Document:

exv10w9

 

     EXHIBIT 10.9

OFFICE LEASE

BY AND BETWEEN

LUKE PROPERTIES, LLC,

A NEVADA LIMITED LIABILITY COMPANY

AND

VESTIN GROUP, INC.,

A DELAWARE CORPORATION

DATED: MARCH 31, 2003

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	1. LEASE OF PREMISES
	 	 	1	 
	1.1 LEASE
	 	 	1	 
	1.2 MODIFICATION OF PREMISES
	 	 	1	 
	2. PURPOSE
	 	 	1	 
	2.1 USE
	 	 	1	 
	2.2 LIMITATION ON USES
	 	 	1	 
	2.3 COMPLIANCE WITH PERMITS
	 	 	2	 
	3. TERM
	 	 	2	 
	3.1 COMMENCEMENT DATE
	 	 	2	 
	3.2 CONSTRUCTION
	 	 	2	 
	3.3 ACCEPTANCE OF PREMISES
	 	 	2	 
	4. BASIC RENT
	 	 	3	 
	4.1 INITIAL BASIC RENT
	 	 	3	 
	4.2 COST OF LIVING INCREASES
	 	 	3	 
	4.3 PARTIAL MONTHS
	 	 	4	 
	4.4 NO OFFSET
	 	 	4	 
	4.5 SECURITY DEPOSIT
	 	 	4	 
	5. RENT ADJUSTMENTS
	 	 	4	 
	5.1 PAYMENT OF EXCESS OPERATING EXPENSES AND REAL PROPERTY TAXES
	 	 	4	 
	5.2 OPERATING EXPENSES
	 	 	4	 
	5.3 BASE OPERATING EXPENSES
	 	 	5	 
	6. PARKING FACILITIES
	 	 	6	 
	7. UTILITIES
	 	 	6	 
	7.1 UTILITY CHARGES
	 	 	6	 
	7.2 MAINTENANCE
	 	 	6	 
	8. ALTERATIONS
	 	 	6	 
	8.1 RESTRICTION ON ALTERATIONS
	 	 	6	 
	8.2 REMOVAL AND SURRENDER OF FIXTURES AND TENANT ALTERATIONS
	 	 	7	 
	9. MAINTENANCE AND REPAIRS
	 	 	8	 
	9.1 TENANT’S OBLIGATIONS
	 	 	8	 
	9.2 LANDLORD’S OBLIGATIONS
	 	 	8	 
	10. TAX ON TENANT’S PERSONAL PROPERTY
	 	 	8	 

 

 

	 	 	 	 	 
	10.1 PERSONAL PROPERTY TAXES
	 	 	8	 
	10.2 EXCLUSION FROM REAL PROPERTY TAXES
	 	 	8	 
	11. INSURANCE; WAIVER OF SUBROGATION
	 	 	8	 
	11.1 LIABILITY INSURANCE
	 	 	9	 
	11.2 PROPERTY INSURANCE
	 	 	9	 
	11.3 POLICY REQUIREMENTS
	 	 	9	 
	11.4 WAIVER OF SUBROGATION
	 	 	10	 
	11.5 BUSINESS OVERHEAD INSURANCE
	 	 	10	 
	12. FIRE OR CASUALTY
	 	 	10	 
	12.1 DAMAGE TO PREMISES
	 	 	10	 
	12.2 DAMAGE TO BUILDING
	 	 	11	 
	12.3 ABATEMENT; TERMINATION
	 	 	11	 
	12.4 LIMITATIONS
	 	 	11	 
	13 EMINENT DOMAIN
	 	 	11	 
	13.1 TAKING
	 	 	11	 
	13.2 TEMPORARY TAKING
	 	 	12	 
	14. ASSIGNMENT AND SUBLETTING
	 	 	12	 
	14.1 GENERAL PROHIBITION
	 	 	12	 
	14.2 NOTICE OF INTENT TO ASSIGN OR SUBLET
	 	 	13	 
	14.3 NO RELEASE OF TENANT’S OBLIGATIONS
	 	 	13	 
	14.4 TRANSFER IS ASSIGNMENT
	 	 	13	 
	14.5 ASSUMPTION OF OBLIGATIONS
	 	 	13	 
	15. LANDLORD’S RESERVED RIGHTS
	 	 	14	 
	15.1 RIGHT OF ENTRY
	 	 	14	 
	15.2 BUILDING AND COMMON AREAS
	 	 	14	 
	15.3 NAME
	 	 	14	 
	16. INDEMNIFICATION AND LIMITATION ON LIABILITY
	 	 	15	 
	16.1 INDEMNITY BY TENANT
	 	 	15	 
	16.2 LIMITATION ON LANDLORD’S LIABILITY
	 	 	15	 
	17. SALE BY LANDLORD
	 	 	15	 
	18. SUBORDINATION
	 	 	15	 
	18.1 SUBORDINATION
	 	 	16	 
	18.2 ATTORNMENT
	 	 	16	 
	18.3 NOTICE FROM TENANT
	 	 	16	 

 

 

	 	 	 	 	 
	19. ESTOPPEL CERTIFICATES
	 	 	16	 
	20. SURRENDER OF PREMISES AND REMOVAL OF PROPERTY
	 	 	16	 
	20.1 NO MERGER
	 	 	16	 
	20.2 SURRENDER OF PREMISES
	 	 	17	 
	20.3 DISPOSAL OF PROPERTY
	 	 	17	 
	20.4 FIXTURES AND IMPROVEMENTS
	 	 	17	 
	20.5 NOTICE OF EXPIRATION OF TERM
	 	 	17	 
	21. HOLDING OVER
	 	 	17	 
	22. DEFAULTS AND REMEDIES
	 	 	18	 
	22.1 DEFAULTS BY TENANT
	 	 	18	 
	22.2 LANDLORD’S REMEDIES
	 	 	19	 
	22.3 RE-ENTRY NOT TERMINATION
	 	 	20	 
	22.4 DEFINITION OF TENANT
	 	 	20	 
	23. BANKRUPTCY
	 	 	21	 
	24. INTEREST ON TENANT’S OBLIGATIONS; LATE CHARGES
	 	 	21	 
	24.1 INTEREST
	 	 	21	 
	24.2 LATE CHARGE
	 	 	21	 
	25. QUIET ENJOYMENT
	 	 	21	 
	26. EXAMINATION OF LEASE
	 	 	22	 
	27. BROKERS
	 	 	22	 
	28. RULES AND REGULATIONS
	 	 	22	 
	29. SIGNAGE
	 	 	22	 
	30. GENERAL PROVISIONS
	 	 	22	 
	30.1 NO WAIVER
	 	 	22	 
	30.2 LANDLORD’S RIGHT TO PERFORM
	 	 	22	 
	30.3 TERMS; HEADINGS
	 	 	23	 
	30.4 ENTIRE AGREEMENT
	 	 	23	 
	30.5 SUCCESSORS AND ASSIGNS
	 	 	23	 
	30.6 NOTICES
	 	 	23	 
	30.7 SEVERABILITY
	 	 	24	 
	30.8 TIME OF ESSENCE
	 	 	24	 
	30.9 GOVERNING LAW
	 	 	24	 
	30 10 ATTORNEYS’ FEES
	 	 	24	 
	30.11 FORCE MAJEURE
	 	 	24	 

 

 

LEASE SUMMARY

     This lease summary is attached to the within lease for convenience of
reference only and shall in no way be considered a part of said lease or used in
the interpretation of any of the provisions contained therein.

	 	 	 
	DATE:

	 	March 31, 2003
	 
	 	 
	LANDLORD:

	 	Luke Properties, LLC, a Nevada limited liability

company
	 
	 	 
	TENANT:

	 	Vestin Group, Inc., a Delaware corporation
	 
	 	 
	PREMISES:

	 	Exhibit “A”
	 
	 	 
	SIZE OF PREMISES:

	 	Approximately Forty Thousand Nine Hundred Forty
(40,940) square feet.
	 
	 	 
	TERM:

	 	Ten (10) years with two (2) five (5) year option
	 
	 	 
	COMMENCEMENT OF

RENT

	 	The earlier of forty-five (45) days after the
completion of construction of the Building or the
date Tenant commences business at the Premises.
	 
	 	 
	BASIC RENT:

	 	$1.75 per square foot per month for a total of
$859,740.00 per annum increasing annually in an
amount equal to four percent (4%) per annum on the
yearly anniversary date of the Commencement Date.
This is a triple net lease and Tenant shall be
responsible for its share of all expenses associated
with the Building.
	 
	 	 
	SECURITY DEPOSIT:

	 	$71,645
	 
	 	 
	LANDLORD’S ADDRESS:

	 	                                        

Las Vegas, Nevada                    
	 
	 	 
	TENANT’S ADDRESS:

	 	                                        

                                        

Las Vegas, Nevada                    

 

 

OFFICE LEASE

     THIS LEASE is made and entered into as of this 31 day of March, 2003,
by and between Luke Properties, LLC, a Nevada limited liability company (the
“LANDLORD”) and Vestin Group, Inc., a Delaware corporation (the “TENANT”).

     1. LEASE OF PREMISES.

          1.1 LEASE. Landlord hereby leases to Tenant, and Tenant hereby
leases from Landlord, those certain premises (the “PREMISES”) shown on the
drawings attached hereto as Exhibit “A,” and commonly described
as___, Las Vegas, Nevada___, consisting of approximately
forty thousand nine hundred forty (40,940) square feet which is one hundred
percent (100%) of the entire building (the “BUILDING”).

          1.2 MODIFICATION OF PREMISES. Landlord shall have the sole
judgment and discretion to determine the architecture, design, appearance,
construction, workmanship, materials and equipment with respect to the
construction of the Building; provided, however, Landlord shall not materially
alter the areas, floor elevations and other characteristics of the Premises as
shown on Exhibit “A” without the express consent of Tenant, which consent shall
not be unreasonably withheld or delayed.

     2. PURPOSE.

          2.1 USE. The Premises shall be used only for professional
services businesses including but not limited to mortgage services, accounting
offices and legal services (the “Use”) and businesses related thereto and for no
other purpose without the prior written consent of Landlord.

          2.2 LIMITATION ON USES. Tenant shall not use or occupy the
Premises, or permit the use or occupancy of the Premises, in any manner or for
any purpose which: (a) would violate any law or regulation of any governmental
authority, or the provisions of any applicable governmental permit or recorded
document; (b) would adversely affect or render more expensive any fire or other
insurance maintained by Landlord for the Building or any of its contents;(c)
might impair or interfere with any of the services and systems of the Building,
including without limitation, the Building’s electrical, mechanical, fire and
life safety, structural, plumbing, heating, ventilation and air conditioning
systems (collectively, the “BUILDING SYSTEMS”) or the janitorial, security and
building maintenance services (collectively, the “SERVICE FACILITIES”); (d)
would injure or annoy, or obstruct or interfere with the rights of, other
tenants, if any, or occupants of the Building or impair the appearance of the
Building or be prejudicial to the business or reputation of Landlord; or (e) is
not compatible with the existing use of the Building. Further, Tenant’s business
machines and mechanical equipment which cause vibration or noise that may be
transmitted to the Building structure or beyond the Premises shall be installed,
maintained and used by Tenant so as to eliminate such vibration or noise. Tenant
shall reimburse Landlord for any cost incurred by Landlord in enforcing the
provisions of this Article 2 or as a result of Tenant’s breach hereof
(including, without limitation, any increase in insurance premiums resulting
from Tenant’s use).

     COMPLIANCE WITH PERMITS. Tenant shall procure and maintain any license
or permit

 

 

required for the lawful conduct of its business or other activity on the
Premises, submit such license or permit for inspection by Landlord if so
requested, and comply at all times with all terms and conditions thereof. The
lease of the Premises shall be subject to all statutes, laws, ordinances and
regulations applicable from time to time to the use, occupancy or possession of
the Premises.

     3. TERM.

          3.1 COMMENCEMENT DATE. The term of this Lease shall commence
on the date this Lease is executed (the “Commencement Date”) and shall end ten
(10) years from the date the payment of rent commences as set forth in Section
4.1 of this Lease, unless sooner terminated pursuant hereto (the “TERM”).
Promptly following the Commencement Date, Landlord and Tenant shall confirm the
Commencement Date and the expiration date by executing and delivering a
Memorandum of Commencement Date (“MEMORANDUM”) in the form attached hereto as
Exhibit “B.” This Lease shall not be void, voidable or subject to termination,
nor shall Landlord be liable to Tenant for any loss or damage, resulting from
Landlord’s inability to deliver the Premises to Tenant on the date specified in
Landlord’s notice given pursuant to Section 3.2, but no rent hereunder shall be
payable hereunder with respect to any delay in delivery of the Premises which is
caused solely by Landlord. Provided Tenant has not been in default during the
Term of the Lease, Landlord hereby grants Tenant the right to renew the Lease
for one (1) additional five (5) year period, at the greater of the then current
Basic Rent increased in accordance with this Lease or at the then current fair
market lease rental rate for the Building as determined by the Landlord. In
order to exercise its renewal option, Tenant shall give Landlord a minimum of
six (6) months written notice prior to the end of the Term of its intention to
renew this Lease.

          3.2 ACCEPTANCE OF PREMISES. By entering into possession of the
Premises or any part thereof and except for such matters as Tenant shall specify
to Landlord in writing within ten (10) days thereafter, Tenant shall be
conclusively deemed to have accepted the Premises and to have agreed that
Landlord has performed all of its obligations hereunder with respect to the
Premises and that the Premises are in satisfactory condition and in full
compliance with the requirements of this Lease as of the date of such
possession. Tenant acknowledges that neither Landlord nor any agent of Landlord
has made any representation or warranty, except as otherwise expressly provided
in this Lease, with respect to the Premises or the Building, including without
limitation, any representation or warranty with respect to the suitability or
fitness of the Premises or the Building for the conduct of Tenant’s business.

     4. BASIC RENT.

     The basic annual rent payable to Landlord (“BASIC RENT”) shall be as
set forth in this Article 4.

          4.1 INITIAL BASIC RENT. For the period beginning on the date
which is the earlier of (a) Forty-five (45) days after Landlord completes
construction of the Building or (b) the date upon which Tenant opens for
business in the Premises, Tenant shall pay Landlord an initial Basic Rent for
the Premises of Eight Hundred Fifty-Nine Thousand Seven Hundred Forty Dollars
($859,740.00) per annum. Such initial Basic Rent shall be payable in equal
monthly installments of Seventy One Thousand Six Hundred Forty-Five Dollars
($71,645.00). Rent shall be further adjusted as provided for in Section 4.2 of
this Lease. Each installment of rent shall be payable in advance, without set
off or demand, on the first day of each calendar month beginning on the
Commencement Date and continuing until Basic Rent is adjusted pursuant to
Section 4.2, except

 

 

that one month’s rent shall be paid upon the execution hereof and shall be
applied by Landlord (without interest) to the first payment(s) of Basic Rent due
under this Section 4.1.

          4.2 BASIC RENT INCREASES.

          4.3 a. The Basic Rent shall be increased on each annual
anniversary of the Commencement Date (each an “ADJUSTMENT DATE”). Basic Rent
hereunder shall be increased by four percent (4%) per annum of the Basic Rent
payable during the immediately preceding calendar year. Landlord shall notify
Tenant of each increase by delivering a written statement setting forth the
Indices, and the new amount of the Basic Rent. Tenant shall pay the new Basic
Rent from its effective date until the next periodic increase.

          4.4 PARTIAL MONTHS. If the Term begins on a day other than the
first day of a calendar month, or ends on a day other than the last day of a
calendar month, Basic Rent for such beginning or ending month shall be prorated
based upon the number of days in such month occurring during, or before or
after, the Term.

          4.5 NO OFFSET. Basic Rent, together with all other sums due
hereunder (herein called “ADDITIONAL RENT”), shall be paid to the Landlord
without deduction or offset of any kind, and in advance and without demand
(except as otherwise herein expressly provided) in lawful money of the United
States at Landlord’s address listed above or such other location or to such
other person as Landlord may from time to time designate in writing. The Basic
Rent and Additional Rent may sometimes be referred to herein collectively as the
“RENT.”

          4.6 SECURITY DEPOSIT. Tenant has paid or will pay Landlord the
amount of Seventy One Thousand Six Hundred Forty-Five Dollars ($71,645.00) as
security for the full and faithful performance of each of the terms hereof by
Tenant. Landlord shall not be required to keep this security deposit separate
from its general funds and Tenant shall not be entitled to interest thereon. If
Tenant defaults with respect to any provision of this Lease, including but not
limited to the provisions relating to the payment of rent, Landlord may, but
shall not be required to, use, apply or retain all or any part of this security
deposit for the payment of any rent or any other sum in default, or for the
payment-of any other amount which Landlord may spend or become obligated to
spend by reason of Tenant’s default or to compensate Landlord for any other loss
or damage which Landlord may suffer by reason of Tenant’s default, including
without limitation, costs and attorneys’ fees incurred by Landlord to recover
possession of the Premises upon a default by Tenant hereunder. If any portion of
said deposit is so used or applied, Tenant shall, upon demand therefor, deposit
cash with Landlord in an amount sufficient to restore the security deposit to
its original amount and Tenant’s failure to do so shall constitute a default
hereunder by Tenant. If Tenant shall fully and faithfully perform every
provision of this Lease to be performed by it, the security deposit or any
balance thereof shall be returned to Tenant (or, at Landlord’s option, to the
last assignee of Tenant’s interest hereunder) within thirty (30) days following
the later of expiration of the Term and surrender of possession of the Premises
to Landlord.

     5. ADDITIONAL RENT.

          5.1 PAYMENT OF EXPENSES AND REAL ESTATE TAXES. Tenant shall
pay to Landlord, as Additional Rent, an amount equal to total annual Operating
Expenses, as defined below, and an amount equal to annual Real Estate Taxes, as
defined below. Such amount shall be paid in advance in monthly installments on
the same dates as Basic Rent is due and payable hereunder based on Landlord’s
notice delivered to Tenant from time to time setting forth Landlord’s

 

 

good faith estimate of the Operating Expenses and Real Estate Taxes for the
current calendar year. Landlord shall have the right to adjust such amount to
reflect any changes in Landlord’s estimate of Operating Expenses.

          5.2 OPERATING EXPENSES.

               a. “OPERATING EXPENSES” shall mean the total of all
actual costs incurred by Landlord in connection with the management, operation,
maintenance and repair of the Building (including all costs of insuring the
Building), including, without limitation, taxes, insurance, parking lot
maintenance, landscaping, all utility expenses not separately metered, labor
compensation insurance, payroll taxes, materials, supplies, and all other costs
of operating and repairing, lighting, cleaning, sweeping, painting, striping,
removing of rubbish or debris, policing and inspecting, depreciation on or
rentals of machinery and equipment, the amortized costs to repair, maintain or
install capital improvements, costs of repairs, maintenance, or replacement of
paving, curbs, walkways, remarking, directional or other signs, landscaping,
drainage, lighting facilities, repair and maintenance of Common Areas and
parking areas, costs and expenses of planting, replanting and replacing flowers,
shrubbery and other landscaping, fees for required licenses and permits, costs
of compliance with any governmental rules, regulations, laws or ordinances, the
cost of maintaining the sprinkler system, sign maintenance, and roof and
building maintenance, (specifically excluding Tenant’s maintenance
responsibilities under this Lease), the costs of premiums for insurance policies
to be maintained by Landlord and any deductibles attributable thereto under
Section 11 hereof, and an administrative fee equal to fifteen percent (15%) of
all of the foregoing. For purposes of computing rent adjustments pursuant to
this Article 5, Operating Expenses for the Building shall be allocated and
charged to Tenant in accordance with generally accepted accounting and
management practices and expressed as an amount per square foot of Rentable
Area. Operating Expenses shall include all Real Property Taxes, as defined
below.

               b. “REAL ESTATE TAXES” shall mean all taxes,
assessments (special or otherwise) and charges levied upon or with respect to
the Building and ad valorem taxes on personal property used in connection
therewith, together with any real property taxes which may be assessed against
the Building. In addition, Real Estate Taxes shall include but not be limited to
(i) all personal property taxes on personal property used in connection with the
Building and related structures, (ii) any and all taxes, assessments, license
fees, and public charges levied, assessed, or imposed and which become payable
during the Term hereof on all leasehold improvements, (iii) any and all
environmental levies or charges now in force affecting the Building or any
portion thereof or which may hereafter become effective, and (iv) any other
taxes levied or assessed in addition to, as a replacement, alteration, or
substitute for, or in lieu of such real or personal property taxes.

               c. Any costs or expenses for services or utilities,
not otherwise included in Operating Expenses, and which are attributable
directly to Tenant’s use or occupancy of the Premises shall be paid in full by
Tenant as Additional Rent when such costs are incurred or, if Landlord makes
such payments, within five (5) days after being billed therefor by Landlord.

          5.3 ADDITIONAL RENTAL AMOUNT.

               a. Tenant shall pay One hundred percent (100%) of
Operating Expenses

 

 

and Real Estate Taxes, as defined above, since Tenant’s Premises consists of One
Hundred percent (100%) of the Building.

               b. Landlord shall provide to Tenant an annual
statement reflecting all of the Building’s Operating Expenses.

               c. The parties agree this Lease is a net net net
lease.

               d. Additional Rent payments shall commence at the
same time as the Basic Rent payments, that is, on the date which is the earlier
of (a) Forty-five (45) days after the completion of the Building or (b) the date
upon which Tenant opens for business in the Premises. Any adjustments to
Additional Rent charges shall be made on an annual basis from the date
Additional Rent payments commenced.

     6. PARKING FACILITIES.

     Tenant shall be entitled to the non-exclusive use of the parking lot.
Tenant shall comply with all rules and regulations which Landlord may adopt from
time to time for the operation and use of such parking facilities.

     7. UTILITIES.

          7.1 UTILITY CHARGES. Tenant shall be solely responsible for
and promptly pay all charges for telephone, electric, gas, or any other utility
used or consumed in the Premises, including water and sewer, but specifically
excluding trash which shall be included as a part of Operating Expenses, and
Tenant shall further be responsible for any utility connection charges, or
system development charges, from any and all utility companies or districts. If
these charges are billed to the Landlord, then Tenant shall make payment in the
full amount billed to Landlord within five (5) days after written demand from
Landlord.

          7.2 MAINTENANCE. Tenant shall be responsible for the normal
maintenance and upkeep of the heating, ventilation and air conditioning systems
serving the Premises and for all other utility installations within the Premises
(including without limitation, regular replacement of HVAC filters) and shall be
responsible for the repair of any such system.

     8. ALTERATIONS.

          8.1 RESTRICTION ON ALTERATIONS. Tenant may make no alteration,
repairs, additions or improvements in, to or about the Premises (collectively,
“TENANT ALTERATIONS”), without the prior written consent of Landlord, which
consent shall not be unreasonably withheld, and Landlord may impose as a
condition to such consent such requirements as Landlord, in its sole discretion,
may deem necessary or desirable, including without limitation, (a) the right to
approve the plans and specifications for any work, (b) the right to require
insurance satisfactory to Landlord, (c) the right to require security for the
full payment for and diligent and faithful performance of any work, (d)
requirements as to the manner in which or the time or times at which work may be
performed and (e) the right to approve the contractor or contractors to perform
Tenant Alterations. All Tenant Alterations shall be compatible with the Building
and completed in accordance with Landlord’s requirements and all applicable
rules, regulations and requirements of governmental authorities and insurance
carriers. Tenant shall pay to Landlord Landlord’s reasonable charges for

 

 

reviewing and inspecting all Tenant Alterations, which amount shall not exceed
Two Hundred Fifty Dollars ($250.00) per Tenant Alteration, to assure full
compliance with all of Landlord’s requirements. Landlord does not expressly or
implicitly covenant or warrant that any plans or specifications submitted by
Tenant are safe or that the same comply with any applicable laws, ordinances,
codes, rules or regulations. Further, Tenant shall indemnify, protect, defend
and hold Landlord, and Landlord’s managing agent, if any, harmless from any
loss, cost or expense, including attorneys’ fees and costs, based upon or
growing out of any alterations or construction undertaken by Tenant or incurred
by Landlord as a result of any defects in design, materials or workmanship
resulting from Tenant Alterations, except to the extent such defects are caused
by Landlord, its agents, servants or employees. If requested by Landlord, Tenant
shall provide Landlord with copies of all contracts, receipts, paid vouchers,
and any other documentation in connection with the construction of such Tenant
Alterations. Tenant shall promptly pay all costs incurred in connection with all
Tenant Alterations and shall not permit the filing of any mechanic’s lien or
other lien in connection with any Tenant Alterations. If a mechanic’s lien or
other lien is filed against the Building Tenant shall discharge or cause to be
discharged (by bond or otherwise) such lien within ten (10) days after Tenant
receives notice of the filing thereof and shall not allow any such lien to be
foreclosed upon. If a mechanic’s lien or other lien is filed against the
Building and Tenant fails to timely discharge such lien, Landlord may, without
waiving its rights and remedies based on such breach of Tenant and without
releasing Tenant from any of its obligations, cause such liens to be released by
any means it shall deem proper, including payment in satisfaction of the claim
giving rise to such lien. Tenant shall pay to Landlord within thirty (30) days
following notice by Landlord, any sum paid by Landlord to remove such liens,
together with interest at Landlord’s cost of money from the date of such payment
by Landlord. Any increase in any tax, assessment or charge levied or assessed as
a result of any Tenant Alterations shall be payable by Tenant in accordance with
Article 10 hereof. Tenant shall be responsible for paying the general
contractor’s overhead and fee in connect
ion with the work performed pursuant to
this Article 8.

          8.2 REMOVAL AND SURRENDER OF FIXTURES AND TENANT ALTERATIONS. All
Tenant Alterations and Tenant Work installed in the Premises pursuant to
Landlord’s Work Letter, which are attached to, or built into, the Premises,
including without limitation, floor coverings, draperies, wall coverings,
paneling, molding, doors, vaults (excluding vault doors), plumbing systems,
electrical systems, mechanical systems, lighting systems, sound equipment,
communication systems and outlets for the systems mentioned above and for all
telephone, radio, telegraph and television purposes, and any special flooring or
ceiling installations, shall become the property of Landlord and shall be
surrendered with the Premises, as a part thereof, at the end of the Term. Any
articles of personal property including business and trade fixtures not attached
to, or built into, the Premises, machinery and equipment, free-standing cabinet
work, and movable partitions, which were installed by Tenant in the Premises at
Tenant’s sole expense and which were not installed in connection with a credit
or allowance granted by Landlord or in replacement for an item which Tenant
would not have been entitled to remove, shall be and remain the property of
Tenant and may be removed by Tenant at any time during the Term as long as
Tenant is not in default hereunder and provided that Tenant repairs any damage
to the Premises or the Building caused by such removal. With respect to Tenant
Work installed in the Premises pursuant to Landlord’s Work Letter, Landlord and
Tenant shall each own undivided interests in such Tenant Work to the extent, in
the case of Landlord, of the Allowance (as defined in Landlord’s Work Letter)
paid to or on behalf of Tenant, and, in the case of

 

 

Tenant, the portion of the cost of such Tenant Work paid for by Tenant. For
purposes of the insurance requirements of Section 11.2(b), Tenant shall be
deemed to have an insurable interest in all of the Tenant Work and Tenant
Alterations in the Premises, as between Landlord and Tenant, but the same shall
be surrendered with the Premises on termination of this Lease, as set forth
above.

     9. MAINTENANCE AND REPAIRS.

          9.1 TENANT’S OBLIGATIONS. Except for Landlord’s obligations
specifically set forth in this Lease, Tenant shall, at Tenant’s sole expense,
keep the Premises and every part thereof clean and in good condition and repair
and Landlord shall have no obligation to alter, remodel, improve, repair,
decorate or paint the Premises or any part thereof. Subject to the provisions of
Section 11.4 and Article 12 below, Tenant shall reimburse Landlord for all
repairs to the Building which are required as a result of any misuse or neglect
of the same by Tenant or any of its officers, agents, employees, contractors,
licensees or invitees while in or about the Building. Notwithstanding the
foregoing, if Tenant fails to diligently complete any repairs for which Tenant
is responsible under this Lease within thirty (30) days after notice from the
Landlord, Landlord may, at Landlord’s sole discretion, complete such repairs and
Tenant shall promptly reimburse Landlord for any and all costs associated
therewith.

          9.2 LANDLORD’S OBLIGATIONS. Subject to Article 12 of this
Lease, Landlord shall repair and maintain with reasonable diligence after
written notice thereof from Tenant, defects in, and damage to, the Building’s
roof and structural systems installed by Landlord and serving or located on the
Premises. If such maintenance and repair is required in part or in whole by the
act, neglect, misuse, fault or omission of any duty of Tenant, its agents,
employees, contractors, licensees or invitees, Tenant shall pay to Landlord the
cost of such maintenance and repairs. Except as provided in Article 12 hereof,
there shall be no abatement of rent with respect to, and Landlord shall not be
liable for and Tenant shall hold Landlord harmless from, any injury to or
interference with Tenant’s business arising from any repairs, maintenance,
alteration or improvement in or to any portion of the Building or in or to the
fixtures (and any items in connection therewith), appurtenances and equipment
therein. As a material inducement to Landlord entering into this Lease, except
as otherwise provided by Nevada law, Tenant waives and releases its right to
make repairs at Landlord’s expense.

     10. TAX ON TENANT’S PERSONAL PROPERTY.

          10.1 PERSONAL PROPERTY TAXES. At least ten (10) days prior to
delinquency, Tenant shall pay all taxes levied or assessed upon Tenant’s
equipment, furniture, fixtures and other personal property located in or about
the Premises. If the assessed value of Landlord’s property is increased by the
inclusion therein of a value placed upon Tenant’s equipment, furniture, fixtures
or other personal property, Tenant shall pay Landlord, upon written demand, the
taxes so levied against Landlord, or the proportion thereof resulting from said
increase in assessment.

          10.2 EXCLUSION FROM REAL PROPERTY TAXES. The portion of taxes
payable by Tenant pursuant to Section 10.1 hereof shall be excluded from Real
Property Taxes for purposes of rent adjustments described in Article 5 of this
Lease.

     11. INSURANCE; WAIVER OF SUBROGATION.

          11.1 LIABILITY INSURANCE. Tenant shall at all times during the
Term and at its own cost and expense procure and continue workers’ compensation
insurance and bodily injury liability and property damage liability insurance
adequate to protect Landlord against liability for injury to or death of any
person or damage to property in connection with the use, operation or condition
of

 

 

the Premises. The limits of liability under the workers’ compensation insurance
policy shall be at least equal to the statutory requirements therefor and the
limits of liability under the Employer’s Liability Insurance policy carried by
Tenant shall be at least One Million Dollars ($1,000,000). The general liability
insurance for non-employees and for damage to property at all times shall be in
an amount of not less than Two Million Dollars ($2,000,000), Combined Single
Limit, for injuries to persons and property damage. Not more frequently than
once every year, if, in the opinion of Landlord’s lender or of the insurance
broker retained by Landlord, the amount of public liability and property damage
insurance coverage at that time is not adequate, Tenant shall increase the
insurance coverage as required by either Landlord’s lender or Landlord’s
insurance broker.

          11.2 PROPERTY INSURANCE.

               a. BUILDING, IMPROVEMENTS AND RENTAL VALUE. Landlord
shall obtain and keep in force during the Term of this Lease a policy or
policies of insurance covering loss or damage to the Building improvements but
not Tenant’s personal property, fixtures, equipment or Tenant Alterations in an
amount Landlord or Landlord’s lender deems to be appropriate. In addition,
Landlord shall obtain and keep in force, during the Term of this Lease, a policy
of rental value insurance covering a period of one year, with loss payable to
Landlord, which insurance shall also cover all Operating Expenses for said
period. In the event that the Premises shall suffer an insured loss, the
deductible amounts under the casualty insurance policies relating to the
Premises shall be paid by Tenant. All costs incurred or paid by Landlord
pursuant to this Section 11.2(a) shall be paid by Tenant as part of Operating
Expenses as defined in Section 5.2 above.

               b. TENANT’S PROPERTY INSURANCE. Tenant, at its sole
cost and expense, shall at all times during the Term maintain in effect policies
of insurance covering (i) all leasehold improvements (including any Tenant
Alterations as may be made by Tenant pursuant to the provisions of Article 8
hereof), trade fixtures, merchandise and other personal property from time to
time in, on or upon the Premises, in an amount not less than one hundred percent
(100%) of their actual replacement cost from time to time during the Term of
this Lease, providing protection against any peril included within the
classification “Fire and Extended Coverage,” together with insurance against
sprinkler damage (if applicable), vandalism and malicious mischief and water
damage caused by plumbing leakage or failure and (ii) all plate glass in the
Premises. The proceeds of such insurance, so long as this Lease remains in
effect, shall be used for the repair or replacement of the property so insured.
Upon termination of this Lease due to any casualty, the proceeds of insurance
shall be paid to Landlord and Tenant, as their interests appear in the insured
property. The full replacement value of the items to be insured under this
Section 11.2 shall be determined by the company issuing the insurance policy at
the time the policy is initially obtained, and shall be increased as reasonably
requested by Landlord from time to time.

          11.3 POLICY REQUIREMENTS. All insurance required to be carried
by Tenant hereunder shall be issued by responsible insurance companies,
qualified to do business in the State of Nevada and reasonably acceptable to
Landlord. Insurance companies rated A-9 or better by Best’s Insurance Reports
shall be deemed acceptable. Each policy shall have a deductible or deductibles,
if any, which are no greater than those maintained by similarly situated tenants
and which are reasonably acceptable to Landlord. Each policy shall name Landlord
and Landlord’s lender as additional insureds, as their interests may appear, and
copies of all policies together with

 

 

certificates evidencing the existence and amounts of such insurance, shall be
delivered to Landlord by Tenant at least thirty (30) days prior to Tenant’s
occupancy of any portion of the Premises. No such policy shall be cancelable
except after thirty (30) days written notice to Landlord. Tenant shall, at least
thirty (30) days prior to the expiration of any such policy, furnish Landlord
with renewals or “binders” thereof, or Landlord may order such insurance and
charge the cost thereof to Tenant, which amount shall be paid by Tenant upon
demand. Any policy may be carried under so-called “blanket coverage” form of
insurance policies, provided any such blanket policy specifically provides that
the amount of insurance coverage required hereunder shall in no way be
prejudiced by other losses covered by the policy. Neither the issuance of any
such insurance policy nor the minimum limits specified in this Section 11.3
shall be deemed to limit or restrict in any way Tenant’s liability arising under
or out of this Lease.

          11.4 WAIVER OF SUBROGATION. To the extent such waivers are
obtainable from insurance carriers, Landlord and Tenant waive their respective
right of recovery against the other for any direct or consequential damage to
the property of the other including its interest in the Premises or the Building
by fire or other casualty to the extent such damage is insured against under a
policy or policies of insurance. Each such insurance policy carried by either
Landlord or Tenant shall include such a waiver of the insurer’s rights of
subrogation. Such waiver shall in no way be construed or interpreted to limit or
restrict any indemnity or other waiver made by Tenant under the terms of this
Lease.

          11.5 BUSINESS OVERHEAD INSURANCE. Tenant shall at all times
during the Term of this Lease and at its own cost and expense procure and
continue business overhead insurance in an amount equal to at least Basic Rent
and Tenant’s share of Operating Expenses and Real Estate Taxes for twelve (12)
months. Not more frequently than once every year, Tenant shall increase the
amount of such business overhead insurance to reflect any increases in Basic
Rent and Operating Expenses and Real Estate Taxes as required by Landlord.
Tenant agrees that the proceeds of such insurance shall be paid to Landlord by
Tenant such that in the event of Tenant’s disability Landlord will receive
monthly payments of Basic Rent and Operating Expenses without delay from Tenant.

     12. FIRE OR CASUALTY.

          12.1 DAMAGE TO PREMISES. In the event the Premises are damaged
by fire or other casualty, Landlord shall repair such damage with reasonable
diligence and in a manner consistent with the provisions of any Underlying
Mortgage, as hereinafter defined. Tenant shall promptly pay to Landlord all
insurance proceeds received by Tenant as a result of such damage so that
Landlord can use such proceeds in the repair of such damage. If the Premises are
damaged by fire or other casualty so that the repair of the Premises cannot, in
Landlord’s reasonable opinion, be completed within sixty (60) days after notice
to Landlord of the occurrence of the damage, Landlord shall have the option, to
be exercised by written notice to Tenant within thirty (30) days after Landlord
receives notice of the occurrence of the damage, either (i) to make such repairs
within a reasonable time, in which event this Lease shall continue in full force
and effect or (ii) to terminate this Lease as of a date not less than thirty
(30) days or more than sixty (60) days after Landlord’s notice to Tenant.

          12.2 DAMAGE TO BUILDING. If the Building is totally destroyed
or is so extensively damaged that the repair thereof cannot, in Landlord’s
reasonable opinion, be completed within one hundred (100) days after the
occurrence of the damage or destruction, or if substantial alteration or
reconstruction of the Building is required, in Landlord’s reasonable opinion, as
a result of the

 

 

damage, then Landlord shall have the option, to be exercised by written notice
to Tenant within thirty (30) days after the occurrence of the damage or
destruction, either (a) to terminate this Lease as of the date not less than
thirty (30) days or more than sixty (60) days after Landlord’s notice to Tenant,
or (b) to repair and rebuild the Building within a reasonable time, in which
event this Lease shall continue in full force and effect.

          12.3 ABATEMENT; TERMINATION. In the event any part of the
Premises, as a result of damage by fire or other casualty, is rendered
untenantable, for the conduct of Tenant’s business, rent shall be reduced and
abated in proportion to the part of the Premises which is so rendered
untenantable until the damaged portion of the Premises have been made tenantable
for the conduct of Tenant’s business or until this Lease expires or terminates,
whichever occurs first; provided that, (a) there shall be no abatement of rent
with respect to any portion of the Premises which is rendered unusable for a
period of five (5) days or less, (b) there shall be no abatement of rent if
Landlord provides other space in the Building to Tenant which is reasonably
suited for the temporary conduct of Tenant’s business,(c) there shall be no
abatement of rent whatsoever with respect to any damage caused in whole or in
part by the negligence or willful act of Tenant, its agents, employees,
contractors, licensees or invitees. In the event Landlord terminates this Lease
pursuant to the terms of Sections 12.1 and 12.2, this Lease and the estate and
interest of the Tenant in the Premises shall terminate and expire on the date
specified in Landlord’s notice of termination and the rent payable hereunder
shall be pro rated as of such date, subject to rent abatement, if any, to the
extent provided above.

          12.4 LIMITATIONS. Subject to Section 11.4 hereof, nothing
contained in this Article 12 shall relieve, discharge or any way affect Tenant’s
liability to Landlord in connection with any damage or destruction to the
Premises or the Building arising out of the negligent or willful acts or
omissions of Tenant, its agents, employees, contractors, licensees and invitees.
Landlord shall not be liable for any loss of business, inconvenience or
annoyance arising from any repair or restoration of any portion of the Premises
or the Building as a result of any damage from fire or other casualty.
Furthermore, in the event of such damage from fire or other casualty, Landlord
shall have no obligation to repair any equipment, furniture, fixtures, paneling,
ceilings, carpets or other floor coverings, partitions, drapes or any personal
property (collectively, “Personal Property”) installed in or about the Premises
by Landlord or Tenant unless Landlord has received insurance proceeds which
insurance proceeds are specifically designated as payment for Personal Property.

