<PAGE>
As filed with the Securities and Exchange Commission on April 26, 1999
Registration No.
333-64473
Registration No. 333-64473-01
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 4
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
Great-West Life & Annuity Insurance GWL&A Financial Inc.
Capital I (Exact name of registrant as
(Exact name of registrant as specified specified in charter)
in charter) Delaware
Delaware (State or other jurisdiction of
(State or other jurisdiction of incorporation or organization)
incorporation or organization) 6719
6733 (Primary Standard Industrial
(Primary Standard Industrial Classification Code Number)
Classification Code Number) 84-1474245
52-2133316 (IRS Employer Identification No.)
(IRS Employer Identification No.)
8515 East Orchard Road
Englewood, Colorado 80111
(303) 689-3000
(Address, including zip code, and telephone number, including area code, of
Registrants principal executive offices)
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, Colorado 80111
(303) 689-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies To:
<TABLE>
<S> <C>
David W. Hirsch Lee Meyerson
Cleary, Gottlieb, Steen & Hamilton Simpson Thacher & Bartlett
One Liberty Plaza 425 Lexington Avenue
New York, NY 10006 New York, New York 10017-3954
(212) 225-2000 (212) 455-2000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
Each of the Registrants hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until each of
the Registrants shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated April 23, 1999
PROSPECTUS
$150,000,000
Great-West Life & Annuity Insurance Capital I
SKIS SM*
% Subordinated Capital Income Securities
(Liquidation Amount $25 per Capital Security)
fully and unconditionally guaranteed, as described herein, by
GWL&A Financial Inc.
-----------
The % Subordinated Capital Income Securities ("SKIS" or the "Capital
Securities") offered hereby represent undivided beneficial ownership interests
in the assets of Great-West Life & Annuity Insurance Capital I, a Delaware
statutory business trust (the "Trust"). GWL&A Financial Inc., a Delaware
corporation ("GWL&A Financial" or the "Company"), will be the owner of all of
the beneficial ownership interests represented by common securities of the
Trust (the "Common Securities"; together with the Capital Securities, the
"Trust Securities"). The Trust exists for the sole purpose of issuing the
Capital Securities and the Common Securities and investing the proceeds thereof
in % Junior Subordinated Debentures due 2048 (the "Junior Subordinated
Debentures") to be issued by the Company.
Application has been made to have the Capital Securities approved for listing
on the New York Stock Exchange, Inc. (the "New York Stock Exchange"). Trading
of the Capital Securities on the New York Stock Exchange is expected to
commence within a 30-day period after the initial delivery of the Capital
Securities. See "Underwriting."
(continued on next page)
See "Risk Factors" beginning on page 13 for certain information relevant to
an investment in the Capital Securities.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds to
Offering Price(1) Commissions(2) Trust(3)(4)
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<S> <C> <C> <C>
Per Capital Security.............. $ (3) $
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Total............................. $ (3) $
</TABLE>
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(1) Plus accrued distributions, if any, from , 1999.
(2) The Trust and the Company have each agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(3) In view of the fact that the proceeds of the sale of the Capital Securities
will be invested in the Junior Subordinated Debentures, the Company has
agreed to pay to the Underwriters, as compensation for their arranging the
investment therein of such proceeds, $ per Capital Security (or $
in the aggregate); except that for sales of Capital Securities to certain
institutions the underwriting commission will be $ per Capital Security.
See "Underwriting."
(4) Before deducting expenses payable by the Company, estimated at $685,000.
-----------
The Capital Securities are offered, subject to prior sale, when, as and if
issued to and accepted by the several Underwriters and subject to certain
conditions. It is expected that delivery of the Capital Securities will be made
in book-entry form through the facilities of The Depository Trust Company on or
about , 1999 at the offices of Lehman Brothers Inc., New York, New York
against payment therefor in immediately available funds.
-----------
Joint Book-Running Managers
Lehman Brothers Merrill Lynch & Co.
-----------
PaineWebber Incorporated Prudential Securities Incorporated
Goldman, Sachs & Co. J.P. Morgan & Co.
, 1999
- -----
* SKIS is a servicemark of Lehman Brothers Inc.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CAPITAL
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
----------------
(continued from previous page)
The Junior Subordinated Debentures will mature on , 2048 (the "Stated
Maturity"). The Capital Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities. See
"Description of Capital Securities--Subordination of Common Securities."
Holders of the Capital Securities will be entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
year, commencing June 30, 1999, at the annual rate of % of the liquidation
amount of $25 per Capital Security (the "Distributions"). The distribution rate
and the distribution payment dates and other payment dates of the Capital
Securities will correspond to the interest rate and interest payment dates and
other payment dates of the Junior Subordinated Debentures, which will be the
sole asset of the Trust. The Company will guarantee the payment of
Distributions and payments on liquidation of the Trust or redemption of the
Capital Securities, but only in each case to the extent of funds held by the
Trust, as described herein (the "Guarantee"). See "Description of Guarantee."
If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Trust, the Trust will have insufficient funds to pay
Distributions on the Capital Securities. The Company's obligations under the
Guarantee, taken together with its obligations under the Junior Subordinated
Debentures and the Indenture (as defined herein), including its obligation to
pay all costs, expenses and liabilities of the Trust (other than with respect
to the Capital Securities), constitute a full and unconditional guarantee of
all of the Trust's obligations under the Capital Securities. The obligations of
the Company under the Guarantee and the Junior Subordinated Debentures are
subordinate and junior in right of payment to all Senior Indebtedness (as
defined in "Description of Junior Subordinated Debentures--Subordination") of
the Company and will be structurally subordinated to all liabilities and
obligations of the Company's subsidiaries. As of December 31, 1998, the Company
had no Senior Indebtedness outstanding, and the Company's consolidated
subsidiaries had indebtedness and other liabilities of approximately $23.9
billion (of which $23.6 billion consists of obligations to policyholders under
outstanding insurance policies) to which the Guarantee and the Junior
Subordinated Debentures would be effectively subordinated.
The Company has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarters with respect to each deferral period (each,
an "Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures or end on a day other
than an Interest Payment Date (as defined herein). Upon the termination of any
such Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period subject to
the requirements set forth herein. Accordingly, there could be multiple
Extension Periods of varying lengths throughout the term of the Junior
Subordinated Debentures. If interest payments on the Junior Subordinated
Debentures are so deferred, distributions on the Capital Securities will also
be deferred and the Company may not, and may not permit any subsidiary of the
Company to, (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, the Company's
capital stock, (ii) make any payment of principal, interest or premium, if any,
on or repay, repurchase or redeem any debt securities that rank pari passu with
or junior to the Junior Subordinated Debentures or (iii) make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks pari passu in all
respects with or junior to the Junior Subordinated Debentures (other than (a)
dividends or distributions in the form of stock, warrants, options or other
rights where the dividend stock or the stocks
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issuable upon exercise of such warrants, options or other right is the same
stock as that on which the dividend is being paid or ranks pari passu with or
junior to such stock, (b) payments under the Guarantee, (c) any declaration of
a dividend in connection with the implementation of a shareholders' rights
plan, or the issuance of rights, stock or other property under any such plan in
the future, or the redemption or repurchase of any such rights pursuant
thereto, (d) as a result of reclassification of the Company's capital stock
into one or more other classes or series of the Company's capital stock or the
exchange or conversion of one class or series of the Company's capital stock
(or any capital stock of a subsidiary of the Company) for another class or
series of the Company's capital stock, or of any class or series of the
Company's indebtedness for any class or series of the Company's capital stock,
(e) the purchase of fractional interests in the shares of the Company's capital
stock pursuant to the conversion or exchange provisions of such capital stock
or the security being converted or exchanged and (f) repurchases, redemptions
or other acquisitions of common stock related to the issuance of common stock
or rights under any of the Company's employment contracts, benefit plans or
other similar arrangement with or for the benefit of one or more employees,
officers, directors or consultants, in connection with a dividend reinvestment
or stockholder stock purchase plan or in connection with the issuance of
capital stock of the Company (or securities convertible into or exercisable for
such capital stock) as consideration in an acquisition transaction entered into
prior to the applicable Extension Period). During an Extension Period, interest
on the Junior Subordinated Debentures will continue to accrue (and the amount
of Distributions to which holders of the Capital Securities are entitled will
accumulate) at the rate of % per annum to the extent permitted by applicable
law, compounded quarterly, and holders of the Capital Securities will be
required to include the stated interest on their pro rata share of the Capital
Securities in their gross income as original issue discount ("OID") even though
the cash payments attributable thereto have not been made. See "Description of
Junior Subordinated Debentures--Option to Extend Interest Payment Period" and
"U.S. Federal Income Tax Consequences--Interest Income and Original Issue
Discount."
The Junior Subordinated Debentures are not redeemable prior to , 2004
unless a Special Event (as defined herein) has occurred. The Junior
Subordinated Debentures are redeemable prior to maturity at the option of the
Company (i) on or after , 2004, at any time, in whole or in part, at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to, but excluding, the date fixed for
redemption, plus 100% of the principal amount thereof, or (ii) at any time, in
whole but not in part, within 90 days of the occurrence and continuation of a
Special Event at a redemption price equal to the accrued and unpaid interest on
the Junior Subordinated Debentures so redeemed to, but excluding, the date
fixed for redemption, plus 100% of the principal amount thereof. The Capital
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Junior Subordinated Debentures at maturity or their earlier
redemption, in an amount equal to the aggregate principal amount of related
Junior Subordinated Debentures maturing or being redeemed and at a redemption
price equal to the aggregate principal amount of such Junior Subordinated
Debentures, in each case plus accumulated and unpaid Distributions on such
Capital Securities to the date of redemption.
The Company will have the right, at any time, to terminate the Trust and
cause the Junior Subordinated Debentures to be distributed to the holders of
the Capital Securities and the Common Securities in liquidation of the Trust.
If the Junior Subordinated Debentures are distributed to the holders of Capital
Securities upon the liquidation of the Trust, the Company will use its best
efforts to list the Junior Subordinated Debentures on the New York Stock
Exchange or such other stock exchanges or inter-dealer quotation system, if
any, on which the Capital Securities are then listed or quoted. See
"Description of Capital Securities--Redemption--Special Event Redemption or
Distribution of Junior Subordinated Debentures" and "Description of Junior
Subordinated Debentures--Distribution of Junior Subordinated Debentures; Book-
Entry Issuance."
In the event of the liquidation of the Trust, after satisfaction of the
claims of creditors of the Trust, if any, as provided by applicable law, the
holders of the Capital Securities will be entitled to receive a liquidation
amount of $25 per Capital Security plus accumulated and unpaid Distributions
thereon to the date of payment, which may be in the form of a distribution of
such amount in Junior Subordinated Debentures as described above. If such
liquidation amount can be paid only in part because the Trust has insufficient
assets available to
3
<PAGE>
pay in full the aggregate liquidation amount, then the amounts payable directly
by the Trust on the Capital Securities shall be paid on a pro rata basis. The
holder of the Common Securities will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Capital Securities,
except that if an Indenture Event of Default (as defined herein) has occurred
and is continuing, the Capital Securities will have a priority over the Common
Securities. See "Description of Capital Securities--Liquidation Distribution
Upon Dissolution."
----------------
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments. In
particular, statements using verbs such as "expect," "anticipate," "believe" or
words of similar import generally involve forward-looking statements. Without
limiting the foregoing, forward-looking statements include statements which
represent the Company's beliefs concerning future or projected levels of sales
of the Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. Whether or not actual results differ
materially from forward-looking statements may depend on numerous foreseeable
and unforeseeable events or developments, some of which may be national in
scope, such as general economic conditions and interest rates, some of which
may be related to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation, and others of
which may relate to the Company specifically, such as credit, volatility and
other risks associated with the Company's investment portfolio, and other
factors. Readers are also directed to consider other risks and uncertainties
discussed in documents filed by Great-West Life & Annuity Insurance Company and
the Company and certain of its subsidiaries with the Securities and Exchange
Commission (the "SEC" or "Commission"). See "Available Information."
4
<PAGE>
SUMMARY
This summary is qualified by the more detailed information and financial
statements appearing elsewhere, or incorporated by reference, in this
Prospectus. Prospective investors are urged to read this Prospectus in its
entirety.
The Company was formed on September 16, 1998 as a holding company for Great-
West Life & Annuity Insurance Company, a Colorado life insurance company
("GWL&A"). On December 30, 1998, the Company became the parent of and successor
registrant to GWL&A. Accordingly, unless the context otherwise requires,
references to the Company in this Prospectus include GWL&A, and all financial
and other information in this Prospectus is presented as if this reorganization
had been completed for all periods discussed.
The Trust
The Trust is a statutory business trust created under the Delaware Business
Trust Act, as amended (the "Trust Act"), pursuant to a declaration of trust (as
amended and restated, the "Declaration") and the filing of a certificate of
trust with the Secretary of State of the State of Delaware. The Company will
acquire Common Securities in an aggregate liquidation preference equal to at
least 3% of the total capital of the Trust. All of the Common Securities will
be owned directly by the Company. The Trust will use all of the proceeds
derived from the issuance of the Capital Securities and the Common Securities
to purchase the Junior Subordinated Debentures and, accordingly, the assets of
the Trust will consist solely of the Junior Subordinated Debentures and
payments made thereunder will be the sole revenue of the Trust. The Trust
exists for the exclusive purpose of (i) issuing the Trust Securities
representing undivided beneficial ownership interests in the assets of the
Trust, (ii) investing the gross proceeds of the Trust Securities in the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary or incidental thereto.
The Company
The Company is an indirect wholly-owned subsidiary of The Great-West Life
Assurance Company ("Great-West Life"), a Canadian life insurance company.
Great-West Life is a subsidiary of Great-West Lifeco Inc. ("Great-West
Lifeco"), a Canadian holding company. Great-West Lifeco is in turn a subsidiary
of Power Financial Corporation ("Power Financial"), a Canadian holding company
with substantial interests in the financial services industry. Power
Corporation of Canada ("Power Corporation"), a Canadian holding and management
company, has voting control of Power Financial. Mr. Paul Desmarais, through a
group of private holding companies, which he controls, has voting control of
Power Corporation. Common and preferred shares of Great-West Life, Great-West
Lifeco, Power Financial and Power Corporation are traded publicly in Canada.
The Company is incorporated in Delaware and maintains its principal executive
offices in Englewood, Colorado.
Great-West Lifeco has commenced an examination of how it holds its ownership
interest in its insurance companies in Canada and the United States; this could
have the effect of the Company and GWL&A no longer being indirectly owned by
Great-West Life although they would continue to be owned by Great-West Lifeco.
Great-West Lifeco's examination is in a preliminary stage. Any such
restructuring would require approvals from the regulators and favorable rulings
from the tax authorities, in both Canada and the United States.
GWL&A
GWL&A is a stock life insurance company originally organized in 1907. GWL&A
is authorized to engage in the sale of life insurance, accident and health
insurance and annuities. It is qualified to do business in all states in the
United States except New York, and in the District of Columbia, Puerto Rico,
Guam and the U.S. Virgin Islands. GWL&A conducts business in New York through
its subsidiary, First Great-West Life &
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Annuity Insurance Company. GWL&A is also a licensed reinsurer in the State of
New York. As of December 31, 1997, GWL&A ranked among the top 25 of all U.S.
life insurance companies in terms of total admitted assets.
GWL&A operates in the following two business segments:
<TABLE>
<S> <C>
Employee Benefits: Life, health and 401(k) products for group
clients; and
Financial Services: Savings products for both public and non-
profit employers and individuals, and life
insurance products for individuals and
businesses.
</TABLE>
Reorganization
On December 30, 1998, all of the outstanding shares of GWL&A's common stock
were contributed to GWL&A Financial, and GWL&A Financial became the parent of
GWL&A. The consolidated assets and liabilities of GWL&A Financial immediately
after the Reorganization were substantially the same as the consolidated assets
and liabilities of GWL&A immediately prior to the Reorganization. The
accounting for the Reorganization was similar to the accounting for a pooling
of interests as it represents a combination of entities under common control.
6
<PAGE>
The Offering
The Trust................... Great-West Life & Annuity Insurance Capital I, a
Delaware statutory business trust. The sole asset
of the Trust will be the Junior Subordinated
Debentures.
Securities Offered.......... % Capital Securities evidencing undivided
beneficial ownership interests in the assets of
the Trust. The holders thereof will be entitled
to a preference in certain circumstances with
respect to Distributions and amounts payable on
redemption or liquidation over the Common
Securities.
Distributions............... Holders of the Capital Securities will be
entitled to receive cumulative cash distributions
accruing from the date of original issuance and
payable quarterly in arrears on March 31, June
30, September 30 and December 31 of each year,
commencing June 30, 1999, at the annual rate of
% of the liquidation amount of $25 per Capital
Security. The distribution rate and the
distribution payment date and other payment dates
for the Capital Securities will correspond to the
interest rate and interest payment date and other
payment dates on the Junior Subordinated
Debentures. See "Description of Capital
Securities."
Junior Subordinated
Debentures.................. The Trust will invest the proceeds from the
issuance of the Capital Securities and Common
Securities in an equivalent amount of % Junior
Subordinated Debentures of the Company. The
Junior Subordinated Debentures will mature on
, 2048. The Junior Subordinated Debentures
will rank subordinate and junior in right of
payment to all Senior Indebtedness of the
Company. In addition, the Company's obligations
under the Junior Subordinated Debentures will be
structurally subordinated to all existing and
future liabilities and obligations of its
subsidiaries. See "Risk Factors--Ranking of
Subordinate Obligations Under the Guarantee and
the Junior Subordinated Debentures" and
"Description of Junior Subordinated Debentures--
Subordination."
Guarantee................... Payment of distributions out of moneys held by
the Trust, and payments on liquidation of the
Trust or the redemption of Capital Securities,
are guaranteed by the Company to the extent the
Trust has funds available therefor. If the
Company does not make principal or interest
payments on the Junior Subordinated Debentures,
the Trust will not have sufficient funds to make
Distributions (as defined herein) on the Capital
Securities, in which event the Guarantee shall
not apply to such Distributions until the Trust
has sufficient funds available therefor. The
Company's obligations under the Guarantee, taken
together with its obligations under the Junior
Subordinated Debentures and the Indenture,
including its obligation to pay all costs,
expenses and liabilities of the Trust (other than
with respect to the Capital Securities),
constitute a full and unconditional guarantee of
all of the Trust's
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obligations under the Capital Securities. See
"Description of Guarantee" and "Relationship
Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee." The
obligations of the Company under the Guarantee
are subordinate and junior in right of payment to
all Senior Indebtedness of the Company. See "Risk
Factors--Ranking of Subordinated Obligations
Under the Guarantee and the Junior Subordinated
Debentures" and "Description of Guarantee."
Right to Defer Interest..... The Company has the right to defer payment of
interest on the Junior Subordinated
Debentures at any time or from time to time
for a period not exceeding 20 consecutive
quarters with respect to each Extension
Period, provided that no Extension Period may
extend beyond the Stated Maturity of the
Junior Subordinated Debentures or end on a
day other than an Interest Payment Date. Upon
the termination of any such Extension Period
and the payment of all amounts then due on
any Interest Payment Date, the Company may
elect to begin a new Extension Period subject
to the requirements set forth herein. If
interest payments on the Junior Subordinated
Debentures are so deferred, distributions on
the Capital Securities will also be deferred
for an equivalent period and the Company may
not, and may not permit any subsidiary of the
Company to, (i) declare or pay any dividends
or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with
respect to, the Company's capital stock, (ii)
make any payment of principal, interest or
premium, if any, on or repay, repurchase or
redeem any debt securities that rank pari
passu with or junior to the Junior
Subordinated Debentures or (iii) make any
guarantee payments with respect to any
guarantee by the Company of the debt
securities of any subsidiary of the Company
if such guarantee ranks pari passu with or
junior to the Junior Subordinated Debentures
(other than (a) dividends or distributions in
the form of stock, warrants, options or other
rights where the dividend stock or the stocks
issuable upon exercise of such warrants,
options or other right is the same stock as
that on which the dividend is being paid or
ranks pari passu with or junior to such
stock, (b) payments under the Guarantee, (c)
any declaration of a dividend in connection
with the implementation of a shareholders'
rights plan, or the issuance of rights, stock
or other property under any such plan in the
future, or the redemption or repurchase of
any such rights pursuant thereto, (d) as a
result of reclassification of the Company's
capital stock into one or more other classes
or series of the Company's capital stock or
the exchange or conversion of one class or
series of the Company's capital stock (or any
capital stock of a subsidiary of the Company)
for another class or series of the Company's
capital stock, or of any class or series of
the Company's indebtedness for any class or
series of the Company's capital stock, (e)
the purchase of fractional interests in the
shares of the Company's capital stock
pursuant to the conversion or exchange
provisions of such capital stock or the
security being
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<PAGE>
converted or exchanged and (f) repurchases,
redemptions or other acquisitions of common
stock related to the issuance of common stock
or rights under any of the Company's
employment contracts, benefit plans or other
similar arrangement with or for the benefit
of one or more employees, officers, directors
or consultants, in connection with a dividend
reinvestment or stockholder stock purchase
plan or in connection with the issuance of
capital stock of the Company (or securities
convertible into or exercisable for such
capital stock) as consideration in an
acquisition transaction entered into prior to
the applicable Extension Period). During an
Extension Period, interest on the Junior
Subordinated Debentures will continue to
accrue (and the amount of Distributions to
which holders of the Capital Securities are
entitled will accumulate) at the rate of %
per annum, compounded quarterly, and holders
of Capital Securities will be required to
include the stated interest on their pro rata
share of the Capital Securities in their
gross income as OID even though the cash
payments attributable thereto have not been
made. See "Description of Junior Subordinated
Debentures--Option to Extend Interest Payment
Period" and "U.S. Federal Income Tax
Consequences--Interest Income and Original
Issue Discount."
Redemption.................. The Junior Subordinated Debentures are
redeemable by the Company in whole or in part
on or after , 2004, or at any time, in
whole but not in part, upon the occurrence of
a Special Event. If the Junior Subordinated
Debentures are redeemed, the Trust will
redeem Trust Securities having an aggregate
liquidation amount equal to the aggregate
principal amount of the Junior Subordinated
Debentures so redeemed. The Trust Securities
will be redeemed upon maturity of the Junior
Subordianted Debentures. See "Description of
Capital Securities--Redemption--Mandatory
Redemption" and "--Special Event Redemption
or Distribution of Junior Subordinated
Debentures."
Liquidation of the Trust.... The Company will have the right, at any time, to
dissolve the Trust and after satisfaction of
claims of creditors of the Trust, if any, as
required by applicable law, cause the Junior
Subordinated Debentures to be distributed to the
holders of the Capital Securities and the Common
Securities in liquidation of the Trust. If the
Junior Subordinated Debentures are distributed to
the holders of Capital Securities upon the
liquidation of the Trust, the Company will use
its best efforts to list the Junior Subordinated
Debentures on the New York Stock Exchange or on
such other stock exchanges or inter-dealer
quotation system, if any, on which the Capital
Securities are then listed or quoted. See
"Description of Junior Subordinated Debentures--
Distribution of Junior Subordinated Debentures;
Book-Entry Issuance."
In the event of the liquidation of the Trust,
after satisfaction of the claims of creditors of
the Trust, if any, as provided by applicable
9
<PAGE>
law, the holders of the Capital Securities will
be entitled to receive a liquidation amount of
$25 per Capital Security plus accumulated and
unpaid Distributions thereon to, but excluding,
the date of payment, which may be in the form of
a distribution of such amount in Junior
Subordinated Debentures as described above. If
such Liquidation Distribution (as defined herein)
can be paid only in part because the Trust has
insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the
amounts payable directly by the Trust on the
Capital Securities shall be paid on a pro rata
basis. The holder of the Common Securities will
be entitled to receive distributions upon any
such liquidation pro rata with the holders of the
Capital Securities, except that if an Indenture
Event of Default has occurred and is continuing,
the Capital Securities shall have a priority over
the Common Securities. See "Description of
Capital Securities--Liquidation Distribution Upon
Dissolution."
Use of Proceeds.............
The proceeds from the sale of the Capital
Securities will be used to purchase the Junior
Subordinated Debentures. The Company plans to
transfer the proceeds from the sale of the Junior
Subordinated Debentures to GWL&A in exchange for
a subordinated note. GWL&A intends to use the
funds for general corporate purposes. See "Use of
Proceeds."
Ratings..................... The Company expects the Capital Securities to be
rated "a1" by Moody's Investors Services, Inc.
and "A-" by Standard & Poor's Ratings Services. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating organization.
10
<PAGE>
Summary Consolidated Financial Data
The following table sets forth summary consolidated financial information of
the Company. The consolidated financial data as of and for the years ended
December 31, 1998, 1997 and 1996 has been derived from audited financial
statements of the Company, adjusted and restated for all periods presented to
reflect the reorganization, consisting of the formation and capitalization of
the Company and the effect of the contribution of all of the outstanding shares
of GWL&A's common stock to the Company. The following information should be
read in conjunction with the consolidated financial statements of the Company,
together with the related notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
INCOME STATEMENT DATA ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
REVENUES:
Premium income
Related party (Net) ..................... $ 46,191 $ 155,798 $ 164,839
Other (Net) ............................. 948,672 677,381 664,610
Fee Income................................. 516,052 420,730 347,519
Net investment income
Related party............................ (9,416) (8,957) (26,082)
Other.................................... 906,776 890,630 860,719
Net realized gains (losses) on investment.. 38,173 9,800 (21,078)
---------- ---------- ----------
2,446,448 2,145,382 1,990,527
---------- ---------- ----------
BENEFITS AND EXPENSES:
Life and other policy benefits............. 768,474 543,903 515,750
Increase in reserves
Related party............................ 46,191 155,798 164,839
Other.................................... 78,851 90,013 64,359
Interest paid or credited to
contractholders........................... 491,616 527,784 561,786
Provision for policyholders' share of
earnings (losses)
on participating business................. 5,908 3,753 (7)
Dividends to policyholders................. 71,429 63,799 49,237
---------- ---------- ----------
1,462,469 1,385,050 1,355,964
Commissions................................ 144,246 102,150 106,561
Operating expenses (income)
Related party............................ (4,542) (6,292) 304,599
Other.................................... 517,676 431,714 33,435
Premium taxes.............................. 30,848 24,153 25,021
---------- ---------- ----------
2,150,697 1,936,775 1,825,580
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................. 295,751 208,607 164,947
---------- ---------- ----------
PROVISION FOR INCOME TAXES:
Current.................................. 81,770 61,644 45,934
Deferred................................. 17,066 (11,797) (15,562)
---------- ---------- ----------
98,836 49,847 30,372
---------- ---------- ----------
NET INCOME................................. $ 196,915 $ 158,760 $ 134,575
========== ========== ==========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------
1998 1997 1996
BALANCE SHEET DATA ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Fixed Maturities:
Held-to-maturity, at amortized cost..... $ 2,199,818 $ 2,082,716 $ 1,992,681
Available-for-sale, at fair value....... 6,936,726 6,698,629 6,206,478
Common stock.............................. 48,640 39,021 19,715
Mortgage loans on real estate, net........ 1,133,468 1,235,594 1,487,575
Real estate, net.......................... 73,042 93,775 67,967
Policy loans.............................. 2,858,673 2,657,116 2,523,477
Short-term investments, available-for-sale
(cost
approximates fair value)................. 420,169 399,131 419,008
----------- ----------- -----------
Total Investments..................... 13,670,536 13,205,982 12,716,901
Cash...................................... 176,369 126,528 125,432
Deferred policy acquisition costs......... 238,901 255,442 282,780
Other assets.............................. 938,046 642,562 741,740
Separate account assets................... 10,099,543 7,847,451 5,484,631
----------- ----------- -----------
TOTAL ASSETS.............................. $25,123,395 $22,077,965 $19,351,484
=========== =========== ===========
POLICY BENEFIT LIABILITIES:
Policy reserves........................... $11,839,714 $11,102,719 11,022,595
Policy and contract claims................ 491,932 375,499 372,327
Policyholders' funds...................... 181,779 165,106 153,867
Provision for policyholders' dividend..... 69,530 62,937 51,279
GENERAL LIABILITIES:
Due to Parent Corporation................. 52,877 126,656 151,431
Other general liabilities................. 1,045,494 1,069,563 947,635
Undistributed earnings on participating
business................................. 143,717 141,865 133,255
Separate account liabilities.............. 10,099,543 7,847,451 5,484,631
----------- ----------- -----------
Total Liabilities..................... $23,924,586 $20,891,796 $18,317,020
----------- ----------- -----------
STOCKHOLDER'S EQUITY:
Preferred stock........................... 0 121,800 121,800
Common stock.............................. 250 250 250
Additional paid-in capital................ 706,588 697,780 671,297
Accumulated other comprehensive income.... 61,560 52,807 14,951
Retained earnings......................... 430,411 313,532 226,166
----------- ----------- -----------
Total Stockholder's Equity............ 1,198,809 1,186,169 1,034,464
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY..................... $25,123,395 $22,077,965 $19,351,484
=========== =========== ===========
</TABLE>
12
<PAGE>
RISK FACTORS
Prospective investors should carefully review the following factors, as well
as the other information contained in this Prospectus, before deciding to make
an investment in Capital Securities.
Ranking of Subordinated Obligations Under the Guarantee and the Junior
Subordinated Debentures
The obligations of the Company under the Guarantee issued by the Company for
the benefit of the holders of Capital Securities and under the Junior
Subordinated Debentures are unsecured and rank subordinate and junior in right
of payment to all Senior Indebtedness of the Company and will be structurally
subordinated to all liabilities and obligations of the Company's subsidiaries.
As of December 31, 1998, the Company had no Senior Indebtedness outstanding,
and the Company's consolidated subsidiaries had indebtedness and other
liabilities of approximately $23.9 billion (of which $23.6 billion consists of
obligations to policyholders under outstanding insurance policies) to which the
obligations of the Company would be effectively subordinated. None of the
Indenture, the Guarantee or the Declaration places any limitation on the amount
of secured or unsecured Senior Indebtedness that may be incurred by the
Company. See "Description of Guarantee--Status of the Guarantee" and
"Description of Junior Subordinated Debentures--Subordination."
Status as a Holding Company
As a holding company, the ability of the Company to pay interest and
principal on the Junior Subordinated Debentures will depend significantly on
the receipt of dividends, interest payments or other distributions from the
Company's subsidiaries. The Company's principal subsidiary is GWL&A. The
ability of GWL&A to pay dividends or make other distributions to the Company
generally is dependent on GWL&A's compliance with applicable regulatory
restrictions. Under Colorado law, GWL&A cannot, without the approval of the
Colorado Commissioner of Insurance, pay a dividend if, as a result of such
payment, the total of all dividends paid in the preceding twelve months would
exceed the greater of (i) 10% of GWL&A's surplus as regards policyholders as of
the preceding December 31 or (ii) GWL&A's net gain from operations for the 12-
month period ending as of the preceding December 31.
In addition, the right of the Company to participate in any distribution of
assets of any subsidiary, including GWL&A, upon such subsidiary's liquidation
or reorganization or otherwise (and thus the ability of holders of the Capital
Securities to benefit indirectly from such distribution), will be subject to
the prior claims of creditors of that subsidiary (including policyholders),
except to the extent that any claims of the Company as a creditor of such
subsidiary may be recognized as such. Accordingly, the Capital Securities will
effectively be subordinated to all existing and future liabilities of the
Company's subsidiaries, and holders of the Capital Securities should look only
to the assets of the Company for payments on the Capital Securities. The
Company plans to contribute the proceeds from the sale of the Junior
Subordinated Debentures to GWL&A as regulatory capital for general corporate
purposes.
Limitation on Enforcement of Certain Rights by Holders of Capital Securities
If a Trust Enforcement Event (as defined herein) occurs and is continuing,
then the holders of Capital Securities would rely on the enforcement by the
Property Trustee (as defined herein) of its rights as a holder of the Junior
Subordinated Debentures against the Company. The holders of a majority in
liquidation preference of the Capital Securities will have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Property Trustee or to direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee to exercise the remedies available to it
as a holder of the Junior Subordinated Debentures. If the Property Trustee
fails to enforce its rights with respect to the Junior Subordinated Debentures
held by the Trust, any record holder of Capital Securities may institute legal
proceedings directly against the Company to enforce the Property Trustees
rights under such Junior Subordinated Debentures without first instituting any
legal proceedings against such Property Trustee or any other person or entity.
13
<PAGE>
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Trust would lack funds for the
payment of Distributions or amounts payable on redemption of the Capital
Securities or otherwise. In such event, holders of the Capital Securities would
not be able to rely upon the Guarantee for payment of such amounts. However, if
the Company failed to pay interest on or principal of the Junior Subordinated
Debentures when such payment is due and payable, then a holder of Capital
Securities may directly institute a proceeding against the Company under the
Indenture for enforcement of payment to such holder of the interest on or
principal of such Junior Subordinated Debentures having a principal amount
equal to the aggregate liquidation amount of the Capital Securities of such
holder (a "Direct Action"). In connection with such Direct Action, the Company
will be subrogated to the rights of such holder of Capital Securities under the
Declaration to the extent of any payment made by the Company to such holder of
Capital Securities in such Direct Action. Except as set forth herein, holders
of Capital Securities will not be able to exercise directly any other remedy
available to the holders of Junior Subordinated Debentures or assert directly
any other rights in respect of the Junior Subordinated Debentures. See
"Description of Capital Securities--Trust Enforcement Events," "Description of
Guarantee," "Description of Junior Subordinated Debentures--Indenture Events of
Default" and "--Enforcement of Certain Rights by Holders of Capital
Securities."
Option to Extend Interest Payment Period; Tax Consequences
The Company has the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for a period not exceeding 20 consecutive quarters provided that no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. As a consequence of any such deferral, quarterly Distributions on
the Capital Securities by the Trust will be deferred during any such Extension
Period but would continue to accumulate at the rate of % per annum to the
extent permitted by applicable law, compounded quarterly during any Extension
Period. During any such Extension Period, the Company may not, and may not
permit any subsidiary of the Company to (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock, (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company that rank pari passu with or junior to the
Junior Subordinated Debentures or (iii) make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior to
the Junior Subordinated Debentures (other than (a) dividends or distributions
in the form of stock, warrants, options or other rights where the dividend
stock or the stocks issuable upon exercise of such warrants, options or other
right is the same stock as that on which the dividend is being paid or ranks
pari passu with or junior to such stock, (b) payments under the Guarantee, (c)
any declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the issuance of rights, stock or other property
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (d) as a result of reclassification of the Company's
capital stock into one or more other classes or series of the Company's capital
stock or the exchange or conversion of one class or series of the Company's
capital stock (or any capital stock of a subsidiary of the Company) for another
class or series of the Company's capital stock, or of any class or series of
the Company's indebtedness for any class or series of the Company's capital
stock, (e) the purchase of fractional interests in the shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged and (f) repurchases,
redemptions or other acquisitions of common stock related to the issuance of
common stock or rights under any of the Company's employment contracts, benefit
plans or other similar arrangement with or for the benefit of one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period). Prior to
the termination of any such Extension Period, the Company may further extend
the Extension Period, provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due on any
14
<PAGE>
Interest Payment Date, the Company may elect to begin a new Extension Period
subject to the above requirements. See "Description of Capital Securities--
Distributions" and "Description of Junior Subordinated Debentures--Option to
Extend Interest Payment Period."
If the Company defers payment of interest on the Junior Subordinated
Debentures, a holder of Capital Securities will continue to accrue income (in
the form of OID) for United States federal income tax purposes in respect of
its pro rata share of the Junior Subordinated Debentures held by the Trust. As
a result, a holder of Capital Securities will include such interest income in
gross income for United States federal income tax purposes in advance of the
receipt of cash attributable to such interest income, and will not receive the
cash related to such income from the Trust if the holder disposes of the
Capital Securities prior to the record date for the payment of Distributions
with respect to such Extension Period. See "U.S. Federal Income Tax
Consequences--Interest Income and Original Issue Discount" and "--Sale or
Redemption of Capital Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Capital Securities is likely to be
adversely affected. A holder that disposes of its Capital Securities during an
Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Capital Securities. In
addition, as a result of the existence of the Company's right to defer interest
payments, the market price of the Capital Securities (which represent preferred
undivided beneficial interests in the Junior Subordinated Debentures) may be
more volatile than the market prices of other similar securities on which the
Company does not have such right to defer interest payments.
Special Event Redemption
Upon the occurrence and continuation of a Special Event, the Company has the
right, subject to any necessary regulatory approval, to redeem the Junior
Subordinated Debentures in whole (but not in part) at a redemption price equal
to 100% of the principal amount of such Junior Subordinated Debentures
(together with accrued and unpaid payments of interest thereon to, but
excluding, the date of redemption) within 90 days following the occurrence of
such Special Event and thereby cause a mandatory redemption of the Capital
Securities and Common Securities. See "U.S. Federal Income Tax Consequences--
Possible Tax Law Changes."
A "Special Event" means a Tax Event or an Investment Company Event. A "Tax
Event" means the receipt by the Trust of an opinion of counsel experienced in
such matters to the effect that, as a result of (a) any amendment to or change
(including any announced prospective change) in the laws or any regulations
thereunder of the United States or any political subdivision or taxing
authority thereof or therein or (b) any judicial decision or any official
administrative pronouncement (including any private letter ruling, technical
advice memorandum or Chief Counsel advice, as defined by the Code) or
regulatory procedure (an "Administrative Action"), regardless of whether such
judicial decision or Administrative Action is issued to or in connection with a
proceeding involving the Company or the Trust and whether or not subject to
review or appeal, which amendment, change, decision or Administrative Action is
enacted, released by the Internal Revenue Service, promulgated or announced, in
each case, on or after the date of this Prospectus, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the date
of such opinion, subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, (ii) interest
payable by the Company or OID accruing on the Junior Subordinated Debentures is
not, or within 90 days of the date of such opinion, will not be, deductible by
the Company, in whole or in part, for United States federal income tax purposes
or (iii) the Trust is, or will be within 90 days of the date of such opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges. An "Investment Company Event" means the receipt by the
Trust of an opinion of counsel, rendered by a law firm having a recognized
securities practice, to the effect that, as a result of the occurrence of a
Change in
15
<PAGE>
Investment Company Act Law (as defined herein), the Trust is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
which Change in Investment Company Act Law becomes effective on or after the
date of original issuance of the Capital Securities.
