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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission File Number 1-7697
SOUTHWESTERN LIFE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 43-6069928
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
500 North Akard Street 75201
Dallas, Texas (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 954-7111
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, American Stock Exchange
$1.00 par value and Chicago Stock Exchange
$1.75 Convertible Exchangeable American Stock Exchange
Preferred Stock, Series 1986-A,
$25.00 stated value
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. / /
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
At March 27, 1995, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant (excluding stock held by all directors and
executive officers, some of whom may not be affiliates) was approximately
$53,105,850.
At March 27, 1995, 47,205,200 shares of the Registrant's Common Stock,
par value $1.00 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information in the indicated sections of the following document is
incorporated by reference into Part III of this Annual Report on Form 10-K:
Election of Directors, Executive Compensation, Security Ownership, Security
Ownership -- Compliance with Section 16(a) of the Securities Exchange Act of
1934, and Executive Compensation -- Certain Transactions in the Registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A in
connection with Registrant's 1995 annual meeting of stockholders.
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TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
la. Executive Officers of Registrant . . . . . . . . . . . . . . . . . . 26
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 27
4. Submission of Matters to a Vote of Security Holders . . . . . . . . 30
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 30
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 31
8. Financial Statements and Supplementary Data . . . . . . . . . . . . 45
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . 96
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . 96
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 96
12. Security Ownership of Certain Beneficial Owners and Management . . . 96
13. Certain Relationships and Related Transactions . . . . . . . . . . . 96
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . 96
Unless otherwise specified or unless the context otherwise requires, all
information in this Annual Report on Form 10-K is as of the date of execution
by Southwestern Life Corporation.
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PART I
ITEM 1. BUSINESS.
GENERAL
Southwestern Life Corporation, a Delaware corporation ("SLC," the
"Company," or "Registrant"), is an insurance holding company that markets a
broad range of life insurance, accident and health insurance and annuity
products to individuals and groups in over forty states and the District of
Columbia. The Company's individual insurance and annuity products are
marketed through more than 11,000 active, independent agents. At December 31,
1994, the Company had consolidated assets of approximately $3.1 billion,
consolidated life insurance in force of approximately $19.3 billion,
annualized health insurance premiums in force of approximately $212.3 million
and annuity funds under management of approximately $581.7 million. A chart
illustrating SLC's holding company system and identifying each principal
subsidiary is included under "SLC Holding Company System" below in this ITEM
1.
On January 27, 1995, the Company announced a series of initial actions as
part of a longer-ranging process designed to address the serious problems
associated with the Registrant's capital structure and to preserve its
financial flexibility. These actions included the suspension of dividend
payments on the Company's preferred stock, the hiring of Donaldson, Lufkin
and Jenrette as a financial advisor to assist the Company in developing a
plan of capital restructuring and the initiation of a review of certain of
the Company's accounting policies, including primarily the accounting for
intangible assets. Despite the Company's difficulties, SLC's insurance
subsidiaries are financially sound and have the capital strength and
claims-paying ability to fulfill all policyholder obligations, with over $250
million of total adjusted capital and surplus, including asset valuation
reserves, at December 31, 1994.
As described in various portions of this document, the Company is
exploring all of its options with regard to improving its capital structure
by increasing the proportion of common equity to total capital and both
reducing and extending the maturity of its indebtedness. The ultimate result
of these efforts is uncertain and their effect on the Company's securities is
not known at this time. For more information see "Business-Business
Strategy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources of Parent Company," and
Notes 3 and 9 of Notes to Financial Statements and Schedule III.
BUSINESS STRATEGY
SLC's business strategy has undergone significant changes over the past
five years. After pursuing a strategy of growth through leveraged
acquisitions, SLC has, since 1989, sold a number of subsidiaries in
transactions designed to reduce leverage. Primarily as a result of sales of
subsidiaries, SLC's total consolidated assets declined from $8.6 billion at
December 31, 1989 to $3.1 billion at year-end 1994. In March 1990, SLC sold
certain subsidiaries, including Philadelphia Life Insurance Company, based in
Dallas, Texas, and Massachusetts General Life Insurance Company, situated in
Denver, Colorado, to Life Partners Group, Inc. In November 1992, SLC sold
Bankers Life and Casualty Company ("Bankers") and Bankers' subsidiary,
Certified Life Insurance Company ("Certified"), to Bankers Life Holding
Corporation ("BLHC"), an affiliate of Conseco, Inc. ("Conseco"). These sales
generated liquidity for the retirement of existing debt, and the transactions
with Life Partners Group, Inc. and BLHC were structured so that SLC retained
an interest in the subsidiaries sold, enabling it to benefit from their
future performance and appreciation.
Since year-end 1992, SLC has pursued a strategy of rebalancing and
simplifying its capital structure. The debt reduction SLC had accomplished
through December 1992 affected primarily the Company's senior secured loans,
which carried the lowest interest rates. During 1993, the Company targeted
the more expensive elements of its capital structure. On September 30, 1993,
SLC sold its remaining interest in Bankers, represented by 13,316,168 shares
of BLHC (approximately 24.4% of those outstanding) to Conseco and one of
Conseco's subsidiaries for $287.6 million, resulting in a gain of
$197.7 million. The sale of the BLHC stock enhanced the Company's common
equity, generated substantial liquidity for use in the Company's capital
restructuring and other corporate purposes, and enabled the Company to
retire its $5.50 Redeemable Preferred Stock, Series 1987-A, stated value
$50 million, held by a Conseco subsidiary. During the fourth quarter of
1993, SLC completed a voluntary exchange offer, pursuant to which it issued
$91.2 million 11 1/4% Senior Subordinated Notes due 2003 to existing
3
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security holders, in exchange for outstanding notes and debentures; it called
for redemption of all of its 16 1/2% Senior Subordinated Debentures due 1994
that remained outstanding following the exchange offer; and it redeemed its
$8.00 Redeemable Preferred Stock, Series 1987-C, stated value $50 million,
that carried a 16% annual dividend rate.
In February 1994, SLC retired its Class B Common Stock, a class of common
equity that carried special voting rights in the election of directors. The
Class B Common Stock had been issued to Consolidated National Corporation
("CNC") in 1985, and enabled CNC to elect 75% of the Company's directors, and
by virtue of such voting power, CNC had been considered to be SLC's
controlling stockholder. Effective February 11, 1994, the Company
repurchased, for $500,000, all of its Class B Common Stock from CNC,
concurrently with CNC's sale of 4,457,243 shares of SLC's Common Stock to
Torchmark Corporation ("Torchmark") and 4,236,820 shares to Stephens Inc.
("Stephens"). On such date, Consolidated Fidelity Life Insurance Company
("CFLIC"), a subsidiary of CNC, also sold 220,000 shares of SLC's Common
Stock to each of Torchmark and Stephens. The Company and CNC terminated the
Management and Consulting Agreement, pursuant to which CNC, through its
affiliates, Robert T. Shaw and C. Fred Rice, had provided management services
to SLC since 1985, and SLC entered into ten-year Independent Contractor and
Consulting Agreements with each of Messrs. Shaw and Rice. Mr. Rice is an
executive officer and director of SLC. As a result of these transactions, the
Company now has only one class of common equity securities, and, from and
after February 11, 1994, no stockholder has beneficially owned 10% or more of
SLC's outstanding Common Stock. Torchmark, a diversified insurance and
financial services company headquartered in Birmingham, Alabama, and
Stephens, an investment banking firm headquartered in Little Rock, Arkansas,
are the largest stockholders of the Company, beneficially owning, 9.89% and
9.86%, respectively, of the Common Stock of the Company as of December 31,
1994. In accordance with the terms of the related stock purchase agreements
entered into among CNC, SLC and each of Stephens and Torchmark, a
representative of each of Torchmark and Stephens was elected to the Company's
Board of Directors, and such representatives continue to serve on the
Company's Board. Further, pursuant to such agreements, SLC has agreed to
continue to have a representative nominated as a director from each such
company for as long as such company holds at least 5% of SLC's outstanding
Common Stock. See Note 4 of Notes to Financial Statements.
On June 30, 1994, the reinsurance agreements between Southwestern Life
Insurance Company, an SLC subsidiary, and Bankers that had been reinsured
through an independent third party to CFLIC were terminated, and the business
reinsured thereunder was recaptured, effective as of April 1, 1994.
Immediately prior to the termination of the CFLIC reinsurance agreements,
Union Bankers Insurance Company, an SLC subsidiary, utilized available cash
to purchase all of the outstanding stock of Marquette National Life Insurance
Company ("Marquette"), then a subsidiary of CFLIC, for $8.2 million.
Following completion of the terminations, CFLIC repurchased the shares of its
preferred stock held by the Company by transferring to the Company the senior
secured loan of the Company with an outstanding principal balance of $30
million, all of the outstanding shares of the Company's Series 1984-A
Preferred Stock, stated value of $22.2 million, all of the outstanding shares
of the Company's Series 1987-B Preferred Stock, stated value of $7.0 million,
a U.S. Treasury note, par value $1.1 million, and 620,423 shares of the
Company's Common Stock. Immediately following the repurchase of the CFLIC
preferred stock, SLC retired the senior secured loan and the SLC preferred
stocks. The shares of SLC Common Stock were placed in treasury and retired as
of year-end 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Changes in Capital Structure" and Note 4
of the Notes to Financial Statements.
During 1994, SLC reduced its notes payable by $48.6 million. As mentioned
above, $30.0 million of senior secured debt was retired in conjunction with
the recapture of the CFLIC business. On July 19, SLC purchased $10 million of
its 11 1/4% Senior Subordinated Notes due 1996 in the open market for $10.1
million plus accrued interest. On August 5, a $4.9 million secured loan was
paid with the proceeds from the sale of the airplane that collateralized the
note. Additionally, Modern American Life Insurance Company ("Modern
American"), an SLC subsidiary, paid dividends totaling $9.0 million in the
form of SLC's 11 1/4% Senior Subordinated Notes due 1996 and SLC purchased
from Modern American $3.0 million principal amount of such Notes, thereby
eliminating Modern American's holdings in SLC securities. On December 1, the
Company met its $100 million sinking fund requirement on its 11 1/4% Senior
Subordinated Notes due 1996 by tendering $12.9 million of such Notes held in
treasury and electing to utilize the $87.1 million in 11 1/4% Senior
Subordinated Notes due 1996 that were exchanged in 1993 for 11 1/4% Senior
Subordinated Notes due 2003 to satisfy the remainder. At year-end 1994, SLC
had reduced the amount of its notes payable to $369.4 million, from $1,179.6
million at December 31, 1989.
4
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In 1995, SLC is seeking to develop a plan to improve its capital structure
by increasing its proportion of common equity, reducing its debt and fixed
charges, and extending the maturities on any remaining debt. To assist with
the development of a plan to address the holding company's situation, in
January 1995, the Company engaged the investment banking firm of Donaldson,
Lufkin & Jenrette as a financial advisor. There can be no assurances,
however, that the Company will timely create and implement such a
restructuring or recapitalization plan or that any plan would receive the
requisite regulatory clearances or approvals or, if necessary, the approval
of the Company's stockholders or creditors. Further, even if a plan is
formulated and approved (as needed), there are no assurances that it will be
effective or successful in eliminating or affecting positively any of the
financial problems and constraints facing the Company. Numerous outside
factors over which the Company has no control could also adversely affect any
restructuring efforts by the Company, such as interest rate fluctuations,
regulatory and legislative actions, and economic conditions generally.
Additionally, it is likely that any restructuring plan involving SLC would
result in the substantial dilution of its existing stockholders, especially
its common stockholders, and could possibly result in a change in control of
SLC. See Note 3 of Notes to Financial Statements.
During 1995, the Company intends to continue its efforts to strengthen its
core insurance subsidiaries by attempting to improve operating earnings
through expense reductions, maintain sales momentum, achieve improved gross
margins, and increase efficiency and productivity. Further, management
intends to emphasize SLC's existing core businesses of individual life and
individual health insurance products, while pursuing the sale of
non-strategic subsidiaries.
On January 12, 1995, the Company sold its wholly-owned subsidiary,
Southeast Title and Insurance Company, for cash in the amount of $2,071,000.
In January 1995, SLC announced it had entered into a letter of intent to sell
Bankers Life Insurance Company of New York, subject to the execution of a
definitive agreement and the approval of applicable Boards of Directors and
state insurance regulatory authorities. On March 24, 1995, the Company signed
a definitive agreement to sell Integrity National Life Insurance Company,
subject to certain contingencies, including the approval of state regulatory
authorities, and a letter of intent to sell Constitution Life Insurance
Company after ceding 100% of Constitution's insurance contracts to another
insurer.
NOTE: The financial information presented in this Report on Form 10-K
includes the assets and results of operations of divested companies prior to
their sale and, in the cases of Bankers and Certified, includes the results
of their operations from November 1992 through September 1993, based on the
equity method of accounting following their sales. For this reason, the
financial data presented for years before, during, and after the years in
which sales of subsidiaries occurred may not be comparable. See Note 2 of
Notes to Financial Statements.
INSURANCE OPERATIONS
As of December 31, 1994, the SLC subsidiaries that are either significant
subsidiaries or are actively marketing insurance products are:
SOUTHWESTERN LIFE INSURANCE COMPANY ("SOUTHWESTERN LIFE"):
Headquartered in Dallas, Texas, Southwestern Life concentrates on the sale
of individual life insurance and annuity products through general agents and
brokers. On the basis of statutory accounting practices as required by state
insurance regulatory authorities ("SAP"), Southwestern Life had total assets
of $1.44 billion at December 31, 1994, and marketed products in 39 states,
the District of Columbia and Guam.
UNION BANKERS INSURANCE COMPANY ("UNION BANKERS"): Headquartered
in Dallas, Texas, Union Bankers markets individual health and life insurance
products and annuity products in 45 states and the District of Columbia
through general agents and brokers. It had total assets of $204.1 million at
December 31, 1994, based on SAP.
CONSTITUTION LIFE INSURANCE COMPANY ("CONSTITUTION LIFE"):
Headquartered in Louisville, Kentucky, Constitution Life is licensed in 48
states
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and the District of Columbia. Constitution Life had total assets, including
separate accounts, of $481.0 million at December 31, 1994, based on SAP.
PHILADELPHIA AMERICAN LIFE INSURANCE COMPANY ("PALICO"):
Headquartered in Houston, Texas, PALICO markets group life, health, and
disability insurance and provides fee-based, third party administrative
services to group plans in 47 states, the District of Columbia and the Virgin
Islands. PALICO had total assets of $54.0 million at December 31, 1994, based
on SAP.
BANKERS LIFE INSURANCE COMPANY OF NEW YORK ("BANKERS NEW YORK"):
Headquartered in Woodbury, New York, Bankers New York concentrates on the
sale of life insurance products and annuity products in eight states through
general agents, special marketing groups and relationships with financial
institutions. Bankers New York had total assets of $204.8 million at December
31, 1994, based on SAP.
INTEGRITY NATIONAL LIFE INSURANCE COMPANY ("INTEGRITY NATIONAL"):
Headquartered in Louisville, Kentucky, Integrity National markets home
service life insurance and health insurance through general agents in 19
states and the District of Columbia. Integrity National had total assets of
$41.3 million at December 31, 1994, based on SAP.
BANKERS MULTIPLE LINE INSURANCE COMPANY ("BML"): With operations
based in both Louisville, Kentucky, and Dallas, Texas, BML offers real
estate errors and omissions insurance products and group and individual
health insurance products through brokers and by direct mail. It is
licensed in all 50 states and the District of Columbia. BML had total
assets of $59.5 million at December 31, 1994, based on SAP.
OTHER SUBSIDIARIES: SLC has a number of direct and indirect
subsidiaries that do not have significant ongoing insurance operations,
including Modern American, Marquette and Western Pioneer Life Insurance
Company ("Western Pioneer"). Modern American, Western Pioneer and
Marquette have insurance in force, but are not marketing insurance products
at this time. Other subsidiaries of SLC include SWL Holding Corporation
("SWL Holding"), Care Financial Corporation ("Care Financial") and Facilities
Management Installation, Inc. ("FMI"). SWL Holding is the intermediate
holding company of Southwestern Life and its subsidiaries. Care Financial is
the intermediate holding company of BML, PALICO and Union Bankers, and its
subsidiary, Marquette. FMI provides substantially all of the management
services to SLC and its insurance subsidiaries.
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SLC HOLDING COMPANY SYSTEM
SLC was organized in 1966 as a Missouri corporation and was reincorporated
in Delaware during 1977. The following chart summarizes the relationships
among SLC and its significant direct and indirect subsidiaries. Each
percentage used in the chart represents the parent's percentage ownership
interest in the outstanding voting securities of the respective subsidiary
company. The years in which SLC formed, or acquired more than 50% of, the
indicated subsidiaries are set forth parenthetically.
[Diagram of SLC's holding company structure omitted in accordance with ']
Securities and Exchange Commission rules for graphic or image material in
electronic filings. The omitted material illustrates that FMI, SWL Holding,
Modern American, Care Financial, Integrity National and Western Pioneer are
each direct subsidiaries of the Company. The diagram further illustrates
that Southwestern Life is held by SWL Holding, and that Southwestern Life is
the parent of Bankers New York and Constitution Life. Further, the diagram
depicts that Care Financial holds Union Bankers, BML and PALICO, and that
Marquette is a subsidiary of Union Bankers.]
The following companies are also direct or indirect subsidiaries of SLC,
but do not have any significant operations: BML Agency, Inc.; SLC Financial
Services, Inc.; Philadelphia American Property Company; Quail Creek
Communications, Inc.; Quail Creek Recreation, Inc.; Quail Creek Water
Company, Inc.; and REO Holding Corporation.
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INSURANCE PREMIUMS AND ANNUITY CONSIDERATIONS
The following table summarizes on a consolidated basis the Company's (i)
premium income and other considerations and (ii) accumulation product premium
equivalents for the three-year period ended December 31, 1994. 1992 includes
amounts from Bankers and Certified, which were sold in November 1992. Premium
income represents gross receipts on traditional whole and term life and
health insurance products for individuals and groups, and other
considerations consist of policy charges for the cost of insurance, policy
administration charges, surrender charges and amortization of policy
initiation fees relating to universal and interest-sensitive life insurance
products and accumulation products, such as guaranteed investment contracts
("GICs") and certain annuities, as well as premiums collected on deferred
annuities. Premium equivalents consist of gross receipts on deposit type
annuities and guaranteed investment contracts. Premium equivalents are not
reported as premium revenues, but rather are reported as additions to
policyholder account balances. For additional information regarding SLC's
industry segments, see "Management's Discussion and Analysis of Condition and
Results of Operations-Analysis of Operating Results by Industry Segment" and
Note 17 of Notes to Financial Statements and Schedules V and VI of the
Financial Statement Schedules.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
PREMIUM CATEGORY (DOLLARS IN MILLIONS) 1994 1993 1992
-------------------------------------------------------------------------------------
PREMIUM INCOME AND OTHER CONSIDERATIONS
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Individual life (including premium
equivalents) . . . . . . . . . . . . $162.4 39% $164.0 35% $267.9 19%
Less premium equivalents. . . . . . . (53.3) (13) (46.0) (10) (76.3) (5)
-------------------------------------------------------------------------------------
Individual life . . . . . . . . . . . 109.1 26 118.0 25 191.6 14
Individual health . . . . . . . . . . 215.8 52 220.3 46 859.1 62
Group and other . . . . . . . . . . . 93.0 22 136.5 29 337.4 24
Accumulation products . . . . . . . . 0.1 0 0.2 0 0.7 0
-------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . $418.0 100% $475.0 100% $1,388.8 100%
-------------------------------------------------------------------------------------
ACCUMULATION PRODUCT PREMIUM EQUIVALENTS
-------------------------------------------------------------------------------------
Guaranteed investment contracts . . . $ 2.7 4% $ 5.3 6% $292.0 63%
Annuities . . . . . . . . . . . . . . 69.3 96 84.6 94 168.3 37
-------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . $72.0 100% $89.9 100% $460.3 100%
-------------------------------------------------------------------------------------
</TABLE>
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LIFE INSURANCE BUSINESS
The following table provides certain information with respect to the
various categories of the life insurance business in force for the Company's
existing insurance subsidiaries and for subsidiaries sold by SLC during the
indicated periods. 1992 includes amounts from Bankers and Certified, which
were sold in November 1992. For purposes of the following table, "permanent"
refers to traditional whole life and universal and interest-sensitive
insurance products, "term" refers to term life products, and "group and
other" refers to life insurance products sold in connection with group
insurance products.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
In-force at beginning of period (1)(2):
Existing subsidiaries . . . . . . . . . . . . . . . $21,398 $21,437 $ 38,572
Subsidiaries sold during period . . . . . . . . . . 0 0 (15,546)
------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . $21,398 $21,437 $ 23,026
--------------------------------------------------------------------------------------
Face amount of new business issued during period (1):
Permanent . . . . . . . . . . . . . . . . . . . . . $ 682 $ 682 $ 729
Term. . . . . . . . . . . . . . . . . . . . . . . . 220 262 307
Group and other . . . . . . . . . . . . . . . . . . 99 968 389
------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . $ 1,001 $ 1,912 $ 1,425
--------------------------------------------------------------------------------------
Termination during period . . . . . . . . . . . . . . $ 1,486 $ 1,759 $ 2,055
Termination rate (3). . . . . . . . . . . . . . . . . 7.3% 8.2% 9.2%
--------------------------------------------------------------------------------------
In-force at all subsidiaries at end of period (1)(2):
Permanent . . . . . . . . . . . . . . . . . . . . . $14,383 $14,838 $ 15,018
Term . . . . . . . . . . . . . . . . . . . . . . . 3,031 3,254 3,655
Group and other . . . . . . . . . . . . . . . . . . 1,870 3,306 2,764
------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . $19,284 $21,398 $ 21,437
--------------------------------------------------------------------------------------
Financial reinsurance ceded at end of period (4). . . $ 1,453 $ 1,677 $ 2,076
Reinsurance ceded at end of period (5). . . . . . . . 5,222 5,658 5,417
--------------------------------------------------------------------------------------
<FN>
(1) Excludes participations in group underwriting pools for federal employees
(FEGLI) and service personnel (SGLI).
(2) Includes reinsurance assumed, but before deduction of reinsurance ceded.
(3) Represents the percentage of individual direct policies terminated during
the indicated period by lapse, surrender, conversion, maturity, or otherwise.
(4) Maintained under reinsurance agreements pursuant to which unaffiliated
insurers have assumed from certain of SLC's insurance subsidiaries large blocks
of life insurance in force, and the related policy reserves and premium income,
generally in return for fees. These agreements are treated as financing
arrangements under generally accepted accounting principles, and the in-force
amounts ceded or assumed under these agreements have been excluded from the
in-force amounts reflected in the table. See Note 11 of the Notes to Financial
Statements and Schedule VI of the Financial Statement Schedules. These
agreements will terminate during the next few years, resulting in the ceding
companies' recapture of the reinsured business and policy reserves.
(5) Excludes reinsurance ceded to other of SLC's insurance subsidiaries.
</TABLE>
TRADITIONAL WHOLE LIFE. The Company's whole life policies are permanent
insurance products that combine life insurance protection with a savings
component or cash value that gradually increases in amount. Typically, a
guaranteed fixed premium, which is higher than for comparable term coverage
when the policyholder is younger, but less than comparable term coverage as
the policyholder grows older, is paid over a period of years. A policyholder
may borrow against the policy's accumulated cash value, but the amount of any
outstanding loans decreases the death benefit under the policy. A
policyholder may choose to surrender a policy and receive the accumulated
cash value rather than continue the insurance protection.
Relatively affluent, price-sensitive individuals historically were the
focus of the Company's marketing efforts for traditional whole life insurance
products. Over the past two years, however, the Company has offered whole
life insurance products with smaller face amounts (starting at $2,500)
designed to appeal to moderate income individuals.
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In addition, the Company now offers traditional whole life insurance products
that are designed to appeal to the senior citizen market. For example, in
1993, the Company introduced Life Made Simple, a whole life product that
provides benefits to pay final expenses, and Senior Survivorship Plan, a
first-to-die joint whole life product that helps offset the reduction in
social security retirement income that occurs upon the death of a spouse, and
in 1994 the Company introduced Future Leaders, a simplified whole life
product designed for people wanting to provide a savings accumulation plan
for their children and grandchildren. By introducing products targeted
towards the senior citizen market and by expanding its marketing efforts to
include moderate income individuals, the Company is attempting to benefit
from the growing senior citizen market and create additional selling
opportunities for its sales force of independent agents among moderate income
individuals. The Company has also consolidated the marketing operations of
Southwestern Life and Union Bankers to more effectively use its agency sales
force. This combined distribution system permits agents at Union Bankers who
have traditionally marketed only the Company's health insurance products to
now market and sell the Company's life insurance products as well. See
"-Distribution System." As of December 31, 1994, there were 311,000 whole
life policies in force with $1.9 billion in face amount and $460.6 million
in reserves.
UNIVERSAL AND INTEREST-SENSITIVE LIFE. The universal and
interest-sensitive life products offered by the Company provide whole life
insurance with adjustable rates of return related to current interest rates.
The principal difference between universal life and interest-sensitive life
products is the amount and timing of premium payments. Universal life
products permit policyholders to vary the frequency and size of their premium
payments, although policy benefits may also vary. Premium payments under
interest-sensitive life products are not generally variable by the
policyholders.
The majority of sales of individual life insurance products, measured by
premium volume, have been for universal and interest-sensitive life insurance
products. The Company's universal and interest-sensitive life products
provide advantages generally not available to its traditional whole life and
term life policyholders, such as flexibility in available coverages and, in
respect of universal life products, flexibility in the amount and timing of
premium payments. In addition, the Company's universal and interest-sensitive
life products can, in some respects, provide higher returns and greater cash
values to policyholders. The Company's universal life and interest-sensitive
life insurance products are marketed to individuals directly and through
qualified retirement plans, deferred compensation plans, and employer
sponsored payroll deduction plans. As of December 31, 1994, there were
132,000 universal and interest-sensitive life policies in force with $12.5
billion in face amount and $920.9 million in reserves.
TERM LIFE. Term life products offer pure insurance protection for a
specified period of time, typically one, five or ten years. No cash value is
built up. The Company offers a variety of term life products that include
some or all of the following features: current and guaranteed premium rates
that are level for either one, five or ten years; preferred smoker, preferred
nonsmoker, nonsmoker, and smoker underwriting classes; and conversion to
permanent insurance allowed to age 65 with premium credit. As of December 31,
1994, there were 36,000 term life policies in force with $3.0 billion in face
amount and $52.0 million in reserves.
Total sales of individual life insurance by SLC's insurance subsidiaries
increased approximately 28% in 1994, compared to declines of 6% in 1993 and
33% in 1992 (excluding Bankers and Certified). In the future, SLC intends to
continue to increase the amount of its life insurance business through
internal growth.
10
<PAGE>
HEALTH INSURANCE BUSINESS
Substantially all of SLC's consolidated premium income and other
considerations for individual health insurance are received from Medicare
supplement plans, comprehensive and major medical (collectively,
"comprehensive") health plans and long-term care plans. The following table
sets forth, by product type, the amounts and percentages of SLC's
consolidated premium income and other considerations for individual health
insurance during the indicated periods. 1992 includes amounts from Bankers
and Certified, which were sold in November 1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
HEALTH POLICY TYPE
(DOLLARS IN MILLIONS) 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medicare Supplement . . . . $124.3 58% $105.5 48% $502.2 58%
Comprehensive . . . . . . . 84.8 39 108.1 49 266.3 31
Long-term care. . . . . . . 6.7 3 6.7 3 90.6 11
-----------------------------------------------------------------------------
Total. . . . . . . . . $215.8 100% $220.3 100% $859.1 100%
-----------------------------------------------------------------------------
</TABLE>
MEDICARE SUPPLEMENT. Medicare supplement products provide coverage for
many of the medical expenses that the Medicare program does not cover, such
as deductible and coinsurance costs (in which the insured and Medicare share
the costs of medical expenses), and specified losses that exceed the federal
program's maximum benefits. Medicare supplement products, like other types of
health insurance, generate profits to the extent that the premium income and
investment income exceed benefit payments and other expenses.
The Company markets Medicare supplement products to individuals age 65
and older who are eligible for Medicare. Medicare supplement products are
highly regulated, standardized products. Such regulations impose minimum loss
ratios, restrict first year commissions payable to agents, require
standardized benefits and impose disclosure requirements. Due to product
standardization, insurance companies compete primarily on the basis of
marketing and distribution. As of December 31, 1994, there were 138,000
Medicare supplement policies in force representing $134.9 million in
annualized premiums and $84.2 million in reserves.
COMPREHENSIVE HEALTH PRODUCTS. The Company markets comprehensive health
products that provide hospital, medical, and surgical coverage within various
prescribed policy deductible and coinsurance limits. The Company's
comprehensive health products are marketed primarily to self-employed
individuals, workers who are not fully covered by group health insurance, and
early retirees. Inflation in the cost of health care continues to exceed the
overall inflation rate, and a "cost shifting" pattern from the public sector
to those privately insured has resulted in increases that have reduced the
affordability of comprehensive health products to consumers. Although the
comprehensive health products offered by the Company in many states have
certain built-in protections against rising policy claims due to escalating
health care costs, premiums on many traditional health plans offered by the
Company may not be increased without notice to or approval by insurance
regulatory authorities. Due to escalating health care costs and marginal
profitability, the Company began deemphasizing sales of comprehensive health
plans in late 1990 and has decreased the number of states in which these
plans are marketed. As of December 31, 1994, the Company had 67,000 policies
in force representing $70.5 million in annualized premiums and $42.0 million
in reserves.
LONG-TERM CARE. The Company's long-term care products are sold to
retirees, older self-employed individuals and other persons in middle income
levels. Like the market for Medicare supplement policies, the Company
believes that the market for long-term care insurance products is attractive
because of the general aging of the United States population. As of December
31, 1994, there were 6,600 long-term care policies in force representing $6.9
million in annualized premiums and $21.1 million in reserves.
ANNUITY BUSINESS
The principal annuity products marketed by the Company consist of
flexible premium deferred annuities ("FPDA") and single premium deferred
annuities ("SPDAs"). The Company also manages a seasoned block of GICs,
single premium immediate annuities and supplementary contracts. In 1993, the
Company made a strategic decision not
11
<PAGE>
to pursue growth in its accumulation business through the sale of GICs, with
the result that annuity products accounted for 94% of the Company's
accumulation product premium equivalents during 1994.
As of December 31, 1994, the guaranteed minimum crediting rates for the
life of the Company's deferred annuity products were as follows:
<TABLE>
<CAPTION>
GUARANTEED MINIMUM FUNDS UNDER
CREDITING RATE MANAGEMENT
------------------ -------------
(DOLLARS IN MILLIONS)
<S> <C>
3.00% . . . . . . . . . . . . . $ 27.9
3.50% . . . . . . . . . . . . . 19.7
4.00% . . . . . . . . . . . . . 307.4
4.50% . . . . . . . . . . . . . 66.5
5.00% . . . . . . . . . . . . . 0.6
6.00% . . . . . . . . . . . . . 41.0
No guaranteed minimum . . . . . 15.9
-------
$ 479.0
=======
</TABLE>
At December 31, 1994, annuity liabilities were composed of $203.8
million of SPDA liabilities and $275.2 million of FPDA liabilities and $102.7
million of other annuity liabilities, for a total of $581.7 million of
annuity liabilities. Of such liabilities, $287.6 million were subject to
surrender charges averaging 7.0% at December 31, 1994.
The Company prices its annuity products based on assumptions concerning
prevailing and expected interest rates and other factors to achieve a
positive difference, or spread, between its expected return on investments
and the crediting rate. The Company achieves such spread through active
portfolio management by its outside, independent investment advisors,
focusing on matching the durations of invested assets and related liabilities
to minimize the exposure to fluctuations in interest rates and by the
adjustment of the crediting rate on annuity products. See "-Investments."
Although the Company believes that the strategies employed by its investment
advisors will continue to permit it to achieve a positive spread, a
significant decline in the yield on the Company's investments could adversely
affect the results of operations and financial condition of the Company.
Due to an annuity holder's right to withdraw funds and the volatility of
market interest rates, it is difficult to predict the timing of the Company's
obligations under its SPDAs and FPDAs. Consequently, the Company maintains a
portfolio of short-term investments that are readily marketable and
sufficient in management's judgment to satisfy liquidity requirements for the
SPDAs and FPDAs. See "-Investments."
GROUP BUSINESS
The group insurance market is highly competitive. The Company's group
insurance business primarily involves the marketing and sale of health
insurance products and the rendering of administrative services to group
plans. The Company's fully insured group plans offer both managed care and
traditional indemnity benefits. These plans are sold to small- and
medium-sized employers to provide basic health care and major medical
benefits to their employees. Most policies are written on a periodic basis,
and competitive bids are often sought prior to renewal. PALICO is the only
insurance subsidiary making any new sales to groups, although BML continues
to underwrite health insurance under an established association group plan.
In 1994, group insurance policies accounted for 17.1% of total consolidated
collected premiums.
PALICO also provides fee-based, administrative services consisting of
processing comprehensive health insurance claims under diverse group plans.
PALICO does not assume any underwriting risk under its administrative-only
arrangements, which are entered into with large- and medium-sized employers.
Instead, PALICO merely processes and pays claims for an administrative fee,
while the employer acts as a self-insurer and provides the policyholder
benefits. PALICO also provides groups with managed care plans, under which
it develops a network of providers with negotiated cost controls and
administers group claims and makes available stop loss coverage for group
12
<PAGE>
benefits. The total claims administered by PALICO under these fee-based,
administrative arrangements increased from $310.7 million during 1993 to
$340.1 million during 1994.
PALICO incurred significant losses in its group business during 1994
and 1993, resulting in pretax operating losses of $5.7 million and $12.9
million with respect to SLC's group business for 1994 and 1993, respectively.
Such losses resulted primarily from group business written in 1992 and 1993,
which was ultimately unprofitable, and inadequate pricing for services
provided under administrative services arrangements. See the subheading
"Group Insurance" under "Management's Discussion and Analysis and
Results of Operations-Analysis of Operating Results by Industry Segment" for
additional analysis of the factors contributing to the losses. Due to the
unprofitable performance of its group insurance plans during 1994 and 1993,
and the uncertainties created by the national health care reform efforts,
PALICO intends to further deemphasize the sale of fully insured traditional
indemnity group plans and fee-based, administrative services in favor of
managed health care programs.
DISTRIBUTION SYSTEM
The Company sells its individual life and health insurance and annuity
products primarily through more than 11,000 independent agents in over 40
states, and the District of Columbia. The following table identifies those
states that accounted for 5% or more of the Company's subsidiaries' combined
direct premiums from life, health, and annuity sales to residents in 1994.
<TABLE>
<CAPTION>
PERCENTAGE 1994 DIRECT PREMIUMS
----------------------------------------------------------
5% TO 10% 11% TO 15% 16% OR MORE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIFE . . . . . . . . . . . California, New Jersey, Texas
New York
HEALTH . . . . . . . . . . Florida, Indiana Illinois Texas
ANNUITIES. . . . . . . . . Florida, New York Texas
TOTAL BUSINESS . . . . . . Florida, Illinois, Texas
New York
----------------------------------------------------------------------------------------------
</TABLE>
Substantially all independent agents selling insurance products for the
Company also represent other insurers. Group insurance is sold principally
through independent agencies that are assisted by group sales staffs employed
by an SLC subsidiary, and alternate funded plans are marketed directly by
employees of an SLC subsidiary. An alternate funded plan is a plan under
which the employer is self-insuring the basic benefits provided by the plan
and the Company contracts to provide administrative and claims processing
services as well as stop loss coverage for the plan.
An important element of the Company's marketing plan is the fostering of
a strong relationship between its insurance subsidiaries and the independent
agents and brokers that sell their insurance products. The administration of
insurance policies involves a high degree of interaction between the Company,
policyholders and agents in the application and underwriting process, as well
as during claims processing. The Company follows a service-oriented approach
towards administering its insurance business and seeks to provide agents and
policyholders with a timely and efficient response to claims, policyholder
questions, and agency matters. The efficiency and professionalism with which
these administrative matters are undertaken directly affect policyholders and
the Company's agents and influence the willingness of agents to promote the
Company's products. Management believes that the Company's reputation for
providing a quality, dependable service to its policyholders and agents is,
and will continue to be, fundamental to its business strategy and success.
The Company structures the commissions on its products so that agents
are provided meaningful financial incentives to increase the production of
new insurance and to promote continued renewals of in-force insurance. At the
same time, the Company employs financial discipline in setting agent
compensation arrangements and seeks to avoid sacrificing product
profitability and earnings growth through excessive or front-loaded
commissions. Commissions on life insurance products vary between products and
make up the largest element of acquisition costs. The Company
13
<PAGE>
believes commissions on annuity products are comparable and competitive with
hose paid on other investment-oriented products, such as bonds and mutual
funds.
The Company has also consolidated the marketing operations of
Southwestern Life and Union Bankers to more effectively use its agency sales
force. The Company believes that the combined distribution system allows
Southwestern Life and Union Bankers to provide their agents with a wider
range of insurance products that may be offered to existing and prospective
clients and thus capture sales that may otherwise have been directed to other
insurance companies.
UNDERWRITING
Premiums charged on insurance products are based, in part, on
assumptions about the incidence and timing of claims. The Company employs
professional underwriting staffs that have adopted and followed detailed
underwriting procedures designed to assess and quantify insurance risks
before issuing life and health insurance policies to individuals and groups.
Except with respect to Medicare supplement insurance, which is heavily
regulated, the underwriting practice of each SLC insurance subsidiary is to
require medical examinations (including blood tests, where permitted) of
applicants for certain health insurance and for life insurance in excess of
prescribed policy amounts. These requirements vary according to the
applicant's age and by policy type and amount, and streamlined procedures
have been developed based on the amount and type of coverage sought. The
Company also relies on medical records and each potential policyholder's
written application for insurance. In issuing health insurance, the Company
uses information from the application and, in some cases, inspection reports,
physician statements, or medical examinations to determine whether a policy
should be issued as applied for, issued with reduced coverage under a health
rider or rejected.
Acquired Immunity Deficiency Syndrome ("AIDS") claims identified to
date, as a percentage of total claims, have not been significant for SLC'S
subsidiaries. Evaluating the effect of future AIDS claims under the life and
health insurance policies issued by SLC is extremely difficult, in part due
to the insufficient and conflicting data regarding the number of persons now
infected by the virus that causes AIDS and uncertainty as to the speed at
which the disease may spread through the general population. The Company has
implemented, where legally permitted, underwriting procedures designed to
assist in the detection in applicants of the virus that causes AIDS.
