UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER: 0-12666
AMERICAN FINANCIAL HOLDING, INC.
(Exact name of registrant as specified in charter)
DELAWARE 87-0458888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 SOUTH 200 WEST, NO. 302, P.O. BOX 683, FARMINGTON, UTAH 84025-0683
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(801) 451-9580
Telecopy:(801) 451-9582
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No x
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $4,759,000
As of October 10, 1996, the Registrant had outstanding 4,232,399 shares of its
common stock, par value $0.01.
DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are
incorporated by reference, briefly describe them and identify the part of the
Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 31, 1990): NONE.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No x
SPECIAL NOTE
THIS ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1995, OF
AMERICAN FINANCIAL HOLDING, INC. (THE "COMPANY"), IS BEING FILED IN OCTOBER
1996, SUBSTANTIALLY AFTER ITS DUE DATE. THIS REPORT SHOULD BE READ IN
CONJUNCTION WITH OTHER PERIODIC REPORTS REPORTING EVENTS OCCURRING AFTER
DECEMBER 31, 1995, TO BE FILED SOON, INCLUDING QUARTERLY REPORTS ON FORM 10-QSB
FOR THE FISCAL QUARTERS ENDED MARCH 31 AND JUNE 30, 1996. SUCH OTHER PERIODIC
REPORTS AND THE INFORMATION SET FORTH THEREIN SHOULD BE READ IN CONJUNCTION WITH
THIS ANNUAL REPORT ON FORM 10-KSB, WHICH CONTAINS INFORMATION AS OF DECEMBER 31,
1995, UNLESS OTHERWISE INDICATED.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION AND HISTORY
American Financial Holding, Inc. (the "Company") markets life insurance and
annuity products underwritten by other insurance providers, principally its
marketing subsidiary, Income Builders, Inc. ("Income Builders").
The Company, through Income Builders, acts as an independent field
marketing organization for LifeUSA Holding, Inc. ("LifeUSA"), and has been a
leading national producer for LifeUSA for combined premium and life premium
sales in recent years. It is the goal of management to acquire, manage, and fund
the operations of a financial services holding company with broad-based
marketing of life insurance and annuities, including the products of other
insurance companies and ultimately the Company's own products. In connection
with the acquisition of Income Builders as a wholly-owned subsidiary, the
Company agreed to use its best efforts to seek additional equity financing to
fund the expansion of Income Builders. (See "Acquisition of Income Builders"
below.)
In 1995, The Company organized American Financial Reinsurance, Inc. ("AF
Reinsurance"), as a wholly-owned subsidiary of Triad Financial Systems, Inc.
("Triad"), a subsidiary of the Company, which was granted a charter by the
Arizona Insurance Department to conduct business as a reinsurance company in
that state and to coinsure a portion of the products sold by the Company. AF
Reinsurance has entered into coinsurance and reinsurance agreements with
Massachusetts General Life Insurance Company and its affiliated insurance
companies, particularly Life Partners Group, Inc., an Englewood, Colorado-based
insurance group (together, "Mass General"), which was recently acquired by
Conseco, through which they may cede back to the Company a portion of the life
insurance and annuity cession allowances coverage marketed by the Company, as
discussed below. See ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Unless the context otherwise requires, when used herein, the term "Company"
refers to the Company and its operating subsidiaries, Income Builders and Triad,
and Triad's subsidiary, AF Reinsurance.
THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN-SHORTAGE OF WORKING CAPITAL
AND CONTINUING LOSSES
The Company has extremely limited working capital, no credit lines, and
insufficient revenue to meet its operating requirements. For the years ended
December 31 1995 and 1994, the Company suffered net losses applicable to common
stockholders of $696,000 and $687,000, respectively, and as of December 31,
1995, had an accumulated deficit of $7,400,000. At December 31, 1995, the
Company had a stockholders' deficit of $503,000. The Company expects that it
will continue to incur operating losses and that its accumulated deficit will
increase. The Company has been dependent solely upon cash provided by financing
activities to fund its operations. The principal sources of capital from outside
sources during the preceding years has been receipts from the sale of
securities. All of the foregoing raises substantial concerns respecting the
ability of the Company to continue as a going concern.
The Company's operating plan for the balance of 1996 and into 1997 is
dependent upon the receipt of additional funding from equity financing. The
Company received $472,000 from its sale of common stock during 1995 as well as
$439,000 in net proceeds through the sale of preferred stock of its wholly-owned
subsidiary. There can be no assurance that the Company will be able to sell
additional equity securities in the future to meet its capital requirements.
The consolidated financial statements do not include any adjustments
relating to recoverability and classification of asset carrying amounts or the
amount and classification of liabilities if the Company were unable to continue
as a going concern. See "FINANCIAL STATEMENTS: Note 10."
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. When used in this document, the words "anticipate," believe,"
"estimate," expect," and "intend" and similar expressions, as they relate to the
Company or its management, are intended to identify forward-looking statements.
Such statements reflect the current view of the Company respecting future events
and are subject to certain risks, uncertainties, and assumptions, including the
risks and uncertainties noted. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected, or intended.
BUSINESS STRATEGY
The Company's business strategy is to grow by (i) expanding its marketing
organization, (ii) reinsuring and coinsuring through AF Reinsurance an
increasing amount of the insurance products that its independent contractor
agents sell, and (iii) acquiring portfolios of insurance in force and life
insurance companies with established products, markets, or other insurance
opportunities. The Company will require substantial amounts of additional equity
financing to fully implement this strategy.
The Company expands its marketing organization by recruiting through a
national campaign for new agents and regional seminars designed both to increase
the number of general agencies under contract as well as to enhance the
productivity of those general agencies already under contract. In addition, the
Company is seeking alliances with additional marketing organizations that market
both LifeUSA and other products and with other insurance underwriters that offer
additional insurance products that can be sold through the Company's marketing
organization.
The organization of AF Reinsurance in order to reinsure and coinsure life
insurance policies and annuities presently sold by the Company's marketing
organization was an initial step in the Company's long-term strategy of
developing an insurance underwriting capability. THE COMPANY DOES NOT NOW ISSUE
ITS OWN LIFE INSURANCE POLICIES OR ANNUITIES, BUT SELLS SEVERAL PRODUCTS
UNDERWRITTEN BY OTHERS. AS WARRANTED, THE COMPANY WILL SEEK REINSURANCE AND
COINSURANCE TREATIES WITH INSURANCE CARRIERS FOR PRODUCTS THAT ARE NEW OR, IF
NECESSARY, REPLICATE PRODUCTS WHEN THE TERMS ARE MORE ATTRACTIVE THAN THOSE
CURRENTLY MARKETED.
The Company investigates opportunities for acquisitions and the
availability of required funding and will consider an acquisition when most of
its acquisition criteria can be met, depending on the availability of required
funding. Key considerations include (i) an acquisition price that reflects
little, if any, goodwill; (ii) a book of business that is both profitable and
properly underwritten; (iii) licenses to sell insurance products in states in
which the Company is not currently authorized but finds attractive; (iv) a
management, sales force, or facilities that the Company would like to acquire;
(v) insurance and annuity products that are attractive; (vi) an investment
portfolio that is sound and properly valued; and (vii) an absence of contingent
liabilities or regulatory problems. To date, the Company has not been
successful in attracting funding to enable it to complete acquisitions.
The Company's long-term goal is to write new insurance products that are
tailored to meet the market needs of the Company's marketing organization. The
Company intends to expand and diversify the array of products for its agents to
cross sell to their clients. The Company will reinsure these new insurance
products in an effort to penetrate the market with new products while minimizing
the impact on its surplus.
There can be no assurance, of course, that the Company will be able to
implement its long-term business strategy, identify any acquisition target, or
complete any acquisition, obtain required expansion capital, or achieve
profitable operations.
As the Company acquires insurance carriers, it will be subject to the
regulation and supervision by the states in which it transacts business.
PRODUCT LINES
The Company markets life insurance and annuity products underwritten by
unrelated insurance companies. Most products marketed by the Company, however,
are presently underwritten by LifeUSA. LifeUSA currently underwrites
approximately 12 life insurance and annuity products, of which the Company has
primarily marketed the Accumulator 8 Series of Annuities and Universal Annuity
Life I and III policies.
As the Company implements its reinsurance arrangement through AF
Reinsurance as discussed below under "AF Reinsurance," it intends to offer
additional insurance, annuity and specialty products developed by Mass General
and other insurance companies through marketing, reinsurance, or other
arrangements with such companies.
MARKETING
The Company sells life insurance and annuity products underwritten by other
insurance providers exclusively through agents under an independent contractor
relationship. These individuals may be agents of other life insurance companies
or independent insurance brokers. The relationship can be terminated by either
party on specified notice. The Company does not intend to have career agents
who sell life insurance exclusively for it. Relying upon independent agents
allows the Company to expand its sales force without significant expense, but it
does require that the Company obtain the right to market competitive products,
as the independent agents customarily handle product lines of several different
insurance companies. The Company recruits and trains the independent agents in
its specific marketing approach to selling life insurance and annuities.
As of December 1996, the Company had contracted with over 5,500 independent
contractor-agents to participate in its marketing organization, with 1995 annual
premium production of over $42,000,000. Since December 31, 1995, the Company,
in conjunction with LifeUSA, has initiated a program to terminate its marketing
relationship with agents that have not generated premiums within the preceding
24 months, which has reduced to approximately 2,600 the number of active
independent contractor-agents as of October 20, 1996.
It is customary for insurance companies which market products through
independent agents to advance to certain agents, at the time the policy is
issued, a substantial portion of the first year commission payable to the agent
even if the policy holder pays the first year insurance premium in monthly
installments. Annualization of the first year commissions provides the agent
with funds to meet operating needs. The insurance providers that underwrite the
products marketed by the Company typically advance up to an aggregate of 50% to
75% of the agent's first year commissions on submission of an insurance
application and/or issuance of the policy. The commission advances are credited
against the agent's account as policy premiums are received by the underwriter
and the agent earns the related commission. If an application for insurance is
rejected or the policy holder discontinues the policy prior to the thirteenth
month, an appropriate amount is charged back against the agent's account. As a
consequence, the Company assumes certain credit risks because the selling agent
could cease further sales of Company products or policies could lapse before
earned premiums are sufficient to pay the agent's indebtedness. The Company is
required to repay commission advances only if the agent cannot. Historically,
the Company has not been required to reimburse any material amount of unearned
commissions.
AF REINSURANCE
Triad organized AF Reinsurance as a wholly-owned subsidiary under the laws
of Arizona. After obtaining initial capitalization, as discussed below, AF
Reinsurance applied for and was granted, effective November 24, 1995, by the
Arizona Insurance Department a Certificate of Authority to operate as a
reinsurance company in Arizona, initially for the purpose of initiating the
Company's reinsurance program with Mass General and LifeUSA of Minneapolis,
Minnesota.
The Company obtained an aggregate of $864,000 in initial capital and
surplus for AF Reinsurance, consisting of $439,000 in net proceeds from the sale
of 8% Payable in Cash and in Kind Cumulative Convertible Preferred Stock of
Triad ("Triad Preferred Stock") and $425,000 in proceeds from a subordinated
surplus debenture issued to Mass General, consistent with its practice of
assisting associated reinsurance carriers in meeting their surplus requirements.
The Company believes that such capital and surplus will be sufficient to
initiate the expected reinsurance business of AF Reinsurance, if the Company is
able to launch successfully its planned marketing program.
AF Reinsurance is now preparing to implement the reinsurance arrangement
with Mass General for various life insurance products underwritten by Mass
General and to be marketed through the Company's marketing organization and
proceed with its other plans for expansion and diversification. AF Reinsurance
also intends to implement a reinsurance arrangement with LifeUSA for annuity and
other products underwritten by it. There can be no assurance that such a
reinsurance arrangement can be reached, that reinsurance arrangements with
insurance companies can be implemented effectively through AF Reinsurance
without substantially impacting its capital and surplus, thus requiring the
infusion into AF Reinsurance of additional funding, that such business will
result in gross operating margins to AF Reinsurance, that Triad will be able to
meet its debt service obligations on its outstanding debentures, or that such
activities will in general be profitable.
In order to implement the reinsurance program with Mass General, the
Company is now developing a program to introduce Mass General's products for
sale through the Income Builders independent contractor sales force on a limited
basis. Depending on the level of production, under its agreement with Mass
General the Company will receive a cede back of 33.3% of the annualized premium
produced for Mass General and assume 33.3% of the related policy obligations.
The Company would benefit from additional capital to fund a marketing program
throughout its sales organization and intends to allocate a portion of
additional funding, to the extent received, for this purpose. There can be no
assurance that the Company will be able to launch an effective marketing program
without substantial amounts of additional funding or that such marketing program
will be successful even if funded and undertaken. Further, there can be no
assurance that the terms of the Company's existing reinsurance arrangements will
result in a financial return to the Company.
While planning the product offerings and marketing effort for Triad, in
1995 it agreed to market a product underwritten by American Physicians Life
("APL"), Columbus, Ohio, and agreed that it would pay APL an amount equal to 10%
of the amount by which $1,000,000 exceeded the premium for the APL product
generated by the Company by September 30, 1996. Because of the inadequate
funding of Triad, the Company was unable to initiate marketing of the APL
product and generated no premium income under the APL agreement. Accordingly,
APL has demanded that the Company pay APL $100,000. In lieu of such payment,
the Company has agreed to repurchase for $224,000 the shares of Triad Preferred
Stock that APL purchased in 1995 for $200,000, plus dividends, payable in four
equal consecutive monthly installments commencing in October 1996. Upon
completion of the repurchase, the $100,000 claim will be canceled. The Company
still intends to introduce the APL product to independent contractor agencies
recruited in the future
REGULATION
The insurance industry is subject to regulation and supervision by the
states in which business is transacted. The laws of the various states
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses to transact business, regulating trade
practices, licensing agents, approving policy forms, filing premium rates on
certain business, setting reserve requirements, determining the form and content
of required financial statements, determining the reasonableness and adequacy of
capital and surplus, and prescribing the maximum concentration of certain
classes of investment held by insurance companies.
Most states have also enacted legislation which regulates insurance holding
company systems, including acquisitions, extraordinary and intercorporate
dividends, the terms of surplus debentures, the terms of affiliated
transactions, and other related matters. Recently, increased scrutiny has been
placed on the insurance regulatory framework, and a number of state legislatures
have considered or enacted legislative proposals that alter, and in many cases
increase, state authority to regulate insurance companies and holding company
systems. Insurance departments in the various states require insurance
companies to make annual and quarterly filings. These statutory filings require
classifications of investments and the establishment of mandatory reserves.
AF Reinsurance is subject to the jurisdiction of the Arizona Department of
Insurance and is required to comply with its rules and regulations, to file
specified reports, and to be subject to examination of its books and records.
COMPETITION
The insurance industry is highly competitive. The Company is subject to
intense competition in its current operations and is expected to have similar
competition in the areas of its future planned expansion. There are many
insurance companies offering a variety of insurance products, and in order to
obtain competitive product lines, the Company must continue to perform at a high
level. The Company is dependent on its ability to attract and retain productive
independent agents to sell its products. The Company pays customary and
competitive commissions, but competition among insurance companies is intense
for independent agents with demonstrated ability. There can be no assurance
that the Company will be able to continue to attract and retain productive
independent agents.
PERSONNEL
The Company has four employees, all of whom are officers and directors of
the parent company, American Financial Holding, Inc., and three of whom are
executive officers and directors of Income Builders, Inc. In addition to its
employees, the Company contracts with regional independent agencies and
insurance salesmen on an independent contractor basis as discussed above. See
"Marketing."
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains its principal executive offices at 225 South 200
West, Suite 302, Farmington, Utah 84025-0683. These offices are located in
approximately 1,000 square feet of office space that the Company currently rents
from an unrelated third party under an oral month-to-month rental agreement.
The operations of Income Builders are conducted from approximately 2,000
square feet of office space located at 42 East Claybourne Avenue, Salt Lake
City, Utah 84115, that are rented on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, and, except
as noted below, no such proceedings have been threatened by or, to the best of
its knowledge, against it.
On October 9, 1996, the Company was advised by the Enforcement Division of
the Securities and Exchange Commission (the "Commission") that it is considering
recommending that the Commission bring an enforcement action, which could
include a civil penalty, against the Company in U.S. District Court for failing
to file timely periodic reports in violation of Section 13(a) of the Securities
Exchange Act of 1934 and the rules thereunder.
In October 1996 the Company also received a request for the voluntary
production of information to the Enforcement Division of the Commission related
to the resignation of Coopers & Lybrand LLP, the dismissal of Arthur Andersen
LLP, and the appointment of Jones, Jensen & Company as the Company's independent
accountant and the reasons therefor. In addition, the Company is requested to
provide certain information respecting its previous sales of securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of its shareholders during the quarter
ended December 31, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There has been no established, consistent trading market for the Company's
common stock during significant portions of the preceding two years. Although
the Company has learned of various isolated transactions, apparently at prices
negotiated in the individual circumstances, there is no reliable information
from which to present data respecting regular trading prices and market
activity.
Since late 1991, the common stock of the Company has been listed on the
Electronic Bulletin Board of the National Association of Securities Dealers,
Inc., system ("EBB") under the symbol "ANFH". Quotations have been published
only intermittently during this period. However, the trading volume of the
common stock of the Company is limited, creating significant changes in the
trading price of the common stock as a result of relatively minor changes in the
supply and demand. Consequently, the price of the common stock in the trading
market fluctuates dramatically over short periods as a result of factors
unrelated to the business activities of the Company.
Because of the lack of specific transaction information and the Company's
belief that quotations are particularly sensitive to actual or anticipated
volume of supply and demand, the Company does not believe that quotations are
reliable indicators of a viable trading market for the Company's common stock.
In this limited market, brokers typically publish no fixed quotations to
purchase a minimum number of shares at a published price, but express a
willingness to buy or sell the stock and from time to time complete transactions
in the securities at negotiated prices. As of October 30, 1996, the Company's
common stock was quoted, subject to the foregoing limitations and
qualifications, at $0.375 bid, $1.00 asked. The foregoing bid quotations do not
reflect dealer mark-ups, mark-downs, brokerage commissions, or other charges and
do not reflect actual transactions.
As of October 10, 1996, there were 4,232,399 shares of common stock issued
and outstanding, held by approximately 700 shareholders.
The Company has not paid dividends on its common stock and does not
anticipate that it will pay dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN-SHORTAGE OF WORKING CAPITAL
AND CONTINUING LOSSES
The Company has extremely limited working capital, no credit lines, and
insufficient revenue to meet its operating requirements. For the years ended
December 31 1995 and 1994, the Company suffered net losses applicable to common
stockholders of $696,000 and $687,000, respectively, and as of December 31,
1995, had an accumulated deficit of $7,400,000. At December 31, 1995, the
Company had a stockholders' deficit of $503,000. The Company expects that it
will continue to incur operating losses and that its accumulated deficit will
increase. The Company has been dependent solely upon cash provided by financing
activities to fund its operations. The principal sources of capital from outside
sources during the preceding years has been receipts from the sale of
securities. All of the foregoing raises substantial concerns respecting the
ability of the Company to continue as a going concern.
The Company's operating plan for the balance of 1996 and into 1997 is
dependent upon the receipt of additional funding from equity financing. The
Company received $472,000 in net proceeds from its sale of common stock during
1995 as well as $439,000 in net proceeds through the sale of preferred stock of
its wholly-owned subsidiary. There can be no assurance that the Company will be
able to sell additional equity securities in the future to meet its capital
requirements. The Company is relying on the sale of common stock and
borrowings, if available, to provide the $224,000 required to repurchase Triad
Preferred Stock from APL and cancel its $100,000 claim.
The consolidated financial statements do not include any adjustments
relating to recoverability and classification of asset carrying amounts or the
amount and classification of liabilities if the Company were unable to continue
as a going concern. See FINANCIAL STATEMENTS: Note 10.
The Company incurred in 1995 and previous years, and continues to incur,
substantial costs in connection with its now abandoned efforts to acquire, and
its completed efforts to organize, a chartered insurance company subsidiary and
to fund planned expansion in order to retain coinsurance revenue from the
established life insurance and annuity production of Income Builders. A
substantial portion of such acquisition and organization costs was for fees for
outside consulting and professional fees that will be eliminated or
substantially reduced in the future.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1995, the Company experienced negative cash
flow from operating activities of $459,000, compared with negative cash flow
from operating activities of $149,000 in 1994. The increased cash required to
fund operating activities in 1995 as compared to 1994 is principally due to the
increased operating loss in 1995.
During 1995, the Company financed its cash flow requirements for operating
activities through $472,000 in net proceeds from the sale of its common stock,
$439,000 in net proceeds from the issuance of preferred stock, and $425,000 from
issuance of long-term debt.
The Company holds promissory notes receivable from executive officers and
directors who are also stockholders aggregating approximately $2,606,000. See
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For financial
reporting purposes, the Company has recorded reserves aggregating $2,222,000
against these notes based on management's conclusion that the ultimate
collectibility of certain of these notes was uncertain. The remaining balance
of these notes is reflected as contra equity as opposed to an asset in the
Company's balance sheet. The stockholders continue to be obligated to repay the
full amount of these notes, including accrued interest, and management believes
the remaining net stockholders' notes receivable of approximately $384,000,
after deducting the above reserves, are realizable based on the availability of
stockholders' personal financial resources. See FINANCIAL STATEMENTS: Note 9.
The Company does not expect that payments under these notes will provide capital
during the next 12 months.
CAPITAL REQUIREMENTS
The Company believes that the initial capitalization of AF Reinsurance is
sufficient for the subsidiary to begin operations, although the Company is
seeking additional funding in order to launch its new product introduction and
marketing expansion and, in general, to form a broader base for planned
activities. In addition to funding for AF Reinsurance, the Company would
benefit from additional funds to cover accrued liabilities and accounts payable
inasmuch as most of the Company's $1,219,000 in current liabilities were past
due at December 31, 1995,to pay ongoing operating losses, and to provide funds
for additional marketing by Income Builders.
In light of the organization of AF Reinsurance, the Company desires to
continue to expand its marketing organization and acquire additional insurance
company assets. The Company will require additional equity or debt capital to
fund this expansion, and there can be no assurance that such funding will be
available on terms viable to the Company.
As of September 30, 1996, Triad had issued and outstanding 52,138 shares of
Triad Preferred Stock with a liquidation preference of $12 per share, or an
aggregate of $625,656 (without giving effect to the proposed repurchase of
shares from APL discussed above), and AF Reinsurance had outstanding $425,000 in
principal amount of surplus debentures, bearing interest at 7.66% per annum, due
quarterly, with annual principal payments of $42,500 due annually, commencing
September 30, 1996. All principal and interest payments required through
October 20, 1996, have been paid. The Company may elect to utilize proceeds
from these surplus debentures, which form a portion of the surplus of AF
Reinsurance, to pay the principal portion of the amount due in the future.
The Company also has converted an account payable into a promissory note
aggregating $317,000 at September 30, 1996, bearing interest at 8% (12% after
default) and due five days after demand, but in any event, by March 31, 1997,
for professional services rendered. The Company does not expect that demand
will be made on this note as long as it pays for ongoing professional services
and costs advanced as they are incurred on a current basis, and as long as the
payee, in its sole discretion, concludes that the Company is making substantial
progress toward obtaining sufficient financing to pay the note. This note is
secured by a pledge of officer and director notes payable to the Company
aggregating approximately $2,606,000.
Inasmuch as the Triad offering of Triad Preferred Stock was not successful
in obtaining the amount of funding anticipated, the Company has been unable to
launch its product introduction and marketing effort as discussed above.
Therefore, the Company is exploring other financing alternatives, including
borrowings, if available, and the sale of additional equity securities. Net
proceeds from such funding would be utilized to fund marketing expansion and
related new product introduction, to increase the surplus of AF Reinsurance, to
cover ongoing general and administrative expenses (including payments to
executive officers and directors), and perhaps to reduce the outstanding Triad
surplus debenture or to redeem Triad Preferred Stock. There can be no assurance
that any of the Company's efforts to obtain additional funding will be
successful or that the Company will be able to continue.
As part of the Company's strategic analysis and planning, it may consider a
number of corporate restructuring alternatives and may explore the possibility
of separating its Triad reinsurance activities and/or Income Builders marketing
organization from the holding company parent and its essentially inactive
subsidiary, American Financial Marketing. There can be no assurance as to
whether any such organizational restructuring will be pursued, whether it will
be implemented, or the business or financial effects thereof.
CERTAIN UNCERTAINTIES
The Company and Triad have sold securities in reliance on exemptions from
registration under the Securities Act and applicable state securities laws.
Management believes that the Company has materially complied with the
requirements of the applicable exemptions. However, since compliance with these
exemptions is highly technical, it is possible that the Company could be faced
with certain contingencies based on civil liabilities resulting from the failure
to meet the terms and conditions of such exemptions, which could have a
material adverse impact on the Company's financial condition. Neither the
Company nor Triad has received any demand from any shareholder requesting a
return of his investment, damages, or other remedies in connection with the
purchase of securities by such shareholder.
RESULTS OF OPERATIONS
General and administrative expenses declined to $1,428,000 in 1995 from
$1,513,000 in 1995 and 1994, or 30% and 33.6% of commission revenue in 1995 and
1994, respectively. General and administrative expenses include office expense,
as well as travel, lodging, and other expenses associated with recruiting
additional sales personnel, which sometimes must be increased in anticipation of
increasing business. The change in general and administrative expense in 1995,
as compared to 1994, was primarily due to cost-cutting measures implemented in
1995 respecting outside financial advisory services.
Commission revenue for the year ended December 31, 1995, increased
$250,000, or 5.6%, over the preceding year. The increase in 1995 commission
revenue was due principally to the increase in 1995 production over the previous
year. The field marketing organization grew from approximately 4,300 agents at
December 31, 1994, to approximately 5,500 agents at December 31, 1995. See
"ITEM 1. BUSINESS: Marketing" respecting the current program to terminate
inactive agents.
The Company generated net interest income in each of the last three years
primarily attributable to interest income from stockholder receivables and
interest expense from notes issued in connection with the acquisition of
automobiles and real estate.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, including the required
accountant's reports, are included following a table of contents beginning
immediately following the signature page to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 10, 1996, the Company engaged Coopers & Lybrand LLP ("Coopers &
Lybrand"), Salt Lake City, Utah, to audit and report on the Registrant's
financial statements for the year ended December 31, 1995.
On such date, the board of directors also approved the dismissal of Arthur
Andersen LLP ("Arthur Andersen"), Salt Lake City, Utah, as the Registrant's
previous auditors.
The report of Arthur Andersen on the Registrant's financial statements
consisting of consolidated balance sheets as of December 31, 1994, and 1993, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1994, did not contain an adverse opinion or disclaimer of opinion
and was not qualified or modified as to audit scope or accounting principles.
However, the report contained an explanatory paragraph regarding the uncertainty
of the Company's ability to continue as a going concern.
During the Registrant's two most recent fiscal years and any subsequent
interim period preceding the dismissal of Arthur Andersen, there were no
disagreements with Arthur Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope of procedure, which
disagreement, if not resolved to the satisfaction of the former accountant,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report.
In June 1993, Arthur Andersen advised the Registrant of concern over
material weaknesses in the Registrant's internal controls that the accountant
believed could adversely affect the Registrant's ability to develop reliable
financial statements. The Registrant implemented Arthur Andersen's
recommendations for strengthening its internal controls. During the most recent
fiscal year and the subsequent interim period preceding Arthur Andersen's
dismissal, the Registrant was not advised by Arthur Andersen that internal
controls necessary for the Registrant to develop reliable financial statements
did not exist nor that information came to its attention that led it to no
longer be able to rely on management's representations or that made it unwilling
to be associated with the financial statements prepared by management.
The Registrant has not been advised by Arthur Andersen of the need to
expand significantly the scope of the Registrant's audit, nor has the Registrant
been advised that during the two most recent fiscal years and the subsequent
interim period preceding its dismissal, information has come to the attention of
Arthur Andersen that on further investigation may (i) materially impact the
fairness or reliability of either a previously issued audit report or the
underlying financial statements, or the financial statements issued or to be
issued covering the fiscal period subsequent to the date of the most recent
financial statements (December 31, 1994) covered by an audit report, or (ii)
cause Arthur Andersen to be unwilling to rely on management's representations or
be associated with the Registrant's financial statements. The Registrant has
not been advised by Arthur Andersen that information has come to its attention
that it concluded materially impacts the fairness or reliability of a previously
issued audit report or the underlying financial statements.
No consultations occurred between the Registrant and Coopers & Lybrand
during the two most recent fiscal years and any subsequent interim period prior
to Coopers & Lybrand's appointment regarding the application of accounting
principles to a specific completed or contemplated transaction, the type of
audit opinion, or other information considered by the Registrant in reaching a
decision as to an accounting, auditing, or financial reporting issue.
On June 17, 1996, Coopers & Lybrand LLP ("Coopers & Lybrand") resigned as
the independent accountants of American Financial Holding, Inc. (the "Company").
Coopers & Lybrand had been appointed by the Company on January 10, 1996, to
audit and report on its financial statements for the year ended December 31,
1995. Coopers & Lybrand did not complete or issue any report on its audit of
the December 31, 1995, financial statements of the Company.
In connection with its resignation, Coopers & Lybrand advised the Company
that information has come to its attention that, if investigated further, may
materially impact the fairness or reliability of previously issued audit reports
or the underlying financial statements relating to the extent of and the method
of accounting for shareholder advances and stock issuance costs.
Between the date of its appointment and dismissal, there were no
disagreements with Coopers & Lybrand on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountant,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report.
On July 8, 1996, the board of directors of American Financial Holding,
Inc. (the "Registrant") approved the engagement of Jones, Jensen & Company,
Salt Lake City, Utah, to audit and report on the Registrant's financial
statements for the year ended December 31, 1995.
No consultations occurred between the Registrant and Jones, Jensen &
Company during the two most recent fiscal years and any subsequent interim
period prior to Jones, Jensen & Company's appointment regarding the
application of accounting principles to a specific completed or
contemplated transaction, the type of audit opinion,or other information
considered by the Registrant in reaching a decision as to an accounting,
auditing, or financial reporting issue.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE OFFICE
Kenton L. Stanger 63 Chief Executive Officer,
President, Director
Raymond L. Punta 46 Executive Vice President,
Director
Chelton S. Feeny 73 Director
Ray P. Brown 52 Executive Vice President-
Marketing, Director
Tim L. Hansen 47 Executive Vice President-
Marketing, Director
Directors are elected at the annual shareholders' meeting of the Company to
serve for a period of one year and until their successors are elected and
qualified. Officers serve at the pleasure of the board of directors.
Kenton L. Stanger has served as Chairman of the Board, President, and Chief
Executive Officer of the Company since 1988. From 1986 to 1988, he was
President of American Financial Marketing, Inc., which was acquired by the
Company in 1988. From 1969 to 1986, Mr. Stanger was Chairman, President and
Chief Executive Officer of Balanced Security Corporation, a financial services
holding company which owned its own life insurance and annuity marketing
company, and an insurance related audio visual production company. During 1985,
he also served as a director for Service Life Insurance Company. From 1965 to
1969, he was President and Chief Executive Officer of Sentinel's Southern Agency
Corporation. Mr. Stanger was the District Sales Manager for Country Mutual Life
and Farm Bureau Insurance Companies from 1958 to 1965. Mr. Stanger is the
father-in-law of Raymond L. Punta.
Raymond L. Punta has served as Executive Vice President and a director of
the Company from 1989 through the present. From 1988 through 1989, Mr. Punta
was a co-owner of American Safety Products, an entity that marketed Halon fire
extinguishers, door entry systems, and other commercial and residential safety
products. Mr. Punta was a national sales trainer for Novar Corporation,
Barberton, Ohio, from 1984 to 1988. From 1973 to 1984, Mr. Punta served as a
law enforcement officer with the San Joaquin County Sheriff's Department and the
Lodi Police Department, both in California. Mr. Punta is the son-in-law of Mr.
Stanger.
Chelton S. Feeny has served as a director of the Company from 1988 through
the present. Dr. Feeny was engaged in the practice of medicine between 1959 and
1988 in Ogden, Utah. Since 1989, he has been employed by the Veterans
Administration Regional Office in Anchorage, Alaska. He currently serves as a
member of the Finance Committee of the Ogden Surgical Society and the Alaska and
Anchorage Surgical Societies.
Ray P. Brown is Executive Vice President-Marketing and has been a director
of the Company since 1989. In 1987, Mr. Brown, in conjunction with Mr. Hansen,
formed Income Builders, Inc., a field marketing organization to sell life
insurance and annuity products offered by LifeUSA. In 1989, Messrs. Brown and
Hansen, exchanged their shares of Income Builders for shares of the Company, and
Income Builders became a wholly owned subsidiary of the Company. Mr. Brown has
been active in the insurance industry since 1972.