Liquidation Distribution of Junior Subordinated Debentures
The Company will have the right, at any time, to terminate the Trust and
cause the Junior Subordinated Debentures to be distributed to the holders of
the Capital Securities and the Common Securities in liquidation of the Trust.
Under current United States federal income tax law and interpretations thereof
and assuming, as expected, the Trust is treated as a grantor trust for United
States federal income tax purposes, a distribution by the Trust of the Junior
Subordinated Debentures pursuant to a liquidation of the Trust will not be a
taxable event to the Trust or to holders of the Capital Securities and will
result in a holder of the Capital Securities receiving directly such holder's
pro rata share of the Junior Subordinated Debentures (previously held
indirectly through the Trust). If, however, the liquidation of the Trust were
to occur because the Trust is subject to United States federal income tax with
respect to income accrued or received on the Junior Subordinated Debentures as
a result of any event described in clauses (a) and (b) of the definition of
"Tax Event" above, or otherwise, the distribution of Junior Subordinated
Debentures to holders of the Capital Securities by the Trust could be a taxable
event to the Trust and each holder, and holders of the Capital Securities may
be required to recognize gain or loss as if they had exchanged their Capital
Securities for the Junior Subordinated Debentures they received upon the
liquidation of the Trust. See "U.S. Federal Income Tax Consequences--
Distribution of Junior Subordinated Debentures to Holders of Capital Securities
Upon Liquidation of the Trust."
There can be no assurance as to the market prices for Capital Securities or
Junior Subordinated Debentures that may be distributed in exchange for Capital
Securities if a liquidation of the Trust occurs. Accordingly, the Capital
Securities that an investor may purchase, whether pursuant to the offer made
hereby or in the secondary market, or the Junior Subordinated Debentures that a
holder of Capital Securities may receive on liquidation of the Trust, may trade
at a discount to the price that the investor paid to purchase the Capital
Securities offered hereby. Because holders of Capital Securities may receive
Junior Subordinated Debentures on termination of the Trust, prospective
purchasers of Capital Securities are also making an investment decision with
regard to the Junior Subordinated Debentures and should carefully review all
the information regarding the Junior Subordinated Debentures contained herein.
See "Description of Capital Securities--Redemption--Special Event Redemption or
Distribution of Junior Subordinated Debentures" and "Description of Junior
Subordinated Debentures--General."
Limited Voting Rights
Holders of Capital Securities generally will have limited voting rights
relating only to the modification of the Capital Securities and certain other
matters described herein. Except upon the occurrence and continuation of an
Event of Default, holders of Capital Securities will not be entitled to vote to
appoint, remove or replace any of the Trustees (as defined below), which voting
rights are vested exclusively in the holder of the Common Securities. The
Trustees and the Company may amend the Declaration without the consent of
holders of Capital Securities to ensure that the Trust will be classified as a
grantor trust for United States federal income tax purposes, to ensure that the
Junior Subordinated Debentures will be treated as indebtedness of the Company
or to ensure that the Trust will not be required to register as an investment
company under the Investment Company Act, provided, however, that in each case
such action shall not adversely affect in any material respect the interests of
any holder of Capital Securities or Common Securities. See "Description of
Capital Securities--Voting Rights; Amendment of the Declaration."
Trading Characteristics of Capital Securities
The Capital Securities may trade at prices that do not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. See "U.S. Federal Income Tax Consequences--Sale or
Redemption of Capital Securities."
16
<PAGE>
No Prior Market; Liquidity
Prior to this offering, there has been no public market for the Capital
Securities. Although the Company has applied for listing of the Capital
Securities on the New York Stock Exchange, there can be no assurance that such
listing will be approved or, if approved, that an active market for the Capital
Securities will develop or be sustained in the future on such exchange.
Although the Underwriters have advised the Company that they intend to make a
market in the Capital Securities as permitted by applicable laws and
regulations prior to the commencement of trading on the New York Stock
Exchange, they are not obligated to do so and may discontinue any such market-
making at any time without notice. Accordingly, no assurance can be given as to
the liquidity of, or trading markets for, the Capital Securities.
17
<PAGE>
REORGANIZATION
GWL&A Financial Inc. was formed on September 16, 1998 to act as a holding
company for GWL&A and its subsidiaries. The Company is incorporated in Delaware
and maintains its principal executive offices in Englewood, Colorado.
On December 30, 1998, all of the outstanding shares of GWL&A's common stock
were contributed to the Company, and the Company became the parent of GWL&A.
The consolidated assets and liabilities of the Company immediately after the
Reorganization were substantially the same as the consolidated assets and
liabilities of GWL&A immediately prior to the Reorganization. The accounting
for the Reorganization was similar to the accounting for a pooling of interests
as it represents a combination of entities under common control.
18
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1998 (after giving effect to the Reorganization),
and as adjusted to give effect to the consummation of the offering of the
Capital Securities.
<TABLE>
<CAPTION>
As of
December 31, 1998
----------------------
Actual As Adjusted
---------- -----------
(dollars in thousands)
<S> <C> <C>
Long-term debt........................................... $ 34,947 $
---------- ----------
Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures(1)............. --
---------- ----------
Stockholder's equity:
Common stock........................................... 250
Additional paid-in capital............................. 706,588
Accumulated other comprehensive income................. 61,560
Retained earnings...................................... 430,411
---------- ----------
Total stockholder's equity........................... 1,198,809
---------- ----------
Total capitalization..................................... $1,233,756 $
========== ==========
</TABLE>
- --------
(1) As described herein, the sole asset of the Trust will be $154,639,200
aggregate principal amount of % Junior Subordinated Debentures, issued
by the Company to the Trust. The Junior Subordinated Debentures will
mature on , 2048. The Company owns all of the Common Securities of
the Trust.
USE OF PROCEEDS
The proceeds to the Trust from the offering of the Capital Securities will
be $ million. All of the proceeds from the sale of the Capital Securities
will be invested by the Trust in the Junior Subordinated Debentures. The
Company plans to transfer the proceeds from the sale of the Junior Subordinated
Debentures ($ before expenses of the offering) to GWL&A in exchange for a
subordinated note. GWL&A intends to use the funds for general corporate
purposes. Pending such use, the proceeds may be temporarily invested in short-
term obligations. The precise amounts and timing of the application of proceeds
will depend upon the funding requirements of the Company and its subsidiaries
and the availability of other funds.
19
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's consolidated ratios of earnings to fixed charges and
consolidated ratios of earnings to combined fixed charges and preferred stock
dividend requirements for each of the periods indicated are set forth below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges (including interest
paid to policyholders)........................... 1.6x 1.4x 1.3x 1.3x 1.2x
Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements (including
interest
paid to policyholders)........................... 1.6 1.4 1.3 1.3 1.2
Earnings to Fixed Charges (excluding interest
paid to policyholders)........................... 23.5 15.8 11.5 12.1 8.0
Earnings to Combined Fixed Charges and Preferred
Stock Dividend Requirements (excluding interest
paid to policyholders)........................... 13.3 8.6 6.9 6.7 4.7
</TABLE>
For purposes of computing the ratios, earnings represent net income before
deduction for fixed charges and income taxes, fixed charges (including interest
paid to policyholders) represent interest on debt and interest paid or credited
to contractholders of the Company's policies and fixed charges (excluding
interest paid to policyholders) represent interest on debt.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Company and, accordingly, the accounts of the Trust will be included in
the consolidated financial statements of the Company. The sole asset of the
Trust will be $154,639,200 aggregate principal amount of % Junior
Subordinated Debentures due 2048, issued by the Company to the Trust. The
Capital Securities will be presented in the consolidated balance sheet of the
Company in a line entitled "Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures," and appropriate disclosures about
the Capital Securities, the Guarantee and the Junior Subordinated Debentures
will be included in the notes to the consolidated financial statements. For
financial reporting purposes, the Company will record Distributions payable on
the Capital Securities as an expense in its consolidated statements of income.
The Company has agreed that future financial reports of the Company will:
(i) include in a footnote to the financial statements disclosure that the sole
asset of the Trust are the Junior Subordinated Debentures; and (ii) if Staff
Accounting Bulletin 53 treatment is sought, include, in an audited footnote to
the financial statements, disclosure that (a) the Trust is wholly owned, (b)
the sole asset of the Trust are the $154,639,200 aggregate principal amount of
% Junior Subordinated Debentures due 2048 and (c) taken together, the
Company's obligations under the Junior Subordinated Debentures, the Indenture
and the Guarantee provide, in the aggregate, a full and unconditional guarantee
by the Company of the Trust's obligations under the Capital Securities.
20
<PAGE>
THE TRUST
The Trust is a statutory business trust formed under the Delaware Business
Trust Act, as amended (the "Trust Act"), pursuant to a declaration of trust and
the filing of a certificate of trust with the Secretary of State of the State
of Delaware (as amended and restated, the "Declaration") substantially in the
form filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. The Declaration will be qualified as an indenture under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Company will
acquire Common Securities in an aggregate liquidation amount equal to at least
3% of the total capital of the Trust. The Trust will use all the proceeds
derived from the issuance of the Capital Securities and the Common Securities
to purchase the Junior Subordinated Debentures and, accordingly, the assets of
the Trust will consist solely of the Junior Subordinated Debentures. The Trust
exists for the exclusive purpose of (i) issuing the Trust Securities
representing undivided beneficial ownership interests in the assets of the
Trust, (ii) investing the gross proceeds of the Trust Securities in the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary or incidental thereto.
Pursuant to the Declaration, there will initially be five trustees (the
"Trustees") for the Trust. Three of the Trustees (the "Regular Trustees") will
be individuals who are employees or officers of or who are affiliated with the
Company. The fourth trustee will be a financial institution that is
unaffiliated with the Company and is indenture trustee for purposes of
compliance with the provisions of the Trust Indenture Act (the "Property
Trustee"). The fifth trustee will be an entity that maintains its principal
place of business in the State of Delaware (the "Delaware Trustee"). Initially,
The Bank of New York, a New York banking corporation, will act as Property
Trustee, and its affiliate, The Bank of New York (Delaware), a Delaware
corporation, will act as Delaware Trustee until, in each case, removed or
replaced by the holder of the Common Securities. For purposes of compliance
with the Trust Indenture Act, The Bank of New York will also act as trustee
under the Trust Guarantee (the "Guarantee Trustee").
The Property Trustee will hold title to the Junior Subordinated Debentures
for the benefit of the holders of the Trust Securities, and the Property
Trustee will have the power to exercise all rights, powers and privileges with
respect to the Junior Subordinated Debentures under the Indenture (as defined
herein) as the holder of the Junior Subordinated Debentures. In addition, the
Property Trustee will maintain exclusive control of a segregated non-interest
bearing bank account (the "Property Account") to hold all payments made in
respect of the Junior Subordinated Debentures for the benefit of the holders of
the Trust Securities. The Guarantee Trustee will hold the Guarantee for the
benefit of the holders of the Capital Securities. The Company, as the holder of
all the Common Securities, will have the right to appoint, remove or replace
any of the Trustees and to increase or decrease the number of Trustees;
provided that the number of Trustees shall be at least three; and provided,
further, that at least one Trustee shall be a Delaware Trustee, at least one
Trustee shall be the Property Trustee and at least one Trustee shall be a
Regular Trustee. The Company will pay all fees and expenses related to the
organization and operations of the Trust (including any taxes, duties,
assessments or governmental charges of whatever nature (other than withholding
taxes) imposed by the United States or any other domestic taxing authority upon
the Trust) and the offering of the Capital Securities and be responsible for
all debts and obligations of the Trust (other than with respect to the Capital
Securities).
For so long as the Capital Securities remain outstanding, the Company will
covenant (i) to maintain directly or indirectly 100% ownership of the Common
Securities, (ii) to cause the Trust to remain a statutory business trust and
not to voluntarily dissolve, wind-up, liquidate or be terminated, except as
permitted by the Declaration, (iii) to use its commercially reasonable efforts
to ensure that the Trust will not be an "investment company" for purposes of
the Investment Company Act and (iv) to take no action that would be reasonably
likely to cause the Trust to be classified as an association or a publicly
traded partnership taxable as a corporation for United States federal income
tax purposes.
The rights of the holders of the Capital Securities, including economic
rights, rights to information and voting rights, are set forth in the
Declaration and the Trust Act. See "Description of Capital Securities." The
Declaration and the Guarantee also incorporate by reference the terms of the
Trust Indenture Act.
The location of the principal executive office of the Trust is c/o GWL&A
Financial Inc., 8515 East Orchard Road, Englewood, Colorado 80111, and its
telephone number is 303-689-3000.
21
<PAGE>
THE COMPANY
GWL&A Financial was formed on September 16, 1998 to act as a holding company
for GWL&A, a Colorado life insurance company, and its subsidiaries. The Company
is incorporated in Delaware and maintains its principal executive offices in
Englewood, Colorado.
The Company is an indirect wholly-owned subsidiary of Great-West Life, a
Canadian life insurance company. Great-West Life is a subsidiary of Great-West
Lifeco, a Canadian holding company. Great-West Lifeco is in turn a subsidiary
of Power Financial, a Canadian holding company with substantial interests in
the financial services industry. Power Corporation, a Canadian holding and
management company, has voting control of Power Financial. Mr. Paul Desmarais,
through a group of private holding companies, which he controls, has voting
control of Power Corporation. Common and preferred shares of Great-West Life,
Great-West Lifeco, Power Financial and Power Corporation are traded publicly in
Canada.
On December 30, 1998, all of the outstanding shares of GWL&A's common stock
were contributed to GWL&A Financial, and GWL&A Financial became the parent of
GWL&A.
Great-West Lifeco has commenced an examination of how it holds its ownership
interest in its insurance companies in Canada and the United States; this could
have the effect of the Company and GWL&A no longer being indirectly owned by
Great-West Life although they would continue to be owned by Great-West Lifeco.
Great-West Lifeco's examination is in a preliminary stage. Any such
restructuring would require approvals from the regulators and favorable rulings
from the tax authorities, in both Canada and the United States.
GWL&A
GWL&A is a stock life insurance company originally organized in 1907. GWL&A
is authorized to engage in the sale of life insurance, accident and health
insurance and annuities. It is qualified to do business in all states in the
United States except New York, and in the District of Columbia, Puerto Rico,
Guam and the U.S. Virgin Islands. GWL&A conducts business in New York through
its subsidiary, First Great-West Life & Annuity Insurance Company. GWL&A is
also a licensed reinsurer in the State of New York. As of December 31, 1997,
GWL&A ranked among the top 25 of all U.S. life insurance companies in terms of
total admitted assets.
Business of the Company
The Company operates, through GWL&A, in two business segments:
<TABLE>
<C> <S>
Life, health and 401(k) products for group clients;
Employee Benefits: and
Financial Services: Savings products for both public and non-profit
employers and individuals, and life insurance products
for individuals and businesses.
</TABLE>
Employee Benefits
The Employee Benefits segment of the Company provides a full range of
employee benefits products to more than 11,300 employers across the United
States. This includes approximately 1,200 employers covered by Anthem Health &
Life Insurance Company ("AH&L"), which the Company acquired in July 1998.
The Company offers customers a variety of health plan options to help them
maximize the value of their employee benefits package. The majority of the
Company's health care business is self-funded, whereby the employer assumes all
or a significant portion of the risk. For companies with better than average
claims experience, this can result in significant health care savings.
22
<PAGE>
The Company offers employers a total benefits solution--an integrated
package of group life and disability insurance, managed care programs, 401(k)
savings plans and flexible spending accounts. Through integrated pricing,
administration, funding and service, the Company helps employers provide cost-
effective benefits that will attract and retain quality employees, and at the
same time, helps employees reach their personal goals by offering benefit
choices, along with information needed to make appropriate choices. Many
customers also find this integrated approach appealing because their benefit
plans are administered through a single company with linked systems that
provide on-line administration and account access, for enhanced efficiency and
simplified plan administration.
The Company offers a choice of managed care products including Health
Maintenance Organization ("HMO") plans, which provide a high degree of managed
care, and Preferred Provider Organization ("PPO") plans and Point of Service
("POS") plans which offer more flexibility in provider choice than HMO plans.
The Company's 401(k) product is offered by way of a group fixed and variable
deferred annuity contract. The product provides a variety of funding and
distribution options for employer-approved retirement plans that qualify under
Internal Revenue Code Section 401(k).
Variable investment options utilize separate accounts to provide
contractholders with a vehicle to assume the investment risks. Assets held
under these options are invested, as designated by the participant, in separate
accounts which in turn invest in shares of underlying funds managed by a
subsidiary of the Company or by selected external fund managers. The
participant currently has up to 32 different variable investment options.
Financial Services
The Financial Services segment of the Company develops, administers and
sells retirement savings and life insurance products and services for
individuals, and for employees of state and local governments, hospitals, non-
profit organizations and public school districts.
The Company's core savings business is in the public/non-profit pension
market. The Company provides investment products, and administrative and
communication services, to employees of state and local governments (Internal
Revenue Code Section 457 plans), as well as employees of hospitals, non-profit
organizations and public school districts (Internal Revenue Code Section 401,
403(b) and 408 plans). The Company provides pension plan administrative
services through a subsidiary company, Financial Administrative Services
Corporation ("FASCorp"). The Company provides marketing and communication
services through another subsidiary company, Benefits Communication
Corporation, and BenefitsCorp Equities, Inc., a broker-dealer subsidiary of
Benefits Communication Corporation (collectively, "BenefitsCorp").
The Company's primary marketing emphasis in the public/non-profit pension
market is group fixed and variable annuity contracts for defined contribution
retirement savings plans. Defined contribution plans provide for participant
accounts with benefits based upon the value of contributions to, and investment
returns on, the individual's account. This has been the fastest growing portion
of the pension marketplace in recent years.
The Company's variable annuity products provide the opportunity for
contractholders to assume the risks of, and receive all the benefits from, the
investment of retirement assets. The variable product assets are invested, as
designated by the participant, in Separate Accounts which in turn invest in
shares of underlying funds managed by a subsidiary of the Company or by
selected external fund managers.
Investment Operations
The Company's investment division manages the Company's general and separate
accounts in support of cash and liquidity requirements of the Company's
insurance and investment products. Investments under management at December 31,
1998 totaled $23.8 billion, comprised of general account assets of $13.7
billion and separate account assets of $10.1 billion.
23
<PAGE>
The Company invests in a broad range of asset classes, including domestic
and international fixed maturities, common stocks, mortgage loans, real estate
and short-term investments. Fixed maturity investments include public and
privately placed corporate bonds, public and privately placed structured
assets, government bonds and redeemable preferred stocks. The Company's
portfolio of structured assets consists of mortgage-backed securities and other
asset-backed securities.
Regulation
The business of the Company is subject to comprehensive state and federal
regulation and supervision throughout the United States, which primarily
provides safeguards for policyholders rather than investors. The laws of the
various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of assets,
regulating premium rating methodology, approving policy forms, establishing
reserve requirements and solvency standards, fixing maximum interest rates on
life insurance policy loans and minimum rates for accumulation of surrender
values, regulating the type, amounts and valuation of investments permitted,
and HMO operations.
The Company's operations and accounts are subject to examination by the
Colorado Insurance Division and other regulators at specified intervals. The
latest financial examination by the Colorado Insurance Division was completed
in 1997, and covered the five year period ending December 31, 1995. This
examination produced no significant adverse findings regarding the Company.
The National Association of Insurance Commissioners has adopted risk-based
capital rules and other financial ratios for life insurance companies. Based on
the Company's December 31, 1998 statutory financial reports, the Company had
risk-based capital well in excess of that required and was within the usual
ranges of all ratios.
Because the Company is a subsidiary of Great-West Life, which is a Canadian
company, the Office of the Superintendent of Financial Institutions Canada
conducts periodic examinations of the Company and approves certain investments
in subsidiary companies.
United States legislation and administrative developments in various areas,
including pension regulation, financial services regulation, health care
legislation and the insurance industry could significantly and adversely affect
the Company in the future. For example, Congress is currently considering
legislation relating to health care reform and managed care issues (including
patients' rights, privacy of medical records and managed care plan or
enterprise liability), and legislation relating to the taxation of policyholder
surplus accounts and the capitalization of deferred acquisition costs. Congress
has from time to time also considered the deferral of taxation on the accretion
of value within certain annuities and life insurance products, financial
services reform legislation establishing frameworks for banks engaging in the
insurance business, changes in regulation for the Employee Retirement Income
Security Act of 1974, as amended, and the availability of Section 401(k) for
individual retirement accounts.
It is not possible to predict whether future legislation or regulation
adversely affecting the business of the Company will be enacted and, if
enacted, the extent to which such legislation or regulation will have an effect
on the Company and its competitors.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial information
of the Company. The consolidated financial data as of and for the years ended
December 31, 1998, 1997 and 1996 has been derived from audited financial
statements of the Company, adjusted and restated for all periods presented to
reflect the reorganization, consisting of the formation and capitalization of
the Company and the effect of the contribution of all of the outstanding shares
of GWL&A's common stock to the Company. The following information should be
read in conjunction with the consolidated financial statements of the Company,
together with the related notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
INCOME STATEMENT DATA ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
REVENUES:
Premium income
Related party (Net) ..................... $ 46,191 $ 155,798 $ 164,839
Other (Net) ............................. 948,672 677,381 664,610
Fee Income................................. 516,052 420,730 347,519
Net investment income
Related party............................ (9,416) (8,957) (26,082)
Other.................................... 906,776 890,630 860,719
Net realized gains (losses) on investment.. 38,173 9,800 (21,078)
---------- ---------- ----------
2,446,448 2,145,382 1,990,527
---------- ---------- ----------
BENEFITS AND EXPENSES:
Life and other policy benefits............. 768,474 543,903 515,750
Increase in reserves
Related party............................ 46,191 155,798 164,839
Other.................................... 78,851 90,013 64,359
Interest paid or credited to
contractholders........................... 491,616 527,784 561,786
Provision for policyholders' share of
earnings (losses)
on participating business................. 5,908 3,753 (7)
Dividends to policyholders................. 71,429 63,799 49,237
---------- ---------- ----------
1,462,469 1,385,050 1,355,964
Commissions................................ 144,246 102,150 106,561
Operating expenses (income)
Related party............................ (4,542) (6,292) 304,599
Other.................................... 517,676 431,714 33,435
Premium taxes.............................. 30,848 24,153 25,021
---------- ---------- ----------
2,150,697 1,936,775 1,825,580
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................. 295,751 208,607 164,947
---------- ---------- ----------
PROVISION FOR INCOME TAXES:
Current.................................. 81,770 61,644 45,934
Deferred................................. 17,066 (11,797) (15,562)
---------- ---------- ----------
98,836 49,847 30,372
---------- ---------- ----------
NET INCOME................................. $ 196,915 $ 158,760 $ 134,575
========== ========== ==========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------
1998 1997 1996
BALANCE SHEET DATA ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Fixed Maturities:
Held-to-maturity, at amortized cost..... $ 2,199,818 $ 2,082,716 $ 1,992,681
Available-for-sale, at fair value....... 6,936,726 6,698,629 6,206,478
Common stock.............................. 48,640 39,021 19,715
Mortgage loans on real estate, net........ 1,133,468 1,235,594 1,487,575
Real estate, net.......................... 73,042 93,775 67,967
Policy loans.............................. 2,858,673 2,657,116 2,523,477
Short-term investments, available-for-sale
(cost approximates fair value)........... 420,169 399,131 419,008
----------- ----------- -----------
Total Investments....................... 13,670,536 13,205,982 12,716,901
Cash...................................... 176,369 126,528 125,432
Deferred policy acquisition costs......... 238,901 255,442 282,780
Other assets.............................. 938,046 642,562 741,740
Separate account assets................... 10,099,543 7,847,451 5,484,631
----------- ----------- -----------
TOTAL ASSETS.............................. $25,123,395 $22,077,965 $19,351,484
=========== =========== ===========
POLICY BENEFIT LIABILITIES:
Policy reserves........................... $11,839,714 $11,102,719 11,022,595
Policy and contract claims................ 491,932 375,499 372,327
Policyholders' funds...................... 181,779 165,106 153,867
Provision for policyholders' dividend..... 69,530 62,937 51,279
GENERAL LIABILITIES:
Due to Parent Corporation................. 52,877 126,656 151,431
Other general liabilities................. 1,045,494 1,069,563 947,635
Undistributed earnings on participating
business................................. 143,717 141,865 133,255
Separate account liabilities.............. 10,099,543 7,847,451 5,484,631
----------- ----------- -----------
Total Liabilities....................... $23,924,586 $20,891,796 $18,317,020
----------- ----------- -----------
STOCKHOLDER'S EQUITY:
Preferred stock........................... 0 121,800 121,800
Common stock.............................. 250 250 250
Additional paid-in capital................ 706,588 697,780 671,297
Accumulated other comprehensive income.... 61,560 52,807 14,951
Retained earnings......................... 430,411 313,532 226,166
----------- ----------- -----------
Total Stockholder's Equity.............. 1,198,809 1,186,169 1,034,464
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY..................... $25,123,395 $22,077,965 $19,351,484
=========== =========== ===========
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The Company was formed on September 16, 1998 to act as a holding company of
GWL&A and its subsidiaries. On December 30, 1998, Great-West Life contributed
all of the outstanding shares of GWL&A's common stock to the Company. The
following discussion reflects the financial condition and results of GWL&A's
operations as if consolidated with the Company for all periods presented.
Results of Operations
Company Consolidated Results
The Company's consolidated net income increased $38.1 million or 24% in 1998
when compared to the year ended December 31, 1997, reflecting improved results
in both the Employee Benefits segment and the Financial Services segment. The
Employee Benefits segment contributed $8.8 million or 23% to the improved
consolidated results compared to the Financial Services segment which
contributed $29.3 million or 77% to the overall improvement. Of total
consolidated net income in 1998 and 1997, the Employee Benefits segment
contributed 54% and 62%, respectively, while the Financial Services segment
contributed 46% and 38%, respectively.
The Company's consolidated net income increased $24.2 million or 18% in 1997
when compared to the year ended December 31, 1996. In 1997, the Employee
Benefits segment contributed $3.0 million or 12% to the overall growth and the
Financial Services segment contributed $21.2 million or 88% to the overall
growth.
The Company's 1997 and 1996 consolidated net income increased by $21.1
million and $25.6 million, respectively, due to changes in income tax
provisions for these years. The current income tax provisions were decreased by
$42.2 million and $31.2 million for 1997 and 1996, respectively, due to the
release of a contingent liability relating to taxes of Great-West Life's U.S.
branch associated with the blocks of business that had been transferred from
Great-West Life's U.S. branch to the Company, as discussed below.
Of the amount released in 1997, $15.1 million was attributable to
participating policyholders and, therefore, had no effect on the net income of
the Company.
In 1989, Great-West Life began a series of transactions to transfer its U.S.
business from its U.S. branch to the Company; this process essentially was
completed in 1993. The objective of these transactions was to transfer to the
Company all of the risks and rewards of Great-West Life's U.S.-related
business. The transfers of insurance contracts and related assets were
accomplished through several reinsurance agreements executed by the Company and
Great-West Life's U.S. branch during these years. As part of this transfer of
Great-West Life's U.S. business, the Company in 1993 entered into a tax
agreement with Great-West Life in order to transfer the tax liabilities
associated with the insurance contracts and related assets that had been
transferred.
In addition to the contingent tax liability release described above, the
Company's income tax provisions for 1997 and 1996 also reflect increases for
additional contingent items related to open tax years where it was determined
to be probable that additional tax liabilities could be owed based on changes
in facts and circumstances. The increase in 1997 was $16.0 million, of which
$10.1 million was attributable to participating policyholders and, therefore,
had no effect on the net income of the Company. The increase in 1996 was $5.6
million.
Certain reclassifications, primarily related to the classification of the
release of the contingent liability described above (see Note 10 to the 1998
consolidated financial statements), have been made to the 1997 and 1996
financial statements.
27
<PAGE>
In 1998 total revenues increased $301.1 million or 14% to $2.4 billion when
compared to the year ended December 31, 1997. The growth in revenues in 1998
was comprised of increased premium income of $161.7 million, increased fee
income of $95.3 million, increased net investment income of $15.7 million and
increased realized gains on investments of $28.4 million. In 1997 total
revenues increased $154.9 million or 8% to $2.1 billion when compared to the
year ended December 31, 1996. The growth in revenues in 1997 was comprised of
increased premium income of $3.7 million, increased fee income of $73.2
million, increased net investment income of $47.0 million and realized gains on
investments of $9.8 million in 1997 versus realized losses in 1996 of $21.1
million.
The increased premium income in 1998 was comprised of growth in Employee
Benefits premium income of $281.8 million, offset by a decrease in Financial
Services premium income of $120.1 million. The growth in premium income in the
Employee Benefits segment primarily reflected $209.5 million of premium income
derived from the acquisition of AH&L in July 1998. The decrease of $120.1
million in Financial Services premium income was due primarily to reinsurance
transactions in 1997 of $155.8 million versus only $46.2 million in premiums
due to reinsurance transactions in 1998. The increased premium income in 1997
was comprised of a decrease in Employee Benefits premium income of $21.4
million, offset by growth in Financial Services premium income of $25.1
million. The decrease in Employee Benefits was attributable to terminations in
1996 which impacted 1997 premiums. See "Results of Operations--Employee
Benefits Results of Operations" below. The increase in Financial Services
premium income was attributable to participating individual insurance.
The increased fee income in 1998 was comprised of growth in Employee
Benefits fee income and Financial Services fee income of $86.6 million and $8.7
million, respectively. The growth in Employee Benefits fee income reflected
$31.6 million of fee income derived from the acquisition of AH&L. The remaining
increase was the result of new sales and increased fees on variable funds
related to growth in equity markets. The increase in fee income in 1997 was
comprised of Employee Benefits fee income and Financial Services fee income of
$36.9 million and $36.3 million, respectively. The increase in both segments
was attributable to new sales and increased fees on variable funds related to
growth in equity markets.
Realized investment gains increased in recent years from a realized
investment loss of $21.1 million in 1996 to realized investment gains of $9.8
million and $38.2 million in 1997 and 1998, respectively. The decrease in
interest rates in 1998 and 1997 resulted in gains on sales of fixed maturities
totaling $38.4 million and $16.0 million in 1998 and 1997, respectively, while
higher interest rates contributed to $11.6 million of fixed maturity losses in
1996. Increases in the provision for asset losses of $0.6 million and $7.6
million, respectively, were recognized in 1998 and 1997.
Total benefits and expenses increased $213.9 million or 11% in 1998 when
compared to the year ended December 31, 1997. The increase in 1998 was a
combination of the acquisition of AH&L which resulted in benefits and expenses
of $258.3 million and overall growth in the group health business, partially
offset by a decrease in policyholder benefits related to reinsurance
transactions of $109.4 million. Excluding these items, benefits and expenses
would have increased $64.6 million or 3% in 1998. The increase from 1996 to
1997 was the result of increased operating expenses associated with the cost of
developing HMOs and FASCorp's business, and system enhancements.
In October 1996, the Company recaptured certain pieces of an individual
participating block of business previously reinsured to Great-West Life. In
June 1997, the Company recaptured all remaining pieces of that block of
business. The Company recorded various assets and liabilities related to the
recaptures as discussed in Note 3 to the 1998 consolidated financial
statements. In recording the recaptures, both life insurance premiums and
benefits were increased by the amounts recaptured ($155.8 million and $164.8
million in 1997 and 1996, respectively). Consequently, the net income of the
Company was not impacted by the reinsurance transactions.
Income tax expense increased $49.0 million or 98% in 1998 when compared to
the year ended December 31, 1997. Income tax expense increased $19.5 million or
64% in 1997 when compared to the year
28
<PAGE>
ended December 31, 1996. The increase in income tax expense in 1998 reflects
higher earnings in 1998, as well as the fact that the 1997 income tax provision
includes a net $26.2 million release of contingent tax liabilities relating to
prior open tax years, as discussed above. The increase in income tax expense
from 1996 to 1997 was partially attributable to a growth in earnings in 1997,
but also reflects net releases in 1997 and 1996 of $26.2 million and $25.6
million of contingent tax liabilities relating to prior open tax years, as
discussed above. Excluding these contingent tax releases, the Company's income
tax expense increased 30% and 27% in 1998 and 1997. See Note 10 to the 1998
consolidated financial statements for a discussion of the Company's effective
tax rates.
In evaluating its results of operations, the Company also considers net
changes in deposits received for investment-type contracts, deposits to
separate accounts and self-funded equivalents. Self-funded equivalents
represent paid claims under minimum premium and administrative services only
contracts, which amounts approximate the additional premiums that would have
been earned under such contracts if they had been written as traditional
indemnity or HMO programs.
Deposits for investment-type contracts increased $686.0 million or 104% in
1998 when compared to the year ended December 31, 1997. Deposits for
investment-type contracts decreased $157.4 million or 19% in 1997 when compared
to the year ended December 31, 1996. The increase in 1998 was primarily due to
two indemnity reinsurance agreements with Great-West Life whereby the Company
reinsured by coinsurance certain Great-West Life individual non-participating
life insurance policies. This transaction increased deposits by $519.6 million
in 1998 and accounted for 78% of the growth. The 19% decrease in 1997 was the
result of decreased deposits related to COLI sales. See "Results of
Operations--Financial Services Results of Operations" below.
Deposits for separate accounts increased $63.7 million or 3% in 1998 when
compared to the year ended December 31, 1997. The increases in 1998 reflect a
continuing movement by depositors toward variable funds and away from fixed
options. Deposits for separate accounts increased $706.9 million or 49% in 1997
when compared to the year ended December 31, 1996. The increase in 1997 was
primarily due to increased deposits in the Financial Services segment. See
"Results of Operations--Financial Services Results of Operations" below.
Self-funded premium equivalents increased $567.1 million or 28% in 1998 when
compared to the year ended December 31, 1997. Self-funded premium equivalents
increased $98.6 million or 5% in 1997 when compared to the year ended December
31, 1996. Approximately half of the 1998 increase ($281.3 million) was due to
the acquisition of AH&L, with the remainder coming from the growth in business.
Total assets increased $3.0 billion or 14% in 1998 when compared to the year
ended December 31, 1997. Separate account assets increased $2.3 billion
primarily due to the strength of the equity markets in the United States.
Invested assets increased $464.5 million, of which $258.6 million was
attributable to AH&L. The remaining growth of $205.9 million represents a 2%
increase in invested assets over 1997, which was primarily attributable to the
consideration received in connection with the reinsurance agreements discussed
previously. Total assets increased $2.7 billion or 14% in 1997 when compared to
the year ended December 31, 1996. The majority of the increase in 1997 was
associated with separate account assets, which increased $2.4 billion due to
the strength of the equity markets in the United States and increased 401(k)
sales.
29
<PAGE>
Employee Benefits Results of Operations
The following is a summary of certain financial data of the Employee
Benefits segment:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
(Millions)
<S> <C> <C> <C>
INCOME STATEMENT DATA
Premiums............................................ $ 747 $ 465 $ 486
Fee income.......................................... 445 358 321
Net investment income............................... 95 100 88
Realized investment gains (losses).................. 8 3 (3)
------- ------- -------
Total Revenues.................................... 1,295 926 892
Policyholder benefits............................... 590 371 406
Operating expenses.................................. 547 428 368
------- ------- -------
Total benefits and expenses....................... 1,137 799 774
------- ------- -------
Income from operations.............................. 158 127 118
Income tax expense.................................. 51 29 22
------- ------- -------
Net Income........................................ $ 107 $ 98 $ 96
======= ======= =======
Deposits for investment-type contracts.............. $ 37 $ 25 $ 34
Deposits to separate accounts....................... 1,568 1,403 1,109
Self-funded premium equivalents..................... 2,606 2,039 1,940
</TABLE>
During 1998, the Employee Benefits segment experienced:
. significant growth in 401(k) assets under administration,
. increased sales and improved customer retention in group life and
health,
. favorable mortality results, and
. license approval for four HMO subsidiaries, for a total of 14 fully
operational HMOs.
Net income for Employee Benefits increased 9% in 1998 and 2% in 1997. The
improvement in earnings in 1998 and 1997 reflects increased fee income from the
variable 401(k) assets and improved group life mortality experience which more
than offset unfavorable morbidity experience and the increased level of
operating expenses associated with building the HMO network in 1998 and 1997.
The changes in income tax provisions discussed above under "Results of
Operations" resulted in increases in net income for the Employee Benefits
segment of $17.6 million and $18.2 million in 1997 and 1996, respectively.
401(k) premiums and deposits for 1998 and 1997 increased 14% and 25%,
respectively, as the result of higher recurring deposits from existing
customers and sales in 1997. Assets under administration (including third-party
administration) in 401(k) increased 26% over 1997 to $6.7 billion and 38% from
1996 to 1997, primarily due to strong equity markets.
Equivalent premium revenue and fee income for group life and health
increased 32% from 1997 levels as the result of a combination of increased
sales (41%) and the AH&L acquisition (59%). From 1996 to 1997, equivalent
premium revenue and fee income had increased 4% as growth was constrained by
competitive pressures.
Group Life and Health
The Employee Benefits segment experienced strong sales growth during 1998
with a net increase of 593 group health care customers (versus 440 in 1997),
which added 143,699 new individual health care members, excluding the AH&L
acquisition. Much of the health care growth can be attributed to the
introduction of new HMOs in markets with high sales potential, and the
Company's ability to offer a choice of managed care products.
30
<PAGE>
To position itself for the future, the Employee Benefits segment is focused
on putting in place the products, strategies and processes that will strengthen
its competitive position in the evolving managed care environment.
With a heightened sensitivity to price comes the demand for more tightly
managed health plans, which is why HMO development remains Employee Benefits'
most important product development initiative. In 1998, the Company licensed
HMOs in Arizona, Florida, Indiana and New Jersey and applied for licenses in
North Carolina and Pennsylvania. The Company also entered into agreements with
another insurance carrier which will exclusively market the HMO product in
various states. This type of arrangement will augment growth in the Company's
HMO programs in the future.
