarily due to a decrease in mortgage loan
production to $9.7 billion for the three months ended June 30, 2004, from $17.1
billion for the same period a year ago. The net loss increase was also due to
smaller margins. Partially offsetting the overall increase in net loss was a
$94.3 million increase in net income from residential mortgage loan servicing.
The increase was primarily due to a $160.7 million pre-tax decrease in the loss
from mortgage servicing rights valuation adjustments net of hedge activity.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Total expenses represent corporate overhead allocated to the Mortgage Banking
segment and do not qualify for discontinued operations treatment.
Income tax benefits increased $1.1 million, or 21%, to $6.4 million for the six
months ended June 30, 2004, from $5.3 million for the six months ended June 30,
2003. The increase is due to the increase in corporate overhead allocated to the
Mortgage Banking segment.
As a result of the foregoing factors, operating loss increased $1.9 million, or
23%, to $10.3 million for the six months ended June 30, 2004, from $8.4 million
for the six months ended June 30, 2003.
Net income decreased $77.7 million, or 80%, to $19.7 million for the six months
ended June 30, 2004, from $97.4 million for the six months ended June 30, 2003.
Residential mortgage loan production net income decreased $228.2 million, which
was primarily due to a decrease in mortgage loan production to $16.5 billion for
the six months ended June 30, 2004, from $32.6 billion for the same period a
year ago. Net income also decreased due to smaller margins. Partially offsetting
the overall decrease was a $156.5 million increase in net income from
residential mortgage loan servicing. The increase was primarily due to a $216.6
million pre-tax decrease in the loss from mortgage servicing rights valuation
adjustments net of hedge activity.
CORPORATE AND OTHER SEGMENT
The following table presents certain summary financial data relating to the
Corporate and Other segment for the periods indicated:
66
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------- ----------- ------------
(IN MILLIONS)
OPERATING EARNINGS DATA:
Operating Revenues (1):
Total operating revenues...................... $ (11.9) $ (2.0) $ (10.3) $ 1.0
Expenses:
Total expenses................................ 7.6 14.8 30.1 24.8
------------ ------------- ------------ ------------
Pre-tax operating loss.......................... (19.5) (16.8) (40.4) (23.8)
Income taxes benefits........................... (10.4) (6.4) (19.8) (8.4)
------------ ------------- ------------ ------------
Operating loss.................................. (9.1) (10.4) (20.6) (15.4)
Net realized/unrealized capital gains (losses),
as adjusted................................... (18.5) 17.1 (6.3) 7.8
Other after-tax adjustments..................... - - - -
------------ ------------- ------------ ------------
U.S. GAAP REPORTED:
Net income (loss)............................... $ (27.6) $ 6.7 $ (26.9) $ (7.6)
============ ============= ============ ============
- ------------
(1) Excludes net realized/unrealized capital gains (losses).
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Total operating revenues decreased $9.9 million to a negative $11.9 million for
the three months ended June 30, 2004, from a negative $2.0 million for the three
months ended June 30, 2003. Net investment income decreased $7.8 million,
primarily due to a decrease in average annualized investment yields for the
segment. The decrease in total revenues was also partially due to a $2.2 million
increase in inter-segment eliminations included in this segment, which was
offset by a corresponding change in total expenses.
Total expenses decreased $7.2 million, or 49%, to $7.6 million for the three
months ended June 30, 2004, from $14.8 million for the three months ended June
30, 2003. A decrease of $3.9 million in interest expense was due to the March
2004 redemption of our surplus notes due 2024. Inter-segment eliminations
included in this segment increased $2.2 million, resulting in a decrease in
total expenses.
Income tax benefits increased $4.0 million, or 63%, to $10.4 million for the
three months ended June 30, 2004, from $6.4 million for the three months ended
June 30, 2003. The increase was partially a result of tax credits received on
our investment in a synthetic fuel production facility as well as an increase in
pre-tax operating loss.
As a result of the foregoing factors, operating loss decreased $1.3 million, or
13%, to $9.1 million for the three months ended June 30, 2004, from $10.4
million for the three months ended June 30, 2003.
Net realized/unrealized capital losses, as adjusted, increased $35.6 million to
$18.5 million of net realized/unrealized capital losses for the three months
ended June 30, 2004, from $17.1 million of net realized/unrealized capital gains
for the three months ended June 30, 2003. The increase was primarily due to the
mark to market of certain seed money investments and the realized capital loss
related to the sale of a foreign investment. This increase was partially offset
by higher other than temporary impairments recognized in 2003 compared to 2004.
As a result of the foregoing factors, net loss increased $34.3 million to $27.6
million of net loss for the three months ended June 30, 2004, from $6.7 million
of net income for the three months ended June 30, 2003.
67
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Total operating revenues decreased $11.3 million to a negative $10.3 million for
the six months ended June 30, 2004, from a positive $1.0 million for the six
months ended June 30, 2003. Net investment income decreased $9.8 million,
primarily due to a decrease in average annualized investment yields for the
segment.
Total expenses increased $5.3 million, or 21%, to $30.1 million for the six
months ended June 30, 2004, from $24.8 million for the six months ended June 30,
2003. An increase of $7.2 million related to a prepayment penalty recognized on
redemption of our surplus notes due 2024. The increase was partially offset by a
decrease of $4.3 million in interest expense from the redemption of our surplus
notes.
Income tax benefits increased $11.4 million to $19.8 million for the six months
ended June 30, 2004, from $8.4 million for the six months ended June 30, 2003.
The increase was primarily a result of an increase in pre-tax operating loss as
well as a tax benefit associated with the sale of a foreign investment.
As a result of the foregoing factors, operating loss increased $5.2 million, or
34%, to $20.6 million for the six months ended June 30, 2004, from $15.4 million
for the six months ended June 30, 2003.
Net realized/unrealized capital losses, as adjusted, increased $14.1 million to
$6.3 million of net realized/unrealized capital losses for the six months ended
June 30, 2004, from $7.8 million of net realized/unrealized capital gains for
the six months ended June 30, 2003. The increase was primarily due to mark to
market of certain seed money investments and the realized capital loss related
to the sale of foreign investments. The increases were partially offset by gains
on sales of invested assets in 2004 and other than temporary impairments
recognized in 2003.
As a result of the foregoing factors, net loss increased $19.3 million to $26.9
million for the six months ended June 30, 2004, from $7.6 million for the six
months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our legal entity organizational structure has an impact on our ability to meet
cash flow needs as an organization. Following is a simplified organizational
structure as of June 30, 2004.
Principal Financial Group, Inc.
|
Principal Financial Services, Inc.
| | |
Principal Life Principal International Other
Insurance Company Entities Subsidiaries
| |
Principal Other
Residential Subsidiaries
Mortgage, Inc.
* Discontinued Operation
SOURCES AND USES OF CASH OF CONSOLIDATED OPERATIONS
Net cash provided by operating activities was $992.8 million and $1,858.8
million for the six months ended June 30, 2004 and 2003, respectively. The
decrease in cash provided by our continuing operations between periods primarily
related to increases in intercompany borrowings between our Corporate segment
and a discontinued segment. These intercompany borrowings were settled on July
1, 2004, in addition to the settlement of all other intercompany arrangements
and sales proceeds received as a result of the sale of Principal Residential
68
Mortgage to CitiMortgage Inc. Also contributing to the reduction in cash
provided by operating activities was an increase in cash paid for benefits,
claims and settlement expense.
Net cash used in investing activities was $1,179.2 million and $2,229.6 million
for the six months ended June 30, 2004 and 2003, respectively. The decrease in
cash used in investing activities between periods was primarily related to an
increase in the net sales and maturities of available-for-sale securities,
mortgage loans and real estate. This was slightly offset by an increase in cash
used to purchase subsidiaries as well as a decrease in proceeds received from
the sale of subsidiaries. On May 11, 2004, we entered into a definitive
agreement for the sale of Principal Residential Mortgage to CitiMortgage Inc.,
which was finalized on July 1, 2004. Excluding the net inflows resulting from
the settlement of intercompany accounts and borrowings, the after tax proceeds
from this transaction are expected to be approximately $630.0 million, subject
to post closing adjustments. We plan to use proceeds from the transaction
primarily for organic growth of our core business, strategic acquisitions, and
share repurchase.
Net cash provided by financing activities was $469.8 million and $834.5 million
for the six months ended June 30, 2004, respectively. The decrease in net cash
provided by financing activities was primarily due to the redemption of a
surplus note in 2004 as well as a decrease in net deposits of investment
contracts and bank deposits. These items were slightly offset by a decline in
treasury stock acquired.
Given the historical cash flow of our subsidiaries and the financial results of
these subsidiaries, we believe the cash flow from our consolidated operating
activities over the next year will provide sufficient liquidity for our
operations, as well as satisfy interest payments and any payments related to
debt servicing.
Although we generate adequate cash flow to meet the needs of our normal
operations, periodically the need may arise to issue debt to fund internal
expansion, acquisitions, investment opportunities and retirement of existing
debt and equity. In December 2003, we filed a shelf registration statement with
the Securities and Exchange Commission, which became effective on June 30, 2004.
The shelf registration totals $3.0 billion, with the ability to issue debt
securities, preferred stock, common stock, warrants, stock purchase contracts
and stock purchase units of Principal Financial Group, Inc ("PFG") and trust
preferred securities of three subsidiary trusts. If we issue securities, we
intend to use the proceeds from the sale of the securities offered by this
prospectus, including the corresponding junior subordinated debentures issued to
the trusts in connection with their investment of all the proceeds from the sale
of preferred securities, for general corporate purposes, including working
capital, capital expenditures, investments in subsidiaries, acquisitions and
refinancing of debt, including commercial paper and other short-term
indebtedness. Principal Financial Services, Inc. ("PFSI") unconditionally
guarantees our obligations with respect to one or more series of debt securities
described in the shelf registration statement. As of June 30, 2004, no amounts
have been issued under our shelf registration.
DIVIDENDS FROM PRINCIPAL LIFE
The payment of stockholder dividends by Principal Life to its parent company is
limited by Iowa laws. Under Iowa laws, Principal Life may pay dividends only
from the earned surplus arising from its business and must receive the prior
approval of the Insurance Commissioner of the State of Iowa ("the Commissioner")
to pay a stockholder dividend if such a stockholder dividend would exceed
certain statutory limitations. The current statutory limitation is the greater
of:
o 10% of Principal Life's statutory policyholder surplus as of the previous
year-end; or
o the statutory net gain from operations from the previous calendar year.
Iowa law gives the Commissioner discretion to disapprove requests for dividends
in excess of these limits. Based on this limitation and 2003 statutory results,
Principal Life could pay approximately $701.2 million in stockholder dividends
in 2004 without exceeding the statutory limitation.
On May 19, 2004, Principal Life declared a dividend of up to $1.2 billion. Total
stockholder dividends paid by Principal Life to its parent company through June
30, 2004 were $494.0 million.
On March 1, 2004, Principal Life redeemed $200.0 million of its surplus notes at
a cost of $207.2 million. Principal Life and the Commissioner have agreed that
this $207.2 million will be applied against Principal Life's 2004 ordinary
69
dividend capacity. As a result, Principal Life may not pay an additional
ordinary dividend in 2004. Principal Life has requested and received permission
from the Commissioner to pay an extraordinary dividend of $700.0 million,$600.0
million of which was accrued as of June 30,2004.
COMMON STOCK ISSUED AND TREASURY STOCK ACQUIRED
In the last two years, our board of directors has authorized various repurchase
programs under which we are allowed to purchase shares of our outstanding common
stock. Shares repurchased under these programs are accounted for as treasury
stock, carried at cost and reflected as a reduction to stockholders' equity.
In May 2004, our board of directors authorized a repurchase program of up to
$700.0 million of our outstanding common stock. This program began after the
completion of the May 2003 repurchase program, which authorized the repurchase
of up to $300.0 million of our outstanding common stock. We acquired 6.3 million
shares in the open market at an aggregate cost of $222.0 million during the six
months ended June 30, 2004. As of June 30, 2004, $625.0 million remains
outstanding under the May 2004 share repurchase authorization.
INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION OPERATIONS
Prior to 2004, we have received approximately U.S. $890.0 million of total
proceeds from our sale of substantially all of BT Financial Group to Westpac.
This amount includes cash proceeds from Westpac, expected tax benefits, and a
gain from unwinding the hedged asset associated with our investment in BT
Financial Group. An additional future contingent receipt of approximately U.S.
$105.0 million may be received in 2004, if Westpac experiences growth in their
retail assets under management. We do not anticipate receiving the contingent
proceeds.
Our Brazilian, Chilean and Mexican operations produced positive cash flow from
operations for the six months ended June 30, 2004 and 2003. These cash flows
have been historically maintained at the local country level for strategic
expansion purposes and local capital requirements. In March 2004, our Brazilian
operations returned $8.2 million and in May 2004 our Indian operations returned
$7.5 million in the form of dividends to our subsidiary, Principal Financial
Services, Inc. Our international operations have required infusions of capital
of $4.2 million for the six months ended June 30, 2004, and $76.8 million for
the six months ended June 30, 2003, primarily to fund acquisitions and to a
lesser extent, to meet the cash outflow and capital requirements of certain
operations. Our capital funding of these operations is consistent with our
long-term strategy to establish viable companies that can sustain future growth
from internally generated sources.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is a measure of our ability to cover
fixed costs with current period earnings. A high ratio indicates that earnings
are sufficiently covering committed expenses. The following table sets forth,
for the years indicated, our ratios of:
o earnings to fixed charges before interest credited on investment products;
and
o earnings to fixed charges.
We calculate the ratio of "earnings to fixed charges before interest credited on
investment products" by dividing the sum of income from continuing operations
before income taxes (BT), interest expense (I), interest factor of rental
expense (IF) less undistributed income from equity investees (E) by the sum of
interest expense (I), interest factor of rental expense (IF) and dividends on
majority-owned subsidiary redeemable preferred securities (non-intercompany)
(D). The formula for this ratio is: (BT+I+IF-E)/(I+IF+D).
70
We calculate the ratio of "earnings to fixed charges" by dividing the sum of
income from continuing operations before income taxes (BT), interest expense
(I), interest factor of rental expense (IF) less undistributed income from
equity investees (E) and the addition of interest credited on investment
products (IC) by interest expense (I), interest factor of rental expense (IF),
dividends on majority-owned subsidiary redeemable preferred securities
(non-intercompany) (D) and interest credited on investment products (IC). The
formula for this calculation is: (BT+I+IF-E+IC)/(I+IF+D+IC). "Interest credited
on investment products" includes interest paid on guaranteed investment
contracts, funding agreements and other investment-only pension products.
Similar to debt, these products have a total fixed return and a fixed maturity
date.
As previously explained, the results of operations of Principal Residential
Mortgage and Argentina are accounted for as discontinued operations and
therefore, their results of operations have been removed from our results of
continuing operations for all periods presented. The reclassifications to
discontinued operations have impacted our ratio of earnings to fixed charges,
thus we have presented our reclassified ratio of earnings to fixed charges in
the following table:
FOR THE SIX
MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ----------------------------
2004 2003 2003 2002 2001
------ -------- ------- ------ -------
Ratio of earnings to fixed charges before interest
credited on investment products.................... 7.7 6.8 8.3 4.5 3.2
Ratio of earnings to fixed charges................... 1.9 1.8 2.0 1.4 1.3
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As of June 30, 2004, we had $1,069.7 million of long-term debt outstanding
compared to $1,374.3 million at December 31, 2003. On March 10, 1994, our
subsidiary, Principal Life issued $300.0 million of surplus notes, including
$200.0 million due March 1, 2024, at a 7.875% annual interest rate and the
remaining $100.0 million due March 1, 2044, at an 8% annual interest rate.
Subject to the Commissioner approval, the surplus notes due March 1, 2024, were
optionally redeemable at Principal Life's election on or after March 1, 2004, in
whole or in part at a redemption price of approximately 103.6% of par. We
elected, with the Commissioner's approval, to redeem on March 1, 2004, the
entire outstanding $200.0 million principal amount of surplus notes due March 1,
2024, at a redemption price of 103.6%. Total cash paid for the surplus note
redemption on March 1, 2004, was $207.2 million.
Long-term debt was also reduced due to the sale of Principal Residential
Mortgage and of a foreign investment and its associated long-term debt.
The following table presents payments due by period for long-term contractual
obligations that have experienced significant changes since December 31, 2003.
71
AS OF JUNE 30, 2004
-------------------------------------------------------------------------------------------------
SIX
MONTHS
ENDED 2009 AND
CONTRACTUAL DECEMBER THERE-
OBLIGATIONS TOTAL 31, 2004 2005 2006 2007 2008 AFTER
- --------------------- ----------- ------------- --------- --------- --------- --------- ------------
(IN MILLIONS)
Long-term debt......... $1,069.7 $ 239.8 $ 39.7 $32.2 $ 109.0 $ 78.7 $ 570.3
Long-term debt
Interest............ 319.8 44.7 64.8 61.9 60.7 51.7 36.0
Operating leases:......
Continuing
operations.... 175.3 25.7 43.8 35.0 23.0 19.2 28.6
Discontinued
Operations.... 4.8 1.0 1.7 1.0 0.6 0.4 0.1
There have been no other significant changes to the long-term contractual
obligations since December 31, 2003.
SHORT-TERM DEBT
As of June 30, 2004, we had $626.2 million of short-term debt outstanding
compared to $702.8 million at December 31, 2003. As of June 30, 2004, we had
credit facilities with various financial institutions in an aggregate amount of
$2.1 billion. Our credit facilities include a $1.0 billion back-stop facility to
provide 100% support for our commercial paper program, of which there were no
outstanding balances as of June 30, 2004. Our credit facilities also include
$700.0 million to finance a commercial mortgage-backed securities ("CMBS")
pipeline, $100.0 million to purchase certain CMBS securities for investment
purposes and $300.0 million in various other credit facilities. Short-term debt
was reduced due to the sale of Principal Residential Mortgage.
OFF-BALANCE SHEET ARRANGEMENTS
SYNTHETIC FUEL PRODUCTION FACILITY. In June 2004, we acquired a significant
variable interest in a coal-based synthetic fuel production facility where we
are not the primary beneficiary. Our minority ownership interest was acquired in
exchange for consideration of $37.0 million, which is primarily comprised of a
non-recourse note payable for $36.0 million, as well as a commitment to fund our
pro-rata share of the operations. We have also agreed to make additional
payments to the seller based on our pro-rata allocation of the tax credits
generated by the facility. The synthetic fuel produced at the facility through
2007 qualifies for tax credits pursuant to Section 29 of the Internal Revenue
Code (currently credits are not available for fuel produced after 2007). Our
obligation to support the entity's future operations is, therefore, limited to
the tax benefit we expect to receive.
DELINQUENT RESIDENTIAL MORTGAGE LOAN FUNDING. Principal Residential Mortgage
Funding, LLC ("PRMF"), provides an off-balance sheet source of funding for
qualifying delinquent mortgage loans. We sell qualifying delinquent FHA and VA
mortgage loans to PRMF which then transfers the loans to Principal Residential
Mortgage EBO Trust ("Trust"), an unaffiliated Delaware business trust and a
qualifying special purpose entity. At June 30, 2004 and 2003, the Trust held
$589.8 million and $557.5 million in mortgage loans, respectively, and had
outstanding participation certificates of $557.7 million and $528.0 million,
respectively.
We are retained as the servicer of the mortgage loans and also perform
accounting and various administrative functions on behalf of PRMF, in our
capacity as the managing member of PRMF. As the servicer, we receive a servicing
fee pursuant to the pooling and servicing agreement. We may also receive a
successful servicing fee only after all other conditions in the monthly cash
flow distribution are met. We received $21.6 million and $15.9 million in
72
servicing and successful servicing fees from PRMF during the six months ended
June 30, 2004 and 2003, respectively. At June 30, 2004 and 2003, our residual
interest in such cash flows was $47.3 million and $44.7 million, respectively,
and was recorded in assets from discontinued operations on the consolidated
statements of financial position.
On May 11, 2004, we entered into a definitive agreement for the sale of
Principal Residential Mortgage to CitiMortgage, Inc, which was completed on July
1, 2004.
GUARANTEES AND INDEMNIFICATIONS
In the normal course of business, we have provided guarantees to third parties
primarily related to a former subsidiary, joint ventures and industrial revenue
bonds. These agreements generally expire from 2004 through 2019. The maximum
exposure under these agreements as of June 30, 2004, was approximately $170.0
million; however, we believe the likelihood is remote that material payments
will be required and therefore have not accrued for a liability on our
consolidated statements of financial position. Should we be required to perform
under these guarantees, we generally could recover a portion of the loss from
third parties through recourse provisions included in agreements with such
parties, the sale of assets held as collateral that can be liquidated in the
event that performance is required under the guarantees or other recourse
generally available to us, minimizing the impact to net income. The fair value
of such guarantees issued after January 1, 2003, was insignificant.
In connection with the 2002 sale of BT Financial Group, we agreed to indemnify
the purchaser, Westpac Banking Corporation ("Westpac"), for among other things,
the costs associated with potential late filings made by BT Financial Group in
New Zealand prior to Westpac's ownership, up to a maximum of A$250.0 million
Australian dollars (approximately U.S. $175.0 million as of June 30, 2004). New
Zealand securities regulations allow Australian issuers to issue their
securities in New Zealand provided that certain documents are appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to constitutions and compliance plans be filed in
New Zealand. In April 2003, the New Zealand Securities Commission opined that
such late filings would result in certain New Zealand investors having a right
to return of their investment plus interest at 10% per annum from the date of
investment. We view these potential late filings as a technical matter as we
believe investors received the information that is required to be provided
directly to them. This technical issue affected many in the industry. On April
15, 2004, the New Zealand government enacted legislation that will provide
issuers, including BT Financial Group, the opportunity for retroactive relief
from such late filing violations. The law allows issuers to apply for judicial
validation of non-compliant issuances resulting from late filings. The law
further provides that judicial relief is mandatory and unconditional unless an
investor was materially prejudiced by the late filing. A related judicial action
is pending. Although we cannot predict the outcome of this matter or reasonably
estimate losses, we do not believe that it would result in a material adverse
effect on our business or financial position. It is possible, however, that it
could have a material adverse effect on net income in a particular quarter or
annual period.
We are also subject to various other indemnification obligations issued in
conjunction with certain transactions, primarily the sale of BT Financial Group
and other divestitures, the sale of residential mortgage loans and servicing
rights in our mortgage banking business, acquisitions and financing transactions
whose terms range in duration and often are not explicitly defined. Certain
portions of these indemnifications may be capped, while other portions are not
subject to such limitations. Generally, a maximum obligation is not explicitly
stated; therefore, the overall maximum amount of the obligation under the
indemnifications cannot be reasonably estimated. While we are unable to estimate
with certainty the ultimate legal and financial liability with respect to these
indemnifications, we believe the likelihood is remote that material payments
would be required under such indemnifications and therefore such
indemnifications would not result in a material adverse effect on our business,
financial position or net income. The fair value of such indemnifications issued
after January 1, 2003, was insignificant.
73
INVESTMENTS
We had total consolidated assets as of June 30, 2004, of $111.4 billion, of
which $52.7 billion were invested assets. The rest of our total consolidated
assets are comprised primarily of separate account assets for which we do not
bear investment risk. Because we generally do not bear any investment risk on
assets held in separate accounts, the discussion and financial information below
does not include such assets. Of our invested assets, $50.7 billion were held by
our U.S. operations and the remaining $2.0 billion were held by our
International Asset Management and Accumulation segment. On May 11, 2004, we
entered into a definitive agreement for the sale of Principal Residential
Mortgage to CitiMortgage, Inc, which was completed on July 1, 2004. The invested
assets and cash have been reclassified to assets from discontinued operations on
the consolidated statements of financial position.
U.S. INVESTMENT OPERATIONS
Our U.S. invested assets are managed by Principal Global Investors, a subsidiary
of Principal Life. Our primary investment objective is to maximize after-tax
returns consistent with acceptable risk parameters. We seek to protect
policyholders' benefits by optimizing the risk/return relationship on an ongoing
basis, through asset/liability matching, reducing the credit risk, avoiding high
levels of investments that may be redeemed by the issuer, maintaining
sufficiently liquid investments and avoiding undue asset concentrations through
diversification. We are exposed to three primary sources of investment risk:
o credit risk, relating to the uncertainty associated with the continued
ability of a given obligor to make timely payments of principal and
interest;
o interest rate risk, relating to the market price and/or cash flow
variability associated with changes in market yield curves; and
o equity risk, relating to adverse fluctuations in a particular common stock.
Our ability to manage credit risk is essential to our business and our
profitability. We devote considerable resources to the credit analysis of each
new investment. We manage credit risk through industry, issuer and asset class
diversification. Our Investment Committee, appointed by our board of directors,
is responsible for establishing all investment policies, reviewing and approving
all investments. As of June 30, 2004, there are ten members on the Investment
Committee, one of whom is a member of our board of directors. The remaining
members are senior management members representing various areas of our company.
We also seek to reduce call or prepayment risk arising from changes in interest
rates in individual investments. We limit our exposure to investments that are
prepayable without penalty prior to maturity at the option of the issuer, and we
require additional yield on these investments to compensate for the risk that
the issuer will exercise such option. We assess option risk in all investments
we make and, when we take that risk, we price for it accordingly.
Our Fixed Income Securities Committee, consisting of fixed income securities
senior management members, approves the credit rating for the fixed maturity
securities we purchase. Teams of security analysts organized by industry focus
either on the public or private markets and analyze and monitor these
investments. In addition, we have teams who specialize in residential
mortgage-backed securities, commercial mortgage-backed securities and public
below investment grade securities. We establish a credit reviewed list of
approved public issuers to provide an efficient way for our portfolio managers
to purchase liquid bonds for which credit review has already been completed.
Issuers remain on the list for one year unless removed by our analysts. Our
analysts monitor issuers on the list on a continuous basis with a formal review
documented annually or more frequently if material events affect the issuer. The
analysis includes both fundamental and technical factors. The fundamental
analysis encompasses both quantitative and qualitative analysis of the issuer.
The qualitative analysis includes an assessment of both accounting and
management aggressiveness. In addition, technical indicators such as stock price
volatility and credit default swap levels are monitored.
74
Our Fixed Income Securities Committee also reviews private transactions on a
continuous basis to assess the quality ratings of our privately placed
investments. We regularly review our investments to determine whether we should
re-rate them, employing the following criteria:
o material declines in the issuer's revenues or margins;
o significant management or organizational changes;
o significant uncertainty regarding the issuer's industry;
o debt service coverage or cash flow ratios that fall below industry-specific
thresholds;
o violation of financial covenants; and
o other business factors that relate to the issuer.
A dedicated risk management team is responsible for centralized monitoring of
the commercial mortgage portfolio. We apply a variety of strategies to minimize
credit risk in our commercial mortgage loan portfolio. When considering the
origination of new commercial mortgage loans, we review the cash flow
fundamentals of the property, make a physical assessment of the underlying
security, conduct a comprehensive market analysis and compare against industry
lending practices. We use a proprietary risk rating model to evaluate all new
and a majority of existing loans within the portfolio. The proprietary risk
model is designed to stress projected cash flows under simulated economic and
market downturns. Our lending guidelines are designed to encourage 75% or less
loan-to-value ratios and a debt service coverage ratio of at least 1.2 times. We
analyze investments outside of these guidelines based on cash flow quality,
tenancy and other factors. The weighted average loan-to-value ratio at
origination for brick and mortar commercial mortgages in our portfolio was 66%
and the debt service coverage ratio at loan inception was 2.2 times as of June
30, 2004.
We have limited exposure to equity risk in our common stock portfolio. Equity
securities accounted for only 1% of our U.S. invested assets as of June 30,
2004.
Our investment decisions and objectives are a function of the underlying risks
and product profiles of each primary business operation. In addition, we
diversify our product portfolio offerings to include products that contain
features that will protect us against fluctuations in interest rates. Those
features include adjustable crediting rates, policy surrender charges and market
value adjustments on liquidations. For further information on our management of
interest rate risk, see Item 3, "Quantitative and Qualitative Disclosures about
Market Risk".
OVERALL COMPOSITION OF U.S. INVESTED ASSETS
U.S. invested assets as of June 30, 2004, were predominantly of high quality and
broadly diversified across asset class, individual credit, industry and
geographic location. Asset allocation is determined based on cash flow and the
risk/return requirements of our products. As shown in the following table, the
major categories of U.S. invested assets are fixed maturity securities and
commercial mortgages. The remainder is invested in real estate, residential
mortgage loans, equity securities and other assets. In addition, policy loans
are included in our invested assets. The following discussion analyzes the
composition of U.S. invested assets, but excludes invested assets of the
participating separate accounts.
75
U.S. INVESTED ASSETS
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------- ----------------------
2004 2003
---------------------- ----------------------
CARRYING % OF CARRYING % OF
AMOUNT TOTAL AMOUNT TOTAL
------------- -------- ------------ --------
($ IN MILLIONS)
Fixed maturity securities
Public.......................................... $ 24,179.8 48% $ 24,785.0 48%
Private......................................... 11,897.0 24 11,343.0 22
Equity securities................................. 649.4 1 657.4 1
Mortgage loans
Commercial...................................... 9,790.7 19 9,630.4 19
Residential..................................... 1,207.2 2 1,288.1 3
Real estate held for sale ........................ 142.8 - 513.0 1
Real estate held for investment................... 895.1 2 1,003.6 2
Policy loans...................................... 805.2 2 804.1 2
Other investments ................................ 1,093.9 2 1,198.8 2
------------- -------- ----------- --------
Total invested assets.......................... 50,661.1 100% 51,223.4 100%
======== ========
Cash and cash equivalents......................... 1,399.8 1,121.1
------------- -----------
Total invested assets and cash ................ $ 52,060.9 $ 52,344.5
============= ===========
U.S. INVESTMENT RESULTS
The following tables present the yield and investment income, excluding net
realized/unrealized gains and losses for our U.S. invested assets. The
annualized yield on U.S. invested assets and on cash and cash equivalents was
5.6% for the three months ended June 30, 2004, compared to 6.1% for the three
months ended June 30, 2003. The annualized yield on U.S. invested assets and on
cash and cash equivalents was 5.7% for the six months ended June 30, 2004,
compared to 5.9% for the six months ended June 30, 2003. We calculate annualized
yields using a simple average of asset classes at the beginning and end of the
reporting period.
76
U.S. INVESTED ASSETS
INVESTMENT INCOME YIELDS BY ASSET TYPE
FOR THE THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------
2004 2003
--------------------------- -----------------------------
YIELD AMOUNT YIELD AMOUNT
------------- ------------- --------------- -----------
($ IN MILLIONS)
Fixed maturity securities............. 5.9% $ 537.5 6.3% $ 556.2
Equity securities..................... 6.3 10.4 7.6 6.9
Mortgage loans - Commercial........... 6.9 167.8 7.1 172.0
Mortgage loans - Residential.......... 3.5 10.7 4.7 10.6
Real Estate........................... 7.0 21.6 6.0 20.2
Policy loans.......................... 6.3 12.6 6.8 13.7
Cash and cash equivalents............. 1.9 4.8 1.9 4.3
Other investments..................... 4.1 11.1 5.5 13.6
------------- -----------
Total before investment expenses.... 5.9 776.5 6.3 797.5
Investment expenses................... 0.3 36.1 0.2 27.4
------------- -----------
Net investment income............... 5.6% $ 740.4 6.1% $ 770.1
============= ===========
U.S. INVESTED ASSETS
INVESTMENT INCOME YIELDS BY ASSET TYPE
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
2004 2003
--------------------------- -----------------------------
YIELD AMOUNT YIELD AMOUNT
------------- ------------- --------------- -----------
($ IN MILLIONS)
Fixed maturity securities............. 5.9% $1,073.3 6.1% $1,101.3
Equity securities..................... 6.7 22.0 5.4 13.7
Mortgage loans - Commercial........... 7.0 337.5 7.1 346.4
Mortgage loans - Residential.......... 3.8 23.6 3.7 20.8
Real Estate........................... 8.8 55.9 5.7 41.8
Policy loans.......................... 6.3 25.4 6.9 27.7
Cash and cash equivalents............. 1.3 8.3 1.5 8.7
Other investments..................... 2.4 13.5 4.6 25.6
---------------- -----------
Total before investment expenses.... 6.0 1,559.5 6.1 1,586.0
Investment expenses................... 0.3 66.1 0.2 53.5
---------------- -----------
Net investment income............... 5.7% $1,493.4 5.9% $1,532.5
================ ===========
FIXED MATURITY SECURITIES
Fixed maturity securities consist of short-term investments, publicly traded
debt securities, privately placed debt securities and redeemable preferred
stock, and represented 72% of total U.S. invested assets as of June 30, 2004 and
70% as of December 31, 2003. The fixed maturity securities portfolio was
comprised, based on carrying amount, of 67% in publicly traded fixed maturity
securities and 33% in privately placed fixed maturity securities as of June 30,
2004 and 69% in publicly traded fixed maturity securities and 31% in privately
placed fixed maturity securities as of December 31, 2003. Included in the
77
privately placed category as of June 30, 2004, and December 31, 2003, were $5.1
billion and $4.3 billion, respectively, of securities eligible for resale to
qualified institutional buyers under Rule 144A under the Securities Act of 1933.
Fixed maturity securities were diversified by category of issuer as of June 30,
2004, and December 31, 2003, as shown in the following table:
U.S. INVESTED ASSETS
FIXED MATURITY SECURITIES BY TYPE OF ISSUER
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------- -----------------------
2004 2003
---------------------- -----------------------
CARRYING % OF CARRYING % OF
AMOUNT TOTAL AMOUNT TOTAL
------------- ------- ------------- --------
($ IN MILLIONS)
U.S. Government and agencies........................... $ 302.1 1% $ 610.9 2%
States and political subdivisions...................... 688.9 2 537.0 1
Non-U.S. governments................................... 456.5 1 422.4 1
Corporate - public..................................... 17,799.1 49 18,033.4 50
Corporate - private.................................... 9,907.7 28 9,693.1 27
Residential pass-through securities.................... 1,477.2 4 2,070.3 6
Commercial MBS......................................... 3,238.6 9 2,917.4 8
Collateral mortgage obligations........................ 619.6 2 294.6 1
Asset-backed securities................................ 1,587.1 4 1,548.9 4
------------- ------- ------------- --------
Total fixed maturities............................... $ 36,076.8 100% $ 36,128.0 100%
============= ======= ============= ========
We held $6,922.5 million of mortgage-backed and asset-backed securities as of
June 30, 2004, and $6,831.2 million as of December 31, 2003.
We believe that it is desirable to hold residential mortgage-backed securities
due to their credit quality and liquidity as well as portfolio diversification
characteristics. Our portfolio is comprised of GNMA, FNMA and FHLMC pass-through
securities.
Commercial mortgage-backed securities provide high levels of credit protection,
diversification, reduced event risk and enhanced liquidity. Commercial
mortgage-backed securities are predominantly comprised of rated large pool
securitizations that are individually and collectively diverse by property type,
borrower and geographic dispersion.
We purchase asset-backed securities ("ABS") to diversify the overall credit
risks of the fixed maturity securities portfolio and to provide attractive
returns. The principal risks in holding asset-backed securities are structural
and credit risks. Structural risks include the security's priority in the
issuer's capital structure, the adequacy of and ability to realize proceeds from
the collateral and the potential for prepayments. Credit risks involve
issuer/servicer risk where collateral values can become impaired in the event of
servicer credit deterioration.
Our ABS portfolio is diversified both by type of asset and by issuer. We
actively monitor holdings of asset-backed securities to ensure that the risk
profile of each security improves or remains consistent. If we are not receiving
an adequate yield for the risk, relative to other investment opportunities, we
will attempt to sell the security. Prepayments in the ABS portfolio are, in
general, insensitive to changes in interest rates or are insulated to such
changes by call protection features. In the event that we are subject to
prepayment risk, we monitor the factors that impact the level of prepayment and
prepayment speed for those asset-backed securities. To the extent we believe
that prepayment risk increases, we may attempt to sell the security and reinvest
in another security that offers better yield relative to the risk. In addition,
we diversify the risks of asset-backed securities by holding a diverse class of
securities, which limits our exposure to any one security.
The international exposure in our U.S. fixed maturity securities totaled
$5,289.4 million, or 15% of total fixed maturity securities, as of June 30,
78
2004, comprised of corporate and foreign government fixed maturity securities.
Of the $5,289.4 million as of June 30, 2004, investments totaled $1,538.6
million in the United Kingdom, $1,224.5 million in the continental European
Union, $644.8 million in Asia, $439.1 million in South America, $388.2 million
in Australia and $10.6 million in Japan. The remaining $1,043.6 million is
invested in 13 other countries. All international fixed maturity securities held
by our U.S. operations are either denominated in U.S. dollars or have been
swapped into U.S. dollar equivalents. Our international investments are analyzed
internally by country and industry credit investment professionals. We control
concentrations using issuer and country level exposure benchmarks, which are
based on the credit quality of the issuer and the country. Our investment policy
limits total international fixed maturity securities investments to 18% of total
statutory general account assets with a 4% limit in emerging markets. Exposure
to Canada is not included in our international exposure due to its treatment by
the NAIC. As of June 30, 2004, our investments in Canada totaled $1,303.5
million.
The following tables present the amortized cost of our top ten exposures
including approved counterparty exposure limits as of June 30, 2004, and
December 31, 2003.
AS OF JUNE 30, 2004
----------------------------
AMORTIZED
COST
----------------------------
(IN MILLIONS)
HSBC Holdings PLC (1)............................... $ 511.7
American International Group Inc.................... 392.6
Bank of America Corp................................ 379.3
MBIA Inc. (2)....................................... 375.2
General Electric Co................................. 294.0
Morgan Stanley...................................... 274.7
Verizon Communications Inc.......................... 261.0
Royal Bank of Scotland Group PLC.................... 260.4
Citigroup Inc....................................... 257.5
Goldman Sachs Group Inc............................. 250.3
----------------------------
Total Top Ten Exposures........................... $ 3,256.7
============================
- ----------------------
(1) Includes a $238.3 million investment classified as an equity security for
GAAP. The investment issuer engages in managing investment grade third
party bond investments and HSBC paper. All non-HSBC paper has the ultimate
benefit of price support protection provided by HSBC Bank, PLC. Since
Principal Life Insurance Company has the senior priority in the issuer, we
believe many third party bonds could be liquidated to satisfy our claim.
While we calculate our exposure on a gross basis, the value we attribute to
the underlying collateral is $125 million.
(2) MBIA Inc. exposure is predominately comprised of the guarantee of
underlying securities that are rated "A-" equivalent or better by the
rating agencies on a stand alone basis. The MBIA wrap guarantees
performance in the event of default of the underlying securities bringing
the combined rating to AAA.
79
AS OF DECEMBER 31, 2003
----------------------------
AMORTIZED
COST
----------------------------
(IN MILLIONS)
HSBC Holdings PLIC (1).............................. $ 518.7
MBIA Inc. (2)....................................... 380.6
American International Group Inc.................... 363.1
Citigroup Inc....................................... 292.2
Bank of America Corp................................ 265.6
Royal Bank of Scotland Group PLC.................... 263.3
Verizon Communications Inc.......................... 261.9
General Electric Co................................. 249.1
Morgan Stanley...................................... 228.8
Bear Stearns Co..................................... 223.9
----------------------------
Total Top Ten Exposures........................... $ 3,047.2
============================
- ----------------------
(1) Includes a $238.3 million investment classified as an equity security for
GAAP. The investment issuer engages in managing investment grade third
party bond investments and HSBC paper. All non-HSBC paper has the ultimate
benefit of price support protection provided by HSBC Bank, PLC. Since
Principal Life Insurance Company has senior priority in the issuer, we
believe many third party bonds could be liquidated to satisfy our claim.
While we calculate our exposure on a gross basis, the value we attribute to
the underlying collateral is $125 million.
(2) MBIA Inc. exposure is predominately comprised of the guarantee of
underlying securities which are rated "A-" equivalent or better by the
rating agencies on a stand alone basis. The MBIA wrap guarantees
performance in the event of a default of the underlying securities bringing
the combined rating to AAA.
Our top ten exposures were rated an "A" equivalent or better by the rating
agencies as of June 30, 2004 and December 31, 2003. As of June 30, 2004 and
December 31, 2003, no individual non-government issuer represented more than 1%
of U.S. invested assets.
Valuation techniques for the fixed maturity securities portfolio vary by
security type and the availability of market data. Pricing models and their
underlying assumptions impact the amount and timing of unrealized gains and
losses recognized, and the use of different pricing models or assumptions could
produce different financial results. Interactive Data Corporation ("IDC") or
direct broker quotes are our sources for external prices for our public bonds
and those private placement securities that are actively traded in the secondary
market. In cases where quoted market prices are not available, a matrix pricing
valuation approach is used. Securities are grouped into pricing categories that
vary by asset class, sector, rating, and average life. Each pricing category is
assigned a risk spread based on studies of observable public market data or
market clearing data from the investment professionals assigned to specific
security classes. The expected cash flows of the security are then discounted
back at the current Treasury curve plus the appropriate risk spread. Although
the matrix valuation approach provides a fair valuation of each pricing
category, the valuation of an individual security within each pricing category
may actually be impacted by company specific factors. Certain market events that
could impact the valuation of securities include issuer credit ratings, business
climate, management changes, litigation, and government actions among others.
The resulting prices are then reviewed by pricing analysts. All loans placed on
the "watch list" are valued individually by the investment analysts or the
analysts that focus on troubled securities ("Workout group"). Although we
believe our estimates reasonably reflect the fair value of those securities, the
key assumptions about risk premiums, performance of underlying collateral (if
any) and other factors involve significant assumptions and may not reflect those
of an active market. To the extent that bonds have longer maturity dates,
management's estimate of fair value may involve greater subjectivity since they
involve judgment about events well into the future. Every month, there is a
comprehensive review of all impaired securities and problem loans by a group
consisting of the Chief Investment Officer, the Portfolio Managers, and the
Workout Group. The valuation of impaired bonds for which there is no quoted
price is typically based on the present value of the future cash flows expected
to be received. If the company is likely to continue operations, the estimate of
80
future cash flows is typically based on the expected operating cash flows of the
company that are available to make payments of the bonds. If the company is
likely to liquidate, the estimate of future cash flows is based on an estimate
of the liquidation value of its net assets.
The Securities Valuation Office ("SVO") of the NAIC evaluates most of the fixed
maturity securities that we and other U.S. insurance companies hold. The SVO
evaluates the bond investments of insurers for regulatory reporting purposes and
assigns securities to one of six investment categories. The NAIC Designations
closely mirror the nationally recognized securities rating organizations' credit
ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered
investment grade by such rating organizations. Bonds are considered investment
grade when rated "Baa3" or higher by Moody's, or "BBB-" or higher by Standard &
Poor's. NAIC Designations 3 through 6 are referred to as below investment grade.
Bonds are considered below investment grade when rated "Ba1" or lower by
Moody's, or "BB+" or lower by Standard & Poor's. As of June 30, 2004, the
percentage, based on estimated fair value, of total publicly traded and
privately placed fixed maturity securities that were investment grade with an
NAIC Designation 1 or 2 was 94%.
We also monitor the credit drift of our corporate fixed maturity securities
portfolio. Credit drift is defined as the ratio of the percentage of rating
downgrades, including defaults, divided by the percentage of rating upgrades. We
measure credit drift once each fiscal year, assessing the changes in our
internally developed credit ratings that have occurred during the year. Standard
& Poor's annual credit ratings drift ratio measures the credit rating change,
within a specific year, of companies that have been assigned ratings by Standard
& Poor's. The annual internal credit drift ratio on corporate fixed maturity
securities we held in our general account was 2.18 times compared to the
Standard & Poor's drift ratio of 2.47 times, as of December 31, 2003.
The following table presents our total fixed maturity securities by NAIC
Designation and the equivalent ratings of the nationally recognized securities
rating organizations as of June 30, 2004, and December 31, 2003, as well as the
percentage, based on estimated fair value, that each designation comprises:
U.S. INVESTED ASSETS
FIXED MATURITY SECURITIES BY CREDIT QUALITY
AS OF JUNE 30, 2004 AS OF DECEMBER 31, 2003
------------------------------------------ ---------------------------------------------
% OF % OF
RATING TOTAL TOTAL
NAIC AGENCY AMORTIZED CARRYING CARRYING AMORTIZED CARRYING CARRYING
RATING (1) EQUIVALENT COST AMOUNT AMOUNT COST AMOUNT AMOUNT
- --------------- ------------------ ------------- ------------ ------------- ------------- ------------- ---------------
($ IN MILLIONS)
1 Aaa/Aa/A............. $ 17,964.2 $ 18,650.7 52% $ 17,299.2 $ 18,415.1 51%
2 Baa.................. 14,474.1 15,149.2 42 13,579.3 14,657.1 41
3 Ba................... 1,542.7 1,617.4 5 1,998.0 2,123.1 6
4 B.................... 422.3 422.6 1 517.4 514.5 1
5 Caa and lower........ 86.7 83.3 - 230.9 225.4 1
6 In or near default... 147.0 153.6 - 220.7 192.8 -
------------- ------------ ------------- ------------- ------------- ---------------
Total fixed
maturities....... $ 34,637.0 $ 36,076.8 100% $ 33,845.5 $ 36,128.0 100%
============= ============ ============= ============= ============= ===============
- -----------------------
(1) Includes 122 securities with an amortized cost of $1,159.4 million, gross
gains of $14.7 million, gross losses of $20.8 million and a carrying amount
of $1,153.3 million as of June 30, 2004, that are still pending a review
and assignment of a rating by the SVO. Due to the timing of when fixed
maturity securities are purchased, legal documents are filed, and the
review by the SVO, there will always be securities in our portfolio that
are unrated over a reporting period. In these instances, an equivalent
rating is assigned based on our fixed income analyst's assessment.
81
We believe that our long-term fixed maturity securities portfolio is well
diversified among industry types and between publicly traded and privately
placed securities. Each year we direct the majority of our net cash inflows into
investment grade fixed maturity securities. Our current policy is to limit the
percentage of cash flow invested in below investment grade assets to 7% of cash
flow. As of June 30, 2004, we had invested 1.3% of new cash flow for the year in
below investment grade assets. While the general account investment returns have
improved due to the below investment grade asset class, we manage its growth
strategically by limiting it to 10% of the total fixed maturity securities
portfolios.
We invest in privately placed fixed maturity securities to enhance the overall
value of the portfolio, increase diversification and obtain higher yields than
are possible with comparable quality public market securities. Generally,
private placements provide broader access to management information,
strengthened negotiated protective covenants, call protection features and,
where applicable, a higher level of collateral. They are, however, generally not
freely tradable because of restrictions imposed by federal and state securities
laws and illiquid trading markets.
The following table shows the carrying amount of our corporate fixed maturity
securities by Salomon industry category, as well as the percentage of the total
corporate portfolio that each Salomon industry category comprises as of June 30,
2004, and December 31, 2003.
U.S. INVESTED ASSETS
CORPORATE FIXED MATURITY SECURITIES BY SALOMON INDUSTRY
AS OF JUNE 30, AS OF DECEMBER 31,
2004 2003
--------------------------- --------------------------
CARRYING % OF CARRYING % OF
AMOUNT TOTAL AMOUNT TOTAL
-------------- ----------- ------------- -----------
($ IN MILLIONS)
INDUSTRY CLASS
Finance - Bank.......................... $ 3,116.3 11% $ 3,041.9 11%
Finance - Insurance..................... 2,126.3 8 1,718.1 6
Finance - Other......................... 3,385.6 12 3,337.5 12
Industrial - Consumer................... 863.8 3 879.4 3
Industrial - Energy..................... 2,624.1 9 2,779.5 10
Industrial - Manufacturing.............. 5,411.3 20 5,729.6 21
Industrial - Other...................... 145.6 1 158.7 1
Industrial - Service.................... 4,382.9 16 4,503.0 16
Industrial - Transport.................. 945.7 3 967.8 4
Utility - Electric...................... 2,923.3 11 2,751.2 10
Utility - Other......................... 58.8 - 67.4 -
Utility - Telecom....................... 1,723.1 6 1,792.4 6
-------------- ----------- ------------- -----------
Total................................. $ 27,706.8 100% $ 27,726.5 100%
============== =========== ============= ===========
We monitor any decline in the credit quality of fixed maturity securities
through the designation of "problem securities", "potential problem securities"
and "restructured securities". We define problem securities in our fixed
maturity portfolio as securities: (i) as to which principal and/or interest
payments are in default or where default is perceived to be imminent in the near
term, or (ii) issued by a company that went into bankruptcy subsequent to the
acquisition of such securities. We define potential problem securities in our
fixed maturity portfolio as securities included on an internal "watch list" for
which management has concerns as to the ability of the issuer to comply with the
present debt payment terms and which may result in the security becoming a
problem or being restructured. The decision whether to classify a performing
fixed maturity security as a potential problem involves significant subjective
judgments by our management as to the likely future industry conditions and
developments with respect to the issuer. We define restructured securities in
our fixed maturity portfolio as securities where a concession has been granted
to the borrower related to the borrower's financial difficulties that would not
have otherwise been considered. We determine that restructures should occur in
82
those instances where greater economic value will be realized under the new
terms than through liquidation or other disposition and may involve a change in
contractual cash flows. If at the time of restructure, the present value of the
new future cash flows is less than the current cost of the asset being
restructured, a realized capital loss is recorded in net income and a new cost
basis is established.
We have a process in place to identify securities that could potentially have an
impairment that is other than temporary. This process involves monitoring market
events that could impact issuers' credit ratings, business climate, management
changes, litigation and government actions, and other similar factors. This
process also involves monitoring late payments, pricing levels, downgrades by
rating agencies, key financial ratios, financial statements, revenue forecasts
and cash flow projections as indicators of credit issues
Every month, a group of individuals including the Chief Investment Officer, our
Portfolio Managers, members of our Workout Group, and representatives from
Investment Accounting review all securities where market value is less than
seventy-five percent of amortized cost to determine whether impairments need to
be taken. The analysis focuses on each issuer's ability to service its debts in
a timely fashion and the length of time the security has been trading below
cost. Formal documentation of the analysis and the company's decision is
prepared and approved by management.
We consider relevant facts and circumstances in evaluating whether the
impairment of a security is other than temporary. Relevant facts and
circumstances considered include: (1) the length of time the fair value has been
below cost; (2) the financial position and access to capital of the issuer,
including the current and future impact of any specific events; and (3) our
ability and intent to hold the security to maturity or until it recovers in
value. To the extent we determine that a security is deemed to be other than
temporarily impaired, the difference between amortized cost and fair value would
be charged to earnings.
There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if an impairment is other than
temporary. These risks and uncertainties include: (1) the risk that our
assessment of an issuer's ability to meet all of its contractual obligations
will change based on changes in the credit characteristics of that issuer, (2)
the risk that the economic outlook will be worse than expected or have more of
an impact on the issuer than anticipated, (3) the risk that our investment
professionals are making decisions based on fraudulent or misstated information
in the financial statements provided by issuers and (4) the risk that new
information obtained by us or changes in other facts and circumstances lead us
to change our intent to hold the security to maturity or until it recovers in
value. Any of these situations could result in a charge to earnings in a future
period.
The realized losses relating to other than temporary impairments of fixed
maturity securities were $36.6 million for the six months ended June 30, 2004.
Following is a summary of our material impairments taken for the six months
ended June 30, 2004:
o $16.7 million on public and private fixed maturity securities of a U.S.
airline. The company has experienced an increasing degree of financial
duress due to a high cost structure, increasingly competitive industry
landscape and high fuel prices. The extent of this financial duress has
pressured the company's liquidity position and increased the probability of
a Chapter 11 filing in the future. These impairments are based on market
prices for the public bonds and estimated market prices for the private
bonds.
o $8.8 million on private fixed maturity securities of a Chilean
conglomerate. The company is in payment default, with lenders currently
exercising legal remedies for enforcement in Chile. These impairments are
based on estimated recovery values for the private securities.
o $7.5 million on private fixed maturity securities of a U.S. prime and
sub-prime auto lending company. The company filed Chapter 11 bankruptcy
protection during late 2002 and emerged from bankruptcy during September
2003. As operating data on the restructured entity has become available it
was determined that a further impairment was warranted. These impairments
are based on estimated recovery values for the private securities.
83
o $7.1 million on private fixed maturity securities relating to an Italian
dairy and bakery goods producer. The company filed the equivalent of
Chapter 11 bankruptcy protection after disclosing massive fraud during
December 2003. After additional information has become available as part of
the bankruptcy process it was determined that a further impairment was
warranted. These impairments are based on estimated recovery values for the
private securities.
For the six months ended June 30, 2004, we realized $19.2 million of losses upon
disposal of bonds excluding hedging adjustments. Included in this $19.2 million
is $10.4 million related to sales of thirteen credit impaired names. We
generally intend to hold securities in unrealized loss positions until they
mature or recover. However, we do sell bonds under certain circumstances such as
when we have evidence of a significant deterioration in the issuer's
creditworthiness, when a change in regulatory requirements modifies what
constitutes a permissable investment or the maximum level of investments held or
when there is an increase in capital requirements or a change in risk weights of
debt securities. Sales generate both gains and losses.
The following tables present our fixed maturity securities available-for-sale by
industry category and the associated gross unrealized gains and losses as of
June 30, 2004, and December 31, 2003.
U.S. INVESTED ASSETS
FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY INDUSTRY CATEGORY
AS OF JUNE 30, 2004
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES (1) AMOUNT
-------------- ------------ --------------- ---------------
(IN MILLIONS)
Finance - Bank.......................... $ 3,014.1 $ 125.3 $ 23.1 $ 3,116.3
Finance - Insurance..................... 2,090.6 66.5 30.8 2,126.3
Finance - Other......................... 3,284.5 132.9 31.8 3,385.6
Industrial - Consumer................... 826.4 45.0 7.6 863.8
Industrial - Energy..................... 2,479.9 167.0 22.8 2,624.1
Industrial - Manufacturing.............. 5,180.0 259.9 28.6 5,411.3
Industrial - Other...................... 139.4 7.4 1.2 145.6
Industrial - Service.................... 4,169.1 238.3 24.5 4,382.9
Industrial - Transport.................. 902.1 59.9 16.3 945.7
Utility - Electric...................... 2,811.0 135.7 23.4 2,923.3
Utility - Other......................... 53.7 5.1 - 58.8
Utility - Telecom....................... 1,619.7 113.4 10.0 1,723.1
-------------- ------------ --------------- ---------------
Total corporate securities............ 26,570.5 1,356.4 220.1 27,706.8
U.S. Government and agencies............ 297.8 7.3 3.0 302.1
States and political subdivisions....... 666.1 28.5 5.7 688.9
Non-U.S. governments.................... 411.3 46.4 1.2 456.5
Mortgage-backed and other
asset-backed securities............... 6,597.4 280.6 55.8 6,822.2
-------------- ------------ --------------- --------------
Total fixed maturity securities,
available-for-sale.................. $ 34,543.1 $ 1,719.2 $ 285.8 $ 35,976.5
============== ============ =============== ==============
- -----------------------
(1) Included in the $285.8 million in unrealized losses is $16.5 million that
relates to fixed maturity securities that are part of fair value hedging
relationships and which have been recognized in net income versus other
comprehensive income.
84
U.S. INVESTED ASSETS
FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY INDUSTRY CATEGORY
AS OF DECEMBER 31, 2003
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES(1) AMOUNT
-------------- ------------ --------------- --------------
(IN MILLIONS)
Finance - Bank.......................... $ 2,870.2 $ 183.3 $ 11.6 $ 3,041.9
Finance - Insurance..................... 1,635.1 95.3 12.3 1,718.1
Finance - Other......................... 3,142.7 205.2 10.4 3,337.5
Industrial - Consumer................... 848.5 56.8 25.9 879.4
Industrial - Energy..................... 2,546.0 245.2 11.7 2,779.5
Industrial - Manufacturing.............. 5,363.5 382.0 15.9 5,729.6
Industrial - Other...................... 147.9 11.1 0.3 158.7
Industrial - Service.................... 4,153.6 355.2 5.8 4,503.0
Industrial - Transport.................. 914.2 74.6 21.0 967.8
Utility - Electric...................... 2,581.4 179.1 9.3 2,751.2
Utility - Other......................... 61.4 6.8 0.8 67.4
Utility - Telecom....................... 1,623.2 170.5 1.3 1,792.4
-------------- ------------ --------------- --------------
Total corporate securities............ 25,887.7 1,965.1 126.3 27,726.5
U.S. Government and agencies............ 599.0 12.9 1.0 610.9
States and political subdivisions....... 498.7 40.5 2.2 537.0
Non-U.S. governments.................... 358.2 64.2 - 422.4
Mortgage-backed and other
asset-backed securities............... 6,406.9 343.5 22.1 6,728.3
-------------- ------------ --------------- --------------
Total fixed maturity securities,
available-for-sale.................. $ 33,750.5 $ 2,426.2 $ 151.6 $ 36,025.1
============= ============ =============== ==============
- -----------------------
(1) Included in the $151.6 million in unrealized losses is $24.8 million that
relates to fixed maturity securities that are part of fair value hedging
relationships and which have been recognized in net income versus other
comprehensive income.
The total unrealized losses on our fixed maturity securities available-for-sale
were $285.8 million and $151.6 million as of June 30, 2004 and December 31,
2003, respectively. Of the $285.8 million in gross unrealized losses as of June
30, 2004, there were $0.1 million in losses attributed to securities scheduled
to mature in one year or less, $31.1 million is attributed to securities
scheduled to mature between one to five years, $74.1 million is attributed to
securities scheduled to mature between five to ten years, $124.7 million is
attributed to securities scheduled to mature after ten years, and $55.8 million
is related to mortgage-backed and other asset-back securities. The gross
unrealized losses as of June 30, 2004 were concentrated primarily in
Mortgage-backed and other asset-backed security, Finance - Other, Finance -
Insurance, and Industrial-Manufacturing sectors. The gross unrealized losses as
of December 31, 2003 were concentrated primarily in the Industrial-Consumer,
Mortgage-backed and other asset-backed security, Industrial-Transportation, and
Industrial-Manufacturing sectors.
The following tables present our fixed maturity securities available-for-sale by
investment grade and below investment grade and the associated gross unrealized
gains and losses as of June 30, 2004, and December 31, 2003.