INVESTMENTS
GENERAL. The Company's investment objectives are to maximize credit
quality, liquidity and return, while minimizing principal risk. The Company
seeks to attain these objectives through professional portfolio management
and monitoring of its investments. Since 1992, the Company has relied
primarily on independent investment advisors in the management of
investments. New England Asset Management, Inc. ("NEAM") provides advice in
the management of approximately $1.3 billion of the Company's investment
portfolio and has advised the Company in connection with the 1993 sale of
$144.7 million of the mortgage-backed residual interests and interest-only
certificates previously held in the Company's investment portfolio and the
reinvestment of a portion of the proceeds from such sale in trust
certificates sold by Fund America Investors Corporation II ("Fund America"),
which transaction is further described below. Conseco Capital Management,
Inc., the investment advisory subsidiary of Conseco, managed approximately
$443 million of investments during 1994. During 1994, Westridge Capital
Corporation managed the investment of approximately $150 million of the
assets and hedged the risk for one of Constitution's accumulation products.
See Note 5 of Notes to Financial Statements, which is incorporated herein by
reference, for additional information about the composition and performance
of SLC's investment portfolio.
The Company pursues an investment strategy principally designed to
balance the duration of investment assets against the liabilities of its
insurance subsidiaries for future policy and contract benefits and, under
certain circumstances, to manage its exposure to changes in market interest
rates, with separate investment segments for specific classes of product
liabilities. As part of this approach, investment guidelines are developed
for each product line that form the basis for distinct investment strategies
to manage each product's return and liquidity requirements. Any exceptions to
these guidelines must be approved by the Investment Committee of the
Company's Board of Directors. The Company seeks investments with duration and
return characteristics that match the duration, cash payment, and other
characteristics of the underlying liabilities. It is the Company's policy, as
well as a requirement
14
<PAGE>
of applicable state insurance laws, to diversify the investments in its
investment portfolio. The Company monitors the exposure of its investment
portfolio to particular borrowers, industries or types of investments and
geographic locations. It is the Company's policy not to make new investments
in commercial mortgage loans or real estate.
INVESTMENT STRATEGY. Since 1991, the Company has taken steps to
restructure its investment portfolio to improve the overall credit quality of
its portfolio. Specifically, the investment strategy has shifted to reducing
the investment in noninvestment-grade, fixed maturity securities and equity
securities and increasing the investments in investment-grade, fixed maturity
securities. The Company's policy on investing in mortgage-backed securities
and collateralized mortgage obligations (collectively, "CMOs") distinguishes
between CMOs that have predictable and stable cash flows ($793.6 million at
December 31, 1994) and which, therefore, do not present a high risk of loss
of principal while providing relatively stable returns, and CMOs that
represent mortgage-backed residual interests or interest-only certificates,
generally referred to as "derivative CMOs" (carrying value of only $20.8
million at December 31, 1994), which may fluctuate significantly in value
depending on levels of prepayments on the underlying mortgages. It is the
Company's policy not to make further investments in derivative CMOs. The
Company believes that its current investment strategy has resulted in a high
quality, liquid investment portfolio, with low principal risk, that is well
matched to the Company's liabilities. While these actions have resulted in
substantially reduced exposure to credit risks, average yields decreased from
8.3% in 1992 to 6.9% in 1993. Investment yields increased to 7.3% in 1994 as
general market interest rates increased during the year.
In accordance with applicable insurance laws, SLC's insurance
subsidiaries maintain substantial portfolios of investment assets that are
held, in large part, to fund their future contractual obligations to
policyholders. In structuring these portfolios, SLC has emphasized, and
expects to continue to emphasize, investments in fixed maturity securities.
In addition, SLC has maintained significant levels of short-term investments
to meet its liquidity needs. Since 1991, fixed maturity securities and
short-term investments have represented more than 75% of SLC's consolidated
investments, while no other category of investment has represented more than
10%. Additional information regarding the categories and amounts of SLC's
investment assets is reflected in Note 5 of Notes to Financial
Statements. State insurance laws also impose certain restrictions on the
nature and extent of investments by insurance companies and, in some states,
may require divestiture of assets contravening these restrictions. In
addition, the NAIC has begun drafting a model investment act which, if
adopted, could significantly affect the investments of SLC's insurance
subsidiaries. See "-Regulation."
INVESTMENT RESULTS. The following table summarizes, for the indicated
periods, certain results of the investments of SLC and its consolidated
subsidiaries. 1992 includes amounts for Bankers and Certified which were sold
in November 1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average cash and invested assets(1) . . . . . . . . . . . . . $2,498.3 $2,845.2 $4,035.1
Net investment income . . . . . . . . . . . . . . . . . . . . 182.0 195.6 333.1
Average yield(2). . . . . . . . . . . . . . . . . . . . . . . 7.3% 6.9% 8.3%
Realized investment gains (losses). . . . . . . . . . . . . . (96.9) 34.8 (119.1)
Change in unrealized investment gains (losses)(3) . . . . . . (75.8) 1.6 22.2
-----------------------------------------------------------------------------------------------------
<FN>
(1) Represents the average of the aggregate cash and invested assets
amounts at the beginning and end of the period, excluding intercompany
investments.
(2) Represents net investment income divided by the average cost and
invested assets for the period.
(3) Generally represents increases or decreases in the value of equity
securities carried at fair value at the end of each period presented
and includes the difference in amortized cost and fair value of
available for sale fixed maturity securities, adjusted for the change
in amortization of deferred policy acquisition costs that would have
been recorded had the Company realized such gains (losses), net of
deferred income tax effects.
</TABLE>
15
<PAGE>
For the year ended December 31, 1994, net investment income decreased
$13.6 million, or 7%, as compared to 1993. Net investment income includes 1)
earnings on surplus investments and assets invested to support the reserve
liabilities of the Company's traditional and interest-sensitive life and
health insurance products (general investment portfolio) and 2) investment
activity related to separately held assets supporting a GIC product, the
credited rate on which is indexed to the S&P 500 Stocks Composite Average
("S&P 500"). In addition, in 1993 and 1992, net investment income included
investment income on certain CMOs held in a special purpose trust (the
"Trust"). The accounts of the Trust are no longer consolidated with those of
the Company for periods after July 30, 1993, as the result of SLC's sale of
a 75% interest in the Trust. Assets supporting the S&P 500 GIC product
include, among other investments, put and call options on various equity
based index futures, including the S&P 500. The return on such investments
is highly volatile and, under certain market conditions, such as the overall
decline in equity markets experienced during early 1994, can result in
investment losses, or negative investment yields. The reduction in investment
yield experienced in 1994 on the assets supporting the indexed GIC product
was more than offset by a reduction in GIC benefits. Following is a summary
of investment income (loss) for the three categories of investments as
described above for the three years ended December 31, 1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
(DOLLARS IN MILLIONS) 1994 1993 1992
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General investment portfolio. . . . . . . . . . . . . . . . . . . $186.7 $168.2 $325.6
Investments supporting indexed GIC product. . . . . . . . . . . . 5.3 27.4 16.1
CMOs held in the Trust. . . . . . . . . . . . . . . . . . . . . . 13.0 5.0
------- ------ -------
Gross investment income. . . . . . . . . . . . . . . . . . . . . . 192.0 208.6 346.7
Investment expenses. . . . . . . . . . . . . . . . . . . . . . . . (10.0) (13.0) (13.6)
------- ------ -------
Net investment income. . . . . . . . . . . . . . . . . . . . . . $182.0 $195.6 $333.1
---------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1994, SLC had net pretax unrealized investment losses
totaling $94.3 million, consisting of $101.0 million of unrealized investment
losses related to available for sale fixed maturities, $1.0 million of
unrealized gains attributable to equity securities, $5.4 million of
unrealized gains attributable to investments in limited partnerships and $0.3
million of unrealized gains attributable to other invested assets. Such
unrealized investment losses are reflected in stockholder's equity, net of a
$9.1 million adjustment in deferred policy acquisition costs and unearned
revenue reserves and $29.8 million in deferred income tax effects. At
December 31, 1993, SLC had pretax unrealized investment gains totaling $33.9
million, consisting of $21.4 million of unrealized gains related to available
for sale fixed maturities, $7.2 million of unrealized gains attributable to
equity securities, and $5.3 million of unrealized gains attributable to
investments in limited partnerships. Such unrealized investment gains were
reflected in stockholders' equity, net of a $10.4 million adjustment in
deferred policy acquisition costs and unearned revenue reserves, a $5.2
million adjustment for the minority interest in certain unrealized investment
losses and $8.2 million in deferred income tax effects. The unrealized losses
related to available for sale fixed maturities at December 31, 1994 are
primarily as a result of declines in market interest rates since December 31,
1993. Except as may be required to meet its liquidity requirements, SLC has
no current plans and management does not believe that SLC will be required
over the near-term to liquidate a significant portion of such available for
sale fixed maturities and incur such losses. As a result of declining
long-term interest rates experienced during the first two months of 1995, the
unrealized losses on available for sale fixed maturity securities had
declined approximately $45.0 million, from $101.0 million at December 31,
1994, to approximately $56.0 million at February 28, 1995.
FIXED MATURITY SECURITIES. The Company's fixed maturity portfolio
generally includes government and corporate debt securities and CMOs.
Historically, this portfolio has been structured, in part, to balance
desirable yields with credit concerns. The Company has concentrated its fixed
maturity investments within categories that are rated investment-grade,
while, in certain instances, holding selected noninvestment-grade securities
that provide higher yields. The Company classifies its high-yield securities
as noninvestment-grade if they are unrated or are rated less than "BBB-" by
Standard & Poor's Corporation ("S&P") or Baa by Moody's Investor Service
("Moody's"). Based on such classifications, the Company's
noninvestment-grade, fixed maturity securities represented 4.2% of the
Company's consolidated cash and invested assets at December 31, 1994 as
compared to 4.0% at December 31, 1993 and 3.8%
16
<PAGE>
at December 31, 1992.
Following is a summary of the Company's fixed maturity investments
segregated by investment quality based on S&P ratings and the two categories
of such investments as reflected in SLC's consolidated balance sheet at
December 31, 1994 (in millions):
<TABLE>
<CAPTION>
HELD TO
MATURITY PERCENT PERCENT
AVAILABLE AT TOTAL TOTAL OF TOTAL
FOR SALE AT AMORTIZED FIXED FIXED INVESTED
INVESTMENT QUALITY(1) FAIR VALUE COST MATURITIES MATURITIES ASSETS
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AAA . . . . . . . . . . . . . . . . . . . . . . $680.6 $1.6 $682.2 41.2% 29.0%
AA . . . . . . . . . . . . . . . . . . . . . . 177.1 177.1 10.7 7.5
A . . . . . . . . . . . . . . . . . . . . . . . 396.0 396.0 23.9 16.8
BBB+ . . . . . . . . . . . . . . . . . . . . . 89.4 89.4 5.4 3.8
BBB . . . . . . . . . . . . . . . . . . . . . . 102.1 7.9 110.0 6.6 4.7
BBB-. . . . . . . . . . . . . . . . . . . . . . 99.5 99.5 6.0 4.2
------- ------ ------- ------- -------
Total investment-grade . . . . . . . . . . . . 1,544.7 9.5 1,554.2 93.8 66.0
------- ------ ------- ------- -------
BB+ . . . . . . . . . . . . . . . . . . . . . . 27.7 27.7 1.7 1.1
BB and BB-. . . . . . . . . . . . . . . . . . . 42.2 42.2 2.6 1.8
B and Below . . . . . . . . . . . . . . . . . . 24.3 6.4 30.7 1.9 1.3
------- ------ ------- ------- -------
Total noninvestment-grade. . . . . . . . . . . 94.2 6.4 100.6 6.2 4.2
------- ------ ------- ------- -------
Total fixed maturities . . . . . . . . . . . $1,638.9 $15.9 $1,654.8 100.0% 70.2%
-------------------------------------------------------------------------------------------------------------------
<FN>
(1) Bonds not rated by S&P are classified according to the rating assigned
to them by the National Association of Insurance Commissioners (the
"NAIC") as follows: for the purposes of the table, NAIC Class 1 is
included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and
Classes 4-6, "B and Below."
</TABLE>
Noninvestment-grade debt securities generally provide higher yields, but
involve greater risks than investment-grade debt securities because these
securities are often unsecured and subordinated to other debt, and because
the issuers of noninvestment-grade debt securities typically are more highly
leveraged and, therefore, more vulnerable to adverse economic conditions than
issuers of investment-grade debt securities. In addition, the trading market
for these securities is usually more limited than for investment-grade debt
securities. The Company continually reviews the percentage of its portfolio
that is invested in noninvestment-grade debt securities (NAIC designations 3
through 6) and intends to maintain the percentage holdings of such securities
at or below the current level.
At December 31, 1994, corporate debt securities then defaulted as to
principal and/or interest had been marked to market and constituted less than
a 1% of the Company's total fixed maturity securities.
DERIVATIVE CMOS. SLC's insurance subsidiaries hold investments in two
derivative CMOs, generally known as "kitchen sink" bonds, that resulted from
actions taken in late 1992 and mid 1993 to reduce the Company's exposure to
further loss of principal on a substantial portfolio of directly-held
derivative CMOs. These investments include certain Class B pass-through
certificates issued by Fund America (the "Fund America Investment") and the
residual interest (the "SIST Residual") in a special purpose trust, the
Secured Investors Structured Trust, 1993-1 ("SIST"). Both the Fund America
Investment and the SIST Residual represent residual or junior interests in
the cash flows from two trusts created in 1993, as described below.
Substantially all of each trust's cash flows from the investments within
these trusts is applied first to the payment of interest on the trust's
outstanding senior debt, with the remainder being applied to reduce the
principal balance of the senior debt. Except for the cash flows from one
relatively small investment held in the Fund America Trust, SLC's insurance
subsidiaries, as holders of the residual interests in these trusts, are not
entitled to receive any of the cash flows from these trusts until the senior
debt has been fully repaid. Thereafter, all cash flows from the underlying
securities in these trusts will be paid to SLC's insurance subsidiaries. As
discussed below, primarily as a result of a rising interest rate environment
and resultant negative market perceptions relative to these types of
investments, the Company realized investment losses totaling $86.2 million on
these investments during 1994.
CMO investments generally offer relatively high yields and, because of
the quality of the underlying collateral, such as residential mortgage loans,
are usually given the highest credit ratings by S&P and Moody's. Beginning in
late
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1990 and continuing through 1991, management utilized a strategy of investing
in CMOs to enhance the credit quality of SLC's investment portfolio without
incurring a reduction in investment yields. A significant portion of these
investments were represented by conventional CMO obligations that had
predictable cash flows and little risk of loss of principal. However, the
Company also invested substantial amounts in derivative CMOs, such as
principal-only certificates, interest-only certificates, inverse floaters,
and residual interests. Although highly rated, such derivative CMOs can
produce yields substantially higher than conventional CMOs, but are sensitive
to changes in market interest rates and there is substantial risk of loss of
principal associated with such investments.
Beginning in the last half of 1991 and continuing throughout 1992,
market interest rates declined significantly and, as a consequence, mortgage
loan interest rates declined to their lowest levels in approximately 25
years. Concurrently, the levels of mortgage loan refinancings and prepayments
reached unprecedented high levels. Based on such factors, SLC incurred
significant losses relative to its derivative CMOs and realized investment
losses on such investments totaling $138.5 million during 1992.
Beginning in mid 1992, SLC began exploring ways to reduce its exposure
to the prepayment risks associated with its remaining portfolio of
derivative-type CMOs, including retaining an unaffiliated investment advisor
and an investment banking firm to examine strategic alternatives regarding
such investments. The primary objectives were to liquidate a substantial
portion of the Company's investments in these types of securities without
incurring significant additional losses, to protect the Company against
future economic losses, and to reduce the accounting volatility associated
with these types of investments. Following extensive analysis of SLC's
portfolio of derivative CMOs, it was the belief of management and SLC's
advisors that the marketplace had significantly underpriced the individual
securities within the portfolio and that a structure involving unaffiliated
parties could be formed that would allow SLC to meet all of its objectives.
In conjunction with the sale of Bankers in November 1992, derivative
CMOs previously owned by Bankers with a carrying value of $251.0 million were
placed in the Trust sponsored by I.C.H. Funding Corporation, an SLC
subsidiary ("ICH Funding"). Bankers was issued a $159.2 million bond
("collateralized mortage note obligation") and SLC retained a residual
interest in the Trust totaling $91.8 million. All cash flows from the Trust
were to be applied first to the repayment of the collateralized mortgage note
obligation due Bankers, with interest at 8.5%, and SLC was given an option to
purchase the remaining collateralized mortgage note obligation from Bankers
within 90 days following the sale of Bankers. Due to continuing high levels
of prepayments of the underlying mortgage loans, at year-end 1992, SLC
reflected a writedown of its investment in the Trust to its fair value of
approximately $79.7 million. In February 1993, the SIST was formed by
transferring substantially all of the remaining assets held in the Trust.
Interests in the SIST totaling $171.0 million were sold to unaffiliated
parties, including $111.0 million of bonds bearing interest at the floating
thirty-day London Interbank Offered Rate ("LIBOR") plus 2 1/2% and $60.0
million of bonds at a fixed rate of 8.0%. SLC utilized $142.1 million of the
proceeds to retire the remaining collateralized mortgage note obligation due
Bankers and, after underwriting expenses, SLC received $24.5 million in cash,
which was applied to reduce its remaining carrying value in the SIST Residual.
In structuring the SIST, additional securities were added at a cost of
$6.8 million solely to collateralize the SIST Residual, which had a carrying
value of $55.2 million following the formation of the SIST. These securities
consisted of the principal component of bonds (the "RFCO Strips") issued by
the Resolution Funding Corporation, a mixed-ownership government corporation
established for the sole purpose of providing financing for the Resolution
Trust Corporation, the agency charged with resolving failed savings and loan
associations. By its terms, the payment of the RFCO Strips are due in full in
a single payment of $58.0 million in January 2021, which amount management
believes to be sufficient to assure SLC's recovery of its carrying value in
the SIST Residual. Although not obligations of, or guaranteed as to principal
by the United States of America, the Offering Circular for the RFCO Strips
stated that the principal amounts of the RFCO Strips would be fully repaid
from proceeds of noninterest bearing obligations of the United States issued
by the Secretary of the Treasury and deposited in a separate account at the
Federal Reserve Bank in New York.
Effective July 30, 1993, SLC and its subsidiaries, along with CFLIC,
entered into a transaction designed to substantially reduce their exposure to
the prepayment risks associated with their remaining investments in
derivative CMOs, including liquidating a substantial portion of such
investments. SLC's subsidiaries and CFLIC sold directly-owned derivative CMOs
with carrying values of approximately $137.7 million and $26.5 million,
respectively, to an
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<PAGE>
unaffiliated party, Fund America. In addition, SLC and CFLIC sold to Fund
America 75% of their rights with respect to the SIST Residual with carrying
values of $7.0 million and $33.7 million, respectively. CFLIC had acquired
its interest in the SIST Residual in conjunction with its acquisition from
SLC of an 83% interest in ICH Funding as discussed in Note 4 of Notes to
Financial Statements. Fund America sponsored the formation of a trust (the
"Fund America Trust") into which it deposited the purchased securities.
Interests in the Fund America Trust aggregating $218.0 million were sold to
unaffiliated parties, of which $217.0 million represented senior debt bearing
interest at the floating thirty-day LIBOR plus 2.0%. Of the gross sale
proceeds, $113.7 million was utilized to purchase securities which were added
to the Fund America Trust, $8.9 million was utilized to acquire RFCO Strips
to solely collateralize the Class B pass-through certificates, $5.0 million
was utilized to pay underwriting and other expenses, and $90.4 million was
utilized as partial consideration for the purchase of the securities from SLC
and its subsidiaries and CFLIC. The remainder of the consideration received
by SLC and it subsidiaries and CFLIC consisted of $101.0 million face value,
or 99%, of the Class B pass-through certificates issued by the Fund America
Trust with a fair value, as determined by the investment banking firm, of
$91.4 million, assuming an 11% discount rate. The Fund America Investment was
recorded at its fair value and SLC recognized a loss on the transaction
totaling $15.1 million. Such loss was offset, in part, by gains totaling
$11.8 million on the disposal of other securities utilized to hedge SLC's
investments in the derivative CMOs. The RFCO Strips added to collateralize
the Fund America Investment are to be paid in a single payment totaling
$102.0 million in April 2030, and management believes such amount are
sufficient to fully recover SLC's investment.
Management had originally intended to reflect the Fund America
Investment and the SIST Residual at their amortized cost in the held to
maturity category of fixed maturity securities to eliminate the accounting
volatility associated with these types of investments. In late 1993, the
Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board ("FASB") issued EITF Issue No. 93-18, "Impairment Recognition for a
Purchased Investment in a Collateralized Mortgage Obligation Investment or in
a Mortgage-Backed Interest Only Certificate," which provided an analytical
framework for measuring the impairment of certain "high risk" CMOs and which
has been widely used to provide guidance as to when writedowns should be
taken on CMO investments in accordance with SFAS No. 115. Under EITF No.
93-18, if the future cash flows from an investment on a discounted basis
utilizing a "risk free" rate of return are projected to be less than the
investment's amortized cost, an "other than temporary" writedown to fair
value is required through a charge to earnings. In addition, authoritative
sources indicated that it was doubtful whether these types of investments
could ever be classified in the held to maturity category of fixed
maturities. Accordingly, at December 31, 1993, SLC classified its Fund
America Investment and the SIST Residual as available for sale and reduced
the carrying value of such investments from $95.5 million to their estimated
fair value, assuming an 11% annual return to maturity, of $67.1 million. Such
reduction, totaling $28.4 million, was reflected as an unrealized investment
loss through a charge to stockholders' equity.
The Fund America Investment and the SIST Residual are both highly
sensitive to changes in mortgage loan prepayment rates and changes in market
interest rates, particularly the one-month LIBOR upon which interest payments
to holders of senior classes of these investments are generally based. At
December 31, 1993, the one-month LIBOR was approximately 3.2% and, primarily
as a result of the rising interest rate environment experienced throughout
1994, had increased to approximately 5.9% as of December 31, 1994. Such
increase in LIBOR had a significant impact on the estimate of future cash
flows that would be required to service the senior classes of debt. The
ultimate expected maturities of the senior debt were extended approximately
five years in the case of the Fund America Trust and approximately three
years in the case of the SIST as a result of the increase in estimated cash
flows needed to service the interest portion of such debt. The rise in LIBOR
in 1994 and its effect on projected cash flows was offset, in part, by a
significant decline in mortgage loan prepayments and refinancings, and, as a
consequence, the assumed rate of prepayments on underlying CMO investments
held in the Fund America Trust and the SIST were appropriately adjusted.
Under the provisions of EITF No. 93-18, the determination of when a loss
is to be "triggered" and reflected as a charge to earnings is a function of
both future cash flows and the "risk free" rate used to discount such cash
flows to their present value. At December 31, 1993, the "risk free" rate used
to value the Fund America Investment and the SIST Residual was 5.0%, or the
equivalent yield on a five-year U.S. Treasury obligation. As a result of both
rising interest rates in 1994 and the lengthening of the period over which
cash flows from these investments are expected to be received, the "risk
free" rate utilized at December 31, 1994 was 7.8%, or the equivalent of a
thirty-year U.S.
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<PAGE>
Treasury obligation. Such increase in the "risk free" rate substantially
lowered the threshold at which realized losses on these investments were
required to be recognized.
The determination of the fair values of the Fund America Investment and
the SIST Residual is primarily affected by the rate utilized to discount
future cash flows. At December 31, 1993, the discount rate assumed by an
investment banking firm to estimate the fair values of these investments was
11%, the same discount rate utilized to initially estimate the fair value of
these investments. Based, in part, on the perceived risks associated with
these types of investments and the turmoil experienced in the CMO marketplace
during 1994 as a result of significant losses incurred by certain investment
management funds investing in these types of instruments, the same investment
banking firm utilized a substantially higher 20.5% discount rate at December
31, 1994. Based on projected cash flows at December 31, 1994, this increase
in the assumed discount rate accounted for approximately $25 million of the
decrease in the fair value of these investments during 1994.
Due primarily to the increasing interest rate environment in 1994 and
its effect on the projected future cash flows of the Fund America Investment
and the SIST Residual as discussed above, realized investment losses on such
investments were "triggered" under the provisions of EITF No. 93-18 on two
occasions during 1994. For the three months ended March 31, 1994, SLC
reflected a charge to earnings for the writedown of these investments from
their GAAP book value totaling $96.4 million to their then fair value
totaling $50.0 million, or a total charge of $46.4 million. For the three
months ended December 31, 1994, SLC recorded an additional charge to earnings
for the writedown of the Fund America Investment from its GAAP book value
totaling $48.4 million to its estimated fair value of $8.6 million, or a
total charge of $39.7 million.
Following is information with respect to the amount and percentage of
senior debt outstanding at December 31, 1994 and 1993, relative to each of
the Fund America Trust and SIST, and the related book value, carrying value,
and projected cash flows attributable to the Company's Fund America
Investment and the SIST Residual:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
FUND AMERICA SIST
------------------ -----------------
(DOLLARS IN MILLIONS) 1994 1993 1994 1993
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior debt outstanding . . . . . . . . . . . . . . . . . . . . . . . . . $152.8 $190.7 $56.6 $90.8
Senior debt outstanding as a percentage of original senior debt. . . . . . 70.4% 87.9% 33.1% 53.1%
Book value of SLC investment. . . . . . . . . . . . . . . . . . . . . . . . $ 8.6 $ 81.7 $ 6.4 $13.8
Carrying value of SLC investment(1) . . . . . . . . . . . . . . . . . . . . 8.6 58.6 3.6 8.5
Projected future SLC cash flows(2). . . . . . . . . . . . . . . . . . . . . 267.2 315.7 40.5 49.7
Projected date of first receipt of cash flows(2). . . . . . . . . . . . . . 2004 1999 2001 1998
----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Represents the fair value of the Company's investments as estimated by
an investment banking firm.
(2) Represents the projected future cash flow attributable to the Company's
99% ownership in the Class B pass-through certificates issued by the
Fund America Trust (87% at December 31, 1993) and the Company's 25%
ownership in the SIST. The projected future cash flows and the
projected date of first receipt of cash flows were estimated by the
Company's investment adviser, NEAM, under an assumed unchanged future
interest rate environment at each of the respective dates.
</TABLE>
The carrying values of the Fund America Investment and the SIST Residual
at December 31, 1994 approximates the fair value of the RFCO Strips included
in the trusts at December 31, 1994, and, therefore, management believes the
likelihood of additional writedowns in the foreseeable future is remote.
The declines in value of the Fund America Investment and the SIST
Residual have not had and are not expected to have any effect on the
Company's operating cash flows over the next several years. The writedowns
reflected relative to these investments will, however, have a significant
effect on earnings as reflected for financial reporting purposes. Prior to
the writedowns discussed above, the Company had accrued investment income on
these investments at 6.0% of their GAAP book value, or approximately $5.8
million of investment income in 1994.
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Beginning in 1995, investment income will be accrued on these investments at
an average 16.5% of their GAAP book value, or approximately $2.5 million of
investment income. For statutory reporting purposes, the Investment Working
Group of the NAIC has tentatively decided not to follow or adopt the GAAP
accounting standards of SFAS No. 115 and EITF No. 93-18 described above. At
December 31, 1994, the combined carrying value of the investments for SAP
totaled $78.8 million.
OTHER INVESTMENTS. At December 31, 1994, $127.0 million in book value of
the Company's investment portfolio consisted of mortgage loans representing
5.4% of SLC's investment portfolio. The Company has a stated policy of not
directly initiating or making new mortgage loans, except under limited
circumstances, including primarily to finance sales of company-owned real
estate. New mortgage loans have totaled $1.8 million, $3.1 million and $17.0
million during 1994, 1993 and 1992, respectively. During 1994, SLC acquired
$7.9 million of mortgages as a distribution from one of its limited
partnership investments and $5.2 million of mortgages in conjunction with the
recapture of the CFLIC reinsurance agreement. Substantially all other
mortgage loans owned by the Company were as a result of the acquisitions of
life insurance companies in 1986 and prior years. At December 31, 1994,
mortgage loans delinquent by more than 60 days constituted amounted to $3.5
million, or 2.8% of total mortgage loans. At December 31, 1994, SLC provided
a $3.0 million reserve for possible mortgage loan losses through a
charge to earnings.
Real estate investments totaling $57.1 million and home office real estate
totaling $13.0 million represented 2.4% and 0.6% of the Company's investment
portfolio, respectively, at December 31, 1994. The Company has a stated
policy of not making real estate investments, except for foreclosures on its
existing mortgage loans. During 1994, there were no significant mortgage loan
foreclosures. Mortgage loan foreclosures totaled $3.2 million and $5.7
million in 1993 and 1992, respectively. During 1993, SLC fulfilled its
obligation to purchase certain real estate from former subsidiaries for
approximately $19.0 million. In addition, in conjunction with the sale of
Bankers in 1992, SLC purchased all of the real estate held by Bankers,
primarily its home office real estate, for $9.0 million. In 1992, Bankers
entered into a long-term lease for a portion of the property sold to SLC and
in 1994 SLC sold a substantial portion of the remaining property at a gain.
The remaining real estate acquired from Bankers, with a carrying value of
$4.1 million at December 31, 1994, is held for sale.
At December 31, 1994, the Company held limited partnership interests in
various partnerships with a carrying value totaling $42.0 million, as
compared to $43.6 million at year-end 1993 and $39.8 million at year-end
1992. These investments were made primarily to participate in the potential
appreciation resulting from certain leveraged buyouts and corporate
reorganizations. In addition, included in such investments at December 31,
1994 was a $21.1 million investment, representing a 49% limited partnership
interest, in a partnership formed to acquire, through auction, certain
mortgage loans and real estate formerly held by failed savings and loan
associations for resale. The Company believes that, on a selective basis,
these investments offer attractive risk-adjusted returns; however, such
investments are not readily marketable and, in the event of a need for
liquidity, the Company may be unable to quickly convert such investments into
cash. See Note 6 of Notes to Financial Statements for additional
information regarding the Company's investments in limited partnerships.
The Company's investment portfolio at December 31, 1994, also included
approximately $229.5 million of cash and short-term investments, plus certain
fixed maturity investments (U.S. government agency-backed and mortgage-backed
securities and publicly traded, investment-grade bonds) that could be readily
converted to cash at or near carrying value with a carrying value of
approximately $1,625.6 million. At December 31, 1994, these liquid
investments constituted 79% of the Company's total cash and invested assets.
REINSURANCE
Indemnity reinsurance is an arrangement or "treaty" under which an
insurance company, the "reinsurer," agrees to indemnify another insurance
company, the "ceding company," for all or a portion of the insurance risks
underwritten by the ceding company. Generally, the Company enters into
indemnity reinsurance arrangements to assist in diversifying its risks and to
limit its maximum loss on large risks, including risks that exceed SLC's
applicable policy-retention limits, currently ranging up to $500,000 per
insured for individual life insurance products. Indemnity reinsurance does
not discharge the ceding insurer's liability to meet policy claims on the
reinsured business. The ceding
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insurer remains responsible for policy claims on the reinsured business to
the extent the reinsurer fails to pay such claims. The Company reinsures with
unaffiliated insurance companies, except that Southwestern Life reinsures a
block of interest-sensitive life business from Modern American. The in force
amount under this reinsurance treaty with Modern American at December 31,
1994 was approximately $455.7 million.
Under most of the Company's reinsurance arrangements, new insurance and
annuity sales are reinsured automatically rather than on a basis that would
require the reinsurer's prior approval. The Company pays reinsurance premiums
to such reinsurers which are, in general, based upon percentages of premiums
received by the Company on the business reinsured less, in certain cases,
ceding commissions and experience refunds paid by the reinsurer to the
Company. Such agreements are generally terminable at any time as to new risks
by either the Company or the reinsurer on appropriate notice; however, such
termination does not affect risks ceded during the term of the agreement,
which generally remain with the reinsurer, subject, in specified cases, to
specified rights on the part of the Company to recapture such risks.
Insurance in force ceded in 1994 under indemnity reinsurance agreements
totaled approximately $1.5 billion. See Note 11 of Notes to Financial
Statements.
In a few instances, SLC's subsidiaries have ceded blocks of insurance to
unaffiliated reinsurers to provide funds for enhancing surplus, financing
acquisitions, and other purposes. Under these financing arrangements,
statutorily determined profits on the reinsured business are accelerated
through the reinsurer's payment of ceding commissions representing the
present value of profits on the business over the reinsurance period. These
reinsurance transactions, or so-called "surplus relief reinsurance" represent
financing arrangements and, in accordance with GAAP, are not reflected in the
accompanying financial statements, except for the ceding fees paid to or
received from reinsurers. Statutory surplus provided by such treaties before
tax effects totaled $57.8 million at December 31, 1994, or approximately 12%
more than the $51.5 million of surplus relief at December 31, 1993 primarily
as a result of the $20.7 million net ceding fee incurred by Employers
Reassurance Corporation ("ERC") to effect the recapture of certain
reinsurance from CFLIC. See Note 4 of Notes to Financial Statements. These
arrangements are expected to terminate over the next several years through
the recapture of the ceded blocks of business and such recaptures will result
in a charge to the statutory earnings of the recapturing companies.
Historically, reinsurance has not had a significant effect on SLC'S
consolidated results of operations, with net ceded premium income and other
considerations representing 6% or less of total premium income and other
considerations in each of the past three years.
ADMINISTRATIVE OPERATIONS
The administrative operations of most of SLC's subsidiaries are
consolidated through FMI, the service corporation subsidiary of SLC.
Functioning as the employer of substantially all of the employees performing
services in SLC's insurance operations, FMI provides management and
administrative services to SLC companies directly and through arrangements with
third parties. Claims administration, risk underwriting, regulatory compliance,
and development and marketing of insurance products are consolidated on behalf
of all of SLC's insurance subsidiaries and are generally separated for
servicing and performed on the basis of insurance product or business segment
instead of on a per subsidiary basis. A significant portion of the data
processing services required in the administrative operations of SLC's
insurance subsidiaries is provided by a third party vendor.
Because of the operational interrelationships among SLC's insurance
subsidiaries, the sales of subsidiaries in prior years have required changes
in the administrative operations of various SLC companies, including changes
in executive responsibilities and personnel requirements. The complete
separation of the operations of SLC's subsidiaries and the subsidiaries
previously sold occurred in 1993, with the expiration of the servicing
arrangements that were entered into when the former subsidiaries were sold in
1989 and 1990. Following a full-scale review, the administrative operations
of SLC's subsidiaries have been reorganized to reduce inefficiencies,
redundancies and excess capacities, and the operations of several companies
have been consolidated across product lines in a primary location under a
common management team.
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<PAGE>
COMPETITION
The insurance industry is highly competitive, with approximately 2,000
life and health insurance companies in the United States. Certain large
insurers and insurance holding company systems have substantially greater
capital and surplus, larger and more diversified portfolios of life and
health insurance policies, and larger agency sales operations than those of
SLC's insurance subsidiaries. Financial and claims paying ratings
assigned to insurers by the nationally recognized independent rating
agencies, always a key ingredient, have in some markets become preemptive,
especially in the area of accumulation products. SLC's insurance subsidiaries
also are encountering increased competition from banks, securities brokerage
firms, and other financial intermediaries marketing insurance products and
other investments, such as savings accounts and securities. SLC's life
insurance subsidiaries, like all life insurance companies, can expect greatly
increased competition from banks due to a recent judicial decision and
potential congressional action. In January, the U.S. Supreme Court held that
national banks may market and sell fixed, variable, and hybrid annuities.
Also in 1995, bills have been introduced in Congress that would substantially
widen the opportunities for banks to participate in the insurance industry,
including allowing banks to sell insurance products and bank holding
companies to own insurance companies.
SLC's insurance subsidiaries compete primarily on the basis of experience,
size, accessibility, cost structure and pricing, claims responsiveness,
product design and diversity, service, and distribution. SLC believes that
its insurance subsidiaries are generally competitive based on premium rates
and service, have longstanding relationships with their agents, and offer a
diverse portfolio of products.
RATINGS
SLC's subordinated debt and preferred stock are rated by Moody's and S&P.
These agencies, along with Duff & Phelps Credit Rating Company ("Duff &
Phelps"), have also rated the claims paying ability of certain of SLC's
insurance subsidiaries. In addition, A.M. Best, an agency specializing in the
rating of insurance companies, has assigned ratings to each of SLC's
insurance subsidiaries. Since 1992, substantially all of the ratings issued
by these agencies have reflected ratings downgrades due primarily to
continuing high levels of debt at the parent company level. As a result of
these downgrades, SLC has a subordinated debt rating of "C" by Moody's and
"C" by S&P, and a preferred stock rating of "C" by Moody's and "C" by S&P
(all of which are below investment grade). SLC's lead life insurance
subsidiary, Southwestern Life, has a "B+" rating by A.M. Best (very good), a
claims paying rating of "B" by Duff & Phelps, and "B+" by S&P. Additionally,
Moody's has assigned an insurance financial strength rating of "B2"
(poor) to Southwestern Life. Bankers New York has been assigned a rating of
"A-" and the remaining SLC subsidiaries have been assigned a rating of "B+"
by A.M. Best. For many of these ratings, SLC and its subsidiaries remain
under review, with negative implications.
The following ratings downgrades, beginning in 1991 and continuing into
1995, were precipitated by the amount of corporate debt remaining from SLC's
prior acquisitions, the perceived interdependence of the SLC's holding
company structure, high and continuing leverage at the parent company, and
losses incurred in connection with past investment strategies: Duff & Phelps
lowered the claims paying abilities of certain SLC subsidiaries in January
1993, October 1994, and January 1995; A.M. Best lowered its ratings in
February 1993 and January 1995; Moody's lowered the subordinated debt,
preferred stock, and insurance financial strength ratings in June 1993 and
January 1995; and S&P lowered the subordinated debt, preferred stock, and
claims paying ratings in November 1992 and January 1995. These factors have
also contributed to increased regulatory oversight of the SLC insurance holding
company organization.
The ratings assigned to SLC and its insurance subsidiaries have a
significant effect on SLC's ability to issue debt securities, as well as the
interest rates that SLC must pay in order to borrow funds. The claims paying
ratings assigned to SLC's subsidiaries could have a significant effect on a
given subsidiary's ability to market its products, as well as its ability to
retain its presently existing insurance in force.
REGULATION
GENERAL. SLC's insurance subsidiaries are subject to comprehensive
regulation in the various states in which they are authorized to do business.
The laws of these states establish supervisory agencies with broad
administrative
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<PAGE>
powers, among other things, to grant and revoke licenses for transacting
business, to regulate trade practices, reserve requirements, the form and
content of policies, and the types and amounts of investments, and to review
premium rates for fairness and adequacy. These supervisory agencies
periodically examine the business and accounts of insurance companies,
including SLC's insurance subsidiaries, and require them to file detailed
annual financial statements and reports prepared in accordance with SAP. In
addition, as an insurance holding company, SLC is also subject to regulatory
oversight in the states in which its insurance subsidiaries are domiciled and
conduct business.