The Company experienced a 35% increase in total health care membership,
including the AH&L acquisition, from 1,675,800 at the end of 1997 to 2,266,700
at year-end 1998. Excluding the AH&L acquisition, which added 450,000 members,
total health care membership increased 8%. Gatekeeper (i.e., POS and HMO)
members grew 34% from 414,500 in 1997 to 556,800 in 1998 including 61,800 AH&L
members. Excluding the AH&L acquisition, gatekeeper members increased 19%. The
Company expects this segment of the business to grow as additional HMO licenses
are obtained.
Total health care membership increased from 1996 to 1997 by 8% (1996 was the
first year the Company offered HMO plans). Gatekeeper members grew 18% from
1996 to 1997.
401(k)
The number of new 401(k) case sales (employer groups), including third-party
administration business generated through the Company's marketing and
administration arrangement with New England, decreased 33% to 800 in 1998 from
1,200 in 1997 (1,200 in 1996). The decrease in 1998 was the result of a shift
in emphasis to group life and health sales. The 401(k) block of business under
administration total 6,100 employer groups and more than 475,000 individual
participants, compared to 5,700 employer groups and 430,000 individual
participants in 1997, and 4,900 employer groups and 355,000 individual
participants in 1996.
During 1998, the in-force block of 401(k) business continued to perform
well, with customer retention of 93% versus 94% in 1997. This, combined with
strong equity markets, resulted in a 26% and 39% increase in assets under
management during 1998 and 1997, respectively.
In addition to the Company's internally-managed funds, the Company offers
externally-managed funds from recognized mutual funds companies such as AIM,
Fidelity, Putnam, American Century, Founders and T. Rowe Price. This strategy,
supported by participant education efforts, is validated by the fact that 99%
of assets contributed in 1998 were allocated to variable funds.
To promote long-term asset retention, the Company enhanced a number of
products and services including prepackaged "lifestyle funds" ("The Profile
Series"), expense reductions for high-balance accounts, a rollover IRA product,
more effective enrollment communications, one-on-one retirement planning
assistance and personal plan illustrations.
31
<PAGE>
Financial Services Results of Operations
The following is a summary of certain financial data of the Financial
Services segment:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1998 1997 1996
------ ----- -----
(Millions)
<S> <C> <C> <C>
INCOME STATEMENT DATA
Premiums................................................. $ 248 $ 368 $ 343
Fee income............................................... 71 62 26
Net investment income.................................... 802 782 747
Realized investment gains (losses)....................... 30 7 (18)
------ ----- -----
Total Revenues......................................... 1,151 1,219 1,098
Policyholder benefits.................................... 872 1,014 950
Operating expenses....................................... 141 124 101
------ ----- -----
Total benefits and expenses............................ 1,013 1,138 1,051
------ ----- -----
Income from operations................................... 138 81 47
Income tax expense....................................... 48 20 8
------ ----- -----
Net Income............................................. $ 90 $ 61 $ 39
====== ===== =====
Deposits for investment-type contracts................... $1,307 $ 633 $ 781
Deposits to separate accounts............................ 640 742 329
</TABLE>
During 1998, the Financial Services segment experienced:
. significant growth in participants and separate account funds
primarily attributable to the public/non-profit business,
. very good persistency in all lines of business, and
. strong sales of BOLI.
Net income for Financial Services increased 48% in 1998 and 56% in 1997. The
improvement in earnings in 1998 reflects higher earnings from an increased
asset base, an increase in investment margins and larger capital gains on fixed
maturities. The 1997 earnings improvement was the result of a reduction of the
mortgage provision for asset impairments, increased fee income on a larger
asset base, capital gains on fixed maturities and an increase in investment
margins. The changes in income tax provisions discussed above under "Results of
Operations" resulted in increases in net income for the Financial Services
segment of $3.6 million and $7.4 million in 1997 and 1996, respectively.
Savings
Premiums decreased $5.9 million or 26%, from $22.6 million in 1997 to $16.8
million in 1998. Premiums decreased $4.0 million or 15%, from $26.7 million in
1996 to $22.6 million in 1997. The decrease in both years is attributable to
the continuing trend of policyholders selecting variable annuity options
(separate accounts) as opposed to the more traditional fixed annuity products.
Fee income increased $8.6 million or 14%, from $62.4 million in 1997 to
$71.0 million in 1998. Fee income increased $36.1 million or 137%, from $26.3
million in 1996 to $62.4 million in 1997. The growth in fee income in 1998 and
1997 was the result of new sales and increased fees on variable funds related
to growth in equity markets.
Deposits for investment-type contracts increased $20.4 million or 9%, from
$218.6 million in 1997 to $239.0 million in 1998. Deposits for investment-type
contracts increased $4.3 million or 2%, from $214.3 million in 1996 to $218.6
million in 1997.
32
<PAGE>
Deposits to separate accounts decreased $101.5 million or 14%, from $742.1
million in 1997 to $640.6 million in 1998. Deposits to separate accounts
increased $413.6 million or 126%, from $328.5 million in 1996 to $742.1
million in 1997. The decrease in 1998 was the result of 1997 being inflated by
the receipt of a large single deposit in the amount of $120.0 million. The
increase in 1997 was due to a combination of the $120.0 million deposit and
the commencement of marketing a new fixed and variable qualified and non-
qualified annuity product through Charles Schwab & Co., Inc., which resulted
in $239.9 million in deposits to separate accounts (the amount of such
deposits from Schwab in 1998 was $204.7 million).
The Financial Services segments core savings business is in the public/non-
profit pension market. The assets of the public/non-profit business, including
separate accounts but excluding Guaranteed Investment Contracts ("GICs"),
increased 9% and 8% during 1998 and 1997 to $7.8 billion and $7.2 billion,
respectively. Much of the growth came from the variable annuity business,
which was driven by premiums and deposits and strong investment returns in the
equity markets.
The Financial Services segment's savings business experienced strong growth
in 1998. The number of new participants in 1998 was 151,300 compared to
129,200 in 1997 (51,900 in 1996), bringing the total lives under
administration to 643,200 in 1998 and 536,200 in 1997. BenefitsCorp sold 21
new large employer cases compared to 13 in 1997 and increased the penetration
of existing cases by enrolling new employees.
The Financial Services segment again experienced a very high retention rate
in public/non-profit contract renewals in 1998, renewing 100% of its own large
case state contracts. Part of this customer loyalty comes from initiatives to
provide high-quality service while controlling expenses.
The Company continued to limit sales of GICs and to allow this block of
business to contract in response to the highly competitive GIC market. As a
result, GIC assets decreased 33% in 1998, to $274.8 million. In 1997, GIC
assets decreased 22% from 1996, to $409.1 million.
Customer demand for investment diversification continued to grow during
1998. New contributions to variable business represented 63% of the total 1998
premiums versus 69% in 1997. The Company continues to expand the investment
products available through Maxim Series Fund, Inc., and through partnership
arrangements with external fund managers. Externally-managed funds offered to
participants in 1998 included American Century, Ariel, Fidelity, Founders,
INVESCO, Janus, Loomis Sayles, Templeton, T. Rowe Price and Vista.
Customer participation in guaranteed separate accounts increased, as many
customers prefer the security of fixed income securities and separate account
assets. Assets under management for guaranteed separate account funds were
$562.3 million in 1998, compared to $466.2 million in 1997 and $392.8 million
in 1996.
FASCorp administered records for approximately 1,304,000 participants in
1998 versus 1,000,000 in 1997.
Life Insurance
The Company continued its conservative approach to the manufacture and
distribution of traditional life insurance products, while focusing on
customer retention and expense management.
Individual life insurance revenue premiums and deposits of $1.3 billion in
1998 increased 71% from 1997 primarily due to reinsurance transactions with
Great-West Life, which resulted in $565.8 million of premiums and deposits in
1998 versus $155.8 million in 1997. Excluding these reinsurance transactions,
individual life insurance revenue premiums and deposits increased 14% from
1997 to 1998. The Company also experienced strong BOLI sales in 1998 which
more than offset reductions in COLI premiums. Individual life insurance
premiums and deposits decreased 14% from 1996 to 1997 due to the reduction of
COLI premiums associated with 1996 legislative changes.
During 1996, the U.S. Congress enacted legislation to phase out during 1997
and 1998 the tax deductibility of interest on policy loans on COLI products.
Since then renewal premiums and deposits for
33
<PAGE>
COLI products have decreased to $179.8 million in 1998 from $299.8 million in
1997 and $384.2 million in 1996, and the Company expects this decline to
continue. As a result of these legislative changes, the Company has shifted its
emphasis from COLI to new sales in the BOLI market. This product provides long-
term benefits for bank employees and was not affected by the 1996 legislative
changes. BOLI premiums and deposits were $430.7 million during 1998, compared
to $179.3 million in 1997. The Company continues working closely with existing
COLI customers to determine the options available to them and is confident that
the effect of the legislative changes will not be material to the Company's
operations.
Investment Operations
The Company's primary investment objective is to acquire assets whose
durations and cash flows reflect the characteristics of the Company's
liabilities, while meeting industry, size, issuer and geographic
diversification standards. Formal liquidity and credit quality parameters have
also been established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines
ensure that even under changing market conditions, the Company's assets will
meet the cash flow and income requirements of its liabilities. Through dynamic
modeling, using state-of-the-art software to analyze the effects of a wide
range of possible market changes upon investments and policyholder benefits,
the Company seeks to ensure that its investment portfolio is appropriately
structured to fulfill financial obligations to its policyholders.
Fixed Maturities
Fixed maturity investments include public and privately placed corporate
bonds, public and privately placed structured assets and government bonds. This
latter category contains both asset-backed and mortgage-backed securities,
including collateralized mortgage obligations ("CMOs"). The Company's strategy
related to structured assets is to focus on those with lower volatility and
minimal credit risk. The Company does not invest in higher risk CMOs such as
interest-only and principal-only strips, and currently has no plans to invest
in such securities.
Private placement investments, which are primarily in the held-to-maturity
category, are generally less marketable than publicly traded assets, yet they
typically offer covenant protection which allows the Company, if necessary, to
take appropriate action to protect its investment. The Company believes that
the cost of the additional monitoring and analysis required by private
placements is more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed maturity
portfolio is maintained at a high average quality, so as to limit credit risk.
If not externally rated, the securities are rated by the Company on a basis
intended to be similar to that of the rating agencies.
The distribution of the fixed maturity portfolio (both available-for-sale
and held-to-maturity) by credit rating is summarized as:
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
<TABLE>
<CAPTION>
December, December 31, December 31,
Credit Rating 1998 1997 1996
------------- --------- ------------ ------------
<S> <C> <C> <C>
AAA................................... 45.6% 45.7% 45.9%
AA.................................... 9.4 8.8 8.1
A..................................... 23.8 23.8 23.7
BBB................................... 20.7 20.7 20.9
BB and below (non-investment grade)... 0.5 1.0 1.4
----- ----- -----
100.0% 100.0% 100.0%
</TABLE>
At December 31, 1998 and 1997, the Company owned no bonds in default.
34
<PAGE>
Mortgage Loans
During 1998, the mortgage portfolio declined 8% to $1.1 billion, net of
impairment reserves. The Company has not actively sought new loan opportunities
since 1989 and, as such, has experienced an ongoing reduction in this
portfolio's balance.
The Company follows a comprehensive approach to the management of mortgage
loans which includes ongoing analysis of key mortgage characteristics such as
debt service coverage, net collateral cash flow, property condition, loan to
value ratios and market conditions. Collateral valuations are performed for
those mortgages which, after review, are determined by management to present
possible risks and exposures. These valuations are then incorporated into the
determination of the Company's allowance for credit losses.
The average balance of impaired loans continued to remain low at $31.2
million in 1998, compared with $37.9 million in 1997, and foreclosures totaled
$3.0 million and $14.1 million in 1998 and 1997, respectively. The low levels
of problematic mortgages relative to the Company's overall balance sheet are
due to the ongoing decrease in the size of the mortgage portfolio, the
Company's active loan management program and overall strength in market
conditions.
Occasionally, the Company elects to restructure certain loans if the
economic benefits to the Company are believed to be more advantageous than
those achieved by acquiring the collateral through foreclosure. At December 31,
1998 and 1997, the Company's loan portfolio included $52.9 million and $64.4
million, respectively, of non-impaired restructured loans.
Real Estate and Common Stock
The Company's real estate portfolio is composed primarily of the Head Office
property ($54.2 million) and properties acquired through the foreclosure of
troubled mortgages ($16.3 million). The Company operates a wholly-owned real
estate subsidiary, which attempts to maximize the value of these properties
through rehabilitation, leasing and sale. The Company is currently adding a
third tower to its Head Office complex, which it anticipates completing in the
year 2000.
The common stock portfolio is composed of mutual fund seed money and some
private equity investments. The Company anticipates a limited participation in
the stock markets in 1999.
Derivatives
The Company uses certain derivatives, such as futures, options and swaps,
for purposes of hedging interest rate and foreign exchange risk. These
derivatives, when taken alone, may subject the Company to varying degrees of
market and credit risk; however, when used for hedging, these instruments
typically reduce risk. The Company controls the credit risk of its financial
contracts through credit approvals, limits and monitoring procedures. The
Company has also developed controls within its operations to ensure that only
Board authorized transactions are executed. Note 6 to the 1998 consolidated
financial statements contains a summary of the Company's outstanding financial
hedging derivatives.
Liquidity and Capital Resources
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are primarily
long-term liabilities. Accident and health reserves, including long-term
disability, consist of both short-term and long-term liabilities. Life
insurance and pension plan reserve requirements are usually stable and
predictable, and are supported primarily by long-term, fixed income
investments. Accident and health claim demands are stable and predictable but
generally shorter term, requiring greater liquidity.
35
<PAGE>
The Company has a commitment to fund an addition to its Head Office complex
over the next 18 months, totaling approximately $30.0 million. The Company
intends to fund this commitment with cash generated from current operations.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and utilizing
positive cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and cash,
which totaled $596.3 million and $525.4 million as of December 31, 1998 and
1997, respectively.
Funds provided from premiums and fees, investment income and maturities of
investment assets are reasonably predictable and normally exceed liquidity
requirements for payment of claims, benefits and expenses. However, since the
timing of available funds cannot always be matched precisely to commitments,
imbalances may arise when demands for funds exceed those on hand. Also, a
demand for funds may arise as a result of the Company taking advantage of
current investment opportunities. The Company's capital resources represent
funds available for long-term business commitments and primarily consist of
retained earnings and proceeds from the issuance of commercial paper and equity
securities. Capital resources provide protection for policyholders and the
financial strength to support the underwriting of insurance risks, and allow
for continued business growth. The amount of capital resources that may be
needed is determined by the Company's senior management and Board of Directors
as well as by regulatory requirements. The allocation of resources to new long-
term business commitments is designed to achieve an attractive return, tempered
by considerations of risk and the need to support the Company's existing
business.
The Company's financial strength provides the capacity and flexibility to
enable it to raise funds in the capital markets through the issuance of
commercial paper. The Company continues to be well capitalized, with sufficient
borrowing capacity to meet the anticipated needs of its business. The Company
had $39.7 million of commercial paper outstanding at December 31, 1998,
compared with $54.1 million at December 31, 1997. The commercial paper has been
given a rating of A-1+ by Standard & Poors Corporation and a rating of P-1 by
Moody's Investors Service, each being the highest rating available.
Year 2000 Issue
The Year 2000 ("Y2K") problem arises when a computer performing date-based
computations or operations produces erroneous results due to the historical
practice of using two digit years within computer hardware and software. This
causes errors or misinterpretations of the century in date calculations.
Virtually all businesses, including the Company, are required to determine the
extent of their Y2K problems. Systems that have a Y2K problem must then be
converted or replaced by systems that will operate correctly with respect to
the year 2000 and beyond.
The Company has a written plan that encompasses all computer hardware,
software, networks, facilities (embedded systems) and telephone systems. The
plan also includes provisions for identifying and verifying that major vendors
and business partners are Y2K compliant. The Company is developing contingency
plans to address the possibility of both internal and external failures as
well. The plan calls for full Y2K compliance for core systems by June 30, 1999
and full Y2K compliance for all Company systems by October 31, 1999.
The Company's plan establishes five phases for becoming Y2K compliant. Phase
1 is "impact analysis" which includes initial inventory and preliminary
assessment of Y2K impact. Phase 2 is "solution planning" which includes system
by system planning to outline the approach and timing for reaching compliance.
Phase 3 is "conversion/renovation" which means the actual process of replacing
or repairing non-compliant systems. Phase 4 is "testing" to ensure that the
systems function correctly under a variety of different date scenarios
including current dates, year 2000 and leap year dates. Phase 5 is
"implementation" which means putting Y2K compliant systems back into
production.
36
<PAGE>
As of March 31, 1998, the Company had completed impact analysis (phase 1)
and solution planning (phase 2) for all of its core systems and was 99%
complete for phases 1 and 2 with respect to its systems as a whole. In
addition, the Company was approximately 95% complete with respect to conversion
and renovation (phase 3), 88% complete with respect to testing (phase 4), and
86% complete with respect to implementation (phase 5).
In addition to ensuring that the Company's own systems are Y2K compliant,
the Company has identified third parties with which the Company has significant
business relationships in order to assess the potential impact on the Company
of the third parties Y2K issues and plans. As of March 31, 1999, the Company
had completed most of this assessment process. The Company will continue
investigating third party readiness and will conduct system testing with
selected third parties throughout 1999. The Company does not have control over
these third parties and cannot make any representations as to what extent the
Company's future operating results may be adversely affected by the failure of
any third party to address successfully its own Y2K issues.
On the basis of currently available information, the expense incurred by the
Company, including anticipated future expenses, related to the Y2K issue has
not and is not expected to be material to the Company's financial condition or
results of operations. The Company has spent approximately $11.3 million on its
Y2K project through the end of March 1999 and expects to spend up to
approximately $15.3 million on its Y2K project. All of these funds will come
from the Company's cash flow from operations. The Company has continued other
scheduled non-Y2K information systems changes and upgrades. Although work on
Y2K issues may have resulted in minor delays on the other projects, the delays
are not expected to have a material adverse effect on the Company's
consolidated financial condition or results of operations.
The most reasonably likely worst case Y2K scenario is that the Company will
experience isolated internal or third party computer failures and will be
temporarily unable to process insurance and annuity benefit transactions. All
of the Company's Y2K efforts have been designed to prevent such an occurrence.
However, if the Company identifies internal or third party Y2K issues which
cannot be timely corrected, there can be no assurance that the Company can
avoid Y2K problems or that the cost of curing the problem will not be material.
In an effort to mitigate risks associated with Y2K failures, the Company is
in the process of developing contingency plans to address core functions,
including relations with third parties. It is the Company's expectation that
contingency plans will address possible failures generated internally, by
vendors or business partners, and by customers. Possible general approaches
include manual processing, payments on an estimated basis and use of disaster
recovery facilities.
37
<PAGE>
DESCRIPTION OF CAPITAL SECURITIES
Pursuant to the terms of the Declaration, the Regular Trustees on behalf of
the Trust will issue the Capital Securities and the Common Securities. The
Capital Securities will represent undivided beneficial ownership interests in
the assets of the Trust and the holders thereof will be entitled to a
preference in certain circumstances with respect to Distributions and amounts
payable on redemption or liquidation over the Common Securities, as well as
other benefits as described in the Declaration. This summary of certain
provisions of the Capital Securities and the Declaration, which summarizes all
of the material terms thereof, does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, all the provisions of the
Declaration, including the definitions therein of certain terms, and the Trust
Indenture Act. Wherever particular defined terms of the Declaration (as
supplemented or amended from time to time) are referred to herein, the
definitions of such defined terms are incorporated herein by reference.
General
The Capital Securities will rank pari passu, and payments will be made
thereon on a pro rata basis, with the Common Securities except as described
under "--Subordination of Common Securities." Legal title to the Junior
Subordinated Debentures will be held by the Property Trustee in trust for the
benefit of the holders of the Capital Securities and the Common Securities. The
Guarantee executed by the Company for the benefit of the holders of the Capital
Securities will be a guarantee on a subordinated basis with respect to the
Capital Securities but will not guarantee payment of Distributions or amounts
payable on redemption or liquidation of the Capital Securities when the Trust
does not have sufficient funds available to make such payments. See
"Description of Guarantee." In such event, a holder of Capital Securities may
vote to direct the Property Trustee to enforce the Property Trustee's rights
under the Junior Subordinated Debentures. See "--Voting Rights; Amendment of
the Declaration" below. In addition, the holder of Capital Securities may, in
certain circumstances, institute a Direct Action against the Company for
payment. See "Description of Junior Subordinated Debentures--Enforcement of
Certain Rights by Holders of Capital Securities." The Company's obligations
under the Guarantee, taken together with its obligations under the Junior
Subordinated Debentures and the Indenture, including its obligation to pay all
costs, expenses and liabilities of the Trust (other than with respect to the
Capital Securities and the Common Securities) and the Declaration, constitute a
full and unconditional guarantee of all of the Trust's obligations under the
Capital Securities.
Holders of the Capital Securities have no preemptive or similar rights.
Distributions
Distributions on each Capital Security will be payable at the annual rate of
% of the stated liquidation amount of $25, payable quarterly in arrears on
March 31, June 30, September 30 and December 31 of each year. Distributions
will accumulate from , 1999, the date of original issuance, and commence
on June 30, 1999. The amount of Distributions payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months.
Distributions on the Capital Securities must be paid on the dates payable to
the extent that the Trust has funds available for the payment of such
Distributions. The revenue of the Trust available for distribution to holders
of its Capital Securities will be limited to payments under the Junior
Subordinated Debentures in which the Trust will invest the proceeds from the
issuance and sale of the Capital Securities and the Common Securities. See
"Description of Junior Subordinated Debentures." If the Company does not make
interest payments on the Junior Subordinated Debentures, the Property Trustee
will not have funds available to pay Distributions on the Capital Securities.
So long as no Indenture Event of Default shall have occurred and be
continuing, the Company will have the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters (each, an
"Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated
38
<PAGE>
Debentures or end on a day other than an Interest Payment Date. As a
consequence of any such extension, quarterly Distributions on the Capital
Securities will be deferred by the Trust during any such Extension Period.
Accordingly, there could be multiple Extension Periods of varying lengths
throughout the term of the Junior Subordinated Debentures. During an Extension
Period, interest on the Junior Subordinated Debentures will continue to accrue
and as a result, distributions to which holders of the Capital Securities are
entitled will accumulate and compound quarterly at the rate (to the extent
permitted by applicable law) per annum of % thereof from the relevant payment
date for such Distributions. The term "Distributions" as used herein shall
include any such compounded amounts unless the context otherwise requires.
During any such Extension Period, the Company may not, and may not permit any
subsidiary of the Company to, (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect
to, any of the Company's capital stock, (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu in all respects with or junior
to the Junior Subordinated Debentures or (iii) make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior in
interest to the Junior Subordinated Debentures (other than (a) dividends or
distributions in the form of stock, warrants, options or other rights where the
dividend stock or the stocks issuable upon exercise of such warrants, options
or other right is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock, (b) payments under the
Guarantee, (c) any declaration of a dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of rights, stock
or other property under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (d) as a result of
reclassification of the Company's capital stock into one or more other classes
or series of the Company's capital stock or the exchange or conversion of one
class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for another class or series of the Company's capital
stock, or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (e) the purchase of fractional interests
in the shares of the Company's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged and (f) repurchases, redemptions or other acquisitions of common
stock related to the issuance of common stock or rights under any of the
Company's employment contracts, benefit plans or other similar arrangement with
or for the benefit of one or more employees, officers, directors or
consultants, in connection with a dividend reinvestment or stockholder stock
purchase plan or in connection with the issuance of capital stock of the
Company (or securities convertible into or exercisable for such capital stock)
as consideration in an acquisition transaction entered into prior to the
applicable Extension Period).
Prior to the termination of any such Extension Period, the Company may
further extend the Extension Period, provided that no Extension Period may
exceed 20 consecutive quarters or extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due on any Interest Payment Date,
the Company may elect to begin a new Extension Period, subject to the foregoing
requirements. See "Description of the Junior Subordinated Debentures--Option to
Extend Interest Payment Period" and "U.S. Federal Income Tax Consequences--
Interest Income and Original Issue Discount." The Company has no current
intention of exercising its right to defer payments of interest by extending
the interest payment period of the Junior Subordinated Debentures.
In the event that any date on which Distributions are payable on the Capital
Securities is not a Business Day, then payment of the Distributions payable on
such date will be made on the next succeeding day that is a Business Day (and
without any additional Distributions or other payment in respect of any such
delay), except that if such next succeeding Business Day falls in the next
calendar year, then such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on the
date such payment was originally payable (each date on which Distributions are
payable in accordance with the foregoing, a "Distribution Date"). A "Business
Day" shall mean any day other than a Saturday or a Sunday, or a day on which
banking institutions in The City of New York are authorized or required by law
or executive order to remain closed or a day on which the corporate trust
office of the Property Trustee or the Indenture Trustee (as defined herein) is
closed for business.
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Distributions on the Capital Securities (other than distributions on a
Redemption Date) will be payable to the holders thereof as they appear on the
register of the Trust on the relevant record dates, which shall be the day of
the month (whether or not a Business Day) prior to the relevant Distribution
Date. Distributions payable on any Capital Securities that are not punctually
paid on any Distribution Date will cease to be payable to the person in whose
name such Capital Securities are registered on the relevant record date, and
such defaulted Distribution will instead be payable to the person in whose name
such Capital Securities are registered on the special record date or other
specified date determined in accordance with the Declaration.
Redemption
Mandatory Redemption. Unless a Special Event has occurred, the Capital
Securities will not be redeemable prior to , 2004. Upon the repayment or
redemption, in whole or in part, of the Junior Subordinated Debentures, whether
at Stated Maturity or upon earlier redemption as provided in the Indenture, the
proceeds from such repayment or redemption shall be applied by the Property
Trustee to redeem Capital Securities and Common Securities on a pro rata basis,
upon not less than 30 but not more than 60 days notice prior to the date fixed
for repayment or redemption. If less than all of the Junior Subordinated
Debentures are to be repaid or redeemed on a Redemption Date, then the proceeds
from such repayment or redemption shall be allocated to the redemption pro rata
of the Capital Securities and the Common Securities.
Special Event Redemption or Distribution of Junior Subordinated
Debentures. If a Special Event shall occur and be continuing, the Company will
have the right either (i) to redeem within 90 days following the occurrence of
such Special Event the Junior Subordinated Debentures outstanding on the date
of redemption (the "Redemption Date") in whole (but not in part) and thereby
cause a mandatory redemption of the Capital Securities in whole (but not in
part) at a redemption price with respect to the Capital Securities equal to
100% of the liquidation amount thereof plus accrued and unpaid distributions if
any, to, but excluding, the date of redemption or (ii) to dissolve the Trust
within 90 days following the occurrence and continuation of such Special Event
and, after satisfaction of the claims of creditors of the Trust as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Capital Securities in liquidation of the Trust. Under
current United States federal income tax law and interpretations thereof and
assuming, as expected, the Trust is treated as a grantor trust, a distribution
of the Junior Subordinated Debentures will not be a taxable event to holders of
the Capital Securities. Should there be a change in law, a change in legal
interpretation, certain events described in clauses (a) and (b) of the
definition of "Tax Event" below or other circumstances, however, the
distribution could be a taxable event to holders of the Capital Securities. See
"U.S. Federal Income Tax Consequences--Distribution of Junior Subordinated
Debentures to Holders of Capital Securities Upon Liquidation of the Trust."
If the Company does not elect to redeem the Junior Subordinated Debentures
as described above, the Capital Securities will remain outstanding until the
repayment of the Junior Subordinated Debentures whether at Stated Maturity or
their earlier redemption, and if certain events described in clauses (a) and
(b) of the definition of "Tax Event" below have occurred and are continuing,
the Company will be obligated to pay any additional taxes, duties, assessments
and other governmental charges (other than withholding taxes) to which the
Trust has become subject as a result of such events.
The term "Special Event" means a Tax Event or an Investment Company Event.
The term "Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of (a) any
amendment to or change (including any announced prospective change) in the laws
or any regulations thereunder of the United States or any political subdivision
or taxing authority thereof or therein, or (b) any judicial decision or any
official administrative pronouncement (including any private letter ruling,
technical advice memorandum or Chief Counsel advice, as defined by the Code) or
regulatory procedure (an "Administrative Action"), regardless of whether such
judicial decision or Administrative Action is issued to or in connection with a
proceeding involving the Company or the Trust and whether or not subject to
review or appeal, which amendment, change, decision or Administrative Action is
enacted, released by the Internal
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Revenue Service, promulgated or announced, in each case, on or after the date
of this Prospectus, there is more than an insubstantial risk that (i) the Trust
is, or will be within 90 days of the date of such opinion, subject to United
States federal income tax with respect to income received or accrued on the
Junior Subordinated Debentures, (ii) interest payable by the Company or OID
accruing on such Junior Subordinated Debentures is not, or within 90 days of
the date of such opinion, will not be, deductible by the Company, in whole or
in part, for United States federal income tax purposes, or (iii) the Trust is,
or will be within 90 days of the date of such opinion, subject to more than a
de minimis amount of other taxes, duties or other governmental charges. An
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel, rendered by a law firm experienced in such matters to the effect that,
as a result of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in Investment
Company Act Law"), the Trust is or will be considered an "investment company"
that is required to be registered under the Investment Company Act of 1940, as
amended ("Investment Company Act"), which Change in Investment Company Act Law
becomes effective on or after the date of original issuance of the Capital
Securities.
Redemption Procedures
Capital Securities redeemed on each Redemption Date shall be redeemed at the
redemption price in respect of the Junior Subordinated Debentures (the
"Redemption Price") with the applicable proceeds from the contemporaneous
redemption or payment at Stated Maturity of the Junior Subordinated Debentures.
Redemptions of the Capital Securities shall be made and the Redemption Price
shall be payable on each Redemption Date only to the extent that the Trust has
sufficient funds available for the payment of such Redemption Price. See also
"--Subordination of Common Securities."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Capital Securities to be
redeemed at its registered address. If the Trust gives a notice of redemption
in respect of the Capital Securities, then, by 12:00 noon, New York City time,
on the Redemption Date, to the extent funds are available, the Property Trustee
will deposit irrevocably with The Depository Trust Company ("DTC") or its
nominee funds sufficient to pay the applicable Redemption Price and will give
DTC irrevocable instructions and authority to pay the Redemption Price to the
holders of the Capital Securities. See "--Book-Entry Issuance." If any Capital
Securities are no longer in book-entry form, the Trust, to the extent funds are
available, will irrevocably deposit with the paying agent for the Capital
Securities funds sufficient to pay the applicable Redemption Price and will
give the paying agent irrevocable instructions and authority to pay the
Redemption Price to the holders thereof upon surrender of their certificates
evidencing the Capital Securities. Notwithstanding the foregoing, Distributions
payable on or prior to the Redemption Date for any Capital Security called for
redemption shall be payable to the holders of such Capital Security on the
relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
date of such deposit, all rights of the holders of such Capital Securities so
called for redemption will cease, except the right of the holders of such
Capital Securities to receive the Redemption Price, but without interest on
such Redemption Price, and such Capital Securities will cease to be
outstanding. In the event that any date fixed for redemption of Capital
Securities is not a Business Day, then payment of the Redemption Price payable
on such date will be made on the next succeeding day which is a Business Day
(and without any interest or other payment in respect of any such delay),
except that, if such Business Day falls in the next calendar year, such payment
will be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on the date such payment was originally
payable. In the event that payment of the Redemption Price in respect of
Capital Securities called for redemption is improperly withheld or refused and
not paid either by the Trust or by the Company pursuant to the Guarantee as
described under "Description of Guarantee," Distributions on such Capital
Securities will continue to accrue at the then applicable rate, from the
Redemption Date originally established by the Trust for the Capital Securities
to the date such Redemption Price is actually paid, in which case the actual
payment date will be the date fixed for redemption for purposes of calculating
the Redemption Price.
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Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Capital Securities by tender, in the
open market or by private agreement.
The Trust may not redeem fewer than all of the outstanding Capital
Securities unless all accrued and unpaid Distributions have been paid on all
Capital Securities for all quarterly distribution periods terminating on or
prior to the date of redemption. If less than all of the Capital Securities and
the Common Securities issued by the Trust are to be redeemed on a Redemption
Date, then the aggregate amount of such Capital Securities and Common
Securities to be redeemed shall be allocated pro rata among the Capital
Securities and the Common Securities. If the Capital Securities are in book-
entry form, they will be redeemed as described below under "--Book-Entry
Issuance." If not, the particular Capital Securities to be redeemed shall be
selected on a pro rata basis not more than 60 days prior to the Redemption Date
by the Property Trustee from the outstanding Capital Securities not previously
called for redemption and which may provide for the selection for redemption of
portions (equal to $25 or an integral multiple of $25 in excess thereof) of the
liquidation amount of Capital Securities of a denomination larger than $25. In
any such proration, the Property Trustee may make such adjustments as may be
appropriate in order that only Capital Securities in authorized denominations
shall be redeemed. The Property Trustee shall promptly notify the Trust
registrar in writing of the Capital Securities selected for redemption and, in
the case of any Capital Security selected for partial redemption, the
liquidation amount thereof to be redeemed. For all purposes of the Declaration,
unless the context otherwise requires, all provisions relating to the
redemption of Capital Securities shall relate, in the case of any Capital
Security redeemed or to be redeemed only in part, to the portion of the
aggregate liquidation amount of Capital Securities which has been or is to be
redeemed.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, the Capital
Securities and the Common Securities, as applicable, shall be made pro rata
based on the liquidation amount of such Capital Securities and Common
Securities; provided, however, that if on any Distribution Date or Redemption
Date an Indenture Event of Default (as defined herein) shall have occurred and
be continuing, no payment of any Distribution on, or Redemption Price of, any
of the Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid Distributions on
all of the outstanding Capital Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the Redemption
Price the full amount of such Redemption Price on all of the outstanding
Capital Securities then called for redemption, shall have been made or provided
for, and all funds available to the Property Trustee shall first be applied to
the payment in full in cash of all Distributions on, or Redemption Price of,
the Capital Securities then due and payable.
Liquidation Distribution Upon Dissolution
The Company will have the right at any time to terminate the Trust and,
after satisfaction of the liabilities of creditors of the Trust as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Capital Securities and Common Securities in liquidation of
the Trust.
Pursuant to the Declaration, the Trust shall automatically dissolve upon
expiration of its term and shall dissolve on the first to occur of: (i) certain
events of bankruptcy, dissolution or liquidation of the Company; (ii) the
distribution of the Junior Subordinated Debentures to the holders of the
Capital Securities and Common Securities; (iii) the redemption of all of the
Capital Securities in connection with the maturity or redemption of all of the
Junior Subordinated Debentures; and (iv) the entry by a court of competent
jurisdiction of an order for the dissolution of the Trust.
If an early dissolution occurs as described in clause (i), (ii) or (iv)
above, the Trust shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of or the
making of reasonable provisions for liabilities to creditors of the Trust as
provided by applicable law, to the
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holders of the Capital Securities and Common Securities their pro rata interest
in the Junior Subordinated Debentures, unless such distribution is determined
by the Property Trustee not to be practicable, in which event such holders will
be entitled to receive out of the assets of the Trust available for
distribution to holders, after satisfaction of liabilities to creditors of the
Trust as provided by applicable law, an amount equal to, in the case of holders
of Capital Securities, the aggregate of the liquidation amount plus accrued and
unpaid Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable by the Trust on
the Capital Securities shall be paid on a pro rata basis. The holder of the
Common Securities will be entitled to receive distributions upon any such
liquidation pro rata with the holders of the Capital Securities, except that if
an Indenture Event of Default has occurred and is continuing, the Capital
Securities shall have a priority over the Common Securities.
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures to holders of the Capital Securities, (i) the Capital
Securities will no longer be deemed to be outstanding, (ii) DTC or its nominee,
as a record holder of Capital Securities, will receive a registered global
certificate or certificates representing the Junior Subordinated Debentures to
be delivered upon such distribution and (iii) any certificates representing
Capital Securities held in certificated form will be deemed to represent Junior
Subordinated Debentures having a principal amount equal to the liquidation
amount of such Capital Securities, and bearing accrued and unpaid interest in
an amount equal to the accrued and unpaid Distributions on such Capital
Securities, until such certificates are presented for cancellation, whereupon
the Company will issue to such holder, and the Indenture Trustee will
authenticate, a certificate representing such Junior Subordinated Debentures.
Trust Enforcement Events
An Indenture Event of Default constitutes a Trust Enforcement Event under
the Declaration with respect to the Trust Securities, provided that pursuant to
the Declaration, the holder of the Common Securities will be deemed to have
waived any Trust Enforcement Event with respect to the Common Securities until
all Trust Enforcement Events with respect to the Capital Securities have been
cured, waived or otherwise eliminated. Until such Trust Enforcement Event with
respect to the Capital Securities has been so cured, waived or otherwise
eliminated, the Property Trustee will be deemed to be acting solely on behalf
of the holders of the Capital Securities and only the holders of the Capital
Securities will have the right to direct the Property Trustee with respect to
certain matters under the Declaration, and therefore the Indenture.
Upon the occurrence of a Trust Enforcement Event, the Indenture Trustee (as
defined herein) or the Property Trustee as the holder of the Junior
Subordinated Debentures will have the right under the Indenture to declare the
principal of and interest on the Junior Subordinated Debentures to be
immediately due and payable. Each of the Company and the Trust is required to
file annually with the Property Trustee an officer's certificate as to its
compliance with all conditions and covenants under the Declaration. If the
Property Trustee fails to enforce its rights with respect to the Junior
Subordinated Debentures held by the Trust, any record holder of Capital
Securities may institute legal proceedings directly against the Company to
enforce the Property Trustee's rights under such Junior Subordinated Debentures
without first instituting any legal proceedings against such Property Trustee
or any other person or entity. In addition, if a Trust Enforcement Event has
occurred and is continuing and such event is attributable to the failure of the
Company to pay interest, principal or other required payments on the Junior
Subordinated Debentures issued to the Trust on the date such interest,
principal or other payment is otherwise payable, then a record holder of
Capital Securities may, on or after the respective due dates specified in the
Junior Subordinated Debentures, institute a proceeding directly against the
Company for enforcement of payment on Junior Subordinated Debentures having a
principal amount equal to the aggregate liquidation amount of the Capital
Securities held by such holder (a "Direct Action"). In connection with such
Direct Action, the Company will be subrogated to the rights of such record
holder of Capital Securities to the extent of any payment made by the Company
to such record holder of Capital Securities.