85
U.S. INVESTED ASSETS
FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY QUALITY
AS OF JUNE 30, 2004
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES AMOUNT
------------- ------------ -------------- ---------------
(IN MILLIONS)
Investment Grade:
Public................................... $ 22,001.3 $ 1,098.0 $ 157.3 $ 22,942.0
Private.................................. 10,343.1 513.9 99.4 10,757.6
Below Investment Grade:
Public................................... 1,194.2 51.3 7.7 1,237.8
Private.................................. 1,004.5 56.0 21.4 1,039.1
------------- ------------ -------------- ---------------
Total fixed maturity securities,
available-for-sale....................... $ 34,543.1 $ 1,719.2 $ 285.8 $ 35,976.5
============= ============ ============== ===============
U.S. INVESTED ASSETS
FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY QUALITY
AS OF DECEMBER 31, 2003
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES AMOUNT
------------- ------------ -------------- ---------------
(IN MILLIONS)
Investment Grade:
Public................................... $ 21,733.3 $ 1,590.6 $ 36.1 $ 23,287.8
Private.................................. 9,050.2 671.7 40.3 9,681.6
Below Investment Grade:
Public................................... 1,407.6 102.1 12.4 1,497.3
Private.................................. 1,559.4 61.8 62.8 1,558.4
------------ ------------ -------------- ---------------
Total fixed maturity securities,
available-for-sale....................... $ 33,750.5 $ 2,426.2 $ 151.6 $ 36,025.1
============ ============ ============== ===============
86
U.S. INVESTED ASSETS
UNREALIZED LOSSES ON INVESTMENT GRADE FIXED MATURITY SECURITIES
AVAILABLE-FOR-SALE BY AGING CATEGORY
AS OF JUNE 30, 2004
------------------------------------------------------------------------------------
PUBLIC PRIVATE TOTAL
---------------------------- -------------------------- --------------------------
GROSS GROSS GROSS
CARRYING UNREALIZED CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES
------------- -------------- ------------ ------------- ------------ -------------
(IN MILLIONS)
Three months or less.................. $ 4,887.2 $ 115.6 $ 2,750.4 $ 67.8 $ 7,637.6 $ 183.4
Greater than three to six months...... 265.3 11.9 166.6 6.4 431.9 18.3
Greater than six to nine months....... 52.8 2.4 84.8 5.0 137.6 7.4
Greater than nine to twelve months.... 65.4 3.4 146.6 12.9 212.0 16.3
Greater than twelve to twenty-four
months.............................. 156.0 14.0 115.2 7.1 271.2 21.1
Greater than twenty-four to thirty-
six months.......................... 43.4 8.5 - - 43.4 8.5
Greater than thirty-six months........ 25.6 1.5 6.6 0.2 32.2 1.7
------------- -------------- ------------ ------------- ------------ -------------
Total fixed maturities, available-
for-sale.......................... $ 5,495.7 $ 157.3 $ 3,270.2 $ 99.4 $ 8,765.9 $ 256.7
============= ============== ============ ============= ============ =============
U.S. INVESTED ASSETS
UNREALIZED LOSSES ON INVESTMENT GRADE FIXED MATURITY SECURITIES
AVAILABLE-FOR-SALE BY AGING CATEGORY
AS OF DECEMBER 31, 2003
------------------------------------------------------------------------------------
PUBLIC PRIVATE TOTAL
---------------------------- -------------------------- --------------------------
GROSS GROSS GROSS
CARRYING UNREALIZED CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES
------------- -------------- ------------ ------------- ------------ -------------
(IN MILLIONS)
Three months or less.................. $ 1,157.2 $ 7.2 $ 574.6 $ 14.2 $ 1,731.8 $ 21.4
Greater than three to six months...... 794.3 10.6 464.4 14.9 1,258.7 25.5
Greater than six to nine months....... 417.7 13.4 209.2 8.5 626.9 21.9
Greater than nine to twelve months.... 50.8 1.5 5.1 0.3 55.9 1.8
Greater than twelve to twenty-four
months.............................. - - 19.1 2.1 19.1 2.1
Greater than twenty-four to thirty-
six months.......................... 21.0 2.4 - - 21.0 2.4
Greater than thirty-six months........ 25.1 1.0 27.3 0.3 52.4 1.3
------------- -------------- ------------ ------------- ------------ -------------
Total fixed maturities, available-
for-sale.......................... $ 2,466.1 $ 36.1 $ 1,299.7 $ 40.3 $ 3,765.8 $ 76.4
============= ============== ============ ============= ============ =============
87
U.S. INVESTED ASSETS
UNREALIZED LOSSES ON BELOW INVESTMENT GRADE FIXED MATURITY SECURITIES
AVAILABLE-FOR-SALE BY AGING CATEGORY
AS OF JUNE 30, 2004
------------------------------------------------------------------------------------
PUBLIC PRIVATE TOTAL
---------------------------- -------------------------- --------------------------
GROSS GROSS GROSS
CARRYING UNREALIZED CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES
------------- -------------- ------------ ------------- ------------ -------------
(IN MILLIONS)
Three months or less.................. $ 110.4 $ 2.7 $ 84.3 $ 3.2 $ 194.7 $ 5.9
Greater than three to six months...... 49.4 3.6 0.4 0.1 49.8 3.7
Greater than six to nine months....... - - 16.2 0.9 16.2 0.9
Greater than nine to twelve months.... 4.8 0.5 10.5 1.1 15.3 1.6
Greater than twelve to twenty-four
months.............................. 15.4 0.4 14.2 1.8 29.6 2.2
Greater than twenty-four to thirty-
six months.......................... 5.2 0.5 26.1 3.0 31.3 3.5
Greater than thirty-six months........ - - 57.8 11.3 57.8 11.3
------------- -------------- ------------ ------------- ------------ -------------
Total fixed maturities, available-
for-sale.......................... $ 185.2 $ 7.7 $ 209.5 $ 21.4 $ 394.7 $ 29.1
============= ============== ============ ============= ============ =============
U.S. INVESTED ASSETS
UNREALIZED LOSSES ON BELOW INVESTMENT GRADE FIXED MATURITY SECURITIES
AVAILABLE-FOR-SALE BY AGING CATEGORY
AS OF DECEMBER 31, 2003
------------------------------------------------------------------------------------
PUBLIC PRIVATE TOTAL
---------------------------- -------------------------- --------------------------
GROSS GROSS GROSS
CARRYING UNREALIZED CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES
------------- -------------- ------------ ------------- ------------ -------------
(IN MILLIONS)
Three months or less.................. $ 41.1 $ 0.6 $ 67.9 $ 28.8 $ 109.0 $ 29.4
Greater than three to six months...... 5.3 0.8 40.4 6.0 45.7 6.8
Greater than six to nine months....... 3.5 0.1 24.1 0.1 27.6 0.2
Greater than nine to twelve months.... - - 0.8 0.1 0.8 0.1
Greater than twelve to twenty-four
months.............................. 26.9 0.8 68.6 9.1 95.5 9.9
Greater than twenty-four to thirty-
six months.......................... 64.2 8.8 62.6 8.2 126.8 17.0
Greater than thirty-six months........ 9.1 1.3 78.6 10.5 87.7 11.8
------------- -------------- ------------ ------------- ------------ -------------
Total fixed maturities, available-
for-sale...................... .... $ 150.1 $ 12.4 $ 343.0 $ 62.8 $ 493.1 $ 75.2
============= ============== ============ ============= ============ =============
Of total gross unrealized losses as of June 30, 2004 and December 31, 2003,
$256.7 million and $76.4 million were related to investment grade securities,
respectively. Gross unrealized losses related to below investment grade
securities were $29.1 million and $75.2 million as of June 30, 2004 and December
31, 2003, respectively.
The following tables present the carrying amount and gross unrealized losses on
fixed maturity securities available-for-sale, where the estimated fair value has
declined and remained below amortized cost by 20% or more as of June 30, 2004,
and December 31, 2003.
88
U.S. INVESTED ASSETS
UNREALIZED LOSSES ON FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY
AGING CATEGORY
AS OF JUNE 30, 2004
---------------------------------------------------------------------------------------------
PROBLEM, POTENTIAL
PROBLEM, AND ALL OTHER FIXED MATURITY
RESTRUCTURED SECURITIES TOTAL
-------------------------------- ------------------------------ ---------------------------
GROSS GROSS GROSS
CARRYING UNREALIZED CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES
---------------- --------------- --------------- -------------- -------------- ------------
(IN MILLIONS)
Three months or less.................. $ 4.0 $ 1.1 $ 0.6 $ 0.1 $ 4.6 $ 1.2
Greater than three to six months...... - - 31.6 8.4 31.6 8.4
Greater than six to nine months....... - - - - - -
Greater than nine to twelve months.... - - - - - -
Greater than twelve months............ 10.1 2.9 - - 10.1 2.9
---------------- --------------- --------------- -------------- -------------- -----------
Total fixed maturity securities,
available-for-sale................ $ 14.1 $ 4.0 $ 32.2 $ 8.5 $ 46.3 $ 12.5
================ =============== =============== ============== ============== ============
U.S. INVESTED ASSETS
UNREALIZED LOSSES ON FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE BY
AGING CATEGORY
AS OF DECEMBER 31, 2003
---------------------------------------------------------------------------------------------
PROBLEM, POTENTIAL
PROBLEM, AND ALL OTHER FIXED MATURITY
RESTRUCTURED SECURITIES TOTAL
--------------------------------- ------------------------------ --------------------------
GROSS GROSS GROSS
CARRYING UNREALIZED CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES
---------------- --------------- --------------- -------------- -------------- -----------
Three months or less.................. $ 30.9 $ 34.6 $ - $ - $ 30.9 $ 34.6
Greater than three to six months...... - - - - - -
Greater than six to nine months....... - - - - - -
Greater than nine to twelve months.... 0.5 0.1 - - 0.5 0.1
Greater than twelve months............ 3.6 1.5 7.7 2.2 11.3 3.7
---------------- --------------- --------------- ------------- -------------- -----------
Total fixed maturity securities,
available-for-sale................ $ 35.0 $ 36.2 $ 7.7 $ 2.2 $ 42.7 $ 38.4
================ =============== =============== ============= ============== ===========
Gross unrealized losses on fixed maturity securities where the estimated fair
value has been 20% or more below amortized cost were $12.5 million as of June
30, 2004 and $38.4 million as of December 31, 2003. The gross unrealized losses
attributed to those securities considered to be "problem", "potential problem"
or "restructured" were $4.0 million and $36.2 million as of June 30, 2004, and
December 31, 2003, respectively.
The following table presents the total carrying amount of our fixed maturity
portfolio, as well as its problem, potential problem and restructured fixed
maturities for the periods indicated:
89
U.S. INVESTED ASSETS
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES AT CARRYING AMOUNT
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------- ---------------------
2004 2003
-------------------- ---------------------
($ IN MILLIONS)
Total fixed maturity securities (public and private)............ $ 36,076.8 $ 36,128.0
==================== =====================
Problem fixed maturity securities............................... $ 106.5 $ 152.5
Potential problem fixed maturity securities..................... 130.1 230.1
Restructured fixed maturity securities.......................... 19.9 39.9
-------------------- ---------------------
Total problem, potential problem and restructured fixed
maturity securities......................................... $ 256.5 $ 422.5
==================== =====================
Total problem, potential problem and restructured fixed
maturity securities as a percent of total fixed maturity
securities.................................................. 1% 1%
MORTGAGE LOANS
Mortgage loans comprised 21% and 22% of total U.S. invested assets as of June
30, 2004, and December 31, 2003, respectively. Mortgage loans consist of
commercial and residential loans. Commercial mortgage loans comprised $9,790.7
million as of June 30, 2004, and $9,630.4 million as of December 31, 2003, or
89% and 88% of total mortgage loan investments, respectively. Residential
mortgages comprised $1,207.2 million as of June 30, 2004 and $1,288.1 million as
of December 31, 2003, or 11% and 12% of total mortgage loan investments,
respectively. Principal Bank holds the majority of residential loans to comply
with federal thrift charter requirements.
COMMERCIAL MORTGAGE LOANS. Commercial mortgages play an important role in our
investment strategy by:
o providing strong risk adjusted relative value in comparison to other
investment alternatives;
o enhancing total returns; and
o providing strategic portfolio diversification.
As a result, we have focused on constructing a solid, high quality portfolio of
mortgages. Our portfolio is generally comprised of mortgages with conservative
loan-to-value ratios, high debt service coverages and general purpose property
types with a strong credit tenancy.
Our commercial loan portfolio consists of primarily non-recourse, fixed rate
mortgages on fully or near fully leased properties. The mortgage portfolio is
comprised of general-purpose industrial properties, manufacturing office
properties and credit oriented retail properties.
California accounted for 20% of our commercial mortgage loan portfolio as of
June 30, 2004. We are, therefore, exposed to potential losses resulting from the
risk of catastrophes, such as earthquakes, that may affect the region. Like
other lenders, we generally do not require earthquake insurance for properties
on which we make commercial mortgage loans. With respect to California
properties, however, we obtain an engineering report specific to each property.
The report assesses the building's design specifications, whether it has been
upgraded to meet seismic building codes and the maximum loss that is likely to
result from a variety of different seismic events. We also obtain a report that
assesses by building and geographic fault lines the amount of loss our
commercial mortgage loan portfolio might suffer under a variety of seismic
events.
90
Our commercial loan portfolio is highly diversified by borrower. As of June 30,
2004, 36% of the U.S. commercial mortgage loan portfolio was comprised of
mortgage loans with principal balances of less than $10.0 million. The total
number of commercial mortgage loans outstanding as of June 30, 2004 and December
31, 2003 was 1,349 and 1,447, respectively. The average loan size of our
commercial mortgage portfolio was $7.3 million as of June 30, 2004.
We actively monitor and manage our commercial mortgage loan portfolio.
Substantially all loans within the portfolio are analyzed regularly, based on a
proprietary risk rating cash flow model, in order to monitor the financial
quality of these assets and are internally rated. Based on ongoing monitoring,
mortgage loans with a likelihood of becoming delinquent are identified and
placed on an internal "watch list". Among criteria which would indicate a
potential problem are: imbalances in ratios of loan to value or contract rents
to debt service, major tenant vacancies or bankruptcies, borrower sponsorship
problems, late payments, delinquent taxes and loan relief/restructuring
requests.
We state commercial mortgage loans at their unpaid principal balances, net of
discount accrual and premium amortization, valuation allowances and write downs
for impairment. We provide a valuation allowance for commercial mortgage loans
based on past loan loss experience and for specific loans considered to be
impaired. Mortgage loans are considered impaired when, based on current
information and events, it is probable that all amounts due according to the
contractual terms of the loan agreement may not be collected. When we determine
that a loan is impaired, we either establish a valuation allowance or adjust the
cost basis of that loan and record a loss for the excess of the carrying value
of the mortgage loan over its estimated fair value. Estimated fair value is
based on either the present value of expected future cash flows discounted at
the loan's original effective interest rate, the loan's observable market price
or the fair value of the collateral. We record increases in such valuation
allowances as realized investment losses and, accordingly, we reflect the losses
in our consolidated results of operations. Such increases (decreases) in
valuation allowances aggregated $7.4 million for the six months ended June 30,
2004 and $(34.0) million for the year ended December 31, 2003.
We review our mortgage loan portfolio and analyze the need for a valuation
allowance for any loan which is delinquent for 60 days or more, in process of
foreclosure, restructured, on the "watch list", or which currently has a
valuation allowance. We categorize loans, which are delinquent, loans in process
of foreclosure, and loans to borrowers in bankruptcy as "problem" loans.
Potential problem loans are loans placed on an internal "watch list" for which
management has concerns as to the ability of the borrower to comply with the
present loan payment terms and which may result in the loan becoming a problem
or being restructured. The decision whether to classify a performing loan as a
potential problem involves significant subjective judgments by management as to
the likely future economic conditions and developments with respect to the
borrower. We categorize loans for which the original terms of the mortgages have
been modified or for which interest or principal payments have been deferred as
"restructured" loans. We also consider matured loans that are refinanced at
below market rates as restructured.
We charge mortgage loans deemed to be uncollectible against the allowance for
losses and credit subsequent recoveries to the allowance for losses. We maintain
the allowance for losses at a level management believes to be adequate to absorb
estimated probable credit losses. Management bases its periodic evaluation of
the adequacy of the allowance for losses on known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of the underlying collateral, composition of the loan
portfolio, current economic conditions and other relevant factors. The
evaluation is inherently subjective as it requires estimating the amounts and
timing of future cash flows expected to be received on impaired loans that may
change. As a result of a change in estimates, we evaluated the adequacy of our
commercial mortgage loan allowance at December 31, 2003 and released $23.9
million from the allowance.
91
The following table represents our commercial mortgage valuation allowance for
the periods indicated:
U.S. INVESTED ASSETS
COMMERCIAL MORTGAGE VALUATION ALLOWANCE
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------- -----------------------
2004 2003
-------------------- -----------------------
($ IN MILLIONS)
Beginning balance.......................................... $ 49.6 $ 83.6
Provision.................................................. 21.2 1.3
Release.................................................... (13.8) (35.3)
-------------------- -----------------------
Ending balance............................................. $ 57.0 $ 49.6
==================== =======================
Valuation allowance as % of carrying value before reserves. 1% 1%
The following table presents the carrying amounts of problem, potential problem
and restructured commercial mortgages relative to the carrying amount of all
commercial mortgages for the periods indicated:
U.S. INVESTED ASSETS
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT
CARRYING AMOUNT
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------- -----------------------
2004 2003
-------------------- -----------------------
($ IN MILLIONS)
Total commercial mortgages ................................ $ 9,790.7 $ 9,630.4
==================== =======================
Problem commercial mortgages(1)............................ $ 45.7 $ 45.9
Potential problem commercial mortgages .................... 68.6 99.3
Restructured commercial mortgages ......................... 61.8 65.3
-------------------- -----------------------
Total problem, potential problem and
restructured commercial mortgages...................... $ 176.1 $ 210.5
==================== =======================
Total problem, potential problem and restructured
commercial mortgages as a percent of total commercial
mortgages.............................................. 2% 2%
- --------------------
(1) Problem commercial mortgages include no mortgage loans in foreclosure as of
June 30, 2004 and December 31, 2003.
EQUITY REAL ESTATE
We hold commercial equity real estate as part of our investment portfolio. As of
June 30, 2004, and December 31, 2003, the carrying amount of equity real estate
investment was $1,037.9 million and $1,516.6 million, or 2% and 3%, of U.S.
invested assets, respectively. We own real estate, real estate acquired upon
foreclosure of commercial mortgage loans and interests, both majority owned and
non-majority owned, in real estate joint ventures.
Equity real estate is categorized as either "real estate held for investment" or
"real estate held for sale". Real estate held for investment totaled $895.1
million as of June 30, 2004, and $1,003.6 million as of December 31, 2003. The
carrying value of real estate held for investment is generally adjusted for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Such impairment adjustments
are recorded as realized investment losses and accordingly, are reflected in our
consolidated results of operations. For the periods ended June 30, 2004 and
December 31, 2003, there were no such impairment adjustments.
92
The carrying amount of real estate held for sale as of June 30, 2004, and
December 31, 2003, was $142.8 million and $513.0 million, net of valuation
allowances of $8.1 million and $19.1 million, respectively. Once we identify a
real estate property to be sold and commence a plan for marketing the property,
we classify the property as held for sale. We establish a valuation allowance
subject to periodical revisions, if necessary, to adjust the carrying value of
the property to reflect the lower of its current carrying value or the fair
value, less associated selling costs.
We use research, both internal and external, to recommend appropriate product
and geographic allocations and changes to the equity real estate portfolio. We
monitor product, geographic and industry diversification separately and together
to determine the most appropriate mix.
Equity real estate is distributed across geographic regions of the country with
larger concentrations in the South Atlantic, West South Central and Pacific
regions of the United States as of June 30, 2004. By property type, there is a
concentration in office buildings that represented approximately 42% of the
equity real estate portfolio as of June 30, 2004.
OTHER INVESTMENTS
Our other investments totaled $1,093.9 million as of June 30, 2004, compared to
$1,198.8 million as of December 31, 2003. Derivatives accounted for $552.3
million in other investments as of June 30, 2004. The remaining invested assets
include minority interests in unconsolidated entities and properties owned
jointly with venture partners and operated by the partners.
INTERNATIONAL INVESTMENT OPERATIONS
As of June 30, 2004, our international investment operations consist of the
investments of Principal International comprised of $2.0 billion in invested
assets. Principal Global Investors works with each Principal International
affiliate to develop investment policies and strategies that are consistent with
the products they offer. Due to the regulatory constraints in each country, each
company maintains its own investment policies, which are approved by Principal
Global Investors. Each international affiliate is required to submit a
compliance report relative to its strategy to Principal Global Investors.
Principal Global Investors employees and international affiliate company credit
analysts jointly review each corporate credit annually.
OVERALL COMPOSITION OF INTERNATIONAL INVESTED ASSETS
As shown in the following table, the major categories of international invested
assets as of June 30, 2004, and December 31, 2003, were fixed maturity
securities and residential mortgage loans:
93
INTERNATIONAL INVESTED ASSETS
AS OF JUNE 30, AS OF DECEMBER 31,
--------------------- -------------------------
2004 2003
--------------------- -------------------------
CARRYING % OF CARRYING % OF
AMOUNT TOTAL AMOUNT TOTAL
------------ ------- ------------- ----------
($ IN MILLIONS)
Fixed maturity securities
Public.......................................... $ 1,474.5 72% $ 1,312.3 66%
Private......................................... - - 81.0 4
Equity securities................................. 38.5 2 41.8 2
Mortgage loans
Residential..................................... 329.7 16 333.1 17
Real estate held for investment................... 8.8 1 9.5 1
Other investments ................................ 188.9 9 213.3 10
------------ ------- ------------- ----------
Total invested assets.......................... 2,040.4 100% 1,991.0 100%
======= ==========
Cash and cash equivalents......................... 76.1 71.4
------------ -------------
Total invested assets and cash ................ $ 2,116.5 $ 2,062.4
============ =============
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK EXPOSURES AND RISK MANAGEMENT
Market risk is the risk that we will incur losses due to adverse fluctuations in
market rates and prices. Our primary market risk exposure is to changes in
interest rates, although we also have exposures to changes in equity prices and
foreign currency exchange rates.
The active management of market risk is an integral part of our operations. We
manage our overall market risk exposure within established risk tolerance ranges
by using the following approaches:
o rebalance our existing asset or liability portfolios;
o control the risk structure of newly acquired assets and liabilities; or
o use derivative instruments to modify the market risk characteristics of
existing assets or liabilities or assets expected to be purchased.
INTEREST RATE RISK
Interest rate risk is the risk that we will incur economic losses due to adverse
changes in interest rates. Our exposure to interest rate risk stems largely from
our substantial holdings of guaranteed fixed rate liabilities in our U.S. Asset
Management and Accumulation segment.
We manage the interest rate risk inherent in our assets relative to the interest
rate risk inherent in our liabilities. One of the measures we use to quantify
this exposure is duration. To calculate duration, we project asset and liability
cashflows. These cashflows are discounted to a net present value basis using a
spot yield curve, which is a blend of the spot yield curves for each of the
asset types in the portfolio. Duration is calculated by re-calculating these
cashflows and redetermining the net present value based upon an alternative
level of interest rates, and determining the percentage change in fair value.
As of June 30, 2004, the difference between the asset and liability durations on
our primary duration managed portfolio was +.04. This duration gap indicates
that as of this date the sensitivity of the fair value of our assets to interest
94
rate movements is greater than that of the fair value of our liabilities. Our
goal is to minimize the duration gap. Currently, our guidelines indicate that
total duration gaps between the asset and liability portfolios should be within
+/-0.25. The value of the assets in this portfolio was $30,206.3 million as of
June 30, 2004.
For products such as whole life insurance and term life insurance that are less
sensitive to interest rate risk, and for other products such as individual
single premium deferred annuities, we manage interest rate risk based on a
modeling process that considers the target average life, maturities, crediting
rates and assumptions of policyholder behavior. As of June 30, 2004, the
weighted-average difference between the asset and liability durations on these
portfolios was +.39. This duration gap indicates that as of this date the
sensitivity of the fair value of our assets to interest rate movements is
greater than that of the fair value of our liabilities. We attempt to monitor
this duration gap consistent with our overall risk/reward tolerances. The value
of the assets in these portfolios was $13,474.9 million as of June 30, 2004.
We also have a block of participating general account pension business that
passes the actual investment performance of the assets to the customer. The
investment strategy of this block is to maximize investment return to the
customer on a "best efforts" basis, and there is little or no attempt to manage
the duration of this portfolio since there is little or no interest rate risk.
The value of the assets in these portfolios was $1,783.6 million as of June 30,
2004.
Using the assumptions and data in effect as of June 30, 2004, we estimate that a
100 basis point immediate, parallel increase in interest rates decreases the net
fair value of our portfolio by approximately $65.2 million. The following table
details the estimated changes by risk management strategy. The table also gives
the weighted-average duration of the asset portfolio for each category, and the
net duration gap (i.e. the weighted average difference between the asset and
liability durations).
AS OF
JUNE 30, 2004 NET FAIR
RISK MANAGEMENT VALUE OF TOTAL DURATION NET VALUE
STRATEGY ASSETS OF ASSETS DURATION GAP CHANGE
- ---------------------------------- -------------------- --------------- --------------- --------------
(IN
(IN MILLIONS) MILLIONS)
Primary duration-managed.......... $30,206.3 3.97 .04 $ (12.1)
Duration-monitored................ 13,474.9 4.97 .39 (53.1)
Non duration-managed.............. 1,783.6 5.61 N/A N/A
-------------------- --------------
Total........................... $45,464.8 $ (65.2)
==================== ==============
Our selection of a 100 basis point immediate, parallel increase or decrease in
interest rates is a hypothetical rate scenario we use to demonstrate potential
risk. While a 100 basis point immediate, parallel increase does not represent
our view of future market changes, it is a near term reasonably possible
hypothetical change that illustrates the potential impact of such events. While
these fair value measurements provide a representation of interest rate
sensitivity, they are based on our portfolio exposures at a point in time and
may not be representative of future market results. These exposures will change
as a result of ongoing portfolio transactions in response to new business,
management's assessment of changing market conditions and available investment
opportunities.
We were also exposed to interest rate risk in our Mortgage Banking business. On
May 11, 2004, we entered into a definitive agreement for the sale of Principal
Residential Mortgage to CitiMortgage, Inc, which was completed on July 1, 2004.
CASH FLOW VOLATILITY
Cash flow volatility arises as a result of several factors. One is the inherent
difficulty in perfectly matching the cash flows of new asset purchases with that
of new liabilities. Another factor is the inherent cash flow volatility of some
95
classes of assets and liabilities. In order to minimize cash flow volatility, we
manage differences between expected asset and liability cash flows within
pre-established guidelines.
We also seek to minimize cash flow volatility by restricting the portion of
securities with redemption features held in our invested asset portfolio. These
asset securities include redeemable corporate securities, mortgage-backed
securities or other assets with options that, if exercised, could alter the
expected future cash inflows. In addition, we limit sales liabilities with
features such as puts or other options that may change the cash flow profile of
the liability portfolio.
DERIVATIVES
We use various derivative financial instruments to manage our exposure to
fluctuations in interest rates, including interest rate swaps, principal-only
swaps, interest rate floors, swaptions, U.S. Treasury futures, Treasury rate
guarantees, interest rate lock commitments and mortgage-backed forwards and
options. We use interest rate futures contracts and mortgage-backed forwards to
hedge changes in interest rates subsequent to the issuance of an insurance
liability, such as a guaranteed investment contract, but prior to the purchase
of a supporting asset, or during periods of holding assets in anticipation of
near term liability sales. We use interest rate swaps and principal-only swaps
primarily to more closely match the interest rate characteristics of assets and
liabilities. They can be used to change the sensitivity to the interest rate of
specific assets and liabilities as well as an entire portfolio. Occasionally, we
will sell a callable liability or a liability with attributes similar to a call
option. In these cases, we will use interest rate swaptions or similar products
to hedge the risk of early liability payment thereby transforming the callable
liability into a fixed term liability.
We also seek to reduce call or prepayment risk arising from changes in interest
rates in individual investments. We limit our exposure to investments that are
prepayable without penalty prior to maturity at the option of the issuer, and we
require additional yield on these investments to compensate for the risk that
the issuer will exercise such option. An example of an investment we limit
because of the option risk is residential mortgage-backed securities. We assess
option risk in all investments we make and, when we assume such risk, we seek to
price for it accordingly to achieve an appropriate return on our investments.
We have increased our credit exposure through credit default swaps by investing
in subordinated tranches of a synthetic collateralized debt obligation. The
outstanding notional amount as of June 30, 2004 was $500.0 million and the mark
to market value was $10.6 million. We also invested in credit default swaps
creating replicated assets with a notional of $398.3 million and mark to market
value of $5.1 million as of June 30, 2004.
We also offer a guaranteed fund as an investment option in our defined
contribution plans in Hong Kong. This fund contains an embedded option that has
been bifurcated and accounted for separately in realized gains (losses). We
recognized a $0.2 million pre-tax gain for the six months ended June 30, 2004.
The obligation to deliver the underlying securities of certain consolidated
grantor trusts to various unrelated trust certificate holders contains an
embedded derivative of the forecasted transaction to deliver the underlying
securities.
In conjunction with our use of derivatives, we are exposed to counterparty risk,
or the risk that counterparty fails to perform the terms of the derivative
contract. We actively manage this risk by:
o establishing exposure limits which take into account non-derivative
exposure we have with the counterparty as well as derivative exposure;
o performing similar credit analysis prior to approval on each derivatives
counterparty that we do when lending money on a long-term basis;
o diversifying our risk across numerous approved counterparties;
96
o limiting exposure to A+ credit or better;
o conducting stress-test analysis to determine the maximum exposure created
during the life of a prospective transaction;
o implementing credit support annex (collateral) agreements with selected
counterparties to further limit counterparty exposures; and
o daily monitoring of counterparty credit ratings.
All new derivative counterparties are approved by the Investment Committee. We
believe the risk of incurring losses due to nonperformance by our counterparties
is manageable.
The notional amounts used to express the extent of our involvement in swap
transactions represent a standard measurement of the volume of our swap
business. Notional amount is not a quantification of market risk or credit risk
and it may not necessarily be recorded on the balance sheet. Notional amounts
represent those amounts used to calculate contractual flows to be exchanged and
are not paid or received, except for contracts such as currency swaps. Actual
credit exposure represents the amount owed to us under derivative contracts as
of the valuation date. The following tables present our position in, and credit
exposure to, derivative financial instruments as of June 30, 2004, and December
31, 2003:
DERIVATIVE FINANCIAL INSTRUMENTS - NOTIONAL AMOUNTS
AS OF JUNE 30, AS OF DECEMBER 31,
--------------------------- ------------------------
2004 2003
--------------------------- ------------------------
NOTIONAL % OF NOTIONAL % OF
AMOUNT TOTAL AMOUNT TOTAL
---------------- --------- -------------- --------
($ IN MILLIONS)
Interest rate swaps............................. $ 5,303.9 52% $ 5,025.0 49%
Foreign currency swaps.......................... 2,571.8 25 2,823.4 27
Credit default swaps ........................... 898.3 9 863.2 8
Bond forwards................................... 511.0 5 467.2 5
Swaptions....................................... 458.8 5 315.0 3
Currency forwards............................... 301.3 3 282.0 3
MBS forwards.................................... 158.5 1 522.1 5
Call options.................................... 30.0 - 30.0 -
Put options..................................... 21.0 - - -
Bond options.................................... 17.5 - 17.5 -
U.S. Treasury futures........................... 8.0 - 27.8 -
Other........................................... 1.5 - 1.5 -
---------------- --------- -------------- --------
Total......................................... $ 10,281.6 100% $ 10,374.7 100%
================ ========= ============== ========
97
DERIVATIVE FINANCIAL INSTRUMENTS - CREDIT EXPOSURES
AS OF JUNE 30, AS OF DECEMBER 31,
--------------------------- ------------------------
2004 2003
--------------------------- ------------------------
CREDIT % OF CREDIT % OF
EXPOSURE TOTAL EXPOSURE TOTAL
---------------- --------- -------------- --------
($ IN MILLIONS)
Foreign currency swaps.......................... $ 407.9 71% $ 637.1 78%
Interest rate swaps............................. 84.7 15 69.0 9
Bond forwards................................... 46.6 8 52.1 6
Credit default swaps............................ 17.9 3 45.9 6
Call options.................................... 7.5 2 6.6 1
Swaptions ...................................... 6.6 1 1.8 -
Currency forwards............................... 1.9 - 0.3 -
---------------- --------- -------------- --------
Total......................................... $ 573.1 100% $ 812.8 100%
================ ========= ============== ========
The following table shows the interest rate sensitivity of our derivatives
measured in terms of fair value. These exposures will change as a result of
ongoing portfolio and risk management activities.
AS OF JUNE 30, 2004
--------------------------------------------------------------------------------------------
FAIR VALUE (NO ACCRUED INTEREST)
----------------------------------------------------
WEIGHTED
AVERAGE -100 BASIS +100 BASIS
NOTIONAL TERM POINT POINT
AMOUNT (YEARS) CHANGE NO CHANGE CHANGE
-------------------- ---------------- ------------ ------------- ----------------------
($ IN MILLIONS)
Interest rate swaps.................. $ 5,303.9 5.94(1) $ (104.1) $ 39.8 $ 168.4
Bond forwards........................ 511.0 2.24(5) 77.2 46.6 17.9
Swaptions............................ 458.8 1.47(4) (17.4) (7.7) (3.6)
Mortgage-backed forwards and options. 158.5 0.04(5) 0.9 (0.4) (1.6)
Bond options......................... 17.5 2.29(5) (1.6) (0.5) -
Put options.......................... 21.0 4.98(5) 0.4 0.8 1.3
U.S. Treasury futures................ 8.0 0.23(3) (0.5) - 0.4
-------------------- ------------ ------------- ----------------------
Total............................. $ 6,478.7 $ (45.1) $ 78.6 $ 182.8
==================== ============ ============= ======================
- --------------------
(1) Based on maturity date of swap.
(2) Based on maturity date of floor.
(3) Based on maturity date.
(4) Based on option date of swaption.
(5) Based on settlement date.
(6) Based on expiration date.
We use U.S. Treasury futures to manage our over/under commitment position, and
our position in these contracts changes daily.
98
DEBT ISSUED AND OUTSTANDING
As of June 30, 2004, the aggregate fair value of long-term debt was $1,196.0
million. A 100 basis point, immediate, parallel decrease in interest rates would
increase the fair value of debt by approximately $45.6 million.
AS OF JUNE 30, 2004
--------------------------------------------------------------
FAIR VALUE (NO ACCRUED INTEREST)
--------------------------------------------------------------
-100 BASIS +100 BASIS
POINT CHANGE NO CHANGE POINT CHANGE
------------------- ----------------- --------------------
(IN MILLIONS)
7.95% notes payable, due 2004...................... $ 205.0 $ 204.2 $ 203.4
8.2% notes payable, due 2009....................... 588.3 562.1 537.4
8% surplus notes payable, due 2044................. 121.8 110.1 99.0
Non-recourse mortgages and notes payable........... 265.4 259.3 253.4
Other mortgages and notes payable.................. 61.1 60.3 59.5
------------------- ----------------- --------------------
Total long-term debt............................. $ 1,241.6 $ 1,196.0 $ 1,152.7
=================== ================= ====================
- ----------------------
EQUITY RISK
Equity risk is the risk that we will incur economic losses due to adverse
fluctuations in a particular common stock. As of June 30, 2004, the fair value
of our equity securities was $687.9 million. A 10% decline in the value of the
equity securities would result in an unrealized loss of $68.8 million. As of
June 30, 2004, a 10% immediate and sustained decline in the equity markets would
result in a decrease of asset-based fee revenues of $20.5 million over the next
six months. The selection of a 10% unfavorable change in the equity markets
should not be construed as a prediction by us of future market events, but
rather as an illustration of the potential impact of such an event.
FOREIGN CURRENCY RISK
Foreign currency risk is the risk that we will incur economic losses due to
adverse fluctuations in foreign currency exchange rates. This risk arises from
our international operations and foreign currency-denominated funding agreements
issued to non-qualified institutional investors in the international market. The
notional amount of our currency swap agreements associated with
foreign-denominated liabilities as of June 30, 2004, was $2,326.2 million. We
also have fixed maturity securities that are denominated in foreign currencies.
However, we use derivatives to hedge the foreign currency risk, both interest
payments and the final maturity payment, of these funding agreements and
securities. As of June 30, 2004, the fair value of our foreign currency
denominated fixed maturity securities was $299.2 million. We use currency swap
agreements of the same currency to hedge the foreign currency exchange risk
related to these investments. The notional amount of our currency swap
agreements associated with foreign-denominated fixed maturity securities as of
June 30, 2004, was $242.7 million. With regard to our international operations,
we attempt to do as much of our business as possible in the functional currency
of the country of operation. At times, however, we are unable to do so, and in
these cases, we use foreign exchange derivatives to hedge the resulting risks.
Additionally, we may take measures to hedge our net equity investments in our
foreign subsidiaries from currency risks. As of June 30, 2004, we used currency
forwards to hedge a portion of our net equity investment in our Mexican
operations from currency fluctuations. The outstanding notional amount of the
currency forwards relating to these operations was $30.5 million (approximately
$350 million Mexican pesos) and we recognized a $0.9 million pre-tax gain in
other comprehensive income for the six months ended June 30, 2004.
We estimate that as of June 30, 2004, a 10% immediate unfavorable change in each
of the foreign currency exchange rates to which we are exposed would result in
no material change to the net fair value of our foreign currency denominated
instruments identified above, including the currency swap agreements. The
99
selection of a 10% immediate unfavorable change in all currency exchange rates
should not be construed as a prediction by us of future market events, but
rather as an illustration of the potential impact of such an event.
EFFECTS OF INFLATION
We do not believe that inflation, in the United States or in the other countries
in which we operate, has had a material effect on our consolidated operations
over the past five years. In the future, however, we may be affected by
inflation to the extent it causes interest rates to rise.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information that we must disclose in our filings
with the SEC is recorded, processed, summarized and reported on a timely basis,
we have adopted disclosure controls and procedures. Our Chief Executive Officer,
J. Barry Griswell, and our Chief Financial Officer, Michael H. Gersie, have
reviewed and evaluated our disclosure controls and procedures as of June 30,
2004, and have concluded that our disclosure controls and procedures are
effective.
There was no change in our internal control over financial reporting during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are regularly involved in litigation, both as a defendant and as a plaintiff
but primarily as a defendant. Litigation naming us as a defendant ordinarily
arises out of our business operations as a provider of asset management and
accumulation products and services, life, health and disability insurance and
mortgage banking. Some of the lawsuits are class actions, or purport to be, and
some include claims for punitive damages. In addition, regulatory bodies, such
as state insurance departments, the SEC, the National Association of Securities
Dealers, Inc., the Department of Labor and other regulatory bodies regularly
make inquiries and conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, ERISA and
laws governing the activities of broker-dealers.
While the outcome of any pending or future litigation cannot be predicted,
management does not believe that any pending litigation will have a material
adverse effect on our business, financial position or net income. The outcome of
litigation is always uncertain, and unforeseen results can occur. It is possible
that such outcomes could materially affect net income in a particular quarter or
annual period.
100
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table presents the amount of our share purchase activity for the
periods indicated:
ISSUER PURCHASES OF EQUITY SECURITIES
MAXIMUM
NUMBER (OR
APPROXIMATE
DOLLAR VALUE) OF
TOTAL NUMBER OF SHARES (OR UNITS)
TOTAL NUMBER SHARES (OR UNITS) THAT MAY YET BE
OF AVERAGE PURCHASED AS PART PURCHASED UNDER
SHARES (OR PRICE PAID OF PUBLICLY THE PLANS OR
UNITS) PER SHARE ANNOUNCED PROGRAMS (IN
PERIOD PURCHASED (OR UNIT) PLANS OR PROGRAMS MILLIONS)
- -------------------------------------------- ----------------- ------------- ---------------------- ---------------------
January 1, 2004 - January 31, 2004...... 644(3) $ 33.07 - $147.0 (1)
February 1, 2004 - February 29, 2004.... - - - $147.0 (1)
March 1, 2004 - March 31, 2004.......... 9,600(4) $ 36.37 - $147.0 (1)
April 1, 2004 - April 30, 2004.......... 2,237,500 $ 35.48 2,237,500 $ 67.6 (1)
May 1, 2004 - May 31, 2004.............. 2,104,811 $ 34.77 2,104,811 $694.4 (1),(2)
June 1, 2004 - June 30, 2004............ 1,964,600 $ 35.32 1,964,600 $625.0 (2)
----------------- ----------------------
Total................................... 6,317,155 $ 35.19 6,306,911 $625.0 (2)
================= ======================
- ---------------------------
(1) In May 2003, our board of directors authorized a repurchase program of up
to $300.0 million of our outstanding common stock. This program began after
the completion of the November 2002 repurchase program, which authorized
the repurchase of up to $300.0 million of our outstanding common stock. On
May 26, 2004, the program that was announced in May 2003 was completed.
(2) In May 2004, our board of directors authorized a repurchase program of up
to $700.0 million of our outstanding common stock. Our first purchase on
this program was on May 28, 2004, which was after the completion of the May
2003 repurchase program, which authorized the repurchase of up to $300.0
million of our outstanding common stock. There is no expiration date for
the program that was announced in May 2004.
(3) Principal Financial Services, Inc., a subsidiary of Principal Financial
Group, Inc., purchased J.F. Molloy and Associates, Inc. effective January
2, 2004. At the time of acquisition, 644 shares of the common stock of
Principal Financial Group, Inc., which were granted as part of our
demutualization, were held in the name of J.F. Molloy and Associates, Inc.
(4) This activity represents the portion of common stock issued and acquired
for a stock incentive award that was utilized to execute the award.
101
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders on May 18, 2004, the
stockholders elected four Class III directors each for a term expiring at the
Company's 2007 annual meeting. The voting results are as follows:
VOTES FOR VOTES WITHHELD
David J. Drury 186,730,726 4,041,892
C. Daniel Gelatt 179,497,836 11,274,782
Sandra L. Helton 184,183,623 6,588,995
Federico F. Pena 186,340,222 4,432,396
The directors whose terms of office continued and the years their terms expire
are as follows:
CLASS I DIRECTORS - TERM EXPIRES IN 2005
Betsy J. Bernard
Jocelyn Carter-Miller
Gary E. Costley
William T. Kerr
CLASS II DIRECTORS - TERM EXPIRES IN 2006
J. Barry Griswell
Charles S. Johnson
Richard L. Keyser
Arjun K. Mathrani
Elizabeth E. Tallett
Further, the stockholders ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for 2004. The voting results are as follows:
FOR AGAINST ABSTAIN
182,121,543 5,269,318 3,381,757
The stockholders also voted to approve the Principal Financial Group, Inc.
Annual Incentive Plan pursuant to the following vote:
FOR AGAINST ABSTAIN
157,671,896 28,125,859 4,974,863
102
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER Description
2.5 Stock Purchase Agreement dated as of May 11, 2004 by and
between Principal Holding Company and CitiMortgage, Inc.
10.8 Employment Agreement dated as of April 1, 2004 by and
between Principal Financial Group, Inc., Principal
Financial Services, Inc., Principal Life Insurance Company
and J. Barry Griswell
10.9 Change-of-Control Supplement and Amendment to Employment
Agreement dated as of April 1, 2004 by and between
Principal Financial Group, Inc., Principal Financial
Services, Inc., Principal Life Insurance Company and
J. Barry Griswell
12 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges
31.1 Certification of J. Barry Griswell
31.2 Certification of Michael H. Gersie
32.1 Certification Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code - J. Barry Griswell
32.2 Certification Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code - Michael H. Gersie
B. REPORTS ON FORM 8-K
Current Report on Form 8-K dated March 31, 2004, and filed May 4, 2004.
Current Report on Form 8-K dated and filed May 12, 2004.
Current Report on Form 8-K dated and filed May 19, 2004.
Current Report on Form 8-K dated June 7, 2004, and filed June 15, 2004.
103
SIGNATURE
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.
PRINCIPAL FINANCIAL GROUP, INC.
Dated: August 4, 2004 By /S/ MICHAEL H. GERSIE
----------------------------------
Michael H. Gersie
Executive Vice President and
Chief Financial Officer
Duly Authorized Officer,
Principal Financial Officer, and
Chief Accounting Officer
104
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
2.5 Stock Purchase Agreement dated as of May 11, 2004
by and between Principal Holding Company and
CitiMortgage, Inc................................... 106
10.8 Employment Agreement dated as of April 1, 2004 by
and between Principal Financial Group, Inc.,
Principal Financial Services, Inc., Principal Life
Insurance Company and J. Barry Griswell............. 171
10.9 Change-of-Control Supplement and Amendment to
Employment Agreement dated as of April 1, 2004 by
and between Principal Financial Group, Inc.,
Principal Financial Services, Inc., Principal Life
Insurance Company and J. Barry Griswell............. 189
12 Statement Regarding Computation of Ratio of
Earnings to Fixed Charges........................... 226
31.1 Certification of J. Barry Griswell.................. 227
31.2 Certification of Michael H. Gersie.................. 228
32.1 Certification Pursuant to Section 1350 of Chapter
63 of Title 18 of the United States Code -
J. Barry Griswell................................... 229
32.2 Certification Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code -
Michael H. Gersie................................... 230
105
EXHIBIT 2.5
STOCK PURCHASE AGREEMENT
dated as of
May 11, 2004
by and between
Principal Holding Company
and
CitiMortgage, Inc.
106
ARTICLE 1 DEFINITIONS
1.1 DEFINED TERMS
1.2 OTHER DEFINED TERMS
ARTICLE 2 PURCHASE AND SALE OF STOCK
2.1 TRANSFER OF STOCK
2.2 CONSIDERATION FOR STOCK
2.3 PRE-CLOSING DELIVERIES
2.4 SETTLEMENT DATE
2.5 CLOSING DATE BALANCE SHEET
2.6 PURCHASE PRICE ALLOCATION
ARTICLE 3 CLOSING
3.1 TIME AND PLACE OF CLOSING
3.2 DELIVERIES BY SELLER
3.3 DELIVERIES BY BUYER
3.4 SETTLEMENT OF INTERCOMPANY ACCOUNTS AND BORROWINGS AND
TAX AMOUNTS
3.5 SETTLEMENT DATE PAYMENTS
3.6 CONFIRMATION AND ADJUSTMENT OF FINAL PURCHASE PRICE
AND SETTLEMENT AMOUNT
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER
4.1 ORGANIZATION OF SELLER
4.2 ORGANIZATION OF THE COMPANY
4.3 CAPITAL STOCK
4.4 AUTHORIZATION
4.5 SUBSIDIARIES
4.6 FINANCIAL STATEMENTS; MINUTE BOOKS
4.7 PROPERTIES AND INSURANCE
4.8 CONTRACTS AND COMMITMENTS
4.9 ABSENCE OF UNDISCLOSED LIABILITIES
4.10 NO CONFLICT OR VIOLATION
4.11 CONSENTS AND APPROVALS
4.12 LITIGATION.
4.13 COMPLIANCE WITH LAW: PERMITS AND LICENSES
4.14 NO BROKERS
4.15 INTELLECTUAL PROPERTY AND TECHNOLOGY
4.16 TAXES
4.17 EMPLOYEE BENEFIT PLANS
4.18 ENVIRONMENTAL LIABILITY
4.19 ADVANCES/RECEIVABLES
4.20 NO RECOURSE
4.21 LOAN REPRESENTATIONS AND WARRANTIES
4.22 SECURITIZATION TRANSACTIONS
4.23 ABSENCE OF CERTAIN CHANGES OR EVENTS
4.24 LABOR MATTERS
4.25 TRANSACTIONS WITH AFFILIATES
4.26 SUFFICIENCY OF ASSETS
4.27 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
4.28 NO REGULATORY IMPEDIMENT
4.29 MASTER SERVICING
4.30 DILIGENCE MATERIALS
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER
5.1 ORGANIZATION OF BUYER
5.2 AUTHORIZATION
5.3 CONSENTS AND APPROVALS
107
5.4 NO BROKERS
5.5 NO CONFLICT OR VIOLATION
5.6 FINANCIAL ABILITY
5.7 ACQUISITION OF STOCK AND OTHER PURCHASED ASSETS
5.8 NO REGULATORY IMPEDIMENT
5.9 GAAP
ARTICLE 6 ACTIONS BY SELLER AND BUYER PRIOR TO THE CLOSING
6.1 MAINTENANCE OF BUSINESS
6.2 CERTAIN PROHIBITED TRANSACTIONS
6.3 ACCESS
6.4 REGULATORY APPROVALS
6.5 EFFORTS TO CLOSE
6.6 AGENCIES
6.7 CONSENTS AND WAIVERS OF THIRD PARTIES
6.8 MONTHLY FINANCIAL INFORMATION
6.9 PRECLOSING TRANSACTIONS
ARTICLE 7 CONDITIONS TO SELLER'S OBLIGATIONS.
7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS
7.2 CONSENTS
7.3 NO GOVERNMENTAL ORDERS
7.4 CERTIFICATES
7.5 CORPORATE AUTHORITY
ARTICLE 8 CONDITIONS TO BUYER'S OBLIGATIONS
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS
8.2 CONSENTS
8.3 NO GOVERNMENTAL ORDERS
8.4 CERTIFICATES
8.5 CORPORATE AUTHORITY
ARTICLE 9 ACTIONS BY SELLER AND BUYER AFTER THE CLOSING
9.1 BOOKS AND RECORDS
9.2 FURTHER ASSURANCES
9.3 NAME CHANGE AND LIMITED USE OF MARK
9.4 EMPLOYEE BENEFIT PLANS
9.5 NONCOMPETITION AND NONSOLICITATION
9.6 ANCILLARY AGREEMENTS
9.7 CUSTODIAL ACCOUNT BALANCES
9.8 POST-CLOSING COOPERATION AND RETENTION OF RECORDS
ARTICLE 10 INDEMNIFICATION
10.1 INDEMNIFICATION BY SELLER
10.2 INDEMNIFICATION BY BUYER
10.3 COORDINATION WITH TAX INDEMNITY
10.4 INDEMNIFICATION PROCEDURE
10.5 INDEMNIFICATION AS EXCLUSIVE REMEDY
10.6 DISTRIBUTION OF EXCESS HOLDBACK AMOUNT
10.7 GUARANTEE
ARTICLE 11 TAXES
11.1 ELECTION UNDER CODE SECTION 338(H)(10)
11.2 TRANSFER TAXES
11.3 INDEMNIFICATION FOR TAXES
108
11.4 PAYMENTS
11.5 TAX RETURNS
11.6 CONTEST PROVISIONS
11.7 TAX SHARING AGREEMENTS
11.8 ASSISTANCE AND COOPERATION
11.9 RETENTION OF RECORDS
11.10 SELLER NOT A FOREIGN PERSON
11.11 OTHER
ARTICLE 12 MISCELLANEOUS
12.1 TERMINATION
12.2 EFFECT OF TERMINATION
12.3 ASSIGNMENT
12.4 NOTICES
12.5 CHOICE OF LAW; JURISDICTION AND FORUM; WAIVER OF JURY
TRIAL
12.6 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS
12.7 COUNTERPARTS
12.8 INVALIDITY
12.9 HEADINGS
12.10 EXPENSES
12.11 PUBLICITY
12.12 DISCLOSURE SCHEDULES1
12.13 CONSTRUCTION OF AGREEMENT
12.14 DISCLAIMER OF WARRANTIES
109
LIST OF SCHEDULES AND EXHIBITS *
SCHEDULES
1.2 Mortgage Loan Schedule
1.3 Reserve Schedule
1.4 Terms of Transition Agreement
2.2 Calculation of Purchase Price
2.2-I Servicing Value Schedule
2.5(a) Closing Date Balance Sheet
3.4 Intercompany Accounts and Tax Amounts
4.3 Capital Stock
4.5 Subsidiaries
4.7(a) Real Property (other than REO)
4.7(b) Certain Leases
4.7(c) Insurance Policies
4.8(a) Certain Contracts
4.8(b) Invalid or Breached Contracts
4.8(c) Mortgage Servicing Portfolio
4.9 Undisclosed Liabilities
4.11 Consents and Approvals
4.12 Litigation
4.13(a) Regulatory Matters
4.13(c) Administrative Investigations
4.13(d) Regulatory Documents
4.15(a)(1) Company Intellectual Property
4.15(a)(2) Company Information Technology
4.15(a)(3) Excluded IT
4.15(a)(4) Third Party IT
4.15(b) IT Exclusions
4.16 Tax Matters
4.16(j) Securitization Entities
4.16(q) 338(h)(10) Election
4.17 Mortgage Group Plans
4.17(a) PRMI Employee Benefit Plans
4.17(d) PRMI Qualified Plans
4.17(e) Value of Benefits
4.17(i) Retention Agreements
4.17(j) Medical Benefits
4.19(a) Advances, Defaulted or Delinquent Loans
4.20 Recourse
4.21(a) Exceptions to Loan Representations and Warranties
4.21(e) Servicing Agreements
4.21(f) Uncertified Mortgage Pools
4.21(g) Past Due Payments
4.21(h) Government Sanctions
4.21(j) Title Insurance Claims
4.21(l) High Cost Loans
4.21(m) Payments Relating to Certain Mortgages
4.21(n) Loan Proceed Disbursements
4.22(a) Securitized Transactions
4.23 Absence of Certain Changes or Events
4.25 Transactions with Affiliates
4.30(a)-(b) Due Diligence Materials
6.2(c) Certain Prohibited Transactions
6.2(f) Disposition of Assets
6.2(g) Servicing Payments
110
6.2(h) Indebtedness
6.9(a) Preclosing Transactions
9.3(b) Internet Domain Names
EXHIBITS
A Servicing Rights Age Adjustment
B Servicing Rights Rate Adjustment
C Servicing Rights Volatility Adjustment
D Pipeline Loan Servicing Value
E Warehouse Loan Servicing Value
F Debt Mark
G List of Marks
H Policies on Use of Licensed Marks
* Principal Financial Group, Inc. agrees to furnish supplementally a copy of
any omitted schedule to the Commission upon request.
111
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement, dated as of May 11, 2004, is by and
between Principal Holding Company, an Iowa corporation ("SELLER"), CitiMortgage,
Inc., a Delaware corporation ("BUYER"), and, solely for purposes of SECTION 10.7
hereof, Principal Financial Services, Inc ("GUARANTOR").
RECITALS
A. Seller owns all of the issued and outstanding capital stock (the
"STOCK") of Principal Residential Mortgage, Inc., an Iowa corporation ("PRMI" or
"COMPANY").
B. The Company is engaged in a mortgage banking business conducted on a
nationwide basis.
C. The Company conducts various of its mortgage banking and related
financing activities through wholly owned Subsidiaries.
D. The Buyer desires to purchase from Seller, and Seller desires to
sell to Buyer, all of the Stock of the Company and thereby to acquire the
Company and the Subsidiaries, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINED TERMS.
As used herein, the terms below shall have the following meanings:
"ADVANCES" means, with respect to the Company or any Subsidiary and the
Servicing Agreements, the moneys that have been advanced by the Company or any
Subsidiary on or before the Closing Date from its funds in connection with its
servicing of the Loans in accordance with Applicable Requirements.
"AFFILIATE" means a Person that directly or indirectly through one or
more intermediaries controls, is controlled by or is under common control with
the Person specified. For purposes of this definition, the term "control"
(including the terms "controlling," "controlled by" and "under common control
with") of a Person means the possession, direct or indirect, of the power to (i)
vote 50% or more of the voting securities or interests of such Person or (ii)
direct or cause the direction of the management and policies of such Person,
whether by contract or otherwise.
"AGENCY OR AGENCIES" means FHA, VA, HUD, a State Agency, FNMA, FHLMC or
GNMA, as applicable.
"AGGREGATE OUTSTANDING LOAN BALANCE" means the aggregate sum of the
principal balances of the mortgage loans held by the Securitization Entity.
"AGREEMENT" means this Stock Purchase Agreement, together with all
schedules (including the Disclosure Schedules) and exhibits referenced herein.
"APPLICABLE REQUIREMENTS" means and includes, as of the time of
reference, with respect to the origination of the Pipeline Loans, or the
origination, purchase, sale, servicing and securitization of the Loans, or
handling of REO, the Servicing Agreements, Securitization Instruments and
Securitization Transactions, all of the following: (i) all contractual
obligations of the Company or any Subsidiary or any Originator, Securitization
Entity or Prior Servicer with respect to any Securitization Transaction or
112
Servicing under any Servicing Agreement, Securitization Instrument, Mortgage
Note, Mortgage and other Mortgage Loan Document or any commitment or other
contractual obligation relating to a Pipeline Loan, (ii) all applicable
underwriting and servicing guidelines of the Company or any Subsidiary as
incorporated in the Seller and Servicing Guides, (iii) all Law applicable to the
Company or any Subsidiary or any Originator, Securitization Entity or Prior
Servicer, (iv) all other applicable requirements and guidelines of each
governmental agency, board, commission, instrumentality and other governmental
or quasi-governmental body or office having jurisdiction, including, without
limitation, those of any Investor and any Insurer and (v) all other applicable
judicial and administrative judgments, orders, stipulations, awards, writs and
injunctions.
"AVERAGE AGGREGATE OUTSTANDING LOAN BALANCE" means, for any taxable
period, the average daily Aggregate Outstanding Loan Balance of the relevant
Securitization Entity during such relevant taxable period.
"BALANCE SHEET" means the unaudited consolidated balance sheet for the
Company dated February 29, 2004 and delivered to Buyer, which shall be prepared
in accordance with GAAP consistently applied and the policies, procedures and
methodologies employed by the Company in the preparation of the Financial
Statements.
"BUSINESS DAY" means any day except a Saturday or Sunday or other day
on which commercial banks in New York, New York are required or authorized by
law or executive order to close.
"BUYER EMPLOYEE BENEFIT PLAN" means an Employee Benefit Plan sponsored
by Buyer or any of its subsidiaries for the benefit of Continuing Employees.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, 46 United States Code Section 96.1 et seq., as
amended.
"CERTIFICATE INSURER" means a provider of an insurance policy insuring
against certain specified losses or shortfalls with respect to mortgage-backed
securities.
"CLOSING DATE" means the date on which the Closing shall occur, which
shall be the first calendar day in the month immediately following the month in
which all consents, approvals and waivers required to have been obtained
pursuant to SECTIONS 7.2 and 8.2 hereof have been obtained and any required
waiting periods have expired.
"CLOSING DATE BALANCE SHEET" means the unaudited consolidated balance
sheet for the Company as of the Cut-Off Time, which shall be prepared in
accordance with GAAP and on the same basis as the Balance Sheet, using the
policies, procedures and methodologies employed by the Company in the
preparation of the Financial Statements and delivered by Buyer to Seller
pursuant to SECTION 2.5 hereof.
"CLOSING DATE TAX AMOUNTS" means the net amount reflected on the
Closing Date Balance Sheet relating to federal, state, local or foreign income
or franchise Taxes, or Taxes measured by or based on net income (for the
avoidance of doubt, such amounts shall include, without limitation, any deferred
tax assets and deferred tax liabilities), of the Company and/or its
Subsidiaries; for purposes of SECTION 3.4, such net amount shall be an amount
payable by Buyer to Seller if such net amount is a liability, and shall be an
amount payable by Seller to Buyer if such net amount is an asset.
"CLOSING NET BOOK VALUE" means an amount equal to the stockholder's
equity of the Company reflected on the Closing Date Balance Sheet.
"CODE" means the Internal Revenue Code of 1986, as it may be amended
from time to time.
"COLLATERAL" means the property securing a Loan.
"COLLATERAL CERTIFICATE" means a security based on and backed by a
Mortgage Pool, which security has been pledged, granted or sold to secure or
support payments on specific asset-backed securities that are administered
pursuant to a Servicing Agreement.