Tim L. Hansen is Executive Vice President-Marketing and has served as a
director of the Company since 1989. In 1987, Mr. Hansen, in conjunction with
Mr. Brown, formed Income Builders, Inc., a field marketing organization to sell
life insurance and annuity products offered by LifeUSA. In 1989, Messrs. Hansen
and Brown exchanged their shares of Income Builders for shares of the Company,
and Income Builders became a wholly owned subsidiary of the Company. Mr. Hansen
has been active in the insurance industry since 1973.
BOARD MEETINGS AND COMMITTEES
Members of the board of directors discussed various business matters
informally on numerous occasions throughout the year. All formal actions were
taken by vote in one board meeting that occurred throughout the year or by
unanimous consent during 1995. The directors who are not employees received
reimbursement of direct expenses incurred on behalf of the Company. Directors
who are employees of the Company receive no compensation for services as
directors.
The board of directors has no standing audit or compensation committees.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3, 4, and 5 and amendments thereto,
furnished to the Company during or respecting its last fiscal year ended
December 31, 1995, any written representation referred to in paragraph (b)(2)(i)
of Item 405 of Regulation S-B, no person who, at any time during the most recent
fiscal year, was a director, officer, beneficial owner of more than 10% of any
class of equity securities of the Company or any other person known to be
subject to Section 16 of the Exchange Act failed to file, on a timely basis,
reports required by Section 16(a) of the Exchange Act, during the most recently
completed full fiscal year or prior fiscal year, except as noted in previous
reports on Form 10-K and except that Chelton S. Feeny failed to report purchases
of Common Stock from the Company as follows: 10,000 shares purchased on March
10, 1995; and 10,000 shares purchased on each of February 23, May 17, September
26, and November 22, 1994.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth, for each of the last three fiscal years,
cash compensation received by any person serving as chief executive officer of
the Company during the last preceding fiscal year and any of the four remaining
most highly compensated other executive officers whose salary and bonus for all
services in all capacities exceeded $100,000 for the most recent fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (g) (h) (I)
Other Securities
Annual Restrict Underlying All
Year Compen- ed Stock Options/ LTIP Other
Ended Salary Bonus sation Award(s) SARs Payouts Compen-
Name and Principal Dec. ($) ($) ($)(1) ($) (#)(2) ($) sation
Position 31 ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenton L. Stanger 1995 -- -- $131,007 -- -- -- --
Chief Executive 1994 -- -- $140,580 -- -- -- --
Officer,
President, Director 1993 -- $10,000 $141,049 -- 75,000 -- --
Tim L. Hansen 1995 $159,394 -- $ 94,788 -- -- -- --
Vice President- 1994 $169,033 -- $ 46,994 -- -- -- --
Marketing,
Director 1993 $159,949 $58,500 $ 61,942 -- 75,000 -- --
Ray P. Brown 1995 $160,565 -- $ 87,000 -- -- -- --
Vice President- 1994 $173,781 -- $ 47,220 -- -- -- --
Marketing,
Director 1993 $159,949 $58,500 $ 63,277 -- 75,000 -- --
Raymond L. Punta 1995 -- -- $ 94,149 -- -- -- --
Executive Vice- 1994 -- -- $106,040 -- -- -- (3)
President
Director 1993 -- $10,000 $ 90,989 -- 75,000 -- (3)
</TABLE>
(1) During 1995 and prior years, the Company made personal loans to the four
named executive officers and directors in the amounts set forth as "Other
Annual Compensation," which includes interest accrued during the year on
the unpaid balance of amounts previously outstanding. Such amounts
included cash advances as well as reimbursements for personal use of
Company automobiles and other items. (See Note 3 respecting Mr. Punta.)
(See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.") Further,
such amounts are treated as compensation for purposes of this table, but
remain an obligation payable by such persons. (See Note 9 to Notes to
Consolidated Financial Statements.) The Company will offset against the
amounts payable to it by such officers and directors documented expenses
paid by such officers and directors from their own funds on behalf of the
Company.
(2) In September 1993, the Company granted the above options to the named
executives, entitling them to purchase shares of Company Common Stock
through September 1998 at $1.75 per share. All such executive officers
have pledged shares issuable on exercise of such options to secure their
obligations to the Company to repay loans due it.
(3) In 1992, the Company purchased from an unrelated party for $106,000, a
condominium in which Mr. Punta resides. The Company purchased the property
in its name, made the $24,000 cash payment and makes the payments due on
the mortgage note in the original principal amount of $82,000, bearing
interest at 10.5% per annum, payable $722 per month, with the entire
unpaid principal due July 1997. During 1993, the Company also paid a total
of $4,537 in homeowners' association fees, Such monthly mortgage and
homeowners' association payments are treated as a loan advance to Mr.
Punta. The Company has agreed with Mr. Punta that he may purchase the
property on reimbursement to the Company of all expenditures not reimbursed
by Mr. Punta to the date of purchase or not charged to loans due the
Company by Mr. Punta.
The following table sets forth information respecting the exercise of
options and SARs during the last completed fiscal year by each executive officer
named in the Summary Compensation Table above and the last completed fiscal year
end values of unexercised options and SARs, based on the average high and low
price of the Company's Common Stock that day on the EBB of $2.75.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d)
Number of
Securities
Underlying Unexercised
Unexercised InValue)ofey
Options/SARs at Options/SARs at
FY End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized Unexercisable Unexercisable
($)
<S> <C> <C> <C> <C>
Kenton L. Stanger -- -- 75,000/-- $75,000/--
Tim L. Hansen -- -- 75,000/-- $75,000/--
Ray P. Brown -- -- 75,000/-- $75,000/--
Raymond L. Punta -- -- 75,000/-- $75,000/--
</TABLE>
EMPLOYEE AGREEMENTS AND BENEFITS
During 1996, the Company expects to provide approximately $135,000 to
Kenton L. Stanger, the exact amount of which will depend on the level of
activities of the Company and the results of its operations. As in previous
years, a large portion of such amount may be in the form of a loan to Mr.
Stanger, repayable by him. As before, the amount of any such loan to Mr. Stanger
will be treated as cash compensation for financial reporting purposes but will
remain a repayment obligation of Mr. Stanger. If the Company has funds available
from the operation of an insurance company subsidiary that may be organized (of
which there can be no assurance) or other sources, the amounts paid to Mr.
Stanger may be treated as a regular salary.
Effective July 1, 1995, the Company entered into executive employment
agreements with Tim L. Hansen and Ray P. Brown at annual salaries for 1995 at
the rate of $200,000 each, plus bonuses based on the income of Income Builders,
provided, however, that the aggregate amount of the compensation to Messrs.
Hansen and Brown in any year can in no event result in Income Builders'
incurring an operating loss. Each agreement provides for a three-year term,
renewed automatically each year and extended for an additional three-year term
unless the Company's board of directors resolves not to extend such agreement,
in which case the employment agreement will expire at the end of the then
current three-year term. Within ninety (90) days after the commencement of a
new fiscal year, the Company will negotiate with Messrs. Hansen and Brown to
determine the amount of any increase in each individual's respective salary for
such year.
The Company provides each of its executive officers and directors who are
full-time employees with health and accident insurance. In addition, the
Company provides to Messrs. Hansen and Brown automobiles for business use.
The Company reimburses its directors for costs of attending meetings of the
board of directors but does not compensate its directors who are not employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The table below sets forth information as to each person who owned of
record or was known by the Company to own beneficially more than 5% of the
4,232,399 shares of issued and outstanding Common Stock of the Company as of
October 20, 1996, and information as to the ownership of the Company's Common
Stock by each of its directors and by its officers and directors as a group.
Except as otherwise indicated, all shares are owned directly, and the persons
named in the table have sole voting and investment power with respect to shares
shown as beneficially owned by them.
<TABLE>
<CAPTION>
NATURE OF NUMBER OF
BENEFICIAL OWNERS OWNERSHIP SHARES OWNED PERCENT
<S> <C> <C> <C>
PRINCIPAL SHAREHOLDER
Kenton L. Stanger Indirect(1) 200,000 4.73%
225 South 200 West, #302 Options 75,000 1.74%
-------
Farmington, Utah 84025-0683 Total 275,000 6.38%
Direct 191,826 4.53%
Tim L. Hansen Indirect(2) 50,272 1.19%
42 East Claybourne Avenue Options 75,000 1.74%
-------
Salt Lake City, Utah 84115 Total 317,098 7.36%
Direct 174,824 4.13%
Ray P. Brown Indirect(2) 67,002 1.58%
42 East Claybourne Avenue Options 75,000 1.74%
-------
Salt Lake City, Utah 84115 Total 316,826 7.36%
Direct 125,000 2.95%
Raymond L. Punta Indirect(3) 210,579 4.98%
225 South 200 West, #302 Options 75,000 1.74%
-------
Farmington, Utah 84025-0683 Total 410,579 9.53%
San Joaquin Trust Direct(1) 175,000 4.13%
Gay Stanger and Cheryl Punta,
Trustees
1546 North Sweetwater Lane
Farmington, Utah 84025
Chelton S. Feeny
2925 DeBarr Street Direct 98,500 2.33%
VARO-11A Indirect(3) 107,522 2.48%
-------
Anchorage, Alaska 99508 Total 206,022 4.75%
DIRECTORS
Kenton L. Stanger - - - - - - - - - See Above - - - - - - - -
Tim L. Hansen - - - - - - - - See Above - - - - - - - -
Ray P. Brown - - - - - - - - - See Above - - - - - - - -
Raymond L. Punta - - - - - - - - - See Above - - - - - - - -
Chelton S. Feeny - - - - - - - - - See Above - - - - - - - -
Direct 590,150 13.94%
ALL DIRECTORS AND EXECUTIVE Indirect 635,375 15.01%
OFFICERS, AS A GROUP (5 PERSONS) Options 300,000 6.62%
---------
Total 1,525,525 33.66%
</TABLE>
---------------
(1) Mr. Stanger is deemed to share voting and dispositive power over 175,000
shares owned by San Joaquin Trust and 25,000 shares owned by Debt Reduction
Trust. The 25,000 shares held by the Debt Reduction Trust have been pledged
to secure the Company's loans made to certain officers and directors. (See
"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
(2) Represents shares held by self-directed retirement account.
(3) Consists of 10,579 shares owned by Mr. Punta's wife and 175,000 shares
owned by San Joaquin Trust and 25,000 shares owned by Debt Reduction Trust,
of which his wife is co-trustee.
(4) Represents shares held by trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN LOANS
During the preceding three fiscal years the Company has made certain
personal loans to present and/or former officers and directors in lieu of paying
salaries. Funds for these loans were derived through the sale of Common Stock
of the Company, as discussed below. During 1991, the Company sold common stock
under an understanding with a trust to contribute back to the Company the number
of shares necessary to raise the funds required. The proceeds from the sale of
such shares were used for loans rather than salaries to officers. These loans
are currently evidenced by promissory notes dated December 31, 1995, bearing
interest at 8% per annum and are due and payable 30 days following demand, but
in any event by December 31, 1998. The loans of Kenton L. Stanger, Raymond L.
Punta, Maxine Heap, and Howard L. Smith are secured by the accommodation pledge
by Debt Reduction Trust, a trust over which Kenton L. Stanger is deemed to share
voting and dispositive power, of 15,000 shares of Common Stock of the Company.
The loans of Ray P. Brown and Timothy L. Hansen are secured by the accommodation
pledge by Debt Reduction Trust, a trust over which Kenton L. Stanger is deemed
to share voting and dispositive power, of 10,000 shares of Common Stock of the
Company. In addition, each of Messrs. Stanger, Punta, Brown, and Hansen has
pledged options to purchase 75,000 shares of Common Stock at $1.75 per share and
the shares issuable on exercise of such options to secure repayment of his loan.
For financial reporting purposes, a portion of such loans has been treated as
cash compensation but remains an obligation payable by such persons. Set forth
below is the name of each such borrower and the outstanding balance, including
accrued interest, as of the dates indicated:
<TABLE>
<CAPTION>
Balance Outstanding, December 31,
Name 1995 1994
<S> <C> <C>
Kenton L. Stanger $ 738,213 $ 560,942
Tim L. Hansen 652,190 517,481
Ray P. Brown 665,589 537,522
Raymond L. Punta 550,147 421,419
Others 78,910 64,307
---------- ----------
$2,685,049 $2,101,671
</TABLE>
The Company will offset against the amounts payable to it by such officers
and directors documented expenses paid by such officers and directors from their
own funds on behalf of the Company. The terms of the foregoing transactions
were not determined in arm's length negotiations.
COMMON STOCK
During 1995, the Company sold 10,000 shares of Common Stock to Chelton
Feeny, a director, for $10,000.
FINANCIAL ADVISORY SERVICES
During 1995, the Company paid Agincourt Capital, Inc. ("Agincourt"), of
which William E. Waterman, Jr., then a director, was chief executive officer.
Pursuant to this agreement, the Company agreed to pay Agincourt a fee of $10,000
per month for financial advisory services plus a cash placement fee of 10% of
the proceeds of financing arranged by it and reimbursement of accountable out-
of-pocket expenses. Under this agreement, the Company paid Agincourt a total of
$170,000, including $50,000 paid as commissions on the sale of Triad Preferred
Stock.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(B) EXHIBITS:
The following exhibits are included as part of this report at the location
indicated:
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
<S> <C> <C> <C>
Item 3. Articles of Incorporation and Bylaws
3.01 3 Certificate of Incorporation, as amended Incorporated
by
Reference(1)
3.02 3 Bylaws Incorporated
by
Reference(1)
Item 4
4.01 4 Form of Certificate Of Incorporation Of This Filing
Triad Financial Systems, Inc.
4.02 4 Form of Triad Financial Systems, Inc. This Filing
Designation Of Rights, Privileges, And
Preferences Of 8% Payable In Cash And In
Kind Cumulative Convertible Preferred
Stock
Item 10. Material Contracts
10.01 10 Agreement dated July 20, 1992, among Incorporated
American Financial Holding, Inc., Tim L. by
Hansen, and Reference(1)
Ray P. Brown, relating to Income
Builders, Inc., and related form of proxy
10.02 10 Financial Advisory Services Agreement Incorporated
with Agincourt dated April 27, 1993 by
Reference(2)
10.03 10 Agent Agreement between LifeUSA Insurance Incorporated
Company and Income Builders; also by
constitutes form of agreement used for Reference(1)
each independent agent
10.04 10 Form of Secured Promissory Note of This Filing
certain directors of American Financial
Holding, Inc., and related schedule,
dated as of December 31, 1995*
10.05 10 Accommodation Stock Pledge Agreement for Incorporated
Stock between American Financial Holding, by
Inc., and Mick K. Stanger and Cheryl S. Reference(1)
Punta, trustees of the Debt Reduction
Trust, dated March 31, 1992
10.06 10 Accommodation Stock Pledge Agreement for Incorporated
Stock between Income Builders, Inc., and by
Mick K. Stanger and Cheryl S. Punta, Reference(1)
trustees of the Debt Reduction Trust,
dated March 31, 1992
10.7 10 Stock Purchase Agreement between Triad Incorporated
Financial Systems, Inc. and Lincoln by
Heritage Life Insurance Company regarding Reference(3)
Modern Income Life Insurance Company
dated February 10, 1994
10.8 10 Form of Nonqualified Stock Option with Incorporated
related schedules of options* by
Reference(3)
10.9 10 Form of Option Pledge Agreement and Incorporated
related schedule* by
Reference(3)
10.10 10 Letter agreement with Raymond L. Punta This Filing
regarding condominium as revised July 17,
1995*
10.11 10 Executive Employment Agreement between This Filing
American Financial Holding, Inc. and Ray
P. Brown effective July 1, 1995*
10.12 10 Executive Employment Agreement between This Filing
American Financial Holding, Inc. and Tim
L. Hansen effective July 1, 1995*
10.13 10 Promissory Note executed by American This Filing
Financial Holding, Inc., payable to
Kruse, Landa & Maycock, L.L.C., in the
amount of $350,000, dated as of September
30, 1996, with related Pledge Agreement
10.14 10 Marketing Agreement between Massachusetts This Filing
General Life Insurance Company, Wabash
Life Insurance Company, American
Financial Reinsurance, Inc., and American
Financial Marketing, Inc., dated January
1, 1996; including exhibits a) General
Agent Contract; b) Co Insurance
Agreement; c) Administrative Services
Agreement; and d) Reinsurance Agreement.
10.15 10 Form of Surplus Debenture No. 1 by This Filing
American Financial Reinsurance, Inc.
10.16 10 Form of Security and Pledge Agreement This Filing
between American Financial Holding, Inc.,
American Financial Reinsurance, Inc., and
Massachusetts General Life Insurance
Company
10.17 10 Agreement for Purchase and Sale of This Filing
Preferred Shares of Triad Financial
Systems, Inc., dated October 22, 1996,
between Triad and American Physicians
Life Insurance Company
Item 16 Letter on Change in Certifying Accountant
16.01 16 Letter from Arthur Andersen dated January Incorporated
15, 1996 by
Reference(4)
16.02 16 Letter from Coopers & Lybrand L.L.P. Incorporated
dated July 8, 1996 by
Reference(5)
Item 21. Subsidiaries of the Company
21.01 21 Subsidiaries of the Company This Filing
</TABLE>
(1) Previously filed as exhibits to the Company's Form 10-K for the fiscal year
ended December 31, 1991, and incorporated herein by reference.
(2) Previously filed as exhibits to the Company's Form 10-K for the fiscal year
ended December 31, 1992, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Form 10-K for the fiscal
year ended December 31, 1993, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's current report on Form 8-K
dated January 10, 1996.
(5) Previously filed as an exhibit to the Company's current report on Form 8-K
dated
* IDENTIFIES MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED
TO BE FILED AS AN EXHIBIT.
(B) REPORTS ON FORM 8-K:
The Company did not file a report on Form 8-K during the quarter ended
December 31, 1995.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, dated as of
the 31st day of October, 1996.
AMERICAN FINANCIAL HOLDING, INC.
By /s/ Kenton L. Stanger, President
(Principal Executive and Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and as of the 31st day of October, 1996.
By /s/ Kenton L. Stanger, Director
By /s/ Raymond L. Punta, Director
By /s/ Ray P. Brown, Director
By---------------------------------
Chelton S. Feeny, Director
By /s/ Tim L. Hansen, Director
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 1995 and for the Years Ended
December 31, 1995 and 1994
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
American Financial Holding, Inc. and Subsidiaries
Farmington, Utah
We have audited the accompanying consolidated balance sheet of American
Financial Holding, Inc. and Subsidiaries as of December 31, 1995 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Financial Holding, Inc. and Subsidiaries as of December 31, 1995 and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has suffered losses from
operations for the years ended December 31, 1995 and 1994, and has a
stockholders' deficit of $444,895 as of December 31, 1995 that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters also are described in Note 10. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of this
uncertainty.
/s/ Jones, Jensen & Company
August 20, 1996
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Financial Holding, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of American Financial Holding, Inc. (a
Delaware corporation) and subsidiaries for the year ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and 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, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
American Financial Holding, Inc. and subsidiaries for the year ended December
31, 1994 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
consolidated financial statements, the Company has suffered losses from
operations, has a stockholders' deficit and has a working capital deficiency
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters also are described in Note 10.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result from the outcome of this
uncertainty.
As explained in Note 2, effective December 31, 1994, the Company changed its
method of accounting for investments in debt and equity securities.
/S/
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 24, 1995 (except with respect to the
matter discussed in the first paragraph of
Note 8 as to which the date is July 1, 1995)
<PAGE>
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
December 31,
1995
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 988,904
Marketable securities (Note 2) 88,100
Commissions receivable 170,014
Interest receivable 1,414
Total Current Assets 1,248,432
PROPERTY AND EQUIPMENT - NET (Notes 1 and 3) 102,601
OTHER ASSETS
Investment in real estate 102,955
Net deferred tax asset (Note 6) 195,560
Deposits 26,804
Total Other Assets 325,319
TOTAL ASSETS $1,676,352
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31,
1995
CURRENT LIABILITIES
Accounts payable $ 375,795
Commissions payable 170,014
Short-term borrowings (Note 7) 53,478
Accrued expenses 281,528
Income taxes payable 256,241
Dividends payable (Note 5) 24,064
Notes payable, current portion (Note 7) 57,738
Total Current Liabilities 1,218,858
LONG-TERM LIABILITIES
Notes payable (Note 7) 522,403
Total Long-Term Liabilities 522,403
Total Liabilities 1,741,261
COMMITMENTS AND CONTINGENCIES (Note 8) -
MINORITY INTEREST (preferred stock in
consolidated subsidiary) (Note 5) 438,504
STOCKHOLDERS' DEFICIT
Common stock: 20,000,000 shares authorized of $0.01
par value, 4,232,399 shares issued and outstanding 42,324
Additional paid-in capital 7,354,360
Stockholders' notes receivable, net of reserve of
$869,255 (Note 9) (383,966)
Unrealized loss on marketable securities (Note 2) (53,412)
Accumulated deficit (7,462,719)
Total Stockholders' Deficit (503,413)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,676,352
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
December 31,
1995 1994
COMMISSION REVENUE $4,759,357 $4,508,894
COMMISSION EXPENSE 4,095,800 3,731,898
GROSS PROFIT 663,557 776,996
GENERAL AND ADMINISTRATIVE EXPENSES 1,486,320 1,512,901
LOSS FROM OPERATIONS (822,763) (735,905)
OTHER INCOME (EXPENSE)
Interest income 195,835 73,063
Interest expense (32,305) (12,526)
Total Other Income (Expense) 163,530 60,537
LOSS BEFORE INCOME TAXES (659,233) (675,368)
INCOME TAX PROVISION (Note 6) (12,381) (12,045)
LOSS BEFORE PREFERRED STOCK DIVIDEND (671,614) (687,413)
PREFERRED STOCK DIVIDEND (24,064) -
---------- ----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (695,678) $ (687,413)
========== ==========
NET LOSS PER COMMON SHARE $ (0.18) $ (0.21)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,872,672 3,327,449
========== ==========
note:the following table is split into two segments for better presentation.
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Additional Stockholders'
Common Stock Paid-in Notes
Shares Amount Capital Receivable
--------- -------- ---------- ---------
Balance,
December 31, 1993 3,039,710 $ 30,397 $ 6,364,280 $(289,751)
Sale of common stock
at an average price per
share of $0.89 518,590 5,186 455,999 -
Common stock issued for
services at an average
price per share of $1.00 85,500 855 84,645 -
Increase in deferred
stock issuance costs, net - - - -
Loans to stockholders - - - (98,978)
Unrealized loss on
marketable
securities - - - -
Net loss for
the year ended
December 31, 1994 - - - -
--------- -------- ---------- ---------
Balance,
December 31, 1994 3,643,800 $ 36,438 $ 6,904,924 $(388,729)
--------- -------- ---------- ---------
Receivable Unrealized
Stock From Sale Loss on
Issuance of Common Marketable Accumulated
Costs Stock Securities Deficit
--------- -------- ---------- ---------
Balance,
December 31, 1993 $ (79,999) $ (9,800) $ - $(6,103,692)
Sale of common stock
at an average price per
share of - - - -
Common stock issued for
services at an average
price per share of $1.00 - - - -
Increase in deferred
stock issuance costs, net (7,010) - - -
Loans to stockholders - - - -
Unrealized loss on
marketable
securities - - (61,516) -
Net loss for
the year ended
December 31, 1994 - - - (687,413)
--------- -------- ---------- ---------
Balance,
December 31, 1994 $ (87,009) $ (9,800) $ (61,516) $(6,791,105)
--------- -------- ---------- ---------
Additional Stockholders'
Common Stock Paid-in Notes
Shares Amount Capital Receivable
--------- -------- ---------- ---------
Balance,
December 31, 1994 3,643,800 $ 36,438 $ 6,904,924 $ (388,729)
Sale of common stock
(net of $32,981 stock
issuance costs) at an
average price per share
of $0.81 580,765 5,808 465,744 -
Common stock issued for
services at an average
price per share of $1.00 7,834 78 7,756 -
Decrease in deferred
stock issuance costs, net - - - -
Collection of note receivable - - - -
Reserve against
stockholders'
notes receivable - - - 4,763
Unrealized loss on
marketable securities - - - -
Preferred stock
dividends declared - - (24,064) -
Net loss for
the year ended
December 31, 1995 - - - -
--------- -------- ---------- ---------
Balance,
December 31, 1995 4,232,399 $ 42,324 $ 7,354,360 $ (383,966)
--------- -------- ---------- ---------
Receivable Unrealized
Stock From Sale Loss on
Issuance of Common Marketable Accumulated
Costs Stock Securities Deficit
--------- -------- ---------- ---------
Balance,
December 31, 1994 $(87,009) $ (9,800) $ (61,516) $(6,791,105)
Sale of common
stock (net
of $32,981 stock
issuance costs) at an
average price per
share of $0.81 - - - -
Common stock issued for
services at an average
price per share of $1.00 - - - -
Decrease in deferred
stock issuance costs,net 87,009 - - -
Collection of note receivable - 9,800 - -
Reserve against
stockholders'
notes receivable - - - -
Unrealized loss on
marketable securities - - 8,104 -
Preferred stock
dividends declared - - - -
Net loss for
the year ended
December 31, 1995 - - - (671,614)
--------- -------- ---------- ---------
Balance,
December 31, 1995 $ - $ - $ (53,412) $(7,462,719)
========= ======== ========== =========
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(695,678) $(687,413)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and amortization 21,669 23,498
Write-off of deferred stock issuance costs - 175,565
Provision (benefit) for advance commission
chargebacks 401 18,203
(Benefit) provision for valuation allowance on
marketable securities 8,104 (61,516)
Common stock issued for services rendered 7,834 85,500
Change in Assets and Liabilities:
(Increase) decrease in marketable securities (9,764) 186,480
(Increase) decrease in commissions receivable (120,014) 63,478
(Increase) decrease in interest receivable (1,414) -
(Increase) decrease in other assets (23,000) 12,948
Increase (decrease) in accounts payable 69,280 107,911
Increase (decrease) in commissions payable 170,014 (113,478)
Increase (decrease) in accrued expenses 76,938 28,128
Increase (decrease) in income taxes payable 12,081 12,045
Increase (decrease) in dividends payable 24,064 -
------- -------
Net Cash Used in Operating Activities (459,485) (148,651)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,570) -
------- -------
Net Cash Used in Investing Activities $(16,570) $ -
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock $471,552 $461,185
Proceeds from short-term borrowings 4,707 -
Principal payments on short-term borrowings - (76,339)
Proceeds from issuance of long-term debt 425,000 -
Principal payments on long-term debt (14,383) (23,701)
Decrease (increase) in stockholders'
notes receivable, net 14,563 (98,978)
Amounts paid for stock issuance costs - (182,575)
Minority interest from issuance of preferred
stock by subsidiary 525,513 -
------- -------
Net Cash Provided by Financing Activities 1,426,952 79,592
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 950,897 (69,059)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 38,007 107,066
------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $988,904 $ 38,007
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 32,305 $ 12,526
Cash paid during the year for income taxes $ 300 $ 300
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1995, the Company traded in two automobiles
with total net book value of $31,888 and related debt of $35,505 in exchange
for two automobiles valued at $57,440 and related debt of $61,057.
During the year ended December 31, 1995, the Company's subsidiary, Triad
Financial Systems, Inc., declared and accrued a preferred stock dividend in
the amount of $24,064.
During the year ended December 31, 1994, the Company traded in three
automobiles with total net book value of $51,638 and related debt of $57,051
in exchange for two automobiles valued at $54,539 and related debt of $59,185.
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization and Nature of Operations
American Financial Holding, Inc. and its wholly-owned subsidiaries,
American Financial Marketing, Inc., Income Builders, Inc., Triad
Financial Systems, Inc. and American Financial Reinsurance, Inc.
(collectively, the "Company") market life insurance and annuity products
underwritten by unrelated insurance providers. Products underwritten by
Life USA (a non-related provider of life insurance and annuity products)
accounted for substantially all of the commission revenue for the years
ended December 31, 1995 and 1994.
During 1989, the Company issued 300,000 shares of its common stock in
exchange for all of the outstanding common stock of Income Builders,
Inc. ("Income Builders"), a Utah corporation. Income Builders is a
national field marketing organization for life insurance and annuity
products. Under the terms of the agreement, Income Builders has become
the marketing arm of the Company. The business combination was
accounted for using the purchase method of accounting with acquired
assets and liabilities recorded at their fair market value.
Triad Financial Systems, Inc. ("Triad") formed a subsidiary corporation
during 1995 named American Financial Reinsurance, Inc. ("AF
Reinsurance"), an Arizona corporation which applied for a Certificate
of Authority to operate as a domestic insurer in Arizona. In August
1995, AF Reinsurance received $425,000 cash from the issuance of a
subordinated surplus debenture payable to Massachusetts General Life
Insurance Company (a member of the Conseco, Inc. Financial Services
Organization). This transaction was for the purpose of assisting AF
Reinsurance in meeting its surplus requirements for reinsurance
purposes. The subordinated surplus debenture is payable at the rate of
$42,500 per year, beginning September 30, 1996 (see Note 7). The State
of Arizona granted AF Reinsurance a Certificate of Authority to operate
as a domestic insurer in Arizona that became effective on November 24,
1995.
b. Accounting Method
The Company's financial statements are prepared using the accrual method
of accounting. The Company has elected a December 31 year end.
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with
maturities of three months or less at the time of acquisition. The
Company maintains its cash accounts mainly in two commercial banks.
Accounts are guaranteed by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000. The amount in excess of the insured limits at
December 31, 1995 was $563,701.
d. Net Loss Per Common Share
The computations of net loss per share of common stock are based on the
weighted average number of common shares outstanding at the date of the
consolidated financial statements. Common stock equivalents are not
considered in the computation of the weighted average number of common
shares outstanding because they would decrease the net loss per common
share.
e. Principles of Consolidation
The consolidated financial statements include those of American
Financial Holding, Inc. and its wholly-owned subsidiaries, American
Financial Marketing, Inc., Income Builders, Inc., Triad Financial
Systems, Inc. and American Financial Reinsurance, Inc. All significant
intercompany accounts and transactions have been eliminated.
f. Stock Issuance Costs
During 1994, management determined that certain previously deferred
stock issuance costs related to the Company's efforts to raise capital
should be expensed. In 1995, the Company charged minority interest for
costs relating to the Triad preferred stock issuance.
g. Property and Equipment
Property and equipment are stated at cost. Expenditures for minor
replacements, maintenance and repairs which do not increase the useful
lives of the property and equipment are charged to operations as
incurred. Major additions and improvements are capitalized.
Depreciation is computed using the straight-line and accelerated
methods over estimated useful lives as follows:
Automobiles 5 years
Furniture and fixtures 5 to 7 years
Equipment 10 years
h. Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases and the
reported amounts of assets and liabilities in the accompanying
consolidated balance sheets. These temporary differences will result in
taxable or deductible amounts in future years when the reported amounts
of the assets or liabilities are recovered or settled.
i. Reclassifications
Certain 1994 amounts have been reclassified to conform to the 1995
consolidated financial statement presentation.
j. Revenue Recognition
Revenues result from commissions earned from sales of life insurance and
annuity products. Revenues are recognized as earned over the life of
the policies. A reserve has been provided for the effect of commissions
advanced to agents which are potentially subject to chargeback if the
earnings process is not completed.
k. Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for the Impairment of Long-Lived Assets."
This new standard is effective for fiscal years beginning after December
15, 1995 and would change the Company's method of determining impairment
of long-lived assets. Although the Company has not performed a detailed
analysis of the impact of this new standard on the Company's financial
statements, the Company does not believe that adoption of the new
standard will have a material effect on the financial statements.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation". This new
standard is effective for fiscal years beginning after December 15,
1995. The standard encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and
other equity instruments to employees based on fair value. Companies
that do not adopt the fair value accounting rules must disclose the
impact of adopting the new method in the notes to the financial
statements. Transactions in equity instruments with non-employees for
goods or services must be accounted for on the fair value method.
Although the Company has not performed a detailed analysis of the impact
of this new standard on the Company's financial statements, the Company
does not believe that adoption of the new standard will have a material
effect on the financial statements.
l. Estimates
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.
m. Concentrations of Risk
Products underwritten by Life USA account for substantially all of the
Company's commission revenue. It is at least reasonably possible that
business with Life USA could be lost in the near term thus resulting in
a material impact to the Company.