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Voting Rights; Amendment of the Declaration
Except as provided below and under "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Declaration, the holders
of the Capital Securities will have no voting rights.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Trustees shall not (i) direct the time, method or place of
conducting any proceeding for any remedy available to the Indenture Trustee or
executing any trust or power conferred on the Property Trustee with respect to
such Junior Subordinated Debentures, (ii) waive any past default that is
waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or
termination of the Indenture or such Junior Subordinated Debentures, where such
consent shall be required, without, in each case, obtaining the prior approval
of the holders of a majority in aggregate liquidation amount of all outstanding
Capital Securities; provided, however, that where a consent under the Indenture
would require the consent of each holder of Junior Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee
without the prior consent of each holder of Capital Securities. The Trustees
shall not revoke any action previously authorized or approved by a vote of the
holders of the Capital Securities except pursuant to a subsequent vote of the
holders of the Capital Securities. The Property Trustee shall notify each
holder of record of the Capital Securities of any notice of default which it
receives with respect to the Junior Subordinated Debentures. In addition to
obtaining the foregoing approvals of the holders of the Capital Securities,
prior to taking any of the foregoing actions, the Property Trustee shall
receive an opinion of counsel experienced in such matters to the effect that
the Trust will not be classified as other than a grantor trust for United
States federal income tax purposes on account of such action.
The Declaration may be amended from time to time by a written instrument
approved and executed by a majority of the Regular Trustees (and in certain
circumstances the Property Trustee and the Delaware Trustee), without the
consent of the holders of the Capital Securities, (i) to cure any ambiguity,
correct or supplement any provisions in the Declaration that may be defective
or inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under the Declaration that shall not be
inconsistent with the other provisions of the Declaration, (ii) to add to the
covenants, restrictions or obligations of the Company or (iii) to modify,
eliminate or add to any provisions of the Declaration to such extent as shall
be necessary to ensure that the Trust will be classified as a grantor trust for
United States federal income tax purposes at all times that any Capital
Securities and Common Securities are outstanding or to ensure that the Junior
Subordinated Debentures are treated as indebtedness of the Company or to ensure
that the Trust will not be required to register as an "investment company"
under the Investment Company Act, provided, however, that such action shall not
adversely affect in any material respect the interests of any holder of Capital
Securities or Common Securities, and any amendments of the Declaration shall
become effective when notice thereof is given to the holders of Capital
Securities and Common Securities. The Declaration may be amended by the Company
and a majority of the Regular Trustees with (i) the consent of holders
representing not less than a majority (based upon liquidation amounts) of the
outstanding Capital Securities and Common Securities and (ii) receipt by the
Regular Trustees of an opinion of counsel to the effect that such amendment or
the exercise of any power granted to the Regular Trustees in accordance with
such amendment will not affect the Trust's status as a grantor trust for United
States federal income tax purposes or the Trust's exemption from status of an
"investment company" under the Investment Company Act, provided, further, that
without the consent of each holder of Capital Securities and Common Securities
affected thereby, the Declaration may not be amended to (i) change the amount
or timing of any Distribution on the Capital Securities and Common Securities
or otherwise adversely affect the amount of any Distribution required to be
made in respect of the Capital Securities and Common Securities as of a
specified date or (ii) restrict the right of a holder of Capital Securities or
Common Securities to institute suit for the enforcement of any such payment on
or after such date.
Any required approval of holders of Capital Securities may be given at a
meeting of holders of Capital Securities convened for such purpose or pursuant
to written consent. The Regular Trustees will cause a notice
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of any meeting at which holders of Capital Securities are entitled to vote, or
of any matter upon which action by written consent of such holders is to be
taken, to be given to each holder of record of Capital Securities in the manner
set forth in the Declaration.
No vote or consent of the holders of Capital Securities will be required for
the Trust to redeem and cancel its Capital Securities in accordance with the
Declaration.
Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities that are owned by the Company, the Trustees or any affiliate of the
Company or any Trustees, shall, for purposes of such vote or consent, be
treated as if they were not outstanding.
Expenses and Taxes
In the Indenture (as defined herein), the Company has agreed to pay all
debts and other obligations (other than with respect to the Capital Securities)
and all costs and expenses of the Trust (including, but not limited to, costs
and expenses relating to the organization of the Trust, the fees and expenses
of the Trustees and the costs and expenses relating to the operation of the
Trust) and to pay any and all taxes and all costs and expenses with respect
thereto (other than withholding taxes) to which the Trust might become subject.
The foregoing obligations of the Company under the Indenture are for the
benefit of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice thereof. Any such Creditor may enforce such
obligations of the Company directly against the Company, and the Company has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Company. The Company has also agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give full effect to
the foregoing.
Book-Entry Issuance
DTC will act as securities depositary for all of the Capital Securities. The
Capital Securities will be issued only as fully-registered securities
registered in the name of Cede & Co. (DTC's nominee). One or more fully-
registered global certificates will be issued for the Capital Securities,
representing in the aggregate the total number of Capital Securities, and will
be deposited with DTC.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the DTC system is also available to
others, such as securities brokers and dealers, banks and trust companies that
clear through or maintain custodial relationships with Direct Participants,
either directly or indirectly ("Indirect Participants"). The rules applicable
to DTC and its Participants are on file with the Commission.
Purchases of Capital Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Capital
Securities on DTC's records. The ownership interest of each actual purchaser of
each Capital Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but
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Beneficial Owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the Direct or Indirect Participants through which the Beneficial Owners
purchased Capital Securities. Transfers of ownership interests in the Capital
Securities are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in Capital Securities,
except in the event that use of the book-entry system for the Capital
Securities of the Trust is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Capital
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Capital Securities are credited, which may or may not be
the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Redemption notices shall be sent to Cede & Co. as the registered holder of
the Capital Securities.
Although voting with respect to the Capital Securities is limited to the
holders of record of the Capital Securities, in those instances in which a vote
is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to Capital Securities. Under its usual procedures, DTC would mail an
omnibus proxy (the "Omnibus Proxy") to the Property Trustee as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts such Capital
Securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Distribution payments on the Capital Securities will be made by the Property
Trustee to DTC. DTC's practice is to credit Direct Participants' accounts on
the relevant payment date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive
payments on such payment date. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices and will be
the responsibility of such Participant and not of DTC, the Property Trustee,
the Trust or the Company, subject to any statutory or regulatory requirements
as may be in effect from time to time. Payment of Distributions to DTC is the
responsibility of the Property Trustee, disbursement of such payments to Direct
Participants is the responsibility of DTC, and disbursements of such payments
to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
DTC may discontinue providing its services as securities depositary with
respect to any of the Capital Securities at any time by giving reasonable
notice to the Property Trustee and the Company. In the event that a successor
securities depositary is not obtained, definitive Capital Securities
certificates representing such Capital Securities are required to be printed
and delivered. The Company, at its option, may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor depositary). After
an Indenture Event of Default, the holders of a majority in liquidation amount
of Capital Securities may determine to discontinue the system of book-entry
transfers through DTC. In any such event, definitive certificates for the
Capital Securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Trust or the Company believe to be
accurate, but the Trust and the Company assume no responsibility for the
accuracy thereof. None of the Trustees, the Trust or the Company has any
responsibility for the performance by DTC or its Participants of their
respective obligations as described herein or under the rules and procedures
governing their respective operations.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
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Registration of transfers of Capital Securities will be effected without
charge by or on behalf of the Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Trust will not be required (i) to register or cause to be
registered the transfer or exchange of the Capital Securities during a period
beginning at the opening of business 15 days before the day of the mailing of
the relevant notice of redemption and ending at the close of business on the
day of mailing of such notice of redemption or (ii) to register or cause to be
registered the transfer or exchange of any Capital Securities so selected for
redemption, except in the case of any Capital Securities being redeemed in
part, any portion thereof not to be redeemed.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance of a
Trust Enforcement Event, undertakes to perform only such duties as are
specifically set forth in the Declaration and, after such Trust Enforcement
Event, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
rights or powers vested in it by the Declaration at the request of any holder
of Capital Securities unless such holder has provided the Property Trustee a
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby. If no Trust Enforcement Event has occurred and is continuing
and the Property Trustee is required to decide between alternative causes of
action, construe ambiguous provisions in the Declaration or is unsure of the
application of any provision of the Declaration, and the matter is not one on
which holders of Capital Securities are entitled under the Declaration to vote,
then the Property Trustee may, but shall be under no duty to, take such action
as is directed by the Company and the holder of the Common Securities and will
have no liability except for its own bad faith, negligence or willful
misconduct.
Payment and Paying Agency
Payments in respect of the Capital Securities shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Capital Securities are not held by DTC, such payments shall be made
by check mailed to the address of the holder entitled thereto as such address
shall appear on the Register. The paying agent (the "Paying Agent") shall
initially be the Property Trustee and any co-paying agent chosen by the
Property Trustee and acceptable to the Regular Trustees and the Company. The
Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written
notice to the Property Trustee and the Company. In the event that the Property
Trustee shall no longer be the Paying Agent, the Regular Trustees shall appoint
a successor (which shall be a bank or trust company acceptable to the Regular
Trustees and the Company) to act as Paying Agent.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below or as otherwise described under "--Liquidation Distribution
Upon Dissolution." The Trust may, at the request of the Company, with the
consent of the Regular Trustees and without the consent of the holders of the
Capital Securities, the Delaware Trustee or the Property Trustee merge with or
into, consolidate, amalgamate, be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to a trust organized as such
under the laws of any State; provided that (i) such successor entity (if not
the Trust) either (a) expressly assumes all of the obligations of the Trust
with respect to the Capital Securities or (b) substitutes for the Capital
Securities other securities having substantially the same terms as the Capital
Securities (the "Successor Securities") so long as the Successor Securities
rank the same as the Capital Securities rank in priority with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) if
the Trust is not the Successor Entity, the Company expressly appoints a trustee
of such successor entity possessing the same powers and duties as the Property
Trustee as the holder of the Junior
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Subordinated Debentures, (iii) the Capital Securities or the Successor
Securities are listed, or any Successor Securities will be listed upon
notification of issuance, on any national securities exchange or any inter-
dealer quotation system on which the Capital Securities are then listed or
quoted, if any, (iv) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not cause the Capital Securities (including
any Successor Securities) to be downgraded by any nationally-recognized
statistical rating organization, (v) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the Capital Securities
(including any Successor Securities) in any material respect, (vi) such
successor entity has a purpose substantially identical to that of the Trust,
(vii) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Company has received an opinion from
independent counsel to the Trust experienced in such matters to the effect that
(a) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of
the holders of the Capital Securities (including any Successor Securities) in
any material respect and (b) following such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease, (1) neither the Trust
nor such successor entity will be required to register as an investment company
under the Investment Company Act and (2) the Trust or the successor entity will
continue to be classified as a grantor trust for United States federal income
tax purposes, (viii) the Company or any permitted successor or assignee owns
all of the common securities of such successor entity and guarantees the
obligations of such successor entity under the Successor Securities at least to
the extent provided by the Guarantee and (ix) such successor entity (if not the
Trust) expressly assumes all of the obligations of the Trust with respect to
the Trustees. Notwithstanding the foregoing, the Trust shall not, except with
the consent of holders of 100% in aggregate liquidation amount of the Capital
Securities, consolidate, amalgamate, merge with or into, be replaced by or
convey, transfer or lease its properties and assets substantially as an
entirety to any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause
the Trust or the successor entity to be classified as an association taxable as
a corporation or as other than a grantor trust for United States federal income
tax purposes and each holder of the Capital Securities not be treated as owning
an undivided interest in the Junior Subordinated Debentures.
Merger or Consolidation of Trustees
Any entity into which the Property Trustee, the Delaware Trustee or any
Regular Trustee that is not a natural person may be merged or converted or with
which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
entity succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under the Declaration,
provided such entity shall be otherwise qualified and eligible.
Miscellaneous
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the Investment Company
Act or classified as other than a grantor trust for United States federal
income tax purposes and so that the Junior Subordinated Debentures will be
treated as indebtedness of the Company for United States federal income tax
purposes. In this connection, the Company and the Regular Trustees are
authorized to take any action, not inconsistent with applicable law, the
Certificate of Trust or the Declaration, that the Company and the Regular
Trustees determine in their discretion to be necessary or desirable for such
purposes, as long as such action does not materially and adversely affect the
interests of the holders of the Capital Securities.
The Trust may not borrow money, issue debt nor mortgage or pledge any of its
assets.
Governing Law
The Declaration and the Capital Securities will be governed by, and
construed in accordance with, the laws of the State of Delaware.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under an Indenture (the
"Indenture") between the Company and The Bank of New York, as trustee (the
"Indenture Trustee"). This summary of certain terms and provisions of the
Junior Subordinated Debentures and the Indenture, which summarizes all of the
material terms thereof, does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, the Indenture, the form of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, and to the Trust Indenture Act. Whenever particular defined terms
of the Indenture are referred to herein, such defined terms are incorporated
herein by reference.
General
Concurrently with the issuance of the Capital Securities, the Trust will
invest the proceeds thereof and the consideration paid by the Company for the
Common Securities in the Junior Subordinated Debentures issued by the Company.
The Junior Subordinated Debentures will be in a principal amount equal to the
aggregate liquidation amount of the Capital Securities plus the Company's
concurrent investment in the Common Securities. The Junior Subordinated
Debentures will bear interest at the annual rate of % of the principal amount
thereof, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each, an "Interest Payment Date"), commencing June
30, 1999, to the person in whose name each Junior Subordinated Debenture is
registered, subject to certain exceptions, at the close of business on the 15th
day of the month preceding the relevant Interest Payment Date. It is
anticipated that, until the liquidation, if any, of the Trust, each Junior
Subordinated Debenture will be held in the name of the Property Trustee in
trust for the benefit of the holders of the Capital Securities and the Common
Securities. The amount of interest payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months. In the event that any date
on which interest is payable on the Junior Subordinated Debentures is not a
Business Day, then payment of the interest payable on such date will be made on
the next succeeding day that is a Business Day (and without any interest or
other payment in respect of any such delay), except that if such next
succeeding Business Day falls in the next calendar year, then such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on the date such payment was originally
payable. Accrued interest that is not paid on the applicable Interest Payment
Date will bear additional interest on the amount thereof (to the extent
permitted by law) at the rate per annum of % thereof, compounded quarterly.
The term "interest" as used herein shall include quarterly interest payments
and interest on quarterly interest payments not paid on the applicable Interest
Payment Date, as applicable.
The Junior Subordinated Debentures will mature on , 2048.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness (as defined
below) of the Company and will be structurally subordinated to all liabilities
and obligations of the Company's subsidiaries. See "--Subordination."
Option to Extend Interest Payment Period
So long as no Indenture Event of Default has occurred and is continuing, the
Company has the right under the Indenture to defer the payment of interest at
any time or from time to time for a period not exceeding 20 consecutive
quarters with respect to each Extension Period, provided that no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures or end on a day other than an Interest Payment Date. At the end of
such Extension Period, the Company must pay all interest then accrued and
unpaid (together with interest thereon at the annual rate of %, compounded
quarterly, to the extent permitted by applicable law). During an Extension
Period, interest will continue to accrue and holders of Junior Subordinated
Debentures (or holders of Capital Securities while the Capital Securities are
outstanding) will be required to accrue interest income (as OID) for United
States federal income tax purposes. See "U.S. Federal Income Tax Consequences--
Interest Income and Original Issue Discount."
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During any such Extension Period, the Company may not, and may not permit
any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock, (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Junior Subordinated Debentures or (iii) make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu or junior in
interest to the Junior Subordinated Debentures (other than (a) dividends or
distributions in the form of stock, warrants, options or other rights where the
dividend stock or the stocks issuable upon exercise of such warrants, options
or other right is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock, (b) payments under the
Guarantee, (c) any declaration of a dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of rights, stock
or other property under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (d) as a result of
reclassification of the Company's capital stock into one or more other classes
or series of the Company's capital stock or the exchange or conversion of one
class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for another class or series of the Company's capital
stock, or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (e) the purchase of fractional interests
in the shares of the Company's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged and (f) repurchases, redemptions or other acquisitions of common
stock related to the issuance of common stock or rights under any of the
Company's employment contracts, benefit plans or other similar arrangement with
or for the benefit of one or more employees, officers, directors or
consultants, in connection with a dividend reinvestment or stockholder stock
purchase plan or in connection with the issuance of capital stock of the
Company (or securities convertible into or exercisable for such capital stock)
as consideration in an acquisition transaction entered into prior to the
applicable Extension Period). Prior to the termination of any such Extension
Period, the Company may further extend the Extension Period, provided that no
Extension Period may exceed 20 quarters or extend beyond the Stated Maturity of
the Junior Subordinated Debentures or end on any date other than on an Interest
Payment Date. Upon the termination of any such Extension Period and the payment
of all amounts then due on any Interest Payment Date, the Company may elect to
begin a new Extension Period subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Company shall give the Property Trustee, the Regular Trustees and the
Indenture Trustee notice of its election of such Extension Period at least one
Business Day prior to the earlier of (i) the date the Distributions on the
Capital Securities would have been payable except for the election to begin
such Extension Period or (ii) the date the Regular Trustees are required to
give notice to an applicable self-regulatory organization or to holders of such
Capital Securities of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Property Trustee shall give notice of the Company's election to begin
a new Extension Period to the holders of the Capital Securities.
Redemption
The Junior Subordinated Debentures are not redeemable prior to , 2004
unless a Special Event has occurred. The Junior Subordinated Debentures are
redeemable prior to maturity at the option of the Company, on or after ,
2004, in whole or in part at any time at 100% of the principal amount thereof
plus accrued and unpaid interest, if any, to, but excluding, the date of
redemption.
The Junior Subordinated Debentures are also redeemable at any time in whole
but not in part, within 90 days of the occurrence of a Special Event, at a
redemption price equal to 100% of the principal amount of such Junior
Subordinated Debentures, together with accrued and unpaid payments of interest
thereon to, but excluding, the date of redemption.
In the event that Junior Subordinated Debentures are redeemed, the Trust
must redeem Trust Securities having an aggregate liquidation preference equal
to the aggregate principal amount of Junior Subordinated Debentures or portions
thereof called for redemption.
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Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at its registered address. Unless the Company
defaults in payment of the redemption price, on and after the redemption date
interest ceases to accrue on such Junior Subordinated Debentures or portions
thereof called for redemption.
Certain Covenants of the Company
The Company will covenant in the Indenture that if and so long as the Trust
is the holder of all Junior Subordinated Debentures, the Company, as borrower,
will pay to the Trust all fees and expenses related to the Trust and the
offering of the Capital Securities and will pay, directly or indirectly, all
ongoing costs, expenses and liabilities of the Trust (including any taxes,
duties, assessments or governmental charges of whatever nature (other than
withholding taxes) imposed by the United States or any domestic taxing
authority upon the Trust) but excluding obligations under the Trust Securities.
The Company will also covenant that it will not, and will not permit any
subsidiary of the Company to, (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect
to, any of the Company's capital stock, (ii) make any payment of principal,
interest or premium, if any, on or repay or repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to
the Junior Subordinated Debentures or (iii) make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior in
interest to the Junior Subordinated Debentures (other than (a) dividends or
distributions in the form of stock, warrants, options or other rights where the
dividend stock or the stocks issuable upon exercise of such warrants, options
or other right is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock, (b) payments under the
Guarantee, (c) any declaration of a dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of rights, stock
or other property under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (d) as a result of
reclassification of the Company's capital stock into one or more other classes
or series of the Company's capital stock or the exchange or conversion of one
class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for another class or series of the Company's capital
stock, or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (e) the purchase of fractional interests
in the shares of the Company's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged and (f) repurchases, redemptions or other acquisitions of common
stock related to the issuance of common stock or rights under any of the
Company's employment contracts, benefit plans or other similar arrangement with
or for the benefit of one or more employees, officers, directors or
consultants, in connection with a dividend reinvestment or stockholder stock
purchase plan or in connection with the issuance of capital stock of the
Company (or securities convertible into or exercisable for such capital stock)
as consideration in an acquisition transaction entered into prior to the
applicable Extension Period) if at such time (x) there shall have occurred any
event of which the Company has actual knowledge that (I) with the giving of
notice or the lapse of time, or both, would constitute an Indenture Event of
Default with respect to Junior Subordinated Debentures and (II) in respect of
which the Company shall not have taken reasonable steps to cure, (y) the
Company shall be in default with respect to its payment of any obligations
under the Guarantee or (z) the Company shall have given notice of its election
of an Extension Period as provided in the Indenture and shall not have
rescinded such notice, or such Extension Period, or any extension thereof,
shall be continuing.
Subordination
In the Indenture, the Company has covenanted and agreed that any Junior
Subordinated Debentures issued thereunder will be subordinated and junior in
right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets of the Company upon any
liquidation, dissolution, winding-up, reorganization, assignment for the
benefit of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy
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proceeding of the Company, the holders of Senior Indebtedness will first be
entitled to receive payment in full of principal of and premium, if any, and
interest, if any, on such Senior Indebtedness before the holders of Junior
Subordinated Debentures or the Property Trustee on behalf of the holders of
Capital Securities will be entitled to receive or retain any payment in respect
of the principal of, or interest, if any, on the Junior Subordinated
Debentures; provided, however, that holders of Senior Indebtedness shall not be
entitled to receive payment of any such amounts to the extent that such holders
would be required by the subordination provisions of such Senior Indebtedness
to pay such amounts over to the obligees on trade accounts payable or other
liabilities arising in the ordinary course of the Company's business.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of all
amounts due thereon (including any amounts due upon acceleration) before the
holders of Junior Subordinated Debentures will be entitled to receive or retain
any payment in respect of the principal of, or interest, if any, on the Junior
Subordinated Debentures; provided, however, that holders of Senior Indebtedness
shall not be entitled to receive payment of any such amounts to the extent that
such holders would be required by the subordination provisions of such Senior
Indebtedness to pay such amounts over to the obligees on trade accounts payable
or other liabilities arising in the ordinary course of the Company's business.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior Indebtedness, or an
event of default with respect to any Senior Indebtedness resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
"Senior Indebtedness" means, with respect to the Company, whether recourse
is to all or a portion of the assets of the Company and whether or not
contingent, (i) every obligation of the Company for money borrowed; (ii) every
obligation of the Company evidenced by bonds, debentures, notes or other
similar instruments of the Company, including obligations incurred in
connection with the acquisition of property, assets or businesses; (iii) every
reimbursement obligation of the Company with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of the
Company; (iv) every obligation of the Company issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business); (v) every
capital lease obligation of the Company; (vi) every obligation of the Company
for claims (as defined in Section 101(4) of the United States Bankruptcy Code
of 1978, as amended) in respect of derivative products such as interest and
foreign exchange rate contracts, commodity contracts and similar arrangements;
and (vii) every obligation of the type referred to in clauses (i) through (vi)
above of another person and all dividends of another person the payment of
which, in either case, the Company has guaranteed or is responsible or liable
for, directly or indirectly, as obligor or otherwise; provided, however, that
Senior Indebtedness shall not be deemed to include (i) any indebtedness of the
Company that is by its terms subordinated to or ranked pari passu with the
Junior Subordinated Debentures; (ii) any indebtedness of the Company which when
incurred and without respect to any election under Section 1111(b) of the
United States Bankruptcy Code of 1978, as amended, was without recourse to the
Company; (iii) any indebtedness of the Company to any of its subsidiaries; (iv)
any indebtedness to any employee of the Company; (v) trade accounts payable in
the ordinary course of business; or (vi) any indebtedness in respect of debt
securities issued to any trust, or a trustee of such trust, partnership or
other entity affiliated with the Company that is a financing entity of the
Company in connection with the issuance by such financing entity of securities
that are similar to the Capital Securities.
The Indenture places no limitation on the amount of additional indebtedness
or other liabilities that may be incurred by the Company's subsidiaries. As of
December 31, 1998, the Company had no Senior Indebtedness outstanding, and the
Company's consolidated subsidiaries had indebtedness and other liabilities of
approximately $23.9 billion (of which $23.6 billion consists of obligations to
policyholders under outstanding insurance policies) to which the Junior
Subordinated Debentures would be effectively subordinated.
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Indenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes an "Indenture Event of Default" with respect to the
Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures when due (subject to the deferral of any due date in the case of
an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, upon redemption, by declaration of
acceleration or otherwise; or
(iii) failure to observe or perform any other covenant contained in the
Indenture for 90 days after written notice to the Company from the
Indenture Trustee or the holders of at least 25% in aggregate outstanding
principal amount of outstanding Junior Subordinated Debentures; or
(iv) certain events of bankruptcy or insolvency of the Company.
The holders of a majority in aggregate outstanding principal amount of
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of Junior Subordinated Debentures may declare the
principal due and payable immediately upon an Indenture Event of Default, and,
should the Indenture Trustee or such holders of such Junior Subordinated
Debentures fail to make such declaration, the holders of at least 25% in
aggregate liquidation amount of the Capital Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of Junior
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee,
and should the holders of such Junior Subordinated Debentures fail to annul
such declaration and waive such default, the holders of a majority in aggregate
liquidation amount of the Capital Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures affected thereby may, on behalf of the holders
of all the Junior Subordinated Debentures, waive any past default, except a
default in the payment of principal or interest (unless such default has been
cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Indenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Junior Subordinated Debenture, and should the
holders of such Junior Subordinated Debentures fail to waive such default, the
holders of a majority in aggregate liquidation amount of the Capital Securities
shall have such right. The Company is required to file annually with the
Indenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Indenture.
In case an Indenture Event of Default shall occur and be continuing, the
Property Trustee will have the right to declare the principal of and the
interest on such Junior Subordinated Debentures and any other amounts payable
under the Indenture to be forthwith due and payable and to enforce its other
rights as a creditor with respect to such Junior Subordinated Debentures.
Enforcement of Certain Rights by Holders of Capital Securities
If an Indenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or
principal on the Junior Subordinated Debentures on the date such interest or
principal is otherwise payable, a holder of Capital Securities may institute a
Direct Action for payment. The Company may not amend the Indenture to remove
the foregoing right to bring a Direct Action without the prior written consent
of the holders of all of the Capital Securities. Notwithstanding any payment
made to such holder of Capital Securities by the Company in connection with a
Direct Action, the Company shall remain obligated to pay the principal of or
interest on the Junior Subordinated Debentures held by the Trust or the
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Property Trustee and the Company shall be subrogated to the rights of the
holder of such Capital Securities with respect to payments on the Capital
Securities to the extent of any payments made by the Company to such holder in
any Direct Action. The holders of Capital Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures.
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, unless (i) in case the Company
consolidates with or merges into another Person or conveys, transfers or leases
its properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any state
or the District of Columbia, and such successor Person expressly assumes the
Company's obligations on the Junior Subordinated Debentures issued under the
Indenture; (ii) immediately after giving effect thereto, no Indenture Event of
Default, and no event which, after notice or lapse of time or both, would
become an Indenture Event of Default, shall have happened and be continuing;
(iii) if at the time any Capital Securities are outstanding, such transaction
is permitted under the Declaration and Guarantee and does not give rise to any
breach or violation of the Declaration or Guarantee; (iv) any such lease shall
provide that it will remain in effect so long as any Junior Subordinated
Debentures are outstanding; and (v) certain other conditions as prescribed in
the Indenture are met.
Modification of Indenture
From time to time the Company and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interest of the holders of Junior
Subordinated Debentures or any outstanding Capital Securities) and qualifying,
or maintaining the qualification of, the Indenture under the Trust Indenture
Act. The Indenture contains provisions permitting the Company and the Indenture
Trustee, with the consent of the holders of not less than a majority in
principal amount of outstanding Junior Subordinated Debentures affected, to
execute supplemental indentures which modify the Indenture in a manner
affecting the rights of the holders of such Junior Subordinated Debentures;
provided that no such supplemental indenture may, without the consent of the
holder of each outstanding Junior Subordinated Debenture so affected, (i)
change the Stated Maturity of the Junior Subordinated Debentures, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon (except such extension as is contemplated hereby) or (ii)
reduce the percentage of principal amount of Junior Subordinated Debentures,
the holders of which are required to consent to any such modification of the
Indenture, provided that, so long as any Capital Securities remain outstanding,
no such modification may be made that adversely affects the holders of such
Capital Securities in any material respect, and no termination of the Indenture
may occur, and no waiver of any Indenture Event of Default or compliance with
any covenant under the Indenture may be effective, without the prior consent of
the holders of at least a majority of the aggregate liquidation amount of the
Capital Securities unless and until the principal of the Junior Subordinated
Debentures and all accrued and unpaid interest thereon have been paid in full
and certain other conditions are satisfied.
Distributions of Junior Subordinated Debentures; Book-Entry Issuance
Under certain circumstances involving the termination of the Trust, Junior
Subordinated Debentures may be distributed to the holders of the Capital
Securities in liquidation of the Trust after satisfaction of liabilities to
creditors of the Trust as provided by applicable law. If distributed to holders
of Capital Securities in liquidation, the Junior Subordinated Debentures will
initially be issued in the form of global securities and certificated
securities. DTC, or any successor depositary for the Capital Securities, will
act as depositary for such global securities. It is anticipated that the
depositary arrangements for such global securities would be substantially
identical to those in effect for the Capital Securities. For a description of
DTC and the terms of the depositary matters, see "Description of Capital
Securities--Book-Entry Issuance."
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If the Junior Subordinated Debentures are distributed to the holders of
Capital Securities upon the liquidation of the Trust, the Company will use its
best efforts to list the Junior Subordinated Debentures on such stock exchanges
or inter-dealer quotation system, if any, on which the Capital Securities are
then listed or quoted. There can be no assurance as to the market price of any
Junior Subordinated Debentures that may be distributed to the holders of
Capital Securities.
Payment and Paying Agents
The Company initially will act as Paying Agent with respect to the Junior
Subordinated Debentures except that, if the Junior Subordinated Debentures are
distributed to the holders of the Capital Securities in liquidation of such
holders' interests in the Trust, the Indenture Trustee will act as the Paying
Agent. The Company at any time may designate additional Paying Agents or
rescind the designation of any Paying Agent or approve a change in the office
through which any Paying Agent acts, except that the Company will be required
to maintain a Paying Agent at the place of payment.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by the Company in trust, for the payment of the principal of, or interest
on, any Junior Subordinated Debentures and remaining unclaimed for two years
after such principal or interest has become due and payable shall, at the
request of the Company, be repaid to the Company and the holder of such Junior
Subordinated Debentures shall thereafter look, as a general unsecured creditor,
only to the Company for payment thereof.
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of New York.
Defeasance and Discharge
The Indenture provides that the Company, at the Company's option: (a) will
be discharged from any and all obligations in respect of the Junior
Subordinated Debentures (except for certain obligations to register the
transfer or exchange of Junior Subordinated Debentures, replace stolen, lost or
mutilated Junior Subordinated Debentures, maintain paying agencies and hold
moneys for payment in trust) or (b) need not comply with certain restrictive
covenants of the Indenture, in each case if the Company deposits, in trust with
the Indenture Trustee, money or U.S. Government Obligations which through the
payment of interest thereon and principal thereof in accordance with their
terms will provide money, in an amount sufficient to pay all the principal of,
and interest, if any, on the Junior Subordinated Debentures on the dates such
payments are due in accordance with the terms of such Junior Subordinated
Debentures. To exercise any such option, the Company is required to deliver to
the Indenture Trustee and the Defeasance Agent, if any, an opinion of counsel
to the effect that (i) the deposit and related defeasance would not cause the
holders of the Junior Subordinated Debentures to recognize income, gain or loss
for U.S. federal income tax purposes and, in the case of a discharge pursuant
to clause (a), such opinion shall be accompanied by a private letter ruling to
the effect received by the Company from the United States Internal Revenue
Service or revenue ruling pertaining to a comparable form of transaction to the
effect published by the United States Internal Revenue Service, and (ii) if
listed on any national securities exchange, such Junior Subordinated Debentures
would not be delisted from such exchange as a result of the exercise of such
option.
Information Concerning the Indenture Trustee
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
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DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance by the Trust of the Capital Securities for the benefit of the
holders from time to time of such Capital Securities. The Bank of New York will
act as guarantee trustee ("Guarantee Trustee") under the Guarantee for the
purposes of compliance with the Trust Indenture Act and the Guarantee will be
qualified as an Indenture under the Trust Indenture Act. This summary of
certain provisions of the Guarantee, which summarizes all of the material terms
thereof, does not purport to be complete and is subject to, and qualified in
its entirety by reference to, all of the provisions of the Guarantee, including
the definitions therein of certain terms, and the Trust Indenture Act. The form
of the Guarantee will be filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Capital Securities.
General
The Company will irrevocably and unconditionally agree to pay in full on a
subordinated basis, to the extent set forth herein, the Guarantee Payments (as
defined below) to the holders of the Capital Securities, as and when due,
regardless of any defense, right of set-off or counterclaim that the Trust may
have or assert other than the defense of payment. The following payments with
respect to the Capital Securities, to the extent not paid by or on behalf of
the Trust (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on the Capital
Securities, to the extent that the Trust has funds on hand available therefor
at the time, (ii) the Redemption Price with respect to any Capital Securities
called for redemption, to the extent that the Trust has funds on hand available
therefor at such time, and (iii) upon a voluntary or involuntary dissolution,
winding up or liquidation of the Trust (unless the Junior Subordinated
Debentures are distributed to holders of the Capital Securities in exchange
therefor), the lesser of (a) the aggregate of the liquidation amount and all
accrued and unpaid Distributions on the Capital Securities to the date of
payment and to the extent that the Trust has funds on hand legally available
therefor, and (b) the amount of assets of the Trust remaining available for
distribution to holders of Capital Securities in liquidation of the Trust. The
Company's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Company to the holders of the applicable
Capital Securities or by causing the Trust to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust's obligations under the Capital Securities, but will apply only to
the extent that the Trust has funds on hand available to make such payments,
and is not a guarantee of collection.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Trust, the Trust will not be able to pay Distributions
on the Capital Securities and will not have funds legally available therefor.
The Guarantee does not limit the incurrence or issuance of other secured or
unsecured debt of the Company, whether under the Indenture or any existing or
other indenture that the Company may enter into in the future or otherwise.
The Company has, through the Guarantee, the Junior Subordinated Debentures
and the Indenture, taken together, fully and unconditionally guaranteed all of
the Trust's obligations under the Capital Securities. No single document
standing alone or operating in conjunction with fewer than all of the other
documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full and unconditional
guarantee of the Trust's obligations under the Capital Securities. See
"Relationship Among the Capital Securities, the Junior Subordinated Debentures
and the Guarantee--General."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Company and will be structurally subordinated to all liabilities and
obligations of the Company's subsidiaries. The Guarantee does not place a
limitation on the amount of additional Senior Indebtedness that may be incurred
by the Company.
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The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Capital
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust or upon
distribution of the Junior Subordinated Debentures to the holders of the
Capital Securities in exchange for all of the Capital Securities.
The obligations of the Company under the Guarantee will be structurally
subordinated to all liabilities and obligations of the Company's subsidiaries.
See "Risk Factors--Ranking of Subordinated Obligations Under the Guarantee and
the Junior Subordinated Debentures."
Amendments and Assignment
Except with respect to any changes that do not materially and adversely
affect the rights of holders of the Capital Securities (in which case no
consent will be required), the Guarantee may not be amended without the prior
approval of the holders of not less than a majority of the aggregate
liquidation amount of the outstanding Capital Securities. The manner of
obtaining any such approval will be as set forth under "Description of Capital
Securities--Voting Rights; Amendment of the Declaration." All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Capital Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate liquidation amount of the
Capital Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee
or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with
all the conditions and covenants applicable to it under the Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in each Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under
no obligation to exercise any of the powers vested in it by the Guarantee at
the request of any holder of any Capital Security unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Capital Securities, upon full
payment of the amounts payable upon liquidation of the Trust or upon
distribution of Junior Subordinated Debentures to the holders of the Capital
Securities in exchange for all of the Capital Securities. The Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of the Capital Securities must restore payment of any sums
paid under the Capital Securities or the Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
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RELATIONSHIP AMONG THE CAPITAL SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
Payments of Distributions and other amounts due on the Capital Securities
(to the extent the Trust has funds available for the payment of such
Distributions and other amounts) are irrevocably guaranteed by the Company as
and to the extent set forth under "Description of Guarantee." If and to the
extent that the Company does not make payments under the Junior Subordinated
Debentures, the Trust will not pay Distributions or other amounts due on the
Capital Securities. The Guarantee does not cover payment of Distributions when
the Trust does not have sufficient funds to pay such Distributions. In such
event, a holder of Capital Securities may institute a legal proceeding directly
against the Company to enforce payment of such Distributions to such holder
after the respective due dates. Taken together, the Company's obligations under
the Junior Subordinated Debentures, the Indenture and the Guarantee provide, in
the aggregate, a full and unconditional guarantee of payments of distributions
and other amounts due on the Capital Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full and unconditional guarantee
of the Trust's obligations under the Capital Securities. The obligations of the
Company under the Guarantee and the Junior Subordinated Debentures are
subordinate and junior in right of payment to all Senior Indebtedness of the
Company.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Capital Securities, primarily
because (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate stated liquidation amount
of the Capital Securities and the Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
related Capital Securities; (iii) the Company will pay for all and any costs,
expenses and liabilities of the Trust except the Trust's obligations under the
Capital Securities; and (iv) the Declaration further provides that the Trust
will not engage in any activity that is not consistent with the limited
purposes of the Trust.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
Enforcement Rights of Holders of Capital Securities
A holder of Capital Securities may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other person or entity.
A default or event of default under any Senior Indebtedness of the Company
will not constitute a default or Indenture Event of Default. In addition, in
the event of payment defaults under, or acceleration of, Senior Indebtedness of
the Company, the subordination provisions of the Indenture provide that no
payments may be made in respect of the Junior Subordinated Debentures until
such Senior Indebtedness has been paid in full or any payment default
thereunder has been cured or waived. Failure to make required payments on the
Junior Subordinated Debentures would constitute an Indenture Event of Default
under the Indenture.