REGULATORY REVIEW. In recent years increased scrutiny has been placed upon
the insurance industry generally and the adequacy of the existing state
regulatory framework in particular. In light of these developments, the NAIC
and state insurance regulators have also become involved in the process of
reexamining existing laws and regulations and their application to insurance
companies. In addition, in connection with its accreditation of states to
conduct periodic examinations, the NAIC has encouraged and persuaded states
to adopt model NAIC laws on specific topics, such as holding company
regulations, the structure of reinsurance transactions and the definition of
extraordinary dividends. During 1992 and continuing through 1994, in part as
a result of these activities, SLC's insurance subsidiaries became subject to
substantially more oversight by insurance regulators than had been the case
in the past, and such increased oversight will likely continue in 1995 and
future periods.
During 1992, a special working group of the NAIC (the "Group"), which
included the representatives of the insurance departments of seven states,
conducted an extensive review of the operations and financial condition of
SLC and its respective insurance subsidiaries. Management believes that the
concerns raised in 1992 by the Group have been resolved. Nevertheless, the
Group has indicated it will continue to monitor, to the extent it deems
appropriate, the activities and the operations of SLC and its insurance
subsidiaries.
REGULATION OF DIVIDEND PAYMENTS. As a holding company with no other
business operations, SLC's primary sources of cash needed to meet its
obligations, including principal and interest payments on its outstanding
indebtedness, are sales of and interest on its investments and dividends from
its insurance subsidiaries. SLC's insurance subsidiaries are subject to
various regulatory restrictions on the maximum amount of payments, including
loans or cash advances, that they may make to SLC without obtaining prior
regulatory approval. See Note 9 of Notes to Financial Statements for
additional information regarding dividend restrictions.
MINIMUM CAPITAL REQUIREMENTS. Effective with statutory annual statements
filed for the year ended December 31, 1993, and thereafter, all life
insurance companies are required to calculate, utilizing NAIC formulas, their
levels of total adjusted capital and risk-based capital. A ratio (the "RBC
ratio") is then determined based on the company's level of adjusted capital
to its risk-based capital.
In states that have adopted the NAIC regulations, including each of the
states where the Company's insurance subsidiaries are domiciled, the RBC
requirements provide for four different levels of regulatory attention
depending on an insurance company's base adjusted capital ("BAC") ratio. The
BAC ratio is defined as two times the RBC ratio. The "Company Action Level"
is triggered if a company's BAC ratio is less than 200% but greater than or
equal to 150%, or if a negative trend has occurred (as defined by the
regulations) and the company's BAC ratio is less than 250%. At the Company
Action Level, the affected company must submit a comprehensive plan to its
regulatory authority that discusses proposed corrective actions to improve
its capital position. The "Regulatory Action Level" is triggered if a
company's BAC ratio is less than 150% but greater than or equal to 100%. At
the Regulatory Action Level, the regulatory authority will perform a special
examination of the affected company and issue an order specifying corrective
actions that must be followed. The "Authorized Control Level" is triggered if
a company's BAC ratio is less than 100% but greater than or equal to 70%, and
the regulatory authority may take any action it deems necessary, including
placing the company under regulatory control. The "Mandatory Control Level"
is triggered if a company's BAC ratio is less than 70%, and the regulatory
authority is mandated to place the affected company under its control.
Management believes that the levels of capital in SLC's insurance
subsidiaries are sufficient to meet RBC requirements. Based on the NAIC's
formulas, the RBC ratios for all but one of SLC's life insurance subsidiaries,
based on financial statements as filed with regulatory authorities, exceeded
300% at December 31, 1994. One subsidiary's
24
<PAGE>
RBC ratio approximated 208% and management is in the process of evaluating
alternatives to achieve at least a 300% RBC ratio for such subsidiary by
year-end 1995.
GUARANTY FUNDS. From time to time, assessments are levied on SLC's
insurance subsidiaries by life and health guaranty associations in those
states in which they are licensed to do business. Such assessments are made
primarily to cover the losses of policyholders of insolvent or rehabilitated
insurers. In some states, these assessments can be partially recovered
through a reduction in future premium taxes. SLC's insurance subsidiaries
paid assessments of $2.7 million in 1994.
CERTAIN AGREEMENTS WITH REGULATORY AUTHORITIES. Certain subsidiaries of
SLC have entered into agreements with state insurance departments which
impose restrictions or reporting requirements in connection with their
operations of business or their payments of dividends. In management's view,
none of these regulatory agreements have adversely affected the insurance
business of the Company.
In conjunction with the receipt of the approval of the Texas Department
required for the restructuring of SLC's insurance holding company
organization in September 1993, SLC and its Texas-based subsidiaries,
Southwestern Life and Union Bankers, entered into an agreement with the Texas
Department, which superseded a prior regulatory agreement they had entered
into on March 31, 1993. Among other things, the agreement with the Texas
Department requires SLC, Southwestern Life and Union Bankers to provide the
Texas Department with designated information on an on-going basis relating to
surrenders on Southwestern Life and its subsidiaries, Constitution Life and
Bankers New York, and departures of executive officers, among other areas;
requires Southwestern Life to provide 30 days prior notice of the payment of
any stockholder dividend, to limit the amount it invests in private placement
securities, and to not invest in interest-only CMOs; and requires 30 days
prior notice of any financial reinsurance transaction or acquisition of
business through assumption reinsurance by either Southwestern Life or Union
Bankers. See Note 9 of Notes to Financial Statements for additional
information regarding dividend restrictions.
REGULATION AT FEDERAL LEVEL. Although the federal government generally
does not directly regulate the insurance business, federal initiatives often
have effects on the business in a variety of ways. Current and proposed
federal measures that may significantly affect the insurance business include
limitations on antitrust immunity, minimum solvency requirements, the removal
of barriers restricting banks from engaging in the insurance and mutual fund
business and changes in the taxation of insurance companies and the products
they market. It is not possible to predict the outcome of any such
congressional activity or the potential effects thereof on the Company or its
business.
HEALTH REFORM LEGISLATION. Numerous legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the U.S. health care system nationally or at the
state level. Certain proposals, such as cutbacks in the Medicare and Medicaid
programs, containment of health care costs on an interim basis by means that
could include a freeze on prices charged by physicians, hospitals and other
health care providers, and permitting states greater flexibility in the
administration of Medicaid, could adversely affect the Company. There can be
no assurance that currently proposed or future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have a material adverse effect on the Company's
operating results.
OTHER REGULATION. During 1993, the NAIC initiated the process of drafting
a model investment act. In general, the currently drafted investment act is
more restrictive than the present investment laws of the states in which
SLC's insurance subsidiaries are domiciled. If adopted, it is likely that
such model investment act would limit the types of investments that can be
made by SLC's insurance subsidiaries in future periods, as well as the
amounts that could be invested in various investment categories, which could
result in an overall reduction in investment yields.
RESERVES
In accordance with applicable insurance laws, SLC's insurance subsidiaries
have established and carry as liabilities actuarial reserves to meet their
respective policy obligations. Life insurance reserves, when added to interest
thereon at certain assumed rates and premiums to be received on outstanding
policies, are calculated to be sufficient to meet policy obligations. The
actuarial factors used in determining such reserves are based on statutorily
prescribed
25
<PAGE>
mortality and interest rates. Reserves maintained for health insurance
include the unearned premiums under each policy, reserves for claims that
have been reported but are not yet due, and reserves for claims that have
been incurred but have not been reported. Furthermore, for all health
policies under which renewability is guaranteed, additional reserves are
maintained in recognition of the actuarially calculated probability that the
frequency and amount of claims will increase as the attained age of the
insured increases. SLC's insurance subsidiaries maintain reserves on
reinsured business once it is assumed by them and take credit for reserves on
reinsured business after it is ceded to other insurers by them. Reserves for
the assumed reinsurance are computed on bases essentially comparable to
direct insurance reserves. See Note 1 of Notes to Financial Statements for
additional information regarding reserve assumptions under GAAP.
EMPLOYEES
At March 1, 1995, SLC and its subsidiaries employed a total of
approximately 1,000 persons, excluding agents who are not employees but are
independent contractors. This reflects a decrease in employees from 1,300 at
December 31, 1993 and 1,500 at December 31, 1992 (excluding employees of
Bankers). The consolidation of most of the Company's operations in Dallas, Texas
in 1993 and 1994, and reductions-in-force instituted in such years to reduce
costs and increase operating efficiencies, primarily account for the reduction
in employees.
ITEM 1A. EXECUTIVE OFFICERS OF REGISTRANT.
Set forth below is certain information regarding the current executive
officers of SLC.
On October 10, 1994, Robert L. Beisenherz resigned from his positions as
Chairman and a member of the Board of Directors of SLC and as its President and
Chief Executive Officer. That same date, James R. Kerber was elected as a
director of the Company and appointed to the positions of interim Chief
Executive Officer and President of SLC. On January 18, 1995, the Board of
Directors elected Glenn H. Gettier, Jr. as Chairman and a member of the Board of
Directors of the Company and as the Company's Chief Executive Officer. Mr.
Kerber was elected to the additional positions of Vice Chairman of the Board and
Chief Operating Officer of the Company.
DANIEL B. GAIL, age 44. Executive Vice President, General Counsel and
Secretary since July 1994. Mr. Gail also serves as an officer in a majority of
the Company's subsidiaries. Prior to joining the Company, Mr. Gail had been a
shareholder of the Dallas, Texas law firm of Winstead, Sechrest & Minick, P.C.,
since 1989, and an associate and shareholder of the Dallas, Texas law firm of
Moore & Peterson, P.C., from 1981 to 1989.
GLENN H. GETTIER, JR., age 52, Chief Executive Officer and Chairman of
the Board since January 18, 1995. Mr. Gettier is also a member of the Executive
Committee of the Board of Directors and serves as a director of a majority of
the Company's subsidiaries. Mr. Gettier served as the Executive Vice President,
Chief Financial Officer and as a director of USLICO Corporation, an insurance
holding company, and United Services Life Insurance Company, a life insurance
company, both located in Arlington, Virginia, from October 1992 until joining
the Company in January 1995. From 1984 until 1990, Mr. Gettier served as the
Executive Vice President and Chief Financial Officer of The Equitable Life
Assurance Society of the United States, a diversified financial services
organization, located in New York, New York.
ROBERT C. GREVING, age 43. Executive Vice President and Chief Actuary
since 1992. Mr. Greving joined the SLC organization in 1990 and served as a
Senior Vice President of the Company until 1993. He also serves as Executive
Vice President, Chief Actuary and a director of SLC's subsidiary, Southwestern
Life, and as an officer and director of various other SLC subsidiaries. Mr.
Greving was a Senior Vice President and Actuary of American Founders Life
Insurance Company, a life insurance company located in Phoenix, Arizona, from
January 1988 until July 1990.
JOHN T. HULL, age 51. Executive Vice President since March 1993,
Treasurer since 1983 and Chief Financial Officer since 1994. Mr. Hull served
from 1983 to 1993 as Senior Vice President and from 1979 to 1982 as the chief
accountant for SLC and certain of its affiliates. He is also an officer and a
director in a majority of the Company's subsidiaries and has also served since
1983 as Treasurer of several SLC subsidiaries.
26
<PAGE>
JAMES R. KERBER, age 62. President of the Company since October 1994 and
Chief Operating Officer and Vice Chairman of the Board since January 1995. Mr.
Kerber is also a member of the Executive Committee of the Company's Board of
Directors and serves as the President and Chairman of the Board of a majority of
the Company's subsidiaries. Mr. Kerber served from 1990 until he joined the
Company in 1994 as the Senior Executive Vice President - Insurance Operations of
Life Partners Group ("LPG"), an insurance holding company located in Denver,
Colorado. From 1981 through March 1990, Mr. Kerber had been employed by the
Company as its Executive Vice President, Insurance Operations - Denver. Mr.
Kerber resigned from his position with the Company in 1990 contemporaneously
with the closing of the Company's sale of certain subsidiaries to an affiliate
of LPG.
C. FRED RICE, age 56. Senior Executive Vice President-Marketing and Real
Estate since 1985. Mr. Rice has served as a director of the Company since 1975
and is a member of the Investment Committee and the Stock Option Committee of
the Board of Directors. He also has served since 1970 as an officer and director
of various affiliates of SLC. Mr. Rice is also an employee of CNC, serving as
Vice President, Secretary, and a director of CNC since 1984.
H. DON RUTHERFORD, age 58. Executive Vice President-Marketing since
April 1994. Prior to that, he served as Senior Vice President from March 1993.
Mr. Rutherford joined Union Bankers Insurance Company in 1967, and serves as
Executive Vice President and Senior Marketing Officer of that subsidiary. Mr.
Rutherford serves as Marketing Director for the individual life and health
products of SLC's insurance organization.
Officers are elected by the Board of Directors of SLC and hold office
until their respective successors are duly elected and qualified. All of the
executive officers of SLC are employed by its wholly-owned subsidiary,
Facilities Management Installation, Inc., except Mr. Rice.
ITEM 2. PROPERTIES.
The following table sets forth certain information regarding the principal
physical properties of SLC and its subsidiaries as of March 1, 1995. SLC also
owns a 2,600-acre residential and recreational real estate development in Perry
Park, Kentucky, and SLC's subsidiaries own certain real estate located in
Chicago, Illinois, which was acquired from Bankers at the time of its sale in
November 1992, and an office building with 129,000 square footage, at 2551 Elm
Street, Dallas, Texas, where Union Bankers was formerly headquartered; they also
hold, for investment purposes, certain real estate, none of which is included in
the table below.
<TABLE>
<CAPTION>
PRINCIPAL HEADQUARTERS SQUARE OWNED
COMPANY LOCATION FOOTAGE OR LEASED
------- ------------ ------- ---------
<S> <C> <C> <C>
SLC, Southwestern Life and 500 North Akard Street 182,000* Leased, expiring
Union Bankers Dallas, Texas 75201 November 1995*
Bankers New York 65 Froehlich Farm Blvd. 14,400 Leased, expiring
Woodbury, New York 11797 February, 1997
PALICO 3121 Buffalo Speedway 221,000 Owned
Houston, Texas 77098
<FN>
______________
* Effective December 1, 1995, the square footage leased will be reduced to
132,017 and the term will be extended to November 30, 1997.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
Modern American is a defendant in a class action lawsuit filed by William
D. Castle and others on or about May 14, 1993 in the Circuit Court of Jackson
County, Missouri, styled WILLIAM D. CASTLE, ET AL. V. MODERN AMERICAN LIFE
INSURANCE COMPANY, CV93-10275 (the "CASTLE case"). The suit purports to be
brought on behalf of a class of persons who own what plaintiffs denominate as
charter contracts, issued by life insurance companies merged into or acquired by
Modern American and its predecessors. The petition alleges breach of contract,
and seeks declaratory judgment, costs, expenses and such other relief as the
Court deems appropriate. As an alternative, the petition seeks rescission. SLC
was added as a defendant to the CASTLE case by an amended petition, filed
February 16, 1993, alleging
27
<PAGE>
that SLC should be liable for any judgment against Modern American because
SLC is the "alter ego" of Modern American and because SLC tortiously
interfered with Modern American's contracts with the plaintiffs. SLC's motion
to dismiss the amended petition as to SLC has been denied. On July 27, 1994,
the Circuit Court entered an order relative to the plaintiffs' motion for
certification of the suit as a class action and certified six subclasses
composed of the persons who own or owned the so-called charter contracts
purchased from Modern American and five of its predecessor corporations. A
motion for summary judgment on the breach of contract claim filed by Modern
American was overruled on October 19, 1994, and on such date plaintiffs'
Notice of Class Action was approved by the court. Modern American's motion
for partial summary judgment regarding plaintiffs' request for rescission
based upon alleged fraud is awaiting decision. In January 1995, the trial
court judge set the CASTLE case for trial commencing July 31, 1995.
On or about October 12, 1993, the Plaintiffs in the CASTLE case also
filed a lawsuit in the Circuit Court of Cole County, Missouri, naming Modern
American and the Director of the Missouri Department of Insurance (the "Missouri
Director") as Defendants. The second lawsuit, styled ROBERT J. MEYER, ET AL. V.
JAY ANGOFF DIRECTOR OF THE MISSOURI DEPARTMENT OF INSURANCE AND MODERN AMERICAN
LIFE INSURANCE COMPANY, CV193-1331CC (the "MEYER case"), is an appeal from
the regulatory proceedings before the Missouri Department of Insurance, by which
Modern American received regulatory approvals required for it to participate in
the restructuring of the SLC insurance holding company organization. The
restructuring was completed on or about September 29, 1993. The Plaintiffs in
the MEYER case are seeking reversal or remand of the Director's Order of
approval. On February 1, 1994 and July 15, 1994, the Cole County Circuit Court
issued orders affirming the Order of the Missouri Director, which approved the
reorganization of Modern American. On August 16, 1994, the plaintiffs appealed
the Cole County Circuit Court's order to the Missouri Court of Appeals. On March
14, 1995, the Missouri Court of Appeals reversed the judgment of the Cole County
Circuit Court and remanded the case for further proceedings. Specifically, the
Missouri Court of Appeals remanded the case to the Cole County Circuit Court for
a trial de novo of those transactions approved by the Director pursuant to Ch.
382 of the Missouri Revised Statutes. Management has instructed its counsel to
petition the Court of Appeals for a rehearing.
Although it is not possible at this time to make a meaningful assessment
of the outcome of the litigation described above, SLC believes it has
meritorious defenses to both the CASTLE and MEYER cases and intends to
defend both cases vigorously. An unfavorable decision in any of these cases,
however, could have a material adverse effect upon the financial condition of
SLC.
A subsidiary of SLC, together with six other parties, has been notified by
the Texas Natural Resource Conservation Commission (formerly known as the Texas
Water Commission) that it is a potentially responsible party under Texas
environmental law with respect to certain property owned by that subsidiary and
leased to a third party in Texas. That property is part of a tract of
approximately 17 acres that allegedly has been contaminated with creosote. The
potentially responsible parties have engaged an environmental consulting firm to
investigate the extent of the contamination and develop a clean-up plan, after
which the costs of the clean-up can be estimated. The Phase I Remedial
Investigation was completed during the first half of 1993, and the Phase I
Remedial Investigation Technical Memorandum (Phase I Report) was finalized by
the end of 1993. Phase II of the Remedial Investigation and the risk assessment
were delayed, but are currently scheduled to be performed during 1995. SLC's
subsidiary has agreed to pay 6% of the cost of the investigation, and a former
SLC subsidiary, which SLC has agreed to indemnify, has also agreed to pay 6% of
the cost of the investigation. There is no agreement among the potentially
responsible parties with regard to any responsibility for or the allocation of
costs of any remedial action which may ultimately be determined necessary. A
potentially responsible party brought an action, TOWNE SQUARE ASSOCIATES AND
MILLENNIUM III REAL ESTATE CORPORATION V. GSV PROPERTIES, ET AL., Cause No.
91-15951, filed November 1991 in the 250th Judicial District, Travis County,
Texas, naming the other potentially responsible parties defendants, including
SLC's subsidiary and former subsidiary. SLC's subsidiary and former subsidiary
asserted a counterclaim against the plaintiff as well as the other defendants,
contesting their status as potentially responsible parties and seeking
contribution and/or indemnity. The claims between the plaintiff and SLC's
subsidiary and former subsidiary have now been resolved and the Texas Natural
Resource Conservation Commission is contesting the Court's jurisdiction over the
remaining claims.
SLC, and Robert L. Beisenherz and Robert T. Shaw, each a former Chairman of
the Company, and certain former affiliates of the Company, were added by an
Amended Complaint, filed December 3, 1993, as defendants in
28
<PAGE>
a lawsuit pending in Marion Circuit Court in Indianapolis, Indiana, MUTUAL
SECURITY LIFE INSURANCE COMPANY, BY ITS LIQUIDATOR, JOHN F. MORTELL V. JAMES
M. FAIL, EMILY S. FAIL, JACK A. GOCHENAUR, ALVIN R. TOWNSEND, SR., JANICE T.
TOWNSEND, CHARLES D. CASPER, HARRY T. CARNEAL, CLIFFORD G. SMITH, KATHERYN F.
SMITH, THOMAS K. PENNINGTON, MICHAEL BOEDEKER, MELVIN R. SCHOCK, LIFESHARES
GROUP, INC., LSC-MARKETING, INC., LIFESHARES SERVICES COMPANY, MICHAEL S.
LANG, LANG ASSOCIATES, INC., BETA FINANCIAL CORPORATION, THE OKLAHOMA BANK,
ROBERT T. SHAW, CONSOLIDATED NATIONAL CORPORATION, I.C.H. CORPORATION,
BANKERS LIFE AND CASUALTY COMPANY, MARQUETTE NATIONAL LIFE INSURANCE COMPANY,
ROBERT L. BEISENHERZ, MARILYN BEISENHERZ, THEODORE L. KESSNER, AND CROSBY,
GUENZEL, DAVIS, KESSNER & KUESTER (the "MUTUAL SECURITY case"). On January 3,
1994, the suit was removed to the United States District Court, the Southern
District of Indiana at Indianapolis, Case No. IP94-0001 C. A Second Amended
Complaint was filed on or about May 18, 1994. The Plaintiff, the Indiana
Commissioner of Insurance, who had been appointed Liquidator of Mutual
Security Life Insurance Company ("MSL") pursuant to a Final Order of
Liquidation entered on December 6, 1991, alleges in the Second Amended
Complaint that the defendant, James M. Fail, and others acquired control of
MSL through a series of transactions and misused assets of MSL to acquire
control of Bluebonnet Savings Bank, FSB ("Bluebonnet"), thereby contributing
to the insolvency of MSL. The allegations against the Company arise primarily
from a loan that was made to Fail in 1989 by Bankers, at that time a
subsidiary of the Company. The Plaintiff alleges that the Company and others
are liable for the acts of Fail under doctrines of joint venture and
conspiracy, including alleged violations of the Racketeer Influenced &
Corrupt Organizations Act ("RICO"), 18 U.S.C. Section 1961, ET SEQ. The
complaint seeks unspecified compensatory damages, treble damages, costs,
attorney fees and all other appropriate relief. On March 30, 1994, motions to
dismiss were filed by CNC and its indirect subsidiary, Marquette. Motions to
dismiss were also filed on behalf of Robert T. Shaw and CNC, as well as
Robert L. Beisenherz. All such motions are awaiting decision.
On November 22, 1994, a second lawsuit was filed in the United States
District Court in the Southern District of Indiana, Case No. IP94-1934-C-M/S, by
the plaintiff liquidator of Mutual Security Life Insurance against essentially
the same defendants as in the Mutual Security case. This second suit seeks to
enjoin certain transfers of Bluebonnet stock set to occur in connection with the
settlement of another cause of action filed in Arizona. The court has denied
plaintiff liquidator's motion for preliminary injunction in this matter, and the
defendants have filed a motion to dismiss this suit as duplicative litigation.
The Company believes it has meritorious defenses to the MUTUAL SECURITY
case and the related second suit and intends to defend each suit vigorously.
In July 1994, the IRS completed its examination of SLC for the years 1986
through 1989 and proposed deficiencies totaling approximately $127.7 million,
before interest. A substantial portion of the proposed deficiencies involved the
deductibility of approximately $444.0 million of interest expense on certain
surplus debentures issued by SLC's insurance subsidiaries. Management believes
the surplus debentures in question were legally enforceable debt instruments, as
opposed to equity contributions, and that the related interest was properly
deductible. Management disagreed with the proposed deficiencies and filed a
written protest with the IRS. On March 7, 1995, representatives of SLC met with
the IRS Appeals Officer at which meeting such Appeals Officer indicated his
tentative agreement with the Company's position that no portion of the
previously deducted interest expense on certain surplus debentures would be
disallowed. The Appeals Officer's decision is not final and is subject to
review. See Note 12 of Notes to Financial Statements.
The Company, James R. Kerber, Vice Chairman, President and Chief Operating
Officer of the Company, C. Fred Rice, a director and Senior Executive Vice
President of the Company, Charles L. Duncan, a director of the Company, and
Robert L. Beisenherz, a former Chairman and Chief Executive Officer of the
Company, are defendants in a class action lawsuit styled, CHARLES OPTIZ, RAY
SCHULMAN, CHARLES HALL, FRANK E. ORENSTEIN, AND WYDE LUMBER & SUPPLY CORP.
PROFIT SHARING PLAN V. CHARLES L. DUNCAN, ROBERT L. BEISENHERZ, C. FRED RICE,
JAMES R. KERBER AND SOUTHWESTERN LIFE INSURANCE COMPANY, filed in U.S. District
Court, Northern District of Texas, on March 21, 1995, Case Number 3-95CV-0416G.
The Plaintiffs seek relief on behalf of themselves and all other persons who
purchased the Company's preferred and/or common stock between April 9, 1993 and
February 3, 1995, due to alleged violations of the securities laws, specifically
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and for common law fraud and deceit. The suit seeks
certification as a class action, unspecified
29
<PAGE>
monetary damages, legal fees and costs and other appropriate relief. All of
the defendants deny all of the allegations, believe they have meritorious
defenses to all of the claims and intend to defend the case vigorously.
Except as described above, SLC and its subsidiaries are not parties, and
their property is not subject to, any material pending legal proceedings other
than ordinary routine litigation incidental to their respective businesses. See
Note 12 of Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock of Southwestern Life Corporation is listed for trading on
the American and Chicago Stock Exchanges under the symbol "SLC." The following
table sets forth for the periods indicated the high and low sale prices per
share of the Common Stock as reported by the American Stock Exchange.
<TABLE>
<CAPTION>
1994 1993
------------- -------------
HIGH LOW HIGH LOW
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter . . . . . . . . . . 7 5/8 5 7 1/4 3 3/4
Second quarter . . . . . . . . . 6 5 7 3/8 4 9/16
Third quarter . . . . . . . . . . 6 1/2 5 1/4 6 3/4 4 7/8
Fourth quarter . . . . . . . . . 5 7/8 2 1/16 6 3/4 4 3/4
----------------------------------------------------------------------------
</TABLE>
At March 27, 1995, 47,205,200 shares of Common Stock of SLC were
outstanding and were owned of record by approximately 51,000 stockholders. No
cash dividends have been declared by SLC on its Common Stock since 1985. SLC
anticipates that it will continue for the foreseeable future to follow a policy
of retaining substantially all its earnings, and that as a result no cash
dividends on the Common Stock will be declared. Certain indentures currently
restrict SLC from declaring or paying dividends on its capital stock in excess
of specified amounts. See Note 3 of Notes to Financial Statements.
On February 11, 1994, SLC repurchased from CNC 100,000 shares of the Class
B Common Stock of SLC, representing all of the shares of that class authorized,
issued and outstanding. See "Business-Business Strategy" and Note 4 of the Notes
to Financial Statements. As a result of that repurchase and the amendment of the
Company's Certificate of Incorporation to delete all references to such shares
of stock, SLC is no longer authorized to issue any shares of Class B Common
Stock. No cash dividends had been declared on the shares of SLC's Class B Common
Stock since 1985.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the indicated periods selected
historical financial information for SLC and its consolidated subsidiaries. Such
information should be read in conjunction with the consolidated financial
statements of SLC, and the related notes and schedules, included elsewhere
herein. Factors affecting the comparability of certain
30
<PAGE>
indicated periods are discussed under "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(DOLLARS IN MILLIONS, ------------------------------------------------
EXCEPT PER SHARE DATA) 1994(1) 1993(2) 1992 1991(3) 1990
---------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . $ 529.5 $1,082.4 $1,740.3 $1,887.6 $1,826.5
Operating earnings (loss). . . . . . (337.5) 211.9 50.9 25.4 (11.4)
Net earnings (loss). . . . . . . . . (337.5) 203.3 46.5 34.2 (5.6)
Net earnings (loss) applicable to
common stock . . . . . . . . . . . (351.1) 174.5 15.7 3.4 (36.4)
---------------------------------------------------------------------------------------
Per common share data:
Primary:
Operating earnings (loss). . . . $ (7.38) $ 3.82 $ .42 $ (.11) $ (.88)
Net earnings (loss). . . . . . . (7.38) 3.64 .33 .07 (.76)
Fully diluted:
Operating earnings (loss). . . . (7.38) 3.53 .42 (.11) (.88)
Net earnings (loss). . . . . . . (7.38) 3.38 .33 .07 (.76)
Common stockholders' equity
(deficit) . . . . . . . . . . . . . (3.48) 5.55 1.88 1.16 .99
Cash dividends . . . . . . . . . . . - - - - -
---------------------------------------------------------------------------------------
Balance sheet data at end of period:
Total assets . . . . . . . . . . . $3,146.7 $3,697.9 $3,868.1 $5,598.2 $5,474.1
Notes payable. . . . . . . . . . . 369.4 418.0 543.3 706.1 781.6
Stockholders' equity . . . . . . . 35.3 495.2 419.2 384.9 376.7
Common stockholders' equity
(deficit) . . . . . . . . . . . . (164.7) 265.9 90.0 55.7 47.5
---------------------------------------------------------------------------------------
<FN>
(1) Operating loss and net loss in 1994 include a charge for the cumulative
effect at December 31, 1994, of a change in accounting for assessing the
recoverability of excess cost of acquired subsidiaires over net assets
acquired totaling $210.7 million, or $(4.43) per share. Such cumulative
effect was determined to be inseparable from a change in an estimate.
(2) Net earnings in 1993 includes charges for the cumulative effect to January
1, 1993 of a change in the method of accounting for post-retirement benefits
totaling $1.8 million, or $(.04) per share, and the cumulative effect at
December 31, 1993 of a change in accounting for certain debt and equity
securities totaling $4.9 million, or $(.10) per share.
(3) Net earnings in 1991 include a benefit for the cumulative effect to January
1, 1991 of a change in the method of accounting for income taxes totaling $8.8
million, or $.18 per share.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is an analysis of the results of operations and financial
condition of SLC and its consolidated subsidiaries. The consolidated financial
statements and related notes and schedules included elsewhere in this Form 10-K
should be read in conjunction with this analysis.
RECENT EVENTS AND OTHER FACTORS
SLC's recent operating results are overwhelmingly affected by largely
nonrecurring or infrequent items. At December 31, 1994, SLC adopted an
accounting change relative to its methodology of assessing the recoverability of
excess cost ("goodwill") that had a significant effect on the Company's reported
results and its stockholders' equity. In addition, as a result of rising
interest rates in 1994 and the application of accounting principles adopted at
year-end 1993, the Company reflected significant other than temporary writedowns
relative to certain of its CMOs. See "Business-Investments" and Note 5 of Notes
to Financial Statements.
Other events during 1994 included 1) the purchase and retirement of SLC's
Class B Common Stock which had given its previous holders the ability to elect
75% of the members of SLC's Board of Directors, 2) the termination of
significant and complex reinsurance agreements with a former affiliate, and 3)
the continued consolidation of operations and reductions in operating expenses.
See Note 4 of Notes to Financial Statements. Management's efforts in 1994 to
identify potential acquisition targets or merger partners to complement SLC's
core businesses, and to sell certain of its nonstrategic subsidiaries, were
unsuccessful. As a consequence, the Company's ability to meet its maturing debt
obligations as they become due in 1995 and 1996 became more problematic.
31
<PAGE>
Following is an analysis of these various events and factors, including
management's assessment of their impact on the financial position and liquidity
of SLC, as well as management's future expectations.
CHANGES IN CAPITAL STRUCTURE AND CFLIC TRANSACTION
In February 1994, SLC purchased all of its Class B Common Stock from CNC
and immediately cancelled and retired such stock. In June 1994, certain
transactions were consummated with CFLIC, a subsidiary of CNC, pursuant to
which SLC acquired from CFLIC all of its outstanding shares of 1984-A
Preferred Stock and 1987-B Preferred Stock and 620,423 shares of its Common
Stock, all of which shares were retired in 1994. See "Business-Business
Strategy" and Note 4 of Notes to Financial Statements. As a result of these
transactions, CNC's ownership in SLC was reduced to less than one million
shares, or 2%, of SLC's outstanding Common Stock. Management believes these
transactions are significant for various reasons. Most importantly,
management believes that SLC's access to both debt and equity capital markets
had been limited because of the control position held by CNC through the
Class B Stock, and that the retirement of the Class B Stock and simultaneous,
considerable reduction in CNC's holdings of SLC Common Stock through sales to
Stephens and Torchmark could ultimately enhance SLC's ability to refinance
its currently outstanding debt. Further, the redemption and retirement of the
SLC preferred stocks and the cancellation of senior debt of the Company that
had been held by CFLIC reduced SLC's interest and preferred dividend
requirements by approximately $5.4 million annually.
LIQUIDITY AND CAPITAL RESOURCES OF OPERATING COMPANIES
The primary sources of liquidity for SLC's insurance subsidiaries include
operating cash flows and short-term investments. The net cash provided by
operating activities and by policyholder contract deposits of SLC and its
subsidiaries, after the payment of policyholder contract withdrawals and
benefits, operating expenses, and interest requirements approximated $179.0
million in 1992. In 1994 and 1993, such operating cash flows resulted in net
cash requirements totaling approximately $21.0 million and $120.4 million,
respectively. Exclusive of withdrawals by holders of GICs as discussed below,
cash provided by operating activities during 1994 and 1993 totaled approximately
$55.1 million and $208.6 million. SLC believes that its short-term investments
are readily marketable and can be sold quickly for cash. Cash and short-term
investments of SLC's subsidiaries totaled $212.8 million, or 9% of consolidated
investments, at year-end 1994, compared to $295.1 million or 11% at year-end
1993 and $370.0 million or 12% at year-end 1992.
The principal requirement for liquidity of SLC's insurance subsidiaries is
their contractual obligations to policyholders, including policy loans, payments
of benefits and claims, and general operating expenses. Further, policy loans of
SLC's subsidiaries have represented 7% of SLC's consolidated investment assets
during the past three years.
In each of 1992, 1993 and 1994 and in January 1995, the claims-paying
ratings assigned to certain of SLC's subsidiaries by various nationally
recognized statistical ratings organizations were lowered. See
"Business-Ratings" for information regarding ratings. Prior to 1995 and
except for withdrawals made by certain GIC holders, management believes SLC's
subsidiaries had not experienced more than normal policy surrenders and
withdrawals as a result of these ratings downgrades. For the years ended
December 31, 1994 and 1993, policyholder contract withdrawals, principally
GICs, exceeded policyholder contract deposits by approximately $11.2 million
and $207.4 million, respectively. Withdrawals by GIC holders totaled $76.1
million during 1994 and $329.0 million in 1993. Approximately $59.0 million
of such withdrawals in 1994 and $184.3 million in 1993 represented scheduled
maturities of GICs which were not reinvested with an SLC subsidiary. In
addition, as a result of the restructuring of SLC's holding company system
completed in 1993, the surplus of the subsidiary was significantly reduced
and, as a consequence, some policyholders became entitled to an early
withdrawal of their GICs. The subsidiary also voluntarily offered certain
other GIC holders the right of early withdrawal. Unscheduled and early GIC
withdrawals totaled $17.1 million in 1994 and $144.7 million during 1993.
Because of its available liquidity and readily marketable securities, the
subsidiary has not encountered, and management does not anticipate that the
subsidiary will encounter, any difficulty in meeting its obligations relative
to such withdrawals.
In January 1995, SLC announced the indefinite suspension of dividends on
its 1986-A Preferred Stock and steps being contemplated by SLC's Board of
Directors to strengthen the holding company's capital structure and reduce
32
<PAGE>
outstanding debt and fixed charges. Management believes that primarily as a
result of these announcements, subsequent downgrades in credit and claim paying
ratings, and the similarity between the holding company's name and that of its
largest insurance subsidiary, Southwestern Life, surrender activity relative to
the life insurance and annuity business of Southwestern Life and, to a lesser
extent, its other insurance subsidiaries has increased over comparable levels in
1994. Surrenders of life insurance and annuity policies have averaged
approximately $8.8 million during each of the first two months of 1995, as
compared to $5.3 million per month in the comparable 1994 period. Because of
their available liquidity, SLC's insurance subsidiaries have not encountered any
difficulty in meeting their obligations relative to these surrenders. SLC's
subsidiaries maintain significant levels of cash and short-term investments and
approximately two-thirds of their investment portfolios are comprised of readily
marketable investment-grade fixed maturity investments. In management's
estimate, substantially all of the net surrender values of the Company's
insurance policies in force at December 31, 1994, could be met through the
liquidation of such investments, if required. Accordingly, management is
confident that SLC's insurance subsidiaries have the capacity to meet all of
their policyholder obligations as they become due.
Certain of SLC's insurance subsidiaries have ceded blocks of insurance to
unaffiliated reinsurers to provide funds for financing acquisitions and other
purposes. Net statutory surplus provided by such treaties before tax effects
totaled $57.8 million at December 31, 1994. For further information, see
"Business-Reinsurance."
SLC's insurance subsidiaries are subject to various capital adequacy tests
that are utilized by regulatory authorities and rating agencies to assist in
their evaluation of the subsidiaries' financial strength. See
"Business-Regulation" for information regarding risk-based capital levels.
Management believes that SLC's insurance subsidiaries are well-capitalized
and have sufficient capital to meet their business needs and to provide
assurance that they are highly capable of meeting their obligations to
policyholders.
The insurance subsidiaries maintain investment portfolios that exceed $2.3
billion in the aggregate. Their investment strategies are designed to maximize
credit quality, liquidity and return, while minimizing principal risk. See
"Business-Investments" for additional information regarding the Company's
investments.
LIQUIDITY AND CAPITAL RESOURCES OF PARENT COMPANY
The primary sources of liquidity for SLC have historically included
dividends and loans from its insurance subsidiaries and payments of principal
and interest on surplus debentures issued by certain insurance subsidiaries. In
1993, the sale of SLC's investment in BLHC provided a substantial amount of
liquidity for the parent company.
The unpaid principal balance of surplus debentures issued to SLC by its
insurance subsidiaries totaled $247.6 million at December 31, 1992. Of this
amount, surplus debentures in the aggregate unpaid principal amount of $141.8
million were payable by Southwestern Life and $105.8 million were payable by
Modern American. In 1993, Southwestern Life repaid the remaining balance on its
surplus debenture utilizing proceeds from its 1992 sale of Bankers. In the
restructuring of SLC's insurance holding company system in 1993, the surplus
debenture from Modern American was retired and added to SLC's investment in its
subsidiaries. Since September 30, 1993, there have been no surplus debentures
due SLC by its subsidiaries.
Prior to 1992, SLC had issued demand and collateralized notes to certain
of its subsidiaries in order to meet short-term liquidity requirements. During
1993 and 1992 SLC repaid all of such obligations to its subsidiaries and does
not intend to utilize such borrowings in future periods.
SLC's principal needs for liquidity are debt service and, to a lesser
extent, preferred dividend requirements. SLC's consolidated indebtedness totaled
$369.4 million at December 31, 1994, as compared to $418.0 million at December
31, 1993, and $543.3 million at December 31, 1992. Substantially all
indebtedness of SLC was incurred in connection with acquisitions of subsidiaries
in periods prior to 1987, including collateralized senior debt and unsecured
subordinated debt, a portion of which was exchanged for new debt in 1993. See
Note 3 of Notes to Financial Statements for additional information regarding
SLC's consolidated indebtedness, including annual maturities.