     13. EMINENT DOMAIN.

          13.1 TAKING. In case the whole of the Premises, or such part
thereof as shall substantially interfere with Tenant’s use and occupancy
thereof, shall be taken by any lawful power or authority by exercise of the
right of eminent domain, or sold to prevent such taking, within sixty (60) days
of receipt of notice of such taking, either Tenant or Landlord may terminate
this Lease effective as of the date possession is required to be surrendered to
said authority. If such portion of the Building is so taken or sold so as to
require, in the opinion of Landlord, a substantial alteration or reconstruction
of the remaining portions thereof, or which renders the Building economically
unviable for its use as presently intended, this Lease may be terminated by
Landlord, as of the date of the vesting of title under such taking or sale, by
written notice to Tenant within sixty (60) days following notice to Landlord of
the date on which said vesting will occur. Except as provided herein, Tenant
shall not because of such taking assert any claim against Landlord or the taking

 

 

authority for any compensation because of such taking, and Landlord shall be
entitled to receive the entire amount of any award without deduction for any
estate or interest of Tenant. In the event the amount of property or the type of
estate taken shall not substantially interfere with Tenant’s use of the
Premises, Landlord shall be entitled to the entire amount of the award without
deduction for any estate or interest of Tenant. In such event, Landlord shall
promptly proceed to restore the Premises to substantially their condition prior
to such partial taking, and the rent shall be abated in proportion to the time
during which, and to the part of the Premises of which, Tenant shall be so
deprived on account of such taking and restoration. Nothing contained in this
Article 13 shall be deemed to give Landlord any interest in, or prevent Tenant
from seeking any award against the taking authority for, the taking of personal
property and fixtures belonging to Tenant or for relocation or business
interruption expenses recoverable from the taking authority.

          13.2 TEMPORARY TAKING. If all or any portion of the Premises
are condemned or otherwise taken for public or quasi-public use for a limited
period of time, this Lease shall remain in full force and effect and Tenant
shall continue to perform all of the terms, conditions and covenants of this
Lease, including without limitation, the payment of Basic Rent and all other
amounts required hereunder. Tenant shall be entitled to receive the entire award
made in connection with any other temporary condemnation or other taking
attributable to any period within the Term. Landlord shall be entitled to the
entire award for any such temporary condemnation or other taking which relates
to a period after the expiration of the Term or which is allocable to the cost
of restoration of the Premises. If any such temporary condemnation or other
taking terminates prior to the expiration of the Term, Tenant shall restore the
Premises as nearly as possible to the condition prior to the condemnation or
other taking, at Tenant’s sole cost and expense; provided that, Tenant shall
receive the portion of the award attributable to such restoration.

     14. ASSIGNMENT AND SUBLETTING.

          14.1 GENERAL PROHIBITION. Tenant acknowledges that the
economic concessions and rental rates set forth in this Lease were negotiated by
Landlord and Tenant in consideration of, and would not have been granted by
Landlord but for, the specific nature of the leasehold interest granted to
Tenant hereunder, as such interest is limited and defined by various provisions
throughout this Lease, including, but not limited to, the provisions of this
Article 14 which define and limit the transferability of such leasehold
interest. Tenant further acknowledges and agrees that the leasehold estate
granted to Tenant hereunder is not a transferable interest in property, and
Landlord hereby reserves the right to receive any increased rental value of the
Premises during the Term as the same may be realized by any transfer of said
estate, except to the extent Tenant is specifically granted the right to
transfer all or part of its leasehold and to retain all or part of the increased
rental value thereof pursuant to the provisions of this Article 14. Tenant shall
not directly or indirectly, voluntarily or involuntarily assign, mortgage or
otherwise encumber all or any portion of its interest in this Lease or in the
Premises (collectively, “ASSIGNMENT”) or permit the Premises to be occupied by
anyone other than Tenant or Tenant’s employees or sublet the Premises
(collectively, “SUBLEASE”) or any portion thereof without obtaining the prior
written consent of Landlord, which consent shall not be unreasonably withheld
subject to the provisions of Section 14.2 hereunder and any such attempted
assignment, subletting, mortgage or other encumbrance without such consent shall
be null and void and of no effect. Notwithstanding the foregoing, if Tenant is
or has been at any time in default under any of the terms of this Lease, Tenant
may not assign, transfer or sublet the Premises in whole or in part.

 

 

          14.2 NOTICE OF INTENT TO ASSIGN OR SUBLET. If Tenant desires
at any time to enter into an Assignment or to Sublease the Premises or any
portion thereof, it shall first notify Landlord of its desire to do so and shall
submit in writing to Landlord (i) the name of the proposed assignee, subtenant,
transferee or occupant (“TRANSFEREE”); (ii) the nature of the proposed
Transferee’s business to be carried on in the Premises; (iii) the terms and
provisions of the proposed Sublease or Assignment; and (iv) such financial
information as Landlord may reasonably request concerning the proposed
Transferee (collectively, the “TRANSFER NOTICE”). In the event the assignee or
sublessee is not engaged in the Use or does not have equal or greater financial
net worth than Tenant, Landlord shall have the right to reject the Sublease or
Assignment which rejection shall be deemed reasonable.

          14.3 NO RELEASE OF TENANT’S OBLIGATIONS. No Assignment or
Sublease shall relieve Tenant of its obligation to pay the rent and to perform
all of the other obligations to be performed by Tenant hereunder. The acceptance
of rent by Landlord from any other person shall not be deemed to be a waiver by
Landlord of any provision of this Lease or to be a consent to any Assignment or
Sublease. Consent to one Sublease or Assignment shall not be deemed to
constitute consent to any subsequent Sublease or Assignment.

          14.4 TRANSFER IS ASSIGNMENT. If Tenant is a corporation or is
an unincorporated association or partnership, the issuance of any additional
stock and/or the sale, transfer, assignment or hypothecation of any stock or
interest in such corporation, association or partnership in the aggregate in
excess of twenty-five percent (25%) shall be deemed an Assignment hereunder.
Tenant agrees to promptly pay as Additional Rent Landlord’s reasonable costs and
attorneys’ fees, not to exceed One Thousand Dollars ($1,000.00) per occurrence,
incurred in connection with the processing and documentation of any requested
Assignment or Sublease.

          14.5 ASSUMPTION OF OBLIGATIONS. Each Transferee, other than
Landlord, shall assume, as provided in this Section 14.5, all obligations of
Tenant under this Lease and shall be and remain liable jointly and severally
with Tenant for the payment of the rent, and for the performance of all of the
terms, covenants, conditions and agreements herein contained on Tenant’s part to
be performed for the Term of this Lease; provided, however, that the Transferee
shall be liable to Landlord for rent only in the amount set forth in the
Assignment or Sublease. No Assignment shall be binding on Landlord unless the
Transferee or Tenant shall deliver to Landlord a counterpart of the Assignment
and an instrument in recordable form which contains a covenant of assumption by
the Transferee satisfactory in substance and form to Landlord consistent with
the requirements of this Section 14.5, but the failure or refusal of the
Transferee to execute such instrument of assumption shall not release or
discharge the Transferee from its liability as set forth above.

     15. LANDLORD’S RESERVED RIGHTS.

          15.1 RIGHT OF ENTRY. Landlord and its agents and
representatives shall have the right, at all reasonable times, upon twenty-four
(24) hours notice except in the case of an emergency, in which event notice
shall be waived, to enter the Premises for purposes of inspection, to post
notices of non-responsibility, to protect the interest of Landlord in the
Premises, to supply janitorial service and any other services to be provided by
Landlord hereunder, to perform all required or permitted work therein, including
the erection of scaffolding, props and other mechanical devices for the purpose
of making alterations, repairs or additions to the Premises or the Building
which are provided for in this Lease or required by law. Landlord and its agents
and representatives shall also have the right during business hours to show the
Premises to prospective

 

 

tenants (during the last six (6) months of this Lease), lessors of superior
leases, mortgagees, prospective mortgagees or prospective purchasers of the
Building. No such entry shall be construed under any circumstances as a forcible
or unlawful entry into, or a detainer of, the Premises, or an eviction of
Tenant, and Tenant hereby waives any claim against Landlord or its agents or
representatives for damages for any injury or inconvenience to or interference
with, Tenant’s business or quiet enjoyment of the Premises.

          15.2 BUILDING AND COMMON AREAS. Provided Landlord does not
unreasonably, obstruct or interfere with Tenant’s use, Landlord may: (a)
install, repair, replace or relocate pipes, ducts, conduits, wires and
appurtenant meters and equipment for service to other parts of the Building
above the ceiling surfaces, below the floor surfaces, within the walls and in
the central core areas of the Premises or the rest of the Building; (b) repair,
renovate, alter, expand or improve the Building; (c) make changes to the common
areas, including, without limitation, changes in the location, size, shape and
number of street entrances, driveways, ramps, entrances, exits, parking spaces,
parking areas, loading and unloading areas, halls, passages, stairways and other
means of ingress and egress, direction of traffic, landscaped areas and
walkways; (d) close temporarily any of the common areas for maintenance purposes
as long as reasonable access to the Premises remains available; (e) designate
other land outside the boundaries of the Building to be a part of the common
areas; (f) add additional buildings and improvements to the common areas; (g)
use the common areas while engaged in making additional improvements, repairs or
alterations to the Building, or any portion thereof; and (h) do and perform such
other acts and make such other changes in, to or with respect to the common
areas and Building as Landlord may deem appropriate all at Landlord’s expense
which shall be passed through to Tenant as an Operating Expense, except for
capital expenditures for additional buildings allowed in (f) which shall remain
the sole responsibility of Landlord.

          15.3 NAME. Landlord may adopt any name for the Building and
Landlord reserves the right to change the name and/or the address of the
Building or any part thereof at any time.

     16. INDEMNIFICATION AND LIMITATION ON LIABILITY.

          16.1 INDEMNITY BY TENANT. Tenant shall indemnify, protect,
defend and hold harmless, Landlord, its officers, directors, partners, agents
and employees, and any affiliate of Landlord, including without limitation, any
corporations or any other entities controlling, controlled by or under common
control with Landlord, from and against any and all claims, suits, demands,
liability, damages and expenses, including attorneys’ fees and costs, arising
from or in connection with Tenant’s use or alteration of the Premises or the
conduct of its business or from any activity performed or permitted by Tenant in
or about the Premises or the Building during the Term or prior to the
Commencement Date if Tenant has been provided access to the Premises or the
Building for any purpose, or arising from any breach or default in the
performance of any obligation on Tenant’s part to be performed under the terms
of this Lease, or arising from Tenant’s use of the Building Services in excess
of their capacity or arising from any other act, neglect, fault or omission of
Tenant or any of its officers, agents, directors, contractors, employees,
licensees or invitees. As a material part of the consideration to the Landlord
for entering into this Lease, Tenant hereby assumes all risk of and releases,
discharges and holds harmless Landlord from and against any and all liability to
Tenant for damage to property or injury to persons in, upon or about the
Premises from any cause whatsoever except that which is caused by the gross
negligence of Landlord.

 

 

          16.2 LIMITATION ON LANDLORD’S LIABILITY. In no event shall
Landlord be liable to Tenant for any injury to any person in or about the
Premises or damage to the Premises or for any loss, damage or injury to any
property of Tenant therein or by any malfunction of any utility or other
equipment, installation or system, or by the rupture, leakage or overflow of any
plumbing or other pipes, including without limitation, water, steam and
refrigeration lines, sprinklers, tanks, drains, drinking fountains or similar
cause in, about or upon the Premises or the Building unless such loss, damage or
injury is caused by the gross negligence of Landlord. None of the shareholders,
officers, employees, agents, partners or affiliates of Landlord shall be
responsible for any of the liabilities, obligations or agreements of Landlord
under this Lease.

     17. SALE BY LANDLORD.

     In the event of any sale or other transfer of Landlord’s interest
in the Building, other than a transfer for security purposes only, Landlord
shall be automatically relieved of any and all obligations and liabilities on
the part of Landlord accruing from and after the date of such transfer.

     18. SUBORDINATION.

          18.1 SUBORDINATION. This Lease is subject and subordinate to
all mortgages, trust deeds, ground leases, or other encumbrances (the
“UNDERLYING MORTGAGES”) which may now or hereafter be executed affecting the
Building and to all renewals, modifications, consolidations, replacements and
extensions of any such Underlying Mortgages. This clause shall be self-operative
and no further instrument of subordination need be required by any mortgagee,
ground lessor or beneficiary, affecting any Underlying Mortgage in order to make
such subordination effective. Tenant, however, shall execute promptly any
certificate or document that Landlord may request to effectuate, evidence or
confirm such subordination, and failure to do so shall be a material breach of
this Lease.

          18.2 ATTORNMENT. If Landlord’s interest in the Building is
sold or conveyed upon the exercise of any remedy provided for in any Underlying
Mortgage, or otherwise by operation of law: (a) this Lease will not be affected
in any way, and Tenant will attorn to and recognize the new owner as Tenant’s
Landlord under this Lease, and Tenant will confirm such attornment in writing
within ten (10) days after request (Tenant’s failure to do so will constitute a
material breach of this Lease); and (b) the new owner shall not be (i) liable
for any act or omission of Landlord under this Lease occurring prior to such
sale or conveyance, (ii) subject to any offset, abatement or reduction of rent
because of any default of Landlord under this Lease occurring prior to such sale
or conveyance, and (iii) liable for the return of any security deposit paid by
Tenant except to the extent that the security deposit has actually been paid to
such person or entity.

          18.3 NOTICE FROM TENANT. Tenant shall give written notice to
the holder of any Underlying Mortgage whose name and address have been
previously furnished to Tenant of any act or omission by Landlord which Tenant
asserts as giving Tenant the right to terminate this Lease or to claim a partial
or total eviction or any other right or remedy under this Lease or provided by
law. Tenant further agrees that if Landlord shall have failed to cure any
default within the time period provided for in this Lease, then the holder of
any Underlying Mortgage shall have an additional sixty (60) days within which to
cure such default or if such default cannot be cured within that time, then such
additional time as may be necessary if within such sixty (60) days such holder
has commenced and is diligently pursuing the remedies necessary to cure such
default (including, but not limited to commencement of foreclosure proceedings,
if necessary to effect such cure), in which

 

 

event this Lease shall not be terminated while such remedies are being so
diligently pursued.

     ESTOPPEL CERTIFICATES.

     Tenant shall at any time and from time to time upon not less than ten
(10) days’ prior notice by Landlord, execute, acknowledge and deliver to
Landlord a statement in writing certifying that this Lease is unmodified and in
full force and effect (or if there have been modifications, that the same is in
full force and effect as modified and stating the modifications), the dates to
which the Basic Rent, Additional Rent and other charges have been paid in
advance, if any, stating whether or not to the best knowledge of Tenant,
Landlord is in default in the performance of any covenant, agreement or
condition contained in this Lease and, if so, specifying each such default of
which Tenant may have knowledge and containing any other information and
certifications which reasonably may be requested by Landlord or the holder of
any Underlying Mortgage. Any such statement delivered pursuant to this Article
19 may be relied upon by any prospective purchaser of the fee of the Building or
any mortgagee, ground lessor or other like encumbrancer thereof or any assignee
of any such encumbrancer upon the Building.

     20. SURRENDER OF PREMISES AND REMOVAL OF PROPERTY.

          20.1 NO MERGER. The voluntary or other surrender of this Lease
by Tenant, a mutual cancellation or a termination hereof, shall not constitute a
merger, and shall, at the option of Landlord, terminate all or any existing
subleases or shall operate as an assignment to Landlord of any or all subleases
affecting the Premises.

          20.2 SURRENDER OF PREMISES. Upon the expiration of the Term,
or upon any earlier termination hereof, Tenant shall quit and surrender
possession of the Premises to Landlord in as good order and condition as the
Premises are now or hereafter may be improved by Landlord or Tenant, reasonable
wear and tear and repairs which are Landlord’s obligation excepted, and shall,
without expense to Landlord, remove or cause to be removed from the Premises,
all debris and rubbish, all furniture, equipment, business and trade fixtures,
free-standing cabinet work, movable partitioning and other articles of persona]
property owned by Tenant or installed or placed by Tenant at its expense in the
Premises, and all similar articles of any other persons claiming under Tenant
unless Landlord exercises its option to have any subleases or subtenancies
assigned to Landlord, and Tenant shall repair all damage to the Premises
resulting from such removal.

          20.3 DISPOSAL OF PROPERTY. In the event of the expiration of
this Lease or other re-entry of the Premises by Landlord as provided in this
Lease, any property of Tenant not removed by Tenant upon the expiration of the
Term of this Lease, or within forty-eight (48) hours after a termination by
reason of Tenant’s default, shall be considered abandoned and Landlord may
remove any or all of such property and dispose of the same in any manner or
store the same in a public warehouse or elsewhere for the account of, and at the
expense and risk of, Tenant. If Tenant shall fail to pay the costs of storing
any such property after it has been stored for a period of thirty (30) days or
more, Landlord may sell any or all of such property at public or private sale,
in such manner and at such places as Landlord, in its sole discretion, may deem
proper, without notice to or demand upon Tenant. In the event of such sale,
Landlord shall apply the proceeds thereof, first, to the cost and expense of
sale, including reasonable attorneys’ fees; second, to the repayment of the cost
of removal and storage; third, to the repayment of any other sums which may then
or thereafter be due to Landlord from Tenant under any of the terms of this
Lease; and fourth, the balance, if any, to Tenant.

 

 

          20.4 FIXTURES AND IMPROVEMENTS. All fixtures, equipment,
alterations, additions, improvements and/or appurtenances attached to or built
into the Premises prior to or during the Term hereof, as further described in
Section 8.2 hereof, shall be and remain part of the Premises and shall not be
removed by Tenant at the end of the Term of this Lease.

          20.5 NOTICE OF EXPIRATION OF TERM. Tenant shall, at least six
(6) months before the expiration of the Term, give written notice to Landlord of
Tenant’s intention to surrender the Premises upon the expiration of the Term.
Nothing contained herein, however, shall be construed as an extension of the
Term or as consent of Landlord to any holding over by Tenant in the event said
notice is not given in a timely fashion.

     21. HOLDING OVER.

     In the event Tenant holds over after the expiration of the Term,
with or without the express or implied consent of Landlord, such tenancy shall
be from month-to-month only, and not a renewal hereof or an extension for any
further term, and such month-to-month tenancy shall be subject to each and every
term, covenant and agreement contained herein; provided, however, that Tenant
shall pay as Basic Rent during any holding over period, an amount equal to the
greater of one-hundred fifty percent (150%) of the fair market value rental rate
of the Premises or two times the Basic Rent payable immediately preceding the
expiration of the Term. Nothing in this Article 21 shall be construed as a
consent by Landlord to any holding over by Tenant and Landlord expressly
reserves the right to require Tenant to surrender possession of the Premises
upon the expiration of the Term or upon the earlier termination hereof and to
assert any remedy in law or equity to evict Tenant and/or collect damages in
connection with such holding over.

     22. DEFAULTS AND REMEDIES.

          22.1 DEFAULTS BY TENANT. The occurrence of any of the
following shall constitute a material default and breach of this Lease by
Tenant:

               a. The failure by Tenant to pay the rent or make any
other payment required to be made by Tenant hereunder as and when due where such
failure continues for three (3) days after notice thereof by Landlord to Tenant;
provided, however, that such notice shall be in lieu of and not in addition to
any notice required under Nevada law.

               b. The abandonment or vacation of the Premises by
Tenant.

               c. The failure by Tenant to observe or perform the
provisions of Articles 2 and 8 where such failure continues and is not remedied
within forty-eight (48) hours after notice thereof from Landlord to Tenant.

               d. The failure by Tenant to provide estoppel
certificates as herein provided.

               e. The failure by Tenant to observe or perform any
other provision of this Lease, including Rules and Regulations which may be
adopted by Landlord where such failure continues for twenty (20) days after
notice thereof by Landlord to Tenant; provided, however, that if the nature of
such default is such that the same cannot reasonably be cured within such twenty
(20) day period, Tenant shall not be deemed to be in default if Tenant shall
within such period

 

 

commence such cure and thereafter diligently prosecute the same to completion.

               f. Any action taken by or against Tenant pursuant to
any statute pertaining to bankruptcy or insolvency or the reorganization of
Tenant (unless, in the case of a petition filed against Tenant, the same is
dismissed within thirty (30) days); the making by Tenant of any general
assignment for the benefit of creditors; the appointment of a trustee or
receiver to take possession of all or any portion of Tenant’s assets located at
the Premises or of Tenant’s interest in this Lease, where possession is not
restored to Tenant within thirty (30) days; or the attachment, execution, or
other judicial seizure of all or any portion of Tenant’s assets located at the
Premises or of Tenant’s interest in this Lease, where such seizure is not
discharged within thirty (30) days.

               g. Tenant shall fail to occupy the Premises within
one hundred twenty (120) days after the Commencement Date.

               h. In addition to the events constituting a default
and breach of the Lease by Tenant as set forth herein, if within any twelve (12)
month period during the term of the Lease Tenant shall have failed to perform
any obligation required of Tenant hereunder, or has been in breach for any
reason under the Lease more than two (2) times, and Landlord, because of any
such failure and/or breach, shall have served upon Tenant within said twelve
(12) month period two (2) or more notices of any such failure or breach, then
any subsequent failure or breach shall be deemed a noncurable default, without
requirement of notice or opportunity to cure, and Landlord shall be immediately
entitled to exercise any and all rights, remedies and/or elections specified
below otherwise available at law or in equity.

               i. Tenant’s failure to vacate and surrender the
Premises as required by this Lease upon the expiration of the Term or
termination of this Lease.

          22.2 LANDLORD’S REMEDIES.

               a. In the event of any such default by Tenant, then,
in addition to any other remedies available to Landlord at law or in equity,
Landlord shall have the immediate option to terminate this Lease and all rights
of Tenant hereunder by giving Tenant five (5) days’ written notice of such
election to terminate. In the event Landlord shall elect to so terminate this
Lease, Landlord may recover from Tenant:

               (i) the worth at the time of award of any unpaid rent
which has been earned at the time of such termination; plus

               (ii) the worth at the time of award of any amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus

               (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of the award
exceeds the amount of such rental

 

 

loss that Tenant proves could be reasonably avoided; plus

               (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant’s failure to perform
its obligations under this Lease or which in the ordinary course of things would
be likely to result therefrom; and

               (v) at Landlord’s election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time by
applicable law.

               b. All “rent” (as defined in Section 4.4) shall be
computed on the basis on the monthly amount thereof payable on the date of
Tenant’s default, as the same are to be adjusted thereafter as contemplated by
this Lease. As used in paragraphs (i) and (ii) above, the “worth at the time of
award” is computed by allowing interest in the per annum amount equal to the
prime rate of interest or other equivalent reference rate from time to time
announced by the Bank of America National Trust and Savings Association (the
“Reference Rate”) plus two percent (2%), but in no event in excess of the
maximum interest rate permitted by law. As used in paragraph (iii) above, the
“worth at the time of award” is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent (1%).

               c. In the event of any such default by Tenant,
Landlord shall also have the right, with or without terminating this Lease, to
re-enter the Premises and remove all persons and property therefrom by summary
proceedings or otherwise; such property may be removed and stored in a public
warehouse or elsewhere at the cost of and for the account of Tenant.

               d. In the event of the vacation or abandonment of the
Premises by Tenant, or in the event that Landlord elects to re-enter as provided
in Paragraph (c) above or takes possession of the Premises pursuant to legal
proceeding or pursuant to any notice provided by law, and if Landlord does not
elect to terminate this Lease, then Landlord may from time to time, without
terminating this Lease, either recover all rent as it becomes due or relet the
Premises or any part thereof for such term or terms and at such rent and upon
such other terms and conditions as Landlord, in its sole discretion, may deem
advisable, with the right to make alterations and repairs to the Premises. If
Landlord does not terminate this Lease and if Tenant requests Landlord’s consent
to an Assignment of this Lease or a Sublease of the Premises at such time as
Tenant is in default, Landlord may not unreasonably withhold its consent to such
Assignment or Sublease.

               e. In the event that Landlord shall elect to so relet
as provided in Paragraph (d) above, then rentals received by Landlord from such
reletting shall be applied: First, to the payment of any indebtedness other than
rent due hereunder from Tenant to Landlord; second, to the payment of any cost
of such reletting; third, to the payment of the cost of any alterations and
repairs to the Premises; fourth, to the payment of rent due and unpaid
hereunder; and the remainder, if any, shall be held by Landlord and applied in
payment of future rent as the same may become due and payable hereunder. Should
that portion of such rentals received from such reletting during any month,
which is applied to the payment of rent hereunder, be less than the rent payable
during that month by Tenant hereunder, then Tenant shall pay such deficiency to
Landlord. Such deficiency

 

 

shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon
as ascertained, any and all reasonable costs and expenses incurred by Landlord
in such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.

          22.3 RE-ENTRY NOT TERMINATION. No re-entry or taking
possession of the Premises by Landlord pursuant to this Article 22 shall be
construed as an election to terminate this Lease unless a written notice of such
intention be given to Tenant or unless the termination thereof be decreed by a
court of competent jurisdiction. Notwithstanding any reletting without
termination by Landlord because of any default of Tenant, Landlord may at any
time after such reletting elect to terminate this Lease for any such default.

          22.4 DEFINITION OF TENANT. As used in this Article 22 and in

          Article 23, the term “TENANT” shall be deemed to include all persons or entities
named as Tenant under this Lease, or each and every one of them. If any of the
obligations of Tenant hereunder in guaranteed by another person or entity, the
term “TENANT” shall be deemed to include all of such guarantors and any one or
more of such guarantors. If this Lease has been assigned, the term “TENANT,” as
used in this Article 22 and in Article 23 shall be deemed to include both the
assignee and the assignor.

     23. BANKRUPTCY.

     If, at any time prior to the Commencement Date, any action is taken
by or against Tenant in any court pursuant to any statute pertaining to
bankruptcy or insolvency or the reorganization of Tenant, Tenant makes any
general assignment for the benefit of creditors, a trustee or receiver is
appointed to take possession of substantially all of Tenant’s assets or of
Tenant’s interest in this Lease, or there is an attachment, execution or other
judicial seizure of substantially all of Tenant’s assets or of Tenant’s interest
in this Lease, then this Lease shall ipso facto be canceled and terminated and
of no further force or effect. In such event, neither Tenant nor any person
claiming through or under Tenant or by virtue of any statute or of any order of
any court shall be entitled to possession of the Premises or any interest in
this Lease and Landlord shall, in addition to any other rights and remedies
under this Lease, be entitled to retain any rent, security deposit or other
monies received by Landlord from Tenant as liquidated damages.

     24. INTEREST ON TENANT’S OBLIGATIONS; LATE CHARGES.

          24.1 INTEREST. Any amount due from Tenant to Landlord which is
not paid when due shall bear interest at the lesser of twelve percent (12%) per
annum or the maximum rate per annum which Landlord is permitted by law to
charge, from the date such payment is due until paid, but the payment of such
interest shall not excuse or cure any default by Tenant under this Lease.

          24.2 LATE CHARGE. In the event Tenant is more than five (5)
days late in paying any installment of rent due under this Lease, Tenant shall
pay Landlord a late charge equal to five percent (5%) of the delinquent
installment of rent plus a fee of Ten Dollars ($10.00) per day until such
installment of rent is paid. The parties agree that the amount of such late
charge represents a reasonable estimate of the cost and expense that would be
incurred by Landlord in processing each delinquent payment of rent by Tenant and
that such late charge shall be paid to Landlord as liquidated damages for each
delinquent payment, but the payment of such late charge shall not excuse or cure
any default by Tenant under this Lease. The parties further agree that the
payment of late charges and the payment of interest provided for in Section 24.1
above are distinct and separate from one another in that the payment of interest
is to compensate Landlord for the use of Landlord’s

 

 

money by Tenant, while the payment of a late charge is to compensate Landlord
for the additional administrative expense incurred by Landlord in handling and
processing delinquent payments.

     25. QUIET ENJOYMENT.

     Tenant, upon the paying of all rent hereunder and performing each of
the covenants, agreements and conditions of this Lease required to be performed
by Tenant, shall lawfully and quietly hold, occupy and enjoy the Premises during
the Term without hindrance or molestation of anyone lawfully claiming by,
through or under Landlord, subject, however, to the provisions set forth in this
Lease.

     26. EXAMINATION OF LEASE.

     The submission of this instrument for examination or signature by
Tenant, Tenant’s agents or attorneys, does not constitute a reservation of, or
an option to lease, and this instrument shall not be effective or binding as a
lease or otherwise until its execution and delivery by both Landlord and Tenant.

     27. BROKERS.

     Tenant warrants that it has not had any contact or dealings with any
person or real estate broker which would give rise to the payment of any fee or
brokerage commission, in connection with this Lease, and Tenant shall indemnify,
hold harmless and defend Landlord from and against any liability with respect to
any fee or brokerage commission arising out of any act or omission of Tenant.

     28. RULES AND REGULATIONS.

     The Rules and Regulations attached hereto as Exhibit “C” are hereby
incorporated herein and made a part of this Lease. Tenant agrees to abide by and
comply with each and every one of said Rules and Regulations and any amendments,
modifications and/or additions thereto as may hereafter be adopted by Landlord
for the safety, care, security, good order and cleanliness of the Premises or
the Building. Landlord shall have the right to amend, modify or add to the Rules
and Regulations in its sole discretion. Landlord shall not be liable to Tenant
for any violation of any of the Rules and Regulations by any other tenant or for
the failure of Landlord to enforce any of the Rules and Regulations.

     29. SIGNAGE.

     Tenant shall not have the right to signage which is visible from
outside the Premises without the prior written consent of Landlord, which
consent shall not unreasonably withheld. Any signage identifying Tenant on the
facade of the Building or on any monument shall be installed by Landlord at
Landlord’s sole discretion and at Tenant’s sole cost and expense.

     30. GENERAL PROVISIONS.

          30.1 NO WAIVER. The waiver by Landlord of any breach of any
term, provision, covenant or condition contained in this Lease, or the failure
of Landlord to insist on the strict performance by Tenant, shall not be deemed
to be a waiver of such term, provision, covenant or condition as to any
subsequent breach thereof or of any other term, covenant or condition contained
in this Lease. The acceptance of rents hereunder by Landlord shall not be deemed
to be a waiver of

 

 

any breach or default by Tenant of any term, provision, covenant or condition
herein, regardless of Landlord’s knowledge of such breach or default at the time
of acceptance of rent.

          30.2 LANDLORD’S RIGHT TO PERFORM. All covenants and agreements
to be performed by Tenant under any of the terms of this Lease shall be
performed by Tenant at Tenant’s sole expense and without abatement of rent. If
Tenant shall fail to observe and perform any covenant, condition, provision or
agreement contained in this Lease or shall fail to perform any other act
required to be performed by Tenant, Landlord may, upon notice to Tenant, without
obligation, and without waiving or releasing Tenant from any default or
obligations of Tenant, make any such payment or perform any such obligation on
Tenant’s part to be performed. All sums so paid by Landlord and all costs
incurred by Landlord, including attorneys’ fees, together with interest thereon
in a per annum amount equal to two percent (2%) in excess of the Reference Rate,
but not in excess of the maximum rate permitted by law, shall be payable to
Landlord on demand and Tenant covenants to pay any such sums, and Landlord shall
have (in addition to any other right or remedy hereunder) the same rights and
remedies in the event of the non-payment thereof by Tenant as in the case of
default by Tenant in the payment of rent.

          30.3 TERMS; HEADINGS. The words “LANDLORD” and “TENANT” as
used herein shall include the plural, as well as the singular. The words used in
neuter gender include the masculine and feminine and words in the masculine or
feminine gender include the neuter. If there is more than one tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. The
headings or titles of this Lease shall have no effect upon the construction or
interpretation of any part hereof.

          30.4 ENTIRE AGREEMENT. This instrument along with any exhibits
and attachments or other documents affixed hereto, or referred to herein,
constitutes the entire and exclusive agreement between Landlord and Tenant with
respect to the Premises and the estate and interest leased to Tenant hereunder.
This instrument and said exhibits and attachments and other documents may be
altered, amended, modified or revoked only by an instrument in writing signed by
both Landlord and Tenant. Landlord and Tenant hereby agree that all-prior or
contemporaneous oral understandings, agreements or negotiations relative to the
leasing of the Premises are merged into and revoked by this instrument.

          30.5 SUCCESSORS AND ASSIGNS. Subject to the provisions of
Article 14 relating to Assignment and Sublease, this Lease is intended to and
does bind the heirs, executors, administrators and assigns of any and all of the
parties hereto.

          30.6 NOTICES. All notices, consents, approvals, requests,
demands and other communications (collectively “NOTICES”) which Landlord or
Tenant are required or desire to serve upon, or deliver to, the other shall be
in writing and mailed postage prepaid by certified or registered mail, return
receipt requested, or by personal delivery, to the appropriate address indicated
below, or at such other place or places as either Landlord or Tenant may, from
time to time, designate in a written notice given to the other. If the term
“Tenant” in this Lease refers to more than one person or entity, Landlord shall
be required to make service or delivery, as aforesaid, to any one of said
persons or entities only. Notices shall be deemed sufficiently served or given
at the time of personal delivery or three (3) days after the date of mailing
thereof; provided, however, that any notice of default to Tenant under Article
22 shall be hand-delivered to the Premises. Any notice, request, communication
or demand by Tenant to Landlord shall be addressed to the Landlord at
                    , and if requested in writing by the Landlord, given or

 

 

served simultaneously to the Landlord’s mortgagee at the address specified in
such request. Any notice, request, communication or demand by Landlord to Tenant
shall be addressed to:

                                                            

                                                            

(and after the Commencement Date, to the Premises). Rejection or other refusal
to accept a notice, request, communication or demand or the inability to deliver
the same because of a changed address of which no notice was given shall be
deemed to be receipt of the notice, request, communication or demand sent.

          30.7 SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party hereunder, shall be held invalid or unenforceable to any extent,
the remaining terms, conditions and covenants of this Lease shall not be
affected thereby and each of said terms, covenants and conditions shall be valid
and enforceable to the fullest extent permitted by law.

          30.8 TIME OF ESSENCE. Time is of the essence of this Lease and
each provision hereof in which time of performance is established.

          30.9 GOVERNING LAW. This Lease shall be governed by,
interpreted and construed in accordance with the laws of the State of Nevada.

          30.10 ATTORNEYS’ FEES. If any action or proceeding is brought
by Landlord or Tenant to enforce its respective rights under this Lease, the
unsuccessful party therein shall pay all costs incurred by the prevailing party
therein, including reasonable attorneys’ fees to be fixed by the court.

          30.11 FORCE MAJEURE. Landlord shall not be liable for any
failure to comply or delay in complying with its obligations hereunder if such
failure or delay is due to acts of God, inability to obtain labor, strikes,
lockouts, lack of materials, governmental restrictions, enemy actions, civil
commotion, fire, unavoidable casualty or other similar causes beyond Landlord’s
reasonable control (all of which events are herein referred to as FORCE MAJEURE
events). It is expressly agreed that Landlord shall not be obliged to settle any
strike to avoid a force majeure event from continuing.

 

 

     IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the date set forth in the first paragraph above.

	 	 	 	 	 
	 	LANDLORD:

LUKE PROPERTIES, LTD.

A NEVADA LIMITED LIABILITY COMPANY

 	 
	 	By:  	/s/ Gregory A. Dean
 	 
	 	 	Name:  	Gregory A. Dean 	 
	 	 	Its: Manager 	 
	 
	 	TENANT:

VESTIN GROUP, INC.

A DELAWARE CORPORATION

 	 
	 	By:  	/s/ Michael Shustek
 	 
	 	 	Name:  	Michael Shustek 	 
	 	 	Its: CEO 	 
	 

EXHIBIT “A”

PREMISES

 

 

EXHIBIT “B”

MEMORANDUM OF COMMENCEMENT AND RENTAL DATE

THE UNDERSIGNED hereby covenants, represents and warrants to Luke Properties,
LLC, a Nevada limited liability company, “Owner/Lessor” of the premises
containing approximately forty thousand nine hundred forty (40,940) square feet,
known as                      the following:

          1. The undersigned (“Tenant”) is the Tenant of the premises
pursuant to a lease (“Lease”) dated March ___, 2003, entered into between the
undersigned Tenant and Owner/Lessor, and hereby acknowledges that it has
received a full and complete copy of the fully executed Lease Agreement.

          2. The Lease is presently in full force and effect.

          3. The Lease constitutes the entire agreement between
Owner/Lessor and Tenant, and there have been no amendments, written or oral, to
such agreement, except as set forth in Paragraph 1 above.

          4. All improvements required under the terms of the Lease to
be made by Owner/Lessor have been satisfactorily completed and have been
accepted by the undersigned. (EXCEPTIONS TO BE STATED ON A SEPARATE ATTACHED
SHEET HERETO, EXECUTED AND DATED.)

          5. The undersigned has accepted the Lease premises and the
keys thereto and has commenced occupancy thereof.

          6. The term of the Lease commences on                      and will end on
                    . A monthly rental as of the date hereof is                      per
month and commences as of the date of                     .

          7. Rent for any fractional month shall be paid upon execution
of Owner/Lessor’s Memorandum of Commencement Date.

          8. The amount of prepaid rent is                      for the
month of                     .

          9. The amount of the prepaid security deposit paid under the
terms of the Lease is                     .

Exhibit A

 

 

          10. Tenant has provided Lessor with the required Certificate
of Insurance on the premises pursuant to Section 11.3 of the Lease Agreement.

	 	 	 	 	 
	 	TENANT/LESSEE:

VESTIN GROUP, INC.,

a Delaware corporation	 
	 
	 	 	 
	 	By:  	
 	 
	 	Its: 	 
	 	 	 	 
	 

Exhibit B

 

 

EXHIBIT “C”

RULES AND REGULATIONS

          (a) Sidewalks, parking areas, doorways, vestibules, halls,
stairways, and similar areas shall not be obstructed nor shall refuse,
furniture, boxes, or other items be placed therein by Tenant or its officers,
agents, servants, and employees, or used for any purpose other than ingress and
egress to and from the Premises, or for going from one part of the Building to
another part of the Building. Canvassing, soliciting and peddling in the
Building are prohibited.

          (b) Tenant shall dispose of all trash in receptacles
designated by Landlord.

          (c) Plumbing, fixtures and appliances shall be used only for
the purposes for which constructed, and no unsuitable material shall be placed
therein.

          (d) No signs, directories, posters, advertisements, or notices
shall be painted or affixed on or to any of the windows or doors, or in
corridors or other parts of the Building, except in such color, size, and style,
and in such places, as shall be first approved in writing by Landlord in its
reasonable discretion. Landlord shall have the right to remove all unapproved
signs without notice to Tenant, at the expense of Tenant.

          (e) Tenant shall not do, or permit anything to be done in or
about the Building, or bring or keep anything therein, that will in any way
increase the rate of fire or other insurance on the Building, or on property
kept therein or otherwise increase the possibility of fire or other casualty.

          (f) Corridor doors, when not in use, shall be kept closed.

          (g) Tenant shall not cause or permit any improper noises in
the Building, or allow any unpleasant odors to emanate from the Premises, or
otherwise interfere, injure or annoy in any way other tenants, or persons having
business with them.

          (h) No animals shall be brought into or kept in or about the
Building.

          (i) When conditions are such that Tenant must dispose of
crates, boxes, etc. on the sidewalk, it will be the responsibility of Tenant to
dispose of same prior to 7:30 a.m. or after 5:30 p.m.

          (j) No machinery of any kind, other than ordinary office
machines such as computers and photocopy machines and ordinary and necessary
equipment for Tenant’s business shall be operated on Premises without the prior
written consent of Landlord, nor shall Tenant use or keep in the Building any
inflammable or explosive fluid or substance (including living Christmas trees
and lighted ornaments), or any illuminating materials, except candles.

          (k) No motorcycles or similar vehicles will be allowed in any
portion of the Building

Exhibit B

 

 

other than the parking areas.

          (l) No nails, hooks, or screws (other than for the purpose of
hanging normal office wall decorations) shall be driven into or inserted in any
part of the Building except as approved by Building maintenance personnel.