Limited Purpose of Trust
The Capital Securities evidence a beneficial interest in the Trust, and the
Trust exists for the sole purpose of issuing the Capital Securities and the
Common Securities and investing the proceeds thereof in Junior Subordinated
Debentures. A principal difference between the rights of a holder of Capital
Securities and a
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holder of Junior Subordinated Debentures is that a holder of Junior
Subordinated Debentures is entitled to receive from the Company the principal
amount of and interest accrued on Junior Subordinated Debentures held, while a
holder of Capital Securities is entitled to receive Distributions from the
Trust (or from the Company under the Guarantee) only if and to the extent the
Trust has funds available for the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Trust involving the liquidation of the Junior Subordinated Debentures, and
after satisfaction of creditors of the Trust, if any, as required by applicable
law, the holders of the Capital Securities will be entitled to receive, out of
assets held by the Trust, the liquidation distribution in cash. See
"Description of Capital Securities--Liquidation Distribution Upon Dissolution."
Upon any voluntary or involuntary liquidation or bankruptcy of the Company, the
Property Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the Company, subordinated in right of payment to all
Senior Indebtedness, but entitled to receive payment in full of principal and
interest before any stockholders of the Company receive payments or
distributions. Because the Company is the guarantor under the Guarantee and has
agreed to pay for all costs, expenses and liabilities of the Trust (other than
the Trust's obligations to the holders of the Capital Securities), the
positions of a holder of Capital Securities and a holder of the Junior
Subordinated Debentures relative to other creditors and to stockholders of the
Company in the event of liquidation or bankruptcy of the Company would be
substantially the same.
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U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences and certain other tax consequences of the purchase, ownership and
disposition of Capital Securities, and where specifically indicated constitutes
the opinion of Cleary, Gottlieb, Steen & Hamilton regarding such material
consequences. This summary does not purport to be a comprehensive description
of all of the tax consequences that may be relevant to a decision to purchase
Capital Securities by any particular investor, including tax consequences that
arise from rules of general application to all taxpayers or to certain classes
of taxpayers or that are generally assumed to be known by investors. This
summary addresses the tax consequences only to a person that acquires Capital
Securities on their original issue at their original offering price and that is
(i) an individual citizen or resident of the United States, (ii) a corporation
or partnership organized in or under the laws of the United States or any state
thereof or the District of Columbia or (iii) otherwise subject to U.S. federal
income taxation on a net income basis in respect of the Capital Securities (a
"United States Holder"). This summary also does not address the tax
consequences to (i) persons that are not United States Holders, except as
described below under "--United States Alien Holders" (ii) persons that may be
subject to special treatment under United States federal income tax law, such
as banks, insurance companies, thrift institutions, regulated investment
companies, real estate investment trusts, tax-exempt organizations, traders in
securities that elect to mark to market and dealers in securities or
currencies, (iii) persons that will hold Capital Securities as part of a
position in a "straddle" or as part of a "hedging," "conversion" or other
integrated investment transaction for federal income tax purposes, (iv) persons
whose functional currency is not the United States dollar or (v) persons that
do not hold Capital Securities as capital assets.
This summary is based upon the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations, Internal Revenue Service rulings
and pronouncements and judicial decisions now in effect, all of which are
subject to change at any time. Such changes may be applied retroactively in a
manner that could cause the tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a beneficial owner
of Capital Securities. For example, a judicial decision could be issued or
legislation could be enacted that would adversely affect the Company's ability
to deduct interest or original issue discount on the Junior Subordinated
Debentures, either of which might in turn permit the Company to cause a
redemption of the Capital Securities. See "--Possible Tax Law Changes." All
references herein to federal tax refer to United States federal tax.
Prospective investors are advised to consult with their own tax advisors in
light of their own particular circumstances as to the United States federal tax
consequences of the purchase, ownership and disposition of capital securities,
as well as the effect of any state, local or foreign tax laws.
Classification of the Junior Subordinated Debentures and the Trust
In the opinion of Cleary, Gottlieb, Steen & Hamilton, under current law and
assuming the accuracy of, and full compliance with, the terms of the Indenture
(and certain other documents) and that such documents conform to the form
thereof that we have reviewed, and based on certain representations of the
Company and the Trust, the Junior Subordinated Debentures will be treated for
United States federal income tax purposes as indebtedness of the Company. By
acceptance of a Capital Security, each Holder covenants to treat the Junior
Subordinated Debentures as indebtedness of the Company and the Capital
Securities as an undivided beneficial ownership interest in the Junior
Subordinated Debentures.
In the opinion of Cleary, Gottlieb, Steen & Hamilton, under current law and
assuming the accuracy of, and full compliance with, the terms of the Trust
Agreement and the Indenture (and certain other documents), the Trust will be
treated for United States federal income tax purposes as a grantor trust and
not as an association taxable as a corporation. Accordingly, for United States
federal income tax purposes, each United States Holder of Capital Securities
will be considered the owner of an undivided beneficial ownership interest in
the Junior Subordinated Debentures, and each United States Holder will be
required to include in its gross income any interest (or original issue
discount accrued) with respect to its allocable share of those Junior
Subordinated Debentures. See "--Interest Income and Original Issue Discount."
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An opinion of Cleary, Gottlieb, Steen & Hamilton is not binding on the
Internal Revenue Service (the "IRS") or the courts. Prospective investors
should note that no rulings have been or are expected to be sought from the IRS
with respect to any of these issues and no assurance can be given that the IRS
will not take contrary positions. Moreover, no assurance can be given that any
of the opinions expressed herein will not be challenged by the IRS or, if
challenged, that such challenge will not be successful. See "--Possible Tax Law
Changes."
Interest Income and Original Issue Discount
Under Treasury regulations applicable to debt instruments issued on or after
August 13, 1996 (the "Regulations"), a contingency that stated interest will
not be timely paid that is "remote," because of the terms of the relevant debt
instrument, will be ignored in determining whether such debt instrument is
issued with OID. As a result of terms and conditions of the Junior Subordinated
Debentures that prohibit certain payments with respect to the Company's capital
stock and indebtedness if the Company elects to extend interest payment
periods, the Company believes that the likelihood of its exercising its option
to defer payments is remote. See "Description of Junior Subordinated
Debentures--Option to Extend Interest Payment Period." Based on the foregoing,
the Junior Subordinated Debentures will not be considered to be issued with OID
at the time of their original issuance and, accordingly, a United States Holder
should include in gross income such holder's allocable share of interest on the
Junior Subordinated Debentures in accordance with such holder's normal method
of accounting for tax purposes.
If the option to defer any payment of interest was determined not to be
"remote" or if the Company exercises its option to defer any payment of
interest, the Junior Subordinated Debentures would be treated as issued with
OID at the time of issuance or at the time of such exercise, as the case may
be, and all stated interest on the Junior Subordinated Debentures would
thereafter be treated as OID as long as the Junior Subordinated Debentures
remained outstanding. In such event, all of a United States Holder's taxable
interest income with respect to the Junior Subordinated Debentures would be
accounted for as OID on a constant yield method regardless of such holder's
method of tax accounting, and actual distributions of stated interest would not
be reported as taxable income. Consequently, a United States Holder would be
required to include OID in gross income even though the Company would not make
any actual cash payments during an Extension Period.
The Regulations have not been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to the interpretation herein.
Because income on the Capital Securities will constitute interest or OID,
corporate United States Holders of the Capital Securities will not be entitled
to a dividends-received deduction with respect to any income taken into account
with respect to the Capital Securities.
Distribution of Junior Subordinated Debentures to Holders of Capital Securities
Upon Liquidation of the Trust
Under current law, a distribution by the Trust of the Junior Subordinated
Debentures as described under the caption "Description of Capital Securities--
Liquidation Distribution upon Dissolution" will be non-taxable and will result
in the United States Holder receiving directly its pro rata share of the Junior
Subordinated Debentures previously held indirectly through the Trust, with a
holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such United States Holder had in its Capital Securities
before such distribution. If, however, the liquidation of the Trust were to
occur because the Trust is subject to United States federal income tax with
respect to income accrued or received on the Junior Subordinated Debentures, as
would be the case if, for example, the Trust were treated as an association
taxable as a corporation, the distribution of Junior Subordinated Debentures to
a United States Holder by the Trust would be a taxable event to the Trust and
each United States Holder, and each United States Holder would recognize gain
or loss as if the United States Holder had exchanged its Capital Securities for
the Junior Subordinated Debentures it received upon the
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liquidation of the Trust. A United States Holder will include interest in
income in respect of Junior Subordinated Debentures received from the Trust in
the manner described above under "--Interest Income and Original Issue
Discount."
Sale or Redemption of Capital Securities
A United States Holder that sells (including a redemption for cash of its
Capital Securities) Capital Securities will recognize gain or loss equal to the
difference between its adjusted tax basis in the Capital Securities and the
amount realized on the sale of such Capital Securities. Assuming that the
Company does not exercise its option to defer payment of interest on the Junior
Subordinated Debentures and the Junior Subordinated Debentures are not
considered issued with OID, a United States Holder's adjusted tax basis in the
Capital Securities generally will be its initial purchase price. If the Junior
Subordinated Debentures are deemed to be issued with OID, as a result of the
Company's deferral of interest payments, a United States Holder's adjusted tax
basis in the Capital Securities generally will be its initial purchase price,
increased by OID previously includible in such United States Holder's gross
income to the date of disposition and decreased by Distributions or other
payments received on the Capital Securities since and including the date of the
first Extension Period. Such gain or loss generally will be a capital gain or
loss (except to the extent any amount realized is treated as a payment of
accrued interest with respect to such United States Holder's pro rata share of
the Junior Subordinated Debentures that is required to be included in income).
Under recently enacted legislation, long-term capital gains recognized by non-
corporate United States Holders generally are subject to a maximum rate of 20
percent in respect of property held for more than one year, effective for
amounts properly taken into account on or after January 1, 1998. To the extent
the selling price, less accrued but unpaid interest through the date of
disposition, is less than the United States Holder's adjusted tax basis, such
holder will recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
The Capital Securities may trade at a price that does not accurately reflect
the value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A United States Holder who disposes of its Capital
Securities between record dates for payments of distributions thereon will be
required to include a portion of the selling price equal to the accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition in income as ordinary income (i.e., interest or, possibly, OID), to
the extent not previously taken into income. To the extent the selling price,
less accrued but unpaid interest through the date of disposition, is less than
the United States Holder's adjusted tax basis, a United States Holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income
tax purposes.
Backup Withholding Tax and Information Reporting
The amount of interest income paid and OID accrued on the Capital Securities
held of record by United States Holders (other than corporations and other
exempt United States Holders) will be reported to the IRS. "Backup" withholding
at a rate of 31% will apply to payments of interest to a nonexempt United
States Holder unless the United States Holder furnishes its taxpayer
identification number in the manner prescribed in applicable Treasury
regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions.
Payment of the proceeds from the disposition of Capital Securities to or
through the United States office of a broker is subject to information
reporting and backup withholding unless the holder or beneficial owner
establishes an exemption from information reporting and backup withholding.
Any amounts withheld from a United States Holder under the backup
withholding rules will be allowed as a refund or a credit against such United
States Holder's United States federal income tax liability, provided the
required information is furnished to the IRS.
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It is anticipated that income on the Capital Securities will be reported to
holders on Form 1099-INT or, if the Company exercises its option to defer any
payment of interest, on Form 1099-OID, and mailed to holders of the Capital
Securities by January 31 following each calendar year.
United States Alien Holders
For purposes of this discussion, a "United States Alien Holder" is a holder
of Capital Securities that is a nonresident alien individual or a foreign
corporation. Under present United States federal income tax laws: (i) payments
by the Trust or any of its paying agents to any holder of a Capital Security
who or which is a United States Alien Holder will not be subject to withholding
of United States federal income tax; provided that, (a) the beneficial owner of
the Capital Security does not actually or constructively own 10 percent or more
of the total combined voting power of all classes of stock of the Company
entitled to vote, (b) the beneficial owner of the Capital Security is not a
controlled foreign corporation that is related to the Company through stock
ownership, and (c) either (A) the beneficial owner of the Capital Security
certifies to the Trust or its agent, under penalty of perjury, that it is not a
United States Holder and provides its name and address (or, with respect to
payments made after December 31, 1999, satisfies certain documentary evidence
requirements for establishing that it is not a United States Holder) or (B) a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"Financial Institution"), and holds the Capital Security in such capacity,
certifies to the Trust or its agent, under penalty of perjury, that such
statement has been received from the beneficial owner by it or by a Financial
Institution between it and the beneficial owner and furnishes the Trust or its
agent with a copy thereof; and (ii) a United States Alien Holder of a Capital
Security will generally not be subject to withholding of United States federal
income tax on any gain realized upon the sale or other disposition of a Capital
Security provided the gain is not effectively connected with the conduct of a
trade or business in the United States by the United States Alien Holder.
With respect to payments made after December 31, 1999, for purposes of
applying the rules set forth under this heading "United States Alien Holders"
to an entity that is treated as fiscally transparent (e.g., a partnership) for
U.S. federal income tax purposes, the beneficial owner means each of the
ultimate beneficial owners of the entity.
CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and each entity whose underlying assets include "plan assets" by
reason of such a plan's investment in such entity (each, a "Plan"), should
consider the fiduciary standards of ERISA in the context of the Plan's
particular circumstances before authorizing an investment in the Capital
Securities. Accordingly, among other factors, the fiduciary should consider
whether the investment would satisfy the prudence and diversification
requirements of ERISA and would be consistent with the documents and
instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well as
individual retirement accounts, Keogh plans and other arrangements subject to
Section 4975 of the Code (also "Plans"), from engaging in certain transactions
involving "plan assets" with persons who are "parties in interest" under ERISA
or "disqualified persons" under the Code ("Parties in Interest") with respect
to such Plan. A violation of these "prohibited transaction" rules may result in
the imposition of an excise tax or other liabilities under ERISA and/or Section
4975 of the Code on such persons, unless exemptive relief is available under an
applicable statutory or administrative exemption.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of a trust would be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code if
"plan assets" of the Plan were used to acquire an equity interest in such trust
and no exception
63
<PAGE>
were applicable under the Plan Assets Regulation. An "equity interest" is
defined under the Plan Assets Regulation as any interest in an entity other
than an instrument which is treated as indebtedness under applicable local law
and which has no substantial equity features and specifically includes a
beneficial interest in a trust.
Pursuant to an exception contained in the Plan Assets Regulation, the assets
of a trust would not be considered "plan assets" of investing Plans if the
equity securities of such trust were deemed to be "publicly-offered
securities." In order to be considered "publicly-offered securities," such
securities must be, among other things, sold pursuant to an effective
registration statement, timely registered under the Securities Exchange Act of
1934, as amended, freely transferable and widely held. No assurance can be
given by the Trust that the Capital Securities will be "widely held" for
purposes of the "publicly-offered securities" exception.
Certain transactions involving the Trust could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of the
Code with respect to a Plan if the Capital Securities of the Trust were
acquired with "plan assets" of such Plan or assets of the Trust were deemed to
be "plan assets" of Plans investing in the Trust. For example, if the Company
is a Party in Interest with respect to the investing Plan (either directly or
by reason of its ownership of its subsidiaries), an indirect extension of
credit prohibited by Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of
the Code between the Company and the investing Plan may be deemed to occur,
unless exemptive relief were available under an applicable administrative
exemption (see below).
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief for direct or indirect prohibited
transactions resulting from the purchase or holding of the Capital Securities.
Those class exemptions are PTCE 96-23 (for certain transactions determined by
in-house asset managers), PTCE 95-60 (for certain transactions involving
insurance company general accounts), PTCE 91-38 (for certain transactions
involving bank collective investment funds), PTCE 90-1 (for certain
transactions involving insurance company pooled separate accounts), and PTCE
84-14 (for certain transactions determined by independent qualified
professional asset managers).
The Capital Securities may not be purchased or held by any Plan, any entity
whose underlying assets include "plan assets" by reason of any Plan's
investment in the entity (a "Plan Asset Entity") or any person investing "plan
assets" of any Plan, unless such purchaser or holder is eligible for the
exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. Any
purchaser or holder of the Capital Securities or any interest therein will be
deemed to have represented by its purchase and holding thereof that it either
(a) is not a Plan or a Plan Asset Entity and is not directly or indirectly
purchasing such securities on behalf of or with "plan assets" of any Plan or
(b) is eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-
38, 90-1 or 84-14 with respect to such purchase and/or holding.
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the Capital
Securities on behalf of or with "plan assets" of any Plan consult with their
counsel regarding the availability of exemptive relief under PTCE 96-23, 95-60,
91-38, 90-1 or 84-14 and regarding the potential consequences if the assets of
the Trust were deemed to be "plan assets."
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Trust have agreed that the Trust will sell to each of the
Underwriters named below for whom Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, PaineWebber Incorporated, Prudential Securities
Incorporated, Goldman Sachs & Co. and J.P. Morgan Securities Inc. are acting as
the representatives (the "Representatives"), and each of the Underwriters has
severally agreed to purchase from the Trust the respective liquidation amount
of Capital Securities set forth opposite its name below:
<TABLE>
<CAPTION>
Liquidation Amount
of Capital
Underwriters Securities
------------ ------------------
<S> <C>
Lehman Brothers Inc. ..................................... $
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
PaineWebber Incorporated..................................
Prudential Securities Incorporated........................
Goldman, Sachs & Co. .....................................
J.P. Morgan Securities Inc. ..............................
------------
Total................................................... $150,000,000
============
</TABLE>
Under the terms and conditions set forth in the Underwriting Agreement, the
Underwriters are committed to take and pay for all such Capital Securities
offered hereby, if any are taken.
The Underwriters propose to offer the Capital Securities in part directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less a
concession of $ per Capital Security (or $ per Capital Security with
respect to sales to certain institutions). The Underwriters may allow, and such
dealers may reallow, a concession not to exceed $ per Capital Security to
certain brokers and dealers. After the Capital Securities are released for sale
to the public, the offering price and other selling terms may from time to time
be varied by the Representatives.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures issued
by the Company, the Underwriting Agreement provides that the Company will pay
as Underwriters' compensation for the Underwriters arranging the investment
therein of such proceeds an amount of $ per Capital Security for the accounts
of the several Underwriters; except that for sales of the Capital Securities to
certain institutions the underwriting commission will be $ per Capital
Security.
Until the distribution of the Capital Securities is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase Capital Securities. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Capital Securities. Such transactions may consist of
bids or purchases for the purposes of pegging, fixing or maintaining the price
of the Capital Securities.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Capital Securities in the open market to reduce the Underwriters' short
position or to stabilize the price of the Capital Securities, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those Capital Securities as part of the Offering.
In general, purchases of a security for the purposes of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the applicable offering.
65
<PAGE>
Neither the Company nor any of the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Capital Securities. In addition,
neither the Company nor any of the Underwriters make any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for the Capital
Securities. Application has been made to have the Capital Securities approved
for listing on the New York Stock Exchange. In order to meet one of the
requirements for listing the Capital Securities on the New York Stock Exchange,
the Underwriters will undertake to sell lots of 100 or more to a minimum of 400
beneficial holders. Trading of the Capital Securities on the New York Stock
Exchange is expected to commence within a 30-day period after the initial
delivery of the Capital Securities. The Representatives have advised the
Company that they intend to make a market in the Capital Securities prior to
commencement of trading on the New York Stock Exchange, but are not obligated
to do so and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the
Capital Securities.
The Company and the Trust have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to the Company and its affiliates, for which such Underwriters or
their affiliates have received or will receive customary fees and commissions.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Capital
Securities, the enforceability of the Declaration and the formation of the
Trust will be passed upon by Richards, Layton & Finger, P.A., special Delaware
counsel to the Company and the Trust. The validity of the Junior Subordinated
Debentures and the Guarantee will be passed upon for the Company and the Trust
by Cleary, Gottlieb, Steen & Hamilton, New York, New York and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Cleary,
Gottlieb, Steen & Hamilton and Simpson Thacher & Bartlett will rely on the
opinion of Richards, Layton & Finger as to matters of Delaware law, and
Richards, Layton & Finger, P.A. will rely on the opinion of Cleary, Gottlieb,
Steen & Hamilton as to matters of New York law.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 included and
incorporated by reference in this prospectus have been audited by Deloitte &
Touche, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included and
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
Each of GWL&A and the Company is or will be subject to the informational
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith files or will file reports and
other information with the Commission. Such material filed by the Company and
GWL&A with the Commission may be inspected by anyone without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may also be obtained at the
Public Reference Section of the Commission at Room 1024,
66
<PAGE>
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of prescribed fees. Certain of such reports and other information are also
available from the Commission over the Internet at http://www.sec.gov. The
periodic reports and other information filed by the Company and GWL&A with the
Commission may also be inspected at the offices of the National Association of
Securities Dealers, Inc., NASDAQ Reports Section, 1735 K Street, Washington,
D.C. 20006.
No separate financial statements of the Trust have been included or
incorporated by reference herein. The Company does not believe such financial
statements would be material to holders of the Capital Securities because (i)
all of the common securities of the Trust will be owned, directly or
indirectly, by the Company, a reporting company under the Exchange Act, (ii)
the Trust has no independent operations but exists for the sole purpose of
issuing securities representing undivided beneficial interests in its assets
and investing the proceeds thereof in Junior Subordinated Debentures issued by
the Company, and (iii) taken together, the Company's obligations under the
Junior Subordinated Debentures, the Indenture and the Guarantee provide, in the
aggregate, a full and unconditional guarantee by the Company of the Trust's
obligations under the Capital Securities.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
On December 30, 1998, the Company became the parent of and successor
registrant to GWL&A. The following document filed with the Commission by GWL&A
(File No. 333-01173) is incorporated herein by reference: Annual Report on Form
10-K for the year ended December 31, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of such
filing.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. Such documents (other than exhibits to such
documents unless such exhibits are specifically incorporated therein by
reference) relating to the Company or GWL&A are available without charge upon
request to: GWL&A Financial Inc., 8515 East Orchard Road, Englewood, Colorado
80111, attention: The Corporate Secretary's Department.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets, December 31, 1998 and 1997.................. F-3
Consolidated Statements of Income, Years Ended December 31, 1998, 1997
and 1996................................................................ F-5
Consolidated Statements of Stockholder's Equity, Years Ended December 31,
1998, 1997 and 1996..................................................... F-6
Consolidated Statements of Cash Flows, Years Ended December 31, 1998,
1997 and 1996........................................................... F-7
Notes to Consolidated Financial Statements, Years Ended December 31,
1998, 1997 and 1996..................................................... F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of GWL&A Financial Inc.:
We have audited the accompanying consolidated balance sheets of GWL&A Financial
Inc. (an indirect wholly-owned subsidiary of The Great-West Life Assurance
Company) and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of GWL&A Financial Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Denver, Colorado
January 25, 1999
F-2
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
ASSETS ----------- -----------
<S> <C> <C>
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,298,936 and $2,151,476)........................ $ 2,199,818 $ 2,082,716
Available-for-sale, at fair value (amortized cost
$6,752,532 and $6,541,422)........................ 6,936,726 6,698,629
Common stock, at fair value (cost $41,932 and
$34,414)............................................ 48,640 39,021
Mortgage loans on real estate, net................... 1,133,468 1,235,594
Real estate, net..................................... 73,042 93,775
Policy loans......................................... 2,858,673 2,657,116
Short-term investments, available-for-sale (cost
approximates fair value)............................ 420,169 399,131
----------- -----------
Total Investments................................ 13,670,536 13,205,982
Cash................................................... 176,369 126,528
Reinsurance receivable
Related party........................................ 5,006 1,950
Other................................................ 187,952 82,414
Deferred policy acquisition costs...................... 238,901 255,442
Investment income due and accrued...................... 157,587 165,827
Other assets........................................... 311,078 121,543
Premiums in course of collection....................... 84,940 77,008
Deferred income taxes.................................. 191,483 193,820
Separate account assets................................ 10,099,543 7,847,451
----------- -----------
TOTAL ASSETS........................................... $25,123,395 $22,077,965
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
LIABILITIES AND STOCKHOLDER'S EQUITY ----------- -----------
<S> <C> <C>
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party........................................... $ 555,300 $ 17,774
Other................................................... 11,284,414 11,084,945
Policy and contract claims................................ 491,932 375,499
Policyholders' funds...................................... 181,779 165,106
Provision for policyholders' dividends.................... 69,530 62,937
GENERAL LIABILITIES:
Due to Parent Corporation............................... 52,877 126,656
Repurchase agreements................................... 244,258 325,538
Commercial paper........................................ 39,731 54,058
Other liabilities....................................... 761,505 689,967
Undistributed earnings on participating business........ 143,717 141,865
Separate account liabilities............................ 10,099,543 7,847,451
----------- -----------
Total Liabilities..................................... 23,924,586 20,891,796
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares
authorized:
Series A, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share, 0 and 600
shares issued and outstanding.......................... 60,000
Series B, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share, 0 and 200
shares issued and outstanding.......................... 20,000
Series C, cumulative, 1,500 shares authorized, none
outstanding............................................
Series D, cumulative, 1,500 shares authorized, none
outstanding............................................
Series E, non-cumulative, 2,000,000 shares authorized,
liquidation value of $20.90 per share, 0 and 2,000,000
shares issued and outstanding.......................... 41,800
Preferred stock, $0 par value; 500,000 shares authorized;
0 shares issued and outstanding..........................
Common stock, $0 par value; 500,000 shares authorized;
50,025 shares issued and outstanding..................... 250 250
Additional paid-in capital................................ 706,588 697,780
Accumulated other comprehensive income.................... 61,560 52,807
Retained earnings......................................... 430,411 313,532
----------- -----------
Total Stockholder's Equity............................ 1,198,809 1,186,169
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $25,123,395 $22,077,965
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Premiums
Related party (net of premiums recaptured
totaling $0, $155,798, and $164,839)..... $ 46,191 $ 155,798 $ 164,839
Other (net of premiums ceded totaling
$86,409, $61,152, and $60,589)........... 948,672 677,381 664,610
Fee income.................................. 516,052 420,730 347,519
Net investment income
Related party............................. (9,416) (8,957) (26,082)
Other..................................... 906,776 890,630 860,719
Net realized gains (losses) on investments.. 38,173 9,800 (21,078)
--------- --------- ---------
2,446,448 2,145,382 1,990,527
--------- --------- ---------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance
recoveries totaling $81,205, $44,871 and
$52,675)................................... 768,474 543,903 515,750
Increase in reserves
Related party............................. 46,191 155,798 164,839
Other..................................... 78,851 90,013 64,359
Interest paid or credited to
contractholders............................ 491,616 527,784 561,786
Provision for policyholders' share of
earnings (losses) on participating
business................................... 5,908 3,753 (7)
Dividends to policyholders.................. 71,429 63,799 49,237
--------- --------- ---------
1,462,469 1,385,050 1,355,964
Commissions................................. 144,246 102,150 106,561
Operating expenses (income):
Related party............................. (4,542) (6,292) 304,599
Other..................................... 517,676 431,714 33,435
Premium taxes............................... 30,848 24,153 25,021
--------- --------- ---------
2,150,697 1,936,775 1,825,580
INCOME BEFORE INCOME TAXES.................... 295,751 208,607 164,947
--------- --------- ---------
PROVISION FOR INCOME TAXES:
Current..................................... 81,770 61,644 45,934
Deferred.................................... 17,066 (11,797) (15,562)
--------- --------- ---------
98,836 49,847 30,372
--------- --------- ---------
NET INCOME.................................... $ 196,915 $ 158,760 $ 134,575
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Additional Other
-------------------- ------------- Paid-in Comprehensive Retained
Shares Amount Shares Amount Capital Income Earnings Total
---------- -------- ------ ------ ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... 2,000,800 121,800 50,025 $250 $664,297 $ 58,763 $148,261 $ 993,371
Net income............ 134,575 134,575
Other comprehensive
loss................. (43,812) (43,812)
----------
Total comprehensive
income................. 90,763
----------
Capital contributions... 7,000 7,000
Dividends............... (56,670) (56,670)
---------- -------- ------ ---- -------- -------- -------- ----------
BALANCE, DECEMBER 31,
1996................... 2,000,800 121,800 50,025 250 671,297 14,951 226,166 1,034,464
Net income............ 158,760 158,760
Other comprehensive
income............... 37,856 37,856
----------
Total comprehensive
income................. 196,616
----------
Capital contributions... 26,483 26,483
Dividends............... (71,394) (71,394)
---------- -------- ------ ---- -------- -------- -------- ----------
BALANCE, DECEMBER 31,
1997................... 2,000,800 121,800 50,025 250 697,780 52,807 313,532 1,186,169
Net income............ 196,915 196,915
Other comprehensive
income............... 8,753 8,753
----------
Total comprehensive
income................. 205,668
----------
Capital contributions... 8,808 8,808
Dividends............... (80,036) (80,036)
Purchase of preferred
shares................. (2,000,800) (121,800) (121,800)
---------- -------- ------ ---- -------- -------- -------- ----------
BALANCE, DECEMBER 31,
1998................... 0 0 50,025 $250 $706,588 $ 61,560 $430,411 $1,198,809
========== ======== ====== ==== ======== ======== ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................. $ 196,915 $ 158,760 $ 134,575
Adjustments to reconcile net income to
net cash provided by operating activ-
ities:
Gain (loss) allocated to participat-
ing policyholders................... 5,908 3,753 (7)
Amortization of investments.......... (15,068) 409 15,518
Realized losses (gains) on disposal
of investments and provisions for
mortgage loans and real estate...... (38,173) (9,800) 21,078
Amortization......................... 55,550 46,929 49,454
Deferred income taxes................ 17,066 (11,824) (14,658)
Changes in assets and liabilities:
Policy benefit liabilities........... 938,444 498,114 358,393
Reinsurance receivable............... (43,643) 112,594 136,966
Accrued interest and other receiv-
ables............................... 28,467 30,299 24,778
Other, net........................... (184,536) 64,465 (13,676)
----------- ----------- -----------
Net cash provided by operating ac-
tivities.......................... 960,930 893,699 712,421
----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Sales............................. 9,920
Maturities and redemptions........ 471,432 359,021 516,838
Available-for-sale
Sales............................. 6,169,678 3,174,246 3,569,608
Maturities and redemptions........ 1,268,323 771,737 803,369
Mortgage loans....................... 211,026 248,170 235,907
Real estate.......................... 16,456 36,624 2,607
Common stock......................... 3,814 17,211 1,888
Purchases of investments:
Fixed maturities
Held-to-maturity................... (584,092) (439,269) (453,787)
Available-for-sale................. (7,410,485) (4,314,722) (4,753,154)
Mortgage loans....................... (100,240) (2,532) (23,237)
Real estate.......................... (4,581) (64,205) (15,588)
Common stock......................... (10,020) (29,608) (12,113)
----------- ----------- -----------
Net cash provided by (used in) in-
vesting activities................ $ 41,231 $ (243,327) $ (127,662)
=========== =========== ===========
FINANCING ACTIVITIES:
Contract withdrawals, net of depos-
its.................................. $ (507,237) $ (577,538) $ (413,568)
Due to Parent Corporation............. (73,779) (19,522) 1,457
Dividends paid........................ (80,036) (71,394) (56,670)
Net commercial paper repayments....... (14,327) (30,624) (172)
Net repurchase agreements (repayments)
borrowings........................... (81,280) 38,802 (88,563)
Capital contributions................. 8,808 11,000 7,000
Purchase of preferred shares.......... (121,800)
Acquisition of subsidiary............. (82,669)
----------- ----------- -----------
Net cash used in financing activi-
ties............................... (952,320) (649,276) (550,516)
----------- ----------- -----------
NET INCREASE IN CASH.................... 49,841 1,096 34,243
CASH, BEGINNING OF YEAR................. 126,528 125,432 91,189
----------- ----------- -----------
CASH, END OF YEAR....................... $ 176,369 $ 126,528 $ 125,432
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Income taxes........................ $ 111,493 $ 86,829 $ 103,700
Interest............................ 13,849 15,124 15,414
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
1.ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization -- GWL&A Financial Inc. (GWL&A Financial or the Company) is an
indirect wholly-owned subsidiary of The Great-West Life Assurance Company (the
Parent Corporation). GWL&A Financial was incorporated in the state of Delaware
on September 16, 1998 to act as a holding company for Great-West Life & Annuity
Insurance Company (GWL&A) and its subsidiaries, and was capitalized through a
$250 cash investment in exchange for shares of common stock. GWL&A, a Colorado
life insurance company, offers a wide range of life insurance, health
insurance, and retirement and investment products to individuals, businesses
and other private and public organizations throughout the United States. In
December 1998, all of the outstanding common stock of GWL&A, which was owned by
the Parent Corporation, was contributed to GWL&A Financial. The contribution
has been accounted for as a pooling of interests as it represents a combination
of entities under common control, and accordingly, the financial statements
have been restated for all periods to include the combined financial results of
GWL&A Financial and GWL&A.
Basis of Presentation -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany transactions and balances have been
eliminated in consolidation.
Certain reclassifications, primarily related to the presentation of related
party transactions and the classification of the release of a contingent
liability (see Note 10) have been made to the 1997 and 1996 financial
statements.
Investments -- Investments are reported as follows:
1. Management determines the classification of fixed maturities at the time of
purchase. Fixed maturities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost unless
fair value is less than cost and the decline is deemed to be other than
temporary, in which case they are written down to fair value and a new cost
basis is established.
Fixed maturities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the net unrealized gains and losses reported as accumulated other
comprehensive income in stockholder's equity. The net unrealized gains and
losses on derivative financial instruments used to hedge available-for-sale
securities are also included in other comprehensive income.
The amortized cost of fixed maturities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts using the effective interest method over the estimated life of the
related bonds. Such amortization is included in net investment income.
Realized gains and losses, and declines in value judged to be other-than-
temporary are included in net realized gains (losses) on investments.
2. Mortgage loans on real estate are carried at their unpaid balances adjusted
for any unamortized premiums or discounts and any valuation reserves.
Interest income is accrued on the unpaid principal balance. Discounts and
premiums are amortized to net investment income using the effective interest
method. Accrual of interest is discontinued on any impaired loans where
collection of interest is doubtful.
F-8
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
The Company maintains an allowance for credit losses at a level that, in
management's opinion, is sufficient to absorb possible credit losses on its
impaired loans and to provide adequate provision for any possible losses
inherent in the loan portfolio. Management's judgement is based on past loss
experience, current and projected economic conditions, and extensive
situational analysis of each individual loan. The measurement of impaired
loans is based on the fair value of the collateral.
3. Real estate is carried at cost. The carrying value of real estate is subject
to periodic evaluation of recoverability.
4. Investments in common stock are carried at fair value.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial maturities
of one year or less and are carried at amortized cost. The Company considers
short-term investments to be available-for-sale and amortized cost
approximates fair value.
7. Gains and losses realized on disposal of investments are determined on a
specific identification basis.
Cash -- Cash includes only amounts in demand deposit accounts.
Deferred Policy Acquisition Costs -- Policy acquisition costs, which
primarily consist of sales commissions related to the production of new and
renewal business, have been deferred to the extent recoverable. Other costs
capitalized include expenses associated with the Company's group sales
representatives. These costs are variable in nature and are dependent upon
sales volume. Deferred costs associated with the annuity products are being
amortized over the life of the contracts in proportion to the emergence of
gross profits. Retrospective adjustments of these amounts are made when the
Company revises its estimates of current or future gross profits. Deferred
costs associated with traditional life insurance are amortized over the premium
paying period of the related policies in proportion to premium revenues
recognized. Amortization of deferred policy acquisition costs totaled $51,724,
$44,298, and $47,089 in 1998, 1997, and 1996, respectively.
Separate Accounts -- Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares of
Maxim Series Fund, Inc. and Orchard Series Fund, Inc., both diversified, open-
end management investment companies which are affiliates of the Company, shares
of other external mutual funds, or government or corporate bonds. Investment
income and realized capital gains and losses of the separate accounts accrue
directly to the contractholders and, therefore, are not included in the
Company's statements of income. Revenues to the Company from the separate
accounts consist of contract maintenance fees, administrative fees, and
mortality and expense risk charges.
Life Insurance and Annuity Reserves -- Life insurance and annuity policy
reserves with life contingencies of $6,866,478 and $5,741,596 at December 31,
1998 and 1997, respectively, are computed on the basis of estimated mortality,
investment yield, withdrawals, future maintenance and settlement expenses, and
retrospective experience rating premium refunds. Annuity contract reserves
without life contingencies of $4,908,964 and $5,346,516 at December 31, 1998
and 1997, respectively, are established at the contractholders account value.
Reinsurance -- Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet (see Note 3). The cost
of reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-9
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
Policy and Contract Claims -- Policy and contract claims include provisions
for reported life and health claims in process of settlement, valued in
accordance with the terms of the related policies and contracts, as well as
provisions for claims incurred and unreported based primarily on prior
experience of the Company.
Participating Fund Account -- Participating life and annuity policy reserves
are $4,108,314 and $3,901,297 at December 31, 1998 and 1997, respectively.
Participating business approximates 32.7% and 50.5% of the Company's ordinary
life insurance in force and 71.9% and 91.1% of ordinary life insurance premium
income at December 31, 1998 and 1997, respectively.
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Amounts allocable to participating policyholders are consistent with
established Company practice.
The Company has established a Participating Policyholder Experience Account
(PPEA) for the benefit of all participating policyholders which is included in
the accompanying consolidated balance sheet. Earnings associated with the
operation of the PPEA are credited to the benefit of all participating
policyholders. In the event that the assets of the PPEA are insufficient to
provide contractually guaranteed benefits, the Company must provide such
benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for the
benefit of the participating policyholders previously transferred to the
Company from the Parent under an assumption reinsurance transaction. The PFA is
part of the PPEA. Earnings derived from the operation of the PFA net of a
management fee paid to the Company accrue solely for the benefit of the
acquired participating policyholders.
Recognition of Premium and Fee Income and Benefits and Expenses -- Life
insurance premiums are recognized when due. Annuity premiums with life
contingencies are recognized as received. Accident and health premiums are
earned on a monthly pro rata basis. Revenues for annuity and other contracts
without significant life contingencies consist of contract charges for the cost
of insurance, contract administration, and surrender fees that have been
assessed against the contract account balance during the period. Fee income is
derived primarily from contracts for claim processing or other administrative
services and from assets under management. Fees from contracts for claim
processing or other administrative services are recorded as the services are
provided. Fees from assets under management, which consist of contract
maintenance fees, administration fees and mortality and expense risk changes,
are recognized when due. Benefits and expenses on policies with life
contingencies impact premium income by means of the provision for future policy
benefit reserves, resulting in recognition of profits over the life of the
contracts. The average crediting rate on annuity products was approximately
6.3%, 6.6%, and 6.8% in 1998, 1997, and 1996.