113
"COLLATERAL CERTIFICATE POOL" means a group of Collateral Certificates
that have been pledged, granted or sold to secure or support payments on
specific asset-backed securities which are administered pursuant to a specific
Servicing Agreement.
"CONTINUING EMPLOYEES" means any employee of PRMI or any Subsidiary on
the Closing Date, except for any employees whom Buyer and Seller agree may be
retained by Seller.
"CONTRACTS" means all agreements, contracts, commitments and
undertakings, written or oral, to which the Company or any Subsidiary is a
party, an obligor or a beneficiary, or by which any of their respective assets
or properties is bound.
"CUSTODIAL ACCOUNT" means all funds held or directly controlled by the
Company or any Subsidiary with respect to any Loan or any Collateral
Certificate, including, but not limited to, all principal and interest funds and
any other funds due Investors, buydown funds, suspense funds, funds for the
payment of taxes, assessments, insurance premiums, ground rents and similar
charges, funds from hazard insurance loss drafts and other mortgage escrow and
impound amounts (including interest thereon for the benefit of Mortgagors, if
applicable).
"CUSTODIAL FILE" means, with respect to a Loan, all of the documents
that must be maintained on file with a document custodian, Investor, trustee or
other designated agent under Applicable Requirements.
"CUT-OFF TIME" means 11:59 p.m. Central Time on the calendar day
immediately preceding the Closing Date.
"DEBT MARK" means an amount determined pursuant to EXHIBIT F hereto.
"DISCLOSURE SCHEDULES" means the schedules attached hereto and
delivered by Seller to Buyer as of the date hereof. Information disclosed in any
section of the Disclosure Schedule shall be deemed to be disclosed with respect
to other sections of this Agreement or the Disclosure Schedule only to the
extent such disclosure would be reasonably apparent in the light of the
substance of the disclosure made or to the extent there is a specific cross
reference.
"EARLY FUNDED LOANS" means Loans as to which the Company or the
applicable Subsidiary elects an early funding settlement option with the
applicable Investor when it delivers a pool purchase transaction, such as FNMA's
"As Soon As Pooled" options.
"EBO TRUST" means The Principal Residential Mortgage EBO Trust, a
Delaware business trust.
"EMPLOYEE BENEFIT PLAN" means any (i) "employee benefit plan" within
the meaning of Section 3(3) of ERISA, (ii) stock option, stock purchase,
restricted stock, equity compensation, deferred compensation, bonus, incentive
compensation, fringe benefit, sick leave, vacation, paid or unpaid leave, profit
sharing, pension, retirement, deferred compensation, medical, life, disability,
accident, salary continuation, retention, supplemental retirement, severance,
termination pay, change-of-control and unemployment benefit plans, programs or
agreements (whether or not insured), or (iii) employment agreement.
"ENCUMBRANCES" means any lien, charge, adverse right, claim, mortgage,
security interest or encumbrance in favor of any party.
"ENVIRONMENTAL LAWS" means all federal, state, district, and local
laws, and all rules or regulations promulgated thereunder, applicable to the
Company and the Subsidiaries relating to pollution, the protection of the
environment or human health or relating to the release, threatened release or
handling of any hazardous, toxic, radioactive or dangerous materials or other
materials regulated under any Environmental Law. Environmental Laws shall
include without limitation CERCLA, the Toxic Substances Control Act, as amended,
the Hazardous Materials Transportation Act, as amended, the Resource
Conservation and Recovery Act, as amended, the Clean Water Act, as amended, the
Safe Drinking Water Act, as amended, the Clean Air Act, as amended, the Atomic
Energy Act of 1954, as amended, the Occupational Safety and Health Act, as
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amended, and all analogous laws promulgated or issued by any state or other
governmental authority.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" with respect to any Person, means any trade or
business that is a member of the same controlled group of corporations as such
Person, within the meaning of Section 414(b) of the Code, that is under common
control with such Person, within the meaning of Section 414(c) of the Code, that
is a member of the same affiliated service group as such Person, within the
meaning of Section 414(m) of the Code, or that is otherwise required to be
aggregated with such Person pursuant to Section 414(o) of the Code.
"ESTIMATED PURCHASE PRICE" means an amount determined pursuant to
SCHEDULE 2.2.
"FED FUNDS RATE" means, for any date, the weighted average of the rates
set forth in the weekly statistical release H.15(519) (or any successor
publication) published by the Board of Governors of the Federal Reserve System
opposite the caption "Federal Funds (Effective)."
"FHA" means the Federal Housing Administration of HUD or any successor
thereto.
"FHLMC" means the Federal Home Loan Mortgage Corporation or any
successor thereto.
"FINAL PURCHASE PRICE" means an amount determined pursuant to SCHEDULE
2.2.
"FNMA" means the Federal National Mortgage Association or any successor
thereto.
"FORECLOSURE" means the process culminating in the acquisition of title
to a Mortgaged Property in a foreclosure sale or by a deed in lieu of
foreclosure or pursuant to any other comparable procedure allowed under
Applicable Requirements.
"GAAP" means generally accepted accounting principles in the United
States which, unless otherwise indicated, are applied on a consistent basis.
"GNMA" means the Government National Mortgage Association or any
successor thereto.
"HAZARDOUS MATERIALS" means any materials or wastes, defined, listed,
classified or regulated as hazardous, toxic, a pollutant, a contaminant or
dangerous in or under any Environmental Laws, including without limitation,
petroleum, petroleum products, friable asbestos, molds, urea formaldehyde,
radioactive materials and polychlorinated biphenyls.
"HOLDBACK AMOUNT" means the amount disclosed on SCHEDULE 2.2 hereof.
"HUD" means the United States Department of Housing and Urban
Development or any successor thereto.
"INFORMATION TECHNOLOGY" means (i) computer software, including
application software, compilers and tool kits in object (or executable) code
and/or (human readable) source code, and related documentation; (ii) proprietary
computer programming languages and related documentation and materials; (iii)
data feeds and databases; (iv) voice and data circuits, including, by way of
example but not of limitation, hubs and routers; (v) telecommunications systems
and services; and (vi) computer hardware and operating systems.
"INSURANCE CONTRACT" means any of the insurance policies, Contracts of
insurance or reinsurance, policy endorsements and certificates of insurance
pertaining to the insurance products or coverages underwritten by the Company or
any of the Subsidiaries.
"INSURER" means a Person who (i) insures or guarantees all or any
portion of the risk of loss on any Loan, including, without limitation, any
Agency and any provider of private mortgage insurance, standard hazard
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insurance, flood insurance, earthquake insurance or title insurance with respect
to any Loan or related Mortgaged Property, (ii) provides any fidelity bond,
direct surety bond, letter of credit, other credit enhancement instrument or
errors and omissions policy or (iii) is a Certificate Insurer.
"INTELLECTUAL PROPERTY" means (i) patents and patent applications,
including reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations of such patents and patent applications; (ii)
registered and unregistered trademarks, service marks, trade dress, logos, trade
names and corporate names, or other identifying marks, indicators or labels,
together with the goodwill associated with them and applications for, and
renewals of, each of them; (iii) registered and unregistered copyrights and
applications for, and renewals of, copyrights; (iv) trade secrets; and (vi)
Internet domain names and Web site content.
"INTERCOMPANY ACCOUNTS AND BORROWINGS" means, for purposes of SECTION
3.4, the accounts and borrowings reflected on SCHEDULE 3.4 relating to
receivables and payables of the Company and Subsidiaries with respect to other
members of The Principal Financial Group, Inc. affiliated group. For purposes of
SECTION 3.4, if the net amount of Intercompany Accounts and Borrowings reflected
on the relevant Pre-Closing Balance Sheet or Closing Date Balance Sheet is a
liability, such net amount shall be an amount payable by Buyer to the Seller,
and if the net amount of Intercompany Accounts and Borrowings is an asset, such
net amount shall be an amount payable by Seller to Buyer.
"INVESTMENT COMMITMENT" means the optional or mandatory commitment of
the Company or any Subsidiary to sell to any Person, and a Person to purchase
from the Company or such Subsidiary, a Warehouse Loan or an interest in a
Warehouse Loan owned or to be acquired by the Company or such Subsidiary.
"INVESTOR" means, with respect to the Mortgage Servicing Portfolio,
FHLMC, FNMA, GNMA, a State Agency, a state mortgage revenue bond agency, Seller
or any Affiliate thereof, or any other Person who owns or holds Loans master
serviced, serviced or subserviced by the Company or any Subsidiary, pursuant to
a Servicing Agreement but shall not mean a holder of mortgage-backed securities,
mortgage pass-through certificates, participation certificates or similar
securities, including any Securitization Trustee acting on behalf of such
holder.
"KNOWLEDGE OF SELLER" means the actual knowledge of Paul Bognanno, Jon
Baymiller, Tracy Jackson, Stephen Gallaher, Loraine Hardin, Charlotte Catalfo,
John Ievalts and John Schmidt as to matters within his or her area of
responsibility after reasonable investigation.
"LAW" means any order, writ, injunction, decree, judgment, ruling, law,
decision, opinion, statute, rule or regulation of any governmental, judicial,
legislative, executive, administrative or regulatory authority of the United
States, or of any state, local or foreign government or any subdivision thereof,
or of any governmental agency (including an Agency or State Agency), including,
without limitation, any federal, state or local fair lending laws.
"LITIGATION" means any action, suit, proceeding, claim, administrative
or regulatory action, governmental investigation or arbitration proceeding.
"LOANS" means Warehouse Loans and Serviced Loans.
"LOSSES" means, in respect of any obligation to indemnify any Person
pursuant to the terms of this Agreement, any and all actual direct, out of
pocket losses, damages, indemnities, liabilities, obligations, judgments,
settlements, awards, deficiencies, offsets, fines and penalties (together,
"DAMAGES"), reasonable out-of-pocket costs, expenses and attorneys' fees
relating to Damages or to any proceedings, counterclaims or defenses that could
reasonably result in incurring or avoiding Damages (including any such
reasonable out-of-pocket costs, expenses and attorneys' fees incurred in
enforcing such right of indemnification against any indemnitor or with respect
to any appeal), but shall not include (i) any such amounts for which the Company
or any Subsidiary had recorded a reserve or allowance reserve in the Closing
Date Balance Sheet to protect against the type of Loss giving rise to a claim
for indemnification under SECTION 10.1 hereof or (ii) loss of profits or other
consequential damages and punitive or other exemplary damages, except to the
extent that such damages have been awarded to a third party against an
Indemnified Party. SCHEDULE 1.3 hereof lists all of the Company reserves and
allowance reserves as of March 31, 2004 and April 30, 2004 (to be updated on the
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Closing Date) by account number and indicates which accounts are and are not
eligible to be credited against Losses with respect to breaches of SECTION
4.21(A).
"LTV" means the ratio that results when the initial principal balance
of a Loan at origination is divided by the lesser of the appraised value and the
purchase price of the Mortgaged Property as of the origination date.
"MARKS" means collectively, any registered or unregistered trademark,
service mark, trade dress, or other identifying symbol, indicator, or label that
is used in any manner to create brand recognition of and to market Seller's and
its subsidiaries' and Affiliates' products and services, including, without
limitation, The Principal, Principal Bank, Principal Life Insurance Company, the
Principal Financial Group, and any trademarks, service marks, trade dress, or
other identifying marks, indicators, or labels that are used in connection
therewith, consisting of those listed on EXHIBIT G hereto.
"MASTER SERVICING" means master servicing services in respect of
Collateral Certificate Pools or Loans, consisting principally of the following
functions (or a portion thereof): (i) the supervision and oversight of the
performance by servicers of their obligations under servicing agreements, but
not otherwise having the contractual responsibility to the Investor to collect
payments from or enforce the Mortgage Loan Documents against individual
Mortgagors, except perhaps in the event the servicer is terminated; (ii) causing
Loans to be serviced in the event a servicer is terminated until a replacement
servicer is retained; (iii) the calculation of payments due to owners of
mortgage-backed securities, asset-backed securities, participation certificates
or other similar securities or Loans; (iv) the transmittal of payments related
to Loans or Collateral Certificates to the Investor; (v) the transmittal or
payment of Advances; (vi) the preparation of reports to Investors, tax
authorities and the Securities and Exchange Commission; and (vii) if applicable,
the compliance with REMIC or other relevant Tax requirements. For purposes of
this Agreement, Master Servicing does not include Servicing where the master
servicer either delegates its duties to a subservicer or servicer and has
responsibility to the Investor for the acts, errors or omissions of such
subservicer or servicer or otherwise has responsibility to the Investor for the
primary servicing of the Loans with respect to the Mortgagors.
"MASTER SERVICING AGREEMENT" means an agreement pursuant to which the
Company or any Subsidiary provides Master Servicing (including, without
limitation, any rights to master servicing fees).
"MATERIAL ADVERSE EFFECT" means, with respect to the Company and the
Subsidiaries, (I) any change, event or effect that has resulted in or had, or
will, within thirty (30) days, result in or have, a material adverse change in,
or a material adverse effect upon, the business, results of operations or the
financial condition of the Mortgage Group taken as a whole, excluding any
change, event or effect attributable to or resulting from (1) adverse changes in
the economy or the financial markets in general; (2) adverse changes in
economic, business or financial conditions, including interest rate conditions,
affecting companies engaged in the mortgage banking business; (3) changes in
laws, regulations, interpretations of laws or regulations, GAAP or regulatory
accounting requirements applicable generally or to mortgage banking companies;
or (4) this Agreement or the transactions contemplated hereby or the
announcement thereof; (5) actions or omissions, or effects of actions or
omissions, taken with the prior written consent, or at the direction, of Buyer;
or (6) any action not taken or omission made because the consent of Buyer
thereto reasonably requested by the Seller or the Company and required by this
Agreement was denied or not acted upon in a timely manner by the Buyer, to the
extent, in the case of clauses (2) and (3), such changes have not had a
materially adverse disproportionate effect on the Mortgage Group (exclusive of
the effect, if any, of changes in factors already taken into account by Buyer in
valuing the Servicing and calculating the Final Purchase Price) relative to
other similarly situated entities operating in the mortgage banking business, or
(II) a material impairment of the Seller's or the Company's or any Subsidiary's
ability to perform any of its material obligations under this Agreement or to
consummate the transactions contemplated hereby in accordance with the terms of
this Agreement.
"MORTGAGE" means with respect to a Loan, a mortgage, deed of trust or
other security instrument creating an Encumbrance upon real property and any
other property described therein which secures a Mortgage Note, together with
any assignment, reinstatement, extension, endorsement or modification thereof.
"MORTGAGE GROUP" means the Company and the Subsidiaries taken as a
whole.
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"MORTGAGE LOAN DOCUMENTS" means the Custodial File and all other
documents relating to Loans required to document and service the Loans by
Applicable Requirements, whether on hard copy, microfiche or its equivalent or
in electronic format and, to the extent required by Applicable Requirements,
credit and closing packages and disclosures.
"MORTGAGE LOAN SCHEDULE" means a report delivered as a computer tape in
a format reasonably acceptable to Buyer that identifies with respect to each
Loan owned by Company and the Subsidiaries, each Serviced Loan and any
Subserviced Loan, the information as of the Preliminary Cut-Off Time specified
on SCHEDULE 1.2.
"MORTGAGE NOTE" means, with respect to a Loan, a promissory note or
notes, or other evidence of indebtedness, with respect to such Loan secured by a
Mortgage or Mortgages, together with any assignment, reinstatement, extension,
endorsement or modification thereof.
"MORTGAGE POOL" means a group of mortgage loans that have been pledged,
granted or sold to secure or support payments on specific mortgage-backed
securities or specific participation certificates, including Collateral
Certificates.
"MORTGAGE SERVICING PORTFOLIO" means the portfolio of Loans and the
Collateral Certificate Pools serviced or master serviced or to be serviced or
master serviced by the Company or any Subsidiary pursuant to Servicing
Agreements.
"MORTGAGED PROPERTY" means the real property and improvements that
secure a Mortgage Note and that are subject to a Mortgage.
"MORTGAGOR" means the obligor(s) on a Mortgage Note.
"ORIGINATOR" means, with respect to any Loan, the entity or entities
that (i) took the relevant Mortgagor's loan application, (ii) processed the
relevant Mortgagor's loan application or (iii) closed and/or funded such Loan.
"PERMITS" means all licenses, permits, franchises, orders, consents,
approvals, registrations, authorizations, qualifications, certificates and
filings with and under all federal, state, local or foreign laws and
governmental or regulatory bodies and all industry or other nongovernmental
self-regulatory organizations.
"PERSON" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization, a limited liability
entity, a government or any department or agency thereof or any other entity.
"PERSONNEL" means any officers or employees of the Company or any
Subsidiary.
"PIPELINE LOANS" shall mean applications in process for residential
mortgage loans to be made by Company and its Subsidiaries which (x) for purposes
of calculating Pipeline Loans Servicing Value, Estimated Purchase Price or Final
Purchase Price as defined in SCHEDULE 2.2, have been registered and designated
as price protected on Company's residential mortgage loan origination system and
(y) for purposes of ARTICLES 4, 6 and 10, whether or not registered or
designated as price protected on the Company's residential mortgage loan
origination system and, in either case, which have not closed or funded as of
the Closing Date.
"PRE-CLOSING BALANCE SHEET" means the unaudited consolidated balance
sheet for the Company dated as of the Preliminary Cut-Off Time and delivered by
Seller to Buyer pursuant to SECTION 2.3 hereof, which shall be prepared in
accordance with GAAP and on the same basis as the Balance Sheet, using the
policies, procedures and methodologies employed by the Company in the
preparation of the Financial Statements.
"PRE-CLOSING TAX AMOUNTS" means the net amount reflected on the
Pre-Closing Balance Sheet relating to federal, state, local or foreign income or
franchise Taxes, or Taxes measured by or based on net income (for the avoidance
of doubt, such amounts shall include, without limitation, any deferred tax
assets and deferred tax liabilities), of the Company and/or its Subsidiaries;
for purposes of SECTION 3.4, such net amount shall be an amount payable by Buyer
to Seller if such net amount is a liability, and shall be an amount payable by
Seller to Buyer if such net amount is an asset.
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"PRE-CLOSING NET BOOK VALUE" means the amount equal to the
stockholder's equity of the Company reflected on the Pre-Closing Balance Sheet.
"PRELIMINARY CUT-OFF TIME" means 11:59 p.m. Central Time on the last
Business Day of the second calendar month immediately preceding the month in
which the Closing Date occurs.
"PRIOR SERVICER" means any party that was a master servicer, servicer
or subservicer of any Loan before the Company or any Subsidiary or the current
Servicer, as applicable, became the master servicer, servicer or subservicer of
such Loan.
"PRIVATE INVESTORS" means Seller, any of its Affiliates or any Person
other than the Agencies who owns Loans master serviced, serviced or subserviced
by the Company or any Subsidiary pursuant to a Master Servicing Agreement or
Servicing Agreement, including Securitization Trustees and Securitization
Entities.
"PRMI DEFINED BENEFIT PLAN" means any PRMI Employee Benefit Plan that
is subject to Section 302 or Title IV of ERISA.
"PRMI EMPLOYEE BENEFIT PLAN" means any Employee Benefit Plan (i) that
has been established or is maintained or sponsored by PRMI, or to which PRMI
contributes or is required to contribute, or into which PRMI has entered or (ii)
that has been established or is maintained or sponsored by an ERISA Affiliate of
PRMI, or to which an ERISA Affiliate of PRMI has contributed or is required to
contribute, or into which an ERISA Affiliate of PRMI has entered, in each case,
for the benefit of any active, retired or former employee, director or
consultant of PRMI or any Subsidiary; provided that the term "PRMI Employee
Benefit Plan" shall not include any Employee Benefit Plan that is maintained
under applicable law by a governmental body.
"PRMI QUALIFIED PLAN" means any PRMI Employee Benefit Plan that is
intended to be qualified under Section 401(a) of the Code.
"RECOURSE" means any arrangement pursuant to which the Company or any
Subsidiary bears the risk to a third party Investor of any part of the ultimate
credit losses incurred in connection with a default under or Foreclosure of a
Loan not owned by the Company or such Subsidiary, except insofar as such risk of
loss is based upon (i) a breach by the Company or any such Subsidiary of any of
their contractual representations, warranties or covenants, (ii) expenses, such
as legal fees, in excess of the reimbursement limits, if any, set forth in the
Applicable Requirements or (iii) an early payment default based on a delinquency
or default under the Loan within the first year after the Closing of such Loan.
The parties hereto acknowledge that no Recourse results from or arises under (x)
the Applicable Requirements pertaining to GNMA or (y) with respect to any Master
Servicing Agreement, losses as to which the responsibility or liability of the
Company or any Subsidiary is limited to customary special hazard, bankruptcy and
fraud coverages, the amount of which coverages is established by nationally
recognized rating agencies in connection with rated series of mortgage
pass-through certificates, participation certificates, mortgage backed
securities or other similar securities.
"REMIC" means a "real estate mortgage investment conduit" within the
meaning of Section 860D of the Code.
"REO" means any property owned by the Company or any Subsidiary
acquired in the conduct of its mortgage servicing business as a result of
Foreclosure or any other method in satisfaction of indebtedness (whether for its
own account or on behalf of an Investor or Insurer).
"RETENTION AGREEMENTS" means those certain agreements listed on
SCHEDULE 4.17(I) hereto.
"SAP" means the statutory accounting principles and practices
prescribed or permitted by the Vermont Department of Insurance.
"SECURITIES LAWS" means the Securities Act of 1933, as amended; the
Securities Exchange Act of 1934, as amended; the Investment Company Act of 1940,
as amended; the Investment Advisers Act of 1940, as amended; the Trust Indenture
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Act of 1939, as amended; and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
"SECURITIZATION ENTITY" means The EBO Trust.
"SECURITIZATION ISSUER" means (i) the Company or any Subsidiary or any
Affiliate of the Company or any Subsidiary depositor in any Securitization
Transaction or (ii) any trust, corporation, partnership, limited liability
entity or special purpose entity that is the issuer of mortgage pass-through
certificates, participation certificates, mortgage-backed securities or other
similar securities in any Securitization Transaction.
"SECURITIZATION TRANSACTION" means any transaction, however named,
involving the Company or any Subsidiary and any one or more purchasers and/or
Investors (other than an Agency) which provides for the monetization of a
discrete pool or pools of (i) mortgage loans and/or mortgage notes or (ii)
Collateral Certificates through debt securities or ownership interests issued by
a Securitization Issuer or Securitization Entity supported or backed by mortgage
loans and/or mortgage notes or Collateral Certificates that have been
transferred to a Securitization Issuer by the Company or such Subsidiary.
"SECURITIZATION TRUSTEE" means any entity that is a trustee for any
Securitization Transaction acting for the benefit of holders of mortgage
pass-through certificates, pass-through certificates or other similar securities
issued in connection with such Securitization Transaction.
"SELLER AND SERVICING GUIDES" means the (i) seller and servicer guides
utilized by the Agencies and other Investors to which the Company and
Subsidiaries have sold residential mortgage loans and for which the Company
services residential mortgage loans or (ii) the Correspondent Seller Guide and
the Wholesale Lender Broker Guide utilized by the Company to govern its
relationships with correspondent and wholesale sellers of loans.
"SERVICED LOAN" means any Loan (including Early Funded Loans) with
respect to which the Company or any Subsidiary owns the Servicing pursuant to a
Servicing Agreement.
"SERVICER" means the Person responsible for performing the master
servicing, servicing or subservicing functions in connection with a Serviced
Loan.
"SERVICING" means mortgage loan servicing rights and obligations
including, without limitation, one or more of the following functions (or a
portion thereof): (i) the administration and collection of payments for the
reduction of principal and/or the application of interest on a mortgage loan;
(ii) the collection of payments on account of taxes and insurance; (iii) the
remittance of appropriate portions of collected payments; (iv) the provision of
full escrow administration; (v) the pursuit of foreclosure and alternate
remedies against a related Mortgaged Property; (vi) the administration and
liquidation of REO; (vii) the right to receive the Servicing Compensation and
any ancillary fees arising from or connected to the Serviced Loans, earnings on
and other benefits of the related Custodial Accounts and any other related
accounts maintained by the Company or any Subsidiary pursuant to Applicable
Requirements; (viii) any other obligation relating to servicing of mortgage
loans required under any Servicing Agreement not otherwise described in the
foregoing clauses; (ix) the right to exercise any clean up calls; (x) the
performance of administrative functions relating to any of the foregoing; and
(xi) the provision of Master Servicing and, in each case, all rights, powers and
privileges incident to any of the foregoing, and expressly includes the related
Custodial Accounts, the Mortgage Loan Documents and the right to enter into
arrangements with third parties that generate ancillary fees and benefits with
respect to the Serviced Loans.
"SERVICING AGREEMENTS" mean agreements, including Master Servicing
Agreements, pursuant to which the Company or any Subsidiary provides Servicing
in connection with Serviced Loans.
"SERVICING COMPENSATION" means any servicing fees and any excess
servicing compensation which the Company or any Subsidiary is entitled to
receive pursuant to any Servicing Agreement or Master Servicing Agreement.
"STATE AGENCY" means any state agency or other state entity with
authority to regulate the mortgage-related activities of the Company or any
Subsidiary or to determine the investment or servicing requirements with regard
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to mortgage loan origination, purchasing, servicing, master servicing or
certificate administration performed by the Company and such Subsidiary.
"STRADDLE PERIOD" means any taxable year or period beginning before and
ending after the Closing Date.
"STOCK" shall have the meaning set forth in the recitals to this
Agreement.
"SUBSERVICED LOAN" means any residential mortgage loan subserviced by,
or to be subserviced by, the Company or any Subsidiary.
"SUBSIDIARIES" means Principal Residential Mortgage Capital Resources,
LLC, a Delaware limited liability entity; Principal Residential Mortgage
Servicing, LLC, a Delaware limited liability entity; Principal Residential
Mortgage Funding, LLC, a Delaware limited liability entity; Principal Mortgage
Reinsurance Company, a Vermont organized insurance company; and Principal
Wholesale Mortgage, Inc., an Iowa corporation.
"TAX" or "TAXES" means any net income, alternative or add-on minimum
tax, gross income, gross receipts, sales, use, ad valorem, franchise, capital,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, custom duty, transfer, documentary or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or any penalty, addition to tax or additional amount
imposed by any governmental authority responsible for the imposition of any such
tax.
"TAX AMOUNTS" means, for purposes of SCHEDULE 3.4 hereof, the net
amount reflected on the unaudited consolidated balance sheet of the Company as
of March 31, 2004 relating to federal, state, local or foreign income or
franchise Taxes, or Taxes measured by or based on net income (for the avoidance
of doubt, such amounts shall include, without limitation, any deferred tax
assets and deferred tax liabilities), of the Company or its Subsidiaries; for
purposes of SECTION 3.4, such net amount shall be an amount payable by Buyer to
Seller if such net amount is a liability, and shall be an amount payable by
Seller to Buyer if such net amount is an asset.
"TAX RETURN" means any return, report, declaration, form, claim for
refund, or information return or statement required or permitted to be filed
with any Tax authority relating to Taxes, including estimated tax returns,
income tax returns, information returns, withholding returns, employment tax
returns, and any schedule or attachment thereto or any amendment thereto.
"TRANSITION SERVICES AGREEMENT" means an agreement executed by, and in
form and substance satisfactory to, the Seller and Buyer for the provision of
transition services after Closing, containing substantially the terms set forth
in SCHEDULE 1.4.
"TREASURY REGULATIONS" means the regulations promulgated under the
Code.
"VA" means the United States Department of Veteran's Administration or
any successor thereto.
"VA LOANS" means mortgage loans that are guaranteed or are eligible to
be guaranteed by the VA.
"WAREHOUSE LOAN" means a mortgage loan evidenced by a Mortgage Note and
secured by a Mortgage owned by the Company or any Subsidiary, including a
mortgage loan that has closed but not funded, but excluding Early Funded Loans.
1.2 OTHER DEFINED TERMS. The following terms shall have the meanings defined
for such terms in the Sections set forth below:
TERM SECTION
- ---- -------
Benefits Continuation Period ss. 9.4(a)
Buyer Indemnified Parties ss. 10.1
Claim Notice ss. 10.4(a)
Closing ss. 3.1
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Confidentiality Agreement ss. 6.3
Company Intellectual Property ss. 4.15(a)(1)
Company Information Technology ss. 4.15(a)(2)
Company Owned Intellectual Property ss. 4.15(a)(1)
Company Owned Information Technology ss. 4.15(a)(2)
Competing Business ss. 9.5
Damages ss. 1.1 (Losses)
Estimated Purchase Price ss. 2.4
Evaluation Material ss. 6.3
Excluded IT ss. 4.15(a)(3)
Final Section 3.4 Amount ss. 3.5
Financial Statements ss. 4.6(a)
Franchise Premium ss. 2.3
Indemnified Party ss.10.4(a)
Indemnifying Party ss.10.4
Indemnity Cap ss.10.1(b)
Leases ss. 4.7(b)
Licensed Marks ss. 9.3(b)
Policies ss. 4.7(c)
PMRC ss. 4.6(b)
Pre-Closing Section 3.4 Amount ss. 3.4
Representatives ss. 6.2(n)
Securitization Instruments ss. 4.22(a)
Seller Indemnified Parties ss. 10.2
Settlement Date ss. 2.7
Tape ss. 4.29
Third Party ss. 4.15(a)(4)
Third Party IT ss. 4.15(a)(4)
Tax Package ss. 11.5(f)
Transition Team ss. 6.3
ARTICLE 2
PURCHASE AND SALE OF STOCK
2.1 TRANSFER OF STOCK. Upon the terms and subject to the conditions contained
herein, Seller will sell, transfer and convey to Buyer, and Buyer will
purchase from Seller, all of the Stock, free and clear of all Encumbrances
at the Closing.
2.2 CONSIDERATION FOR STOCK. The consideration for the Stock shall be the Final
Purchase Price. At the Closing, in accordance with SECTION 3.3, Buyer shall
pay to Seller the Estimated Purchase Price.
2.3 PRE-CLOSING DELIVERIES. No later than the 10th Business Day of the month
immediately preceding the month in which the Closing will occur, Seller
shall deliver the following to Buyer: (i) the Mortgage Loan Schedule; (ii)
the Pre-Closing Balance Sheet; (iii) a schedule setting forth the
Pre-Closing Section 3.4 Amount in the form of SCHEDULE 3.4; (iv) a schedule
in the form of SCHEDULE 2.5(A) setting forth the Estimated Purchase Price;
(v) a schedule detailing Advances and accounts receivable as of the
Preliminary Cut-Off Time; and (vi) wire instructions designating the
account or accounts to which to wire the Estimated Purchase Price and the
Pre-Closing Section 3.4 Amount on the Closing Date.
2.4 SETTLEMENT DATE. Except as otherwise provided in SECTION 3.6 hereof, on a
date ("SETTLEMENT DATE") within 90 days after the Closing Date or such
later date as agreement may be reached pursuant to SECTION 2.5 hereof, the
Buyer and Seller shall determine the Final Purchase Price and the Final
Section 3.4 Amount in accordance with the provisions of SECTIONS 2.5 and
3.4 hereof. On the Settlement Date, Buyer or Seller, as the case may be,
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shall be entitled to the net difference between (i) the amount paid under
SECTION 3.3(A), and (ii) the sum of (x) the Final Purchase Price PLUS (y)
the Final Section 3.4 Amount (or, if such amount is an amount payable by
Seller to Buyer, minus the Final Section 3.4 Amount) MINUS (z) the Holdback
Amount, together with interest thereon at the Fed Funds Rate from and
including the Closing Date to but excluding the date of payment (such
amount, including interest, the "SETTLEMENT AMOUNT"), payable in accordance
with SECTION 3.5.
2.5 CLOSING DATE BALANCE SHEET
(a) Not later than 60 days after the Closing Date, Buyer shall prepare or cause
to be prepared and deliver or cause to be delivered to Seller the Closing
Date Balance Sheet and the Final Purchase Price calculation. For
illustrative purposes only, SCHEDULE 2.5(A) discloses an example of the
Estimated Purchase Price and Final Purchase Price calculations assuming
that the Closing Date is May 1, 2004.
(b) Buyer shall permit Seller to have reasonable access to the records and
Personnel of the Company and the Subsidiaries used in preparing the Closing
Date Balance Sheet in order to verify amounts set forth thereon. Seller may
dispute items reflected on the Closing Date Balance Sheet only on the basis
of (1) mathematical or factual errors, (2) noncompliance with this SECTION
2.5 (including all defined terms and cross-references) or (3) inconsistent
application of accounting methods, principles, practices, procedures,
policies and estimation methodologies used in the preparation of the
Balance Sheet, except where preparation on that basis would be
inappropriate due to prior errors or changes in circumstances that would
render such basis inconsistent with GAAP in any material respect. Unless
Seller delivers written notice (a "DISPUTE Notice") to Buyer on or prior to
the 30th day after Seller's receipt of the Closing Date Balance Sheet
specifying in reasonable detail the amount, nature and basis of all
disputed items, Seller shall be deemed to have accepted and agreed to the
Closing Date Balance Sheet, and such Closing Date Balance Sheet shall be
deemed conclusive for purposes of determining the Final Purchase Price.
(c) In the event that Buyer and Seller are unable to agree with respect to the
Closing Date Balance Sheet, then within seven days of delivery of the
Dispute Notice, Buyer and Seller shall mutually agree to an independent
public accounting firm that is not the independent auditor for either Buyer
or Seller; provided if Buyer and Seller are unable to agree on an
independent public accounting firm, either may request the American
Arbitration Association (New York City Office) to appoint an independent
accounting firm meeting such requirements. The independent public
accounting firm selected pursuant to this SECTION 2.5(C) shall be referred
to as the "ACCOUNTANT." The Accountant shall make a determination only of
such disputed items identified in the Dispute Notice (and not as to any
other matters) based solely upon submissions/presentations by Buyer and
Seller and the provisions of this Agreement (and not by independent review)
and shall deliver to Buyer and Seller, as promptly as practicable and no
more than 45 days after its appointment, a written report setting forth the
resolution of each disputed item. The findings of the Accountant, which
shall not exceed in amount the amount claimed by either party as to any
item in dispute, shall be conclusive and binding upon Buyer and Seller for
purposes of this Agreement. Each of Buyer and Seller shall bear all the
fees and costs incurred by it in connection with the arbitration referred
to in this SECTION 2.5, except that the fees and expenses of the Accountant
shall be borne 50% by Seller and 50% by Buyer (and shall not be accrued in
the Closing Date Balance Sheet). The provisions in this SECTION 2.5(C)
relating to resolutions of disputes by the Accountant are not intended to
and shall not be interpreted to require that the parties refer to such a
firm (i) any dispute arising out of a breach by one of the parties of its
obligations under the Agreement; (ii) any dispute the resolution of which
requires the construction or interpretation of this Agreement; or (iii) any
other dispute other than (in the case of this clause (iii)) a dispute
related to the mathematical calculation of the Closing Date Balance Sheet
or the Final Purchase Price or the accounting treatment of any asset or
liability, or item of income or expense, that affects the calculation of
the Closing Date Balance Sheet.
2.6 PURCHASE PRICE ALLOCATION. In connection with the Section 338(h)(10)
Election, Buyer and Seller agree that the "Aggregate Deemed Sale Price" (as
defined in Treasury Regulations Section 1.338-4) for the Stock will be
allocated among the assets of the Company and, if applicable, the
Subsidiaries, for all purposes (including Tax and financial accounting
purposes) in a manner consistent with Code Sections 338 and 1060 and the
Treasury Regulations thereunder. If Buyer and Seller agree on such
allocation within one hundred twenty (120) days after the Closing Date
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(which shall be evidenced by an allocation schedule signed by each of Buyer
and Seller), Buyer, Seller, the Company and the Subsidiaries shall file all
Tax Returns and information reports in a manner consistent with such agreed
allocation and shall take no position inconsistent therewith. In the event
that Buyer and Seller are unable to agree on such allocation within one
hundred twenty (120) days after the Closing Date, neither Buyer (or the
Company or the Subsidiaries with respect to periods beginning after the
Closing Date) nor Seller (or the Company or the Subsidiaries with respect
to periods ending on or before the Closing Date) shall be required,
pursuant hereto, to file any Tax Returns or information reports or
otherwise take any positions consistent with the allocation of the other
party.
ARTICLE 3
CLOSING
3.1 TIME AND PLACE OF CLOSING. Subject to the receipt of the deliveries
specified in SECTIONS 3.2 and 3.3 below, the closing of the transactions
contemplated herein (the "CLOSING") shall be held as of 12:01 a.m. (Central
Standard Time) on the Closing Date at such place and time as the parties
may agree.
3.2 DELIVERIES BY SELLER. At the Closing, Seller shall deliver, or cause to be
delivered, the following to Buyer:
(a) The stock certificates representing the shares of Stock, together with duly
executed stock powers;
(b) The certificate(s) contemplated by Article 8 hereof;
(c) The Transition Services Agreement and, subject to SECTION 9.6 hereof, the
Loan Servicing Agreement, duly executed;
(d) The resignation letters of all Persons who are officers of the Company or
any of the Subsidiaries whose principal employment is not as an employee of
such entity or who are directors of the Company or any of the Subsidiaries;
(e) A duly executed certificate of non-foreign status (a "FIRPTA CERTIFICATE")
from Seller in the form and manner that complies with Section 1445 of the
Code and the Treasury Regulations promulgated thereunder; and
(f) All other documents, instruments and writings required to be delivered by
Seller at or prior to the Closing Date pursuant to this Agreement.
3.3 DELIVERIES BY BUYER. At the Closing, Buyer shall deliver the following to
Seller:
(a) The sum of (i) the Estimated Purchase Price PLUS (ii) the Pre-Closing
Section 3.4 Amount (or, if such amount is payable by Seller to Buyer, minus
the Pre-Closing Section 3.4 Amount) MINUS (iii) the Holdback Amount, by
wire transfer in immediately federal funds to an account designated by
Seller pursuant to SECTION 2.3;
(b) The certificate(s) contemplated by ARTICLE 7 hereof;
(c) The Transition Services Agreement and, subject to SECTION 9.6 hereof, the
Loan Servicing Agreement, duly executed; and
(d) All other documents, instruments and writings required to be delivered by
Buyer at or prior to the Closing Date pursuant to this Agreement.
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3.4 SETTLEMENT OF INTERCOMPANY ACCOUNTS AND BORROWINGS AND TAX AMOUNTS. In
accordance with SECTION 2.3, no later than the 10th Business Day of the
month immediately preceding the month in which the Closing will occur,
Seller shall deliver to Buyer a schedule in the form of SCHEDULE 3.4
setting forth the balance of each of the (i) Intercompany Accounts and
Borrowings as of the date of, and reflected in, the Pre-Closing Balance
Sheet and (ii) the Pre-Closing Tax Amounts, and the net amount necessary to
settle such Intercompany Accounts and Borrowings and the Pre-Closing Tax
Amounts ("PRE-CLOSING SECTION 3.4 AMOUNT"). Not more than 60 days after the
Closing Date, Buyer shall deliver to Seller a schedule in the form of
SCHEDULE 3.4 setting forth the balance of each of (i) the Intercompany
Accounts and Borrowings, as of the date of, and reflected in, the Closing
Date Balance Sheet and (ii) the Closing Date Tax Amounts, and the net
amount necessary to settle such Intercompany Accounts and Borrowings and
Closing Date Tax Amounts ("FINAL SECTION 3.4 AMOUNT"). The procedures and
principles set forth in SECTIONS 2.5(B) and 2.5(C) shall apply to access to
records and Personnel, disputes and expenses in connection with the
determination of the Final Section 3.4 Amount. Buyer shall cause to be
released on the Closing Date the guarantees, swaps and other forms of
credit enhancement provided by Seller or its Affiliates to third parties to
support the debt obligation of Company to such third parties, as listed on
SCHEDULE 3.4. Seller shall cause to be released on the Closing Date all
security interests on assets of the Company and any of its Subsidiaries in
connection with any intercompany borrowing upon the repayment of such
borrowings by Buyer or its Affiliates.
3.5 SETTLEMENT DATE PAYMENTS. On the Settlement Date, the following actions
shall be taken:
(a) Buyer or Seller, as the case may be, shall pay the Settlement Amount by
wire transfer in immediately available funds to an account designated by
the recipient thereof.
(b) Each party shall take such other actions, and shall execute and deliver
such other instruments or documents, as shall be required in connection
with the determination and payment of the Final Purchase Price and the
Final Section 3.4 Amount.
3.6 CONFIRMATION AND ADJUSTMENT OF FINAL PURCHASE PRICE AND SETTLEMENT AMOUNT.
The determination of the Final Purchase Price and the Settlement Amount and
the payment thereof shall be subject to further confirmation and adjustment
as provided for in SCHEDULE 2.2 and EXHIBIT D.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
4.1 ORGANIZATION OF SELLER. Seller is duly organized and validly existing as a
corporation in good standing under the laws of its jurisdiction of
organization and has full corporate power and authority to conduct its
business as it is presently being conducted.
4.2 ORGANIZATION OF THE COMPANY. The Company and each Subsidiary is duly
organized and validly existing as a corporation or limited liability entity
in good standing under the laws of the jurisdiction in which it is
organized and has full corporate or entity power and authority to conduct
its business and to own, lease and operate its properties and assets. The
Company and each Subsidiary is duly qualified or otherwise authorized in
all material respects as a foreign corporation or limited liability entity
to conduct its business and is in good standing in each jurisdiction where
such authorization or qualification is required for the conduct of its
business or the ownership of its assets. True, complete and correct copies
of the organizational documents of the Company and each Subsidiary as of
the date of this Agreement have been previously made available to Buyer.
4.3 CAPITAL STOCK. SCHEDULE 4.3 sets forth a complete and accurate list of the
Company's authorized shares of common stock and the number of shares of
common stock which are issued and outstanding. No shares of any other class
or series of capital stock of the Company are authorized, issued or
outstanding. All of the shares of the Stock have been duly and validly
authorized and issued, and are fully paid and nonassessable. Seller owns of
record and beneficially all of the Stock free and clear of all
Encumbrances, including without limitation, any agreement, understanding or
restriction affecting the voting rights or other incidents of record or
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beneficial ownership pertaining to the Stock. There are no subscriptions,
options, warrants, calls, commitments, preemptive rights or other rights of
any kind outstanding for the purchase of, or any securities convertible or
exchangeable for, any equity interests of the Company. There are no
restrictions upon the voting or transfer of any shares of the Stock
pursuant to the charter or bylaws of the Company or any agreement or other
instrument to which the Company, Seller or any Affiliate of Seller is a
party or by which the Company, Seller or any Affiliate of Seller is bound.
Upon consummation of the transactions contemplated by this Agreement, Buyer
will be the owner of the Stock, free and clear of all Encumbrances other
than any Encumbrances arising as a result of action by Buyer.
4.4 AUTHORIZATION. Seller has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by Seller
have been duly authorized by all necessary corporate action. This Agreement
has been duly executed and delivered by Seller and, assuming the due
execution of this Agreement by Buyer, is a valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms, except
that such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting the rights or remedies of creditors or general
principles of equity (whether considered in a proceeding at law or in
equity) and the discretion of the court before which any proceeding
therefor may be brought.
4.5 SUBSIDIARIES. SCHEDULE 4.5 sets forth a complete and accurate list of all
of the Subsidiaries, all of which are directly wholly owned by the Company.
SCHEDULE 4.5 also sets forth the jurisdiction of incorporation or
organization of each of the Subsidiaries and the number of issued and
outstanding shares of capital stock or interests of each Subsidiary. All
outstanding shares of capital stock or interests of the Subsidiaries have
been duly and validly authorized and issued, and are fully paid and
nonassessable. All such outstanding shares or interests are owned by the
Company free and clear of any Encumbrances, including, without limitation,
any agreement, understanding or restriction affecting the voting rights or
other incidents of record or beneficial ownership pertaining to such
shares. There are no subscriptions, options, warrants, calls, commitments,
preemptive rights or other rights of any kind outstanding for the purchase
of, nor any securities convertible into or exchangeable for, any equity
interests of any of the Subsidiaries. Each of the Subsidiaries is a
corporation or limited liability entity duly organized, validly existing
and in good standing in all material respects under the jurisdiction of its
organization, with full corporate or entity power, right and authority and
all necessary Federal, state and local authorizations to own its properties
and conduct its business as now being conducted and is duly qualified and
in good standing in all material respects to transact business in each
jurisdiction where such authorization or qualification is required for the
conduct of its business or the ownership of its assets. Except for
ownership of the Subsidiaries or as disclosed in SCHEDULE 4.5, neither the
Company nor any of the Subsidiaries beneficially owns or controls, directly
or indirectly, any shares of stock or other equity interest in any
corporation, firm, partnership, joint venture or other Person.
4.6 FINANCIAL STATEMENTS; MINUTE BOOKS.
(a) The audited consolidated balance sheets and the related consolidated
statements of operations and comprehensive income, of changes in
stockholder's equity and of cash flows of the Company at December 31, 2003
and December 31, 2002 and for the periods then ended, including the
footnotes thereto (the "FINANCIAL STATEMENTS"), and the Balance Sheet have
been delivered to Buyer by Seller. The Financial Statements and the Balance
Sheet are based on the books and records of the Company and its
Subsidiaries, and fairly present, in all material respects, the financial
position and results of operations of the Company and its Subsidiaries, as
of the date of or for the period indicated therein, in accordance with
GAAP. The Monthly Unaudited Balance Sheets delivered by Buyer pursuant to
SECTION 6.8, when prepared, will be based on the books and records of the
Company and its Subsidiaries and will fairly present, in all material
respects, the financial position and results of operations of the Company
and the Subsidiaries, as of the date of or for the period indicated
therein, in accordance with GAAP. The books and records of the Company and
each Subsidiary have been, and are being, maintained in all material
respects in accordance with GAAP and any other applicable legal and
accounting requirements. The minute books of the Company and each
Subsidiary, which have been made available to Buyer, contain accurate
records in all material respects of all corporate actions of their
respective shareholders and Boards of Directors.
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(b) The audited balance sheet of Principal Mortgage Reinsurance Company, Inc.
("PMRC") and the related audited statements of operations and comprehensive
income and cash flows at December 31, 2002 and for the year then ended, and
the unaudited balance sheet as of December 31, 2003 and interim balance
sheet as of March 31, 2004 and the related unaudited interim statements of
operations and comprehensive income and cash flows for the year ended
December 31, 2003, and the three (3) months ended March 31, 2004, and its
annual statements for the fiscal years ended December 31, 2003 and December
31, 2002, as filed with the insurance regulatory authorities (or other
comparable state regulatory agencies), copies of which have been delivered
to Buyer prior to the date hereof, fairly present, in all material
respects, PMRC's statutory financial condition as of the dates thereof and
its results of operations and cash flows for the periods then ended in
conformity with SAP consistently applied. The other information contained
in such annual statements fairly presents, in all material respects, the
information required to be contained therein in conformity with SAP
consistently applied. PMRC is the only Subsidiary of the Company required
by Law to prepare financial statements for filing with, or submission to,
insurance regulatory authorities (or other comparable state regulatory
agencies). The aggregate reserves held with respect to Insurance Contracts
of PMRC, as established and reflected in its December 31, 2003 financial
statements and annual report meet all requirements of applicable Law and
SAP in all material respects.
4.7 PROPERTIES AND INSURANCE.
(a) SCHEDULE 4.7(A) sets forth the address or other description of all real
property owned by the Company or any Subsidiary other than REO. Except (i)
as may be reflected in the Financial Statements, (ii) for any lien for
current taxes not yet payable, (iii) for such other Encumbrances and
imperfections of title that do not materially affect the value of personal
or real property reflected in the Financial Statements or acquired since
the date of such Financial Statements and that do not materially affect the
value of or materially interfere with or impair the present and continued
use of such property and (iv) as it relates to any REO, the Company and its
Subsidiaries have good and marketable indefeasible fee simple title, free
and clear of Encumbrances, to all of the personal and real property
reflected in the Financial Statements, and all personal and real property
acquired since the date of the Financial Statements, except such personal
and real property as has been disposed of in the ordinary course of
business for adequate consideration or that is being held on behalf of the
applicable Investor or Insurer or except for liens, security interests,
claims, charges, or other such other Encumbrances as have been
appropriately reserved for in the Financial Statements. There are no
outstanding options, rights of first offer, rights of reverter or rights of
first refusal to purchase the real property described on SCHEDULE 4.7(A) or
any portion thereof or interest therein. Other than as a result of
Foreclosure, the Company and each Subsidiary is not a party to any
agreement or option to purchase any real property or interest therein.
(b) SCHEDULE 4.7(B) sets forth a true, correct and complete list of the address
or other description, as of the date hereof, of each lease for real
property to which the Company or any Subsidiary is a party (including, the
date, if available, and name of the parties to such lease). With respect to
all material leases of real property to which the Company or any Subsidiary
is a party other than leases related to REO (collectively, the "LEASES"),
except as set forth on SCHEDULE 4.7(B), (i) each Lease is valid and binding
on the Company or relevant Subsidiary and in full force and effect in all
material respects and, to the Knowledge of Seller, is valid and binding on
the other parties thereto, (ii) the Company or such Subsidiary (and, to the
Knowledge of Seller, any counterparty thereto) has performed in all
material respects all obligations required to be performed by it to date
under each Lease; (iii) neither the Company nor any Subsidiary has received
a notice of default or termination with respect to any such Lease; (iv) the
transactions contemplated by this Agreement do not require the consent of
any other party to any such Lease (except for those lease consents to be
obtained by the Company or each Subsidiary pursuant to SECTION 4.11 of this
Agreement); (v) no security deposit or portion thereof deposited with
respect to any such Lease has been applied in respect of a breach or
default under such Lease which has not been redeposited in full; (vi) none
of the Company or any Subsidiary owe, nor will any of them owe in the
future, any brokerage commissions or finder's fees with respect to any such
Lease; (vii) the other party to any such Lease is not an Affiliate of, and
otherwise does not have any economic interest in, the Company or each
Subsidiary; (viii) the Company and each Subsidiary have not subleased,
licensed or otherwise granted any person the right to use or occupy the
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estate or interest created by any such Lease or any portion thereof; (ix)
the Company and each Subsidiary has not collaterally assigned or granted
any other security interest in any such Lease or any interest therein; and
(x) there are no Encumbrances on the estate or interest created by any such
Lease. The Company and each Subsidiary quietly enjoy the premises provided
for in any such Lease in all material respects.
(c) SCHEDULE 4.7(C) sets forth a summary of all insurance policies and bonds,
other than mortgage loan insurance policies and policies that fund a Seller
Plan, pursuant to which the Company or any Subsidiary is an insured party
("POLICIES"). The Company and each Subsidiary is in material compliance
with the Policies and is not in default under any of the material terms
thereof. Each Policy is outstanding and in full force and effect and all
premiums and other payments due under any Policy have been paid in due and
timely fashion. Except as set forth in Part 1 of SCHEDULE 4.7(C), the
Company and each Subsidiary will be cancelled as insured parties (but not
as to coverage in respect of pre-Closing occurrences) under the Policies as
of the Closing Date.
(d) With the exception of leased property, each of the Company and the
Subsidiaries has good, valid and marketable title to all tangible personal
property owned by the Company and/or the Subsidiaries, free and clear of
all Encumbrances. With respect to personal property used in the business of
the Company or the Subsidiaries that is leased rather than owned, neither
the Company nor any Subsidiary is in default in any material respect under
the terms of any such lease.
4.8 CONTRACTS AND COMMITMENTS.
(a) Except as set forth in SCHEDULE 4.8(A) and in the Mortgage Loan Schedule,
neither the Company nor any Subsidiary is a party to, is bound by or
receives benefits under (i) any material Contract not made in the ordinary
course of business (other than Contracts pursuant to which the Company or a
Subsidiary receives funding, employee benefits or other services from
Seller or an Affiliate, enterprise-wide arrangements with Seller or an
Affiliate and Contracts made available by Seller to Buyer); (ii) any
Contract relating to the borrowing of money by it or the guarantee by it of
any such obligation (other than Contracts for intercompany obligations to
be settled in accordance with SECTION 3.4 hereof); (iii) any Contract that
by its terms limits the payment of dividends by the Company or any
Subsidiary or that by its terms either requires the Company or any
Subsidiary to do business with the contract party on an exclusive basis or
restricts or limits the Company or any Subsidiary from owning, managing or
operating any business or in any geographical location (including
non-competition agreements); (iv) any joint venture or partnership
agreement; (vi) any agreement that grants any right of first refusal or
right of first offer or similar right to third parties or that limits or
purports to limit the ability of the Company or any of the Subsidiaries in
any material respect to pledge, sell, transfer or otherwise dispose of any
material amount of assets or business (other than in connection with
Securitization Transactions or Contracts entered into in the ordinary
course of business that require that the particular transactions that are
the subject thereof to be conducted with the counterparty or counterparties
to the Contract); (vii) any Contract providing for any material future
payments that are conditioned, in whole or in part, on a change of control
with respect to the Company; (viii) any material Insurance Contract; (ix)
any material agency, broker, sale representative, marketing or similar
Contract; (x) any Contract that contains a "most favored nation" clause
obligating the Company or any Subsidiary to change the material terms and
conditions of such Contract based on better terms or conditions provided to
other parties in similar contracts; (xi) any Contract relating to any
merger or business combination concerning the Company or any Subsidiary or
the acquisition or disposition of any assets or any Person during the last
five years; (xii) any Contract with any director, officer, employee or
Affiliate of the Company or any Subsidiary; and (xiii) any other Contract
involving aggregate expenditures or revenues in excess of $500,000 or which
is otherwise material to the Company or any Subsidiary (the contracts of
the type covered in clauses (i) through (xiii), the "MATERIAL CONTRACTS").
(b) Except as set forth in SCHEDULE 4.8(B), (i) each Material Contract is valid
and binding on the Company or relevant Subsidiary and in full force and
effect and, to the Knowledge of Seller, is valid and binding on the other
parties thereto; (ii) the Company or such Subsidiary (and, to the Knowledge
of Seller, any counterparty thereto) has performed in all material respects
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all obligations required to be performed by it to date under each Material
Contract. Neither the Company nor any Subsidiary is in material default
under any material order, writ, judgment, decree, Contract or other
instrument to which it is a party or by which it or any of its assets or
properties is bound, whether entered into in the ordinary course of
business or otherwise and whether written or oral, and there has not
occurred any event that, with the lapse of time or giving of notice or
both, would constitute such a default.
(c) Seller has delivered to Buyer the Mortgage Loan Schedule. The information
contained in the Mortgage Loan Schedule is true and correct in all material
respects. SCHEDULE 4.8(C) sets forth a list of (i) each Investor with which
the Company or a Subsidiary had, as of the date of the Balance Sheet, a
Servicing Agreement, together with the aggregate principal amount of Loans
or Collateral Certificate Pools subject to each such Servicing Agreement as
of such date, and (ii) the aggregate balance of all Custodial Accounts as
of such date. Seller has previously made available to Buyer copies of all
Servicing Agreements which were in effect on the date of the Balance Sheet
and which were in Seller's or the Company's possession. All such Servicing
Agreements are in full force and effect at the date hereof, without notice
by the applicable Investor of termination thereof.
4.9 ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Company nor any Subsidiary
has any material liability (contingent or otherwise), except as disclosed
in the Financial Statements, the Balance Sheet or on SCHEDULE 4.9, and
except for liabilities incurred in the ordinary course of business
consistent with past practice since the date of the Balance Sheet, or
liabilities not within the Knowledge of Seller that are not required to be
disclosed under GAAP.
4.10 NO CONFLICT OR VIOLATION. Except as provided for in SECTION 4.11, neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will in any material respect (i) conflict
with or result in any breach which would constitute a default (or which
would give rise to any right of consent, acceleration or termination or the
loss of any benefit) under any term or provision of any Contract to which
Seller, the Company, any Subsidiary or any of their Affiliates is a party
or is subject or by which any assets of the Company or any of the
Subsidiaries are bound, or interfere with the ability of Seller to
consummate the transactions contemplated by this Agreement, (ii) result in
the creation or imposition of any Encumbrance on any of the property or
assets of the Company or any Subsidiary, (iii) result in any violation of
the provisions of the charter or bylaws or similar organizational document
of Seller, the Company or any Subsidiary, (iv) result in any violation by
Seller, the Company or any Subsidiary of any Law or (v) result in the
creation or imposition of any Encumbrance on any shares of the Stock.
4.11 CONSENTS AND APPROVALS. No consent, approval or authorization of, or
declaration, notice, filing or registration with, any governmental or
regulatory authority, or material consent, approval or authorization of any
other Person, is required to be made or obtained by Seller, the Company or
any Subsidiary on or prior to the Closing Date in connection with the
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated by this Agreement, except (i) as set forth
in SCHEDULE 4.11, and (ii) the filing of premerger notification reports
under the Hart Scott-Rodino Antitrust Improvements Act of 1976, as amended.
4.12 LITIGATION. Except as set forth in SCHEDULE 4.12, there is no material
Litigation instituted, pending or, to the Knowledge of Seller, threatened
against the Company or any Subsidiary or against any asset, interest or
right of the Company or any Subsidiary. There is no actual or, to the
Knowledge of Seller, threatened Litigation that presents a claim to
restrain, delay, condition or prohibit the transactions contemplated herein
or to impose upon Buyer, Seller, the Company or any Subsidiary any material
costs, conditions or obligations in connection therewith.
4.13 COMPLIANCE WITH LAW: PERMITS AND LICENSES.
(a) The Company and the Subsidiaries are operating in compliance in all
material respects with all applicable Laws. Neither the Company nor any
Subsidiary has received any notification from any agency or department of
Federal, state or local government, (i) asserting a material violation of
any Law, (ii) threatening to revoke any material Permit or (iii) limiting
its operations in any material respect. Except as set forth in SCHEDULE
4.13(A), neither the Company nor any Subsidiary is subject to any
regulatory or supervisory cease and desist order, agreement, directive,
memorandum of understanding or commitment that currently restricts or will
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in the future restrict in any material respect the conduct of its business,
its credit policies, its management or its business, and none of them has
received any communication requesting that they enter into any of the
foregoing.
(b) The Company and the Subsidiaries hold all material Permits necessary for
the ownership and conduct of their respective businesses in each of the
jurisdictions in which the Company and such Subsidiaries conduct or operate
their respective businesses in the manner now conducted and such Permits
are in full force and effect. Without limiting the generality of the
foregoing, PRMI or the applicable Subsidiary is approved by and is in good
standing: (i) as a non-supervised mortgagee by HUD to originate and service
Title II FHA mortgage loans; (ii) as a GNMA I and II Issuer by GNMA; (iii)
by the VA to originate VA loans; and (iv) as a seller/servicer by FNMA and
FHLMC to originate and service conventional residential mortgage loans.
Except as provided for in SECTION 4.11, the consummation of the
transactions contemplated by this Agreement will not result in any
revocation, cancellation or suspension of any such Permit, and there is no
pending or, to the Knowledge of Seller, threatened material Litigation with
respect to revocation, cancellation, suspension or nonrenewal thereof and
there has occurred no event which (whether with notice or lapse of time or
both) will result in such a revocation, cancellation, suspension or
nonrenewal thereof.