          (m) Landlord has the right to evacuate the Building in the
event of an emergency or catastrophe.

          (n) No food and/or beverages shall be distributed from
Tenant’s office (other than food and beverages intended for Tenant’s employees
and clients) without the prior written approval of Landlord.

          (o) No additional locks shall be placed upon any doors without
the prior written consent of Landlord. All necessary keys shall be furnished by
Landlord, and the same shall be surrendered upon termination of this Lease, and
Tenant shall then give Landlord or its agent an explanation of the combination
of all locks on the doors or vaults. Tenant shall initially be given two (2)
keys to the Premises by Landlord.

          (p) Tenant will not locate furnishings or cabinets adjacent to
mechanical or electrical access panels or over air conditioning outlets so as to
prevent operating personnel from servicing such units as routine or emergency
access may require. Cost of moving such furnishings for Landlord’s access will
be for Tenant’s account.

          (q) Tenant shall comply with parking rules and regulations as
may be posted and distributed from time to time.

          (r) No portion of the Building shall be used for the purpose
of lodging rooms.

          (s) Vending machines or dispensing machines of any kind will
not be placed in the Premises by Tenant other than soft drink, candy and other
similar vending machines for the use of Tenant’s employees.

          (t) Prior written approval, which shall be at Landlord’s sole
discretion, must be obtained for installation of window shades, blinds, drapes,
or any other window treatment of any kind whatsoever. Landlord will control all
internal lighting that may be visible from the exterior of the Building and
shall have the right to change any unapproved lighting at Tenant’s expense.

          (u) No Tenant shall make any changes or alterations to any
portion of the Building without Landlord’s prior written approval, which may be
given on such conditions as Landlord may elect. All such work shall be done by
Landlord or by contractors and/or workers approved by Landlord, working under
Landlord’s supervision. The provisions of this Paragraph shall not affect or be
deemed to supersede in any way the provisions of the Lease with regard to the
improvement

 

 

and alteration of the Premises.

          (v) Tenant shall provide plexiglass or other pads for all
chairs mounted on rollers or casters.

          (w) Landlord reserves the right to rescind any of these rules
and make such other and further rules and regulations as in its reasonable
business judgment shall from time to time be needful for the operation of the
Building, which rules shall be binding upon each Tenant upon delivery to such
Tenant of notice thereof in writing.exv10w10

 

Exhibit 10.10

INSURANCE ADMINISTRATIVE SERVICES AGREEMENT

THIS INSURANCE ADMINISTRATIVE SERVICES AGREEMENT (the “Agreement”) is entered into as
of this 3rd day of June, 2004 (the “Effective Date”) by and between Merrill
Lynch Life Insurance Company, an Arkansas domiciled life insurance company with its principal
offices located at 1300 Merrill Lynch Drive, 2nd Floor, Pennington, NJ 08534
(“Customer”) and Liberty Insurance Services Corporation, a South Carolina corporation with
offices located at 2000 Wade Hampton Boulevard, Greenville, South Carolina 29615
(“Liberty”). When referring to Liberty and Customer collectively the term “party” or
“parties” may be used herein.

RECITALS:

     WHEREAS, Liberty administers life insurance contracts and annuity contracts as a third party
administrator; and

     WHEREAS, Customer desires to engage Liberty to render the administrative services and related
services for the Contracts described in this Agreement on the terms and conditions set forth in
this Agreement, and agrees that Liberty shall perform such administrative services on Customer’s
behalf.

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, the
parties, intending to be legally bound, hereby agree as follows:

Article 1

Definitions

For all purposes as used in this Agreement, unless the context or use clearly indicates otherwise,
the following terms shall have the following meanings and these definitions shall apply to both the
singular and plural forms of the defined terms. Terms other than those defined shall be given
their plain English meaning.

     1.1 An “Active” Contract is any Contract that is currently in force. Any Contract
that is in a “pending” status is also considered to be Active. Approximately 58,000 Contracts are
Active as of the Effective Date.

     1.2 “Additional Services Fees” has the definition provided in Section 3.4.

     1.3 “Additional Services Request” has the definition provided in Section 3.4.

     1.4 “Administrative System” means one of the six insurance administrative systems
currently used by Customer to administer the Contracts. These systems are as follows: MIPS, Sched,
Flex, Fidelity, Estate, and Onyx.

     1.5 “Agreement” means this Agreement together with the exhibits and schedules attached
to it, and any amendments.

 

 

     1.6 “Amendment for Additional Services” has the definition provided in Section 3.4.

     1.7 “Ancillary Systems” means the ancillary systems currently used by Customer in
connection with the administration of the Contracts that are not part of the Administrative System.

     1.8 “Authorized Personnel” are those employees of Customer who have the authority to
authorize Additional Services, as designated in Exhibit 3.4.2.

     1.9
“Books and Records” has the definition provided in Section 4.1.

     1.10
“Breakage” has the definition provided in Exhibit 6.1.

     1.11 “Business Continuity Plan” has the definition provided in Section 3.5.

     1.12 “Business Day” means any day that is not a Saturday, Sunday or a day on which the
New York stock exchange is closed.

     1.13 “Claims” has the definition provided in Section 13.3.

     1.14 “Claims Account” means the bank account established and funded by Customer for
the payment of Contract claims and other disbursements.

     1.15 “Claims Notice” has the definition provided in Section 13.3.

     1.16 “Confidential Information” has the meaning provided in Section 10.1.

     1.17 “Consumer Price Index” means the Consumer Price Index for All Urban Consumers,
All Items, U.S. City Average, as published by the United States Bureau of Labor Statistics of the
Department of Labor.

     1.18 “Contract” or “Contracts” means one or all of the closed block, comprised
of both Active and Inactive Contracts, which as of the Effective Date contained approximately
116,000 interest sensitive whole life policies, variable life policies, variable universal life
policies, riders, endorsements, and associated contract benefits for which Liberty shall be
performing the Services under this Agreement and which are more specifically identified by the plan
codes listed on Exhibit 1.18. 

     1.19 “Contract History” means a complete record of all information about one or more
of the Contracts, regardless of what medium within which the record is stored (e.g. electronically,
on paper, or on microfiche). “Contract History” includes, but is not limited to: copies of
contract schedule pages, applications, policy forms; records of premium payments, deductions of
insurance charges, loans, and other transactions applicable to the Contracts; records of
investment base, account values, loans, and other policy values and correspondence to or from
the Contractholder.

     1.20 “Customer” has the definition provided in the preamble.

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     1.21 “Customer Software” has the definition provided in Section 9.1.

     1.22 “Damages” has the definition provided in Section 13.1.

     1.23 “Data” has the definition provided in Section 9.3.

     1.24 “Data Recovery Plan” has the definition provided in Section 3.5.

     1.25 “Deteriorating Financial Condition” has the definition provided in Section 8.4
(a).

     1.26 “Effective Date” means the date first written above.

     1.27 An “Inactive” Contract is any Contract that is not currently in force, including
Contracts that have been surrendered for their cash value or on which a death claim has been paid.
Approximately 58,000 Contracts are Inactive as of the Effective Date.

     1.28 “Incomplete Records Contracts” has the definition provided in Section 5.23.

     1.29 “Indemnified Party” has the definition provided in Section 13.3.

     1.30 “Indemnifying Party” has the definition provided in Section 13.3.

     1.31 “Insurance Risk” has the definition provided in Section 5.1.

     1.32 A “Lapsed” Contract is any Inactive Contract that is eligible to be reinstated to
Active status, according to the provisions of that Contract.

     1.33 “Liberty Personnel” has the definition provided in Section 11.2 (II).

     1.34 “Liberty Software” means the proprietary software of Liberty used in the
performance of the Services.

     1.35 “MIPS History Viewer” is an electronic repository of Contract History for
Contracts that are administered on MIPS. MIPS History Viewer is not an administrative system, and
Contract History from MIPS History Viewer is not available through MIPS.

     1.36 “Pass Through Costs” has the definition provided in Section 7.2 and are more
specifically identified in Exhibit 6.1.

     1.37 “Performance Standards” means the standards set forth in Exhibit 3.2.1 of this
Agreement.

     1.38 “Person” means an association, firm, individual, partnership (general or
limited), corporation, limited liability company, trust, financial institution, unincorporated
organization or other legal entity.

     1.39 “Premium Account” means the bank account established by Customer on behalf of
Customer in a federally or state insured financial institution pursuant to which Liberty shall be

3 

 

 

provided access in accordance with applicable law governing third party administrators as provided
in Section 15.6.

     1.40 “Related Companies” has the definition provided in Section 10.1.

     1.41 “Renewal Term” has the definition provided in Section 8.1.

     1.42 “Security Procedures” has the definition provided in Section 3.3 as set forth in
Exhibit 3.3.

     1.43 “Service Center” has the definition provided in Section 3.2.

     1.44 “Services” means the insurance administrative services set forth in Exhibit 3.2.

     1.45 “Services Fees” has the definition provided in Section 6.2 and set forth in
Exhibit 6.1.

     1.46 “Services Starting Date” means the date on which Liberty begins performance of
the Services at the Service Center.

     1.47 “SIU” has the definition provided in Section 5.5.

     1.48 “Standard Rates” has the definition provided in Section 3.4 and as set forth in
Exhibit 3.4.

     1.49 “System” means Liberty’s proprietary software or Third Party Software licensed by
Liberty, computer hardware, computer programs and programming aids with supporting documentation,
including, but not limited to, input and output formats, program listings, system flow charts,
narrative descriptions and operating instructions, including tangible media upon which such
programs are recorded, all of which are used by Liberty to perform the Services for the Contracts.

     1.50 “Term” has the definition provided in Section 8.1.

     1.51 “Terminated” Contract is any Inactive Contract that is not eligible to be
reinstated to Active status, according to the provisions of that Contract.

     1.52 “Termination Fee” has the definition provided in Section 8.6.

     1.53 “Third Party Software” means any software that is not proprietary to either
Liberty or Customer but is used by either Liberty or Customer to administer the Contracts.

     1.54 “Transition Services” has the definition provided in Section 3.1 and as more
particularly set forth in Exhibit 3.1.

     1.55 “Transition Services Fees” has the definition provided in Section 6.1 and as set
forth in Exhibit 6.1.

4 

 

 

     1.56 “Year End” means the end of the financial period for Customer. The Year End in
2004 for Merrill Lynch Life Insurance Company is December 23, for ML Life Insurance Company of New
York is December 23, and for Monarch Life Insurance Company is December 31. Thereafter, Customer
shall provide Liberty with a schedule of all the close dates each year during the Term and any
Renewal Term for each of these insurers as soon as such close dates are known to Customer.

Article 2

Engagement

     2.1 Engagement by Customer. Customer hereby engages Liberty to perform the Transition
Services, Services, and Additional Services (if any) on behalf of the Customer with respect to the
Contracts on the terms and conditions set forth in the Agreement, and Customer acknowledges and
accepts the engagement of Liberty. Nothing herein shall restrict Customer’s right to contract with
any third party to provide products and/or services similar to or identical to the Services
provided in this Agreement.

     2.2 Acceptance of Engagement by Liberty. Liberty hereby accepts such engagement and
agrees to perform the Transition Services, Services, and additional services in accordance with the
terms and conditions of this Agreement.

Article 3

Services

     3.1 Transition Services. Beginning on the Effective Date, Liberty, with reasonable
assistance from Customer, shall commence planning and analysis activities for the conversion of the
Customer’s Data and Books and Records to a format appropriate for administration by Liberty at the
Service Center, and transition and training in connection with the assumption of the administrative
operations and procedures in connection with the Contracts, as described further in Exhibit 3.1
(collectively, the “Transition Services”).

     The parties acknowledge that the description and definition of the Transition Services
attached as Exhibit 3.1 are general in nature and the parties agree to utilize commercially
reasonable efforts to develop a definitive Transition Services plan in accordance with the
procedures outlined under the heading “Transition and Transition Analysis Phase” of the Business
Transition Methodology document, attached hereto as Exhibit 3.1.1, which will define the Transition
Services in greater detail. Upon prior written approval by Customer and Liberty, the final
Transition Services plan shall supplement the general Transition Services and the schedule set
forth in Exhibit 3.1.

     The Transition Services shall be provided by Liberty, with reasonable assistance from
Customer, using certain Customer Software and Third Party Software access to which shall be
provided by Customer to Liberty as of the Effective Date, either directly by Customer for the
Customer Software and for the Third Party Software by Customer using its reasonable efforts to
facilitate use by Liberty of the Third Party Software. It is understood and agreed that access and
use by Liberty of the Third Party Software shall not include access or use by Liberty of source

5 

 

 

code or system documentation in contravention of existing software license agreements with third
parties. Any costs associated with obtaining access or use by Liberty to the Customer Software or
the Third Party Software shall be borne solely by Customer.

     3.2  Services. Beginning on the Services Starting Date, Liberty shall provide the
administrative services described in Exhibit 3.2 (the “Services”) in accordance with (i)
the performance standards (the “Performance Standards”) as set forth in Exhibit 3.2.1 for
the Services Fees set forth in Exhibit 6.1, as adjusted in accordance with Section 7.1. However,
during the first sixty (60) calendar days after the Services Starting Date, Liberty shall not be
subject to any Section 3.7 penalties for failure to meet the Performance Standards. The Services
shall be provided from Liberty’s service center listed on Exhibit 3.2.2 (the “Service
Center”), with the telephone call center of that Service Center available between the hours of
8:30 am and 6:00 pm Eastern Time. Liberty may provide the Services from one or more other Service
Center(s) selected by Liberty that meet the same security and data recovery procedures required by
this Agreement, as long as Liberty continues to perform services in accordance with the Performance
Standards.

     (i) Liberty agrees that none of the Services described in Exhibit 3.2 subsections A, B, C, E,
H, and L (except for mailing services and technology consulting services) will be provided by any
third party(ies) who are not already being used by Liberty as of the execution date of this
Agreement, without first obtaining Customer’s written acceptance. In no event shall Liberty
provide Services by utilizing any entity or Service Center that is not located within, and
providing all Services from, the continental United States without first obtaining Customer’s
written acceptance.

     (ii) Any services, functions, actions or responsibilities not specifically described in this
Agreement that are incidental to or reasonably necessary to perform the Services will be deemed to
be implied by and included within the scope of the Services to the same extent and in the same
manner as if specifically described in this Agreement.

     3.3 Facilities; Security and Data Recovery Procedures. Except as otherwise provided
in this Agreement, Liberty shall furnish the facilities, including, without limitation, physical
facilities, trained personnel, and data processing hardware and software, necessary to provide the
Services. However, the costs for any telecommunication lines from Customer to the Service
Center(s) shall be paid by Customer as a Pass Through Cost. During the Term and any Renewal
Term(s), Liberty shall maintain and enforce security procedures (the “Security Procedures”)
at the Service Center(s) that are at least as rigorous as those security procedures in effect at
the Service Center(s) as of the Effective Date of this Agreement. A summary of the existing
Security Procedures is set forth in Exhibit 3.3.

     (i) All Liberty connectivity to Customer and Customer connectivity to Liberty computing
systems and/or networks and all attempts at same shall be only through security gateways/firewalls
and only through mutually agreed upon security procedures; Liberty and Customer will not access,
and will not permit unauthorized persons or entities to access, the other party’s computing systems
and/or networks without the other party’s express written authorization and any such actual or
attempted access shall be consistent with any such

6 

 

 

authorization; Liberty and Customer will use the
latest available, most comprehensive virus detection/scanning program prior to any attempt to
access any of the other party’s computing systems and/or networks and upon detecting a virus, all
attempts to access the other party’s computing systems and/or networks shall immediately cease and
shall not resume until any such virus has been eliminated; and Liberty and Customer will each abide
by the computer security guidelines attached hereto as Exhibit 3.3.1

     3.4 Additional Services. Either party may request a change to the description or
pricing of Services herein or to amend this Agreement or an Exhibit (herein a “Additional
Services Request”). No Additional Services Request shall be binding on the parties unless the
requirements of this Article 3.4 have been satisfied and the Additional Services Request is agreed
to in writing by an authorized representative of both parties as defined in Section 16.7.

     Until such time as an Additional Services Request is formally agreed to by both parties, both
parties shall continue to perform their respective obligations without taking account of the
Additional Services Request. In the case of any Additional Services Request, Liberty shall within
10 Business Days of the date the request has been submitted in a format that fully provides Liberty
with detailed specifications of the requirements, supply to the Customer either: (a) full details
of all consequential changes that will be required (such as changes in fees or service levels) as a
result of the Additional Services Request; or written confirmation that there will be no such
consequential changes or effects. Both parties may mutually agree in writing to extend this
process.

     Upon receipt of such an Additional Services Request from Customer, Liberty shall inform
Customer pursuant to the terms of the preceding paragraph after receipt of Customer’s request as to
whether Liberty is able to perform such additional services and, if so, Liberty shall provide
Customer with: (a) a written description of the work Liberty anticipates performing in
connection with such Additional Services Request, (b) a schedule for commencing and completing the
Additional Services Request and (c) Liberty’s estimated charges for such additional services (the
“Additional Services Fees”) which charges shall be calculated using those rates set forth
on Exhibit 3.4 (the “Standard Rates”). In the event Customer elects to have Liberty
perform the additional services, Customer and Liberty shall execute a written amendment to this
Agreement in substantially the form set forth in Exhibit 3.4.1 (when completed and signed by both
Customer and Liberty, such form shall be an “Amendment for Additional Services”). Written
agreement by Customer shall be by at least one of the officers designated as an Authorized Person
in Exhibit 3.4.2. Liberty shall not begin performing any additional services until an Amendment
for Additional Services in respect of such additional services has been executed on behalf of
Customer, as agreed by Customer and Liberty and in compliance with any applicable Third Party
Software restrictions.

     3.5 Safeguarding Data. Liberty shall be responsible for maintaining a data recovery
plan (the “Data Recovery Plan”), which is tested on an annual basis, and an off-site
business continuity and resumption plan (the “Business Continuity Plan”), which is tested
at least every eighteen months and, within thirty-six (36) months from the Effective Date, will be
tested at least annually, to ensure that Customer’s Data and Books and Records can be restored
after the occurrence of a force majeure event such as flood, fire, earthquake, accident, explosion,
riot, war,

7 

 

 

civil commotion, or other similar disaster. Liberty and Customer shall mutually agree
on the procedures to be followed with respect to the continued provision of the Services in such an
event. Customer shall have the right to audit Liberty’s Data Recovery Plan annual test results and
any test results of Liberty’s Business Continuity Plan. Exhibit 3.5 sets forth a high level summary
of Liberty’s current Data Recovery Plan and Business Continuity Plan. Liberty shall establish
reasonable safeguards to protect Customer’s Data and Books and Records against unauthorized
distribution, loss or alteration. Upon reasonable notice, Customer shall have the right to review
such procedures. Liberty shall notify Customer immediately of any security breaches involving
Customer’s Data or Books and Records.

     3.6 Bank Accounts. Customer shall establish and maintain premium accounts with
Customer’s preferred bank for each legal entity and will provide Liberty access to such accounts
for the purpose of receiving client funds via checks, Fed Fund wire transfers and PAC
(pre-authorized checks) payments. These accounts will also be utilized for the payment of client
moneys via outgoing Fed Fund wire transfers. Liberty shall be given appropriate signing authority
and systems access to process the outgoing payments in accordance with Customer guidelines.
Customer currently maintains ZBA (zero balance account) disbursement accounts for each entity and
shall provide signing authority to Liberty personnel in accordance with Customer guidelines with
regard to issuance of check disbursements. Customer will continue to maintain existing procedures
for funding of daily presentment amounts through Customer’s concentration accounts.

     3.7 Penalties for Failure to Meet Performance Standards. If Liberty fails to meet
agreed upon tolerances of the Performance Standards set forth in Exhibit 3.2.1 in any month and,
upon notice by Customer, fails to correct the performance for the same Performance Standard within
the following month, Customer shall be entitled to an abatement of three percent (3%) of the
monthly Services Fees or Minimum Fees for each month thereafter until the Performance Standards are
met. For example, if Liberty receives notice from Customer of a failure to meet a specific
Performance Standard in January, and Liberty fails to correct the performance during February, then
Customer shall be entitled to the 3% abatement in March and any subsequent month(s) during which
Liberty fails to meet the specific Performance Standards.

Article 4

Books and Records

     4.1 Books and Records. This Agreement shall be retained as part of the official
records of both Customer and Liberty for the duration of the Term and any Renewal Term(s) of the
Agreement and for five (5) calendar years thereafter in accordance with the National
Association of Insurance Commissioners (hereinafter “NAIC”) Third Party Administrator
Model Act.

     (a) Notwithstanding any contrary provision herein, until this Agreement is terminated or
expires, Customer’s employees, internal and external auditors, attorneys, accountants and
regulators in connection with an examination of Customer (or its Affiliates), will each have the

8 

 

 

right, during Liberty’s normal business hours in accordance with reasonable procedures and at
reasonable frequencies upon prior notice to Liberty, to: (i) examine all records and materials of
Liberty including, without limitation, premiums received for the Contracts, agents’ commissions for
the Contracts, premium accounting, billing and collections, financial accounting, Liberty’s
administrator’s fees, premiums received and deposited on behalf of Customer, subaccount positions
on both an aggregate and individual contractholder level, claims paid on behalf of Customer, and
authorized expenses paid on behalf of Customer and any other materials pertaining to the Services
including an examination of the operation of Liberty’s administration and other information systems
used to provide the Services (collectively, “Books and Records”), (ii) take extracts from
any such records, redacted to remove references to matters other than those under this Agreement,
(iii) visit and inspect any site operated by or for Liberty; (iv) interview employees and
subcontractors of Liberty regarding the Services, (v) run computer programs, subject to Third Party
Software license restrictions, and perform any other functions necessary for control assessment
and/or investigations, (vi) verify the integrity of Customer’s data, (vii) examine the systems that
process, store, support and transmit that data, and (viii) examine Liberty’s performance of the
Services including, to the extent applicable to the Services and to the charges therefore, audits
and reviews of practices and procedures, systems, applications development and maintenance
procedures and practices, general controls (e.g., organizational controls, input/output controls,
system modification controls, processing controls, system design controls, and access controls) and
security practices and procedures as necessary to enable Customer and its affiliates to meet
applicable regulatory requirements. Liberty shall provide to such employees, auditors, attorneys,
accountants and regulators such assistance as they reasonably require at Standard Rates. Visits,
inspections, interviews, requests, examinations, and other actions taken by Customer or its
affiliates, its agents and other persons pursuant to this Section 4.1(a) must be preceded by
reasonable notice to Liberty, and such actions will be conducted during normal business hours, and
will be reasonably related to the Services, provided that Liberty shall make its facilities,
personnel, records and similar items available at any time without prior notice if requested by
regulators pursuant to an audit of Customer or by Customer’s or its affiliates’ internal or
external auditors or attorneys pursuant to an audit specifically investigating an incident or
suspected incident posing a risk to Customer’s business or reputation. All identified incremental
costs associated with activities covered by this section that are a direct result of changes
requested directly by Customer (in contrast with changes made as a result of regulatory or industry
standards changing, which will be handled in accordance with Section 5.9) shall be subject to the
definition of Pass Through Costs of Exhibit 6.1 and may be reimbursable to Liberty. To the extent
such costs can be estimated and such costs exceed $5,000, Liberty shall notify Customer pursuant to
the terms of Section 16.7.

     (b) Following any audit or examination, Customer shall conduct (in the case of an internal
audit), or request its external auditors or regulators to conduct, a review conference with Liberty
to obtain factual concurrence with issues identified in the review. At Customer’s request,
Liberty shall furnish Customer with copies of Liberty’s external audit reports or agreed upon
procedure reviews as they relate to the Services (redacted to remove references to matters other
than the Services). Liberty and Customer shall meet to review any audit report or procedure review
promptly after the issuance thereof and mutually agree upon the appropriate manner, if any, in
which to respond to the changes suggested by the audit report or procedure review.

9 

 

 

Liberty shall formally reply in writing to Customer audits within 30 calendar days after the audit report is
issued. If Customer identifies to Liberty that Customer’s audit of Liberty identifies a bona fide,
reasonable problem or concern in Liberty’s control environment or security policies and procedures,
then, at Customer’s request, Liberty shall correct such problem within a mutually acceptable
timetable at no cost to Customer, except in the event the issue relates to a program or procedure
of Customer’s that Liberty is following based on the Business Requirements Document or other
instruction by Customer.

     (c) Such Books and Records shall be maintained in accordance with prudent standards of
insurance record keeping and shall be maintained for a period of not less than seven (7) calendar
years from the year of their creation. The commissioner of insurance or appropriate governmental
officer of any federal, state or local authority with jurisdiction over the Contracts, Customer or
Liberty shall have reasonable access to such Books and Records during normal business hours for the
purpose of examination, audit and inspection. In the event of termination of this Agreement,
Liberty may, by written agreement with Customer, transfer all Books and Records to a new
administrator rather than retain them for seven (7) calendar years from the year of their creation.
In such cases, the new administrator shall acknowledge, in writing, that it is responsible for
retaining the Books and Records of the Customer as required by applicable insurance law governing
third party administrators.

     4.2 Ownership of Books and Records. All Books and Records relating to the Contracts
shall be the property of Customer. However, Liberty shall retain the right to continuing access to
the Books and Records to permit Liberty to fulfill all of its obligations under this Agreement.

     4.3 Liberty Self Audit. Liberty shall, at no cost to Customer, provide Customer with
a Type II SAS 70 report within ninety (90) days after the end of each calendar year. The costs of
any corrective actions taken as a result of Type II SAS 70 reports will be paid by Liberty, except
to the extent the corrective actions relate to a program or procedure of Customer’s that Liberty is
following based on the Business Requirements Document or other instruction by Customer.

     4.4 Periodic Review. Customer shall have the right to inspect Liberty’s Books and
Records and standard reports generated in the normal course of providing the Services during normal
business hours for the purpose of examination and inspection.

Article 5

Certain Covenants Of Customer

     5.1 Except as otherwise set forth in Article 13, Customer acknowledges that Liberty assumes no
mortality or morbidity risk (“Insurance Risk”) for any of the Contracts, Contract owners,
and for the insureds and beneficiaries of the Contracts. For purposes of this Agreement,
Insurance Risk shall also include, without limitation, all compliance issues involving the
Contracts, such as income tax compliance with the Internal Revenue Code and any issues related
thereto, whether currently known or discovered during or after the Term or any Renewal Term of the
Agreement, and all regulatory and actuarial issues relating to the design, cash values and benefits
contents of the Contracts.

10

 

 

     5.2 Customer agrees to provide to Liberty, at Customer’s expense, access to Customer’s
knowledgeable employees and independent contractors that may be required in the performance of the
Transition Services, the Business Requirements Document and Additional Services Requests for the
Services.

     5.3 Customer agrees that it shall be solely responsible for determining the benefits, premium
rates, underwriting standards and criteria, claims payment procedures and claims settlement
procedures, anti-money laundering policies and procedures, and privacy notices and privacy policies
applicable to coverage of the Contracts and to the Contracts during the Term and any Renewal Term
of this Agreement, and for securing reinsurance for the Contracts, if any is necessary. Customer
shall provide Liberty, in writing, with all rules, procedures, guidelines, and instructions
pertaining to these matters which Liberty agrees to comply with in full.

     5.4 Liberty agrees that it shall provide to Customer a copy of any written complaints or a
tape recording of any oral complaints received by Liberty from any person within one Business Day
for written complaints and two Business Days for oral complaints. For purposes of this section,
“complaint” shall mean a written or oral communication which primarily expresses a grievance.
Liberty agrees further to cooperate fully with Customer in providing all necessary documentation in
its control so that Customer may respond in a timely fashion to the complainant. Liberty shall
also cooperate and make its personnel available to assist Customer in the event a complaint shall
involve services provided by Liberty. Customer shall be responsible for all complaints and
regulatory inquiries arising from the Contracts. Customer will maintain a complaint log and
perform any complaint reporting required of insurance companies in the various states.

     5.5 Customer agrees that it shall be responsible for filing and maintaining anti-fraud plans
in the jurisdictions requiring such anti-fraud plans to be filed, whether currently required or
required during the Term or any Renewal Term of this Agreement and for maintaining special
investigation units (“SIU’s”) in connection with any such anti-fraud plans in accordance
with applicable state law. Liberty shall cooperate with Customer in Customer’s efforts to prepare
any such required anti-fraud plan and in Customer’s reporting requirements associated with such
anti-fraud plans.

     5.6 Customer agrees to use reasonable efforts to (a) ensure that existing support of the
Contracts, both operational support and information technology support, will remain in place until
Liberty begins providing the Services on the Services Starting Date; and (b) ensure that
knowledgeable employees or contractors of Customer will be available to assist Liberty during the
Transition Services and in the preparation of the Business Requirements Document.

     5.7 Except as otherwise set forth in Article 13, Customer agrees that Liberty shall not be
responsible for any and all claims, litigation, damages, losses, actions, suits, proceedings,
including, without limitation, attorneys’ fees and costs incurred, whether contractual,
extra-contractual, or punitive in nature, which are in any way related to the Contracts, the
Insurance

11 

 

 

Risk, or which are related to the acts or omissions of Customer’s employees, agents,
brokers, and/or representatives who sold or serviced the Contracts.

     5.8 Customer agrees that Liberty shall have the right to audit, as Liberty deems necessary
from time to time, facts provided by Customer about the Contracts in order to independently verify
any information about the Contracts provided by Customer, which may affect the Transition Services,
the Services and the Additional Services. Liberty shall conduct any such audit during Customer’s
normal business hours and at Liberty’s sole expense. All such audits pursuant to this Section 5.8
shall be conducted in such a manner as to not unreasonably interfere with Customer’s normal
operations. All Confidential Information of Customer obtained as a result of any monitoring,
audits or inspections pursuant to this Section 5.8 shall be held by Liberty in accordance with the
provisions of Section 10.1.

     5.9 In addition to the fee increases otherwise stated in this Agreement, Customer agrees that,
subject to Liberty filing an Additional Services Request pursuant to Article 3.4 (and Exhibit
3.4.1) and Customer’s prior written approval, Services Fees specified for the Services may be
increased by Liberty in the event that legislative and/or regulatory changes affecting the
Contracts which occur during the Term or any Renewal Term of this Agreement and which are not
currently contemplated by the parties cause Liberty’s cost of performing the Services to result in
unforeseen increases. Any such increases in the Services Fees shall be reasonable and in
proportion to Liberty’s increased incremental costs for performing such Services and Liberty shall
use reasonable efforts to provide Customer with at least ninety (90) calendar days’ advance
written notice of any such increases.

     5.10 If required by the State of Arkansas, Department of Insurance, Customer shall, at no cost
to Liberty, obtain authority and any regulatory approvals that may be necessary for Liberty to have
lawful access to the Contracts and the Books and Records as of the Effective Date in order to
facilitate the performance by Liberty of the Transition Services, the Services and any Additional
Services. Customer shall, at no cost to Liberty, obtain any regulatory approvals that may be
necessary to transfer the Books and Records to Liberty’s Service Center.

     5.11 Customer warrants to Liberty that the Data is Year 2000 compliant. Customer further
warrants to Liberty that in the event “windowing” techniques were used during Year 2000 remediation
of the Books and Records, Customer shall provide Liberty with written documentation of all
applicable rules used in the Year 2000 remediation of the Data for which Liberty will perform the
Transition Services.

     5.12 Customer shall use reasonable efforts to maintain administration of the Contracts during
the Transition Services within the Performance Standards and with no material production backlog.
Customer agrees that Liberty shall not be liable for failure to maintain Performance Standards
resulting from material production backlogs on the Services Starting Date. Customer
will use reasonable efforts to maintain operations at the Performance Standards set forth in
Exhibit 3.2.1 prior to and as of the close of the last Business Day prior to the Services Starting
Date.

12

 

 

     5.13 Customer shall designate an employee of sufficient status within Customer’s organization
to act as liaison with Liberty to facilitate the obligations of Customer under the Agreement during
the Term and any Renewal Term of the Agreement, including monitoring, managing, and reporting.
Such designated employee shall be the prime source of communications to Customer by Liberty and
shall have sufficient authority to make decisions relating to the Agreement on behalf of Customer.

     5.14 During the Transition Services period, Customer shall provide Liberty with a secured
space in which to house Liberty employees or contractors at Customer’s premises. Customer will
provide Liberty with the ability to utilize existing Customer wiring and the power and
environmental controls to support the Liberty employees or contractors use of laptops, at no cost
to Liberty.

     5.15 Customer shall be responsible for valuation of the Contracts using existing methodologies
and for calculation of statutory, tax and GAAP (Generally Accepted Accounting Principles) reserves
for the Contracts. Liberty will provide valuation summary and seriatim valuation records
electronically to Customer to enable Customer to perform valuation for the Contracts.

     5.16 Customer shall retain primary responsibility for maintaining the Contracts in compliance
with all regulatory/legislative changes that occur during the Term or any Renewal Term of this
Agreement. Liberty shall endeavor to provide Customer with notice of regulatory/legislative
changes that would impact the Contracts and will assist Customer in the implementation of such
changes as directed by Customer. Any such changes shall be handled as Additional Services Requests
in accordance with Section 3.4.

     5.17 Customer warrants to Liberty that all initial and subsequent privacy notices for the
Contracts have been provided to Contract owners in accordance with the Gramm-Leach-Bliley Act and
any other applicable federal and state privacy laws. Customer shall provide Liberty with any
privacy notices it wishes Liberty to send to Contract owners in accordance with the
Gramm-Leach-Bliley Act.

     5.18 Customer shall provide Liberty with preliminary detailed specific technical interface
requirements for Customer’s financial and valuation systems requirements within thirty (30)
calendar days following the Effective Date and make reasonable efforts to provide final
requirements within sixty (60) days of the Effective Date. If the completion of these requirements
extends beyond 60 days of the Effective Date, then both parties shall meet to discuss the impact
upon the Services Starting Date and the expeditious resolution of the completion of these
requirements.

     5.19 Customer acknowledges and agrees that Customer shall bear all costs and expenses
associated with any employment termination costs, severance costs, outplacement costs and costs of
employee benefits for Customer’s employees whose employment may be affected as a result of this
Agreement.

13

 

 

     5.20 Customer shall obtain all necessary consents from Third Party Software vendors currently
used to administer the Contracts to enable use of the Third Party Software by Liberty in the
performance of the Transition Services and, if applicable, the Services.

     5.21 Customer agrees to comply with applicable state third party insurance administration laws
and regulations and Federal Securities Laws and regulations that place responsibilities upon
Customer, as insurer, and as depositor for the separate accounts for the Contracts.

     5.22 Customer agrees to provide the preliminary Year End closing schedule and requirements to
Liberty by September 30 of each year and updated Year End closing schedule requirements by November
1 of each year in a format mutually acceptable to both Customer and Liberty. Thereafter, Customer
shall provide Liberty with the Year End closing schedule and requirements for each insurer of the
Contracts as soon as such dates are known by Customer but in no event later than November 15 of
each year.

     5.23 Customer acknowledges that there may be some Contracts for which only partial Books and
Records or Data currently exists (the “Incomplete Records Contracts”). Customer agrees
that procedures for providing Services for Incomplete Records Contracts will be handled as
exception processing and will require written sign off from one of Customer’s Exhibit 3.4.2
designated persons or their designees. Customer further agrees that Liberty shall have no
liability either under this Agreement or to any third party for failure to maintain Books and
Records or Data on such Incomplete Record Contracts for any period prior to the Services Starting
Date. Additionally, such Incomplete Record Contracts shall not be subject to the Performance
Standards as long as notification to Customer of exception processing occurs within the Performance
Standards.

     5.24 Customer agrees to provide Liberty with written instructions as to Customer’s privacy
requirements, including, without limitation, instructions as to the use of encryption in sending
nonpublic personal information to Customer’s agents. If the costs of implementing such privacy
requirements increase Liberty’s costs of providing the Services, such costs shall be handled as
Pass Through Costs.

     5.25 Customer agrees to provide Liberty with written instructions as to Customer’s Mutual Fund
market timing policies and procedures, and any other relevant instructions pertaining to regulatory
requirements concerning the Contracts and their administration.

     5.26 Customer agrees to use its reasonable efforts to provide Liberty with Unit Values,
whether full or partial, by 8:20 pm ET on Business Days, to enable Liberty to apply prices to the
Contracts on the same day. For purposes of this Section 5.26, Unit Values shall mean separate
account index as defined in the Contracts. If not received by 8:20 pm ET, Liberty will use prior
day’s pricing and Customer agrees to absorb any Breakage that may result from applying prior
day’s pricing.

     (a) Liberty agrees to use its reasonable efforts to provide Customer with an electronic file
of all subaccount trading activity by 11:59 PM ET each Business Day.

14

 

 

     (b) Liberty agrees to use its reasonable efforts to provide Customer with an electronic file
of all general ledger activity by 4:00 AM ET covering all such activity for the preceding Business
Day.

     5.27 Customer shall use its reasonable efforts to provide Liberty with the complete Contract
History for the Contracts as Liberty may need in the performance of its duties under this
Agreement.

Article 6

Compensation

     6.1 Transition Services Fees. In consideration of Liberty providing the Transition
Services, Customer shall pay to Liberty the fees set forth in Exhibit 6.1 (the “Transition
Services Fees”), according to the payment terms set forth in Exhibit 6.1.

     6.2 Services Fees. In consideration of Liberty providing the Services, Customer shall
pay to Liberty the fees set forth in Exhibit 6.1 (the “Services Fees”), subject to any
applicable adjustments set forth in this Agreement, and subject to the Minimum Fees set forth in
Exhibit 6.1.

     6.3 Additional Service Fees. In consideration of Liberty providing the additional
services, Customer shall pay the Additional Service Fees in the manner agreed upon by Customer and
Liberty in accordance with Section 3.4.

     6.4 Telecommunication Charges. Unless otherwise set forth in this Agreement, all
telecommunication charges incurred by Liberty in respect of the Transition Services, the Services
or the additional services shall be paid by Customer as a Pass Through Cost.

     6.5 Billing Frequency. Unless otherwise set forth in this Agreement, the Service
Fees, any Pass Through Costs, and the Additional Service Fees (if applicable) shall be due and
payable by Customer to Liberty each month no later than thirty (30) calendar days after Customer’s
receipt of a detailed billing statement. Customer shall pay the full amount of the billing
statement to Liberty when due by wire (electronic) transfers of immediately available funds in U.S.
dollars. Customer shall be billed in advance no later than the seventh (7th) Business
Day of each month for the Services to be performed in that month, based upon the Service Fees and
Minimum Fees set forth in Exhibit 6.1, and any additional services provided in the prior month.
Bills for Additional Services may be billed separately. Liberty will prepare invoices based on the
Contract count at the beginning of the month. Both parties agree to review
the total billing statements on an annual basis and perform a true-up of the fees, as
necessary. If any payment from Customer is not received by Liberty on or before thirty (30) days
following Customer’s receipt of a billing statement from Liberty, then Customer shall pay Liberty
interest at a monthly rate equal to 10% per annum (or the maximum rate of interest allowed by law,
if lower) on the past-due amount until paid in full; provided, however, that the charging of
interest is not a consent to late payment. Neither (i) the failure of Liberty to deliver a billing
statement

15

 

 

for Services rendered or to be rendered under the terms of this Agreement nor (ii) any
error in the amount billed by Liberty for such Services shall constitute a waiver by Liberty of
Customer’s obligation to pay for such Services or additional services or Pass Through Costs.
Disputes concerning fees and expenses shall be resolved as provided in Paragraph 6.7 of this
Agreement.