33
<PAGE>
SLC reduced its reported indebtedness by $162.8 million in 1992, $125.3
million in 1993, and $48.6 million in 1994. Such reductions totaling $336.7 were
effected primarily through SLC's prepayment of $45.0 million of senior secured
debt in 1992, the prepayment of $168.4 million of senior secured debt and
subordinated debt with proceeds form the sale of Bankers in 1992 and BLHC in
1993, a purchase in an open-market transaction of $10.0 million of senior
subordinated debt in 1994, and $83.3 million of scheduled subordinated debt
sinking fund and principal installments during the three-year period. In
connection with the CFLIC transactions in 1994, SLC retired the remaining $30.0
million principal balance outstanding on its senior secured debt.
Exclusive of the effects of investment transactions and the 1994 change in
accounting for excess cost, the pretax operating earnings of SLC and its
subsidiaries have been insufficient to cover SLC's debt service and preferred
dividend requirements over each of the last three years. For the years ended
December 31, 1994, 1993 and 1992, such pretax earnings were insufficient to
cover fixed charges and preferred dividends by approximately $44.6 million,
$103.4 million and $53.4 million, respectively. During the period, SLC covered
its fixed charges and dividend requirements primarily from proceeds resulting
from the sale of its investment in BLHC and the repayment of surplus debentures
in 1993 and 1992.
The following table reflects SLC's cash sources and requirements on a
projected basis for 1995 and on an actual basis for 1994.
<TABLE>
<CAPTION>
PROJECTED ACTUAL
(DOLLARS IN MILLIONS) 1995 1994
------------------------------------------------------------------
<S> <C> <C>
Cash sources:
Sales and redemptions of investments. . . . . $ 5.2
Sale of Integrity National. . . . . . . . . . $ 9.6
Dividends from insurance subsidiaries . . . . 31.3
Dividends from non-insurance subsidiaries . . 5.2 9.0
Investment income . . . . . . . . . . . . . . 4.2 7.4
Other . . . . . . . . . . . . . . . . . . . . 7.0 10.8
------------------------------------------------------------------
Total sources . . . . . . . . . . . . . . 26.0 63.7
------------------------------------------------------------------
Cash requirements/uses:
Subordinated debt sinking fund and
unaffiliated principal payments(1) . . . . . 59.8 8.5
Early retirement of subordinated debt . . . . 10.0
Operating expenses. . . . . . . . . . . . . . 3.6 5.4
Interest. . . . . . . . . . . . . . . . . . . 46.6 50.1
Capital contributions to subsidiaries . . . . 7.0
Preferred dividends . . . . . . . . . . . . . 15.7
Net cash required for CFLIC transactions. . . 15.7
Purchase of SLC subordinated debt from
subsidiaries . . . . . . . . . . . . . . . . 11.5
Other . . . . . . . . . . . . . . . . . . . . 1.8 11.1
------------------------------------------------------------------
Total requirements/uses . . . . . . . . . 111.8 135.0
------------------------------------------------------------------
Net cash provided (required) during year . . . (85.8) (71.3)
Cash and marketable securities available,
beginning of year . . . . . . . . . . . . . . 60.8 132.1
------------------------------------------------------------------
Cash and marketable securities available
(deficiency), end of year . . . . . . . . . . $(25.0) $ 60.8
------------------------------------------------------------------
<FN>
(1) Based on the expectation that the $21.5 million of SLC subordinated debt
held by Constitution Life will be available at the holding company for
meeting the sinking fund requirement. The transfer of these securities
to SLC will require regulatory approval.
</TABLE>
SLC's actual cash sources in 1994 exceed the previously projected 1994
cash sources, as reflected in SLC's 1993 Annual Report on Form 10-K, by
approximately $13.1 million. Included in the increase in such cash sources is a
$5.0 million prepayment on a note receivable, $6.5 million in income tax
reimbursements for utilization of SLC's
34
<PAGE>
income tax losses to offset the taxable income of its subsidiaries, and other
miscellaneous sources totaling $1.6 million. SLC's actual 1994 cash
requirement/uses exceed the previously projected 1994 cash requirements by
$23.1 million. Included in the increase in such cash requirement/uses is a
net $15.7 million additional investment in CFLIC preferred stock. See Note 4
of Notes to Financial Statements. In addition, other uses not previously
projected include the use of $10.0 million cash to purchase $10.0 million
principal amount of SLC's 11 1/4% Notes due 1996, the use of $7.0 million
cash for capital contributions to subsidiaries, a loss on the liquidation of
marketable securities totaling $4.6 million and other miscellaneous uses
totaling $7.3 million. Included in projected uses of cash in 1994 was the
purchase by SLC of $34.1 million of its 11 1/4% Notes due 1996 from certain
of its subsidiaries. During 1994, SLC decided not to utilize its available
cash to purchase $21.5 million principal amount of such Notes.
As indicated in the preceding table, SLC does not currently have
sufficient specifically projected cash sources to meet all of its 1995 cash
requirements, and as set forth in Note 9 of Notes to Financial Statements SLC
is severely limited regarding the amount of dividends that could be paid in
1995 by its insurance subsidiaries in the absence of regulatory approval.
Accordingly, SLC is in various stages of negotiating the sale of several of
its non-strategic subsidiaries that, at the prices under consideration, could
provide in excess of $50 million of capital resources to the holding company.
As of March 28, 1995, only one of such sales, that of Integrity National for
$9.6 million, was evidenced by a definitive agreement, and this amount is
included as a source of cash in the preceding projection. No assurances can
be given that the sale of any subsidiary, including Integrity National, will
be consummated. Additionally, in early 1995, management initiated a process
of contacting various financially capable parties who may be interested in
considering the investment of new capital into SLC. No assurances can be
given that any investment will be made or, if made, have a beneficial effect
on current stockholders of the Company. Lastly, while not currently being
pursued, the Company has the additional options of seeking to borrow on a
secured basis or to obtain regulatory approval for cash dividends from its
insurance subsidiaries. Based on its evaluation of these various options,
management believes that the Company has sufficient financial flexibility to
make it likely that the Company can meet its debt service requirements
through the end of 1995. However, there are no assurances that the Company
will be successful in its attempts to obtain sufficient cash to fulfill its
1995 cash requirements, including its debt service requirements. If the
Company is unable to obtain sufficient resources to meet its 1995 debt
obligations, such failure could result in a default on one or more of such
obligations and the holders thereof would be entitled to exercise certain
remedies, including accelerating the maturity of the entire indebtedness and
commencing legal proceedings to collect the indebtedness. In such event, the
Company will examine and consider the range of available alternatives to
default and the exercise of creditors' remedies.
RESULTS OF OPERATIONS
SLC's results in 1994, 1993, and 1992 have been affected by numerous items
of an infrequent and nonrecurring nature. In 1994, SLC adopted an accounting
change relative to the methodology of assessing the recoverability of excess
cost (goodwill) related to the 1986 acquisition of Southwestern Life that had a
significant effect on the Company's operating results. See Note 7 of Notes to
Financial Statements for additional information regarding this accounting change
and writedowns. In addition, primarily as a result of rising interest rates, the
Company reflected significant other than temporary writedowns relative to its
Fund America Investment and the SIST Residual. See "Business-Investments."
Writedowns of certain other CMO investments were also taken in 1994 based on the
anticipated liquidation of such assets at a loss in early 1995. The Company also
reflected a loss in 1994 on the anticipated 1995 sale of its investment in
Bankers New York and reflected a gain realized on the redemption of certain of
its securities in connection with the termination of a reinsurance arrangement
with CFLIC. See Notes 2 and 4 of Notes to Financial Statements. The 1994
operating results were also affected by a provision for litigation expenses and
other contingencies.
In 1993, SLC realized significant gains on the sale of its investment in
BLHC, the sale of other invested assets, and the termination of a reinsurance
arrangement with Bankers, and realized a benefit from the change in corporate
income tax rates. In addition, significant writedowns of certain capitalized
costs and operating facilities were taken in connection with the continuation of
an operational consolidation and provisions were made for the costs associated
with agreements entered into with SLC's former controlling stockholders and
certain other contingencies.
35
<PAGE>
In 1992, SLC realized a gain on the sale of an effective 60% interest in
Bankers, which was offset by charges for significant losses on the portfolio of
derivative CMOs, a litigation settlement, costs incurred to modify a data
processing services arrangement, and costs incurred or accrued relative to an
operational consolidation.
The following table reflects the results of SLC's basic operations from
1992 through 1994, the contribution to operating results of Bankers through
October 1992, and the effects that the above described charges and credits had
on SLC's operating results for each of the three years.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1994 1993 1992
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax earnings before equity in operating earnings
of BLHC, amortization of excess cost, interest
expense and credit (charges):
Existing operating companies . . . . . . . . . . . $ 28.3 $ 23.9 $ 36.5
Corporate . . . . . . . . . . . . . . . . . . . . 6.3 16.2 3.6
Bankers . . . . . . . . . . . . . . . . . . . . . 94.3
Equity in operating earnings of BLHC . . . . . . . . . 29.1 3.3
Amortization of excess cost . . . . . . . . . . . . . (9.6) (9.6) (11.0)
Interest expense . . . . . . . . . . . . . . . . . . . (48.3) (66.2) (79.0)
---------------------------------------------------------------------------------------
Pretax earnings (loss) before credits (charges). . . . (23.3) (6.6) 47.7
Federal income tax expense . . . . . . . . . . . . . . 32.2 .7 8.1
---------------------------------------------------------------------------------------
Earnings (loss) before credits (charges) . . . . . . . (55.5) (7.3) 39.6
---------------------------------------------------------------------------------------
Change in accounting for excess cost . . . . . . . . . (210.7)
Writedown of PALICO excess cost . . . . . . . . . . . (6.8)
Gain (loss) on sales of subsidiaries . . . . . . . . . (4.2) 110.7
Gain on sale of BLHC . . . . . . . . . . . . . . . . . 297.0
Realized losses on CMO portfolio . . . . . . . . . . . (97.2) (4.4) (138.5)
Other realized gains . . . . . . . . . . . . . . . . . 0.3 39.2 19.4
Gain on reinsurance termination . . . . . . . . . . . 22.6
Gain on CFLIC transaction . . . . . . . . . . . . . . 11.1
Litigation settlement . . . . . . . . . . . . . . . . (18.0)
Data processing services settlement . . . . . . . . . (12.6)
Consolidation expenses . . . . . . . . . . . . . . . . (23.9) (10.9)
Provision for services agreements . . . . . . . . . . (9.0)
Provision for litigation costs and other
contingencies . . . . . . . . . . . . . . . . . . . (7.8) (9.3)
Benefit from change in income tax rates . . . . . . . 3.5
Other tax effects related to charges (credits) . . . . 33.4 (96.5) 61.2
---------------------------------------------------------------------------------------
Total credits (charges). . . . . . . . . . . . . . . . (281.9) 219.2 11.3
---------------------------------------------------------------------------------------
Operating earnings (loss) before cumulative effect
of changes in accounting methods and extraordinary
losses . . . . . . . . . . . . . . . . . . . . . . . $(337.4) $211.9 $ 50.9
---------------------------------------------------------------------------------------
</TABLE>
The increase in the pretax operating loss from $6.6 million in 1993 to a
pretax operating loss of $23.3 million in 1994 reflects in part the effects of
SLC's sale of its investment in BLHC effective September 30, 1993, and the
subsequent utilization of the proceeds from such sale. In 1993, SLC had
reflected its equity in the operating results of BLHC totaling $29.1 million
through the date of such sale, and in 1994 SLC had no similar equity earnings
included in its operating results. SLC utilized $100 million of the proceeds
from such sale to redeem preferred stocks with annual dividend requirements
totaling $13.5 million. Although such use of funds to redeem preferred stock had
an effect on earnings available to common stockholders, it had no effect on
SLC's pretax operating results. SLC utilized approximately $63.2 million of such
proceeds for the redemption of a portion of its outstanding indebtedness in 1993
and 1994, which reduced annual interest requirements on long-term indebtedness
by approximately $9.4 million. The
36
<PAGE>
remainder of the proceeds totaling approximately $124.4 million were invested
primarily in lower yielding short-term obligations to meet SLC's liquidity
needs. The interest savings on the debt retired and the yields on such
short-term investments were insufficient to replace the equity earnings in
BLHC.
Pretax earnings from existing operating companies improved by $4.4
million in 1994 as compared to 1993, primarily as a result of general and
administrative expense savings realized in 1994. General and administrative
expenses totaled $92.2 million in 1994, as compared to $111.2 million in
1993, primarily reflecting the results of operational consolidations and
other cost saving measures. The expense savings in 1994 were offset in large
measure by higher than expected benefit costs, primarily in the individual
life insurance and individual health insurance segments.
The decline in pretax operating earnings of $47.7 million in 1992 to a
pretax operating loss of $6.6 million in 1993 reflects primarily the
exclusion of Bankers' results for all of 1993, offset in part by a reduction
in interest expense on long-term indebtedness of $16.5 million (See
"-Interest Expense and Preferred Dividend Requirements"). Through October
1992, Bankers was included in SLC's consolidated results and contributed
approximately $94.3 million to SLC's 1992 pretax earnings. For the last two
months of 1992, SLC reflected its equity in the operating results of BLHC
totaling $3.3 million. The combined Bankers contribution to pretax earnings
and equity in operating results of BLHC totaling $97.6 million in 1992
compares to SLC's equity in the operating earnings of BLHC totaling $29.1
million in 1993. Except for the interest expense savings on long-term debt
realized in 1993, SLC was unable to effectively redeploy the proceeds from
the sale of Bankers during the last two months of 1992 and during 1993 to
fully replace the reduction in pretax earnings resulting from the sale of
Bankers. In addition, SLC incurred losses of $12.9 million in its group
insurance operations in 1993.
37
<PAGE>
ANALYSIS OF OPERATING RESULTS BY INDUSTRY SEGMENT
SLC's major industry segments consist of individual life insurance,
individual health insurance, group and other insurance, accumulation products,
and corporate (including surplus investment). The following table sets forth the
consolidated revenues, expenses, pretax operating earnings and product sales
(annualized first year premiums) attributed or allocated to each industry
segment. "Pretax operating earnings (loss)" reflected in the table represents
SLC's consolidated operating earnings or loss before realized investment gains
or losses, corporate interest expense, amortization of excess cost, provision
for income taxes, the cumulative effect of accounting changes, and extraordinary
gains and losses. See Note 17 of the Notes to Financial Statements and Schedule
V of the Financial Statement Schedules for additional information regarding
SLC's segment results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
---------------------------------------------------------------------------------------
INDIVIDUAL LIFE INSURANCE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total sales . . . . . . . . . . . . . . . . . . . . . . $ 16.9 $ 13.1 $ 25.1
---------------------------------------------------------------------------------------
Premiums (including premium equivalents) . . . . . . . $162.4 $164.0 $267.9
Less premium equivalents . . . . . . . . . . . . . . . (53.3) (46.0) (76.3)
------ ------ ------
Premium income and other considerations . . . . . . . . $109.1 118.0 191.6
Net investment and other income . . . . . . . . . . . . 126.5 147.6 157.1
------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . 235.6 265.6 348.7
Total benefits and expenses . . . . . . . . . . . . . . 204.3 220.5 306.2
------ ------ ------
Pretax operating earnings . . . . . . . . . . . . . . . $ 31.3 $ 45.1 $ 42.5
---------------------------------------------------------------------------------------
INDIVIDUAL HEALTH INSURANCE
---------------------------------------------------------------------------------------
Comprehensive and other sales . . . . . . . . . . . . . $ 17.3 $ 29.0 $ 49.7
Medicare supplement sales . . . . . . . . . . . . . . . 30.9 33.6 99.4
Long-term care sales . . . . . . . . . . . . . . . . . 1.2 1.0 16.3
------ ------ ------
Total Sales . . . . . . . . . . . . . . . . . . . . . . $ 49.4 $ 63.6 $165.4
---------------------------------------------------------------------------------------
Premium income and other considerations . . . . . . . . $215.8 $220.3 $859.1
Net investment and other income . . . . . . . . . . . . 17.5 11.2 54.8
------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . 233.3 231.5 913.9
Total benefits and expenses . . . . . . . . . . . . . . 217.5 210.5 847.4
------ ------ ------
Pretax operating earnings . . . . . . . . . . . . . . . $ 15.8 $ 21.0 $ 66.5
---------------------------------------------------------------------------------------
GROUP AND OTHER INSURANCE
---------------------------------------------------------------------------------------
Total sales . . . . . . . . . . . . . . . . . . . . . . $ 8.2 $ 41.2 $ 61.9
---------------------------------------------------------------------------------------
Premium income and other considerations . . . . . . . . $ 93.1 $136.5 $337.4
Net investment and other income . . . . . . . . . . . . 15.1 15.6 20.5
------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . 108.2 152.1 357.9
Total benefits and expenses . . . . . . . . . . . . . . 113.9 165.0 352.8
------ ------ ------
Pretax operating earnings (loss) . . . . . . . . . . . $ (5.7) $(12.9) $ 5.1
---------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
(DOLLARS IN MILLIONS) 1994 1993 1992
---------------------------------------------------------------------------------------
ACCUMULATION PRODUCTS
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total sales . . . . . . . . . . . . . . . . . . . . . . $ 72.1 $ 89.9 $460.3
---------------------------------------------------------------------------------------
Premium income and other considerations . . . . . . . . $ 0.1 $ .2 $ .7
Net investment and other income . . . . . . . . . . . . 32.5 52.4 120.6
------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . 32.6 52.6 121.3
Total benefits and expenses . . . . . . . . . . . . . . 45.7 59.3 120.9
------ ------ ------
Pretax operating earnings (loss) . . . . . . . . . . . $(13.1) $ (6.7) $ .4
---------------------------------------------------------------------------------------
CORPORATE
---------------------------------------------------------------------------------------
Total revenues . . . . . . . . . . . . . . . . . . . . $ 16.8 $345.6 $117.6
Total expenses . . . . . . . . . . . . . . . . . . . . 11.3 45.6 41.5
------ ------ ------
Pretax operating earnings (loss). . . . . . . . . . . . $ 5.5 $300.0 $ 76.1
---------------------------------------------------------------------------------------
</TABLE>
INDIVIDUAL LIFE INSURANCE. Revenues of the individual life insurance
segment accounted for approximately 38.6% of consolidated revenues excluding
corporate revenues and realized investment gains and losses in 1994, as compared
to 37.8% in 1993 and 20% in 1992. The increase in 1993 was directly attributable
to the sale of Bankers in 1992. Bankers' revenues had been derived predominantly
from sales of individual health insurance products and, as a result of the sale,
the relative proportion of SLC's revenues attributable to the individual life
insurance segment increased significantly. Most individual life insurance sales
over the last three years were of universal and interest-sensitive life
insurance products, although several new traditional whole life products were
introduced into the marketplace during 1993. Exclusive of sales by Bankers,
individual life sales declined from $14.0 million in 1992 to $13.1 million in
1993, but increased to $16.9 million in 1994. Management believes the declines
in 1993 were attributable to the downgrade in the claims-paying rating of SLC's
most significant life insurance subsidiary, Southwestern Life, and the inability
to successfully market several new products introduced during 1991. However, as
a result of changes in marketing strategies to target sales in the senior
citizen marketplace and the introduction of new products in 1993, sales of
individual life insurance products increased significantly in the latter half of
1993 and continued to increase in 1994.
Pretax operating earnings of the individual life insurance segment
increased from $42.5 million in 1992 to $45.1 million in 1993, but decreased to
$31.2 million in 1994. Included in pretax operating earnings in 1993 was a
non-recurring gain on the termination of a reinsurance arrangement between an
SLC subsidiary and Bankers totaling $22.6 million. Excluding such gain, pretax
operating earnings in 1993 totaled $22.5 million. Bankers derived substantial
profits from its individual life insurance business and the sale of Bankers
accounts for a significant portion of the decline in pretax operating earnings
of this segment in 1993. Declining market interest rates and the reduced yields
earned by SLC on its investment portfolio also contributed to the decline in the
operating profits of this segment. Over one-half of the Company's life insurance
reserves represent reserves on traditional life insurance products having fixed
contractual interest rates. Consequently, declining investment yields in 1992
and 1993 resulted in significantly reduced profit margins on the traditional
block of business. Remaining life insurance reserves consist primarily of
reserves on interest-sensitive products and credited rates on such policies were
reduced in both 1992 and 1993 to correspond with the decline in yields on
investments. Excluding the effects of the reinsurance recapture in 1993, pretax
profitability of the individual life insurance segment improved in 1994,
primarily as a result of an improvement in investment yields and an overall
reduction in general expense levels. The improvement in 1994 was offset, in
part, by higher than anticipated death claims.
Management expects to continue to emphasize growth in the Company's
individual life insurance segment. However, as a result of the further downgrade
in Southwestern Life's claims paying ratings in early 1995, Southwestern Life's
ability to maintain or increase the levels of new sales of life insurance
products in 1995 is at present uncertain. A decline in sales, combined with
continuing high levels of surrenders of existing life insurance policies (as
39
<PAGE>
previously discussed under "-Liquidity and Capital Resources-Insurance
Operations"), could result in reduced profitability in this segment in future
periods.
INDIVIDUAL HEALTH INSURANCE. Sales in the individual health insurance
segment declined significantly in 1994 primarily due to the Company's
decision to deemphasize sales of comprehensive health products, while
revenues remained relatively level as a result of both premium rate increases
on existing business and improved investment yields. Both sales and revenues
in the individual health insurance segment declined significantly in 1993 as
a result of the sale of Bankers. Individual health premiums earned by Bankers
represented approximately 74.8% of total individual health premiums in 1992.
The individual health premiums earned in 1994 and 1993 and the remaining
premiums earned in 1992 were primarily attributable to Medicare supplement
products and comprehensive individual health products issued by Union
Bankers, BML and Integrity National.
Exclusive of Bankers, sales of individual health products increased from
$60.3 million in 1992 to $63.6 million in 1993, but declined to $49.4 million in
1994. Premiums earned (exclusive of Bankers) increased from $216.2 million in
1992 to $220.3 million in 1993, but declined to $215.8 million in 1994. The
ratio of policy benefits to premiums earned (exclusive of Bankers) declined from
68.4% in 1992 to 62.3% in 1993, but increased to 67.6% in 1994. The significant
decline in the benefit ratio in 1993 resulted in an approximate $15.0 million
improvement in the gross operating margins (the excess of premiums earned over
benefits incurred) of the Company's individual health insurance segment.
Correspondingly, the significant increase in the benefit ratio in 1994 resulted
in an approximate $13.3 million deterioration in gross operating margins.
Substantially all of the increase in the individual health benefit ratio in 1994
was attributable to the Medicare supplement line of business, reflecting a
deficiency in premiums charged for certain Medicare supplement products.
Congressional mandates have imposed a minimum 65% benefit ratio for Medicare
supplement products and, as a result, the benefit ratio for Medicare supplement
products is generally higher than for other individual health insurance
products. The benefit ratio applicable to the Company's Medicare supplement
business decreased from 69.5% in 1992 to 65.8% in 1993, resulting in a
substantial portion of the improvement in the individual health benefit ratio in
1993, but increased to 73.3% in 1994. The Company received rate increases for
these products in 1994, which subsequently proved to be insufficient, and in mid
and late 1994 and early 1995 filed requests for significant additional rate
increases, a majority of which have been approved as requested and implemented,
and the remainder of which are still pending.
Management expects to continue to emphasize growth in the individual
health insurance segment, principally through the sale of a new comprehensive
product introduced in January 1995. Management believes that the recent
consolidation of the marketing operations of Southwestern Life and Union Bankers
and the Company's reputation for quality service and support are important
factors that will enable the Company to compete more effectively in the market
for Medicare supplement products.
GROUP INSURANCE. Sales of group life and health insurance have declined
from $61.9 million in 1992 to $41.2 million in 1993 to $8.2 million in 1994.
Substantially all sales of new group business over this three-year period were
made by PALICO. During 1993, the Company determined that a substantial portion
of the business which had been written by PALICO in late 1992 and 1993 was
unprofitable. Due to significant losses incurred by PALICO in 1993 and
uncertainties created by national health care reform efforts, management
determined that PALICO would discontinue writing substantial volumes of new
business in the latter part of 1993 and for all of 1994. In addition to revenues
from group insurance products, PALICO also earned revenues of $12.8 million in
1992, $11.5 million in 1993, and $12.5 million in 1994 from administrative
services only ("ASO") contracts and third party administration ("TPA") contracts
whereby it processes claims for nonaffiliated groups without assuming
underwriting risks.
While sales of new group business declined during 1993 as compared to
1992, earned premiums of this segment (excluding Bankers) increased from $103.8
million in 1992 to $136.5 million in 1993 as a result of new sales made in 1992.
Earned premiums declined in 1994 to $93.1 million, primarily as a result of
reduced sales in 1993 and 1994. The related ratio of policy benefits to earned
premiums of the group segment increased from 62.9% in 1992 to 74.8% in 1993, but
declined to 68.6% in 1994. The significant increase in the benefit ratio in 1993
contributed to a pretax operating loss in the group segment of $12.9 million in
1993, as compared to pretax operating earnings of $5.1 million in 1992. The
pretax operating loss of the group segment declined to $5.7 million in 1994,
reflecting, in part, the improvement in the group benefit ratio in 1994. A
portion of the operating losses in 1993 and 1994 were also
40
<PAGE>
attributable to PALICO's TPA business. PALICO's success with ASO contracts
prior to 1993 led it to greatly expand its involvement in TPA operations
during 1993. Primarily because of problems in adequately pricing for the
services to be rendered under these contracts, the TPA operations were
unprofitable in both 1993 and 1994. As a consequence, PALICO terminated all
of its TPA contracts during 1994.
ACCUMULATION PRODUCTS. Sales of accumulation products declined
significantly in 1994 and 1993 as compared to prior periods as a result of
the Company's strategic decision not to pursue growth in its accumulation
product segment through the sale of GICs. The decision not to pursue growth
in the accumulation business was directly attributable to a downgrade in the
claims-paying rating of Constitution Life. New GIC sales have declined from
$292.1 million in 1992 to $5.3 million in 1993 and $2.7 million in 1994. Such
decline in GIC sales was offset, in part, by increases in new annuity sales,
principally SPDAs. New annuity sales totaled $69.3 million in 1994 and $89.9
million in 1993 as compared to $27.2 million in 1992.
The accumulation products segment reflected a pretax operating loss of
$13.1 million in 1994, as compared to a loss of $6.7 million in 1993 and a
gain of $0.4 million in 1992. The loss in 1994 was attributable in part to an
$8.6 million writedown of the present value of future profits of acquired
business relative to certain annuity business resulting from higher than
anticipated surrender rates and reduced yields on related investments.
Substantially all of the remaining pretax operating loss in 1994 and the
pretax operating loss in 1993 was attributable to declines in yields earned
on invested assets. For most of 1993 and during all of 1994, the Company
credited interest on a substantial portion of its GIC liabilities at
guaranteed fixed rates which, in many cases, exceeded rates being earned on
the related invested assets. At year-end 1994, approximately 90% of the
remaining $313.3 million of GIC liabilities bore interest at floating rates
based on changes in the Standard and Poor's 500 stock index. Approximately
$300.5 million of such GIC liabilities are scheduled to mature and are
expected to be withdrawn by year-end 1995. A provision has been reflected in
the Company's 1994 results of operations of approximately $3.0 million for
investment losses expected to be incurred upon the liquidation of assets
needed to fund such GIC withdrawals in 1995.
CORPORATE. The corporate segment includes those elements of the Company's
operations other than its insurance operations. Revenues allocated to the
corporate segment include investment income on the interest-bearing assets of
the holding company and on the capital and surplus of SLC's insurance
subsidiaries in excess of amounts necessary to support their insurance
operations. In addition, such revenues also include the $11.1 million gain
realized on the CFLIC recapture in 1994, which was offset in part by the $4.2
million estimated loss to be incurred on the sale of Bankers New York; the
$297.0 million gain on the sale of SLC's investment in BLHC in 1993; and the
$110.7 million gain on SLC's sale of its investment in Bankers in 1992.
In 1994, $11.3 million of expenses were allocated to the corporate segment,
including provisions for franchise taxes and taxes other than income taxes,
litigation reserves and other contingencies. In 1993, $45.6 million of
expenses were allocated to the corporate segment, including $23.9 million in
writeoffs of capitalized data processing costs and certain home office real
estate, a $9.0 million provision for services agreements entered into with
SLC's former controlling stockholders, a $9.3 million provision for
anticipated costs of litigation and other contingencies, and $4.4 million of
expenses associated with the restructuring of SLC's collateralized mortgage
note obligation. In 1992, $41.5 million of expenses were allocated to this
segment, including an $18.0 million litigation settlement, $12.6 million of
costs associated with modifying SLC's data processing servicing arrangements
with an unaffiliated vendor, and $10.9 million in costs related to a planned
operational consolidation of three of SLC's Texas-based insurance
subsidiaries.
INTEREST EXPENSE AND PREFERRED DIVIDEND REQUIREMENTS
SLC's consolidated interest expense totaled $48.3 million in 1994, $66.2
million in 1993, and $79.0 million in 1992. The reductions in interest
expense were primarily as a result of the principal reductions in SLC's
long-term indebtedness made during the periods as previously discussed under
"-Liquidity and Capital Resources of Parent Company." The reductions in
interest expense in 1993 and 1992 were offset, in part, by the interest
expense incurred relative to collateralized mortgage note obligations
totaling $6.0 million in 1993 and $2.3 million in 1992. The collateralized
mortgage note obligations were initially incurred in conjunction with the
sale of Bankers in 1992. As a result of the transactions entered into in July
1993 intended to reduce SLC's exposure to prepayment risks on certain
41
<PAGE>
derivative CMOs (see "Business-Investments"), the accounts of the Trust, which
included the collateralized mortgage note obligation and the related
interest expense, are no longer included in SLC's consolidated balance sheet
or statement of earnings after July 30, 1993. Exclusive of such interest
expense, interest expense in long-term indebtedness decreased $16.5 million
in 1993 and $11.9 million in 1994.
Preferred dividend requirements totaled $13.7 million in 1994, $28.8
million in 1993 and $30.8 million in 1992. In January of 1995, SLC's Board of
Directors announced the indefinite suspension of the payment of preferred
stock dividends; however, these dividends are cumulative and, accordingly,
the Company is now in arrears on its preferred dividends. See Note 10 of
Notes to Financial Statements.
INCOME TAX PROVISIONS AND DEFERRED INCOME TAX ASSET
In 1994, income tax expense represented less than 1% of consolidated
operating earnings before income taxes, or more than 34% less than the
expected corporate income tax rate. Several items had a significant impact on
the 1994 effective income tax rate. First, a substantial portion of the
pretax operating loss was attributable to the accounting for excess cost,
which is a nontaxable item. In addition, the valuation allowance for SLC's
deferred income tax asset for 1994 was increased over 1993 based on
management's assessment that SLC and its nonlife insurance subsidiaries may
not be able to fully utilize existing book/tax deductible temporary
differences and tax loss carryforwards. Finally, a provision was made in 1994
for the anticipated settlement of the Internal Revenue Service ("IRS")
examination of the tax years 1986 through 1989, which includes the
utilization of prior existing tax loss carryforwards. See Note 12 of the
Notes to Financial Statements for additional discussion of IRS examinations
of open tax years.
In 1993, income tax expense represented approximately 31% of consolidated
operating earnings before income taxes, or 4% less than the expected
corporate income tax rate. During 1993, the corporate income tax rate was
increased from 34% to 35%, retroactive to January 1, 1993. The effect of such
rate increase on SLC's deferred income tax asset as of the beginning of 1993,
a benefit totaling $3.5 million, has been included in the 1993 income tax
provision. Other significant items affecting the 1993 effective income tax
rate included a reduction in the valuation allowance for SLC's deferred
income tax asset based on the utilization of available loss carryforwards to
offset income taxes otherwise payable as a result of the BLHC sale and other
investment gains and the utilization of capital loss carryforwards which had
previously not been reflected for financial reporting purposes. In 1992, SLC
reported an income tax credit totaling $69.2 million on a consolidated
operating loss before income taxes of $18.4 million. This unusual
relationship was primarily attributable to the significant tax basis gain on
the sale of Bankers and a reduction in the Company's valuation allowance for
its deferred tax asset as a result of utilizing available capital loss
carryforwards to reduce taxes otherwise payable as a result of such gain. See
Note 13 of Notes to Financial Statements for an analysis of the various
components affecting SLC's income tax provisions.
42
<PAGE>
At December 31, 1994 and 1993, SLC reported deferred income tax assets
totaling $84.9 million and $53.0 million, respectively. The substantial
increase in the deferred income tax asset between the periods is primarily as
a result of the tax effect associated with realized losses incurred in 1994
on certain invested assets and the tax effect associated with net unrealized
losses that arose in 1994. The tax assets were comprised of the tax benefit
(cost) associated with the following types of temporary differences based on
the 35% tax rate in effect at the end of 1994 and 1993:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
Items subject to ordinary tax treatment:
Book/tax temporary differences . . . . . . . $ 53.5 $ 35.9
Operating loss carryforwards . . . . . . . . 15.2 13.6
-----------------------------------------------------------------------------
Deferred income tax asset . . . . . . . . 68.7 49.5
-----------------------------------------------------------------------------
Items subject to capital gains treatment:
Book/tax temporary differences . . . . . . . 49.1 .7
Capital loss carryforwards . . . . . . . . . 5.2
-----------------------------------------------------------------------------
Deferred income tax asset. . . . . . . . . 49.1 5.9
-----------------------------------------------------------------------------
Alternative minimum tax credit carryforward. . 8.6 13.9
-----------------------------------------------------------------------------
Less: Valuation allowance. . . . . . . . . . . (41.5) (16.3)
-----------------------------------------------------------------------------
Total deferred income tax asset. . . . . . . . $ 84.9 $ 53.0
-----------------------------------------------------------------------------
</TABLE>
Operating and capital loss carryforwards have significantly different
characteristics as to expiration dates and their usability. For federal
income tax purposes, operating losses may be carried forward for a maximum of
fifteen years from the year they are incurred; capital losses may be carried
forward for a maximum of five years. In addition, ordinary loss carryforwards
may be utilized to offset ordinary income or capital gains, whereas capital
loss carryforwards can only be utilized to offset capital gains. As a
consequence, taxpayers have substantially more flexibility in being able to
utilize operating loss carryforwards than capital loss carryforwards. For
federal income tax purposes, at December 31, 1994, SLC and its insurance
subsidiaries had $43.5 million of ordinary loss carryforwards expiring in
2009.
Alternative minimum tax ("AMT") credit carryforwards result from the
acceleration of income taxes under certain circumstances and can be carried
forward for an indefinite period. The $8.6 million and $13.9 million
component of SLC's deferred income tax assets at December 31, 1994 and 1993,
respectively, represents taxes incurred under AMT provisions which are
expected to be recovered through reduced income tax payments over the next
several years.
See Note 13 of Notes to Financial Statements for a summary of management's
assessment regarding the recoverability of the Company's deferred income tax
assets and the valuation allowances provided against such deferred income tax
assets at December 31, 1994 and 1993.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Effective January 1, 1993, SLC adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions," and incurred a charge for
the cumulative effect of the adoption of the accounting change as of that
date totaling $1.8 million, after tax effects. In addition, effective
December 31, 1993, SLC adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and incurred a charge for the
cumulative effect of the adoption of the accounting change as of that date
totaling $4.9 million, after tax effects.
43
<PAGE>
EXTRAORDINARY LOSSES
For the years 1993 and 1992, SLC incurred extraordinary losses, net of tax
effects, totaling $1.9 million and $4.3 million, respectively. The
extraordinary losses in both periods were related to early extinguishment of
debt. See Note 15 of Notes to Financial Statements for an analysis of the
components of such losses.
IMPACT OF INFLATION
Medical cost inflation has had a significant impact on the individual
health and group health lines of business. Benefit costs have continued to
increase in recent years in excess of the Consumer Price Index and will
likely continue to do so. This impact, however, has been substantially offset
by increases in premium rates. Management does not believe that inflation has
otherwise had a significant impact on its results of operations over the past
three years.
KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE RESULTS
PROPOSED HEALTH CARE REFORM. The current administration has targeted health
care reform as a top domestic priority and Congress has considered proposed
legislation that, if enacted, could significantly change the manner in which
the entire health care industry operates. See "Business-Regulation" for
further information.
FEDERAL INCOME TAX AUDIT ISSUES
See Note 12 of Notes to Financial Statement for a discussion of potential
income tax audit issues.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES OF
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
(Items 8, 14(a), and 14(c))
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . 46
Consolidated Balance Sheets at December 31, 1994 and 1993 . . . 47
Consolidated Statements of Earnings (Loss) for the years ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . 48
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . 49
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . 50
Notes to Financial Statements . . . . . . . . . . . . . . . . . 51
FINANCIAL STATEMENT SCHEDULES
Schedule II - Condensed financial information of registrant. 89
Schedule III - Supplementary insurance information. . . . . . 93
Schedule IV - Reinsurance. . . . . . . . . . . . . . . . . . 94
Schedule V - Valuation and qualifying accounts and
reserves . . . . . . . . . . . . . . . . . . . 95
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted
or the information is presented in the consolidated financial statements or
related notes.
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Southwestern Life Corporation
We have audited the consolidated financial statements and financial
statement schedules of Southwestern Life Corporation and Subsidiaries as
listed in the index on page 45 of this Form 10-K. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, the
Company has significant debt requirements in 1995 and 1996. Management has
stated they have several alternatives which they believe will result in full
satisfaction of the 1995 requirements. However, at the present time, it appears
that to satisfy the requirements for both 1995 and 1996, a significant
restructuring of these debt obligations or a more comprehensive
recapitalization plan will be required. Such restructuring or recapitalization
would likely result in a substantial dilution of existing stockholders,
especially common stockholders, and could possibly result in a change in
control of the Company.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southwestern
Life Corporation and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
As discussed in Note 7 to the Financial Statements, the Company changed its
method of assessing the recoverability of Excess Cost of Investments in
Subsidiaries over Net Assets Acquired in 1994.