NOTE 2 - MARKETABLE SECURITIES
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's marketable
securities are classified as "available-for-sale." Accordingly,
unrealized gains and losses are excluded from earnings and reported in a
separate component of stockholders' equity. There has been no
restatement of previously issued financial statements in connection with
the adoption of this new accounting standard.
During 1995 and 1994, Income Builders received commission bonuses in the
form of options for the purchase of Life USA common stock. These
options are fully vested upon receipt and are exercisable for five years
from the date of receipt. The options carry an exercise price equal to
the greater of $10.00 or 150 percent of the market value of Life USA's
common stock on the date of grant. As of December 31, 1995, the Company
has received options to purchase approximately 111,600 shares of Life
USA common stock. No value has been assigned to these options in the
accompanying consolidated financial statements because the market value
of Life USA's common stock is below the option exercise prices and due
to uncertainties regarding the Company's ability to exercise these
options.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 consisted of the following:
December 31,
1995
Automobiles $ 97,852
Equipment 48,239
Furniture and fixtures 22,132
---------
Total 168,223
Less accumulated depreciation (65,622)
---------
Property and equipment - net $ 102,601
=========
Depreciation expense for the years ended December 31, 1995 and 1994 was
$21,669 and $23,498, respectively.
NOTE 4 - COMMON STOCK OPTIONS
On August 7, 1992, the Company adopted the 1992 Stock Option Plan (the
"Plan"). The Plan was approved by the stockholders in September 1992.
The Plan allows the board of directors (or a committee appointed by the
board) to issue options to purchase common stock to employees of the
Company and others deemed by the board of directors to have
substantially contributed to the business of the Company. Under the
terms of the Plan, the board of directors can grant options covering
500,000 shares of the Company's common stock. The options granted shall
be either incentive stock options as defined in Section 422 of the
Internal Revenue Code or nonqualified stock options. The exercise price
of each option issued under the Plan shall be determined by the board of
directors based upon the greater of the average trading price of the
Company's common stock over a thirty-day trading period as determined by
an independent reliable means or 110 percent of the cash offering price
at which the Company's common stock was sold for cash at any time during
the six month period that commenced September 15, 1992 and ended March
15, 1993. The option price for incentive stock options must be in
excess of 100 percent of the fair market value of the common stock on
the date the option is granted. Options granted under the Plan may not
have a term of more than ten years from the date of grant. In addition,
incentive stock options must be exercised by any holder within three
months following termination of employment. Options granted under the
Plan may be exercised at any time, or only after a period of time, or in
installments as established by the board of directors at the time of
grant.
No options were issued under the Plan during 1992. In September 1993,
the Board of Directors authorized the issuance of nonqualified stock
options to purchase 400,000 shares of common stock at an exercise price
of $1.75 per share. The options vested immediately and expire on August
31, 1998. None of the stock options were exercised during 1995 or 1994.
NOTE 5 - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
On June 30, 1995, the Company's wholly-owned subsidiary, Triad Financial
Systems, Inc. ("Triad") met the minimum requirements of a private
placement offering of its 8% payable in cash and in kind cumulative
convertible preferred stock. Triad received $601,596 from the issuance
of 50,133 shares of its preferred stock at $12.00 per share. The net
proceeds of $438,504 (net of $163,092 of stock issuance costs) have been
presented in the accompanying consolidated balance sheet as minority
interest in consolidated subsidiary. Dividends on the preferred stock
equivalent to $48,128 ($0.96 per share) annually are cumulative and are
payable semi-annually at the rate of $0.24 per share in cash and $0.24
in additional shares of preferred stock on June 30 and December 31 each
year, commencing December 31, 1995. The shares of preferred stock have
a liquidation preference equal to the original issuance price of $12.00
per share plus an amount equal to all accumulated and unpaid dividends
on the shares to the date of final distribution. Each share of
preferred stock is convertible into three shares of the common stock of
American Financial Holding, Inc. Dividends payable at December 31, 1995
were $24,064.
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following amounts:
Year Ended
December 31,
1995 1994
Current:
Federal $ (11,981) $ (11,745)
State (400) (300)
--------- ---------
(12,381) (12,045)
--------- ---------
Deferred:
Federal - -
State - -
--------- ---------
- -
--------- ---------
Total income tax provision $ (12,381) $ (12,045)
========= =========
As of December 31, 1995, the Company has reported net operating loss
carryforwards of approximately $4,300,000 in its Federal income tax
returns which expire by 2010. Most of these net operating loss
carryforwards were generated by the Company (formerly Vidtor
Communications) prior to its merger with American Financial Marketing,
Inc. in May 1988. Based upon provisions within the Internal Revenue
Code, significant portions, if not all, of the predecessor's net
operating loss carryforwards may be limited as to their use or
unavailable for use by the Company. A valuation allowance has been
provided in the accompanying consolidated financial statements reducing
to zero the benefit that may result from the utilization of the
predecessor's net operating loss carryforwards.
In accordance with the provisions of SFAS No. 109, the Company has
recorded a net deferred tax asset in the accompanying 1995 consolidated
balance sheet as follows:
December 31,
1995
Net operating losses $ 266,703
Future deductible temporary differences related
to reserves, accruals and compensation 884,306
Future taxable temporary differences related
to depreciation (7,367)
Valuation allowance (948,082)
---------
Net deferred tax asset $ 195,560
=========
The differences between the effective income tax rate and the Federal
statutory income tax rate are presented below.
For the Years Ended
December 31,
1995 1994
Benefit at the Federal
statutory rate of 34 percent $204,243 $ 229,625
Nondeductible expenses (389) (2,432)
Increase in deferred tax asset
valuation allowance (205,549) (227,295)
State income taxes, net
of Federal benefit (264) (198)
Other (10,422) (11,745)
-------- ---------
Total income tax provision $(12,381) $ (12,045)
======== =========
NOTE 7 - NOTES PAYABLE AND SHORT-TERM BORROWINGS
Notes payable consisted of the following at December 31, 1995:
December 31,
1995
Notes payable to a credit union, monthly payments
ranging from $530 to $640, interest at rates ranging
from 6.90 to 8.90 percent, final payments due during
the period from March 1999 to January 2002,
secured by automobiles $ 77,990
Subordinated surplus debenture, interest at 7.56
percent is due quarterly, annual principal payments of
$42,500 commencing on September 30, 1996 and
ending on September 30, 2005, secured by 100,000
shares of common stock 425,000
Mortgage note payable to an individual, interest at 10.5
percent, monthly payment of $722, balloon principal
payment of $76,903 due July 1997, secured by
real estate 77,151
-------
Total notes payable 580,141
Less: current portion (57,738)
-------
Long-term notes payable $ 522,403
=======
Scheduled principal payments of notes payable are as follows:
Year Ending December 31, Amount
1996 $ 57,738
1997 135,350
1998 60,178
1999 56,745
2000 50,182
Thereafter 219,948
--------
$580,141
========
As of December 31, 1995, Income Builders had a margin loan payable to an
investment broker for $53,478. The margin loan bears interest at 8.75
percent as of December 31, 1995 and is payable on demand. The loan is
secured by marketable securities.
Based on the terms of the above notes payable being comparable to those
prevailing in the market, the fair values of the notes payable are
considered to approximate their book values.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
Effective July 1, 1995, the Company entered into executive employment
agreements with two of its officers at annual salaries for 1995 at the
rate of $200,000 each, plus bonuses based on the income of Income
Builders, provided, however, that the aggregate amount of the
compensation to them in any year can in no event result in Income
Builders incurring an operating loss. Each agreement provides for a
three-year term, renewed automatically each year and extended for an
additional three-year term unless the Company's board of directors
resolves not to extend such agreement, in which case the employment
agreement will expire at the end of the then current three-year term.
Within ninety (90) days after the commencement of a new fiscal year, the
Company will negotiate with the officers to determine the amount of any
increase in each individual's respective salary for such year. The
annual salaries under this agreement remain at $200,000 for 1996.
Marketing Agreement
American Financial Reinsurance, Inc., a wholly-owned subsidiary of the
Company, entered into an agreement with Wabash Life Insurance Company
for marketing services. The Company has advanced $25,000 to Wabash Life
Insurance Company (a member of the Conseco, Inc. Financial Services
Organization) as a deposit for its services. The deposit is refundable
after two years if the Company has generated a specified level of
revenue from reinsurance contracts.
As further discussed in Note 11, the Company has commitments to American
Physician Life (APL) to sell insurance premiums or to pay the insurance
provider if certain minimums are not met, and at September 30, 1996, the
Company incurred a $100,000 liability in connection with that
commitment.
Certain Uncertainties
The Company and Triad have sold securities in reliance on exemptions
from registration under the Securities Act and applicable state
securities laws. Management believes that the Company has materially
complied with the requirements of the applicable exemptions. However,
since compliance with these exemptions is highly technical, it is
possible that the Company could be faced with certain contingencies
based on civil liabilities resulting from the failure to meet the terms
and conditions of such exemptions, which could have a material adverse
impact on the Company's financial condition. Neither the Company nor
Triad has received any demand from any shareholder requesting a return
of his investment, damages, or other remedies in connection with the
purchase of securities by such shareholder.
NOTE 9 - RELATED PARTY TRANSACTIONS
At December 31, 1995, the Company had notes receivable of $2,685,049 due
from officers, directors and stockholders of the Company. The loans
were initially made as unsecured advances with no due dates specified.
On March 31, 1992, all advances were converted to promissory notes which
bear interest at eight percent and are due on demand. The promissory
notes have been amended for additional advances and accrued interest
during 1995 and 1994. Approximately 100,000 shares of common stock of
the Company is pledged as partial collateral for all except one of the
notes.
The Company has expensed for financial reporting purposes a portion of
the notes receivable in each year as compensation expense to certain
officers and directors. The total amount that has been expensed is
$1,431,828. Of this amount, $588,140 and $246,620 was expensed in the
years ended December 31, 1995 and 1994, respectively. However, these
individuals are obligated under the promissory notes to repay the entire
stated principal of the loans.
At December 31, 1993, management determined that the ultimate
collectibility of certain of the stockholders' notes receivable was
uncertain. Accordingly, management recorded a reserve of $869,255
against those portions of the stockholders' notes receivable which had
not previously been expensed for financial reporting purposes. The
stockholders continue to be obligated to repay the entire stated
principal of the loans. Management believes the remaining net
stockholders' notes receivable are realizable based upon the
availability of stockholders' personal financial resources. The net
amounts of the notes receivable have been reflected as an offset to
stockholders' deficit in the accompanying consolidated balance sheets
and consolidated statements of stockholders' deficit.
During the years ended December 31, 1995 and 1994, the Company
recognized $166,632 and $148,375, respectively, of interest income
related to these notes receivable. The interest income was not paid by
the shareholders but was added to the balance of the notes receivable.
NOTE 10 - GOING CONCERN
The Company has suffered losses from operations for the years ended
December 31, 1995 and 1994, and has a stockholders' deficit of $444,895
as of December 31, 1995. The Company's continued existence is dependent
upon its ability to achieve its 1996 operating plan, which includes cost
reductions and additional funding from equity financing. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of this
uncertainty.
The Company continues to rely on the sale of its securities to provide
cash to fund its operations as well as its acquisition and expansion
efforts. The Company received $471,552 in net proceeds from the sale of
its common stock during 1995. The Company also raised an additional
$438,504 in net proceeds through selling preferred stock of its wholly-
owned subsidiary, Triad Financial Systems, Inc.
Inasmuch as the offering of Triad preferred stock was not successful in
obtaining the amount of funding anticipated, the Company has been unable
to launch its product introduction and marketing effort. Therefore, the
Company is exploring other financing alternatives, including borrowings,
if available, and the sale of additional equity securities. Net
proceeds from such funding would be utilized to fund marketing expansion
and related new product introduction, to increase the surplus of AF
Reinsurance, to cover ongoing general and administrative expenses
(including payments to executive officers and directors), and perhaps to
reduce the outstanding Triad surplus debenture or to redeem Triad
preferred stock. There can be no assurance that any of the Company's
efforts to obtain additional funding will be successful or that the
Company will be able to continue as a going concern.
As part of the Company's strategic analysis and planning, it may
consider a number of corporate restructuring alternatives and may
explore the possibility of separating its Triad reinsurance activities
and/or Income Builders marketing organization from the holding company
parent and its essentially inactive subsidiary, American Financial
Marketing. There can be no assurance as to whether any such
organizational restructuring will be pursued, whether it will be
implemented, or the business or financial effects thereof will be
successful.
In order to implement the reinsurance program with Life Partners, the
Company is now developing a program to introduce Life Partners' products
for sale through the Income Builders independent contractor sales force
on a limited basis. However, the Company would benefit from additional
capital to fund a marketing program throughout its sales organization
and intends to allocate a portion of additional funding to the extent
received, for this purpose, there can be no assurance that the Company
will be able to launch an effective marketing program without
substantial amounts of additional funding or that such marketing program
will be successful even if funded and undertaken. Further, there can be
no assurance that the terms of the Company's existing reinsurance
arrangements will result in a financial return to the Company.
NOTE 11 - SUBSEQUENT EVENTS
On October 9, 1996, the Company was advised by the Enforcement Division
of the Securities and Exchange Commission (the Commission) that it is
considering recommending that the Commission bring an enforcement
action, which could include a civil penalty, against the Company is U.S.
District Court for failing to file timely periodic reports in violation
of Section 13(a) of the Securities and Exchange Act of 1934 and the
rules thereunder.
In October 1996, the Company also received a request for the voluntary
production of information to the Enforcement Division of the Commission
related to the resignation of Coopers & Lybrand LLP and the termination
of Arthur Andersen LLP and the appointment of Jones, Jensen & Company as
the Company's independent accountant and the reasons therefore. In
addition, the Company is requested to provide certain information
respecting its previous sales of securities.
The Company also has converted an account payable into a promissory note
aggregating $317,000 at September 30, 1996, bearing interest at 8% (12%
after default) and due five days after demand, but in any event by March
31, 1997, for professional services rendered. The Company does not
expect that demand will be made on this note as long as it pays for
ongoing professional services and costs advanced as they are incurred on
a current basis, and as long as the payee, in its sole discretion,
concludes that the Company is making substantial progress toward
obtaining sufficient financing to pay the note. This note is secured by
a pledge of officer and director notes payable to the Company
aggregating approximately $2,606,000.
While planning the product offerings and marketing effort for Triad in
1995 it agreed to market a product underwritten by American Physicians
Life (APL), Columbus Ohio, and agreed that it would pay APL an amount
equal to 10% of the amount by which $1,000,000 exceeded the premium for
the APL product generated by the Company by September 30, 1996. At
December 31, 1995 and during the early part of fiscal 1996, management
believed fhat Triad had resources to market the APL product, However,
because of the present inadequate funding of Triad, the Company has been
unable to initiate marketing of the APL product and has generated no
premium income under the APL agreement. Accordingly, APL has demanded
that the Company pay APL $100,000. The liability to APL occurred in
1996 and has not been recognized in the accompanying financial
statements.
CERTIFICATE OF INCORPORATION
OF
TRIAD FINANCIAL SYSTEMS, INC.
ARTICLE I
NAME
The name of the corporation (the "Corporation") shall be:
Triad Financial Systems, Inc.
ARTICLE II
DURATION
The Corporation shall continue in existence perpetually unless sooner
dissolved according to law.
ARTICLE III
PURPOSES
The purposes for which the Corporation is organized are:
To engage in the insurance and annuity business of every kind and nature.
To do all and everything necessary, suitable, convenient, or proper for the
accomplishment of any of the purposes or the attainment of any one or more of
the objects herein enumerated or incidental to the powers herein named or which
shall at any time appear conducive or expedient for the protection or benefit of
the Corporation, with all the powers hereafter conferred by the laws under which
this Corporation is organized; and
To engage in any and all other lawful purposes, activities, and pursuits,
whether similar or dissimilar to the foregoing, for which corporations may be
organized under the General Corporation Law of Delaware and to exercise all
powers allowed or permitted thereunder.
ARTICLE IV
CAPITALIZATION
The Corporation shall have authority to issue an aggregate of 4,000,000
shares, of which 2,000,000 shares shall be preferred stock, $0.01 par value
(hereinafter the "Preferred Stock"), and 2,000,000 shares shall be common stock,
par value $0.01 (hereinafter the "Common Stock"). The powers, preferences, and
rights, and the qualifications, limitations, or restrictions thereof, of the
shares of stock of each class and series which the Corporation shall be
authorized to issue, is as follows:
(a) Preferred Stock. Shares of Preferred Stock may be issued from
time to time in one or more series as may from time to time be determined
by the board of directors. Each series shall be distinctly designated.
All shares of any one series of the Preferred Stock shall be alike in every
particular, except that there may be different dates from which dividends
thereon, if any, shall be cumulative, if made cumulative. The powers,
preferences, participating, optional, and other rights of each such series
and qualifications, limitations, or restrictions thereof, if any, may
differ from those of any and all other series at any time outstanding.
Except as hereinafter provided, the board of directors of this Corporation
is hereby expressly granted authority to fix by resolution or resolutions
adopted prior to the issuance of any shares of each particular series of
Preferred Stock, the designation, powers, preferences, and relative
participating, optional, and other rights and the qualifications,
limitations, and restrictions thereof, if any, of such series, including,
without limiting the generality of the foregoing, the following:
(i) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute each series, which number may
be increased (except as otherwise fixed by the board of directors) or
decreased (but not below the number of shares thereof outstanding)
from time to time by action of the board of directors;
(ii) The rate and times at which, and the terms and conditions on
which, dividends, if any, on the shares of the series shall be paid;
the extent of preferences or relation, if any, of such dividends to
the dividends payable on any other class or classes of stock of this
Corporation or on any series of Preferred Stock; and whether such
dividends shall be cumulative or noncumulative;
(iii) The right, if any, of the holders of the shares of the
same series to convert the same into, or exchange the same for, any
other class or classes of stock of this Corporation and the terms and
conditions of such conversion or exchange;
(iv) Whether shares of the series shall be subject to redemption
and the redemption price or prices, including, without limitation, a
redemption price or prices payable in shares of any other class or
classes of stock of the Corporation, cash, or other property and the
time or times at which, and the terms and conditions on which, shares
of the series may be redeemed;
(v) The rights, if any, of the holders of shares of the series
on voluntary or involuntary liquidation, merger, consolidation,
distribution, or sale of assets, dissolution, or winding up of this
Corporation;
(vi) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for shares of the series; and
(vii) The voting powers, if any, of the holders of shares of
the series which may, without limiting the generality of the
foregoing, include (A) the right to more or less than one vote per
share on any or all matters voted on by the shareholders, and (B) the
right to vote as a series by itself or together with other series of
Preferred Stock or together with all series of Preferred Stock as a
class, on such matters, under such circumstances, and on such
conditions as the board of directors may fix, including, without
limitation, the right, voting as a series by itself or together with
other series of Preferred Stock or together with all series of
Preferred Stock as a class, to elect one or more directors of this
Corporation in the event there shall have been a default in the
payment of dividends on any one or more series of Preferred Stock or
under such other circumstances and upon such conditions as the board
of directors may determine.
(b) Common Stock. The Common Stock shall have the following powers,
preferences, rights, qualifications, limitations, and restrictions:
(i) After the requirements with respect to preferential
dividends of Preferred Stock, if any, shall have been met and after
this Corporation shall comply with all the requirements, if any, with
respect to the setting aside of funds as sinking funds or redemption
or purchase accounts and subject further to any other conditions which
may be required by the General Corporation Law of Delaware, then, but
not otherwise, the holders of Common Stock shall be entitled to
receive such dividends, if any, as may be declared from time to time
by the board of directors without distinction to series;
(ii) After distribution in full of any preferential amount to be
distributed to the holders of Preferred Stock, if any, in the event of
a voluntary or involuntary liquidation, distribution or sale of
assets, dissolution, or winding up of this Corporation, the holders of
the Common Stock shall be entitled to receive all of the remaining
assets of the Corporation, tangible and intangible, of whatever kind
available for distribution to stockholders, ratably in proportion to
the number of shares of Common Stock held by each without distinction
as to series; and
(iii) Except as may otherwise be required by law or this
Certificate of Incorporation, in all matters as to which the vote or
consent of stockholders of the Corporation shall be required or be
taken, including, any vote to amend this Certificate of Incorporation,
to increase or decrease the par value of any class of stock, effect a
stock split or combination of shares, or alter or change the powers,
preferences, or special rights of any class or series of stock, the
holders of the Common Stock shall have one vote per share of Common
Stock on all such matters and shall not have the right to cumulate
their votes for any purpose.
(c) Other Provisions
(i) The board of directors of the Corporation shall have
authority to authorize the issuance, from time to time without any
vote or other action by the stockholders, of any or all shares of the
Corporation of any class at any time authorized, and any securities
convertible into or exchangeable for such shares, in each case to such
persons and for such consideration and on such terms as the board of
directors from time to time in its discretion lawfully may determine;
provided, however, that the consideration for the issuance of shares
of stock of the Corporation having par value shall not be less than
such par value. Shares so issued, for which the full consideration
determined by the board of directors has been paid to the Corporation,
shall be fully paid stock, and the holders of such stock shall not be
liable for any further call or assessment thereon.
(ii) Unless otherwise provided in the resolution of the board of
directors providing for the issue of any series of Preferred Stock, no
holder of shares of any class of the Corporation or of any security of
obligation convertible into, or of any warrant, option, or right to
purchase, subscribe for, or otherwise acquire, shares of any class of
the Corporation, whether now or hereafter authorized, shall, as such
holder, have any preemptive right whatsoever to purchase, subscribe
for, or otherwise acquire shares of any class of the Corporation,
whether now or hereafter authorized.
(iii) Anything herein contained to the contrary
notwithstanding, any and all right, title, interest, and claim in and
to any dividends declared or other distributions made by the
Corporation, whether in cash, stock, or otherwise, which are unclaimed
by the stockholder entitled thereto for a period of six years after
the close of business on the payment date, shall be and be deemed to
be extinguished and abandoned; and such unclaimed dividends or other
distributions in the possession of the Corporation, its transfer
agents, or other agents or depositories, shall at such time become the
absolute property of the Corporation, free and clear of any and all
claims of any person whatsoever.
ARTICLE V
LIMITATION ON LIABILITY
A director of the Corporation shall have no personal liability to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except (i) for any breach of a director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under section 174 of the General Corporation Law of Delaware as it may
from time to time be amended or any successor provision thereto, or (iv) for any
transaction from which a director derived an improper personal benefit.
ARTICLE VI
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
The Corporation elects not to be governed by the provisions of section 203
of the General Corporation Law of Delaware regarding business combinations with
interested shareholders.
ARTICLE VII
REGISTERED OFFICE AND REGISTERED AGENT
The name and address of the Corporation's registered agent in the state of
Delaware is The Corporation Trust Company, 1209 Orange Street, in the city of
Wilmington, county of New Castle, Delaware. Either the registered office or the
registered agent may be changed in the manner provided by law.
ARTICLE VIII
AMENDMENT
The Corporation reserves the right to amend, alter, change, or repeal all
or any portion of the provisions contained in its Certificate of Incorporation
from time to time in accordance with the laws of the state of Delaware, and all
rights conferred on stockholders herein are granted subject to this reservation.
ARTICLE IX
ADOPTION AND AMENDMENT OF BYLAWS
The initial bylaws of the Corporation shall be adopted by the board of
directors. The power to alter, amend, or repeal the bylaws or adopt new bylaws
shall be vested in the board of directors, but the stockholders of the
Corporation may also alter, amend, or repeal the bylaws or adopt new bylaws.
The bylaws may contain any provisions for the regulation or management of the
affairs of the Corporation not inconsistent with the laws of the state of
Delaware now or hereafter existing.
ARTICLE X
DIRECTORS
The governing board of the Corporation shall be known as the board of
directors. The number of directors comprising the board of directors shall be
fixed and may be increased or decreased from time to time in the manner provided
in the bylaws of the Corporation, except that at no time shall there be less
than one nor more than nine directors. The original board of directors shall
consist of three persons. The name and address of each person who is to serve
as a director until the first annual meeting of stockholders and until his or
her successor is elected and shall qualify is as follows:
Name Address
Kenton L. Stanger 5 Triad Center, Suite 585
Salt Lake City, Utah 84180
Donald E. Manuel 5 Triad Center, Suite 585
Salt Lake City, Utah 84180
Tim L. Hansen 5 Triad Center, Suite 585
Salt Lake City, Utah 84180
Raymond L. Punta 5 Triad Center, Suite 585
Salt Lake City, Utah 84180
William E. Waterman, Jr. 5 Triad Center, Suite 585
Salt Lake City, Utah 84180
ARTICLE X
INCORPORATOR
The name and mailing address of the incorporator signing this certificate
of incorporation is as follows:
Name Address
Kenton L. Stanger 5 Triad Center, Suite 585
Salt Lake City, Utah 84180
The undersigned, being the sole incorporator herein before named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
state of Delaware, makes this certificate, hereby declaring and certifying that
this is his/her act and deed and that the facts herein stated are true, and
accordingly have hereunto set his/her hand this 10th day of November, 1993.
/s/Kenton L. Stanger
STATE OF UTAH )
:SS.
COUNTY OF SALT LAKE )
I, a notary public, hereby certify that on the 10th day of November, 1993,
personally appeared before me Kenton L. Stanger, who being by me first duly
sworn, declared that he signed such instrument as his own act and deed and that
the facts stated therein are true.
WITNESS MY HAND AND OFFICIAL SEAL.
/s/Notary Public
TRIAD FINANCIAL SYSTEMS, INC.
DESIGNATION OF RIGHTS, PRIVILEGES, AND PREFERENCES OF
8% PAYABLE IN CASH AND IN KIND
CUMULATIVE CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Delaware General Corporation Law, section
151, of the corporation laws of the state of Delaware, the undersigned
corporation hereby adopts the following Designation of Rights, Privileges, and
Preferences of 8% Payable in Cash and in Kind Cumulative Convertible Preferred
Stock (the "Designation"):
FIRST: The name of the Corporation is Triad Financial Systems, Inc.
SECOND: The following resolution establishing a series of preferred stock
designated as the "8% Payable in Cash and in Kind Cumulative Convertible
Preferred Stock" consisting of 2,000,000 shares, par value $0.01, was duly
adopted by the board of directors of the Corporation on August 3, 1994, in
accordance with the certificate of incorporation of the Corporation and the
corporation laws of the state of Delaware:
RESOLVED, there is hereby created a series of preferred stock of the
Corporation to be designated as the "8% Payable in Cash and in Kind
Cumulative Convertible Preferred Stock" consisting of 2,000,000 shares,
par value $0.01 (referred to herein as the "Preferred Stock"), with the
following powers, preferences, rights, qualifications, limitations, and
restrictions:
1. Liquidation.
1.01 In the event of any voluntary or involuntary liquidation (whether
complete or partial), dissolution, or winding up of the Corporation or of
the Corporation's parent company, American Financial Holding, Inc. (the
"Parent"), the holders of the Preferred Stock shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
shareholders, whether from capital, surplus, or earnings, an amount in cash
equal to the original issuance price per share of the Preferred Stock plus
all amounts and shares to which the holders of the Preferred Stock are
entitled for unpaid dividends in accordance with section 3 below, whether
or not previously declared, accrued thereon to the date of final
distribution subject to the priority distribution required respecting any
issued and outstanding shares of any series of preferred stock authorized
prior to the date hereof. No distribution shall be made on any common
stock or other subsequent series of preferred stock of the Corporation by
reason of any voluntary or involuntary liquidation (whether complete or
partial), dissolution, or winding up of the Corporation or the Parent
unless each holder of any Preferred Stock shall have received all amounts
to which such holder shall be entitled under this subsection 1.01.
1.02 If on any liquidation (whether complete or partial), dissolution,
or winding up of the Corporation or the Parent, the assets of the
Corporation available for distribution to holders of Preferred Stock and
any other stock ranking as to any such distribution on a parity with the
Preferred Stock shall be insufficient to pay the holders of outstanding
Preferred Stock or such other stock the full amounts to which they
otherwise would be entitled under subsection 1.01, the assets of the
Corporation available for distribution to holders of Preferred Stock or
such other stock shall be distributed to them pro rata on the basis of the
full respective preferential amounts to which they are entitled.
2. Voting Rights. Except as otherwise provided herein, the Preferred
Stock shall not be entitled to vote.
2.01 The holders of the Preferred Stock shall have the exclusive and
special right, voting separately and as a single class, to vote for and
elect not less than three of the Corporation's seven directors comprising
the board of directors.
2.02 Notwithstanding anything herein to the contrary, upon the
occurrence of an Event of Default (defined below), the holders of the
Preferred Stock shall be entitled to (i) upon the affirmative vote or
consent of not less than two-thirds of the issued and outstanding shares of
Preferred Stock, liquidate the Corporation and distribute the assets of the
Corporation, or proceeds from the sale thereof, to the holders of the
Preferred Stock and any other class or series of stock ranking on a parity
with the Preferred Stock as to payments upon liquidation; and (ii) in lieu
of liquidating the Corporation pursuant to clause (i) above, upon the
affirmative vote or consent of not less than two-thirds of the issued and
outstanding shares of Preferred Stock, exchange their shares of Preferred
Stock in its entirety for 100% of the issued and outstanding shares of
common stock of the Corporation's wholly-owned subsidiary, Modern Income
Life Insurance Company (the "Insurance Company"). For purposes of this
section 2.02, the term "Event of Default" shall mean the occurrence of any
of the following events:
(a) A registration statement filed in respect of an initial
public offering respecting the Common Stock of the Parent has not
become effective by September 30, 1997;
(b) The Corporation reports a net loss equal to or greater than
$2,500,000 for any fiscal year; or
(c) The Corporation's ratio of total equity to total assets is
less than 0.08 to 1.0.
2.03 Upon an occurrence of an Event of Default, as defined above, or
if dividends on the Preferred Stock shall be in arrears in an amount equal
to at least one semiannual dividend payment, the number of directors
constituting the whole board of directors shall, without further action by
the shareholders or the board of directors, be increased by two, and the
holders of the Preferred Stock shall have the exclusive and special right,
voting separately and as a single class, to vote for and elect such
additional directors at the earlier to occur of a special meeting of the
holders of the Preferred Stock called for such purpose or the next annual
meeting of shareholders of the Corporation; provided, however, that a
special meeting need not be called if the next annual meeting of the
shareholders of the Corporation is called to be held within 90 days of the
occurrence of the event giving rise to the need for such meeting. The
directors so elected shall serve until the next annual meeting of the
shareholders and until their successors shall be duly elected and
qualified; provided, however, that the right of the holders of the
Preferred Stock to elect additional directors shall cease and the term of
the additional directors elected by the holders of the Preferred Stock
voting as a separate class pursuant to this subsection 2.03 shall terminate
at such time as the full cumulative dividends on the Preferred Stock shall
have been paid and no other Event of Default shall have occurred. Any
director elected by the holders of the Preferred Stock may be removed by,
and shall not be removed except by, the vote of holders of record of the
outstanding shares of the Preferred Stock, voting together as a single
class, at a meeting called for said purpose. As long as an Event of
Default exists hereunder giving rise to the right of holders of the
Preferred Stock to elect one or more additional directors to the board of
directors, any vacancy, for any reason other than removal, in the office of
a director so elected shall be filled by the vote of the remaining
directors similarly elected by the Preferred Stock and any such vacancy
resulting from the removal of such a director shall be filled by a vote of
the holders of the Preferred Stock.
2.04 So long as any shares of the Preferred Stock are outstanding,
neither the Corporation nor the Parent shall, without the affirmative vote
of the holders of shares representing at least two-thirds of the Preferred
Stock outstanding on the record date for such meeting and present in person
or by proxy, (a) adopt any amendment to its certificate of incorporation if
such amendment would (i) authorize or create, or increase the authorized
amount of, any class of stock which is entitled to dividends or assets in
priority to or on a parity with the Preferred Stock; (ii) increase the
authorized number of shares of the Preferred Stock; (iii) change any of the
rights or preferences of the then outstanding Preferred Stock; or (iv)
otherwise affect adversely the holders of the Preferred Stock; or (b) issue
any shares of any other series of preferred stock that are entitled to
dividends or assets in priority to or on a parity with the Preferred Stock.
2.05 At all meetings of the shareholders held for the purpose of
electing directors of the Corporation pursuant to subsections 2.01 and
2.03, the presence in person or by proxy of the holders of shares
representing a majority of the votes entitled to be cast by the outstanding
shares of the Preferred Stock shall be required to constitute a quorum of
such class for the election of directors hereunder; provided, however, that
the absence of a quorum of the holders of stock of any class shall not
prevent the election at any such meeting, or adjournment thereof, of
directors if the necessary quorum of shareholders is present in person or
by proxy at such meeting; and provided, further, that in the absence of a
quorum of the holders of stock of any class, a majority of those holders of
stock who are present in person or by proxy shall have the power to adjourn
the election of those directors to be elected by that class from time to
time without notice, other than announcement at the meeting, until the
requisite amount of holders of stock of such class shall be present in
person or by proxy.