Income Taxes -- Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of deferred
tax assets and liabilities for expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, all expected future events (other than the
enactments or changes in the tax laws or rules) are considered. Although
realization is not assured, management believes it is more likely than not that
the deferred tax asset, net of a valuation allowance, will be realized.
Repurchase Agreements and Securities Lending -- The Company enters into
repurchase agreements with third-party broker/dealers in which the Company
sells securities and agrees to repurchase substantially similar securities at a
specified date and price. Such agreements are accounted for as collateralized
borrowings. Interest
F-10
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
expense on repurchase agreements is recorded at the coupon interest rate on the
underlying securities. The repurchase fee received or paid is amortized over
the term of the related agreement and recognized as an adjustment to investment
income.
The Company requires collateral in an amount greater than or equal to 102%
of the borrowing for all securities lending transactions.
The Company implemented Statement of Financial Accounting Standards (SFAS)
No. 125 "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities" in 1998 as it relates to repurchase agreements
and securities lending arrangements. The implementation of this Statement had
no material effect on the Company's financial statements.
Derivatives -- The Company makes limited use of derivative financial
instruments to manage interest rate, market and foreign exchange risk. Such
hedging activity consists of interest rate swap agreements, interest rate
floors and caps, foreign currency exchange contracts and equity swaps. The
differential paid or received under the terms of these contracts is recognized
as an adjustment to net investment income on the accrual method. Gains and
losses on foreign exchange contracts are deferred and recognized in net
investment income when the hedged transactions are realized.
Interest rate swap agreements are used to convert the interest rate on
certain fixed maturities from a floating rate to a fixed rate. Interest rate
swap transactions generally involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal
amount. Interest rate floors and caps are interest rate protection instruments
that require the payment by a counter-party to the Company of an interest rate
differential. The differential represents the difference between current
interest rates and an agreed-upon rate, the strike rate, applied to a notional
principal amount. Foreign currency exchange contracts are used to hedge the
foreign exchange rate risk associated with bonds denominated in other than U.S.
dollars. Equity swap transactions generally involve the exchange of variable
market performance of a basket of securities for a fixed interest rate.
Although derivative financial instruments taken alone may expose the Company
to varying degrees of market and credit risk when used solely for hedging
purposes, these instruments typically reduce overall market and interest rate
risk. The Company controls the credit risk of its financial contracts through
credit approvals, limits, and monitoring procedures. As the Company generally
enters into transactions only with high quality institutions, no losses
associated with non-performance on derivative financial instruments have
occurred or are expected to occur.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and for Hedging Activities." This Statement provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. This Statement is effective for the Company
beginning January 1, 2000, and earlier adoption is encouraged. The Company has
not adopted this Statement as of December 31, 1998. Management has not
determined the impact of the Statement on the Company's financial position or
results of operations.
Stock Options -- In October 1995, the FASB issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which was effective for the Company beginning
January 1, 1996. This Statement requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
F-11
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
require) compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company has continued to apply APB
Opinion No. 25 to stock-based compensation awards to employees and has
disclosed the required pro forma effect on net income (see Note 13).
2. ACQUISITION
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the
outstanding shares of Anthem Health & Life Insurance Company (AH&L). The
purchase price was based on AH&L's adjusted book value, and is subject to
further minor adjustments. The results of AH&L's operations, which had an
insignificant effect on net income, have been combined with those of the
Company since the date of acquisition.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price was allocated to the net assets acquired
based on their estimated fair values. The fair value of tangible assets
acquired and liabilities assumed was $379,934 and $317,440, respectively. The
balance of the purchase price, $20,175, was recorded as excess cost over net
assets acquired (goodwill) and is being amortized over 30 years on a straight-
line basis. Management intends to finalize its allocation of the purchase price
within a year of the transaction, which will likely result in a reallocation of
the purchase price, which is not expected to be material.
3. RELATED-PARTY TRANSACTIONS
On December 31, 1998, the Company and the Parent Corporation entered into an
Indemnity Reinsurance Agreement pursuant to which the Company reinsured by
coinsurance certain Parent Corporation individual non-participating life
insurance policies. The Company recorded $859 in premium income and increase in
reserves, associated with certain policies, as a result of this transaction. Of
the $137,638 in reserves that was recorded as a result of this transaction,
$136,779 was recorded under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments" ("SFAS No. 97"), accounting principles.
The Company recorded, at the Parent Corporation's carrying amount, which
approximates estimated fair value, the following at December 31, 1998 as a
result of this transaction:
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Cash......................... $ 24,600
Deferred income taxes........ 3,816
Policy loans................. 82,649
Due from Parent Corporation.. 19,753
Other........................ 6,820
--------
$137,638
========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholder's Equity
------------------------------------
<S> <C>
Policy reserves................................................... $137,638
--------
$137,638
========
</TABLE>
In connection with this transaction, the Parent Corporation made a capital
contribution of $5,608 to the Company.
On September 30, 1998, the Company and the Parent Corporation entered into
an Indemnity Reinsurance Agreement pursuant to which the Company reinsured by
coinsurance certain Parent Corporation individual
F-12
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
non-participating life insurance policies. The Company recorded $45,332 in
premium income and increase in reserves as a result of this transaction. Of the
$428,152 in reserves that was recorded as a result of this transaction,
$382,820 was recorded under SFAS No. 97 accounting principles. The Company
recorded, at the Parent Corporation's carrying amount, which approximates
estimated fair value, the following at September 30, 1998 as a result of this
transaction:
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Bonds........................ $147,475
Mortgages.................... 82,637
Cash......................... 134,900
Deferred policy acquisition
costs....................... 9,724
Deferred income taxes........ 15,762
Policy loans................. 56,209
Other........................ 2,265
<CAPTION>
--------
$448,972
<S> <C>
========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholder's Equity
------------------------------------
<S> <C>
Policy reserves................................................... $428,152
Due to Parent Corporation......................................... 20,820
--------
$448,972
========
</TABLE>
In connection with this transaction, the Parent Corporation made a capital
contribution of $3,200 to the Company.
On September 30, 1998, the Company purchased furniture, fixtures and
equipment from the Parent Corporation for $25,184. In February 1997, the
Company purchased the corporate headquarters properties from the Parent
Corporation for $63,700.
On June 30, 1997, the Company recaptured all remaining pieces of an
individual participating insurance block of business previously reinsured to
the Parent Corporation on December 31, 1992. The Company recorded $155,798 in
premium income and increase in reserves as a result of this transaction. The
Company recorded, at the Parent Corporation's carrying amount, which
approximates estimated fair value, the following at June 30, 1997 as a result
of this transaction:
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Cash.................... $160,000
Bonds................... 17,975
Other................... 60
--------
$178,035
========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholder's Equity
------------------------------------
<S> <C>
Policy reserves................................................... $155,798
Due to Parent Corporation......................................... 20,373
Deferred income taxes............................................. 2,719
Undistributed earnings on participating business.................. (855)
--------
$178,035
========
</TABLE>
In connection with this transaction, the Parent Corporation made a capital
contribution of $11,000 to the Company.
On October 31, 1996, the Company recaptured certain pieces of an individual
participating insurance block of business previously reinsured to the Parent
Corporation on December 31, 1992. The Company recorded $164,839 in premium
income and increase in reserves as a result of this transaction. The Company
F-13
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
recorded, at the Parent Corporation's carrying amount, which approximates
estimated fair value, the following at October 31, 1996 as a result of this
transaction:
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Cash.................... $162,000
Mortgages............... 19,753
Other................... 118
--------
$181,871
========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholder's Equity
------------------------------------
<S> <C>
Policy reserves................................................... $164,839
Due to Parent Corporation......................................... 16,180
Deferred income taxes............................................. 1,283
Undistributed earnings on participating business.................. (431)
--------
$181,871
========
</TABLE>
In connection with this transaction, the Parent Corporation made a capital
contribution of $7,000 to the Company.
Effective January 1, 1997, all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to the
Company. All related employee benefit plan assets and liabilities were also
transferred to the Company (see Note 9). The transfer did not have a material
effect on the Company's operating expenses as the actual costs associated with
the employees and the benefit plans were charged previously to the Company
under administrative service agreements between the Company and the Parent
Corporation.
Prior to January 1997, the Parent Corporation administered, distributed, and
underwrote business for the Company and administered the Company's investment
portfolio under various administrative agreements.
Since January 1, 1997, the Company has performed these services for the U.S.
operations of the Parent Corporation. The following represents revenue from or
payments made to the Parent Corporation for services provided pursuant to these
service agreements. The amounts recorded are based upon management's best
estimate of actual costs incurred and resources expended based upon number of
policies and/or certificates in force.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
--------------------------
<S> <C> <C> <C>
Investment management revenue (expense)... $ 475 $ 801 $ (14,800)
Administrative and underwriting revenue
(payments)............................... 4,542 6,292 (304,599)
</TABLE>
At December 31, 1998 and 1997, due to Parent Corporation includes $17,930
and $8,957 due on demand and $34,947 and $117,699 of notes payable which bear
interest and mature at various dates through June 15, 2008. These notes may be
prepaid in whole or in part at any time without penalty; the issuer may not
demand payment before the maturity date. The amounts due on demand to the
Parent Corporation bear interest at the public bond rate (6.1% and 7.1% at
December 31, 1998 and 1997, respectively) while the remainder bear interest at
various rates ranging from 5.4% to 6.6%. Interest expense attributable to these
payables was $9,891, $9,758, and $11,282 for the years ended December 31, 1998,
1997 and 1996, respectively.
4. REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
risks to other insurance enterprises under excess coverage and co-insurance
contracts. The Company retains a maximum of $1.5 million of coverage per
individual life.
F-14
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers
to minimize its exposure to significant losses from reinsurer insolvencies. At
December 31, 1998 and 1997, the reinsurance receivable had a carrying value of
$192,958 and $84,364, respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
<TABLE>
<CAPTION>
Ceded Assumed Percentage
Primarily to Primarily of Amount
the Parent from Other Assumed
Gross Amount Corporation Companies Net Amount to Net
------------ ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
Life insurance in
force:
Individual.......... $ 34,017,379 $ 4,785,079 $ 8,948,442 $ 38,180,742 23.4%
Group............... 81,907,539 2,213,372 84,120,911 2.6%
------------ ----------- ----------- ------------
Total............. $115,924,918 $ 4,785,079 $11,161,814 $122,301,653
============ =========== =========== ============
Premium Income:
Life insurance...... $ 352,710 $ 24,720 $ 65,452 $ 393,442 16.6%
Accident/health..... 571,992 61,689 74,284 584,587 12.7%
------------ ----------- ----------- ------------
Total............. $ 924,702 $ 86,409 $ 139,736 $ 978,029
============ =========== =========== ============
December 31, 1997:
Life insurance in
force:
Individual.......... $ 24,598,679 $ 4,040,398 $ 3,667,235 $ 24,225,516 15.1%
Group............... 51,179,343 2,031,477 53,210,820 3.8%
------------ ----------- ----------- ------------
Total............. $ 75,778,022 $ 4,040,398 $ 5,698,712 $ 77,436,336
============ =========== =========== ============
Premium Income:
Life insurance...... $ 320,456 $ (127,388) $ 19,923 $ 467,767 4.1%
Accident/health..... 341,837 32,645 34,994 344,186 10.0%
------------ ----------- ----------- ------------
Total............. $ 662,293 $ (94,743) $ 54,917 $ 811,953
============ =========== =========== ============
December 31, 1996:
Life insurance in
force:
Individual.......... $ 23,409,823 $ 5,246,079 $ 3,482,118 $ 21,645,862 16.1%
Group............... 47,682,237 1,817,511 49,499,748 3.7%
------------ ----------- ----------- ------------
Total............. $ 71,092,060 $ 5,246,079 $ 5,299,629 $ 71,145,610
============ =========== =========== ============
Premium Income:
Life insurance...... $ 307,516 $ (111,743) $ 19,633 $ 438,892 4.2%
Accident/health..... 339,284 7,493 34,242 366,033 9.4%
------------ ----------- ----------- ------------
Total............. $ 646,800 $ (104,250) $ 53,875 $ 804,925
============ =========== =========== ============
</TABLE>
F-15
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
5. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Investment income:
Fixed maturities and short-term
investments............................ $638,079 $633,975 $ 601,913
Mortgage loans on real estate........... 110,170 118,274 140,823
Real estate............................. 20,019 20,990 5,292
Policy loans............................ 180,933 194,826 175,746
Other................................... 285 18 1,316
-------- -------- ---------
949,486 968,083 925,090
Investment expenses, including interest
on amounts charged by the Parent
Corporation of $9,891, $9,758, and
$11,282................................ 52,126 86,410 90,453
-------- -------- ---------
Net investment income..................... $897,360 $881,673 $ 834,637
======== ======== =========
Net realized gains (losses) on investments are as follows:
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities........................ $ 38,391 $ 15,966 $ (11,624)
Mortgage loans on real estate........... 424 1,081 1,143
Real estate............................. 363
Provisions.............................. (642) (7,610) (10,597)
-------- -------- ---------
Net realized gains (losses) on invest-
ment..................................... $ 38,173 $ 9,800 $ (21,078)
======== ======== =========
</TABLE>
F-16
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasury
Securities and
obligations of U.S.
Government Agencies.. $ 34,374 $ 1,822 $ $ 36,196 $ 34,374
Collateralized mort-
gage obligations..... 10,135 194 9,941 10,135
Public utilities...... 213,256 12,999 460 225,795 213,256
Corporate bonds....... 1,809,957 78,854 3,983 1,884,828 1,809,957
Foreign governments... 10,133 782 10,915 10,133
State and municipali-
ties................. 121,963 9,298 131,261 121,963
---------- -------- ------- ---------- ----------
$2,199,818 $103,755 $ 4,637 $2,298,936 $2,199,818
========== ======== ======= ========== ==========
Available-for-Sale:
U.S. Treasury
Securities and
obligations of U.S.
Government Agencies:
Collateralized
mortgage
obligations........ $ 863,479 $ 39,855 $ 1,704 $ 901,630 $ 901,630
Direct mortgage
pass- through
certificates....... 467,100 4,344 692 470,752 470,752
Other............... 191,138 1,765 788 192,115 192,115
Collateralized
mortgage
obligations.......... 926,797 16,260 1,949 941,108 941,108
Public utilities...... 464,096 14,929 36 478,989 478,989
Corporate bonds....... 3,557,209 123,318 17,420 3,663,107 3,663,107
Foreign governments... 56,505 2,732 59,237 59,237
State and
municipalities....... 226,208 4,588 1,008 229,788 229,788
---------- -------- ------- ---------- ----------
$6,752,532 $207,791 $23,597 $6,936,726 $6,936,726
========== ======== ======= ========== ==========
</TABLE>
F-17
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
Fixed maturities owned at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasury
Securities and
obligations of U.S.
Government Agencies.. $ 25,883 $ 1,186 $ 25 $ 27,044 $ 25,883
Collateralized
mortgage
obligations.......... 5,006 174 5,180 5,006
Public utilities...... 245,394 11,214 3 256,605 245,394
Corporate bonds....... 1,668,710 57,036 3,069 1,722,677 1,668,710
Foreign governments... 10,268 659 10,927 10,268
State and
municipalities....... 127,455 1,588 129,043 127,455
---------- -------- ------- ---------- ----------
$2,082,716 $ 71,857 $ 3,097 $2,151,476 $2,082,716
========== ======== ======= ========== ==========
Available-for-Sale:
U.S. Treasury
Securities and
obligations of U.S.
Government Agencies:
Collateralized
mortgage
obligations........ $ 652,975 $ 17,339 $ 310 $ 670,004 $ 670,004
Direct mortgage
pass- through
certificates....... 917,216 7,911 2,668 922,459 922,459
Other............... 297,337 1,794 244 298,887 298,887
Collateralized
mortgage
obligations.......... 682,158 19,494 1,453 700,199 700,199
Public utilities...... 549,435 8,716 1,320 556,831 556,831
Corporate bonds....... 3,265,039 107,740 4,350 3,368,429 3,368,429
Foreign governments... 131,586 4,115 60 135,641 135,641
State and
municipalities....... 45,676 503 46,179 46,179
---------- -------- ------- ---------- ----------
$6,541,422 $167,612 $10,405 $6,698,629 $6,698,629
========== ======== ======= ========== ==========
</TABLE>
The collateralized mortgage obligations consist primarily of sequential and
planned amortization classes with final stated maturities of two to thirty
years and average lives of less than one to fifteen years. Prepayments on all
mortgage-backed securities are monitored monthly and amortization of the
premium and/or the accretion of the discount associated with the purchase of
such securities is adjusted by such prepayments.
See Note 8 for additional information on policies regarding estimated fair
value of fixed maturities.
F-18
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1998, by projected maturity, are shown below. Actual maturities
will likely differ from these projections because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
--------------------- ---------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less........ $ 316,174 $ 321,228 $ 235,842 $ 252,067
Due after one year through five
years......................... 925,016 961,592 1,279,123 1,309,202
Due after five years through
ten years..................... 675,444 722,685 769,278 803,498
Due after ten years............ 130,480 138,119 449,273 457,785
Mortgage-backed securities..... 10,135 9,941 2,257,376 2,313,490
Asset-backed securities........ 142,569 145,371 1,761,640 1,800,684
---------- ---------- ---------- ----------
$2,199,818 $2,298,936 $6,752,532 $6,936,726
========== ========== ========== ==========
</TABLE>
Proceeds from sales of securities available-for-sale were $6,169,678,
$3,174,246, and $3,569,608 during 1998, 1997, and 1996, respectively. The
realized gains on such sales totaled $41,136, $20,543, and $24,919 for 1998,
1997, and 1996, respectively. The realized losses totaled $8,643, $10,643, and
$40,748 for 1998, 1997, and 1996, respectively. During the years 1998, 1997,
and 1996, held-to-maturity securities with an amortized cost of $9,920, $0, and
$0 were sold due to credit deterioration with insignificant gains and losses.
At December 31, 1998 and 1997, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $115,168 and $162,817 of fixed
maturities, respectively.
The Company engages in hedging activities to manage interest rate and
exchange risk. The following table summarizes the 1998 financial hedge
instruments:
<TABLE>
<CAPTION>
Notional
December 31, 1998 Amount Strike/Swap Rate Maturity
----------------- ---------- ------------------ -----------
<S> <C> <C> <C>
Interest Rate Floor.............. $ 100,000 4.50% (LIBOR) 11/99
Interest Rate Caps............... 1,070,000 6.75%-11.82% (CMT) 12/99-10/03
Interest Rate Swaps.............. 242,451 4.95%-9.35% 08/99-02/03
Foreign Currency Exchange
Contracts....................... 34,123 N/A 05/99-07/06
Equity Swap...................... 95,652 4.00% 12/99
</TABLE>
The following table summarizes the 1997 financial hedge instruments:
<TABLE>
<CAPTION>
Notional
December 31, 1997 Amount Strike/Swap Rate Maturity
----------------- -------- ------------------ -----------
<S> <C> <C> <C>
Interest Rate Floor................ $100,000 4.50% (LIBOR) 1999
Interest Rate Caps................. 565,000 6.75%-11.82% (CMT) 1999-2002
Interest Rate Swaps................ 212,139 6.20%-9.35% 01/98-02/03
Foreign Currency Exchange
Contracts......................... 57,168 N/A 09/98-07/06
Equity Swap........................ 100,000 5.64% 12/98
</TABLE>
LIBOR --London Interbank Offered Rate
CMT --Constant Maturity Treasury Rate
F-19
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
The Company has established specific investment guidelines designed to
emphasize a diversified and geographically dispersed portfolio of mortgages
collateralized by commercial and industrial properties located in the United
States. The Company's policy is to obtain collateral sufficient to provide
loan-to-value ratios of not greater than 75% at the inception of the mortgages.
At December 31, 1998, approximately 33% of the Company's mortgage loans were
collateralized by real estate located in California.
The following represents impairments and other information with respect to
impaired loans:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Loans with related allowance for credit losses of
$2,492 and $2,493......................................... $13,192 $13,193
Loans with no related allowance for credit losses.......... 10,420 20,013
Average balance of impaired loans during the year.......... 31,193 37,890
Interest income recognized (while impaired)................ 2,308 2,428
Interest income received and recorded (while impaired)
using the cash basis method of recognition................ 2,309 2,484
</TABLE>
As part of an active loan management policy and in the interest of
maximizing the future return of each individual loan, the Company may from time
to time modify the original terms of certain loans. These restructured loans,
all performing in accordance with their modified terms that are not impaired,
aggregated $52,913 and $64,406 at December 31, 1998 and 1997, respectively.
The following table presents changes in allowance for credit losses:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year........................ $67,242 $65,242 $63,994
Provision for loan losses......................... 642 4,521 4,470
Chargeoffs........................................ (787) (2,521) (3,468)
Recoveries........................................ 145 246
------- ------- -------
Balance, end of year.............................. $67,242 $67,242 $65,242
======= ======= =======
</TABLE>
7. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by a
$50,000 standby letter-of-credit. At December 31, 1998, commercial paper
outstanding had maturities ranging from 69 to 118 days and interest rates
ranging from 5.10% to 5.22%. At December 31, 1997, maturities ranged from 41 to
99 days and interest rates ranged from 5.6% to 5.8%.
F-20
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1998 1997
---------------------- ---------------------
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Fixed maturities and short-term
investments................... $9,556,713 $9,655,831 $9,180,476 $9,249,235
Mortgage loans on real estate.. 1,133,468 1,160,568 1,235,594 1,261,949
Policy loans................... 2,858,673 2,858,673 2,657,116 2,657,116
Common stock................... 48,640 48,640 39,021 39,021
LIABILITIES:
Annuity contract reserves with-
out life contingencies........ 4,908,964 4,928,800 5,346,516 5,373,818
Policyholders' funds........... 181,779 181,779 165,106 165,106
Due to Parent Corporation...... 52,877 52,877 126,656 124,776
Repurchase agreements.......... 244,258 244,258 325,538 325,538
Commercial paper............... 39,731 39,731 54,058 54,058
HEDGE CONTRACTS:
Interest rate floor............ 17 17 25 25
Interest rate caps............. 971 971 130 130
Interest rate swaps............ 6,125 6,125 4,265 4,265
Foreign currency exchange con-
tracts........................ 689 689 3,381 3,381
Equity swap.................... (8,150) (8,150) 856 856
</TABLE>
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies. However,
considerable judgement is necessarily required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of fixed maturities that are publicly traded are
obtained from an independent pricing service. To determine fair value for fixed
maturities not actively traded, the Company utilized discounted cash flows
calculated at current market rates on investments of similar quality and term.
Mortgage loans fair value estimates generally are based on a discounted cash
flow basis. A discount rate "matrix" is incorporated whereby the discount rate
used in valuing a specific mortgage generally corresponds to that mortgage's
remaining term. The rates selected for inclusion in the discount rate "matrix"
reflect rates that the Company would quote if placing loans representative in
size and quality to those currently in the portfolio.
Policy loans accrue interest generally at variable rates with no fixed
maturity dates and, therefore, estimated fair value approximates carrying
value.
The fair value of annuity contract reserves without life contingencies is
estimated by discounting the cash flows to maturity of the contracts, utilizing
current crediting rates for similar products.
F-21
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
The estimated fair value of policyholders' funds is the same as the carrying
amount as the Company can change the crediting rates with 30 days notice.
The estimated fair value of due to Parent Corporation is based on discounted
cash flows at current market spread rates on high quality investments.
The carrying value of repurchase agreements and commercial paper is a
reasonable estimate of fair value due to the short-term nature of the
liabilities.
The estimated fair value of financial hedge instruments, all of which are
held for other than trading purposes, is the estimated amount the Company would
receive or pay to terminate the agreement at each year-end, taking into
consideration current interest rates and other relevant factors. Included in
the net gain position for interest rates swaps are $0 of unrealized losses in
1998 and 1997. Included in the net gain position for foreign currency exchange
contracts are $932 and $0 of loss exposures in 1998 and 1997, respectively.
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to the
Company. See Note 3 for further discussion.
The Company's Parent had previously accounted for the pension plan under the
Canadian Institute of Chartered Accountants (CICA) guidelines and had recorded
a prepaid pension asset of $19,091. As U.S. generally accepted accounting
principles do not materially differ from these CICA guidelines and the transfer
was between related parties, the prepaid pension asset was transferred at
carrying value. As a result, the Company recorded the following effective
January 1, 1997:
<TABLE>
<S> <C>
Prepaid pension cost.............. $19,091
-------
$19,091
=======
</TABLE>
<TABLE>
<S> <C>
Undistributed earnings on Participating
business................................... $ 3,608
Stockholder's equity........................ 15,483
-------
$19,091
=======
</TABLE>
F-22
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
The following table summarizes changes from 1997 to 1998, and from 1996 to
1997, in the benefit obligations and in plan assets for the Company's defined
benefit pension plan and post-retirement medical plan. There is no additional
minimum pension liability required to be recognized. There were no amendments
to the plans due to the acquisition of AH&L.
<TABLE>
<CAPTION>
Post-Retirement
Pension Benefits Medical Plan
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of
year................................. $115,057 $ 96,417 $ 19,454 $ 16,160
Service cost.......................... 6,834 5,491 1,365 1,158
Interest cost......................... 7,927 7,103 1,341 1,191
Actuarial gain (loss)................. 5,117 9,470 (1,613) 1,500
Benefits paid......................... (3,630) (3,424) (603) (555)
-------- -------- -------- --------
Benefit obligation at end of year..... 131,305 115,057 19,944 19,454
-------- -------- -------- --------
Change in plan assets
Fair value of plan assets at beginning
of year.............................. 162,879 138,221
Actual return on plan assets.......... 23,887 28,082
Benefits paid......................... (3,630) (3,424)
-------- -------- -------- --------
Fair value of plan assets at end of
year................................. 183,136 162,879
-------- -------- -------- --------
Funded status......................... 51,831 47,822 (19,944) (19,454)
Unrecognized net actuarial loss....... (11,405) (6,326) (113) 1,500
Unrecognized net obligation or (asset)
at transition........................ (19,684) (21,198) 14,544 15,352
======== ======== ======== ========
Prepaid (accrued) benefit cost........ $ 20,742 $ 20,298 $ (5,513) $ (2,602)
======== ======== ======== ========
Weighted-average assumptions as of
December 31
Discount rate......................... 6.50% 7.00% 6.50% 7.00%
Expected return on plan assets........ 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase......... 4.00% 4.50% 4.00% 4.50%
Components of net periodic benefit cost
Service cost.......................... $ 6,834 $ 5,491 $ 1,365 $ 1,158
Interest cost......................... 7,927 7,103 1,341 1,191
Expected return on plan assets........ (13,691) (12,286)
Amortization of transition
obligation........................... (1,514) (1,514) 808 808
-------- -------- -------- --------
Net periodic (benefit) cost........... $ (444) $ (1,206) $ 3,514 $ 3,157
======== ======== ======== ========
</TABLE>
The Company-sponsored post-retirement medical plan (medical plan) provides
health benefits to employees. The medical plan is contributory and contains
other cost sharing features, which may be adjusted annually for the expected
general inflation rate. The Company's policy will be to fund the cost of the
medical plan benefits in amounts determined at the discretion of management.
F-23
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. For measurement purposes, a 6.5% annual
rate of increase in the per capita cost of covered health care benefits was
assumed. A one-percentage-point change in assumed health care cost trend rates
would have the following effects:
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Point
Increase Decrease
------------ ------------
<S> <C> <C>
Effect on total of service and interest cost
on components................................ $ 649 $1,140
Effect on post-retirement benefit obliga-
tion......................................... 4,129 3,098
</TABLE>
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15% of base
compensation. The Company matches 50% of the first 5% of participant pre-tax
contributions. Company contributions for the years ended December 31, 1998 and
1997 totaled $3,915 and $3,475, respectively.
The Company has a deferred compensation plan providing key executives with
the opportunity to participate in an unfunded, deferred compensation program.
Under the program, participants may defer base compensation and bonuses, and
earn interest on their deferred amounts. The program is not qualified under
Section 401 of the Internal Revenue Code. The total of participant deferrals,
which is reflected in other liabilities, was $16,102 and $13,952 at December
31, 1998 and 1997, respectively. The participant deferrals earn interest at a
rate based on the average 10-year composite government securities rate plus
1.5%. The interest expense related to this plan was $1,185 and $1,019 in 1998
and 1997, respectively.
The Company also provides a supplemental executive retirement plan (SERP) to
certain key executives. This plan provides key executives with certain benefits
upon retirement, disability, or death based upon total compensation. The
Company has purchased individual life insurance policies with respect to each
employee covered by this plan. The Company is the owner and beneficiary of the
insurance contracts. The incremental expense for this plan for 1998 and 1997
was $2,840 and $2,531, respectively. The total liability of $9,349 and $6,509
as of December 31, 1998 and 1997 is included in other liabilities.
10. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and
the Company's effective rate after giving effect to the reclassifications
discussed below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
Federal tax rate....................................... 35.0% 35.0% 35.0%
Change in tax rate resulting from:
Settlement of Parent tax exposures................... (20.2) (18.9)
Provision for contingencies.......................... 7.7 3.4
Prior year tax adjustment............................ (1.5) 0.5 (1.4)
Other, net........................................... (0.1) 0.9 0.3
---- ----- -----
Total.............................................. 33.4% 23.9% 18.4%
==== ===== =====
</TABLE>
F-24
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
The Company's income tax provision was favorably impacted in 1997 and 1996
by releases of contingent liabilities relating to taxes of the Parent
Corporation's U.S. branch associated with blocks of business that were
transferred from the Parent Corporation's U.S. branch to the Company from 1989
to 1993; the Company had agreed to the transfer of these tax liabilities as
part of the transfer of this business. The releases recorded in 1997 and 1996
reflected the resolution of certain tax issues with the Internal Revenue
Service (IRS) relating to the 1990-1991 and 1988-1989 audit years,
respectively. The releases totaled $42,150 for 1997 and $31,200 for 1996;
however, $15,100 of the release in 1997 was attributable to participating
policyholders and therefore had no effect on the net income of the Company
since that amount was credited to the provision for policyholders' share of
earnings (losses).
The 1997 and 1996 releases were recorded in revenues in the Company's prior
financial statements, but have been reclassified in the accompanying
consolidated financial statements as a component of the current income tax
provisions for those years.
In addition to these releases of contingent tax liabilities, the Company's
income tax provisions for 1997 and 1996 also reflect increases for other
contingent items relating to open tax years where the Company determined it was
probable that additional taxes could be owed based on changes in facts and
circumstances. The increase in 1997 was $16,000, of which $10,100 was
attributable to participating policyholders and therefore had no effect on the
net income of the Company. The increase in 1996 was $5,600. These increases in
contingent tax liabilities have been reflected as a component of the deferred
income tax provisions for 1997 and 1996 as the Company does not expect near
term resolution of these contingencies.
Excluding the effect of the 1997 and 1996 tax items discussed above, the
effective tax rates for 1997 and 1996 were 34.1% and 33.9%, respectively.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Asset Liability Asset Liability
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Policyholder reserves..... $143,244 $159,767
Deferred policy
acquisition costs........ $39,933 $47,463
Deferred acquisition cost
proxy tax................ 100,387 79,954
Investment assets......... 19,870 5,574
Net operating loss
carryforwards............ 2,867 9,427
Other..................... 6,566 1,279
-------- ------- -------- -------
Subtotal................ 253,064 59,803 250,427 53,037
Valuation allowance....... (1,778) (3,570)
-------- ------- -------- -------
Total Deferred Taxes.... $251,286 $59,803 $246,857 $53,037
======== ======= ======== =======
</TABLE>
Amounts included in investment assets above include $34,556 and $30,085
related to the unrealized gains on the Company's fixed maturities available-
for-sale at December 31, 1998 and 1997, respectively.
The Company files a separate tax return and, therefore, losses incurred by
subsidiaries cannot be offset against operating income of the Company. At
December 31, 1998, the Company's subsidiaries had
F-25
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
approximately $8,193 of net operating loss carryforwards, expiring through the
year 2011. The tax benefit of subsidiaries' net operating loss carryforwards,
net of a valuation allowance of $0 and $1,809 are included in the deferred tax
assets at December 31, 1998 and 1997, respectively.
The Company's valuation allowance was increased (decreased) in 1998, 1997,
and 1996 by $(1,792), $34, and $1,463, respectively, as a result of the re-
evaluation by management of future estimated taxable income in its
subsidiaries.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate accumulation in
the account is $7,742 and the Company does not anticipate any transactions,
which would cause any part of the amount to become taxable. Accordingly, no
provision has been made for possible future federal income taxes on this
accumulation.
11. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". This
Statement establishes new rules for reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income or stockholders' equity. This Statement
requires unrealized gains or losses on the Company's available-for-sale
securities and related offsets for reserves and deferred policy acquisition
costs, which prior to adoption were reported separately in stockholder's
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
No. 130.
Other comprehensive income at December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
Before- Net-of-
Tax Tax (Expense) Tax
Amount or Benefit Amount
------- ------------- -------
<S> <C> <C> <C>
Unrealized gains on available-for-sale
securities:
Unrealized holding gains arising
during the period.................... $39,430 $ (13,800) $25,630
Less: reclassification adjustment for
(gains) losses realized in net
income............................... (14,350) 5,022 (9,328)
------- --------- -------
Net unrealized gains.................. 25,080 (8,778) 16,302
Reserve and DAC adjustment.............. (11,614) 4,065 (7,549)
------- --------- -------
Other comprehensive income.............. $13,466 $ (4,713) $ 8,753
======= ========= =======
</TABLE>
F-26
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
Other comprehensive income at December 31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ------------- ----------
<S> <C> <C> <C>
Unrealized gains on available-for-
sale securities:
Unrealized holding gains arising
during the period............... $ 80,821 $ (28,313) $ 52,508
Less: reclassification adjustment
for (gains) losses realized in
net income...................... 2,012 (704) 1,308
---------- --------- ---------
Net unrealized gains............. 82,833 (29,017) 53,816
Reserve and DAC adjustment......... (24,554) 8,594 (15,960)
---------- --------- ---------
Other comprehensive income......... $ 58,279 $ (20,423) $ 37,856
========== ========= =========
Other comprehensive loss at December 31, 1996 is summarized as follows:
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ------------- ----------
<S> <C> <C> <C>
Unrealized gains on available-for-
sale securities:
Unrealized holding gains (losses)
arising during the period....... $ (125,559) $ 43,971 $ (81,588)
Less: reclassification adjustment
for (gains) losses realized in
net income...................... 19,381 (6,783) 12,598
---------- --------- ---------
Net unrealized gains (losses).... (106,178) 37,188 (68,990)
Reserve and DAC adjustment......... 38,736 (13,558) 25,178
---------- --------- ---------
Other comprehensive loss........... $ (67,442) $ 23,630 $ (43,812)
========== ========= =========
</TABLE>
12. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
Effective September 30, 1998, the Company purchased all of its outstanding
series of preferred stock owned by the Parent Corporation for $121,800.
Dividends of $6,692, $8,854, and $8,587 were paid on preferred stock in
1998, 1997, and 1996, respectively. In addition, dividends of $73,344, $62,540,
and $48,083 were paid on common stock in 1998, 1997, and 1996, respectively.
Dividends are paid as determined by the Board of Directors.
The Company is involved in various legal proceedings, which arise in the
ordinary course of its business. In the opinion of management, after
consultation with counsel, the resolution of these proceedings should not have
a material adverse effect on its financial position or results of operations.
As an insurance company domiciled in the State of Colorado, the maximum
amount of dividends which can be paid to stockholders are subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gain from operations for GWL&A at
December 31, 1998 were $727,124 and $225,586 (unaudited), respectively. GWL&A
should be able to pay up to $225,586 (unaudited) of dividends in 1999.
F-27
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
13. STOCK OPTIONS
The Company is an indirect subsidiary of Great-West Lifeco Inc. (Lifeco).
Lifeco has a stock option plan (the Lifeco plan) that provides for the granting
of options for common shares of Lifeco to certain officers and employees of
Lifeco and its subsidiaries, including the Company. Options may be awarded at
no less than the market price on the date of the grant. Termination of
employment prior to vesting results in forfeiture of the options, unless
otherwise determined by a committee that administers the Lifeco plan. As of
December 31, 1998, 1997 and 1996, stock available for award under the Lifeco
plan aggregated 1,424,400, 3,440,000 and 6,244,000 shares.
The plan provides for the granting of options with varying terms and vesting
requirements. The basic options under the plan become exercisable twenty
percent per year commencing on the first anniversary of the grant and expire
ten years from the date of grant. Options granted in 1997 and 1998 totaling
1,832,000 and 278,000, respectively, become exercisable if certain long-term
cumulative financial targets are attained. If exercisable, the exercise period
runs from April 1, 2002 to June 26, 2007. Additional options granted in 1998
totaling 380,000 become exercisable if certain sales or financial targets are
attained. During 1998, 30,000 of these options vested and accordingly, the
Company recognized compensation expense of $116. If exercisable, the exercise
period runs from the date that the particular options become exercisable until
January 27, 2008.
The following table summarizes the status of, and changes in, Lifeco options
outstanding and the weighted-average exercise price (WAEP) for the years ended
December 31. As the options granted relate to Canadian stock, the values, which
are presented in U.S. dollars, will fluctuate as a result of exchange rate
fluctuations:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
Options WAEP Options WAEP Options WAEP
---------- ------ ---------- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, Jan. 1,..... 5,736,000 $ 7.71 4,104,000 $ 6.22 0 $ .00
Granted................ 988,000 13.90 1,932,000 10.82 4,104,000 6.62
Exercised.............. 99,176 6.33 16,000 5.95 0 .00
Expired or canceled.... 80,000 13.05 284,000 6.12 0 .00
---------- ------ ---------- ------ ---------- -----
Outstanding, Dec 31,..... 6,544,824 8.07 5,736,000 7.71 4,104,000 6.22
========== ====== ========== ====== ========== =====
Options exercisable at
year-end................ 1,652,424 $ 5.72 760,800 $ 5.96 0 $ .00
========== ====== ========== ====== ========== =====
Weighted average value of
options granted during
year.................... $ 1.18 $ 2.65 $ 4.46
========== ========== ==========
</TABLE>
The following table summarizes the range of exercise prices for outstanding
Lifeco common stock options at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- ---------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
- ------------- --------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 5.54-$ 7.36 3,804,824 7.62 $ 5.61 1,622,424 $ 5.58
$10.61-$13.23 2,740,000 8.70 $11.48 30,000 $13.23
</TABLE>
Of the exercisable Lifeco options, 1,622,424 relate to basic option grants
and 30,000 relate to variable grants.