As more fully described in Notes 14 and 5 to these consolidated financial
statements, effective January 1, 1993 and December 31, 1993, the Company
adopted statements of Financial Accounting Standards No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions" and No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
respectively.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 30, 1995
46
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Investments:
Fixed maturities:
Available for sale at fair value . . . . . . . . . $1,638,867 $1,691,693
Held to maturity at amortized cost . . . . . . . . 15,915 26,149
Equity securities, at fair value . . . . . . . . . . 10,812 75,831
Mortgage loans on real estate, at amortized
cost. . . . . . . . . . . . . . . . . . . . . . . . 127,047 138,504
Real estate, at lower of cost or fair
value . . . . . . . . . . . . . . . . . . . . . . . 57,068 67,491
Policy loans . . . . . . . . . . . . . . . . . . . . 172,108 177,736
Collateral loans . . . . . . . . . . . . . . . . . . 55,466 34,099
Investments in limited partnerships. . . . . . . . . 42,027 43,640
Cash and short-term
investments . . . . . . . . . . . . . . . . . . . . 229,522 366,922
Other invested assets. . . . . . . . . . . . . . . . 9,666 16,058
---------- ----------
Total investments. . . . . . . . . . . . . . . . . 2,358,498 2,638,123
Due from reinsurers. . . . . . . . . . . . . . . . . . 236,272 388,083
Notes and accounts receivable and uncollected
premiums. . . . . . . . . . . . . . . . . . . . . . . 6,978 6,951
Accrued investment income. . . . . . . . . . . . . . . 31,825 31,633
Deferred policy acquisition costs. . . . . . . . . . . 208,952 168,525
Present value of future profits of acquired
business . . . . . . . . . . . . . . . . . . . . . . 68,805 50,705
Deferred income tax asset. . . . . . . . . . . . . . . 84,862 53,033
Excess cost of investments in subsidiaries over net
assets acquired, net of accumulated amortization. . . 80,500 307,604
Other assets . . . . . . . . . . . . . . . . . . . . . 70,032 53,206
---------- ----------
$3,146,724 $3,697,863
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Insurance liabilities:
Future policy benefits and other policy
liabilities . . . . . . . . . . . . . . . . . . . . $ 894,100 $ 927,303
Universal life and investment contract
liabilities . . . . . . . . . . . . . . . . . . . . 1,692,013 1,684,396
Notes payable:
Due within one year. . . . . . . . . . . . . . . . . 59,802 34,546
Due after one year . . . . . . . . . . . . . . . . . 309,592 383,435
Federal income taxes currently payable . . . . . . . . 39,628 29,015
Other liabilities . . . . . . . . . . . . . . . . . . 116,251 143,998
---------- ----------
3,111,386 3,202,693
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . . . 199,997 229,239
Common stock . . . . . . . . . . . . . . . . . . . . 48,983 71,594
Common stock, Class B. . . . . . . . . . . . . . . . 100
Additional paid-in capital . . . . . . . . . . . . . 126,583 155,499
Net unrealized investment gains (losses), net of
deferred income taxes . . . . . . . . . . . . . . . (55,359) 20,458
Retained earnings (deficit). . . . . . . . . . . . . (279,265) 71,833
---------- ----------
40,939 548,723
Notes receivable collateralized by common stock. . . (1,795) (1,729)
Treasury stock, at cost. . . . . . . . . . . . . . . (3,806) (51,824)
---------- ----------
35,338 495,170
---------- ----------
$3,146,724 $3,697,863
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income:
Premium income and other considerations. . $ 418,020 $ 475,026 $ 1,388,779
Net investment income. . . . . . . . . . . 182,044 195,632 333,138
Realized investment gains (losses) . . . . (96,928) 34,825 (119,088)
Equity in earnings of equity investees
and limited partnerships. . . . . . . . . 4,165 35,210 6,203
Other income . . . . . . . . . . . . . . . 26,355 44,660 20,521
Gain (loss) on sale of subsidiaries. . . . (4,200) 110,734
Gain on sale of investment in Bankers Life
Holding Corporation . . . . . . . . . . . 297,041
----------- ----------- -----------
529,456 1,082,394 1,740,287
----------- ----------- -----------
Benefits, expenses and costs:
Policyholder benefits . . . . . . . . . . . 377,984 428,332 1,205,445
Amortization of deferred policy acquisition
costs and present value of future
profits. . . . . . . . . . . . . . . . . . 62,099 48,900 133,457
Other operating expenses. . . . . . . . . . 152,598 223,788 329,844
Amortization of excess cost . . . . . . . . 16,421 9,591 10,981
Interest expense. . . . . . . . . . . . . . 48,251 66,153 78,961
Change in accounting for excess cost. . . . 210,683
----------- ----------- -----------
868,036 776,764 1,758,688
----------- ----------- -----------
Operating earnings (loss) before income
taxes. . . . . . . . . . . . . . . . . . . . (338,580) 305,630 (18,401)
Income tax expense (credit) . . . . . . . . . (1,140) 93,706 (69,256)
----------- ----------- -----------
Operating earnings (loss) . . . . . . . . . . (337,440) 211,924 50,855
Cumulative effect of changes in accounting
methods. . . . . . . . . . . . . . . . . . . (6,734)
Extraordinary losses, net of tax effects. . . (1,919) (4,342)
----------- ----------- -----------
Net earnings (loss) . . . . . . . . . . . . . (337,440) 203,271 46,513
Less dividends on preferred stock . . . . . . (13,658) (28,784) (30,800)
----------- ----------- -----------
Net earnings (loss) applicable to common
stock. . . . . . . . . . . . . . . . . . . $ (351,098) $ 174,487 $ 15,713
=========== =========== ===========
Weighted average common shares
outstanding. . . . . . . . . . . . . . . . 47,556,187 47,915,551 48,139,870
=========== =========== ===========
Primary earnings (loss) per common share:
Operating earnings (loss) . . . . . . . . $(7.38) $3.82 $ .42
Cumulative effect of changes in
accounting methods . . . . . . . . . . . (.14)
Extraordinary losses. . . . . . . . . . . (.04) (.09)
------ ----- -----
Net earnings (loss) . . . . . . . . . . . $(7.38) $3.64 $ .33
====== ===== =====
Fully diluted earnings (loss) per common share:
Operating earnings (loss) . . . . . . . . $(7.38) $3.53 $ .42
Cumulative effect of changes in
accounting methods . . . . . . . . . . . (.12)
Extraordinary losses. . . . . . . . . . . (.03) (.09)
------ ----- -----
Net earnings (loss) . . . . . . . . . . . $(7.38) $3.38 $ .33
====== ===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year. . . . . . . $ 229,239 $ 329,242 $ 329,242
Exchanged for common stock. . . . . . . . (3)
Redemption of shares. . . . . . . . . . . (29,242) (100,000)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . 199,997 229,239 329,242
---------- ---------- ----------
Common stock:
Balance at beginning of year. . . . . . . 71,594 71,401 71,399
Exercise of stock options . . . . . . . . 58 192 2
Issuance of shares for Class B common
stock. . . . . . . . . . . . . . . . . . 100
Exchange of preferred stock . . . . . . . 1
Retirement of treasury shares . . . . . . (22,769)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . 48,983 71,594 71,401
---------- ---------- ----------
Common stock, Class B:
Balance at beginning of year. . . . . . . 100 100 100
Purchase and cancellation of shares . . . (100)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . 100 100
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year. . . . . . . 155,499 155,391 155,389
Exercise of stock options . . . . . . . . 90 106 2
Exchange of preferred stock . . . . . . . 2
Retirement of treasury shares . . . . . . (29,006)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . 126,583 155,499 155,391
---------- ---------- ----------
Net unrealized investment gains (losses):
Balance at beginning of year. . . . . . . 20,458 18,823 (3,384)
Change during year. . . . . . . . . . . . (75,817) 1,635 22,207
---------- ---------- ----------
Balance at end of year. . . . . . . . . . (55,359) 20,458 18,823
---------- ---------- ----------
Retained earnings (deficit):
Balance at beginning of year. . . . . . . 71,833 (102,654) (118,367)
Net earnings (loss) . . . . . . . . . . . (337,440) 203,271 46,513
Cash dividends on preferred stock . . . . (13,658) (28,784) (30,800)
---------- ---------- ----------
Balance at end of year. . . . . . . . . . (279,265) 71,833 (102,654)
---------- ---------- ----------
Notes receivable collateralized by common
stock:
Balance at beginning of year. . . . . . . (1,729) (2,163)
Additions during year . . . . . . . . . . (66) (154) (2,163)
Collections during year . . . . . . . . . 588
---------- ---------- ----------
Balance at end of year. . . . . . . . . . (1,795) (1,729) (2,163)
---------- ---------- ----------
Treasury stock, common:
Balance at beginning of year. . . . . . . (51,824) (50,891) (49,460)
Purchase of shares. . . . . . . . . . . . (3,757) (933) (1,431)
Retirement of treasury shares . . . . . . 51,775
---------- ---------- ----------
Balance at end of year. . . . . . . . . . (3,806) (51,824) (50,891)
---------- ---------- ----------
Total stockholders' equity. . . . . . . $ 35,338 $ 495,170 $ 419,249
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Operating earnings (loss) . . . . . . . $(337,440) $ 211,924 $ 50,855
Items not requiring (providing) cash:
Adjustments relating to universal
life and investment products:
Interest credited to account
balances . . . . . . . . . . . . . 74,378 100,120 159,392
Charges for mortality and
administration . . . . . . . . . . (64,120) (71,375) (85,730)
Depreciation and amortization . . . . 17,800 26,639 23,454
Change in accounting for excess
cost . . . . . . . . . . . . . . . . 210,683
Increase (decrease) in future policy
benefits . . . . . . . . . . . . . . (27,209) 621 33,970
Decrease (increase) in deferred
policy acquisition costs . . . . . . 9,843 24 (10,219)
Increase (decrease) in currently
payable taxes. . . . . . . . . . . . 10,613 16,384 (45,986)
Increase (decrease) in policy
liabilities, other policyholder
funds, accounts payable and accrued
expenses . . . . . . . . . . . . . . (26,154) 27,745 7,649
Decrease in notes and accounts
receivable and accrued investment
income.. . . . . . . . . . . . . . . 841 7,838 15,903
Amortization of bond, mortgage and
collateral loan discount, net. . . . 1,612 7,484 (13,606)
Deferred income tax expense
(credit) . . . . . . . . . . . . . . 6,490 73,028 (70,092)
Equity in undistributed earnings of
equity investees and limited
partnerships . . . . . . . . . . . . (4,165) (34,276) (6,203)
Gain on Consolidated Fidelity Life
Insurance Company transaction. . . . (11,133)
Gain on sale of investment in
Bankers Life Holding Corporation . . (297,041)
Loss (gain) on sale of subsidiaries . 4,200 (110,734)
Realized investment (gains) losses. . 96,928 (34,825) 119,088
Gain on termination of reinsurance. . (22,642)
Other, net. . . . . . . . . . . . . . (8,160) (10,786) 12,347
--------- ----------- -----------
Net cash provided (used) by
operating activities . . . . . . . (44,993) 862 80,088
--------- ----------- -----------
Cash flows from investing activities:
Sales of fixed maturities . . . . . . . 430,392 640,168 1,410,441
Maturities and other redemptions of
fixed maturities . . . . . . . . . . . 228,328 610,809 881,534
Sales of other long-term invested
assets . . . . . . . . . . . . . . . . 169,851 252,883 175,995
Sale of investment in Bankers Life
Holding Corporation. . . . . . . . . . 287,639
Proceeds from sale of subsidiaries,
net of cash disposed . . . . . . . . . 89,672
Purchases of fixed maturities . . . . . (798,662) (1,186,502) (2,246,298)
Purchases of other long-term invested
assets . . . . . . . . . . . . . . . . (84,197) (120,696) (162,526)
Cash received (transferred) on
reinsurance transactions . . . . . . . 25,158 (43,152)
Additional investment in Consolidated
Fidelity Life Insurance Company
preferred stock, net of cash
recovered. . . . . . . . . . . . . . . (15,652)
Purchase of subsidiary, net of cash
acquired . . . . . . . . . . . . . . . (3,589)
Other . . . . . . . . . . . . . . . . . (8,001)
--------- ----------- -----------
Net cash provided (used) by
investing activities . . . . . . . (48,371) 441,149 140,817
--------- ----------- -----------
Cash flows from financing activities:
Proceeds of notes payable . . . . . . . 6,200
Proceeds of collateralized mortgage
note obligations . . . . . . . . . . . 171,000
Principal payments on collateralized
mortgage note obligations. . . . . . . (205,356)
Policyholder contract deposits. . . . . 177,708 200,439 615,171
Policyholder contract withdrawals . . . (188,918) (407,871) (603,833)
Principal payments on notes payable . . (8,587) (41,280) (169,229)
Repurchase of subordinated debt . . . . (10,081) (84,069) (1,694)
Redemption of preferred stock . . . . . (100,000)
Purchase of common stock for treasury . (500) (933) (1,431)
Dividends on preferred shares . . . . . (13,658) (28,784) (30,800)
--------- ----------- -----------
Net cash provided (used) by
financing activities . . . . . . . (44,036) (496,854) (185,616)
--------- ----------- -----------
Net increase (decrease) in cash and
short-term investments . . . . . . . . . (137,400) (54,843) 35,289
Cash and short-term investments at
beginning of year. . . . . . . . . . . . 366,922 421,765 386,476
--------- ----------- -----------
Cash and short-term investments at end
of year. . . . . . . . . . . . . . . . . $ 229,522 $ 366,922 $ 421,765
========= ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
Effective June 15, 1994, I.C.H. Corporation changed its name to
Southwestern Life Corporation (the Company or SLC).
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries from date of acquisition
through date of divestiture. All significant intercompany accounts and
transactions have been eliminated in consolidation. Previously reported
amounts for 1993 and 1992 have in some instances been reclassified to conform
to the 1994 presentation. See Note 2 for organizational changes.
The Company's insurance subsidiaries maintain their accounts in conformity
with accounting practices prescribed or permitted by state insurance
regulatory authorities. In the accompanying financial statements such
accounts have been adjusted to conform with generally accepted accounting
principles (GAAP).
(B) INVESTMENTS
Fixed maturity investments include bonds and preferred stocks with
mandatory redemption features. The Company classifies all fixed maturity
investments into two categories as follows:
- Available for sale securities, representing securities that may be
sold prior to maturity due to changes that might occur in market
interest rate risks, changes in the security's prepayment risk,
management of the Company's income tax position, the Company's
general liquidity needs, increases in loan demand, the need to
increase regulatory capital, changes in foreign currency risk, or
similar factors. Available for sale securities are carried at fair
value.
- Held to maturity securities, representing securities such as private
placements which are not readily marketable and which the Company
has the ability and positive intent to hold to maturity. Held to
maturity securities are carried at amortized cost. The Company may
dispose of such securities under certain unforeseen circumstances,
such as issuer credit deterioration or regulatory requirements.
Fixed maturity investments and related futures contracts which are
denominated in or linked to foreign currencies are revalued to reflect
changes in the exchange rate as of the balance sheet date. Anticipated
prepayments on mortgage-backed securities are taken into consideration in
determining estimated future yields on such securities.
Equity securities include investments in common stocks and non-redeemable
preferred stocks and are carried at fair value. Policy loans and collateral
loans are stated at their current unpaid principal balance, net of
unamortized discount and related liabilities for which the Company has the
right to offset. Short-term investments include commercial paper, invested
cash and other investments purchased with maturities generally less than
three months and are carried at amortized cost. The Company considers all
short-term investments to be cash equivalents.
Mortgage loans are stated at the aggregate unpaid principal balances, less
unamortized discount and valuation allowances. Fees received and costs
incurred with origination of mortgage loans are deferred and amortized as
yield adjustments over the remaining lives of the mortgages. Real estate,
substantially all of which was acquired through foreclosure, is recorded at
the lower of fair value, minus estimated costs, to sell or cost. If the fair
value of the foreclosed real estate minus estimated costs to sell is less
than cost, a valuation allowance is provided for the deficiency. Increases or
decreases in the valuation allowance are charged or credited to income.
51
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments in limited partnerships and 20% to 50% interests in the common
stocks of other entities, whose affairs are not controlled by the Company
(equity investees), are reflected on the equity method, or at cost, adjusted
for the Company's share, after allowance for possible dilution, of the
undistributed earnings and losses (both realized and unrealized) since
acquisition.
The Company regularly evaluates investments based on current economic
conditions, past credit loss experience and other circumstances. A decline in
net realizable value that is other than temporary is recognized as a realized
investment loss and a reduction in the cost basis of the investment. The
Company discounts expected cash flow in the computation of net realizable
value of its investments, other than certain mortgage-backed securities. In
those circumstances where the expected cash flows of residual interest and
interest-only mortgage-backed securities, discounted at a risk-free rate of
return, result in an amount less than the carrying value, a realized loss is
reflected in an amount sufficient to adjust the carrying value of a given
security to its fair value.
Net realized investment gains and losses, including gains and losses on
foreign currency transactions and held for sale securities, are included in
the determination of net earnings. Unrealized investment gains and losses on
available for sale securities and marketable equity securities are charged or
credited directly to stockholders' equity. The specific identification method
is used to account for the disposition of investments.
(C) DUE FROM REINSURERS
Amounts recoverable from reinsurers, including amounts equal to the assets
supporting insurance liabilities ceded to reinsurers and amounts due for the
reimbursement of related benefit payments, are reflected as receivables due
from reinsurers. Amounts due from reinsurers are evaluated as to their
collectibility and, if appropriate, reserves for doubtful collectibility are
established through a charge to earnings.
(D) EXCESS COST OF INVESTMENT IN SUBSIDIARIES OVER NET ASSETS ACQUIRED
Excess cost of investments in subsidiaries over net assets acquired, or
"goodwill," is amortized on the straight-line basis over a 40-year period.
The Company periodically assesses the recoverability of excess cost through
an actuarial projection of future earnings of the applicable insurance
subsidiaries (excluding excess cost amortization) over the remaining life of
such excess cost. Such projections include various interest rate scenarios,
with anticipated levels of new business production for only a five-year
period. Prior to 1994, projected future earnings were undiscounted. At
December 31, 1994, the Company adopted a change in accounting for assessing
the recoverability of excess cost by discounting projected future earnings of
the Company's insurance subsidiaries, using an economic rate of return (13%).
(See Note 7.)
(E) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS OF
ACQUIRED BUSINESS
Costs which vary with and are related to the acquisition of new business
have been deferred to the extent that such costs are deemed recoverable
through future revenues. These costs include commissions, certain costs of
policy issuance and underwriting and certain variable agency expenses. For
traditional life and health products deferred costs are amortized with
interest over the premium paying period in proportion to the ratio of
anticipated annual premium revenue to the anticipated total premium revenue.
Deferred policy acquisition costs related to universal life,
interest-sensitive and investment products are amortized in relation to the
present value, using the assumed crediting rate, of expected gross profits on
the products, and retrospective adjustments of these amounts are made
whenever the Company revises its estimates of current or future gross profits
to be realized from a group of policies.
52
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The present value of future profits on business in force of acquired
subsidiaries represents the portion of the cost to acquire such subsidiaries
that is allocated to the value of the right to receive future cash flows from
insurance contracts existing at the dates of acquisitions. Such value is the
actuarially determined present value of the future cash flows from the
acquired policies, based on projections of future premium collection,
mortality, morbidity, surrenders, operating expenses, investment yields, and
other factors. The account is amortized with interest over the estimated
remaining life of the acquired policies.
Recoverability of deferred policy acquisition costs and the present value
of future profits of acquired business is evaluated annually by comparing the
current estimate of discounted expected future cash flows to the unamortized
asset balance by line of insurance business. If such current estimate
indicates that the existing insurance liabilities, together with the present
value of future cash flows from the business, will not be sufficient to
recover the unamortized asset balance, the difference is charged to expense.
Amortization is adjusted in future years to reflect the revised estimate of
future profits.
Anticipated returns, including realized and unrealized gains and losses,
from the investment of policyholder balances are considered in determining
the amortization of deferred policy acquisition costs. When fixed maturities
are stated at their fair value, an adjustment is made to deferred policy
acquisition costs and unearned revenue reserves equal to the changes in
amortization that would have been recorded if those fixed maturities had been
sold at their fair value and the proceeds reinvested at current yields.
Furthermore, if future yields expected to be earned on fixed maturities
decline, it may be necessary to increase certain insurance liabilities.
Adjustments to such liabilities are required when their balances, in addition
to future net cash flows including investment income, are insufficient to
cover future benefits and expenses.
(F) FUTURE POLICY BENEFITS
The liability for future policy benefits of long duration contracts has
been computed by the net level premium method based on estimated future
investment yield, mortality, morbidity and withdrawal experience. Reserve
interest assumptions are graded and range from 6% to 10%. Mortality,
morbidity and withdrawal assumptions reflect the experience of the life
insurance subsidiaries modified as necessary to reflect anticipated trends
and to include provisions for possible unfavorable deviations. The
assumptions vary by plan, year of issue and duration. The future policy
benefit reserves include a provision for policyholder dividends based upon
dividend scales assumed at the date of purchase of acquired companies or as
presently contemplated.
(G) POLICY AND CONTRACT CLAIMS
Policy and contract claims include provisions for reported claims in
process of settlement, valued in accordance with the terms of the related
policies and contracts, as well as provisions for claims incurred and
unreported based on prior experience of the Company.
(H) UNIVERSAL LIFE AND INVESTMENT CONTRACT LIABILITIES
Benefit reserves for universal life, interest-sensitive and investment
products are determined following the retrospective deposit method and
consist principally of policy account values before any surrender charges,
plus certain deferred policy fees which are amortized using the same
assumptions and factors used to amortize deferred policy acquisition costs.
53
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) INCOME TAXES
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end. Excess cost of
investment in subsidiaries over net assets acquired is reduced for the tax
benefits obtained from the utilization of an acquired company's tax
deductions.
(J) RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES
Premium revenue for traditional life insurance products is reported as
earned when due. Accident and health premiums are earned over the period for
which premiums are paid. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the premium paying
period. This association is accomplished by means of a provision for future
policy benefit reserves and the amortization of deferred policy acquisition
costs.
(K) PARTICIPATING POLICIES
Participating life insurance policies represent approximately 1% of the
total individual life insurance in force at December 31, 1994 and 1993,
respectively. The amount of dividends to be paid is determined annually by
the boards of directors of the life insurance subsidiaries. A portion of the
earnings of the Company is allocated to the participating policyholders and
included in other policyholder funds.
(L) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities
(including mandatorily redeemable preferred stocks) are based on quoted
market prices, where available. For fixed maturity securities not actively
traded, fair values are estimated using values obtained from independent
pricing services or are estimated based on expected future cash flows using a
current market rate applicable to the yield, credit quality, and maturity of
the investments. The fair values for equity securities are based on quoted
market prices and are recognized in the balance sheet. (See Note 5.)
MORTGAGE AND COLLATERAL LOANS: The fair values for mortgage and
collateral loans are estimated using discounted cash flow analyses, based on
interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations. (See Note 5.)
POLICY LOANS: The Company does not believe an estimate of the fair value
of policy loans can be made without incurring excessive cost. Policy loans
have no stated maturities and are usually repaid by reductions to benefits
and surrenders. Because of the numerous assumptions which would have to be
made to estimate fair value, the Company further believes that such
information would not be meaningful.
INVESTMENTS IN LIMITED PARTNERSHIPS: Fair values for the Company's
investments in limited partnerships are based on the estimated fair values of
the partnership assets and liabilities, assuming a liquidation of the
partnership and distribution of proceeds to the partners. (See Note 6.)
54
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company's
off-balance-sheet interest rate swaps are based on formulas using current
assumptions. (See Note 5.)
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued. (See Note 8.)
NOTES PAYABLE: The fair value of the Company's subordinated long-term
debt is estimated using prices from public trades of the Company's
subordinated debt as of December 31, 1994. The fair value of other long-term
debt is estimated using discounted cash flow analyses, based on the
Company's implicit incremental borrowing rates from the fair value of the
Company's long-term debt. (See Note 3.)
(M) EARNINGS PER SHARE CALCULATIONS
Primary earnings per share are computed by dividing earnings, less
preferred dividend requirements, by the weighted average number of common
shares outstanding. In computing fully diluted earnings per share, the
weighted average number of common shares outstanding is adjusted to reflect
common stock equivalents resulting from stock options and the assumed
conversion of the Company's Series 1986-A Preferred Stock into common shares,
and preferred dividend requirements are adjusted to eliminate dividends on
the shares assumed to have been converted. The computation of fully diluted
earnings per share excludes the assumed conversion of such preferred shares
for each period in which the assumed conversion would be antidilutive.
2. ACQUISITIONS AND DISPOSITIONS
On November 9, 1992, the Company completed the sale of its wholly-owned
subsidiary, Bankers Life and Casualty Company (Bankers), and Bankers'
subsidiary, Certified Life Insurance Company (Certified), to an affiliate of
Conseco, Inc. (Conseco) for $600 million cash, subject to final adjustment.
Prior to the closing, Bankers transferred its ownership in all of its other
subsidiaries to the Company, and the Company and its subsidiaries purchased
certain other assets from Bankers, including primarily a residual interest in
certain mortgage-backed securities, Bankers' home office real estate, and
certain equity investments. The Company provided financing for the
acquisition totaling $101.4 million and, in return, retained an approximate
29.7% interest in Bankers. The financing consisted of a $16.7 million common
equity investment in Bankers Life Holding Corporation (BLHC), the Conseco
entity formed for the purpose of making the acquisition, and the purchase of
$34.7 million of BLHC 11% Junior Subordinated Debentures due 2003 and $50.0
million of a BLHC preferred stock yielding an 11% annual return. In addition,
Conseco Capital Partners, L.P. (CCP) acquired a 52.6% interest in BLHC, and
the Company, through one of its subsidiaries, made an additional $9.6 million
investment to acquire a 19.3% ownership interest in CCP. As a result of the
29.7% interest in BLHC and the indirect investment through CCP the Company
retained a residual interest in Bankers totaling approximately 39.9%. The
results of operations of Bankers and Certified were included in the Company's
consolidated results of operations through October 31, 1992, the effective
date of the sale for financial reporting purposes. Subsequent to that date,
the Company reflected its proportionate share of the operating results of CCP
and BLHC based on the equity method. Because of the significant ownership
interest in Bankers retained by the Company, the sale of Bankers was
accounted for as a step transaction in accordance with GAAP. Accordingly, the
Company reflected its residual interest in Bankers on its historical
accounting basis and reflected a gain on the approximate 60.1% interest in
Bankers deemed to have been sold totaling $110,734,000 in the Company's
consolidated statement of earnings for the year ended December 31, 1992. In
conjunction with the sale of Bankers, the Company indemnified the purchasers
against certain contingencies relating to taxes and other matters associated
with Bankers and Certified in periods prior to the closing date. The Company
believes its liability, if any, will not be material.
55
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
2. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Effective March 31, 1993, BLHC completed an initial public offering
(Offering) of 19.55 million shares of its common stock, or an approximate
35.8% interest in BLHC at $22 per share. Proceeds of the Offering, after
underwriting expenses, approximated $405 million. Effective the same day, CCP
announced a plan of dissolution and BLHC shares held by CCP were subsequently
distributed to the respective partners in accordance with that plan. The
Company received 2,917,318 shares of BLHC common stock as a result of such
distribution, increasing its direct ownership in BLHC common stock to
13,316,168 shares, or approximately 24.4% of BLHC's outstanding common shares
following the Offering. The Company reflected a gain on the BLHC Offering
totaling $99,376,000, primarily representing the Company's 24.4% equity in
the net proceeds of such Offering. BLHC utilized a portion of the Offering
proceeds to redeem certain of its outstanding securities, including the $50
million stated value of BLHC preferred stock and the $34.7 million principal
amount of BLHC Junior Subordinated Notes held by the Company. Because a
portion of the purchase price paid for such investments had been allocated to
the Company's common equity investments in BLHC, such redemptions resulted in
additional gains totaling $8,252,000, which have been included as a component
of realized investment gains.
On September 30, 1993, the Company sold its investment in BLHC to Conseco
and one of Conseco's subsidiaries for $287,639,000 cash. The Company utilized
$50 million of the proceeds to redeem $50 million stated value of the Series
1987-A Preferred Stock of the Company from a Conseco subsidiary. The sale of
the BLHC shares resulted in a gain totaling $197,665,000. The gains resulting
from BLHC's Offering and the sale of the Company's interest in BLHC totaling
$297,041,000 have been reflected as a single line item in the consolidated
statement of earnings for the year ended December 31, 1993. The Company
continued to reflect its equity in the earnings of BLHC through the date of
sale.
Immediately prior to the termination of the reinsurance agreements with
Consolidated Fidelity Life Insurance Company (CFLIC) on June 30, 1994 (see
Note 4), Union Bankers Insurance Company (Union Bankers), a subsidiary of the
Company, utilized available cash to purchase all of the outstanding stock of
Marquette National Life Insurance Company (Marquette), a subsidiary of CFLIC,
for $8,215,000. The purchase price was based on the fair value of Marquette's
underlying net assets, consisting primarily of cash and U.S. Treasury
obligations, adjusted for the value of Marquette's various state licenses, as
determined by an independent actuarial firm. Marquette's results of
operations have been included in the Company's results of operations for
periods subsequent to June 30, 1994.
On January 12, 1995, the Company sold its wholly-owned subsidiary,
Southeast Title and Insurance Company (Southeast) for cash in the amount of
$2,071,000. The sales price approximated the GAAP book value of the Company's
investment in Southeast.
On January 20, 1995, the Company entered into a letter of intent to sell to
an unaffiliated party its wholly-owned subsidiary, Bankers Life Insurance
Company of New York (Bankers New York) for $35,000,000 cash, subject to
certain closing adjustments. At December 31, 1994, the Company reflected a
loss on the anticipated sale of Bankers New York totaling $4.2 million. The
transaction is subject to, among other conditions, completion of a definitive
agreement and receipt of required regulatory approvals.
On March 24, 1995, the Company entered into a definitive agreement to sell
to an unaffiliated party its ownership interest in its 98.8% owned
subsidiary, Integrity National Life Insurance Company (Integrity National),
for $9,578,000 cash, subject to closing adjustments. The transaction is
subject to, among other conditions, receipt of required regulatory approvals
and reinsurance of certain of Integrity National's business.
On March 24, 1995, the Company entered into a letter of intent to sell to
an unaffiliated third party its wholly-owned subsidiary Constitution Life
Insurance Company (Constitution) for $1.86 million cash plus Constitution's
adjusted capital and surplus. The transaction is subject to, among other
conditions, completion of a definitive agreement
56
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
2. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
and receipt of regulatory approvals. Also, as a condition to consummation of
the transaction, Constitution will be required to cede 100% of its insurance
contracts to another insurer.
3. NOTES PAYABLE
The carrying and fair values of notes payable at December 31, 1994 and 1993
are summarized as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
11 1/4% Senior Subordinated Notes due 1996 (a). . $256,101 $266,101 $212,563 $263,440
11 1/4% Senior Subordinated Notes due 2003 (b). . 91,161 91,161 61,989 90,249
9 1/2% Unsecured Note due 1996 (c). . . . . . . . 21,900 25,550 20,486 25,071
Borrowings under senior secured loan (d). . . . . 30,000 30,000
Other . . . . . . . . . . . . . . . . . . . . . . 232 5,169 193 5,169
-------- -------- -------- --------
$369,394 $417,981 $295,231 $413,929
======== ======== ======== ========
<FN>
The prime rate at December 31, 1994 was 8.5%.
-----------
(a) The 11 1/4% Senior Subordinated Notes due 1996 (Old Notes) require a
sinking fund payment of $100,000,000 on December 1, 1995. The Old Notes
are redeemable at the option of the Company by paying a premium of 2%
through November 30, 1995. Thereafter, the Old Notes may be redeemed at
their face amount. In addition, the Company may not declare or pay
dividends on its Common Stock without the consent of the holders of the
Old Notes if certain financial conditions set forth in the Indenture for
such Notes will be exceeded as a result of the dividends.
(b) On November 11, 1993, the Company completed an exchange offering whereby
$4,055,000 of the Company's Debentures and $87,106,000 of the Company's
Old Notes were exchanged for $91,161,000 of the Company's 11 1/4% Senior
Subordinated Notes due 2003 (New Notes). The terms and covenants of the
New Notes are substantially similar to those of the Old Notes, except that
the New Notes mature December 1, 2003 and are non-callable until
December 1, 1996, after which they will be callable at a premium of 3%
during the succeeding twelve month period and 2% during the twelve month
period commencing December 1, 1997.
(c) The 9 1/2% Unsecured Note requires principal installments of $3,650,000 on
December 31, 1995 and a final installment of $18,250,000 on December 31,
1996.
(d) The senior secured loan was initially obtained from various banks in
September 1990 in the original principal amount of $250,000,000, and
had been paid down to $160,000,000 by year-end 1991. On January 6, 1992,
the Company prepaid $45,000,000 of the outstanding loan and the remaining
$115,000,000 of the loan was purchased by CFLIC, a subsidiary of CNC, the
Company's then-controlling shareholder. On November 17, 1992, the Company
prepaid an additional $85,000,000 of the loan utilizing proceeds from the
sale of Bankers, and CFLIC agreed that a final installment of $30,000,000
would become due December 31, 1994. On June 30, 1994 the Company acquired
and cancelled the note as part of transactions with CFLIC (see Note 4).
</TABLE>
The following summary sets forth the maturities and sinking fund requirements
of notes payable during each of the five years following December 31, 1994 (in
thousands):
<TABLE>
<S> <C>
1995 . . . . . . . . . . . . . . . $ 59,802
1996 . . . . . . . . . . . . . . . 218,306
1997 . . . . . . . . . . . . . . . 60
1998 . . . . . . . . . . . . . . . 65
1999 and thereafter. . . . . . . . 91,161
--------
$369,394
========
</TABLE>
At December 31, 1994, SLC held $22,399,000 principal amount of the Old
Notes which, at the Company's option, can be used to partially satisfy its
100,000,000 sinking fund obligation relative to such notes due December 1,
57
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
3. NOTES PAYABLE (CONTINUED)
1995. In addition, an SLC subsidiary holds $21,500,000 principal amount of
Old Notes. Regulatory approval will be required to transfer these Old Notes
to SLC in the form of a dividend. In the above schedule of maturities and
sinking fund requirements, it has been assumed that the aggregate $43,899,000
principal amount of the Old Notes held by SLC and its subsidiary will be
available for sinking fund purposes and that the sinking fund requirement in
1995 will total $56,101,000. At its option, the Company may alternatively
determine to use sinking fund provisions in 1995 to retire up to $100,000,000
principal amount of the Old Notes at their par value.
Due to the dividend restrictions at the subsidiary level as discussed in
Note 9, the Company's ability to meet its debt obligations of $59,802,000 in
1995 and $218,306,000 in 1996 is dependent on being able to effect a
restructuring or refinancing of certain significant debt obligations or to
sell certain assets to generate sufficient cash proceeds to meet such debt
obligations or obtain sufficient cash from another source, such as an equity
investor or an institutional lender. Such restructuring or recapitalization
may require regulatory, creditor or stockholder approvals and would likely
result in a substantial dilution of existing stockholders, especially common
stockholders, and could possibly result in a change in control of the
Company. Based on current conditions and circumstances, management intends
and believes SLC has the ability to effect the actions necessary to generate
sufficient cash proceeds to meet its debt obligations through December 1995.
At December 31, 1994 and 1993, the Company had notes receivable totaling
$27,000,000 and $26,500,000, respectively, which were collateralized by the
Company's note payable in the amount of $21,000,000 and $20,340,000,
respectively. The Company has the right to set off its obligation against the
notes receivable. In the accompanying balance sheets, the Company's notes
receivables have been reflected net of amounts due under the notes payable.
4. RELATED PARTY TRANSACTIONS
On June 15, 1993, the Company, the Company's then-controlling shareholder,
CNC, and CNC's subsidiary, CFLIC, entered into an agreement (the 1993
Agreement) under which (i) the Company was authorized, and undertook the
obligation, to negotiate the termination of reinsurance agreements pursuant
to which CFLIC reinsured certain annuity business written by Southwestern
Life Insurance Company (Southwestern Life), a subsidiary of the Company, and
Bankers, and (ii) the Company transferred assets, consisting of a limited
partnership interest at market value, which exceeded book value by
$13,002,000 (that has since been liquidated) and 83% of the outstanding
common stock of I.C.H. Funding Corporation (ICH Funding), to CFLIC to acquire
preferred stock of CFLIC, with a stated value of $63,000,000. Under the terms
of the 1993 Agreement, the CFLIC preferred stock was to be repurchased by
CFLIC immediately following the termination of the CFLIC reinsurance
agreements. Therefore, for financial reporting purposes, the recognition of
the unrealized gain on the limited partnership interest transferred and
subject to repurchase was deferred. The reinsurance agreements had been
entered into in 1990 in conjunction with the Company's sale of Marquette to
CNC and its stockholders. Under the reinsurance agreements, Employers
Reassurance Corporation (ERC), an independent third party insurer, retroceded
to CFLIC certain annuity business which was reinsured with ERC by each of
Southwestern Life and Bankers.
On June 30, 1994, the CFLIC reinsurance agreements were terminated, and the
business reinsured thereunder was recaptured, effective as of April 1, 1994.
Immediately prior to the termination of the CFLIC reinsurance agreements,
Union Bankers utilized available cash to purchase all of the outstanding
stock of Marquette, a subsidiary of CFLIC, for $8,215,000 (see Note 2).
Following completion of the terminations, CFLIC repurchased the shares of its
preferred stock held by the Company by transferring to the Company the senior
secured loan of the Company with an outstanding principal balance of
$30,000,000, all of the outstanding shares of the Company's Series 1984-A
Preferred Stock with a stated value of $22,242,000, all of the outstanding
shares of the Company's Series 1987-B Preferred Stock with a stated value of
$7,000,000, a U.S. Treasury note (par value $1,050,000), and 620,423 shares
58
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
of the Company's Common Stock. Immediately following the repurchase of the
CFLIC preferred stock, SLC retired the senior secured loan and the SLC
preferred stocks. The shares of SLC Common Stock received were placed in
treasury and retired.
Upon termination of the CFLIC reinsurance agreement relating to the
business written by Southwestern Life, CFLIC transferred cash and invested
assets to ERC with a fair value equal to the reserve liabilities being
recaptured, net of the ceding fees payable. Due primarily to a requirement by
insurance regulatory authorities to transfer such investments upon
termination of the reinsurance agreements at their fair value, the Company
increased its basis in the CFLIC preferred stock by investing an additional
$26,212,000 (including $21,078,000 cash and a $5,134,000 receivable)
immediately prior to the terminations to enable CFLIC to have sufficient
assets (other than the Company's securities being transferred to the Company
upon redemption of the CFLIC preferred stock) to complete the terminations. A
substantial portion of such amount was attributable to a decline in the fair
value of the 83% interest in ICH Funding subsequent to the Company's transfer
of such investment to CFLIC in June 1993.
In conjunction with the termination of the CFLIC reinsurance agreement
relating to the business written by Southwestern Life, annuity reserve
liabilities totaling $323,305,000 were assumed by ERC and invested assets
with a fair value of $289,414,000 were transferred by CFLIC to ERC. The
difference between the reserve liabilities assumed by ERC and the assets
transferred from CFLIC, totaling $33,891,000, represented the aggregate
ceding fee paid to CFLIC to effect the termination. Immediately thereafter,
Southwestern Life recaptured $107,163,000 of the reserve liabilities from ERC
and received invested assets from ERC totaling $93,942,000. The assets
consisted of cash, short-term investments and marketable fixed maturity
investments totaling $25,455,000, CFLIC's investment in ICH Funding and
certain pass-through certificates issued by a special purpose trust with an
estimated fair value totaling $12,528,000, collateral loans due from James M.