     6.6 Partial Months. Charges for a partial month shall be prorated on a daily basis
based upon a thirty-day month.

     6.7 Billing Disputes. If Customer disagrees, in good faith, with any charge(s) on a
billing statement from Liberty, Customer shall give Liberty written notice, which complies with the
following provisions:

          (a) The notice shall separately identify each and every item in dispute, the amount which is
disputed, the specific reasons alleged by Customer for the disputed charge, and the amount which is
not disputed; if any, and

          (b) The notice shall be accompanied by payment in full for the undisputed amount of the
billing statement.

     Both parties agree to mutually negotiate to resolve any disputes within thirty (30) calendar
days of Customer’s written notice of a billing statement dispute. If the matter is not resolved
within said thirty (30) calendar days period, the matter shall be resolved as provided in Article
14 of this Agreement.

     6.8 Taxes.

(a) Taxation. Customer shall be liable for, and shall be invoiced for, any sales/use tax,
VAT, transfer tax, excise tax, tariff, duty or any other similar tax or payment in lieu thereof
imposed by any governmental authority arising from the performance or furnishing by Liberty of
Transition Services, Services and any additional services under this Agreement. Customer shall not
be responsible for payment of any income, franchise, gross receipts or personal property taxes paid
by Liberty as a result of this Agreement. In the event that a withholding tax or any sales, use,
excise, business or services tax is assessed on the provision of the Services by Liberty to
Customer or on Liberty’s charges to Customer under this Agreement, however levied or assessed,
Customer shall bear and be responsible for and pay the amount of any such tax. To the extent that
any withholding tax, sales, use, gross receipts, excise, value-added or services tax is required by
law to be separately identified in Liberty’s billings to Customer, Liberty shall separately
identify the tax and assume any and all responsibility for non-compliance, including tax, interest
and penalty assessments.

(b) Taxes Based on Relocation. Any taxes assessed, as determined by Customer, including a
gross-up thereon, on the provision of the Services for a particular site resulting from Liberty’s
relocating or rerouting the delivery of Services for Liberty’s convenience to, from or through a
location other than the locations or jurisdictions set forth in this Agreement shall be paid by
Customer, and Customer shall receive a credit with respect to the fees invoiced under this
Agreement equal to such payments made pursuant to this Section.

16

 

 

(c) Real Property Taxes. Customer and Liberty shall each bear sole responsibility
for all taxes, assessments and other real property-related levies on its owned or leased real
property.

(d) Cooperation. Customer and Liberty agree to cooperate to minimize imposition of
value-added taxes under this Agreement, including without limitation, entering into separate
agreements consistent with the terms and conditions of this Agreement that provide for the
provision of Services to Customer. Liberty will cooperate with Customer in obtaining any VAT
refund, sales/use tax refund or refund of any similar tax available to Customer. Liberty shall
promptly notify Customer of any tax liability or potential tax liability, and of any pending or
threatened tax audit or other proceeding that it knew or should have known would lead to the
imposition of tax liability against Customer, and shall afford Customer opportunity to
participate in any such audit or proceeding affecting its interests. Customer shall not be
liable for any tax liability imposed as a result of any audit where Customer is not provided with
such notice and opportunity to participate.

(e) Segregation. Customer and Liberty shall cooperate to segregate the fees paid hereunder
into the following separate payment streams: (a) those for taxable Services; (b) those for
nontaxable Services; (c) those for which a sales, use or other similar tax has already been paid;
and (d) those for which Liberty functions merely as a paying agent for Customer in receiving goods,
supplies or services (including leasing and licensing arrangements) that otherwise are nontaxable
or have previously been subject to tax. In addition, Customer and Liberty shall each reasonably
cooperate with the other to more accurately determine a Party’s tax liability and to minimize such
liability, to the extent legally permissible. Customer and Liberty shall each provide and make
available to the other any resale certificates, information regarding out-of-state sales or use of
equipment, materials or services, and any other exemption certificates or information requested by
a party.

Article 7

Fees and Costs

     7.1 Annual Adjustment to Fees. Not more than once per year, at the anniversary of the
Services Starting Date, Liberty may increase the Services Fees and Standard Rates by a percentage
equal to the percentage increase in the Consumer Price Index (“CPI”) as defined in Section 1.14.
The percentage increase will be calculated as follows:

	 	 	 	 	 	 	 	 	 	 	 
	

	 	 	 	 	 	CPI prior calendar year	 	 	 	 
	 

	 	Percentage increase
	 	=
	 	

	 	-
	 1	 
	

	 	 	 	 	 	CPI immediately preceding calendar year	 	 	 	 

No seasonal adjustments will be considered in calculating the percentage increase.

     7.2 Pass Through Costs. Customer shall pay certain pass through costs and expenses of
the type set forth in Exhibit 6.1 (the “Pass Through Costs”) identified in this Agreement,
which Pass Through Costs are related to the Transition Services, the Services and the additional
services.

17

 

     7.3 Audit of Charges. Upon at least five (5) Business Days’ notice from Customer and
no more than twice during any calendar year (unless a previous audit reveals a discrepancy),
Liberty shall provide Customer with access to all of the financial records and supporting
documentation in respect of its charges to Customer, excluding Liberty’s pricing model for this
Agreement. If, as a result of such audit, Customer determines that Liberty has overcharged
Customer, Customer shall notify Liberty of the amount of such overcharge and Liberty shall promptly
pay to Customer the amount of the overcharge. All Confidential Information of Liberty obtained as
a result of any monitoring, audits or inspections pursuant to this Section 7.3 shall be held by
Customer in accordance with the provisions of Article 10.

     7.4 Undercharges. If, as a result of an internal audit of its charges to Customer,
Liberty determines that it has undercharged Customer, Liberty may provide Customer with a billing
statement in respect of such amount. Any such billing statement shall include the information
specified in Section 6.5 and evidence that the amount was not charged to Customer previously. Upon
receipt of this information and evidence, Customer shall pay the amount of the undercharge
according to Section 6.5, unless disputed in good faith.

Article 8

Term and Termination

     8.1 Term. The term of this Agreement shall begin on the Effective Date and shall
continue for a period ending ten (10) years following the Services Starting Date as outlined in
Exhibit 3.1, unless terminated earlier pursuant to this Article 8 or extended as provided below
(the “Term”). Customer may renew this Agreement and extend the Term for an additional
period mutually agreed upon by both parties (the “Renewal Term”), under mutually agreeable
terms and conditions including, without limitation, new pricing for the Renewal Term, by providing
notice to Liberty at least 180 calendar days before the expiration of the initial Term described in
the first sentence of this Section 8.1.

     8.2 Customer Termination for Convenience. Customer may terminate the Term of this
Agreement on and after the first anniversary of the Services Starting Date, at any time and without
cause, upon at least ninety (90) calendar days notice to Liberty prior to such termination date,
and provided further that Customer pays to Liberty the applicable Termination Fee as set forth in
Section 8.6, payable together with the notice of termination, less any applicable pro rata portion
of the final month’s Services Fees paid by Customer to Liberty in advance.

     8.3 Termination for Cause. If either party fails to perform any of its material
obligations under this Agreement (except as provided in Section 8.4), and such failure is not cured
within thirty (30) calendar days after notice is given to the defaulting party specifying the
nature of the default, the non-defaulting party may, upon further notice to the defaulting party,
terminate this Agreement as of the date specified in such notice of termination; provided,
however, that if the defaulting party is using its best efforts to cure such failure at the end
of such thirty (30) calendar day period and diligently pursues such efforts thereafter, the
non-defaulting party may not terminate this Agreement unless such failure continues for an
additional sixty (60) calendar days. No Termination Fee shall be payable by Customer upon
termination of the Agreement by Customer for failure of Liberty to perform pursuant to this Section
8.3. A

18

 

 

Termination Fee as set forth in Section 8.6 shall be payable by Customer upon termination
of the Agreement by Liberty for failure of Customer to perform pursuant to this Section 8.3.

     8.4 Termination for Insolvency. In the event that either Liberty or Customer becomes
or is declared insolvent or bankrupt, is the subject of any proceedings relating to its
liquidation, its insolvency or for the appointment of a receiver or similar officer for it, makes
an assignment for the benefit of all or substantially all of its creditors or enters into an
agreement for the composition, extension, or readjustment of all or substantially all of its
obligations, then, unless the insolvent or bankrupt party immediately gives adequate assurance of
the future performance of this Agreement, the other party may, by giving written notice thereof to
such party, terminate this Agreement as of a date specified in such notice of termination. If
Customer provides written notice to Liberty of its intention to terminate this Agreement due to
Liberty’s insolvency, bankruptcy or receivership, no Termination Fees shall apply to such
termination.

     (a) In the event that Customer determines that Liberty is experiencing a Deteriorating
Financial Condition, Customer shall have the right to terminate this Agreement immediately without
opportunity to cure. “Deteriorating Financial Condition”, with respect to a publicly
traded company, or a down stream subsidiary of a publicly traded company, shall mean any of the
following events for more than 30 calendar days: (1) Common stock is trading below US$1 in NYSE or
NASDAQ or (2) delisted from NYSE or NASDAQ or suspended from trading. With respect to a both
publicly traded companies and privately held companies, Deteriorating Financial Condition shall
also mean an inability to pay creditors for a period of more than 30 calendar days.

     8.5 Effect of Expiration or Termination. Upon the expiration of this Agreement or
termination of this Agreement for any reason:

          (1) Liberty shall provide to Customer those Services or additional services requested by
Customer for up to twelve (12) months from the date of such expiration or termination. Customer
shall pay Liberty for such Services or additional services at the then current rates for Services
Fees and Additional Services Fees then in effect.

          (2) Customer shall pay Liberty for all Services and additional services performed through the
final date of the performance of such services.

          (3) Customer shall be (a) obligated to pay a Termination Fee to Liberty as set forth in
Section 8.6 in the event of a termination of this Agreement, except as provided for in Section 8.3
and 8.4 or for any termination that occurs during a Renewal Term; and (b) required to make any
further payments under Section 6.8 (Taxes).

          (4) Upon termination or expiration of this Agreement for any reason, Liberty agrees that, in
order to provide for uninterrupted service of the Contracts to Customer, at Customer’s request,
Liberty shall provide, at Liberty’s then applicable Standard Rates, all reasonable assistance
requested by Customer in promptly and orderly moving all Services to Customer or to a third party
selected by Customer.

19

 

 

     8.6 Termination Fee. The termination fee (the “Termination Fee”) payable by
Customer to Liberty under Section 8.2 and Section 8.3 of this Agreement, shall be:

	 	(a)  	$2,800,000, for terminations effective from the Effective
Date to the period ending before the first anniversary date from the Services Starting
Date;
	 
	 	(b)  	$2,500,000, for terminations effective in the period beginning on and after the
first anniversary date and ending before the second anniversary date from the Services
Starting Date;
	 
	 	(c)  	$2,300,000, for terminations effective in the period beginning on and after the
second anniversary date and ending before the third anniversary date from the Services
Starting Date;
	 
	 	(d)  	$2,000,000, for terminations effective in the period beginning on and after the
third anniversary date and ending before the fourth anniversary date from the Services
Starting Date;
	 
	 	(e)  	$1,800,000, for terminations effective in the period beginning on and after the
fourth anniversary date and ending before the fifth anniversary date from the Services
Starting Date;
	 
	 	(f)  	$700,000, for terminations effective in the period beginning on and after the
fifth anniversary date and ending before the sixth anniversary date from the Services
Starting Date;
	 
	 	(g)  	$500,000, for terminations effective in the period beginning on and after the
sixth anniversary date and ending before the seventh anniversary date from the Services
Starting Date;
	 
	 	(h)  	$400,000, for terminations effective in the period beginning on and after the
seventh anniversary date and ending before the eighth anniversary date from the
Services Starting Date;
	 
	 	(i)  	$300,000, for terminations effective in the period beginning on and after the
eighth anniversary date and ending before the ninth anniversary date from the Services
Starting Date; and
	 
	 	(j)  	$200,000, for terminations effective in the period beginning on and after the
ninth anniversary date and ending before the tenth anniversary date from the Services
Starting Date.
	 
	 	(k)  	No Termination Fees shall apply for terminations effective during the Renewal
Term or any subsequent Renewal Terms.

20

 

 

     If there is a partial termination of the Contracts in the first five years of this Agreement
due to sale of a portion of the Contracts, exclusive of Contracts insured by Monarch Life Insurance
Company, Customer shall pay a pro rata share of the Termination Fees based upon the percentage of
Contracts terminated as measured against the Contracts in force on the Effective Date.

     8.7 Duties of Customer upon Termination. Within thirty (30) Business Days after the
effective date of the termination of this Agreement, Liberty shall submit a final bill for services
provided through the date of termination. Within thirty (30) Business Days of receipt of this
statement, Customer shall pay Liberty all sums owing under the terms of this Agreement. Customer
shall return to Liberty, at Liberty’s expense, all Liberty property, equipment, manuals, operating
instructions and procedures, together with any copies thereof, and all notes, memoranda or other
documents relating to Liberty Services and the System.

     8.8 Duties of Liberty Upon Termination. Within thirty (30) Business Days after the
effective date of termination, Liberty, at Customer’s expense, shall return all Customer property
including: equipment, manuals, operating instructions and procedures, together with any copies
thereof and all notes, memoranda or other documents or materials relating to the Customer or any
Contracts.

Article 9

Systems and Proprietary Rights

     9.1 Access to Customer Software and Third Party Software. Customer hereby agrees to
use reasonable efforts to obtain for Liberty, at no cost to Liberty, on or before the Effective
Date, a non-exclusive, royalty-free, non-transferable right and license to access and use, and copy
for back-up purposes, any Customer proprietary software on which the Contracts are being
administered by Customer, together with any and all associated software documentation (the
“Customer Software”) and, subject to applicable software license restrictions, any Third
Party Software on which the Contracts are being administered by Customer, together with any and all
associated software documentation, to enable Liberty to perform the Transition Services, and the
Services. To the extent necessary to give rights to Liberty to use and modify the Third Party
Software on which the Contracts are being administered as of the Effective Date, Customer shall, at
Customer’s expense, obtain such rights for Liberty from applicable third party software vendors.
Upon expiration or termination of this Agreement or the end of Liberty’s need to use portions of
the Customer Software or Third Party Software licensed by Customer, the applicable rights granted
to Liberty in this Section 9.1 shall immediately revert to Customer, except as necessary for
Liberty to carry out its obligations under Section 8.5. When Liberty has fulfilled its obligations
under Section 8.5, it shall (i) deliver to Customer a current copy of all the Customer
Software or Third Party Software in Liberty’s possession, (ii) destroy or erase all other
copies of the Customer Software or Third Party Software originally licensed by Customer in
Liberty’s possession, and (iii) certify in writing to Customer that Liberty has complied with the
obligations of this Section 9.1. Listings of the Customer Software and Third Party Software to be
used in the performance of the Transition Services and Services are attached as Exhibit 9.1.

21

 

 

     9.2 Liberty Software. At termination or expiration of this Agreement, if Customer so
requests, Liberty shall offer to sell Customer a license to use the Liberty Software (proprietary
to Liberty) then being used by Liberty to perform the Services for the Contracts for the then
current license fee for the Liberty Software. Any modification to the Liberty Software made by
Liberty to support administration of the Contracts or performance of the Services will be licensed
to Customer at no additional charge.

     9.3 Ownership of Data. All data and information submitted to Liberty by Customer in
connection with the Transition Services, the Services and the additional services or any other
services performed under this Agreement, or produced by Liberty in performing the Transition
Services, the Services and additional services or any other services performed under this Agreement
(collectively, the “Data”) is and shall remain the exclusive property of Customer and shall
be considered the Confidential Information of Customer. Data (a) shall not be used by Liberty
other than pursuant to this Agreement, (b) shall not be disclosed, sold, assigned, leased or
otherwise provided to third parties by Liberty except as necessary to perform the Transition
Services, the Services and the additional services, and (c) shall not be commercially exploited by
or on behalf of Liberty, its employees or agents.

     9.4 Correction of Errors. Customer is responsible for (a) the accuracy and
completeness of the Data provided to Liberty for the Transition Services and (b) any errors in and
with respect to the Data directly attributable to any inaccurate or incomplete Data provided by
Customer to Liberty. Upon discovery of Customer - created errors or inaccuracies in the Data,
Liberty shall, at Customer’s expense, with reasonable promptness in light of the nature of the
errors or inaccuracies, correct any errors or inaccuracies in the Data. However, Customer may,
during the Transition Services period, elect to correct errors or inaccuracies in the Data and
advise Liberty of those corrections.

     9.5 Ownership of Media. Unless furnished or paid for by Customer, all media upon
which Data is stored is and shall remain the property of Liberty.

     9.6 Return of Data. Upon (i) the expiration or termination of this Agreement for any
reason, (ii) the reasonable request by Customer at any time, at Customer’s expense, (iii) with
respect to any particular Data, on such earlier date that such Data is no longer required by
Liberty in order to provide the Services or additional services or in order to comply with
applicable third-party insurance administrator laws and regulations, Liberty shall (1) promptly
return to Customer all Data, in a flat file format and on the media reasonably requested by
Customer, or, at the election and direction of Customer (2) with respect to Data returned pursuant
to clauses (i) or (iii) above and at the election and direction of Customer, erase or destroy all
Data in Liberty’s possession and provide written certification thereof. Any archival tapes containing Data shall be
used by Liberty solely for back-up purposes.

Article 10

Confidentiality; Hiring Prohibitions

     10.1 Customer Confidential Information. Liberty will regard and preserve as
confidential all information related to the business of Customer, its parent, affiliates and

22

 

 

subsidiaries, and its or their respective clients, contractholders or contractholders contained in
blocks of business serviced by Customer, or suppliers (hereinafter the “Related Companies”)
that may be obtained by Liberty as a result of this Agreement (the “Confidential
Information”). Liberty will not, without first obtaining Customer’s prior written consent,
disclose to any person, firm or enterprise, or use for its benefit, any information relating to the
pricing, methods, processes, financial data, lists, apparatus, statistics, programs, research,
developments or related information of Customer, the Related Companies or its or their respective
clients or suppliers concerning past, present or future business activities of said entities.
Liberty shall inform Liberty Personnel providing Services to Customer under this Agreement of the
confidentiality obligations set forth in this Agreement. Liberty shall take all steps necessary to
assure that confidentiality is maintained by its personnel. The obligations contained in this
paragraph do not extend to information that: (i) is already known to the Liberty at the time of
disclosure without restriction or breach of any agreement; (ii) is obtained from a third party
without restriction or breach of this Agreement; (iii) is public information or becomes public
through no fault of the party to whom such information has been disclosed; (iv) is independently
developed by the Liberty without the use of Customer’s Confidential Information; (v) is required to
be disclosed by law or court order (provided that the Liberty shall promptly notify Customer of any
such requirement prior to disclosure in order to afford Customer an opportunity to seek a
protective order to prevent or limit disclosure), or (vi) is directly related to the tax treatment
and tax structure of the transaction contemplated hereby and all materials of any kind (including
opinions or other tax analyses) relating to such tax treatment and tax structure. For purposes of
the preceding sentence, tax refers to U.S. federal and state tax.

Global Privacy Language. For the purposes of this Agreement, including this Section
10.1, the term “personal information” means: (i) any “nonpublic personal information” as such
term is defined under the Title V of the U.S. Gramm-Leach-Bliley Act, 15 U.S.C. § 6801 et seq.,
and the rules and regulations issued thereunder or (ii) any information that can specifically
identify an individual, such as name, address, social security number (“SSN”) etc.,
together with any other information that relates to an individual who has been so identified.
The obligations set forth in this Section shall survive termination of this Agreement.
Notwithstanding anything to the contrary contained in this Agreement, with respect to any
personal information delivered or made available to Liberty under or pursuant to this Agreement,
Liberty agrees that:

	 	(i)  	as between Customer and it, Customer owns and retains all rights in and to such
personal information, and it shall use and process such personal information solely for
the purposes of carrying out its obligations under, and as expressly set forth in, this
Agreement or as otherwise expressly directed in writing by Customer and not for any other
purposes;
	 
	 	(ii)  	it shall maintain an effective information security program, keep such personal
information confidential and take appropriate administrative, technical and physical
measures to secure and protect such personal information against unauthorized,
unlawful or accidental access, disclosure, transfer, destruction, loss or alteration;

23

 

 

	 	(iii)  	it shall limit access to such information to a need-to-know basis and shall
inform its employees and sub-contractors who have access to such personal information
of its highly confidential nature and the limitations and procedures that apply to
access and use of such personal information;
	 
	 	(iv)  	except as otherwise provided in Section 3.2 (i), it shall not disclose or make
such personal information available to sub-contractors without: (i) Customer’s prior
written consent; and (ii) entering into an agreement in writing with the
sub-contractor whereby the sub-contractor agrees to comply with, and treat such
personal information in accordance with, this Section, using a nondisclosure form
acceptable to Customer;
	 
	 	(v)  	it shall promptly notify Customer when it becomes aware of any unauthorized
access of such personal information or if it becomes the subject of any government,
other enforcement or private proceeding relating to its data handling practices;
	 
	 	(vi)  	it shall use and process such personal information in accordance with applicable
privacy and data protection legislation, and in the case of any legal or regulatory
obligation to disclose such personal information,
	 
	 	(vii)  	it shall notify and co-operate with Customer, limit any disclosure to the
minimum required by law and, to the extent possible, request that such information be
kept confidential;
	 
	 	(viii)  	it has no reason to believe that any legislation prevents it from fulfilling its
obligations under this Agreement and it shall promptly notify Customer of any adverse
change in any such legislation applicable to its obligations under this Agreement in
which event Customer is entitled to suspend the delivery of personal information and,
if necessary, terminate this Agreement with immediate effect;
	 
	 	(ix)  	it shall not, except as explicitly agreed to in writing by Customer, under any
arrangement established under this Agreement collect any personal information on
Customer employees or clients from any cookies, applets, Web bug or beacons or
similar technologies;
	 
	 	(x)  	it shall, upon the reasonable request of Customer, provide Customer with
information regarding its privacy/data protection practices and shall allow Customer
reasonable access to audit compliance by it with this Section;
	 
	 	(xi)  	it shall, on termination of this Agreement, promptly and in a secure manner
return to Customer all such personal information and any copies or, at Customer’s
written direction, destroy such personal information and copies (and certify that
this has been done) unless any legislation or legal action prevents it from doing so
in which case it warrants to keep such personal information and

24

 

 

	 	   	copies secure and confidential and no longer to actively process them and to return or, at Customer’s
written direction, destroy such personal information and copies (and certify that
this has been done) as soon as such legislation or legal action no longer prevents it
from doing so;
	 
	 	(xii)  	it shall promptly notify Customer’s legal counsel of any access requests made to
it directly by individuals whose personal information may have been delivered or made
available to it pursuant to this Agreement (“data subjects”), and shall, prior to
responding to such request, provide copies of any such personal information that it
is processing on behalf of Customer within such reasonable time limits as may be
specified by Customer;
	 
	 	(xiii)  	and it shall make available to any data subject on request a copy of this Section,
and notwithstanding any other provision of this Agreement shall permit a data subject
to enforce the provisions of this Section.

Nothing in Section 10.1 shall affect any data or information that Liberty validly receives from a
source apart from (i) this Agreement or (ii) the relationship established pursuant to this
Agreement, nor affect Liberty’s rights to use such data or information, provided that if Liberty
receives any such data or information that is identical to any personal information that is
delivered or made available to Liberty under or pursuant to this Agreement, then that fact shall
in no way diminish Liberty’s obligations to keep the personal information so provided by Customer
separate and secure. For avoidance of doubt, and as an example only, this means that if Liberty
receives a name and social security number from Customer and also receives an identical name and
SSN from a third party not acting on behalf of Customer, then this Agreement does not affect in
any way how Liberty handles or uses the information received from the third party, but Liberty
still must keep the data received from Customer separate and secure under this Agreement.

To the extent that Liberty receives, creates, has access to or uses protected health information
regarding individuals who are owners of or eligible for benefits under the Contracts
(“PHI”), in accordance with the requirements of the federal Health Insurance Portability
and Accountability Act of 1996 and related regulations (“HIPAA”), as may be amended from
time to time, Liberty agrees:

	 	a.  	Not to use or disclose PHI except i) to perform functions, activities, or
services for, or on behalf of, the Customer as specified in this Agreement and
consistent with applicable laws, or ii) to the extent that such use or disclosure is
required by law. Any such use or disclosure shall be limited to that required to perform such
services or to that required by relevant law
	 
	 	b.  	Not to disclose PHI to any third party, including, without limitation,
Liberty’s third party service providers except to the extent necessary to carry out
Liberty’s obligations under this Agreement and then only with an agreement in writing
from the third party to use or disclose such PHI only to the extent necessary to carry
out their respective obligations to Liberty and for no other purposes. Liberty and
Customer shall maintain, and shall require all third parties approved to maintain

25

 

 

	 	   	effective information security measures to protect PHI from unauthorized disclosure or
use.
	 
	 	c.  	To use appropriate safeguards to prevent use or disclosure of PHI other than
as permitted by this Agreement and to implement administrative, physical and technical
safeguards to reasonably protect the confidentiality, integrity and availability of
any electronic PHI that each party creates, receives, maintains or transmits on behalf
of the other.
	 
	 	d.  	Liberty and Customer shall provide each other with information regarding such
security measures upon the reasonable request of the other party and promptly provide
the other with information regarding any failure of such security measures or any
security breach related to PHI. Liberty and Customer shall attempt to mitigate any
harmful effect of any use or disclosure that is made in violation of the requirements
of this Agreement.
	 
	 	e.  	To, within 15 Business Days of either Liberty’s or Customer’s request, provide
the other party with any PHI or information relating to PHI as deemed necessary by
the party to provide individuals with access to, amendment of, and an accounting of
disclosures of PHI.
	 
	 	f.  	To make records relating to use or disclosure of PHI available to the
Secretary of the United States Department of Health and Human Services at his/her
request to determine compliance with HIPAA.
	 
	 	g.  	To, upon termination of the Agreement, in accordance with either party’s
wishes, either return or destroy all PHI maintained in any form and retain no copies.
If Liberty and Customer agree that such return or destruction is not feasible, the
parties shall extend the protections of this Agreement to the PHI beyond the
termination of this Agreement, in which case any further use or disclosure of the PHI
will be solely for the purposes that make return or destruction infeasible.
Destruction without retention of copies is deemed “infeasible” if prohibited by the
terms of this Agreement or by applicable law, including record retention requirements
of various state insurance laws.

Notwithstanding any of the above, Customer shall be solely responsible for providing Privacy
Notices and obtaining any necessary HIPAA Authorizations.

For these purposes, PHI means individually identifiable information that is transmitted or
maintained in any medium and relates to the past, present or future physical or mental health or
condition of an individual; the provision of health care to an individual; or future payment for
the provision of health care to the individual. PHI includes demographic information about
individuals, including names; addresses; dates directly related to an individual, including but
not limited to birth date; telephone numbers; fax numbers; E-mail addresses; Social Security

26

 

 

numbers; policy numbers, medical record numbers; account numbers; and any other unique identifying
number, characteristic, or code.

Breach of any of these provisions by either party shall constitute a material breach of this
Agreement and provide grounds for immediate termination of this Agreement by the breached party,
notwithstanding any other provisions of this Agreement.

This Article will survive the termination of this Agreement.

     10.2 Unauthorized Acts. Each party shall: (1) notify the other party promptly of any
material unauthorized possession, use or knowledge, or attempt thereof, of the other party’s
Confidential Information by any Person which may become known to such party, (2) promptly furnish
to the other party full details of the unauthorized possession, use or knowledge, or attempt
thereof, and assist the other party in investigating or preventing the reoccurrence of any
unauthorized possession, use or knowledge, or attempt thereof, of Confidential Information, (3) use
reasonable efforts to cooperate with the other party in any litigation and investigation against
Persons deemed necessary by the other party to protect its proprietary rights and (4) promptly use
all reasonable efforts to prevent a reoccurrence of any such unauthorized possession, use or
knowledge of Confidential Information. Each party shall bear the cost it incurs as a result of
compliance with this Section 10.2.

     10.3 Action by Parties. No party shall commence any legal action or proceeding in
respect of any unauthorized possession, use or knowledge, or attempt thereof, of the other party’s
Confidential Information by any Person not a party to this Agreement without providing prior notice
of the action to the other party.

     10.4 Employee Solicitation. Liberty shall not solicit, offer work to, employ or
contract with any employee, agent, or independent contractor of Customer, and; b) Customer shall
not solicit, offer work to, employ or contract with any employee, agent, or independent contractor
of Liberty if such person is, or has within the preceding twelve (12) months, been engaged for
Liberty in the performance of any work or project between Liberty and Customer described in this
Agreement, without Liberty or Customer as the case may be first obtaining the written permission of
the other party. This Section 10.4 shall not restrict the right of either Party to: (i) solicit
the employment of personnel of the other party after such personnel have separated or
have been separated from the service of such Party, provided that the soliciting Party did not
solicit such separation; (ii) solicit or recruit generally by advertising in the media utilizing
journals, newspapers and other publications of general circulation and (iii) utilize the services
of a third-party professional agency regularly engaged in such solicitations as long as such agency
is not directed to solicit employees, agents or independent contractors of Liberty or Customer
without Liberty or Customer as the case may be first obtaining the written permission of the other
party.

     10.5 Non-Solicitation of Clients. Liberty agrees that the names and addresses of all
clients and prospective clients of Customer and of Customer’s parent company, and of any affiliated
company, which may come to the attention of Liberty or any company or person

27

 

affiliated with
Liberty as a result of this Agreement are confidential. Such customer information shall not be
used, without the prior written consent of Customer, by Liberty or any company or person affiliated
with Liberty for any purpose whatsoever except as may be necessary in connection with the services
provided hereunder.

     In no event shall the names and addresses of such customers and prospective customers that
constitute confidential information under this Agreement be furnished by Liberty to any other
company or person including, but not limited to: (1) any of such company’s managers, agents or
brokers; (2) any company affiliated with Liberty or any manager, agent or broker of such company;
or (3) any securities broker-dealer or any insurance agency.

     Liberty agrees that neither Liberty nor any company or person affiliated with Liberty shall
solicit directly any customers whose names constitute confidential information pursuant to this
section.

     The intent of this paragraph is that Liberty shall not utilize, or permit to be utilized, its
knowledge of Customer, of Customer’s parent company or of any affiliated companies or of the
clients of any of the foregoing for the solicitation of sales of any products or services.

Article 11

Representations And Warranties

     11.1 By Customer. Customer represents, warrants, and covenants that:

     (a) it is an insurance company duly incorporated, validly existing and in good standing
under the laws of Arkansas; ML Life Insurance Company of New York is an affiliated life
insurance company duly incorporated, validly existing and in good standing under the laws of
New York; and it has an existing administration agreement with Monarch Life Insurance
Company under which it has the authority to subcontract to Liberty the administration of the
business of Monarch Life Insurance Company;

     (b) it has all the requisite corporate power and authority to execute, deliver and
perform its obligations under this Agreement;

     (c) if required, the Arkansas Department of Insurance and the New York Department of
Insurance has each given Customer approval to enter into this Agreement and to move its
Books and Records pursuant to this Agreement, and no other approval, authorization or
consent of any governmental or regulatory authority is required to be obtained or made by it
in order for it to enter into and perform its obligations under this Agreement;

     (d) it has not, and will not, disclose any Confidential Information of Liberty in
violation of the terms of this Agreement;

     (e) concerning only the contracts issued and sold by the Customer or its subsidiary,
the Contracts which are the subject of the Transition Services and the Services

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were issued
in conformity in all material respects with the laws and regulations of the jurisdiction
governing the issue or delivery of such Contracts at the time of issue and such Contracts
will remain in compliance in all material respects with applicable laws and regulations
during the term of this Agreement. The Contract forms used to issue the Contracts that are
the subject of the Services have been filed, where necessary, with the appropriate state
insurance authorities in the states where the Contracts have been sold and met in all
material respects all applicable legal requirements of each such state at the time in which
they were sold;

     (f) there is no claim, action, suit, investigation, or proceeding pending or, to
Customer’s knowledge, contemplated or threatened against Customer which seeks damages or
penalties in connection with any of the transactions contemplated by this Agreement or to
restrict or delay the transactions contemplated hereby or to limit in any manner Liberty’s
rights under this Agreement;

     (g) there are no brokers with claims to fees based upon the transactions contemplated
under this Agreement;

     (h) the nature of Customer’s obligations are time sensitive, and accordingly, time is
of the essence in the performance of their obligations under this Agreement;

     (i) Customer has obtained, or shall have obtained on or before the Effective Date,
consent or licenses from all necessary Third Party Software vendors with which Customer has
licenses to permit Liberty to gain access to and to use the Third Party Software and
Customer Software currently used by Customer to administer the Contracts; and

     (j) there are no regulatory authority restraints known to the Customer on the Books and
Records and Data being transferred to the Service Center.

     11.2 By Liberty. Liberty represents, warrants and covenants that:

I.    (a) it is a licensed third party administrator duly incorporated, validly existing and in
good standing under the laws of South Carolina;

     (b) it has all requisite corporate power and authority to execute, deliver and perform
its obligations under this Agreement;

     (c) no approval, authorization or consent of any governmental or regulatory authority
is required to be obtained or made by it in order for it to enter into and perform its
obligations under this Agreement;

     (d) it has not, and will not, disclose any Confidential Information of Customer in
violation of the terms of this Agreement;

29

 

     (e) the Transition Services, the Services and the additional services shall be rendered
by personnel reasonably qualified by training and experience to perform such services;

     (f) the Services and the additional services do not and will not infringe upon the
proprietary rights of any third party and Liberty has obtained all necessary software
licenses to enable it to perform the Transitional Services and the Services;

     (g) the Services and the additional services will be provided with diligence and shall
be executed in a workmanlike manner in accordance with practices and professional standards
used in well-managed operations performing services similar to the Services and the
additional services;

     (h) Liberty has, or prior to the performance of any Services will have, all licenses
and permits from state or federal regulatory authorities required for the performance of the
Services and the additional services;

     (i) there is no claim, action, suit, investigation, or proceeding pending or, to
Liberty’s knowledge, contemplated or threatened against Liberty which seeks damages or
penalties in connection with any of the transactions contemplated by this Agreement or to
restrict or delay the transactions contemplated hereby or to limit in any manner Customer’s
rights under this Agreement;

     (j) there are no brokers with claims to fees based upon the transactions contemplated
under this Agreement;

     (k) the nature of Liberty’s obligations are time sensitive, and accordingly, time is of
the essence in the performance of Liberty’s obligations under this Agreement; and

II.    Liberty recognizes that, in providing the services called for hereunder, Liberty’s
employees, agents, independent contractors, subcontractors or other personnel (herein
collectively “Liberty Personnel”) will have access to sensitive information
regarding Customer, its clients, services and its participation in various financial markets. In
addition, Liberty recognizes that Customer is regulated by several government and industry
regulatory and self-regulatory agencies that require it to screen and monitor individuals
who have access to client personal information and other non-public information. As such,
Liberty agrees to the procedures found below.

III.    Prior to assigning or permitting any Liberty Personnel to provide services under this
Agreement, Liberty shall:

     (i) Subject all Liberty Personnel who will perform services under this
Agreement to a background check. Such background check shall be performed by
Liberty at its expense and shall be thorough enough to indicate whether its Liberty
Personnel have been convicted of, or pled guilty or no contest to, any felony in the

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United States and in any foreign country where the Liberty Personnel are providing
the services.

     (ii) Require all Liberty Personnel who will perform services under this
Agreement to complete and sign the Liberty Personnel Employment Application Form, a
copy of which is attached hereto as Exhibit 11.2, before the Liberty Personnel are
assigned to provide services under this Agreement. Liberty shall review the
completed forms, and maintain all such forms in Liberty’s company records during the
time that such Liberty Personnel provide services under this Agreement, and for an
additional seven years thereafter. Liberty shall provide Customer with access to
these records upon Customer’s request.

               (iii) Fingerprint and photograph all Liberty Personnel who will perform services under
this Agreement that require NASD licensing and maintain such materials in Company records
during the time that such Liberty Personnel provides services under this Agreement, and for
an additional five years thereafter.

               (iv) Not knowingly assign or permit any Liberty Personnel to provide services under
this Agreement who have, within the previous ten-year period, been convicted of, or pled
guilty or no contest to, any felony, regardless of the crime. In addition, Liberty shall
not knowingly assign or permit any Liberty Personnel to provide services under this
Agreement who have been convicted of, or pled guilty or no contest to, any misdemeanor
involving:

	 	•  	Purchase or sale of a security	 	•  	Bribery
	 
	 	•  	Burglary	 	•  	Embezzlement; theft
	 
	 	•  	Counterfeiting	 	•  	Conspiracy
	 
	 	•  	Forgery	 	•  	Robbery
	 
	 	•  	Extortion	 	•  	Petit Larceny
	 
	 	•  	Making a false statement to a Government Official, Law Enforcement Officer, or under oath	 	•  	Use or possession of stolen property

IV. During the term of the Agreement, Liberty shall:

          (a) Require all Liberty Personnel who provide services under the Agreement to immediately
report to appropriate Liberty management if they are arrested, arraigned, indicted, charged,
convicted of or plead no contest to, any felony or any of the misdemeanors listed above.

31

 

Liberty
shall immediately provide such information to the following Customer contacts: Customer’s Office of
General Counsel.

          (b) Inform Customer immediately if it suspects or has determined that any Liberty Personnel
providing services under this Agreement is engaged in (1) unlawful activity involving or related to
the services provided under this Agreement or (2) activity that would be a violation of the terms
and conditions of this Agreement, including, but not limited to:

	 	•  	Insider Trading	 	•  	Breach of confidentiality
	 
	 	•  	Improper or illegal use of information obtained as a result of Liberty’s performance of the services under this
Agreement	 	•  	Abusive or inappropriate action or communication directed to a Customer employee
	 
	 	•  	Making a false statement to a Customer employee	 	•  	Sexual harassment of a Customer employee
	 
	 	•  	Theft

	 	•  	Provide reasonable cooperation to Customer in any Customer investigation of
alleged breach of the terms of this Section 11.2 by Liberty or its Liberty
Personnel.

     (c) Information provided by Liberty to Customer in Liberty’s RFP Response dated
November 4, 2003 in connection with these Services is true and accurate as of the date of
this Agreement.

     (d) NO EMPLOYEE, AGENT, OR REPRESENTATIVE OF CUSTOMER HAS BEEN OFFERED, SHALL BE
OFFERED, HAS RECEIVED, OR SHALL RECEIVE, DIRECTLY OR INDIRECTLY, ANY BENEFIT, FEE,
COMMISSION, DIVIDEND, GIFT, OR CONSIDERATION OF ANY KIND IN CONNECTION WITH THE SERVICES.
LIBERTY WILL NOT, AT ANY TIME, OFFER GRATUITIES OR ANY MERCHANDISE, CASH, SERVICES, OR OTHER
INDUCEMENTS TO THE EMPLOYEES OF CUSTOMER.

     (e) Liberty is aware of and familiar with the provisions of the Foreign Corrupt
Practices Act of 1977, as amended by the Omnibus Trade and Competitiveness Act of 1988
(“FCPA”) and the International Antibribery and Fair Competition Act of 1998
(“IAFCA”), and their purposes and will take no action and make no payment in
violation

32

 

of, or which might cause Liberty or Customer to be in violation of, the FCPA
and/or IAFCA. Liberty further represents and warrants that no person employed by it in
connection with the performance of its obligations under this Agreement is an official of
the government of any foreign country, or of any agency thereof, and that no part of any
moneys or consideration paid hereunder shall accrue for the benefit of any such official.
Notwithstanding anything to the contrary, if Liberty takes any action that could constitute
a violation of the FCPA or IAFCA, Customer may, at its sole option, immediately terminate
this Agreement. Furthermore, for purposes of reasonably ensuring compliance with the FCPA
and the IAFCA, Liberty agrees that, upon request by Customer at any time during the term of
this Agreement, Liberty will make available for audit by an accounting firm designated by
Customer which is reasonably acceptable to Liberty, Liberty’s books, records and other
documentation relevant to its business activities conducted pursuant to this Agreement. The
accounting firm shall provide to Customer only such information obtained from such review
that relates to a possible violation of the FCPA and the IAFCA. Customer shall pay any and
all costs of any such requested audit.