F-28
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
Power Financial Corporation (PFC), which is the parent corporation of
Lifeco, has a stock option plan (the PFC plan) that provides for the granting
of options for common shares of PFC to key employees of PFC and its affiliates.
Prior to the creation of the Lifeco plan in April 1996, certain officers of the
Company participated in the PFC plan. Under the PFC plan, options may be
awarded at no less than the market price on the date of the grant. Termination
of employment prior to vesting results in forfeiture of the options, unless
otherwise determined by a committee that administers the PFC plan. As of
December 31, 1998, 1997 and 1996, stock available for award under the PFC plan
aggregated 4,400,800, 4,400,800 and 5,440,800 shares.
Options granted to officers of the Company under the PFC plan become
exercisable twenty percent per year commencing on the date of the grant and
expire ten years from the date of grant.
The following table summarizes the status of, and changes in, PFC options
outstanding and the weighted-average exercise price (WAEP) for the years ended
December 31. As the options granted relate to Canadian stock, the values, which
are presented in U.S. dollars, will fluctuate as a result of exchange rate
fluctuations:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
Options WAEP Options WAEP Options WAEP
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, Jan. 1,...... 1,076,000 $3.05 1,329,200 $3.14 1,436,000 $3.17
Exercised............... 720,946 3.60 253,200 2.68 106,800 2.95
--------- ----- --------- ----- --------- -----
Outstanding, Dec. 31,..... 355,054 2.89 1,076,000 3.05 1,329,200 3.14
========= ===== ========= ===== ========= =====
Options exercisable at
year-end................. 355,054 $2.89 1,076,000 $3.05 1,301,200 $3.15
========= ===== ========= ===== ========= ===== ===
</TABLE>
As of December 31, 1998, the PFC options outstanding have exercise prices
between $2.25 and $3.44 and a weighted-average remaining contractual life of
2.99 years.
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by APB No. 25, "Accounting for Stock Issued to Employees",
under which compensation expenses for stock options are generally not
recognized for stock option awards granted at or above fair market value. Had
compensation expense for the Company's stock option plan been determined based
upon fair values at the grant dates for awards under the plan in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income, would have been reduced by $727, $608, and $257, in 1998, 1997, and
1996, respectively. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumption used for those options granted in 1998, 1997, and
1996, respectively: dividend yield of 3.00%, expected volatility of 34.05%,
24.04%, and 15.61%, risk-free interest rates of 4.79%, 4.72%, and 4.67%, and
expected lives of 7.5 years.
14. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health and
401(k) products to small and mid-sized corporate employers. The Financial
Services segment markets and administers savings products to public and not-
for-profit employers and individuals and offers life insurance products to
individuals and businesses.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based on profit or loss from
operations after income taxes.
F-29
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each segment
has unique distribution channels.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
Summarized segment financial information for the year ended and as of
December 31 was as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------------
Employee Financial
Benefits Services Total U.S.
---------- ----------- -----------
<S> <C> <C> <C>
Operations:
Revenue:
Premium income............................ $ 746,898 $ 247,965 $ 994,863
Fee income................................ 444,649 71,403 516,052
Net investment income..................... 95,118 802,242 897,360
Realized investment gains (losses)........ 8,145 30,028 38,173
---------- ----------- -----------
Total revenue........................... 1,294,810 1,151,638 2,446,448
Benefits and Expenses:
Benefits.................................. 590,058 872,411 1,462,469
Operating expenses........................ 546,959 141,269 688,228
---------- ----------- -----------
Total benefits and expenses............. 1,137,017 1,013,680 2,150,697
Net operating income before income taxes.... 157,793 137,958 295,751
Income taxes................................ 50,678 48,158 98,836
---------- ----------- -----------
Net income.............................. $ 107,115 $ 89,800 $ 196,915
========== =========== ===========
<CAPTION>
Employee Financial
Benefits Services Total U.S.
---------- ----------- -----------
<S> <C> <C> <C>
Assets:
Investment assets........................... $1,434,691 $12,235,845 $13,670,536
Separate account assets..................... 5,704,313 4,395,230 10,099,543
Other assets................................ 567,204 786,112 1,353,316
---------- ----------- -----------
Total assets............................ $7,706,208 $17,417,187 $25,123,395
========== =========== ===========
</TABLE>
F-30
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------------
Employee Financial
Benefits Services Total U.S.
---------- ----------- -----------
<S> <C> <C> <C>
Operations:
Revenue:
Premium income............................ $ 465,143 $ 368,036 $ 833,179
Fee income................................ 358,005 62,725 420,730
Net investment income..................... 100,067 781,606 881,673
Realized investment gains (losses)........ 3,059 6,741 9,800
---------- ----------- -----------
Total revenue........................... 926,274 1,219,108 2,145,382
Benefits and Expenses:
Benefits.................................. 371,333 1,013,717 1,385,050
Operating expenses........................ 427,969 123,756 551,725
---------- ----------- -----------
Total benefits and expenses............. 799,302 1,137,473 1,936,775
Net operating income before income taxes.... 126,972 81,635 208,607
Income taxes................................ 28,726 21,121 49,847
---------- ----------- -----------
Net income.............................. $ 98,246 $60,514 $ 158,760
========== =========== ===========
<CAPTION>
Employee Financial
Benefits Services Total U.S.
---------- ----------- -----------
<S> <C> <C> <C>
Assets:
Investment assets........................... $1,346,944 $11,859,038 $13,205,982
Separate account assets..................... 4,533,516 3,313,935 7,847,451
Other assets................................ 355,834 668,698 1,024,532
---------- ----------- -----------
Total assets............................ $6,236,294 $15,841,671 $22,077,965
========== =========== ===========
</TABLE>
F-31
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997, and 1996
(Amounts in Thousands, except Share Amounts)
<TABLE>
<CAPTION>
Year ended December 31, 1996
--------------------------------
Employee Financial
Benefits Services Total U.S.
-------- ---------- ----------
<S> <C> <C> <C>
Operations:
Revenue:
Premium income............................. $486,565 $ 342,884 $ 829,449
Fee income................................. 321,074 26,445 347,519
Net investment income...................... 87,511 747,126 834,637
Realized investment gains (losses)......... (2,661) (18,417) (21,078)
-------- ---------- ----------
Total revenue............................ 892,489 1,098,038 1,990,527
Benefits and Expenses:
Benefits................................... 406,143 949,821 1,355,964
Operating expenses......................... 368,258 101,358 469,616
-------- ---------- ----------
Total benefits and expenses.............. 774,401 1,051,179 1,825,580
Net operating income before income taxes..... 118,088 46,859 164,947
Income taxes................................. 22,874 7,498 30,372
-------- ---------- ----------
Net income............................... $ 95,214 $ 39,361 $ 134,575
======== ========== ==========
The following table, which summarizes premium and fee income by segment,
represents supplemental information.
<CAPTION>
1998 1997 1996
-------- ---------- ----------
<S> <C> <C> <C>
Premium Income:
Employee Benefits
Group Life & Health....................... $746,898 $ 465,143 $ 486,565
-------- ---------- ----------
Total Employee Benefits................ 746,898 465,143 486,565
-------- ---------- ----------
Financial Services
Savings.................................. 16,765 22,634 26,655
Individual Insurance..................... 231,200 345,402 316,229
-------- ---------- ----------
Total Financial Services............... 247,965 368,036 342,884
-------- ---------- ----------
Total premium income......................... $994,863 $ 833,179 $ 829,449
======== ========== ==========
Fee Income:
Employee Benefits
Group Life & Health...................... $366,805 $ 305,302 $276,688
401(k)................................... 77,844 52,703 44,386
-------- ---------- ----------
Total Employee Benefits................ 444,649 358,005 321,074
-------- ---------- ----------
Financial Services
Savings.................................. 71,403 62,725 26,445
-------- ---------- ----------
Total Financial Services............... 71,403 62,725 26,445
-------- ---------- ----------
Total fee income....................... $516,052 $ 420,730 $ 347,519
======== ========== ==========
</TABLE>
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any infor-
mation or to make any representations other than those contained or incorpo-
rated by reference in this Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company, the Trust or the Underwriters. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than
those to which it relates nor does it constitute an offer to sell or a solici-
tation of an offer to buy to any person in any jurisdiction in which it would
be unlawful to make such an offer or solicitation. Neither the delivery of this
nor any sale made hereunder shall under any circumstances create an implication
that there has been no change in the facts set forth in this Prospectus or in-
corporated by reference herein or in the affairs of the Company or the Trust
since the date hereof.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Forward-Looking Statements................................................. 4
Summary.................................................................... 5
Risk Factors............................................................... 13
Reorganization............................................................. 18
Capitalization............................................................. 19
Use of Proceeds............................................................ 19
Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and
Preferred Stock Dividends................................................. 20
Accounting Treatment....................................................... 20
The Trust.................................................................. 21
The Company................................................................ 22
Selected Consolidated Financial Data....................................... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 27
Description of Capital Securities.......................................... 38
Description of Junior Subordinated Debentures.............................. 49
Description of Guarantee................................................... 56
Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee................................. 58
U.S. Federal Income Tax Consequences....................................... 60
Certain ERISA Considerations............................................... 63
Underwriting............................................................... 65
Legal Matters.............................................................. 66
Experts.................................................................... 66
Available Information...................................................... 66
Incorporation of Certain Documents by Reference............................ 67
Index to Financial Statements.............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$150,0000,000
Great-West Life & Annuity
Insurance Capital I
SKIS SM
% Subordinated Capital
Income Securities
(Liquidation Amount $25 Per Capital Security)
fully and unconditionally guaranteed, as described herein, by
GWL&A Financial Inc.
------------------
PROSPECTUS
, 1999
------------------
Lehman Brothers
Merrill Lynch & Co.
PaineWebber Incorporated
Prudential Securities Incorporated
Goldman, Sachs & Co.
J.P. Morgan & Co.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with issuance and distribution of the
securities being registered, other than underwriting compensation, are:
<TABLE>
<S> <C>
Securities Act Filing Fee......................................... $ 44,250
New York Stock Exchange Listing Fee............................... 88,100
Legal Fees and Expenses........................................... 300,000*
Accounting Fees and Expenses...................................... 150,000*
Printing and Engraving Fees....................................... 90,000*
Property Trustee's Fees........................................... 6,000*
Miscellaneous..................................................... 6,650*
--------
Total........................................................... $685,000*
========
</TABLE>
- --------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
GWL&A Financial Inc.'s Articles of Incorporation provides for the
indemnification of directors.
GWL&A Financial Inc.'s Bylaws provide for the indemnification of officers,
directors and third parties acting on behalf of GWL&A Financial Inc. if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of GWL&A Financial Inc.'s, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his conduct was unlawful.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1 Form of Underwriting Agreement.
3.1* Articles of Incorporation of GWL&A Financial Inc.
3.2* Bylaws of GWL&A Financial Inc.
4.1* Certificate of Trust of Great-West Life & Annuity Insurance Capital I.
Form of Amended and Restated Declaration of Trust of Great-West Life &
4.2* Annuity Insurance Capital I.
Form of Indenture between GWL&A Financial Inc. and The Bank of New York,
4.3* as Trustee.
4.4* Form of Guarantee Agreement between GWL&A Financial Inc. and The Bank of
New York, as Trustee.
4.5* Form of Capital Security (included in Item 4.2 above).
4.6* Form of Subordinated Debt Security (included in Item 4.3 above).
5.1* Opinion of Richards, Layton & Finger.
5.2 Opinion of Cleary, Gottlieb, Steen & Hamilton.
8.1* Opinion of Cleary, Gottlieb, Steen & Hamilton.
12* Calculation of Ratio of Income to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Deloitte & Touche LLP.
Consent of Richards, Layton & Finger (included in its Opinion filed as
23.3* Exhibit 5.1).
Consent of Cleary, Gottlieb, Steen & Hamilton (included in its Opinion
23.4 filed as Exhibit 5.2).
24* Powers of Attorney of GWL&A Financial Inc.
25.1* Form T-1, Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as Property Trustee under the
Amended and Restated Declaration of Trust of Great-West Life & Annuity
Insurance Capital I.
25.2* Form T-1, Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as Trustee under the
Indenture.
25.3* Form T-1, Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as Guarantee Trustee under
the Guarantee of GWL&A Financial Inc. for the benefit of holders of the
Capital Securities of Great-West Life & Annuity Insurance Capital I.
</TABLE>
- --------
* Previously filed.
ITEM 17. UNDERTAKINGS
Each of the undersigned Registrants hereby undertakes that: (1) for purposes
of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective, and (2) for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Each of the undersigned Registrants hereby undertakes that, for the purpose
of determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, each of the
Registrants has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
Registrants certifies that it has reasonable grounds to believe that it has
qualified for filing on Form S-3 and has duly caused this Amendment No. 4 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in Englewood, State of Colorado, on April 23, 1999.
GREAT-WEST LIFE & ANNUITY INSURANCE
CAPITAL I
By: GWL&A Financial Inc., as Sponsor
/s/ Mitchell T.G. Graye
By: _________________________________
Mitchell T.G. Graye
Executive Vice President, Chief
Financial Officer
Date: April 23, 1999
GWL&A FINANCIAL INC.
/s/ William T. McCallum
By: _________________________________
William T. McCallum
President and Chief Executive
Officer
Date: April 23, 1999
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed below by the following
persons on behalf of GWL&A Financial Inc. in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William T. McCallum President and Chief April 23, 1999
________________________________________ Executive Officer and a
William T. McCallum Director
/s/ Mitchell T. G. Graye Executive Vice President, April 23, 1999
________________________________________ Chief Financial Officer
Mitchell T. G. Graye
/s/ Glen R. Derback Vice President and April 23, 1999
________________________________________ Controller
Glen R. Derback
* Director April 23, 1999
________________________________________
James Balog
* Director April 23, 1999
________________________________________
James W. Burns
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director April 23, 1999
________________________________________
Orest T. Dackow
* Director April 23, 1999
________________________________________
Andre Desmarais
Director April 23, 1999
________________________________________
Paul Desmarais, Jr.
* Director April 23, 1999
________________________________________
Robert G. Graham
* Chairman of the Board April 23, 1999
________________________________________
Robert Gratton
* Director April 23, 1999
________________________________________
N. Berne Hart
* Director April 23, 1999
________________________________________
Kevin P. Kavanagh
* Director April 23, 1999
________________________________________
William Mackness
* Director April 23, 1999
________________________________________
Jerry E.A. Nickerson
* Director April 23, 1999
________________________________________
P. Michael Pitfield
* Director April 23, 1999
________________________________________
Michel Plessis-Belair
* Director April 23, 1999
________________________________________
Brian E. Walsh
</TABLE>
/s/ D. Craig Lennox
*By: ______________________________
D. Craig Lennox
Attorney-in-fact pursuant to
Powers of Attorney filed herewith.
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
<C> <S>
1 Form of Underwriting Agreement.
3.1* Articles of Incorporation of GWL&A Financial Inc.
3.2* Bylaws of GWL&A Financial Inc.
4.1* Certificate of Trust of Great-West Life & Annuity Insurance Capital I.
Form of Amended and Restated Declaration of Trust of Great-West Life &
4.2* Annuity Insurance Capital I.
Form of Indenture between GWL&A Financial Inc. and The Bank of New
4.3* York, as Trustee.
4.4* Form of Guarantee Agreement between GWL&A Financial Inc. and The Bank
of New York, as Trustee.
4.5* Form of Capital Security (included in Item 4.2 above).
4.6* Form of Subordinated Debt Security (included in Item 4.3 above).
5.1* Opinion of Richards, Layton & Finger.
5.2 Opinion of Cleary, Gottlieb, Steen & Hamilton.
8.1* Opinion of Cleary, Gottlieb, Steen & Hamilton.
12* Calculation of Ratio of Income to Fixed Charges and Ratio of Earnings
to Combined Fixed Charges and Preferred Stock Dividend.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Deloitte & Touche LLP.
Consent of Richards, Layton & Finger (included in its Opinion filed as
23.3* Exhibit 5.1).
Consent of Cleary, Gottlieb, Steen & Hamilton (included in its Opinion
23.4 filed as Exhibit 5.2).
24* Powers of Attorney of GWL&A Financial Inc.
25.1* Form T-1, Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as Property Trustee under
the Amended and Restated Declaration of Trust of Great-West Life &
Annuity Insurance Capital I.
25.2* Form T-1, Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as Trustee under the
Indenture.
25.3* Form T-1, Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as Guarantee Trustee under
the Guarantee of GWL&A Financial Inc. for the benefit of holders of
the Capital Securities of Great-West Life & Annuity Insurance Capital
I.
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1
$150,000,000
GREAT-WEST LIFE & ANNUITY INSURANCE CAPITAL I
____% Subordinated Capital Income Securities (SKISSM)
UNDERWRITING AGREEMENT
----------------------
April __, 1999
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
PaineWebber Incorporated
Prudential Securities Incorporated
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.,
As Representatives of the several
Underwriters named in Schedule 1
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
Great-West Life & Annuity Insurance Capital I, a Delaware statutory
business trust (the "Trust"), and GWL&A Financial Inc., a Delaware corporation
(the "Company"), propose to issue and sell an aggregate of $150 million
liquidation amount of ___% Subordinated Capital Income Securities (the "Capital
Securities"), liquidation amount $25 per Capital Security, of the Trust,
guaranteed (the "Guarantee" and, together with the Capital Securities and the
Junior Subordinated Debentures referred to below, the "Securities") by the
Company pursuant to the Guarantee Agreement (the "Guarantee Agreement") to be
entered into between the Company and The Bank of New York (the "Guarantee
Trustee"), the form of which has been filed as an exhibit to the Registration
Statements (as defined below). The Company will be the owner of all of the
beneficial ownership interests represented by the common securities (the "Common
Securities") of the Trust. Concurrently with the issuance of the Capital
Securities and the Company's purchase of all of the Common Securities, the Trust
will invest the proceeds of each thereof in ___% Junior Subordinated Debentures
(the "Junior Subordinated Debentures") issued by the Company. The Junior
Subordinated Debentures are to be issued pursuant to an Indenture (the
"Indenture") to be entered into between the Company and The Bank of New York
(the "Indenture Trustee"), the form of which has been filed as an exhibit to the
Registration Statements. This is to confirm the agreement concerning the
purchase of the Capital Securities from the Trust by the Underwriters named in
Schedule 1 hereto (the "Underwriters").
<PAGE>
2
1. Representations, Warranties and Agreements of the Company and the
Trust. The Company and the Trust, jointly and severally, represent, warrant and
agree that:
(a) A registration statement on Form S-3, and amendments thereto,
with respect to the Securities have (i) been prepared by the Company and
the Trust in conformity with the requirements of the United States
Securities Act of 1933, as amended (the "Securities Act") and the rules
and regulations (the "Rules and Regulations") of the United States
Securities and Exchange Commission (the "Commission") thereunder, (ii) been
filed with the Commission under the Securities Act and (iii) become
effective under the Securities Act; and a second registration statement on
Form S-3 with respect to the Securities (i) may also be prepared by the
Company and the Trust in conformity with the requirements of the Securities
Act and the Rules and Regulations and (ii) if so prepared, will be filed
with the Commission under the Securities Act pursuant to Rule 462(b) of the
Rules and Regulations on the date hereof; and the Indenture, the
Declaration (as hereinafter defined) and the Guarantee have been qualified
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). Copies of the first such registration statement and the amendments
to such registration statement, together with the form of any such second
registration statement, have been delivered by the Company and the Trust to
you as the representatives (the "Representatives") of the Underwriters. As
used in this Agreement, "Effective Time" means (i) with respect to the
first such registration statement, the date and the time as of which such
registration statement, or the most recent post-effective amendment
thereto, if any, was declared effective by the Commission and (ii) with
respect to any second registration statement, the date and time as of which
such second registration statement is filed with the Commission, and
"Effective Times" is the collective reference to both Effective Times;
"Effective Date" means (i) with respect to the first such registration
statement, the date of the Effective Time of such registration statement
and (ii) with respect to any second registration statement, the date of the
Effective Time of such second registration statement, and "Effective Dates"
is the collective reference to both Effective Dates; "Preliminary
Prospectus" means each prospectus included in such registration statement,
or amendments thereof, before it became effective under the Securities Act
and any prospectus filed with the Commission by the Company and the Trust
with the consent of the Representatives pursuant to Rule 424(a) of the
Rules and Regulations; "Primary Registration Statement" means the first
registration statement referred to in this Section 1(a), as amended at its
Effective Time, "Rule 462(b) Registration Statement" means the second
registration statement, if any, referred to in this Section 1(a), as filed
with the Commission, and "Registration Statements" means both the Primary
Registration Statement and any Rule 462(b) Registration Statement,
including in each case any documents incorporated by reference therein at
such time and all information contained in the final prospectus filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations in
accordance with Section 5(a) hereof and deemed to be a part of the
Registration Statements as of the Effective Time of the Primary
Registration Statement pursuant to paragraph (b) of Rule 430A of the Rules
and Regulations; and "Prospectus" means such final prospectus, as first
filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b)
of the Rules and Regulations. Reference made herein to any Preliminary
Prospectus or to the Prospectus shall be deemed to refer to and include any
<PAGE>
3
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the Securities Act, as of the date of such Preliminary Prospectus or
the Prospectus, as the case may be, and any reference to any amendment or
supplement to any Preliminary Prospectus or the Prospectus shall be deemed
to refer to and include any document filed under the United States
Securities Exchange Act of 1934 (the "Exchange Act") after the date of such
Preliminary Prospectus or the Prospectus, as the case may be, and
incorporated by reference in such Preliminary Prospectus or the Prospectus,
as the case may be; and any reference to any amendment to either of the
Registration Statements shall be deemed to include any annual report of the
Company filed with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act after the Effective Time that is incorporated by reference in
the Registration Statements. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
(b) The Primary Registration Statement conforms (and the Rule 462(b)
Registration Statement, if any, the Prospectus and any further amendments
or supplements to the Registration Statements or the Prospectus, when they
become effective or are filed with the Commission, as the case may be, will
conform) in all material respects to the requirements of the Securities Act
and the Rules and Regulations and do not and will not, as of the applicable
effective date (as to the Registration Statements and any amendment
thereto) and as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided that no representation
or warranty is made as to (i) information contained in or omitted from the
Registration Statements or the Prospectus in reliance upon and in
conformity with written information furnished to the Company and the Trust
through the Representatives by or on behalf of any Underwriter specifically
for inclusion therein, or (ii) that part of the Primary Registration
Statement which constitutes the Statement of Eligibility and Qualifications
(Form T-1) under the Trust Indenture Act of the Trustee; and the Indenture,
the Declaration and the Guarantee conform in all material respects to the
requirements of the Trust Indenture Act and the applicable rules and
regulations thereunder.
(c) The documents incorporated by reference in the Prospectus, when
they were filed with the Commission, conformed in all material respects to
the requirements of the Securities Act and the rules and regulations of the
Commission thereunder; and any further documents so filed and incorporated
by reference in the Prospectus, when such documents are filed with the
Commission, will conform in all material respects to the requirements of
the Securities Act and the rules and regulations of the Commission
thereunder.
(d) The Company and Great-West Life & Annuity Insurance Company
("GWL&A") have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are
in good standing as foreign corporations in each jurisdiction in which
their respective ownership or lease of property or the conduct of their
respective businesses
<PAGE>
4
requires such qualification other than where such failures would not,
either individually or in the aggregate, have a material adverse effect on
the business, financial condition, stockholders' equity or operating
results of the Company and its subsidiaries (as defined in Section 15)
taken as a whole, and have all power and authority necessary to own or hold
their respective properties and to conduct the businesses in which they are
engaged; and none of the subsidiaries of the Company other than GWL&A is a
"significant subsidiary", as such term is defined in Rule 405 of the Rules
and Regulations.
(e) Each of the Company and GWL&A is in compliance with the
requirements of the insurance statutes of its jurisdiction of incorporation
and domicile, including the statutes relating to companies which control
insurance companies, and the rules, regulations and interpretations of the
insurance regulatory authorities thereunder (the "Applicable Insurance
Laws"), has filed all reports, information statements and other documents
with the insurance regulatory authorities of its jurisdiction of
incorporation and domicile as are required to be filed pursuant to the
Applicable Insurance Laws, and has duly paid all taxes (including franchise
taxes and similar fees) it is required to have paid under the Applicable
Insurance Laws, except where the failure to comply with such requirements,
file such statements or reports or pay such taxes would not, either
individually or in the aggregate, have a material adverse effect on the
business, financial condition, stockholders' equity or operating results of
the Company and its subsidiaries taken as a whole, and each of the Company
and GWL&A maintains its books and records in accordance with the Applicable
Insurance Laws, except where the failure to so maintain its books and
records would not, either individually or in the aggregate, have a material
adverse effect on the business, financial condition, stockholders' equity
or operating results of the Company and its subsidiaries taken as a whole.
Except as disclosed in the Prospectus, no insurance regulatory agency or
body has issued, or commenced any proceeding for the issuance of, any order
or decree impairing, restricting or prohibiting the payment of dividends by
any such insurance company subsidiary to its parent or materially limiting
the conduct of its business.
(f) All ceded reinsurance and retrocessional agreements to which the
Company's insurance company subsidiaries are a party are in full force and
effect and neither the Company nor any of such subsidiaries is in violation
of, or in default in the performance, observance or fulfillment of, any
obligation, agreement, covenant or condition contained therein, except for
such violations or defaults which could not reasonably be expected,
individually or in the aggregate, to have a material adverse effect on the
business, financial condition, stockholders' equity or operating results of
the Company and its subsidiaries taken as a whole. Neither the Company nor
any of such subsidiaries has received any notice from any of the other
parties to such agreements that such other party intends not to perform in
any material respect such agreement and none of the Company and such
subsidiaries has any reason to believe that any of the other parties to
such agreements will be unable to perform such agreements, except to the
extent that (i) the Company has established appropriate reserves on its
consolidated financial statements included or incorporated by reference
into the Registration Statements and the Prospectus, or (ii) such
nonperformance could not reasonably be expected, individually or in the
aggregate, to have a material adverse effect
<PAGE>
5
on the business, financial condition, stockholders' equity or operating
results of the Company and its subsidiaries taken as a whole; and each of
the Company and its insurance company subsidiaries is entitled to give
effect in its underwriting results in its most recently filed statutory
financial statements for reinsurance ceded pursuant to such agreements.
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued and are fully paid and
non-assessable; and all of the issued shares of capital stock of GWL&A have
been duly and validly authorized and issued and are fully paid and non-
assessable and are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims.
(h) The Capital Securities and the Common Securities have been duly
and validly authorized and, when issued and delivered against payment
therefor as provided herein, will be duly and validly issued, fully paid
and non-assessable; and the Capital Securities and the Common Securities,
when issued and delivered, will conform in all material respects to the
description thereof contained in the Prospectus.
(i) The Indenture has been duly authorized, and when duly executed by
the proper officers of the Company (assuming due execution and delivery by
the Indenture Trustee) and delivered by the Company, will constitute a
valid and binding agreement of the Company enforceable against the Company
in accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing; and the Junior
Subordinated Debentures have been duly authorized, and, when duly executed,
authenticated, issued and delivered as contemplated in the Indenture, will
constitute valid and binding obligations of the Company entitled to the
benefits of the Indenture and enforceable in accordance with their terms,
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing; and the Junior Subordinated Debentures, when
issued and delivered, will conform in all material respects to the
description thereof contained in the Prospectus.
(j) The Trust has been duly created and is validly existing as a
statutory business trust in good standing under the Business Trust Act of
the State of Delaware (the "Delaware Business Trust Act") with the trust
power and authority to own property and conduct its business as described
in the Prospectus, and has conducted and will conduct no business other
than the transactions contemplated by this Agreement as described in the
Prospectus; the Trust is not a party to or bound by any agreement or
instrument other than this Agreement and, as and when executed, the Amended
and Restated Declaration of Trust (the "Declaration") among the Company,
The Bank of New York, as property trustee (the "Property Trustee"), The
Bank of New York (Delaware), as Delaware trustee (the "Delaware
<PAGE>
6
Trustee") and the individuals named therein as the Regular Trustees (the
"Regular Trustees," and together with the Property Trustee and the Delaware
Trustees, the "Trustees"), and the agreements and instruments contemplated
by the Declaration and described in the Prospectus; the Trust has no
liabilities or obligations other than those arising out of the transactions
contemplated by this Agreement and the agreements and instruments
contemplated by the Declaration and described in the Prospectus; and the
Trust is not a party to or subject to any action, suit or proceeding of any
nature.
(k) The Declaration has been duly authorized by the Company and, when
duly executed and delivered by the Company and the Trustees, will be a
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting the rights of creditors generally,
general equitable principles (whether considered in a proceeding in equity
or at law) and an implied covenant of good faith and fair dealing, and will
conform in all material respects to the description thereof contained in
the Prospectus. Each of the Regular Trustees is an employee of the Company
and/or GWL&A and has been duly authorized by the Company and/or GWL&A to
serve in such capacity and to execute and deliver the Declaration.
(l) The Guarantee Agreement has been duly authorized and, when duly
executed and delivered by the proper officers of the Company and the
Guarantee Trustee, will constitute a valid and legally binding agreement of
the Company, enforceable against the Company in accordance with its terms,
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing; and the Guarantee Agreement, when executed and
delivered, will conform in all material respects to the description thereof
contained in the Prospectus.
(m) This Agreement has been duly authorized, executed and delivered
by each of the Company and the Trust.
(n) The execution, delivery and performance of this Agreement, the
Declaration, the Guarantee Agreement, the Indenture and the Junior
Subordinated Debentures by the Company and the Trust, as applicable, and
the consummation of the transactions contemplated herein and therein will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which the
Company or GWL&A is a party or by which the Company or GWL&A is bound or to
which any of the property or assets of the Company or GWL&A is subject and
will not violate or conflict with any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their properties or
assets, except for such conflict, breach, violations or defaults as would
not, either individually or in the aggregate, have a material adverse
effect on the business, financial condition,
<PAGE>
7
stockholders' equity or operating results of the Company and its
subsidiaries taken as a whole, nor will such actions result in any
violation of the provisions of the charter or by-laws of the Company or
GWL&A; and except for the registration of the Securities under the
Securities Act and such consents, approvals, authorizations, registrations
or qualifications as may be required under the Exchange Act and applicable
state securities laws in connection with the purchase and distribution of
the Capital Securities by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Declaration, the Guarantee Agreement,
the Indenture or the Junior Subordinated Securities or the consummation of
the transactions contemplated herein and therein, including the issuance of
the Common Securities and the Capital Securities by the Trust and the
purchase of the Junior Subordinated Debentures by the Trust from the
Company.
(o) There are no contracts, agreements or understandings between the
Company or any of its subsidiaries or the Trust and any person granting
such person the right to require the Company or the Trust to include such
securities in the securities registered pursuant to the Registration
Statements.
(p) Neither the Company nor GWL&A has sustained, since the date of
the latest audited financial statements included or incorporated by
reference in the Prospectus, any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since such date, there has not been any material change in
the capital stock or long-term debt of the Company or GWL&A or any material
adverse change in or affecting the general affairs, management, financial
position or results of operations of the Company and its subsidiaries taken
as a whole, otherwise than as set forth or contemplated in the Prospectus.
(q) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statements or
included or incorporated by reference in the Prospectus present fairly in
all material respects the financial condition and results of operations of
the entities purported to be shown thereby, at the dates and for the
periods indicated, and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved; the pro forma financial information included in the
Prospectus has been prepared in accordance with the requirements of
Regulation S-X promulgated by the Commission and contains all adjustments
necessary for a fair presentation of the information set forth therein; and
the information contained in the Prospectus that constitutes "forward-
looking statements" within the meaning of Section 21E(i)(1) of the Exchange
Act has been prepared on the basis of the Company's best current judgments
and estimations as to future operating plans and results.
(r) Deloitte & Touche, LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus or is
incorporated by reference therein and
<PAGE>
8
who have delivered the initial letter referred to in Section 7(g) hereof,
are independent public accountants as required by the Securities Act and
the Rules and Regulations.
(s) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property
or assets of the Company or any of its subsidiaries is the subject which,
if determined adversely to the Company or any of its subsidiaries, are
reasonably likely to have a material adverse effect on the business,
financial position or results of operations of the Company and its
subsidiaries taken as a whole; and to the best of the Company's knowledge,
no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(t) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to either of the
Registration Statements by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed as
exhibits to either of the Registration Statements or incorporated therein
by reference as permitted by the Rules and Regulations.
(u) Neither the Company nor GWL&A (i) is in violation of its charter
or by-laws, (ii) is in default in any material respect, and no event has
occurred which, with notice or lapse of time or both, would constitute such
a default, in the due performance or observance of any term, covenant or
condition contained in any material indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which it is a party or
by which it is bound or to which any of its property or assets is subject
or (iii) is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its property
or assets may be subject or has failed to obtain any material license,
permit, certificate, franchise or other governmental authorization or
permit necessary to the ownership of its properties or assets or to the
conduct of its business.
(v) Neither the Trust nor the Company is or, after giving effect to
the offering and sale of Securities and the consummation of the other
transactions contemplated by the Prospectus, will be, required to register
as an "investment company" within the meaning of such term under the
Investment Company Act of 1940 (the "Investment Company Act") and the rules
and regulations of the Commission thereunder.
2. Purchase of the Capital Securities by the Underwriters. The Trust
and the Company hereby agree to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations, warranties and agreements
herein contained, but subject to the conditions hereinafter stated, agrees,
severally and not jointly, to purchase from the Trust, the respective
liquidation amount of Capital Securities set forth in Schedule 1 hereto opposite
their names at a purchase price of 100% of the liquidation amount thereof.
As compensation to the Underwriters for their commitments hereunder,
the Company agrees to pay the Underwriters a commission of __% of the
liquidation amount of the Capital Securities set forth in Schedule 1 opposite
each Underwriter's name.
<PAGE>
9
3. Offering of Capital Securities by the Underwriters. Upon
authorization by the Representatives of the release of the Capital Securities,
the several Underwriters propose to offer the Capital Securities for sale upon
the terms and conditions set forth in the Prospectus; provided, however, that no
Capital Securities registered pursuant to the Rule 462(b) Registration
Statement, if any, shall be offered prior to the Effective Time thereof.
4. Delivery of and Payment for the Stock. Delivery of and payment
for the Capital Securities shall be made at the office of Simpson Thacher &
Bartlett at 425 Lexington Avenue, New York, New York at 10:00 A.M., New York
City time, on the third full business day following the date of this Agreement
or at such other date or place as shall be determined by agreement between the
Representatives, the Trust and the Company. This date and time are sometimes
referred to as the "Closing Date". On the Closing Date, the Trust shall deliver
or cause to be delivered to the Representatives for the account of each
Underwriter, against payment to or upon the order of the Trust of the purchase
price by wire transfer in immediately available funds, the Capital Securities in
the form of one or more permanent global securities in definitive form (the
"Global Securities") deposited with the Property Trustee as custodian for the
Depository Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee for DTC. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. On the Closing Date, the Company will
pay, or cause to be paid, the commission payable on the Closing Date to the
Underwriters under the last paragraph of Section 2 in immediately available
funds in New York City.
5. Further Agreements of the Company and the Trust. The Company
agrees, and the Trust, jointly and severally, each represents and warrants to,
and agrees with, each of the Underwriters that:
(a) To prepare the Rule 462(b) Registration Statement, if
necessary, in a form approved by the Representatives (which approval
shall not be unreasonably withheld) and to file such Rule 462(b)
Registration Statement with the Commission on the date hereof; to
prepare the Prospectus in a form approved by the Representatives
(which approval shall not be unreasonably withheld) and to file such
Prospectus pursuant to Rule 424(b) under the Securities Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement; to make no
further amendment or any supplement to the Registration Statements or
to the Prospectus prior to the Closing Date except as permitted
herein; to advise the Representatives, promptly after it receives
notice thereof, of the time when any amendment to either Registration
Statement has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof; to file promptly all reports and
any definitive proxy or information statements required to be filed by
the Company with the Commission pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of the Prospectus
and for so long as the delivery of a prospectus is required in
connection with the offering or sale of the Securities; to advise the
Representatives, promptly after it receives notice thereof, of the
<PAGE>
10
issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Securities
for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request
by the Commission for the amending or supplementing of the
Registration Statements or the Prospectus or for additional
information; and, in the event of the issuance of any stop order or of
any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending any such qualification, to
use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to the Representatives and to counsel
for the Underwriters a signed copy of each of the Registration
Statements as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and exhibits
filed therewith;
(c) To deliver promptly to the Representatives such number of
the following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statements as
originally filed with the Commission and each amendment thereto (in
each case excluding exhibits other than this Agreement, the Indenture,
the Declaration, the Guarantee Agreement and the computation of the
ratio of earnings to fixed charges), (ii) each Preliminary Prospectus,
the Prospectus and any amended or supplemented Prospectus and (iii)
any document incorporated by reference in the Prospectus (excluding
exhibits thereto); and, if the delivery of a prospectus is required at
any time after the Effective Time of the Primary Registration
Statement in connection with the offering or sale of the Capital
Securities or any other securities relating thereto and if at such
time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary to amend or supplement the Prospectus (including by filing
under the Exchange Act any document incorporated by reference in the
Prospectus) in order to comply with the Securities Act or the Exchange
Act, to notify the Representatives and, upon their request, to file
such document and to prepare and furnish without charge for the nine-
month period after the effective date of the Registration Statement to
each Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended
or supplemented Prospectus which will correct such statement or
omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statements or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company, the Trust or the
Representatives, be required by the Securities Act or requested by the
Commission;
<PAGE>
11
(e) Prior to filing with the Commission any amendment to either
of the Registration Statements or supplement to the Prospectus, any
document incorporated by reference in the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy
thereof to the Representatives and counsel for the Underwriters and
obtain the consent of the Representatives to the filing (which consent
shall not be unreasonably withheld) , provided, that, with respect to
any such document incorporated by reference, the Company and the Trust
shall be obligated to furnish such copy and obtain such consent unless
such actions would materially impair the Company's ability to comply
with its obligations under the federal securities laws on a timely
basis;
(f) As soon as practicable after the Effective Date of the
Primary Registration Statement, to make generally available to the
Company's security holders and to deliver to the Representatives an
earnings statement of the Company and its subsidiaries (which need not
be audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule
158);
(g) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Securities for
offering and sale under the securities laws of such jurisdictions in
the United States as the Representatives may request and to comply
with such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Securities, provided that in
connection therewith, none of the Trust, the Company or GWL&A shall be
obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action that would subject it to
service of process in suits, other than those arising out of the
offering or sale of the Securities, in any jurisdiction where it is
not now so subject;
(h) For a period ending on the later of the Closing Date and the
date on which selling restrictions have terminated, not to, directly
or indirectly, (1) offer for sale, sell, pledge or otherwise dispose
of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any
time in the future of) (i) any trust certificate or other securities
of the Trust other than the sale of the Common Securities to the
Company and the sale of the Capital Securities to the Underwriters, as
contemplated by the Prospectus, (ii) any securities that are
substantially similar to the Securities, or (iii) any securities that
are convertible into, or exchangeable or exercisable for, any of the
foregoing, or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of the Securities, whether any such
transaction described in clause (1) or (2) above is to be settled by
delivery of the Securities or other securities, in cash or otherwise,
in each case without the prior written consent of Lehman Brothers
Inc., on behalf of the Representatives;
<PAGE>
12
(i) Prior to the Effective Date of the Primary Registration
Statement, to apply for the listing of the Capital Securities on the
New York Stock Exchange, Inc. and to use its best efforts to complete
that listing, subject only to official notice of issuance and evidence
of satisfactory distribution, prior to the Closing Date.