Fail and CFSB Corporation totaling $50,640,000, and other assets, principally
mortgage loans, totaling $5,319,000. The difference between the reserve
liabilities recaptured by Southwestern Life and the assets transferred from
ERC, totaling $13,221,000, represented a ceding fee paid by Southwestern
Life, and reduced ERC's net ceding fees incurred to effect the CFLIC
reinsurance termination to $20,670,000. The reinsurance agreement between
Southwestern Life and ERC was amended to provide that ERC will be permitted
to recover the net ceding fees incurred out of the future profits on the
portion of Southwestern Life's annuity business it retained, together with
interest at 2% per annum on the unamortized balance of such ceding fees. For
financial reporting purposes, the reinsurance arrangement between
Southwestern Life and ERC has been reflected as a financing arrangement and,
accordingly, is not reflected in the Company's financial statement except for
the interest paid to ERC.
The amount of the ceding fees paid to CFLIC in connection with the
recapture was determined by management of the Company utilizing the
methodology developed by an independent actuarial firm, with appropriate
adjustments in assumptions to reflect changes in market interest rates and
other factors.
Pursuant to the 1993 Agreement, the Company agreed to bear the federal
income tax consequences resulting from the termination of the CFLIC
reinsurance agreements. Upon closing of the CFLIC termination, the Company
agreed to indemnify CNC and CFLIC for tax liabilities of CFLIC and Marquette
arising through June 30, 1994, and deposited into an escrow account
$8,825,000 of cash which the Company was to have received upon CFLIC's
repurchase of its preferred stock as a source of funds for the payment of
taxes for which the Company is responsible. With the payment of such tax
liabilities, the Company became entitled to all tax refunds to which CFLIC is
entitled through the carryback of capital losses resulting from the
termination of the CFLIC reinsurance agreements or as a result of any
redetermination of CFLIC's tax liabilities through the first taxable period
of CFLIC and Marquette ending after such termination. The amount deposited
into escrow along with the proceeds from CFLIC's tax refunds exceeded what
was required to pay CFLIC's tax liabilities and the $5,134,000 liability to
ERC by $5,426,000. These excess
59
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
funds were returned to the Company and effectively reduced the Company's
increase in basis in the CFLIC preferred and its net cash outlay to
$15,652,000.
For financial reporting purposes, the Company recorded the redemption of
its preferred stocks received from CFLIC at their stated value which, in
management's opinion, approximated the fair value of such securities as of
the date the 1993 Agreement was entered into. The 620,423 shares of the
Company's Common Stock received from CFLIC were recorded at their market
value, or $5.25 per share, as of the date of closing. The termination of the
CFLIC reinsurance agreements, the receipt of a payment-in-kind dividend from
CFLIC representing dividends on such preferred stock from the date of
issuance through the date of redemption, and the redemption of the Company's
securities resulted in a pretax gain totaling approximately $11,133,000,
which included recognition of the $13,002,000 deferred unrealized gain on the
limited partnership interest that had been liquidated while held by CFLIC.
Experience refunds received from CFLIC under the Southwestern Life
reinsurance arrangement totaled $4,851,000 and $2,068,000 for the years ended
December 31, 1993 and 1992, respectively. An experience refund was not
received for the three months ended March 31, 1994 because the business
reinsured by Southwestern Life was not profitable that quarter due
principally to the sales of certain high yield securities and lower
reinvestment yields. The Bankers business reinsured by CFLIC was not
profitable in 1992 due primarily to a loss incurred relative to certain
reinsurance recoverables and, as a consequence, Bankers was not entitled to
an experience refund in 1992.
Bankers was a party to a service agreement with Marquette and CFLIC whereby
it provided investment management, administrative, data processing, and
general supervisory and management services related to business reinsured
with CFLIC, in exchange for annual fees equal to .45% of reserves on the
reinsured policies. Fees earned from providing such services totaled
$1,593,000 for the ten months ended October 31, 1992. Such fees were taken
into consideration in the determination of profitability of the reinsured
business. In addition, a subsidiary entered into a service agreement
effective January 1992, whereby the subsidiary provided administrative
services for Marquette. Fees earned from providing such services totaled
$449,000 and $2,016,000 for the years ended December 31, 1993 and 1992,
respectively.
On February 11, 1994, the Company purchased all of the 100,000 shares of
its Class B Common Stock held by CNC for total cash consideration of
$500,000. The Class B Common Stock had entitled CNC to elect 75% of the
Company's Board of Directors (see Note 10). Concurrently with the purchase of
such stock, the Company entered into Independent Contractor and Services
Agreements (Services Agreements) with Robert T. Shaw and C. Fred Rice, the
controlling shareholders of CNC. The Services Agreements provide for a lump
sum payment to Messrs. Shaw and Rice totaling $2 million as of the closing
date and additional payments totaling $8,575,000 over a ten-year period. In
addition, the Company agreed to provide customary employee benefits to
Messrs. Shaw and Rice and their dependents. In the event of the deaths of
Messrs. Shaw or Rice, any amounts not previously paid under the Services
Agreements will become immediately payable to their estates. In consideration
for the Services Agreements, Messrs. Shaw and Rice agreed that they would
attempt to identify business opportunities in the insurance industry which
may be suitable for the Company and to consult with the Company regarding
such other matters as the Company may reasonably request. In addition, Mr.
Rice will continue to serve as an executive officer of the Company and, if
re-elected, will continue to serve on the Company's Board of Directors. The
Services Agreements replaced a management and consulting contract with CNC
that provided for annual payments to CNC totaling $2,000,000. In addition,
Mr. Shaw was granted an option, exercisable within a six month period, to
acquire certain aircraft equipment owned by the Company at its depreciated
book value. In cash transactions completed on June 30 and August 5, 1994, an
entity controlled by Mr. Shaw purchased one aircraft for $1,144,000 and an
unrelated third party to whom Mr. Shaw assigned his option purchased the
other aircraft for $4,005,000, respectively. At December 31, 1994, the
Company has provided a liability for the present value of amounts payable
under the Services Agreements totaling $6,102,000.
At December 31, 1993, the Company held a $2 million promissory note from
CNC bearing interest at 10% and payable in December 1995. The note and
accrued interest were repaid on February 11, 1994.
60
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
Through June 1993, FMI had leased office space under a ten-year lease in a
building owned by Messrs. Shaw and Rice. Effective March 30, 1990, FMI had
sublet substantially all of the office space to a former subsidiary which was
sold as of that date.
5. INVESTMENTS
Investment income by type of investment was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Gross investment income (loss):
Fixed maturities $144,027 $132,077 $253,740
Equity securities 4,911 3,852 5,699
Financial options and futures (8,743) 15,515 17,935
Mortgage loans 11,357 15,814 21,144
Policy loans 10,390 10,938 13,216
Short-term investments 11,636 13,069 13,162
Collateral loans 6,470 5,000 6,195
Real estate 8,243 6,982 6,380
Investments held in trust under
reinsurance treaty 5,795
Other 3,756 5,337 3,480
-------- -------- --------
192,047 208,584 346,746
Less: Investment expenses 10,003 12,952 13,608
-------- -------- --------
Net investment income $182,044 $195,632 $333,138
======== ======== ========
</TABLE>
Following is an analysis of realized gains (losses) on investments:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities $ 3,001 $12,360 $ 31,610
Collateralized mortgage obligations (97,803) (4,356) (138,519)
Equity securities (509) 37,620 (1,056)
Mortgage loans (3,124)
Investment in limited partnership (5,013)
Investment real estate (1,050) (4,220) (2,557)
Assets held by unaffiliated reinsurer (1,437)
Other 2,557 (6,298) (7,129)
-------- ------- ---------
(96,928) 30,093 (119,088)
Add minority interest in realized losses 4,732
-------- ------- ---------
$(96,928) $34,825 $(119,088)
======== ======= =========
</TABLE>
61
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
The following table reflects investment writedowns which were included in
realized investment gains or losses during each of the three years in the period
ended December 31, 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities $ 4,400
Collateralized mortgage obligations $ 97,803 $138,519
Equity securities 430 2,100 6,200
Mortgage loans 3,000 400
Investment in limited partnership 4,998
Investment real estate 3,800 4,500 3,800
-------- ------- --------
Total writedowns $105,033 $15,998 $148,919
======== ======= ========
</TABLE>
Fixed maturities writedowns in 1993 were related to credit deterioration
of noninvestment-grade securities. CMO writedowns in 1994 included $86,187,000
of other than temporary writedowns of derivative CMO investments in Fund
America Investors Corporations II (Fund America Investment) and the Secured
Investors Secured Trust 1993-1 (SIST Residual), $7,248,000 of writedowns on
investments expected to be liquidated in 1995, and $4,368,000 of other than
temporary writedowns on other CMO investments. CMO writedowns in 1992 resulted
primarily from mortgage loan refinancing activity and the resultant effect of
prepayments on residual interest and interest-only CMOs. Writedowns of equity
securities in 1993 and 1992 primarily relate to non-redeemable preferred
stocks. The mortgage loan writedown in 1994 reflects the provision of a
reserve for mortgage loan losses. Investment real estate writedowns
reflect the general deterioration in real estate markets over the three
year period.
In 1993, the Company adopted the provisions of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and has classified its
fixed maturities into two categories, including available for sale and held to
maturity. SFAS No. 115 also establishes criteria for the recognition of a
permanent impairment in the carrying value of debt and equity securities.
During 1993, the Company reflected a charge for the cumulative effect of
writedowns of certain mortgage-backed securities required under the provisions
of SFAS No. 115 totaling $7,573,000. The cumulative charge was reflected net of
$2,651,000 in related income tax effects.
During 1994, the Company continued to evaluate its Fund America Investment
and the SIST Residual in accordance with SFAS No. 115 and Emerging Issues Task
Force (EITF) Issue No. 93-18, "Impairment Recognition for a Purchased
Investment in a Collateralized Mortgage Obligation Investment or in a Mortgage-
Backed Interest Only Certificate." Due primarily to the rising interest rate
environment experienced in 1994 and its effect on the projected future cash
flows of the Fund America Investment and the SIST Residual, realized investment
losses were triggered under the provisions of EITF No. 93-18 on two occasions
during 1994. For the three months ended March 31, 1994, the Company reflected a
charge to earnings for the writedown of these investments from their GAAP book
value of $96,384,000 to their then fair value totaling $49,936,000, or a total
charge of $46,448,000. For the three months ended December 31, 1994, the
Company recorded an additional charge to earnings for the writedown of the Fund
America Investment from its GAAP book value totaling $48,352,000 to its
estimated fair value of $8,613,000, or a total charge of $39,739,000. At
December 31, 1994, the combined GAAP book value and carrying value of these
investments totaled $15,000,000 and $12,253,000, respectively.
62
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
The amortized cost of investments in fixed maturities, the cost of equity
securities and the estimated values of such investments at December 31, 1994
and 1993 by categories of securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1994:
Available for sale:
United States Government,
government agencies and
authorities $ 60,261 $ 115 $ (1,855) $ 58,521
States, municipalities and
political subdivisions 13,542 109 (268) 13,383
Foreign government securities 20,928 27 (1,613) 19,342
Public utilities 149,045 54 (17,715) 131,384
Mortgage-backed securities 837,173 2,103 (45,754) 793,522
All other corporate 658,946 814 (37,045) 622,715
---------- ------ ---------- ----------
Subtotal, available for sale
fixed maturities 1,739,895 3,222 (104,250) 1,638,867
Held to maturity:
Mortgage-backed securities 15,915 (2,003) 13,912
---------- ------ ---------- ----------
Subtotal, all fixed maturities 1,755,810 3,222 (106,253) 1,652,779
---------- ------ ---------- ----------
Non-redeemable preferred stocks 8,345 248 8,593
Common stocks 1,444 1,015 (240) 2,219
---------- ------ ---------- ----------
Subtotal, equity securities 9,789 1,263 (240) 10,812
---------- ------ ---------- ----------
Total fixed maturities and
equity securities $1,765,599 $4,485 $ (106,493) $1,663,591
========== ====== ========== ==========
</TABLE>
63
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1993:
Available for sale:
United States Government,
government agencies and
authorities $ 38,904 $ 1,649 $ (41) $ 40,512
States, municipalities and
political subdivisions 635 67 702
Public utilities 139,235 3,906 (1,584) 141,557
Mortgage-backed securities 801,646 18,194 (37,901) 781,939
All other corporate 689,849 39,719 (2,585) 726,983
---------- ------ ---------- ---------
Subtotal, available for sale
fixed maturities 1,670,269 63,535 (42,111) 1,691,693
Held to maturity:
Mortgage-backed securities 16,149 (1,954) 14,195
All other corporate 10,000 10,000
---------- ------ ---------- ---------
Subtotal, held to maturity 26,149 (1,954) 24,195
---------- ------ ---------- ---------
Subtotal, all fixed maturities 1,696,418 63,535 (44,065) 1,715,888
---------- ------ ---------- ---------
Non-redeemable preferred stocks 62,134 4,594 (94) 66,634
Common stocks 6,426 3,037 (266) 9,197
---------- ------ ---------- ---------
Subtotal, equity securities 68,560 7,631 (360) 75,831
---------- ------ ---------- ---------
Total fixed maturities and
equity securities $1,764,978 $71,166 $ (44,425) $1,791,719
========== ======= ========== ==========
</TABLE>
The amortized cost and estimated fair value of fixed maturities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---- -----
(IN THOUSANDS)
<S> <C> <C>
Available for sale:
Due in one year or less $ 60,292 $ 59,188
Due after one year through five
years 200,018 194,091
Due after five years through ten
years 302,598 285,888
Due after ten years 339,814 306,178
---------- ---------
902,722 845,345
Mortgage-backed securities 837,173 793,522
---------- ---------
Subtotal, available for sale 1,739,895 1,638,867
Held to maturity:
Mortgage-backed securities 15,915 13,912
---------- ---------
$1,755,810 $1,652,779
========== ==========
</TABLE>
64
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
Excluding scheduled maturities and sales related to reinsurance
transactions, proceeds from sales of investments in debt securities during
1994, 1993 and 1992 and the related gross gains and gross losses realized on
such sales were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales $430,392 $ 640,168 $1,410,441
======== ========= ==========
Gross gains $ 6,424 $ 25,629 $ 38,935
======== ========= ==========
Gross losses $ (3,423) $ (19,671) $ (4,569)
======== ========= ==========
</TABLE>
Following are changes in unrealized appreciation (depreciation) on
investments (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Investments carried at amortized cost:
Fixed maturities held to maturity $ (49) $ 9,269 $ 38,269
========= ========= ========
Investments carried at fair value:
Available for sale fixed maturities $(122,452) $ 17,156 $ 4,268
Equity securities (6,248) (17,137) 26,585
Equity in unrealized gains of equity
investees and limited partnerships 75 4,472 758
Other 487 875 292
--------- -------- -------
(128,138) 5,366 31,903
Less effect on other balance sheet
accounts:
Deferred policy acquisition costs 34,478 (16,647)
Unearned revenue reserves (15,011) 6,266
Deferred income taxes 38,034 1,470 (9,696)
Minority interest in unrealized losses (5,180) 5,180
--------- -------- -------
Change in unrealized investment gains
and losses $ (75,817) $ 1,635 $ 22,207
========= ======== ========
</TABLE>
The carrying value of nonaffiliated invested assets for which no
investment income was recorded during the twelve months ended December 31,
1994, was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fixed maturities $ 1,834
Equity securities 308
Investment real estate 34,486
Mortgages 2,641
Investments in limited partnerships 9,282
Other invested assets 779
-------
$49,330
=======
</TABLE>
65
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
The Company has a diversified investment portfolio that includes
securities of over 750 issuers. Excluding investments in bonds or notes of the
United States Government or Government agencies or authorities, the carrying
value and fair values of investments by issuer which exceeded 10% of
stockholders' equity at December 31, 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
ISSUER VALUE VALUE
------ ------- -------
<S> <C> <C>
FIXED MATURITIES
Citicorp Mortgage Securities $28,304 $28,304
Residential Funding Mortgage
Securities 1 Inc. 17,219 17,219
Green Tree Acceptance Inc. 14,261 14,261
Merrill Lynch Mortgage Insurance Inc. 12,737 12,737
Solomon, Inc. 11,956 11,956
News America Holdings 11,646 11,646
Hydro Quebec 11,516 11,516
Goldman Sachs 11,162 11,162
BankAmerica Corp. 10,198 10,198
Newfoundland Province CDA 10,154 10,154
Chrysler Financial Corp. 9,632 9,632
Pacific Gas & Electric Co. 9,506 9,506
Continental Corp. 9,341 9,341
Premier Auto Trust 9,273 9,273
LASMO (USA) Inc. 8,962 8,962
Canadian Imperial Bank 8,855 8,855
Philadelphia Electric Co. 8,813 8,813
Money Store 8,676 8,676
Fund America Investors Corp. 8,613 8,613
ITT Financial Corporation 8,472 8,472
Standard Credit Card 8,022 8,022
Transamerica Finance Corp. 8,000 8,000
Ultramar Credit 7,985 7,985
Bankers Trust - NY 7,969 7,969
Days Inns Mortgage Trust 7,931 7,353
Telecommunications Inc. 7,868 7,868
RJR Nabisco Inc. 7,725 7,725
Residential Funding Corp. 7,623 7,623
Aircraft Lease Portfolio 7,510 7,510
Norwest Financial Inc. 7,477 7,477
Long Island Lighting 7,411 7,411
Utilicorp United Inc. 7,379 7,379
Mortgage Capital Funding 7,292 7,292
Manufactured Housing 7,115 7,115
Signet Credit Card Trust 7,083 7,083
Chase Manhattan Credit Card 6,989 6,989
Chemical Banking Corp. 6,798 6,798
National Re Holding 6,470 6,470
237 Park Avenue Associates 6,381 6,121
Hong Kong Shanghi III 6,340 6,340
Boeing Company 6,278 6,278
Texas Utilities Electric Co. 6,271 6,271
WSGP International Diversified Funding 6,018 6,018
Corestates Capital 5,994 5,994
Occidental Petroleum 5,983 5,983
Oxford Acceptance Corp. 5,796 5,796
ERP Operating Ltd. Partnership 5,790 5,790
Discover Card Trust 5,724 5,724
Daimler-Benz Vehicle Trust 5,703 5,703
Time Warner Entertainment 5,648 5,648
Norwest Corporation 5,570 5,570
Fical Home Equity 5,397 5,397
MBIA, Inc. 5,360 5,360
American Airline 5,351 5,351
Ford Credit Grantor Trust 5,337 5,337
Ford Motor Co. 5,311 5,311
Sears Mortgage Securities Corp. 5,286 5,286
Fleet Finance Home Equity Trust 5,262 5,262
Coast Savings & Loan Association 5,256 5,256
USGI Inc. 5,224 5,224
Banc One Columbus 5,145 5,145
J.P. Morgan & Company 5,045 5,045
Standard Credit Card Trust 5,036 5,036
Travelers Inc. 5,026 5,026
Colonial Credit Card Trust 5,009 5,009
Wells Fargo & Company 5,005 5,005
GATX Capital Corp. 5,000 5,000
Bristol Oaks L.P. 5,000 5,000
Shearson Lehman Bros. Holding 5,000 5,000
Chevy Chase Master Card Trust 4,997 4,997
Los Angeles County Pension
Obligation 4,989 4,989
Budget Fleet Finance Corp. 4,963 4,963
Comerica 4,922 4,922
Finance Authority of Maine 4,903 4,903
NationsBank Corporation 4,855 4,855
Phillip Morris 4,850 4,850
Mississippi Power & Light Company 4,847 4,847
General Motors Acceptance Corp. 4,837 4,837
Prudential Securities Secured
Fin. Ln. 4,776 4,776
NP Funding II LP 4,746 4,746
First Union Corp. 4,744 4,744
CFI Timeshare Certificates 4,725 4,725
Golden West Financial Corp. 4,722 4,722
Morgan Stanley Group Inc. 4,713 4,713
Prime Finance Corporation 4,703 4,703
Coca Cola Enterprises Inc. 4,689 4,689
Southern Union Corp. 4,685 4,685
</TABLE>
66
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
CARRYING FAIR
ISSUER VALUE VALUE
------ ------- -------
<S> <C> <C>
FIXED MATURITIES (CONTINUED)
Ford Motor Credit Co. $ 4,647 $ 4,647
Merrill Lynch & Co. Inc. 4,631 4,631
Central Power & Light Co. FL 4,622 4,622
National City Corp. 4,601 4,601
Money Store Inc. (The) 4,566 4,566
Cleveland Electric Illumination 4,538 4,538
May Department Stores Co. 4,470 4,470
Commonwealth Edison Co. 4,435 4,435
Diamond Shamrock 4,421 4,421
Greenwich Capital Acceptance 4,390 4,390
Lockheed Corporation 4,357 4,357
NationsBank Credit Card Master
Trust 4,297 4,297
Public Service Enterprise 4,265 4,265
British Columbia Hydro & Power 4,185 4,185
Public Service Electric & Gas Company 4,168 4,168
First Chicago Corp. 4,140 4,140
Time Warner Inc. 4,105 4,105
Ontario, Province of Canada 4,030 4,030
Capital Home Equity Loan Trust 4,001 4,001
Bank Nova Scotia 4,000 4,000
Pacific Bell 3,995 3,995
Commercial Credit Group Inc. 3,958 3,958
B P America 3,956 3,956
General Electric Capital Corp. 3,889 3,889
Fleet/Norstar Financial Group 3,858 3,858
J C Penney Inc. 3,832 3,832
Shawmut National Corp. 3,778 3,778
First Bank N.A. 3,744 3,744
UFSB Trust 3,726 3,726
Service Corp International 3,709 3,709
G E Capital Mortgage Services 3,694 3,694
Weyerhauser Co 3,676 3,676
Guardian Savings & Loan Assn 3,646 3,646
Secured Investors Structured Trust 3,640 3,640
COLLATERAL LOANS
CFSB Corporation 29,306 29,306
James M. Fail 20,159 20,159
Victor Sayyah 6,001 6,001
EQUITIES
Sears Roebuck & Company 3,532 3,532
LIMITED PARTNERSHIPS
GSSW (real estate) 21,100 21,100
Hicks Muse/Trident 8,893 8,893
MORTGAGE LOANS
Ballard Texas Properties 8,664 7,120
Koger Properties Inc. 7,570 7,491
Bent Tree Tower 6,932 5,371
Citizens First National 6,894 6,414
Hamilton Partners 6,352 6,300
West Houston Hotel 5,110 5,110
Farb Investments 5,022 4,153
Central & South West 4,898 4,651
REAL ESTATE
Quail Creek, Arizona
(residential development) 6,805 6,805
SHORT TERM INVESTMENTS
State Street STIF 29,066 29,066
Bank of Louisville 24,365 24,365
Champion International Corp. 4,998 4,998
American Brands Inc. 4,158 4,158
Kerr McGee Corporation 3,999 3,999
</TABLE>
At December 31, 1994 and 1993, the Company held unrated
or noninvestment-grade fixed maturities with carrying values of $100,493,000
and $107,012,000, respectively, and aggregate fair values of $100,233,000 and
$106,197,000, respectively. These holdings amounted to 6.1% of the Company's
fixed maturity investments and 4.2% of total cash and invested assets at
December 31, 1994. The holdings of noninvestment-grade securities are widely
diversified and include securities of 63 issuers.
At December 31, 1994 and 1993, the Company held residual interest
mortgage-backed securities other than the Fund America Investment and the SIST
Residual with carrying values of $7,904,000 and $11,137,000, respectively, and
fair values of $4,223,000 and $8,481,000, respectively. The effective annual
yield on such investments based on their carrying value approximated 4.5% at
December 31, 1994.
67
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
At December 31, 1994 and 1993, the Company held mortgage loans principally
involving commercial real estate with carrying values of $127,047,000 and
$138,504,000, respectively, and estimated fair values of $119,065,000 and
$142,998,000, respectively. Approximately 62% of such mortgages involved
property located in Texas, consisting of first mortgage liens on completed
income-producing properties. No individual mortgage exceeds $8 million.
The Company's life insurance subsidiaries are required to maintain certain
amounts of assets on deposit with state regulatory authorities. Such assets
had an aggregate carrying value of $185,250,000 at December 31, 1994,
including securities of the Company with an estimated fair value of
$3,640,000, which have been eliminated in consolidation in the accompanying
balance sheet.
Certain of the Company's subsidiaries have entered into interest rate swap
arrangements to convert the interest rate characteristics of certain
investments to match those of related insurance liabilities. The agreements
expire from 1995 to 1997 and exchange fixed-rate payments ranging from 6.0%
to 8.44% for three month LIBOR-based interest payments on notional amounts of
$23.3 million. The interest rate differential to be received or paid is
recognized over the lives of the agreements as an adjustment to interest
expense. The subsidiaries are exposed to credit risk in the event of default
by counterparties to the extent of any amounts that have been recorded in the
balance sheet and market risk as a result of potential future increases in
LIBOR. The fair value of interest rate swap arrangements at December 31,
1994, approximated $336,000.
6. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS
Following is an analysis of the Company's investment in limited
partnerships (excluding the Company's investment in CCP at December 31, 1992,
which was reflected as an investment in equity investees):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 43,640 $ 39,808 $ 36,917
Contributions and capitalized costs 2,161 5,696 23,747
Equity in operating earnings 4,165 6,093 2,938
Equity in extraordinary losses (1,082)
Equity in unrealized gains (losses) 75 5,349 7
Sale of partnership investment (4,998)
Writedown of partnership investment (5,013)
Distributions of earnings (123) (401) (9,496)
Other distributions (7,891) (2,894) (13,223)
--------- --------- ---------
Balance, end of year $ 42,027 $ 43,640 $ 39,808
========= ========= =========
</TABLE>
The fair value of the Company's investments in limited partnerships
approximated their carrying value of $42,027,000 and $43,640,000 at December
31, 1994 and 1993, respectively.
Included in limited partnerships at December 31, 1994, was a $21,100,000
investment, representing a 49% limited partnership interest, in a partnership
formed to acquire through auction for resale certain mortgage loans and real
estate formerly held by failed savings and loan associations. During 1994,
this limited partnership distributed $7,891,000 of mortgages to the Company.
68
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS (CONTINUED)
At December 31, 1992, the Company owned a 39.9% indirect equity interest
in Bankers, consisting of a 29.7% equity interest in BLHC and 10.2% equity
interest through its limited partnership investment in CCP. In addition, the
Company owned $34.7 million principal amount of BLHC 11% Junior Subordinated
Debentures due 2003 and $50.0 million of a BLHC 11% preferred stock. The 1992
sale of Bankers was accounted for as a "step transaction" in accordance with
GAAP. Accordingly, gain recognition was limited to the 60.1% interest deemed
to have been sold. The excess of the sales price over the Company's basis in
Bankers on the 39.9% portion of the investment deemed to have been retained
by the Company (excess of sales price over basis in retained interest) was
reflected as a reduction in the carrying value of the Company's investments
in BLHC and CCP. Effective March 31, 1993, the Company's ownership interest
in BLHC was reduced to 24.4% as a result of BLHC's offering and on September
30, 1993, the Company sold its investment in BLHC (see Note 2).
At December 31, 1992, CCP had no assets or liabilities, other than its
investment in BLHC. Financial information of BLHC and the Company's carrying
value and equity in earnings of BLHC as of and for the two months ended
December 31, 1992, and the Company's equity in the earnings of BLHC for the
nine months ended September 30, 1993, is as follows (in thousands):
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Financial position:
Invested assets $ 1,847,000
Other assets 1,523,500
Insurance liabilities 2,490,200
Notes payable and other liabilities 709,300
Preferred stockholders' equity 160,800
Common stockholders' equity 10,200
Results of operations (unaudited):
Revenues $ 1,081,600 $ 222,500
Earnings from operations before
effect of accounting change 95,300 22,700
Cumulative effect of change in method
of accounting for post-retirement
benefits (13,300)
Extraordinary loss from early debt
retirement (5,600)
Net earnings attributable to common
stock 85,200 6,500
Amounts recorded by the Company:
Investment in 11% Junior Subordinated
Debt $ 30,551
Investment in 11% preferred stock 46,509
Equity investment in BLHC and CCP (35,739)
---------
$ 41,321
=========
</TABLE>
69
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS (CONTINUED)
Following is an analysis of the Company's equity investments in BLHC and
CCP (in thousands):
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Equity investment, beginning of year $(35,739)
Cost of investment in BLHC $ 16,700
Cost of investment in CCP 9,640
Allocated cost of common stock equity
kickers received for purchase of
subordinated debt and preferred stock 8,117
Excess of sales price over basis in
retained interest (74,338)
Equity in earnings of BLHC and CCP,
including amortization of portion of
excess of sales price over basis 29,117 3,265
Equity in extraordinary losses of BLHC (1,370)
Equity in (elimination of equity in)
unrealized investment gains (877) 877
Cash dividends received from BLHC (533)
Equity in proceeds of BLHC initial
public offering 99,376
Reduction in investment upon sale (89,974)
-------- --------
Equity investment, end of year $ - $(35,739)
======== ========
</TABLE>
Included in the limited partnership investments at December 31, 1991, was
the Company's 21.4% interest in CCP (Predecessor CCP). On July 21, 1992,
Predecessor CCP formed a new insurance holding company, CCP Insurance, Inc.
(CCP Insurance) and completed an initial public offering (IPO) of common
stock in CCP Insurance. Predecessor CCP was liquidated and the Company
received 1,764,439 shares of CCP Insurance common stock in exchange for its
21.4% interest in Predecessor CCP. At the date of exchange, the Company's
carrying value in Predecessor CCP totaled $19,509,000, which became the
Company's basis in the shares of CCP Insurance common stock. The Company
subsequently reflected its investment in CCP Insurance, along with 525,000
shares of CCP Insurance purchased in the IPO, as marketable equity
securities. Effective September 29, 1993, CCP Insurance completed an
underwritten primary and secondary offering of shares of its common stock.
The Company sold all of the 1,764,439 shares of the common stock of CCP
Insurance in conjunction with the offering for $47,272,000 and realized
investment gains totaling $27,758,000. In addition, during 1994 and 1993, the
Company sold 12,000 and 455,375 shares of CCP Insurance common stock
respectively in open market transactions and realized gains totaling $140,000
in 1994 and $5,310,000 in 1993. At December 31, 1994, the Company continues
to hold 57,625 shares of CCP Insurance common stock with a fair value of
approximately $1.2 million.
70
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS (CONTINUED)
Financial information of Predecessor CCP and the Company's equity in the
earnings of Predecessor CCP is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Results of operations (through July 1992):
Revenues. . . . . . . . . . . . . . . . . . . $281,800
Net operating earnings. . . . . . . . . . . . 17,663
Extraordinary loss. . . . . . . . . . . . . . (6,248)
Amounts recorded by the Company:
Equity in operating earnings. . . . . . . . . $ 3,550
Equity in extraordinary loss. . . . . . . . . (1,082)
Distributed earnings received . . . . . . . . 8,902
</TABLE>
Following is a summary of the equity in earnings of equity investees and
limited partnerships:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating earnings:
BLHC $29,117 $3,265
Limited partnerships. . . . . . . . . $ 4,165 6,093 2,938
------- ------- ------
Equity in operating earnings. . . . . . 4,165 35,210 6,203
Equity in extraordinary losses. . . . . (1,370) (1,082)
------- ------- ------
$ 4,165 33,840 $ 5,121
======= ======= =======
Distributed earnings received $ 123 $ 934 $ 9,496
======= ======= =======
</TABLE>
7. ACCOUNTING FOR EXCESS COST (GOODWILL)
SLC's accounting policy is to amortize goodwill on a straight-line basis
over a 40-year period. Historically, the Company periodically assessed the
recoverability of its goodwill through an actuarial projection of the
undiscounted future earnings of the Company's insurance subsidiaries (excluding
excess cost amortization) over the remaining life of such goodwill. Such
projections assumed anticipated levels of new production over a succeeding
five-year period.
Under its historical accounting practices, approximately $288,333,000 of
SLC's total $298,017,000 of unamortized goodwill at year-end 1994 was
attributable to SLC's acquisition of Southwestern Life in 1986. The Company
tested the recoverability of the Southwestern Life goodwill and, based on the
historical methodology utilized, management concluded that such goodwill
appeared to be fully recoverable.
In early 1995, the Company's Board of Directors approved a change in SLC's
strategy for dealing with its public debt obligations and fixed charges. As
publicly announced, the new strategy seeks to restructure SLC's capital in such
a way as to appropriately meet the Company's long term goals, and to
significantly increase SLC's common equity. Management believes that this
process will inevitably involve negotiations with third parties based on the
perceived fair values of SLC and its operating subsidiaries. Accordingly,
management concluded that the Company's accounting policy with respect to the
recoverability of goodwill should be changed to discount projections of future
earnings using an economic rate of return that would be customary for evaluating
the present value of future profits in connection with current life insurance
company transactions. As a result of this accounting change, the goodwill
attributable to the acquisition of Southwestern Life was reduced from
$288,333,000 to $77,650,000, or a total reduction of $210,683,000. Because such
a change in accounting was determined to be inseparable from a change in
71
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
7. ACCOUNTING FOR EXCESS COST (GOODWILL) (CONTINUED)
an estimate, such reduction was reflected as a charge to operating earnings, as
opposed to being reflected as the cumulative effect of a change in an accounting
principle.
In addition to the reduction in goodwill related to Southwestern Life, SLC
evaluated the recoverability of its remaining goodwill totaling approximately
$9,683,000 and determined that $6,834,000 of such goodwill, substantially all of
which was related to the 1986 acquisition of Philadelphia American Life
Insurance Company (PALICO), was not recoverable through projected future
earnings. PALICO is the Company's principal provider of group health insurance
products and incurred substantial losses relative to such business over the past
two years. Accordingly, an additional charge to operating earnings of $6,834,000
was reflected at year-end 1994 and included in amortization of excess cost in
the consolidated statement of earnings.
8. INSURANCE LIABILITIES
Insurance liabilities consist of the following:
<TABLE>
<CAPTION>
MORTALITY OR INTEREST
WITHDRAWAL MORBIDITY RATE DECEMBER 31, DECEMBER 31,
ASSUMPTIONS ASSUMPTIONS ASSUMPTIONS 1994 1993
----------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Traditional life insurance
contracts . . . . . . . . . . . Company Company 6%-10% $ 498,866 $ 528,634
experience experience
Traditional annuity products . . N/A N/A N/A 137,764 138,244
Individual accident and health . Company Company 6%-10% 62,526 61,996
experience experience
Group life and health. . . . . . N/A N/A N/A 9,704 9,340
Unearned premiums . . . . . . . N/A N/A N/A 36,362 35,412
Claims and benefits payable. . . N/A N/A N/A 104,456 106,763
Dividend and coupon
accumulations and other . . . . N/A N/A N/A 44,422 46,914
--------- ---------
894,100 927,303
--------- ----------
Universal life and investment contract
liabilities:
Universal life and annuities . . . . . N/A N/A N/A 1,378,717 1,306,665
Guaranteed investment contracts. . . . N/A N/A N/A 313,296 377,731
--------- ---------
1,692,013 1,684,396
--------- ---------
$2,586,113 $2,611,699
========= =========
</TABLE>
The estimated fair value of guaranteed investment contracts approximated
their carrying value at December 31, 1994, because it is expected that
substantially all of such contracts will be terminated during 1995. The
estimated fair value of the liabilities for other investment contracts is
approximately equal to their carrying value at December 31, 1994, because
interest rates credited to account balances approximate current rates paid on
similar investments and are generally not guaranteed beyond one year. Fair
values for the Company's insurance liabilities other than those for
investment-type insurance contracts are not required to be disclosed. However,
the fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk, which
minimizes exposure to changing interest rates through the matching of investment
maturities with amounts due under insurance contracts.
72
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. INSURANCE LIABILITIES (CONTINUED)
Activity in the liability for claims and benefits payable for the years
ended December 31, 1994, 1993 and 1992 is summarized as follows (1992 excludes
amounts for Bankers and Certified, which were sold in November 1992):
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Claims and benefits payable at beginning of year. . . . . $106,763 $ 89,245 $ 90,278
Less reinsurance recoverables . . . . . . . . . . . . . . 4,224 1,282 1,025
-------- ------- -------
Net beginning balance. . . . . . . . . . . . . . . . . . 102,539 87,963 89,253
Add incurred losses net of reinsurance:
Current year . . . . . . . . . . . . . . . . . . . . . . 223,474 207,230 175,502
Prior years . . . . . . . . . . . . . . . . . . . . . . (7,514) (10,661) (3,404)
-------- -------- -------
215,960 196,569 172,098
-------- -------- -------
Deduct payments for claims, net of reinsurance:
Current year . . . . . . . . . . . . . . . . . . . . . . 163,805 126,204 131,460
Prior years . . . . . . . . . . . . . . . . . . . . . . 54,462 52,847 41,671
-------- -------- --------
218,267 179,051 173,131
-------- -------- -------
Claims and benefits payable, net of related
reinsurance recoverables at end of year . . . . . . . . 99,181 102,539 87,963
Plus reinsurance recoverables . . . . . . . . . . . . . . 5,275 4,224 1,282
-------- ------- ------
Balance at end of year. . . . . . . . . . . . . . . . . . $104,456 $106,763 $ 89,245
======== ======== ========
</TABLE>
The above reconciliation shows a consistent redundancy in the Company's
claims reserve due to the Company's conservative reserving methodology which has
been applied on a consistent basis from year to year.
9. STOCKHOLDERS' EQUITY AND RESTRICTIONS
At December 31, 1994, substantially all of consolidated stockholders'
equity represented net assets of the Company's insurance subsidiaries that
cannot be transferred to the Company in the form of dividends, loans or
advances. Generally, the net assets of the Company's insurance subsidiaries
available for transfer to the Company are limited to the greater of (except in
Kentucky where the applicable test is lesser of) the subsidiaries' net gain from
operations during the preceding year or 10% of the subsidiaries' net surplus as
of the end of the preceding year as determined in accordance with accounting
practices prescribed or permitted by insurance regulatory authorities. Payment
of dividends in excess of such amounts would generally require approval by the
regulatory authorities. At December 31, 1994, approximately $15 million was
available under existing laws for the payment of dividends by insurance
subsidiaries to the Company during 1995 without prior approval; however, Modern
American has agreed with its domiciliary state that it will not pay any
stockholder dividends without obtaining prior regulatory approval. Southwestern
Life has agreed in writing with its domiciliary state to give 30 days prior
notice before the payment of any stockholder dividends. Further, management has
given the Texas Department of Insurance assurances that neither Southwestern
Life nor Union Bankers will declare and pay any dividends in 1995 without the
prior approval of the Texas Insurance Commissioner.