(c) Except for normal examinations conducted by any court, administrative
agency or commission or other governmental authority or instrumentality or
self-regulatory organization in the regular course of the business of the
Company and the Subsidiaries or as set forth in SCHEDULE 4.13(C), no court,
administrative agency or commission or other governmental authority or
instrumentality or self-regulatory organization has initiated any material
proceeding or, to the Knowledge of Seller, threatened a material
investigation into the business or operations of the Company or any
Subsidiaries that is ongoing or pending. Except as set forth in SCHEDULE
4.13(C), there is no material unresolved violation by any court,
administrative agency or commission or other governmental authority or
instrumentality or self-regulatory organization with respect to any report
or statement relating to any examinations of the Company or the
Subsidiaries.
(d) Except as set forth in SCHEDULE 4.13(D), the Company and each Subsidiary
has timely filed all regulatory reports, schedules, forms, registrations
and other documents, together with any amendments required to be made with
respect thereto, that each was required to file since January 1, 2001 with
any governmental authority (the "REGULATORY DOCUMENTS"), and have timely
paid all fees and assessments due and payable in connection therewith,
except where the failure to make such payments and filings would not be
material. There is no material unresolved violation or exception asserted
by any such governmental authority with respect to any of the Regulatory
Documents. As of their respective dates, the Regulatory Documents complied
in all material respects with all requirements of Law. Seller has made
available to Buyer true and complete copies of all Regulatory Documents.
(e) All Insurance Contracts issued by PMRC are reinsurance contracts issued in
compliance with applicable Law in all material respects and were issued on
forms approved by appropriate governmental authorities or otherwise
permitted under applicable Law. All premium rates, rating plans and policy
terms established or used by PMRC that are required to be filed with or
approved by applicable governmental authorities have been so filed or
approved and comply in all material respects with the insurance Laws
applicable thereto.
4.14 NO BROKERS. Except for the services of Lehman Brothers, which has been
employed by Seller, neither Seller nor the Company nor any Subsidiary has
employed, or is subject to any valid claim of, any broker, finder,
consultant or other intermediary in connection with the transactions
contemplated by this Agreement. Seller is solely responsible for any
payment, fee or commission that may be due to Lehman Brothers in connection
with the transactions contemplated hereby.
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4.15 INTELLECTUAL PROPERTY AND TECHNOLOGY.
(a)
(1) All of the Intellectual Property that Company or any of the Subsidiaries
owns (the "COMPANY OWNED INTELLECTUAL PROPERTY"), licenses or otherwise has
acquired the right to use as of the date of this Agreement (collectively,
the "COMPANY INTELLECTUAL PROPERTY"), to the extent material, is set forth
on SCHEDULE 4.15(A)(1), which specifies, as applicable, (A) the nature of
such Company Intellectual Property, (B) whether such Company Intellectual
Property is owned or licensed by the Company or any of the Subsidiaries,
(C) if provided under a license, the licensor and (D) if owned, (i) any
applications or registrations relating to such Company Intellectual
Property, together with the application(s) or registration(s) number(s) and
(ii) any termination or expiration dates for such Company Intellectual
Property.
(2) All of the Information Technology that Company or any of the Subsidiaries
owns (the "COMPANY OWNED INFORMATION TECHNOLOGY"), licenses or otherwise
has acquired the right to use as of the date of this Agreement
(collectively, the "COMPANY INFORMATION TECHNOLOGY"), to the extent
material, is set forth on SCHEDULE 4.15(A)(2), which specifies, as
applicable, (A) whether such Company Information Technology is provided
under a service contract or is owned or licensed by Company or the
Subsidiaries, (B) if provided under a service contract, the service
provider, if licensed, the licensor, and if owned, the owner of such
Company Information Technology, (C) the scope of such Company Information
Technology, including, by way of example, but not of limitation, the range
of services provided and number of licenses and (D) the expiration dates of
service contracts and licenses.
(3) All Intellectual Property and Information Technology that Seller or any
Seller Affiliate (other than the Company or any of the Subsidiaries) owns,
licenses or has otherwise acquired the right to use as of the date of this
Agreement that is used in or reasonably necessary to the Company's or any
of the Subsidiaries' day-to-day business operations, but that Seller shall
not assign and transfer to Company at the Closing (the "EXCLUDED IT"), to
the extent material, is set forth on SCHEDULE 4.15(A)(3).
(4) All Intellectual Property and Information Technology that Seller or any
Seller Affiliate (other than the Company or any of the Subsidiaries)
licenses or otherwise has acquired the right to use from a third party as
of the date of this Agreement, that is used in or reasonably necessary to
the Company's or any of the Subsidiaries' day-to-day business operations,
but that, due to license limitations or other causes, Seller shall not
license to Company or use on Company's or any of the Subsidiaries' behalf
following the closing (the "THIRD PARTY IT"), to the extent material , is
set forth on SCHEDULE 4.15(A)(4).
(b) Except as set forth on SCHEDULE 4.15(B):
(1) The Company Intellectual Property and Company Information Technology,
together with the Excluded IT and Third Party IT include all rights
necessary to enable Company and each of the Subsidiaries to conduct its
day-to-day business operations in the manner in which it is conducting them
as of the date of this Agreement.
(2) The Company and each of the Subsidiaries has taken all commercially
reasonable measures to keep in full force and effect all Company Owned
Intellectual Property and Company Owned Information Technology
registrations, renewals, and applications for registration and to maintain
the confidentiality of all trade secrets that constitute Company Owned
Intellectual Property or Company Owned Information Technology. The Company
Owned Intellectual Property and the Company Owned Information Technology
(and any Company Intellectual Property and Company Information Technology
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that the Company and any of the Subsidiaries shall own following the
Closing) is free and clear of any Encumbrance. All registrations and
applications for registration of Company Owned Intellectual Property with a
governmental authority currently comply in all material respects with the
formal legal requirements for such registrations and applications (as
applicable).
(3) The Company and the Subsidiaries either exclusively own or have licensed
from a third party the Company Intellectual Property and the Company
Information Technology.
(4) (A) All licenses, service Contracts, and other Contracts that constitute,
or shall constitute following the Closing, Company Information Technology
are in full force and effect and are the Company's and, to the Knowledge of
Seller, the applicable licensor's legal, valid, and binding obligations,
(B) Company and the Subsidiaries are not in default under any such licenses
and (C) none of Company or any Subsidiary, all licensors or any other
contracting parties have exercised termination rights with respect to such
licenses, service Contracts or other Contracts.
(5) As of the date of this Agreement, there is no material Litigation pending
or, to Knowledge of Seller, threatened, that involves a claim (A) that any
Company Owned Intellectual Property or Company Owned Information Technology
(or any Company Intellectual Property and Company Information Technology
that Company shall own following the Closing) infringes, misappropriates,
dilutes, or violates a Third Party's rights in or to Intellectual Property
or Information Technology or challenging the ownership, use,
protectability, registerability, validity, or enforceability of the Company
Owned Intellectual Property or Company Owned Information Technology or (B)
against any customers of Company, any of the Subsidiaries or Seller or any
of its Affiliates, as the case may be, with respect to the Company Owned
Intellectual Property or Company Owned Information Technology or any such
customer's use thereof.
(6) To the Knowledge of Seller, no Third Party is infringing, violating,
diluting, misusing, or misappropriating any Company Owned Intellectual
Property, Company Owned Information Technology, Company Intellectual
Property or Company Information Technology. Neither Company nor any of the
Subsidiaries nor Seller has made any claim against any Third Party based
upon any such infringement, violation, dilution, misuse, or
misappropriation.
(7) The processes employed, the services provided, the businesses conducted,
the products used or dealt in by the Company and the Subsidiaries, the
Company Intellectual Property and/or Company Information Technology, do
not, and, within the last six years did not, infringe, violate, dilute,
misuse or misappropriate any Intellectual Property or Information
Technology rights of a Third Party. No Third Party has made a complaint,
demand, notice, material charge or claim against the Company, any of the
Subsidiaries or Seller based upon any such infringement, violation,
dilution, misuse, or misappropriation. There are no interference or
opposition proceedings relating to any Company Owned Intellectual Property
or Company Owned Information Technology.
(8) No Company Owned Intellectual Property or Company Owned Information
Technology is currently the subject of any re-examination, opposition,
cancellation or invalidation proceeding before any governmental authority.
4.16 TAXES.
Except as set forth on SCHEDULE 4.16:
(a) All Tax Returns required to be filed by or with respect to the Company or
Subsidiaries have been timely filed and such Tax Returns are complete and
accurate in all material respects. All Taxes that were required to have
been paid by, or with respect to, the Company or any Subsidiary have been
paid.
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(b) None of the Company or any Subsidiary currently is the beneficiary of any
extension of time within which to file any Tax Return.
(c) No deficiencies for any material Tax have been proposed, asserted or
assessed against the Company which have not been settled and paid in full
or for which adequate reserves in accordance with GAAP have not been
established, and, to the Knowledge of Seller, no such assertion of material
deficiency or assessment of Tax liability is pending or being threatened
with respect to the Company or any Subsidiary.
(d) There are currently no agreements in effect with respect to the Company or
any Subsidiaries to extend the period of limitations for the assessment or
collection of any Tax.
(e) There is no presently pending audit examination, refund claim, or
litigation, proposed adjustment or matter in controversy with respect to
any Taxes for which the Company or any Subsidiaries may be liable, and, to
the Knowledge of Seller, no such examination, action or proceeding is
threatened.
(f) Neither the Company nor any Subsidiary has been a member of an affiliated,
combined, consolidated or unitary group for purposes of filing any income
or franchise Tax Return, other than a group of which Principal Financial
Group, Inc. was the common parent.
(g) Seller is not a "foreign person" within the meaning of Treasury Regulations
Section 1.1445-2(b).
(h) Neither the Company nor any Subsidiary is a party to any agreement,
contract, arrangement, or plan that has resulted or would result,
individually or in the aggregate, in connection with the transactions
contemplated by this Agreement in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
(i) Neither the Company nor any Subsidiary is a party to any Tax sharing or Tax
allocation agreement.
(j) Each of the Company and Subsidiaries and each Securitization Entity has
withheld and paid to the proper taxing authority on a timely basis all
Taxes required to have been withheld and paid in connection with amounts
paid, or deemed to have been paid, or owing, or amounts allocated to any
employee, independent contractor, creditor, stockholder or other third
party. Each such obligation of each Securitization Entity to withhold and
pay is listed on SCHEDULE 4.16(J).
(k) No power of attorney has been granted with respect to any of the Company or
Subsidiaries as to any matter relating to Taxes.
(l) There are no Encumbrances for Taxes on the assets of the Company or
Subsidiaries other than Encumbrances for Taxes not yet due and payable.
(m) To the Knowledge of Seller, no claim has ever been made by a taxing
authority in a jurisdiction where the Company, any Subsidiary, or any
Securitization Entity does not file Tax Returns that any of the Company,
its Subsidiaries, or a Securitization Entity, respectively, is or may be
required to file Tax Returns with respect to such jurisdiction.
(n) Neither the Company nor any Subsidiary will be required to include any item
of income in, or exclude any item of deduction from, taxable income for any
period ending after the Closing Date as a result of any (i) change in
method of accounting for a taxable period ending on or prior to the Closing
Date; (ii) "closing agreement" as described in Code Section 7121 (or any
corresponding or similar provision of any law relating to income Tax)
executed prior to the Closing; (iii) installment sale or open transaction
disposition made prior to the Closing; or (iv) prepaid amount received
prior to the Closing.
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(o) Neither the Company nor any Subsidiary distributed stock of another Person,
or has had its stock distributed by another Person, in a transaction that
was purported or intended to be governed in whole or in part by Code
Section 355 or Code Section 361.
(p) Since its formation, each Securitization Entity (i) has been properly
treated for United States federal income Tax purposes as other than an
association, "Taxable Mortgage Pool" within the meaning of Code Section
7701(i), or "Publicly Traded Partnership" within the meaning of Code
Section 7704 taxable as a corporation, and (ii) has not been an entity
subject to Tax for federal, state, local, or foreign Tax purposes. All
securities issued by the EBO Trust (other than those securities held by
Principal Residential Mortgage Funding, LLC) (the "EBO Securities") are
properly treated as either debt of the Company or equity of the EBO Trust
for United States federal income Tax purposes.
(q) The Principal Financial Group, Inc. is eligible to make a joint election
pursuant to Code Section 338(h)(10) with respect to the Company and those
Subsidiaries listed on SCHEDULE 4.16(Q) in connection with the sale of
Stock to Buyer contemplated by this Agreement.
(r) Since its formation each of Principal Wholesale Mortgage, Inc., Principal
Mortgage Reinsurance Company and Seller has been properly classified for
United States federal Tax purposes as an association taxable as a
corporation. Since its formation each of Principal Residential Mortgage
Funding, LLC, Principal Residential Mortgage Servicing, LLC and Principal
Residential Mortgage Capital Resources, LLC has been properly classified
for United States federal Tax purposes as an entity the existence of which
is disregarded from that of its owner.
4.17 EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 4.17 sets forth an accurate and complete list of all PRMI Employee
Benefit Plans and identifies, with respect to each such PRMI Employee
Benefit Plan, either PRMI or the applicable ERISA Affiliate of PRMI that
established, sponsors or maintains such PRMI Employee Benefit Plan or that
contributes or is required to contribute to such PRMI Employee Benefit Plan
or that has entered into such PRMI Employee Benefit Plan. Except as set
forth on SCHEDULE 4.17(A), neither PRMI nor any ERISA Affiliate of PRMI has
announced or otherwise made a commitment to implement any arrangement that,
if implemented, would be a PRMI Employee Benefit Plan.
(b) With respect to each PRMI Employee Benefit Plan, Seller has made available
or caused to be made available to Buyer a true and complete copy of each
PRMI Employee Benefit Plan, any amendments thereto (or if the PRMI Employee
Benefit Plan is not written, a description thereof), any related trust or
other funding vehicle, any reports or summaries required under ERISA and
the most recent determination letter received from the Internal Revenue
Service with respect to each PRMI Qualified Plan.
(c) Each PRMI Employee Benefit Plan complies in form and has been maintained
and operated in all material respects in accordance with the requirements
of all applicable laws, including ERISA and the Code, and each PRMI
Employee Benefit Plan has been maintained and operated in all material
respects in accordance with its terms. With respect to each PRMI Employee
Benefit Plan that is intended to meet requirements for tax-favored
treatment under the Code, the term "applicable laws" shall include, without
limitation, the provisions of the Code that provide for such tax-favored
treatment.
(d) SCHEDULE 4.17 separately identifies each PRMI Qualified Plan. Except as set
forth on SCHEDULE 4.17(D), each PRMI Qualified Plan and each trust
established in connection with each PRMI Qualified Plan is the subject of a
favorable determination letter issued by the Internal Revenue Service.
(e) SCHEDULE 4.17 separately identifies each PRMI Defined Benefit Plan. Except
as set forth on SCHEDULE 4.17(E), the present fair market value of the
assets of each PRMI Defined Benefit Plan equal or exceed the present value
of vested and nonvested accrued benefits under such PRMI Defined Benefit
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Plan, based on the actuarial assumptions and methodology used for funding
purposes as set forth in such PRMI Defined Benefit Plan's most recent
actuarial report. No reportable event under Section 4043 of ERISA has
occurred with respect to any PRMI Defined Benefit Plan. No event has
occurred and no condition has existed or exists that could constitute
grounds under Section 4042 of ERISA for termination of or appointment of a
trustee to administer any PRMI Defined Benefit Plan. Neither PRMI nor any
ERISA Affiliate of PRMI has transferred, in whole or in part, a PRMI
Defined Benefit Plan to a trade or business that was at the time of
transfer not an ERISA Affiliate of PRMI. No accumulated funding deficiency
(as defined in Section 402 of ERISA or Section 412 of the Code) exists nor
has any funding waiver from the Internal Revenue Service been received or
requested with respect to any PRMI Defined Benefit Plan. No excise or other
tax is due or owing because of any failure to comply with (i) the minimum
funding standards of the Code or ERISA with respect to any PRMI Defined
Benefit Plan or (ii) the provisions of Section 4980B of the Code.
(f) Neither PRMI nor any ERISA Affiliate of PRMI contributes to or has an
obligation to contribute to or has contributed to a multiemployer pension
plan (as defined in Section 3(37) of ERISA) for the benefit of any active,
retired or former employee or director of PRMI or any Subsidiary.
(g) No PRMI Employee Benefit Plan is a multiple employer welfare arrangement
within the meaning of Section 3(41) of ERISA.
(h) PRMI does not, and, following the Closing Date, Buyer will not, have any
liability (actual or contingent) with respect to any Employee Benefit Plan
established, maintained, or sponsored by any ERISA Affiliate of PRMI, or to
which any ERISA Affiliate of PRMI has contributed or is required to
contribute, or into which any ERISA Affiliate of PRMI has entered that is
not a PRMI Employee Benefit Plan.
(i) Except as provided on SCHEDULE 4.17(I), the consummation of the
transactions contemplated by this Agreement will not, either alone or in
combination with another event, (i) entitle any current or former employee,
officer or consultant of PRMI or any ERISA Affiliate of PRMI to severance
pay, unemployment compensation or any other payment or (ii) accelerate the
time of payment or vesting, or increase the amount of compensation due any
such employee, officer or consultant.
(j) Except as provided on SCHEDULE 4.17(J), no PRMI Employee Benefit Plan
provides medical, surgical, hospitalization, death or similar benefits
(whether or not insured) for employees or former employees of PRMI or any
Subsidiary for periods extending beyond their retirement or other
termination of service, other than (i) coverage mandated by applicable law,
(ii) death benefits under any "pension plan" or (iii) benefits the full
cost of which is borne by the current or former employee (or his
beneficiary).
(k) There are no pending, threatened or anticipated material claims by or on
behalf of any PRMI Employee Benefit Plan, by any employee or beneficiary
covered under any such PRMI Employee Benefit Plan, or otherwise involving
any such PRMI Employee Benefit Plan (other than routine claims for
benefits).
(l) Neither the Company nor any Subsidiary maintains or sponsors any PRMI
Qualified Plan.
4.18 ENVIRONMENTAL LIABILITY. There is no pending or, to the Knowledge of
Seller, material threatened Litigation against the Company, any Subsidiary
or against any Person or entity whose liability the Company or any
Subsidiary has or may have retained or assumed either contractually or by
operation of law that could reasonably result in the imposition on the
Company or any Subsidiary of any material liability arising under any
Environmental Laws, and neither the Company nor any Subsidiary is subject
to any agreement, order, judgment, decree, or memorandum by or with any
court, governmental authority, regulatory agency or third party imposing
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any such material liability. There are no present or, to the Knowledge of
Seller, past actions, activities, circumstances, conditions, events or
incidents, including without limitation, the release or threatened release
or presence of any Hazardous Materials, which could form the basis for any
material Litigation that would impose any material liability or obligation
on the Company or any Subsidiary under Environmental Laws. During or, to
the Knowledge of Seller, prior to the period of (i) the Company's or any
Subsidiary's ownership or operation of any of their respective current
properties, (ii) the Company's or any Subsidiary's participation in the
management of any property or (iii) the Company's or any Subsidiary's
holding of a security interest or other interest in any property, there
were no releases or threatened releases of hazardous, toxic, radioactive or
dangerous materials or other materials regulated under any Environmental
Laws in, on, under or affecting any such property. Neither the Company nor
any Subsidiary has taken any action with respect to any properties that
they do not currently own or operate that would prevent the Company or any
Subsidiary from qualifying under the lender exclusion of CERCLA or any
other Environmental Laws with respect to such property.
4.19 ADVANCES/RECEIVABLES.
(a) The Advances are valid and subsisting amounts owing to the Company or the
Subsidiaries, are carried on the books of the Company and the Subsidiaries
at values determined in accordance with GAAP in all material respects and
are not subject to setoffs or claims arising from acts or omissions of the
Company or the Subsidiaries. Except as set forth in SCHEDULE 4.19(a), no
Investor has or has claimed any material defense, offset or counterclaim to
repayment of any Advance that is pending. SCHEDULE 4.19(A) accurately
summarizes the Advances outstanding as of the date of the Balance Sheet.
(b) The accounts receivable reflected on the Balance Sheet, and those to be
reflected on the Pre-Closing Balance Sheet or the Closing Date Balance
Sheet, have (or will have) arisen from bona fide transactions in the
ordinary course of the business of the Company and the Subsidiaries and are
(or will be) valid obligations of the respective makers thereof and are not
(and will not be) subject to material setoffs or claims, except for the
amounts reserved for doubtful or uncollectible accounts as reflected on the
Balance Sheet, the Pre-Closing Balance Sheet or the Closing Date Balance
Sheet, as the case may be. The accounts receivable are (or will be)
reflected on the Balance Sheet, the Pre-Closing Balance Sheet or the
Closing Date Balance Sheet, as the case may be, at values determined in
accordance with GAAP in all material respects.
4.20 NO RECOURSE. Except for those Loans and Mortgage Pools designated as
Recourse on the Tape set forth on SCHEDULE 4.20 which do not exceed $600
million in aggregate principal amount as of the date of the Balance Sheet
and for which Loan Reserves are reflected in accordance with GAAP on the
Balance Sheet, none of the Loans, Collateral Certificates, Securitization
Instruments or Servicing Agreements provide for Recourse to the Company or
any Subsidiary.
4.21 LOAN REPRESENTATIONS AND WARRANTIES.
The Seller makes the representations and warranties set forth below
regarding each Loan (PROVIDED, for purposes of this SECTION 4.21, the Investor,
if any, for any Warehouse Loan shall be the Investor that is party to the
applicable Investment Commitment) and, if and to the extent specified, each
Pipeline Loan or REO:
(a) Except as set forth on SCHEDULE 4.21(A), each Loan or Collateral
Certificate in the Mortgage Servicing Portfolio was eligible in all
material respects for sale to, insurance by, or pooling to back securities
issued or guaranteed by, the applicable Investor or Insurer upon such sale,
issuance of insurance or pooling, except for Serviced Loans or Collateral
Certificates as to which the ineligibility for such sale, issuance of
insurance or pooling would not be the contractual or legal responsibility
of Company or any Subsidiary under Applicable Requirements because the
Company or any Subsidiary did not originate, sell or pool such Loan or
Collateral Certificate. Each Warehouse Loan allocated to a particular
Investor in accordance with the standard secondary market practices of the
Company or any Subsidiary is eligible in all material respects for sale
under an Investment Commitment. Except as set forth on SCHEDULE 4.21(A),
each Warehouse Loan not allocated to a particular Investor in accordance
with the foregoing sentence would be otherwise eligible for sale in all
material respects under an Investment Commitment upon allocation to an
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Investor. Except as set forth on SCHEDULE 4.21(A), there exists no fact or
circumstance that would entitle the applicable Insurer or Investor to (i)
demand from the Company or any Subsidiary either repurchase of any Serviced
Loan or any Collateral Certificate or indemnification for losses or refuse
to purchase a Warehouse Loan, (ii) impose on the Company or any Subsidiary
sanctions, penalties or special requirements in respect of any Loan, or
(iii) rescind any insurance policy or reduce insurance benefits in respect
of any Loan which would result in a breach of any obligation of the Company
or any Subsidiary under any Contract. Each Pipeline Loan complied in all
material respects with Applicable Requirements for the stage of processing
that had been achieved as of the Closing Date based on the Investor or
Insurer Program under which Company originated the Pipeline Loan, including
but not limited to compliance with applicable Laws and procurement of
required settlement services (E.G., appraisal, title and insurance). The
Company and each of the Subsidiaries have handled each REO in accordance
with Applicable Requirements.
(b) Each Loan is evidenced by a Mortgage Note and is duly secured by a valid
first lien Mortgage on the related Mortgaged Property, in each case, on
such forms and with such terms as comply with all Applicable Requirements.
Each Mortgage Note and the related Mortgage is genuine and each is the
legal, valid and binding obligation of the maker thereof, enforceable in
all material respects in accordance with its terms, subject to bankruptcy,
insolvency and similar laws affecting generally the enforcement of
creditors' rights and the discretion of a court to grant specific
performance. All parties to the Mortgage Note and the Mortgage had legal
capacity to execute the Mortgage Note and the Mortgage and each Mortgage
Note and Mortgage has been duly and properly executed by such parties. Each
Loan is not subject to any rights of rescission, set-off, counterclaim or
defense, including the defense of usury, nor will the operation of any of
the terms of the Mortgage Note or the Mortgage, or the exercise of any
right thereunder, render either the Mortgage Note or the Mortgage
unenforceable by the Company, in whole or in part, or subject to any right
of rescission (except any Warehouse Loan which is closed but not funded),
set-off, counterclaim or defense, including the defense of usury, and no
such right of rescission, set-off, counterclaim, or defense has been
asserted with respect thereto. For purposes of this SECTION 4.21(B),
references to Mortgage Notes shall be deemed to include mortgage notes in
respect of REO.
(c) The Company and each Subsidiary (in their respective capacities as Servicer
or otherwise) and each Originator and Prior Servicer have complied in all
material respects with the Applicable Requirements including, without
limitation, the federal Fair Housing Act, federal Equal Credit Opportunity
Act and Regulation B, federal Fair Credit Reporting Act, federal Truth in
Lending Act and Regulation Z, National Flood Insurance Act of 1968, federal
Flood Disaster Protection Act of 1973, federal Real Estate Settlement
Procedures Act and Regulation X, federal Fair Debt Collection Practices
Act, federal Home Mortgage Disclosure Act, and state consumer credit and
usury codes and laws.
(d) There has been no material fraudulent action on the part of any Person
(including without limitation any borrower, appraiser, builder or
developer, credit reporting agency, settlement agent, realtor, broker or
correspondent) in connection with the origination of any Loan or Pipeline
Loan or the application of any insurance proceeds with respect to a Loan or
the Collateral for which Company is responsible to the applicable Investor
or Insurer.
(e) SCHEDULE 4.21(E) represents a complete and accurate list of each Servicing
Agreement as of the date of the Balance Sheet pertaining to Serviced Loans
and includes (i) the identity of the Mortgage Group member acting as
Servicer under such Servicing Agreement; (ii) whether the relevant Servicer
is acting as master servicer, servicer or subservicer under such Servicing
Agreement; and (iii) the outstanding principal balance of any advances made
by the relevant Servicer with respect to the Loans, Collateral Certificate
Pools or Pipeline Loans (if any) Serviced under such Servicing Agreement.
All information contained in SCHEDULE 4.2(E) is complete and accurate in
all material respects. The Servicing of the Loans and Collateral
Certificate Pools complies in all material respects with all Applicable
Requirements.
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(f) Except as disclosed in SCHEDULE 4.21(F), all Mortgage Pools have been
initially certified, finally certified and/or recertified if required by
the relevant Investor, Insurer or other certifying Person and otherwise in
accordance in all material respects with Applicable Requirements.
(g) All Custodial Accounts required to be maintained by the Company and the
Subsidiaries have been established and continuously maintained in
accordance with Applicable Requirements in all material respects. Except as
to payments which are past due under the Loans or Collateral Certificates
identified on SCHEDULE 4.21(G), all Custodial Account balances required by
the Loans and paid to the Company or Subsidiaries for the account of the
Mortgagors under the Loans or with respect to Collateral Certificates or
Securitization Transactions have been credited to the appropriate account
and have been retained in and disbursed from the appropriate account in
accordance with the Applicable Requirements in all material respects.
Subject to and in accordance with the Applicable Requirements pertaining
generally to the type, size, rating or capitalization of depository
institutions qualified to hold such balances, the Company and the
Subsidiaries have the right and power to determine the financial
institution in which the Custodial Accounts are held.
(h) Except as disclosed in SCHEDULE 4.21(H) and for indemnity agreements with
any of such Persons (a true and complete list of all current such indemnity
agreements being in SCHEDULE 4.21(H)) and except for customary industry
standards for indemnification and repurchase remedies in connection with
agreements for the sale or servicing of mortgage loans, none of the Company
or any Subsidiary is now nor has been, during the last three years, subject
to any material fine, suspension, settlement or other agreement or
administrative agreement or sanction by, or any obligation to indemnify,
HUD, GNMA, VA, FNMA, FHLMC or other Investor, any federal agency, or State
Agency relating to the origination, sale or servicing of mortgage or
consumer loans.
(i) Each Loan is covered by an American Land Title Association or similar
lender's title insurance policy (or a title commitment or title binder
committing the title company to issue such title insurance policy) or,
where customary, an attorney's opinion of title (collectively, "TITLE
INSURANCE POLICY") in each case meeting the Applicable Requirements in all
material respects, issued by an Insurer acceptable to any relevant Agency,
and any other Investor or Private Investor and qualified to do business in
the jurisdiction where the Mortgaged Property is located, insuring the
Company or the relevant Subsidiary, its successors and assigns as to the
lien of the Mortgage in the original principal amount of the Loan and
against any loss by reason of the invalidity or unenforceability of the
lien. Additionally, such lender's title insurance policy affirmatively
insures ingress and egress to and from the Mortgaged Property, and against
encroachments by or upon the Mortgaged Property. The Company or the
relevant Subsidiary is the sole insured of each lender's title insurance
policy, and each lender's title insurance policy is in full force and
effect and will be in full force and effect upon the consummation of the
transactions contemplated by this Agreement. Except as disclosed in
SCHEDULE 4.21(I), no claims have been made under a lender's title insurance
policy, and no prior holder of the related Mortgage, including the Company
and any Subsidiary, has done, by act or omission, anything which would
impair the coverage of any lender's title insurance policy.
(j) Each appraisal made in connection with the origination of a Loan or, if
applicable, a Pipeline Loan, was performed in all material respects in
accordance with Applicable Requirements. Except as otherwise permitted or
required by the Applicable Requirements, each conventional Loan with an LTV
at origination in excess of 80% is subject to a primary insurance policy
satisfying the requirements of the applicable Investor or to the extent
that no Investor exists, complying with the requirements contained in the
Seller and Servicing Guides. All provisions of such primary insurance
policy have been and are being complied with in all material respects, such
policy is in full force and effect, and all premiums due thereunder have
been paid. Any Mortgage subject to any such primary insurance policy
obligates the Mortgagor thereunder to maintain such insurance and to pay
all premiums and charges in connection therewith if the Investor so
requires or to the extent that no Investor exists, complying with the
requirements contained in the Seller and Servicing Guides.
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(k) All flood and hazard insurance policies with respect to Loans were obtained
where required and are in compliance in all material respects with
Applicable Requirements.
(l) Except as disclosed on SCHEDULE 4.21(L), no Loan is a "high-cost loan" or
"covered loan" under either the Home Ownership Equity Protection Act or a
similar state or local anti-predatory lending Law.
(m) Except as disclosed in SCHEDULE 4.21(M), there are no material taxes,
ground rents, water charges, sewer rents, assessments (including
assessments payable in future installments), insurance premiums, leasehold
payments or other outstanding charges affecting the related Mortgaged
Properties (i) with respect to any Warehouse Loan or REO and (ii) with
respect to any Serviced Loan (except those items which, if unpaid, are not
obligations of the Company or any Subsidiary under Applicable
Requirements), in each case that are past due and, except with respect to
insurance premiums, for which a penalty is payable.
(n) Except as disclosed in SCHEDULE 4.21(N), the proceeds of each Loan have
been fully disbursed to or for the account of the related Mortgagor, there
is no obligation for the related mortgagee to advance additional funds
thereunder and any and all requirements as to completion of any on site or
off site improvement and as to disbursements of any completion or repair
escrow funds therefore have been complied with in all material respects.
4.22 SECURITIZATION TRANSACTIONS.
(a) SCHEDULE 4.22(A) represents a complete and accurate list of each material
Securitization Transaction as of the date of the Balance Sheet and sets
forth the relevant Securitization Issuer, the classes of securities issued,
the current principal balance for each class, the applicable coupon rate or
discount of each class, the current rating assigned to each class, if any,
and the scheduled maturity date(s) of each class. The information contained
in SCHEDULE 4.22(A) is complete and accurate in all material respects.
Since the date of the Balance Sheet, no further Securitization Transactions
other than those disclosed on SCHEDULE 4.22(A) have been completed or are
currently pending. The Company and each Subsidiary has complied in all
material respects with all obligations and conditions to be performed or
satisfied by it with respect to all agreements and arrangements pursuant to
which it is bound under a Securitization Transaction (such agreements and
arrangements are collectively referred to as the "SECURITIZATION
INSTRUMENTS"). Each Securitization Issuer, Securitization Entity,
Securitization Trustee, Servicer and Prior Servicer (if any) has performed
in all material respects all of its respective obligations for which the
Company or any Subsidiary is responsible or may be subject to liability
under the Securitization Instruments or any other existing Law applicable
to Securitization Transactions. Neither the Company nor any Subsidiary nor
any governmental entity, Tax authority, Securitization Issuer,
Securitization Trustee or Servicer has taken any action that would
materially and adversely affect the characterization or Tax treatment for
federal, state or local income or franchise Tax purposes, of any
Securitization Entity or any securities issued in connection with a
Securitization Transaction, and except as set forth in SCHEDULE 4.22(A),
all required federal, state and local Tax and information returns and
elections relating to any Securitization Transaction for which the Company,
any Subsidiary or a Securitization Issuer under the control of Company or
any Subsidiary is responsible under the Securitization Instruments have
been accurately prepared and properly and timely filed in all material
respects.
(b) Neither the Company nor any Subsidiary (acting as Servicer or otherwise)
has materially changed its policies and procedures relating to its
reporting obligations under any Servicing Agreement or Securitization
Instrument. The relevant Servicer has consistently applied in all material
respects all accounting principles and calculation methodologies used by it
in the preparation of any reports required to be delivered pursuant to any
Servicing Report or Securitization Instrument, except to account for
changes in GAAP.
(c) There is no material Litigation pending or any investigation by any
governmental authority pending, or, to the Knowledge of Seller, threatened
against the Seller, the Company, any Subsidiary, any Securitization Entity
139
or any Securitization Issuer relating to any Collateral Certificate or
Securitization Transaction, including but not limited to any Litigation or
investigation relating to an untrue statement of material fact contained in
any disclosure or offering document delivered to Investors, Private
Investors or creditors relating to the Loans, the Collateral Certificates
or any Securitization Transaction (including any exhibits, attachments,
supplements or amendments thereto) (collectively, the "OFFERING
Documents"), or the omission of a material fact from any Offering Documents
necessary to make the statements contained therein not misleading. No
Offering Document contains an untrue statement of a material fact or omits
a material fact necessary to make the statements contained therein not
misleading with respect to the Company, any Subsidiary or any information
for which the Company or any Subsidiary is responsible in such Offering
Document.
(d) Except as publicly disclosed prior to the date hereof, none of Standard &
Poor's, a division of The McGraw-Hill Companies, Inc., Moody's Investor
Service., Inc., Fitch Inc., doing business as Fitch Ratings or A.M. Best,
has indicated that it has under surveillance or review, its rating of (i)
the financial strength, claims paying ability or servicer rating (if any)
of the Company or any Subsidiary and (ii) any Collateral Certificates or
securities issued in connection with Securitization Transactions, and to
the Knowledge of Seller, there exists no circumstance or condition
reasonably likely to cause any such ratings to be modified, qualified,
lowered or placed under such surveillance.
4.23 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the Financial
Statements or in SCHEDULE 4.23, since December 31, 2003, no Material
Adverse Effect has occurred. Except as contemplated by this Agreement or
permitted under SECTION 6.2, since February 29, 2004, the Company and each
Subsidiary has carried on its business in all material respects in the
ordinary course.
4.24 LABOR MATTERS. Neither the Company nor any Subsidiary is a party to or is
bound by any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization, nor is the
Company or any Subsidiary the subject of a proceeding asserting that any of
them has committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel the Company or any
Subsidiary to bargain with any labor organization as to wages or conditions
of employment, nor is there any strike or other material labor dispute or
disputes involving the Company or any Subsidiary pending, or to the
Knowledge of Seller, threatened. There is no activity involving any of the
Company's or the Subsidiary's employees seeking to certify a collective
bargaining unit or engaging in other organizational activity.
4.25 TRANSACTIONS WITH AFFILIATES. Except as set forth on SCHEDULE 3.4 or
SCHEDULE 4.25, there are no outstanding amounts payable to or receivable
from, or advances by the Company or any Subsidiary to, and neither the
Company nor any of the Subsidiaries is otherwise a creditor or debtor to,
Seller or any of its Affiliates, or any director, officer or employee of
Seller or any of its Affiliates (including the Company and the
Subsidiaries). Except as set forth on SCHEDULE 4.25, neither the Company
nor any Subsidiary has purchased, acquired or leased any property or
services from or sold, transferred or leased any property or services to,
or made any management consulting or similar fee agreement with, Seller or
any of its Affiliates (other than the Company or any Subsidiary) or any
director, officer or employee of Seller or any of its Affiliates (including
the Company and the Subsidiaries).
4.26 SUFFICIENCY OF ASSETS. Except for the property and services provided by
Seller and its Affiliates as listed on SCHEDULE 4.25, the assets and
properties of the Company and the Subsidiaries, taken as a whole,
constitute all of the material assets and properties which are reasonably
required for the operation of the business of the Company and the
Subsidiaries as currently conducted.
4.27 INTEREST RATE RISK MANAGEMENT INSTRUMENTS. All interest rate swaps, caps,
floors and option agreements and other interest rate risk management
arrangements (collectively, "HEDGING INSTRUMENTS") entered into for the
account of the Company or the Subsidiaries were entered into in accordance
with applicable Law. The Hedging Instruments are legal, valid and binding
obligations of the Company or the applicable Subsidiary and the other
parties thereto, enforceable against the Company or such Subsidiary, and to
the Knowledge of Seller, the counterparty thereto, in accordance with their
terms (except as enforceability may be limited by bankruptcy, insolvency
and other laws relating to creditors' rights generally or by general
equitable principles), without any material set-off, defense or
counterclaim, and are in full force and effect with respect to the Company,
the applicable Subsidiary and the other parties thereto. The Company and
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the Subsidiaries have duly performed all of their material obligations
under the Hedging Instruments to the extent that such obligations to
perform have accrued, and there are no breaches, violations or defaults or
allegations or assertions of such by any party thereunder.
4.28 NO REGULATORY IMPEDIMENT. Seller is not aware of any fact relating to its
business, operations, financial condition or legal status that might
reasonably be expected to impair in any material respect its ability to
obtain all consents, orders, authorizations, and approvals from federal or
state governmental authorities necessary for the consummation of the
transactions contemplated hereby within the time period contemplated by
this Agreement.
4.29 MASTER SERVICING. Neither the Company nor any of the Subsidiaries engage in
Master Servicing.
4.30 DILIGENCE MATERIALS. Seller has previously delivered to Buyer (i) certain
tapes (electronic media) on which information regarding the Loans as of
February 27, 2004 and March 31, 2004 is recorded (the "Tapes") and (ii)
other information concerning the Company and its Subsidiaries identified in
SCHEDULE 4.30(A) and (B) (such information, together with the Tapes, the
"Diligence Materials"). The information contained in the Tapes is true and
accurate in all material respects as of the date specified therein, with
the exception of the following excluded "fields:"
sas_type
sas_purp
group
mn_del
escrow_bal
crsibnkfcl
term
rterm
Subject to any written limitations stated in such Diligence Materials or on
SCHEDULE 4.30(A), the Diligence Materials listed on SCHEDULE 4.30(A) are
true and accurate in all material respects as of the date specified
therein. Subject to any written limitations stated in such Diligence
Materials or in SCHEDULE 4.30(B), the Diligence Materials listed on
SCHEDULE 4.30(B) are true copies of the documents that they purport to be.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
5.1 ORGANIZATION OF BUYER. Buyer is duly organized and validly existing as a
corporation and in good standing under the laws of the jurisdiction of its
organization and has full corporate power and authority to conduct its
business as it is presently being conducted and to own and lease its
properties.
5.2 AUTHORIZATION. The execution, delivery and performance of this Agreement by
Buyer have been duly authorized by all necessary corporate action. This
Agreement has been duly executed and delivered by Buyer and, assuming the
due execution of this Agreement by the other parties hereto, is a valid and
binding obligation of Buyer, enforceable against it in accordance with its
terms, except as such enforcement may be limited by bankruptcy, insolvency,
receivership, conservatorship, reorganization, moratorium or other similar
laws now or hereafter in effect relating to or affecting the rights and
remedies of creditors generally, and general principles of equity (whether
considered in a proceeding at law or in equity) and the discretion of the
court before which any proceeding therefor may be brought.
5.3 CONSENTS AND APPROVALS. No consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority or any other Person is required to be made or obtained by Buyer
on or prior to the Closing Date in connection with the execution, delivery
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and performance of this Agreement and the consummation of the transactions
contemplated by this Agreement, except (i) the filing of premerger
notification reports under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended and (ii) any required approvals or consents from
federal and state regulatory agencies. Buyer has no knowledge of any fact
or circumstance concerning itself that reasonably could be expected to
delay the receipt of, or result in a denial of, any required consent or
approval.
5.4 NO BROKERS. Buyer has not employed, and is not subject to the valid claim
of, any broker, finder, consultant or other intermediary in connection with
the transactions contemplated by this Agreement.
5.5 NO CONFLICT OR VIOLATION. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated by this
Agreement will in any material respect (i) conflict with or result in any
material breach which would constitute a default under any term or
provision of any Contract, agreement, indebtedness, lease, commitment,
license, franchise, Permit, authorization or concession to which Buyer or
any of its Affiliates is a party or is subject or by which any assets of
Buyer or such Affiliate are bound, (ii) result in any material violation of
the provisions of the charter or bylaws of Buyer, or (iii) result in any
material violation by Buyer of any Law.
5.6 FINANCIAL ABILITY. Buyer has sufficient funds available to it to consummate
the transactions contemplated in this Agreement, including, without
limitation, payment of the amounts contemplated in SECTION 3.3(A) hereof.
5.7 ACQUISITION OF STOCK AND OTHER PURCHASED ASSETS. Buyer has such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of its purchase of the Stock. Buyer
confirms that Seller has made available to Buyer the opportunity to ask
questions of the officers and management employees of Seller, the Company
and the Subsidiaries and to acquire additional information about the
business and financial condition of the Company and the Subsidiaries. Buyer
is acquiring the Stock for investment and not with a view toward or for
sale in connection with any distribution thereof, or with any present
intention of distributing or selling the Stock. Buyer agrees that the Stock
may not be sold, transferred, offered for sale, pledged, hypothecated or
otherwise disposed of without registration under Securities Laws, except
pursuant to an exemption from registration under such Securities Laws, and
without compliance with state securities laws, in each case, to the extent
applicable.
5.8 NO REGULATORY IMPEDIMENT. Buyer is not aware of any fact relating to its
business, operations, financial condition or legal status that might
reasonably be expected to impair in any material respect its ability to
obtain all consents, orders, authorizations, and approvals from federal and
state governmental authorities necessary for the consummation of the
transactions contemplated hereby within the time period contemplated by
this Agreement.
5.9 GAAP. As of the date of this Agreement, Buyer has no actual knowledge that
the Company did not prepare the Balance Sheet in accordance with GAAP and
consistent with the policies, procedures and methodologies employed by the
Company in the preparation of the Financial Statements. Seller has the
burden of proving Buyer's actual knowledge for purposes of this SECTION
5.9.
ARTICLE 6
ACTIONS BY SELLER AND
BUYER PRIOR TO THE CLOSING
Seller or Buyer, as the case may be, covenants as follows for the period from
the date hereof to the Closing Date:
6.1 MAINTENANCE OF BUSINESS. Seller shall cause the Company and each of the
Subsidiaries in all material respects to (i) carry on their business
(including but not limited to the manner and selection of Loans sold to
Investors), in the ordinary course consistent with past practice except as
contemplated or required by this Agreement, or as otherwise agreed in
writing by the parties hereto, (ii) use commercially reasonable efforts to
maintain and preserve intact the business organization, employees and
advantageous business relationships of the Company and the Subsidiaries,
(iii) maintain the reserves in account numbers 1440000, 1410600, 1440100,
1430100 and 1512000 consistent with the assumptions and formulas used by
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the Company in calculating the reserves recorded on the Company's March 31,
2004 balance sheet in such account numbers and (iv) take no action which
would reasonably be expected to adversely affect or delay its ability to
obtain any approvals required to consummate the transactions contemplated
hereby.
6.2 CERTAIN PROHIBITED TRANSACTIONS. Except as permitted or contemplated by
this Agreement, Seller shall cause the Company and each Subsidiary not to,
without the prior written approval of Buyer, which shall not be
unreasonably withheld:
(a) except for compensation and benefit increases in the ordinary course of
business consistent with past practice and the items set forth on SCHEDULE
4.17(I), (i) increase the compensation or fringe benefits payable or
provided by the Company or any Subsidiary to any individual, or (ii) enter
into or commit itself to any new officer employment, management or
consulting agreement with any Person, other than agreements that can be
terminated without additional payment in less than 30 days;
(b) issue any broadly distributed communication of a general nature to
Continuing Employees (including general communications relating to benefits
and compensation) without the prior written approval of Buyer (which will
not be unreasonably delayed or withheld), except for communications that
either are in the ordinary course of business that do not relate to the
transactions contemplated hereby or are made pursuant to a mutually-agreed
upon communications plan;
(c) except as set forth on SCHEDULE 6.2(C), except in the ordinary course of
business consistent with past practice, permit or allow any assets or
properties of the Company or any Subsidiary to be subject to any material
Encumbrance;
(d) make any capital expenditure or any commitment to make any capital
expenditure, except for such expenditures or commitments made in the
ordinary course of business consistent with either the business plan
previously furnished to Buyer or not exceeding $250,000 in the aggregate;
(e) enter into any Material Contract or any other Contract with a
non-cancelable term in excess of six months or involving aggregate
expenditures or revenues by the Company or any Subsidiary in excess of
$250,000;
(f) except as set forth on SCHEDULE 6.2(F), sell, lease, license, transfer or
otherwise dispose of, or acquire or agree to acquire, any material assets
except in the ordinary course of business; PROVIDED, with respect to the
buyout of delinquent Loans from GNMA securities, "ordinary course of
business" shall be deemed to be in a manner and amount consistent in all
material respects with methodologies employed by, and average repurchases
of, the Company during the six months ended March 31, 2004;
(g) except in the ordinary course of business consistent with past practice and
as set forth on SCHEDULE 6.2(G), (I) enter into, amend (including by
re-pricing), extend, or terminate, or agree to enter into, amend, extend or
terminate, any material Servicing Agreement, or (II) acquire, sell,
transfer or otherwise dispose of, or agree to (or amend any agreement to)
acquire, sell, transfer or dispose of, any Servicing;
(h) except in the ordinary course of business consistent with past practice and
as set forth on SCHEDULE 6.2(H), and except for immaterial amounts or
terms, incur any indebtedness for borrowed money, assume, guarantee,
endorse or otherwise become responsible for obligations of any other
Person, or make any loans or advances to any Person;
(i) change in any material respect any (A) financial accounting policies,
practices or procedures, (B) collections, pricing, origination, credit or
underwriting policies, practices or procedures, (C) Servicing practices,
policies and procedures with respect to the Loans or (D) actuarial,
reserving, investment or risk management or other similar policies of the
Company or any Subsidiary, except to hedge to the pricing matrix for the
Servicing and other components of the Final Purchase Price as determined
143
pursuant to SCHEDULE 2.2 and EXHIBITS A - F hereto or to respond to changes
in GAAP or SAP, Applicable Requirements and market conditions;
(j) settle any material Litigation that contains terms that generally bind the
way the Company conducts business in the future or waive any material
rights or claims;
(k) make, declare, set aside or pay any dividends or distributions (whether in
cash, stock or property) in respect of any capital stock of the Company or
any Subsidiary or directly or indirectly redeem, purchase or otherwise
acquire any of the Company's or any Subsidiary's capital stock or any
securities or obligations convertible into or exercisable for any of the
Company's or any Subsidiary's capital stock;
(l) issue or commit to issue any shares of capital stock of the Company or any
Subsidiary or obligations or securities convertible into or exchangeable
for capital stock of the Company or any Subsidiary, or grant any stock
appreciation rights or grant any Person any right to acquire any shares of
capital stock of the Company or any Subsidiary;
(m) amend its charter or bylaws or comparable organizational documents;
(n) merge with any other Person or permit any other Person to merge into it or
consolidate with any other Person;
(o) authorize or permit any of Seller's, Seller's Affiliates or the Company's
or any Subsidiary's officers, directors, employees, representatives or
agents (collectively, "REPRESENTATIVES") to directly or indirectly solicit,
initiate or encourage any inquiries relating to, or that may reasonably be
expected to lead to, the making of, any proposal that constitutes an
Acquisition Proposal (as defined below), or recommend or endorse any
Acquisition Proposal, or participate in any discussions or negotiations, or
provide third parties with any nonpublic information, relating to any such
Acquisition Proposal or otherwise facilitate any effort or attempt to make
or implement an Acquisition Proposal. Each of Seller or the Company or any
Subsidiary will immediately cease and cause to be terminated any
activities, discussions or negotiations conducted prior to the date of this
Agreement with any parties other than Buyer with respect to any Acquisition
Proposal and, to the extent it is able to do so, require the return (or if
permitted by the terms of the applicable confidentiality agreement, the
destruction) of all confidential information previously provided to such
parties. As used in this Agreement, "ACQUISITION PROPOSAL" means any
inquiry, proposal or offer relating primarily to any tender or exchange
offer, proposal for a merger, consolidation, other business combination or
other acquisition involving the Company or any Subsidiary or the
acquisition in any manner of any of the voting stock, equity, assets or
properties of the Company or any Subsidiary, other than the transactions
contemplated by this Agreement or as otherwise expressly permitted
elsewhere in this SECTION 6.2;
(p) take any action that is intended or may reasonably be expected to result in
any of its representations and warranties set forth in this Agreement being
or becoming untrue in any material respect at any time prior to the Closing
Date, or in any of the conditions set forth in SECTION 7 or 8 not being
satisfied in any material respect or in a material violation of any
provision of this Agreement, except, in each case, as may be required by
Applicable Requirements;
(q) make or change any election, file any amended Tax Return, enter into any
closing agreement, settle any Tax claim or assessment of or relating to the
Company or any Subsidiary, surrender any right to claim a refund of Taxes,
or consent to any extension or waiver of the limitation period applicable
to any Tax claim or assessment upon or relating to the Company or any
Subsidiary if such election, amendment, agreement, settlement, surrender,
consent or other action would likely have the effect of increasing the Tax
liability of the Company or any Subsidiary for any taxable period beginning
on or after the day after the Closing Date unless required by applicable
Law;
144
(r) engage in any transaction with, or enter into any agreement, arrangement,
or understanding with, directly or indirectly, any Affiliate, or make any
payment or distribution to any Affiliate (other than payments for services
as an officer, director or employee of the Company or a Subsidiary), except
for transactions in the ordinary course of business consistent with past
practice or involving immaterial amounts or terms;
(s) permit any employee of the Company or any Subsidiary having decision making
responsibility for the sale or retention of Servicing (including, but not
limited to, best execution strategies surrounding Warehouse Loans) to take
actions in respect of the calculations and methodologies used in this
Agreement (including as set forth on the Exhibits and schedules hereto)
related to the calculation of Pre-Closing Servicing Rights Value, Closing
Servicing Rights Value, Pipeline Loans Servicing Value and Warehouse Loans
Servicing Value or otherwise used in determination of the Estimated
Purchase Price or Final Purchase Price in order to, or with the effect of,
affecting or manipulating in bad faith the Estimated Purchase Price or the
Final Purchase Price; or
(t) authorize, commit or agree to take any of the foregoing actions.
6.3 ACCESS. Seller shall allow Buyer during regular business hours through
Buyer's employees, agents and representatives (i) to make such
investigation of the business, properties, books and records of the Company
or any Subsidiary, (ii) to conduct such examination of the condition of the
Company or any Subsidiary, as Buyer reasonably deems necessary or advisable
for purposes of an orderly integration of the Company and the Subsidiaries
by Buyer following Closing, (iii) to train Continuing Employees and any
other Seller's employees who will or may become employees of Buyer or who
will provide services to Buyer through the Transition Services Agreement
with respect to Buyer's policies, procedures and systems and (iv) for other
purposes reasonably consistent with this Agreement. In furtherance of the
foregoing, to the fullest extent permitted under applicable Law, not later
than seven (7) Business Days from the date hereof, the Seller, the Company
and the Subsidiaries shall jointly appoint three (3) officers with
knowledge of, and experience in, the operations and affairs of the Company
and the Subsidiaries, and Buyer shall appoint three (3) officers with
responsibility for overseeing the operational integration of the Company
and the Subsidiaries with Buyer's business, to comprise a transition team
(the "TRANSITION TEAM") that shall meet on a regular basis to discuss and
implement reasonable steps necessary to achieve an orderly integration of
the Company and the Subsidiaries with Buyer as of the Closing. In addition,
subject to the establishment of appropriate screening and confidentiality
mechanisms as determined by the Transition Team, the Transition Team shall
ensure that Buyer has access to necessary information to enable it to
prepare for the conversion of those information technology systems of the
Company and the Subsidiaries, as may be identified by Buyer's appointees on
the Transition Team, to the information technology systems of Buyer as of
the Closing or as promptly as practicable thereafter.
All reasonable requests for access to the offices, properties, plants,
books and records relating to Seller or the Company or the Subsidiaries
shall be made to such representatives of Seller as Seller shall designate
or to the Seller's representatives on the Transition Team, who shall be
solely responsible for coordinating all such requests and all access
permitted hereunder. It is further understood and agreed that neither Buyer
nor its representatives shall contact any of the employees, customers or
suppliers of Seller or the Company or the Subsidiaries in connection with
the transactions contemplated hereby, whether in person or by telephone,
mail or other means of communication without the prior authorization of
such representatives of Seller as Seller may designate; provided, that the
foregoing shall not be deemed to preclude ongoing contact with any such
Person with whom Buyer or its Representatives has been in contact prior to
the date hereof. Any information obtained from Seller or the Company or any
Subsidiary shall be deemed to be "Evaluation Material" as defined in the
Confidentiality Agreement dated February 20, 2004 between Seller and Buyer
(the "CONFIDENTIALITY AGREEMENT") and shall be subject to the
Confidentiality Agreement. Notwithstanding the foregoing, Seller shall not
be required to violate any obligation of confidentiality to which Seller,
or the Company or any Subsidiary is subject or to waive any privilege which
any of them may possess in discharging their obligations pursuant to this
SECTION 6.3 or to violate any Law.
6.4 REGULATORY APPROVALS. As soon as practicable after execution and delivery
of this Agreement, Buyer and Seller shall make all filings required under
applicable laws and regulations for consummation of the transactions
contemplated hereby. In addition, Buyer and Seller will each promptly
furnish all information as may be required by any federal or state
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regulatory agency properly asserting jurisdiction in order that the
requisite approvals for the transactions contemplated hereby may be
obtained or to cause any applicable waiting periods to expire. Seller and
Buyer will, as soon as practicable, use commercially reasonable efforts to
take, or cause to be taken, all action required to obtain as promptly as
practicable all necessary Permits, consents, approvals, authorizations and
agreements of, and to give all notices and reports and make all other
filings with, any governmental or regulatory authority, necessary to
authorize, approve or permit the consummation of the transactions
contemplated hereby, and Buyer and Seller shall cooperate with each other
in good faith with respect thereto. To the extent such documents are
publicly available, Buyer and Seller shall promptly provide to each other
copies of all applications, documents, correspondence and written comments
that each of them or any of their Affiliates files with, sends to or
receives from any regulatory or governmental agency, or the staff or
supervisory agents of any of them, relating to this Agreement and the
transactions contemplated herein, including any applications filed for the
purpose of obtaining any necessary regulatory consents, approvals or
waivers. Buyer and Seller each represents and warrants to the other that
all information concerning it, its Affiliates or their respective
directors, officers, shareholders and subsidiaries (or submitted for
inclusion) in any such application or filing shall be true, correct and
complete in all material respects.
6.5 EFFORTS TO CLOSE. Subject to the terms and conditions herein provided, each
of the parties hereto shall use commercially reasonable efforts to take, or
cause to be taken, all action or do, or cause to be done, all things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated hereby and to cause the fulfillment of the
parties' obligations hereunder.
6.6 AGENCIES. Promptly after the execution of this Agreement, Seller shall
cause the Company to cooperate with Buyer to proceed to obtain any required
Permits from the Agencies necessary to complete the transactions
contemplated by this Agreement. Seller shall have the responsibility to
cause the Company to use all commercially reasonable efforts to secure any
such Permits from the Agencies, and Buyer shall cooperate and use all
commercially reasonable efforts to secure any such Permit. Seller shall pay
all fees imposed by the Agencies and costs with respect to any Permits.
6.7 CONSENTS AND WAIVERS OF THIRD PARTIES. Seller shall cause the Company or
any of the Subsidiaries to use commercially reasonable efforts, and Buyer,
upon request of Seller, shall use commercially reasonable efforts to
cooperate with Seller, in attempting to secure any approvals or consents
from (or file notices with or obtain waivers from) any third party required
to consummate the transactions contemplated herein.
6.8 MONTHLY FINANCIAL INFORMATION. Not later than the 10th Business Day of each
month between the date of this Agreement and the Closing Date, Seller shall
provide Buyer with (i) an unaudited consolidated balance sheet for the
Company as of the most recently completed month-end period (a "MONTHLY
UNAUDITED BALANCE SHEET") in sufficient detail to determine the Final
Purchase Price in conformance with SECTION 2.2, which shall be accompanied
by a certificate, duly executed by the chief financial officer, chief
accounting officer or other senior financial officer of Seller stating with
respect to such Monthly Unaudited Balance Sheet, that such Monthly
Unaudited Balance Sheet is based on the books and records of the Company
and its Subsidiaries and fairly presents, in all material respects, the
financial position of the Company and its Subsidiaries, as of the date
indicated therein, in accordance with GAAP; (ii) a report delivered as a
computer tape containing, with respect to each Loan owned by the Company
and the Subsidiaries and each Serviced Loan and Subserviced Loan, the
information specified on SCHEDULE 1.2 as of the most recent month-end
period; and (iii) an updated servicing data file as of the prior month-end
regarding Serviced Loans containing the same information and data elements
and in the same format as the month-end servicing tape provided to Buyer as
of March 31, 2004. As soon as such information becomes available, Seller
shall provide Buyer with PMRC's audited balance sheet as of December 31,
2003 and the related audited statements of operations and income and cash
flows for the year then ended.
6.9 PRECLOSING TRANSACTIONS.
(a) Seller shall, on or prior to the Closing Date, transfer or cause to be
transferred to the Company or a Subsidiary, as appropriate, the contracts
and other assets owned by Seller or its Affiliates and presently
exclusively used and necessary for the operation of the business of the
Company as set forth on SCHEDULE 6.9(A). All such transfers shall be on
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terms, and made pursuant to documents, reasonably acceptable to Buyer and
Seller. The purchase price for all transfers of assets that are made to
Seller or any Subsidiary shall be as set forth on SCHEDULE 6.9(A), shall be
paid in cash or, in the case of transfers to Seller, reduction of
intercompany indebtedness owed by the Company and shall be at Seller's sole
cost and expense.