     (f) In regard to work performed and Services rendered under this Agreement, Liberty
shall be responsible for compliance with all federal, state and local laws, ordinances,
rules, regulations and judicial and administrative orders and settlements (including,
without limitation, OSHA). Liberty expressly represents and warrants that it has the
necessary expertise in regard to achieving and maintaining the aforementioned compliance.

     (g) Subject to Section 3.3(i), to the extent Liberty’s systems have any connectivity to
Customer’s computer systems, (i) all Liberty interconnectivity to Customer’s computing
systems and/or networks and all attempts at same shall be only through Customer’s security
gateways/firewalls; (ii) it will not access, and will not permit unauthorized persons or
entities, over which Liberty has control, to access, Customer’s computing systems and/or
networks without Customer’s express written authorization and any such actual or attempted
access shall be consistent with any such authorization.

     (h) None of its or its affiliates’ principals or executive officers and, to the best of
its knowledge, after reasonable inquiry, none of its shareholders (which, in the case of
publicly held companies, shall include only those shareholders holding more than 5% of the
stock) are related to any public official or official of any issuer of municipal securities.

     11.3 DISCLAIMER. EXCEPT AS SPECIFIED IN SECTIONS 11.1 or 11.2, LIBERTY AND CUSTOMER
MAKE NO OTHER WARRANTIES IN RESPECT OF THE TRANSITION SERVICES, THE SERVICES, OR THE ADDITIONAL
SERVICES AND EACH EXPLICITLY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A SPECIFIC PURPOSE.

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Article 12

Remedies

     12.1 Specific Performance and Injunction. The parties acknowledge that if either party
fails to comply with its obligations under Article 9 or Article 10 of this Agreement, or threatens
to fail to comply with Article 9 or Article 10, the other party may suffer irreparable harm for
which there may be no adequate remedy at law. Accordingly, if either party fails to comply with
such obligations, then, in addition to its other remedies, the other party will be entitled
immediately to injunctive relief or any other appropriate equitable remedy.

     12.2 Cumulative Remedies. Except as expressly limited by this Article 12, no remedy
conferred upon or reserved to a party is intended to be exclusive of any other remedy available at
law or in equity, but each and every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Agreement or now or hereafter existing at law or in equity, by
statute or otherwise.

Article 13

Indemnification

     13.1 Indemnification by Liberty. Liberty shall indemnify, defend and hold Customer,
and its parent, affiliates, directors, officers, agents or employees harmless from and against any
and all claims, litigation, suits, proceedings, actions, liability, losses, expenses or damages,
including reasonable attorneys’ and consultants’ fees and costs incurred, (collectively,
“Damages”) which Customer and its parent, affiliates, directors, officers, agents or
employees may sustain directly due to or directly arising out of any act or omission by Liberty,
its parent, affiliates, directors, officers, agents, representatives, employees or others under
contract with, appointed by, or otherwise acting on behalf of Liberty, which is in violation or
breach of this Agreement or in violation of any applicable law, rule or regulation, except to the
extent such Damages directly resulted from the negligence, bad faith or willful misconduct of
Customer or its parent, affiliates, directors, officers, agents or employees.

     13.2 Indemnification by Customer. Customer shall indemnify, defend and hold Liberty,
and its parent, affiliates, directors, officers, agents or employees harmless from and against any
and all Damages which Liberty and its parent, affiliates, directors, officers, agents or employees
may sustain directly due to or directly arising out of any act or omission by Customer, its parent,
affiliates, directors, officers, agents, representatives, employees or others under contract with,
appointed by or otherwise acting on behalf of Customer, which is in violation or breach of this
Agreement or in violation of any applicable law, rule or regulation, or which are in any way
related to the Contracts, or the Insurance Risk for the Contracts, or to the acts or omissions of
the employees, agents, brokers, and/or representatives who sold the Contracts or to those persons
who serviced the Contracts prior to the Services Starting Date, except to the extent such Damages
directly resulted from the negligence, bad faith, or willful misconduct of Liberty or its parent,
affiliates, directors, officers, agents or employees.

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     Except for personal injury or death, or damage to personal or real property, in no event shall
either party to this Agreement be liable to the other for special, indirect or consequential
damages in connection with or arising out of the furnishing, performance or use of the services or
materials provided hereunder.

     13.3 Indemnification Procedures Involving Third Party Claims. If any third party
makes a claim covered by Sections 13.1 or 13.2 against any indemnified party (an “Indemnified
Party”) with respect to which such Indemnified Party intends to seek indemnification under
Sections 13.1 or 13.2, such Indemnified Party shall promptly deliver to the indemnifying party (an
“Indemnifying Party”) a written notice (a “Claims Notice”), including a brief
description of the amount and basis of the Claim, if known, and thereafter keep Indemnifying Party
reasonably apprised as to the status of the defense. Provided, however, that the failure
of the Indemnified Party to give prompt notice or to keep Indemnifying Party reasonably apprised
shall not relieve the Indemnifying Party of any of its obligations under this Agreement unless such
failure prejudices the Indemnifying Party.

     The Indemnifying Party shall be entitled to assume and control the defense of any such claim,
action or proceeding (“Claim”) on Indemnified Party’s behalf by written notice to the
Indemnified Party within thirty (30) days after receipt of a Claims Notice and the Indemnified
Party shall cooperate fully with, and assist the Indemnifying Party in the defense and all related
settlement negotiations of such Claim. The Indemnifying Party shall pay all reasonable outside
costs incurred by the Indemnified Party related to the Indemnified Party’s assistance in defense of
a Claim. The Indemnifying Party shall keep the Indemnified Party reasonably apprised as to the
status of the defense. The Indemnified Party shall have the right to join in the defense of such
Claim and employ its own separate counsel in any action, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party.

     If the Indemnifying Party shall fail to notify the Indemnified Party of its desire to assume
the defense of any such Claim within the prescribed period of time or shall notify the Indemnified
Party that it will not assume the defense of any such Claim, then the Indemnified Party shall
defend such Claim in any such manner as it may deem appropriate, subject to the right of the
Indemnifying Party to assume the defense of such Claim any time prior to its final determination or
settlement. The Indemnifying Party shall also be permitted to join in the
defense of such Claim and employ counsel at its own expense. Neither the Indemnifying Party
nor any Indemnified Party shall be liable for any settlement of any Claim without its consent,
which consent shall not be unreasonably withheld. In the event that one party submits to the other
a settlement proposal that it wishes to accept, the party that receives the notice of the
settlement proposal shall notify the submitting party, within ten (10) business days, of its
decision to reject settlement, or consent to acceptance of the settlement offer shall be
conclusively presumed.

     Notwithstanding the foregoing, the Indemnified Party shall retain, assume or reassume sole
control over, and all expenses relating to, every aspect of the defense that it or Indemnifying
Party reasonably believes is not the subject of the indemnification provided for in Sections 13.1
or 13.2.

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     Until both (a) the Indemnified Party receives notice from the Indemnifying Party that it will
defend; and (b) the Indemnifying Party assumes such defense, the Indemnified Party may, at any time
after ten (10) days from notifying the Indemnifying Party of the Claim, resist the Claim or, after
consultation with and the consent of the Indemnifying Party, settle or otherwise compromise or pay
the Claim. The Indemnifying Party shall pay all reasonable outside costs of the Indemnified Party
actually incurred arising out of or relating to defense and any such settlement, compromise or
payment. The Indemnified Party shall keep the Indemnifying Party reasonably apprised as to the
status of the defense.

     Following indemnification as provided in Sections 13.1 and 13.2, the Indemnifying Party shall
be subrogated to all rights of the Indemnified Party with respect to the matters from which
indemnification has been made. Indemnification of the parties entitled to indemnification for
breach of this Agreement shall be the exclusive remedy of such parties and the liability of all
parties shall be limited as expressly provided in Article 13.

     13.4 Limitations on Indemnification. Notwithstanding anything contained in this
Agreement to the contrary, the indemnification rights granted pursuant to this Article 13 shall be
subject to the following limitations:

	 	(i)  	There shall be no indemnification obligation for any Damages that arise from or
were caused by actions taken or actions not taken by the Indemnified Party.
	 
	 	(ii)  	There shall be no indemnification obligation for any Damages that the
Indemnified Party had an opportunity but failed in good faith to mitigate, to the
extent that failure to so mitigate would result in a reduction of Damages recoverable
under applicable principles of contract law.
	 
	 	(iii)  	There shall be no indemnification obligation on a particular Claim
unless and until the aggregate amount of Damages suffered by the Indemnified Party
exceeds $50,000.00 on that particular Claim. For purposes of this Section 13.4, a
“Claim” shall mean all assertions of Damages and causes of action made against
the Indemnified Party that arise out of a single event, act, or omission or related
series of events, acts, or omissions.
	 
	 	(iv)  	In no event shall an Indemnifying Party be liable for indemnification payments
for Damages in excess of $1,000,000 per Claim, provided however that there shall be no
limitation if the Indemnifying Party’s liability for indemnification payments were
incurred as a result of Indemnifying Party’s bad faith or willful misconduct.
	 
	 	(v)  	In no event shall an Indemnifying Party be liable for any punitive damages or
interest or special, incidental, indirect or consequential damages (whether in the
nature of lost profits, business interruption or otherwise) suffered by Indemnified
Party unless the Indemnifying Party participated in or consented in writing to the act
or omission to act that resulted in the imposition of such additional damages.
	 
	 	(vi)  	In no event shall an Indemnifying Party be liable for indemnification payments
under this Agreement in an aggregate amount exceeding $10,000,000.

The provisions of this Article 13 shall survive the termination or expiration of this Agreement.

36

 

     13.5 The obligations of the parties under this Article 13 shall not be subject to the
provisions of Article 14.

Article 14

Dispute Resolution and Arbitration

     14.1 Intention. It is the intention of Customer and Liberty that the customs and
practices of the life insurance and life insurance administration industry will be given full
effect in the operation and interpretation of this Agreement. The parties agree to act in all
matters with good faith and the utmost integrity when dealing with each other and contractholders
of Customer.

     14.2 Dispute Resolution. The parties will use reasonable efforts to resolve any
dispute arising out of or relating to this Agreement through a meeting of the account managers from
each party. If the parties are unable to resolve the dispute, either party may escalate the
dispute to its executives as defined in Section 16.7. If an executive level meeting fails to
resolve the dispute within thirty (30) days after escalation, the dispute will be decided through
arbitration. Neither this Article 14 nor any other provision of this Agreement will prevent
either party from pursuing equitable remedies to the extent required to protect rights or property
or to prevent irreparable harm. If any dispute or claim between the parties is subject to judicial
proceedings, each party expressly waives any right it might have to demand a jury trial in such
proceedings.

     14.3. Process. To initiate arbitration, either Liberty or Customer will notify the
other party by certified mail of its desire to arbitrate, stating the nature of the dispute and the
remedy sought. The party to which the notice is sent will respond to the notification in writing
within ten (10) Business Days of its receipt.

     There will be three (3) arbitrators who will be current or former officers of life insurance
or insurance administration companies other than the parties to this Agreement, their parent,
affiliates or subsidiaries. Each of the three arbitrators will be impartial regarding the dispute.
Each of the parties to this Agreement will appoint one of the arbitrators and these two will
select the third. If either party refuses or neglects to appoint an arbitrator within sixty (60)
calendar days after the other party has given written notice to the other of its arbitrator
appointment, the party that has given notice may appoint the second arbitrator. If the two
arbitrators do not agree on a third arbitrator within thirty (30) calendar days of the appointment
of the second arbitrator, then Liberty and Customer will each name three candidates to serve as the
third arbitrator. Beginning with the party that did not initiate arbitration, each party will
eliminate one candidate from the six until one remains. If this last remaining candidate declines
to serve as the arbitrator, then the candidate previously last eliminated will be approached to
serve. This process will be repeated until a candidate has agreed to serve as the third
arbitrator.

     14.4. Arbitration Hearing. The arbitration hearing will be held on the date set by
the arbitrators at a mutually agreed upon location. In no event will this date be later than four
(4) months after the appointment of the third arbitrator. As soon as possible, the arbitrators will
establish arbitration procedures as warranted by the facts and issues of the particular case. At
least fifteen (15) Business Days prior to the arbitration hearing, each party will provide the
other

37

 

party(s) and the arbitrators with a detailed statement of the facts and arguments it will
present at the arbitration hearing. The arbitrators will have the power to decide all substantive
and procedural rules of the arbitration including but not limited to inspection of documents,
examination of witnesses and any other matter relating to the conduct of the arbitration.

     14.5 Decision. The arbitrators will base their decision on the terms and conditions
of this Agreement and the customs and practices of the insurance and the insurance administration
industries rather than on strict interpretation of the law. The decision of the arbitrators will be
made by majority rule, submitted in writing, and will be final and binding on both parties. There
will be no appeal from the decision. Either party to the arbitration may petition any court having
jurisdiction over the parties to reduce the decision to judgment.

     14.6 Costs of Arbitration. Unless the arbitrators decide otherwise, each party will
bear the expense of its own arbitration activities, including its appointed arbitrator and any
outside attorney and witness fees. The parties will jointly bear the expense of the third
arbitrator.

Article 15

Compliance with Law

     15.1 Regulatory Authority. Liberty and Customer shall comply with the applicable
federal and state laws and regulations having jurisdiction over the Contracts and the Services.

     15.2 Other State TPA Requirements. To the extent required by applicable law, the
provisions of any current state insurance laws regulating third party insurance administrators that
must be incorporated into an agreement of this type are hereby incorporated by reference into this
Agreement to the extent applicable, including, but not limited to, the provisions of all of the
following: Alaska Stat. §§ 21.27.630 to 21.27.650; Arizona Revised Statutes §20-485 to §20-485.12;
Arkansas Code Ann. §§23-92-101 to 23-92-208; California Insurance Code §§1759 to 1759.10; Delaware
Code §§311, 2304(16) and 2312 and Delaware Regulation 1406; Florida Stat. §§626.88 to 626.894;
Georgia Code §§33-23-100 to 33-23-105 and Georgia Admin. Comp. Ch. 120-2-49; Idaho Code §§41-901 to
41-915; 25 Illinois Comp. Stats. 5/511.100 to 5/511.113; Indiana Code §§27-1-25-1 to 27-1-25-15 and
Ind. Admin. Tit. 760 R. 1-41-1 to 1-41-5; Iowa Code §§510.11 to 510.23 and Iowa Admin.
Code §§191-58.1 to 191-58.13; Kansas Stat. Ann.
§§40-3801 to 40-3810; Kentucky Rev. Stat. §§304.9-051 to 304.9-052, 304.9-371 to 304.9-377;
Louisiana Rev. Stat. Ann. §§22:3031 to 22:3046; Maine Rev. Stat. Ann. Tit. 24-A §§1901 to 1912;
Maryland Ann. Code Ins. §§8-301 to 8-322; Michigan Comp. Laws §§550.901 to 550.962; Minnesota Stat.
§60A.23 sub.8 and Minn. Ins. Reg. §2767.0100 to 2767.0900; Mississippi Code Ann. §§83-18-1 to
83-18-29; Missouri Rev. Stat. §§376.1075 to 376.1095 and Mo. Admin. Code tit. 20 §§200-9.500 to
200-9.800; Montana Code Ann. §§33-17-601 to 33-17-618; Nebraska Rev. Stat. §§44-5801 to 44-5816;
Nevada Rev. Stat. §§683A.025; 683.0805 to 683A.0893 and Nev. Admin. Code §§683A.100 to 683A.165;
New Hampshire Rev. Stat. Ann. §§402-H:1 to 402-H:16 and N.H. Admin. Code Ins. 2301.01 to 2301.20;
New Mexico Stat. Ann. §§59A-12A-1 to 59A-12A-17 and N.M. Ins. Regs. §§4.5.1 to 4.5.22; North
Carolina Gen. Stat. §§58-56-2 to 58-56-66;and N.C. Admin. Code tit. 11 ch. 21 §§0101 to 0110; North
Dakota Cent. Code §§26.1-27-01 to 26.1-27-12; Ohio Rev. Code Ann. §§3959.01 to 3959.16, 3959.99 and
Ohio Ins. Regs. Rule 301-1-51; Oklahoma Stat. Tit. 36 §§1441 to 1452; Oregon Rev. Stat. §§744.700
to 744.740 and

38

 

 Or. Admin. R. 836-075-0000 to 836-075-0070; Pennsylvania Uncons. Stat. §§40-25-1001
to 40-25-1013; Rhode Island Gen. Laws §§27-20.7-1 to 27-20.7-16; South Carolina Code Ann.
§§38-51-10 to 38-51-120; South Dakota Codified Laws §§58-29D-1 to 58-29D-34; Tennessee Code Ann.
§§56-6-401 to 56-6-412; Texas Ins. Code Ann. Art. 21.07-6 and 28 Tex. Admin. Code §§7.1601 to
7.1615; Utah Code Ann. §§31A-25-102 to 31A-25-402; West Virginia Code §§33-46-1 to 33-46-20;
Wisconsin Stat. §§633.01 to 633.17 and Wis. Admin. Code § Ins. 8.20 to 8.32; Wyoming Ins. Regs. Ch.
4, and any other similar laws and regulations for third party administrators that may be enacted or
adopted during the Term or Renewal Term of this Agreement. In furtherance of the foregoing, the
parties agree to the provisions in this Article 14.

     15.3 Payments To and From Administrator. The payment to Liberty of any premiums or
charges for insurance by or on behalf of an insured of the Customer shall be deemed to have been
received by Customer, and the payment of return premiums or claim payments forwarded by the
Customer to Liberty shall not be deemed to have been paid to the Contract insured or Contract
claimant until such payments are received by the Contract insured or Contract claimant. Nothing in
this Section 15.3 shall limit any right of Customer against Liberty resulting from the failure of
Liberty to make payments to Customer, Contract insureds or Contract claimants.

     15.4 Trade Secrets. Any trade secrets contained in the Data and Books and Records,
including but not limited to the identity and addresses of Contract owners, shall be Confidential
Information, except the commissioner of insurance or governmental officer may use such Confidential
Information in any proceedings instituted against Liberty or Customer.

     15.5 Continuing Access. Customer owns the Data and Books and Records and shall at
all times have access to the Data and Books and Records; however, Liberty shall retain the right to
continuing access to such Data and Books and Records of Customer sufficient to permit Liberty to
fulfill all of its contractual obligations to Customer, Contract insureds and Contract claimants
pursuant to this Agreement. The relevant insurance commissioner or governmental officer shall be
entitled to collect proper charges from Customer incurred in examination of Customers Books and
Records maintained under this Agreement in accordance with, and to the extent permitted (if any)
under, applicable law.

     15.6 Fiduciary Capacity of Liberty. All insurance charges or premiums collected by
Liberty on behalf of or for Customer, and the return of premiums received from Customer shall be
held by Liberty in a fiduciary capacity. Such funds shall be immediately remitted to the Person or
Persons entitled to them or shall be deposited promptly in a fiduciary bank account (the
“Premium Account”) established and maintained by Customer in a federally or state insured
financial institution. Liberty shall not pay any claim by withdrawals from the Premium Account.
Withdrawals from the Premium Account shall be made, as provided in this Agreement, for the
following:

	 	(i)  	remittance to Customer when entitled to remittance;
	 
	 	(ii)  	deposit in an account maintained in the name of Customer;

39

 

	 	(iii)  	transfer to and deposit in a claims paying
account (the “Claims Account”), with claims to be paid
as provided in this Agreement;
	 
	 	(iv)  	payment to a group Contract owner for
remittance to individual certificate holder entitled to such
remittance;
	 
	 	(v)  	payment to Liberty of its commissions, fees or charges; and
	 
	 	(vi)  	remittance of return premiums to the Person or
Persons entitled to such return premium.

     15.7 Payment of Claims. All claims paid by Liberty from funds collected on behalf of
or for Customer shall be paid only on drafts, checks or by Federal Funds Wire or other electronic
wiring of funds as applicable as authorized by the Customer from the Claims Account.

     15.8 Compensation Not Contingent on Claim Experience. Compensation to Liberty
pursuant to this Agreement shall not make the amount of Liberty’s compensation contingent upon
savings effected in the adjustment, settlement and payment of losses covered by Customer’s
obligations.

     15.9 Notice to Contract Insured Individuals. Prior to the Services Starting Date, to
the extent required by applicable state law, Liberty shall provide a written notice, approved and
paid for by Customer, to Contract insured individuals advising them of the identity of, and
relationship among, Liberty, the Contract owner and Customer. When Liberty collects funds, the
reason for collection of each item must be identified to the Contract insured party and each item
must be shown separately from any premium. Additional charges may not be made for services to the
extent the services have been paid for by the Customer. Liberty shall disclose to Customer all
charges, fees and commissions received from all services in connection with the provision of
administrative services for Customer, including any fees or commissions paid by insurers providing
reinsurance.

     15.10 Delivery of Materials to Contract Owners. Any Contracts or other written
communications delivered by Customer to Liberty for delivery to Contract insured parties or
Contract covered individuals shall be delivered by Liberty promptly after receipt of
instructions from Customer to deliver them, as mutually agreed.

Article 16

Miscellaneous

     16.1 Governing Law and Forum. This Agreement shall be governed by the laws of the
State of New York, without reference to conflict of laws principles.

     16.2 No Waiver. No failure or delay on the part of a party in exercising any right,
privilege, power or remedy under this Agreement, and no course of dealing, shall operate as a
waiver of any such right, privilege, power or remedy, nor shall any single or partial exercise of
any right, privilege, power or remedy under this Agreement preclude any other or further exercise

40

 

of such right, privilege, power or remedy. No waiver shall be asserted against either party unless
duly signed in writing on behalf of such party. No notice to or demand on a party in any case
shall entitle such party to any other notice or demand in any similar or other circumstances or
constitute a waiver of the right of the party giving such notice or making such demand to take any
other action in any circumstances without notice or demand.

     16.3 Assignment. Neither party may assign this Agreement without the prior written
consent of the other party; provided, however, that either party may, upon notice to the other
party, assign this Agreement, without the other party’s consent, to any successor entity pursuant
to a merger or corporate reorganization involving an entity or involving an entity or entities that
are affiliates or subsidiaries of the assigning party as of the Effective Date of this Agreement.
Any assignment in contravention of this Section 16.3 shall be null and void. The prohibitions
against assignment under this Section 16.3 shall not affect Liberty’s rights to subcontract under
Section 16.14 of this Agreement.

     16.4 Entire Agreement. This Agreement and each of the Exhibits and schedules attached
to this document and incorporated by reference into this Agreement, constitutes the entire, final
and complete agreement between the parties with respect to its subject matter, and supersedes all
prior discussions, negotiations and agreements, written or oral, related to the subject matter of
this Agreement, and there are no other representations, understandings or agreements between the
parties relative to such subject matter.

     16.5 Independent Contractor. The relationship between the parties is that of
independent contractors. It is not the intent of the parties to create, nor shall this Agreement be
construed to create any partnership, joint venture, or employment relationship between or among the
parties, or any of the officers, employees, agents or representatives of the parties.

     16.6 Severable Provisions. Each paragraph and provision is severable from the
Agreement, and if a court of competent jurisdiction declares one or more provisions or parts
invalid, the remaining provisions shall nevertheless remain in full force and effect.

     16.7 Notices. All notices and other communications required or permitted or otherwise
provided for in this Agreement shall be given in writing and
transmitted by personal delivery or certified mail, return receipt requested, postage prepaid, or facsimile transmission (or
e-mail or electronic transmission as permitted or agreed by the parties from time to time),
addressed as follows:

	 	 	 	 	 
	If to Liberty:

	 	 	 	Liberty Insurance Services Corporation
	

	 	 	 	2000 Wade Hampton Boulevard
	

	 	 	 	Greenville, South Carolina 29615
	

	 	 	 	Attention: Robert E. Evans, President & CEO
	

	 	 	 	Facsimile number: (864) 609-8084
	 
	 	 	 	 
	with a copy to:

	 	 	 	Liberty Insurance Services Corporation
	

	 	 	 	2000 Wade Hampton Boulevard
	

	 	 	 	Greenville, South Carolina 29615

41

 

	 	 	 	 	 
	

	 	 	 	Attention: Susan E. Cyr, VP & General Counsel
	

	 	 	 	Telecopy number: (864) 609-3176
	 
	 	 	 	 
	If to Customer:

	 	 	 	Merrill Lynch Life Insurance Company
	

	 	 	 	Attn: Barry G. Skolnick
	

	 	 	 	Senior Vice President and General Counsel
	

	 	 	 	1300 Merrill Lynch Drive, 2nd Floor
	

	 	 	 	Pennington, NJ 08534
	

	 	 	 	Facsimile number: (609) 274-0926/0928
	 
	 	 	 	 
	with copies to:

	 	 	 	Merrill Lynch Life Insurance Company
	

	 	 	 	Attn: Chief Financial Officer
	 
	 	 	 	 
	

	 	 	 	Merrill Lynch Life Insurance Company
	

	 	 	 	Attn: Chief Actuary
	 
	 	 	 	 
	

	 	 	 	and
	 
	 	 	 	 
	

	 	 	 	Merrill Lynch Insurance Group Services, Inc.
	

	 	 	 	Attn: Chief Operating Officer
	

	 	 	 	480 Deer Lake Boulevard East
	

	 	 	 	Jacksonville, FL 32246

For purposes of this Agreement, Authorized Representatives for each party are as follows:

	 	 	 	 	 
	For Liberty:

	 	 	 	Senior Vice President, Business Process Outsourcing, and
	

	 	 	 	General Counsel
	 
	 	 	 	 
	For Customer:

	 	 	 	Chief Operations Officer of Merrill Lynch Insurance Group Services, and
	

	 	 	 	Chief Financial Officer of Merrill Lynch Life Insurance Company, and

	

	 	 	 	Chief Actuary of Merrill Lynch Life Insurance Company, and
	

	 	 	 	General Counsel of Merrill Lynch Insurance Group Services, Inc.

     16.8 Counterparts. This Agreement may be executed in any number of counterparts, all
of which taken together shall constitute one single agreement between the parties.

     16.9 Headings; Cross References. The article and section headings and the table of
contents are for reference and convenience only and shall not be considered in the interpretation
of this Agreement. All cross-references in this Agreement to Sections, Articles or Exhibits shall
be deemed to be references to the corresponding section or article in, or exhibit to, this
Agreement, unless the context otherwise clearly indicates.

     16.10 Consents, Approvals and Requests. All consents and approvals to be given by
either party under this Agreement shall not be unreasonably withheld and each party shall make

42

 

only reasonable requests under this Agreement. No approval shall be valid or acceptable unless given by
an authorized representative of the appropriate party.

     16.11 Publicity. Liberty and Customer shall not use the other party’s name, but not
its trademarks or service marks, or refer to it directly or indirectly in any media release, public
announcement or public disclosure relating to this Agreement or its subject matter, including in
any promotional or marketing materials, lists or business presentations without approval from the
other party for each such use or release, except as may be required by law; provided, however,
that Liberty may use Customer’s name when referring to Liberty’s clients in business
presentations and proposals. Customer has the right in its own sole discretion to withhold its
consent to any such request by Liberty.

     16.12 Amendments. No amendment to, or change, waiver or discharge of, any provision
of this Agreement shall be valid unless in writing and signed by an authorized representative of
the party against which such amendment, change, waiver or discharge is to be enforced.

     16.13 Third-Party Beneficiaries. Each party intends that this Agreement shall not
benefit, or create any right or cause of action in or on behalf of, any Person or entity other than
Customer and Liberty.

     16.14 Subcontracting. Subject to the terms of this paragraph, Liberty may subcontract
any portion of the work to be performed under this Agreement without Customer’s prior written
consent so long as subcontractor complies with all relevant laws, Performance Standards, and the
terms and conditions of this Agreement. Liberty agrees that none of the Services described in
Exhibit 3.2, subsections A, B, C, E, H, and L (except for mailing services and technology
consulting services) will be provided by any third party(ies) who are not already being used by
Liberty as of the Effective Date of this Agreement, without first obtaining Customer’s written
consent. In the event Liberty subcontracts any work to be performed under this Agreement, Liberty
shall retain responsibility for the work. Liberty shall notify Customer if Liberty subcontracts a
portion of the Services under this Agreement. Such notice to Customer by Liberty may be after the
fact. Liberty shall not subcontract any portion of the work to be performed under this Agreement
without Customer’s written consent if the subcontractor is to perform any of the work outside of
the continental United States.

     16.15 Force Majeure. The performance by either party of any of the undertakings set
forth in this Agreement shall not be deemed untimely to the extent any late performance or
nonperformance is due to acts of God, acts of war, civil disturbance, acts of government,
including, but not limited to, government or court orders or any other act or event beyond the
control of the effected party.

     16.16 Survival. The provisions of Section 4.2, Section 5.1, Section 5.7, Section 6.8,
Section 7.3, Section 7.4, Section 8.5, Section 8.6, Section 8.7, Section 9.2, Section 9.3, Article
10, Article 12, Article 13, Article 14, Section 16.1, Section 16.4, Section 16.11 and this Section
16.16 shall survive the termination or expiration of this Agreement.

43

 

     16.17 Insurance. Without limiting Liberty’s liability to Customer or third parties
hereunder, Liberty at its sole cost agrees to maintain the following insurance coverage with
insurance carriers no less than A rated by Best’s Insurance Guide:

	1.  	All insurance coverage required by Federal, State or Local law and statute, including
Workers’ Compensation Insurance.

	2.  	Employer’s Liability Insurance with a minimum limit of $1,000,000 bodily injury by accident,
$1,000,000 bodily injury by disease, and $1,000,000 bodily injury each person.

	3.  	Commercial General Liability Insurance and Umbrella Liability, including coverage for
Products/Completed Operations, Contractual Liability, Personal and Advertising Injury for the
services and products to be provided, and obligations undertaken by Liberty (or any
subcontractor) to Customer under this contract. Such Commercial General Liability Insurance
and Umbrella Liability shall provide for minimum Combined Bodily Injury and Property Damage
Coverage Limits of $5,000,000 per occurrence.

	4.  	Comprehensive Automobile Liability Insurance with Combined Bodily Injury and Property Damage
Coverage Limits, per occurrence, of at least $1,000,000.

	5.  	Fidelity Bond covering all Liberty’s (or any subcontractor) employees and officers for a
limit of at least $2,000,000 per occurrence.
	 
	6.  	Errors & Omission insurance with limits of $3,000,000.

All insurance required herein shall be primary and non-contributory. Liberty shall furnish to
Customer certificates of insurance evidencing such required insurance coverage will include
Customer, its parent, subsidiaries, affiliates, and their officers, agents, directors and employees
as additional insured - as its interests may appear under this contract. Said certificates will
include a provision whereby the insurance carrier will endeavor to provide directly to Customer,
thirty (30) days’ advance written notice before cancellation of coverage or material reduction in
coverage takes effect for such policies evidenced on such certificate, regardless of whether
canceled by Liberty or insurance carrier.

44

 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first
above written.

	 	 	 	 	 
	 	 	LIBERTY INSURANCE SERVICES CORPORATION
	 
	 	 	 	 
	

	 	By:
	 	/s/ Bruce W. Powell
	

	 	 	 	 
	 	 	Name: Bruce W. Powell
	 	 	Title: Senior Vice President, Operations
	 	 	Date: June 3, 2004
	 
	 	 	 	 
	 	 	MERILL LYNCH LIFE INSURANCE COMPANY
	 
	 	 	 	 
	

	 	By:
	 	/s/ Amy L. Ferrero
	

	 	 	 	 
	 	 	Name: Amy L. Ferrero
	 	 	Title: Senior Vice
President, Administration
	 	 	Date: June 3, 2004

45

 

EXHIBIT 1.18

PLAN CODES FOR

CONTRACTS

The Contracts are insured by Merrill Lynch Life Insurance Company (MLLIC), ML Life Insurance
Company of New York (MLLICNY), and Monarch Life Insurance Company (Monarch) and were originally
issued by MLLIC, MLLICNY, Monarch, or Family Life Insurance Company. All Contracts are currently
administered by Merrill Lynch Insurance Group Services, Inc. and are more specifically identified
by the following Contract plan codes:

	 	 	 	 	 	 	 	 	 
	 
	 	Product Name	 	 	Product Type	 	 	Plan Code	 
	 	Captn 1

	 	 	Single Premium Variable Life Insurance
	 	 	CAP	 
	 	Captn 2

	 	 	Modified Single Premium Variable Life Insurance
	 	 	MSB	 
	 	Captn Flex

	 	 	Flexible Premium Variable Life Insurance
	 	 	C3S, C3J	 
	 	Directed Life 2: Accumulator

	 	 	Scheduled Premium Variable Life Insurance
	 	 	SP1
Version code: A	 
	 	Directed Life 2: Economizer

	 	 	Scheduled Premium Variable Life Insurance
	 	 	SP1
Version code: C	 
	 	Directed Life 2: Protector

	 	 	Scheduled Premium Variable Life Insurance
	 	 	SP1
Version code: B	 
	 	Directed Life: 100L

	 	 	Scheduled Premium Variable Life Insurance
	 	 	L83, L84, LPE	 
	 	Directed Life: 200D

	 	 	Scheduled Premium Variable Life Insurance
	 	 	V81, V83, V84, VPE	 
	 	Directed Life: 7-Pay

	 	 	Scheduled Premium Variable Life Insurance
	 	 	7PY, 7PE	 
	 	Estate Investor

	 	 	Flexible Premium Variable Universal Life Insurance
	 	 	EIS, EIJ	 
	 	Fidelity

	 	 	Single Premium Variable Life Insurance
	 	 	JSC, JLC, SLC, SFO, JFO	 
	 	Investor Life

	 	 	Flexible Premium Variable Life Insurance
	 	 	P1S, P1J	 
	 	Investor Life Plus

	 	 	Flexible Premium Variable Life Insurance
	 	 	P2S, P2J	 
	 	Legacy Power

	 	 	Modified Single Premium Variable Life Insurance
	 	 	A1S	 
	 	ML-ONE

	 	 	Single Premium Interest Sensitive Whole Life Insurance
	 	 	ML1	 
	 	ML-ONE(E)

	 	 	Single Premium Interest Sensitive Whole Life Insurance
	 	 	MLE	 
	 

46

 

	 	 	 	 	 	 	 	 	 
	 
	 	Product Name	 	 	Product Type	 	 	Plan Code	 
	 	ML-1R

	 	 	Single Premium Interest Sensitive Whole Life Insurance
	 	 	MLR	 
	 	ML-2R

	 	 	Single Premium Interest Sensitive Whole Life Insurance
	 	 	ML2	 
	 	ML-7

	 	 	Seven-Pay Interest Sensitive Whole Life Insurance
	 	 	ML7	 
	 	Priority I

	 	 	Interest Sensitive Whole Life Insurance
	 	 	PR1	 
	 	Prime Plan I

	 	 	Single Premium Variable Life Insurance
	 	 	S81, S83	 
	 	Prime Plan II

	 	 	Single Premium Variable Life Insurance
	 	 	P83	 
	 	Prime Plan III

	 	 	Single Premium Variable Life Insurance
	 	 	PP3, PN3	 
	 	Prime Plan IV

	 	 	Single Premium Variable Life Insurance
	 	 	PP4, PN4	 
	 	Prime Plan V

	 	 	Modified Single Premium Variable Life Insurance
	 	 	MSA	 
	 	Prime Plan VI

	 	 	Flexible Premium Variable Life Insurance
	 	 	P6S, P6J	 
	 	Prime Plan 7

	 	 	Flexible Premium Variable Life Insurance
	 	 	P8S, P8J	 
	 	Prime Plan Investor

	 	 	Flexible Premium Variable Life Insurance
	 	 	P7S, P7J	 
	 

47

 

EXHIBIT 3.1

TRANSITION SERVICES

Liberty will provide an overall transition project manager and provide the overall management and
leadership to establish, in conjunction with Customer, tasks, timelines, responsibilities and
guidelines in connection with the Transition Services and the transition and training in connection
with the conversion of Customer’s Data and Books and Records to a format appropriate for
administration by Liberty at the Service Center starting on the Services Starting Date. Customer
will adopt and follow reasonable Liberty transition planning and implementation guidelines.
Customer will provide reasonable resources from Customer’s employees and contractors to participate
in the Transition Services. The following guidelines shall serve as the basis for the detailed
analysis and planning that must follow.

The final Transition Services schedule will be jointly developed by Liberty and Customer and
finalized in the Business Requirements Document. Initial transition planning will begin on the
Effective Date and will be completed by the Services Starting Date, which Services Starting Date
shall commence on May 31, 2005, provided, however that if there are changes to the Business
Requirements Document that are outside the scope of services currently contemplated by the parties,
the Services Starting Date and the pricing of the Transition Services may be impacted. The
Services Starting Date shall occur on the first Business Day following a weekend. If Customer
materially delays Liberty’s work any time during the Transition Services Period, then the
completion date will be extended on a day-for-day basis for a period of time equal to the delay.
Any such material delay by Customer shall be treated as additional services at Standard Rates and
may cause an increase in the Transition Services Fees. Liberty will notify Customer immediately of
any such material delay. If Liberty is the cause of any material delay, Liberty agrees to reduce
its fee by $5,000 each calendar day beyond the Services Starting Date.

The following project management/control procedures will be included in the Transition Services
plan:

	 	1)  	interim milestones and sign-offs
	 
	 	2)  	weekly updates
	 
	 	3)  	periodic team meetings
	 
	 	4)  	monthly progress reports
	 
	 	5)  	periodic management/steering committee meetings
	 
	 	6)  	issue management procedures
	 
	 	7)  	change procedures consistent with those procedures set forth for the additional
services
	 
	 	8)  	training/knowledge transfer

48

 

The following assumptions are made by Liberty in connection with the Transition Services to
be provided by Liberty and Customer:

	 	•  	The block of business contains approximately 116,000 contracts of which
58,000 are currently active and approximately 58,000 are inactive U.S. Contracts as
of the Effective Date.
	 
	 	•  	Customer will provide Liberty copies of Contract forms and all documentation regarding
the administration of these contracts.
	 
	 	•  	The setup for financial accounting services will be on the appropriate financial system
based on the implementation approach.
	 
	 	•  	Customer will accept the Liberty standard reporting, correspondence, billing notices.
	 
	 	•  	Liberty shall designate only employees who are registered with the National Association
of Securities Dealers (“NASD”) with at least Series 6 and 63 licenses to provide
the telephone support to Customer’s contractholders contemplated hereunder. Liberty shall
designate only supervisors or managers who are registered with the NASD with at least
Series 6, 26 and 63 licenses to provide supervisory or managerial services in the provision
of telephone support.
	 
	 	•  	Liberty shall use reasonable business judgment to ensure only Liberty Personnel
possessing the necessary training and experience required to service the Contracts shall be
used in the performance of the services as contemplated hereunder.
	 
	 	•  	Liberty employees shall at all times act in the best interest of the Customer. Liberty
Personnel shall act in good faith and in a manner designed to maintain the existing
relationship between Customer and contractholders.
	 
	 	   	Customer will pay all Pass Through Costs as described in Exhibit 6.1.
	 
	 	•  	Liberty will be able to begin documentation of requirements on-site at no later than 60
calendar days after signing of the Agreement between Customer and Liberty.