At the request of the Illinois Department of Insurance, BML has informed
the Illinois Department in writing that it currently has no intention to declare
or pay any dividends in 1995 and that it will give the Illinois Department
advance notice if there is a change in the company's intention.
73
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
9. STOCKHOLDERS' EQUITY AND RESTRICTIONS (CONTINUED)
Both Integrity National and PALICO have acknowledged in writing the
request of the Pennsylvania Department of Insurance that prior to paying any
dividends in 1995 each company, respectively, will notify in advance
and obtain the Pennsylvania Department's approval of such dividends, which
approval the Pennsylvania Department has agreed not to unreasonably withhold.
The Company's insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
their respective state insurance departments. Prescribed statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices differ from state
to state, and may differ from company to company within a state, and may change
in the future. Furthermore, the NAIC has a project to codify statutory
accounting practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices. Accordingly, that
project, which is expected to be completed in 1996, will likely change to some
extent prescribed statutory accounting practices, and may result in changes to
the accounting practices that insurance enterprises use to prepare their
statutory financial statements.
On the basis of reporting as prescribed by insurance regulatory
authorities, the combined stockholders' equity of the consolidated insurance
subsidiaries, after elimination of amounts attributable to investments in
consolidated insurance subsidiaries, amounted to approximately $219,357,000 and
$259,856,000 and the combined asset valuation reserve of SLC's insurance
subsidiaries amounted to $34,827,000 and $45,023,000 as of December 31, 1994 and
1993, respectively. Combined net income (loss) was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income (loss) . . . . . . . . . $ (8,636) $ 628 $ 22,191
Realized investment gains (losses). . . . (13,437) 52,055 (68,482)
------- ------ -------
Net income (loss) . . . . . . . . . . . . $(22,073) $52,683 $(46,291)
======== ======== =========
</TABLE>
Gains and losses relative to individual investments are generally
reflected for statutory reporting purposes as unrealized investment gains or
losses until such time as the specific investments are sold or otherwise
disposed of. In addition, statutory investment gains and losses are reported net
of related income tax effects. Statutory realized investment losses in 1992
include losses on the disposition of First Executive Corporation common stock
totaling $118 million which were reflected prior to 1992 for financial reporting
purposes.
During 1992, certain employees who had previously purchased shares of the
Company's Common Stock under a Restricted Stock Purchase Agreement pledged the
shares of Common Stock to collateralize notes receivable which had been issued
to a former affiliate in 1982, but which were subsequently acquired by the
Company in 1985. The notes and accrued interest totaling $1,537,000 and
$1,471,000 at December 31, 1994 and 1993, respectively, bear interest at 9%,
mature in 1996 and were collateralized by 375,564 shares of the Company's Common
Stock at each of the respective dates. In addition, the Company has other notes
receivable with a carrying value of $258,000 at December 31, 1994 and 1993,
respectively, which are collateralized by 51,534 shares of the Company's Common
Stock. In the accompanying balance sheets, such notes and accrued interest have
been reflected as reductions in stockholders' equity.
74
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
10. CAPITAL STOCK
At December 31, 1994, the Company had two classes of capital stock, Series
Preferred Stock (no par value), and Common Stock ($1.00 par value). The only
Preferred Stock outstanding at December 31, 1994 was the Series 1986-A (Series
1986-A Preferred Stock).
The holder of each outstanding share of Series 1986-A Preferred Stock is
entitled to cumulative annual dividends of $1.75 and liquidating distributions
of up to $25 per share. Such dividends and liquidating distributions are payable
in preference to the Common Stock. The Series 1986-A Preferred Stock may be
converted, at the option of the holder, at any time into shares of Common Stock
at the rate of .7692 shares of Common Stock for each share of Series 1986-A
Preferred Stock. The Company may redeem, at its option, any or all shares of the
Series 1986-A Preferred Stock at redemption prices declining annually to $25 per
share after December 1, 1996 plus accrued and unpaid dividends. The Series
1986-A Preferred Stock is exchangeable, in whole but not in part, at the
Company's option on any dividend payment date commencing December 1, 1988 for
the Company's 7% Convertible Subordinated Debentures due 2011 at the rate of $25
principal amount of Debentures for each share of Series 1986-A Preferred Stock.
The Series 1986-A Preferred Stock is nonvoting, except as required by law and
except that if six quarterly dividends are unpaid and past due the holders of
the Series 1986-A Preferred Stock may elect two directors to the Company's Board
of Directors. On January 27,1995, the Company's Board of Directors authorized
the suspension of the payments of dividends on the Series 1986-A Preferred Stock
until reinstated by action of the Board. At March 31, 1995, approximately $3.5
million of preferred dividends were in arrears.
Through February 10, 1994, the Common Stock and Class B Common Stock were
entitled to vote as separate classes on stockholder actions that directly or
indirectly could effect a change in the aggregate number or par value of shares
of Class B Common Stock or in the powers, preferences or rights of the holders
of Class B Common Stock. The Company's Board of Directors was classified by its
Certificate of Incorporation to require, so long as the Class B Common Stock was
outstanding, that at least 50% of the Company's directors were to be
independent, and that 75% of the directors were to be elected by the Class B
Common Stock and the remaining 25% were to be elected by the Common Stock and
voting Preferred Stock. The Class B Common Stock had the same rights to
dividends and liquidating distributions as the Common Stock. On February 11,
1994, the Company purchased all of the outstanding shares of Class B Common
Stock and immediately cancelled and retired such shares (see Note 4).
In connection with the CFLIC transaction on June 30, 1994 (see Note 4),
the Company redeemed all of the outstanding shares of the Series 1984-A
Preferred Stock and the 1987-B Preferred Stock.
In connection with the sale of the Company's investment in BLHC on
September 30, 1993 (see Note 2), the Company redeemed all of the outstanding
shares of its Series 1987-A Preferred Stock at their $50 per share stated value.
On December 2, 1993, the Company redeemed for cash all of the outstanding shares
of its Series 1987-C Preferred Stock at their $50 per share stated value. Annual
dividend requirements on the redeemed shares totaled $5.50 per share and $8.00
per share, respectively.
75
<PAGE>
10. CAPITAL STOCK (CONTINUED)
Capital stock activity for the three years ended December 31, 1994, was as
follows:
<TABLE>
<CAPTION> SHARES
AUTHORIZED
PER SERIES 1994 1993 1992
---------- ---- ---- ----
<S> <C> <C> <C> <C>
Preferred stock (authorized 50,000,000 shares):
Series 1984-A Preferred Stock . . . . . . . . . . 541,563
=========
Balance, beginning of year. . . . . . . . . . . 541,563 541,563 541,563
Shares redeemed in CFLIC transaction. . . . . . (541,563)
----------- ---------- ----------
Balance, end of year . . . . . . . . . 541,563 541,563
=========== ========== ==========
Series 1986-A Preferred Stock. . . . . . . . . . . 8,000,000
=========
Balance, beginning of year . . . . . . . . . . . 7,999,880 7,999,980 7,999,980
Shares retired upon exchange . . . . . . . . . . (100)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . 7,999,880 7,999,880 7,999,980
=========== ========== ==========
Series 1987-A Preferred Stock. . . . . . . . . . . 2,000,000
=========
Balance, beginning of year . . . . . . . . . . . 1,000,000 1,000,000
Shares redeemed . . . . . . . . . . . . . . . . (1,000,000)
---------- ----------
Balance, end of year . . . . . . . . . . . . . . 1,000,000
========== ==========
Series 1987-B Preferred Stock. . . . . . . . . . . 140,000
=========
Balance, beginning of year . . . . . . . . . . . 140,000 140,000 140,000
Shares redeemed in CFLIC transaction . . . . . . (140,000)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . 140,000 140,000
Series 1987-C Preferred St . . . . . . . . . . . . 1,000,000
========= =========== ========== ==========
Balance, beginning of year . . . . . . . . . . . 1,000,000 1,000,000
Shares redeemed . . . . . . . . . . . . . . . . (1,000,000)
---------- ----------
Balance, end of year . . . . . . . . . . . . . . 1,000,000
========== ==========
Common stock (authorized 200,000,000 shares):
Issued:
Balance, beginning of year . . . . . . . . . . . 71,593,610 71,401,004 71,398,954
Issued upon exchange of preferred stock. . . . . 76
Issued upon exercise of stock options. . . . . . 58,300 192,530 2,050
Issued for Class B shares acquired
for treasury . . . . . . . . . . . . . . . . 100,000
Retirement of treasury shares. . . . . . . . . . (22,768,528)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . 48,983,382 71,593,610 71,401,004
----------- ---------- ----------
Held by subsidiaries and in treasury:
Balance, beginning of year . . . . . . . . . . . 23,766,471 23,610,789 23,317,203
Purchase of shares . . . . . . . . . . . . . . . 155,682 293,586
Shares redeemed issued for Class B shares . . . 100,000
Shares redeemed in CFLIC transaction . . . . . . 620,423
Retirement of treasury shares. . . . . . . . . . (22,768,528)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . 1,718,366 23,766,471 23,610,789
----------- ---------- ----------
Outstanding, end of year . . . . . . . . . . . . . 47,265,016 47,827,139 47,790,215
=========== ========== ==========
Common stock, Class B (none currently authorized):
Balance, beginning of year . . . . . . . . . . . . 100,000 100,000 100,000
Purchase and cancellation of shares. . . . . . . . (100,000)
----------- ---------- ----------
Balance, end of year . . . . . . . . . . . . . . . 100,000 100,000
=========== ========== ==========
</TABLE>
76
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
10. CAPITAL STOCK (CONTINUED)
Shares of Common Stock reserved for issuance at December 31, 1994:
<TABLE>
<S> <C>
Conversion of Series 1986-A Preferred Stock . . . 6,153,755
Exercise of incentive plan stock options . . . . 1,200,000
Stock options to be granted . . . . . . . . . . . 1,440,000
---------
Total . . . . . . . . . . . . . . . . . . . . . 8,793,755
=========
</TABLE>
11. REINSURANCE
The Company's life insurance subsidiaries have set their retention limit
for acceptance of risk on life insurance policies at various levels currently up
to $500,000. There are reinsurance agreements with various companies whereby
insurance in excess of the respective subsidiaries' retention limits is
reinsured. To the extent that reinsuring companies become unable to meet their
obligations under these agreements, the subsidiaries remain contingently liable.
Insurance in force ceded in 1994 and 1993 under risk sharing arrangements
totaled approximately $5.2 billion and $5.7 billion, respectively.
In 1993, the Company adopted the provisions of SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,"
which changes the accounting and reporting for reinsurance contracts. SFAS No.
113 requires that when a reinsurance contract does not relieve the reinsurer
from the legal liability to its policyholders, ceding insurers must report
amounts recoverable from reinsurers as assets rather than as a reduction of the
related policyholder liabilities. In addition, financial reporting disclosures
were amended to require information relative to the volume of premiums ceded to
and the benefits paid by reinsurers under related reinsurance arrangements. At
December 31, 1994 and 1993, the Company has reflected in its balance sheet an
asset for amounts due from reinsurers totaling $236,272,000 and $388,083,000,
respectively, and has correspondingly increased its insurance liabilities by the
same amounts in each respective year. Following is information relative to
premiums ceded to unaffiliated reinsurers and the related benefits incurred by
such reinsurers for the year ended December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994
--------------------------------
TRADITIONAL DEPOSIT
REINSURANCE PRODUCTS TOTAL
----------- -------- -----
<S> <C> <C> <C>
Premiums and deposits ceded . . . . . . $34,840 $18,605 $53,445
====== ====== ======
Benefits and withdrawals ceded. . . . . $31,401 $ 2,855 $34,256
====== ====== ======
<CAPTION>
1993
--------------------------------
TRADITIONAL DEPOSIT
REINSURANCE PRODUCTS TOTAL
----------- -------- -----
<S> <C> <C> <C>
Premiums and deposits ceded . . . . . . $49,964 $19,849 $69,813
====== ====== ======
Benefits and withdrawals ceded. . . . . $35,486 $30,807 $66,293
====== ====== ======
</TABLE>
Amounts due from reinsurers at December 31, 1993, includes $334,633,000
due from ERC relative to certain annuity business which ERC had retroceded to
CFLIC. The Company terminated the reinsurance arrangements with CFLIC during
1994 and reduced amounts due from ERC to $188,756,000 at December 31, 1994 (see
Note 4).
Certain of the Company's insurance subsidiaries have ceded blocks of
insurance under reinsurance treaties to provide funds for financing
acquisitions and other purposes. These reinsurance transactions, generally
known as "surplus relief reinsurance," represent financing
arrangements and, in accordance with GAAP, are not reflected in the
77
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
11. REINSURANCE (CONTINUED)
accompanying financial statements except for the risk fees paid to reinsurers.
Statutory surplus provided by such treaties totaled $57.8 million and $51.5
million at December 31, 1994 and 1993, respectively. Risk fees paid to
reinsurers generally range from 2% to 4% of the net amount of surplus provided.
12. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
Rental expense for the years ended December 31, 1994, 1993 and 1992 was
approximately $8.7 million, $6.6 million and $11.4 million, respectively. At
December 31, 1994, the Company and its subsidiaries had long-term leases
covering certain of their facilities and equipment. The net minimum rental
commitments under noncancellable operating leases with lease terms in excess of
one year are $6.1 million, $0.7 million, $0.2 million and $0.1 million for the
years ending December 31, 1995, 1996, 1997 and 1998, respectively.
In addition, as a result of a judgement involving a mortgage loan
foreclosure, a subsidiary is obligated under a real property lease for payments
totaling $120,000 annually through November 2082.
At December 31, 1994, the Company had made investments during the year of
$1.8 million associated with an outstanding commitment to make limited
partnership investments of up to $25 million in Conseco Capital Partners II,
L.P. The partnership was formed to make corporate acquisitions of specialized
annuity, life and health insurance companies and related businesses.
The Company and its subsidiaries have been under examination by the
Internal Revenue Service (IRS) for the tax years 1983 through 1992. The IRS
completed its examination for the years 1983 through 1985 and issued preliminary
Notices of Deficiencies totaling approximately $17.5 million, before interest.
The Company protested such assessed deficiencies and subsequently reached a
final agreement with the IRS under which the Company and certain of its
subsidiaries paid approximately $4.0 million of additional taxes and interest.
In 1994, the IRS issued a preliminary Notice of Deficiency in the amount
of $127.7 million to the Company's insurance subsidiaries for the tax years 1986
through 1989, which included the disallowance of interest expense on the surplus
debentures issued by the Company's insurance subsidiaries. The issue involved
approximately $444 million of interest deductions claimed by the Company's
subsidiaries during the periods under examination and, if disallowed as
deductions, would have resulted in substantial additional tax and interest.
However, the Company protested this issue and subsequent to year-end 1994,
reached a tentative settlement for the tax years 1986 through 1989 which will
allow a full deduction for interest expense on surplus debentures. The tentative
settlement is subject to final approval by the congressional Joint Committee on
Taxation. Management believes that, based upon the tentative settlement and the
indemnification received from the seller relative to certain former and
presently owned subsidiaries, the ultimate liability for taxes and interest for
these years will not exceed amounts recorded in the Company's financial
statements.
The IRS has not completed its examination for the years 1990 through 1992
and therefore has not issued preliminary Notices of Deficiencies for those
years. Further, based on the current status of the examination of 1990 through
1992, no issues have been brought to the attention of management that would
result in a substantial liability for taxes and interest.
From time to time, assessments are levied on the Company's insurance
subsidiaries by life and health guaranty associations in states in which they
are licensed to do business. Such assessments are made primarily to cover the
losses of policyholders of insolvent or rehabilitated insurers. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. The Company's insurance subsidiaries paid assessments of $2.7
million, $3.2 million and $2.8 million in the years 1994, 1993 and 1992,
respectively. Based on information currently available, the Company's insurance
subsidiaries have accrued approximately $1.3 million for future assessments.
78
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
12. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES (CONTINUED)
Reference is hereby made to Item 3, Legal Proceedings, of this Form 10-K
with respect to a discussion of the CASTLE case and the MEYER case.
Various other lawsuits and claims are pending against the Company and its
subsidiaries. Based in part upon the opinion of counsel as to the ultimate
disposition of the above discussed and other matters, management believes that
the liability, if any, will not be material.
See Note 2 for a discussion regarding indemnifications made by the Company
with respect to the sale of Bankers.
13. FEDERAL INCOME TAXES
The Company, its non-life insurance subsidiaries and its life insurance
subsidiaries file a single consolidated tax return. ICH Funding filed a
separate income tax return subsequent to the Company's transfer of an 83%
ownership interest to CFLIC in June 1993 (see Note 4) and continued to do so
until the Company's reacquisition of such interest in June 1994. As an
indirect wholly-owned subsidiary of the Company, ICH Funding will request
permission from the IRS to rejoin the consolidated tax group for the period
subsequent to June 1994. Marquette, which was also acquired in June 1994, is
not eligible to join the Company's consolidated tax return for 60 months and,
therefore, will file a separate income tax return until such time has passed.
The Company's deferred federal income tax asset at December 31, 1994 and
1993, is comprised of the tax benefit (cost) associated with the following items
based on 35% tax rates in effect:
<TABLE>
<CAPTION>
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
Items subject to ordinary tax treatment:
Deferred policy acquisition costs and present
value of future profits of acquired business . . . $(71,962) $(56,581)
Future policy benefits . . . . . . . . . . . . . . 67,503 62,815
Other assets and liabilities. . . . . . . . . . . . 57,902 29,657
Net operating loss carryforwards. . . . . . . . . . 15,233 13,644
------ ------
Deferred income tax asset . . . . . . . . . . . . 68,676 49,535
------ ------
Items subject to capital gains treatment:
Invested assets . . . . . . . . . . . . . . . . . . 49,056 692
Capital loss carryforwards. . . . . . . . . . . . . 5,209
------- ------
Deferred income tax asset . . . . . . . . . . . . 49,056 5,901
------- ------
Alternative minimum tax credit carryforwards. . . . . 8,595 13,948
Less: Valuation allowance . . . . . . . . . . . . . . (41,465) (16,351)
------ ------
Total deferred income tax asset . . . . . . . . . $ 84,862 $ 53,033
====== ======
</TABLE>
79
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
13. FEDERAL INCOME TAXES (CONTINUED)
The provision (credit) for income taxes is included in the statements of
earnings as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
(IN THOUSANDS)
<S> <C> <C> <C>
Operating earnings (loss) . . . . . . . . $(1,140) $93,706 $(69,256)
Cumulative effect of changes in
accounting methods . . . . . . . . . . . (3,585)
Extraordinary losses. . . . . . . . . . . (1,033) (2,237)
------ ------ -------
$(1,140) $89,088 $(71,493)
====== ====== =======
</TABLE>
The components of the provision (credit) for income taxes on operating
earnings (loss) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense (credit) . . . . . . . $(7,630) $20,678 $ 836
Deferred tax expense (credit) . . . . . . . 6,490 73,028 (70,092)
-------- -------- --------
Income tax expense (credit) . . . . . . . $(1,140) $93,706 $69,256)
======== ======== ========
</TABLE>
A reconciliation of the income tax provisions (credits) based on the
prevailing corporate tax rate of 35% in 1994 and 1993 and 34% in 1992 to the
provisions (credits) reflected in the consolidated financial statements is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Computed expected income tax expense
(credit) at statutory regular tax rate . . $(118,503) $106,970 $ (6,256)
Change in accounting for excess cost . . . 73,739
Amortization of excess cost . . . . . . . . 5,748 3,357 3,734
Effect of change in income tax rate . . . . (3,509)
Reduction in (benefit from) utilization
of tax loss
carryforwards . . . . . . . . . . . . . . 4,005 (910) (5,158)
Additional tax basis gains on
sales of subsidiaries . . . . . . . . . . 16,206
Provision for tax settlement. . . . . . . . 7,981
Increase (reduction) in deferred tax
asset valuation allowance. . . . . . . . . 25,114 (8,554) (79,929)
Other . . . . . . . . . . . . . . . . . . . 776 (3,648) 2,147
------ ------ ------
Income tax expense (credit) . . . . . . $ (1,140) $ 93,706 $ (69,256)
====== ====== =======
</TABLE>
The benefit from the reduction in the deferred tax asset in 1993 as
reflected in the above reconciliation exceeds the actual change in the valuation
allowance as a result of the change in corporate tax rates during 1993.
80
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
13. FEDERAL INCOME TAXES (CONTINUED)
At December 31, 1994, the Company and its subsidiaries had the following
income tax carryforwards available (in thousands):
<TABLE>
<CAPTION>
TAX EXPIRATION
PURPOSES DATES
-------- ----------
<S> <C> <C>
U.S. federal regular tax operating loss carryforwards . . . $43,523 2009
U.S. federal AMT credit carryforwards against regular tax . 8,595 indefinite
</TABLE>
Management has periodically assessed the ability of the Company's insurance
subsidiaries to produce taxable income in future periods sufficient to fully
utilize their operating book/tax temporary differences and tax loss
carryforwards. These assessments have included actuarial projections under
alternative scenarios of future profits on the existing insurance in force of
the Company's insurance subsidiaries, including provisions for adverse
deviation and assumptions regarding new business, adjusted to reflect the
Company's anticipated debt service costs. Valuation allowances totaling
$41,465,000 and $16,351,000 were provided against the Company's deferred tax
assets at December 31, 1994 and 1993, respectively, to reflect the
uncertainties of realizing all of the benefits of temporary differences and
available tax loss carryforwards.
Included in the deferred income tax asset at December 31, 1994 are tax
effects totaling $29,809,000 associated with unrealized investment losses
included in stockholders' equity. Substantially all of such unrealized
investment losses at December 31, 1994, are attributable to SLC's insurance
subsidiaries' available for sale fixed maturities. The Company provided a
valuation allowance against the deferred income tax asset related to
unrealized investment losses as of the end of each interim period during
1994. At December 31, 1994, management assessed the level of its
subsidiaries' cash and short-term investments, the quality and duration of
their available for sale fixed maturity portfolios, and the likelihood that
its subsidiaries would be required to dispose of a substantial portion of
their available for sale fixed maturities and incur net capital losses in
order to meet their liquidity needs. These assessments included a review of
actuarial cash flow projections under various interest rate scenarios and
evaluations of historical data relative to benefits and surrender activity.
Management has concluded based on such assessment that it is unlikely that
the Company's subsidiaries would be required to incur significant capital
losses to meet anticipated liquidity needs over the near term and,
accordingly, the valuation allowance provided against the deferred income tax
asset arising from unrealized investment losses in 1994 interim periods was
eliminated at December 31, 1994.
The IRS is examining federal income tax returns of the Company and certain
insurance subsidiaries through 1992. See Note 12 for a discussion of certain
proposed deficiencies.
14. BENEFIT AND OPTION PLANS
The Company has not established retirement benefit plans for its
employees. However, Bankers had a noncontributory unfunded deferred compensation
plan for qualifying members of its career agency force. Net pension costs during
1992 included in other operating expenses included the following components (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Service cost-benefits earned during the period . . . $1,223
Interest cost on projected benefit obligation . . . 1,730
Net amortization . . . . . . . . . . . . . . . . . 150
-----
Net periodic pension cost. . . . . . . . . . . . . . $3,103
=====
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8% and 5%, respectively.
81
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
14. BENEFIT AND OPTION PLANS (CONTINUED)
During 1993, the Company entered into agreements with certain employees
providing for severance benefits supplemental to those available to all
employees under the Company's welfare benefit plans. The agreements generally
provide for a benefit of two times the annual salary of each covered employee
upon the voluntary or involuntary termination of their employment for any reason
other than gross misconduct, plus an additional benefit of up to one year's
salary if, in the aggregate, shares of the Company's Common Stock acquired by
such employees under the Company's incentive stock option plans or the stock
purchase plan of a predecessor company are disposed of at less than a minimum
specified price. For the year ended December 31, 1993, the Company reflected a
charge for the total anticipated cost of providing benefits under the agreements
totaling $2,820,000.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106
requires that an enterprise accrue, during the years that an employee renders
the necessary service, the expected cost of providing postretirement life and
health care benefits to an employee and the employee's beneficiaries and covered
dependents. The Company's transition obligation as of January 1, 1993,
approximated $22,873,000. The Company reflected a charge for the cumulative
effect to January 1, 1993, of providing postretirement benefits for its
remaining employees totaling $2,746,000. The cumulative charge has been
reflected net of $934,000 in related income tax effects. The Company's
obligation for accrued postretirement benefits is unfunded. Following is an
analysis of the change in the liability for accrued postretirement benefits for
the year ended December 31, 1994 (in thousands):
<TABLE>
<S> <C>
Accrued postretirement benefits, beginning of year . . . . . . . . . $23,814
-------
Recognition of components of net periodic postretirement benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 517
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,777
Amortization of prior service costs . . . . . . . . . . . . . . . . (149)
------
Net periodic postretirement benefit cost. . . . . . . . . . . . . . 2,145
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . (1,399)
------
Net change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746
------
Accrued postretirement benefits, end of year. . . . . . . . . . . . . $24,560
=======
</TABLE>
The liability for accrued postretirement benefits includes the following at
December 31, 1994 (in thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,990
Active Eligible . . . . . . . . . . . . . . . . . . . . . . . . . . 1,844
Active Ineligible . . . . . . . . . . . . . . . . . . . . . . . . . 2,989
------
22,823
Unrecognized actuarial loss . . . . . . . . . . . . . . . . . . . . . 350
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . 1,387
------
Accrued postretirement benefits . . . . . . . . . . . . . . . . . . . $24,560
======
</TABLE>
For measurement purposes, an 8% annual rate of increase in the health care
cost trend rate was assumed for 1994; the rate was assumed to decrease
gradually to 4.5% by the year 2015 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by 1 percentage point in each year would increase the accumulated
postretirement health care benefit obligation as of December 31, 1994 by
$2,078,000 and the aggregate of the service and interest components of net
periodic postretirement health care benefit cost for 1994 by $355,000. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.5%.
82
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
14. BENEFIT AND OPTION PLANS (CONTINUED)
Southwestern Life and certain former subsidiaries provided certain health
care and life insurance benefits for retired employees. Employees meeting
certain age and length of service requirements become eligible for these
benefits. The cost of providing these benefits and similar benefits for active
employees is recognized as expenses as claims are incurred. These costs
approximated $2,430,000 for 1992.
Under provisions of the 1990 Stock Option Incentive Plan the Company is
authorized to grant options to certain key employees for the purchase of up to
2.9 million shares of the Company's Common Stock at a price not less than fair
market value at date of grant. The options are exercisable for up to ten years
from date of grant and become exercisable at various times ranging from six
months to three years. Stock options granted are summarized as follows:
<TABLE>
<CAPTION>
EXERCISABLE
OPTION PRICES END OF PERIOD
------------------------ -----------------------
NUMBER OF AGGREGATE AGGREGATE
SHARES PER SHARE (000'S) PER SHARE (000'S)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding January 1, 1992 . . . . 1,366,780 $1.70-$6.00 $4,735 $1.70-$3.13 $1,157
======
Granted during 1992 . . . . . . . . 2,000,000 $3.97 7,938
Exercised during 1992 . . . . . . . (2,050) $1.70 (3)
Terminated during 1992. . . . . . . (585,000) $3.13-$6.00 (2,510)
---------- -------
Outstanding December 31, 1992 . . . 2,779,730 $1.70-$3.97 10,160 $1.70-$3.13 $1,154
======
Exercised during 1993 . . . . . . . (194,530) $1.70-$3.13 (445)
Terminated during 1993. . . . . . . (580,200) $1.70-$3.97 (2,042)
---------- -------
Outstanding December 31, 1993 . . . 2,005,000 $3.13-$3.97 7,673 $3.13-$3.97 $2,672
======
Granted during 1994 . . . . . . . . 250,000 $5.13 1,281
Exercised during 1994 . . . . . . . (180,000) $3.13-$3.97 (637)
Terminated during 1994 . . . . . . (875,000) $3.75-$3.97 (3,451)
---------- -------
Outstanding December 31, 1994 . . . 1,200,000 $3.13-$5.13 $4,866 $3.13-$3.97 $1,660
========= ====== =======
</TABLE>
15. EXTRAORDINARY LOSSES
For the years 1993 and 1992, the Company incurred extraordinary losses,
all related to early extinguishment of debt, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992
---- ----
(IN THOUSANDS)
<S> <C> <C>
Gains on early extinguishment of subordinated debt . . . $ 6
Writeoff of deferred loan costs resulting from early
extinguishment of debt . . . . . . . . . . . . . . . . $ (892) (2,561)
Costs incurred to effect early extinguishment of debt. . (690) (2,942)
Equity in extraordinary losses of equity investees
and partnerships resulting from early extinguishment
of debt . . . . . . . . . . . . . . . . . . . . . . . (1,370) (1,082)
------ ------
Extraordinary losses before tax effects . . . . . . . . (2,952) (6,579)
Tax effects. . . . . . . . . . . . . . . . . . . . . . . 1,033 2,237
------ ------
Extraordinary losses, net. . . . . . . . . . . . . . . . $(1,919) $(4,342)
====== ======
</TABLE>
Exclusive of scheduled sinking fund obligations, in 1993, the Company
redeemed $83,379,000 of its 16 1/2% Debentures utilizing proceeds from the
sales of Bankers and BLHC. In 1992, the Company prepaid $130 million of
83
<PAGE>
15. EXTRAORDINARY LOSSES (CONTINUED)
its senior secured loan utilizing proceeds from the sale of Bankers totaling $85
million and internally-generated funds totaling $45 million.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION> PRIMARY FULLY DILUTED PER
PER SHARE AMOUNTS SHARE AMOUNTS
------------------ -------------------
OPERATING NET OPERATING NET OPERATING NET
EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS
REVENUES (LOSS) (LOSS) (LOSS) (LOSS) (LOSS) (LOSS)
-------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
1994:
First Quarter . . $103,718 $(39,369) $(39,369) $(.91) $(.91) $(.91) $(.91)
Second Quarter. . 175,058 4,738 4,738 .03 .03 .03 .03
Third Quarter . . 166,956 (145) (145) (.08) (.08) (.08) (.08)
Fourth Quarter. . 83,724 (302,663) (302,663) (6.45) (6.45) (6.45) (6.45)
1993:
First Quarter . . $337,834 $105,623 $102,580 $2.05 $1.98 $1.79 $1.74
Second Quarter. . 175,564 (8,476) (8,605) (.34) (.34) (.34) (.34)
Third Quarter . . 399,215 125,734 125,734 2.46 2.46 2.14 2.14
Fourth Quarter. . 169,781 (10,957) (16,438) (.35) (.46) (.35) (.46)
</TABLE>
Fully diluted earnings per share are independently calculated for each
interim period. In those periods where the results of such calculations would
be antidilutive, primary earnings per share are reflected in lieu of fully
diluted earnings per share. Therefore, the sum of the quarterly earnings per
share on a fully diluted basis will not necessarily equal fully diluted
earnings per share for the entire year.
The Company's fourth quarter 1994 operating results were affected by the
adoption of a change in accounting, numerous significant charges, and
significant changes in income tax provisions. At December 31, 1994, the
Company adopted a change in accounting for assessing the recoverability of
excess cost of investments in subsidiaries over net assets acquired, or
"goodwill." Such change in accounting resulted in a reduction in the
remaining unamortized balance of excess cost relative to the Company's
investment in Southwestern Life totaling $210,683,000, which was reflected as
a charge to operating earnings since such adjustment was considered to be
inseparable from a change in estimate. In addition, the Company reflected a
$6,834,000 writedown through a charge to operating earnings of other excess
cost, primarily the excess cost related to the Company's investment in
PALICO, based on the determination that it was likely that such excess cost
was not recoverable. Because there are no income tax consequences associated
with excess cost, the effect on 1994 fourth quarter operating results of the
change in accounting and the writedown of excess cost totaled $217,517,000,
or $4.60 per common share. See Note 7 for a discussion of the change in
accounting policy and the additional writedown taken with respect to excess
cost.
Pretax charges to operations in the 1994 fourth quarter included writedowns
related to certain investments totaling $58,216,000, a provision for the loss
on the anticipated sale of Bankers New York totaling $4,200,000, and a
provision for litigation costs and other contingencies totaling $7,830,000.
The investment writedowns included an other than temporary writedown of the
Company's Fund America Investment totaling $39,739,000 (see Note 5). Other
investment writedowns reflected in the 1994 fourth quarter included other
than temporary impairments in the values of certain other derivative CMOs,
real estate and mortgage loans totaling $10,800,000, and provisions for
losses on CMO investments expected to be disposed of in order to meet
liquidity needs totaling $7,677,000. The Company has entered into a letter of
intent with respect to the sale of Bankers New York and, accordingly,
reflected a charge to operating earnings during the 1994 fourth quarter
for the difference between the proceeds anticipated to be received
84
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
from such sale and the Company's carrying value of its investment in Bankers New
York (see Note 2). The net after-tax effect of the investment writedowns, the
estimated loss on the sale of Bankers New York and the provision for litigation
costs and other contingencies totaled $45,660,000, or $0.97 per common share.
Based on the current financial condition of the Company and the
uncertainties regarding SLC's ability to utilize its available loss
carryforwards and other temporary differences, SLC increased its valuation
allowance for deferred income tax assets in the 1994 fourth quarter by
$20,116,000. Further, based on the tentative resolution of certain issues
relative to an IRS audit for the tax years 1986 through 1989, the Company
increased its liability for income tax settlements by $7,981,000 and reflected
other adjustments to its income tax liabilities totaling $2,269,000. These
adjustments, totaling $30,366,000, or $0.64 per common share, were included in
the Company's 1994 fourth quarter income tax provision (see Note 13).
Exclusive of the above-described excess cost adjustments, other charges
and income tax provisions, the Company reported a net loss for the 1994 fourth
quarter totaling $9,120,000. After preferred dividend requirements, the net loss
attributable to common stock totaled $11,453,000, or $0.24 per common share.
Such 1994 fourth quarter operating results were effected by, among other things,
pretax losses in the Company's group insurance segment totaling approximately
$6,985,000, provisions for anticipated future guaranty fund assessments and
other miscellaneous taxes totaling approximately $3,700,000, and provisions for
the doubtful collectibility of certain receivables totaling $2,000,000.
Reporting results of insurance operations on a quarterly basis
necessitates numerous estimates throughout the year, principally in the
calculation of reserves and in the determination of the effective rate for
federal income taxes. It is the Company's practice to review its estimates at
the end of each quarter and, if necessary, make appropriate refinements, with
the resulting effect being reported in current operations. Only at year-end is
the Company able to retrospectively assess the precision of its previous
quarterly estimates. The Company's fourth quarter results contain the effect of
the difference between previous estimates and final year-end results and,
therefore, the results of an interim period may not be indicative of the results
for the entire year.
17. INDUSTRY SEGMENT DATA
The Company and its subsidiaries are principally engaged in the sale and
underwriting of individual life and health insurance, group insurance and
accumulation products. Total revenues by segment reflect sales to unaffiliated
customers. Operating earnings (loss) equal total revenues less operating
expenses.
Premium income and other considerations includes premium income, mortality
and administration charges, surrender charges and amortization of deferred
policy initiation fees. Net investment income and other income are allocated to
the segments based on rates ranging from 6% to 10% related to reserves generated
by each of the four insurance segments. Corporate revenues and operating
earnings include gains (losses) on the sales of subsidiaries, equity in earnings
(losses) of unconsolidated affiliates and limited partnerships, and the
remaining net investment income considered to be income applicable to the
investment of capital and surplus funds. Operating expenses are allocated to
each segment based on a number of assumptions and estimates and reported segment
operating results would change if different methods were applied.
85
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
17. INDUSTRY SEGMENT DATA (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Individual life (including premium
equivalents) . . . . . . . . . . . . . . $288,932 $311,570 $425,007
Less premium equivalents. . . . . . . . . (53,345) (45,942) (76,346)
------- ------- -------
235,587 265,628 348,661
Individual health . . . . . . . . . . . . 233,275 231,541 913,883
Group and other . . . . . . . . . . . . . 108,173 152,137 357,937
Accumulation products . . . . . . . . . . 32,580 52,645 121,310
Corporate . . . . . . . . . . . . . . . . 16,769 345,618 117,584
Realized investment gains (losses). . . . (96,928) 34,825 (119,088)
------- ------- -------
Total revenues . . . . . . . . . . . . $529,456 $1,082,394 $1,740,287
======= ========= =========
Operating earnings (loss):
Individual life . . . . . . . . . . . . . $31,247 $ 45,145 $ 42,464
Individual health . . . . . . . . . . . . 15,780 21,036 66,528
Group and other . . . . . . . . . . . . . (5,737) (12,892) 5,121
Accumulation products . . . . . . . . . . (13,092) (6,705) 418
Corporate . . . . . . . . . . . . . . . . 5,505 299,965 76,098
Realized investment gains (losses). . . . (96,928) 34,825 (119,088)
Amortization of excess cost . . . . . . . (16,421) (9,591) (10,981)
Change in accounting for excess cost. . . (210,683)
Corporate interest expense . . . . . . . (48,251) (66,153) (78,961)
------- ------- -------
Operating earnings (loss) before income
taxes and equity earnings (loss). . . $(338,580) $305,630 $ (18,401)
======== ======= ========
</TABLE>
18. SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Fixed maturity investments held to maturity at amortized cost decreased
from $26,149,000 at December 31, 1993 to $15,915,000 at December 31, 1994. The
decrease was principally due to the redemption during 1994 of one security with
a book value of $10,000,000. No gain or loss was recorded on the redemption. No
purchases, sales or transfers of securities occurred in this category during
1994.