2.06 Holders of Preferred Stock shall vote as a class and each such
holder shall have one vote for each share of Preferred Stock held.
2.07 The affirmative vote of at least two-thirds of the board of
directors shall be required to approve any of the following actions: (i)
the purchase of an insurance company or incurring other capital
expenditures in a single or series of related transactions in an aggregate
amount exceeding $2,500,000; (ii) the sale by the Corporation of the stock
of its subsidiary corporation, Modern Income Life Insurance Company; (iii)
the authorization of issuance of any securities of the Corporation; (iv)
the declaration or authorization of the payment of a dividend on the common
stock of the Corporation; (v) the authorization or approval of any
agreement between the Corporation and an affiliate of the Corporation
requiring an aggregate expenditure by the Corporation in a single or a
series of related transactions of more than $250,000; and (vi) the increase
in the number of directors constituting the board of directors (other than
an automatic increase resulting from one of the events described herein).
3. Dividends.
3.01 The Corporation shall pay dividends to the holders of the
Preferred Stock at the times and in the amounts provided for in this
section 3.
3.02 The dividend rate for each share of the Preferred Stock shall be
8% of the original issuance price per share per annum, payable one-half in
cash and one-half in shares of Preferred Stock. Such dividends at such
rates shall be payable at semiannual installments on each June 30 and
December 31, commencing December 31, 1994 (a "Dividend Payment Date").
Such dividends shall be cumulative from the date of initial issuance of
such share of the Preferred Stock and shall be payable to holders of record
as their names appear on the stock transfer books of the Corporation on
such record date, not more than 60 days preceding the Dividend Payment
Date, as shall be fixed by the board of directors. Dividends payable for
any partial dividend period shall be computed on the basis of the actual
number of days elapsed over a 360 day year. The Preferred Stock shall be
nonparticipating, and holders thereof shall not be entitled to receive any
dividends thereon other than the dividends referred to in this section 3.
3.03 No dividend or other distribution shall be declared or paid or
set apart for payment on any stock ranking, as to dividends or upon
liquidation, junior to the Preferred Stock, including, without limitation,
the shares of the Corporation's common stock, for any period unless the
holders of the Preferred Stock shall have then been or contemporaneously
are paid (or declared and a sum sufficient for the payment thereof set
apart for such payment) all dividends for all dividend payment periods
terminating on or prior to the date of payment of the distribution on such
junior stock. No dividends shall be declared on any class or series of
stock ranking on a parity with the Preferred Stock as to dividends in
respect of any dividend period unless there shall otherwise be or have been
declared on the Preferred Stock like dividends for all semiannual periods
coinciding with or ending before such semiannual period, ratably in
proportion to the respective annual dividend rates fixed therefor. If the
Corporation is in default with respect to any dividends payable on, or any
obligation to retire shares of, the Preferred Stock, the Corporation shall
not declare or pay (or set apart a sum for such payment) any dividends or
make any distribution in cash or other property on, or redeem, purchase, or
otherwise acquire, any other class or series of stock ranking junior to the
Preferred Stock either as to dividends or upon liquidation.
3.04 Registration of transfer of any share of Preferred Stock on the
stock records maintained by or for the Corporation to a person other than
the transferor shall constitute a transfer of any right which the
transferor may have had to receive any accrued but unpaid dividends as of
the date of transfer, whether declared or undeclared, and the Corporation
shall have no further obligation to the transferor with respect to such
accrued and unpaid dividends. Any shares of Preferred Stock represented by
a new certificate issued to a new holder shall continue to accrue dividends
as provided in this section 3.
4. Conversion.
4.01 Each share of Preferred Stock is convertible into common stock,
par value $0.01 (the "Common Stock"), of the Parent at the times, in the
manner, and subject to the conditions provided in this section 4.
4.02 Each share of Preferred Stock shall be automatically converted at
such time as the registration statement filed in respect of a public
offering respecting the Common Stock of the Parent at a price of at least
$4.80 per share of Common Stock in an aggregate amount of at least
$10,000,000 becomes effective (the "Conversion Date") on or before
September 30, 1997. In addition, holders of Preferred Stock shall be
entitled to convert all or any portion of their Preferred Stock upon a
registration statement respecting Common Stock issuable on such conversion
becoming effective.
4.03 Each share of Preferred Stock shall be converted into that number
of shares of Common Stock of the Parent determined by dividing the original
offering price of the Preferred Stock by $4.00. In addition, each holder
of Preferred Stock on the Conversion Date shall be entitled to receive
additional shares of Common Stock equal to the number of shares of
Preferred Stock payable as dividends on the Preferred Stock accumulated
through the Dividend Payment Date immediately preceding the Conversion Date
and unpaid on the Conversion Date, multiplied by the original issuance
price of the Preferred Stock and divided by $4.00.
4.04 In order to prevent dilution of the rights granted hereunder, the
rate of conversion of shares of Preferred Stock shall be subject to
adjustment from time to time in accordance with this subsection 4.04.
(a) In the event the Parent shall declare a dividend or make any
other distribution on any capital stock of the Parent payable in
Common Stock, options to purchase Common Stock, or securities
convertible into Common Stock or the Parent shall at any time
subdivide (other than by means of a dividend payable in Common Stock)
its outstanding shares of Common Stock into a greater number of shares
or combine such outstanding stock into a smaller number of shares,
then in each such event, the conversion rate in effect immediately
prior to such combination shall be adjusted so that the holders of the
Preferred Stock shall be entitled to receive the kind and number of
shares of Common Stock or other securities of the Parent which they
would have owned or have been entitled to receive after the happening
of any of the events described above, had such shares of Preferred
Stock been converted immediately prior to the happening of such event
or any record date with respect thereto; an adjustment made pursuant
to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date for such
event.
(b) If any capital reorganization or reclassification of the
capital stock of the Corporation or the Parent, consolidation or
merger of the Corporation or the Parent with another corporation, or
the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common
Stock shall be entitled to receive stock, securities, or assets with
respect to or in exchange for Common Stock, then, as a condition of
such reorganization, reclassification, consolidation, merger, or sale,
lawful adequate provisions shall be made whereby the holders of the
Preferred Stock shall thereafter have the right to acquire and receive
on conversion of the Preferred Stock such shares of stock, securities,
or assets as would have been issuable or payable (as part of the
reorganization, reclassification, consolidation, merger, or sale) with
respect to or in exchange for such number of outstanding shares of the
Parent's Common Stock as would have been received on conversion of the
Preferred Stock immediately before such reorganization,
reclassification, consolidation, merger, or sale. In any such case,
appropriate provision shall be made with respect to the rights and
interests of the holders of the Preferred Stock to the end that the
provisions hereof (including without limitations provisions for
adjustments of the conversion rate and for the number of shares
issuable on conversion of the Preferred Stock) shall thereafter be
applicable in relation to any shares of stock, securities, or assets
thereafter deliverable on the conversion of the Preferred Stock. In
the event of a merger or consolidation of the Corporation or the
Parent with or into another corporation or the sale of all or
substantially all of their assets as a result of which a number of
shares of common stock of the surviving or purchasing corporation
greater or lesser than the number of shares of Common Stock of the
Parent outstanding immediately prior to such merger, consolidation, or
purchase are issuable to holders of Common Stock of the Parent, then
the conversion rate in effect immediately prior to such merger,
consolidation, or purchase shall be adjusted in the same manner as
though there was a subdivision or combination of the outstanding
shares of Common Stock of the Parent. Neither the Corporation nor the
Parent will effect any such consolidation, merger, or sale unless
prior to the consummation thereof the successor corporation resulting
from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument mailed or delivered to the
holders of the Preferred Stock at the last address of each such holder
appearing on the books of the Corporation, the obligation to deliver
to each such holder such shares of stock, securities, or assets as, in
accordance with the foregoing provisions, that such holder may be
entitled to acquire on conversion of Preferred Stock.
(c) In the event that the Parent shall issue rights or warrants
to holders of its Common Stock entitling them to subscribe for or
purchase shares of Common Stock within a period of 60 days at a price
per share less than the then current market price per share of Common
Stock, then the conversion rate shall be adjusted such that in each
case the number of shares of Parent Common Stock into which each share
of Preferred Stock shall thereafter be convertible shall be determined
by multiplying the number of shares of Common Stock into which such
share was theretofore convertible by a fraction (calculated to four
decimal places), the numerator of which shall be the number of shares
of Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and the denominator of which shall be
the number of shares of Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of shares of
Common Stock which the aggregate offering price of the total number of
shares so offered would purchase at such current market price.
(d) In the event that the Parent shall distribute to the holders
of its Common Stock evidences of its indebtedness or assets or capital
stock (excluding cash dividends or distributions made out of current
or retained earnings) or rights or warrants to subscribe for
securities other than as referred to above, then the conversion rate
shall be adjusted such that in each such case the number of shares of
Common Stock into which each share of Preferred Stock shall thereafter
be convertible shall be determined by multiplying the number of shares
of Common Stock into which such share was theretofore convertible by a
fraction (calculated to four decimal places), the numerator of which
shall be the current market price per share of Common Stock on the
date of such distribution, and the denominator of which shall be such
current market price per share of the Common Stock less the then fair
market value (as reasonably determined by the board of directors of
the Corporation) of the portion of the assets, evidences of
indebtedness, capital stock, subscription rights or warrants so
distributed applicable to one share of Common Stock.
(e) No adjustment shall be made in the conversion rate of the
number of shares of Common Stock issuable on conversion of the
Preferred Stock:
(i) In connection with the offer and sale of any shares of
Preferred Stock;
(ii) In connection with the issuance of any Common Stock,
securities, or assets on conversion or redemption of shares of
the Preferred Stock;
(iii) In connection with the issuance of any shares of
Common Stock, securities, or assets on account of the
antidilution provisions set forth in this subsection 4.04;
(iv) In connection with the purchase or other acquisition by
the Corporation or the Parent of any capital stock, evidence of
its indebtedness, or other securities of the Corporation or the
Parent;
(v) In connection with the sale or exchange by the
Corporation or the Parent of any common stock, evidence of its
indebtedness, or other securities of the Corporation or the
Parent, including securities containing the right to subscribe
for or purchase common stock or preferred stock of the
Corporation or the Parent; or
(vi) If such adjustment would require a change of less than
1% in the conversion rate; provided, however, that any adjustment
that would otherwise be required to be made but for this
subsection (vi), shall be carried forward and taken into account
in any subsequent adjustment required hereunder.
(f) For purposes hereof, the current market price of the Parent
Common Stock shall be the average of the closing bid prices of such
Common Stock in the over-the-counter market as quoted on the National
Association of Securities Dealers, Inc., Automated Quotation system
for 20 consecutive trading days immediately prior to the relevant
date, unless the Common Stock is not regularly traded in the over-the-
counter market, in which case the current market value shall be
determined by the board of directors of the Corporation by any
reasonable means.
4.05 The Parent covenants and agrees that:
(a) The shares of Common Stock, securities, or assets issuable
on any conversion of any shares of Preferred Stock shall have been
deemed to have been issued to the person on the Conversion Date, and
on the Conversion Date, such person shall be deemed for all purposes
to have become the record holder of such Common Stock, securities, or
assets.
(b) All shares of Common Stock or other securities which may be
issued on any conversion of the Preferred Stock will, on issuance, be
fully paid and nonassessable and free from all taxes, liens, and
charges with respect to the issue thereof. Without limiting the
generality of the foregoing, the Parent will from time to time take
all such action as may be requisite to assure that the par value of
the unissued Common Stock or other securities acquirable on any
conversion of the Preferred Stock is at all times sufficient to render
the Common Stock issued upon conversion as fully paid and non-
assessable.
(c) The issuance of certificates for Common Stock or other
securities on conversion of the Preferred Stock shall be made without
charge to the registered holder thereof for any issuance tax in
respect thereof or other costs incurred by the Corporation or the
Parent in connection with the conversion of the Preferred Stock and
the related issuance of Common Stock or other securities.
5. Redemption.
5.01 Subject to the requirements and limitations of the corporation
laws of the state of Delaware, the Corporation shall have the right to
redeem shares of Preferred Stock on the following terms and conditions.
5.02 Shares of Preferred Stock are subject to redemption by the
Corporation at any time that the Parent Common Stock has traded during 20
of 30 consecutive trading days, ending not more than 30 days prior to the
date of the notice of redemption, for at least $4.80 per share; provided
that, there is an effective registration statement under the Securities Act
with respect to the issuance of the Parent Common Stock issuable on
conversion of the Preferred Stock. The Corporation shall provide written
notice of redemption to the holders of the Preferred Stock on not more than
50 days' nor less than 30 days' written notice specifying the date on which
the Preferred Stock shall be redeemed (the "Redemption Date"). Subsequent
to the notice of redemption and prior to the Redemption Date, shares of
Preferred Stock may still be converted to Common Stock pursuant to section
4. The Corporation may redeem a portion or all of the issued and
outstanding shares of Preferred Stock; provided that, in the event that
less than all of the outstanding shares of Preferred Stock are redeemed,
such redemption shall be pro rata determined on the basis of the number of
shares of Preferred Stock held by each holder reflected on the stock
records and the total number of shares of Preferred Stock outstanding.
5.03 The redemption price for each share of Preferred Stock shall be
the original per share issuance price therefor plus any accrued but unpaid
dividends, if applicable, on such share as of the Redemption Date (the
"Redemption Price"). The Redemption Price shall be paid in cash.
5.04 Redemption of the Preferred Stock shall be made in the following
manner:
(a) The Corporation shall notify the transfer agent of the
Preferred Stock (the "Transfer Agent") of its intention to redeem the
Preferred Stock. Such notice shall include a list of all holders of
Preferred Stock outstanding as of the most recent practicable date and
a statement of the number of shares of Preferred Stock to be redeemed
and the manner in which the Redemption Price is to be paid. At least
ten days prior to the date that written notice of redemption is given
to the holders of the Preferred Stock, the Corporation shall make
appropriate arrangements with the Transfer Agent for the delivery of
funds necessary to make payment of the Redemption Price for all shares
of Preferred Stock redeemed by the Corporation.
(b) On the Redemption Date, all shares of Preferred Stock
subject to redemption shall be automatically redeemed unless earlier
converted pursuant to section 4. The holder of any shares of
Preferred Stock so redeemed shall be required to tender the
certificates representing such shares, duly endorsed, to the Transfer
Agent in exchange for payment of the Redemption Price. On such
surrender, the Transfer Agent shall cause to be issued and delivered a
check with all reasonable dispatch to the holder and in such name or
names as the holder may designate.
(c) The Transfer Agent shall periodically, but not less
frequently than monthly, provide to the Corporation an accounting of
the Preferred Stock tendered for redemption and the funds disbursed
pursuant thereto. Following the expiration of a period of 120 days
following the Redemption Date, the Transfer Agent shall provide to the
Corporation a complete accounting of the Preferred Stock redeemed and
a list of all shares of Preferred Stock remaining unconverted and not
returned to the Corporation for redemption. Any certificates
representing Preferred Stock received by the Transfer Agent subsequent
to the return of funds to the Corporation will be promptly delivered
to the Corporation. The Corporation shall pay all costs associated
with establishing and maintaining any bank accounts for funds
deposited with the Transfer Agent, including the costs of issuing any
check.
6. Registration Rights. The Corporation and the Parent shall register
the Preferred Stock and the Common Stock issuable or issued on conversion of the
Preferred Stock pursuant to the provisions of an agreement among the
Corporation, the Parent, and the holders of the Preferred Stock, as the same may
be modified from time to time.
7. Additional Provisions.
7.01 No change in the provisions of the Preferred Stock set forth in
this Designation affecting any interests of the holders of any shares of
Preferred Stock shall be binding or effective unless such change shall have
been approved or consented to by the holders of at least two-thirds of the
Preferred Stock in the manner provided in the corporation laws of the state
of Delaware, as the same may be amended from time to time.
7.02 A share of Preferred Stock shall be transferable only on the
books of the Corporation on delivery thereof duly endorsed by the holder or
by his duly authorized attorney or representative or accompanied by proper
evidence of succession, assignment, or authority to transfer. In all cases
of transfer by an attorney, the original letter of attorney, duly approved,
or an official copy thereof, duly certified, shall be deposited and remain
with the Corporation. In case of transfer by executors, administrators,
guardians, or other legal representatives, duly authenticated evidence of
their authority shall be produced and may be required to be deposited and
remain with the Corporation in its discretion. On any registration or
transfer, the Corporation shall deliver a new certificate representing the
share of Preferred Stock so transferred to the person entitled thereto.
7.03 The Parent shall not be required to issue any fractional shares
of Common Stock on the conversion of any share of Preferred Stock. If any
fraction of a share of Common Stock would, except for the provisions of
this subsection 7.03, be issuable on the conversion or redemption of any
share of Preferred Stock, the Parent shall pay an amount in cash equal to
the current value of such fraction computed on the basis of the closing
market price of the Parent Common Stock on the last prior business day
unless the Common Stock is not regularly traded, in which case the current
value of such fraction shall be determined by the board of directors of the
Corporation by any reasonable means.
7.04 The Corporation shall not be required to issue any fractional
shares of Preferred Stock on the declaration and payment of any dividend on
the Preferred Stock. If any fraction of a share of Preferred Stock would,
except for the provisions of this subsection 7.04, be issuable on the
declaration and payment of such dividends, the Corporation shall pay an
amount in cash equal to the value of such fraction computed on the basis of
the original issuance price of the Preferred Stock.
7.05 Any notice required or permitted to be given to the holders of
Preferred Stock under this Designation shall be deemed to have been duly
given if mailed by first class mail, postage prepaid to such holders at
their respective addresses appearing on the stock records maintained by or
for the Corporation and shall be deemed to have been given as of the date
deposited in the United States mail.
IN WITNESS WHEREOF, the foregoing Designation of Rights, Privileges, and
Preferences of 8% Payable in Cash and in Kind Cumulative Convertible Preferred
Stock of the Corporation has been executed this 27th day of December, 1995.
ATTEST: TRIAD FINANCIAL SYSTEMS, INC.
/s/ Raymond L. Punta, Secretary /s/ Kenton L. Stanger, President
STATE OF UTAH )
:SS
COUNTY OF SALT LAKE )
On December 27th, 1995, before me, the undersigned, a notary public in and
for the above county and state, personally appeared Kenton L. Stanger and
Raymond L. Punta, who being by me duly sworn, did state, each for themselves,
that he, Kenton L. Stanger, is the president, and that he, Raymond L. Punta, is
the secretary, of Triad Financial Systems, Inc., a Delaware corporation, and
that the foregoing Designation of Rights, Privileges, and Preferences of 8%
Payable in Cash and in Kind Cumulative Convertible Preferred Stock of Triad
Financial Systems, Inc., was signed on behalf of such corporation by authority
of a resolution of its board of directors, and that the statements contained
therein are true.
WITNESS MY HAND AND OFFICIAL SEAL.
/s/ Notary Public
$-------------(U.S.) Dated: December 31, 1995
PROMISSORY NOTE
FOR VALUE RECEIVED, -----------------, an individual resident of the state
of Utah ("Maker"), promises to pay to AMERICAN FINANCIAL HOLDING, INC., a
Delaware corporation ("Payee"), or order, -------------------------------
Dollars ($------------), with interest on the unpaid principal balance at eight
(8%) per annum, due and payable on or before 30 days after demand or, if no
demand, in any event on or before December 31, 1998, with no penalty for
prepayment.
Payments of principal and interest shall be made in lawful money of the
United States of America to the above-named Payee at P.O. Box 683, 225 South 200
West, Farmington, Utah 84025-0683, or order.
Every Maker, endorser, and guarantor of this Note, or the obligation
represented hereby, waives presentment, demand, notice, protest, notice of
protest, or enforcement of this Note, assents to any extensions or postponements
of the time of payment or any other indulgence and to the addition to release of
any other party or person primarily or secondarily liable. None of the rights
and remedies of the Payee hereunder is to be waived or affected by failure or
delay to exercise them. All remedies conferred on the Payee of this Note shall
be cumulative and none is exclusive. Such remedies may be exercised
concurrently or consecutively at the Payee's option.
If this Note is placed with an attorney for collection, or if suit be
instituted for collection or if any other remedy permitted by law is pursued by
the Payee hereof because of any default in the terms and conditions herein, then
in such event, the undersigned agrees to pay reasonable attorneys' fees, costs,
and other expenses incurred by the Payee hereof in so doing.
This Note shall be governed by and construed in accordance with the laws of
the state of Utah.
This Note is partially secured by options to purchase common stock of Payee
and certain stock pledged by an accommodation pledgor.
/s/ Maker
SCHEDULE OF MAKERS AND NOTE AMOUNTS:
(a) Kenton L. Stanger - $783,213;
(b) Raymond L. Punta - $550,147;
(c) Tim L. Hansen - $652,190; and
(d) Ray P. Brown - $665,589
AMERICAN FINANCIAL HOLDING, INC .
P.O. BOX 683
225 SOUTH 200 WEST, SUITE 302
FARMINGTON, UTAH 84025-0683
July 17, 1995
Mr. Raymond L. Punta
2147 Ridgewood Way
Bountiful, Utah 84010
Re: Purchase of Condominium
Dear Mr. Punta:
This shall confirm the understanding of American Financial Holding, Inc.
(the "Company"), respecting the residential condominium located at 2147
Ridgewood Way, Bountiful, Utah, in which you reside and which was purchased by
the Company in May 1992, on the terms and conditions reflected in the attached
settlement sheet. Generally, the total purchase price was $106,000, of which
$27,000 was paid in cash and the balance of approximately $79,000, together with
interest at 10.5% per annum, is due in payable in equal monthly installments of
$722, including required reserves, with the entire unpaid balance due on or
before July 1995, now extended to July 1997.
This shall confirm that you are responsible for all monthly payments on the
condominium, including the monthly $722 payment referred to above, homeowners'
association fees, taxes, insurance, maintenance, and the like. To the extent
that any of such items are advanced by the Company, such advances shall
constitute a loan to you and shall be repayable upon demand.
In consideration of the foregoing, you shall have the right to purchase the
condominium from the Company upon the reimbursement to it of all out-of-pocket
expenditures incurred in connection with the purchase and ownership of such
condominium. On such purchase and reimbursement to the Company, the Company
will convey to you its title to the condominium, subject to any existing
encumbrance. If you do not exercise this right to purchase the condominium
prior to December 31, 1998, the Company will thereafter be free, at its sole
discretion exercisable on 30-days' prior written notice to you, to sell the
condominium to such third party on such terms and conditions as it may deem
appropriate. Your failure to purchase the condominium or its sale by the
Company to another party shall not relieve you of the obligation for the above
monthly purchase installment, homeowners' association dues, taxes, insurance,
maintenance, and similar payments for so long as you reside in the condominium.
In the event you do not exercise your right to purchase, all payments
theretofore made by you (both directly or on your behalf) shall be deemed rental
payments, and you shall have no right or clam for reimbursement thereof from the
Company.
If the foregoing accurately sets forth your agreement with the Company,
please so indicate by signing on the space provided therefor on the copy of this
letter and returning it.
AMERICAN FINANCIAL HOLDING, INC.
/s/ Kenton L. Stanger, President
ACCEPTED AND AGREED:
/s/ Raymond L.Punta
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered into this
29th day of June, 1995 (the "Execution Date"), to be effective July 1, 1995 (the
"Effective Date"), by and between AMERICAN FINANCIAL HOLDING, INC., a Delaware
corporation (the "Employer"), and RAY P. BROWN (the "Executive").
For and in consideration of the mutual covenants contained herein and of
the mutual benefits to be derived hereunder, the parties agree as follows:
1. Employment. Employer hereby employs Executive to perform those duties
generally described in this Agreement, and Executive hereby accepts and agrees
to such employment on the terms and conditions hereinafter set forth.
2. Term. The term of this Agreement shall be for a period of three (3)
years commencing on the Effective Date of this Agreement and shall, on each
anniversary of the Effective Date hereof, automatically be renewed and extended
for a new three (3) year term unless previously terminated pursuant to the terms
hereof. Notwithstanding the foregoing, Executive may terminate this Agreement
at any time upon at least ninety (90) days prior written notice to Employer, and
the board of directors of Employer may resolve at any time not to extend this
Agreement for an additional year upon the next succeeding anniversary of the
Effective Date, whereupon the term of this Agreement shall expire upon the
termination of the then current three (3) year period.
3. Duties. During the term of this Agreement, Executive shall be
employed by Employer, shall be appointed as a director, and shall initially be
elected vice-president of marketing. Executive agrees to serve in such offices
or positions with Income Builders, Inc. ("Income Builders"), a wholly-owned
subsidiary of Employer, as its board of directors may determine, and such
substitute or further offices or positions of substantially consistent rank and
authority as shall, from time to time, be determined by Employer's board of
directors. Executive agrees to continue to serve as a member of the board of
directors of Employer and to serve as a director and officer of Income Builders
for no additional compensation. Executive shall devote substantially all of his
working time and efforts to the business of Employer and its subsidiaries and
shall not during the term of this Agreement be engaged in any other substantial
business activities which will significantly interfere or conflict with the
reasonable performance of his duties hereunder.
4. Compensation.
(a) For all services rendered by Executive on behalf of the Employer,
Executive shall be paid through December 31, 1995, an annual draw of
$200,000, payable in weekly installments, plus such bonuses as the board of
directors of Income Builders shall from time to time determine; provided,
however, that in no event shall the accrual or payment of Executive's
annual compensation, when combined with all other annual compensation for
executives of Income Builders, result in Income Builders reporting a net
loss, prior to income taxes and without deducting charge-backs for unearned
commissions previously paid, for any fiscal year for operations, as
determined in accordance with generally accepted accounting principles, as
determined by Employer's regular outside certified public accountants.
Executive shall also be paid such additional incentive compensation as the
board of directors of Employer may, in its sole discretion, from time to
time determine. Within the first 90 days of each fiscal year commencing in
1996, the parties shall determine the amount of any increase in the fixed
draw and formula for annual bonuses for such fiscal year, which shall be
applicable during such year.
(b) All payments shall be subject to withholding and other applicable
taxes. The compensation may be increased at any time as Employer's board
of directors may determine, based on earnings, increased activities of the
Employer, or such other factors as the board of directors may deem
appropriate.
5. Employment Benefits. Employer shall provide, either directly or
indirectly through Income Builders, health and medical insurance for Executive
in a form and program to be chosen by Employer for its full-time employees.
Executive shall be entitled to participate in any retirement, pension, profit-
sharing, stock option, or other plan as in effect from time to time on the same
basis as other employees.
6. Vacations. Executive shall be entitled each year to a paid vacation
of a least two (2) weeks. Vacation shall be taken by Executive at a time and
with starting and ending dates mutually convenient to Employer and Executive.
Vacation or portions of vacations not used in one employment year shall carry
over to the succeeding employment year, but shall thereafter expire if not used
within such succeeding year.
7. Expenses. Income Builders will reimburse Executive for expenses
incurred in connection with Income Builders' business, including expenses for
travel, lodging, meals, beverages, entertainment, and other items on Executive's
periodic presentation of an account of such expenses.
8. Stock Registration Provisions. During the term of this Agreement,
Executive shall have the following rights and obligations with respect to
registration under the Securities Act of 1933, as amended, and applicable blue
sky laws of shares of common stock ("Shares") of Employer owned of record by
Executive or to be acquired on exercise of any options issued in Executive's
name to purchase Shares, including any Shares that may be subject to redemption:
(a) Participatory Registration. Employer shall notify Executive, at
least thirty (30) days prior to the filing of any registration statement of
forms S-1, S-2, S-3, SB-2, or any successor forms under the Securities Act
of 1933, as amended, covering common stock of the Employer and will, upon
the written request of Executive delivered at least twenty (20) days prior
to such filing, include in any such registration statement such information
as may be required to register such number of Executive's Shares as
Executive may request. In connection with such offering, Executive and
Employer shall each include customary representations, warranties,
indemnification, and contribution provisions in any underwriting agreement
entered into in connection with such registration. If the managing
underwriters for such registration advise Employer in writing that, in
their opinion, the total amount of securities to be included in such
registration statement exceeds the amount which should reasonably be
included in that offering to achieve the Employer's financing goals,
Employer may limit the amount of stock to be included as follows: (i)
first, all securities Employer proposes to sell may be included, (ii)
second, the Shares of common stock requested to be included in such
registration by all executives pursuant to registration rights may be
reduced and adjusted among participating executives and employees on the
basis of the amount of shares owned of record by each executive, and (iii)
third, if applicable, other stock requested to be included in such
registration may be similarly and ratably adjusted with all executives'
stock pro rata according to the amount
of stock owned of record by any proposed seller. All incremental expenses
of such registration will be allocated pro rata according to the number of
Shares included for Executive. There shall be no limit on the number of
registrations so requested, but each such request shall cover an amount of
Shares having a proposed offering price of not less than Fifty Thousand
Dollars ($50,000.00).
(b) General. In connection with each of the foregoing registrations
and subject to the provisions concerning expenses, Employer shall also (i)
use its best efforts to qualify the Shares for public sale under the blue
sky laws of such jurisdictions as Executive may reasonably request, (ii)
provide such number of preliminary and final prospectuses as Executive may
reasonably request, and (iii) keep the final prospectus in any such
registration current for a reasonable period not to exceed one hundred
twenty (120) days. In connection with the indemnification and contribution
to be provided by Executive to any underwriter or Employer pursuant to this
paragraph 8, the aggregate liability of Executive shall not exceed the
aggregate net proceeds received by Executive from the sale of the
registered Shares, and, in connection with contribution, shall also take
into consideration the relative fault of each contributing person.
The above stock registration provisions shall not have the effect of
modifying or adding to any stock redemption rights the Employer may have with
respect to any Shares owned of record by the Executive.
9. Nondisclosure of Information. In further consideration of employment
and the continuation of employment by Employer, Executive will not, directly or
indirectly, during or after the term of employment, disclose to any person not
authorized by Employer to receive or use such information, except for the sole
benefit of Employer, any of Employer's confidential or proprietary data,
information, or techniques, or give to any person not authorized by Employer to
receive it any information that is not generally known to anyone other than
Employer or that is designated by Employer as "Limited," "Private," or
"Confidential," or similarly designated or for which there is any reasonable
basis to be believed is, or which appears to be, treated by Employer as
confidential.
10. Termination for Cause. Employer may terminate this Agreement during
its term for cause ("Cause") by showing that Executive has materially breached
the terms hereof; that Executive, in the determination of the board, has been
grossly negligent in the performance of his duties; that Executive has
substantially failed to meet written standards established by Employer for the
performance of his duties; that Executive has engaged in material willful or
gross misconduct in the performance of his duties hereunder; or that a final
non-appealable conviction of or a plea of guilty or nolo contendere by Executive
to a felony or misdemeanor involving fraud, embezzlement, theft, or dishonesty
or other criminal conduct against Employer.
11. Termination Upon Change of Control. Notwithstanding any provision of
this Agreement to the contrary, Executive may terminate this Agreement, but not
the covenant not to disclose information set forth in paragraph 9, upon the
happening of any of the following events:
(a) The sale by Employer of substantially all of its assets to a
single purchaser or to a group of associated purchasers;
(b) The sale, exchange, or other disposition to a single person or
group of persons under common control in one transaction or series of
related transactions resulting in such person or persons owning, directly
or indirectly, greater than fifty percent (50%) of the combined voting
power of the outstanding shares of Employer's common stock;
(c) More than fifty percent (50%) of the members of the board of
directors of Employer shall be persons who are neither nominated for
election by the board or an authorized committee of the board nor elected
by the board;
(d) The decision by Employer to terminate its business and liquidate
its assets; or
(e) The merger or consolidation of Employer in a transaction in which
the shareholders of Employer immediately prior to such merger or
consolidation receive less than fifty percent (50%) of the outstanding
voting shares of the new or continuing corporation.
In the event Executive does not elect to terminate this Agreement upon the
happening of any of the events noted above, and as a result of such event,
Employer is not the surviving entity, then the provisions of this Agreement
shall inure to the benefit of and be binding upon the surviving or resulting
entity. If as a result of the merger, consolidation, transfer of assets, or
other event listed above, the duties of Executive are increased, then the
compensation of Executive provided for in paragraph 4 of this Agreement shall be
reasonably adjusted upward to compensate for the additional duties and
responsibilities assumed.