(b) Seller shall, on or prior to the Closing Date, amend or terminate, or cause
to be amended or terminated, all interest rate swap agreements or other
instruments or arrangements which have the intent or effect of transferring
net interest margin from one or more of the Subsidiaries such that the
benefit of such instruments or arrangements inures to Buyer following the
Closing, and Seller shall provide Buyer with evidence to such effect.
(c) Seller shall cause the Company to provide such information to Buyer as may
be reasonably necessary to enable Buyer to arrange the pay off and
termination at Closing of all the Company's and any of the Subsidiary's
existing financing with third parties and shall cooperate with Buyer in the
filing of UCC-3 termination statements and other similar instruments to
effect the release of liens related thereto.
ARTICLE 7
CONDITIONS TO SELLER'S OBLIGATIONS
The obligations of Seller to consummate the transactions contemplated hereby on
the Closing Date are subject, in the discretion of Seller, to the satisfaction
or waiver in writing, on or prior to the Closing Date, of each of the following
conditions:
7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and
warranties of Buyer contained in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date (or on the date
when made in the case of any representation and warranty which specifically
relates to an earlier date), except as otherwise consented to in writing by
Seller and except for the failure or failures of such representations and
warranties to be so true and correct that (after excluding any effect of
materiality qualifications as set forth in any such representation or
warranty), in the aggregate, has not resulted in, or would not reasonably
be expected to result in, a material adverse effect on Buyer's ability to
consummate the transactions contemplated by this Agreement, and Buyer shall
have performed in all material respects all agreements and covenants as
required hereby to be performed by it prior to or at the Closing Date.
There shall be delivered to Seller a certificate (signed by the President
or a Vice President of Buyer) to the foregoing effect.
7.2 CONSENTS. All Permits, consents, approvals and waivers from governmental
and regulatory authorities and Agencies and those set forth in SCHEDULE
4.11 necessary to permit Seller to consummate the transactions contemplated
hereby shall have been obtained; all conditions required to be satisfied
prior to Closing imposed by the terms of such Permits, consents, approvals
or waivers shall have been satisfied; and all waiting periods relating to
such approvals shall have expired.
7.3 NO GOVERNMENTAL ORDERS. Neither of the parties hereto shall be subject to
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of this Agreement
or the transactions contemplated hereby.
7.4 CERTIFICATES. Buyer will furnish Seller with such certificates of its
officers, directors and others to evidence compliance with the conditions
set forth in this ARTICLE 7 as may be reasonably requested by Seller.
7.5 CORPORATE AUTHORITY. Seller shall have received certified copies of
resolutions adopted by the board of directors of Buyer approving the
execution, delivery and performance of this Agreement.
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ARTICLE 8
CONDITIONS TO BUYER'S OBLIGATIONS
The obligations of Buyer to consummate the transactions contemplated hereby are
subject, in the discretion of Buyer, to the satisfaction or waiver, on or prior
to the Closing Date, of each of the following conditions:
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and
warranties of Seller contained in this Agreement shall be true and correct
as of the date of this Agreement and as of the Closing Date as though made
on and as of the Closing Date (or on the date when made in the case of any
representation and warranty which specifically relates to an earlier date),
except as consented to in writing by Buyer and except for the failure or
failures of such representations and warranties to be so true and correct
(after excluding any effect of materiality qualifications set forth in any
such representation or warranty) that, in the aggregate, has not resulted
in a Material Adverse Effect, and Seller shall have performed in all
material respects all agreements and covenants required hereby to be
performed by Seller prior to or at the Closing Date. There shall be
delivered to Buyer a certificate (signed by the President or a Vice
President of Seller) to the foregoing effect.
8.2 CONSENTS. All Permits, consents, approvals and waivers from governmental
and regulatory authorities and Agencies necessary to permit Buyer to
consummate the transactions contemplated hereby and those consents set
forth on SCHEDULES 4.11 or 6.7 shall have been obtained; all conditions
required to be satisfied prior to the Closing imposed by the terms of such
Permits, consents, approvals or waivers shall have been satisfied; and all
waiting periods relating to such approvals shall have expired. For purposes
of this SECTION 8.2, a consent or approval from a governmental authority or
Agency shall not be deemed to have been obtained if in connection with the
grant thereof there shall have been an imposition by such governmental
authority or Agency of any condition, requirement, restriction or change of
regulation, or any other action directly or indirectly related to such
grant taken by such governmental authority or Agency, which, either alone
or together with all such other conditions or requirements, requires the
Company or any of the Subsidiaries to be operated in a manner which is
materially different from industry standards in effect on the date hereof
and which materially adversely affects the business, financial condition,
results of operations or prospects of the Company and the Subsidiaries
taken as a whole.
8.3 NO GOVERNMENTAL ORDERS. None of the parties hereto shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction
which enjoins, conditions or prohibits the consummation of this Agreement
or the transactions contemplated hereby.
8.4 CERTIFICATES. Seller shall furnish Buyer with such certificates of its
officers, directors and others to evidence compliance with the conditions
set forth in this ARTICLE 8 as may be reasonably requested by Buyer.
8.5 CORPORATE AUTHORITY. Buyer shall have received certified copies of
resolutions adopted by the board of directors of Seller approving the
execution, delivery and performance of this Agreement.
ARTICLE 9
ACTIONS BY SELLER
AND BUYER AFTER THE CLOSING
9.1 BOOKS AND RECORDS. From and after the Closing, any books, records and
files, including Evaluation Material, relating to the business, properties,
assets or operations of the Company or any Subsidiary, including to the
extent that they pertain to the operations of the Company prior to the
Closing Date (to the extent they remain in existence and available) shall
become the property of Buyer. Except with respect to the retention of any
books, records and files relating to Taxes, which shall be governed by
ARTICLE 11 hereof, for a period ending on the first anniversary of the
Closing Date, Seller shall have the right to inspect and to make copies of
the same at any time during normal business hours in connection with the
audit, Tax, reporting, litigation or similar needs of Seller arising in the
ordinary course of business and for no other purposes whatsoever
(including, for the avoidance of doubt, any record retention policy of
Seller or any Affiliate of Seller). From and after the Closing, except as
required by applicable Law and the regulations, rules and requirements of a
recognized stock exchange or regulatory authority, Seller shall, and shall
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cause its Affiliates and authorized Representatives to, hold all such
information and any other confidential information that Seller possesses
concerning the Company and the Subsidiaries (including any information that
qualifies as "Evaluation Material" for purposes of the Confidentiality
Agreement) in confidence and not disclose to any third party any such
confidential information possessed by it, and shall use any such
information solely for the purposes delineated above unless such
information (1) is disclosed with the prior written approval of Buyer, (2)
is or becomes readily ascertainable from published information or trade
sources or (3) is required to be disclosed by law, regulation, supervisory
authority, other applicable judicial or governmental order or applicable
stock exchange rules. Except as otherwise provided in the Confidentiality
Agreement, in the event that this Agreement is terminated or the
transactions contemplated by this Agreement otherwise fail to be
consummated, Buyer will promptly cause all copies of documents or extracts
thereof containing information and data as to Seller, the Company and the
Subsidiaries to be returned to Seller at Buyer's expense, or (at Seller's
option) confirm in writing to Seller that Buyer has completely destroyed
all such copies, documents, extracts, information and data.
9.2 FURTHER ASSURANCES. On and after the Closing Date, Seller, the Company, the
Subsidiaries and Buyer will take all appropriate action and execute all
documents, instruments or conveyances of any kind which may be reasonably
necessary or advisable to carry out any of the provisions hereof,
including, but not limited to, any necessary powers of attorney or limited
appointment of officers to enable the Company, after Closing, to assign and
release Mortgages.
9.3 NAME CHANGE AND LIMITED USE OF MARKS.
(a) Except as provided in this SECTION 9.3, Buyer will cause the Company and
each of the Subsidiaries to change their names and take such other action
necessary to ensure that none of such entities retains, does business
under, or has any ownership right in, any Licensed Mark, except as
specifically provided in this SECTION 9.3.
(b) Seller hereby grants to Buyer following the Closing Date, a non-exclusive,
non-transferable, fully paid and royalty-free license to use the service
marks shown in EXHIBIT H as have been used by Seller, the Company or the
Subsidiaries prior to the Closing Date in connection with their mortgage
businesses (the "LICENSED MARKS") on stationery, signage and other business
materials (whether in tangible or electronic form) in connection with the
transition of the names used by the Company and the Subsidiaries to new
names (the "LICENSED USES"), all in accordance with EXHIBIT H.
Notwithstanding the foregoing, Buyer, the Company and the Subsidiaries
shall use reasonable efforts to change all references to the Licensed Marks
used by the Company and the Subsidiaries as soon as reasonably practicable
following the Closing Date. Buyer agrees that within nine months following
the Closing Date, it shall amend the names of the Company and the
Subsidiaries in their respective organizational documents to names which do
not include the Marks or Licensed Marks. The Licensed Marks are set forth
in EXHIBIT H. For a period of nine months after the Closing Date, Seller
shall cause hypertext transfer protocol servers registered to internet
domains that are set forth on SCHEDULE 9.3(B) to operate and to
automatically redirect to such internet domain or domains that do not
include the Marks or Licensed Marks as Buyer shall specify. The license
granted by this SECTION 9.3 shall be effective as of the Closing Date and
shall terminate on the date nine months following the Closing Date. Buyer
acknowledges, covenants and agrees that, except as specifically provided or
permitted under this Agreement, Buyer shall not acquire hereunder any
right, title or interest in or to the Licensed Marks and, except as
specifically permitted under this SECTION 9.3, shall not use in any manner,
(i) any Licensed Mark (except for descriptive or other fair use), and any
content or text owned or licensed by Seller that is subject to state or
federal copyright protection, or (ii) any confusingly similar registered or
unregistered trademark, service mark, trade dress, or other identifying
symbol.
(c) Buyer shall submit to certain of Seller's personnel, specifically
designated by Seller in writing, for approval, the form of any
communications in which Buyer proposes to use the Licensed Marks covered by
this license if such use departs from the Licensed Uses. Seller agrees it
will not unreasonably delay or withhold approval of any proposed use of the
Licensed Marks that is the same as or substantially similar to that made by
Seller, the Company or the Subsidiaries prior to the Closing Date. The
license granted to Buyer under this SECTION 9.3 is not assignable by Buyer,
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and, except as sub-licensed or authorized by Seller, the Company or the
Subsidiaries prior to the Closing Date, Buyer shall not sub-license or
authorize any other party to make use of the Licensed Marks without the
prior written consent of Seller.
(d) Buyer agrees that it shall:
(i) use the Licensed Marks hereunder only for the Licensed Uses and in
conformity with this SECTION 9.3;
(ii) take reasonable steps to guard against the dilution and misuse of the
Licensed Marks by using the Licensed Marks hereunder only for the
Licensed Uses; and
(iii)ensure that all of the services identified by the Licensed Marks (x)
comply in all material respect with applicable local, state and
federal government laws and regulations pertaining to such services,
and (y) meet standards for such services generally accepted in the
mortgage banking industry, except if and to the extent such services
of Seller, the Company or the Subsidiaries do not so comply prior to
the Closing Date.
(e) Seller and Buyer agree that the Licensed Marks are a valuable asset of
Seller and its Affiliates and any misuse of the Licensed Marks in violation
of this SECTION 9.3 may cause Seller and its Affiliates irreparable harm
for which it may have no adequate remedy at law; therefore, Seller shall be
entitled to seek a preliminary injunction and other equitable relief to
prevent any further misuse of the Licensed Marks.
(f) Buyer acknowledges and agrees that Seller shall have the right at any time,
at Seller's expense, to reasonably require the Company and any Subsidiary
to make amendments or other modifications to mortgages, deeds of trust,
financing statements or other recorded documents recorded prior to the date
hereof necessary to remove the word "Principal" or the name of any
predecessor of the Company or any Subsidiary from the name of such
documents.
(g) Seller shall license the Company Intellectual Property that comprises
Excluded IT, and to the extent permissible, Seller shall license the
balance of the Excluded IT and Third Party IT, to Company and the
Subsidiaries on a limited basis, or use the Excluded IT and Third Party IT
on Company's and the Subsidiaries' behalf, to allow Buyer to conduct the
business of the Company and the Subsidiaries as it was conducted prior to
the Closing Date, for a period of 180 days following the Closing Date,
pursuant to this SECTION 9.3 and as shall be further documented in a
Transition Services Agreement. The Transition Services Agreement shall
provide that, at the request of Buyer, Seller shall agree to extend the
term of the license for up to an additional 180 days at such prices as the
parties may agree pursuant to the Transition Services Agreement. Prior to
the Closing and during the applicable transition period, Seller shall
reasonably assist Buyer in acquiring (with Buyer and Seller equally sharing
any required cost and expense) such rights in the Excluded IT and the Third
Party IT as are reasonably necessary to the Company's day-to-day business
operations.
(h) Seller covenants and agrees not to bring any action against Buyer or any of
its Affiliates on the grounds that Buyer has violated Seller's rights under
United States Patent Application Serial Number 10/342,062 and Number
09/918,091 (the "Seller Patents") by practicing one or more of the claims
of the Seller Patents without obtaining a license to do so. Buyer covenants
and agrees not to bring any action against Seller or any of its Affiliates
on the grounds that Seller has violated Buyer's intellectual property and
proprietary rights by exercising Seller's rights to the Seller Patents.
9.4 EMPLOYEE BENEFIT PLANS.
(a) Pursuant to the terms of the Transition Services Agreement, Seller will, at
Buyer's expense, administer the payroll for Continuing Employees and will,
at Buyer's expense, provide coverage to Continuing Employees under Seller's
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welfare benefit plans for a period beginning on the Closing Date and ending
no later than December 31, 2004 (the "TRANSITION PERIOD").
(b) Except as otherwise provided in this Article, until January 1, 2005, Buyer
shall, or shall cause its Affiliates to, provide each Continuing Employee
with (i) salary or wages, including incentive compensation, as applicable,
at least equal to those provided to such Continuing Employee immediately
prior to the Closing Date and (ii) employee benefits that are no less
favorable in the aggregate than the employee benefits provided by Buyer to
its similarly situated employees. Subject to SECTION 9.4(H) below,
notwithstanding any provision hereof, none of Buyer, the Company or any of
their respective Affiliates will have any obligation to continue the
employment of any Continuing Employee for any period following the Closing
Date.
(c) Subject to SECTION 9.4(I), Buyer shall cause the Buyer Employee Benefit
Plans to credit service with PRMI and the ERISA Affiliates of PRMI and any
predecessor employers prior to the last day of the Transition Period, to
the extent credited under the corresponding or comparable PRMI Employee
Benefit Plans, as service with Buyer and its subsidiaries for purposes of
eligibility and vesting under Buyer Employee Benefit Plans in which a
Continuing Employee becomes eligible to participate in after the last day
of the Transition Period and for purposes of determining the amount of
benefits under Buyer's severance plan or vacation plan; PROVIDED, HOWEVER,
that in no event shall the Continuing Employees be entitled to any credit
to the extent that it would result in duplication of benefits with respect
to the same period of service.
(d) Subject to SECTION 9.4(I), on and after the last day of the Transition
Period, Buyer shall, or shall cause its subsidiaries, to give full credit
to Continuing Employees for, and permit the Continuing Employees to either
retain and carry over or to be paid in respect of all unused paid time off
accrued by the Company on the Closing Date Balance Sheet and during the
Transition Period in respect of the Continuing Employees while employees of
PRMI and the ERISA Affiliates of PRMI.
(e) Subject to SECTION 9.4(I), Buyer shall, from and after the last day of the
Transition Period, (i) cause any and all pre-existing condition
limitations, eligibility waiting periods, active employment requirements
and requirements to show evidence of good health under the Buyer Employee
Benefit Plans, to the extent that such conditions, exclusions and waiting
periods would have been waived or satisfied under the corresponding welfare
plan in which any such Continuing Employee participated immediately prior
to the last day of the Transition Period, to be waived with respect to
Continuing Employees (and their spouses and eligible dependents) who become
participants in such Buyer Employee Benefit Plans and (ii) give credit for
or otherwise take into account under the Buyer Employee Benefit Plans the
out-of-pocket expenses and annual expense limitation amounts paid by each
Continuing Employee under the comparable PRMI Employee Benefit Plan for the
year in which the last day of the Transition Period occurs.
(f) Buyer shall cause a Buyer Employee Benefit Plan that is qualified under
Section 401(a) of the Code to, at the direction of the Continuing
Employees, accept rollovers of "eligible rollover distributions" (within
the meaning of Section 402(c)(4) of the Code) to Continuing Employees from
the PRMI Qualified Plans, to the extent that the Buyer Employee Benefit
Plan allows rollovers.
(g) Except as otherwise set forth herein, Seller shall retain any benefit
liabilities under PRMI Employee Benefit Plans accruing in respect of the
pre-closing period that are not accrued on the Closing Date Balance Sheet,
including but not limited to the Retention Agreements.
(h) If the employment of a Continuing Employee terminates (a) on or prior to
the first anniversary of the Closing Date, such Continuing Employee shall
be entitled to severance benefits from Buyer or its Affiliates at least
equal to the severance benefits specified on SCHEDULE 4.17(I) and (b) after
the first anniversary of the Closing Date, such Continuing Employee shall
be entitled to severance benefits in accordance with the severance policies
of Buyer, as in effect from time to time thereafter. For purposes of
subsection (a) of this SECTION 9.4(H), it is understood that if Buyer or
any of its Affiliates changes, without such Continuing Employee's prior
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consent, a Continuing Employee's work location and such change results in
an increase in the one-way commute from such Continuing Employee's primary
residence to his or her worksite by 25 miles or more, such Continuing
Employee shall be entitled to terminate his or her employment and receive
the severance benefits described above if such employee declines to make
such change.
(i) Seller shall, or shall cause PRMI and any Subsidiary to, cooperate with
Buyer or any of its subsidiaries or Affiliates in providing reasonable
access to any employees and providing such information as is necessary to
facilitate the implementation of the provisions of this SECTION 9.4.
9.5 NONCOMPETITION AND NONSOLICITATION.
(a) During the period beginning on the Closing Date and ending on the date
which is three (3) years following the Closing Date, neither Seller nor any
Affiliate of Seller that is an entity (other than any pooled investment
vehicle to which Seller or an Affiliate serves as general partner or
investment advisor) shall, within the United States of America, without the
prior written consent of Buyer: (x) engage in the business of (A)
originating or servicing one-to-four family residential first mortgage
loans with a consumer purpose ("RESIDENTIAL MORTGAGE LOANS"), or (B)
establishing correspondent and wholesale contractual arrangements providing
for the purchase from time to time of eligible Residential Mortgage Loans
and purchasing Residential Mortgage Loans pursuant to such arrangements or
(y) enter into a transaction the primary purpose of which is to acquire 15%
or more of the equity interests or voting power of any Person principally
engaged in the business of originating or servicing Residential Mortgage
Loans (a "COMPETING BUSINESS"); provided, however, that this SECTION 9.5
shall not apply to the activities of Seller or its Affiliates undertaken in
a fiduciary or representative capacity. For purposes of this Agreement, a
loan is made "with a consumer purpose" if it is made for personal, family
or household purposes or is a loan reasonably incidental thereto.
Residential Mortgage Loans do not include (i) one-to-four family
residential second or other junior lien mortgage loans or (ii) loans made
for commercial, corporate, business or agricultural purposes or loans
secured by liens on nonresidential property. Notwithstanding the foregoing,
Seller and its Affiliates shall not be prohibited from or restricted in:
(1) Making bulk purchases of Residential Mortgage Loans or interests
therein intended at the time of purchase to be held for Seller's or
any of its Affiliates' own account;
(2) Purchasing Residential Mortgage Loans or interests therein where the
sellers are obligated either to repurchase the Residential Mortgage
Loans or direct their delivery for subsequent sale to a third party
within a specified period of time;
(3) Servicing Residential Mortgage Loans for its own account or
contracting with third parties to perform servicing of Residential
Mortgage Loans held for Seller's or any of its Affiliates' own
account;
(4) Acquiring a security interest in Residential Mortgage Loans or the
ownership thereof or any interest therein by virtue of enforcing such
security interest;
(5) Purchasing, pooling or otherwise dealing in mortgage-backed
securities, collateralized mortgage bonds or other forms of securities
based on, backed by or otherwise related to Residential Mortgage
Loans;
(6) Engaging in any hedge or derivative transactions;
(7) With respect to Principal Bank, in addition to the other permitted
activities enumerated in this Section:
(a) Lending and other activities determined by Principal Bank, acting
in good faith, to be necessary or desirable in connection with
its obligations, goals or commitments to provide loan and other
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credit services pursuant to the Community Reinvestment Act of
1977, as amended, or any similar federal, state or local legal
requirement or any state or local housing program or any housing
assistance program engaged in by Principal Bank to satisfy its
legal obligations;
(b) Originating or servicing commercial purpose loans secured by
one-to-four family residential properties;
(c) Purchasing Residential Mortgage Loans in connection with the
foreclosure or workout of home equity loans or home equity lines
of credit; or
(d) Originating other Residential Mortgage Loans, the aggregate
principal balance of which shall not exceed $50 million in any
calendar year.
(8) Engaging in a mortgage broker business by any employees, agents or
contractors of Seller or any of its Affiliates as long as such
activity is an incidental part of such employee's, agent's or
contractor's business activities;
(9) Making investments in the ordinary course of business, including in a
general and separate account of an insurance company, in investment
funds that make investments in Persons engaging in a Competing
Business and in Persons engaging in a Competing Business, provided
that each such investment is a passive investment and Seller and its
Affiliates do not have representatives on the board of directors or
similar governing body comprising a majority of such board or body of
such Competing Business;
(10) Making investments in Buyer and its Affiliates;
(11) Managing investment funds that make investments in Persons engaging in
a Competing Business or in Residential Mortgage Loans;
(12) Making, purchasing, selling, servicing or otherwise dealing in
commercial real estate transactions of any type;
(13) Acquiring any business or entity that includes operations the conduct
of which by Seller would, but for this clause (13), otherwise violate
the restrictions of SECTION 6.2, if the primary purpose of such
acquisition is not to acquire a Competing Business; provided that (i)
if such business or entity is substantially engaged in one or more
businesses, but (ii) if more than 50% of such entity's consolidated
net income is derived from the Competing Business for each of the last
two (2) fiscal years immediately preceding such acquisition and exceed
$20 million in each year, then within one year after the date of such
acquisition (unless less than one year remains on the non-competition
covenant in this Section), Seller shall have ceased conducting such
Competing Business or shall have entered a binding agreement (which
may be an agreement with Buyer) for the disposition of the Competing
Business. If any such binding agreement shall terminate prior to the
completion of the sale of such Competing Business, Seller shall cease
conducting such Competing Business or enter into a new binding
agreement for its disposition within three months after the date of
such termination; and
(14) Merging into, or otherwise combining in any form with or being
acquired by any entity in any transaction in which Seller or any of
its Affiliates is not the surviving entity or ultimate controlling
person following such transaction, in which event none of the
restrictions set forth in this SECTION 9.5 shall continue to apply,
PROVIDED that the parties have not structured the transaction as a
pretext to avoid the restrictive covenants in this SECTION 9.5.
(b) From the Closing Date, neither Seller nor any of its Affiliates shall
solicit Mortgagors for any purposes, including, but not limited to,
financial services, insurance coverage or prepayment of Mortgage Loans, on
a targeted basis by either using information that they obtained as a result
of Seller's ownership of the Company or conducting a targeted search for
such information. Without the prior written consent of Buyer, Seller shall
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not sell or distribute any customer list incorporating the names of
Mortgagors and shall not itself use any such list to solicit or promote, or
to allow any other person to solicit or promote, the sale of any services
or products to any Mortgagor, in each case using information that it or
they obtained as a result of Seller's ownership of the Company. Seller and
its Affiliates may make sales to, or solicit the sale to, Mortgagors of
financial services and products, including, but not limited to,
insurance-related products, provided that such sales or solicitations are
not made on a targeted basis on the basis of information that they obtained
as a result of Seller's ownership of the Company or as a result of a
targeted search for such information. The foregoing restrictions shall not
apply to:
(1) any advertising or marketing campaign by or on behalf of the Seller or
any of its Affiliates offering financial services, including mortgages
(to the extent not prohibited pursuant to SECTION 9.5(A)) or
insurance-related products and services, directed to its own customer
base or the general public or any segment thereof provided such
segment does not target the Mortgagors; or
(2) a solicitation for financial services to any Mortgagor with whom
Seller or an Affiliate has a customer relationship unrelated to the
Mortgage Loan existing as of the Closing Date; provided that such
solicitation is part of a solicitation program not directed primarily
to the Mortgagors.
(c) Seller agrees that, for a period beginning on the date of this
Agreement and ending on the date three (3) years following the Closing
Date, neither Seller nor its Affiliates will solicit for employment
any of the Continuing Employees; provided, however, that it is
understood that this SECTION 9.5(C) shall not prohibit: (1)
solicitation of any Continuing Employee who contacts Seller or any
Affiliate of Seller on his or her own initiative without any
solicitation by or encouragement from Seller or any Affiliate
(excluding any solicitation by a professional search firm where Seller
or an Affiliate has not directed such firm to solicit that person);
(2) generalized solicitations by advertising and the like which are
not directed to the Continuing Employees; (3) solicitations of
Continuing Employees whose employment was terminated by Buyer or the
Company or any Subsidiary; provided that for any Continuing Employee
hired after termination by Buyer within thirty (30) days after Closing
and who obtained a severance benefit from Buyer, Seller shall
reimburse Buyer the amount of the severance benefit paid by Buyer; or
(4) solicitations of Continuing Employees who have terminated their
employment with the Company or any Subsidiary without any prior
solicitation (which would otherwise violate this SECTION 9.5(C)) by
Seller or any Affiliate.
(d) Seller acknowledges that the restrictions and agreements contained in
this SECTION 9.5 are reasonable and necessary to protect the
legitimate interests of Buyer, and that any violation of this SECTION
9.5 will cause substantial and irreparable injury to Buyer that would
not be quantifiable and for which no adequate remedy would exist at
law and agrees that injunctive relief, in addition to all other
remedies, shall be available therefor.
(e) It is the intent and understanding of each party hereto that if, in
any action before any court or agency legally empowered to enforce
this SECTION 9.5, any term, restriction, covenant, or promise is found
to be unreasonable and for that reason unenforceable, then such term,
restriction, covenant or promise shall not thereby be terminated but
that it shall be deemed modified to the extent necessary to make it
enforceable by such court or agency and, if it cannot be so modified,
that it shall be deemed amended to delete therefrom such provision or
portion adjudicated to be invalid or unenforceable, such modification
or amendment in any event to apply only with respect to the operation
of this SECTION 9.5 in the particular jurisdiction in which such
adjudication is made.
9.6 ANCILLARY AGREEMENTS. On the Closing Date, Buyer and Seller shall
enter into a mutually agreeable Loan Servicing Agreement and
Transition Services Agreement, both in form and substance reasonably
satisfactory to Buyer and Seller and, with respect to the Transition
Services Agreement, at rates that are equal to the 2004 rates charged
to the Company by Seller or any Affiliate thereof; provided, that at
Seller's discretion, Seller may elect to keep in place one or more of
the existing loan servicing agreements between Company or any
Subsidiary and any of their Affiliates.
9.7 CUSTODIAL ACCOUNT BALANCES. Upon Buyer's request, Seller shall obtain
all necessary approval and provide any required notices and shall
transfer to Buyer the balances of all Custodial Accounts held by it
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pursuant to Servicing Agreements as of the Closing Date by wire
transfer to such accounts as Buyer may designate, subject to the terms
of the respective Servicing Agreements.
9.8 POST-CLOSING COOPERATION AND RETENTION OF RECORDS.
(a) Buyer and Seller agree that following the Closing, each party and/or their
independent auditors shall have reasonable access during normal business
hours to the books and records of the Company and the Subsidiaries and
their predecessors applicable to the period prior to the Closing and shall
have the reasonable assistance and cooperation of appropriate personnel
consistent with assistance and cooperation furnished during the period
prior to the Closing, in each case in connection with the audit, reporting,
litigation or similar needs of Seller. Without limiting the foregoing, the
Transition Services Agreement shall provide that (i) Buyer shall make
available to Seller and its Affiliates the employees of the Company and the
Subsidiaries and the affected employees whose assistance, expertise,
testimony, notes, recollections or presence (including participation as a
witness in a deposition, hearing or trial) is necessary or appropriate in
connection with the foregoing and (ii) Seller shall reimburse Buyer for the
cost incurred by Buyer in providing such assistance (including reasonably
allocated charges for the cost of the time of any Buyer or Company
employees made available to Seller). This SECTION 9.8(A) shall not apply to
any books, records or other matters relating to Taxes.
(b) Following the Closing, Buyer shall, and shall cause the Company and the
Subsidiaries to, (i) subject to the last sentence of this SECTION 9.8(B),
preserve and keep (x) the records of the Company and the Subsidiaries held
by the Company and the Subsidiaries prior to the Closing relating to the
business of the Company and the Subsidiaries (including personnel records)
for so long as and to the extent required by applicable Law (but in no
event less than three years after the Closing Date) and (ii) to the extent
permitted by applicable Law, make such records and personnel available to
Seller and its Affiliates, subject to customary confidentiality commitments
reasonable under the circumstances, as may be reasonably required by any
such party, including in connection with any insurance claims by, legal
proceedings against or investigations by any governmental authority of,
Seller or any of its Affiliates or for similar matters or to enable Seller
to comply with its obligations under applicable Law and this Agreement or
otherwise reasonably necessary for the conduct of Seller's business and
operations. In the event Buyer or any of its Affiliates wishes to destroy
any such records after that time in accordance with its normal document
retention policy, then Buyer shall (or shall cause such Affiliate to) give
30 days' prior written notice to Seller and (to the extent permitted by
applicable Law) Seller shall have the right at its option and expense, upon
prior written notice given within such 30-day period, to take possession of
the records within sixty days after the date such notice is given. Seller
shall reimburse Buyer for the cost incurred by Buyer of providing such
assistance (including reasonably allocated charges for the cost of the time
of any Buyer or any Company employees made available to Seller). This
SECTION 9.8(B) shall not apply to any books, records or other matters
relating to Taxes.
ARTICLE 10
INDEMNIFICATION
10.1 INDEMNIFICATION BY SELLER.
(a) INDEMNIFICATION. Subject to the provisions of this SECTION 10.1 and except
as provided in SECTION 10.3 hereof, Seller shall save, defend, indemnify
and hold harmless Buyer, the Company, each Subsidiary and their respective
Affiliates, and each of their respective past, present and future
directors, officers, agents and representatives (together, the "BUYER
INDEMNIFIED PARTIES") from and against, and shall promptly reimburse such
Buyer Indemnified Parties for, any and all Losses incurred by such Buyer
Indemnified Party and arising out of or resulting from:
(1) the inaccuracy of any representation or warranty made by Seller in
this Agreement; and
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(2) the failure by Seller to perform any obligation or covenant in this
Agreement.
(b) HOLDBACK AMOUNT; LIMITS ON LIABILITY. No Buyer Indemnified Party shall seek
reimbursement from Seller for Losses under SECTION 10.1(A) until all Losses
for which Buyer Indemnified Parties are entitled to indemnification exceed
the Holdback Amount, and then only to the extent of such excess. In
addition, Seller shall have no obligation under CLAUSE (1) of SECTION
10.1(A) to pay by way of indemnification amounts that aggregate more than
Three Hundred Million Dollars ($300,000,000) (the "INDEMNITY CAP").
Notwithstanding the foregoing, the Indemnity Cap shall not apply to the
extent any Buyer Indemnified Party seeks reimbursement or indemnification
for Losses resulting from a breach of any representations and warranties
set forth in SECTIONS 4.3, 4.4 AND 4.5.
(c) EXCLUSION FROM LIABILITY. Notwithstanding anything else to the contrary,
and in addition to any other limitations and exclusions set forth in this
Agreement, Seller shall not indemnify or hold harmless any Buyer
Indemnified Party, and no Buyer Indemnified Party shall seek reimbursement
or indemnity from Seller for any Losses unless, in the case of SECTIONS
10.1(A)(1) and 10.1(A)(2) (but only insofar as SECTION 10.1(A)(2) relates
to ARTICLE 6 hereof), written demand for reimbursement of such Losses is
made within one (1) year from the Closing Date, except that such time
limitation shall not apply to the extent Buyer or the Company or any
Subsidiary seeks reimbursement or indemnification for breach of any
representations and warranties set forth in (x) SECTIONS 4.15, 4.19, 4.20,
4.21 and 4.22, in which case written demand for reimbursement must be made
within six (6) years from the Closing Date or five (5) years in the case of
SECTION 4.15 and (y) SECTIONS 4.3, 4.4 AND 4.5, in which case receipt of
written demand for reimbursement is not subject to time limitations. Any
such written demand must (i) set forth actual Losses that have begun to
accrue but in respect of which the total liability has not yet been fixed
or (ii) contain a notice from a third party of a claim that will cause
actual Losses to accrue after such applicable survival period, including
without limitation, pending curtailments, lawsuits or government
investigations, in which case such survival period will be extended in
order to cover the finally determined Losses related thereto.
10.2 INDEMNIFICATION BY BUYER.
(a) Except as provided in SECTION 10.3 hereof, Buyer shall save, defend,
indemnify and hold harmless Seller and its Affiliates and their respective
past, present and future directors, officers, agents and representatives
(together, the "SELLER INDEMNIFIED PARTIES") from, and shall promptly
reimburse such Seller Indemnified Parties for any Losses incurred by or
assessed against such Seller Indemnified Party and arising out of or
resulting from:
(1) the inaccuracy of any representation or warranty made by Buyer in this
Agreement;
(2) the failure by Buyer to timely perform any obligation or covenant in
this Agreement; or
(3) any of the businesses, assets, operations or activities of the Company
or the Subsidiaries occurring after the Closing Date which do not
arise out of or result from any actions or inactions of Seller or its
Affiliates or in respect of which a Buyer Indemnified Party is
entitled to indemnification pursuant to SECTION 10.1(A).
(b) LIMITS ON LIABILITY. Buyer shall have no obligation under CLAUSE (1) of
SECTION 10.2(A) to pay by way of indemnification amounts that aggregate
more than Indemnity Cap.
(c) EXCLUSION FROM LIABILITY. Notwithstanding anything else to the contrary,
and in addition to any other limitations and exclusions set forth in this
Agreement, Buyer shall not indemnify or hold harmless any Seller
Indemnified Party, and no Seller Indemnified Party shall seek reimbursement
or indemnity from Buyer for any Losses (other than Losses resulting from
Buyer's covenants under SECTIONS 9.3 and 9.4) unless, in the case of
SECTIONS 10.2(A)(1) and 10.2(A)(2) (but only insofar as SECTION 10.2(A)(2)
relates to ARTICLE 6 hereof), written demand for reimbursement of such
Losses is made within one (1) year from the Closing Date. Any such written
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demand must (i) set forth actual liabilities that have begun to accrue but
in respect of which the total liability may not yet have been fixed or (ii)
contain a notice from a third party of a claim that will cause actual
liabilities to accrue after such applicable survival period, including
without limitation, pending curtailments, lawsuits or government
investigations, in which case such survival period will be extended in
order to cover the finally determined liabilities related thereto.
10.3 COORDINATION WITH TAX INDEMNITY. Except as expressly provided in ARTICLE 11
hereof, the provisions of this ARTICLE 10 shall not apply to (i) any
representations or warranties under SECTION 4.16 hereof, (ii) any
representations or warranties relating to Taxes under SECTION 4.22, (iii)
any obligations or covenants contained in ARTICLE 11 hereof and (iv) any
other provision of this Agreement providing any representation, warranty or
covenant relating to Taxes other than those set forth in SECTION 4.21.
ARTICLE 11 shall provide the exclusive means for indemnity under this
Agreement for any indemnity for Losses relating to Taxes other than those
set forth in SECTION 4.21.
10.4 INDEMNIFICATION PROCEDURE. The obligations and liabilities of the
indemnifying party (the "INDEMNIFYING PARTY") under this ARTICLE 10 and,
where expressly provided for in ARTICLE 11, under ARTICLE 11 hereof with
respect to Losses shall be subject to the following terms and conditions:
(a) The indemnified party (the "INDEMNIFIED PARTY") shall give the Indemnifying
Party prompt notice ("CLAIM NOTICE") of any Losses incurred (or likely to
be incurred) by the Indemnified Party, and the Indemnifying Party may
undertake the defense of any proceeding regarding such Losses by selecting
representatives of its own choosing. Such notice shall describe the claim
or suit in reasonable detail and shall indicate the amount (estimated, if
necessary) of the Losses that have been or may be suffered by the
Indemnified Party. If the Indemnifying Party agrees to payment under a
Claim Notice as provided in SECTION 10.4(G) but elects not to undertake the
defense of any proceeding, it shall notify the Indemnified Party of such
election within ten (10) Business Days of its receipt of a Claim Notice.
(b) The Indemnified Party shall be entitled to participate at its own expense
in the defense of any claim relating to such Losses, but such defense shall
be controlled by counsel to the Indemnifying Party. Notwithstanding the
foregoing, an Indemnified Party shall have the right to employ separate
counsel at the Indemnifying Party's expense if (i) the named parties to
such proceeding (including any impleaded parties) include both such
Indemnified Party and the Indemnifying Party, (ii) such Indemnified Party
shall have been advised by counsel in its reasonable judgment that a
material conflict of interest is likely to exist if the same counsel were
to represent such Indemnified Party that would make it inappropriate for
the same counsel to represent both parties and the Indemnifying Party and
(iii) such Indemnified Party notifies the Indemnifying Party in writing
that it elects to employ separate counsel at the expense of the
Indemnifying Party.
(c) The Indemnifying Party shall not be liable for any settlement of any
litigation or proceeding effected without the written consent of the
Indemnifying Party, which shall not be unreasonably withheld. The
Indemnifying Party shall not, without the Indemnified Party's written
consent, settle or compromise any claim regarding Losses or consent to
entry of any judgment which would impose an injunction or other equitable
relief upon the Indemnified Party or which does not include as an
unconditional term thereof the release by the claimant or the plaintiff of
the Indemnified Party from all liability in respect of any such Losses.
(d) In the event (x) the Indemnifying Party fails, within twenty (20) days of
receipt of a Claim Notice, to defend, contest, or otherwise protect against
any such claim or suit, or is not defending such claim in good faith or (y)
the Indemnified Party concludes in good faith that such ongoing claim or
suit would have a material adverse impact on the business or operations of
Buyer, the Company or any Subsidiary, and the Indemnifying Party determines
in good faith that such assumption of defense by the Indemnified Party will
not prejudice the Indemnifying Party's interests in any material respect,
the Indemnified Party may, but will not be obligated to, defend, contest,
or otherwise protect against the same, and make any compromise or
settlement thereof and recover the entire costs thereof from the
Indemnifying Party, including reasonable attorneys' and experts' fees,
disbursements and all amounts paid as a result of such claim or suit or the
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compromise or settlement thereof, provided that any such settlement or
compromise shall be permitted hereunder only with the written consent of
the Indemnifying Party, which consent shall not be unreasonably withheld.
The Indemnified Party shall cooperate and provide such assistance as the
Indemnifying Party may reasonably request in connection with the defense of
the matter subject to indemnification.
(e) In calculating Losses, a Buyer Indemnified Party shall be entitled to
include Damages (and reasonable out-of-pocket costs, expenses and
attorneys' fees relating to Damages or to any proceedings, counterclaims or
defenses that could reasonably result in incurring or avoiding Damages
(including any such reasonable out-of-pocket costs, expenses and attorneys'
fees incurred in enforcing such right of indemnification against any
indemnitor or with respect to any appeal)) incurred after the Closing Date
by virtue of the continuation by Buyer, the Company or any Subsidiary of
the business practices of the Company and the Subsidiaries as in effect
prior to the Closing Date if and to the extent such business practices are
materially inconsistent with those of Buyer Indemnified Party; PROVIDED,
that a Buyer Indemnified Party shall only be entitled to seek reimbursement
or indemnity of such amounts until the earlier of (x) the ninety (90) day
anniversary of the Closing Date or (y) such time as Buyer, after having
obtained actual or constructive knowledge of the reasonable likelihood of
the incurrence of Damages as a result of such practices, shall have had a
commercially reasonable opportunity to have changed or corrected the
practices in question.
(f) In calculating Losses there shall be deducted (retroactively, if necessary)
(i) any insurance recovery in respect thereof (and no right of subrogation
shall accrue hereunder to any insurer), (ii) any amount specifically
accrued or reserved against as a liability on the Closing Date Balance
Sheet with respect to such Losses (or, in the case of any such Loss
comprised of the loss of, or reduced value of, any asset, the extent to
which such asset was written down on the Closing Date Balance Sheet to
reflect such reduction in value) and (iii) any recoveries from third
Persons pursuant to indemnification or otherwise with respect thereto. Any
party receiving indemnity shall assign to the Indemnifying Party all of its
claims for recovery against third Persons as to such Losses, whether by
insurance coverage, contribution claims, subrogation or otherwise. Buyer
and Seller agree that, for purposes of computing the amount of any
indemnification payment under this ARTICLE 10 or ARTICLE 11 hereof, any
such indemnification payment shall be treated as an adjustment to the
Purchase Price for all Tax purposes. The Indemnified Party shall claim on
the appropriate Tax Return any Benefit Item arising from the incurrence or
payment of Losses if the Indemnified Party believes such Benefit Item is
allowable or if the Indemnifying Party provides the Indemnified Party with
an opinion of a nationally recognized law firm or accounting firm (which
firm and opinion shall be reasonably acceptable to the Indemnified Party)
to the effect that such Benefit Item "should" be allowable. Not more than
ten (10) Business Days after filing the Tax Return on which such Benefit
Item is claimed, the Indemnified Party shall pay the Indemnifying Party the
amount of any realized Tax Benefit arising from such Benefit Item (net of
the Tax cost, including the net present value of any reasonably anticipated
future Tax cost, to the Indemnified Party or its Affiliates arising from
the receipt of the indemnification payment). For purposes of this SECTION
10.4(F), "BENEFIT ITEM" shall mean any loss, deduction, credit or other
item that decreases Taxes paid or payable or increases Tax Basis, and "Tax
Benefit" shall mean the Tax effect of any Benefit Item, including any
interest with respect thereto or interest that would have been payable but
for such item.
(g) After the giving of any Claim Notice pursuant to SECTION 10.3, the amount
of indemnification to which an Indemnified Party shall be entitled under
this ARTICLE 10 or ARTICLE 11 hereof shall be determined: (i) by the
written agreement between the Indemnified Party and the Indemnifying Party
or payment by an Indemnifying Party of all amounts specified in a Claim
Notice; provided, however, that if agreement has not been reached or
payment has not been made within 30 days of the receipt of the material
information that the Indemnifying Party needs to evaluate the merits of the
Claim, the Indemnified Party shall be entitled to pursue recourse in
accordance with SECTION 12.5; (ii) by a final judgment or decree of any
court of competent jurisdiction or, in the case of income tax
indemnification under ARTICLE 11, a "determination" within the meaning of
Code Section 1313(a); or (iii) by any other means to which the Indemnified
Party and the Indemnifying Party shall agree. The judgment or decree of a
court shall be deemed final when the time for appeal, if any, shall have
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expired and no appeal shall have been taken or when all appeals taken shall
have been finally determined. The Indemnified Party shall have the burden
of proof in establishing the amount of Losses suffered by it.
(h) In any case where an Indemnified Party recovers from third Persons any
amount (other than any amounts deducted pursuant to SECTION 10.4(E) hereof)
in respect of a matter with respect to which an Indemnifying Party has
indemnified it pursuant to this ARTICLE 10 or ARTICLE 11 hereof, such
Indemnified Party shall promptly pay over to the Indemnifying Party the
amount so recovered (after deducting therefrom the full amount of the
expenses incurred by it in procuring such recovery), but not in excess of
the sum of (i) any amount previously so paid by the Indemnifying Party to
or on behalf of the Indemnified Party in respect of such matter and (ii)
any amount expended by the Indemnifying Party in pursuing or defending any
claim arising out of such matter.
(i) An Indemnified Party shall make commercially reasonable efforts to mitigate
any actual or potential Loss, and the failure to do so shall result in a
reduction in the Indemnifying Party's indemnification obligation hereunder
but only to the extent such efforts would have mitigated the Loss. By way
of illustration, the Buyer agrees that, if it suffers, or reasonably
expects to suffer, Losses attributable to a breach of SECTION 4.21 and the
facts or circumstances giving rise to such breach also would constitute a
breach under the applicable mortgage loan origination, mortgage loan sale
or similar agreement with a Prior Originator or seller of the Loan other
than the Seller or an Affiliate of the Seller (and such mortgage loan
origination, mortgage loan sale or similar agreement contains an
indemnification provision providing the Buyer with a means of seeking
indemnity thereunder), the Buyer Indemnified Parties will not be entitled
to indemnification under SECTION 10(A)(1) above with respect to such breach
until Buyer shall have first used commercially reasonable efforts to pursue
available remedies under the applicable agreement against such breaching
party with no less diligence than the Company and its Subsidiaries used
within the last two (2) years and, in any event, it would pursue if there
were no indemnification by Seller hereunder; provided, however, that in the
event that the Buyer has used its commercially reasonable efforts to pursue
its remedies under the applicable mortgage loan origination, mortgage loan
sale or similar agreement against such breaching party and the Buyer
Indemnified Parties have not been successful in recovering their Losses
directly resulting from the breach of the applicable agreement after one
year has elapsed from the date on which the relevant Buyer Indemnified
Parties first gave notice of the relevant Claim to the Seller (which such
one year period shall act to toll the relevant survival period contained in
SECTION 10.1(C) or 10.2(C), as applicable), the Buyer Indemnified Parties
shall be entitled to seek indemnification for such remaining Losses from
the Seller pursuant to the terms of SECTION 10.4 of this Agreement, without
further regard to the mitigation provisions of this SECTION 10.4(I), but
subject to the remaining provisions of this SECTION 10. The Indemnifying
Party shall have the right, but not the obligation, and shall be afforded
the opportunity by the Indemnified Party to the extent reasonably possible,
to make commercially reasonable efforts to minimize damages before such
damages actually are incurred by the Indemnified Party.
10.5 INDEMNIFICATION AS EXCLUSIVE REMEDY.
Except in the case of fraud, with respect to any matter as to which
indemnification is provided pursuant to this ARTICLE 10 (other than breaches of
covenants contained in Articles other than ARTICLE 6 hereof and any claim for
equitable or injunctive relief), such indemnification shall be the sole remedy
available to the Indemnified Party.
10.6 DISTRIBUTION OF EXCESS HOLDBACK AMOUNT.
Within thirty (30) days following the sixth anniversary of the Closing Date,
Buyer shall pay (by wire transfer in immediately available funds) to Seller an
amount in cash equal to the excess, if any, of (x) the amount of the Holdback
Amount LESS (y) the sum of (i) the aggregate amount of all payments or
reimbursements for Losses that, but for the existence of the Holdback Amount,
would have been paid to any of the Buyer Indemnified Parties pursuant to this
ARTICLE 10 on or prior to such payment date AND (ii) the aggregate amount of all
Unresolved Claims as of such payment date (the "UNRESOLVED CLAIM RESERVE
AMOUNT"). For purposes of this SECTION 10.6, "UNRESOLVED CLAIMS" shall mean, as
of any payment date, all claims for indemnification made by any Buyer
Indemnified Parties pursuant to this ARTICLE 10 that are the subject of dispute
or are otherwise unresolved as of such date. On a bi-annual basis following the
sixth anniversary of the Closing Date, following the resolution of any
Unresolved Claims, Buyer shall pay (by wire transfer in immediately available
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funds) to Seller an amount in cash equal to the excess, if any of (x) the
Unresolved Claim Reserve Amount in respect of any Unresolved Claims LESS (y) the
aggregate amount of all payments or reimbursements for Losses that, but for this
existence of the Holdback Amount, would have been paid to any of the Buyer
Indemnified Parties pursuant to ARTICLE 10 in respect of the Unresolved Claims.
Buyer shall provide Seller with bi-annual reports of the status of claims in
respect of which Buyer has made written demand on Seller pursuant to SECTION
10.1(C) hereof and for which indemnification would be payable by Seller but for
the amounts applied by the Buyer from the Holdback Amount, including the
application of any reserves.
10.7 GUARANTEE. Guarantor hereby unconditionally guarantees to Buyer the full
and prompt payment of all amounts which may become due and owing to Buyer
from Seller pursuant to this ARTICLE 10. Guarantor also shall reimburse the
Buyer for reasonable fees and expenses incurred in successfully enforcing
this guarantee obligation. This SECTION 10.7 shall survive termination of
this Agreement.
ARTICLE 11
TAXES
11.1 ELECTION UNDER CODE SECTION 338(H)(10).
(a) Seller and Buyer shall join in making an election under Code Section
338(h)(10) (and any corresponding election under state, local or foreign
Tax law) with respect to the sale and purchase of Stock hereunder and any
deemed sale and purchase of the equity of any Subsidiary for which such an
election may lawfully be made (the "SECTION 338(H)10) ELECTION"), and
Seller shall cooperate fully with Buyer in making the Section 338(h)(10)
Election, including executing and filing IRS Form 8023 and all other forms,
returns, elections, schedules, and documents required to effect the Section
338(h)(10) Election.
(b) Seller and Buyer agree that, except as required by a final determination
with any tax authority, they will not take, or cause to be taken, any
action in connection with the filing of any Tax Return on behalf of Seller,
Buyer, or their Affiliates or otherwise which would be inconsistent with or
prejudice the Section 338(h)(10) Election.
11.2 TRANSFER TAXES. All sales, use, transfer, documentary, stamp, registration
and other similar Taxes that are payable in connection with the
transactions contemplated by this Agreement shall be borne one-half by
Buyer and one-half by Seller. The party required by applicable law to file
any Tax Returns and other documentation with respect to any such Taxes
shall prepare and file such Tax Returns and Buyer and Seller shall each,
and shall each cause its Affiliates to, cooperate in the timely preparation
and filing of, and join in the execution of, any such Tax Returns and other
documentation.
11.3 INDEMNIFICATION FOR TAXES.
(a) Except as otherwise provided herein, Seller shall be liable for and shall
indemnify the Buyer Indemnified Parties for (x) any Losses attributable to
(i) any Taxes of any member (other than the Company and Subsidiaries) of an
affiliated, consolidated, combined or unitary group of which the Company or
any Subsidiary is or was a member on or prior to the Closing Date,
including pursuant to Treasury Regulations Section 1.1502-6 or any similar
provision of state, local or foreign law, (ii) any Taxes that are imposed
on the Company or any Subsidiary for any taxable year or period that ends
on or before the Closing Date and, with respect to any Straddle Period, the
portion of such Straddle Period ending on and including the Closing Date,
and (iii) any Taxes of any person (other than the Company or any
Subsidiary) liability for which is imposed on the Company or any Subsidiary
as a transferee or successor, by contract or otherwise, pursuant to a
transaction or contract or other indemnification obligation that occurs or
arises before the Closing; and (y) any Losses (including Taxes) for which
the Company, any Subsidiary, any Securitization Entity, or Buyer or any of
Buyer's Affiliates become liable as a result of the inaccuracy of any
representation or warranty relating to Taxes made by Seller in SECTIONS
4.16 and 4.22 of this Agreement. Notwithstanding the foregoing, (i) Seller
shall have no obligation pursuant to this SECTION 11.3(A) for any Taxes or
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Losses accrued or reserved as a liability on the Closing Date Balance Sheet
that are not included in the calculation of the Closing Date Tax Amount,
and (ii) Seller shall have no indemnification obligation for any Taxes or
Losses relating to a breach of the representations set forth in Section
4.16(p) or 4.22 hereof (the "Securitization Entity Losses") to the extent
that such Securitization Entity Losses are related to or attributable to a
taxable year beginning after the second anniversary of the Closing Date;
provided, further that Seller's obligation to indemnify any person for any
Securitization Entity Losses for any taxable period shall not exceed an
amount equal to the product of (x) the aggregate amount of Securitization
Entity Losses related or attributable to such taxable period, multiplied by
(y) a ratio, not to exceed one (1.00), of (i) the Aggregate Outstanding
Loan Balance of the relevant Securitization Entity as of the Closing,
divided by (ii) the Average Aggregate Outstanding Loan Balance of the
relevant Securitization Entity for the taxable period to which the
Securitization Entity Losses relate or are attributable. Notwithstanding
anything to the contrary in this Agreement, Seller shall have no obligation
to indemnify the Company, any Subsidiary, any Securitization Entity, Buyer,
or any of Buyer's Affiliates pursuant to this Section 11.3(a) for any Taxes
or Losses resulting from the breach of any representation set forth in any
of Sections 4.16(p), 4.16(q) or 4.22, to the extent that such
indemnification obligation is attributable to Buyer's breach of the
covenant set forth in Section 11.3(f) hereof. Seller shall be entitled to
any refund of Taxes of the Company or any Subsidiary attributable to
taxable periods ending on or prior to the Closing Date (other than any
refunds for Taxes reflected as an asset on the Closing Date Balance Sheet
and not included in the calculation of Closing Date Tax Amounts), and
Buyer, the Company, and Subsidiaries shall promptly remit to Seller the
amount of any such refund received by Buyer, the Company, or Subsidiaries.
(b) Except to the extent inconsistent with SECTION 11.3(A), Buyer shall be
liable for and shall indemnify Seller and any Affiliate of Seller for (x)
the Taxes of the Company or any Subsidiaries for any taxable year or period
that begins after the Closing Date and, with respect to any Straddle
Period, the portion of such Straddle Period beginning after the Closing
Date; and (y) any Taxes owed by Seller or any Affiliate of Seller resulting
from any transaction engaged in by the Company or any Subsidiary not in the
ordinary course of business occurring on the Closing Date after Buyer's
purchase of the Stock. Buyer shall be entitled to any refund of Taxes of
the Company or any Subsidiaries attributable to such periods beginning
after the Closing Date or attributable to such transactions, and Seller and
its Affiliates shall promptly remit to Buyer the amount of any such refund
received by Seller or its Affiliates.
(c) For purposes of SECTIONS 11.3(A) and (B), whenever it is necessary to
determine the liability for Taxes of the Company or any Subsidiaries for a
Straddle Period, the determination of the Taxes for the portion of the
Straddle Period ending on and including, and the portion of the Straddle
Period beginning after, the Closing Date shall be determined by assuming
that the Straddle Period consisted of two taxable years or periods, one
which ended at the close of the Closing Date and the other which began at
the beginning of the day following the Closing Date, and items of income,
gain, deduction, loss or credit, and state and local apportionment factors
of the Company or Subsidiaries for the Straddle Period shall be allocated
between such two taxable years or periods on a "closing of the books basis"
by assuming that the books of the Company or any Subsidiaries were closed
at the close of the Closing Date, provided, however, that (i) exemptions,
allowances or deductions that are calculated on an annual basis, such as
the deduction for depreciation, and Taxes calculated on a periodic basis
(such as real property Taxes and other ad valorem Taxes) shall be
apportioned ratably between such periods on a daily basis, and (ii) any
extraordinary item within the meaning of Treasury Regulations Section
1.1502-76(b)(2)(ii)(C) that occurs or results from a transaction that takes
place after the Closing on the Closing Date shall be treated as occurring
at the beginning of the day following the Closing Date.
(d) The provisions of SECTIONS 10.3, 10.4(D) (other than SECTION 10.4(D)(Y)),
10.4(F) (other than 10.4(F)(II)), 10.4(G), 10.4(H) and 10.4(I) shall apply
for purposes of the indemnification provisions of this SECTION 11.3 and the
contest provisions of SECTION 11.6.
(e) Notwithstanding anything else to the contrary, Seller shall not indemnify
or hold harmless any Buyer Indemnified Party, and no Buyer Indemnified
Party shall seek reimbursement or indemnity from Seller, for any Losses
pursuant to SECTION 11.3(A)(Y) unless written demand for reimbursement of
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such Losses is made within one month following the expiration of the
applicable statute of limitations, including any applicable tolling period.
(f) Unless Buyer obtains Seller's prior written consent, Buyer will not take,
nor shall it permit any of Buyer's Affiliates, the Company, any Subsidiary,
or any Securitization Entity to take (i) any action with respect to the EBO
Securities or any Securitization Entity that is inconsistent with the
Company's characterization of the EBO Securities or any Securitization
Entity prior to Closing for United States federal income Tax purposes
(collectively, the "Pre-Closing Securitization Entity Treatment"); and (ii)
any action that could be expected to result in a change in the Pre-Closing
Securitization Entity Tax Treatment.
11.4 PAYMENTS. Any payment by Buyer or Seller under this ARTICLE 11 or under
ARTICLE 10, or any payment by Buyer or Seller under SECTION 3.5 of the
difference between the Estimated Purchase Price and the Final Purchase
Price (determined under SECTIONS 2.4 and 2.5 hereof), or any payment by
Buyer or Seller under SECTIONS 2.2 or 3.4 with respect to intercompany
accounts shall be treated by Buyer and Seller as an adjustment to the Final
Purchase Price for Tax purposes if payment occurs after the Closing Date.
11.5 TAX RETURNS.
(a) Seller shall file or cause to be filed when due (x) all Tax Returns by or
with respect to the Company or any Subsidiary that are due before the
Closing Date, and (y) all income and franchise Tax Returns and other Tax
Returns either (i) measured by or based on net income or (ii) measured by
or based on equity that, in either case, are required to be filed by or
with respect to the Company or any Subsidiary for taxable years or periods
ending on or before the Closing Date and shall pay (or cause, prior to the
Closing to be paid by Company or any Subsidiary) any Taxes due in respect
of the Tax Returns described in clauses (x) and (y) for which Seller is
liable pursuant to SECTION 11.3(A). Buyer shall file, or cause to be filed
when due, all Tax Returns with respect to the Company or any of its
Subsidiaries other than those described in the previous sentence and shall
remit any Taxes due in respect of such Tax Returns. Seller shall pay by
wire transfer to Buyer the Taxes for which Seller is liable pursuant to
SECTION 11.3(A) but which are payable with Tax Returns to be filed by Buyer
pursuant to the previous sentence at least three days prior to the due date
for the payment of such Taxes. To the extent permitted or required by
applicable law, the income, gains, deductions, losses, credits and
recapture of credits, and each item thereof of the Company or any of its
Subsidiaries for all taxable periods or portions thereof ending on the
Closing Date including items attributable to the Section 338(h)(10)
election shall be included in the consolidated federal income Tax Return
filed by the parent of the affiliated group of which the Company is a
member on the Closing Date and any state or local consolidated, combined,
unitary or similar income or franchise Tax Return filed by an affiliated
group of which the Company is a member on the Closing Date; provided,
however, that no extraordinary item within the meaning of Treasury
Regulations Section 1.1502-76(b)(2)(ii)(C) that occurs or results from a
transaction that takes place after the Closing shall be included in such
Tax Returns, notwithstanding any other provision of this Agreement, and
Buyer agrees to indemnify Seller and any Affiliate of Seller from any Taxes
and Losses relating to any such extraordinary item.