6. Expenses. The Company and the Trust agree to pay (a) the costs
incident to the authorization, issuance, sale and delivery of the Securities and
any taxes payable in that connection; (bi the costs incident to the preparation,
printing and filing under the Securities Act of the Registration Statements and
any amendments and exhibits thereto; (c) the costs of distributing the
Registration Statements as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Prospectus or any document incorporated by reference therein, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the Securities; (e) any applicable listing or other fees; (f) the
fees and expenses of qualifying the Securities under the securities laws of the
several jurisdictions as provided in Section 5(g); (g) any fees charged by
securities rating services for rating the Securities; and (h) all other costs
and expenses incident to the performance of the obligations of the Company and
the Trust under this Agreement; provided that, except as provided in this
Section 6 and in Section 11, the Underwriters shall pay their own costs and
expenses, including the costs and expenses of their counsel, any transfer taxes
on the Securities which they may sell and the expenses of advertising any
offering of the Capital Securities made by the Underwriters.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on the Closing Date, of the representations and warranties of the Company
and the Trust contained herein, to the performance by the Company and the Trust
of their respective obligations hereunder, and to each of the following
additional terms and conditions:
(a) The Rule 462(b) Registration Statement, if any, and the
Prospectus shall have been timely filed with the Commission in
accordance with Section 5(a); no stop order suspending the
effectiveness of either of the Registration Statements or any part
thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and any
request of the Commission for inclusion of additional information in
either of the Registration Statements or the Prospectus or otherwise
shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to the Closing Date that either of the
Registration Statements or the Prospectus or any amendment or
supplement thereto contains an untrue statement of a fact which, in
the opinion of Simpson Thacher & Bartlett, counsel for the
Underwriters, is material or omits to state a fact which, in the
opinion of such
<PAGE>
13
counsel, is material and is required to be stated therein or is
necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the
Indenture, the Declaration, the Guarantee Agreement, the Securities,
the Registration Statements and the Prospectus, and all other legal
matters relating to this Agreement and the transactions contemplated
hereby, shall be reasonably satisfactory in all material respects to
counsel for the Underwriters, and the Company and the Trust shall have
furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) (1) Cleary, Gottlieb, Steen & Hamilton shall have furnished
to the Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated the Closing Date, in form and
substance satisfactory to the Representatives, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus;
(iii) The Company has corporate power to own its properties
and conduct its business as described in the Prospectus, and the
Company has corporate power to issue the Junior Subordinated
Debentures, and to enter into this Agreement, the Indenture and
the Guarantee Agreement and to perform its obligations hereunder
and thereunder;
(iv) The execution and delivery of the Indenture have been
duly authorized by all necessary corporate action of the Company,
and the Indenture has been duly executed and delivered by the
Company and qualified under the Trust Indenture Act, and is a
valid, binding and enforceable agreement of the Company.
(v) The execution and delivery of the Junior Subordinated
Debentures have been duly authorized by all necessary corporate
action of the Company, and the Junior Subordinated Debentures
have been duly executed and delivered by the Company and
qualified under the Trust Indenture Act, and are valid, binding
and enforceable obligations of the Company, entitled to the
benefits of the Indenture.
<PAGE>
14
(vi) The execution and delivery of the Declaration have
been duly authorized by all necessary corporate action of the
Company and qualified under the Trust Indenture Act.
(vii) The execution and delivery of the Guarantee
Agreement have been duly authorized by all necessary corporate
action of the Company, and the Guarantee Agreement has been duly
executed and delivered by the Company, and qualified under the
Trust Indenture Act, and is a valid, binding and enforceable
agreement of the Company.
(viii) The statements set forth under the headings
"Description of Capital Securities," "Description of Junior
Subordinated Debentures," "The Trust," "Description of Guarantee"
and "Relationship among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee" in the Prospectus,
insofar as such statements purport to summarize certain
provisions of the Debentures and the Guarantee Agreement, provide
a fair summary of such provisions; the statements made in the
Prospectus under the heading "U.S. Federal Income Tax
Consequences," insofar as such statements purport to summarize
certain federal income tax laws of the United States, constitute
a fair summary of the principal U.S. federal income tax
consequences of an investment in the Capital Securities, and the
opinion of Cleary, Gottlieb, Steen & Hamilton filed as Exhibit
8.1 to the Registration Statement is confirmed and the
Underwriters may rely on such opinion as if it were addressed to
them.
(ix) The execution and delivery of this Agreement have
been duly authorized by all necessary corporate action of the
Company, and this Agreement has been duly executed and delivered
by the Company.
(x) The issuance and sale of the Junior Subordinated
Debentures to the Trust and the issuance of the Guarantee
Agreement pursuant to this Agreement and the performance by
either the Company or the Trust, as applicable, of its
obligations in this Agreement, the Indenture, the Junior
Subordinated Debentures, the Declaration and the Guarantee
Agreement (a) will not require any consent, approval,
authorization, registration or qualification of or with any
governmental authority of the United States or the State of New
York, except such as have been obtained or effected under the
Securities Act, the Exchange Act and the Trust Indenture Act (but
we express no opinion as to any consent, approval, authorization,
registration or qualification that may be required under state
securities or Blue Sky laws) and (b) will not result in a breach
or violation of any of the terms and provisions of the Articles
of Incorporation or By-Laws of the Company or any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company
or GWL&A or any of their properties or assets.
<PAGE>
15
(xi) The Company and the Trust are not and, after giving
effect to the offering and sale of the Capital Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
In rendering such opinion, such counsel may state that (i) their
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the State of New York and the
General Corporation Law of the State of Delaware, (ii) insofar as the
foregoing opinions relate to the valid existence and good standing of
the Company, they are based solely on a certificate of good standing
received from the Secretary of State of the State of Delaware, (iii)
insofar as the foregoing opinions relate to the validity, binding
effect or enforceability of any agreement or obligation of the
Company, (a) such counsel has assumed that each other party to such
agreement or obligation has satisfied those legal requirements that
are applicable to it to the extent necessary to make such agreement or
obligation enforceable against it, and (b) such opinions are subject
to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and to general principles of equity.
(2) Such counsel shall also have furnished to the Representatives
a written statement, addressed to the Underwriters and dated the
Closing Date, in form and substance satisfactory to the
Representatives, to the effect that such counsel has acted as counsel
to the Company in connection with the preparation of the Registration
Statement, and based on the foregoing:
(i) The Primary Registration Statement (except the
financial statements and schedules and other financial and
statistical data included therein, as to which they need express
no view), at the Effective Time, and the Prospectus (except as
aforesaid), as of the date thereof, appeared on their face to be
appropriately responsive in all material respects to the
requirements of the Securities Act and the Trust Indenture Act,
and the rules and regulations thereunder, other than Regulation
S-T under the Securities Act. In addition, such counsel does not
know of any contracts or other documents of a character required
to be filed as exhibits to the Registration Statement or required
to be described in the Registration Statement or the Prospectus
that are not filed or described as so required;
(ii) The documents incorporated by reference in the
Registration Statements and the Prospectus (except the financial
statements and schedules and other financial and statistical data
included therein, as to which they need express no view), of as
the respective dates of their filing, appeared on their face to
be appropriately responsive in all material respects to the
requirements of the Exchange Act and the rules and regulations
thereunder;
(iii) No information has come to such counsel's attention
that causes such counsel to believe that the Registration
Statement, including the
<PAGE>
16
documents incorporated by reference therein (except the financial
statements and schedules and other financial and statistical data
included therein, as to which no view need be expressed), at the
time it became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(iv) No information has come to such counsel's attention
that causes such counsel to believe that the Prospectus,
including the documents incorporated by reference therein (except
the financial statements and schedules and other financial and
statistical data included therein, as to which no view need be
expressed), as of the date hereof or the Closing Date, contained
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading.
Such statement shall also confirm that (based solely upon a
telephonic confirmation from a representative of the Commission) the
Registration Statement is effective under the Securities Act, the Rule
462(b) Registration Statement, if any, was filed with the Commission
on the date specified therein, and the Prospectus was filed with the
Commission pursuant to the subparagraph of Rule 424(b) of the Rules
and Regulations specified in such opinion on the date specified
therein, and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued, and no proceeding for that purpose has been instituted or
threatened, by the Commission.
(e) Ruth B. Lurie, Vice President, Counsel and Assistant
Secretary of the Company, shall have furnished to the Representatives
her written opinion, as counsel to the Company, addressed to the
Underwriters and dated the Closing Date, in form and substance
satisfactory to the Representatives, to the effect that:
(i) GWL&A has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Colorado and it is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which
its respective ownership or lease of property or the conduct of
its business requires such qualification other than those
jurisdictions in which the failure to so qualify would not,
either individually or in the aggregate, have a material adverse
effect on the business, financial condition, stockholders' equity
or operating results of the Company and its subsidiaries taken as
a whole;
(ii) GWL&A has corporate power to own or hold its
properties and conduct its business as described in the
Prospectus;
(iii) to the best knowledge of such counsel, each of the
Company and GWL&A is in compliance with the requirements of the
Applicable
<PAGE>
17
Insurance Laws and has filed all reports, information statements
and other documents with the insurance regulatory authorities of
its jurisdiction of incorporation and domicile as are required to
be filed pursuant to the Applicable Insurance Laws, except where
the failure to comply with such requirements or file such
statements or reports would not, either individually or in the
aggregate, have a material adverse effect on the business,
financial condition, stockholders' equity or operating results of
the Company and its subsidiaries taken as a whole; and except as
disclosed in the Prospectus, no insurance regulatory agency or
body has issued, or commenced any proceeding for the issuance of,
any order or decree impairing, restricting or prohibiting the
payment of dividends by any insurance company subsidiary to its
parent or materially limiting the conduct of its business.
(iv) the Company is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in
which its respective ownership or lease of property or the
conduct of its business requires such qualification other than
where such failures would not, either individually or in the
aggregate, have a material adverse effect on the business,
financial condition, stockholders' equity or operating results of
the Company and its subsidiaries taken as a whole;
(v) all of the issued shares of capital stock of GWL&A
have been duly and validly authorized and issued and are fully
paid and non-assessable and are owned of record and, to the best
of such counsel's knowledge, are owned beneficially by the
Company, either directly or indirectly, free and clear of all
liens, encumbrances, equities or claims;
(vi) to the best of such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and
any person granting such person the right to require the Company
to include such Securities in the securities registered pursuant
to the Registration Statements;
(vii) to the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is a party or of which any
property or assets of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any
of its subsidiaries, are reasonably likely to have a material
adverse effect on the business, financial condition,
stockholders' equity or, results of operations of the Company and
its subsidiaries taken as a whole; and
(viii) the issuance and sale of the Junior Subordinated
Debentures to the Trust and the issuance of the Guarantee
Agreement pursuant to this Agreement and the performance by
either the Company or the Trust, as applicable, of its
obligations in this Agreement, the Indenture, the Debentures, the
Declaration and the Guarantee Agreement (a) will not
<PAGE>
18
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
material indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of
the property or assets of the Company or any of its subsidiaries
is subject, and (b) will not result in any violations of any
statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over
the Company or GWL&A or any of their properties or assets.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States
of America and the laws of the State of Colorado. Insofar as the
foregoing opinions relate to the valid existence and good standing of
GWL&A, they are based solely on a certificate of good standing
received from the Secretary of State of the State of Colorado.
(f) The Representatives shall have received from Simpson Thacher
& Bartlett, counsel for the Underwriters, such opinion or opinions,
dated the Closing Date, with respect to the issuance and sale of the
Securities, the Registration Statements, the Prospectus and other
related matters as the Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as they
reasonably request for the purpose of enabling them to pass upon such
matters.
(g) At the time of execution of this Agreement, the
Representatives shall have received from Deloitte & Touche LLP a
letter, in form and substance satisfactory to the Representatives,
addressed to the Underwriters and dated the date hereof (i) confirming
that they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the date hereof
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(h) With respect to the letter of Deloitte & Touche LLP referred
to in the preceding paragraph and delivered to the Representatives
concurrently with the execution of this Agreement (the "initial
letter"), the Company shall have furnished to the Representatives a
letter (the "bring-down letter") of such accountants, addressed to the
Underwriters and dated the Closing Date (i) confirming that they are
independent public accountants within the meaning of the Securities
Act and are in compliance with the applicable requirements relating to
the qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as
<PAGE>
19
of the date of the bring-down letter (or, with respect to matters
involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down
letter), the conclusions and findings of such firm with respect to the
financial information and other matters covered by the initial letter
and (iii) confirming in all material respects the conclusions and
findings set forth in the initial letter.
(i) Richards, Layton & Finger shall have furnished to the
Representatives its written opinion, as special Delaware counsel to
the Company and the Trust, addressed to the Underwriters and dated the
Closing Date, in form and substance satisfactory to the
Representatives, to the effect that:
(i) The Trust has been duly created and is validly
existing in good standing as a business trust under the Delaware
Business Trust Act, and all filings required under the laws of
the State of Delaware with respect to the creation and valid
existence of the Trust as a business trust have been made;
(ii) Under the Delaware Business Trust Act and the
Declaration, the Trust has the trust power and authority to own
its property and conduct its business as set forth in the
Declaration;
(iii) The Declaration constitutes a valid and binding
obligation of the Company and the Trustees, and is enforceable
against the Company and the Trustees in accordance with its
terms;
(iv) Under the Delaware Business Trust Act and the
Declaration, the Trust has the trust power and authority (i) to
execute and deliver, and to perform its obligations under, this
Agreement and (ii) to issue and perform its obligations under the
Capital Securities and the Common Securities;
(v) Under the Delaware Business Trust Act and the
Declaration, the execution and delivery by the Trust of this
Agreement, and the performance by the Trust of its obligations
hereunder, have been duly authorized by all necessary trust
action on the part of the Trust;
(vi) The Common Securities have been duly authorized for
issuance by the Declaration, and, when issued and delivered by
the Trust to the Company as described in the Prospectus and the
Declaration, will be validly issued undivided beneficial
interests in the assets of the Trust; under the Declaration and
the Delaware Business Trust Act, the issuance of the Common
Securities is not subject to preemptive rights;
(vii) The Capital Securities have been duly authorized by
the Declaration and are duly and validly issued and, subject to
the qualifications set forth herein, fully paid and nonassessable
undivided beneficial interests in the assets of the Trust and are
entitled to the benefits of the Declaration.
<PAGE>
20
The holders of the Capital Securities, as beneficial owners of
the Trust, will be entitled to the same limitation of personal
liability extended to stockholders of private corporations for
profit organized under the General Corporation Law of the State
of Delaware. Such counsel may note that the holders of Capital
Securities may be obligated, pursuant to the Declaration, (A) to
provide indemnity and/or security in connection with and pay
taxes or governmental charges arising from transfers or exchanges
of certificates for Capital Securities and the issuance of
replacement certificates for Capital Securities, and (B) to
provide security or indemnity in connection with requests of or
directions to the Property Trustee to exercise its rights and
powers under the Declaration;
(viii) Under the Delaware Business Trust Act and the
Declaration, the issuance of the Capital Securities is not
subject to preemptive rights;
(ix) The issuance and sale by the Trust of the Capital
Securities, the execution, delivery and performance by the Trust
of this Agreement, the consummation by the Trust of the
transactions contemplated hereby and compliance by the Trust with
its obligations hereunder, and the performance by the Company, as
sponsor, of its obligations under the Declaration (A) do not
violate (i) any of the provisions of the certificate of trust of
the Trust or the Declaration or (ii) any applicable Delaware law
or administrative regulation (except that such counsel need
express no opinion with respect to the securities laws of the
State of Delaware) and (B) do not require any consent, approval,
license, authorization or validation of, or filing or
registration with, any Delaware legislative, administrative or
regulatory body under the laws or administrative regulations of
the State of Delaware (except that such counsel need express no
opinion with respect to the securities laws of the state of
Delaware); and
(x) Assuming that the Trust derives no income from or in
connection with sources within the State of Delaware and has no
assets, activities (other than maintaining the Delaware Trustee
and the filing of documents with the Secretary of State of the
State of Delaware) or employees in the State of Delaware, the
holders of the Capital Securities (other than those holders of
Capital Securities who reside or are domiciled in the State of
Delaware) will have no liability for income taxes imposed by the
State of Delaware solely as a result of their participation in
the Trust, and the Trust will not be liable for any income tax
imposed by the State of Delaware.
(j) The Company shall have furnished to the Representatives a
certificate, dated the Closing Date, of its Chairman of the Board, its
President or a Vice President and its Chief Financial Officer or
Controller stating that:
(i) The representations, warranties and agreements of the
Company and the Trust in Section 1 are true and correct as of the
Closing
<PAGE>
21
Date; the Company and the Trust have complied with all their
agreements contained herein; and the conditions set forth in
paragraph (a) of this Section 7 have been fulfilled; and
(ii) They have carefully examined the Registration
Statements and the Prospectus and, in their opinion (A) the
Registration Statements, as of their respective Effective Dates,
and the Prospectus, as of each of the Effective Dates, did not
include any untrue statement of a material fact and did not omit
to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, and (B)
since the Effective Date of the Primary Registration Statement,
no event has occurred which should have been set forth in a
supplement or amendment to either of the Registration Statements
or the Prospectus.
(k) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus and (ii) since
such date there shall not have been any change in the capital stock or
long-term debt of the Company or GWL&A or any change, in or affecting
the general affairs, management, financial position, stockholders'
equity or results of operations of the Company and its subsidiaries
taken as a whole, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is, in the reasonable judgment of the Representatives, so
material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Securities on
the terms and in the manner contemplated in the Prospectus.
(l) Subsequent to the execution and delivery of this Agreement
(i) no downgrading shall have occurred in the rating accorded the
Company's debt securities or preferred stock or the claims paying or
financial strength rating accorded to GWL&A by any "nationally
recognized statistical rating organization", as that term is defined
by the Commission for purposes of Rule 436(g)(2) of the Rules and
Regulations and (ii) no such organization shall have publicly
announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's debt
securities or preferred stock or the claims paying or financial
strength rating of GWL&A.
(m) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange Inc. or in the
over-the-counter market, or trading in any securities of the Company
on any exchange or in the over-the-counter market, shall have been
suspended or minimum prices shall have been established on the New
York Stock Exchange or such market by the Commission, by such exchange
or by any other regulatory body or governmental authority having
jurisdiction, (ii) a
<PAGE>
22
banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities
involving the United States or there shall have been a declaration of
a national emergency or war by the United States or (iv) there shall
have occurred such a material adverse change in general economic,
political or financial conditions (or the effect of international
conditions on the financial markets in the United States shall be
such) as to make it, in the judgment of a majority in interest of the
several Underwriters, impracticable or inadvisable to proceed with the
public offering or delivery of the Securities on the terms and in the
manner contemplated in the Prospectus.
(n) The New York Stock Exchange Inc. shall have approved the
Capital Securities for listing, subject only to official notice of
issuance and evidence of satisfactory distribution.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
<PAGE>
23
8. Indemnification and Contribution.
(a) The Company and the Trust, jointly and severally, shall indemnify
and hold harmless each Underwriter, its officers and employees and each person,
if any, who controls any Underwriter within the meaning of the Securities Act,
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of the Securities),
to which that Underwriter, officer, employee or controlling person may become
subject, under the Securities Act or otherwise, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, either of the Registration Statements or the Prospectus,
or in any amendment or supplement thereto, or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, either of the Registration
Statements or the Prospectus, or in any amendment or supplement thereto, any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse each Underwriter and each such
officer, employee or controlling person promptly upon demand for any legal or
other expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company and the Trust shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statements or the Prospectus, or in any such
amendment or supplement, in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through the
Representatives by or on behalf of such Underwriter specifically for inclusion
therein, which information consists solely of the information specified in
Section 8(e). The foregoing indemnity agreement is in addition to any liability
which the Company or the Trust may otherwise have to any Underwriter or to any
officer, employee or controlling person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company and the Trust, their officers and employees, each of
their directors and each person, if any, who controls the Company within the
meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company or the Trust or any such director, officer or controlling person may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, either of the Registration Statements or the Prospectus,
or in any amendment or supplement thereto, or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, either of the Registration
Statements or the Prospectus, or in any amendment or supplement thereto, any
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information concerning such
Underwriter furnished to the Company and the Trust through the Representatives
by or on behalf of that Underwriter specifically for inclusion therein ,and
shall reimburse the Company and the Trust and any such director, officer or
controlling
<PAGE>
24
person for any legal or other expenses reasonably incurred by the Company or the
Trust or any such director, officer or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any Underwriter may
otherwise have to the Company and the Trust or any such director, officer,
employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
any indemnified party shall have the right to employ separate counsel in any
such action and to participate in the defense thereof, but the fees and the
expense of such counsel shall be at the expense of such indemnified party unless
(i) the employment thereof has been specifically authorized by the indemnifying
party in writing, (ii) such indemnified party shall have been advised by such
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the indemnifying party and in
the reasonable judgment of such counsel it is advisable for such indemnified
party to employ separate counsel, or (iii) the indemnifying party has failed to
assume the defense of such action and employ counsel reasonably satisfactory to
the indemnified party, in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party,
it being understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to local counsel) at any time for all such indemnified
parties, which firms shall be designated in writing by Lehman Brothers if the
indemnified parties under this Section consist of any Underwriter or any of
their respective officers, employees or controlling persons, or by the Company,
if the indemnified parties under this Section 8 consist of the Company or the
Trust or any of the Company's or the Trust's directors, officers, employees or
controlling persons. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be unreasonably
withheld), settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to such
claim or
<PAGE>
25
action) unless such settlement, compromise or consent includes an unconditional
release of each indemnified party from all liability arising out of such claim,
action, suit or proceeding, or (ii) be liable for any settlement of any such
action effected without its written consent (which consent shall not be
unreasonably withheld), but if settled with the written consent of the
indemnifying party or if there be a final judgment of the plaintiff in any such
action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Trust on the one hand and the Underwriters on
the other from the offering of the Securities or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Trust on the one hand
and the Underwriters on the other with respect to the statements or omissions
which resulted in such loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Trust on the one hand and the
Underwriters on the other with respect to such offering shall be deemed to be in
the same proportion as the total net proceeds from the offering of the
Securities purchased under this Agreement (before deducting expenses) received
by the Company and the Trust, on the one hand, and the total underwriting
discounts and commissions received by the Underwriters with respect to the
shares of the Securities purchased under this Agreement, on the other hand, bear
to the total gross proceeds from the offering of the shares of the Securities
under this Agreement, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company and the Trust or the Underwriters, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such statement or omission. For purposes of the preceding two sentences, the
net proceeds deemed to be received by the Company shall be deemed to be also for
the benefit of the Trust and information supplied by the Company shall also be
deemed to have been supplied by the Trust. The Company and the Trust and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 8(d) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section 8(d) shall be deemed to include, for
purposes of this Section 8(d), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8(d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public was offered to the public exceeds the amount of any
damages which
<PAGE>
26
such Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute as provided in this Section 8(d) are several in proportion to
their respective underwriting obligations and not joint.
(e) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Securities by the
Underwriters set forth on the cover page of, the legend on the inside front
cover page of and the concession and reallowance figures and the information in
the third and fifth through eighth textual paragraphs appearing under the
caption "Underwriting" in, the Prospectus constitute the only information
concerning such Underwriters furnished in writing to the Company by or on behalf
of the Underwriters specifically for inclusion in the Registration Statements
and the Prospectus, and the Underwriters severally confirm that such statements
are correct.
9. Defaulting Underwriters.
If, on the Closing Date, any Underwriter defaults in the performance
of its obligations under this Agreement, the remaining non-defaulting
Underwriters shall be obligated to purchase the Capital Securities which the
defaulting Underwriter agreed but failed to purchase on the Closing Date in the
respective proportions which the Capital Securities set opposite the name of
each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the
total Capital Securities set opposite the names of all the remaining non-
defaulting Underwriters in Schedule 1 hereto; provided, however, that the
remaining non-defaulting Underwriters shall not be obligated to purchase any of
the Capital Securities on the Closing Date if the total Capital Securities which
the defaulting Underwriter or Underwriters agreed but failed to purchase on such
date exceeds 9.09% of the total Capital Securities to be purchased on the
Closing Date, and any remaining non-defaulting Underwriter shall not be
obligated to purchase more than 110% of the Capital Securities which it agreed
to purchase on the Closing Date pursuant to the terms of Section 2. If the
foregoing maximums are exceeded, the remaining non-defaulting Underwriters, or
those other underwriters satisfactory to the Representatives and to the Company
who so agree, shall have the right, but shall not be obligated, to purchase, in
such proportion as may be agreed upon among them, all the Capital Securities to
be purchased on the Closing Date. If the remaining Underwriters or other
underwriters satisfactory to the Representatives and to the Company do not elect
to purchase the Capital Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase on the Closing Date, this Agreement
shall terminate without liability on the part of any non-defaulting Underwriter
or the Company and the Trust. As used in this Agreement, the term "Underwriter"
includes, for all purposes of this Agreement unless the context requires
otherwise, any party not listed in Schedule 1 hereto who, pursuant to this
Section 9, purchases the Capital Securities which a defaulting Underwriter
agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company or the Trust for damages caused by its
default. If other underwriters are obligated or agree to purchase the Capital
Securities of a defaulting or withdrawing Underwriter, either the
Representatives, the Company or the Trust may postpone the Closing Date for up
to seven
<PAGE>
27
full business days in order to effect any changes that in the opinion of counsel
for the Company or counsel for the Underwriters may be necessary in the
Registration Statements, the Prospectus or in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company and the Trust prior to delivery of and payment for the Capital
Securities if, prior to that time, any of the events described in Sections 7(k),
7(l) or 7(m) shall have occurred or if the Underwriters shall decline to
purchase the Capital Securities for any reason permitted under this Agreement.
11. Reimbursement of Underwriters' Expenses. If (i) the Company or
the Trust shall fail to tender the Capital Securities for delivery to the
Underwriters for any reason permitted under this Agreement other than by reason
of a default by any of the Underwriters pursuant to Section 9 of this Agreement,
or if (iii) the Underwriters shall decline to purchase the Capital Securities
because any other condition pursuant to Section 7 of this Agreement of the
Underwriters' obligations hereunder required to be fulfilled by the Company and
the Trust is not fulfilled, the Company and the Trust shall reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) incurred by the Underwriters in connection with this Agreement and the
proposed purchase of the Capital Securities, and upon demand the Company and the
Trust shall pay the full amount thereof to the Representatives.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588) with a copy, in the case of any notice
pursuant to Section 8(c), to the Director of Litigation, Office of the
General Counsel, Lehman Brothers Inc., Three World Financial Center,
10th Floor, New York, New York 10285;
(b) if to the Company or to the Trust, shall be delivered or sent
by mail, telex or facsimile transmission to the address of the Company
set forth in the Primary Registration Statement, Attention: Mitchell
T. G. Graye (Fax: 303-689-6770);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Trust shall be entitled to act and rely upon any request, consent, notice or
agreement given or made on behalf of the Underwriters by Lehman Brothers Inc.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company and
the Trust and their respective successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except that
(A) the representations, warranties, indemnities and agreements of the
<PAGE>
28
Company and the Trust contained in this Agreement shall also be deemed to be for
the benefit of the person or persons, if any, who control any Underwriter within
the meaning of Section 15 of the Securities Act and (B) the indemnity agreement
of the Underwriters contained in Section 8(b) of this Agreement shall be deemed
to be for the benefit of directors of the Company, officers of the Company who
have signed either of the Registration Statements and any person controlling the
Company within the meaning of Section 15 of the Securities Act. Nothing in this
Agreement is intended or shall be construed to give any person, other than the
persons referred to in this Section 13, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Trust and the Underwriters
contained in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Securities and shall remain in full force and effect, regardless of any
investigation made by or on behalf of any of them or any person controlling any
of them.
15. Definition of the Terms "Business Day" and "Subsidiary." For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE>
29
If the foregoing correctly sets forth the agreement among the Company
and the Trust and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
GWL&A Financial Inc.
By ________________________________________
Name:
Title:
By ________________________________________
Name:
Title:
Great-West Life & Annuity Insurance Capital I
By ________________________________________
Name:
Title:
Accepted:
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
PaineWebber Incorporated
Prudential Securities Incorporated
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By __________________________________
Attorney-In-Fact
<PAGE>
30
SCHEDULE 1
Liquidation
Amount of
Capital
Underwriters Securities
------------ ----------
Lehman Brothers Inc.................................$
Merrill Lynch, Pierce, Fenner & Smith Incorporated..
PaineWebber Incorporated............................
Prudential Securities Incorporated..................
Goldman, Sachs & Co.................................
J.P. Morgan Securities Inc..........................
Total............................................$150,000,000
============
<PAGE>
Exhibit 5.2
[CLEARY, GOTTLIEB, STEEN & HAMILTON LETTERHEAD]
Writer's Direct Dial: (212) 225-2552
April 23, 1999
Great-West Life & Annuity Insurance Capital I
GWL&A Financial Inc.
c/o GWL&A Financial Inc.
8515 East Orchard
Englewood, Colorado 80111
Ladies and Gentlemen:
We have acted as special counsel to Great-West Life & Annuity
Insurance Capital I, a Delaware business trust (the "Trust"), and GWL&A
Financial Inc., a Delaware corporation (the "Company"), in connection with the
registration by the Trust and the Company under the Securities Act of 1933, as
amended (the "Securities Act"), of (i) the Trust's Subordinated Capital Income
Securities (liquidation amount of $25 per security) (the "Capital Securities"),
(ii) the Company's Junior Subordinated Debentures due 2048 (the "Debentures")
and (iii) the guarantee of the Capital Securities by the Company for the benefit
of the holders from time to time of the Capital Securities (the "Guarantee").
The Capital Securities will be issued under an amended and restated declaration
of trust of the Trust among the Company and the trustees named therein (the
"Amended and Restated Declaration of Trust"). The Debentures will be issued
under an indenture between the Company and the trustee named therein (the
"Indenture"). The Guarantee will be issued under a guarantee agreement between
the Company and the trustee named therein (the "Guarantee Agreement"). The
Capital Securities, the Debentures and the Guarantee are being registered by the
Trust and the Company pursuant to a Registration Statement on Form S-3 (Nos.
333-64473 and 333-64473-01) (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") on September 28, 1998, as
amended by Amendment No. 1 to the Registration Statement, filed with the
Commission on November 5, 1998, by Amendment No. 2 to the Registration Statement
filed on November 13, 1998, by Amendment No. 3 to the Registration Statement
filed on April 8, 1999 and by Amendment No. 4 to the Registration Statement
filed on the date of this opinion.
<PAGE>
Great-West Life & Annuity Insurance Capital I
GWL&A Financial Inc., p.2
In arriving at the opinions expressed below, we have reviewed the
following documents:
(a) the Registration Statement, the related Prospectus and the
documents incorporated by reference therein;
(b) a form of the Amended and Restated Declaration of Trust, filed
as an exhibit to the Registration Statement;
(c) a form of the Indenture, filed as an exhibit to the Registration
Statement;
(d) a form of the Guarantee Agreement, filed as an exhibit to the
Registration Statement; and
(e) certain resolutions of the Board of Directors of the Company
(the "Resolutions").
In addition, we have reviewed the originals or copies certified or otherwise
identified to our satisfaction of all such corporate records of the Company and
the Trust and such other instruments and other certificates of public officials,
officers and representatives of the Company and the Trust and such other
persons, and we have made such investigations of law, as we have deemed
appropriate as a basis for the opinions expressed below.
In rendering the opinions expressed below, we have assumed the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies. In addition, we have
assumed and have not verified (i) the accuracy as to factual matters of each
document we have reviewed, (ii) that the Amended and Restated Declaration of
Trust and the Capital Securities will conform to the form thereof that we have
reviewed and that the Capital Securities will be duly authenticated in
accordance with the terms of the Amended and Restated Declaration of Trust,
(iii) that the Indenture and the Debentures will conform to the form thereof
that we have reviewed and that the Debentures will be duly authenticated in
accordance with the terms of the Indenture, and (iv) that the Guarantee
Agreement will conform to the form thereof that we have reviewed.
Based on the foregoing, and subject to the further assumptions and
qualifications set forth below, it is our opinion that:
1. With respect to the Debentures, when (a) the Indenture has been
duly qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), (b) the Indenture has been duly executed and delivered, (c) the
Debentures have been duly executed and delivered by the Company in the manner
provided for in the Indenture, and (d) the Debentures have been issued, sold and
delivered in the manner and at such prices and upon such terms as approved by
the Pricing Committee (as defined in the Resolutions) in accordance with the
<PAGE>
Great-West Life & Annuity Insurance Capital I
GWL&A Financial Inc., p.3
Resolutions, upon payment of the consideration provided for therein, the
Debentures to be issued under the Indenture will be the valid, binding and
enforceable obligations of the Company, entitled to the benefits of the
Indenture.
2. With respect to the Guarantee, when (a) the Guarantee Agreement
has been duly qualified under the Trust Indenture Act, (b) the Guarantee
Agreement has been duly executed and delivered, (c) the Amended and Restated
Declaration of Trust has been duly executed and delivered, and (d) the Capital
Securities have been issued, sold and delivered in the manner and at such prices
and upon such terms as approved by the Pricing Committee in accordance with the
Resolutions, upon payment of the consideration provided for therein, the
Guarantee will be a valid, binding and enforceable obligation of the Company,
entitled to the benefits of the Guarantee Agreement.
In connection with our opinions expressed above, we have assumed that
(i) the Registration Statement and any amendments thereto (including post-
effective amendments) will have become effective and will comply with all
applicable laws at the time the Capital Securities, the Debentures and the
Guarantee are offered or issued as contemplated by the Registration Statement;
(ii) the Board of Directors of the Company will have taken no further corporate
action with respect to the Debentures and the Guarantee; (iii) the terms of the
Capital Securities and of their issuance and sale will have been duly
established in conformity with the Amended and Restated Declaration so as not to
violate any applicable law and so as to comply with any requirement or
restriction imposed by any court or government body having jurisdiction over the
Trust; (iv) the terms of the Debentures and of their issuance and sale will have
been duly established in conformity with the Indenture so as not to violate any
applicable law and so as to comply with any requirement or restriction imposed
by any court or government body having jurisdiction over the Company; and (v)
the Capital Securities will be issued and sold in compliance with applicable
federal and state laws and in the manner stated in the Registration Statement
and the Prospectus.
Insofar as the foregoing opinion relates to the validity, binding
effect or enforceability of any agreement or obligation of the Company, (a) we
have assumed that each other party to such agreement or obligation will satisfy
those legal requirements that are applicable to it to the extent necessary to
make such agreement or obligation enforceable against it, and (b) such opinion
is subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and to general principles of equity.
The foregoing opinion is limited to the federal law of the United
States of America, the law of the State of New York and the General Corporation
Law of the State of Delaware. In particular, we express no opinion as to the
Capital Securities, as to which we understand that you are relying on the
opinion of Richards, Layton & Finger, special Delaware counsel to the Company
and the Trust.
<PAGE>
Great-West Life & Annuity Insurance Capital I
GWL&A Financial Inc., p.4
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the heading "Legal
Matters" in the Prospectus included in the Registration Statement. By giving
such consent, we do not thereby admit that we are experts with respect to any
part of the Registration Statement, including this exhibit, within the meaning
of the term "expert" as used in the Securities Act or the rules and regulations
of the Commission issued thereunder.
Very truly yours,
CLEARY, GOTTLIEB, STEEN & HAMILTON
By /s/ David W. Hirsch
----------------------------------
David W. Hirsch, a Partner
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 4 to
Registration Statement Nos. 333-64473 and 333-64473-01 of Great-West Life &
Annuity Capital I and GWL&A Financial Inc. on Form S-3 of our report dated
January 25, 1999, appearing in the Annual Report on Form 10-K of Great-West Life
& Annuity Insurance Company for the year ended December 31, 1998, and to the
reference to us under the heading "Experts" in the Prospectus, which is part of
such Registration Statement.
DELOITTE & TOUCHE LLP
Denver, Colorado
April 23, 1999
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to the Registration Statement Nos.
333-64473 and 333-64473-01 of Great-West Life & Annuity Capital I and GWL&A
Financial Inc. on Form S-3 of our report dated January 25, 1999, appearing in
the Prospectus, which is part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Denver, Colorado
April 23, 1999