12. Payments on Death or Disability. This Agreement and Executive's
employment hereunder shall terminate on the death of Executive or if its
determined, based upon the written opinion of the physician regularly attending
Executive, that Executive is unable, because of a medically determinable
disease, injury, or other physical or mental disability, to perform
substantially all of his regular duties to Employer and that such disability is
determined or reasonably expected to continue for at least 180 days. In the
event of termination of this Agreement on such death or disability, then
Executive or Executive's estate, as the case may be, shall be paid all amounts
payable to him pursuant to paragraph 4 hereof and shall receive all benefits
provided pursuant to paragraph 5 hereof during the balance of the term of this
Agreement.
13. Termination Payments. In the event that the Executive's employment is
terminated by Employer during the term hereof for reasons other than Cause as
defined in paragraph 10, Employer shall compensate Executive with the monthly
compensation as provided in paragraph 4, and shall continue to provide Executive
with employment benefits as provided in paragraph 5, through the term hereof.
14. Nontransferability. Neither Executive, Executive's spouse,
Executive's designated contingent beneficiary, nor their estates shall have any
right to anticipate, encumber, or dispose of any payment due under this
Agreement. Such payments and other rights are expressly declared nonassignable
and nontransferable, except as specifically provided herein.
15. Indemnification. Employer shall indemnify Executive and hold
Executive harmless from liability for acts or decisions made by Executive while
performing services for Employer to the greatest extent permitted by applicable
law. Employer shall use its best efforts to obtain coverage for Executive under
any insurance policy now in force or hereafter obtained during the term of this
Agreement insuring officers and directors of Employer against such liability.
16. Assignment. This Agreement may not be assigned by either party
without the prior written consent of the other party.
17. Entire Agreement. This Agreement is and shall be considered to be the
only agreement or understanding between the parties hereto with respect to the
employment of Executive by Employer. All negotiations, commitments, and
understandings acceptable to both parties have been incorporated herein. No
letter, telegram, or communication passing between the parties hereto covering
any matter during this contract period, or any plans or periods thereafter,
shall be deemed as part of this Agreement; and shall not have the effect of
modifying or adding to this Agreement unless it is distinctly stated in such
letter, telegram, or communication that it is to constitute a part of this
Agreement and is to be attached as an amendment to this Agreement and is signed
by the parties to this Agreement.
18. Enforcement. Executive acknowledges that any remedy at law for breach
of paragraph 9 would be inadequate, acknowledges that Employer would be
irreparably damaged by an actual or threatened breach thereof, and agrees that
Employer shall be entitled to an injunction restraining Executive from any
actual or threatened breach of paragraph 9 as well as any further appropriate
equitable relief without any bond or other security being required. In addition
to the foregoing, each of the parties hereto shall be entitled to any remedies
available in equity or by statute with respect to the breach of the terms of
this Agreement by the other party.
19. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the state of Utah.
20. Severability. If and to the extent that any court of competent
jurisdiction holds any provision or any part thereof of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity of
the remainder of this Agreement.
21. Waiver. No failure by any party to insist upon the strict performance
of any covenant, duty, agreement, or condition of this Agreement or to exercise
any right or remedy consequent upon a breach hereof shall constitute a waiver of
any such breach or of any covenant, agreement, term, or condition.
AGREED AND ENTERED INTO as of the date first above written.
Employer:
AMERICAN FINANCIAL HOLDING, INC.
/s/ Kenton L. Stanger
Executive:
/s/ Ray P. Brown
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered into this
29th day of June, 1995 (the "Execution Date"), to be effective July 1, 1995 (the
"Effective Date"), by and between AMERICAN FINANCIAL HOLDING, INC., a Delaware
corporation (the "Employer"), and TIM L. HANSEN (the "Executive").
For and in consideration of the mutual covenants contained herein and of
the mutual benefits to be derived hereunder, the parties agree as follows:
1. Employment. Employer hereby employs Executive to perform those duties
generally described in this Agreement, and Executive hereby accepts and agrees
to such employment on the terms and conditions hereinafter set forth.
2. Term. The term of this Agreement shall be for a period of three (3)
years commencing on the Effective Date of this Agreement and shall, on each
anniversary of the Effective Date hereof, automatically be renewed and extended
for a new three (3) year term unless previously terminated pursuant to the terms
hereof. Notwithstanding the foregoing, Executive may terminate this Agreement
at any time upon at least ninety (90) days prior written notice to Employer, and
the board of directors of Employer may resolve at any time not to extend this
Agreement for an additional year upon the next succeeding anniversary of the
Effective Date whereupon the term of this Agreement shall expire upon the
termination of the then current three (3) year period.
3. Duties. During the term of this Agreement, Executive shall be
employed by Employer, shall be appointed as a director, and shall initially be
elected vice-president of marketing. Executive agrees to serve in such offices
or positions with Income Builders, Inc. ("Income Builders"), a wholly-owned
subsidiary of Employer, as its board of directors may determine, and such
substitute or further offices or positions of substantially consistent rank and
authority as shall, from time to time, be determined by Employer's board of
directors. Executive agrees to continue to serve as a member of the board of
directors of Employer and to serve as a director and officer of Income Builders
for no additional compensation. Executive shall devote substantially all of his
working time and efforts to the business of Employer and its subsidiaries and
shall not during the term of this Agreement be engaged in any other substantial
business activities which will significantly interfere or conflict with the
reasonable performance of his duties hereunder.
4. Compensation.
(a) For all services rendered by Executive on behalf of the Employer,
Executive shall be paid through December 31, 1995, an annual draw of
$200,000, payable in weekly installments, plus such bonuses as the board of
directors of Income Builders shall from time to time determine; provided,
however, that in no event shall the accrual or payment of Executive's
annual compensation, when combined with all other annual compensation for
executives of Income Builders, result in Income Builders reporting a net
loss, prior to income taxes and without deducting charge-backs for unearned
commissions previously paid, for any fiscal year for operations, as
determined in accordance with generally accepted accounting principles, as
determined by Employer's regular outside certified public accountants.
Executive shall also be paid such additional incentive compensation as the
board of directors of Employer may, in its sole discretion, from time to
time determine. Within the first 90 days of each fiscal year commencing in
1996, the parties shall determine the amount of any increase in the fixed
draw and formula for annual bonuses for such fiscal year, which shall be
applicable during such year.
(b) All payments shall be subject to withholding and other applicable
taxes. The compensation may be increased at any time as Employer's board
of directors may determine, based on earnings, increased activities of the
Employer, or such other factors as the board of directors may deem
appropriate.
5. Employment Benefits. Employer shall provide, either directly or
indirectly through Income Builders, health and medical insurance for Executive
in a form and program to be chosen by Employer for its full-time employees.
Executive shall be entitled to participate in any retirement, pension, profit-
sharing, stock option, or other plan as in effect from time to time on the same
basis as other employees.
6. Vacations. Executive shall be entitled each year to a paid vacation
of a least two (2) weeks. Vacation shall be taken by Executive at a time and
with starting and ending dates mutually convenient to Employer and Executive.
Vacation or portions of vacations not used in one employment year shall carry
over to the succeeding employment year, but shall thereafter expire if not used
within such succeeding year.
7. Expenses. Income Builders will reimburse Executive for expenses
incurred in connection with Income Builders' business, including expenses for
travel, lodging, meals, beverages, entertainment, and other items on Executive's
periodic presentation of an account of such expenses.
8. Stock Registration Provisions. During the term of this Agreement,
Executive shall have the following rights and obligations with respect to
registration under the Securities Act of 1933, as amended, and applicable blue
sky laws of shares of common stock ("Shares") of Employer owned of record by
Executive or to be acquired on exercise of any options issued in Executive's
name to purchase Shares, including any Shares that may be subject to redemption:
(a) Participatory Registration. Employer shall notify Executive, at
least thirty (30) days prior to the filing of any registration statement of
forms S-1, S-2, S-3, SB-2, or any successor forms under the Securities Act
of 1933, as amended, covering common stock of the Employer and will, upon
the written request of Executive delivered at least twenty (20) days prior
to such filing, include in any such registration statement such information
as may be required to register such number of Executive's Shares as
Executive may request. In connection with such offering, Executive and
Employer shall each include customary representations, warranties,
indemnification, and contribution provisions in any underwriting agreement
entered into in connection with such registration. If the managing
underwriters for such registration advise Employer in writing that, in
their opinion, the total amount of securities to be included in such
registration statement exceeds the amount which should reasonably be
included in that offering to achieve the Employer's financing goals,
Employer may limit the amount of stock to be included as follows: (i)
first, all securities Employer proposes to sell may be included, (ii)
second, the Shares of common stock requested to be included in such
registration by all executives pursuant to registration rights may be
reduced and adjusted among participating executives and employees on the
basis of the amount of shares owned of record by each executive, and (iii)
third, if applicable, other stock requested to be included in such
registration may be similarly and ratably adjusted with all executives'
stock pro rata according to the amount
of stock owned of record by any proposed seller. All incremental expenses
of such registration will be allocated pro rata according to the number of
Shares included for Executive. There shall be no limit on the number of
registrations so requested, but each such request shall cover an amount of
Shares having a proposed offering price of not less than Fifty Thousand
Dollars ($50,000.00).
(b) General. In connection with each of the foregoing registrations
and subject to the provisions concerning expenses, Employer shall also (i)
use its best efforts to qualify the Shares for public sale under the blue
sky laws of such jurisdictions as Executive may reasonably request, (ii)
provide such number of preliminary and final prospectuses as Executive may
reasonably request, and (iii) keep the final prospectus in any such
registration current for a reasonable period not to exceed one hundred
twenty (120) days. In connection with the indemnification and contribution
to be provided by Executive to any underwriter or Employer pursuant to this
paragraph 8, the aggregate liability of Executive shall not exceed the
aggregate net proceeds received by Executive from the sale of the
registered Shares, and, in connection with contribution, shall also take
into consideration the relative fault of each contributing person.
The above stock registration provisions shall not have the effect of
modifying or adding to any stock redemption rights the Employer may have with
respect to any Shares owned of record by the Executive.
9. Nondisclosure of Information. In further consideration of employment
and the continuation of employment by Employer, Executive will not, directly or
indirectly, during or after the term of employment, disclose to any person not
authorized by Employer to receive or use such information, except for the sole
benefit of Employer, any of Employer's confidential or proprietary data,
information, or techniques, or give to any person not authorized by Employer to
receive it any information that is not generally known to anyone other than
Employer or that is designated by Employer as "Limited," "Private," or
"Confidential," or similarly designated or for which there is any reasonable
basis to be believed is, or which appears to be, treated by Employer as
confidential.
10. Termination for Cause. Employer may terminate this Agreement during
its term for cause ("Cause") by showing that Executive has materially breached
the terms hereof; that Executive, in the determination of the board, has been
grossly negligent in the performance of his duties; that Executive has
substantially failed to meet written standards established by Employer for the
performance of his duties; that Executive has engaged in material willful or
gross misconduct in the performance of his duties hereunder; or that a final
non-appealable conviction of or a plea of guilty or nolo contendere by Executive
to a felony or misdemeanor involving fraud, embezzlement, theft, or dishonesty
or other criminal conduct against Employer.
11. Termination Upon Change of Control. Notwithstanding any provision of
this Agreement to the contrary, Executive may terminate this Agreement, but not
the covenant not to disclose information set forth in paragraph 9, upon the
happening of any of the following events:
(a) The sale by Employer of substantially all of its assets to a
single purchaser or to a group of associated purchasers;
(b) The sale, exchange, or other disposition to a single person or
group of persons under common control in one transaction or series of
related transactions resulting in such person or persons owning, directly
or indirectly, greater than fifty percent (50%) of the combined voting
power of the outstanding shares of Employer's common stock;
(c) More than fifty percent (50%) of the members of the board of
directors of Employer shall be persons who are neither nominated for
election by the board or an authorized committee of the board nor elected
by the board;
(d) The decision by Employer to terminate its business and liquidate
its assets; or
(e) The merger or consolidation of Employer in a transaction in which
the shareholders of Employer immediately prior to such merger or
consolidation receive less than fifty percent (50%) of the outstanding
voting shares of the new or continuing corporation.
In the event Executive does not elect to terminate this Agreement upon the
happening of any of the events noted above, and as a result of such event,
Employer is not the surviving entity, then the provisions of this Agreement
shall inure to the benefit of and be binding upon the surviving or resulting
entity. If as a result of the merger, consolidation, transfer of assets, or
other event listed above, the duties of Executive are increased, then the
compensation of Executive provided for in paragraph 4 of this Agreement shall be
reasonably adjusted upward to compensate for the additional duties and
responsibilities assumed.
12. Payments on Death or Disability. This Agreement and Executive's
employment hereunder shall terminate on the death of Executive or if its
determined, based upon the written opinion of the physician regularly attending
Executive, that Executive is unable, because of a medically determinable
disease, injury, or other physical or mental disability, to perform
substantially all of his regular duties to Employer and that such disability is
determined or reasonably expected to continue for at least 180 days. In the
event of termination of this Agreement on such death or disability, then
Executive or Executive's estate, as the case may be, shall be paid all amounts
payable to him pursuant to paragraph 4 hereof and shall receive all benefits
provided pursuant to paragraph 5 hereof during the balance of the term of this
Agreement.
13. Termination Payments. In the event that the Executive's employment is
terminated by Employer during the term hereof for reasons other than Cause as
defined in paragraph 10, Employer shall compensate Executive with the monthly
compensation as provided in paragraph 4, and shall continue to provide Executive
with employment benefits as provided in paragraph 5, through the term hereof.
14. Nontransferability. Neither Executive, Executive's spouse,
Executive's designated contingent beneficiary, nor their estates shall have any
right to anticipate, encumber, or dispose of any payment due under this
Agreement. Such payments and other rights are expressly declared nonassignable
and nontransferable, except as specifically provided herein.
15. Indemnification. Employer shall indemnify Executive and hold
Executive harmless from liability for acts or decisions made by Executive while
performing services for Employer to the greatest extent permitted by applicable
law. Employer shall use its best efforts to obtain coverage for Executive under
any insurance policy now in force or hereafter obtained during the term of this
Agreement insuring officers and directors of Employer against such liability.
16. Assignment. This Agreement may not be assigned by either party
without the prior written consent of the other party.
17. Entire Agreement. This Agreement is and shall be considered to be the
only agreement or understanding between the parties hereto with respect to the
employment of Executive by Employer. All negotiations, commitments, and
understandings acceptable to both parties have been incorporated herein. No
letter, telegram, or communication passing between the parties hereto covering
any matter during this contract period, or any plans or periods thereafter,
shall be deemed as part of this Agreement; and shall not have the effect of
modifying or adding to this Agreement unless it is distinctly stated in such
letter, telegram, or communication that it is to constitute a part of this
Agreement and is to be attached as an amendment to this Agreement and is signed
by the parties to this Agreement.
18. Enforcement. Executive acknowledges that any remedy at law for breach
of paragraph 9 would be inadequate, acknowledges that Employer would be
irreparably damaged by an actual or threatened breach thereof, and agrees that
Employer shall be entitled to an injunction restraining Executive from any
actual or threatened breach of paragraph 9 as well as any further appropriate
equitable relief without any bond or other security being required. In addition
to the foregoing, each of the parties hereto shall be entitled to any remedies
available in equity or by statute with respect to the breach of the terms of
this Agreement by the other party.
19. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the state of Utah.
20. Severability. If and to the extent that any court of competent
jurisdiction holds any provision or any part thereof of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity of
the remainder of this Agreement.
21. Waiver. No failure by any party to insist upon the strict performance
of any covenant, duty, agreement, or condition of this Agreement or to exercise
any right or remedy consequent upon a breach hereof shall constitute a waiver of
any such breach or of any covenant, agreement, term, or condition.
AGREED AND ENTERED INTO as of the date first above written.
Employer:
AMERICAN FINANCIAL HOLDING, INC.
/s/ Kenton L. Stanger, President
Executive:
/s/ Tim L. Hansen
$350,000.00 AS OF SEPTEMBER 30, 1996
PROMISSORY NOTE
DO NOT DESTROY THIS NOTE
WHEN PAID, THIS NOTE MUST BE SURRENDERED FOR CANCELLATION
FOR VALUE RECEIVED, the undersigned, AMERICAN FINANCIAL HOLDING, INC., a
Delaware corporation whose mailing address is P.O. Box 683, Farmington, UT
84025-0683 ("Maker"), hereby promises to pay to the order of KRUSE, LANDA &
MAYCOCK, L.L.C., a Utah limited liability company whose mailing address is
Eighth Floor, 50 West Broadway, Salt Lake City Utah 84101, ("Payee"), the
aggregate unpaid amount due to Payee by Maker as evidenced by regular monthly
statements for professional services rendered and costs advanced sent by Payee
to Maker in accordance with Payee's regular billing practices, of which Three
Hundred Sixteen Thousand Seven Hundred Fifty-Six and 62/100 Dollars
($316,756.62) was due and payable as of September 30, 1996, but in any event not
to exceed Three Hundred Fifty Thousand and No/100 Dollars ($350,000.00),
together with interest (calculated on the basis of the actual number of days
elapsed but computed as if each year consisted of 360 days) on the unpaid
principal balance from time to time outstanding at the rate of eight percent
(8%) per annum.
The entire unpaid principal and all accrued and unpaid interest shall be
due and payable within five days after demand, but in any event on or before
March 31, 1997. Payments hereunder shall be made in lawful money of the United
States of America to Holder at the Holder's principal place of business.
Maker reserves the right and privilege of prepaying this Note in whole or
in part at any time, or from time to time, without notice, premium, charge, or
penalty. Prepayments on this Note shall be applied first to accrued and unpaid
interest to the date of such prepayment, next to expenses for which Payee is due
to be reimbursed, and then to the unpaid principal balance hereof.
Any amount not paid when due shall thereafter bear interest until paid, at
the rate of twelve percent (12%) per annum.
Upon the occurrence or during the continuance of any one or more of the
events hereinafter enumerated, Payee or the holder of this Note may forthwith or
at any time thereafter during the continuance of any such event, by notice in
writing to the Maker, declare the unpaid balance of the principal and interest
on the Note to be immediately due and payable, and the principal and interest
shall become and shall be immediately due and payable without presentation,
demand, protest, notice of protest, or other notice of dishonor, all of which
are expressly waived by Maker such events being as follows:
1. Default in the payment of the principal and interest of this Note
or any portion thereof when the same shall become due and payable, whether
at maturity as herein expressed, by acceleration, or otherwise, unless
cured within five days after notice thereof by Holder or the holder of this
Note to Maker;
2. Maker shall file a voluntary petition in bankruptcy or a
voluntary petition seeking reorganization, or shall file an answer
admitting the jurisdiction of the court and any material allegations of an
involuntary petition filed pursuant to any act of Congress relating to
bankruptcy or to any act purporting to be amendatory thereof, or shall be
adjudicated bankrupt, or shall make an assignment for the benefit of
creditors, or shall apply for or consent to the appointment of any receiver
or trustee for Maker, or of all or any substantial portion of its property,
or Maker shall make an assignment to an agent authorized to liquidate any
substantial part of its assets; or
3. An order shall be entered pursuant to any act of Congress
relating to bankruptcy or to any act purporting to be amendatory thereof
approving an involuntary petition seeking reorganization of the Maker, or
an order of any court shall be entered appointing any receiver or trustee
of or for Maker, or any receiver or trustee of all or any substantial
portion of the property of Maker, or a writ or warrant of attachment or any
similar process shall be issued by any court against all or any substantial
portion of the property of Maker, and such order approving a petition
seeking reorganization or appointing a receiver or trustee is not vacated
or stayed, or such writ, warrant of attachment, or similar process is not
released or bonded within 60 days after its entry or levy.
Every Maker, endorser, and guarantor of this Note, or the obligation
represented hereby, waives presentment, demand, notice, protest, notice of
protest, or enforcement of this Note, assents to any extensions or postponements
of the time of payment or any other indulgence and to the addition to release of
any collateral and of any other party or person primarily or secondarily liable.
None of the rights and remedies of Holder hereunder are to be waived or affected
by failure or delay to exercise them or the release of any collateral or any
part thereof, with or without substitution. All remedies conferred on Holder of
this Note shall be cumulative and none is exclusive. Such remedies may be
exercised concurrently or consecutively at Holder's option.
If this Note is placed with an attorney for collection, or if suit be
instituted for collection, or if any other remedy permitted by law is pursued by
Holder hereof because of any default in the terms and conditions herein, then in
such event, Maker agrees to pay reasonable attorneys' fees, costs, and other
expenses incurred by Holder hereof in so doing.
This Note is secured by the pledge of those four certain promissory notes
in the aggregate principal amount of $2,606,139, in which Kenton L. Stanger,
Raymond L. Punta, Ray P. Brown, and Tim L. Hansen appear as makers and the Maker
of this Note appears as payee. Such collateral assignment is made pursuant to a
Pledge Agreement executed contemporaneously with this Note.
This Note shall be governed by and construed in accordance with the laws of
the state of Utah.
AMERICAN FINANCIAL HOLDING, INC.
/s/ Kenton L. Stanger
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is made and entered into effective
the 30th day of September, 1996, by and between AMERICAN FINANCIAL HOLDING,
INC., a Delaware corporation, (hereinafter referred to as "Debtor"), and KRUSE,
LANDA & MAYCOCK, L.L.C., a Utah limited liability company (hereinafter referred
to as "Creditor").
To secure the due and timely performance of the payment by Debtor to
Creditor of the obligation evidenced by that certain promissory note of even
date herewith in the aggregate principal amount of $350,000 in which Debtor
appears as maker and Creditor appears as payee, all future obligations of the
Debtor to the Creditor, and all renewals, extensions, and modifications thereof
(the "Obligation"), Debtor hereby pledges, hypothecates, assigns, transfers,
sets over, and grants a security interest in and to those certain promissory
notes dated as of December 31, 1995, in which (a) Kenton L. Stanger appears as
the maker in the amount of $783,213; (b) Raymond L. Punta appears as the maker
in the amount of $550,147; (c) Tim L. Hansen appears as the maker in the amount
of $652,190; and (d) Ray P. Brown appears as maker in the amount of $665,589,
and in each case the Debtor appears as payee (collectively, the "Collateral").
The Collateral shall be delivered as hereinafter provided to be held for and on
behalf of Creditor and to be disposed of in accordance with the terms hereof.
Unless otherwise defined, words used herein shall have the meanings given
them in the Utah Uniform Commercial Code as now adopted and as hereafter amended
from time to time.
Debtor will promptly deliver to Creditor the original of the promissory
notes constituting the Collateral, together with such other documents,
satisfactory in form and substance to the Creditor, with respect to the
Collateral as the Creditor may reasonably request to preserve and protect, and
to enable the Creditor to enforce its rights and remedies hereunder, and prior
to complete payment and satisfaction of the Obligation, Debtor shall not: (a)
sell, assign, exchange, or otherwise transfer any of his right in any of the
Collateral; (b) create or suffer to exist any lien, security interest, or other
charge or encumbrance against the Collateral, except for the pledge hereunder;
(c) make or consent to any amendment or other modification or waiver with
respect to any of the Collateral or enter into any agreement or permit to exist
any restriction with respect to any of the collateral other than pursuant
hereto; (d) take or fail to take any action which would in any manner impair the
value or enforceability of Creditor's security interest in any of the
collateral; and (e) release, satisfy, or discharge the obligations of the makers
of the notes forming the Collateral. In the event any payments are made to
Debtor by makers of the notes forming the Collateral, Debtor will immediately
endorse and deliver the same to Creditor in the form received. Debtor will
instruct the makers of the notes forming the Collateral to make all payments
thereunder directly to Creditor until the Obligation is satisfied and thereafter
to make payments to Debtor. Any transfer by Debtor of the Collateral shall be
subject to the interest of Creditor as a secured party therein.
In the event of default under the Collateral, Creditor shall be entitled to
all of the remedies available under the Utah Uniform Commercial Code.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Debtor:
AMERICAN FINANCIAL HOLDING, INC.
/s/ Kenton L. Stanger, President
Creditor:
KRUSE, LANDA & MAYCOCK, L.L.C.
/s/ James R. Kruse, President
MARKETING AGREEMENT
This MARKETING AGREEMENT, made and entered into as of the 1st day of
January 1996 by and between MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY
("MGLIC"), a Massachusetts stock life insurance corporation with principal
offices at 7887 East Belleview Avenue, Englewood, Colorado 80111, WABASH LIFE
INSURANCE COMPANY ("WLIC"), a Kentucky corporation with principal offices at
7887 East Belleview Avenue, Englewood, Colorado 80111, and American Financial
Reinsurance, Inc. ("Life Company"), an Arizona corporation with principal
offices at 225 South 200 West, Suite 302, Farmington, Utah 84025, and American
Financial Marketing, Inc. ("Marketing Company"), a Utah corporation with
principal offices at 225 South 200 West, Suite 302, Farmington, Utah 84025.
WITNESSETH
WHEREAS, MGLIC desires to increase their sale and issuance of life
insurance and similar products ("Insurance Business") and to maximize the
persistency thereof through the sale of such products by general agents of MGLIC
recruited by Marketing Company (hereinafter called "Agents"), and the
reinsurance by MGLIC to Life Company of part of such Insurance Business, all in
accordance with and subject to the following terms, conditions and provisions.
NOW, THEREFORE, in consideration of the premises and of the mutual promises
of the parties hereto, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. General Agents. To the extent they have not previously done so, MGLIC
and each Agent, as more specifically set forth and identified in Exhibit "A",
which is attached hereto and incorporated herein, including persons or other
entities recruited as Agents subsequent to the date hereof, shall promptly enter
into a General Agents' Compensation Agreement (herein so-called) in the form
attached hereto as Exhibit "A" and incorporated herein to solicit applications
for Insurance Business; provided, however, that MGLIC shall not be obligated to
enter into a General Agents' Compensation Agreement with any given Agent unless
such Agent meets the reasonable appointment criteria for general agents applied
by MGLIC in the ordinary course of business. Marketing Company agrees to
identify in writing at the contract date all Agents to be included in the
Marketing Company. Such Agents are hereinafter individually referred to as
"General Agent" and collectively referred to as "General Agents."
2. Reinsurance. Simultaneously with the execution of this Marketing
Agreement, MGLIC and Life Company shall enter into a reinsurance agreement
("Modified Coinsurance Agreement") on a modified coinsurance basis attached
hereto as Exhibit "B" and incorporated herein. Under the Modified Coinsurance
Agreement MGLIC will cede and Life Company will reinsure, on a quota share
basis, certain percentages of the Insurance Business produced by General Agents
as more specifically set forth in Exhibit "B" hereto.
3. Administrative Services. Simultaneously with the execution of this
Marketing Agreement, Life Company and WLIC shall enter into an Administrative
Services Agreement (herein so-called) in substantially the form attached hereto
as Exhibit "C" and incorporated herein.
4. Production Goals. Marketing Company agrees to use reasonable efforts to
cause General Agents to solicit applications for Insurance Business to be issued
by MGLIC for not less than the following aggregate cumulative First Year
Premiums ("Cumulative Production Goals") on or before the following
Target Dates (herein so-called):
TARGET DATES CUMULATIVE PRODUCTION GOALS
December 31, 1996 2,000,000
December 31, 1997 4,000,000
December 31, 1998 6,000,000
December 31, 1999 8,000,000
December 31, 2000 10,000,000
For the purposes of this Agreement the term "First-Year Premiums" shall
mean the aggregate life insurance premiums payable during the first year a
policy or contract of insurance is in effect, exclusive of (i) lump-sum cash
deposits in excess of published premium rates, (ii) premiums for flexible
premium life insurance contracts in excess of control premiums and (iii)
premiums for single pay contracts. All First-Year Premiums associated with any
application for Insurance Business submitted by a General Agent to MGLIC shall
be counted in full unless and until such application is rejected by MGLIC. All
First-Year Premiums associated with any rejected application shall cease to be
counted as of the date of such rejection.
Insurance policies and contracts which have been issued prior to the date
hereof by MGLIC as a result of applications for Insurance Business solicited by
General Agents after July 1, 1995, shall be deemed to have been issued
subsequent to the date hereof but prior to December 31, 1996, for the purpose of
calculating the aggregate Cumulative First Year Premiums.
5. Termination. For the purpose of this Agreement, the term "Completion
Date" shall mean (i) December 31, 2000, or (ii) the date by which MGLIC has
issued Insurance Business as a result of applications solicited by General
Agents with aggregate cumulative First-Year Premiums in the aggregate amount of
$10,000,000, whichever occurs first.
(a) Prior to Completion Date. This Agreement may not be terminated prior to
the Completion Date, except:
(i) By the mutual consent of the parties hereto; or
(ii) By MGLIC and WLIC if any one or more of the Cumulative Production
Goals set forth herein are not achieved by their respective Target Dates, and
then only upon six (6) months' prior written notice by MGLIC and WLIC to
Marketing Company and Life Company; or
(iii) By MGLIC and WLIC in the event of a material breach on the part of
Marketing Company, Life Company or any General Agent of this Agreement, the
Administrative Services Agreement, any Modified Coinsurance Agreement between
MGLIC and Life Company or any General Agents' Compensation Agreement and such
breach is not cured or eliminated within thirty (30) days after receipt of
written notice thereof to Marketing Company and Life Company from MGLIC and
WLIC; or
(iv) By Marketing Company and Life Company in the event of a material
breach on the part of MGLIC and WLIC of this Agreement, the Administrative
Services Agreement, the Modified Coinsurance Agreement or any General Agents'
Compensation Agreement and such breach is not cured or eliminated within thirty
(30) days after receipt of written notice thereof to MGLIC and WLIC from
Marketing Company and Life Company.
(b) After Completion Date. This Agreement may not be terminated any time
after the Completion Date except:
(i) By the mutual consent of the parties hereto; or
(ii) By MGLIC and WLIC upon thirty (30) days, written notice to Marketing
Company and Life Company; or
(iii) By Marketing Company and Life Company upon thirty (30) days' written
notice to MGLIC and WLIC.
6. Recapture of Reinsured Business. If any Cumulative Production Goal is
not met by the Target Date applicable thereto, or if this Agreement is
terminated prior to the Completion Date pursuant to the provisions of Paragraph
5(a)(i) or 5(a)(iii) above, MGLIC shall have the right, upon six months' prior
written notice to Marketing Company and Life Company, to recapture all of the
Insurance Business ceded by MGLIC to Life Company under the Modified Coinsurance
Agreement and Life Company shall transfer to MGLIC cash equal to the preceding
Accounting Period's Reserve Liability and any future liability shall cease.
7. Right of First Refusal. In the event that Life Company receives an Offer
(herein so-called) from an unaffiliated party ("Offeror") to purchase or to
reinsure all or part of the Insurance Business previously assumed and reinsured
by Life Company from MGLIC, before Offerees accept such Offer they shall deliver
a copy of the Offer to MGLIC and WLIC. During the thirty (30) day period
following such delivery, MGLIC and WLIC shall have a right of first refusal for
either MGLIC or WLIC or any of their affiliates to elect to reinsure such
Insurance Business, on the same terms and conditions contained in such Offer.
Upon the earlier of (i) the delivery by MGLIC and WLIC to Life Company of
written notification of their intent not to exercise such right of first
refusal, or (ii) the expiration of such thirty (30) day period without receipt
by Life Company of MGLIC and WLIC's written notice of intent not to exercise
such right of first refusal, the Life Company shall have the right to accept the
Offer.
If MGLIC and WLIC exercise such right of first refusal but fail to
consummate the purchase within ninety (90) days after receipt by Life company of
MGLIC and WLIC's written notice of exercise, and if such failure is for any
reason other than the refusal of Life Company to consummate the transaction in
accordance with the terms of the offer or the failure of MGLIC and WLIC, despite
diligent efforts, to obtain all necessary regulatory approval, MGLIC and WLIC's
right of first refusal shall terminate completely and permanently. If, despite
diligent efforts, MGLIC and WLIC fail to obtain all necessary regulatory
approvals within the ninety (90) day period specified above, the right of
refusal shall terminate on the earliest of (1) the date on which the receipt of
regulatory approvals is no longer possible or regulatory disapproval is
announced, (2) the date thirty days after the date on which regulatory approval
is granted if the purchase remains unconsummated (unless Life Company has
refused to consummate the transaction in accordance with the terms of the
Offer), or (3) the date on which MGLIC and WLIC cease to make diligent efforts
to obtain all necessary regulatory approvals. Such ninety (90) day period may be
extended by mutual consent of MGLIC, WLIC and Life Company.