(b) With respect to Tax Returns to be filed by Buyer pursuant to the preceding
SECTION 11.5(A) that relate to taxable years or periods ending on or before
the Closing Date, such Tax Returns (x) shall be prepared in a manner
consistent with past practice (unless the positions that would otherwise be
taken in accordance with past practice are not reasonable positions) and
(y) shall be submitted to Seller not later than thirty (30) days prior to
the due date for filing such Tax Returns (or if such due date is within 45
days following the Closing Date, as promptly as practicable following the
Closing Date) for review and approval by Seller, which approval shall not
be unreasonably withheld, and Buyer shall incorporate any reasonable
comments of Seller.
(c) All Straddle Period Tax Returns to be filed by Buyer pursuant to SECTION
11.5(A) (x) shall be prepared in a manner consistent with past practice
(unless the positions that would otherwise be taken in accordance with past
practice have no "reasonable basis" within the meaning of Code Section
6662(d) (or comparable state, local, or foreign law) or are not reasonable
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positions) and (y) shall be submitted to Seller not later than thirty (30)
days prior to the due date for filing of such Tax Returns (or if such due
date is within 45 days following the Closing Date), as promptly as
practicable following the Closing Date. The Seller shall have the right to
review such Straddle Period Tax Returns and to review all work papers and
procedures used to prepare any such Tax Return. If Seller, within ten (10)
business days after delivery of any such Tax Return, notifies Buyer in
writing that it objects to any of the items in such Tax Return (including,
without limitation, the allocation of Tax liability between the pre-closing
and post-closing periods included in such Straddle Period Tax Return),
Buyer and Seller shall attempt in good faith to resolve the dispute and, if
they are unable to do so, the disputed items shall be resolved (within a
reasonable time, taking into account the deadline for filing such Tax
Return) by an internationally recognized independent accounting firm chosen
by and mutually acceptable to both Buyer and Seller. Upon resolution of all
such items, the relevant Tax Return shall be filed on that basis. The
costs, fees, and expenses of such accounting firm shall be borne equally by
Buyer and Seller.
(d) The Buyer will not carry back (nor permit the Company or any of its
Subsidiaries to carry back) to any period ending on or before the Closing
Date (treating for this purpose such date as the end of a short taxable
year) any losses, deductions, or credits giving rise to a refund of Taxes
for such period without Seller's prior written consent. Buyer shall be
entitled to any refund of Taxes relating to a permitted carryback, and
Seller and its Affiliates shall promptly remit to Buyer the amount of any
such refund of Taxes received by Seller or its Affiliates.
(e) None of Buyer or any Affiliate of Buyer shall (or shall cause or permit the
Company to) amend, refile or otherwise modify (or grant an extension of any
statute of limitation with respect to) any Tax Return relating in whole or
in part to the Company or any Subsidiary with respect to any taxable year
or period ending on or before the Closing Date (or with respect to any
Straddle Period) without the prior written consent of Seller.
(f) With respect to any taxable period for which Seller is responsible to
prepare and file a Tax Return pursuant to this SECTION 11.5, Buyer, if so
requested by Seller, shall promptly cause the Mortgage Group to prepare and
provide to Seller a package of tax information materials (the "TAX
PACKAGE"), which shall be completed in accordance with past practice
including past practice as to providing the information, schedules and work
papers and as to the method of computation of separate taxable income or
other relevant measure of income of the Mortgage Group members. Buyer shall
cause the Tax Package for the portion of the taxable period ending on the
Closing Date to be delivered to Seller within 120 days after the Closing
Date. Seller shall reimburse Buyer for out of pocket costs incurred in
preparing the Tax Package.
11.6 CONTEST PROVISIONS.
(a) In the event (i) Seller or its Affiliates or (ii) Buyer or its Affiliates
receive notice of any pending or threatened Tax audits or assessments or
other disputes concerning Taxes (each, a "Tax Proceeding") with respect to
which the other party may incur liability under ARTICLE 11 hereof, the
party in receipt of such notice shall promptly notify the other party of
such matter in writing, provided that failure to comply with this provision
shall not affect a party's right to indemnification hereunder unless such
failure materially and adversely affects the indemnifying party's ability
to challenge or participate in such Tax Proceeding in accordance with the
provisions of this SECTION 11.6.
(b) Seller shall have the sole right to represent the interests of the Company,
Subsidiaries and Securitization Entity in any Tax Proceeding relating to
taxable periods ending on or before the Closing Date and to employ counsel
of its choice at its expense. Notwithstanding the foregoing, Seller shall
not be entitled to settle, either administratively or after the
commencement of litigation, any claim for Taxes that would adversely affect
the liability for Taxes of Buyer or the Mortgage Group members for any
period after the Closing Date to any extent (including, but not limited to,
the imposition of income Tax deficiencies, the reduction of asset basis or
cost adjustments, the lengthening of any amortization or depreciation
periods, the denial of amortization or depreciation deductions, or the
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reduction of the loss or credit carryforwards) without the prior written
consent of Buyer, which consent shall not be unreasonably withheld, and
such consent shall not be necessary to the extent that Seller has
indemnified Buyer against the effect of any such settlement.
(c) In the case of any Tax Proceeding with respect to any Straddle Period or
period beginning after the Closing Date that relates to matters for which
Seller could be obligated to indemnify any person as the result of a breach
of any of Seller's representations set forth in SECTION 4.16(P), SECTION
4.16(Q), or SECTION 4.22 ("Breach Matter"): (i) if the Tax Proceeding
involves both a claim for Taxes that would be borne, pursuant to SECTION
11.3(A), by Seller if the Tax authority were successful with respect to
such claim (a "Seller Tax Claim") and a claim for Taxes that would be
borne, pursuant to SECTION 11.3(B), by Buyer if the Tax authority were
successful with respect to such claim (a "Buyer Tax Claim") and the
relevant Tax authority agrees to permit the Seller Tax Claim and the Buyer
Tax Claim to be separately contested and settled, then, unless the Tax
Proceeding relates to a Tax Return of a consolidated, combined, unitary or
affiliated group of which Buyer or any Affiliate of Buyer (other than the
Company or any Subsidiary or any successor to the Company or any
Subsidiary) is the common parent (x) the Seller Tax Claim and the Buyer Tax
Claim shall be separately contested, (y) Seller shall control the Seller
Tax Claim, and (z) Buyer shall control the Buyer Tax Claim; (ii) if the Tax
Proceeding involves only a Seller Tax Claim, then unless the Tax Proceeding
relates to a Tax Return of a consolidated, combined, unitary or affiliated
group of which Buyer or any Affiliate of Buyer (other than the Company or
any Subsidiary or any successor to the Company or any Subsidiary) is the
common parent, Seller shall control such claim; and (iii) in any other
event, Buyer shall control such claim. If the Buyer is entitled to control
a Tax Proceeding described in this SECTION 11.6(C) relating to a Breach
Matter, Buyer shall have the right to represent the interests of the
Company, Subsidiaries and Securitization Entity with respect to such Tax
Proceeding and to determine whether, when and on what terms to settle such
Tax Proceeding to the extent that it relates to a Breach Matter; provided,
however, that (i) Buyer shall provide Seller on a regular ongoing basis
with a timely and reasonably detailed account of each stage of such Tax
Proceeding and all significant developments with respect to such Tax
Proceeding to the extent that it relates to a Breach Matter and shall take
into account the reasonable comments of Seller with respect to each stage
and development in defending such Tax Proceeding; (ii) Buyer shall provide
Seller with copies of all correspondence received and delivered by Buyer to
the extent that such correspondence relates to a Breach Matter; (iii) Buyer
shall consult with Seller before taking any significant action in
connection with such Tax Proceeding to the extent that it relates to a
Breach Matter and shall take into account the reasonable comments of Seller
in carrying out such significant action, (iv) Buyer shall consult with
Seller and offer Seller an opportunity to comment before submitting any
written materials prepared or furnished in connection with such Tax
Proceeding to the extent that it relates to a Breach Matter and shall take
into account the reasonable comments of Seller in preparing such written
materials; (v) Buyer shall defend such Tax Proceeding relating to a Breach
Matter diligently and in good faith as if Buyer were responsible for 100
percent of the Taxes claimed to be due in the Tax Proceeding; (vi) Buyer
shall not settle such Tax Proceeding to the extent that it relates to a
Breach Matter without the prior written consent of Seller, which consent
shall not be unreasonably withheld; and (vii) notwithstanding anything to
the contrary in this Agreement, Buyer shall be responsible for the full
amount of costs and expenses incurred by Buyer in defending such Tax
Proceeding (including, without limitation, any legal and other professional
costs and expenses) and such amounts shall not be considered Losses for
which Seller is obligated to indemnify Buyer pursuant to this Agreement.
With respect to any Tax Proceeding relating to Breach Matters that Seller
has the right to control pursuant to this SECTION 11.6(C), Seller shall the
full right to handle, defend, conduct and control such Tax Proceeding.
Seller also shall have the right to compromise and settle such Tax
Proceeding that it has authority to control pursuant to this SECTION
11.6(C), subject to Buyer's prior written consent, which shall not be
unreasonably withheld.
(d) With respect to any Tax Proceeding (other than a Tax Proceeding to which
SECTION 11.6(C) is applicable) with respect to any Straddle Period, Seller
shall be entitled to participate at its expense in the defense of any claim
for Taxes for such Straddle Period and, with the written consent of Buyer,
which consent shall not be unreasonably withheld, and at Seller's sole
expense, may assume the entire defense of such Tax claim, subject to
Buyer's participation at its expense. Neither Buyer nor Seller, as
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applicable, shall be entitled to settle any Tax Proceeding with respect to
any Straddle Period described in this SECTION 11.6(D) without the prior
written consent of Seller or Buyer, as applicable, which consent shall not
be unreasonably withheld.
11.7 TAX SHARING AGREEMENTS. Any Tax allocation or sharing agreement or
arrangement, whether or not written, that may have been entered into by
Seller or any of its Affiliates and any Mortgage Group member shall be
terminated as to the Mortgage Group member as of the Closing Date, and no
payments which are owed by or to the Mortgage Group member pursuant thereto
shall be made thereunder.
11.8 ASSISTANCE AND COOPERATION.
After the Closing Date, each of Seller and Buyer shall (and shall cause their
respective Affiliates to):
(a) assist the other party in preparing any Tax Returns or reports which such
other party is responsible for preparing and filing in accordance with this
ARTICLE 11;
(b) cooperate fully in preparing for any audits of, or disputes with taxing
authorities regarding, any Tax Returns of the Mortgage Group members;
(c) make available to the other and to any taxing authority as reasonably
requested all information, records, and documents relating to Taxes of the
Mortgage Group members, provided, however, that Buyer shall have no
obligation to make available to Seller such information, records, and
documents that relate to taxable periods beginning after the Closing Date;
(d) provide timely notice to the other in writing of any pending or threatened
Tax audits or assessments of any member of the Mortgage Group for taxable
periods for which the other may have a liability under this ARTICLE 11;
(e) furnish the other with copies of all correspondence received from any
taxing authority in connection with any Tax audit or information request
with respect to any such taxable period; and
(f) cooperate with and assist the other in obtaining any refund that Buyer or
Seller reasonably believes should be available, including, without
limitation, through the filing of appropriate forms with the applicable
taxing authorities.
11.9 RETENTION OF RECORDS. Buyer will cause the Company and the Subsidiaries to
retain any records relevant to the determination of Tax liabilities of the
Mortgage Group members for taxable periods ending on or prior to the
Closing Date and for Straddle Periods for a period of not less than ten
(10) years following the Closing Date; provided, however, that Buyer may
dispose of such records prior to that time with the prior written consent
of Seller, which consent shall not be unreasonably withheld.
11.10SELLER NOT A FOREIGN PERSON. At the Closing, Seller shall deliver to Buyer
an affidavit of Seller, in a form reasonably satisfactory to Buyer, stating
under penalties of perjury Seller's U.S. taxpayer identification number and
that Seller is not a foreign person under Treasury Regulations Section
1.1445-2(b)(2).
11.11 OTHER.
(a) In the event either Seller or Buyer breaches any obligation imposed on it
under this ARTICLE 11, such breaching party shall indemnify the other party
for all losses, liabilities, damages or expenses incurred by that other
party as a result of that breach.
(b) It is the intention of the parties that the provisions of this ARTICLE 11
shall exclusively govern all matters relating to Taxes with respect to the
Company and any Subsidiary as between the Buyer and its Affiliates
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(including the Company and any Subsidiary following the Closing) and the
Seller and its Affiliates, and that the provisions of this ARTICLE 11 shall
exclusively govern the determination and administration of all claims
between them relating to such Tax matters.
(c) Notwithstanding any other provisions of this Agreement, the obligations of
the parties set forth in this ARTICLE 11 shall be unconditional and
absolute. For the avoidance of doubt, there shall not be any duplicative
payments of indemnities by Seller or Buyer under this ARTICLE 11 or
otherwise under this Agreement.
(d) Notwithstanding anything to the contrary in this Agreement, the obligation
of Seller under this ARTICLE 11 shall not be subject to a deductible,
threshold or similar concept and shall be unlimited in amount.
ARTICLE 12
MISCELLANEOUS
12.1 TERMINATION. This Agreement may be terminated:
(a) At any time on or prior to the Closing Date, by the mutual consent in
writing of the parties hereto;
(b) At any time on or prior to the Closing Date, by Buyer in writing, if Seller
has, or by Seller in writing, if Buyer has breached (i) any covenant or
agreement contained herein in any material respect or (ii) any
representation or warranty contained herein and such breach would
constitute a failure to satisfy the condition contained in SECTION 7.1 or
Section 8.1, as applicable, and in either case if such breach has not been
cured by the earlier of 30 days after the date on which written notice of
such breach is given to the party committing such breach or the Closing
Date;
(c) At any time, by either party hereto in writing, if (i) the applications for
prior approval referred to in SECTION 6.6 hereof have been denied, and the
time period for appeals and requests for reconsideration has run, (ii) any
governmental or regulatory agency or Governmental Agency which must grant a
Permit, consent, approval or waiver contemplated by SECTION 7.2 or 8.2 has
denied such Permit, consent, approval or waiver and such denial has become
final and nonappealable or (iii) any governmental or regulatory agency or
Governmental Agency of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the consummation of
the transactions contemplated by this Agreement; or
(d) By either party hereto in writing, if the Closing Date has not occurred by
the close of business on December 31, 2004, unless the failure of the
Closing Date to occur by such date shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe the covenants and
agreements of such party set forth herein.
12.2 EFFECT OF TERMINATION. In the event this Agreement is terminated pursuant
to SECTION 12.1 hereof, this Agreement shall become void and have no
effect, except that (i) the provisions relating to expenses and publicity
set forth in SECTIONS 12.10 and 12.11 together with the confidentiality
provision in SECTION 6.3 hereof concerning the Confidentiality Agreement
and the provisions of SECTION 10.7, respectively, shall survive any such
termination and (ii) a termination pursuant to SECTION 12.1(B)(I) shall not
relieve the breaching party from liability for an uncured breach of such
covenant or agreement giving rise to such termination.
12.3 ASSIGNMENT. Neither this Agreement nor any of the rights or obligations
hereunder may be assigned by either party without the prior written consent
of the other; PROVIDED that Buyer may assign this Agreement and any rights
and obligations hereunder to any Affiliate without the consent of Seller;
provided, that no such assignment shall relieve Buyer of any of its
obligations hereunder. This Agreement shall be binding upon and inure to
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the benefit of the parties hereto and their respective successors and
assigns, and no other Person shall have any right, benefit or obligation
hereunder.
12.4 NOTICES. Unless otherwise provided herein, any notice, request, instruction
or other document to be given hereunder by any party to the others shall be
in writing and delivered in person or by courier, telegraphed, telexed or
by facsimile transmission or mailed by certified mail, postage prepaid,
return receipt requested (such mailed notice to be effective on the date
such receipt is acknowledged), as follows:
If to Buyer: CitiMortgage, Inc.
1000 Technology Drive
O'Fallon, Missouri 63304
Attention: Legal Department
Telecopy: (636) 261-6518
With copies to: CitiMortgage, Inc.
1000 Technology Drive
O'Fallon, Missouri 63304
Attention: Capital Markets/Brad Brunts
Telecopy: (636) 261-1312
If to Seller The Principal Financial Group
or Guarantor: 711 High Street
Des Moines, IA 50392
Attention: General Counsel
Telecopy: (515) 235-9852
With copies to: Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Attn: Laurence E. Platt
Telecopy: (202) 778-9100
or to such other place and with such other copies as either party may
designate as to itself by written notice to the others.
12.5 CHOICE OF LAW; JURISDICTION AND FORUM; WAIVER OF JURY TRIAL.
(a) This Agreement shall be construed, interpreted and the rights of the
parties determined in accordance with the laws of the State of New York,
without regard to the conflict of law principles thereof, except with
respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and
as to those matters the law of the jurisdiction under which the respective
entity derives its powers shall govern.
(b) Any action brought in connection with this Agreement may be brought in the
federal or state courts located in the City of New York which courts shall
have exclusive jurisdiction. The parties further agree, to the extent
permitted by law, that final and unappealable judgment against any of them
in any action or proceeding contemplated above shall be conclusive and may
be enforced in any other jurisdiction by suit on the judgment, a certified
copy of which shall be conclusive evidence of the fact and amount of such
judgment.
(c) By the execution and delivery of this Agreement, Buyer and Seller submit to
the personal jurisdiction of any state or federal court in the City of New
York in any action or proceeding arising out of or relating to this
Agreement and the transactions contemplated hereby.
(d) Each party waives, to the fullest extent permitted by applicable law, any
right it may have to a trial by jury in respect of any action or proceeding
arising out of or relating to this Agreement or the transactions
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contemplated hereby. Each party certifies that it has been induced to enter
into this Agreement by, among other things, the mutual waivers and
certifications set forth above in this SECTION 12.5.
12.6 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement, together with all
exhibits and schedules hereto (including without limitation the Disclosure
Schedules) and the Confidentiality Agreement, constitute the entire
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties. No supplement,
modification or waiver of this Agreement shall be binding unless executed
in writing by all parties. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute
a continuing waiver unless otherwise expressly provided.
12.7 COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
12.8 INVALIDITY. In the event that any one or more of the provisions contained
in this Agreement or in any other instrument referred to herein, shall, for
any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or any other such instrument.
12.9 HEADINGS. The headings of the Articles and Sections herein are inserted for
convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement.
12.10EXPENSES. Except as otherwise provided herein, Seller and Buyer will each
be liable for its own costs and expenses incurred in connection with the
negotiation, preparation, execution or performance of this Agreement.
12.11PUBLICITY. The parties shall by mutual consent (which consent shall not be
unreasonably withheld or delayed by either party) agree as to the form and
substance of any press release relating to this Agreement or the
transactions contemplated hereby and shall consult with each other as to
the form and substance of other public disclosure related thereto;
PROVIDED, HOWEVER, that nothing contained herein shall prohibit any party,
following notification to the other party, from making any disclosure which
its counsel deems necessary. The parties shall work cooperatively in
approaching the Office of Thrift Supervision to inform it of the
transaction.
12.12DISCLOSURE SCHEDULES. Neither the specification of any dollar amount in
any representation or warranty contained in this Agreement nor the
inclusion of any specific item in any Disclosure Schedule hereto is
intended to imply that such amount, or higher or lower amounts, or the item
so included or other items, are or are not material or that such item has
had or is reasonably likely to result in a material adverse effect with
respect to the disclosing party, and no party shall use the fact of the
setting forth of any such amount or the inclusion of any such item in any
dispute or controversy between the parties as to whether any obligation,
item or matter not described herein or in any Disclosure Schedule is or is
not material or that such item has had or is reasonably likely to result in
a material adverse effect with respect to the disclosing party for purposes
of this Agreement. Unless this Agreement specifically provides otherwise,
neither the specification of any item or matter in any representation or
warranty contained in this Agreement nor the inclusion of any specific item
in any Disclosure Schedule hereto is intended to imply that such item or
matter, or other items or matters, are or are not in the ordinary course of
business. Seller shall at the Closing, by notice in accordance with the
terms of this Agreement, supplement, amend or create any Disclosure
Schedule in order to add information or correct previously supplied
information. No such amendment shall be evidence, in and of itself, that
the representations and warranties in the corresponding section are no
longer true and correct in all material respects; PROVIDED, HOWEVER, that
no supplemental, amended or additional Disclosure Schedule shall affect the
representations, warranties, covenants or agreements of Seller set forth in
this Agreement or be deemed to cure any breach for purposes of this
Agreement.
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12.13CONSTRUCTION OF AGREEMENT. Seller and Buyer acknowledge that each party
and each party's counsel have reviewed and revised this Agreement and that
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party will not be employed in the
interpretation of this Agreement or any amendments, Schedules or Exhibits
hereto.
12.14DISCLAIMER OF WARRANTIES. EXCEPT AS TO THOSE MATTERS EXPRESSLY COVERED BY
THE REPRESENTATIONS AND WARRANTIES IN THIS AGREEMENT AND THE CERTIFICATE
DELIVERED BY SELLER PURSUANT TO SECTION 7.1, SELLER IS SELLING THE STOCK
(AND THE BUSINESS AND ASSETS OF THE COMPANY REPRESENTED THEREBY) ON AN "AS
IS, WHERE IS" BASIS AND SELLER DISCLAIMS ALL OTHER WARRANTIES,
REPRESENTATIONS AND GUARANTIES WHETHER EXPRESS OR IMPLIED. SELLER MAKES NO
REPRESENTATION OR WARRANTY AS TO MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE AND NO IMPLIED WARRANTIES WHATSOEVER. In furtherance of
the foregoing, Buyer understands that any cost estimates, projections or
other predictions which have been provided to Buyer by or on behalf of
Seller are not and shall not be deemed to be representations or warranties
of Seller. Buyer acknowledges that (i) there are uncertainties inherent in
attempting to make such estimates, projections and other predictions, (ii)
Buyer is taking full responsibility for making its own evaluation of the
adequacy and accuracy of all estimates, projections and other predictions
so furnished to it, and (iii) under no circumstances shall Buyer have any
claim against Seller or any of its officers, directors, Affiliates, agents
or representatives (including, without limitation, Lehman Brothers Inc.)
with respect thereto.
[signature page to follow on next page]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, as of the day and year
first above written.
CitiMortgage, Inc. Principal Holding Company
By: --------------------- By: ----------------------------
Solely for the purpose of its express agreement to be bound by the terms of
SECTION 10.7 of this Agreement, Principal Financial Services, Inc. has executed
this Agreement as of the day and year first above written.
PRINCIPAL FINANCIAL SERVICES, INC.
By:
------------------------------------------------
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Exhibit 10.8
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "AGREEMENT") dated as of April 1, 2004
("AGREEMENT DATE") by and between Principal Financial Group, Inc., a Delaware
corporation, (together with all successors thereto "PFGI"), Principal Financial
Services, Inc., an Iowa corporation, and Principal Life Insurance Company, an
Iowa corporation (together with all successors thereto, "LIFE") (each of the
foregoing referred to individually as a "COMPANY" or collectively as
"COMPANIES", and J. Barry Griswell ("EXECUTIVE"), a resident of Iowa. Executive
is currently serving as Chairman, President and Chief Executive Officer of the
Companies. The parties desire to enter into this Agreement, which is intended to
more fully embody the agreement among the parties as to Executive's employment.
This Agreement supersedes the employment agreement by and between Principal
Mutual Holding Company, Principal Financial Group, Inc., Principal Financial
Services, Inc., and Principal Life Insurance Company and Executive dated May 19,
2000. In consideration of the mutual agreements contained herein, and other good
and valuable consideration, the sufficiency of which is hereby acknowledged, the
Company and Executive agree as follows:
ARTICLE I.
DEFINITIONS
The terms set forth below have the following meanings (such meanings to be
applicable to both the singular and plural forms, except where otherwise
expressly indicated):
1.1 "ACCRUED ANNUAL BONUS" means the amount of any Annual Bonus earned but not
yet paid with respect to any Fiscal Year ended prior to the Date of
Termination.
1.2 "ACCRUED BASE SALARY" means the amount of Executive's Base Salary, which is
accrued but not yet paid as of the Date of Termination.
1.3 "AFFILIATE" means any Person that directly or indirectly controls, is
controlled by, is under common control with, a Company. For the purposes of
this definition, the term "control" when used with respect to any Person,
means (a) the power to direct or cause the direction of management or
policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise, or (b) for
purposes of Section 1.11 and Article VII, the power substantially to
influence the direction of strategic management policies of such Person,
and provided a Company has a direct or indirect commercial relationship
with such Person, all as determined by the Human Resources Committee of the
Board or its successor.
1.4 "AGREEMENT" - see the introductory paragraph of this Agreement.
1.5 "AGREEMENT DATE" - see the introductory paragraph in this Agreement.
1.6 "ANNIVERSARY DATE" - means any annual anniversary of the Agreement Date.
1.7 "ANNUAL BONUS" - see Section 4.2.
1.8 "BASE SALARY" - see Section 4.1.
1.9 "BENEFICIARY" - see Section 9.6.
1.10 "BOARD" means the Board of Directors of PFGI unless the context indicates
otherwise.
1.11 "CAUSE" means any of the following:
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(a) Executive's conviction of, plea of guilty to, or plea of nolo
contendere to a felony or misdemeanor (other than a traffic-related
felony or misdemeanor) that involves fraud, dishonesty or moral
turpitude,
(b) any willful action by Executive resulting in criminal, civil or
internal Company conviction, sanction or judgment under Federal or
State workplace harassment or discrimination laws or internal Company
workplace harassment, discrimination or other workplace policy under
which such action could be and could reasonably be expected to be
grounds for immediate termination of a member of Senior Management
(other than mere failure to meet performance goals, objectives, or
measures),
(c) Executive's habitual abuse of or addiction to alcohol or controlled
substances, which interferes with the performance of Executive's
duties,
(d) Executive's willful and intentional material breach of this Agreement,
including, but not limited to, the restrictive covenants contained in
Article VII,
(e) Executive's habitual neglect of duties, (other than resulting from
Executive's incapacity due to physical or mental illness) which
results in substantial financial detriment to any of the Companies or
any Affiliate,
(f) Executive's personally engaging in such conduct as results or is
likely to result in (i) substantial damage to the reputation of any of
the Companies or any Affiliate, as a respectable business, and (ii)
substantial financial detriment (whether immediately or over time) to
any of the Companies or Affiliates,
(g) Executive's willful and intentional material misconduct in the
performance or gross negligence of his duties under this Agreement
that results in substantial financial detriment to a Company or any
Affiliate,
(h) Executive's intentional failure (including a failure caused by gross
negligence) to cause any of the Companies to comply with applicable
law and regulations material to the business of such Company which
results in substantial financial detriment to any of the Companies or
any Affiliate, or
(i) Executive's willful or intentional failure to comply in all material
respects with a specific written direction of the Board that is
consistent with normal business practice and not inconsistent with
this Agreement and Executive's responsibilities hereunder.
For purposes of clauses (d), (e), (f), (g) and (h) of the preceding sentence,
Cause shall not mean the mere existence or occurrence of any one or more of the
following, and for purposes of clause (i) of the preceding sentence, Cause shall
not mean the mere existence or occurrence of item (iv) below:
(i) bad judgment,
(ii) negligence, other than Executive's habitual neglect of duties or gross
negligence,
(iii)any act or omission that Executive believed in good faith to have been
in the interest of the Company (without intent of Executive to gain
therefrom, directly or indirectly, a profit to which he was not
legally entitled), or
(iv) failure to meet performance goals, objectives or measures;
provided, that for purposes of clauses (c), (d), (e), (f), (g), (h) and (i), any
act or omission that is curable shall not constitute Cause unless the Company
gives Executive written notice of such act or omission that specifically refers
to this Section and, within 10 days after such notice is received by Executive,
Executive fails to cure such act or omission. Notwithstanding anything to the
contrary herein, any act or omission of which any member of the Board who is not
172
a party to such act or omission has had actual knowledge for at least six months
shall not constitute "Cause" under any clause of this Section.
1.12 "CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
1.13 "COMPANY" - see the introductory paragraph to this Agreement.
1.14 "COMPETITIVE BUSINESS" means as of any date any corporation or other Person
(and any branch, office or operation thereof) that engages in, or proposes
to engage in:
(a) the underwriting, reinsurance, marketing or sale of (i) any form of
insurance of any kind that any of the Companies as of such date does,
or has under active consideration a proposal to, underwrite, reinsure,
market or sell (any such form of insurance, a "COMPANY INSURANCE
PRODUCT" or (ii) any other form of insurance that is marketed or sold
in competition with any Company Insurance Product, or
(b) the sale of financial services which involve (i) the management, for a
fee or other remuneration, of an investment account or fund (or
portions thereof or a group of investment accounts or funds), (ii) the
giving of advice, for a fee or other remuneration, with respect to the
investment and/or reinvestment of assets or funds (or any group of
assets or funds), or (iii) financial planning services, or
(c) the design, implementation and administration of employee benefit
plans, including plan documents, employee communications, reporting,
disclosure, financial advice, investment advice, and fiduciary
services, or
(d) any other business that as of such date is a direct and material
competitor of a Company and its Affiliates to the extent that prior to
the Date of Termination any of the Companies or its Affiliates engaged
at any time within 12 months in or had under active consideration a
proposal to engage in such competitive business;
and that is located anywhere in the Untied States or anywhere outside of the
United States where such Company or its Affiliates is then engaged in, or has
under active consideration a proposal to engage in, any of such activities.
1.15 "DATE OF TERMINATION" means the date of the receipt of the Notice of
Termination by Executive (if such Notice is given by or on behalf of PFGI)
or by PFGI (if such Notice is given by Executive), or any later date, not
more than 15 days after the giving of such Notice, specified in such
notice, as of which Executive's employment with the Companies shall be
terminated; provided, however, that:
(i) if Executive's employment is terminated by reason of death, the Date
of Termination shall be the date of Executive's death; and
(ii) if Executive's employment is terminated by reason of Disability, the
Date of Termination shall be the 30th day after Executive's receipt of
the physician's certification of Disability, unless, before such date,
Executive shall have resumed the full-time performance of Executive's
duties; and
(iii)if Executive terminates his employment without Good Reason, the Date
of Termination shall be the 30th day after the giving of such Notice;
and
(iv) if no Notice of Termination is given, the Date of Termination shall be
the last date on which Executive is employed by the Companies.
1.16 "DISABILITY" means a mental or physical condition which renders Executive
unable or incompetent to carry out the material job responsibilities which
such Executive held or the material duties to which Executive was assigned
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at the time the disability was incurred, which has existed for at least six
months and which in the certified opinion of a physician mutually agreed
upon by PFGI and Executive (which agreement neither party shall
unreasonably withhold) is expected to be permanent or to last for an
additional duration in excess of six months.
1.17 "EMPLOYMENT PERIOD" - see Section 3.1.
1.18 "EXECUTIVE" - see the introductory paragraph of this Agreement.
1.19 "FISCAL YEAR" means the fiscal year used in connection with the preparation
of the consolidated financial statements of PFGI.
1.20 "GOOD REASON" means the occurrence of any one of the following events
unless Executive specifically agrees in writing that such event shall not
be Good Reason:
(a) any material breach of the Agreement by any of the Companies,
including any of the following, each of which shall be deemed
material:
(i) any adverse change in the title, status, responsibilities,
authorities or perquisites of Executive;
(ii) any failure of Executive to be nominated, appointed or elected
and to continue to be nominated, re-elected, or re-appointed as
Chairman, President and Chief Executive Officer of PFGI without
Executive's prior written consent;
(iii)any failure of Executive to be nominated, appointed or elected
and to continue to be nominated, re-elected, or re-appointed as a
member of the Board of Directors of PFGI or the Board of
Directors of Life;
(iv) causing or requiring Executive to report to anyone other than the
Board of PFGI;
(v) assignment to Executive of duties materially inconsistent with
his position and duties described in this Agreement, including
status, offices, or responsibilities as contemplated under
Section 2.1 or any other action by any of the Companies which
results in an adverse change in such position, status, offices,
titles or responsibilities;
(vi) any reduction or failure to pay Executive's base Salary in
violation of Section 4.1 or his Annual Bonus in violation of
Section 4.2;
(vii)any failure to grant or pay an LTIP Award or LTIP Bonus required
under Section 4.3; or
(viii) any reduction in bonus or incentive (including without
limitation, the LTIP) opportunity; provided that no such
reduction shall be deemed to occur merely because the Company
revises or modifies the structure of or performance factors taken
into account (or the degree to which any such performance factors
are taken into account) under any bonus or incentive (including
without limitation, the LTIP) plan or arrangement; provided
further that the Executive shall not be treated less favorably
than the other members of Senior Management;
provided that the creation, existence or appointment of a Chief Executive
Officer other than Executive of any subsidiary of PFGI shall not be deemed to be
Good Reason if such other Chief Executive Officer reports, directly or
indirectly, to Executive; and provided, further, that no act or omission
described in clauses (i) through (viii) of this Section shall constitute Good
Reason unless Executive gives PFGI written notice of such act or omission and
the Company fails to cure such act or omission within 30-days after delivery of
such notice (except that Executive shall not be required to provide such notice
in case of intentional acts or omissions by a Company or more than once in cases
of repeated acts or omissions); or
174
(b) the failure of PFGI to assign this Agreement to its successor or the
failure of a successor of PFGI, Life or the Company to expressly
assume and agree to be bound by the Agreement; or
(c) relocation of the Company's executive offices or Executive's own
office location to a location that is outside the United States;
In the event of an occurrence or omission constituting Good Reason, Executive
shall not be entitled to terminate his employment for Good Reason unless within
3 months after Executive first obtains actual knowledge of such an event
constituting Good Reason, he notifies PFGI of the events constituting such Good
Reason and of his intention to terminate his employment for Good Reason by a
Notice of Termination.
Notwithstanding any provision in this Section to the contrary, no appointment of
a company president or chief operating officer shall constitute Good Reason
pursuant to Clause (a) (ii) of this Section, and no reduction in base salary,
bonus or incentive (including without limitation, the LTIP) that applies to all
members of Senior Management shall constitute Good Reason pursuant to Clauses
(a) (vii) or (viii) of this Section.
1.21 "INCLUDING" means including without limitation.
1.22 "LIFE" - see introductory paragraph to this Agreement.
1.23 "LTIP" means, as applicable, the Long-Term Performance Plan of Life, the
1999 Long-Term Performance Plan, and any of their respective successors or
other long-term incentive plans in which Senior Management is generally
eligible to participate.
1.24 "LTIP AWARD" means an incentive compensation opportunity granted under the
LTIP.
1.25 "LTIP BONUS" means the amount paid or earned in respect of an LTIP Award.
1.26 "LTIP PERFORMANCE PERIOD" means any performance period designated in
accordance with any LTIP approved by the Board of Life or any committee of
the Board of Life.
1.27 "PFGI" - see introductory paragraph to this Agreement.
1.28 "NOTICE OF TERMINATION" means a written notice of termination of
Executive's employment given in accordance with Section 9.12 by PFGI on
behalf of the Companies, or by Executive, as the case may be, which sets
forth (a) the specific termination provision in this Agreement relied upon
by the party giving such notice, (b) in reasonable detail the specific
facts and circumstances claimed to provide a basis for such Termination of
Employment, and (c) if the Date of Termination is other than the date of
receipt of such Notice of Termination, the Date of Termination.
1.29 "PERSON" means any individual, sole proprietorship, partnership, joint
venture, limited liability company, trust, unincorporated organization,
corporation, institution, public benefit corporation, entity or government
instrumentality, division, agency, body or department.
1.30 "PRESENT VALUE ACTUARIAL EQUIVALENT" means an amount equal in value to a
benefit payable in a specified form on (or commencing on) a specified date,
based on the method specified in the Supplemental Executive Retirement Plan
for Employees, as established January 1, 1982, as amended and restated from
time to time ("SERP"), under the definition of "Actuarial Equivalent"
(which refers to the definition of such term in the Principal Pension Plan
as established April 1,1940, as amended and restated from time to time) or
the successor plan to the SERP, provided that if the SERP no longer exists
or such method is no longer specified in the SERP (whether by reference to
another plan or otherwise), then based on the assumed rates of interest and
mortality (weighted .65 male and .35 female) under Section 417(e) of the
Code for the month (generally published at the beginning of the following
month) prior to the month of the Executive's Date of Termination.
1.31 "PRORATA ANNUAL BONUS" means the product of (i) the Target Annual Bonus
(provided that no effect shall be given to any reduction in such Target
Annual Bonus that would qualify as Good Reason if Executive were to
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terminate his employment on account thereof) multiplied by (ii) a fraction
of which the numerator is the number of days which have elapsed in such
Fiscal Year through the Date of Termination and the denominator of which is
365.
1.32 "RETIREMENT" means any Termination of Employment after Executive reaches
age 57, other than for Cause and other than for Good Reason.
1.33 "SENIOR MANAGEMENT" means Executive Vice President or higher-level officers
of PFGI in the United States.
1.34 "TARGET ANNUAL BONUS" - see Section 4.2.
1.35 "TARGET ANNUAL GOALS" - see Section 4.2.
1.36 "TAX GROSS-UP PAYMENT" means an amount payable to Executive such that after
payment of Taxes on such amount there remains a balance sufficient to pay
the Taxes being reimbursed.
1.37 "TAXES" means the incremental federal, state, local and foreign income,
employment, excise and other taxes payable by Executive with respect to any
applicable item of income.
1.38 "TERMINATION FOR GOOD REASON" means a Termination of Employment by
Executive for a Good Reason.
1.39 "TERMINATION OF EMPLOYMENT" means a termination by the Companies or
Executive of Executive's employment with the Companies and their
Affiliates.
1.40 "TERMINATION WITHOUT CAUSE" means a Termination of Employment by the
Companies for any reason other than Cause or Executive's death or
Disability.
1.41 "VOTING SECURITIES" of a corporation means securities of such corporation
that are entitled to vote generally in the election of directors of such
corporation.
1.42 "WITHHOLDING TAXES" means any federal, state, provincial, local or foreign
withholding taxes and other deductions required to be paid in accordance
with applicable law by reason of compensation received pursuant to this
Agreement.
ARTICLE II.
DUTIES
2.1 DUTIES. PFGI shall continue to employ Executive during Employment Period as
its Chairman, President and Chief Executive Officer, and Executive shall
have the authority, duties, and responsibilities as are commensurate and
consistent with such position and title, and as provided in, PFGI's
by-laws. The Parties acknowledge that as of the Agreement Date, Executive
also serves as Chairman, President and Chief Executive Officer of Life. It
is contemplated that, in connection with each annual meeting or action by
written consent in lieu thereof of stockholders of PFGI and of Life during
the Employment Period, the stockholders of PFGI and of Life, respectively
will elect Executive to their respective Boards. Executive shall report
solely to the Board of PFGI. During the Employment Period, Executive shall
be the most senior executive of PFGI and shall have broad discretion and
authority to manage and direct the day-to-day affairs and operations of the
Companies in compliance with applicable law, including the sole authority
to direct the strategic direction of the Companies, except to the extent
required in connection with the exercise by the Board of its corporate
governance duties and responsibilities under PFGI's by-laws and other
applicable law. During the Employment Period, Executive shall follow the
directives of the Board and shall meet with the Board on a periodic basis
sufficient to enable the Board to fulfill its corporate governance
responsibilities. All operating, staff, other executives, and divisions of
the Companies shall report solely to Executive, either directly or
indirectly through subordinates of Executive who report to Executive.
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During the Employment Period, Executive shall perform the duties assigned
to him hereunder, and, subject to Section 2.2, shall devote his full
business time, attention and effort, excluding any periods of disability,
vacation, or sick leave to which Executive is entitled, to the affairs of
the Companies and shall use his best efforts to promote the interests of
the Companies. The Executive acknowledges that his business time is not
limited to a fixed number of hours per week.
2.2 OTHER ACTIVITIES. Executive may serve on corporate, civic or charitable
boards or committees, deliver lectures, fulfill speaking engagements or
teach at educational institutions, and manage personal investments;
provided that such activities do not individually or in the aggregate
significantly interfere with the performance of Executive's duties under
this Agreement.
ARTICLE III.
EMPLOYMENT PERIOD
3.1 EMPLOYMENT PERIOD. Subject to the termination provisions hereinafter
provided, the term of Executive's employment under this Agreement (the
"EMPLOYMENT PERIOD") shall begin on the Agreement Date and end on the
Anniversary Date which is three years after such date or, if later, such
later date to which the Employment Period is extended pursuant to the
following sentence. On the first anniversary of the Agreement Date and
thereafter, the Employment Period shall be automatically extended each day
by one day to create a new two year term until, at any time after the first
anniversary of the Agreement Date, PFGI delivers written notice (an
"EXPIRATION NOTICE") to Executive or Executive delivers an Expiration
Notice to PFGI, in either case, to the effect that the Agreement shall
expire on a date specified in the Expiration Notice (the "EXPIRATION Date")
that is not less than two years after the date the Expiration Notice is
delivered to PFGI or the Executive, respectively; provided, however, the
Employment Period shall automatically end on Executive's 65th birthday
(March 15, 2014) unless PFGI delivers, any time prior to one year before
such date of expiration, written notice to Executive that the Agreement
shall not so expire and shall instead, subject to the prompt consent of
Executive, expire (unless further extended by mutual consent) on a date
specified in such notice. The employment of Executive by PFGI shall not be
terminated other than in accordance with Article VI.
ARTICLE IV.
COMPENSATION
4.1 SALARY. Executive shall be paid in accordance with normal payroll practices
(but not less frequently than monthly) an annual salary at a rate of
$1,000,000 per year ("BASE SALARY"). During the Employment Period, the Base
Salary shall be reviewed periodically and may be increased from time to
time as shall be determined by the Board, in accordance with normal Company
administrative practices for Senior Management after consultation with
Executive. After any such increase, the term "BASE SALARY" shall thereafter
refer to the increased amount. Any increase in Base Salary shall not limit
or reduce any other obligation of the Company to Executive under this
agreement. Base Salary shall not be reduced at any time without the express
written consent of Executive; provided that the Board may, in its
discretion restructure or alter the time of payment of Base Salary in order
to enhance the deductibility thereof, provided there is no economic
detriment to the Executive and that the Board and Executive shall cooperate
in good faith in such restructuring or alteration.
4.2 ANNUAL BONUS.
(a) Executive shall be eligible to receive an annual bonus ("ANNUAL
BONUS") in accordance with the terms hereof for each Fiscal Year,
which begins or ends during the Employment Period. Executive shall be
eligible for an Annual Bonus based upon target performance goals (the
"TARGET ANNUAL GOALS"), as determined by the Board on an annual basis,
after consultation with Executive and in accordance with normal
Company administrative practices for Senior Management, which provides
for a payment opportunity of at least the highest target level
generally available to Senior Management under any Company annual
bonus plan ("TARGET ANNUAL BONUS") upon the Executive's achievement of
the Target Annual Goals. The parties acknowledge that, as of the
Agreement Date, the Annual Bonus is payable in accordance with the
Company plan named PrinPay.
(b) The entire Annual Bonus that is payable to Executive with respect to a
Fiscal Year shall be paid in cash, or such other medium as is
generally applicable to members of Senior Management, as soon as
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practicable after the appropriate Board has determined whether and the
degree to which Target Annual Goals have been achieved following the
close of such Fiscal Year. In any event, the entire Annual Bonus that
is payable to Executive with respect to a Fiscal Year shall be paid at
the same time as the Annual Bonus is paid to the other members of
Senior Management, but in any event no later than 90 days after the
end of the Fiscal Year.
4.3 LONG-TERM INCENTIVE PLAN BONUS AND OTHER INCENTIVE COMPENSATION. Executive
shall have the opportunity to participate in the LTIP (if such plan exists)
and any other incentive compensation plan or program available to Senior
Management at the highest available level under such plan or program. The
appropriate Board may restructure or alter the time of payment of amounts
under the LTIP or other incentive compensation plan or program in order to
enhance the deductibility thereof, provided there is no economic detriment
to the Executive and that the Board and Executive shall cooperate in good
faith in such restructuring or alteration.
4.4 SAVINGS AND RETIREMENT PLANS. Executive shall be eligible to participate
during the Employment Period in any Company's savings and retirement plans,
practices, policies and programs, in accordance with the terms thereof, at
the highest available level, if any, applicable from time to time to
members of Senior Management, including any supplemental executive
retirement plan.
ARTICLE V.
OTHER BENEFITS
5.1 WELFARE BENEFITS. During the Employment Period, Executive and his family
shall be eligible to participate in at the highest level, and shall receive
all benefits under, any Company's welfare benefit plans, practices,
policies and programs provided or made generally available by the Company
to Senior Management (including medical, prescription, dental, disability,
salary continuance, employee life, group life, dependent life, accidental
death and travel accident insurance plans and programs), in accordance with
their terms as in effect from time to time. Notwithstanding the foregoing,
the Companies shall provide Executive with disability insurance coverage on
terms no less favorable to Executive than those in effect on the Agreement
Date (including, without limitation, percentage of salary provided as a
disability benefit, but subject to any maximum limitation on the dollar
amount applicable to Senior Management, provided that such limitation shall
not be applied to reduce the dollar amount of the monthly amount of
Executive's long term disability benefit below $46,630.87). In addition, to
the extent not covered in the first sentence of this Section 5.1, Executive
shall be entitled to reimbursement for an annual executive physical
examination at the Mayo Clinic or equivalent medical facility of his
choosing.
5.2 FRINGE BENEFITS. During the Employment Period, Executive shall be entitled
to fringe benefits generally applicable to Senior Management in accordance
with their terms as in effect from time to time.
5.3 VACATION. During the Employment Period, Executive shall be entitled to paid
vacation time under the plans, practices, policies and programs generally
applicable to members of Senior Management in accordance with their terms
as in effect from time to time.
5.4 EXPENSES. Executive shall be promptly reimbursed for all actual and
reasonable employment-related business expenses he incurs during the
Employment Period in accordance with any Company's practices, policies, and
procedures generally applicable to members of Senior Management in
accordance with their terms as in effect from time to time, including the
timely submission of required receipts and accountings. In addition, at all
times reasonably practicable, Executive and his spouse shall travel, both
for business and personal reasons, on aircraft owned and operated by or
under the direction of the Companies. Spousal use of corporate aircraft
will be limited to trips when accompanying Executive. Where not reasonably
practicable, Executive shall be entitled to first-class air travel for
business. Notwithstanding the foregoing, no expense shall be reimbursed
more than once, and nothing in this Agreement shall be construed to require
the Companies to maintain corporate aircraft or rent aircraft to comply
with this Agreement.
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ARTICLE VI.
TERMINATION BENEFITS
6.1 TERMINATION FOR CAUSE OR OTHER THAN FOR GOOD REASON, ETC.
(a) If PFGI terminates Executive's employment with the Companies for Cause
or Executive terminates his employment other than for Good Reason,
death or Disability, the Executive shall be entitled to receive
immediately after the Date of Termination a lump sum amount equal to
the sum of Executive's Accrued Base Salary and Accrued Annual Bonus,
and Executive shall not be entitled to receive any severance or other
payment, other than compensation and benefits which relate to or
derive from Executive's employment with the Companies on or prior to
the Date of Termination (including, without limitation, any deferrals
under the LTIP) and which are otherwise payable in case of termination
for Cause or other than for Good Reason, death or Disability, as
applicable.
(b) Executive's employment may be terminated for Cause only if (i) PFGI
provides Executive (before the Date of Termination) with written
notice of the Board meeting referred to in clause (ii) of this Section
6.1(b) at least twenty days prior to such meeting and specifies in
detail in writing the basis of a claim of Cause and provides
Executive, with or without counsel, at Executive's election, an
opportunity to be heard and present arguments and evidence on
Executive's behalf at such meeting, (ii) the PFGI Board, by
affirmative vote of not less than 2/3 of the entire membership of the
PFGI Board (excluding the Executive's vote from any such
determination) that the acts or omissions constitute Cause which
Executive failed to cure after being given an opportunity to cure if
required by Section 1.11, and to the effect that Executive's
employment should be terminated for Cause and (iii) PFGI thereafter
provides Executive a Notice of Termination which specifies in detail
the basis of such Termination of Employment for Cause. Nothing in this
Section 6.1(b) shall preclude the Board, by majority vote, from
suspending Executive from his duties, with pay at any time.
6.2 TERMINATION FOR RETIREMENT, DEATH OR DISABILITY. If, before the end of the
Employment Period, Executive's employment terminates due to his Retirement,
death or Disability, Executive or his Beneficiaries, as the case may be,
shall be entitled to receive immediately after the Date of Termination, a
lump sum amount which is equal to the sum of Executive's Accrued Base
Salary, Accrued Annual Bonus, and Prorata Annual Bonus. Executive's LTIP
Bonus shall be paid according to the terms of the LTIP.
6.3 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. In the event of a Termination
Without Cause or a Termination for Good Reason (in either case occurring
during the Employment Period), Executive shall be entitled to receive the
following:
(a) promptly after the Date of Termination, (but in no event later than
ten business days after the Date of Termination) a lump sum amount
equal to the sum of Executive's Accrued Base Salary, Accrued Annual
Bonus and Prorata Annual Bonus;
(b) promptly after the Date of Termination, (but in no event later than
ten business days after the Date of Termination), a lump sum amount
equal to the product of (i) the sum of Base Salary plus Target Annual
Bonus for the Fiscal Year during which the Date of Termination occurs
(provided that no effect shall be given to any reduction in Target
Annual Bonus that would qualify as Good Reason if Executive were to
terminate his employment on account thereof), and multiplied by (ii)
three;
(c) for each LTIP Performance Period that is unexpired as of the Date of
Termination, Executive shall be treated as he would be treated under
the LTIP in effect on the Agreement Date if (i) he terminated
employment at age 57 other than for cause (as defined in the LTIP) and
(ii) he retired ("LTIP Benefit"); provided that the discretion of the
Committee shall not be exercised so as to treat Executive less
favorably than other members of Senior Management; provided further
that if such payment cannot be provided under the terms of the LTIP,
then the Company shall pay amounts equal to such LTIP Benefit, reduced
by amounts actually payable under the LTIP at the same time as they
otherwise would have been paid;
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(d) the benefits specified in Section 5.1, except to the extent provided
under section 6.3(e), to which Executive is entitled as of the Date of
Termination, for two years following his Date of Termination, subject
to the terms of applicable plans, programs or policies; PROVIDED that
the Executive shall pay the same amount for such benefits as covered
members of Senior Management who are actively employed would pay;
PROVIDED FURTHER that any coverage required to be offered by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended,
shall begin after such benefits otherwise cease hereunder;
(e) if the Date of Termination occurs prior to the Executive's 57th
birthday, the benefits equivalent to those payable under the Principal
Welfare Benefit Plan for Employees calculated under the terms of such
plan as if the Date of Termination occurred after Executive's 57th
birthday, reduced by amounts actually payable under such plan, and if
either Executive or the Company reasonably believes it is likely that
such benefits cannot be provided on a tax-favored basis, the Company
shall pay the cost of the insurance premium for such benefits;
(f) if the Date of Termination occurs prior to Executive's 57th birthday,
promptly, but in no event later than ten business days after the Date
of Termination, an amount equal to the Present Value Actuarial
Equivalent of the benefits to which Executive would be entitled if he
had reached his 57th birthday prior to his Date of Termination and if
he had accrued a number of years of service that is equal to the
number of years of service he would have accrued had his Date of
Termination been his 57th birthday under the Principal Pension Plan
for Employees, and the Supplemental Executive Retirement Plan for
Employees, reduced by the Present Value Actuarial Equivalent of
benefits actually payable under such plans calculated as though such
plans permitted payment at the Executive's Date of Termination by
applying an early retirement factor that declines by 5% (from the
factor utilized for termination of employment at Executive's actual
age at termination of employment and upon commencement of early
retirement at the earliest retirement age) for each year that
Executive's Date of Termination precedes the earliest age at which
early retirement is actually permitted under such plan;
(g) all outstanding stock options, stock appreciation rights, and
restricted stock shall become vested; and
(h) key executive level outplacement services, the provider of which shall
be selected by Executive, up to a maximum of $10,000; provided that in
no event shall any amount be payable to Executive in lieu of his
receipt of such services.
Notwithstanding anything herein to the contrary, the benefits provided in
Section 6.3 shall be provided only upon Executive's execution of a release and
waiver as described in Section 6.5.
6.4 OTHER RIGHTS. This Agreement shall not prevent or limit Executive's
continuing or future participation in any benefit, bonus, incentive or
other plan, program or policy provided by the Company and for which
Executive may qualify, and shall not impair the Company's rights to amend
or terminate any benefit, bonus, incentive or other plan program or policy;
provided however that no such amendment or termination shall treat
Executive less favorably than other Senior Management and Executive's
benefits, bonus and incentives in the aggregate shall not be reduced.
Amounts which are vested benefits or which Executive is otherwise entitled
to receive under any plan, program or policy and any other payment or
benefit required by law at or after the Date of Termination shall be
payable in accordance with such plan, program or policy or applicable law
except as expressly modified by this Agreement.
6.5 WAIVER AND RELEASE. Notwithstanding anything herein to the contrary, upon
any Termination of Employment (other than due to death)
(a) the Executive shall execute a release and waiver in form mutually
agreed by Executive and the Board of PFGI (which agreement neither
party shall unreasonably withhold) which releases, waives, and forever
discharges the Companies, their Affiliates, and their respective
subsidiaries, affiliates, employees, officers, shareholders, members,
partners, directors, agents, attorneys, predecessors, successors and
assigns, from and against any and all claims, liabilities, demands,
causes of action, costs, expenses, attorneys' fees, damages and
obligations of every kind and nature in law, equity, or otherwise,
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known and unknown suspected and unsuspected, disclosed and
undisclosed, including but not limited to any and all such claims and
demands directly or indirectly arising out of or in any way connected
with the Executive's employment with and services as a director of the
Companies and their Affiliates; claims or demands related to
compensation or other amounts under any compensatory arrangement,
stock, stock options, or any other ownership interests in any of the
Companies or any Affiliate, vacation pay, fringe benefits, expense
reimbursements, severance benefits, or any other form of compensation
or equity; claims pursuant to any federal, state, local law, statute
of cause of action including, but not limited to, the federal Civil
Rights Act of 1964, as amended; the federal Age Discrimination in
Employment Act of 1967, as amended; the federal Americans with
Disabilities Act of 1990; tort law, contract law; wrongful discharge,
discrimination; defamation; harassment; or emotional distress;
provided that Executive's waiver and release shall not relieve the
Companies from any of the following obligations, to the extent they
are to be performed after the date of the release and waiver: (i)
payment of amounts due under Sections 6.1, 6.2 or 6.3, as applicable,
(ii) any obligations under the second sentence of Section 6.4, and
(iii) payment of any gross-up amount due under Article VIII; and
provided further that (x) neither party shall release the other from
his or its obligations under Article IX of this agreement, to the
extent such obligations are to be performed after the Date of
Termination, and (y) Executive shall not be precluded from defending
against Cause Claims (as defined in Section 6.5(b)); and
(b) the Company shall execute a release and waiver in form mutually agreed
by Executive and the Board of PFGI (which agreement neither party
shall unreasonably withhold) which releases, waives, and forever
discharges the Executive and his executors, administrators, successors
and assigns, from and against any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys' fees, damages
and obligations of every kind and nature in law, equity, or otherwise,
known and unknown, suspected and unsuspected, disclosed and
undisclosed, including but not limited to any and all such claims and
demands directly or indirectly arising out of or in any way connected
with the Executive's employment with and services as a director of the
Companies and their Affiliates, but excluding any such claims
liabilities, demands, causes of action, costs, expenses, attorneys'
fees, damages or obligations arising out of or in any way connected
with events, acts or conduct giving rise to or in any way connected
with Executive's Termination of Employment for Cause ("Cause Claims"),
provided, however, that (i) neither party shall release the other from
his or its obligations under Article IX of this agreement, to the
extent such obligations are to be preformed after the Date of
Termination, and (ii) Executive shall not be precluded from defending
against Cause Claims.
(c) Executive hereby agrees that the execution of this Agreement is
adequate consideration for the execution of such a release, and hereby
acknowledges that the Companies would not have executed this Agreement
had Executive not agreed to execute such a release.
ARTICLE VII.
RESTRICTIVE COVENTANTS
7.1 NON-COMPETITION. Executive shall not at any time during the period
beginning on the Agreement Date and ending on the third anniversary of the
Date of Termination (whether or not during the Term), regardless of the
reasons for such termination, directly or indirectly, in any capacity:
(a) engage or participate in, become employed by, serve as a director of,
or render advisory or consulting or other services in connection with,
any Competitive Business; provided, however, that after the Date of
Termination this Section 7.1(a) shall not preclude Executive from
being an employee of, or consultant to, any business unit of a
Competitive Business if (i) such business unit does not qualify as a
Competitive Business in its own right and (ii) Executive does not have
any direct or indirect involvement in, or responsibility for, any
operations of such Competitive Business that cause it to qualify as a
Competitive Business; or
(b) make or retain any financial investment, whether in the form of equity
or debt, or own any interest, in any Competitive Business; provided,
however, that nothing in this subsection shall restrict Executive from
making an investment in any Competitive Business if such investment
(i) represents no more than 1% of the aggregate market value of the
outstanding capital stock or debt (as applicable) of such Competitive
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Business, (ii) does not give Executive any right or ability, directly
or indirectly, to control or influence the policy decisions or
management of such Competitive Business, and (iii) does not create a
conflict of interest between Executive's duties under this Agreement
and his interest in such investment.
7.2 NON-SOLICITATION. Executive shall not at any time during the period
beginning on the Agreement Date and ending on the third anniversary of the
Date of Termination (whether or not during the Term), regardless of the
reasons for such termination, directly or indirectly:
(a) other than in connection with the good-faith performance of his duties
as an officer of any of the Companies, encourage any employee or agent
of the Companies or any Affiliate to terminate his relationship with
any of the Companies or any Affiliate;
(b) solicit the employment of or the engagement as a consultant or advisor
of, any employee or agent of any of the Companies or any Affiliate
(other than by the Company or an Affiliate), or cause or encourage any
Person to do any of the foregoing;
(c) establish (or take preliminary steps to establish) a business with, or
encourage others to establish (or take preliminary steps to establish)
a business with, any employee or agent of the Company or any
Affiliate; or
(d) interfere with the relationship of any of the Companies with, or
endeavor to entice away from any of the Companies, any Person who or
which at any time during the period commencing one year prior to the
Agreement Date was or is a material client or material supplier of, or
maintained a material business relationship with, any of the Companies
or an Affiliate.
7.3 CONFIDENTIALITY. The Executive acknowledges that in the course of
performing services for the Companies and Affiliates, he may create,
develop, learn of, receive or contribute non-public information, ideas,
processes, methods, designs, devices, inventions, data, models and other
information relating to the Companies and their Affiliates or their
products, services, businesses, operations, employees or customers, whether
in tangible or intangible form, and that the Companies or their Affiliates
desire to protect and keep secret and confidential, including trade secrets
and information from third parties that the Companies or their Affiliates
are obligated to keep confidential ("CONFIDENTIAL INFORMATION").