49

 

EXHIBIT 3.1.1

BUSINESS TRANSITION METHODOLOGY

Liberty’s methodology to accommodate the Transition Services identified in this Exhibit
3.1.1 are outlined below and will be adhered to in the performance of these Transition
Services.

I. Conversion and Transition Analysis Phase:

	•  	This phase will begin on the Effective Date and will be
completed by the Customer Services Starting Date; provided, however, that
Customer provides all necessary support to Liberty during the Transition Services
Period.
	 
	•  	Upon signing of the Agreement, Liberty will assign a
project manager responsible for the supervision and control of all aspects of the
Transition Services.

	 	•  	During this Conversion and Transition Analysis phase, Customer will be expected
to provide resources capable of supplying the following information:

	 	1.  	Provide an individual capable of directing and authorizing the assignment of
Customer resources as may be required to support the conversion and transition
analysis. (Business Area Coordinator)
	 
	 	2.  	Provide in-house knowledge of existing business processes and administrative
systems used to support the Policies. (Business)
	 
	 	3.  	Provide transferable knowledge of the Policies, including without
limitation commissions, valuation, lapsing, loans, riders, benefits, etc.
(Actuarial)
	 
	 	4.  	Provide resources capable of defining the data structures and data
integrity for the systems currently being used to support the Policies.
Provide life insurance data files in an electronic media capable of being
interpreted by Liberty. (Data)
	 
	 	5.  	Provide Customer employees who are knowledgeable of and capable of
explaining the procedures used to operate and update the current policy
administration systems supporting the Contracts. (Systems & Operations)

50

 

EXHIBIT 3.1.1 (Continued)

	•  	Liberty will develop business area requirements, which will detail
all activities required to support the conversion and transition
of the Contracts.
	 
	•  	Customer will review and, if acceptable, provide its written
acceptance of the final version of the Business Requirements
Document. Once agreement between Customer and Liberty has been
reached on the business requirements documents, they shall
collectively be referred to herein as the “Business Requirements
Document”. Any change to the final Business Requirements
Document will be handled as additional services (and will be
charged at the Standard Rates), following the defined change
control process within Liberty’s methodology.
	 
	•  	Liberty and Customer agree that business area requirements will
include required delivery times and methods for all reports,
files, and other data (collectively, “reports”) provided by either
party to the other. Liberty and Customer acknowledge that these
reports may contain time-sensitive data that is critical to the
functioning of both businesses and, as a result, agree that the
requirements will include a mandatory response time in the event
that an error is discovered in a report. If necessary, support
for error corrections will be provided on weekends and holidays.
Appropriate knowledgeable staff will be provided by both parties
to correct errors in a timely fashion.

II. Conversion Development and Transition Phase:

	•  	This phase will begin no later than two weeks following
the Conversion and Transition analysis phase.
	 
	•  	Liberty will complete the system enhancements as defined in the Business
Requirements Document.
	 
	•  	Liberty will complete the interfaces to
Customer’s systems as defined in the Business Requirements Document. Liberty
and Customer will jointly test the integrity of all interfaces to Customer
Software.
	 
	•  	Liberty and Customer will perform quality
assurance and testing of the Liberty Software. Liberty and Customer will
jointly test interfaces to the Customer Software.
	 
	•  	Liberty will develop the programs to
evaluate, populate and convert the Contract master files to the Liberty
Software as provided in the Business Requirements Document.
	 
	•  	Liberty will define, code and test the plan
description file needed to support the Contracts and
Liberty agrees further that the Contracts will be
supported in accordance with all product
specifications provided by Customer, including
certain specifications that may not be currently
supported by Customer’s Administrative Systems,
unless Customer provides its written consent to omit
a particular specification.
	 
	•  	Liberty agrees that it will not alter any terminology
or definitions used with respect to the Contracts or
in the existing administration systems or in
communications to Customer’s employees, agents, or
clients, unless Customer provides written consent to
such alteration. All relevant terminology will be
defined in policy forms, prospectuses, policy
specifications, or client service standards, etc. By
way of example only, the phrase “Investment Base”
(and

51

 

EXHIBIT 3.1.1 (Continued)

not Account Value, Contract Value, or similar terms) will be used to describe the amount available
under a variable life policy for investment.

	•  	During this Conversion Development and Transition phase,
Customer will provide reasonably sufficient numbers of resources and sufficiently
knowledgeable personnel or consultants capable of supplying the following information
to assist Liberty in its responsibilities:

	 	1.  	Provide actuarial resources capable of testing and certifying values
being generated by the Liberty Software. Provide resources to work with
Liberty actuarial resources to establish the post-conversion valuation
procedures and processes.
	 
	 	2.  	Provide an individual capable of directing and authorizing the
assignment of Customer resources as may be required to support the Conversion
Development and Transition phase development. (Business Area Coordinator)
	 
	 	3.  	Provide personnel from Customer capable of defining the data structures
and data integrity for the systems currently being used to support the
Contracts. Provide life insurance data files in an electronic media capable of
being interpreted by Liberty. (Data)
	 
	 	4.  	Provide personnel from Customer capable of operating and maintaining
the current Customer Software Policy administration systems. (Operations)

III. Conversion Implementation Phase:

	•  	This Conversion Implementation phase will begin immediately
following the Conversion Development and Transition phase.
	 
	•  	This phase will consist of quality assurance by Liberty and
acceptance testing by Customer and Liberty of the Liberty Software.
	 
	•  	Liberty will balance and reconcile all Data being converted
to support the Services subject to testing against Customer’s existing administrative systems
and review which shall be provided to Customer. 100% of Contracts that are being converted to
the Liberty Software, the Contract values shown below must be within $1.00 or less of the
equivalent value as provided by Customer’s administrative systems as of a series of valuation
dates. Customer may provide Liberty with written approval to exclude certain Contracts from
this requirement. Definitions and calculation rules for all values will be provided in the
product specifications that will be provided to Liberty by Customer.

	 	o  	Values applicable to whole life contracts include:

	 	§	Interest credited
	 
	 	§	Cost of insurance charges
	 
	 	§	Account value
	 
	 	§	Total cash value

52

 

	 	§	Policy debt
	 
	 	§	Net cash value
	 
	 	§	Surrender penalty
	 
	 	§	Surrender value
	 
	 	§	Specified face
	 
	 	§	Death benefit
	 
	 	§	Net death benefit
	 
	 	§	Preferred loan available
	 
	 	§	Non-preferred loan available
	 
	 	§	Total loan available
	 
	 	§	Preferred loan balance
	 
	 	§	Non-preferred loan balance
	 
	 	§	Net loan cost

	 	o	Values applicable to variable life contracts include:

	 	§	Investment base/account value
	 
	 	§	Cost of insurance
	 
	 	§	Administration expense charges
	 
	 	§	Net loan cost
	 
	 	§	Unrecovered load
	 
	 	§	Net cash value/net Contract value
	 
	 	§	Policy debt/loan debt
	 
	 	§	GID interest adjustment
	 
	 	§	Net net cash value
	 
	 	§	Surrender value/net surrender value
	 
	 	§	Total death benefit
	 
	 	§	Variable insurance amount
	 
	 	§	Current face
	 
	 	§	Fixed base
	 
	 	§	Amount available for loan
	 
	 	§	Tabular cash value (MIPS only)
	 
	 	§	Scheduled fixed base (Sched only)
	 
	 	§	Unearned COI (Estate only)
	 
	 	§	Rider COI (Estate only)
	 
	 	§	Maximum non-MEC premium (Estate only)
	 
	 	§	Maximum premium payable (Estate only)

	§	Liberty will provide the training for Service Center
employees on how to process the Contracts on the Liberty Software.
	 
	§	Liberty will certify that all interface files created to
support the Contracts are functioning in accordance with the business area
requirements.

53

 

EXHIBIT 3.2

SERVICES

The final version of the Services to be performed under this Agreement will be determined by the
Business Requirements Document as mutually agreed to by Customer and Liberty.

Liberty shall perform the following duties and responsibilities with respect to the administration
of the Contracts.

A. Billing and Collection Services

	 	1.  	Producing and mailing premium and loan notifications in accordance with
Customer’s guidelines.
	 
	 	2.  	Applying payments accurately using information including loan, loan interest,
and premium.
	 
	 	3.  	Processing non-forfeiture actions within the established Performance Standards.
	 
	 	4.  	Providing the appropriate Contract information, billing information, billing
statement messages and loan repayment reminders.
	 
	 	5.  	Processing cash deposits according to Customer’s banking instructions.
	 
	 	6.  	Maintaining Contract accounting records.
	 
	 	7.  	Establishing process with depositing bank for handling returned items.
	 
	 	8.  	Administering direct billing, EFT/PAC billing .
	 
	 	9.  	Providing lapse notices.
	 
	 	10.  	Providing premium error clearing.
	 
	 	11.  	Providing premium processing.
	 
	 	12.  	Processing premium and loan payments from Customer’s accounts.
	 
	 	13.  	Processing stale checks.
	 
	 	14.  	Adhering to Customer’s guidelines for accepting money.

B Contract Owner Support Services

	 	1.  	Full processing of Data files in support of Customer’s mailing of all annual,
quarterly, and confirmation statements to Contract owners.
	 
	 	2.  	Preparing, processing, recording, and mailing confirmation of non-financial and
financial Contract changes, including, without limitation, ownership, beneficiary,
assignments (as identified in Exhibit 3.2.1)
	 
	 	3.  	Processing and recording address changes and other non-financial changes.
	 
	 	4.  	Processing financial transactions including: Contract surrenders, loans, fund
transfers, additional premium payments (as identified in Exhibit 3.2.1) and supporting
Customer’s processing of annuitizations.
	 
	 	5.  	Processing reinstatements and Contract changes (additional payments, reissues
and reinstatements) in adherence to Customer’s underwriting guidelines.
	 
	 	6.  	Preparing illustration projections for Contract owners.

	 
	 	7.  	Providing call center services for Contract owners.
	 
	 	8.  	Providing conservation data to Customer.

54

 

	 	9.  	Preparing Data files for annual reports, proxy, and privacy mailings pursuant
to Customer’s instructions.
	 
	 	10.  	Preparing Data files for ad hoc and other mailings (as Additional Services)
	 
	 	11.  	Responding to written Contract owner inquiries.
	 
	 	12.  	Processing returned mail.
	 
	 	13.  	Support and process trust maturities.
	 
	 	14.  	Support and process Contract overloans.
	 
	 	15.  	No trades will be accepted or processed after market close of the New York
Stock Exchange for that day’s pricing. If a trade is not processed by market close of
the New York Stock Exchange and Liberty had it in their possession by one-half hour
prior to market close of the New York Stock Exchange, then it is considered an error by
Liberty. Any bulk transaction requests received by Liberty by one hour prior to market
close will be processed by market close of the New York Stock Exchange. Any trades
received by Liberty after these specified timeframes will be deemed to be not in good
order and they will receive the following day’s pricing.
	 
	 	16.  	To the extent Liberty discovers any trading activity that is inconsistent with
the Customer’s policy, as amended from time to time, on Mutual Fund market timing, then
Liberty will immediately notify Customer of such activities.
	 
	 	17.  	Liberty shall not adjust or alter in any way the Contract owner’s values
without the prior consent of Customer. Contract Values shall include but not be
limited to: death benefits, cash values, investment base and loan debt.

C. Claims Support Services

	 	1.  	Acknowledge, adjudicate and pay claims according to Customer’s written
guidelines.
	 
	 	2.  	Responding to inquiries and resolving disputes according to Customer’s written
guidelines.
	 
	 	3.  	Providing assistance to Customer, if necessary, in defending a claims
determination.
	 
	 	4.  	Establishing procedures to avoid, detect, and report possible fraudulent
activities; however, it is Customer’s duty to establish an SIU and any anti-fraud
plan(s) required by state insurance laws and regulations.
	 
	 	5.  	Investigating claim related Contract changes and verifying coverage.

	 
	 	6.  	Gathering necessary documentation to review a claim.
	 
	 	7.  	Adhering to Customer’s published claims guidelines by consulting with Customer
before denying any claims.
	 
	 	8.  	Issuing benefit checks.
	 
	 	9.  	Provide Customer with a monthly query capability to obtain all claim
acknowledgements and paid death claims for the prior month.

D. Financial Accounting, Treasury and Commission Support Services

	 	1.  	Create daily accounting extract and feed for all Contract owner
transactions, and cash related transactions.
	 
	 	2.  	Create and transmit daily sub account trading file.
	 
	 	3.  	Create daily CMA client debit and credit interface.

55

 

	 	4.  	Processing price corrections.
	 
	 	5.  	Controlling suspense accounts.
	 
	 	6.  	Performing suspense account reconciliation.
	 
	 	7.  	Processing fund changes and trust maturities.
	 
	 	8.  	Creating and maintaining bank accounts as directed by Customer.
	 
	 	9.  	IRS tax compliance testing under IRC Section 7702 and 7702A in accordance with
Customer’s guidelines.
	 
	 	10.  	Preparing and mailing PS58, Form 712 support.

	 
	 	11.  	Calculating commissions.
	 
	 	12.  	Remit and interface to Customer commission payments.
	 
	 	13.  	Accept/transmit appointment files.
	 
	 	14.  	Prepare an electronic file for Customer to perform tax reporting (Forms 1099
and 5498). Provide appropriate information to Customer for its abandoned
property/escheat processing and reporting.
	 
	 	(I)  	Treasury/Cash Management (CM):

Deposits:

	•  	New bank accounts will be opened for processing life deposits with Bank of America. Cash Management will have
balance reporting and funds transfer access to consolidate funds into concentration or will fund account as needed.
Liberty will have access and appropriate authority to generate outgoing wire transfers for client wires.
	 
	•  	CM will monitor the depository accounts daily to determine funding/excess cash positions.
	 
	•  	Liberty will need to notify CM of next day’s total outgoing wires prior to close of business each day.

	 
	•  	Liberty will need to notify CM by 10:00 AM ET each Business Day of any unexpected outgoing wires not included in
normal daily totals.
	 
	•  	Liberty will need to provide CM with a breakdown of all deposits and wire transfer disbursements at a portfolio
level by 10:00 AM ET for prior Business Day’s activity.

PAC’s:

	•  	PAC’s will be directed through new deposit accounts.
	 
	•  	Liberty will need to provide CM with daily totals for portfolio level details.

Check Disbursements:

	•  	MLIG currently maintains ZBA disbursement accounts for each entity with JPMorgan Chase Funding is automatic versus
the MLIG concentration accounts.
	 
	•  	Liberty will be provided with signatory authorization on these accounts in accordance with MLIG policy for check
issuance purposes.
	 
	•  	Liberty will need to provide CM with a breakdown of presentments at a portfolio level by 10:00 AM ET each day for
prior day’s activity.

56

 

Account Credits:

	•  	A transmission must be set up to send MLPF&S the credit information daily. (Will need systems participation to
determine feasibility or alternate solutions.)
	 
	•  	Liberty will notify CM of daily totals for funding
purposes by 10:00 AM ET.

Account Debits:

	•  	This category will require systems participation for
possible solutions.
	 
	•  	Regardless of the method determined to generate these
transactions, funds will be transferred to the deposit account.
	 
	•  	Liberty will need to provide CM with a breakdown of presentments at a portfolio level by 10:00 AM ET each day for
prior day’s activity.

E. Actuarial Support Services

	 	1.  	Illustration support services in cooperation with Customer’s actuaries.
	 
	 	2.  	Preparing valuation extracts in accordance with Customer’s standards to enable
Customer to perform Contract valuation.
	 
	 	3.  	Providing Contract data in support of annual statement/year-end requirements in
accordance with Customer’s standards.
	 
	 	4.  	Providing data to support: experience analysis, audits and regulatory
inquiries, and manual tax calculations and legal/customer complaints to enable Customer
to perform calculations as required.

F. Records Management Support Services

	 	1.  	Establishing and maintaining facilities and procedures for the safekeeping of
Books and Records, including: Contract records, confidential records, claims records,
and other relative materials.
	 
	 	2.  	Ensuring that documents are sorted, prepared, and stored as part of the
Contract record according to Customer’s guidelines and in accordance with applicable
third party insurance administration law.
	 
	 	3.  	Purging all records according to Customer’s record retention schedule and in
accordance with applicable third party insurance administration law.
	 
	 	4.  	Providing onsite file storage and offsite file storage and imaging.

	 
	 	5.  	Providing Customer with copies of Contract records upon request.

G. Distribution Services

	 	1.  	Ensuring that mail is date stamped and delivered within the Customer’s
Performance Standards.
	 
	 	2.  	Ensuring outgoing mail reaches the post office within Customer’s guidelines.
	 
	 	3.  	Completing Contract mailings, disbursement mailings, confirmation mailings and
claim payment mailings.

57

 

H. Disaster and Business Recovery Services

	 	1.  	Making tapes, microfiche and other hardcopy backups containing copies of any
and all Data then residing on the system.
	 
	 	2.  	Allowing Customer’s personnel access to the off-site facilities
	 
	 	3.  	Making available to Customer a copy of the back-up copies as requested.
	 
	 	4.  	Providing disaster recovery planning and testing.
	 
	 	5.  	Arranging off-site storage of back-up tapes.
	 
	 	6.  	Providing a hot site.
	 
	 	7.  	Maintain back-up of all Contract records/files.
	 
	 	8.  	Meet minimum service/administrative requirements as outlined in mutually
agreed upon Customer’s Business Recovery documentation.

I. Reinsurance Administration Services

	 	1.  	Provide abstract to Customer.
	 
	 	2.  	Notification of claim acknowledgment and payment.
	 
	 	3.  	Providing support for reinsurer’s audits.
	 
	 	4.  	Providing Customer with initial notice of death and waiver claims and providing
Customer with supporting claims documentation.

J. Regulatory and Compliance Support Services 

	 	1.  	Provide complaint information/documentation support to Customer.
	 
	 	2.  	Making available to Customer all records and logs required in connection with any
audits.
	 
	 	3.  	Notifying Customer of any suspected employee or agent fraud or defalcations immediately
or not later than forty-eight (48) hours of becoming aware of such suspected problem.
	 
	 	4.  	Notifying Customer of any threatened or filed lawsuits connected to the Contracts or
the Agreement.
	 
	 	5.  	Provide assistance to Customer’s legal department in support of restricted Contracts
and subpoenas.
	 
	 	6.  	Incoming Funds: Liberty must adhere to Customer’s (and Monarch Life Insurance
Company’s) rules for acceptance of cash equivalents (i.e., money orders, cashier checks,
etc.)
	 
	 	   	Disbursements: Liberty will provide Customer with information on pending disbursements
(checks/wires) via an excel spreadsheet twenty-four (24) hours prior to disbursement being
made to the client. Customer will research disbursements utilizing the Customer’s
anti-money laundering tools and provide approval to Liberty within twenty-four (24) hours to
disburse the funds. Liberty will not disburse funds without approval from Customer. In the
event additional research is required, Customer will request Liberty to pend the
disbursement until resolution. If a pended disbursement goes beyond the service standard
contained in Exhibit 3.2.1 as a result of Customer’s request to pend a particular
disbursement, Liberty will not be penalized unless the initial twenty-four (24) hour
notification was not provided to Customer.

58

 

	 	   	Ongoing adherence to USA PATRIOT Act: Liberty will provide a weekly file of all active
Customer and Monarch Life Insurance Company business to Customer. This file will be run
against the Customer Regulatory List Screening Utility (RLSU) for adherence to the USA
PATRIOT Act.
	 
	 	7.  	Implementation of regulatory changes as identified by Customer. (as Additional
Services)
	 
	 	8.  	Support Customer guidelines regarding the following regulatory/compliance items:
anti-money laundering, prohibition of late-day trading and market timing activities,
Patriot Act requirements and privacy.
	 
	 	9.  	Support regulatory examinations and financial audits.
	 
	 	10.  	Correct a Contract’s value on the administrative system as required by Customer to
support resolution of client complaints as directed .

K. Administrative Support

1. Perform management of above operations and maintain all relevant process/product
documentation and conduct staff training.

L. Conversion of Contract History 

Liberty and Customer agree as follows:

	 	1.  	All Contract History that is available electronically on an Administrative
System will be converted to the Liberty Software for Active Contracts, Lapsed
Contracts, and Contracts which were Terminated after December 31, 2002.
	 
	 	2.  	All other Contract History that is available electronically on an
Administrative System will be converted to an electronic storage medium. Liberty will
provide Customer with this Contract History on request.
	 
	 	3.  	All Contract History that is not available electronically will be stored as a
Pass Through Cost by Liberty. Copies of this Contract History will be made available
to Customer upon request.

M. System Access

	 	1.  	Liberty agrees to provide Customer remote access to their Contract Data via the
Liberty Software. Access will be granted for both the production and actuary
environments. Liberty Software access hours shall be on Business Days between 7:30 AM
and 9:00 PM ET and on weekends/public holidays with 5 days’ prior written notice from
Customer. Liberty Software access availability to Customer during access hours shall
be at 99%. Severity 1 Incident reports shall be delivered by Liberty to Customer
within 24 hours of resolution. A Severity 1 Incident is defined as an unscheduled
system outage during the access hours. The Severity 1 Incident report will include
information on the duration of the outage, business impact, security and privacy
impact, and root cause analysis. The format and content of the incident report will be
mutually agreed to by Liberty and Customer.

59

 

EXHIBIT 3.2.1

PERFORMANCE STANDARDS

Performance Standards for the Services provided would be as follows, and are measured from the date
of receipt of all required and completed documentation to the time the transaction is completed.
All references to “days” in this Exhibit 3.2.1 shall mean Business Days.

Merrill Lynch Reportable Transactions

	 	 	 	 	 	 	 	 	 
	 
	 	Transaction	 	 	1st Tier Performance Standard	 	 	2nd Tier Performance Standard	 
	 	Claims Processing:
	 	 	 	 	 	 	 
	 	Acknowledge Death Claim*

	 	 	90% completed within 2 Business Days
	 	 	100% completed within 4 Business Days	 
	 	Death Claim Payment*

	 	 	90% completed within 2 Business Days
	 	 	100% completed within 3 Business Days	 
	 	Claim Correspondence

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Billing:
	 	 	 	 	 	 	 
	 	Payments*

	 	 	 	 	 	100% completed Same Day	 
	 	Misc. Billing Processing

	 	 	 	 	 	100% completed Same Day	 
	 	Billing Research

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Billing Record Change

	 	 	 	 	 	100% completed within 2 Business Days	 
	 	Financial Processing:
	 	 	 	 	 	 	 
	 	Loans/Partial Withdrawals*

	 	 	 	 	 	100% completed Same Day	 
	 	Reallocations*

	 	 	 	 	 	100% completed Same Day	 
	 	Surrenders/1035 Exchanges*

	 	 	 	 	 	100% completed Same Day	 
	 	Corrective Processing

	 	 	 	 	 	100% completed within 2 Days	 
	 	Loan Wiring Authorization

	 	 	 	 	 	100% completed within 3 Days	 
	 	Price Corrections
received by 2:00 PM ET
(excludes multi-day
and/or multi-fund price
corrections) *

	 	 	 	 	 	100% completed Same Day (in the case of
multi-day and/or multi-fund price
corrections, both parties agree to
discuss a plan for correction)	 
	 	Reinstatements

	 	 	 	 	 	100% completed within 10 Business Days	 
	 	Reissues

	 	 	 	 	 	100% completed within 15 Business Days	 
	 	Settlement Option Quote

	 	 	 	 	 	100% completed within 10 Business Days	 
	 	Non-Financial Processing:
	 	 	 	 	 	 	 
	 	Merrill Lynch Account Number

	 	 	 	 	 	100% completed within 2 Business Days	 
	 	Financial Advisor Changes*

	 	 	 	 	 	100% completed within 3 Business Days	 
	 	Agent Changes*

	 	 	 	 	 	100% completed within 7 Business Days	 
	 	Address Changes*

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Beneficiary/Owner Changes*

	 	 	 	 	 	100% completed within 7 Business Days	 
	 	Other Non-Financial Changes

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Policy Informational Letters/Documents:
	 	 	 	 	 	 	 
	 	Inforce Illustrations

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Reg. 60 Illustrations*

	 	 	 	 	 	100% completed within 5 Business Days	 
	 

60

 

	 	 	 	 	 	 	 	 	 
	 
	 	Transaction	 	 	1st Tier Performance Standard	 	 	2nd Tier Performance Standard	 
	 	Duplicate Policies

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Telephone Correspondence

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Policy or Loan History

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Performance Data

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Surrender Packet

	 	 	 	 	 	100% completed within 4 Business Days	 
	 	Written Correspondence*

	 	 	 	 	 	100% completed within 7 Business Days	 
	 	Tax:
	 	 	 	 	 	 	 
	 	1099 Corrections or Duplicates

	 	 	 	 	 	100% completed within 2 Business Days	 
	 	Form 712

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Complaints:
	 	 	 	 	 	 	 
	 	Transfer Oral Customer
Complaints*

	 	 	 	 	 	100% completed within 2 Business Days	 
	 	Transfer Written Customer
Complaints*

	 	 	 	 	 	100% completed within 1 Business Day	 
	 	Call Center:
	 	 	 	 	 	 	 
	 	800 line calls received*

	 	 	 	 	 	•     97% of total calls answered

•     80% of total calls answered
within 30

      seconds	 
	 

	*	 	ONLY THESE ASTERISKED TRANSACTIONS ARE SUBJECT TO SECTION 3.7 PENALTIES FOR FAILURE TO MEET PERFORMANCE STANDARDS

Note that any transaction which requires Customer actuarial calculations or support will be
forwarded to Customer within the above prescribed timeframe and “Pended for Special Handling”
while Liberty is awaiting a response from Customer. When forwarding a transaction to Customer,
Liberty will include all information (current and historical Contract values, transaction
history, date of original receipt, etc.) required to complete the actuarial calculation or
support. The request from Liberty should also clearly indicate the specific transaction that has
been requested. Once the transaction is returned to Liberty from Customer it will begin a new
performance standard period based on the above prescribed timeframes. In the event that the
request is financial in nature, Liberty will process the transaction effective the date of
original receipt in the Liberty Service Center unless otherwise instructed by Customer. Customer
is responsible for any breakage associated with transactions pended for special handling in this
manner. All communications or contact with Contract owners, beneficiaries, or agents will be
made solely by Liberty and not by Customer’s actuarial staff.

61

 

PROCESSING GUIDELINES FOR MERRILL LYNCH FINANCE

Customer and Liberty agree to complete financial processing guidelines for the Contracts

following completion of the Business Requirements Document as mutually agreed to by

Customer and Liberty.

62

 

EXHIBIT 3.2.2

SERVICE CENTER(S)

2000 Wade Hampton Boulevard

Greenville, South Carolina 29615

Liberty shall provide all services contemplated in this Agreement each Business Day of scheduled
operation. The telephone call center shall be open on Business Days during the following hours:
8:30 AM to 6:00 PM Eastern Standard Time.

Disaster recovery sites include the following locations:

Smyrna Megacenter (Sungard)

5600 United Drive

Smyrna, GA 30082

Atlanta MegaCenter (Sungard)

11650 Great Oaks Way

Alpharetta, GA 30022

Wood Dale MegaCenter (Sungard)

711 N. Edgewood Avenue

Wood Dale, IL 60191

63

 

EXHIBIT 3.3

SECURITY PROCEDURES

Liberty shall take commercially reasonable steps to provide that the Service Center
environment is not accessed or used by any unauthorized party, and that no data is added,
altered, deleted, or otherwise removed by any unauthorized party. Such steps may include,
without limitation, the use of access codes, passwords, and anti-virus programs, as
appropriate for the environment.

Liberty’s computing platforms are housed in a secure data center on Liberty’s premises.
Access to the data center is restricted to authorized personnel only through a card access
system. The access system logs access as well as access attempts by unauthorized
personnel. The entrance to the data center is also monitored by personnel located within
the data center. Visitors to the data center are required to be escorted.

User access to Liberty’s computing platforms is controlled by standard commercially
accepted methods. The system administrator and the security administrator monitor all
security provisions and system logs. All security provisions have been repeatedly audited
by Liberty’s internal audit department and external auditor and continue to receive
excellent reviews.

All access to Confidential Information, including Contract owner’s credit card billing
numbers, authorized automatic checking account numbers of Policy owners, and other
confidential Customer Data are limited to only authorized personnel. In addition, all such
information will be located in a secure location during non-business hours.

64

 

EXHIBIT 3.3.1

CUSTOMER INFORMATION SECURITY

TERMS AND CONDITIONS.

Liberty shall comply with the following rules (heretofore “applicable Information and Security
Provisions”) when providing goods and/or services under this Agreement to Customer.

A. General

o Employs staff whose responsibilities include Information Security and Privacy and Information
Risk Management.

Establishes and implements information security policies, processes, and procedures that govern:

	 	a.  	appropriate use of the Internet, electronic mail, voice mail, and facsimile machines by
Liberty staff,
	 
	 	b.  	Liberty staff remote access to Liberty-owned and operated networks and systems (both
with user-level privileges and administrator-level privileges),
	 
	 	c.  	Liberty personnel management (including procedures to be followed when a staff member
leaves Liberty’s employ),
	 
	 	d.  	backup, recovery, and archival of Liberty-owned and Customer-owned information,
	 
	 	e.  	secure operating system and software application configuration and management,
	 
	 	f.  	access to, processing, and disposal of Customer information,
	 
	 	g.  	computer security incident response and investigation,
	 
	 	h.  	security vulnerability notification and remediation,
	 
	 	i.  	protection against malicious code and viruses,
	 
	 	j.  	business continuity and disaster recovery,
	 
	 	k.  	change management, and
	 
	 	l.  	physical security;

o Will not post any information or inquiry to any public forum including, but not limited to,
Internet Newsgroups, for which said information can be traced or related to Customer or the
services provided under this Agreement;

o Use commercially reasonable efforts to monitor, on a regular basis, reputable sources of computer
security vulnerability information such as FIRST, CERT/CC, and Liberty mailing lists, and take
appropriate measures to obtain, thoroughly test, apply and provide to Customer relevant service
packs, patches, upgrades, and workarounds.

o Test, on at least an annual basis, the implementation of its information security measures
through the use of network, system, and application vulnerability scanning tools and/or penetration
testing. High level results of each test, including vulnerability severity and counts, and a
timeline for resolving any problems discovered, will be completed and provided to Customer within
seven (7) Business Days of the completion of the test. Detailed results of any such test will be
maintained by Liberty as confidential and will not be shared with any other parties, including
Customer, to reduce exposure to potential exploitation. Reports will be provided to IS&P
(Information Security and Protection) Team at Customer.

65

 

o Maintain, for a period of at least 90 calendar days (or such longer period as may be required by
law or contract) detailed logs files concerning all activity on Liberty’s systems associated with
Services provided to Customer including, without limitation:

	 	a.  	All sessions to the secured site will be established
	 
	 	b.  	Information related to the reception of specific information from a user or another
system
	 
	 	c.  	Failed user authentication attempts
	 
	 	d.  	Unauthorized attempts to access resources (software, data, processes, etc.)
	 
	 	e.  	Administrator actions
	 
	 	f.  	Events generated (e.g., commands issued) to make changes in security profiles,
permission levels, application security configurations, and/or system resources.
	 
	 	g.  	All Log files should be protected against unauthorized access, modification, or
deletion.

o Upon conclusion or termination of this Agreement, provide Customer with copies of all Customer
information maintained under this Agreement. Liberty will remove all Customer information from the
Liberty production and test systems, and will notify Customer when this is complete.

o Upon conclusion or termination of this Agreement, use mutually agreed upon data destruction
processes (as approved and certified by each party’s information technology processes) to eliminate
all Customer information from Liberty systems and applications

o Establish and implement a training and awareness program to communicate these policies,
processes, and procedures to all staff members.

o Liberty further agrees to follow a documented management approval process to handle exceptions to
the policies and processes defined in Section A above.

o Upon request, Liberty agrees to provide copies of relevant policy, process, and procedure
documents to Customer.

o Adhere to a software design, development, testing, and deployment “life cycle” methodology for
all software releases, and to integrate information security and information risk management into
all phases of the methodology.

o Permit Customer to request and/or perform, at the expense of Customer, up to two additional
security assessments per year, including but not limited to, review of policies, processes, and
procedures, on-site assessment of physical security arrangements. Such assessments will be
conducted at a time mutually agreed upon between Liberty and Customer, and the results will be
provided to Liberty by Customer.

o At the time of initial user sign-on to any system, device, and/or application used to provide
services under this Agreement, the system, device, and/or application must display a message
advising users that the system they are accessing is for authorized use only. The message should
also include content that advises prospective users that unauthorized and/or malicious use of the
system is prohibited and violators may be prosecuted to the fullest extent of the local and
international law and that by logging on, the user has read and understood these terms. The
following is solely for example purposes:

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EXAMPLE OF US BASED LANGUAGE

*********************************************** WARNING **************************************************

You have accessed a private computer system. This system is for
authorized use only and user activities are monitored and recorded by
company personnel. Unauthorized access to or use of this system is
strictly prohibited and constitutes a violation of federal and state
criminal and civil laws, including Title 18, Section 1030 of the United
States Code and applicable international laws. Violators will be
prosecuted to the fullest extent of the law. By logging on you certify
that you have read and understood these terms and that you are authorized
to access and use this system.

B. Network and Communications Security

o At the Hosting Facility site, deploy multiple layers of defense, specifically firewalls,
host/network-based intrusion detection and proxy services to increase the effort required to
compromise network(s), system(s) or application(s) and to increase the probability that such
attempts will be detected.

o Configure firewalls, network routers, switches, load balancers, name servers, mail servers, and
other network components in accordance with commercially reasonable industry standards.

o Minimize the potential for external unauthorized access to Liberty Software systems through the
use of firewalls, filtering routers, or other similar network segmentation devices.

o All security monitoring systems including, but not limited to, firewalls and intrusion detection
systems must be monitored 24 hours per day, 365 days per year.

C. Infrastructure Platforms, Services, and Operations Security

o Configure all infrastructure platforms and services (operating systems, web servers,
database servers, firewalls, routers, etc.) used to provide services under this Agreement and
authentication mechanisms according to industry best practices.

o Ensure that all remote administrative access to production systems is performed over encrypted
connections (i.e., SSH, SCP, SSL-enabled web-management interfaces, and VPN solutions).

o Restrict user accounts on each system used to provide services under this Agreement to
those Liberty staff members with a job-related need to access the system.

o Use commercially reasonable efforts to ensure that the authentication mechanisms used
to control access to each system used to provide services under this Agreement are configured to
prevent the use of trivial and predictable authenticators. Strong authentication, such as
token-based authentication, should be applied to users with remote access to systems and/or network
devices. Liberty network authentication passwords must be at least six characters and include at
least three of the following four categories:

	 	•  	Upper case letters

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	 	•  	Lower case letters

	 	•  	Numbers

	 	•  	Extended characters such as: ( ) * & ^ % $# @ ! < > ? : ; “ ] [ = +

Additional authorization controls to applications should be applied to users with access to
critical business applications, sensitive information, or special access privileges, including
password complexity as per the Liberty Password Requirements Table attached to this Exhibit 3.3.1.

o Maintain logically separate development, quality assurance, test, and production
operating environments as it relates to services provided under this agreement.

o Except for access required to diagnose problems, ensure that developers do not have access to
production systems or production data. Lead programmers have access to production systems for
emergency fixes only. This access is controlled using a profile with elevated privileges that is
monitored by the information security staff.

D. Application Security

o Permit only authenticated and authorized users to view, create, modify, or delete
information managed by applications used in connection with providing services under this
Agreement.

o Ensure that web browser cookies that store confidential data will be encrypted using a public and
widely accepted encryption algorithm.

o “Time out” and terminate system communication sessions after a period of user inactivity as per
the Liberty Password Requirements Table attached as part of this Exhibit 3.3.1. After this
timeout, the user must re-authenticate to the network before any further work may be performed.

o Terminate any active sessions interrupted by power failure, system “crash,” network problem, or
other anomaly, or when the connection is interrupted by the user as per the Liberty Password
Requirements Table attached as part of this Exhibit 3.3.1.

o Require each user of the application to be uniquely and unambiguously identified through the use
of an identifier such as a user-id.

E. Data Security

o Transmit all Customer information classified “Confidential” or above between Liberty
Software systems and Customer Software systems, or to an external user using the Secure Sockets
Layer or Transport Layer Security protocols with no less than 128-bit keys. Under no circumstances
shall Liberty permit this information to be transmitted unencrypted.

o When database storage is required, secure all Customer information classified “Confidential” or
above with appropriate access controls or logical partitioning of data.

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o Limit access to all Customer information processed under this Agreement to those Liberty
Personnel with a job-related need, and require all such Liberty Personnel to sign and agree to be
bound by a confidentiality agreement.

o Maintain separate and distinct development, test and staging, and production databases to ensure
that production information is not accidentally altered or destroyed.

o Testing should be done only with test data; production files and data must never be impacted by
the development process. If access to production data is required, such access must be limited to
read only.

F. Physical Security

o Maintain all workstations, servers, and network equipment used to provide services under
this Agreement in secure facilities owned, operated, or contracted for by Liberty.

o Limit access to these secure facilities to authorized Liberty staff members with job-related
needs.

o Monitor access to these secure facilities through the use of security guards,
surveillance cameras, authorized entry systems, or similar methods capable of recording entry
and exit information.

o Maintain all backup and archival media containing Customer information, or other
information used to provide services under this Agreement, in secure,
environmentally-controlled storage areas owned, operated, or contracted for by Liberty.

o Limit access to backup and archival media storage areas and contents to authorized
Liberty staff members with job-related needs.

o Ensure that, upon termination pursuant to the terms of Article 8, employee(s)’ physical
and logical access to any services performed under this Agreement Customer will be removed
and/or disabled within 24 hours of Customer’s request.

o Maintain a documented policy and procedure for handling the removal of non-personal
property removed from secured areas (e.g., a Property Removal Pass). Authorizations by
Liberty management must precede any equipment, information or software being taken off-site.

o Liberty must implement appropriate physical and environmental controls. Physical access
controls must include those that restrict and monitor entry to Liberty’s facility (e.g. data or
network operations centers, telecommunications rooms, or ancillary areas (i.e. generator or UPS
storage rooms), and should be implemented as follows:

	 	a.  	Access will be limited to a ‘need-to-know/use’ basis, and will be kept to a minimum;
	 
	 	b.  	The Liberty or building custodian will review physical access privileges on a
semi-annual basis;

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	 	c.  	Physical entry to sensitive areas (data or network operations centers, UPS areas, etc.)
must be minimally controlled by electronic card access locks.

o Dispose of Confidential Information as follows:

	 	a.  	Paper – Confidential Information contained on hard copy will be disposed of by
shredding.
	 
	 	b.  	Non-Paper Storage Media (e.g. tapes, computer discs, microfilm and microfiche) – using
a mutually agreed upon method of destruction.
	 
	 	c.  	Computer Hardware – Extreme caution will be taken when disposing or repairing of PC’s,
laptops or other devices used to store confidential information. These devices must be
cleared of all confidential information before they are destroyed, sent to a vendor to be
repaired or refurbished, or donated to charity.
	 
	 	d.  	A disk wipe utility or physical device must be used to fully erase all Liberty and all
Customer information prior to disposal or transfer of any equipment containing a hard
drive, removable media, or any media with data storage capabilities.
	 
	 	e.  	Leased systems must be completely cleared of Liberty and all Customer information (data
records) before being returned to the leasing company. A third party service may be used to
perform disk wipes prior to return of equipment to the leasing company.

G. Malicious Code and Virus Protection

o Use the latest, commercially available industry acceptable virus and malicious code detection and
protection product(s) on all workstations and servers used to provide services under this
Agreement.

o Maintain installed virus and malicious code detection and protection product(s) at the latest
available signature levels.

o Report all occurrences of viruses and malicious code, not handled by deployed detection and
protection measures, on any workstation or server used to provide services under this Agreement, to
Customer within 2 hours of discovery, if such occurrence causes a breach in security affecting
Customer Data or Services. This report must be made by calling 1-800 MER HELP (637 4357). The
attendant will input a trouble ticket and route it to the IS&P queue.