8. Miscellaneous.
(a) Assignments. This Agreement shall be binding on the parties hereto and
their respective successors and permitted assigns, but no party may assign this
Agreement without the prior written consent of the other parties.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
(c) Section Headings. The headings set forth herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
(d) Waiver. No delay or omission by any party hereto to exercise any right
or power arising upon any noncompliance or default by any other party with
respect to any of the terms of this Agreement shall impair any such right or
power or be construed as a waiver thereof. A waiver by any of the parties hereto
of the fulfillment of any of the covenants, conditions or agreements to be
performed by any other shall not be construed to be a waiver of any succeeding
breach thereof or of any other covenant, condition or agreement herein
contained. All remedies provided for in this Agreement shall be cumulative in
addition to and not in lieu of any other remedies available to any party at law,
in equity or otherwise.
(e) Amendments. This Agreement may not be amended, nor shall any waiver,
change, modification, consent or discharge be effected, except by an instrument
in writing duly executed by the parties hereto or their respective successors or
permitted assigns.
(f) Arbitration. Any disagreement that should arise between the parties
regarding the rights or liabilities of the parties under any transaction
pursuant to this Agreement shall be referred to arbitrators. One arbitrator is
to be chosen by each party from among officers of other life insurance
companies, which said officers are familiar with reinsurance transactions. A
fifth arbitrator shall be chosen by the said arbitrators before entering into
arbitration. An arbitrator may not be a present or former officer, attorney, or
consultant of the parties or either's affiliates. If the arbitrators appointed
by the parties cannot agree on a fifth person then either party may apply to
the President of the American Life Insurance Association for appointment of a
fifth arbitrator. The arbitrators' decision will be final and binding upon
both parties.
The place of the meeting of the arbitrators will be decided by a majority
vote of the members thereof. All expenses and fees of the arbitrators will be
borne equally by the parties, unless the arbitrators decide otherwise.
(g) Notices. Any notices required or permitted under this Agreement shall
be in writing and shall be deemed to have been duly given if delivered,
telecopied, or mailed, by certified mail, return receipt requested to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to MGLIC:
Cathy A. Shinagawa
Massachusetts General Life Insurance Company
7887 East Belleview Avenue
Englewood, Colorado 80111
If to WLIC:
Cathy A. Shinagawa
Wabash Life Insurance Company
7887 East Belleview Avenue
Englewood, Colorado 80111
If to Life Company:
Kenton Stanger, President
PO Box 683
225 South 200 West, Suite 302
Farmington, Utah 84025-0683
If to Marketing Company:
Kenton Stanger, President
PO Box 683 225 South 200 West, Suite 302
Farmington, Utah 84025-0683
All notices and other communications required or permitted hereunder that are
addressed as provided in this Section 8(g) will, if delivered personally or by
mail in the manner described above, be deemed given upon receipt, and will if
delivered by telecopy, be deemed delivered when confirmed.
(h) Force Majeure. The parties shall be excused from performance hereunder
for any period when the parties are prevented from performing any services to be
provided hereunder, in whole or in part, as a result of an Act of God, fire,
war, civil disturbance, court order, insurance department regulatory order,
labor dispute, or other cause beyond its reasonable control, and such
nonperformance shall not be a ground for Termination hereof or assertion of
default hereunder. In the event either party hereto shall be excused from
performance under this provision, said party shall use its best efforts to
provide, directly or indirectly, alternative and, to the extent practicable,
equivalent fulfillment of its obligation hereunder.
(i) Oversight. If nonpayment of premiums within the time specified or
failure to comply with any of the other terms of this Agreement is shown to be
unintentional and the result of oversight or misunderstanding on the part of
either parties hereto, this Agreement will not be considered abrogated thereby,
but the parties to this Agreement will be restored to the position they would
have occupied had no such oversight or misunderstanding occurred.
(j) Severable Provisions. If any provisions of this Agreement shall be
found to be invalid by any administrative agency or court of competent
jurisdiction, such finding shall not affect the remaining provisions of this
Agreement and all other provisions herein shall remain in full force and effect.
(k) Approvals, Consents. etc. In any instance where agreement,
approval, acceptance or consent of any parties is required by any
provision of this Agreement, such action shall not be unreasonably
delayed or withheld.
(1) Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of
Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed and delivered by their officers "hereunto duly authorized, all as of the
date first hereinabove written.
ATTEST: MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY
/s/ Roger Dunker
Secretary President
ATTEST: WABASH LIFE INSURANCE COMPANY
/s/ Roger Dunker
Secretary President
AMERICAN FINANCIAL HOLDINGS, INC. dba
ATTEST: AMERICAN FINANCIAL MARKETING, INC.
/s/ Raymond L. Punta /s/ Kenton L. Stanger
Secretary President
ATTEST: AMERICAN FINANCIAL REINSURANCE, INC.
/s/ Raymond L. Punta /s/ Kenton L. Stanger
Secretary Chief Executive Officer
EXHIBIT A
GENERAL AGENT AGREEMENT
Effective this ----- day of ------, 19-----
MASSACHUSETTS GENERAL LIFE Insurance Company
(hereinafter referred to as Company) hereby appoints -------------------
(General Agent's Name)
to act as the Company's General Agent (hereinafter referred to as General Agent
or You), for the solicitation of applications for insurance. The title of the
General Agent shall be -----------
The parties hereby agree as follows:
RELATIONSHIP OF PARTIES
1. The General Agent is an independent contractor. Nothing contained in
this contract or in any course of dealing between you and the Company
whether in the past or currently shall be construed or interpreted to
create an employer-employee relationship between the Company and you.
You shall be free to exercise your own judgment as to the persons from
whom applications are solicited and as to the time, place and manner of
solicitation; however, the applicable statutes and governmental
regulations pertaining to the conduct of business covered hereby as well
as the regulations from time to time adopted by the Company respecting its
methods of doing business shall be observed and conformed to by you.
AUTHORITY
2. Your authority shall extend no further than is stated in this
contract. You are hereby authorized to solicit applications for insurance
and annuity contracts on behalf of the Company. You are further authorized
to collect in cash a first-year premium on applications solicited or on
policies forwarded to you for delivery. You may not collect any deferred
first-year or renewal premium unless a receipt is forwarded by the Company
to you for that purpose. You shall not collect any premiums past due
except upon conditions specifically prescribed by the Company. You shall
not undertake to make, alter, or discharge any contract or waive any
forfeiture, or extend the time for payment of any premium or note, or
waive payments in cash, or contract debts or obligations in the name of
the Company or obligate it in any way. Except in cases where the first
full premium has been paid in advance, you shall not deliver any policy
where you have knowledge of any conditions suffered by the applicant
subsequent to the application date which might affect insurability.
You have the authority to recruit insurance producers (Producers) to
solicit insurance and annuities under your supervision and recommend their
licensing to the Company. The Company reserves the right of refusal to
license any such proposed Producer. You shall contract directly with your
Producers under agreements suitable to you for solicitation of insurance
as authorized herein; provided, however, that you agree to provide the
Company with copies of all such agreements.
LITIGATION
3. You shall not institute legal proceedings against any applicant,
policyholder or any other person for any cause arising out of the business
transacted under this appointment unless the Company shall have been
notified in writing of such action or the proposed action simultaneously
with the institution of such legal proceedings. Should the Company be sued
because of any alleged act by you, the Company shall, upon receipt of
notification of such suit, notify you immediately in order that you and
the Company may mutually agree upon the appropriate defense, the
employment of counsel and a determination as to which party shall be
liable for the cost of such defense. The Company, at its sole discretion
and expense, may settle any claim or claims of applicants for insurance,
policyholders or others against the Company arising out of the business
transacted under this appointment, upon receipt of proof satisfactory to
the Company of the justice of such claim or claims. No settlement calling
for payment by you in whole or in part (whether directly or indirectly, or
whether contributed to in whole or in part by any insurance carrier) shall
be made without your consent.
MODIFICATIONS
4. The Company shall not be bound by a promise, agreement,
understanding, or representation heretofore or hereafter made unless made
in writing and signed by an officer of the Company expressing by its terms
an intention to modify this contract.
DISPUTES
5. If a claim to compensation is disputed by another General Agent or
Producer, the decision of the Company thereon shall be binding and
conclusive.
RULES AND REGULATIONS
6. This agreement shall be deemed to be supplemented by any provisions,
rules and instructions for the conduct of its business which may be set
forth in any rate book, instruction manual, or other publication, or
written directives issued by the Company from time to time to the same
extent as if such provisions, rules, and instructions were included
herein.
REPLACEMENT AND REINSTATEMENTS
7. If a policy issued by the Company is terminated and a new policy is
issued on the same life which, in the judgment of the Company, is to take
the place 'of the terminated policy, no compensation shall be allowed
thereon. If any policy obtained through you lapses and is then restored
through the action of some other person, the Company shall not be liable
for any further compensation thereon.
ADVERTISING
8. You shall comply with the rules of the Company and any applicable
statutes and governmental regulations relating to advertising, publicity
releases, and the use of written or printed material pertaining to the
Company policies, plans, financial condition, or statements concerning
production.
COMPENSATION
9. As compensation for the services to be rendered, you will be paid at
the rates and under the conditions set forth in the attached schedule(s)
of compensation on premiums paid in cash and accepted by the Company for
first and subsequent policy years on account of policies issued on
applications obtained by you or your Producers, and only after the due
date of the premium.
The Compensation Schedules may be changed upon written notice to you by
the Company and any applications solicited by you shall be affected by
such change thirty (30) days after the date of such written notice. Any
such change will not affect vesting requirements.
You hereby agree that any obligation due from you may be offset by the
Company against any money payable to you under this contract, and that any
such indebtedness shall be a first lien upon any funds due to you under
this contract. The Company may, moreover, require an immediate repayment
of such indebtedness regardless of whether future compensation becoming
payable to you appears to be adequate to offset such indebtedness. In the
event ;he Company is required to pursue formal collection procedure in
order to collect any indebtedness under the terms of this contract, you
agree to be, responsible for any expense incurred, be it the fee of a
collection agency, attorney. or other cost, including court costs.
In the event you have been appointed by an affiliate of the Company, any
indebtedness owing the Company may be offset by compensation due you from
the affiliate and any indebtedness owing the affiliate may be offset by
compensation due you under this appointment.
REJECTIONS
10. The Company may reject any application for insurance obtained by you
or your Producers without specifying the reason therefor and return the
premium thereon.
RETURN OF PREMIUM
11. Should the Company for any reason return a premium on a policy, you
shall repay to the Company on demand, the amount of compensation received
on the premium so returned.
INDEBTEDNESS
12. Any indebtedness incurred by you and/or by any producers and general
agents on whose business you receive compensation shall, in the absence of
any agreement in writing to the contrary, be loans payable upon demand. As
security for any such loans, the Company shall have a first lien upon any
compensation payable to you under this or any other contract between you
and the Company and may at any time deduct from any such compensation any
such indebtedness.
ASSIGNMENT
13. No assignment of compensation payable hereunder shall be valid unless
accepted in writing by the Company.
INTENT NOT TO WAIVE
14. The failure of the Company to enforce any provision in this contract
or any regulation it promulgates shall not constitute a waiver thereof.
TERMINATION
15. This contract shall terminate: (1) Upon your death or in the event you
become totally and permanently disabled; (2) Upon the giving of written
notice by you or the Company, said notice being delivered personally or
mailed to the last known address of the other party via United States
mail.
In the event of termination as described above, you agree to deliver all
Company property to the Company and to repay any existing indebtedness to
the Company. If the contract terminates by reason of your health, or in
the event you die prior to receipt of all compensation due to you,
compensation due, or thereafter becoming due, shall be paid to your
estate. In the event you are a corporation, this contract shall
automatically terminate in the event the corporation ceases to do business
as a corporation, in which case all compensation due and thereafter
becoming due to it shall be payable to its successor or duly appointed
representative.
PRIOR AGREEMENTS SUPERSEDED
16. This agreement supersedes all prior agreements between the Company
and you with respect to policies issued :through you after the effective
date hereof.
WITHDRAWAL
17. Company retains the right to withdraw any policy form or withdraw
from any territory or jurisdiction.
IN WITNESS WHEREOF, this appointment has been executed on this ---- day of ----
- ----, 19--
MASSACHUSETTS GENERAL LIFE Insurance Company
By /s/ vice president
AMERICAN FINANCIAL HOLDING, INC.,
d/b/a AMERICAN FINANCIAL MARKETING, INC.
[name of agency]
By /s/ Kenton L. Stanger, president and CEO
EXHIBIT B
MODIFIED COINSURANCE AGREEMENT
THIS MODIFIED COINSURANCE AGREEMENT, made and entered into as of the 1st
day of January 1996 by and between MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY
("Ceding Insurer"), a Massachusetts corporation with principal offices located
at 7887 East Belleview Avenue, Englewood, Colorado 80111, and American Financial
Reinsurance, Inc. ("Reinsurer"), an Arizona corporation with principal offices
located at 225 South 200 West, Suite 302, Farmington, Utah 84025.
WITNESSETH:
WHEREAS, Ceding Insurer, Reinsurer, WABASH LIFE INSURANCE COMPANY ("WLIC"), a
Kentucky corporation, and American Financial Marketing, Inc. ("Marketing
Company"), a Utah corporation and an affiliate of Reinsurer, are parties to a
Marketing Agreement (herein so-called) dated as of even date herewith, under
which, among other things, Ceding Insurer and Reinsurer agreed to enter into
this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises of the
parties hereto, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Definitions. Except as otherwise indicated herein, all terms used in the
Marketing Agreement shall have the same meaning in this Agreement. In addition,
the following terms shall mean:
1.1 "Abatement" means the termination of the provisions of this Agreement
relating to the cession of additional Insurance Business Produced, but excludes
the termination of the remaining provisions of the Modified Coinsurance
Agreement.
1.2 "Accounting Period" means each calendar quarter ending on March 31, June 30,
September 30 and December 31 of each year.
1.3 "Beginning Calendar Year" means the period commencing with the effective
date of this Agreement and ending December 31, 1995.
1.4 "Calculation Period" means the Beginning Calendar Year, the Ending Calendar
Year and each Calendar Year occurring in between them.
1.5 "Calendar Year" means the each twelve month period beginning January 1 and
ending December 31.
1.6 "Ending Calendar Year" means the period commencing on January 1 of the year
in which this Agreement is Abated and ending on the date of Abatement.
1.7 "First Year Paid Life Insurance Premiums" means the life insurance premiums
received by the Ceding Insurer on the Policies reinsured hereunder during the
first year each of such Policies is in effect, exclusive of (i) lump-sum cash
deposits in excess of published premium rates, (ii) premiums for flexible
premium life insurance contracts in excess of control premiums and (iii)
premiums for single pay contracts.
1.8 "Gross Rate of Interest" for any Accounting Period for each product type
shall be the sum of (a) the amount of basis points (interest spread) as dictated
in Schedule A by product type and (b) the effective weighted average of the
rates of interest credited by Ceding Insurer, excluding additional interest
credits, if any, to policyowners on interest-sensitive whole life and flexible
premium adjustable life insurance policies as authorized by Ceding Insurer's
Board of Directors and in effect from time to time during the Accounting Period.
1.9 "Gross Investment Income" for any Accounting Period shall be an amount equal
to:
(a) Twenty-five percent of the Gross Rate of Interest multiplied by an amount
equal to (i) Reinsurer's Quota Share of the Reserve Liability at the beginning
of such Accounting Period less (ii) an amount equal to Reinsurer's Quota Share
of the principal amount of all policy loans on the Policies reinsured hereunder
("Policy Loans'') at the beginning of the Accounting Period less (iii) any
unpaid settlements due to the Ceding Insurer plus (iv) any unpaid settlements
due to the Reinsurer;
Plus (b) An amount equal to Reinsurer's Quota Share of the interest received by
Ceding Insurer during such Accounting Period on all Policy Loans.
1.10 "Gross Premium" means all of the paid premiums received by Ceding Insurer
on the Policies reinsured hereunder including (i) lump sum cash deposits in
excess of published premium rates, (ii) premiums for flexible premium life
insurance contracts in excess of control premiums and (iii) premiums for single
pay contracts.
1.11 "Insurance Business Produced" means one hundred percent (100~) of Ceding
Insurer's liability under all insurance policies and contracts ("Policies")
issued by Ceding Insurer on the basis of applications solicited by Marketing
Company or its subagents pursuant to the Marketing Agreement.
1.12 "Quota Share" means for any given Calculation Period:
(a) For Calendar year 1995, a thirty-three and one-third percent (33.33~)
undivided interest in the Insurance Business Produced during that Calendar Year;
and
(b) For Calendar Years after 1995, if (i) Insurance Business Produced by
Marketing Company is $5,000,000 or more of First Year Paid Life Insurance
Premiums received by Ceding Insurer in any Calendar Year, the Quota Share for
the subsequent Calendar year shall be a fifty percent (50%) undivided interest
in the Insurance Business Produced, or (ii) if Insurance Business Produced by
Marketing Company is less than $5,000,000 of First Year Paid Life Insurance
Premiums received by Ceding Insurer in any Calendar Year, the Quota Share for
the subsequent Calendar Year shall be a thirty-three and one-third percent
(33.33%) undivided interest in the Insurance Business Produced. Insurance
Business Produced by Marketing Company must be greater than $2,000,000 of First
Year Paid Life Insurance Premiums received by Ceding Insurer in any Calendar
Year for Reinsurer to continue to be eligible to participate.
1.13 "Reserve Liability" means the actuarial reserves relating to the Policies
reinsured hereunder as reported in Exhibit 8 of Ceding Insurer's Annual
Statement prepared on forms prescribed by the National Association of Insurance
Commissioners ("NAIC Statement"). Such reserves shall be determined on the same
basis as that used by the Ceding Insurer in computing its Reserve Liability. In
addition, a reserve shall be calculated based upon the block's experience
through cash flow testing by a statement actuary. If such testing of cash flows
indicates an additional reserve is to be established for the block of business
then such reserve will be established to comply with regulatory provisions.
1.14 "Claims Liability" means the claims incurred but not paid relating to the
Policies reinsured hereunder as reported in Exhibit 11 of Ceding Insurer's
Annual Statement prepared on forms prescribed by the National Association of
Insurance Commissioners ("NAIC Statement"). Such claims shall be determined on
the same basis as that used by the Ceding Insurer in computing its Claims
Liability.
1.15 "Termination" means the termination of all of the provisions of this
Agreement and includes the recapture by Ceding Insurer of all Policies
previously reinsured hereunder.
2. Reinsurance. Ceding Insurer agrees to cede to Reinsurer and Reinsurer agrees
to assume and reinsure from Ceding Insurer, on a modified coinsurance basis,
Reinsurer's Quota Share of the Insurance Business Produced on the terms and
conditions stated herein.
2.1 This Agreement is an indemnity reinsurance agreement solely between the
Ceding Insurer and the Reinsurer and, except as otherwise provided herein, the
performance of the obligations of each party hereunder shall be rendered solely
to the other party. Except as otherwise provided herein, no person other than
Ceding Insurer and Reinsurer shall have any rights under this Agreement and the
Ceding Insurer shall be and remain solely liable to any insured, policyowner, or
beneficiary under the Policies reinsured hereunder.
2.2 Reinsurer shall, except for Reserves, Policy Loans and Policy Issue Expenses
and Policy Maintenance Expenses, share with the Ceding Insurer, on the basis of
Reinsurer's Quota Share, in all transactions relating to the Policies reinsured
hereunder, including, without limitation:
(a) All premium transactions effected;
(b) All commissions, fees and bonuses paid to or for the benefit of the
Marketing Company and/or General Agents.
(c) All policy benefits paid.
(d) All policyholder dividends paid. (e) All premium taxes paid.
(e) All premium taxes paid.
(f) All nonforfeiture benefits paid.
2.3 Except as provided herein, the liability of Reinsurer with respect to the
Policies reinsured hereunder shall begin and end simultaneously with the
liability of the Ceding Insurer.
2.4 Reinsurer's Quota Share of reinsurance hereunder shall be maintained in
force as to the Policies reinsured hereunder without reduction so long as the
amount of insurance for which the Ceding Insurer is obligated under such
Policies remains in force without reduction.
3. Reserves. Ceding Insurer shall be solely responsible for furnishing all of
the assets necessary to satisfy the Reserve Liability on the Policies reinsured
hereunder ("Reserves").
3.1 Ceding Insurer shall retain ownership of all assets held as Reserves on the
Policies reinsured hereunder and Reinsurer shall have no legal, equitable or
security interest in such assets.
3.2 Reinsurer shall not participate in any long or short term capital gains or
losses incurred by Ceding Insurer with respect to such assets and no part of any
such gains and losses of Ceding Insurer from, or considered as being from, the
sale or exchange of any asset shall be treated as gains or losses from the sale
or exchange of assets owned by or belonging to the Reinsurer.
3.3 Reinsurer shall be solely responsible for paying all Federal, State and
local income taxes, if any, relating to the Gross Investment Income paid by the
Ceding Insurer to the Reinsurer hereunder.
4. Expenses. Except as otherwise provided herein, Ceding Insurer shall bear all
expenses relating to the issuance and maintenance of the Policies reinsured
hereunder.
4.1 For purposes of this Agreement, Policy Issue Expenses (herein so-called) for
each new Policy reinsured hereunder and Policy Maintenance Expenses (herein
so-called) for each Policy reinsured hereunder are detailed in Schedule A
(attached). Reinsurer shall reimburse the Ceding Insurer for Policy Issue
Expenses and Policy Maintenance Expenses in an amount equal to Reinsurer's Quota
Share of the Policies reinsured hereunder, expressed as a percentage of the
Policy Issue Expenses and the Policy Maintenance Expenses.
4.2 For purposes of this Agreement, a DAC Tax allowance shall be charged based
upon Reinsurer's Quota Share of nonpension premium less the DAC Tax basis as
calculated under IRS Regulation 848. The solution shall be multiplied by the
present value of future DAC Tax Capitalization and Amortization based upon the
ceding insurers marginal tax rate for Federal Income Tax purposes. Assuming a
34% tax rate, the solution would be multiplied by 1.5%.
4.3 Service Fees shall be paid by the Reinsurer as detailed in Exhibit C for
Services performed by WLIC pursuant to the Administrative Services Agreement, as
long as the business described herein remains in force.
5. Payments by Ceding Insurer. Within sixty (60) days after the end of each
Accounting Period, Ceding Insurer shall deliver to Reinsurer an accounting with
respect to all Policies reinsured hereunder and Ceding Insurer shall pay to
Reinsurer the sum of:
(a) Reinsurer's Quota Share of Gross Premiums for such Accounting
Period.
(b) The Gross Investment Income for such Accounting Period.
(c) Reinsurer's Quota Share of any decrease in Reserve Liability and Claims
Liability for such Accounting Period.
5.1 All sums due Reinsurer shall be offset, to the extent applicable, against
all sums due Ceding Insurer under Paragraph 6 below.
6. Payments by Reinsurer. Within sixty (60) days after the end of each
Accounting Period, Reinsurer shall pay Ceding Insurer the sum of:
(a) Reinsurer's Quota Share of all disbursements made by Ceding Insurer with
respect to the Policies for such Accounting Period, (other than disbursements
relating to Policy Issue Expenses, Policy Maintenance Expenses, Reserves, Claims
Liability and Policy Loans) including, without limitation, all death benefits,
nonforfeiture benefits, matured endowments, disability waiver of premium
benefits, policyholder dividends, premium taxes, commissions and bonuses and
Reinsurer agrees that it will pay all costs and expenses incurred by it or on
its behalf in connection with the retrocession of any liability on the Policies
reinsured hereunder.
(b) Reinsurer's Quota Share of all Policy Issue Expenses and Policy Maintenance
Expenses for such Accounting Period.
(c) Reinsurer's Quota Share of all increases in Reserve Liability and Claims
Liability for such Accounting Period.
(d) Reinsurance premiums due on Retrocession pursuant to Article IV of Exhibit D
(Reinsurance Agreement).
6.1 All sums due Ceding Insurer shall be offset, to the extent applicable,
against all sums due Reinsurer under Paragraph 5 above.
7. Tax Reserves. Reinsurer shall be responsible for its pro-rata share of any
tax liability resulting from the difference between tax reserves and statutory
reserves. A tax reserve adjustment shall be calculated on an annual basis and
allocated to Reinsurer for this tax purpose.
8. Oversight. It is understood and agreed that if failure to comply with any
terms of this Agreement is shown to be unintentional and the result of
misunderstanding or oversight on the part of either the Ceding Insurer or
Reinsurer, both the Ceding Insurer and Reinsurer shall be restored to the
positions they would have been in had no such misunderstanding or oversight
occurred.
9. Reinstatement. If a Policy reinsured hereunder lapses for nonpayment of
premium and is subsequently reinstated by the Ceding Insurer under its regular
rules, Reinsurer will automatically reinstate its reinsurance with respect to
such Policy. The Ceding Insurer will promptly notify Reinsurer regarding any
such reinstatement and will pay to Reinsurer its share of premiums in arrears,
with interest at the same rate and in the same manner as received by the Ceding
Insurer in connection with the reinstatement.
10. Misstatement of Age or Sex. If there is an increase or reduction in any
Policy reinsured hereunder because of an overstatement or understatement of age
or misstatement of sex being established either before or after the death of the
life insured, Ceding Insurer and Reinsurer shall share in such increase or
reduction in proportion to their respective liabilities under the Policy.
11. Settlement of Claims.
11.1 The Ceding Insurer shall give the Reinsurer prompt notice of any claim
submitted on a policy reinsured hereunder and prompt notice of any instigation
of any legal proceedings in connection therewith. Copies of proofs of other
documents bearing on such claim or proceeding shall be furnished to the
Reinsurer when requested.
11.2 The Reinsurer shall accept the good faith decision of the Ceding Insurer in
settling any claim or suit and shall pay its share of net reinsurance liability
upon receiving proper evidence of the Ceding Insurer's having settled with the
claimant. Payment of net reinsurance liability on account of death or
dismemberment shall be made in one lump sum. In settlement of reinsurance
liability for Waiver of Premium benefits, the Reinsurer shall pay to the Ceding
Insurer its proportionate share of the gross premium waived.
11.3 If the Ceding Insurer should contest or compromise any claim or proceeding,
and the amount of net liability thereby be reduced, the Reinsurer's reinsurance
liability shall be reduced in the proportion that the net liability of the
Reinsurer bore to the sum of the retained net liability of the Ceding Insurer
and the net liability of other reinsurers existing as of the occurrence of the
claim.
11.4 Any unusual expenses incurred by the Ceding Insurer in defending or
investigating a claim for policy liability or in taking up or rescinding a
policy reinsured hereunder shall be participated in by the Reinsurer in the same
proportion as described in Section 11.3 above.
11.5 In no event shall the following categories of expenses or liabilities be
considered, for purposes of this agreement, as "unusual expenses" or items of
"net reinsurance liability":
(a) routine investigative or administrative expenses;
(b) expenses incurred in conjunction with a dispute or contest arising out of
conflicting claims of entitlement to policy proceeds or benefits which the
Ceding Insurer admits are payable;
(c) expenses, fees, settlements, or judgments arising out of or in conjunction
with claims against the Ceding Insurer for punitive or exemplary damages;
(d) expenses, fees, settlements, or judgments arising out of or in conjunction
with claims made against the Ceding Insurer and based on alleged or actual bad
faith, failure to exercise good faith, or tortious conduct.
11.6 For purposes of this Agreement, penalties, attorney's fees, and interest
imposed automatically by statute against the Ceding Insurer and arising solely
out of judgment being rendered against the Ceding Insurer in a suit for policy
benefits reinsured hereunder shall be considered "unusual expenses."
11.7 In the event that the amount of insurance provided by a policy or policies
reinsured hereunder is increased or reduced because of a misstatement of age or
sex established after the death of the insured, the net reinsurance liability of
the Reinsurer shall increase or reduce in the proportion that the net
reinsurance liability of the Reinsurer bore to the sum of the net retained
liability of the Ceding Insurer and the net liability of other reinsurers
immediately prior to the discovery of such misstatement of age or sex.
Reinsurance policies in force with the Reinsurer shall be reformed on the basis
of the adjusted amounts, using premiums and reserves applicable to the correct
age and sex. Any adjustment in reinsurance premiums shall be made without
interest.
11.8 The Reinsurer shall refund to the Ceding Insurer any reinsurance premiums,
without interest, unearned as of the date of death of the life reinsured
hereunder.
11.9 If the Ceding Insurer pays interest from a specific date, such as the date
of death of the insured, on the contractual benefit of a policy reinsured under
this Agreement, the Reinsurer shall indemnify the Ceding Insurer for the
Reinsurer's share of such interest. Interest paid by the Reinsurer under this
Section 11.9 shall be computed at the same rate and commencing as of the same
date as that paid by the Ceding Insurer. The computation of interest paid by the
Reinsurer under this Section 11.9 shall cease as of the earlier of (a) the date
of payment of the Reinsurer's share of reinsurance liability and (b) the date of
termination of the period for which the Ceding Insurer has paid such interest.
12. Inspection of Records. Each party shall have the right at any reasonable
time during normal business hours to inspect, at the office of the other party,
all books and documents relating to reinsurance under this Agreement.
13. Insolvency. In the event of the insolvency of the Ceding Insurer, all
reinsurance shall be payable directly to the liquidator, receiver, or statutory
successor of said Ceding Insurer, without diminution because of the insolvency
of the Ceding Insurer; provided, however, that any obligations of the Ceding
Insurer to Reinsurer shall be offset against the obligations of Reinsurer to
Ceding Insurer.
13.1 In the event of the insolvency of the Ceding Insurer, the liquidator,
receiver, or statutory successor of the Ceding Insurer shall give the Reinsurer
written notice of the pendency of any claim on a Policy reinsured within a
reasonable time, to be not less than thirty days, after such claim is filed in
the insolvency proceeding. During the pendency of any such claim, Reinsurer may
investigate such claim and in the name of the Ceding Insurer (or its liquidator,
receiver, or statutory successor), but at its own expense, interpose in the
proceeding where such claim is to be adjudicated any defense or defenses which
it may deem available to the Ceding Insurer or its liquidator, receiver, or
statutory successor.
13.2 Any expense thus incurred by Reinsurer shall be chargeable, subject to
court approval, against the Ceding Insurer as part of the expense of liquidation
to the extent of a proportionate share of the benefit which may accrue to the
Ceding Insurer solely as a result of the defense undertaken by Reinsurer. Where
two or more reinsurers are participating in the same claim and a majority in
interest elect to interpose a defense or defenses to any such claim, the
resulting expense shall be apportioned in accordance with the terms of the
reinsurance agreement as though such expense had been incurred by the Ceding
Insurer.
14. Abatement. This Agreement may not be Abated until such time as the Marketing
Agreement has been terminated, after which time this Agreement may be Abated:
(a) By the mutual consent of the Ceding Insurer and the Reinsurer; or
(b) By Ceding Insurer upon thirty (30) days' written notice to Reinsurer; or
(c) By Reinsurer upon thirty (30) days' written notice to Ceding Insurer.
15. Termination. This Agreement may not be terminated until such time as the
Marketing Agreement has been terminated, after which time this Agreement may
only be terminated:
(a) By the mutual consent of the Ceding Insurer and the Reinsurer; or
(b) By Ceding Insurer in the event of a material breach hereof by Reinsurer and
such breach is not cured or eliminated within thirty (30) days after receipt of
written notice thereof to Reinsurer from Ceding Insurer; or
(c) By Reinsurer in the event of a material breach hereof by Ceding Insurer and
such breach is not cured or eliminated within thirty (30) days after receipt of
written notice thereof to Ceding Insurer from Reinsurer.
16. Recapture of Reinsured Business. If any Cumulative Production Goal is not
met by the Target Date applicable thereto, the Ceding Insurer shall have the
right, upon six months' prior written notice to Marketing Company and Reinsurer,
to recapture all of the Insurance Business ceded by the Ceding Insurer to
Reinsurer under this Agreement. No consideration shall be paid by the Ceding
Insurer to Marketing Company or to Reinsurer for the recapture of such insurance
business.
17. Right of First Refusal. Ceding Insurer shall have a right of first refusal
to reinsure the Policies reinsured hereunder to Reinsurer under the terms,
conditions and provisions set forth in Paragraph 7 of the Marketing Agreement.
18. Waiver. No delay or omission by any party hereto to exercise any right or
power arising upon any noncompliance or default by any other party with respect
to any of the terms of this Agreement shall impair any such right or power to be
construed as a waiver thereof. A waiver by any of the parties hereto of the
fulfillment of any of the covenants, conditions, or agreements to be performed
by any other shall not be construed to be a waiver of any succeeding breach
hereof or of any other covenant, condition or agreement herein contained. All
remedies provided for in this Agreement shall be cumulative in addition to and
not in lieu of any other remedies available to any party at law, in equity or
otherwise.
l9. Amendments. This Agreement may not be amended, nor shall any waiver, change,
modification, consent or discharge be effected, except by an instrument in
writing duly executed by the parties hereto or their respective successors or
permitted assigns.