Confidential Information shall not include: (i) information that is or
becomes generally known through no fault of Executive; (ii) information
received from a third party outside of the Company that was disclosed
without a breach of any confidentiality obligation; or (iii) information
approved for release by written authorization of the Company. The Executive
recognizes that all such Confidential Information is the sole and exclusive
property of the Companies and their Affiliates, and that disclosure of
Confidential Information would cause damage to the Companies and their
Affiliates. The Executive agrees that, except as required by the duties of
his employment with any of the Companies or any of their and/or its
Affiliates and except in connection with enforcing the Executive's rights
under this Agreement or if compelled by a court or governmental agency, in
each case provided that
prior written notice is given to PFGI, he will not, without the consent of
PFGI, willfully disseminate or otherwise disclose, directly or indirectly,
any Confidential Information obtained during his employment with any of the
Companies or their Affiliates, and will take all necessary precautions to
prevent disclosure, to any unauthorized individual or entity inside or
outside the Company, and will not use the Confidential Information or
permit its use for the benefit of Executive or any other person or entity
other than the Companies or the Affiliates. These obligations shall
continue during and after the termination of Executive's employment
(whether or not during the Employment Period).
7.4 INTELLECTUAL PROPERTY. During the employment period, Executive shall
disclose immediately to the Company all ideas, inventions and business
plans that he makes, conceives, discovers or develops alone or with others
during the course of his employment with the Company, including any
inventions, modifications, discoveries, developments, improvements,
computer programs, processes, products or procedures (whether or not
protectable upon application by copyright, patent, trademark, trade secret
or other proprietary rights) ("WORK PRODUCT") that: (i) relate to the
business of the Company or any customer or supplier to the Company or any
of the products or services being developed, manufactured, sold or
otherwise provided by the Company or that may be used in relation
therewith; or (ii) result from tasks assigned to Executive by the Company;
or (iii) result from the use of the premises or personal property (whether
tangible or intangible) owned, leased or contracted for by the Company.
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Executive agrees that any Work Product shall be the property of the Company
and, if subject to copyright, shall be considered a "work made for hire"
within the meaning of the Copyright Act of 1976, as amended (the "ACT"). If
an to the extent that any such Work Product is found as a matter of law not
to be a "work made for hire" within the meaning of the Act, Executive
expressly assigns to the Company all right, title and interest in and to
the Work Product, and all copies thereof, and the copyright, patent,
trademark, trade secret and all their proprietary rights in the Work
Product, without further consideration, free from any claim, lien for
balance due or rights of retention thereto on the part of Executive.
(a) The Company hereby notifies Executive that the preceding paragraph
does not apply to any inventions for which no equipment, supplies,
facility, or trade secret information of the Company was used and
which was developed entirely on the Executive's own time, unless: (i)
the invention relates (a) to the Company's business, or (b) to the
Company's actual or demonstrably anticipated research or development,
or (ii) the invention results form any work performed by the Executive
for the Company.
(b) Executive agrees that upon disclosure of Work Product to the Company,
Executive will, during his employment and at any time thereafter, at
the request and cost of the Company, execute all such documents and
perform all such acts as the Company or its duly authorized agents may
reasonably require: (i) to apply for, obtain and vest in the name of
the Company alone (unless the Company otherwise directs) letters
patent, copyrights or other analogous protection in any country
throughout the world, and when so obtained or vested to renew and
restore the same; and (ii) to defend any opposition proceedings in
respect of such applications and any opposition proceedings or
petitions or applications for revocation of such letters patent,
copyright or other analogous protection.
(c) In the event that the Company is unable, after reasonable effort, to
secure Executive's signature on any letters patents, copyright or
other analogous protection relating to Work Product, whether because
of Executive's physical or mental incapacity or for any other reason
whatsoever, Executive hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as his agent and
attorney-in-fact, to act for and on his behalf to executive and file
any such application or applications and to do all other lawfully
permitted acts to further the prosecution and issuance of letters
patent, copyright and other analogous protection with the same legal
force and effect as if personally executed by Executive.
7.5 REASONABLENESS OF RESTRICTIVE COVENANTS.
(a) Executive acknowledges that the covenants contained in Sections 7.1,
7.2, 7.3 and 7.4 are reasonable in the scope of the activities
restricted, the geographic area covered by the restrictions, and the
duration of the restrictions, and that such covenants are reasonably
necessary to protect the Companies' relationships with their
employees, clients and suppliers. Executive further acknowledges such
covenants are essential elements of this Agreement and that, but for
such covenants, the Companies would not have entered into this
Agreement.
(b) The Companies and Executive have each consulted with their respective
legal counsel and have been advised concerning the reasonableness and
propriety of such covenants. Executive acknowledges that his
observance of the covenants contained in Sections 7.1, 7.2, 7.3 and
7.4 will not deprive him of the ability to earn a livelihood or to
support his dependents.
7.6 RIGHTS TO INJUNCTION; SURVIVAL OF UNDERTAKINGS.
(a) In recognition of the necessity of the limited restrictions imposed by
Sections 7.1, 7.2, 7.3 and 7.4, the parties agree that it would be
impossible to measure solely in money the damages that any of the
Companies would suffer if Executive were to breach any of his
obligations under such Sections. Executive acknowledges that any
breach of any provision of such Sections would irreparably injure the
Companies. Accordingly, Executive agrees that any of the Companies
shall be entitled, in addition to any other remedies to which such
Company may be entitled under this Agreement or otherwise, to an
injunction to be issued by a court of competent jurisdiction, to
restrain any actual breach, or threatened breach, of such provisions,
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and Executive hereby waives any right to assert any defense that any
of the Companies has an adequate remedy at law for any such breach.
(b) If a court determines that any of the covenants included in this
Article VII are unenforceable in whole or in part because of such
covenant's duration or geographical or other scope, such court may
modify the duration or scope of such provision, as the case may be, so
as to cause such covenant as so modified to be enforceable.
(c) All of the provisions of this Article VII shall survive any
Termination of Employment without regard to (i) the reasons for such
termination or (ii) the expiration of the Employment Period.
(d) No Company shall have any further obligation to pay or provide
severance or benefits under Section 6.3 if a court determines that the
Executive has breached any covenant in this Article VII.
ARTICLE VIII.
CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY
8.1 TAX GROSS-UP PAYMENT. If at any time or from time to time it shall be
determined that any payment to Executive pursuant to this Agreement or any
other payment or benefit ("POTENTIAL PARACHUTE PAYMENT") hereunder or
otherwise would be subject to the excise tax imposed by Section 4999 of the
Code or any similar tax payable under any United States federal, state,
local, foreign or other law ("EXCISE TAX"), then Executive shall receive
and PFGI shall pay or cause to be paid a Tax Gross-Up Payment with respect
to all such excise taxes and other Taxes; provided, however, that this
Article VIII shall be subject in its entirety to any Change of Control
agreement with Executive entered after the Agreement Date by the Company.
The Tax Gross-Up Payment is intended to compensate Executive for all such
excise taxes and any federal, state, local, foreign or other income,
employment, or excise taxes or other taxes payable by Executive with
respect to the Tax Gross-Up Payment.
8.2 LIMITATIONS ON GROSS-UP PAYMENTS.
(a) Notwithstanding any other provision of this Article VIII, if the
aggregate After-Tax Amount (as defined below) of the Potential
Parachute Payments and Tax Gross-Up Payment that, but for this Section
8.2, would be payable to Executive, does not exceed 120% of After-Tax
Floor Amount (as defined below), then no Tax Gross-Up Payment shall be
made to Executive and the aggregate amount of Potential Parachute
Payments payable to Executive shall be reduced (but not below the
Floor Amount) to the largest amount which would both (i) not cause any
Excise Tax to be payable by Executive and (ii) not cause any Potential
Parachute Payments to be come nondeductible by the Company by reason
of Section 280G of the Code (or any successor provision). For purposes
of the preceding sentence, Executive shall be deemed to be subject to
the highest effective after-tax marginal rate of Taxes.
(b) For purposes of this Agreement:
(i) "AFTER-TAX AMOUNT" means the portion of a specified amount that
would remain after payment of all Taxes paid or payable by
Executive in respect of such specified amount; and
(ii) "FLOOR AMOUNT" means the greatest pre-tax amount of Potential
Parachute Payments that could be paid to Executive without
causing Executive to become liable for any Excise Taxes in
connection therewith; and
(iii)"AFTER-TAX FLOOR AMOUNT" means the After-Tax Amount of the Floor
Amount.
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ARTICLE IX.
MISCELLANEOUS
9.1 APPROVALS. The Companies represent and warrant to Executive they have taken
all corporate action necessary to authorize this Agreement.
9.2 NO MITIGATION. In no event shall Executive be obligated to seek other
employment or take any other action to mitigate the amounts payable to
Executive under any of the provisions of this Agreement, nor shall the
amount of any payment hereunder be reduced by any compensation earned as a
result of Executive's employment by another employer, except that any
continued welfare benefits provided for by Section 6.3(d) shall not
duplicate any benefits that are provided to Executive and his family by
such other employer and shall be secondary to any coverage provided by such
other employer.
The Companies' obligation to make the payments provided for in this
Agreement and otherwise perform the obligations hereunder shall not (unless
Executive is terminated for Cause) be affected by any circumstances,
including set-off, counterclaim, recoupment, defense or other claim, right
or action, which the Companies may have against Executive.
9.3 ENFORCEMENT.
(a) The Company shall promptly reimburse Executive for all attorneys'
fees, costs and expenses incurred by Executive in connection with the
negotiation, execution and delivery of this agreement, up to a maximum
of $18,000. If Executive incurs legal, accounting, expert witness or
other fees, costs or expenses (including arbitration fees, costs or
expenses) in an effort to secure, preserve, establish entitlement to,
or obtain compensation or benefits under this Agreement, the Company
shall promptly reimburse Executive for such fees, costs and expenses
whether or not Executive is successful; provided, however, that no
reimbursement shall be made of such expenses if Executive's assertion
of rights was in bad faith and Executive does not prevail (after
exhaustion of all available judicial remedies).
(b) If the Companies fail to pay any amount provided under any provision
of this Agreement when due, the Executive shall be entitled to
interest, compounded monthly, on such amount at a rate equal to the
lesser of (i) (A) the highest rate of interest charged by the relevant
Company's principal lender on its revolving credit agreements, or (B)
in the absence of such a lender, the prime commercial lending rate
announced THE WALL STREET JOURNAL in effect from time to time during
the period of such nonpayment, or (ii) the highest legally-permissible
interest rate allowed to be charged under applicable law.
9.4 INDEMNIFICATION AND INSURANCE. The Executive shall be indemnified and held
harmless by the Companies to the greatest extent permitted under applicable
Iowa law as the same now exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits
a Company to provide broader indemnification that was permitted prior to
such amendment) and the Companies' respective by-laws as such exist on the
Agreement Date if the Executive was, is, or is threatened to be, made a
party to any pending, completed or threatened action, suit, arbitration,
alternate dispute resolution mechanism, investigation, administrative
hearing or any other proceeding whether civil, criminal, administrative or
investigative, and whether formal or informal, by reason of the fact that
the Executive is or was, or had agree to become, a director, officer,
employee, agent, or fiduciary of a Company or any other entity which the
Executive is or was serving at the request of a Company ("PROCEEDING"),
against all expenses (including all reasonable attorneys' fees) and all
claims, damages, liabilities and losses incurred or suffered by the
Executive or to which the Executive may become subject for any reason. A
Proceeding shall not include any proceeding to the extent it concerns or
relates to a matter described in Section 9.3(a). Upon receipt from
Executive of (i) a written request for an advancement of expenses, which
Executive reasonably believes will be subject to indemnification hereunder
and (ii) a written undertaking by Executive to repay any such amounts if it
shall ultimately be determined that Executive is not entitled to
indemnification under this Agreement or otherwise, the Companies shall
advance such expenses to Executive or pay such expenses for Executive, all
in advance of the final disposition of any such matter. During Executive's
employment and thereafter, Companies shall provide Executive with coverage
under a director's and officer's liability insurance policy in amounts no
less than, and on terms no less favorable than, those provide to senior
executive officers and directors of the Companies on the Agreement Date and
185
in amounts no less than, and on terms no less favorable than those, as
provided to senior executive officers and directors of the Companies from
time to time.
9.5 COOPERATION WITH REGARD TO LITIGATION. The Executive agrees to cooperate
with the Companies during his employment with any of the Companies (whether
or not during the Employment Period) and thereafter (including following
Executive's termination of employment for any reason, whether or not
pursuant to this Agreement) by making himself reasonably available to
testify on behalf of the Companies or their Affiliates, in any action, suit
or proceeding, whether civil, criminal, administrative, or investigative
and to assist each Company or any of its Affiliates in any such action,
suit, or proceeding by providing information and meeting and consulting
with the Board of such Company or Affiliate or counsel or representatives
or counsel to the Company or its Affiliates, as reasonably requested by the
Board or such counsel. The Executive shall be entitled to reimbursement for
any expenses (including legal fees) reasonably incurred by the Executive in
connection with his compliance with the foregoing covenant; provided,
however, that during the Employment Period the Executive shall not be
reimbursed for his time spent in connection with his compliance with the
foregoing covenant. The Companies agree to pay Executive a per diem of
$3,500 per day for each day of service (including travel days) performed by
Executive in accordance with this Section after Executive is no longer
employed by the Companies.
9.6 BENEFICIARY. If Executive dies prior to receiving all of the amounts
payable to him in accordance with the terms and conditions of this
Agreement, such amounts shall be paid to the beneficiary ("BENEFICIARY")
designated by Executive in writing to the Company during his lifetime, or
if no such Beneficiary is designated, to Executive's estate. Such payments
shall be made in a lump sum to the extent so payable and, to the extent not
payable in a lump sum, in accordance with the terms of this Agreement. Such
payments shall not be less than the amount payable to Executive as if
Executive had lived to the date of payment and were the payee. Executive,
without the consent of any prior Beneficiary, may change his designation of
Beneficiary or Beneficiaries at any time or from time to time by submitting
to the Company a new designation in writing.
9.7 ASSIGNMENT; SUCCESSORS. This Agreement is personal to Executive and he may
not assign his duties or obligations under it. No Company may assign its
respective rights and obligations under this Agreement without the prior
written consent of Executive, except to a successor to the Company's
business, which expressly assumes the Company's obligations hereunder in
writing. This Agreement shall be binding upon and inure to the benefit of
Executive, his estate and Beneficiaries, the Companies and their successors
and permitted assigns. Each Company shall require any successor to all or
substantially all of the business and/or assets of such Company, whether
direct or indirect, by purchase, merger, consolidation, acquisition of
stock, or otherwise, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as such Company would
be required to perform if no such succession had taken place.
9.8 NON-ALIENATION. Except as is otherwise expressly provided herein, benefits
payable under this Agreement shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution or levy of any kind, either voluntary or
involuntary, prior to actually being received by Executive, and any such
attempt to dispose of any right to benefits payable hereunder shall be
void.
9.9 SEVERABILITY. If all or any part of this Agreement is declared to be
unlawful or invalid, such unlawfulness or invalidity shall not serve to
invalidate any portion of this Agreement not declared to be unlawful or
invalid. Any provision so declared to be unlawful or invalid shall, if
possible, be construed in a manner which will give effect to the terms of
such provision to the fullest extent possible while remaining lawful and
valid.
9.10 AMENDMENT; WAIVER. This Agreement shall not be amended or modified except
by written instrument executive by PFGI and Executive. A waiver of any
term, covenant or condition contained in this Agreement shall not be deemed
a waiver of any other term, covenant or condition, and any waiver of any
default in any such term, covenant or condition shall not be deemed a
waiver of any later default thereof or of any other term, covenant or
condition.
9.11 ARBITRATION. Any dispute, controversy or claim arising out of or in
connection with or relating to this Agreement or any breach or alleged
breach thereof shall be submitted to and settled by binding arbitration in
Des Moines, Iowa, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association (or at any other place or under any
186
other form of arbitration mutually acceptable to the parties so involved).
Any dispute, controversy or claim submitted for resolution shall be
submitted to three (3) arbitrators, each of whom is a nationally recognized
executive compensation specialist. The Company involved in the dispute,
controversy or claim, or PFGI if more than one Company is so involved,
shall select one arbitrator, the Executive shall select one arbitrator and
the third arbitrator shall be selected by the first two arbitrators. Any
award rendered shall be final and conclusive upon the parties and a
judgment thereon may be entered in the highest court of a forum, state or
federal, having jurisdiction. The expenses of the arbitration shall be
borne according to Section 9.3, except that in the discretion of the
arbitrators any award may include the fees and costs of a party's attorneys
if the arbitrator expressly determines that the party against whom such
award is entered has caused the dispute, controversy or claim to be
submitted to arbitration in bad faith or as a dilatory tactic. No
arbitration shall be commenced after the date when institution of legal or
equitable proceedings based upon such subject matter would be barred by the
applicable statute of limitations. Notwithstanding anything to the contrary
contained in this Section 9.11 or elsewhere in this Agreement, either party
may bring an action in the Iowa District Court for Polk County, or the
United State District Court for the Southern District of Iowa, if
jurisdiction there lies, in order to maintain the status quo ante of the
parties. The "status quo ante" is defined as the last peaceable,
uncontested status between the parties. However, neither the party bringing
the action nor the party defending the action thereby waives its right to
arbitration of any dispute, controversy or claim arising out of or in
connection or relating to this Agreement. Notwithstanding anything to the
contrary contained in this Section 9.11 or elsewhere in this Agreement,
either party may seek relief in the form of specific performance,
injunctive or other equitable relief in order to enforce the decision of
the arbitrator. The parties agree that in any arbitration commenced
pursuant to this Agreement, the parties shall be entitled to such discovery
(including depositions, requests for the production of documents and
interrogatories) as would be available in a federal district court pursuant
to Rules 26 through 37 of the Federal Rules of Civil Procedure. In the
event that either party fails to comply with its discovery obligations
hereunder, the arbitrator(s) shall have full power and authority to compel
disclosure or impose sanctions to the full extent of Rule 37, Fed. R. Civ.
P.
9.12 NOTICES. All notices hereunder shall be in writing and delivered by hand,
by nationally-recognized delivery service that guarantees overnight
delivery, or by first-class, registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to a Company, to: Principal Financial Group, Inc.
711 High Street
Des Moines, Iowa 50392
Attention: Karen Shaff
Facsimile No.: (515) 235-9852
With Copy to: Pamela Baker, Esq.
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Facsimile No.: (312) 876-7934
If to Executive, to: (at his most recent home address or
facsimile number on file with the Company)
With copy to: Susan J. Daley
Altheimer & Gray
10 South Wacker Drive
Suite 4000
Chicago, Illinois 60606
Facsimile No.: (312) 715-4800
Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice shall be effective when actually received
by the addressee.
187
9.13 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each
of which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.
9.14 CAPTIONS. The captions of this Agreement are not a part of the provisions
hereof and shall have no force or effect.
9.15 ENTIRE AGREEMENT. This Agreement forms the entire agreement between the
parties hereto with respect to the subject matter contained in the
Agreement and shall supersede all prior agreements, promises and
representations regarding employment, compensation, severance or other
payments contingent upon termination of employment, whether in writing or
otherwise.
9.16 APPLICABLE LAW. This Agreement shall be interpreted and construed in
accordance with the laws of the State of Iowa, without regard to its choice
of law principles.
9.17 SURVIVAL OF EXECUTIVE'S RIGHTS. All of Executive's rights hereunder,
including his rights to compensation and benefits, and his obligations
under Article VIII hereof, shall survive the termination of Executive's
employment or the termination of this Agreement.
9.18 JOINT AND SEVERAL LIABILITY. The obligations of the Companies to Executive
under this Agreement shall be joint and several.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
PRINCIPAL FINANCIAL GROUP, INC.
By: ___________________________________________
Its: Chairman, Human Resources Committee of the
Board of Directors
PRINCIPAL LIFE INSURANCE COMPANY
By: ___________________________________________
Its: Chairman, Human Resources Committee of the
Board of Directors
PRINCIPAL FINANCIAL SERVICES, INC.
By: ___________________________________________
Its: Chairman, Human Resources Committee of the
Board of Directors
J. BARRY GRISWELL
/s/ J. BARRY GRISWELL
-------------------------------------------
188
EXHIBIT 10.9
CHANGE-OF-CONTROL SUPPLEMENT
AND AMENDMENT TO EMPLOYMENT AGREEMENT
FOR
J. BARRY GRISWELL
189
Article I. Certain Definitions
1.1 Accrued LTIP Bonus
1.2 Accrued Obligations
1.3 Annual Performance Period
1.4 Article
1.5 Beneficial Owner
1.6 Board
1.7 Bonus Plan
1.8 Cause
1.9 Change of Control
1.10 Company
1.11 Company Certificate
1.12 Consummation Date
1.13 Continuity of Ownership
1.14 Effective Date
1.15 Employment Agreement
1.16 Exchange Act
1.17 Excise Taxes
1.18 Good Reason
1.19 Gross-Up Multiple
1.20 Gross-Up Payment
1.21 Imminent Control Change
1.22 Imminent Control Change Period
1.23 including
1.24 IRS
1.25 IRS Claim
1.26 LTIP
1.27 LTIP Award
1.28 LTIP Performance Period
1.29 LTIP Target Award
1.30 LTIP Outstanding Award
1.31 Lump Sum Value
1.32 Maximum Annuity
1.33 Merger of Equals
1.34 Merger of Equals Cessation Date
1.35 New LTIP
1.36 Notice of Consideration
1.37 PFGI Incumbent Directors
1.38 Plans
1.39 Post-Change Employment Period
1.40 Post-Merger of Equals Period
1.41 Potential Parachute Payment
1.42 Pro-rata Annual Bonus
1.43 Pro-rata LTIP Bonus
1.44 Refund Claim
1.45 Reorganization Transaction
1.46 Restricted Shares
1.47 SEC
1.48 SEC Person
1.49 Section
1.50 SERP
1.51 tock Options
1.52 Supplement Date
1.53 Supplement Term
1.54 Surviving Corporation
1.55 Target Annual Bonus
190
1.56 Taxes
1.57 Termination Date
1.58 Termination of Employment
1.59 25% Owner
1.60 Voting Securities
Article II. Post-Change Employment Period
2.1 Position and Duties
2.2 Compensation
2.3 Stock Incentive Awards
2.4 Unfunded Deferred Compensation
2.5 Pro-rata Annual Bonus
2.6 Pro-rata LTIP Bonus
Article III. Termination of Employment
3.1 Disability
3.2 Death
3.3 Termination for Cause
3.4 Good Reason
Article IV. Company's Obligations Upon Certain Terminations of Employment
4.1 Termination During the Post-Change Employment Period
4.2 Termination During a Post-Merger of Equals Period
4.3 Termination During an Imminent Control Change Period (with no Change
of Control)
4.4 Termination During an Imminent Control Change Period (which Culminates
in a Change of Control)
4.5 Waiver and Release
4.6 Termination by the Company for Cause
4.7 Termination by Executive Other Than for Good Reason
4.8 Termination by the Company for Disability
4.9 If upon Death
4.10 Executive's Election to Waive
Article V. Certain Additional Payments by the Company
5.1 Gross-Up Payment
5.2 Limitation on Gross-Up Payments
5.3 Additional Gross-up Amounts
5.4 Amount Increased or Contested
5.5 Refunds
Article VI. Expenses, Interest and Dispute Resolution
6.1 Legal Fees and Other Expenses
6.2 Interest
6.3 Binding Arbitration
Article VII. No Set-off or Mitigation; No Double Payment
7.1 No Set-off by Company
7.2 No Mitigation
7.3 No Double Payment
Article VIII. Non-Exclusivity of Rights
8.1 Waiver of Certain Other Rights
8.2 Other Rights
8.3 No Right to Continued Employment
191
Article IX. Miscellaneous
9.1 No Assignability
9.2 Successors
9.3 Payments to Beneficiary
9.4 Non-Alienation of Benefits
9.5 Severability
9.6 Amendments
9.7 Notices
9.8 Continuing Validity of Employment Agreement
9.9 Counterparts
9.10 Governing Law
9.11 Captions
9.12 Number and Gender
9.13 Tax Withholding
9.14 Waiver
9.15 Joint and Several Liability
9.16 Entire Agreement
192
CHANGE-OF-CONTROL SUPPLEMENT
AND AMENDMENT TO EMPLOYMENT AGREEMENT
FOR
J. BARRY GRISWELL
THIS CHANGE OF CONTROL SUPPLEMENT and AMENDMENT TO EMPLOYMENT AGREEMENT
("SUPPLEMENT AND AGREEMENT") dated as of April 1, 2004 (the "SUPPLEMENT DATE")
is made by and among Principal Financial Group, Inc., a Delaware corporation,
(together with all successors thereto, " PFGI"), Principal Financial Services,
Inc., an Iowa corporation, and Principal Life Insurance Company, an Iowa
corporation (together with all successors thereto, "LIFE") (each of the
foregoing referred to individually as a "COMPANY" or collectively as
"COMPANIES"), and J. Barry Griswell ("EXECUTIVE"). This Supplement and Agreement
supersedes the Change of Control Supplement and Amendment to Employment
Agreement between Principal Mutual Holding Company, Principal Financial Group,
Inc., Principal Financial Services, Inc. and Principal Life Insurance Company
and Executive dated October 19, 2000.
RECITALS
The Companies have determined that it is in the best interests of the Companies
and their stockholders to assure that the Companies will have the continued
service of Executive. The Companies also believe it is imperative to reduce the
distraction of Executive that would result from the personal uncertainties
caused by a pending or threatened change of control of PFGI, to encourage
Executive's full attention and dedication to the Companies, and to provide
Executive with compensation and benefits arrangements upon a change of control
which ensure that the expectations of Executive will be satisfied and are
competitive with those of similarly-situated businesses. This Supplement and
Amendment is intended to accomplish these objectives, and to amend Executive's
Employment Agreement with the Companies dated as of April 1, 2004 (such
agreement as amended from time to time, and any successors thereto, the
"EMPLOYMENT AGREEMENT") in order to coordinate it with certain provisions that
apply in the event of a Change of Control or IMMINENT CHANGE OF CONTROL.
ARTICLE I.
CERTAIN DEFINITIONS
As used in this Supplement and Amendment, the terms specified below shall have
the following meanings:
1.1 "ACCRUED LTIP BONUS" means the amount of any LTIP Bonus earned but either
deferred or not paid on or prior to the Effective Date, Merger of Equals
Cessation Date, or Termination Date, as applicable.
1.2 "ACCRUED OBLIGATIONS" means, as of any date, the sum of Executive's Accrued
Base Salary, Accrued Annual Bonus, Accrued LTIP Bonus, any accrued but
unpaid paid time off, and any other amounts and benefits which are then due
to be paid or provided to Executive by the Company, but have not yet been
paid or provided (as applicable).
1.3 "ANNUAL PERFORMANCE PERIOD" -- see Section 2.2(b).
1.4 "ARTICLE" means, unless the context otherwise requires, an article of this
Supplement and Amendment.
193
1.5 "BENEFICIAL OWNER" means such term as defined in Rule 13d-3 of the SEC
under the Exchange Act.
1.6 "BOARD" means the Board of Directors of PFGI or, from and after the
effective date of a Reorganization Transaction, the Board of Directors of
the Surviving Corporation.
1.7 "BONUS PLAN" -- see Section 2.2(b).
1.8 "CAUSE" -- see Section 3.3.
1.9 "CHANGE OF CONTROL" means, except as otherwise provided below, the
occurrence of any one or more of the following:
(a) any SEC Person becomes the Beneficial Owner of 25% or more of the
common stock of PFGI or of Voting Securities representing 25% or more
of the combined voting power of all Voting Securities of PFGI (such an
SEC Person, a "25% OWNER"); or
(b) the PFGI Incumbent Directors (determined using the Supplement Date as
the baseline date) cease for any reason to constitute at least a
majority of the Board; or
(c) consummation of a merger, reorganization, consolidation, or similar
transaction (any of the foregoing, a "REORGANIZATION TRANSACTION")
where the Continuity of Ownership is not more than 60%; or
(d) approval by the stockholders of PFGI, and consummation of a plan or
agreement for the sale or other disposition of all or substantially
all of the consolidated assets of PFGI or a plan of liquidation of
PFGI.
Notwithstanding the occurrence of any of the foregoing events, a Change of
Control shall not occur with respect to Executive if, in advance of such
event, Executive agrees in writing that such event shall not constitute a
Change of Control.
1.10 "COMPANY" - see the introductory paragraph to this Supplement and
Amendment.
1.11 "COMPANY CERTIFICATE" -- see Section 5.4(a).
1.12 "CONSUMMATION DATE" means the first date after an Imminent Control Change
upon which an Effective Date occurs, provided, however that one of the
following is satisfied:
(a) the Imminent Control Change has not lapsed; or
(b) the Imminent Control Change in effect upon such Effective Date is the
last Imminent Control Change in a series of Imminent Control Changes
unbroken by any period of time between the lapse of an Imminent
Control Change and the occurrence of a new Imminent Control Change.
1.13 "CONTINUITY OF OWNERSHIP" of a stated percentage means
(a) the Persons who were the direct or indirect owners of the outstanding
common stock and Voting Securities of PFGI immediately before such
Reorganization Transaction became, immediately after the consummation
of such Reorganization Transaction, the direct or indirect owners of
194
both the stated percentage of the then-outstanding common stock of the
Surviving Corporation and Voting Securities representing the stated
percentage of the combined voting power of the then-outstanding Voting
Securities of the Surviving Corporation, in substantially the same
respective proportions as such Persons' ownership of the common stock
and Voting Securities of PFGI immediately before such Reorganization
Transaction.
1.14 "EFFECTIVE DATE" means the date on which a Change of Control first occurs
during the Supplement Term.
1.15 "EMPLOYMENT AGREEMENT" - see the introductory paragraph of this Supplement
and Amendment.
1.16 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
1.17 "EXCISE TAXES" -- see Section 5.1.
1.18 "GOOD REASON" -- see Section 3.4.
1.19 "GROSS-UP MULTIPLE" -- see Section 5.1.
1.20 "GROSS-UP PAYMENT" -- see Section 5.1.
1.21 "IMMINENT CONTROL CHANGE" means, as of any date on or after the Supplement
Date and prior to the Effective Date, the occurrence of any one or more of
the following:
(a) PFGI enters into an agreement the consummation of which would
constitute a Change of Control;
(b) Any SEC Person commences a "tender offer" (as such term is used in
Section 14(d) of the Exchange Act) or exchange offer, which, if
consummated, would result in a Change of Control; or
(c) Any SEC Person files with the SEC a preliminary or definitive proxy
solicitation or election contest to elect or remove one or more
members of the Board, which, if consummated or effected, would result
in a Change of Control;
provided, however, that an Imminent Control Change will lapse and
cease to qualify as an Imminent Control Change:
(i) With respect to an Imminent Control Change described in
clause (a) of this definition, the date such agreement is
terminated, cancelled or expires without a Consummation Date
occurring;
(ii) With respect to an Imminent Control Change described in
clause (b) of this definition, the date such filing or other
certification is withdrawn, expires or is denied or
otherwise rejected by the relevant state regulators without
a Consummation Date occurring;
(iii)With respect to an Imminent Control Change described in
clause (c) of this definition, the date such tender offer or
exchange offer is withdrawn or terminates without a
Consummation Date occurring;
195
(iv) With respect to an Imminent Control Change described in
clause (d) of this definition, (1) the date the validity of
such proxy solicitation or election contest expires under
relevant state corporate law, or (2) the date such proxy
solicitation or election contest culminates in a stockholder
vote, in either case without a Consummation Date occurring;
or
(v) The date a majority of the PFGI Incumbent Directors make a
good faith determination that any event or condition
described in clause (a), (b), (c) or (d) of this definition
no longer constitutes an Imminent Control Change, provided
that such determination may not be made prior to the six (6)
month anniversary of the occurrence of such event.
1.22 "IMMINENT CONTROL CHANGE PERIOD" means the period commencing on the date of
an Imminent Control Change (or the first Imminent Control Change in a
series of Imminent Control Changes unbroken by any period of time between
the lapse of an Imminent Control Change and the occurrence of a new
Imminent Control Change) and ending on the Consummation Date, or if
earlier, the date an Imminent Control Change lapses (without the prior or
concurrent occurrence of a new Imminent Control Change).
1.23 "INCLUDING" means including without limitation.
1.24 "IRS" means the Internal Revenue Service of the United States of America.
1.25 "IRS CLAIM" -- see Section 5.4.
1.26 "LTIP" means the Long-Term Performance Plan as Amended and Restated as of
January 1, 2001, and as amended from time to time.
1.27 "LTIP AWARD" means an incentive compensation opportunity granted under the
LTIP or New LTIP.
1.28 "LTIP PERFORMANCE PERIOD" means any performance period designated in
accordance with any LTIP or New LTIP approved by the Board of Life or any
committee of the Board of Life.
1.29 "LTIP TARGET AWARD" means, in respect of any LTIP Award under a New LTIP,
the amount which Executive would have been entitled to receive for the LTIP
Performance Period corresponding to such LTIP Award if the performance
goals established pursuant to such LTIP Award were achieved at the target
level (currently 100%) as of the end of the LTIP Performance Period.
1.30 "LTIP OUTSTANDING AWARD" - see definition of "Pro-rata LTIP Bonus."
1.31 "LUMP SUM VALUE" of an annuity payable pursuant to a defined benefit plan
(whether or not qualified under Section 401(a) of the Code) means, as of a
specified date, the present value of such annuity, as determined, as of
such date, under generally accepted actuarial principles using (i) the
applicable interest rate, mortality tables and other methods and
assumptions that the Pension Benefit Guaranty Corporation ("PBGC") would
use in determining the value of an immediate annuity on the Termination
Date or (ii) if such interest rate and mortality assumptions are no longer
published by the PBGC, interest rate and mortality assumptions determined
in a manner as similar as practicable to the manner by which the PBGC's
interest rate and mortality assumptions were determined immediately prior
to the PBGC's cessation of publication of such assumptions; provided,
however, that if such defined benefit plan provides for a lump sum
distribution and such lump-sum distribution either (x) is the only payment
method available under such plan or (y) provides for a greater amount than
the Lump Sum Value of the Maximum Annuity available under such plan, then
"Lump Sum Value" shall mean such lump sum amount.
1.32 "MAXIMUM ANNUITY" means, in respect of a defined benefit plan (whether or
not qualified under Section 401(a) of the Code), an annuity computed in
whatever manner permitted under such plan (including frequency of annuity
payments, attained age upon commencement of annuity payments, and nature of
surviving spouse benefits, if any) that yields the greatest Lump Sum Value.
196
1.33 "MERGER OF EQUALS" means a Change of Control consisting of, as of any date
on or after the Supplement Date, a Reorganization Transaction that,
notwithstanding the fact that such transaction also qualifies as a Change
of Control, satisfies all of the following:
(a) consummation of such Reorganization Transaction results in Continuity
of Ownership of at least 40%, but not more than 60%; and
(b) an SEC Person does not become a 25% Owner of the Surviving
Corporation; and
(c) PFGI Incumbent Directors (determined using the date immediately
preceding the Effective Date as the baseline date), throughout the
period beginning on the Effective Date and ending on the second
anniversary of the Effective Date, continue to constitute not less
than
(i) a majority of the Board, if subsection (a) of this definition is
satisfied because the Reorganization Transaction resulted in
Continuity of Ownership of at least 50%, but not more than 60%;
or
(ii) one (1) member less than a majority of the Board, if subsection
(a) of this definition is satisfied because the Reorganization
Transaction resulted in Continuity of Ownership of at least 40%,
but less than 50%; and
(d) the person who was the Chief Executive Officer of PFGI immediately
prior to the first to occur of the (x) the day prior to the beginning
of the Imminent Control Change Period or (y) the day prior to the
Effective Date shall serve as the Chief Executive Officer of the
Surviving Corporation at all times during the period commencing on the
Effective Date and ending on the first anniversary of the Effective
Date;
provided, however, that a Merger of Equals shall cease to be considered a
Merger of Equals and shall instead qualify as a Change of Control that is
not a Merger of Equals from and after the first date (the "MERGER OF EQUALS
CESSATION DATE") as of which:
(i) during the Post-Change Employment Period the conditions of any of
clause (b) or clause (c) or clause (d) of this definition shall
not be satisfied; or
(ii) prior to the first anniversary of the Effective Date, the Company
shall make a filing with the SEC, issue a press release, or make
a public announcement to the effect that PFGI or the Surviving
Corporation is seeking or intends to seek a replacement for its
Chief Executive Officer, whether such replacement is to become
effective before or after such first anniversary.
1.34 "MERGER OF EQUALS CESSATION DATE" - see the definition of "Merger of
Equals."
1.35 "NEW LTIP" - see definition of "Pro-rata LTIP Bonus."
1.36 "NOTICE OF CONSIDERATION" -- see Section 3.3 (a)(ii)(2).
1.37 "PFGI 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 members, or by stockholders of PFGI
if PFGI is a stock company at the relevant time, or stockholders or
members, as applicable, of the Surviving Corporation, as applicable, was
approved by a vote or written consent of at least a majority of the
directors then comprising the PFGI Incumbent Directors shall also
thereafter be considered a PFGI Incumbent Director, unless the initial
assumption of office of such subsequently-elected or appointed director was
in connection with an Imminent Control Change but only if such Imminent
197
Control Change was triggered by the occurrence of an event described in
subsection (d) of the definition of Imminent Control Change.
1.38 "PLANS" means plans, programs, policies, practices or procedures of the
Company.
1.39 "POST-CHANGE EMPLOYMENT PERIOD" means the period commencing on the
Effective Date and ending on the second anniversary of the Effective Date.
1.40 "POST-MERGER OF EQUALS PERIOD" means the period commencing on an Effective
Date of a Merger of Equals and ending on the first to occur of the Merger
of Equals Cessation Date or the end of the Post-Change Employment Period.
1.41 "POTENTIAL PARACHUTE PAYMENT" -- see Section 5.1.
1.42 "PRO-RATA ANNUAL BONUS" on and after the Effective Date means,
notwithstanding Section 1.31 of the Employment Agreement, an amount equal
to the product of Executive's Target Annual Bonus (for the fiscal year in
which the Effective Date, Merger of Equals Cessation Date or Termination
Date occurs, as applicable, but disregarding any reduction in such Target
Annual Bonus that would qualify as Good Reason if Executive were to
terminate employment on account thereof) multiplied by a fraction, the
numerator of which equals the number of days from and including the first
day of such fiscal year through and including the Effective Date, Merger of
Equals Cessation Date or Termination Date, as applicable, and the
denominator of which equals 365.
1.43 "PRO-RATA LTIP BONUS" means an amount equal to the sum of the following
amounts, calculated separately for each LTIP Award for which the LTIP
Performance Period has not ended as of the Effective Date, Merger of Equals
Cessation Date, or Termination Date, as applicable:
(a) For any LTIP Award that was granted under the LTIP, the sum of the
following amounts (recalculated as of the applicable date for each
such LTIP Award):
(i) Executive's LTIP Outstanding Award (as defined below) with
respect to any LTIP Performance Period which began prior to the
calendar year of the Effective Date, Merger of Equals Cessation
Date or Termination Date, as applicable; and
(ii) Executive's LTIP Outstanding Award (as defined below) with
respect to any LTIP Performance Period which BEGAN in the
calendar year in which the Effective Date, Merger of Equals
Cessation Date or Termination Date, as applicable, occurs,
multiplied by a fraction, the numerator of which equals the
number of days from and including the first day of such calendar
year through and including the Effective Date, Merger of Equals
Cessation Date or Termination Date, as applicable, and the
denominator of which equals 365.
(b) For any LTIP Award that was granted under a new or successor plan
replacing or supplementing the LTIP ("New LTIP"), an amount calculated
by adding together the amounts determined by multiplying each LTIP
Target Award by a fraction, the numerator of which equals the number
of days from and including the beginning of the LTIP Performance
Period applicable to such LTIP Target Award through and including the
Effective Date, Merger of Equals Cessation Date or Termination Date,
as applicable, and the denominator of which equals the aggregate
number of days in such LTIP Performance Period.
"LTIP OUTSTANDING AWARD" means, in respect of any LTIP Award, the
amount which Executive would have been entitled to receive for the LTIP
Performance Period applicable to such LTIP Award, which amount is equal
to the product of (x) the number of Initial Performance Units (as
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defined in the LTIP) multiplied by (y) an amount determined by applying
the formula described as the "Start Imputed Value" in the LTIP, but
determining "Average Return on Equity" and "Equity of the consolidated
Principal Financial Group" as of December 31 of the year preceding the
year in which the applicable determination date occurs, and not taking
into account any value for any unfinished year in the award cycle, not
taking into account any performance scores, multipliers or adjustment
factors, and not prorated for any unfinished year in the award cycle.
1.44 "REFUND CLAIM" -- see Section 5.4.
1.45 "REORGANIZATION TRANSACTION" -- see clause (c) of the definition of "Change
of Control."
1.46 "RESTRICTED SHARES" -- see Section 2.3.
1.47 "SEC" means the United States Securities and Exchange Commission.
1.48 "SEC PERSON" means any person (as such term is used in Rule 13d-5 of the
SEC under the Exchange Act) or group (as such term is defined in Sections
3(a)(9) and 13(d)(3) of the Exchange Act), other than an Affiliate or any
employee benefit plan (or any related trust) of PFGI or any of its
Affiliates.
1.49 "SECTION" means, unless the context otherwise requires, a section of this
Supplement and Amendment.
1.50 "SERP" means a supplemental executive retirement Plan that is not qualified
under Section 401(a) of the Code, including the Supplemental Executive
Retirement Plan for Employees (or any successor plan).
1.51 "STOCK OPTIONS" -- see Section 2.3.
1.52 "SUPPLEMENT DATE" - see the introductory paragraph of this Supplement and
Amendment.
1.53 "SUPPLEMENT TERM" means the period commencing on the Supplement Date and
ending on the latest of (a) the third anniversary of the Supplement Date,
(b) the second anniversary of an Effective Date occurring within one year
of the Supplement Date, or (c) last day the Employment Agreement is in
effect. An Expiration Notice with respect to the Employment Agreement given
on or after the first anniversary of the Supplement Date shall apply
equally to this Supplement and Amendment. Notwithstanding the foregoing, if
an Effective Date or an Imminent Control Change occurs before the
Expiration Date specified in an Expiration Notice, then such Expiration
Notice shall be void and of no further effect; provided, however, if such
Imminent Control Change does not culminate in a Consummation Date, then
such Expiration Notice shall be reinstated and the Supplement and Amendment
and Employment Agreement shall expire on the date originally specified as
the Expiration Date, or if later, the date the Imminent Control Change
lapses.
1.54 "SURVIVING CORPORATION" means the corporation resulting from a
Reorganization Transaction or, if securities representing at least 50% of
the aggregate voting power of such resulting corporation, (if such
corporation is a stock company at the relevant time), or of the mutual life
insurance holding company policies (if such corporation is a mutual life
insurance holding company at the relevant time) are directly or indirectly
owned by another corporation, such other corporation.
1.55 "TARGET ANNUAL BONUS" solely for the purposes of this Supplement and
Amendment, means, as of a certain date, an amount equal to the product of
Base Salary determined as of such date multiplied by the percentage of such
Base Salary to which Executive would have been entitled immediately prior
to such date under any Bonus Plan for the Annual Performance Period for
which such Annual Bonus is awarded if the performance goals established
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pursuant to such Bonus Plan were achieved at the 100% level as of the end
of the Annual Performance Period; provided, however, that any reduction in
Executive's Base Salary or Annual Bonus that would qualify as Good Reason
shall be disregarded for purposes of this definition.
1.56 "TAXES" means the incremental federal, state, local and foreign income,
employment, excise and other taxes payable by Executive with respect to any
applicable item of income.
1.57 "TERMINATION DATE" means the date of the receipt of the Notice of
Termination by Executive (if such Notice is given by the Company) or by the
Company (if such Notice is given by Executive), or any later date, not more
than 15 days after the giving of such Notice, specified in such notice as
of which Executives' employment shall be terminated; provided, however,
that:
(i) if Executive's employment is terminated by reason of death or
Disability, the Termination Date shall be the date of Executive's
death or the date of the Disability (as described in Section
3.1(b)), as applicable; and
(ii) if no Notice of Termination is given, the Termination Date shall
be the last date on which Executive is employed by the Company.
1.58 "TERMINATION OF EMPLOYMENT" means any termination of Executive's employment
with the Company, whether such termination is initiated by the Company or
by Executive.
1.59 "25% OWNER" -- see paragraph (a) of the definition of "Change of Control."
1.60 "VOTING SECURITIES" for purposes of this Supplement and Amendment means,
notwithstanding Section 1.41 of the Employment Agreement (defining Voting
Securities) (a) with respect to a corporation, securities of such
corporation that are entitled to vote generally in the election of
directors of such corporation, and (b) with respect to a mutual life
insurance company or mutual life insurance holding company, policies of
such company entitled to vote generally in the election of directors of
such company.
ARTICLE II.
POST-CHANGE EMPLOYMENT PERIOD AND IMMINENT CONTROL CHANGE PERIOD
2.1 POSITION AND DUTIES.
(a) CHANGE OF CONTROL AND MERGER OF EQUALS. During the Post-Change
Employment Period, (including any portion thereof that qualifies as a
Merger of Equals), the provisions of Article II of the Employment
Agreement shall continue to apply, except that Executive's services
shall be performed at the location where the Executive was employed
immediately before the Effective Date (or if the Effective Date was
the Consummation Date of an Imminent Control Change, before the
beginning of such Imminent Control Change Period) or any other
location no more than 50 miles from such former location.
(b) IMMINENT CONTROL CHANGE PERIOD. During any Imminent Control Change
Period, the provisions of Article II of the Employment Agreement shall
continue to apply.
2.2 COMPENSATION.
(a) BASE SALARY. During an Imminent Control Change Period and the
Post-Change Employment Period (including any portion thereof that
qualifies as a Merger of Equals), the provisions of Section 4.1 of the
Employment Agreement (Salary) shall continue to apply. Any increase in
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base Salary shall not limit or reduce any other obligation of the
Company to Executive under this Supplement and Amendment.
(b) ANNUAL BONUS.
(i) CHANGE OF CONTROL AND MERGER OF EQUALS. During the Post-Change
Employment Period (including any portion thereof that qualifies
as a Merger of Equals), the provisions of Section 4.2 of the
Employment Agreement (Annual Bonus) shall continue to apply,
unless modified by Section 2.2(b)(ii) below, provided that on and
after the Effective Date, Executive's bonus opportunity shall be
no less than and target performance goals shall be no higher than
those in effect immediately prior to the Effective Date for each
Annual Performance Period which ends during the Post-Change
Employment Period. "ANNUAL PERFORMANCE PERIOD" means each period
of time designated in accordance with any annual bonus
arrangement, including the Principal Incentive Pay Plan
("PrinPay") and any successor thereto, (a BONUS PLAN" which is
based upon performance approved by the Board or any committee of
the Board, or in the absence of any Bonus Plan or any such
designated period of time, each calendar year.
(ii) IMMINENT CONTROL CHANGE PERIOD. During an Imminent Control Change
Period, the provisions of Section 4.2 of the Employment Agreement
(Annual Bonus) shall continue to apply; provided however, that if
the Imminent Control Change Period culminates in a Consummation
Date, then, in determining whether the Executive's Termination of
Employment is for "Good Reason" shall be determined as though the
provisions of Sections 2.2(b)(i) applied commencing with the
first day of the Imminent Control Change Period.
(c) OTHER COMPENSATION AND BENEFITS.
(i) IMMINENT CONTROL CHANGE PERIOD, POST-CHANGE EMPLOYMENT PERIOD,
MERGER OF EQUALS. During an IMMINENT CONTROL CHANGE Period and
the Post Change Employment Period (including any portion thereof
that qualifies as a Merger of Equals) the provisions of Sections
4.3 (Long-Term Incentive Plan Bonus and Other Incentive
Compensation), 4.4 (Savings and Retirement Plans) and Article V
(Other Benefits) of the Employment Agreement shall continue to
apply; provided that on and after the Effective Date, Executive's
compensation and benefits shall not be materially less favorable,
in the aggregate, than the most favorable compensation and
benefits provided by the Company to Executive (including any such
compensation and benefits provided under Plans) at any during the
90-day period immediately before the Effective Date. In addition,
during the Post-Change Employment Period (including any portion
thereof that qualifies as a Merger or Equals):
(1) LTIP AWARDS. LTIP Awards shall be granted to Executive at least
as frequently as LTIP Awards were granted during the three-year
period immediately preceding the Effective Date, with target
payments no less than the average (expressed as a percentage of
Executive's Base Salary in effect at the beginning of the
applicable Performance Period) of the Executive's LTIP Awards
outstanding immediately prior to the Effective Date, with target
performance goals substantially comparable to the target
performance goals under Executive's LTIP Awards outstanding on
the Effective Date; and
(2) OFFICE AND SUPPORT STAFF. Executive shall be entitled to an
office or offices of a size and with furnishings and other
appointments, and to secretarial and other assistance in
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accordance with the most favorable Plans in effect prior to the
Change of Control or Imminent Control Change.
2.3 STOCK INCENTIVE AWARDS.
(a) CHANGE OF CONTROL THAT IS NOT A MERGER OF EQUALS. On the Effective
Date, except as provided in Section 2.3(b) or (c) below, Executive
shall (i) become fully vested in, and may thereafter exercise in whole
or in part, in accordance with the terms thereof, all outstanding
stock options, stock appreciation rights, or similar incentive awards
(collectively, "STOCK Options") and (ii) become fully vested in all
shares of restricted stock or restricted stock units and similar
awards ("RESTRICTED SHARES"). Notwithstanding the foregoing, if the
Effective Date is a Reorganization Transaction and if so provided
under the agreement pursuant to which the Reorganization Transaction
is effected, then all Executive's Stock Options shall (x) be
extinguished for such consideration as is provided for vested options
under such agreement or (y) be converted into options to purchase the
stock of the Surviving Corporation, and such converted options shall
be subject to the same option terms and restrictions as those
applicable on the Effective Date.
(b) MERGER OF EQUALS. Section 2.3(a) shall not apply in the case of a
Merger of Equals unless there occurs a Merger of Equals Cessation
Date, at which time Section 2.3(a) shall be applied by substituting
the Merger of Equals Cessation Date for the Effective Date wherever
such term appears.
(c) IMMINENT CONTROL CHANGE PERIOD. Section 2.3(a) and (b) shall not apply
during an Imminent Control Change Period.
2.4 UNFUNDED DEFERRED COMPENSATION.
(a) CHANGE OF CONTROL THAT IS NOT A MERGER OF EQUALS. On the Effective
Date, except as provided in Section 2.4(b) or (c) below, Executive
shall become fully vested in all benefits previously accrued under any
deferred compensation Plan (including a SERP and any defined
contribution excess plan) that is not qualified under Section 401(a)
of the Code. To the extent not so provided under such non-qualified
Plan, within ten business days after the Effective Date, the Company
shall pay or cause to be paid to Executive a lump-sum cash amount
equal to:
(i) the sum of the Lump-Sum Values of all Maximum Annuities that are
payable pursuant to all such non-qualified plans that are defined
benefit Plans, plus
(ii) the sum of Executive's account balances under all non-qualified
plans that are defined contribution Plans.
(b) MERGER OF EQUALS. Section 2.4(a) shall not apply in the case of a
Merger of Equals unless there occurs a Merger of Equals Cessation
Date, at which time Section 2.4(a) shall be applied by substituting
the Merger of Equals Cessation Date for the Effective Date wherever
such term appears.
(c) IMMINENT CONTROL CHANGE PERIOD. Section 2.4(a) and (b) shall not apply
during an Imminent Control Change Period.
Executive shall have the opportunity to waive the accelerated vesting and
lump-sum payment at any time prior to the earlier of (i) the 15th day after the
date of an Imminent Control Change or (ii) the 30th day prior to a Change of
Control which is not preceded by an Imminent Control Change; provided, however,
that in no event shall the waiver be allowed on the Effective Date or
thereafter.
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2.5 PRO-RATA ANNUAL BONUS.
(a) CHANGE OF CONTROL THAT IS NOT A MERGER OF EQUALS. Except as provided
in Section 2.5(b) or (c) below, to the extent not so provided by the
Bonus Plan, the Company shall pay or cause to be paid to Executive
within ten business days after the Effective Date, a lump-sum cash
payment equal to the Pro-rata Annual Bonus, in satisfaction of the
Company's obligations under the Bonus Plan for periods prior to the
Effective Date.
(b) MERGER OF EQUALS. Section 2.5(a) shall not apply in the case of a
Merger of Equals unless (i) there occurs a Merger of Equals Cessation
Date, at which time Section 2.5(a) shall be applied by substituting
the Merger of Equals Cessation Date for the Effective Date.
(c) IMMINENT CONTROL CHANGE PERIOD. Section 2.5(a) and (b) shall not apply
during an Imminent Control Change Period.
2.6 PRO-RATA LTIP BONUS.
(a) CHANGE OF CONTROL THAT IS NOT A MERGER OF EQUALS. Except as provided
in Section 2.6(b) or (c) below, to the extent not so provided by the
LTIP or New LTIP, as applicable, the Company shall pay or cause to be
paid to Executive, within ten business days after the Effective Date a
lump-sum cash payment equal to the sum of (i) the Pro-rata LTIP Bonus
and (ii) all Accrued LTIP Bonuses, in satisfaction of the Company's
obligations under the LTIP and New LTIP for periods prior to the
Effective Date.
(b) MERGER OF EQUALS. Section 2.6(a) shall not apply in the case of a
Merger of Equals unless there occurs a Merger of Equals Cessation
Date, at which time Section 2.6(a) shall be applied by substituting
the Merger of Equals Cessation Date for the Effective Date.
(c) IMMINENT CONTROL CHANGE PERIOD. Section 2.6(a) and (b) shall not apply
during an Imminent Control Change Period.
ARTICLE III.
TERMINATION OF EMPLOYMENT
3.1 DISABILITY. The provisions of this Section 3.1 and Section 4.8 shall
supersede the provisions of Section 1.16 of the Employment Agreement
(definition of "Disability") and Section 6.2 of the Employment Agreement
(Termination for Retirement, Death or Disability) during the Post-Change
Employment Period or any Imminent Control Change Period but only insofar as
such Section 6.2 applies to termination for Disability.
(a) During the Post-Change Employment Period or any Imminent Control
Change Period, the Company may terminate Executive's employment at any
time because of Executive's Disability by giving Executive or his
legal representative, as applicable, (i) written notice in accordance
with Section 9.7 of the Company's intention to terminate Executive's
employment pursuant to this Section and (ii) a certification of
Executive's Disability by a physician selected by the Company or its
insurers, subject to the consent of Executive or Executive's legal
representative, which consent shall not be unreasonably withheld or
delayed. Executive's employment shall terminate effective on the 30th
day after Executive's receipt of such notice (which such 30th day
shall be deemed to be the date of the Disability) unless, before such
30th day, Executive shall have resumed the full-time performance of
Executive's duties.
(b) "DISABILITY" means any medically determinable physical or mental
impairment that has lasted for a continuous period of not less than
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six months and can be expected to be permanent or of indefinite
duration, and that renders Executive unable to perform the duties
required under this Supplement and Amendment.
3.2 DEATH. Executive's employment shall terminate automatically upon
Executive's death during the Post-Change Employment Period or Imminent
Control Change Period.
3.3 TERMINATION FOR CAUSE.
(a) POST CHANGE EMPLOYMENT PERIOD. During the Post-Change Employment
Period (including any portion thereof that qualifies as a Post-Merger
of Equals Period), the Company may terminate Executive's employment
for Cause solely in accordance with all of the substantive and
procedural provisions of this Section 3.3(a). Section 1.11 of the
Employment Agreement (definition of "Cause") and Section 6.1 of the
Employment Agreement (Termination for Cause or Other than for Good
Reason, etc.) shall be inapplicable during any Post-Change Employment
Period, insofar as it relates to the material contained in this
Section 3.3 and Section 4.6, except as otherwise provided herein.
(i) DEFINITION OF CAUSE. For purposes of this section 3.3(a), "Cause"
means any one or more of the following:
(1) Executive's conviction of, plea of guilty to, or plea of nolo
contendere to a felony or misdemeanor (other than a
traffic-related felony or misdemeanor) that involves fraud,
dishonesty or moral turpitude;
(2) Executive's willful and intentional material misconduct in the
performance or gross neglect of his duties that results in
substantial financial detriment to a Company or any Affiliate;
(3) Executive's habitual neglect of duties (other than resulting from
Executive's incapacity due to physical or mental illness other
than habitual use or addiction to alcohol or controlled
substances) which results in substantial financial detriment to
any of the Companies or Affiliate; or
(4) Executive's willful and intentional material breach of the
Employment Agreement or this Supplement and Amendment;
provided, however, that for purposes of clauses (2), (3) and (4),
Cause shall not include any one or more of the following:
(A) Executive's bad judgment
(B) Executive's negligence, other than Executive's habitual
neglect of duties or gross negligence;
(C) any act or omission believed by Executive in good faith
to have been in or not opposed to the interest of the
Company (without intent of Executive to gain, directly
or indirectly, a profit to which Executive was not
legally entitled); or
(D) failure to meet performance goals, objectives or
measures following good faith efforts to meet such
goals, objectives or measures; and
further provided that, if a breach of the Employment Agreement or
this Supplement and Amendment involved an act, or a failure to
act, which was done, or omitted to be done, by Executive in good
faith and with a reasonable belief that Executive's act, or
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failure to act, was in the best interests of the Company or was
required by applicable law or administrative regulation, such
breach shall not constitute Cause if, within 30 days after
Executive is given written notice of such breach that
specifically refers to this Section, Executive cures such breach
to the fullest extent that it is curable.
(ii) PROCEDURAL REQUIREMENTS FOR TERMINATION FOR CAUSE. The Company
shall strictly observe each of the following procedures:
(1) BOARD MEETING. A meeting of the Board shall be called for the
stated purpose of determining whether Executive's acts or
omissions constitute Cause and, if so, whether to terminate
Executive's employment for Cause.
(2) NOTICE OF CONSIDERATION. Not less than 30 days prior to the date
of such meeting the Company shall provide Executive and each
member of the Board written notice (a "NOTICE OF CONSIDERATION")
of (x) a detailed description of the acts or omissions alleged to
constitute Cause, (y) the date, time and location of such meeting
of the Board, and (z) Executive's rights under clause (3) below.
(3) OPPORTUNITY TO PRESENT RESPONSE. Executive shall have the
opportunity with or without counsel, at Executive's election, an
opportunity to be heard and present arguments and evidence on
Executive's behalf at such a meeting and / or to present to the
Board a written response to the Notice of Consideration.
(4) CAUSE DETERMINATION. Executive's employment may be terminated for
Cause only if (x) the acts or omissions specified in the Notice
of Consideration did in fact occur and do constitute Cause as
defined in this Section, (y) the Board makes a specific
determination to such effect and to the effect that Executive's
employment should be terminated for Cause ("CAUSE DETERMINATION")
and (z) the Company thereafter provides Executive with a Notice
of Termination which specifies in specific detail the basis of
such Termination of Employment for Cause and which Notice shall
be consistent with the reasons set forth in the Notice of
Consideration. The Cause Determination shall require the
affirmative vote of at least 66-2/3% of the members of the Board.