H. Business Continuity and Recovery

o Perform backups of all systems, applications, and data used to provide services under this
agreement in a manner consistent with the business resumption specified elsewhere in this
Agreement.

o Periodically transfer backup media to a secure off-site storage facility.

o Have a detailed, documented plan for responding to a prolonged disruption in services caused by
power failure, system failure, natural disaster, or other unforeseen circumstances that

70

 

includes processes and procedures for resuming operations within a mutually agreed upon time
period.

o       If the scope of the services provided under this agreement call for any level of Business
Continuity, Liberty will provide Customer IS&P with a copy of their Business Continuity Plan for
review.

o       Test, on at least an eighteen month basis, the implementation of this plan. The results of each
test, and a plan for resolving any problems discovered in a timely manner, will be documented and
such documentation provided to Customer within five business days of the completion of the test.

o       Report the activation of this plan to Customer within one (1) hour of activation, and provide
regular status updates, at mutually agreed upon times throughout the day, for the duration of the
recovery period; This report must be made by calling 1-800 MER HELP (637 4357). The attendant will
input a trouble ticket and route it to the IS&P queue

I. Computer Security Incident Response

o      Have a detailed, documented plan for responding to computer security incidents that includes
processes and procedures for assessing the severity of the incident, identifying the cause of the
incident, repairing the cause of the incident, restoring normal operations, and documenting the
results of the response

o      Report the detection of any computer security incident involving the networks, systems, or
applications used to provide services under this Agreement to Customer within 2 hours of discovery,
if such incident jeopardizes Customer security or Data confidentiality, and provide regular status
updates at four-hour intervals (or at mutually agreed upon times throughout the day) for the
duration of the incident. This report must be made by calling 1-800 MER HELP (637 4357). The
attendant will input a trouble ticket and route it to the IS&P queue.

o      Provide Customer, within five (5) Business Days of the closure of the incident, with a written
report describing the incident, actions taken during the response, and plans for future actions to
prevent a similar incident from occurring in the future.

o      Follow industry best practices, when collecting and preserving evidence during an incident
investigation.

J. Other

o      At some time before the implementation/go live date, Customer will be permitted to perform a risk
assessment and security review of any application that requires access to Customer information.

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EXHIBIT 3.4

STANDARD RATES*

(2004 Time and Materials Rates)

	 	 	 	 	 	 	 	 	 
	 	 	 	 	Personnel Hourly Rates	 	 
	

	 	Sr. Management
	 	$	200	 	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	     •     Directors and VP’s	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	Sr. Professional Staff
	 	$	160	 	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	     •     Actuaries, Project Managers	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	Programmers/System Analysts
	 	$	110	 	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	Professional Staff
	 	$	90	 	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	     •     Business Analysts, Quality Assurance,	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	           Accountants, Underwriters, Trainers	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	Service Center Personnel
	 	$	50	 	 	 

If outside consulting services are used and those services billed by the outside
consulting services are greater than these Standard Rates, Liberty will bill those outside
consulting services to Customer at Liberty’s cost. If outside consulting services are used
and those services billed are less than the Standard Rates, Liberty will bill those outside
consulting services to Customer at a discount to Liberty’s costs as mutually agreed to by
Liberty and Customer during the completion of the Additional Services Request Form as
defined in Exhibit 3.4.1.

*These Standard Rates are subject to annual adjustment in accordance with Section 7.1 of
the Agreement.

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EXHIBIT 3.4.1

ADDITIONAL SERVICES REQUEST FORM

Requests for additional services by either party will be made on the following form. Once approved
by Liberty and Customer, the Additional Services Request Form will become an Amendment for
Additional Services in accordance with Section 3.4 of the Agreement. The multi-phase process
outlined below will govern both the cost basis for the development and the approvals to proceed to
the next phase.

	 	 	 
	Phase 1:

	 	Additional Services Request Review
	Phase 2:

	 	Requirements Definition
	Phase 3:

	 	Recommended Solution provided
	Phase 4:

	 	Estimate Provided
	Phase 5:

	 	Approved Request Prioritized
	Phase 6:

	 	Solution Implemented
	Phase 7:

	 	Solution Tested
	Phase 8:

	 	Final Approval Requested
	Phase 9:

	 	Deliver to Production

All Customer or Liberty requests for additional services will be submitted in writing. Upon
receipt of a written request, and approval by Customer, Liberty will begin the following
multi-phase procedure:

Phase 1: Additional Services Request Review. Liberty or Customer, as the case may be,
will review the request and will analyze the following at a summary level:

	 	•  	business need addressed by the request
	 
	 	•  	Commercial availability of the software that would meet business need

Phase 2: Requirements Definition. Both parties agree to work together to create
comprehensive requirements.

	 	•  	Customer’s or Liberty’s requirements will be compared to the business need to ensure
the need will be met by the requirements.
	 
	 	•  	The requirements will be in writing and complete before progressing to the next
phase.
	 
	 	•  	Requirements will include any deadlines jointly set by Customer and Liberty, if
appropriate.
	 
	 	•  	Customer and Liberty will provide written approval of the requirements.
	 
	 	•  	Once scope is defined, any changes will be reviewed and approved once impact is
known.

Phase 3: Recommended Solution Provided. The approved requirements from Phase 2 will be
analyzed by Liberty or Customer as the case may be.

	 	•  	Liberty will provide a detailed, recommended solution. This solution will involve
participation from the Service Center as well as Customer input.

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	 	•  	The solution will be provided in writing.
	 
	 	•  	This solution will provide the cost adjusted pursuant to Exhibit 3.4 and time frame,
resource requirements for testing and training, and any technological constraints or
negative impacts.
	 
	 	•  	Customer will approve the solution or request changes to the original request.
	 
	 	•  	Customer and Liberty will both provide written approval for the solution.

Phase 4: Estimate Provided. Liberty will provide a written estimate for the Additional
Services requested.

	 	•  	Based on the approved recommended solution, a detailed cost estimate will be
prepared by Liberty.
	 
	 	•  	This estimate will include all resources necessary to successfully implement the
requirements defined in Phase 2.
	 
	 	•  	If the Additional Service Request modification is made consistently across the
majority of Liberty clients and platforms, the estimate will be pro-rated based on the
current Active Contracts as a percentage of total contracts being serviced on all
Liberty platforms.
	 
	 	•  	This estimate will be delivered by Liberty and all impacts will be discussed at this
time.
	 
	 	•  	Scope changes at this point will begin the process again, at Phase 1.
	 
	 	•  	Customer and Liberty will both provide written authorization for the estimate.
	 
	 	•  	Approval of this phase is authorization to proceed with the prioritization and
development of the request.
	 
	 	•  	The parties shall use commercially reasonable efforts to resolve any Additional
Services Request within 20 Business Days of the date made; however, if they are unable
to reach agreement, the following provisions shall apply: (a) if an Additional Services
Request originated by Liberty would in the Customer’s reasonable opinion have an
adverse impact on the Services or the fees payable by Customer, the Customer shall be
entitled to refuse that Additional Services Request; (b) if Liberty can demonstrate to
the Customer’s reasonable satisfaction that an Additional Services Request originated
by the Customer would require any consequential changes as set out in Section 3.4
above, the Customer shall be entitled to require Liberty to comply with that Additional
Services Request subject to the Customer agreeing to such consequential changes; and
(c) if Liberty fails to demonstrate to Customer’s reasonable satisfaction that any such
consequential changes are required, the Customer shall be entitled to deny
authorization of that Additional Services Request sought by Liberty.

Phase 5: Approved Request Prioritized. This new request will be prioritized by Liberty
based on any deadlines set by Customer in the requirements and the resource availability.

	 	•  	Customer and Liberty will work together to set the priority for the new request.
	 
	 	•  	Resource availability of both information technology and Service Center will be
considered in the prioritization, as well as, the urgency of the request.
	 
	 	•  	A list of requested Additional Service Requests will be maintained by Liberty.

74

 

	 	•  	Customer will have access to this list of prioritized requests.
	 
	 	•  	Liberty will provide Customer with weekly status updates to Customer regarding the
progress and timeline to completion for each Additional Service Request.

Phase 6: Solution Implemented. Liberty will provide the staff to make the changes
necessary to support the Additional Services Request.

	 	•  	If applicable, Liberty will make the necessary system modifications based on the
recommended solution approved by Customer.
	 
	 	•  	Liberty will work within the estimate approved by Customer.

Phase 7: Solution Tested. Customer and Liberty will provide the appropriate resources to
successfully plan and test the modification.

	 	•  	Liberty Quality Assurance will provide the guidance necessary for Customer to ensure
the modification meets the business need.
	 
	 	•  	Appropriate testing resources will be provided to prepare and implement the testing
plan.
	 
	 	•  	Liberty Quality Assurance will provide necessary training for the modification to
the testers.
	 
	 	•  	If the modification requires training to be provided to the Service Center, Liberty
will provide the training.
	 
	 	•  	Testing will be done in a stable, controlled testing environment.
	 
	 	•  	Problems will be reported in writing to the implementation team and incorporated
into the weekly status update required as a part of Phase 5.
	 
	 	•  	Once testing is complete, approval will be received in writing from all testers.

Phase 8: Final Approval Requested.

	 	•  	Final approval is required prior to moving the modifications to the Production
environment.

Phase 9: Deliver to Production. Customer will approve all testing prior to the
modifications being delivered to Production.

	 	•  	Production Releases will be scheduled in advance.
	 
	 	•  	Customer will be notified of the modification delivery into production.
	 
	 	•  	Delivery of the modification to Production completes the Additional Services Request
process.

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EXHIBIT 3.4.1 (Continued)

     This Exhibit 3.4.1 describes the request form to be used in the event Customer or
Liberty requests to have additional services provided by Liberty under the Agreement.

ADDITIONAL SERVICES REQUEST FORM

Project Name:                                                                                                                                                                 

Author:                                                                                                           Creation Date:                                         

                                                                                                                                                                                                                                 

Change Request Number:                                                                                                                                      

Change Request Title:                                                                                                                                            

Initial Request By:                                                                                  Initial Request Date:                             

                                                                                               Change Request Status:                                         Change

                                                                                               Request                                        Priority:                    

	 	 	 	 	 
	O     Initial Request

	 	 
	 	 
	O     Request Approved

	 	O     High
	 	 
	O     Request Not Approved

	 	O     Medium	 	 
	O     Change in Progress

	 	O     Low	 	 
	O     Closed
	 	 	 	 

Description of Change:

	 	 	 
	 
	Reason for Change:
	 	 

Estimated Impact of Change:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	Documents &	 	 	 	 	 	 	 
	 	Component	 	 	Requirements	 	 	Design	 	 	Construction	 	 	Training	 	 	Acceptance	 	 	TOTAL	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

Completion Instructions On Next Page.

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The Additional Services Request Form shall be modified or replaced if mutually agreed upon by
Customer and Liberty.

ADDITIONAL SERVICES REQUEST FORM COMPLETION INSTRUCTIONS

	 	1.  	Project Name: Self explanatory
	 
	 	2.  	Author: Self explanatory
	 
	 	3.  	Creation Date: Self explanatory
	 
	 	4.  	Change Request Number: Self explanatory
	 
	 	5.  	Change Request Title: Give a brief descriptive title to the change
request.
	 
	 	6.  	Initial Request By: Enter the person’s name who initiated the change
request.
	 
	 	7.  	Initial Request Date: Enter the date on which the initial change
request was made.
	 
	 	8.  	Change Request Status: Mark the status of the issue. Initial Request,
Request Approved, Change in Progress or Closed. The status cannot be changed
to Request Approved until the Request Approved By and Approval Date lines are
completed. The status cannot be changed to In Progress until the Change in
Progress By and Progress Date are entered. The status cannot be changed to
Closed unless the Closed By and Closed Date lines have been completed.
	 
	 	9.  	Change Request Priority: Mark the priority of the request as High,
Medium or Low. “High” indicates immediate action should be taken. Change has
significant impact on budget, timeliness or expectations. “Medium” indicates
that the change has a moderate slight impact on budget, timeliness or
expectations. “Low” indicates that the request has light or no impact on
budget, timeliness or expectations but the request must still be completed.
	 
	 	10.  	Description of Change: Describe the requested change together with a
rationale if this is not apparent.
	 
	 	11.  	Reason for Change: Describe the background data in information which
gave rise to the change.
	 
	 	12.  	Estimated Impact of Change: Enter each component of the change as well
as the number of hours positively or negatively impacted on the project. Hours
impacted should be identified at each stage.

	 	 	 	 	 
	 	 	 
	 	 
	 	 	 
	 	 	 
	 	Accepted by: Liberty

	 	Accepted by:  Customer	 
	 	 
	 	 	 
	 	 	 
	 	 
	 	 	 
	 	 	 
	 	By:

	 	By:	 
	 	 	 
	 	Print Name:

	 	Print Name:	 
	 	 	 
	 	Title:

	 	Title:	 
	 	 	 

77

 

Exhibit 3.4.2

For purposes of authorizing additional services under the terms of this Agreement, the following
officers of Customer must sign any Additional Service Request before any work may be commenced:

	 	•  	General Counsel, Merrill Lynch Life Insurance Company
	 
	 	•  	Chief Financial Officer, Merrill Lynch Life Insurance Company
	 
	 	•  	Chief Actuary, Merrill Lynch Life Insurance Company
	 
	 	•  	Chief Operating Officer of Merrill Lynch Insurance Group Services, Inc.
	 
	 	•  	Vice President of Insurance Operations for Merrill Lynch Insurance Group Services, Inc.

78

 

EXHIBIT 3.5

DATA RECOVERY PLAN AND BUSINESS CONTINUITY PLAN

Liberty’s computing platforms are backed-up each week over the weekend, with incremental backups
performed daily. This includes all system libraries and user directories as well as application
software and data. The back-up tapes are aged in a fire proof vault, in a separate building on the
Liberty site, and also stored at a secure off-site location. The disaster recovery documentation
reflects which back-up tapes should be used at each point in the recovery process. The tapes are
preserved according to the following retention guidelines.

AS/400:

	 	•  	Daily backups are retained for 14 days
	 
	 	•  	Weekly backups are retained for a minimum of 5 weeks
	 
	 	•  	End of month back-ups are retained for 6 months
	 
	 	•  	End of quarter back-ups are retained for 3 years
	 
	 	•  	End of year back-ups are retained for 7 years

LAN Servers:

	 	•  	Daily back-ups are retained for 5 weeks
	 
	 	•  	Weekly back-ups are retained for 5 weeks
	 
	 	•  	End of quarter back-ups are retained for 1 year

Liberty has contracted for recovery services for its entire computing environment. This
contract includes hot site services as well as ongoing review and testing of recovery
procedures. The recovery procedures have been fully documented and the documentation is
updated as changes occur to reflect the most current information regarding the actual tape
volumes needed for recovery and their location. The recovery procedure is tested,
including a complete restoration of the system at the hot site on an annual basis.
Liberty’s internal audit department monitors the conduct and results of the recovery test.

A copy of Liberty’s Business Continuity Plan is available upon request. A comparable
Business Continuity Plan will be maintained for as long as the Contracts are being
administered by Liberty.

79

 

EXHIBIT 3.6

LIBERTY EMPLOYEES AUTHORIZED ON CUSTOMER’S PREMIUM ACCOUNT

AND CLAIMS ACCOUNT

TBD

80

 

EXHIBIT 6.1

FEES

	1.  	TRANSITION SERVICES FEES

The fixed amount payable by Customer to Liberty for the Transition Services shall be One Million
Five Hundred Thousand Dollars ($1,500,000), payable in installments on the completion of the
milestones indicated below. This fixed amount for Transition Services is exclusive of Pass Through
Costs, which are reimbursable by Customer to Liberty pursuant to Section 7.2 of the Agreement.

	 	 	 	 	 	 	 	 	 
	 
	 	Installment	 	 	Estimated Date	 	 	Milestone	 
	 	$500,000

	 	 	June 15, 2004
	 	 	Signing of Agreement	 
	 	$500,000

	 	 	October 15, 2004
	 	 	120 Days after Signing of Agreement	 
	 	$500,000

	 	 	May 31, 2005
	 	 	End of Transition Services period	 
	 

The Transition Services Fees listed above are inclusive of all work to be performed pursuant
to the Business Area Requirements as of the Effective Date, with the following exceptions:

	 	 	 	 	 	 	 	 
	 
	 	Item Name	 	 	Estimated Cost	 
	 	Calculate commissions

	 	 	$	201,000	 	 
	 	Extracts for NSCC reporting – Positions, FAR, and license &
appointment

	 	 	$	58,650	 	 
	 	Process OFAC feed on all checks prior to releasing them
from System

	 	 	$	23,450	 	 
	 	Provide information on Trades and Buy/Sell Activity – prior
to 3:30 PM ET daily**

(new money and new trade requests only)

	 	 	$	23,450	 	 
	 	Provide dual environment for policy wording terminology
differences between variable life and whole life contracts

	 	 	$	75,000	 	 
	 

** Mutual fund activity notification does not include trades for automatic asset rebalanced
(AAR) accounts. If AAR’s need to be included in the notification, there would be an additional
estimated cost of $93,800.

If Customer chooses to have Liberty commence work on any of the exception items above, then
the Transition Services Fees will be increased by the estimated costs listed. The increased
Transition Services Fees will be payable in accordance with the Transition Services Fees Milestone
payment schedule listed above.

81

 

	2.  	SERVICES FEES

	 	 	 
	Policy	 	Cost*
	Interest-sensitive Whole Life

	 	$16.00 per active Contract, per year
	Variable Life

	 	$45.00 per active Contract, per year
	Variable Universal Life

	 	$45.00 per active Contract, per year
	Transactional Fee per Terminated Contract

	 	$10.00 one-time charge per active Contract

NOTES:

Customer shall not be charged a Service Fee for any Contract or Contracts that is/are
Inactive.

*Annual Contract Administration fees are subject to annual increases based on an external index
(Consumer Price Index as defined in Article 1).

**The monthly minimum Contract administration fee payable to Liberty is $50,000 (the “Minimum
Fee”), regardless of the number of Contracts remaining in force. However, the monthly minimum is
subject to reduction or set-off pursuant to breakage or other error related costs or
indemnification payments paid or owed pursuant to Article 13.

*** Liability for Breakage: At the end of each calendar year, Customer will take the
ending variable life separate account asset base and multiply it by the rate .008%. The end result
(by legal entity) will be compared to the actual net breakage incurred and booked in the ledger.
If the actual amounts exceed the .008% threshold amount, Liberty will pay the difference to
Customer within thirty (30) calendar days of receipt of breakage payment request from Customer, if
such breakage was due to Liberty’s error. All other price corrections due to Customer’s error will
be corrected and billed to Customer at Standard Rates, and Customer shall be responsible for such
breakage. Liberty will not be responsible for breakage resulting from Liberty’s following a
Customer defined process. Customer will also be responsible for breakage as specified in Section
5.26, Exhibit 3.2 and Exhibit 3.2.1.

****Contracts in force shall be calculated consistent with the methodology reflected in Customer’s
annual bluebook/greenbook statement.

	3.  	PASS THROUGH COSTS
	 
	§	All reasonable transition travel costs (e.g. commercial air travel by coach ticket) and expenses related to Transition
Services.
	 
	§	Inbound and outbound long distance toll charges and communication lines incurred in providing the Transition Services,
the Customer Services and any Additional Services under this Agreement, including costs of a toll-free telephone number
for Contract owners and agents
	 
	§	Custom form printing
	 
	§	Postage and express mail charges
	 
	§	Sales/use taxes on the Transition Services, the Customer Services and any Additional Services

82

 

	§	Storage of historical, non-imaged files
	 
	§	Scanning of historical, non-imaged files into the workflow system
	 
	§	Microfiche and microfilm charges to store
	 
	§	Data communication lines
	 
	§	Special regulatory mailings such as TPA relationship notices, privacy notices, etc.
	 
	§	Customer discretionary mailings
	 
	§	Off-site records storage and imaging costs
	 
	§	Other costs expressly identified in this Agreement as Pass Through Costs
	 
	§	Underwriting and claims investigation charges such as exams, APS’s, investigative bureau services, MIB charges, etc.
	 
	§	Costs for faxes or encryption, if applicable, if Customer’s instructions for sending non-public personal information
to agents, Customer, or other third parties require the use of a specific encryption standard or software not already
employed by or licensed to Liberty.

83

 

EXHIBIT 9.1

LISTING OF CUSTOMER SOFTWARE AND THIRD PARTY SOFTWARE AND

MEDIA ON WHICH CONTACTS ARE CURENTLY BEING ADMINISTERED OR

STORED

TBD

84

 

EXHIBIT 11.2

LIBERTY PERSONNEL EMPLOYMENT APPLICATION FORM

85

 

ADDITIONAL SERVICES REQUEST FORM

	 	 	 
	Project name:

	 	          Merrill Lynch Intergration
	

	 	 

	 	 	 
	Author:

	 	                    Tammy Vadas                                                  Creation Date                    8/2/2004
	 

	 	 	 
	Change Request Number:

	 	          MLA
	 

	 	 	 
	Change Request Title:

	 	          Additional Services to be included as part of the Transition project.
	 

	 	 	 	 	 	 	 
	Initial Request By:

	 	          Amy Ferrero – Merrill Lynch          
	 	Initial Request Date:
	 	          7/1/2004
	 	 	 

Change Request Status:

	 	 	 
	 X

	 	Initial Request
	 
	 O

	 	Request Approved
	 
	 O

	 	Request Not Approved
	 
	 O

	 	Change in Progress
	 
	 O

	 	Closed

Change Request Priority:

	 	 	 
	 
	 X

	 	High
	 
	 O

	 	Medium
	 
	 O

	 	Low

	 	 	 
	 

Description of Change:

	 	 	 	 	 	 	 	 
	 
	 	Item Name	 	 	Estimated Cost	 	 
	 	Calculate commissions
	 	 	$	201,000	 	 
	 	Extracts for NSCC reporting – Positions, FAR, and license & appointment
	 	 	$	58,650	 	 
	 	Process OFAC feed on all checks prior to releasing them from System
	 	 	$	23,450	 	 
	 	Provide information on Trades and Buy Sell Activity – prior to 3:30 PM ET daily
(new money and new trade requests only)
	 	 	$	23,450	 	 
	 	Provide dual environment for policy wording terminology differences between
variable life and whole life contracts
	 	 	$	75,000	 	 
	 

	 	 	 
	 

Reason for Change: The Services listed above are contained in the Insurance Administrative
Services Agreement (page 81). These additional services were excluded from the original scope of the
Transition project. These requested changes are now to be implemented as part of the project and
have been approved by Merrill Lynch as an additional service. An email approval was submitted by
Merrill Lynch on 7/1/2004. This signed form is required to provide an original signature that will
become part of the Insurance Administrative Services Agreement.

Estimated Impact of Change:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 
	 	Component	 	 	Requirements	 	 	Design	 	 	Construction	 	 	Documents & Training	 	 	Acceptance	 	TOTAL	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	NOTE: See pricing
chart referenced above which was taken directly from the contract.	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 
	 

	 	Accepted by:
	 	Liberty Insurance Services
	 	Accepted by:
	 	Merrill Lynch

	 	 	 	 	 
	 

	 	By: Bruce W. Powell
	 	By: Amy Ferrero
	 	 	 
	 
	 

	 	Print Name: BRUCE W. POWELL
	 	Print Name: Amy Ferrero
	 	 	 
	

	 	Title: SVP
	 	Title: Senior Vice President, Administrative
	 	 	 
	 
	

	 	Date: 8/5/2004
	 	Date : 8/4/04
	 	 	 

 

AMENDMENT NO. 2

TO

INSURANCE ADMINISTRATIVE SERVICES AGREEMENT

     This Amendment No. 2 to INSURANCE ADMINISTRATIVE SERVICES AGREEMENT (the “Amendment No. 2”)
is made as of the 29th day of November, 2004, (the “Amendment No, 2 Effective Date”) by
and between Merrill Lynch Life Insurance Company, an Arkansas domiciled life insurance company
with its principal offices located at 1300 Merrill Lynch Drive, 2nd Floor, Pennington,
NJ 08534 (“Customer”), and Liberty Insurance Services Corporation, a South Carolina corporation
with offices located at 2000 Wade Hampton Boulevard, Greenville, South Carolina 29615 (“Liberty”).

RECITALS

     WHEREAS, Customer and Liberty are parties to an Insurance Administrative Services Agreement
dated as of June 3, 2004 (the “Agreement”), pursuant to which Liberty has agreed to provide
certain administrative services and related services to Customer for the Contracts described in
the Agreement; and

     WHEREAS, Customer and Liberty previously amended the Agreement by executing an Additional
Services Request Form effective as of August 5, 2004 (“Amendment No. 1”); and

     WHEREAS, Customer and Liberty wish to further amend the Agreement by executing this Amendment
No. 2 to the Agreement to reflect the agreement of the parties as to a new definition of Transition
Services, an earlier Services Starting Date, a delayed conversion to Liberty Software, and certain
other provisions of the Agreement relating to those changes; and

     WHEREAS, this Amendment No. 2 contains amendments to certain provisions of the Agreement to
reflect the agreement of the parties as to a new definition of Transition Services, an earlier
Services Starting Date, a delayed conversion to Liberty Software, and certain other provisions of
the Agreement relating to those changes.

     NOW, THEREFORE, for and in consideration of the agreements of the parties set forth below,
the parties, intending to be legally bound, hereby agree as follows:

     Section 1.
Definitions. Unless otherwise defined in this Amendment No. 2, terms
defined in this Amendment No. 2 have the same meanings as defined in the Agreement. Each reference
to “hereof”, “hereunder”, “herein”, and “hereby” and each other similar reference, and each
reference to “this Agreement” and each other similar reference contained in this Amendment No. 2
to the Agreement shall, from and after the Amendment No. 2 Effective Date, refer to the Agreement,
as amended by prior Amendment No. 1 and by this Amendment No. 2.

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A new definition, “Workable Contract History” shall be added to Article 1 as Section 1.57.

“1.57. “Workable Contract History” means Contract History that is stored on an
Administrative System or on the Liberty Software and that the Administrative System or Liberty
Software can use to automatically recalculate Contract values in the event that corrective
processing, death claims, or other backdated transactions must be applied to a particular
Contract. Any changes made to Workable Contract History will generate new financial records and
transactions, or cancel existing financial records and transactions, as of the effective date of
the change and as of all dates subsequent to the effective date of the change.”

As of the Amendment No. 2 Effective Date, Workable Contract History, as defined herein, is
contained only on the Administrative Systems listed in Section 1.4 of the Agreement.

     Section 2. Amendment To Definition Section 1.54 “Transition Services”. As of the
Amendment No. 2 Effective Date, the definition of “Transition Services” shall be amended to reflect
the agreement of the parties that Liberty will assume from Customer the responsibility for
performing the Services in connection with the Contracts on or around March 14, 2005, which shall
be the Services Starting Date. The parties agree that Liberty shall perform the Services on the
Services Starting Date using some or all of the Customer Software and Third Party Software that is
being used by Customer to administer the Contracts on the day prior to the Services Starting Date.
Liberty shall complete a full conversion of all Contracts to the Liberty Software (the “Conversion
Plan”) no later than July 31, 2006, but only if Customer shall have provided to Liberty, no later
than May 2, 2005, all of the following completed documents, formally signed by an officer of
Customer: (1) complete final product specifications for the Contracts; (2) complete description of
the variances between Customer’s current Administrative Systems and its current policies and
procedures and the final product specifications for the Contracts; (3) written directives to
Liberty on how to handle such variances identified in subsection (2) in the conversion process; (4)
a description of any planned changes to Customer’s software and information systems that are
interconnected with the Administrative Systems, and (5) any changes to existing interfaces that
will be required by Customer after conversion. These specified documents shall form the basis upon
which Liberty’s Conversion Plan is made, and any subsequent changes to those documents by Customer
will be handled as Additional Services Requests. Any delays by Customer in delivering all of these
specified documents on or before May 2, 2005 will extend the completion date of the conversion on a
day-for-day basis for a period of time equal to the delay.

All interface files, used by Customer prior to the Services Starting Date, will be provided by
Liberty following the Services Starting Date, and will contain the exact layout and content
provided prior to the Services Starting Date. Upon Liberty’s implementation of the Conversion Plan
(or Alternate Conversion Plan), all interfaces provided to Customer prior to such implementation
shall continue to be provided and will contain the exact layout and content as before such
implementation unless otherwise agreed to in writing by Customer.

	 	 	 
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Commencing on the Services Starting Date, Liberty may begin to analyze and evaluate
alternative approaches to a full conversion of all Contracts to Liberty Software (the “Alternate
Conversion Plans”). Any analysis and evaluation of the Conversion Plan or any Alternate Conversion
Plans presented to Customer by Liberty will include all of the following: (i) a plan to address
the Exhibit 12.1 Systems issues, (ii) an agreed upon plan to include Workable Contract History,
and (iii) a timeline for completion of the conversion no later
than July 31, 2006. The Client
reserves the right to reject any or all suggested alternatives and require Liberty to complete a
full conversion of all Contracts to Liberty Software pursuant to the Conversion Plan as required
by the Agreement and this Amendment No.2 by July 31, 2006. The acceptance by Customer of the
Alternate Conversion Plans will require a further amendment to the Agreement.

     Section 3. Amendment to Section 4.3. As of the Amendment No. 2 Effective Date, the
following additional sentence shall be added to the end of Section 4.3: “The costs of any
corrective actions taken as a result of the initial Type II SAS 70 report dated 12/31/05 for
Customer relating to the Customer’s programs, practices and procedures existing prior to the
Services Starting Date, or relating to programs, practices and procedures of Customer’s that
Liberty is following based on the Business Requirements Document or other instruction by Customer,
or performs at Customer’s direction, will be paid by Customer.”

     Section 4. Amendments To Exhibits 3.1, 3.1.1, 3.2, Subsection L and 3.2.1.

     Exhibit 3.1 is hereby amended to reflect the Services Starting Date as March 14,
2005.

     The third bullet point paragraph of Section III in Exhibit 3.1.1 is hereby amended to read as
follows:

“Liberty will balance and reconcile all Data being converted to support the Services
subject to testing against Customer’s existing Administrative Systems which shall be
provided to Customer. With the exception of explainable differences, 100% of contracts that
are being converted to the Liberty Software, the Contract values shown below must be within
$1.00 or less of the equivalent values as provided by Customer’s Administrative Systems as
of a series of valuation dates. Liberty and Customer must agree in writing on any such
explainable differences. Customer may provide Liberty with written approval to exclude
certain Contracts from this requirement. Definitions and calculation rules for all values
will be provided in the product specifications that will be provided to Liberty by
Customer.”

All other language in Exhibit 3.1.1 remains unchanged.

	 	 	 
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Exhibit
3.2, Subsection L is hereby amended to read as
follows: 

“L. Conversion of Contract History 

Liberty and
Customer agree as follows:

1. As of the Services Starting Date, all Workable Contract History that is available
electronically on an Administrative System will remain available on that Administrative System for
as long as Liberty uses that Administrative System to administer any portion of the Contracts.

2. As of the date that Liberty begins to administer a Contract on the Liberty Software, a subset
of all Workable Contract History will be converted to the Liberty Software for Active Contracts,
Lapsed Contracts, and Contracts which were Terminated within 13 months of the date that Liberty
first uses the Liberty Software for such Contracts. Such subset shall include all Workable Contract
History commencing on December 31, two calendar years prior to the date upon which conversion
takes place, through the last business day prior to Liberty first administering such Contracts on
the
Liberty Software. The Workable Contract History described in this paragraph shall meet the
balancing and reconciliation standards contained in the 3rd bullet point paragraph of
Section III in
Exhibit 3.1.1. as amended by this Amendment No. 2.

3. All other Contract History that is available electronically on an Administrative System or
MIPS History Viewer will be stored on an electronic storage medium. Copies of this Contract
History will be made available to Customer. Liberty and Customer shall agree upon standards
regarding Contract History storage and accessibility before Liberty implements any process to move
Contract History from an Administrative System. Such standards will be agreed upon by July 14,
2005.

4. All Contract History that is not available electronically will be stored as a Pass Through
Cost by Liberty. Copies of this Contract History will be made available to Customer upon request.

5. Workable Contract History currently available on existing Customer Administrative
System(s) which is not being converted to the Liberty Software must be maintained and available
to Customer upon request. Non-converted Contract History must contain the following minimum
 information:

	•  	Existing transaction history as available on “Transaction Inquiry” screens in existing
Customer Administrative System(s).

	 	o   	Detail currently available within each historical transaction on the
Transaction Inquiry screen in existing Customer Administrative System(s).
	 
	 	o   	Policy Value Quote detail for each historical transaction date
including all sub-screen detail available on the “Policy Value Quote” screen in
existing Customer Administrative System(s).

	•  	Policy Inquiry detail as available in the “Policy Inquiry” menu in existing
Customer Administrative System(s)

	 	 	 
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	•  	SAI (Separate Account Index) return history from inception for all funds and
products as available in existing Customer Administrative System(s).

Non-workable Contract History currently available to Customer will be retained by Liberty in its
current state beyond conversion to the Liberty Software, scheduled for completion on July 31,
2006. (This includes, MIPS History Viewer, Vantage Fiche, Policy Files etc.) Customer agrees that
non-workable Contract History available in paper or microfiche format can be converted to image by
Liberty as long as data content remains the same.

     Exhibit 3.2.1 is hereby amended in its entirety and replaced with the attached Amended
Exhibit 3.2.1.

     Section 5.
Amendment To Exhibit 3.3.1. Exhibit 3.3.1 is hereby amended in its entirety
to reflect changes to the computer security guidelines that may result from use of the Customer
Software and Third Party Software upon which Liberty will be administering the Contracts on the
Services Starting Date and changes, if any, resulting from the new definition of Transition
Services and the revised processes and procedures surrounding the Services based on this Amendment
No. 2. Amended Exhibit 3.3.1 is attached below.

     Section 6.
Amendment to Exhibit 3.5.  Exhibit 3.5 to is hereby amended to reflect the
Data Recovery Plan and Business Continuity Plan for the Customer Software and Third Party Software
upon which Liberty will be administering the Contracts on the Services Starting Date and changes,
if any, resulting from the new definition of Transition Services and the revised processes and
procedures surrounding the Services based on this Amendment
No. 2. Amended Exhibit 3.5 is attached
below.

     Section 7.
Reaffirmation of Exhibit 6.1. All terms and conditions set forth in
Exhibit 6.1 remain unchanged by this Amendment No. 2, except that the estimated date for the end
of the Transition Services period is amended to be March 14, 2005.

     Section 8. Amendment to Section 9.1. Section 9.1 is amended to read as
follows:

     “9.1 Access to Customer Software and Third Party Software. Customer hereby agrees to
use reasonable efforts to obtain for Liberty, at no cost to Liberty, on or before the Effective
Date, a non-exclusive, royalty-free, non-transferable right and license to access and use, and
copy for backup purposes, any Customer proprietary software on which the Contracts are being
administered by Customer, together with any and all associated software documentation (the
“Customer Software”) and any Third Party Software on which the Contracts are being administered by
Customer, together with any and all associated software documentation, to enable Liberty to
perform the Transition Services, and the Services, subject to applicable software license
restrictions, and further subject to any restrictions or prohibitions which prevent Customer from
transferring or assigning such Third Party Software. To the extent necessary to give rights to
Liberty to use and modify the Third Party Software on which the Contracts are being administered
as of the Effective Date, Customer shall

	 	 	 
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obtain such rights for Liberty from applicable Third Party Software vendors for Third Party
Software and media listed in Exhibit 9.1 as transferable. Liberty, at Liberty’s expense, will
obtain such rights for Liberty from applicable third party vendors for software and media listed in
Exhibit 9.1 that are not transferable or assignable by Customer or designated as assignable with a
fee, such fee to be paid by Liberty. Such expense will not be Pass Through Costs to Customer. Upon
expiration or termination of this Agreement or the end of Liberty’s need to use portions of the
Customer Software or Third Party Software licensed by Customer, the applicable rights granted to
Liberty in this Section 9.1 shall immediately revert to Customer, except as necessary for Liberty
to carry out its obligations under Section 8.5. When Liberty has fulfilled its obligations under
Section 8.5, it shall (i) deliver to Customer a current copy of all the Customer Software or Third
Party Software in Liberty’s possession, (ii) destroy or erase all other copies of the Customer
Software or Third Party Software originally licensed by Customer in Liberty’s possession, and (iii)
certify in writing to Customer that Liberty has complied with the obligations of this Section 9.1.
Listings of the Customer Software and Third Party Software to be used in the performance of the
Transition Services and Services are attached as Amended Exhibit 9.1. Amended Exhibit 9.1 also
contains a list of the software and media that Customer is not transferring or assigning to
Liberty.

     Section 9. Effect of Amendment No. 2. Except as expressly set forth in this Amendment
No. 2, the amendments contained herein shall not constitute an amendment or waiver of any term or
condition of the Agreement, as previously amended by Amendment No. 1, and all other such terms and
conditions of the Agreement which are not inconsistent with this Amendment No. 2 or prior
Amendment No 1 shall remain unchanged and in full force and effect and are hereby ratified and
confirmed in all respects.

     Section 10. Counterparts. This Amendment No. 2 may be executed in any number of
counterparts, all of which taken together shall constitute one single agreement between the
parties.

     Section 11. Effectiveness. This Amendment No. 2 shall become effective as of the
Amendment No. 2 Effective Date when Customer and Liberty shall each have received duly executed
counterparts signed by each of the parties (or, in the case of either party as to which an
executed counterpart shall not have been received, shall have received telegraphic, telex or other
written confirmation from the other party of execution of a counterpart by such party).

     Section 12. WAIVER OF WARRANTIES. THE SYSTEMS LISTED IN SCHEDULE 9.1 (‘THE
SYSTEMS”) ARE PROVIDED TO LIBERTY ON AN “AS-IS” AND “AS-AVAILABLE,” BASIS, WITHOUT WARRANTIES OF
ANY KIND. CUSTOMER DOES NOT MAKE, AND NEITHER LIBERTY NOR ANY THIRD PARTY HEREBY RECEIVES, ANY
WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, ANY
WARRANTIES REGARDING QUALITY, SUITABILITY, MERCHANTABILITY, NON-INFRINGEMENT, QUIET ENJOYMENT,
QUALITY OF INFORMATION, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE (IRRESPECTIVE OF ANY COURSE
OF DEALING, CUSTOM OR USAGE OF TRADE). WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, CUSTOMER
MAKES NO WARRANTY THAT

	 	 	 
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THE SYSTEMS AND ANY ASSOCIATED SERVICES PROVIDED UNDER THE INSURANCE ADMINISTRATIVE
AGREEMENT, AS AMENDED, SHALL MEET LIBERTY’S REQUIREMENTS, OR THAT THE SYSTEMS SHALL OPERATE ERROR
FREE OR THAT USE OF THE SYSTEMS SHALL BE UNINTERRUPTED, OR THAT THE SYSTEMS, ASSOCIATED SERVICES,
OR ANY ELEMENTS THEREOF WILL PERFORM IN THE MANNER DESCRIBED OR EXPECTED, OR THAT ANY REVENUE OR
PROFIT TO LIBERTY WILL RESULT FROM THE USE OF THE SYSTEMS OR ANY ASSOCIATED SERVICES. NO ORAL OR
WRITTEN INFORMATION OR ADVICE GIVEN BY CUSTOMER OR ANY OF ITS AGENTS SHALL CREATE ANY ADDITIONAL
WARRANTIES OR IN ANY WAY INCREASE THE SCOPE OF CUSTOMER’S OBLIGATIONS HEREUNDER. LIBERTY AGREES
AND ACKNOWLEDGES THAT THE SYSTEMS AND ASSOCIATED SERVICES ARE NOT INTENDED TO REPLACE LIBERTY’S
PROFESSIONAL SKILL AND JUDGMENT.