20. Approvals, Consents. etc. In any instance where agreement, approval,
acceptance or consent of any party is required by any provision of this
Agreement, such action shall not be unreasonably delayed or withheld.
21. Force Majeure. Ceding Insurer or Reinsurer shall be excused from performance
hereunder for any period when either is prevented from performing any services
to be provided hereunder, in whole or in part, as a result of an Act of God,
fire, war, civil disturbance, court order, insurance department regulatory
order, labor dispute, or other cause beyond its reasonable control, and such
nonperformance shall not be a ground for Termination hereof or assertion of
default hereunder. In the event either party hereto shall be excused from
performance under this-provision, said party shall use its best efforts to
provide, directly or indirectly, alternative and, to the extent practicable,
equivalent fulfillment of its obligations hereunder.
22. Severability. If any provision of this Agreement is declared or found to be
illegal, unenforceable or void by any administrative agency, regulatory body, or
court of competent jurisdiction, such finding shall not affect the remaining
provisions of this Agreement, and all other provisions hereof shall remain in
full force and effect.
23. Arbitration. Any disagreement that should arise between Ceding Insurer and
Reinsurer regarding the rights or liabilities of either party under any
transaction pursuant to this Agreement shall be referred to arbitrators. One
arbitrator is to be chosen by each party from among officers of other life
insurance companies, which said officers are familiar with reinsurance
transactions. A third arbitrator shall be chosen by the said two arbitrators
before entering into arbitration. An arbitrator may not be a present or former
officer, attorney, or consultant of Ceding Insurer or Reinsurer or either's
affiliates. If the arbitrators appointed by the two parties cannot agree on a
third person then either party may apply to the President of the American Life
Insurance Association for appointment of a third arbitrator. The arbitrators'
decision will be final and binding upon both parties.
The place of the meeting of the arbitrators will be decided by a majority vote
of the members thereof. All expenses and fees of the arbitrators will be borne
equally by Ceding Insurer and Reinsurer, unless the arbitrators decide
otherwise.
24. Notice. Any notices required or permitted under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered, telecopied or
mailed, by certified mail, return receipt requested to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
If to Reinsurer to:
Kenton Stanger PO Box 683
225 South 200 West, Suite 302
Farmington, Utah 84025-0683
If to Ceding Insurer:
Cathy A. Shinagawa
Massachusetts General Life Insurance Company
7887 East Belleview Avenue
Englewood, Colorado 80111
25. Assignment. This Agreement shall not be assigned by either party hereto
without the prior written consent of the other party hereto.
26. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Massachusetts; provided, however, that
the services to be rendered to Reinsurer shall be rendered in conformity with
the laws of its domiciliary states.
27. Oversight. If nonpayment of premium within the time specified or failure to
comply with any of the other terms of this agreement is shown to be
unintentional and the result of oversight or misunderstanding on the part of
either party hereto, this Agreement will not be considered abrogated thereby,
but both the parties to this Agreement will be restored to the position they
would have occupied had no such oversight or misunderstanding occurred.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
and delivered by their respective officers "hereunto duly authorized, all as the
date first hereinabove written.
ATTEST: MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY
/s/ /s/ Roger Dunker
Secretary President
ATTEST: AMERICAN FINANCIAL REINSURANCE, INC.
/s/ Raymond L. Punta /s/ Kenton L. Stanger
Secretary Chief Executive Officer
EXHIBIT C
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT made and entered into as of the 1st day
of January, 1996 by and between WABASH LIFE INSURANCE COMPANY ("WLIC"), a
Kentucky corporation with principal offices located at 7887 East Belleview
Avenue, Englewood, Colorado 80111, and American Financial Reinsurance, Inc.
("Life Company"), an Arizona corporation with administrative offices at 225
South 200 West, Suite 302, Farmington, Utah 84025.
WITNESSETH:
WHEREAS, MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY ("MGLIC"), American
Financial Marketing, Inc. ("Marketing Company"), WLIC and Life Company have
entered into a Marketing Agreement (herein so-called) both of even date herewith
under which, among other things, WLIC and Life Company agreed to enter into this
Administrative Services Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises of the
parties hereto, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Definitions. All terms used in the Marketing Agreement shall have the same
meaning in this Agreement unless otherwise indicated herein.
2. Administrative Services. WLIC agrees to provide to Life Company all
administrative services and to perform all functions necessary to fully process,
administer and account for all Insurance Business issued as a result of
applications solicited by General Agents which Insurance Business is ceded by
MGLIC to and reinsured by Life Company under the Modified Coinsurance Agreement
and any other Coinsurance Agreement between Life Company and MGLIC (the
"Reinsured Business"). Such administrative services and functions shall include,
without limitation, all necessary actuarial, accounting and retrocession
reinsurance services required to fully process, administer and account for all
of the Reinsured Business.
3. Service Fee. As consideration for rendering the administrative services and
performing the functions specified in Paragraph 2 above, Life Company agrees to
pay to WLIC a monthly Service Fee (herein so-called) equal to one-sixth of one
percent (.167~) of the Quota Share of the premiums on the policies of MGLIC in
force each month and reinsured by Life Company. For purposes of this
calculation, premiums in force shall consist of (i) annualized premiums for all
fixed premium policies in force, excluding single premium whole life and (ii)
units in force multiplied by the control premium at date of issue for all
universal life policies. The Service Fee shall be payable to WLIC within sixty
(60) days after the end of each Accounting Period as defined in the certain
Modified Coinsurance Agreement of even date herewith and shall constitute full
compensation to WLIC for the rendition of such administrative services and the
performance of such functions, including WLIC's costs and expenses related to
such services. Such Service Fee shall be payable to WLIC in addition to any
fees, expenses or allowances payable by Life Company to MGLIC under the said
Modified Coinsurance Agreement and any other Coinsurance Agreement between MGLIC
and Life Company. In the event that such payment would be in violation of
applicable insurance or state laws, WLIC shall not accept the payment and shall
be released from future obligations under this Agreement.
4. Supervision of Life Company. All services performed by WLIC hereunder shall
at all times be subject to the review, control and supervision of Life Company's
Board of Directors. WLIC shall at all times act in a fiduciary capacity with
respect to Life Company. WLIC shall prepare and submit to Life Company such
reports as to services provided and costs incurred as Life Company may
reasonably request. WLIC shall allow representatives of Life Company to inspect
and copy, at all reasonable times, WLIC's financial and other records pertaining
to services provided to Life Company.
5. Third Party Agreements. Life Company acknowledges that WLIC may, as a part of
its normal business, perform similar services and functions for its affiliates
and for other nonaffiliated third parties ("Other Parties") and that WLIC may
utilize the same office space, equipment and personnel to perform such services
and functions for its affiliates and Other Parties as it utilizes to perform
such services and functions for Life Company.
6. Responsible Officer. Life Company shall designate an officer who shall be
authorized to direct WLIC in the performance of its duties hereunder.
7. Termination. This Agreement may not be terminated until such time as all
Modified Coinsurance Agreements between MGLIC and Life Company have been
terminated, after which this Agreement may only be terminated: (a) By the mutual
consent of the parties hereto; or (b) By WLIC in the event of a material breach
hereof by Life Company and such breach is not cured or eliminated within thirty
(30) days after receipt of written notice thereof to Life Company from WLIC; or
(c) By Life Company in the event of a material breach hereof by WLIC and such
breach is not cured or eliminated within thirty (30) days after receipt of
written notice thereof to WLIC from Life Company.
8. Further Assurance. Upon the sale of Life Company, or upon the sale of all or
substantially all the assets, or upon the sale or transfer of any Insurance
Business ceded to Life Company for which WLIC provides administrative services,
WLIC will cooperate and cause its affiliates to cooperate to effect the orderly
transition of the business, operations, or affairs (as the case may be) of Life
Company and will take such action as Life Company reasonably requests in
connection therewith.
9. Miscellaneous.
(a) Assignments. This Agreement shall be binding on the parties hereto and their
respective successors and permitted assigns, but no party may assign this
Agreement without the prior written consent of the other parties.
(b) Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
(c) Section Headings. The headings set forth herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
(d) Waiver. No delay or omission by any party hereto to exercise any right or
power arising upon any noncompliance or default by any other party with respect
to any of the terms of this Agreement shall impair any such right or power to be
construed as a waiver thereof. A waiver by any of the parties hereto of the
fulfillment of any of the covenants, conditions, or agreements to be performed
by any other shall not be construed to be a waiver of any succeeding breach
thereof or of any other covenant, condition, or agreement herein contained. All
remedies provided for in this Agreement shall be cumulative in addition to and
not in lieu of any other remedies available to any party at law, in equity or
otherwise.
(e) Amendments. This Agreement may not be amended, nor shall any waiver, change,
modification, consent or discharge be effected, except by an instrument in
writing duly executed by the parties hereto or their respective successors or
permitted assigns.
(f) Relationship of Parties. In furnishing services to Life Company, WLIC shall
be deemed to be acting as an independent contractor. WLIC does not undertake by
this Agreement or otherwise to perform any obligation of Life Company, whether
regulatory or contractual, except as provided herein. WLIC shall not be deemed
to be joint venturer with, or an employee of, Life Company.
(g) Approvals, Consents. etc. In any instance where agreement, approval,
acceptance or consent of any party is required by any provision of this
Agreement, such action shall not be unreasonably delayed or withheld.
(h) Force Majeure. WLIC or Life Company shall be excused from performance
hereunder for any period when either is prevented from performing any services
to be provided hereunder, in whole or in part, as a result of an Act of God,
fire, war, civil disturbance, court order, insurance department regulatory
order, labor dispute, and such nonperformance shall not be a ground for
termination hereof or assertion of default hereunder. In the event WLIC shall be
excused from performance under this provision, WLIC shall use its best efforts
to provide, directly or indirectly, alternative and, to the extent practicable,
equivalent fulfillment of its obligations hereunder.
(i) Severability. If any provision of this Agreement is declared or found to be
illegal, unenforceable or void by any administrative agency, regulatory body, or
court of competent jurisdiction, such finding shall not affect the remaining
provisions of this Agreement, and all other provisions hereof shall remain in
full force and effect.
(j) Arbitration. Any disagreement that should arise between Life Company and
WLIC regarding the rights or liabilities of either party under any transaction
pursuant to this Agreement shall be referred to arbitrators. One arbitrator is
to be chosen by each party from among officers of other life insurance
companies, which said officers are familiar with reinsurance transactions. A
third arbitrator shall be chosen by the said two arbitrators before entering
into arbitration. An arbitrator may not be a present or former officer,
attorney, or consultant of Life Company or WLIC or either's affiliates. If the
arbitrators appointed by the two parties cannot agree on a third person then
either party may apply to the President of the American Life Insurance
Association for appointment of a third arbitrator. The arbitrators' decision
will be final and binding upon both parties.
The place of the meeting of the arbitrators will be decided by a majority vote
of the members thereof. All expenses and fees of the arbitrators will be borne
equally by Ceding Insurer and Reinsurer, unless the arbitrators decide
otherwise.
(k) Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Massachusetts.
(1) Notice. Any notices required or permitted under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered, telecopied or
mailed, by certified mail, return receipt requested to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
If to WLIC:
Cathy A. Shinagawa
Wabash Life Insurance Company
7887 East Belleview Avenue
Englewood, Colorado 80111
If to Life Company:
Kenton Stanger, President
PO Box 683
225 South 200 West, Suite 302
Farmington, Utah 84025-0683
(m) Oversight. If nonpayment of premiums within the time specified or failure to
comply with any of the other terms of this Agreement is shown to be
unintentional and the result of oversight or misunderstanding on the part of
either party hereto, this Agreement will not be considered abrogated thereby,
but both the parties to this Agreement will be restored to the position they
would have occupied had no such oversight or misunderstanding occurred.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
and delivered by their respective officers "hereunto duly authorized, all as of
the date first hereinabove written.
ATTEST: WABASH LIFE INSURANCE COMPANY
/s/ /s/ Roger Dunker
Secretary President
ATTEST: AMERICAN FINANCIAL REINSURANCE, INC.
/s/ Raymond L. Punta /s/ Kenton L. Stanger
Secretary Chief Executive Officer
EXHIBIT D
REINSURANCE AGREEMENT
THIS REINSURANCE AGREEMENT, made and entered into as of the 1st day of January
1996 by and between American Financial Reinsurance, Inc. ("Life Company"), an
Arizona corporation with principal offices located at 225 South 200 West, Suite
302, Farmington, Utah 84025, and MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY
("MGLIC"), a Massachusetts corporation with principal offices located at 7887
East Belleview Avenue, Englewood, Colorado 80111.
W-I-T-N-E-S-S-E-T-H
The Life Company and MGLIC mutually agree to reinsure on the terms and
conditions set out below. This agreement is solely between the Life Company and
MGLIC, and performance of the obligations of each party under this agreement
shall be rendered solely to the other party. In no instance shall anyone other
than the Life Company or MGBIC have any rights under this agreement.
ARTICLE I. Automatic Reinsurance
1. Insurance. The Life Company will cede (retrocede) and MGLIC will accept
reinsurance under policies which are written by MGLIC and quota share reinsured
to the Life Company under a Modified Coinsurance Agreement or Coinsurance
Agreement between MGLIC and Life Company, of even date herewith. When the Life
Company retains its maximum limit of retention, as shown in Schedule A,
attached, the Life Company will cede (retrocede) and MGLIC will accept
automatically amounts in excess of the Life Company's retention.
It is hereby understood by Life Company and MGLIC that Life Company shall not be
liable for any such amounts ceded (retroceded) to MGLIC hereunder and that the
liability of Life Company shall always be limited to its maximum limit of
retention as shown in the attached Schedule A.
2. Coveraqes. Life insurance, waiver of premium disability benefit for an amount
not greater than the corresponding life insurance, and benefits under associated
riders are exclusively the coverages or risks reinsured automatically under
Paragraph 1 (to the extent that limits are specified in Schedule A, attached).
The life insurance includes both basic policies and term riders providing life
insurance protection. Reinsurance under this agreement will be limited to the
Plans listed in Schedule D attached to this agreement.
3. Reqular Limits of Retention. The regular limits of retention detailed in
Schedule A and referred to in this agreement may be modified by the Life Company
by thirty (30) days' written notice to MGLIC. The amount of reinsurance to be
ceded and accepted automatically after the new limits take effect will be
determined by mutual agreement.
4. Procedures to Effect Reinsurance. MGLIC will notify the Life Company
quarterly of all new policies assumed by the Life Company where the Life
Company's quota share of the face amount exceeds the Life Company's retention
limit as detailed in Schedule A. These policies will be automatically ceded
(retroceded) to MGLIC. A sample listing of such reporting of policies is
attached as Schedule B to this agreement.
ARTICLE II. Liability
1. Automatic Reinsurance Liability. The liability of MGLIC on any automatic
reinsurance under this agreement begins and ends at the same time as that of the
Life Company.
ARTICLE III. Amount of Insurance
1. Amounts. Life insurance under this agreement shall be on the Yearly Renewable
Term plan for the amount at risk under the policy reinsured. The Life Company's
net amount at risk shall be calculated in the following manner:
At the end of each month, the reinsured risk amount shall be determined as
follows:
(a) If Death Benefit Option A:
Reinsured Risk Amount =
Reinsured Risk Amount =
Value of Accumulation Account
--------------------------------------
Ceded Amt x 1 - Value of Accumulation Account
--------------------------------------
Death Benefit
(b) If Death Benefit option B:
Reinsured Risk Amount = Ceded Amount
When the original policy is issued on a level term plan for twenty years or less
or on a reducing term plan for any period of years, the reinsurance shall be for
the face amount, and cash values, if any, shall be disregarded. If desired,
amount at risk may be determined by other methods agreeable to the Life Company
and MGLIC. Reinsurance amounts for waiver of premium disability benefit, for
additional indemnity for accidental death or death by accidental means, and for
benefits under associated riders are on the same basis as coverages assumed by
the Life Company.
2. Reductions and Terminations. Reinsurance amounts are calculated in terms of
coverages on the life of a person. If any of the Life Company's policies or
riders on the person are reduced or terminated, the reinsurance will be reduced
or terminated by the corresponding amount. The reduction will not be applied,
however, to force the Life Company to reassume more than its regular retention
limit at the time of the reduction for the age at issue, mortality rating and
form of the policy or policies for which reinsurance is being terminated.
3. Reinstatements. A policy which has been ceded to MGLIC on an automatic basis,
that was reduced, terminated or lapsed, if reinstated will be reinstated
automatically to the amount that would be in force had the policy not been
reduced, terminated or lapsed.
In connection with all such reinstatements, the Life Company shall pay MGLIC all
reinsurance premiums in arrears with interest at the same rate and in like
manner as the Life Company has been credited under its Modified Coinsurance
Agreement with MGLIC.
4. Nonforfeiture Benefits. Reduced paid-up will be treated as a reduction in
accordance with Paragraph 2 above. Extended term will be continued on a basis
proportionate to the reinsurance risk before the extended term option was
effected. Approximations and methods to simplify handling may be agreed upon by
the Life Company and MGLIC.
ARTICLE IV. Premiums
1. Life Reinsurance. The monthly premiums for standard and substandard life
reinsurance shall be computed in accordance with the rates contained in the
attached Schedule C, using MGLIC's applicable monthly modal factor. If a flat
extra premium is charged, the amount will be payable to MGLIC, in addition to
the standard and any substandard premiums, less an allowance for commissions as
shown in Schedule C.
The basic premiums payable for reinsurance of opted insurance issued under the
provisions of guaranteed insurability riders will be calculated at the rates
effective for regular new reinsurance ceded under this agreement at the date of
option. A single extra payment will also be payable for such reinsurance and
will be calculated at the rates shown in Schedule E, attached hereto. This extra
payment will be payable at issue of the opted policy and will not be subject to
refund for any reason.
MGLIC anticipates that those premium rates will be continued indefinitely for
all business ceded using these rate schedules; however, because of the technical
questions in some states regarding deficiency reserve requirements, for those
premiums less than those which are based on the 1980 CSO Table at 4 1/2%
interest, only the later premiums shall be guaranteed for renewal by MGLIC.
2. Disability Waiver of Premium and Payor Benefits. Premiums for these benefits,
if included in this Agreement, will be paid at the same rate as MGLIC charges
for the benefit, less allowances for commissions as shown in Schedule C.
3. Preliminary Term Insurance. If the Life Company issues a policy with
preliminary term insurance, the reinsurance premium for the preliminary term
period will be paid to MGLIC at the same rate the Life Company has been credited
for the policies on which reinsurance in MGLIC is based. This rule applies to
all benefits under the preliminary term insurance. For the first policy year
after the preliminary term period, the premiums for all benefits will be
computed at first year rates.
4. Accidental Death Benefits. The Life Company shall cede 100% of its Quota
Share of Accidental Death Benefits to MGLIC and will be "Bulk Reported" to MGLIC
on an annual basis. The total amount of such Accidental Death Benefits in force
as of December 31 in any year, shall be determined from
line 39, Page 26 (Exhibits of Life Insurance), as shown in the Company's annual
statement filed with the State Insurance Department.
The premium due MGLIC from the Company will be determined for each calendar year
as follows:
(a) At the beginning of each calendar year an advance premium at the rate of
$0.60 per $1,000 of Accidental Death Benefits in force on December 31st
immediately preceding the beginning of each calendar year shall be payable; and
(b) at the close of such calendar year, premium at the rate of $0.30 per $1,000
of increase of such insurance in force, from the preceding December 31st to the
current December 31st, shall be payable.
5. Payments. Premiums are payable quarterly. If reinsurance is reduced,
terminated or increased by reinstatement during the quarter, pro rata adjustment
will be made by MGLIC and the Life Company on all premium items except policy
fees.
6. Procedure. Each calendar quarter MGLIC will send to the Life Company one copy
of a statement of reinsurance due. The statement will show the premium due on
new reinsurance effected in the preceding quarter and on existing reinsurance,
the pro rata adjustments for changes in reinsurance and death claim benefits
payable to the Life Company. The settlement of any amounts due under this
Paragraph 6 shall be adjusted by any monies due and payable in accordance with
Paragraph 6 of Exhibit B (Modified Coinsurance Agreement). If a balance is due
the Life Company, it will be remitted promptly by MGLIC. The Life Company will
note to MGLIC any discrepancies and proper adjustment will be made. Except as
provided in this Article, the payment of reinsurance premiums shall be a
condition precedent to the liability of MGLIC under reinsurance covered by this
agreement. In the event of nonpayment of reinsurance premiums as provided in
this paragraph, MGLIC shall have the right to terminate the reinsurance under
all policies having reinsurance premiums in arrears.
7. Aqe or Sex Adjustment. If the insured's age or sex was misstated and the
amount of insurance on the reinsured's policy is adjusted after his death, the
Life Company and MGLIC will share the adjustment in proportion to the amount of
liability of each at the time of issue of the policies. Premiums will be
recalculated for the correct ages and amounts but according to the proportion as
above and adjusted without interest. If the insured is still alive, the method
above will be used for past years and the amount of reinsurance and premium
adjusted for the future to the amount that would have been correct at issue.
ARTICLE V. DAC Tax
1. Life Company and MGLIC, herein collectively called the "Parties" or
singularly, the "Party." The Parties hereby elect under Treasury Regulation
("REG.") Section1.848-2(g)(8) to compute "specified policy acquisition
expenses," as defined under Internal Revenue Code ("IRC") Section848(c)(1) in
the following manner:
The party with net positive consideration as determined under Reg.
Section1.848-2 (f) and Reg. Section1.848-3 shall compute specified policy
acquisition expenses without regard to the general deductions limitation of IRC
Section848 (c)(1) for each taxable year commencing with the year ending on or
after December 29, 1992.
The parties will exchange information pertaining to the aggregate amount of net
consideration as determined under Reg. Section1.848-2(f) and Section1.848-3,
for all Reinsurance Agreements in force between them, to ensure consistency for
purposes of computing specified policy acquisition expenses. MGLIC shall provide
to the Life Company the amount of such net consideration for each taxable year
no later than June 1 following the end of the year. The Life Company shall
advise MGLIC within thirty (30) days of receipt of such information if it
disagrees with the amounts provided. If the Life Company fails to notify MGLIC
within the specified period, MGLIC shall assume that the Life Company agrees
with the amounts provided by MGLIC.
If the Parties should disagree as to the amount of the net considerations, the
Parties agree to resolve any differences by basing the net consideration
calculation on MGLIC's books and records. In addition, MGLIC agrees to allow the
Life Company access to its books and records only as it pertains to this
Reinsurance Agreement in order to confirm MGLIC's computations.
The Life Company and MGLIC represent and warrant that they are subject to U.S.
taxation under subchapter L of the IRC.
2. For purposes of this Agreement, a DAC Tax allowance shall be charged based
upon MGLIC's retrocession of nonpension premium less the DAC Tax basis as
calculated under IRS Regulation 848. The solution shall be multiplied by the
present value of future DAC Tax Capitalization and Amortization based upon the
ceding insurers marginal tax rate for Federal Income Tax purposes. Assuming a
34% tax rate, the solution would be multiplied by 1.5~.
ARTICLE VI. Recapture
1. Recapture. If the Life Company increases its limits of retention, it may make
a corresponding reduction in the reinsurance in force under this agreement on
all persons where the Life Company has maintained its maximum limit of retention
as detailed in Schedule A.
2. Method of Recapture. If the Life Company elects to recapture, it will notify
MGLIC in writing within 90 days from the effective date of its increase in
retention. At the next anniversary (or the tenth anniversary, if later) of the
reinsured's policy, the reinsurance will be reduced to increase the total
retained by the Life Company to its new maximum. Recapture is allowed on only
one retention during any twelve month period and the amount of increase subject
to recovery shall not exceed 100 percent of the previous retention detailed in
Schedule A. If reinsurance on any policy for any person is reduced under this
provision, all must be reduced.
ARTICLE VII. Arbitration
Any disagreement that should arise between Ceding Insurer and Reinsurer
regarding the rights or liabilities of either party under any transaction
pursuant to this Agreement shall be referred to arbitrators. One arbitrator is
to be chosen by each party from among officers of other life insurance
companies, which said officers are familiar with reinsurance transactions. A
third arbitrator shall be chosen by the said two arbitrators before entering
into arbitration. An arbitrator may not be a present or former officer,
attorney, or consultant of Ceding Insurer or Reinsurer or either's affiliates.
If the arbitrators appointed by the two parties cannot agree on a third person
then either party may apply to the President of the American Life Insurance
Association for appointment of a third arbitrator. The arbitrators' decision
will be final and binding upon both parties.
The place of the meeting of the arbitrators will be decided by a majority vote
of the members thereof. All expenses and fees of the arbitrators will be borne
equally by Ceding Insurer and Reinsurer, unless the arbitrators decide
otherwise.
ARTICLE VIII. Duration of Agreement
1. Duration of Agreement. This agreement will be effective on and after the
effective date first set forth above. It is unlimited in duration but may be
amended by mutual consent of the Life Company and MGLIC. It may be terminated as
to new reinsurance by either party giving 90 days' written notice to the other.
Termination as to new reinsurance does not affect existing reinsurance. That
reinsurance will remain in force until termination of the Life Company's policy
or policies on which the reinsurance is based in accordance with the terms of
this agreement.
ARTICLE IX. General Provisions
1. Reinsurance Conditions. The reinsurance is subject to the same limitations
and conditions as the insurance under the policy or policies reinsured is based.
2. Errors and Omissions. It is expressly understood and agreed that if
nonpayment of premiums within the time specified or failure to comply with any
terms of this contract is shown to be unintentional and the result of
misunderstanding or oversight on the part of either the Life Company or MGLIC,
both the Life Company and MGLIC shall be restored to the positions they would
have occupied had no such error or oversight occurred.
3. Insolvency. All reinsurance under this agreement will be paid by MGLIC
directly to the Life Company, its liquidator, receiver, or statutory successor,
on the basis of the liability of the Life Company under the policy or policies
reinsured without diminution because of the insolvency of the Life Company. In
the event of the insolvency of the Life Company, the liquidator, receiver, or
statutory successor of the Life Company will give written notice of a pending
claim against the Life Company on any policy reinsured within a reasonable time
after the claim is filed in the insolvency proceedings. While the claim is
pending, MGLIC may investigate and interpose, at its own expense, in the
proceedings where the claim is to be adjudicated, any defenses which it may deem
available to the Life Company or its liquidator, receiver, or statutory
successor. The expense incurred by MGLIC will be charged subject to court
approval, against the Life Company as an expense of liquidation to the extent of
a proportionate share of the benefit that accrues to the Life Company as a
result of the defenses by MGLIC. Where two or more reinsurers are involved and a
majority in interest elect to defend a claim, the expense will be apportioned in
accordance with the terms of the reinsurance agreement as if the expense had
been incurred by the Life Company.
4. Oversight. It is understood and agreed that if failure to comply with any
terms of this Agreement is shown to be unintentional and the result of
misunderstanding or oversight on the part of either the Ceding Insurer or
Reinsurer, both the Ceding Insurer and Reinsurer shall be restored to the
positions they would have been in had no such misunderstanding or oversight
occurred.
5. Waiver. No delay or omission by any party hereto to exercise any right or
power arising upon any noncompliance or default by any other party with respect
to any of the terms of this Agreement shall impair any such right or power to be
construed as a waiver thereof. A waiver by any of the parties hereto of the
fulfillment of any of the covenants, conditions or agreements to be performed by
any other shall not be construed to be a waiver of any succeeding breach hereof
or of any other covenant, condition or agreement herein contained. All remedies
provided for in this Agreement shall be cumulative in addition to and not in
lieu of any other remedies available to any party at law, in equity or
otherwise.
6. Amendments. This Agreement may not be amended, nor shall any waiver, change,
modification, consent or discharge be effected, except by an instrument in
writing duly executed by the parties hereto or their respective successors or
permitted assigns.
7. Approvals, Consents. etc. In any instance where agreement, approval,
acceptance or consent of any party is required by any provision of this
Agreement, such action shall not be unreasonably delayed or withheld.
8. Force Majeure. Ceding Insurer or Reinsurer shall be excused from performance
hereunder for any period when either is prevented from performing any services
to be provided hereunder, in whole or in part, as a result of an Act of God,
fire, war, civil disturbance, court order, insurance department regulatory
order, labor dispute, or other cause beyond its reasonable control, and such
nonperformance shall not be a ground for Termination hereof or assertion of
default hereunder. In the event either party hereto shall be excused from
performance under this provision, said party shall use its best efforts to
provide, directly, or indirectly, alternative and, to the extent practicable,
equivalent fulfillment or its obligations hereunder.
9. Severability. If any provision of this Agreement is declared or found to be
illegal, unenforceable or void by any administrative agency, regulatory body, or
court of competent jurisdiction, such finding shall not affect the remaining
provisions of this Agreement, and all other provisions hereof shall remain in
full force and effect.
10. Notice. Any notices required or permitted under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered, telecopied or
mailed, by certified mail, return receipt requested to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
If to Life Company:
Kenton Stanger, President
PO Box 683
225 South 200 West, Suite 302
Farmington, Utah 84025-0683
If to MGLIC:
Cathy A.Shinagawa
Massachusetts General Life Insurance Company
7887 East Belleview Avenue
Englewood, Colorado 80111
11. Section Headings. The headings set forth herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
12. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Massachusetts.
13. Assignment. This Agreement shall be binding on the parties hereto and their
respective successors and permitted assigns, but no party may assign this
Agreement without the prior written consent of the other parties.
ATTEST: AMERICAN FINANCIAL REINSURANCE, INC.
/s/ Raymond L. Punta /s/ Kenton L. Stanger
Secretary (Chief Executive Officer)
ATTEST: MASSACHUSETTS GENERAL LIFE INSURANCE
COMPANY
/s/ /s/ Roger Dunker
Secretary President
FORM OF
AMERICAN FINANCIAL REINSURANCE, INC.
SURPLUS DEBENTURE NO. 1
$500,000 -----------, 19--
FOR VALUE RECEIVED and subject to the terms, conditions, restrictions, and
limitations contained herein, American Financial Reinsurance, Inc., an Arizona
insurance corporation ("AFRI"), promises to pay to Massachusetts General Life
Insurance Company, a Massachusetts corporation ("MGL"), the principal sum of
$500,000 with interest on the unpaid balance thereof at the rate hereinafter
provided. Interest shall be payable on the last day of each calendar quarter.
The first such interest payment shall be due and payable on -------, 19--.
Interest on the principal balance hereof from time to time remaining unpaid
prior to maturity shall be computed based upon the weighted average of the Gross
Rate of Interest for the comparable time period as defined in Paragraph 1.8 of
that certain Modified Coinsurance Agreement between AFRI and MGL, which said
paragraph is attached hereto as Exhibit A. In no event will the interest charged
hereunder (including late charges) exceed the maximum rate of interest permitted
under Arizona law.
It being the intention of the parties hereto to conform strictly to the
usury laws of the State of Arizona, all agreements between AFRI and MGL, whether
now existing or hereafter arising and whether written or oral, are hereby
expressly limited so that in no event, whether by reason of acceleration of the
maturity hereof or otherwise, shall the amount paid or agreed to be paid to MGL
for the use, forbearance, or detention of money hereunder or otherwise exceed
the maximum amount permissible under applicable law. If fulfillment of any
provision hereof or of any mortgage, loan agreement, or other document
evidencing or securing the indebtedness evidenced hereby, at the time
performance of such provision shall be due, shall involve transcending the limit
of validity prescribed by law, then, ipso facto, the obligation to be fulfilled
shall be reduced by the limit of such validity; and if MGL shall ever receive
anything of value deemed interest under applicable law that would exceed
interest at the highest lawful rate, an amount equal to any excessive interest
shall be applied to the reduction of the principal amount owing hereunder and
not to the payment of interest, or if such excessive interest exceeds the unpaid
balance of principal hereof, such excess shall be refunded to AFRI. All amounts
paid or agreed to be paid to MGL for the use, forbearance, or detention of the
indebtedness of AFRI to MGL shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread throughout the full term of such
indebtedness until payment in full so that interest on account of such
indebtedness is uniform throughout the term thereof. The provisions of this
paragraph shall control all agreements between AFRI and MGL.
(1) On or before each Interest Payment Date, the Board of Directors of
AFRI will calculate the Surplus of AFRI (as hereinafter defined) as of the most
recent date practicable, but in no event as of a date before the end of the
immediately preceding calendar quarter (each such date being hereinafter
referred to as a "Calculation Date"). The Board of Directors of AFRI shall
obtain the written approval of the Department of Insurance for the State of
Arizona before any payments are made under the terms of this Debenture.