(b) IMMINENT CONTROL CHANGE PERIOD. Except as provided below, this Section
3.3 shall not apply during any Imminent Control Change Period.
Instead, the terms of 6.1 of the Employment Agreement shall govern a
termination of Executive for Cause during an Imminent Control Change
Period. However, in the case of an Imminent Control Change Period that
culminates in a Consummation Date, no termination of Executive's
employment during such Imminent Control Change Period shall be deemed
to have been for Cause unless all the substantive and procedural
provisions of Section 3.3(b) shall have been satisfied:
(i) DEFINITION OF CAUSE. For purposes of this Section 3.3(b), "Cause"
shall have the meaning ascribed to it in Section 3.3(a).
(ii) PROCEDURAL REQUIREMENTS FOR TERMINATION FOR CAUSE. To qualify as
a termination for Cause, a termination by the Company during the
Imminent Control Change Period shall have strictly complied with
the procedures set forth in Section 3.3(a)(ii), substituting the
phrase Imminent Control Change Period for Post-Merger of Equals
Period wherever it appears.
(c) STANDARD OF REVIEW. If the Notice of Consideration is given to
Executive during an Imminent Control Change Period or Post-Change
Employment Period, then in the event that the existence of Cause shall
become an issue in any action or proceeding between the Company and
Executive, the Company shall, notwithstanding the Cause determination
referenced in clause 4(y) of Section 3.3(a)(ii), have the burden of
establishing that the actions or omissions specified in the Notice of
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Consideration did in fact occur and do constitute Cause and that the
Company has satisfied the procedural requirements of Section
3.3(a)(ii).
3.4 GOOD REASON. During the Post-Change Employment Period (including any
portion thereof that is a Post Merger of Equals Period), the Executive may
terminate his employment for Good Reason solely in accordance with the
substantive and procedural provisions of this Section 3.4. Section 1.20 of
the Employment Agreement (definition of "Good Reason") and Section 6.3 of
the Employment Agreement (Termination Without Cause or for Good Reason)
shall be inapplicable during any Post-Change Employment Period, insofar as
it relates to the material contained in this Section 3.4 and Article IV,
except as otherwise provided herein.
(A) CHANGE OF CONTROL AND A MERGER OF EQUALS. During the Post -Change
Employment Period (including any portion thereof that is a Merger of
Equals), Executive may terminate his employment for Good Reason in
accordance with the substantive and procedural provisions of Section
3.4(a).
(i) GOOD REASON DEFINITION. For purposes of this Section 3.4(a),
"Good Reason" means the occurrence of any one or more of the
following actions or omissions during the Post-Change Employment:
(1) any act or omission that would constitute Good Reason as defined
in Section 1.20 of the Employment Agreement;
(2) failure to pay Executive's Base Salary in violation of Section
2.2(a) or any failure to increase Executive's Base Salary to the
extent, if any, required by such Section;
(3) any failure to pay Executive's Annual Bonus or any reduction in
Executive's bonus opportunity, in either case in violation of
Section 2.2(b);
(4) requiring Executive to be based at any office or location other
than the location specified in Section 2.1(a);
(5) any other material breach of this Supplement or Amendment by the
Company;
(6) any Termination of Employment by the Company that purports to be
for Cause, but is not in full compliance with all of the
substantive and procedural requirements of this Supplement and
Amendment (any such purported termination shall be treated as a
Termination of Employment without Cause for all purposes of this
Supplement and Amendment); or
(7) the failure at any time of a successor to the Company explicitly
to assume and agree to be bound by this Supplement and Amendment.
(ii) DETERMINATION OF GOOD REASON. Any reasonable determination by
Executive that any of the events specified in subsection (i)
above has occurred and constitutes Good Reason shall be
conclusive and binding for all purposes, unless the Company
establishes that Executive did not have any reasonable basis for
such determination.
(b) IMMINENT CONTROL CHANGE PERIOD. Except as provided below, this Section
3.4 shall not apply during any Imminent Control Change Period.
Instead, the terms of Section 6.3 of the Employment Agreement
(Termination Without Cause or for Good Reason) shall govern a
termination by Executive For Good Cause during an Imminent Change of
Control Period. However, in the case of an Imminent Control Change
Period that culminates in a Consummation Date, no termination of
Executive's employment during the Imminent Control Change Period shall
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be deemed to have been for Good Reason unless all the substantive and
procedural provisions of this Section 3.4(b) shall have been
satisfied:
(i) DEFINITION OF GOOD REASON. For purposes of this Section 3.4(b),
"Good Reason" shall have the same meaning as in Section
3.4(a)(i), except that the act or omission shall have occurred
during the Imminent Control Change Period.
(ii) DETERMINATION OF GOOD REASON. Executive's determination that an
event constituting Good Reason as defined in Section 3.4(a)(i)(2)
- (7) has occurred during an Imminent Control Change Period shall
not be entitled to any presumptive validity or other deference by
a court.
(c) NOTICE BY EXECUTIVE. In the event of any Termination of Employment by
Executive for Good Reason during a Post-Change Employment Period (or
during an Imminent Control Change Period if Executive intends to claim
benefits hereunder in the event the Imminent Control Change Period
culminates in a Consummation Date), Executive shall as soon as
practicable thereafter notify the Company of the events constituting
such Good Reason by a Notice of Termination. A delay in the delivery
of such Notice of Termination or a failure by Executive to include in
the Notice of Termination any fact or circumstance which contributes
to a showing of Good Reason shall not waive any right of Executive
under this Supplement and Amendment or preclude Executive from
asserting such fact or circumstance in enforcing rights under this
Supplement and Amendment; provided that no act or omission by the
Company shall qualify as Good Reason if Executive's Termination of
Employment occurs more than 12 months after Executive first obtains
actual knowledge of such act or omission.
ARTICLE IV.
COMPANY'S OBLIGATIONS UPON CERTAIN TERMINATIONS OF EMPLOYMENT
4.1 TERMINATION DURING THE POST-CHANGE EMPLOYMENT PERIOD. If, during the
Post-Change Employment Period (other than during a Post-Merger of Equals
Period) the Company terminates Executive's employment other than for Cause
or Disability, or Executive terminates employment for Good Reason, Section
6.3 of the Employment Agreement (Termination Without Cause or for Good
Reason) shall not apply, and the Company's sole obligations to Executive
under Articles II and IV shall be as follows:
(a) SEVERANCE PAYMENTS. The Company shall pay or provide Executive, in
addition to all vested rights arising from Executive's employment as
specified in Article II, a lump-sum cash amount equal to the sum of
the following, no more than ten business days after the Termination
Date:
(i) ACCRUED OBLIGATIONS. All Accrued Obligations;
(ii) PRORATED ANNUAL BONUS FOR YEAR OF TERMINATION. Executive's
Pro-rata Annual Bonus reduced (but not below zero) by the amount
of any Annual Bonus paid to Executive with respect to the
Company's fiscal year in which the Termination Date occurs,
whether paid under Section 2.5 or otherwise;
(iii)PRORATED LTIP BONUS. Executive's Pro-rata LTIP Bonus reduced
(but not below zero) by the amount of any LTIP Bonus paid to
Executive with respect to the LTIP Performance Periods not
completed as of the Termination Date, whether such amount was
paid under Section 2.6 or otherwise;
(iv) ADDITIONAL LTIP AMOUNT. For each LTIP Performance Period that is
unexpired as of the Date of Termination, Executive shall be
treated as he would be treated under the LTIP in effect on the
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effective date of the Employment Agreement if (1) he terminated
employment at age 57 other than for cause (as defined in the
LTIP) and (2) he retired ("LTIP Benefit"); provided that the
discretion of the Committee shall not be exercised so as to treat
Executive less favorably than other members of Senior Management;
provided further that if such payment cannot be provided under
the terms of the LTIP or New LTIP, as applicable, then the
Company shall pay amounts equal to such LTIP benefit, reduced by
amounts actually payable under the LTIP or New LTIP, as
applicable, at the same time as they otherwise would have been
paid;
(v) DEFERRED PENSIONS AND PENSION ENHANCEMENTS. The sum of
(1) all amounts previously deferred by, or accrued to the benefit of,
Executive under any defined contribution non-qualified plans (as
described in Section 2.4), whether vested or unvested, together
with any accrued earnings thereon, to the extent that such
amounts and earnings have not been previously paid by the Company
(whether pursuant to Section 2.4 or otherwise) or are provided
under the terms of such non-qualified Plan; plus
(2) an amount equal to the positive difference, if any, between:
(A) the sum of the Lump-Sum Values of each Maximum Annuity that would
be payable to Executive under any defined benefit Plan (whether
or not qualified under Section 401(a)) if Executive had:
(1) become fully vested in all such previously-unvested benefits,
(2) accrued a number of years of service (for purposes of determining
the amount of such benefits, entitlement to early retirement
benefits, and all other purposes of such defined benefit plans)
that is three years greater than the number of years of service
actually accrued by Executive as of the Termination Date, and
(3) received the lump-sum severance benefits specified in Section 4.1
(a) (excluding LTIP Bonuses and any amounts in respect of Stock
Options or Restricted Shares, if any, including severance
multiples thereof) as covered compensation in equal monthly
installments during the period of three years following the
Termination Date,
minus
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(B) the sum of (x) the Lump-Sum Values of the Maximum Annuity
benefits actually payable to Executive under each defined benefit
Plan that is qualified under Section 401(a) of the Code and (y)
the aggregate amounts previously paid (whether pursuant to
Section 2.4 or otherwise) to Executive under the defined benefit
Plans (whether or not qualified under Section 401(a) of the Code)
described in clause (A) of this Section 4.1(a)(v)(2).
Notwithstanding the foregoing, the amount payable under this Section
4.1(a)(v)(2) with respect to the SERP and the Principal Pension Plan for
Employees in the aggregate, shall not be less than the amount to which
Executive would be entitled as of the Date of Termination under Section
6.3(f) of the Employment Agreement (providing for certain benefits if the
Date of Termination occurs prior to the Executive's 57th birthday).
(vi) MULTIPLE OF SALARY AND BONUS. An amount equal to three (3.0)
times the sum of (x) Base Salary and (y) the Target Annual Bonus,
each determined as of the Termination Date; provided, however,
that any reduction in Executive's Base Salary or Annual Bonus
that would qualify as Good Reason shall be disregarded for
purposes of this clause (vi); and
(vii)UNVESTED DEFINED CONTRIBUTION PLAN. To the extent not paid
pursuant to Section 4.1(a)(v), an amount equal to the sum of the
value of the unvested portion of Executive's accounts or accrued
benefits under any unqualified or qualified defined contribution
retirement plan maintained by the Company as of the Termination
Date and forfeited by Executive by reason of the Termination of
Employment.
(b) CONTINUATION OF WELFARE BENEFITS. Until the third anniversary of
the Termination Date or such later date as any Plan may specify,
the Company shall continue to provide to Executive and
Executive's family welfare benefits (including medical,
prescription, dental, disability, salary continuance, individual
life, group life, accidental death and travel accident insurance
plans and programs) which are at least as favorable as the most
favorable Plans of the Company applicable to members of Senior
Management who are actively employed after the Termination Date
and their families. The cost of such welfare benefits to
Executive shall not exceed the cost of such benefits to actively
employed members of Senior Management of the Company as
applicable from time to time.
If the Date of Termination occurs prior to the Executive's 57th
birthday, Executive shall be entitled to the benefits equivalent to
those payable under the Principal Welfare Benefit Plan for Employees
calculated under the terms of such plan as if the Date of Termination
occurred after Executive's 57th birthday, reduced by amounts actually
payable under such plan, and if either Executive or the Company
reasonably believes it is likely that such benefits cannot be provided
on a tax-favored basis, the Company shall pay the cost of the insurance
premium for such benefits.
Executive's rights under this Section shall be in addition to, and not
in lieu of, any post-termination continuation coverage or conversion
rights Executive may have pursuant to applicable law, including
continuation coverage required by Section 4980 of the Code.
(c) OUTPLACEMENT. The Company shall pay on behalf of Executive reasonable
fees and costs charged by the outplacement firm selected by Executive
to provide outplacement services to Executive after the Termination
Date, within ten business days of its receipt of an invoice therefor,
subject to a maximum of $30,000.
(d) INDEMNIFICATION, DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The
provisions of Section 9.4 of the Employment Agreement (Indemnification
and Insurance) shall continue to apply after the Effective Date.
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(e) STOCK INCENTIVE AWARDS. Immediately prior to the Executive's
Termination of Employment, Executive shall (i) become fully vested in,
and may thereafter exercise in whole or in part, in accordance with
the terms thereof, all outstanding Stock Options and (ii) become fully
vested in all Restricted Shares.
4.2 TERMINATION DURING A POST-MERGER OF EQUALS PERIOD. If, during a Post-Merger
of Equals Period, the Company terminates Executive's employment other than
for Cause or Disability, or if Executive terminates employment for Good
Reason, Section 6.3 of the Employment Agreement (Termination Without Cause
or for Good Reason) shall not apply, and the Company's sole obligations to
Executive under Articles II and IV shall be as follows:
(a) SEVERANCE PAYMENTS. The Company shall pay or provide Executive, in
addition to all vested rights arising from Executive's employment as
specified in Article II, a lump-sum cash amount, no more than thirty
business days after the Termination Date, equal to the sum of all
amounts described in Section 4.1(a).
(b) CONTINUATION OF WELFARE BENEFITS. Until the third anniversary of the
Termination Date or such later date as any Plan may specify, the
Company shall continue to provide to Executive and Executive's family
welfare benefits with the same scope and cost as described in Section
4.1(b).
If the Date of Termination occurs prior to the Executive's 57th
birthday, Executive shall be entitled to the benefits equivalent to
those payable under the Principal Welfare Benefit Plan for Employees
calculated under the terms of such plan as if the Date of Termination
occurred after Executive's 57th birthday, reduced by amounts actually
payable under such plan, and if either Executive or the Company
reasonably believes it is likely that such benefits cannot be provided
on a tax-favored basis, the Company shall pay the cost of the insurance
premium for such benefits.
Executive's rights under this Section shall be in addition to, and not
in lieu of, any post-termination continuation coverage or conversion
rights Executive may have pursuant to applicable law, including
continuation coverage required by Section 4980 of the Code.
(c) OUTPLACEMENT. The Company shall pay on behalf of Executive reasonable
fees and costs charged by the outplacement firm selected by the
Company to provide outplacement services to Executive after the
Termination Date, within ten business days of its receipt of an
invoice therefor, subject to a maximum of $30,000.
(d) INDEMNIFICATION, DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The
provision of Section 9.4 of the Employment Agreement (Indemnification
and Insurance) shall continue to apply during a Post-Merger of Equals
Period.
(e) STOCK INCENTIVE AWARDS. Immediately prior to the Executive's
Termination of Employment, Executive shall (i) become fully vested in,
and may thereafter exercise in whole or in part, in accordance with
the terms thereof, all outstanding Stock Options and (ii) become fully
vested in all Restricted Shares.
4.3 TERMINATION DURING AN IMMINENT CONTROL CHANGE PERIOD (WITH NO CHANGE OF
CONTROL). If, during an Imminent Control Change Period, the Company
terminates Executive's employment other than for Disability and other than
for a reason that would constitute Cause if there were a Change of Control,
or if Executive terminates employment for a reason that would constitute
Good Reason if there were a Change of Control, and in either case the
Imminent Control Change Period does not culminate in a Consummation Date,
the applicable terms of the Employment Agreement shall govern, except that:
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(a) CONTINUATION OF WELFARE BENEFITS. Until the earlier of (i) the third
anniversary of the Termination Date or (ii) the last day of the
Imminent Control Change Period (or such later date as any Plan may
specify), if it would provide greater benefits to Executive than under
the Employment Agreement, the Company shall continue to provide to
Executive and Executive's family welfare benefits with the same scope
and cost as described in Section 6.3(d) of the Employment Agreement
(Termination Without Cause or for Good Reason).
(b) OUTPLACEMENT. The Company shall pay on behalf of Executive reasonable
fees and costs charged by the outplacement firm selected by the
Company to provide outplacement services to Executive after the
Termination Date, within ten business days of its receipt of an
invoice therefor, subject to a maximum of $30,000. All outplacement
amounts payable on account of a Termination Date which occurred during
an Imminent Change of Control Period will be reduced, (but not below
zero) by outplacement amounts paid to Executive on account of such
Termination Date but before payment pursuant to this Section 4.3(b).
(c) STOCK INCENTIVE AWARDS. In addition to vesting in accordance with
Section 6.3(g) of the Employment Agreement, Executive's Stock Options
(whether vested prior to or upon such Termination Date) will:
(i) not expire (unless such Stock Options would have so expired had
Executive remained an employee of the Company) during the
Imminent Control Change Period; and
(ii) continue to be exercisable after the Termination Date to the
extent provided in the applicable grant agreement or Plan, and
thereafter, such Stock Options shall not be exercisable during
the Imminent Control Change Period.
Upon the date the Imminent Control Change lapses without a
Consummation Date Executive's vested Stock Options may be
exercised, in whole or in part, during the 30-day period
following the lapse of the Imminent Control Change, (but in no
case shall Stock Options remain exercisable after the date on
which such Stock Options would have expired if Executive had
remained an employee of the Company).
4.4 TERMINATION DURING AN IMMINENT CONTROL CHANGE PERIOD (WHICH CULMINATES IN A
CHANGE OF CONTROL). If, during an Imminent Control Change Period that
culminates in a Consummation Date, the Company terminates Executive's
employment other than for Cause or Disability, or if Executive terminates
employment for Good Reason, the Employment Agreement shall govern prior to
the Consummation Date, and upon the Consummation Date the Company's sole
obligations to Executive under Articles II and IV shall be as follows:
(a) SEVERANCE PAYMENTS. The Company shall pay or provide Executive, in
addition to all vested rights arising from Executive's employment as
specified in Article II, a lump-sum cash amount equal to the sum of
all amounts described in Section 4.1(a). Such amount shall be paid no
more than ten business days after an Effective Date that does not
qualify as a Merger of Equals and no more than 30 business days after
an Effective Date which does qualify as a Merger of Equals.
Notwithstanding the foregoing, all amounts paid pursuant to this
Section 4.4(a) shall be reduced (but not below zero) by the same or
similar amounts paid to Executive on account of the Termination of
Employment (under this Supplement and Amendment, the Employment
Agreement or otherwise) to the extent such amounts would reasonably be
considered duplicative, prior to the date payment is made under this
Section 4.4(a).
(b) CONTINUATION OF WELFARE BENEFITS. Until the third anniversary of the
Termination Date or such later date as any Plan may specify, the
Company shall continue to provide to Executive and Executive's family
welfare benefits with the same scope and cost as described in Section
4.1(b). Notwithstanding the foregoing, all coverage under this Section
4.4(b) shall be reduced by all coverage provided by the Company to
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Executive on account of the Termination of Employment (under this
Supplement and Amendment, the Employment Agreement, or otherwise), to
the extent such amounts would reasonably be considered duplicative,
prior to the date such benefits are provided under this Section
4.4(b).
If the Date of Termination occurs prior to the Executive's 57th
birthday, Executive shall be entitled to the benefits equivalent to
those payable under the Principal Welfare Benefit Plan for Employees
calculated under the terms of such plan as if the Date of Termination
occurred after Executive's 57th birthday, reduced by amounts actually
payable under such plan, and if either Executive or the Company
reasonably believes it is likely that such benefits cannot be provided
on a tax-favored basis, the Company shall pay the cost of the insurance
premium for such benefits.
Executive's rights under this Section shall be in addition to, and not
in lieu of, any post-termination continuation coverage or conversion
rights Executive may have pursuant to applicable law, including
continuation coverage required by Section 4980 of the Code.
(c) OUTPLACEMENT. The Company shall pay on behalf of Executive reasonable
fees and costs charged by the outplacement firm selected by the
Company to provide outplacement services to Executive after the
Termination Date, within ten business days of its receipt of an
invoice therefor, subject to a maximum of $30,000. Notwithstanding the
foregoing, all outplacement amounts payable pursuant to this Section
4.4(c) shall be reduced (but not below zero) by outplacement amounts
paid to Executive on account of such Termination Date (under this
Supplement and Amendment, the Employment Agreement, or otherwise) but
prior to the date payment is made pursuant to this Section 4.4(c).
(d) STOCK INCENTIVE AWARDS. In addition to vesting in accordance with
Section 6.3(g) of the Employment Agreement, Executive's vested Stock
options (whether vested prior to or upon such Termination Date) shall
be treated as follows:
(i) not expire (unless such Stock Options would have so expired had
Executive remained an employee of the Company) during the
Imminent Control Change Period;
(ii) continue to be exercisable after the Termination Date to the
extent provided in the applicable grant agreement or Plan, and
thereafter, such Stock Options shall not be exercisable during
the Imminent Control Change Period.
Upon the Consummation Date, such vested Stock Options may be
exercised by Executive in whole or in part, during the 30-day
period following the Consummation Date, (but in no case shall
Stock Options remain exercisable after the date on which such
Stock options would have expired if Executive had remained an
employee of the Company). Notwithstanding any provision in this
Section, if the Consummation Date is a Reorganization
Transaction, and if so provided under the agreement pursuant to
which the Reorganization Transaction is effected, then all
Executive's Stock Options shall (a) be extinguished for such
consideration as is provided for vested options under such
agreement; or (b) be converted into options to purchase the stock
of the Surviving Corporation, and such converted options shall be
subject to the same option terms as those applicable prior to the
Consummation Date.
4.5 WAIVER AND RELEASE. Notwithstanding anything herein to the contrary, the
Company shall have no obligation to Executive under Section 4.1, 4.2, 4.3
or 4.4 or Article V unless and until Executive executes a release and
waiver of PFGI and the Companies, in substantially the same form as
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attached hereto as Exhibit A. This Section 4.5 shall superseded Section 6.5
of the Employment Agreement (Waiver and Release) insofar as it relates to
material contained in this Section 4.5, effective on the Effective Date.
4.6 TERMINATION BY THE COMPANY FOR CAUSE. If the Company terminates Executive's
employment for Cause during the Post-Change Employment Period or Imminent
Control Change Period, Section 6.1 of the Employment Agreement (Termination
for Cause or Other than for Good Reason, etc.) shall not apply, and the
Company's sole obligation to Executive under Articles II and IV shall be to
pay Executive, a lump-sum cash amount equal to all Accrued Obligations
determined as of the Termination Date. The LTIP Bonus shall be governed
according to the terms of the LTIP and New LTIP, as applicable.
4.7 TERMINATION BY EXECUTIVE OTHER THAN FOR GOOD REASON.
(a) If Executive terminates employment during the Post-Change Employment
Period or Imminent Control change Period other than for Retirement,
Good Reason, Disability or Death, Section 6.2 of the Employment
Agreement (Termination for Retirement, Death or Disability) shall not
apply, and the Company's sole obligation to Executive under Articles
II and IV shall be to pay Executive, a lump-sum cash amount equal to
all Accrued Obligations determined as of the Termination Date. The
LTIP Bonus shall be governed according to the terms of the LTIP and
New LTIP, as applicable.
(b) If Executive terminates employment during the Post-Change Employment
Period or Imminent Control Change Period due to his Retirement,
Section 6.2 of the Employment Agreement (Termination for Retirement,
Death or Disability) shall govern.
4.8 TERMINATION BY THE COMPANY FOR DISABILITY. If the Company terminates
Executive's employment by reason of Executive's Disability during the
Post-Change Employment Period or Imminent Control Change Period, Section
6.2 of the Employment Agreement (Termination for Retirement, Death or
Disability) shall not apply, and the Company's sole obligation to Executive
under Articles II and IV shall be as follows:
(a) to pay Executive (i) the amount determined in accordance with Section
6.2 of the Employment Agreement (Termination for Retirement, Death or
Disability), and (ii) to the extent not paid under the Employment
Agreement, a lump-sum cash amount equal to all Accrued Obligations
determined as of the Termination Date, and
(b) to provide Executive disability and other benefits after the
Termination Date that are not less than the most favorable of such
benefits then available under Plans of the Company to disabled peer
executives of the Company.
If the Termination Date occurred during an Imminent Control Change Period
which had a Consummation Date which is not also a Merger of Equals or a
Post-Change Employment Period other than a Post-Merger of Equals Period,
such disability and other benefits shall also be no less favorable, in the
aggregate, than the most favorable of the disability and other benefits
available to Executive under such Plans in effect at any time during the
90-day period immediately preceding (1) the Effective Date if such
Termination Date occurred during a Post-Change Employment Period or (2) the
date of the Imminent Control Change if such Termination Date occurred
during an Imminent Control Change Period. The LTIP Bonus shall also be
governed according to the terms of the LTIP and New LTIP, as applicable.
4.9 IF UPON DEATH. Notwithstanding anything to the contrary set forth in this
Article IV, if Executive's employment is terminated by reason of
Executive's death during the Post-Change Employment Period or Imminent
Control Change Period, Section 6.2 of the Employment Agreement (Termination
for Retirement, Death or Disability) shall not apply, and the Company's
sole obligations to Executive under Articles II and IV shall be as follows:
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(a) to pay Executive's Beneficiary or estate (i) the amount determined in
accordance with Section 6.2 of the Employment Agreement (Termination
for Retirement, Death or Disability) and (ii) to the extent not paid
under the Employment Agreement, a lump-sum cash amount equal to all
Accrued Obligations; and
(b) to provide Executive's estate or Beneficiary survivor and other
benefits that are not less than the most favorable survivor and other
benefits then available under Plans of the Company to the estates or
the surviving families of peer executives of the Company.
If the Termination Date occurred during an Imminent Control Change which
had a Consummation Date which is not also a Merger of Equals or a
Post-Change Employment Period other than a Post-Merger of Equals Period,
such survivor benefits shall also be no less favorable, in the aggregate,
than the most favorable of the survivor benefits available to Executive
under such Plans in effect at any time during the 90-day period immediately
preceding (1) the Effective Date if such Termination Date occurred during a
Post-Change Employment Period or (2) the date of the Imminent Control
Change if such Termination Date occurred during an Imminent Control Change
Period. The LTIP Bonus shall be governed according to the terms of the LTIP
and New LTIP, as applicable.
4.10 EXECUTIVE'S ELECTION TO WAIVE. Notwithstanding the foregoing provisions of
this Article IV or any provision of the Employment Agreement, if
Executive's employment is terminated during a Post-Change Employment Period
other than for Disability, or other than by the Company for Cause,
including under circumstances entitling Executive to payments and provision
of benefits under Section 4.1 or 4.2, then Executive may waive ("Severance
Waiver") all his rights to such payments and benefits, and all rights to
payments and provision of benefits under Section 6.3 of the Employment
Agreement; provided, however, that the Severance Waiver shall not include a
wavier of payment or provision of Executive's Accrued Obligations. Any such
Severance Waiver shall be in writing and shall be delivered to the Company
as provided in Section 9.7 within three days if such termination of
employment (and in any event prior to receipt of Executive's receipt of any
payments or benefits). The provisions of Section 7.1 of the Employment
Agreement (non-Competition) shall not apply from and after the date the
Severance Waiver is duly delivered to the Company.
ARTICLE V.
CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY
5.1 GROSS-UP PAYMENT. During the Supplement Term, this Section 5.1 shall
supersede Section 8.1 of the Employment Agreement, effective on an
Effective Date. If at any time or from time to time, it shall be determined
by the Company's independent auditors, but only after an Effective Date,
that any payment or other benefit to Executive pursuant to Article II or
Article IV of this Supplement and Amendment or otherwise ("POTENTIAL
PARACHUTE PAYMENT") is or will become subject to the excise tax imposed by
Section 4999 of the Code or any similar tax payable under any United States
federal, state, local, foreign or other law ("EXCISE Taxes"), then the
Company shall pay or cause to be paid a tax gross-up payment ("GROSS-UP
PAYMENT") with respect to all such Excise Taxes and other Taxes on the
GROSS-UP PAYMENT. The GROSS-UP PAYMENT shall be an amount equal to the
product of
(a) The amount of the Excise Taxes (calculated at the effective marginal
rates of all federal, state, local, foreign or other law),
multiplied by
(b) A fraction (the "GROSS-UP MULTIPLE"), the numerator of which is one
(1.0), and the denominator of which is one (1.0) minus the lesser of
(i) the sum, expressed as a decimal fraction, of the effective
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marginal rates of any Taxes and any Excise Taxes applicable to the
GROSS-UP PAYMENT or (ii) .80. If different rates of tax are applicable
to various portions of a GROSS-UP PAYMENT, the weighted average of
such rates shall be used. For purposes of this section, Executive
shall be deemed to be subject to the highest effective marginal rate
of Taxes.
The GROSS-UP PAYMENT is intended to compensate Executive for all such
Excise Taxes and any other Taxes payable by Executive with respect to the
GROSS-UP PAYMENT. The Company shall pay or cause to be paid the Gross-Up
Payment to Executive within ten (10) days of the calculation of such
amount, but in no event after the Executive makes the payment to the IRS of
such Excise Taxes.
5.2 LIMITATION ON GROSS-UP PAYMENTS. This section 5.2 shall supersede Section
8.2 of the Employment Agreement, effective on the Supplement Date.
(a) To the extent possible, any payments or other benefits to Executive
pursuant to Article II and Article IV of this Agreement shall be
allocated as consideration for Executive's entry into the covenants of
Article VII of the Employment Agreement (Restrictive Covenants).
(b) Notwithstanding any other provision of this Article V, if the
aggregate After-Tax Amount (as defined below) of the Potential
Parachute Payments and GROSS-UP PAYMENT that, but for this Section
5.2, would be payable to Executive, does not exceed 110% of After-Tax
Floor Amount (as defined below), then no GROSS-UP PAYMENT shall be
made to Executive and the aggregate amount of Potential Parachute
Payments payable to Executive shall be reduced (but not below the
Floor Amount) to the largest amount which would both (i) not cause any
Excise Tax to be payable by Executive and (ii) not cause any Potential
Parachute Payments to become nondeductible by the Company by reason of
Section 280G of the Code (or any successor provision). For purposes of
the preceding sentence, Executive shall be deemed to be subject to the
highest effective marginal rate of Taxes.
(c) For purposes of this Supplement and Amendment:
(i) "AFTER-TAX AMOUNT" means the portion of a specified amount that
would remain after payment of all Taxes paid or payable by
Executive in respect of such specified amount;
(ii) "FLOOR AMOUNT" means the greatest pre-tax amount of Potential
Parachute Payments that could be paid to Executive without
causing Executive to become liable for any Excise Taxes in
connection therewith; and
(iii)"AFTER-TAX FLOOR AMOUNT" means the After-Tax Amount of the Floor
Amount.
5.3 ADDITIONAL GROSS-UP AMOUNTS. If, for any reason (whether pursuant to
subsequently enacted provisions of the Code, final regulations or published
rulings of the IRS, or a final judgment of a court of competent
jurisdiction) the Company's independent auditors later determine that the
amount of Excise Taxes payable by Executive is greater than the amount
initially determined pursuant to Section 5.1, then the Company shall,
subject to Sections 5.2 and 5.4, pay Executive, within ten (10) days of
such determination, or pay to the IRS as required by applicable law, an
amount (which shall also be deemed a Gross-Up Payment) equal to the product
of:
(a) the sum of (i) such additional Excise Taxes and (ii) any interest,
penalties, expenses or other costs incurred by Executive as a result
of having taken a position in accordance with a determination made
pursuant to Section 5.1 or 5.4,
multiplied by
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(b) the Gross-Up Multiple.
5.4 AMOUNT INCREASED OR CONTESTED.
(a) Executive shall notify the Company in writing (an "EXECUTIVE'S
NOTICE") of any claim by the IRS or other taxing authority (an "IRS
CLAIM") that, if successful, would require the payment by Executive of
Excise Taxes in respect of Potential Parachute Payments in an amount
in excess of the amount of such Excise Taxes determined in accordance
with Section 5.1. Executive's Notice shall include the nature and
amount of such IRS Claim, the date on which such IRS Claim is due to
be paid (the "IRS CLAIM DEADLINE"), and a copy of all notices and
other documents or correspondence received by Executive in respect of
such IRS Claim. Executive shall give the Executive's Notice as soon as
practicable, but no later than the earlier of (i) 10 days after
Executive first obtains actual knowledge of such IRS Claim or (ii)
five days before the IRS Claim Deadline; provided, however, that any
failure to give such Executive's Notice shall affect the Company's
obligations under this Article only to the extent that the Company is
actually prejudiced by such failure. If at least one business day
before the IRS Claim Deadline the Company shall:
(i) deliver to Executive a written certificate from the Company's
independent auditors ("COMPANY CERTIFICATE") to the effect that,
notwithstanding the IRS Claim, the amount of Excise Taxes,
interest or penalties payable by Executive is either zero or an
amount less than the amount specified in the IRS Claim,
(ii) pay to Executive, or to the IRS as required by applicable law, an
amount (which shall also be deemed a Gross-Up Payment) equal to
difference between the product of (x) amount of Excise Taxes,
interest and penalties specified in the Company Certificate, if
any, multiplied by (y) the Gross-Up Multiple, less the portion of
such product, if any, previously paid to Executive by the
Company, and
(iii)direct Executive pursuant to Section 5.4(d) to contest the
balance of the IRS Claim,
then Executive shall pay only the amount, if any, of Excise Taxes, interest
and penalties specified in the Company Certificate. In no event shall
Executive pay an IRS Claim earlier than 30 business days after having given
an Executive's Notice to the Company (or, if sooner, the IRS Claim
Deadline).
(b) At any time after the payment by Executive of any amount of Excise
Taxes, other Taxes or related interest or penalties in respect of
Potential Parachute Payments (including any such amount equal to or
less than the amount of such Excise Taxes specified in any Company
Certificate, or IRS Claim), the Company may in its discretion require
Executive to pursue a claim for a refund (a "REFUND CLAIM") of all or
any portion of such Excise Taxes, other Taxes, interest or penalties
as may be specified by the Company in a written notice to Executive.
(c) If the Company notifies Executive in writing that the Company desires
Executive to contest an IRS Claim or to pursue a Refund Claim,
Executive shall:
(i) give the Company all information that it reasonably requests in
writing from time to time relating to such IRS Claim or Refund
Claim, as applicable,
(ii) take such action in connection with such IRS Claim or Refund
Claim (as applicable) as the Company reasonably requests in
writing from time to time, including accepting legal
representation with respect thereto by an attorney selected by
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the Company, subject to the approval of Executive (which approval
shall not be unreasonably withheld or delayed),
(iii)cooperate with the Company in good faith to contest such IRS
Claim or pursue such Refund Claim, as applicable,
(iv) permit the Company to participate in any proceedings relating to
such IRS Claim or Refund Claim, as applicable, and
(v) contest such IRS Claim or prosecute Refund Claim (as applicable)
to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as
the Company may from time to time determine in its discretion.
The Company shall control all proceedings in connection with such IRS Claim
or Refund Claim (as applicable) and in its discretion may cause Executive
to pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the Internal Revenue Service or other taxing
authority in respect of such IRS Claim or Refund Claim (as applicable);
provided that (i) any extension of the statute of limitations relating to
payment of taxes for the taxable year of Executive relating to the IRS
Claim is limited solely to such IRS Claim, (ii) the Company's control of
the IRS Claim or Refund Claim (as applicable) shall be limited to issues
with respect to which a Gross-Up Payment would be payable, and (iii)
Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or other taxing
authority.
(d) The Company may at any time in its discretion direct Executive to (i)
contest the IRS Claim in any lawful manner or (ii) pay the amount
specified in an IRS Claim and pursue a Refund Claim; provided,
however, that if the Company directs Executive to pay an IRS Claim and
pursue a Refund Claim, the Company shall advance the amount of such
payment to Executive on an interest-free basis and shall indemnify
Executive, on an after-tax basis, for any Excise Tax or income tax,
including related interest or penalties, imposed with respect to such
advance.
(e) The Company shall pay directly all legal, accounting and other costs
and expenses (including additional interest and penalties) incurred by
the Company or Executive in connection with any IRS Claim or Refund
Claim, as applicable, and shall indemnify Executive, on an after-tax
basis, for any Excise Tax or income tax, including related interest
and penalties, imposed as a result of such payment of costs and
expenses.
5.5 REFUNDS. If, after the receipt by Executive or the IRS of any payment or
advance of Excise Taxes or other Taxes by the Company pursuant to this
Article, Executive receives any refund with respect to such Excise Taxes,
Executive shall (subject to the Company's complying with any applicable
requirements of Section 5.4) promptly pay the Company the amount of such
refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 5.4 or receipt by the IRS of an
amount paid by the Company on behalf of the Executive pursuant to Section
5.4, a determination is made that Executive shall not be entitled to any
refund with respect to such claim and the Company does not notify Executive
in writing of its intent to contest such determination within 30 days after
the Company receives written notice of such determination, then such
advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid. Any contest of a denial of refund
shall be controlled by Section 5.4(d).
217
ARTICLE VI.
EXPENSES, INTEREST AND DISPUTE RESOLUTION
6.1 LEGAL FEES AND OTHER EXPENSES.
(a) If Executive incurs legal fees or other expenses (including expert
witness and accounting fees and arbitration costs and expenses under
Section 6.3) in an effort to secure, preserve, establish entitlement
to or obtain benefits under this Supplement and Amendment, the Company
shall, regardless of the outcome of such effort, reimburse Executive
on a current basis (in accordance with Section 6.1(b)) for such fees
and expenses.
(b) Reimbursement of legal fees and expenses and gross-up payments shall
be made monthly within 10 days after Executive's written submission of
a request for reimbursement together with evidence that such fees and
expenses were incurred.
(c) If Executive does not prevail (after exhaustion of all available
judicial remedies) in respect of a claim by Executive or by the
Company hereunder, and the Company establishes before a court of
competent jurisdiction that Executive had no reasonable basis for
Executive's claim hereunder, or for Executive's response to the
Company's claim hereunder, or that Executive acted in bad faith, no
further reimbursement for legal fees and expenses shall be due to
Executive in respect of such claim and Executive shall refund any
amounts previously reimbursed hereunder with respect to such claim.
(d) In no event shall Executive be entitled to reimbursement under this
Supplement and Amendment and under the Employment Agreement for the
same fees, costs or expenses.
(e) The Company shall promptly reimburse Executive for all attorney's
fees, costs and expenses incurred by Executive in connection with the
negotiation, execution and delivery of this Supplement and Amendment.
6.2 INTEREST. If the Company does not pay any amount due to Executive under
this Supplement and Amendment within ten business days after such amount
first became due and owing, interest shall accrue on such amount from the
date it became due and owing until the date of payment at an annual rate
equal to 300 basis points above the base commercial lending rate published
in THE WALL STREET JOURNAL in effect from time to time during the period of
such nonpayment.
6.3 BINDING ARBITRATION. Any dispute, controversy or claim arising out of or in
connection with or relating to this Supplement and Amendment or any breach
or alleged breach thereof, or any benefit or alleged benefit hereunder,
shall be submitted to and settled by binding arbitration in Des Moines,
Iowa, in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. Any dispute, controversy or claim submitted for
resolution shall be submitted to three (3) arbitrators, each of whom is a
nationally recognized executive compensation specialist. The Company
involved in the dispute, controversy or claim, or PFGI if more than one
Company is so involved, shall select one arbitrator, the Executive shall
select one arbitrator and the third arbitrator shall be selected by the
first two arbitrators. Any award rendered shall be final and conclusive
upon the parties and a judgment thereon may be entered in the highest court
of a forum, state or federal, having jurisdiction. The expenses of the
arbitration shall be borne according to Section 6.1. No arbitration shall
be commenced after the date when institution of legal or equitable
proceedings based upon such subject matter would be barred by the
applicable statute of limitations. Notwithstanding anything to the contrary
contained in this Section 6.3 or elsewhere in this Supplement and
Amendment, either party may bring an action in the District Court of Polk
County, or the United States District Court for the Southern District of
Iowa, if jurisdiction there lies, in order to maintain the status quo ante
of the parties. The "status quo ante" is defined as the last peaceable,
218
uncontested status between the parties. However, neither the party bringing
the action nor the party defending the action thereby waives its right to
arbitration of any dispute, controversy or claim arising out of or in
connection or relating to this Supplement and Amendment. Notwithstanding
anything to the contrary contained in this Section 6.3 or elsewhere in this
Supplement and Amendment, either party may seek relief in the form of
specific performance, injunctive or other equitable relief in order to
enforce the decision of the arbitrator(s). The parties agree that in any
arbitration commenced pursuant to this Supplement and Amendment, the
parties shall be entitled to such discovery (including depositions,
requests for the production of documents and interrogatories) as would be
available in a federal district court pursuant to Rules 26 through 37 of
the Federal Rules of Civil Procedure. In the event that either party fails
to comply with its discovery obligations hereunder, the arbitrator(s) shall
have full power and authority to compel disclosure or impose sanctions to
the full extent of Rule 37 of the Federal Rules of Civil Procedure.
ARTICLE VII.
NO SET-OFF OR MITIGATION; NO DOUBLE PAYMENT
7.1 NO SET-OFF BY COMPANY. Executive's right to receive when due the payments
and other benefits provided for under this Supplement and Amendment is
absolute, unconditional and subject to no setoff, counterclaim or legal or
equitable defense. Time is of the essence in the performance by the Company
of its obligations under this Supplement and Amendment. Any claim which the
Company may have against Executive, whether for a breach of this Supplement
and Amendment or otherwise, shall be brought in a separate action or
proceeding and not as part of any action or proceeding brought by Executive
to enforce any rights against the Company under this Supplement and
Amendment.
7.2 NO MITIGATION. Executive shall not have any duty to mitigate the amounts
payable by the Company under this Supplement and Amendment by seeking new
employment or self-employment following termination. Except as specifically
otherwise provided in this Supplement and Amendment, all amounts payable
pursuant to this Supplement and Amendment shall be paid without reduction
regardless of any amounts of salary, compensation or other amounts which
may be paid or payable to Executive as the result of Executive's employment
by another employer or self-employment.
7.3 NO DOUBLE PAYMENT. Notwithstanding any other provision of this Supplement
and Amendment, the Executive shall not be entitled to payment under both
this Supplement and Amendment and the Employment Agreement for the same
type of benefit or payment, to the extent such payment would reasonably be
considered duplicative. Amounts paid hereunder shall be reduced by amounts
paid under the Employment Agreement for the same type of benefit or
payment, to the extent such payment would reasonably be considered
duplicative.
ARTICLE VIII.
NON-EXCLUSIVITY OF RIGHTS
8.1 WAIVER OF CERTAIN OTHER RIGHTS. To the extent that lump sum cash severance
payments are made to Executive pursuant to Article IV, Executive hereby
waives the right to receive severance payments of severance benefits under
any other Plan or agreement of the Company, including under the Employment
Agreement.
8.2 OTHER RIGHTS. Except as expressly provided in Section 8.1 or elsewhere in
this Supplement and Amendment, this Supplement and Amendment shall not
prevent or limit Executive's continuing or future participation in any
benefit, bonus, incentive or other Plans provided by the Company and for
which Executive may qualify, nor shall this Supplement and Amendment limit
or otherwise affect such rights as Executive may have under any other
agreements with the Company. The applicable provisions of the Employment
Agreement (including the provision in Article VII (Restricted Covenants))
219
shall continue to apply, except as expressly provided in Sections 8.1 and
4.10 or elsewhere in this Supplement and Amendment. Amounts which are
vested benefits or which Executive is otherwise entitled to receive under
any Plan and any other payment or benefit required by law at or after the
Termination Date shall be payable in accordance with such Plan or
applicable law except as expressly modified by this Supplement and
Amendment.
8.3 NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in this Supplement and Amendment
shall guarantee the right of Executive to continue in employment, and the
Companies retain the right to terminate the Executive's employment at any
time for any reason or for no reason.
ARTICLE IX.
MISCELLANEOUS
9.1 NO ASSIGNABILITY. This Supplement and Amendment is personal to Executive
and without the prior written consent of the Company shall not be
assignable by Executive otherwise than by will or the laws of descent and
distribution. This Supplement and Amendment shall inure to the benefit of
and be enforceable by Executive's legal representatives.
9.2 SUCCESSORS. This Supplement and Amendment shall inure to the benefit of and
be binding upon the Company and its successors and assigns. The Company
will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the
business or assets of the Company to assume expressly and agree to perform
this Supplement and Amendment in the same manner and to the same extent
that the Company would be required to perform it if no such succession had
taken place. Any successor to the business or assets of the Company which
assumes or agrees to perform this Supplement and Amendment by operation of
law, contract, or otherwise shall be jointly and severally liable with the
Company under this Supplement and Amendment as if such successor were the
Company.
9.3 PAYMENTS TO BENEFICIARY. If Executive dies before receiving amounts to
which Executive is entitled under this Supplement and Amendment, such
amounts shall be paid in a lump sum to Executive's Beneficiary (or estate).
9.4 NON-ALIENATION OF BENEFITS. Benefits payable under this Supplement and
Amendment shall not be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, charge, garnishment,
execution or levy of any kind, either voluntary or involuntary, before
actually being received by Executive, and any such attempt to dispose of
any right to benefits payable under this Supplement and Amendment shall be
void.
9.5 SEVERABILITY. If any one or more Articles, Sections or other portions of
this Supplement and Amendment are declared by any court or governmental
authority to be unlawful or invalid, such unlawfulness or invalidity shall
not serve to invalidate any Article, Section or other portion not so
declared to be unlawful or invalid. Any Article, Section or other portion
so declared to be unlawful or invalid shall be construed so as to
effectuate the terms of such Article, Section or other portion to the
fullest extent possible while remaining lawful and valid.
9.6 AMENDMENTS. This Supplement and Amendment shall not be amended or modified
except by written instrument executed by the Company and Executive.
9.7 NOTICES. All notices and other communications under this Supplement and
Amendment shall be in writing and delivered by hand, by
nationally-recognized delivery service that promises overnight delivery, or
by first-class registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
220
If to Executive, to Executive at his most recent home address on file with
the Company.
With a copy to:
Susan Daley, Esq.
Altheimer & Grey
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Facsimile No.: (312) 715-4800
If to any Company:
Principal Financial Group, Inc.
711 High Street Des Moines, Iowa 50392
Attention: Karen Shaff
Facsimile No.: (515) 235-9852
With copy to:
Pamela Baker, Esq.
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Facsimile No.: (312) 876-7934
or to such other address as either party shall have furnished to the other
in writing. Notice and communications shall be effective when actually
received by the addressee.
9.8 CONTINUING VALIDITY OF EMPLOYMENT AGREEMENT. Except as amended herein or as
subsequently amended, the Employment Agreement shall remain in effect in
accordance with its terms.
9.9 COUNTERPARTS. This Supplement and Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together constitute one and the same instrument.
9.10 GOVERNING LAW. This Supplement and Amendment shall be interpreted and
construed in accordance with the laws of the State of Iowa, without regard
to its choice of law principles.
9.11 CAPTIONS. The captions of this Supplement and Amendment are not a part of
the provisions hereof and shall have no force or effect.
9.12 NUMBER AND GENDER. Wherever appropriate, the singular shall include the
plural, the plural shall include the singular, and the masculine shall
include the feminine.
9.13 TAX WITHHOLDING. The Company may withhold from any amounts payable under
this Supplement and Amendment any Taxes that are required to be withheld
pursuant to any applicable law or regulation and may report all such
amounts payable to such authority as is required by any applicable law or
regulation.
9.14 WAIVER. Executive's failure to insist upon strict compliance with any
provision of this Supplement and Amendment shall not be deemed a waiver of
such provision or any other provision of this Supplement and Amendment. A
221
waiver of any provision of this Supplement and Amendment shall not be
deemed a waiver of any other provision, and any waiver of any default in
any such provision shall not be deemed a waiver of any later default
thereof or of any other provision.
9.15 JOINT AND SEVERAL LIABILITY. The obligations of the Companies to Executive
under this Supplement and Amendment shall be joint and several.
9.16 ENTIRE AGREEMENT. This Supplement and Amendment, together with the
Employment Agreement, contains the entire understanding ---------------- of
the Companies and Executive with respect to its subject matter.
IN WITNESS WHEREOF, Executive, Principal Financial Group, Inc. Principal
Financial Services, Inc., and Principal Life Insurance Company have executed
this Supplement and Amendment as of the date first above written.
EXECUTIVE
/s/ J. BARRY GRISWELL
------------------------------------
J. Barry Griswell
PRINCIPAL FINANCIAL GROUP, INC.
By: --------------------------------
Title: CHAIRMAN, HUMAN RESOURCES
COMMITTEE OF THE BOARD
PRINCIPAL FINANCIAL SERVICES, INC.
By: --------------------------------
Title: CHAIRMAN, HUMAN RESOURCES
COMMITTEE OF THE BOARD
PRINCIPAL LIFE INSURANCE COMPANY
By: --------------------------------
Title: CHAIRMAN, HUMAN RESOURCES
COMMITTEE OF THE BOARD
222
EXHIBIT A
WAIVER AND RELEASE
This agreement, release and waiver (the "RELEASE"), made as of the ___ day of
________________, _____ (the "Effective Date"), is made by and among Principal
Financial Group, Inc., a Delaware corporation, Principal Financial Services,
Inc., an Iowa corporation, Principal Life Insurance Company, an Iowa corporation
("COMPANY"), and _____________________ ("EXECUTIVE").
WHEREAS, the Company and Executive have entered into a Change of Control
Employment Agreement dated , ("AGREEMENT");
NOW THEREFORE, in consideration for receiving benefits and severance pursuant to
the Agreement, and in consideration of the representations, covenants and mutual
promises set forth in this Release, the parties agree as follows:
1. RELEASE. Except with respect to the Company' obligations under the
Agreement, the Executive, and Executive's heirs, executors, assigns,
representatives, agents, legal representatives, and personal
representatives, hereby releases, acquits and forever discharges the
Company, its agents, subsidiaries, affiliates, respective officers,
directors, agents, servants, employees, attorneys, shareholders,
successors, assigns and affiliates, of and from any and all claims,
liabilities, demands, causes of action, costs, expenses, attorneys fees,
damages, indemnities and obligations of every kind and nature, in law,
equity, or otherwise, known and unknown, suspected and unsuspected,
disclosed and undisclosed, arising out of or in any way related to
agreements, events, acts or conduct at any time prior to the day prior to
execution of this Release, including but not limited to: any and all such
claims and demands directly or indirectly arising out of or in any way
connected with the Executive's employment with the Company; the Executive's
termination of employment with the Company; claims or demands related to
salary, bonuses, commissions, stock, stock options, or any other ownership
interests in the Company, vacation pay, fringe benefits, expense
reimbursements, sabbatical benefits, severance benefits, or any other form
of compensation or equity; claims pursuant to any federal, state, local
law, statute, ordinance or cause of action including, but not limited to,
the federal Civil Rights Act of 1964, as amended; the federal Age
Discrimination in Employment Act of 1967, as amended; the federal Americans
with Disabilities Act of 1990; tort law; contract law; wrongful discharge;
discrimination; fraud; defamation; harassment; emotional distress; or
breach of the implied covenant of good faith and fair dealing. This Release
does not apply to any benefits to which the Executive may be entitled under
a Company sponsored tax qualified retirement or savings plan.
2. RELEASE BY COMPANY. Except with respect to the Executive's obligations
under the Agreement, including but not limited to the covenants entered
into pursuant to the eligibility requirements of the Agreement, the
Company, and its agents, subsidiaries, attorneys, representatives,
successors, and assigns, hereby release, acquit and forever discharge the
Executive, and Executive's heirs, executors, assigns, representatives,
agents, legal representatives, and personal representatives, of and from
any and all claims, liabilities, demands, causes of action, costs,
expenses, attorneys fees, damages, indemnities and obligations of every
kind and nature, in law, equity, or otherwise, known and unknown, suspected
and unsuspected, disclosed and undisclosed, arising out of or in any way
related to agreements, events, acts or conduct at any time prior to the day
prior to execution of this Release, including but not limited to: any and
all claims and demands directly or indirectly arising out of or in any way
connected with the Executive's employment with the Company.
3. NO INDUCEMENT. Executive agrees that no promise or inducement to enter into
this Release has been offered or made except as set forth in this Release,
that the Executive is entering into this Release without any threat or
coercion and without reliance or any statement or representation made on
behalf of the Company or by any person employed by or representing the
Company, except for the written provisions and promises contained in this
Release.
223
4. DAMAGES. The parties agree that damages incurred as a result of a breach of
this Release will be difficult to measure. It is, therefore, further agreed
that, in addition to any other remedies, equitable relief will be available
in the case of a breach of this Release. It is also agreed that, in the
event of a breach of this Release by Executive, the Company may withhold,
retain, or require reimbursement of all or any portion of the benefits and
payments under the Agreement.
5. ADVICE OF COUNSEL; TIME TO CONSIDER; REVOCATION. Executive acknowledges the
following:
(a) Executive has read this Release, and understands its legal and binding
effect. Executive is acting voluntarily and of Executive's own free
will in executing this Release.
(b) Executive has been advised to seek and has had the opportunity to seek
legal counsel in connection with this Release.
(c) Executive was given at least 21 days to consider the terms of this
Release before signing it.
Executive understands that, if Executive signs the Release, Executive may
revoke it within seven days after signing it. Executive understands that
this Release will not be effective until after the seven-day period has
expired.
6. SEVERABILITY. If all or any part of this Release is declared by any court
or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any other portion of this Release. Any
section or a part of a section declared to be unlawful or invalid shall, if
possible, be construed in a manner which will give effect to the terms of
the section to the fullest extent possible while remaining lawful and
valid.
7. AMENDMENT. This Release shall not be altered, amended, or modified except
by written instrument executed by the Companies and the Executive. A waiver
of any portion of this Release shall not be deemed a waiver of any other
portion of this Release.
8. COUNTERPARTS. This Release may be executed in several counterparts, each of
which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.
9. HEADINGS. The headings of this Release are not part of the provisions
hereof and shall not have any force or effect.
10. APPLICABLE LAW. The provisions of this Release shall be interpreted and
construed in accordance with the laws of the State of Iowa without regard
to its choice of law principles.
IN WITNESS WHEREOF, the parties have executed this Release as of the dates
specified below.
EXECUTIVE
-------------------------------------------------------
DATE: -------------------------------------------------
PRINCIPAL FINANICAL GROUP, INC.
By: -------------------------------------------------
Title:-------------------------------------------------
DATE: -------------------------------------------------
224
PRINCIPAL FINANCIAL SERVICES, INC.
By: -------------------------------------------------
Title:-------------------------------------------------
DATE: -------------------------------------------------
PRINCIPAL LIFE INSURANCE COMPANY
By: -------------------------------------------------
Title:-------------------------------------------------
DATE: -------------------------------------------------
225
Exhibit 12
PRINCIPAL FINANCIAL GROUP, INC.
COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO
FOR THE
SIX MONTHS
ENDED FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
----------- ------------ ----------- ----------- ----------- ----------- -------------
($ IN MILLIONS)
1. Income from continuing operations
before income taxes................... $ 370.9 $ 331.8 $ 824.3 $ 371.5 $ 249.9 $ 751.1 $ 975.3
2. Interest expense........................ 52.3 51.0 104.3 99.2 96.7 116.8 145.4
3. Interest factor of rental expense....... 2.3 4.0 4.6 8.0 9.4 15.1 9.9
4. Undistributed income from equity
investees............................. (4.5) (6.8) (18.3) 4.3 (17.4) (27.1) (99.7)
----------- ------------ ----------- ----------- ----------- ----------- -------------
5. Earnings before interest credited on
investment products................... 421.0 380.0 914.9 483.0 338.6 855.9 1,030.9
6. Interest credited on investment
products.............................. 365.6 366.1 735.7 743.4 773.1 723.5 708.5
----------- ------------ ----------- ----------- ----------- ----------- -------------
7. Earnings................................ $ 786.6 $ 746.1 $1,650.6 $1,226.4 $1,111.7 $1,579.4 $1,739.4
=========== ============ =========== =========== =========== =========== =============
8. Interest expense........................ $ 52.3 $ 51.0 $ 104.3 $ 99.2 $ 96.7 $ 116.8 $ 145.4
9. Interest factor of rental expense....... 2.3 4.0 4.6 8.0 9.4 15.1 9.9
10. Preferred stock dividend requirements
of majority-owned subsidiaries (non-
intercompany)......................... 0.2 0.7 1.2 0.4 - - -
----------- ------------ ----------- ----------- ----------- ----------- -------------
11. Fixed charges before interest credited
on investment products................ 54.8 55.7 110.1 107.6 106.1 131.9 155.3
12. Interest credited on investment
products.............................. 365.6 366.1 735.7 743.4 773.1 723.5 708.5
----------- ------------ ----------- ----------- ----------- ----------- -------------
13. Fixed charges........................... $ 420.4 $ 421.8 $ 845.8 $ 851.0 $ 879.2 $ 855.4 $ 863.8
=========== ============ =========== =========== =========== =========== =============
14. Ratio of earnings to fixed charges
before interest credited on investment
products (Line item 5/Line item 11)... 7.7 6.8 8.3 4.5 3.2 6.5 6.6
15. Ratio of earnings to fixed charges
(Line item 7/Line item 13)............ 1.9 1.8 2.0 1.4 1.3 1.8 2.0
226
Exhibit 31.1
CERTIFICATIONS
I, J. Barry Griswell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Principal Financial
Group, Inc.;
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 registrant's other certifying officer(s) 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)) 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) Evaluated the effectiveness of the registrant's 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
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
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 registrant's 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 registrant's internal
control over financial reporting.
Date: August 4, 2004
/S/ J. BARRY GRISWELL
----------------------------------
J. Barry Griswell
Chairman, President and Chief
Executive Officer
227
Exhibit 31.2
CERTIFICATIONS
I, Michael H. Gersie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Principal Financial
Group, Inc.;
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 registrant's other certifying officer(s) 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)) 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) Evaluated the effectiveness of the registrant's 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
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
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 registrant's 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 registrant's internal
control over financial reporting.
Date: August 4, 2004
/S/ MICHAEL H. GERSIE
----------------------------------
Michael H. Gersie
Executive Vice President and
Chief Financial Officer
228
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
OF TITLE 18 OF THE UNITED STATES CODE
I, J. Barry Griswell, Chairman, President and Chief Executive Officer of
Principal Financial Group, Inc., certify that (i) the Form 10-Q for the quarter
ended June 30, 2004 fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and (ii) the information contained in the Form
10-Q for the quarter ended June 30, 2004 fairly presents, in all material
respects, the financial condition and results of operations of Principal
Financial Group, Inc.
/S/ J. BARRY GRISWELL
----------------------------------
J. Barry Griswell
Chairman, President and Chief
Executive Officer
Date: August 4, 2004
229
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
OF TITLE 18 OF THE UNITED STATES CODE
I, Michael H. Gersie, Executive Vice President and Chief Financial Officer of
Principal Financial Group, Inc., certify that (i) the Form 10-Q for the quarter
ended June 30, 2004 fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and (ii) the information contained in the Form
10-Q for the quarter ended June 30, 2004 fairly presents, in all material
respects, the financial condition and results of operations of Principal
Financial Group, Inc.
/S/ MICHAEL H. GERSIE
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Michael H. Gersie
Executive Vice President and
Chief Financial Officer
Date: August 4, 2004
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