     CUSTOMER IS CURRENTLY AWARE OF A NUMBER OF ISSUES, ATTACHED AS EXHIBIT 12.1, THAT
EXIST TODAY IN THE ADMINISTRATIVE SYSTEM. LIBERTY AGREES THAT THESE EXISTING ISSUES WILL BE
ADDRESSED IN ANY CONVERSION PLAN OR ALTERNATIVE PLAN OF CONVERSION IT PRESENTS TO CUSTOMER. COSTS
FOR ADDRESSING THESE ISSUES LISTED ON EXHIBIT 12.1 WILL BE BORNE BY LIBERTY. ALL OTHER ISSUES WITH
THE ADMINISTRATIVE SYSTEM THAT CUSTOMER IS CURRENTLY AWARE OF THAT REQUIRE FIXES SHALL BE HANDLED
AS ADDITIONAL SERVICES REQUESTS.

     Section 13. Support Services. Customer will provide forty-five (45) business days of
support for Liberty as part of this Agreement starting on or about March 14th 2005.
Merrill Lynch subject matter experts will provide phone support and guidance to assist in the
remediation of issues and answer technical questions, and shall be available during this time to
travel to Greenville, if necessary, to assist Liberty in the support of the Insurance
Administrative Services Agreement. Travel expenses on or after March 14, 2005 that are associated
with such requested visits to Greenville by Customer personnel will be paid by Liberty. Any
modification to Liberty’s computing and or application environment will be performed by Liberty
personnel only.

	 	 	 
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Section 14. The first paragraph of Section 5.26 of the Agreement is hereby deleted in
its entirety and replaced with the following language:

“Customer agrees to use its reasonable efforts to provide Liberty with Unit Values, whether full or
partial, by 9:15 pm ET on Business Days, to enable Liberty to apply prices to the Contracts on the
same day. For purposes of this Section 5.26, Unit Values shall mean separate account index as
defined in the Contracts. If not received by 9:00 pm ET, Liberty agrees to contact Customer to
research delay. If not received by 9:15 pm ET, Customer will provide instructions to Liberty on how
to apply prices to Contracts. If Customer instructs Liberty to use prior day’s pricing, Customer
agrees to absorb any Breakage that may result from applying prior day’s pricing. Customer also
accepts the consequences of failing to provide Liberty with Unit Values by 9:15 pm ET.”

     Subsections (a) and (b) of Section 5.26 remain unchanged.

	 	 	 
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IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 signed and delivered by
their duly authorized representatives as of the Amendment No. 2 Effective Date first above written.

	 	 	 
	

	 	LIBERTY INSURANCE SERVICES CORPORATION

	 	 	 	 	 	 	 
	

	 	By:	 	 	 	 
	

	 	 	 	 	 	 

	 	 	 	 	 	 	 
	

	 	Printed Name:
	 	Bruce W. Powell
	 	 
	

	 	 	 	 	 	 

	 	 	 	 	 	 	 
	

	 	Title:
	 	Senior Vice President, Operations
	 	 
	

	 	 	 	 	 	 

	 	 	 
	

	 	MERRILL LYNCH LIFE INSURANCE COMPANY

	 	 	 	 	 	 	 
	

	 	By:	 	 	 	 
	

	 	 	 	 	 	 

	 	 	 	 	 	 	 
	

	 	Printed Name:
	 	Amy L. Ferrero
	 	 
	

	 	 	 	 	 	 

	 	 	 	 	 	 	 
	

	 	Title:
	 	Senior Vice President, Administration
	 	 
	

	 	 	 	 	 	 

	 	 	 
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AMENDED EXHIBIT 3.2.1

PERFORMANCE STANDARDS

Performance Standards for the Services provided would be as follows, and are measured
from the date of receipt of all required and completed documentation to the time the
transaction is completed. All references to “days” in this Amended Exhibit 3.2.1 shall
mean Business Days.

Merrill Lynch Reportable Transactions

	 	 	 	 	 	 	 	 	 
	 
	 	Transactions	 	 	1st  Tier Performance Standard	 	 	2nd Tier Performance Standard	 
	 	Claims Processing:
	 	 	 	 	 	 	 
	 	Acknowledge Death Claim*

	 	 	90% completed within 2 Business Days
	 	 	100% completed within 4 Business Days	 
	 	Death Claim Payment*

	 	 	90% completed within 2
Business Days
	 	 	100% completed within 3 Business Days
	 
	 	Claim Correspondence

	 	 	 
	 	 	100% completed within 5 Business Days	 
	 	Billing:
	 	 	 	 	 	 	 
	 	Payments*, **

	 	 	 	 	 	100% completed Same Day	 
	 	Misc. Billing Processing

	 	 	 	 	 	100% completed Same Day	 
	 	Billing Research

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Billing Record Change

	 	 	 	 	 	100% completed within 2 Business Days	 
	 	Accounting/Financial
Processing:
	 	 	 	 	 	 	 
	 	Loans/Partial Withdrawals*,
**

	 	 	 	 	 	100%
processed Same Day 
100% of funds
disbursed within 4 Calendar Days	 
	 	Reallocations*, **

	 	 	 	 	 	95% completed Same Day 
100% completed Next
Business Day
	 
	 	Surrenders/1035

Exchanges*, **

	 	 	 	 	 	100% processed Same Day

 100% of funds
disbursed within 4 Calendar Days	 
	 	Corrective Processing **

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Loan Wiring Authorization

	 	 	 	 	 	100% completed within 3 Days	 
	 	Price Corrections received by
2:00 PM ET (excludes multi-day
and/or multi-fund
price corrections) *, **

	 	 	 	 	 	100% completed Same Day (in the case of
multi-day and/or multi-fund price corrections,
both parties agree to discuss a plan for
correction)	 
	 	Reinstatements

	 	 	 	 	 	100% completed within 10 Business Days	 
	 	Reissues

	 	 	 	 	 	100% completed within 15 Business Days	 
	 	Settlement Option Quote

	 	 	 	 	 	100% completed within 10 Business Days	 
	 

	 	 	 
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	 	Transactions	 	 	1st  Tier Performance Standard	 	 	2nd Tier Performance Standard	 
	 	Mutual Fund Trades (in
excess of #1 million) Forecast

	 	 	Notify
Customer same day
(by 4:00 pm ET
daily)	 	 	 	 
	 	Open Suspense items-Assigned
to Liberty

	 	 	100%
resolved within 45
Business Days
	 	 	Excludes death claim related suspense items	 
	 	Misc. research items,
including Breakage, open
cash/suspense items, reinsurance and
death claim related items

	 	 	100%
resolved or provide
status of
resolution within 5
Business Days of
inquiry	 	 	 	 
	 	Incoming/outgoing wires

	 	 	100%
completed same day
(if received by
3:45 pm ET)	 	 	 	 
	 	Cash Deposits

	 	 	100%
completed same day
(if received by
3:45 pm ET)	 	 	 	 
	 	Non-Financial Processing:
	 	 	 	 	 	 	 
	 	Merrill Lynch Account
Number

	 	 	 	 	 	100% completed within 2 Business Days	 
	 	Financial Advisor Changes*

	 	 	 	 	 	100% completed within 3 Business Days	 
	 	Agent Changes*

	 	 	 	 	 	100% completed within 7 Business Days	 
	 	Address Changes*

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Beneficiary/Owner Changes*

	 	 	 	 	 	100% completed within 7 Business Days	 
	 	Other Non-Financial
Changes

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Policy
Informational
Letters/Documents:
	 	 	 	 	 	 	 
	 	Inforce Illustrations

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Reg. 60 Illustrations*

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Duplicate Policies

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Telephone Correspondence

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Policy or Loan History

	 	 	 	 	 	100% completed within 15 Business Days	 
	 	Performance Data

	 	 	 	 	 	100% completed within 5 Business Days	 
	 	Surrender Packet

	 	 	 	 	 	100% completed within 4 Business Days	 
	 	Written Correspondence*

	 	 	 	 	 	100% completed within 7 Business Days	 
	 	Tax:
	 	 	 	 	 	 	 
	 	1099 Corrections or
Duplicates

	 	 	 	 	 	100% completed within 2 Business Days	 
	 	Form 712

	 	 	 	 	 	100% completed within 5 Business Days	 
	 

	 	 	 
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AMENDED EXHIBIT 3.2.1 (Continued)

	 	 	 	 	 	 	 	 	 
	 
	 	Transactions	 	 	1st  Tier Performance Standard	 	 	2nd Tier Performance Standard	 
	 	Complaints:
	 	 	 	 	 	 	 
	 	Transfer Oral Customer Complaints*

	 	 	 	 	 	100% completed within 2 Business Days	 
	 	Transfer Written Customer Complaints*

	 	 	 	 	 	100% completed within 1 Business Day	 
	 	Call Center:
	 	 	 	 	 	 	 
	 	800 line calls received*

	 	 	 	 	 	• 97% of total calls answered

• 80% of total calls answered within 30   seconds	 
	 

*ONLY THESE ASTERISKED TRANSACTIONS ARE SUBJECT TO SECTION 3.7 PENALTIES FOR
FAILURE TO MEET PERFORMANCE STANDARDS

** If Liberty fails to meet these Performance Standards as a result of a delayed or
missing transmission from Customer to Liberty, the missed Performance Standards will
not be aggregated for penalties described in Section 3.7.

Note that any transaction which requires Customer actuarial calculations or
support will be forwarded to Customer within the above prescribed timeframe and
“Pended for Special Handling” while Liberty is awaiting a response from Customer. When
forwarding a transaction to Customer, Liberty will include all information (current
and historical Contract values, transaction history, date of original receipt, etc.)
required to complete the actuarial calculation or support. The request from Liberty
should also clearly indicate the specific transaction that has been requested. Once
the transaction is returned to Liberty from Customer it will restart the performance
standard period for the remaining days based on the above prescribed timeframes. In
the event that the request is financial in nature, Liberty will process the
transaction effective the date of original receipt in the Liberty Service Center
unless otherwise instructed by Customer. Customer is responsible for any Breakage
associated with transactions pended for special handling in this manner. All
communications or contact with Contract owners, beneficiaries, or agents will be made
solely by Liberty and not by Customer’s actuarial staff.

	 	 	 
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AMENDED EXHIBIT 3.3.1

CUSTOMER INFORMATION SECURITY

TERMS AND CONDITIONS.

Liberty shall comply with the following rules (“applicable Information and Security
Provisions”) when providing goods and/or services under this Agreement to Customer.

A. General

o     Employs staff whose responsibilities include Information Security and Privacy and
Information Risk Management.

Establishes and implements information security policies, processes, and procedures that govern:

	 	a.  	appropriate use of the Internet, electronic mail, voice mail, and facsimile machines
by Liberty staff,
	 
	 	b.  	Liberty staff remote access to Liberty-owned and operated networks and systems (both
with user-level privileges and administrator-level privileges),
	 
	 	c.  	Liberty personnel management (including procedures to be followed when a staff member
leaves Liberty’s employ),
	 
	 	d.  	backup, recovery, and archival of Liberty-owned and Customer-owned information,
	 
	 	e.  	secure operating system and software application configuration and management,
	 
	 	f.  	access to, processing, and disposal of Customer information,
	 
	 	g.  	computer security incident response and investigation,
	 
	 	h.  	security vulnerability notification and remediation,
	 
	 	i.  	protection against malicious code and viruses,
	 
	 	j.  	business continuity and disaster recovery,
	 
	 	k.  	change management, and
	 
	 	l.  	physical security;

o     Will not post any information or inquiry to any public forum including, but not limited to,
Internet Newsgroups, for which said information can be traced or related to Customer or the
services provided under this Agreement;

o     Use commercially reasonable efforts to monitor, on a regular basis, reputable sources of
computer security vulnerability information such as FIRST, CERT/CC, and Liberty mailing lists, and
take appropriate measures to obtain, thoroughly test, apply and provide to Customer relevant
service packs, patches, upgrades, and workarounds.

o     Test, on at least an annual basis, the implementation of its information security
measures through the use of network, system, and application vulnerability scanning tools and/or
penetration testing. High level results of each test, including vulnerability severity and counts,
and a timeline for resolving any problems discovered, will be completed and provided to Customer
within seven (7) Business Days of the completion of the test. Detailed results of any such test
will be maintained by Liberty as confidential and will not be shared with any other parties,
including Customer, to reduce exposure to potential exploitation. Reports will be provided to IS&P
(Information Security and Protection) Team at Customer.

	 	 	 
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o     Maintain, for a period of at least 90 calendar days (or such longer period as may be
required by law or contract) detailed logs files concerning all activity on Liberty’s systems
associated with Services provided to Customer including, without limitation:

	 	a.  	All sessions to the secured site will be established
	 
	 	b.  	Information related to the reception of specific information from a user or another system
	 
	 	c.  	Failed user authentication attempts

	 
	 	d.  	Unauthorized attempts to access resources (software, data, processes, etc.)
	 
	 	e.  	Administrator actions
	 
	 	f.  	Events generated (e.g., commands issued) to make changes in security profiles,
permission
levels, application security configurations, and/or system resources.
	 
	 	g.  	All Log files should be protected against unauthorized access, modification, or deletion.

o     Upon conclusion or termination of this Agreement, provide Customer with copies of all
Customer information maintained under this Agreement. Liberty will remove all Customer information
from the Liberty production and test systems, and will notify Customer when this is complete.

o     Upon conclusion or termination of this Agreement, use mutually agreed upon data destruction
processes (as approved and certified by each party’s information technology processes) to
eliminate all Customer information from Liberty systems and applications

o     Establish and implement a training and awareness program to communicate these policies,
processes, and procedures to all staff members.

o     Liberty further agrees to follow a documented management approval process to handle
exceptions to the policies and processes defined in Section A above,

o     Upon request, Liberty agrees to provide copies of relevant policy, process, and procedure
documents to Customer.

o     Adhere to a software design, development, testing, and deployment “life cycle” methodology
for all software releases, and to integrate information security and information risk management
into all phases of the methodology.

o     Permit Customer to request and/or perform, at the expense of Customer, up to two additional
security assessments per year, including but not limited to, review of policies, processes, and
procedures, on-site assessment of physical security arrangements. Such assessments will be
conducted at a time mutually agreed upon between Liberty and Customer, and the results will be
provided to Liberty by Customer.

o     At the time of initial user sign-on to any system, device, and/or application used to provide
services under this Agreement, the system, device, and/or application must display a message
advising users that the system they are accessing is for authorized use only. The message should
also include content that advises prospective users that unauthorized and/or malicious use of the
system is prohibited and violators may be prosecuted to the fullest extent of the local and
international law and that by logging on, the user has read and understood these terms. The
following is solely for example purposes:

	 	 	 
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EXAMPLE OF US BASED LANGUAGE

**********************************************WARNING****************************************************************

You have accessed a private computer system. This system is for
authorized use only and user activities are monitored and recorded by
company personnel. Unauthorized access to or use of this system is
strictly prohibited and constitutes a violation of federal and state
criminal and civil laws, including Title 18, Section 1030 of the United
States Code and applicable international laws. Violators will be
prosecuted to the fullest extent of the law. By logging on you certify
that you have read and understood these terms and that you are authorized
to access and use this system.

B. Network and Communications Security

o     At the Hosting Facility site, deploy multiple layers of defense, specifically firewalls,
host/network-based intrusion detection and proxy services to increase the effort required to
compromise network(s), system(s) or application(s) and to increase the probability that such
attempts will be detected.

o     Configure firewalls, network routers, switches, load balancers, name servers, mail servers,
and other network components in accordance with commercially reasonable industry standards.

o     Minimize the potential for external unauthorized access to Liberty Software systems through
the use of firewalls, filtering routers, or other similar network segmentation devices.

o     All security monitoring systems including, but not limited to, firewalls and intrusion
detection systems must be monitored 24 hours per day, 365 days per year.

C. Infrastructure Platforms, Services, and Operations Security

o     Configure all infrastructure platforms and services (operating systems, web servers,
database servers, firewalls, routers, etc.) used to provide services under this Agreement and
authentication mechanisms according to industry best practices.

o     Ensure that all remote administrative access to production systems is performed over
encrypted connections (i.e., SSH, SCP, SSL-enabled web-management interfaces, and VPN solutions).

o     Restrict user accounts on each system used to provide services under this Agreement to those
Liberty staff members with a job-related need to access the system.

o     Use commercially reasonable efforts to ensure that the authentication mechanisms used to
control access to each system used to provide services under this Agreement are configured to
prevent the use of trivial and predictable authenticators. Strong authentication, such as
token-based authentication, should be applied to users with remote access to systems and/or
network devices. Liberty network authentication passwords must be at least six characters and
include at least three of the following four categories:

	 	 	 
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	 	•  	Upper case letters
	 
	 	•  	Lower case letters
	 
	 	•  	Numbers
	 
	 	•  	Extended characters such as: () * & ^ % $# @ ! <> ? :; “ ] [ = +

Additional authorization controls to applications should be applied to users with access to
critical business applications, sensitive information, or special access privileges, including
password complexity as per the Liberty Password Requirements Table attached to this Amended
Exhibit 3.3.1.

o     Maintain logically separate development, quality assurance, test, and production operating
environments as it relates to services provided under this agreement.

o     Except for access required to diagnose problems, ensure that developers do not have access to
production systems or production data. Lead programmers have access to production systems for
emergency fixes only. This access is controlled using a profile with elevated privileges that is
monitored by the information security staff.

D. Application Security

o     Permit only authenticated and authorized users to view, create, modify, or delete
information managed by applications used in connection with providing services under this
Agreement.

o     Ensure that web browser cookies that store confidential data will be encrypted using a public
and widely accepted encryption algorithm.

o     “Time out” and terminate system communication sessions after a period of user inactivity as
per the Liberty Password Requirements Table attached as part of this
Amended Exhibit 3.3.1. After
this timeout, the user must re-authenticate to the network before any further work may be
performed.

o     Terminate any active sessions interrupted by power failure, system “crash,” network problem,
or other anomaly, or when the connection is interrupted by the user as per the Liberty Password
Requirements Table attached as part of this Amended Exhibit 3.3.1.

o     Require each user of the application to be uniquely and unambiguously identified through the
use of an identifier such as a user-id.

E. Data Security

o     Transmit all Customer information classified “Confidential” or above between Liberty
Software systems and Customer Software systems, or to an external user using the Secure Sockets
Layer or Transport Layer Security protocols with no less than 128-bit keys. Under no

	 	 	 
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circumstances shall Liberty permit this information to be transmitted unencrypted.

o     When database storage is required, secure all Customer information classified
“Confidential” or above with appropriate access controls or logical partitioning of data.

o     Limit access to all Customer information processed under this Agreement to those Liberty
Personnel with a job-related need, and require all such Liberty Personnel to sign and agree to
be bound by a confidentiality agreement.

o     Maintain separate and distinct development, test and staging, and production databases to
ensure that production information is not accidentally altered or destroyed.

o     Testing should be done only with test data; production files and data must never be impacted
by the development process. If access to production data is required, such access must be
limited to read only.

F. Physical Security

o     Maintain all workstations, servers, and network equipment used to provide services
under this Agreement in secure facilities owned, operated, or contracted for by Liberty.

o     Limit access to these secure facilities to authorized Liberty staff members with job-related
needs.

o     Monitor access to these secure facilities through the use of security guards, surveillance
cameras, authorized entry systems, or similar methods capable of recording entry and exit
information.

o     Maintain all backup and archival media containing Customer information, or other
information used to provide services under this Agreement, in secure, environmentally-controlled
storage areas owned, operated, or contracted for by Liberty.

o     Limit access to backup and archival media storage areas and contents to authorized
Liberty staff members with job-related needs.

o     Ensure that, upon termination pursuant to the terms of Article 8, employee(s)’
physical and logical access to any services performed under this Agreement Customer will be
removed and/or disabled within 24 hours of Customer’s request.

o     Maintain a documented policy and procedure for handling the removal of non-
personal property removed from secured areas (e.g., a Property Removal Pass). Authorizations by
Liberty management must precede any equipment, information or software being taken off-site.

	 	 	 
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o     Liberty must implement appropriate physical and environmental controls. Physical access
controls must include those that restrict and monitor entry to Liberty’s facility (e.g. data or
network operations centers, telecommunications rooms, or ancillary areas (i.e. generator or UPS
storage rooms), and should be implemented as follows:

	 	a.  	     Access will be limited to a ‘need-to-know/use’ basis, and will be kept to a
minimum;
	 
	 	b.  	     The Liberty or building custodian will review physical access privileges on a
semi-annual basis;
	 
	 	c.  	     Physical entry to sensitive areas (data or network operations centers, UPS
areas, etc.) must be minimally controlled by electronic card access locks.

o     Dispose of Confidential Information as follows;

	 	a.  	Paper – Confidential Information contained on hard copy will be disposed of by
shredding.
	 
	 	b.  	Non-Paper Storage Media (e.g. tapes, computer discs,
microfilm and microfiche) –
using
a mutually agreed upon method of destruction.
	 
	 	c.  	Computer Hardware – Extreme caution will be taken when disposing or repairing of
PC’s, laptops or other devices used to store confidential information. These devices must
be cleared of all confidential information before they are destroyed, sent to a vendor to
be
repaired or refurbished, or donated to charity.
	 
	 	d.  	A disk wipe utility or physical device must be used to fully erase all Liberty and
all
Customer information prior to disposal or transfer of any equipment
containing a hard drive, removable media, or any media with data storage capabilities.
	 
	 	e.  	Leased systems must be completely cleared of Liberty and all Customer information
(data
records) before being returned to the leasing company. A third party
service may be used to perform disk wipes prior to return of equipment to the leasing company.

G. Malicious Code and Virus Protection

o     Use the latest, commercially available industry acceptable virus and malicious code
detection and protection product(s) on all workstations and servers used to provide services
under this Agreement.

o     Maintain installed virus and malicious code detection and protection product(s) at the
latest available signature levels.

o     Report all occurrences of viruses and malicious code, not handled by deployed detection and
protection measures, on any workstation or server used to provide services under this Agreement,
to Customer within 2 hours of discovery, if such occurrence causes a breach in security affecting
Customer Data or Services. This report must be made by calling the Merrill Lynch Client
Relationship Manager and 1-800 MER HELP (637 4357). The attendant will input a trouble ticket and
route it to the Merrill Lynch IS&P queue.

	 	 	 
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H. Business Continuity and Recovery

o     Perform backups of all systems, applications, and data used to provide services under
this agreement in a manner consistent with the business resumption specified elsewhere in this
Agreement.

o     Transfer backup media to a secure off-site storage facility as noted in Amended Exhibit 3.5

o     Have a detailed, documented plan for responding to a prolonged disruption in services caused
by power failure, system failure, natural disaster, or other unforeseen circumstances that includes
processes and procedures for resuming operations within a mutually agreed upon time period.

o     If the scope of the services provided under this agreement call for any level of Business
Continuity, Liberty will provide Customer with a copy of their Business Continuity Plan for review.

o     Test, on at least a twelve month basis, the implementation of this plan as stated in Amended
Exhibit 3.5. The results of each test, and a plan for resolving any problems discovered in a timely
manner, will be documented and such documentation provided to Customer within five business days of
the completion of the test.

o     Report the activation of this plan to Customer within one (1) hour of activation, and provide
regular status updates, at mutually agreed upon times throughout the day, for the duration of the
recovery period; This report must be made by calling the Merrill Lynch Client Relationship Manager
and 1-800 MER HELP (637 4357). The attendant will input a trouble ticket and route it to the
Merrill Lynch IS&P queue.

I. Computer Security Incident Response

     o     Have a detailed, documented plan for responding to computer security incidents that
includes processes and procedures for assessing the severity of the incident, identifying the
cause of the incident, repairing the cause of the incident, restoring normal operations, and
documenting the results of the response

     o     Report the detection of any computer security incident involving the networks, systems, or
applications used to provide services under this Agreement to Customer within 2 hours of
discovery, if such incident jeopardizes Customer security or Data confidentiality, and provide
regular status updates at four-hour intervals (or at mutually agreed upon times throughout the
day) for the duration of the incident. This report must be made by calling the

	 	 	 
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Merrill Lynch Client Relationship Manager and 1-800 MER HELP (637 4357). The attendant
will input a trouble ticket and route it to the Merrill Lynch IS&P queue.

o     Provide Customer, within five (5) Business Days of the closure of the incident, with a
written report describing the incident, actions taken during the response, and plans for future
actions to prevent a similar incident from occurring in the future.

         o     Follow industry best practices, when collecting and preserving evidence during an incident
investigation.

J. Other

o     At some time before the implementation/go live date, Customer will be permitted to
perform a risk assessment and security review of any systems and applications that requires
access to Customer information.

	 	 	 
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AMENDED EXHIBIT 3.5

DATA RECOVERY PLAN AND BUSINESS CONTINUITY PLAN

Liberty will leverage its enterprise Disaster/Recovery (DRP) and Business Continuity
Plans (BCP) for safeguarding and restoration of operations and Service Center services.

From the Services Starting Date, the Administrative System and the System will be backed up in
their entirety (full system back-up) weekly. Definition of full system backup (“Full System
Backup”) includes all of the following:

	 	 	 	 	 	 
	 	Ÿ     Operating System and System Files

	 	 	Ÿ     All Database Dumps (SQL & Oracle)	 
	 	          Ÿ     System Registry

	 	 	     Ÿ     All Application Source Code	 
	 	     Ÿ     System State information

	 	 	          Ÿ     All Application Data	 
	 	          Ÿ     All User files

	 	 	               Ÿ     Systems Libraries	 
	 

Incremental backups are performed daily following completion of batch cycle processing
(“Incremental Backup”). Incremental Backup files contain information identical to the Full
System Backup files, excepting only changes since the last Full System Backup or Incremental
Backup.

Logs for all Full System Backup and Incremental Backup processes are checked daily for errors.
In the event of a Full System Backup failure, the Full System Backup process is re-run at the
next available opportunity (typically the evening following discovery of the failure).

	 	 	 
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AMENDED EXHIBIT 3.5 (Continued)

All Weekly Full System Backups are sent to a secure, off-site location on the following
Business Day. All Daily Incremental Backups are sent to a secure, off-site location on the
following Business Day.

Quarter-end Full System Backups and Year-end Full System Backups are sent, no later than the
following Business Day, to a secure off-site location.

Each such backups are stored with a defined retention period noted below.

Back-up File Retention

	 	 	 	 	 
	Daily Incremental Backups

	 	-
	 	Last 10 generations
	 
	 	 	 	 
	Weekly Full System Backups

	 	-
	 	Last 5 generations
	 
	 	 	 	 
	Quarter-end Full System Backups

	 	-
	 	Last 5 generations
	 
	 	 	 	 
	Year-end Full System Backups

	 	-
	 	Last 7 generations

Liberty is committed to provide services to Customer for all days defined as a Business Day
in this Agreement. Liberty has classified Business Continuity/Disaster-Recovery
requirements as follows for Business Days.

	 	 	 	 	 	 	 	 	 
	 
	 	Level of Severity	 	 	Severity Description	 	 	Systems Recovery Time	 
	 	Level 1 Severity

	 	 	Generally defined as
Building and Systems are
operational but not
accessible to most employees
(generally due to unsafe
weather)
	 	 	All Systems are available
same day by 8:00 a.m. ET	 
	 	Level 2 Severity

	 	 	Systems, Network, and
Telephony components are
operational; however
Business Process areas are
inaccessible.
	 	 	All Systems are available
within 8 hours from declaration of
disaster level.	 
	 	Level 3 Severity

	 	 	Business Process
areas (and personnel) are
accessible; however all or
parts of certain Liberty
Software / Customer Software
are not.
	 	 	Priority 1 Systems as
defined in the Business Continuity
Plan are available within 24 hours
from declaration of disaster
level.	 
	 

	 	 	 
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AMENDED EXHIBIT 3.5 (Continued)

	 	 	 	 	 	 	 	 	 
	 
	 	Level of Severity	 	 	Severity Description	 	 	Systems Recovery Time	 
	 	Level 4 Severity

	 	 	Neither
Business Process
areas or Systems
are available
	 	 	Priority 1
Systems as defined
in the Business
Continuity Plan are
available within 48
hours from
declaration of
disaster level	 
	 

Declaration of disaster level is made by committee as defined in Liberty’s Disaster
Recovery plan.

Liberty has contracted for recovery services for its computing platforms. This recovery
services contract includes warm site services as well as ongoing review and testing of
recovery procedures. The recovery procedures have been fully documented and the documentation
is updated as changes occur. The recovery procedure is tested, including a complete
restoration of all the systems at the warm site on an annual basis. Liberty’s data center and
Quality Assurance areas monitor the conduct and results of the recovery test.

A copy of Liberty’s Business Continuity Plan has been provided to Customer. Updates to
Liberty’s Business Continuity Plan will be made available to Customer upon request. A
comparable Business Continuity Plan will be maintained for as long as the Contracts are being
administered by Liberty.

	 	 	 
	Execution Copy
	 	23

 

 

AMENDED EXHIBIT 9.1

	 	 	 	 	 
	ML System	 	Description	 	Status
	 	 	 	 	 
	Alus

CASSYS

CATS

CD

CDREINS

CHGCTL

CIR

CLAIMS

COBRA

COMPUSET

CRCP-Clients

CRCP-System

ESTI

ESTATE Inforce Illus

FID

FLEX

FLEX Inforce Illus

GEOTAX

GL

IC

JV

MIPS

MIPSHIST

MIPS Inforce Illus

ONYX

PAC

PS58

QUINTET

RPS

SAMS

Single Point

SCHED

TAX

VB POLLER

Citrix MetaFrame XPe

Microsoft Windows 2000 Advance Svr

Oracle Database 8.17 Enterprise Ed.

Edify IVR Software

Microsoft SQL 2000 Enterprise Ed.
	 	Alpha Name Look-up

Cashiering

Chart of Accounts

Cash Disbursement

Reinsurance Cash Disbursement

Program Change Control

Current Interest Rate (onyx)

Death Claims

Commissions and Broker System

Compuset Poller

Client System

Core Program Functions

Estate Administration

Estate Inforce Illustrations

Fidelity Administration

Flex Administration

Flex Inforce Illustrations

Geographic Tax Identifier(doesn’t work)

General Ledger

Inventory Control

Journal Voucher

MIPS Administration

MIPS History Viewer

MIPS Inforce Illustration

ONYX Administration

Pre-authorized Checks

PS58 Tax Reporting

Client Letters

Repetitive Payment System

Suspense Account Monitoring System

Product/process documentation

Sched Administration

Tax Reporting

Application Mall Polling

Citrix Application Server

File / Terminal Server

Oracle Database System

IVR Software

SQL Server
	 	Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Assignable with a fee

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Not Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Transferring

Not Transferring

Not Transferring

Not Transferring

Not Transferring

Not Transferring

	 	 	 
	Execution Copy
	 	24

 

 

Amended Exhibit 9.1 (Continued)

	 	 	 	 	 
	ML System	 	Description	 	Status
	 	 	 	 	 
	Microsoft IIS Server

Citrix Web Interface(Nfuse)

Windows Client Desktop Licenses (XP)
	 	Web Server

Citrix Web Client Host

Desktop Operating Systems
	 	Not Transferring

Not Transferring

Not Transferring

	 	 	 
	Execution Copy
	 	25

 

 

EXHIBIT 12.1

Known System Issues That Exist in the Administrative System

The following issues currently exist for specified policies in Customer’s Administrative
Systems. Each issue is being resolved and will require adjustments to policy values and/or other
policy details when the resolution is complete. No system modifications or Customer funding are
required as only these specific contracts are impacted and functionality exists within the
Administrative Systems to make these changes. All changes to the 7 Contracts below will be
implemented post Services Starting Date and prior to conversion date.

	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	System/ Product	 	 	 	 
	 	Issue	 	 	Description	 	 	Impacted	 	 	Scope	 
	 	Incorrect Tax

Status

	 	 	Contract
reflects as a
Non-Mec but should
be a MEC. As a
result, when a
loan was taken in
2001 it was not
taxed. The client
needs to be
notified, the tax
status on-line
needs to be
changed, policy
values need to be
validated and tax
reporting needs to
be done. This
Contract will
terminate 4/16/08
per over loan
letter.
	 	 	Flex
	 	 	1

Contract	 
	 	Face Amount

Overstated

	 	 	The face amount on
this contract did
not change properly
after last PPP was
made. It needs to
be manually
recalculated and
adjusted on the
admin
system.
	 	 	Flex
	 	 	3

Contracts	 
	 	Face Amount

Overstated

	 	 	The face amount did
not change properly
after an
underwriting change
on was made on 1
contract and after
PPPs were applied
on 2 other
contracts. The face
amounts need to be
manually
recalculated and
adjusted on the
admin system.
	 	 	Sched
	 	 	3

Contracts	 
	 

	 	 	 
	Execution Copy
	 	26

 

 

EXHIBIT 12.1 (Continued)

The following issues currently exist in Customer’s Administrative Systems. Customer has
analyzed each issue and determined that modifications to Customer’s existing Administrative
Systems will not be required prior to conversion to the Liberty Software. Such conversion is
scheduled for completion by July 31, 2006. Liberty is financially responsible for correcting
these issues.

	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	System/Product	 	 	 	 
	 	Issue	 	 	Description	 	 	Impacted	 	 	Scope	 
	 	Initial

Contract Load

	 	 	Initial load does not match those provided in
the product specification.
	 	 	Flex
	 	 	116 contracts	 
	 	Target Loan Amount

Formula

	 	 	Target loan amounts available formula may be
inconsistent with preferred loan verbiage in
the
prospectus.
	 	 	Flex
	 	 	Unknown at this time	 
	 	Overloan Logic

	 	 	Systematic overloan processing does not exist.
	 	 	Flex, Sched,

Fidelity
	 	 	N/A	 
	 	Maturity Logic

	 	 	No maturity logic in systems.
	 	 	All but MIPS
	 	 	N/A	 
	 	Financial

Transactions After

Market Close

	 	 	The administrative systems do not prevent the
user from processing financial transactions
after market close. Currently a daily report
is validated to ensure late trading does not
occur.
	 	 	All systems
	 	 	N/A	 
	 	Guarantee Period

Expiring

	 	 	There is no systematic termination of
contracts when the policy’s guarantee period
expires and there is no cash value in the
policy.
	 	 	All systems
	 	 	N/A	 
	 	Vanishing Premium

	 	 	The vanishing premium concept on Priority One
contracts cannot be exercised systematically.
	 	 	Onyx
	 	 	N/A	 
	 	Tabular Value

Discrepancy

	 	 	Tabular values for this contract do not match
and should be fixed with conversion.
	 	 	Legacy Power
	 	 	1 contract	 
	 	Tabular Value

Discrepancy

	 	 	The tabular value amount on the admin system
corresponds to a value one quarter ahead.
Tabular value at issue should equal net
premium amount.
	 	 	Legacy Power
	 	 	N/A	 
	 	Face Amount Change

with Partial

Withdrawal

	 	 	Flex screens show change in face immediately
for policies electing partial withdrawals
however the change should take effect on the
next policy processing date.
	 	 	Flex
	 	 	N/A	 
	 	New Contract

Issuance

	 	 	New contracts cannot be produced and
maintained on the administrative system
without developer intervention.
	 	 	All
	 	 	N/A	 
	 	Face Amount

Adjustment

	 	 	Face amount is not adjusting down when taking
a partial withdrawal and guarantee period is
less than life.
	 	 	Flex
	 	 	30 contracts currently. Can
potentially grow to
several hundred.	 
	 

	 	 	 
	Execution Copy
	 	 

27

 

EXHIBIT 12.1 (Continued)

	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	System/ Product	 	 	 	 
	 	Issue	 	 	Description	 	 	Impacted	 	 	Scope	 
	 	Non-Mec Partial

Withdrawals

	 	 	System does not allow for partial
withdrawal processing on a non-mec
contract.
	 	 	Onyx
	 	 	Potentially high volume.	 
	 	GID NSP Factor

Recalculation

	 	 	GID NSP factor recalculation does not

occur for premium payments on anniversary
	 	 	Flex
	 	 	Currently impact is very
low but potentially
could grow. Thousands
possible.	 
	 	Premium Payments on

Policy Anniversary

without GID

	 	 	If a premium is processed on an
anniversary for a Prime Plan VI or Prime
Plan 7 contract without GID, the COI
charge on the next quarterversary does not
match product specs.
	 	 	Flex
	 	 	Large number of
potential contracts. PAC
or CMA clients more
likely impacted.	 
	 	Onyx Cost of Insurance

	 	 	Cost of Insurance logic has not been coded.
	 	 	Onyx
	 	 	7,000-8,000 contracts	 
	 	Premium Loan

Payoff

	 	 	Premium loan payoff calculation in the
admin system is inconsistent with the
prospectus wording.
	 	 	Flex
	 	 	N/A	 
	 	Cash Value

	 	 	The quarterly administrative charge is not
interpolated between processing dates.
	 	 	PP VI &

Captain Flex
	 	 	N/A	 
	 

The following issues currently exist in Customer’s Administrative Systems. Customer
has analyzed each issue and determined that modifications to Customer’s existing
Administrative Systems will not be required prior to conversion to the Liberty Software. Such
conversion is scheduled for completion by July 31, 2006. However, because of the immediate
increased financial risk to Customer due to these issues, an interim manual solution for
addressing these issues will be defined by Customer no later than May 2, 2005 and implemented
by Liberty no later than June 30, 2005. Liberty is financially responsible for correcting
these issues.

	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	System/ Product	 	 	 	 
	 	Issue	 	 	Description	 	 	Impacted	 	 	Scope	 
	 	DL2 Plan C drop in

face amount

	 	 	Contractual drop in face for DL2 Plan C policies
is not occurring.
	 	 	Sched
	 	 	Potentially several hundred	 
	 	Year 15 auto drop
in face amount.

	 	 	Auto drop in face in year 15 for contracts with
partial withdrawals taken is not working
	 	 	Fidelilty
	 	 	200 contracts	 
	 

	 	 	 
	Execution Copy
	 	28

 

 

EXHIBIT 12.1 (Continued)

The following issues currently exist in Customer’s Administrative Systems. Manual
procedures are utilized by Customer to allow for processing within the specified Service
Level Agreement for each impacted transaction. Liberty has been provided with these manual
procedures. In addition, Service Level Agreements impacted by these manual processes have
been modified in this Amendment #2. Although Customer is not requiring Liberty to
systematically correct these issues prior to or with conversion to the Liberty Software, the
original Service Level Agreement as defined in this Agreement will be in effect when
conversion is complete. If Liberty chooses to modify Customer’s existing Administrative
Systems to allow for systematic processing, Liberty will be financially responsible for those
changes.

	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	System/ Product	 	 	 	 
	 	Issue	 	 	Description	 	 	Impacted	 	 	Scope	 
	 	Total Investment

Base Reallocation

	 	 	Total investment base reallocation cannot be
processed systematically.
	 	 	Flex, Sched,

Estate, Fidelity
	 	 	N/A	 
	 	 
	 	 	 	 	 	 
	 	 	 	 
	 	Invalid MLA
Numbers.

	 	 	Inactive MLA numbers exist on the
administrative systems.
	 	 	All
	 	 	Potentially thousands.	 
	 	 
	 	 	 	 	 	 
	 	 	 	 
	 	Change Fund

Expenses

	 	 	Fund expense changes in the illustration system
require developer intervention.
	 	 	Flex & MIPS

Illustrations
	 	 	N/A	 
	 

	 	 	 
	Execution Copy
	 	29

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