(2) To the extent the Capital and Surplus of AFRI exceeds 25\ of the
Liabilities of AFRI (as hereinafter defined) or $500,000, whichever is greater,
on the most recent Calculation Date, AFRI will pay to MGL, on each Interest
Payment Date, the amount of accrued but unpaid interest on the unpaid principal
balance of this Surplus Debenture.
(3) If, on any Calculation Date, the Capital and Surplus of AFRI does not
exceed 25` of the Liabilities of AFRI or $500,000, whichever is greater, by an
amount sufficient to pay all accrued but unpaid interest on this Surplus
Debenture, the remaining accrued but unpaid interest together with interest
thereon at the Rate, shall be payable on the next Interest Payment Date to the
extent the Capital and Surplus of AFRI exceeds 25% of the Liabilities or
$500,000, whichever is greater, of AFRI.
(4) To the extent the Capital and Surplus of AFRI exceeds the sum of 25`
of the Liabilities of AFRI or $500,000, whichever is greater, plus an amount
equal to all accrued but unpaid interest on the most recent Calculation Date,
AFRI will pay to MGL, on September 30 of each year set forth below, the amounts
of principal set forth below or such lesser amount as may be paid hereunder:
Year Amount
1996 $50,000
1997 $50,000
1998 $50,000
1999 $50,000
2000 $50,000
2001 $50,000
2002 $50,000
2003 $50,000
2004 $50,000
2005 $50,000
(5) For purposes of this Surplus Debenture, the term "Surplus of AFRI"
shall mean the sum of:
(a) "special surplus" of AFRI;
(b) "paid-in and contributed surplus" of AFRI;
(c) "unassigned surplus" of AFRI;
(d) any amounts required to be carried as liabilities with respect to
outstanding surplus debentures issued by AFRI; and
(e) surplus evidenced by surplus debentures of AFRI which is not
included in clauses (a) - (d) of this paragraph (5).
The items listed in clauses (a) - (e) of this paragraph (5) will be calculated
in accordance with accounting practices required or permitted by the Arizona
Department of Insurance ("Arizona Department") for inclusion in the Annual
Statement of AFRI filed with the Arizona Department as of December 31 of each
year.
(6) For purposes of this Surplus Debenture, the term "Liabilities of
AFRI" shall mean the difference obtained after subtracting any amounts required
to be carried as liabilities with respect to outstanding surplus debentures
issued by AFRI from the amount of total liabilities of AFRI calculated in
accordance with accounting practices required or permitted by the Arizona
Department as of December 31 of each year.
(7) The obligation of AFRI to pay this Surplus Debenture will not
otherwise be or constitute a liability of AFRI or a claim against any of its
assets except in the event of liquidation of AFRI, and in no event will this
Surplus Debenture be considered or treated as a current or fixed liability or
obligation of AFRI as defined under the Arizona Insurance Code and the rules and
regulations promulgated thereunder, except to the extent that a payment of
principal or interest becomes due and payable hereunder.
(8) In the event of liquidation of AFRI, this Surplus Debenture will
become immediately due and payable and will be superior to and in preference of
the rights and claims of the shareholders of AFRI; provided, however, that to
the extent required by applicable law, all obligations, rights, and claims
hereunder are expressly subordinated to the claims of (a) any supervisor,
conservator, or receiver of AFRI appointed by the Commissioner of the Arizona
Department, and (b) all other creditors of AFRI, other than the shareholders of
AFRI.
(9) All payments made hereunder will be credited first to accrued but
unpaid interest, if any, and the balance of such payment will be credited to the
principal amount hereof.
(10) In the event that AFRI consolidates or merges into another corporation
or sells substantially all its assets to any other corporation, the corporation
into which AFRI is consolidated or merged or to which the assets of AFRI are
transferred will assume the liability of AFRI hereunder.
(11) By acceptance and as a part of the consideration for the issuance
hereof, MGL expressly acknowledges that it has been informed and has knowledge
that this Surplus Debenture has not been registered under the Securities Act of
1933, as amended, or the securities laws of any state and that AFRI has issued
this Surplus Debenture pursuant to exemptions from registration available under
such acts or laws. MGL further expressly acknowledges and agrees that it is
acquiring this Surplus Debenture for investment purposes and not with a view
toward a public distribution hereof and that this Surplus Debenture may not be
sold or otherwise transferred in the absence of an effective registration
statement with respect hereto or an exemption from registration under the
Securities Act of 1933, as amended, or any other applicable securities laws.
(12) If this Surplus Debenture is collected through judicial proceedings,
AFRI agrees, subject to conditions and restrictions contained herein, to pay all
reasonable legal fees and disbursements incurred by MGL in connection with such
collection.
(13) This Surplus Debenture may be prepaid at any time or from time to time
without premium or penalty to the extent that the Surplus of AFRI exceeds 25` of
the Liabilities of AFRI on the date of any proposed prepayment. Prepayments of
this Surplus Debenture will be applied to the inverse order of its maturity.
(14) This Surplus Debenture will be governed by and construed in
accordance with the laws of the State of Arizona.
(15) This Surplus Debenture will inure to the benefit of AFRI and its
successors and assignees.
IN WITNESS WHEREOF, AFRI has caused this Surplus Debenture to be duly executed
as of ------------, 19--.
AMERICAN FINANCIAL REINSURANCE, INC.
By:
Name:
Title:
BOND POWER
FOR VALUE RECEIVED, Massachusetts General Life Insurance Company, hereby sells,
assigns and transfers without recourse unto -----, that certain Surplus
Debenture No.---- issued by in the original face amount of $-----, dated -----,
19--, standing in the name of Massachusetts General Life Insurance Company on
the books of ------------ and does hereby irrevocably constitute and appoint ---
- -----, attorney to transfer the said debenture on the books of ------ with full
power of substitution in the premises.
Date:--------------
MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY
By:
Its:
FORM OF
SECURITY AND PLEDGE AGREEMENT
THIS AGREEMENT is entered into this day of ---------, 19---, between American
Financial Holding, Inc., a Delaware Corporation (referred to herein as "Holding
Co."), American Financial Reinsurance, Inc., an Arizona Corporation (referred to
herein as "Borrower"), each of whom has an address of 225 South 200 West, Suite
302, Farmington, Utah 84025, and MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY, a
Massachusetts corporation, whose principal office is located at 7887 East
Belleview Avenue, Englewood, Colorado 80111 ("MGL").
1. Grant of security Interest. To secure the indebtedness incurred by Borrower
pursuant to a Surplus Debenture dated-----, 19----, the Payee of which is MGL
and such other demand or promissory note as Borrower may from time to time
execute in favor of MGL, Borrower and Holding Co. hereby grant to MGL an
unrestricted security interest in the Collateral as hereinafter defined and
hereby pledge the said Collateral to MGL. Borrower and Holding Co. further agree
that concurrently with the execution of this Agreement, Borrower and Holding Co.
shall deliver to MGL all of the Collateral as described in Section 2 hereof.
This security interest may, at MGL's option, be further evidenced by financing
statements executed in accordance with the Uniform Commercial Code in effect in
the State of Arizona. The security interest and pledge granted hereunder shall
terminate immediately upon payment in full of the Note.
2. Collateral. The term "Collateral" as used herein shall mean (i) the One
Hundred Thousand (100,000) Shares of the issued and outstanding stock of
Borrower, which represents 100` of the issued shares of stock of Borrower; (ii)
together with any stock dividends or other distributions of stock with respect
to such shares; and (iii) all other shares of Capital Stock of Borrower which
may be acquired, by dividend or otherwise, by Holding Co. If the Note is in
default pursuant to its own terms or pursuant to Section 6 hereof, the
Collateral shall also include, in addition to the above, any cash dividends or
other nonstock distributions declared and paid by Borrower with respect to said
shares.
3. Voting. Holding Co. shall have the unrestricted right to vote the Collateral
and to execute proxies, consents, or waivers with respect thereto for any and
all purposes so long as there shall have been no Event of Default by the
Borrower and Holding Co. under this Agreement or in the payment of any sums due
under the Note. The pledged shares shall continue to be registered in the name
of Holding Co.
4. Covenants. The Borrower and Holding Co. covenant as follows so long as the
Note is issued and outstanding and any part thereof remains unpaid:
4.1 Financial Statements. The Borrower and Holding Co. will cause to be
delivered to MGL copies of each of the following:
(a) As soon as available, and in any event within ninety days after the end of
each fiscal year of Borrower, statutory financial statements of Borrower
prepared on the National Association of Insurance Commissioners ("NAIC") form,
as filed by Borrower with the Commissioner of Insurance of the State of Arizona.
(b) As soon as available, and in any event within forty-five days after the end
of each of the first three quarterly accounting periods in each fiscal year of
Borrower, interim statutory financial statements on the NAIC form.
(c) Copies of all financial statements, reports, and proxy statements, if any,
which Borrower sends to its stockholders or files with the Securities and
Exchange Commission or any other governmental agency.
4.2 Maintenance of Existence. Borrower and Holding Co. will maintain their
corporate existence and will comply with any and all applicable statutes and
regulations.
4.3 Inspection. The Borrower will permit representatives of MGL, at MGL's
expense, to visit and inspect any property of the Borrower or of Holding Co., to
examine their respective books of account, and to discuss their affairs,
finances, and accounts with their officers, all at such reasonable times and
intervals as MGL may request, but not more often than once in any six-month
period.
4.4 Notice of Default. If an officer of Borrower or Holding Co. obtains
knowledge of any default hereunder or of any event which with the giving of
notice or the passage of time or both would constitute a default hereunder, he
or she shall so advise MGL.
4.5 Capital and Surplus. The Borrower will not permit the statutory capital and
surplus of Borrower to be reduced below the level required by applicable law.
4.6 Dividends. Until the Note has been paid in full, the Borrower will not,
declare or pay any cash dividends without the prior consent of MGL, which
consent will not be unreasonably withheld or delayed.
4.7 Debt. Borrower will not acquire any additional debt nor will Borrower loan
any monies to any party without the prior written consent of MGL.
4.8 Expense. Until the Note has been paid in full, the Borrower will not pay any
material expenses, including but not limited to salaries, legal, actuarial,
operating or make any other material expenditures of any type without the prior
written consent of MGL, which such consent shall not be unreasonably withheld or
delayed. For purposes of this paragraph, material shall mean any expenditure
that exceeds Ten Thousand Dollars ($10,000).
4.9 Minimum Production Requirement. Holding Co.'s marketing subsidiary shall
produce at least $2,000,000 in new insurance premium each calendar year. For the
purposes of this Paragraph 4.9, new insurance premium shall mean the aggregate
life insurance premiums payable during the first year a policy or contract of
insurance is in effect, exclusive of (i) lump-sum cash deposits in excess of
published premium rates, (ii) premiums for flexible premium life insurance
contracts in excess of control premiums, and (iii) premiums for single pay
contracts.
4.10 Reinsurance Contracts. Borrower will not enter into any reinsurance
contracts with any party without the prior written consent of MGL.
5. Purchase Not for Distribution. MGL represents and warrants that it is not
acquiring the Note with a view to distribution which would be in violation of
the Securities Act of 1933, as amended.
6. Events of Default. The occurrence of any one or more of the following events
shall constitute an Event of Default by Borrower and Holding Co. under this
Agreement:
6.1 Nonpayment of Principal. If the Borrower fails to pay principal under the
Note when due, whether by acceleration or otherwise, and such failure continues
for a period of thirty days following delivery of notice of nonpayment to
Borrower.
6.2 Nonpayment of Interest. If the Borrower fails to make any payment of
interest under the Note when due and such failure continues for a period of
thirty days following delivery of notice of nonpayment to the Borrower.
6.3 Breach. If Borrower or Holding Co. fails in any material respect to perform
or observe any covenant contained in this Agreement or violates any material
condition hereof, and such failure or violation continues for a period of sixty
days following receipt by Borrower and Holding Co. of notice of such breach from
MGL.
6.4 Misrepresentations. If any representation or warranty by the Borrower and
Holding Co. contained herein proves to have been untrue in any material respect
as of the date when made, and such misrepresentation or breach is not cured
within sixty days of receipt by Borrower and Holding Co. of notice thereof from
MGL.
6.5 Insolvency. (a) If Borrower or Holding Co. (i) files a petition in
bankruptcy or for the approval of a plan of reorganization, arrangement, or
rehabilitation under the United States Bankruptcy Code or any state insolvency
act as now in existence or hereafter amended (or an admission seeking the relief
therein provided), (ii) admits in writing its inability to pay its debts as they
come due, (iii) makes an assignment for the benefit of creditors, (iv) consents
to the appointment of a receiver for all or a substantial portion of its
property, or (v) fails to have vacated or set aside within ninety days of its
entry any order of a court appointing without the Borrower's or Holding Co.'s
consent a receiver or trustee for all or a substantial portion of its property;
or (b) if a case or proceeding shall have been commenced against either or both
of Borrower and/or Holding Co. in a court having competent jurisdiction seeking
a decree or order relating to (i) the bankruptcy or reorganization of Borrower
and/or Holding Co., or (ii) the appointment of a receiver, custodian, trustee,
intervenor or liquidator of it, or all or substantially all of its assets, and
such case or proceeding shall remain unstayed or undismissed for 90 consecutive
days or such court shall enter a decree or order granting the relief sought in
such case or proceeding.
6.6 Minimum Production Requirement. If Borrower shall fail to achieve the
minimum production requirements as stated in Paragraph 4.9.
7. Remedies.
7.1 Remedies as to Collateral. In case any Event of Default shall have occurred,
MGL is hereby authorized and empowered by Borrower and Holding Co. to cause and
may cause all Collateral pledged hereunder to be transferred into its own name
or that of a nominee or nominees. Borrower and Holding Co. hereby irrevocably
appoint and constitute MGL as the attorney for Borrower and Holding Co. for the
purposes of effecting such transfer. Thereafter and for so long as any Event of
Default shall not have been cured, MGL shall be entitled to exercise all the
rights appertaining to the ownership of the Collateral, except as limited
herein, and MGL is hereby irrevocably constituted the attorney for Borrower and
Holding Co. for the purpose of exercising such rights. If, thereafter, MGL
should waive such default, it shall continue to have all rights in the
Collateral provided to MGL in this Agreement prior to the occurrence of an Event
of Default. In any voting of shares of stock constituting Collateral hereunder
subsequent to an Event of Default, MGL shall incur no liability or
responsibility by reason of any error of judgment or of any matter or thing done
or omitted to be done, except for willful misconduct or gross negligence. MGL
shall after such Event of Default be entitled to collect or receive any and all
dividends (whether paid in cash, property, stock or otherwise) on any shares of
stock constituting Collateral hereunder. Any and all sums so collected or
received by MGL shall be applied in the manner hereinafter provided.
7.2 Private or Public Sale. In case an Event of Default shall have occurred, and
Borrower shall have failed to pay the whole amount due and payable, MGL, acting
by any agent, broker, attorney or dealer designated by it, is hereby authorized
and empowered, by Borrower and Holding Co. without demand or notice (other than
such demand or notice as is required by law and written notice to Borrower and
Holding Co. delivered to it not less than thirty days prior to the date of the
proposed sale, which notice shall state the amount of the outstanding
indebtedness of Borrower under the Note and the date and place of the proposed
sale of any of the Collateral), to sell at private or public sale or at or
through any brokers board or securities exchange, the whole or any part of the
Collateral, at such reasonable place or places, at such reasonable time or
times, at such reasonable price or prices, and on such reasonable terms and
conditions as MGL in MGL's discretion may determine, which discretion shall be
exercised in good faith, and MGL may transfer, assign and deliver the same to
the purchaser or purchasers thereof. MGL shall have the same right to purchase
at such sale as would a stranger, provided that any such sale to MGL may not be
at a price lower than the fair market value of the Collateral being sold. The
sale of part of the Collateral shall not exhaust this power of sale, but sales
may be made from time to time until all the Collateral has been sold or until,
in the sole judgment of MGL, sufficient sums have been realized thereon. MGL may
in its discretion postpone the sale of all or part of the Collateral from time
to time without notice of any kind other than announcement (at the time and
place of sale set out in the written notice to Borrower and Holding Co. referred
to above) of the time and place of such postponed sale or sales and written
notice to Borrower and Holding Co.
Without in any way limiting the generality of any power or discretionary right
hereinbefore granted or reserved to MGL, MGL may at any sale restrict the
prospective bidders or purchasers to persons who will represent and agree that
they are purchasing for their own account, for investment, and not with a view
to the distribution of any of the Collateral, if such restriction is necessary
in the opinion of counsel for MGL in order to comply with the provisions of any
securities law, rule, regulation or ordinance, federal and/or state, applicable
with respect to such sales.
In no event may MGL sell the Collateral or any portion thereof for a price less
than the value, determined in accordance with generally accepted accounting
principles, of the proportion of the shareholder equity of Borrower represented
by such Collateral or portion thereof.
Without in any way limiting the generality of the foregoing, MGL may, at its
election, exercise any and all rights and remedies available to a secured party
under the Uniform Commercial Code as in effect in the State of Arizona or other
applicable jurisdiction, in addition to any and all other rights and remedies
afforded by this Security and Pledge Agreement, the Note, at law, in equity, or
otherwise.
7.3 Waiver, Etc. Borrower and Holding Co. covenant that neither Borrower,
Holding Co. nor any of their subsidiaries will plead, petition or otherwise
insist upon any right which it or they might have, before or after any sale or
sales, to claim or exercise any right of redemption, except as provided in
Section 7.1 hereof.
7.4 Application of Proceeds. The purchase money, proceeds or avails of any sale
or sales made under Section 7.2, together with any other cash sums received from
prior sales or pursuant to the provisions of Section 7.1 which then may be held
by MGL under the terms of this Agreement, shall be applied as follows: (i)
first, to the payment of the reasonable costs and expenses of such sale or
sales, including reasonable compensation to MGL's agents and counsel and
reasonable commissions to brokers or dealers, if any, and to the payment of all
taxes, assessments or liens, if any, prior to the lien of this Agreement, except
any taxes, assessments or liens subject to which such sale shall have been made;
(ii) second, to the payment of the whole amount of the principal and interest
then due and unpaid under the Note (including interest on overdue principal and
interest to the extent permitted by applicable law) and, in case such sums
available shall be insufficient to pay the whole amount so due and unpaid under
the Note, then to the payment first of accrued interest on the Note, and then
principal; and (iii) the surplus, if any, shall be paid to Borrower, its
successors or assigns, or to whomever may be lawfully entitled to receive the
same as a court of competent jurisdiction may direct. In the event that the
proceeds from such sale are insufficient to pay the costs, expenses and
principal and accrued interest as provided in (i) and (ii) above, the right of
MGL to proceed against Borrower for any deficiency shall not be abridged or
affected in any manner by the sale of the Collateral.
7.5 Cumulative Rights and Remedies. No right or remedy in this Agreement or the
Note is intended to be exclusive of any other right or remedy, but every such
right or remedy shall be cumulative and shall be in addition to every other
right or remedy herein or in the Note conferred, or now or hereafter existing at
law or in equity or by statute, including but not limited to the Uniform
Commercial Code as enacted in Arizona. No delay or omission by MGL to exercise
any right or remedy shall impair such right or remedy or any other such right or
remedy or shall be construed to be a waiver of any Event of Default or
acquiescence thereto; every right and remedy herein conferred or now or
hereafter existing at law or in equity or by statute may be exercised separately
or concurrently and in such order and as often as may be deemed expedient by
MGL. Without limiting the generality of the foregoing, pursuit or exercise of
any right or remedy provided for herein or in the Note shall not be an election
against, or waiver or relinquishment of, any other right or remedy. The
invalidity of any right or remedy in any jurisdiction shall not invalidate such
right or remedy in any other jurisdiction. The invalidity or unenforceability of
any of the rights or remedies herein provided in any jurisdiction shall not in
any way affect the rights to the enforcement in such jurisdiction or elsewhere
of any other rights or remedies herein provided.
B. Other Requirements. Simultaneous with the execution of this Agreement,
Borrower and Holding Co. shall deliver, or cause to be delivered to MGL, the
following:
8.1 Resolutions. A copy of the resolutions of Borrower's and Holding Co.'s Board
of Directors authorizing the execution of this Agreement and the Note, duly
certified as of the date hereof by an authorized officer of Borrower and Holding
Co.
8.2 Collateral. The original signed copy of the Note together with appropriate
collateral assignments executed in blank and the original stock certificate
representing 100,000 shares of common stock of Borrower together with stock
power executed in blank.
8.3 Opinion of Company Counsel. A written opinion, dated the date hereof and
addressed to MGL and rendered by counsel for Borrower and Holding Co. stating
that after investigation and review of all relevant documents:
(a) Holding Co. is a duly organized and validly existing corporation under the
laws of the State of Delaware and has the corporate power and authority to own
its property and to carry on its business as now conducted;
(b) Borrower is a duly organized and validly existing corporation under the laws
of the State of Arizona and has the corporate power and authority to own its
property and to carry on its business as now conducted;
(c) the Note has been duly authorized, executed and delivered by Borrower and
constitutes a legal, valid, binding and enforceable obligation of Borrower under
the laws of the State of Arizona in accordance with its terms, except as limited
by bankruptcy and insolvency laws and other laws affecting the enforcement of
creditors' rights;
(d) this Agreement and the pledge of the Collateral have been duly authorized,
executed and delivered by Borrower and Holding Co.; this Agreement constitutes
the valid, binding and enforceable obligation of Borrower and Holding Co. under
the laws of the State of Arizona and creates a valid, binding, and unrestricted
lien of MGL on the Collateral, in accordance with the terms of this Agreement;
and MGL will be entitled to the benefits of this Agreement, all except as
limited by bankruptcy and insolvency laws and other laws affecting the
enforcement of creditors' rights;
(e) the execution, delivery and performance of this Agreement by Borrower and
Holding Co. and compliance with the provisions thereof and the Note will not
violate the provisions of the Articles of Organization and Bylaws of Borrower
and Holding Co. or, to the best knowledge of such counsel, conflict with or
result in a breach of the provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, franchise, permit, license, note, agreement
or other instrument to which Borrower and Holding Co. are a party or result in
the creation or imposition of any lien, charge, or encumbrance upon any assets
of Borrower and Holding Co. (other than the Collateral); and
(f) Borrower and Holding Co. have not created or permitted to be created any
lien or encumbrance on the Collateral, except the pledge to and the security
interest of MGL created by this Agreement.
8 4 Investments. Borrower shall have invested an amount equal to the principal
balance remaining unpaid from time to time under the Note in investments that
are suitable for a licensed life insurance company. MGL shall have the right, on
written notice to Borrower and Holding Co., to direct the investments referred
to in this Paragraph 8.4, consistent with applicable law and prudent business
practices. The rights and obligations set forth in this Paragraph 8.4 shall in
all respects be governed by and subject to the laws of the State of Arizona.
9. Representations and warranties. Borrower and Holding Co. represent and
warrant to MGL that as of the date of this Agreement:
9.1 Corporate Existence. Borrower is a corporation validly existing and in good
standing under the laws of the State of Arizona and has full corporate power to
own or lease its properties and to conduct its business as it is presently being
conducted.
9.2 Holding Co. is a corporation validly existing and in good standing under the
laws of the State of Delaware and has full corporate power to own or lease its
properties and to conduct its business as it is presently being conducted.
9.3 Authorization. Borrower is duly authorized under the laws of Arizona and
Holding Co. is duly authorized under the laws of Delaware to create, issue and
deliver the Note and to make and perform this Agreement; all corporate action
required for the lawful creation, issuance and delivery of the Note and the
execution and performance of this Agreement has been duly taken; all such
documents and instruments when duly executed and delivered will be valid and
binding and enforceable obligations of Borrower and Holding Co. under the laws
of Arizona in accordance with their respective terms; and MGL will be entitled
to the benefits thereof, except in each case as limited by bankruptcy,
insolvency and fraudulent conveyance laws, and other laws affecting the
enforcement of creditors' rights.
9.4 Taxes. Borrower and Holding Co. have filed all required federal, state and
local tax returns and have paid, or made adequate provisions for the payment of,
all taxes shown to be due by such returns or pursuant to any assessment which is
due.
9.5 Suits and Proceedings. There are no actions, suits or proceedings pending,
or to the knowledge of the Borrower and Holding Co. threatened, against or
affecting the Borrower and Holding Co. at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or before any
arbitration board of any kind, which involve the possibility of any material
judgment or liability, not fully covered by insurance, against Borrower and
Holding Co., and Borrower and Holding Co. are not in material default with
respect to any order, writ, injunction or decree of any court of federal, state,
municipal, or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign.
9.6 Compliance with Other Instruments and with the Law. The Borrower and Holding
Co. are not in default under or in violation of, and the execution and delivery
of the Note and this Agreement (and the consummation of the transactions therein
contemplated) and compliance with the provisions thereof will not violate, any
law, order, rule or regulation applicable to Borrower] and Holding Co. or the
Articles of Organization or Bylaws of Borrower and Holding Co. and will not
conflict with or result in a breach of the provisions of, or constitute a
default under, the terms of said Articles or Bylaws, or any indenture, mortgage,
deed of trust, franchise, permit, license, note, contract, agreement or other
instrument to which Borrower and Holding Co. are a party, or result in the
acceleration of any indebtedness of Borrower and Holding Co. or in the creation
of imposition of any lien, charge or encumbrance upon any of the property or
assets of the Borrower and Holding Co. (other than the Collateral).
10. Miscellaneous.
10.1 Waivers. No omission or delay by MGL in exercising any right or power under
this Agreement or the Note will impair such right or power or be construed to be
a waiver of any default thereof or an acquiescence thereto, and any single or
partial exercise of any such right or power will not preclude other or further
exercise thereof or the exercise of any other right, and no waiver will be valid
unless in writing and signed by MGL and then only to the extent specified.
10.2 Survival of Covenants: Successors and Assiqns. All covenants, agreements,
representations and warranties made by Borrower and Holding Co. in this
Agreement and in certificates or other documents delivered pursuant to it shall
survive the execution of this Agreement and the execution and delivery of the
Note and shall continue in full force and effect in accordance with their terms
until the Note is paid in full. All such covenants, agreements, representations
and warranties shall be binding upon any successors and assigns of the Borrower
and Holding Co.
10.3 Notices. Any notice required or permitted by this Agreement shall be
delivered by mailing it by certified or registered mail, postage prepaid, return
receipt requested, addressed to Borrower and American Financial Holding, Inc. at
225 South 200 West, Suite 302, Farmington, Utah 84025, or to MGL at 7887 East
Belleview Avenue, Englewood, Colorado 80111. Such addresses may be changed upon
ten days prior notice to the other party given in the foregoing manner.
10.4 Counterparts. This Agreement may be executed simultaneously in any number
of counterparts, each of which, when so executed and delivered, shall be an
original; but such counterparts shall together constitute one and the same
instrument.
10.5 Topical Headings. The topical headings used herein are inserted for
convenience only and shall not be construed as having any substantive
significance or meaning whatsoever or as indicating that all the provisions of
this Agreement relating to any particular topic are to be found in any
particular article or section.
10.6 Assignment. MGL may assign this Agreement and its rights hereunder to any
corporation affiliated with or buying a controlling interest in MGL; provided,
however, that such assignment shall not relieve MGL of any of its obligations
hereunder. MGL may also assign this Agreement and its rights hereunder to any
corporation into which MGL may be merged or consolidated, otherwise, neither
this Agreement nor any rights or obligations hereunder may be assigned by either
party hereto without the prior written consent of the other.
10.7 Governing Law. This Agreement and the rights and obligations of the parties
hereunder and the Note to be issued pursuant hereto shall (except as expressly
provided otherwise therein) be construed and interpreted in accordance with the
laws of the State of Arizona, including without limitation the Uniform
Commercial Code of said state.
IN WITNESS WHEREOF, American Financial Holding, Inc., American Financial
Reinsurance, Inc. and Massachusetts General Life Insurance Company have caused
this Agreement to be signed and delivered by their officers "hereunto duly
authorized, all as of the date first hereinabove written.
ATTEST: AMERICAN FINANCIAL HOLDING, INC.
By:
Secretary President
ATTEST: AMERICAN FINANCIAL REINSURANCE, INC.
By:
Secretary President
ATTEST: MASSACHUSETTS GENERAL LIFE INSURANCE
COMPANY
By:
Secretary President
AGREEMENT FOR PURCHASE AND SALE OF PREFERRED SHARES
OF TRIAD FINANCIAL SYSTEMS, INC.
This Agreement is entered into as of October 22, 1996, by Triad Financial
Systems, Inc. ("Purchaser"), a corporation formed under the laws of Delaware,
and American Physicians Life Insurance Company ("Seller"), a corporation formed
under the laws of Ohio.
I. Purchaser desires to purchase, and Seller desires to sell, the 17,000
Preferred Shares of Triad Financial Systems, Inc. presently owned by
Seller, and all accrued cash and stock dividends due to Seller through and
including September 30, 1996 according to the following terms.
II. The total purchase price shall be $224,000.00. This shall be paid in four
(4) equal installments of $56,000.00 each, as specified below.
III. 1. The first payment of $56,000 shall be paid to Seller by Purchaser
within 24 hours of the execution of this Agreement. All payments
shall be made by certified check or wire transfer.
This first payment shall be paid into an escrow account at Huntington
National Bank, N.A. Said escrow account shall be arranged by Seller
between and among Purchaser, Huntington National Bank, and Seller and
shall contain standard representations, warranties, and indemnities.
No Preferred Shares of Triad shall be transferred from Seller to
Purchaser on account of the payment into escrow of the first payment
of $56,000.
2. The second payment of $56,000.00 shall be made by Purchaser to Seller
thirty (30) calendar days, and on no event later than forty (40)
calendar days, after the first payment has been made in accord with
III. 1. Upon receipt of said payment, Seller shall transfer 4,250 of
its Triad Preferred Shares to Purchaser.
3. The third payment of $56,000.00 shall be made by Purchaser to Seller
sixty (60) calendar , and on no event later than forty (70) calendar
days, after the first payment has been made. Upon receipt of said
payment, Seller shall transfer 4,250 of its Triad Preferred Shares to
Purchaser.
4. The fourth payment of $56,000.00 shall be made by Purchaser to Seller
ninety (90) calendar , and on no event later than forty (100) calendar
days, after the first payment has been made. Upon receipt of said
payment, Seller shall transfer the remaining 8,500 of its Triad
Preferred Shares to Purchaser.
IV. If all payments from Purchaser are not received by Seller on a timely
basis, and in the full amount, as specified in III above, the $56,000.00
held in escrow pursuant to III.(1) above, shall be immediately paid by the
escrow agent to Seller and said $56,000.00 shall belong to Seller
immediately and absolutely and free and clear of any claims by Purchaser.
In addition, Seller shall not be obligated to accept any further payments
of $56,000.00 from Purchaser and Seller shall not be obligated to transfer
any further Triad Preferred Shares to Purchaser.
V. Seller warrants and represents that it has good title to its 17,000 Triad
Preferred Shares, free an d clear of any liens, charges, or encumbrances.
VI. Upon completion by Purchaser of the four payments of $56,000 each, pursuant
to Section III above, and receipt by Seller of a total of $224,000, any and
all obligations American Financial Holding, Inc. may have under Paragraph 6
of AFH's June 30, 1995 letter to Seller shall be extinguished in full and
released by Seller and AFH shall have no further payment obligations to
Seller under said Paragraph 6.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
AMERICAN PHYSICIANS LIFE INSURANCE COMPANY
/s/ Richard H. Sharpe, President and CEO
Date: October 21, 1996
TRIAD FINANCIAL SYSTEMS, INC.
/s/ Kenton L. Stanger, President
Date: October 22, 1996
Exhibit 21.01
SCHEDULE OF SUBSIDIARIES
The following are wholly-owned subsidiaries of the Company
Name State of Incorporation
Income Builders, Inc. Utah
Triad Financial Systems, Inc. Delaware
American Financial Reinsurance, Inc. Arizona
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 30, 1995, AND STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 988,904
<SECURITIES> 88,100
<RECEIVABLES> 171,428
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,248,432
<PP&E> 168,223
<DEPRECIATION> 65,622
<TOTAL-ASSETS> 1,676,352
<CURRENT-LIABILITIES> 1,218,858
<BONDS> 0
<COMMON> 42,324
0
0
<OTHER-SE> (461,089)
<TOTAL-LIABILITY-AND-EQUITY> 1,676,352
<SALES> 4,759,357
<TOTAL-REVENUES> 4,759,357
<CGS> 4,095,800
<TOTAL-COSTS> 5,582,120
<OTHER-EXPENSES> (195,835)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,305
<INCOME-PRETAX> (659,233)
<INCOME-TAX> 12,381
<INCOME-CONTINUING> (671,614)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (695,678)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