Cash payments (receipts) for interest expense and income taxes were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest . . . . . . . . . . . . $51,484 $71,167 $77,211
Income taxes . . . . . . . . . . 2,560 (8,248) 6,537
</TABLE>
86
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
18. SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
The following reflects assets acquired and liabilities assumed relative to
the acquisition of Marquette (see Note 2), consideration given for such
acquisition and the net cash flow relative to such acquisition during the year
ended December 31, 1994 (in thousands):
<TABLE>
<S> <C>
Assets of acquired subsidiary . . . . . . . . . $8,177
Liabilities of acquired subsidiary. . . . . . . (1,546)
Excess cost of investment in subsidiary over
net assets acquired. . . . . . . . . . . . . . 1,584
-----
Cost of acquisition . . . . . . . . . . . . . $8,215
=====
Net cash flow from acquisition:
Cash paid for acquisition. . . . . . . . . . $8,215
Cash of acquired subsidiary . . . . . . . . . (4,626)
-----
Net cash required by acquisition. . . . . . $3,589
=====
</TABLE>
The following reflects assets and liabilities disposed of relative to the
sale of Bankers and Certified (See Note 2) and net cash flow relative to such
sale during the year ended December 31, 1992 (in thousands):
<TABLE>
<S> <C>
Assets of subsidiaries sold . . . . . . . . . $2,191,519
Liabilities of subsidiaries sold . . . . . . . (1,837,230)
Excess cost of investment in subsidiaries
over net assets sold. . . . . . . . . . . . . 59,198
---------
Net investment in subsidiaries sold. . . . $ 413,487
=========
Net cash flow from sale:
Cash received from sale. . . . . . . . . . . $600,000
Cash of subsidiaries sold. . . . . . . . . . (398,811)
Investment in securities of purchaser. . . . (111,517)
--------
Net cash provided by sale of subsidiaries $ 89,672
========
</TABLE>
19. OTHER OPERATING INFORMATION
Other operating costs and expenses for the three years ended December 31,
1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Non-deferrable commission expense . . . . . . $32,042 $44,122 $44,662
Taxes, licenses and fees. . . . . . . . . . . 20,493 21,777 38,257
General and administrative expenses . . . . . 92,233 111,236 205,439
Settlement fee for modification of
data processing arrangement. . . . . . . . . 12,600
Consolidation expenses . . . . . . . . . . . 23,870 10,885
Provision for costs of litigation and
other contingencies . . . . . . . . . . . . 7,830 9,320
Placement fee for collateralized mortgage
note obligations . . . . . . . . . . . . . . 4,413
Services agreements with CNC principals
(see Note 4) . . . . . . . . . . . . . . . . 9,050
Litigation settlement . . . . . . . . . . . . 18,001
-------- -------- ---------
Other operating expenses. . . . . . . . . . $152,598 $223,788 $329,844
======== ======== ========
</TABLE>
87
<PAGE>
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
19. OTHER OPERATING INFORMATION (CONTINUED)
In October 1992, the Company entered into a settlement agreement and
agreed to pay a $12.6 million settlement fee to Perot Systems, Inc. to modify an
existing data processing services arrangement. Under the settlement agreement,
Perot Systems agreed to eliminate minimum fee requirements totaling $15.6
million annually through July 1992, to lower its unit transaction charges, and
to procure the release of the Company relative to its guarantee of certain
equipment lease obligations.
For the years ended December 31, 1993, and 1992, the Company reflected
consolidation and reorganization expenses totaling $23,870,000 and $10,885,000,
respectively. The expenses were associated with the operational consolidation of
three of the Company's Texas-based insurance subsidiaries. The 1993 expenses
include a $10,757,000 writedown of certain home office real estate, a $9,760,000
writeoff of certain capitalized data processing costs and $3,353,000 in
writeoffs of other property and equipment. The 1992 expense included an accrual
for the expenses anticipated to be incurred relative to such consolidation and
an $8,000,000 writedown of certain home office real estate. In addition, during
1994 and 1993, the Company assessed its exposure to the costs associated with
pending litigation and certain other contingencies and provided reserves
totaling $7,830,000 and $9,320,000, respectively, for the costs anticipated to
be incurred relative to such matters. The litigation settlement expense in 1992
related to a class action suit which had been filed by certain policyholders and
which was settled in that year.
Changes in the present value of future profits of acquired business for
the three years ended December 31, 1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
----- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year . . . . . . . $50,705 $63,863 $116,430
Amortization:
Cash flow realized . . . . . . . . . . (12,884) (11,438) (24,980)
Interest capitalized . . . . . . . . . 5,682 5,049 9,996
Impairment resulting from increased
surrender activity . . . . . . . . . (8,588)
Sale of subsidiaries and reinsurance . . (6,769) (37,583)
Recapture of CFLIC business. . . . . . . 33,890
------ ------ -------
Balance, end of year . . . . . . . . . . $68,805 $50,705 $ 63,863
====== ====== =======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 10% and 9% of the present value of future
profits of acquired business as of December 31, 1994, are expected to be
amortized in each of the next two years, respectively, and 8% in each of the
succeeding three years. The interest accrual rate for the present value of
future profits of acquired business ranged from 8% to 10% during each of the
three years in the period ended December 31, 1994.
88
<PAGE>
SCHEDULE II
SOUTHWESTERN LIFE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, 1994 and 1993
(In Thousands)
ASSETS
<TABLE> 1994 1993
<CAPTION> ---- ----
<S> <C> <C>
Fixed maturities, at fair
value . . . . . . . . . . . . . . . . . . . . $ 42,501 $ 59,504
Equity securities, affiliated, at fair value. . 54,000
Investments in limited partnerships . . . . . . 158 158
Real estate, at lower of cost or fair value . . 6,041 7,817
Collateral loans. . . . . . . . . . . . . . . . 6,001 6,160
Cash and short-term investments . . . . . . . . 16,733 71,845
Investments in and advances to subsidiaries:
Investments in subsidiaries 376,190 754,482
Advances to subsidiaries. . . . . . . . . . . 14,049 8,629
Notes and accounts receivable . . . . . . . . . 1,955 8,072
Federal income tax recoverable. . . . . . . . .
Deferred income tax asset . . . . . . . . . . . 435 12,615
Other assets . . . . . . . . . . . . . . . . . 1,570 4,076
------- -------
$465,633 $987,358
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable:
Due within one year . . . . . . . . . . . . . $ 81,302 $ 34,687
Due after one year . . . . . . . . . . . . . 309,592 417,334
Advances from subsidiaries . . . . . . . . . . . 11,765 14,402
Federal income taxes currently payable . . . . . 8,483 3,664
Accrued expenses and other liabilities . . . . . 19,153 22,101
------ -------
430,295 492,188
======== ========
Stockholders' equity:
Preferred stock . . . . . . . . . . . . . . . 199,997 229,239
Common stock . . . . . . . . . . . . . . . . 48,983 71,594
Common stock, Class B. . . . . . . . . . . . 100
Additional paid-in capital . . . . . . . . . 126,583 155,499
Net unrealized investment gains (losses) . . (55,359) 20,458
Retained earnings (deficit) . . . . . . . . (279,265) 71,833
------- -------
40,939 548,723
Notes receivable collateralized by
common stock . . . . . . . . . . . . . . . (1,795) (1,729)
Treasury stock, at cost . . . . . . . . . . . (3,806) (51,824)
-------- --------
35,338 495,170
-------- -------
$465,633 $987,358
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
89
<PAGE>
SCHEDULE II (CONTINUED)
SOUTHWESTERN LIFE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF EARNINGS
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Interest income....................................................... $ 10,873 $ 4,096 $ 1,400
Income from subsidiaries and equity investees:
Dividends........................................................... 47,815 43,681 22,842
Interest income..................................................... 491 7,347 37,221
Administrative services............................................. 39,964 106,589 170,165
Realized investment losses............................................ (6,829) (6,024) (46)
Gain on sale of investment in Bankers Life
Holding Corporation.................................................. 297,041
Other income.......................................................... (4,350) 2,722 1,628
------------ ----------- -----------
87,964 455,452 233,210
------------ ----------- -----------
Expenses:
Administrative and general expenses:
Subsidiaries and related parties.................................... 39,964 106,589 170,165
Other 10,582 26,403 10,166
Interest:
Subsidiaries........................................................ 3,409 4,554 6,859
Other............................................................... 48,251 60,135 76,680
------------ ----------- -----------
102,206 197,681 263,870
------------ ----------- -----------
Operating earnings (loss) before provision for federal
income taxes and equity in undistributed earnings
(loss) of subsidiaries and equity investees........................ (14,242) 257,771 (30,660)
Income tax expense (credit) 3,802 68,632 (47,234)
------------ ----------- -----------
Operating earnings (loss) before equity in undistributed
earnings (loss) of subsidiaries and equity investees............... (18,044) 189,139 16,574
Equity in undistributed earnings (loss) of subsidiaries
and equity investees................................................... (320,351) 22,785 34,281
------------ ----------- -----------
Operating earnings (loss)........................................... (338,395) 211,924 50,855
Cumulative effect of changes in accounting methods...................... (6,734)
Extraordinary gains (loss), net of tax effect........................... 955 (1,919) (4,342)
------------ ----------- -----------
Net Earnings (loss)................................................. (337,440) 203,271 46,513
Less dividends on preferred stock....................................... (13,658) (28,784) (30,800)
------------ ----------- -----------
Net earnings (loss) applicable to common stock...................... $ (351,098) $ 174,487 $ 15,713
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
90
<PAGE>
SCHEDULE II (CONTINUED)
SOUTHWESTERN LIFE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Operating earnings (loss)............................................. $ (338,395) $ 211,924 $ 50,855
Items not requiring (providing) cash:
Equity in undistributed (earnings) losses of subsidiaries
and related party.................................................. 320,351 (22,785) (34,281)
Increase (decrease) in accrued expenses and other liabilities....... (5,585) 18,025 (4,625)
Change in deferred tax asset........................................ 12,180 48,513 (49,121)
Gain on sale of investment in Bankers Life Holding Corporation...... (297,041)
Other, net.......................................................... 10,693 7,727 (11,754)
------------ ------------ ------------
Net cash used by operating activities............................. (756) (33,637) (48,926)
------------ ------------ ------------
Cash flows from investing activities:
Payments received on notes receivable, subsidiaries................... 147,267 359,500
Sale of investment in Bankers Life Holding Corporation................ 287,639
Purchase of long-term investments..................................... (21,298) (78,160)
Sales of long-term investments........................................ 82,156
Purchase of investments from subsidiaries............................. (34,457) (91,796)
Capital contributions to subsidiaries................................. (8,385)
Other, net............................................................ (500) (11,626)
------------ ------------ ------------
Net cash provided by investing activities........................... 52,473 321,789 256,078
------------ ------------ ------------
Cash flows from financing activities:
Proceeds of notes payable, unaffiliated............................... 6,200
Principal repayment on notes payable, unaffiliated.................... (38,569) (41,567) (165,132)
Principal repayment on notes payable, subsidiaries.................... (11,522) (7,334) (32,549)
Repurchases of subordinated debt...................................... (10,081) (89,439) (1,694)
Redemption of preferred stock......................................... (29,242) (100,000)
Purchase of treasury shares........................................... (3,757) (933)
Dividends on preferred shares......................................... (13,658) (28,784) (30,800)
------------ ------------ ------------
Net cash used by financing activities............................... (106,829) (268,057) (223,975)
------------ ------------ ------------
Net increase (decrease) in cash and short-term investments.............. (55,112) 20,095 (16,823)
Cash and short-term investments at beginning of year.................... 71,845 51,750 68,573
------------ ------------ ------------
Cash and short-term investments at end of year.......................... $ 16,733 $ 71,845 $ 51,750
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
91
<PAGE>
SCHEDULE II (CONTINUED)
SOUTHWESTERN LIFE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Southwestern Life Corporation and Subsidiaries. Notes payable at December 31,
1994 and 1993, are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
11 1/4% Senior Subordinated Notes due 1996(a)........................................... $ 277,601 $ 300,159
11 1/4% Senior Subordinated Notes due 2003.............................................. 91,161 91,161
9 1/2% unsecured note payable due 1996.................................................. 21,900 25,550
Borrowings under senior secured loan.................................................... 30,000
Other................................................................................... 232 5,151
----------- -----------
$ 390,894 $ 452,021
=========== ===========
<FN>
------------------------
(a) The principal amount of these notes held by subsidiaries at December 31,
1994 and 1993 was $21,500,000 and $34,058,000, respectively.
</TABLE>
The following summary sets forth the scheduled maturities and sinking fund
requirements of notes payable during each of the five years following December
31, 1994 (in thousands):
<TABLE>
<S> <C>
1995 ............................................................................ $ 81,302
1996 ............................................................................ 218,306
1997 ............................................................................ 60
1998 ............................................................................ 65
1999 and thereafter ............................................................. 91,161
---------
$ 390,894
=========
</TABLE>
Dividends from subsidiaries and equity investees consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash dividends................................................................. $ 38,800 $ 43,681 $ 12,000
Deemed dividend................................................................ 10,842
Dividends of Senior Subordinated Notes......................................... 9,015
--------- --------- ---------
$ 47,815 $ 43,681 $ 22,842
========= ========= =========
</TABLE>
Prior to the sale of Bankers, the parent company acquired certain assets
from Bankers at their fair value. The tax attributes related to such assets were
likewise transferred to SLC and the income tax consequences which had been
reflected for financial purposes have been reflected as a deemed dividend to the
parent company.
The parent company had a $955,000 extraordinary gain from the repurchase of
Senior Subordinated Notes from a subsidiary which has been eliminated in the
consolidated financial statements.
92
<PAGE>
SCHEDULE III
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
<TABLE>
<CAPTION>
FUTURE AMORTIZATION
DEFERRED POLICY OF DEFERRED
POLICY BENEFITS POLICY
ACQUISITION AND ACQUISITION
COSTS AND UNIVERSAL PREMIUM COSTS AND
PRESENT LIFE AND CLAIMS INCOME AND NET BENEFITS, PRESENT
VALUE OF INVESTMENT AND OTHER INVESTMENT CLAIMS VALUE OF
ACQUIRED PRODUCT UNEARNED BENEFITS CONSIDER- AND OTHER AND ACQUIRED
SEGMENT BUSINESS LIABILITIES PREMIUMS PAYABLE ATIONS INCOME LOSSES BUSINESS
---------------------- ----------- ---------- ----------- --------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December
31, 1994:
Individual life..... $ 170,402 $1,611,139 $ 9,744 $ 109,116 $ 126,471 $ 138,185 $ 20,413
Individual health... 69,158 49,579 $ 36,090 63,266 215,817 17,458 145,929 30,542
Group and other..... 22,651 273 31,299 93,067 15,106 63,865
Accumulation
products........... 38,197 761,925 147 20 32,560 30,005 11,144
Corporate........... 16,769
--------- ---------- --------- --------- ---------- --------- ---------- ----------
$ 277,757 $2,445,294 $ 36,363 $ 104,456 $ 418,020 $ 208,364 $ 377,984 $ 62,099
========= ========== ========= ========= ========== ========= ========== ==========
Year ended December
31, 1993:
Individual life..... $ 140,459 $1,610,277 $ 8,110 $ 118,049 $ 147,579 $ 141,345 $ 16,728
Individual health... 68,854 46,933 $ 35,236 64,274 220,266 11,275 137,113 32,172
Group and other..... 24,403 176 34,165 136,486 15,651 99,509
Accumulation
products........... 9,917 787,911 214 225 52,420 50,365
Corporate........... 345,618
--------- ---------- --------- --------- ---------- --------- ---------- ----------
$ 219,230 $2,469,524 $ 35,412 $ 106,763 $ 475,026 $ 572,543 $ 428,332 $ 48,900
========= ========== ========= ========= ========== ========= ========== ==========
Year ended December
31, 1992:
Individual life..... $ 170,041 $1,670,703 $ 6,760 $ 191,555 $ 157,106 $ 238,100 $ 30,646
Individual health... 69,657 42,574 $ 33,346 63,086 859,094 54,789 583,487 101,267
Group and other..... 26,875 103 19,369 337,406 20,531 287,872
Accumulation
products........... 2,972 744,288 30 724 120,586 95,986 1,544
Corporate........... 117,584
--------- ---------- --------- --------- ---------- --------- ---------- ----------
$ 242,670 $2,484,440 $ 33,449 $ 89,245 $1,388,779 $ 470,596 $1,205,445 $ 133,457
========= ========== ========= ========= ========== ========= ========== ==========
<CAPTION>
OTHER
OPERATING
SEGMENT COSTS
---------------------- -----------
<S> <C>
Year ended December
31, 1994:
Individual life..... $ 45,742
Individual health... 41,024
Group and other..... 50,045
Accumulation
products........... 4,523
Corporate........... 11,264
---------
$ 152,598
=========
Year ended December
31, 1993:
Individual life..... $ 62,410
Individual health... 41,220
Group and other..... 65,520
Accumulation
products........... 8,985
Corporate........... 45,653
---------
$ 223,788
=========
Year ended December
31, 1992:
Individual life..... $ 37,451
Individual health... 162,601
Group and other..... 64,944
Accumulation
products........... 23,362
Corporate........... 41,486
---------
$ 329,844
=========
</TABLE>
93
<PAGE>
SCHEDULE IV
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
REINSURANCE
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in Thousands)
<TABLE>
<CAPTION>
PERCENTAGE OF
GROSS CEDED TO OTHER ASSUMED FROM AMOUNT ASSUMED
AMOUNT COMPANIES OTHER COMPANIES NET AMOUNT TO NET
----------- -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force (A)..................... $18,411,768 $ 5,222,076 $ 871,776 $ 14,061,468 6.2%
=========== ============ ============ ============== ====
Premium income and other considerations:
Individual life (including premium
equivalents)................................. $ 168,598 $ 12,697 $ 6,560 $ 162,461 4.1%
Less premium equivalents...................... (58,219) (9,310) (4,436) (53,345)
----------- ------------ ------------ --------------
Individual life............................... 110,379 3,387 2,124 109,116
Individual health............................. 231,983 16,295 129 215,817 0.1%
Group and other............................... 108,223 15,156 93,067 0.0%
Accumulation products......................... 263 243 20 0.0%
----------- ------------ ------------ --------------
Total....................................... $ 450,848 $ 35,081 $ 2,253 $ 418,020
=========== ============ ============ ==============
Year ended December 31, 1993:
Life insurance in force (A)..................... $20,425,230 $ 5,658,090 $ 972,626 $ 15,739,766 6.2%
=========== ============ ============ ============== ====
Premium income and other considerations:
Individual life (including premium
equivalents)................................. $ 171,147 $ 12,498 $ 5,342 $ 163,991 3.2%
Less premium equivalents...................... (47,057) (3,351) (2,236) (45,942)
----------- ------------ ------------ --------------
Individual life............................... 124,090 9,147 3,106 118,049
Individual health............................. 231,856 11,870 280 220,266 .1%
Group and other............................... 165,405 28,948 29 136,486 0.0%
Accumulation products......................... 192 16 49 225 21.8%
----------- ------------ ------------ --------------
Total....................................... $ 521,543 $ 49,981 $ 3,464 $ 475,026
=========== ============ ============ ==============
Year ended December 31, 1992:
Life insurance in force (A)..................... $20,528,559 $ 5,417,485 $ 907,756 $ 16,018,830 5.7%
=========== ============ ============ ============== ====
Premium income and other considerations:
Individual life (including premium
equivalents)................................. $ 273,048 $ 10,512 $ 5,365 $ 267,901 2.0%
Less premium equivalents...................... (77,226) (3,987) (3,106) (76,345)
----------- ------------ ------------ --------------
Individual life............................... 195,822 6,525 2,259 191,556
Individual health............................. 855,428 1,591 5,257 859,094 0.6%
Group and other............................... 376,600 39,686 492 337,406 0.1%
Accumulation products......................... 7,063 6,418 78 723 11.0%
----------- ------------ ------------ --------------
Total....................................... $ 1,434,913 $ 54,220 $ 8,086 $ 1,388,779
=========== ============ ============ ==============
<FN>
------------------------------
(A) Excludes face amount of life insurance in force ceded to other unaffiliated
companies under financial reinsurance agreements with unaffiliated insurers
generally in return for fees, as follows (in thousands):
1994 1993 1992
------------- ------------- -------------
Ceded to other companies............................................... $ 1,453,263 $ 1,677,183 $ 2,076,293
</TABLE>
These agreements will terminate during the next few years.
94
<PAGE>
SCHEDULE V
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ------------------------------------
BEGINNING CHARGED TO COSTS CHARGED TO OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
------------------------------------------------- ----------- ----------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for mortgage loan losses............. $ 1,043 $ 3,000 $ 7(B) $ 4,036
Allowance for losses on real estate............ 17,615 3,800 1,780(B) 19,635
Allowance for doubtful accounts................ 2,863 99 $ 305(E) 1,380(C) 1,887
Accumulated depreciation on property
and equipment................................. 35,094 3,553 3,302(B) 35,345
Allowance for losses on property
and equipment................................. 8,000 8,000
Amortization of excess cost of investments
in subsidiaries over net assets acquired...... 78,120 16,421 305,224
210,683(F)
Accumulated depreciation on real estate........ 9,363 1,378 458(B) 10,283
----------- -------- ------- ----------- -------------
$ 152,098 $ 238,934 $ 305 $ 6,927 $ 384,410
=========== ========= ======= =========== =============
Year ended December 31, 1993:
Allowance for mortgage loan losses............. $ 1,450 $ 407(B) $ 1,043
Allowance for losses on real estate............ 14,557 $ 4,500 1,442(B) 17,615
Allowance for doubtful accounts................ 3,163 104 404(C) 2,863
Accumulated depreciation on property
and equipment................................. 23,439 7,390 $ 4,639 (A) 374(B) 35,094
Allowance for losses on property and
equipment..................................... 8,000 8,000
Amortization of excess cost of investments in
subsidiaries over net assets acquired......... 68,340 9,591 189 (A) 78,120
Accumulated depreciation on real estate........ 9,922 1,430 (1,367)(A) 622(B) 9,363
----------- -------- ------- ----------- -------------
$ 128,871 $ 23,015 $ 3,461 $ 3,249 $ 152,098
=========== ========= ======= =========== =============
Year ended December 31, 1992:
Allowance for mortgage loan losses............. $ 2,318 $ 407 $ 1,275(A) $ 1,450
Allowance for losses on real estate............ 13,778 2,312 $ 45 (A) 1,578(B) 14,557
Allowance for doubtful accounts................ 3,158 422 244(C) 3,163
173(D)
Allowance for other invested assets............ 18,392 18,392(C) --
Accumulated depreciation on property and
equipment..................................... 43,594 8,356 5,371(B) 23,439
23,140(D)
Allowance for losses on property and
equipment..................................... 8,000 8,000
Amortization of excess cost of investments in
subsidiaries over net assets acquired......... 71,798 10,981 14,439(D) 68,340
Accumulated depreciation on real estate........ 9,215 1,370 492(B) 9,922
171(D)
----------- -------- ------- ----------- -------------
$ 162,253 $ 31,848 $ 45 $ 65,275 $ 128,871
=========== ========= ======= =========== =============
<FN>
------------------------------
(A) Miscellaneous reclassification.
(B) Retirement upon sales of assets.
(C) Elimination of allowance upon disposition of account.
(D) Deduction upon sales of previously consolidated subsidiaries.
(E) Added from acquisition of subsidiary.
(F) Change in accounting for excess cost.
</TABLE>
95
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information appearing under ITEM 1a in Part I of this Form 10-K and the
information appearing under the heading "Election of Directors" in the
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 in connection with the Registrant's
1995 Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the heading "Executive Compensation" in the
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 in connection with the Registrant's
1995 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL AND OWNERS MANAGEMENT.
The information appearing under the heading "Security Ownership" in the
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 in connection with the Registrant's
1995 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the subheading "Certain Transactions" in the
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 in connection with the Registrant's
1995 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
1. EXHIBITS. The exhibits listed on the Index to Exhibits appearing on
pages 99 through 106 of this Form 10-K and the footnotes thereto are
incorporated herein by reference. The exhibit descriptions incorporated by
reference identify by asterisk (*) each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Form 10-K
pursuant to ITEM 14(c).
2. FINANCIAL STATEMENTS. The list of audited consolidated financial
statements of SLC and the related auditor's report appearing under the heading
"Financial Statements" in the Index to Financial Statements and Financial
Statement Schedules of Southwestern Life Corporation and Subsidiaries in ITEM 8
on page 45 of this Form 10-K is incorporated herein by reference.
3. FINANCIAL STATEMENT SCHEDULES. The list of schedules appearing under
the heading "Financial Statement Schedules" in the Index to Financial Statements
and Financial Statement Schedules of Southwestern Life Corporation and
Subsidiaries in ITEM 8 on page 45 of this Form 10-K is incorporated herein by
reference.
4. FORM 8-K. During the quarter ended December 31, 1994, on October 13,
1994, SLC filed a Report on Form 8-K, dated October 10, 1994, to report under
ITEM 5 of that form, (1) realized losses in the amount of $46.4 million in
the value of certain of its investments in collateralized mortgage
obligations were appropriate as of the quarter ended March 31, 1994 and (2)
the resignation of Robert L. Beisenherz as the Chairman of the Board, Chief
Executive Officer and President of the Registrant and the appointment of
James R. Kerber as the Registrant's President and Chief Executive Officer and
as a director of the Registrant.
96
<PAGE>
On January 27, 1995, the Registrant filed a Report on Form 8-K dated January
18, 1995, to report under ITEM 5 of that form, that (i) Glenn H. Gettier, Jr.
was appointed Chairman of the Board and Chief Executive Officer of SLC effective
January 18, 1995, and James R. Kerber was appointed to the additional offices of
Vice Chairman of the Board and Chief Operating Officer, and (2) the Board
authorized a series of initial actions by SLC's senior management affecting the
Registrant.
97
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHWESTERN LIFE CORPORATION
By: /s/ GLENN H. GETTIER, JR.
----------------------------
Glenn H. Gettier, Jr.
Chairman of the Board and
Chief Executive Officer
Date: March 30, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/GLENN H. GETTIER, JR. Chairman of the Board and March 30, 1995
------------------------- Chief Executive Officer
Glenn H. Gettier, Jr. (Principal Executive Officer)
/S/JAMES R. KERBER Vice Chairman of the Board, Chief March 30, 1995
------------------------- Operating Officer and President
James R. Kerber
/S/JOHN T. HULL Executive Vice President, Treasurer March 30, 1995
------------------------- and Chief Financial Officer
John T. Hull (Principal Financial and
Accounting Officer)
/S/CHARLES L. DUNCAN Director March 30, 1995
-------------------------
Charles L. Duncan
/S/JON E.M. JACOBY Director March 30, 1995
-------------------------
Jon E.M. Jacoby
/S/C. FRED RICE Director March 30, 1995
-------------------------
C. Fred Rice
/S/S. LEROY STEGNER Director March 30, 1995
-------------------------
S. Leroy Stegner
/S/KEITH A. TUCKER Director March 30, 1995
-------------------------
Keith A. Tucker
/S/VERNON K. ZIMMERMAN Director March 30, 1995
-------------------------
Vernon K. Zimmerman
98
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------ ----------- ----------
<S> <C> <C>
2.1 Stock Purchase Agreement dated June 29, 1990, among Consolidated
National Corporation, Robert T. Shaw and Bankers Life and Casualty Company with
respect to all outstanding capital stock of Marquette National Life Insurance
Company, including Exhibit 1.35 thereto governing the coinsurance relationship
between Southwestern Life Insurance Company and Marquette National Life
Insurance Company (filed as Exhibits 2.1 and 2.3 to the Registrant's Report on
Form 10-Q for the quarter ended June 30, 1990, and incorporated herein by
reference).......................................................................
2.2 Coinsurance Annuity Reinsurance Agreement-October 1, 1990, for Bankers
Life and Casualty Company (filed as Exhibit 19-1 to Registrant's Current Report
on Form 8-K dated November 9, 1990, and incorporated herein by reference) and
amendments thereto (filed as Exhibit 2.11 to the Registrant's Annual Report on
Form 10-K for year ended December 31, 1991, and Exhibit 2.11 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and each
incorporated herein by reference)................................................
2.3 Coinsurance Annuity Retrocession Agreement (Bankers Business)-October 1,
1990 for Marquette National Life Insurance Company (filed as Exhibit 19-2 to the
Registrant's Current Report on Form 8-K dated November 9, 1990, and incorporated
herein by reference) and amendments thereto (filed as Exhibit 2.12 to the
Registrant's Annual Report on Form 10-K for year ended December 31, 1991, and
Exhibit 2.12 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992, and each incorporated herein by reference)....................
2.4 Coinsurance Annuity and Supplemental Contract Reinsurance Agreement
II-June 30, 1990, for Southwestern Life Insurance Company (filed as Exhibit 19-3
to the Registrant's Current Report on Form 8-K dated November 9, 1990, and
incorporated herein by reference) and amendments thereto (filed as Exhibit 2.13
to the Registrant's Annual Report on Form 10-K for year ended December 31, 1991,
Exhibit 2.13 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992, Exhibit 2.18 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993, and Exhibit 2.23 to the Registrant's
Current Report on Form 8-K dated June 30, 1994, and each incorporated herein by
reference).......................................................................
2.5 Coinsurance Annuity and Supplementary Contract Retrocession Agreement
II-June 30, 1990, for Marquette National Life Insurance Company (filed as
Exhibit 19-4 to the Registrant's Current Report on Form 8-K dated November 9,
1990, and incorporated herein by reference) and amendments thereto (filed as
Exhibit 2.14 to the Registrant's Annual Report on Form 10-K for year ended
December 31, 1991, and Exhibit 2.14 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992, Exhibit 2.19 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993, and each
incorporated herein by reference)..............................................
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2.6 Stock Purchase Agreement dated October 3, 1989, between the Registrant
and HMS Acquisition Corporation (filed as Exhibit 1 to the Registrant's Current
Report on Form 8-K dated October 3, 1989, and incorporated herein by reference),
and the amendment thereto dated March 29, 1990, (filed as Exhibit 19.4 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1989,
and incorporated herein by reference).............................................
2.7 Compromise and Settlement Agreement, dated September 1, 1990, relating
to the Stock Purchase Agreement referenced as Exhibit 2.6 above (filed as
Exhibit 2.8 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990, and incorporated herein by reference)..........................
2.8 Stock Purchase Agreement dated December 11, 1989, as amended, between
the Registrant, Modern American Life Insurance Company and Financial Holding
Corporation (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K
dated December 29, 1989, and incorporated herein by reference)....................
2.9 Stock Acquisition Agreement dated February 20, 1992, between the
Registrant and Conseco, inc. (filed as Exhibit 2.10 to the Registrant's Current
Report on Form 8-K dated February 20, 1992 and incorporated herein by reference)
and amendments thereto (filed as Exhibit 2.15 to the Registrant's Annual Report
on Form 10-K for year ended December 31, 1991, and as Exhibit 2.16 of
Registrant's Report on Form 10-Q for the quarter ended September 30, 1992, and
each incorporated herein by reference)............................................
2.10 Stockholders' Agreement, dated November 9, 1992, among Bankers Life
Holding Corporation and its initial common stockholders, and the Registrant's
assumption thereof (filed as Exhibit 2.10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by
reference)........................................................................
2.11 Letter Agreement of the Registrant, dated March 8, 1993, relating to the
Coinsurance Annuity Reinsurance Agreement referenced as Exhibit 2.2 above (filed
as Exhibit 2.15 of the Annual Report on Form 10-K for the year ended December
31, 1992, and incorporated herein by reference)...................................
2.12 Agreement of the Registrant, dated March 10, 1993, relating to the
Coinsurance Annuity and Supplemental Contract Reinsurance Agreement II
referenced as Exhibit 2.4 above (filed as Exhibit 2.16 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference).................................................
2.13 Agreement, dated June 15, 1993, among I.C.H. Corporation, Consolidated
National Corporation and Consolidated Fidelity Life Insurance Company (filed as
Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated June 15, 1993
and incorporated herein by reference).............................................
2.14 Agreement, dated June 3, 1994, between Consolidated Fidelity Life
Insurance Company and Union Bankers Insurance Company (filed as Exhibit 2.18 to
the Registrant's Current Report on Form 8-K dated June 30, 1994 and incorporated
herein by reference)..............................................................
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2.15 Termination and Recapture Agreement among Consolidated Fidelity Life
Insurance Company, Southwestern Life Corporation, Southwestern Life Insurance
Company and Employers Reassurance Corporation (filed as Exhibit 2.19 to their
Registrant's Current Report on Form 8-K dated June 30, 1994, and incorporated
herein by reference)..............................................................
2.16 Amendment to Agreement, effective April 1, 1994, among Consolidated
National Corporation, Consolidated Fidelity Life Insurance Company and
Southwestern Life Corporation (filed as Exhibit 2.20 to the Registrant's Current
Report on Form 8-K dated June 30, 1994, and incorporated herein by reference)......
2.17 Letter Agreement, dated June 30, 1994, among Southwestern Life
Corporation, Consolidated Fidelity Life Insurance Company and Consolidated
National Corporation (filed as Exhibit 2.21 to the Registrant's Current Report
on Form 8-K dated June 30, 1994, and incorporated herein by reference).............
2.18 Escrow Agreement, dated June 30, 1994, among Southwestern Life
Corporation, Consolidated Fidelity Life Insurance Company and Mid-America Bank
of Louisville and Trust Company (filed as Exhibit 2.22 to the Registrant's
Current Report on Form 8-K dated June 30, 1994, and incorporated herein by
reference).........................................................................
3.1 Restated Certificate of Incorporation of the Registrant dated October
10, 1994 (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, and incorporated herein by reference)....
3.2 Bylaws of the Registrant, as amended and restated, dated October 7, 1994
(filed as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994, and incorporated herein by reference).............
4.1 Indenture dated as of November 15,1986, between the Registrant and
Mid-America Bank of Louisville and Trust Company, as trustee (filed as Exhibit
4.3 to the Registrant's Registration Statement on Form S-3 No. 33-9455, and
incorporated herein by reference)...................................................
4.2 Indenture dated as of November 12, 1993, between the Registrant and
Mid-America Bank of Louisville and Trust Company, as trustee (filed as Exhibit
4.5 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1993, and incorporated herein by reference).....................................
4.3 Agreement of Registrant to file long-term debt instruments (filed as
Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference).............................
10.1 Agreement dated October 8, 1984 between the Registrant and Robert T.
Shaw (filed as Exhibit I to Amendment No. 26-1 to the Schedule 13D filed by
Consolidated National Successor Corporation and certain affiliates relating to
shares of the Common Stock of the Registrant and incorporated herein by
reference)..........................................................................
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10.2 Stock Purchase Agreement dated July 31, 1986 between the Registrant and
Tenneco Inc. (filed as Exhibit 2.1 to the Registrant's Current Report on Form
8-K dated July 31, 1986 and incorporated herein by reference), and the Amendment
Agreement dated December 31, 1986 between the Registrant and Tenneco, Inc.
(filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated
December 31, 1986, and incorporated herein by reference)..........................
10.3* Management and Consulting Agreement effective January 22, 1985 among the
Registrant, Consolidated National Corporation and Consolidated National
Successor Corporation (filed as Exhibit 10.21 to the Registrant's Registration
Statement on Form S-14, No. 2-96685, and incorporated herein by reference)........
10.4* Termination Agreement, dated February 11, 1994, between the Registrant
and Consolidated National Corporation relating to the Management and Consulting
Agreement referenced as Exhibit 10.3 above (filed as Exhibit 10.2 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
and incorporated herein by reference).............................................
10.5* Deferred Compensation Plan (filed as Exhibit 10.32 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988, and
incorporated herein by reference).................................................
10.6* Salaried Employees Severance Pay Plan, as restated effective October 1,
1994 (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 1994, and incorporated herein by reference)....
10.7* Form of Indemnification Agreement relating to certain officers and
directors of the Registrant (filed as Exhibit 10.11 of Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, and incorporated
herein by reference)..............................................................
10.8* Amended and Restated 1990 Stock Option Incentive Plan (filed as Exhibit
10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30,
1994, and incorporated herein by reference) and the form of the stock option
certificate (filed as Exhibit 19.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1991, and incorporated herein by reference)...
10.9* Restricted Stock Purchase Agreement, as amended, between System Services
Group and John T. Hull (filed as Exhibit 10.18 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1986, and incorporated herein by
reference).........................................................................
10.10 Lease between Lincoln Property Company No. 375, LTD. and Southwestern
Life Insurance Company, dated June 28, 1984 (filed as Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990,
and incorporated herein by reference)..............................................
10.11 Amendments to Lease referenced as Exhibit 10.9 above...............................
10.12 Data Processing Agreement between the Registrant and Perot Systems
Corporation dated September 29, 1993 (filed as Exhibit 10.15 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993, and
incorporated herein by reference)...................................................
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10.13 Processing Services Agreement between Facilities Management
Installation, Inc. and CYBERTEK Corporation dated September 20, 1994................
10.14 Enterprise License Agreement between Facilities Management Installation,
Inc. and CYBERTEK Corporation dated September 20, 1994..............................
10.15 Agreement of Lease between the Tilles Investment Company and Bankers
Life and Casualty Company of New York (filed as Exhibit 10.26 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991,
and incorporated herein by reference)...............................................
10.16 The Assignment and Grant of Option executed by Consolidated Fidelity
Life Insurance Company and Registrant effective as of May 21, 1992 (filed as
Exhibit 38-1 to Amendment No. 38 to Schedule 13D filed by Consolidated National
Corporation relating to the common stock of Registrant and incorporated herein
by reference).......................................................................
10.17* Form of Amended and Restated Supplemental Benefit Agreement of
Registrant dated October 10, 1994 entered into by John T. Hull (filed as Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, and incorporated herein by reference)...........................
10.18 Letter Agreements between the Registrant and Consolidated National
Corporation, dated March 29, 1993 and November 9, 1992 (incorporated by
reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992)...................................................
10.19 Agreement, dated September 11, 1993, between the Registrant and Conseco,
Inc. (filed as Exhibit 4 to Amendment No. 1 to the Schedule 13D relating to the
common stock of Bankers Life Holding Corporation, filed by the Registrant,
Consolidated National Corporation, Robert T. Shaw and C. Fred Rice, dated
September 15, 1993, and incorporated herein by reference)...........................
10.20 Agreement, dated September 11, 1993, between the Registrant and Bankers
National Life Insurance Company (filed as Exhibit 5 to Amendment No. 1 to the
Schedule 13D relating to the common stock of Bankers Life Holding Corporation,
filed by the Registrant, Consolidated National Corporation, Robert T. Shaw and
C. Fred Rice, dated September 15, 1993, and incorporated herein by reference)........
10.21 Letter Agreement, dated September 11, 1993, among the Registrant,
Conseco, inc. and Bankers Life Holding Corporation (filed as Exhibit 6 to
Amendment No. 1 to the Schedule 13D relating to the common stock of Bankers Life
Holding Corporation, filed by the Registrant, Consolidated National Corporation,
Robert T. Shaw and C. Fred Rice, dated September 15, 1993, and incorporated
herein by reference)..................................................................
10.22 Stock Purchase Agreement, dated January 15, 1994, among Consolidated
National Corporation, Consolidated Fidelity Life Insurance Company, Robert T.
Shaw, D. Fred Rice, Registrant and Torchmark Corporation (filed as Exhibit No. 1
to the Registrant's Current Report on Form 8-K dated January 15, 1994, and
incorporated herein by reference), as amended (filed as Exhibit 10 to the
Registrant's Current Report on Form 8-K dated February 11, 1994, and
incorporated herein by reference).....................................................
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10.23 Stock Purchase Agreement, dated January 15, 1994, among Consolidated
National Corporation, Consolidated Fidelity Life Insurance Company, Robert T.
Shaw, C. Fred Rice, the Registrant and Stephens Inc. (filed as Exhibit No. 2 to
the Registrant's Current Report on Form 8-K dated January 15, 1994, and
incorporated herein by reference)..................................................
10.24 Letter from Registrant to Robert T. Shaw effective January 15, 1994
(filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, and incorporated herein by reference).....................
10.25 Letter, dated January 15, 1994, from Registrant to Robert Shaw (filed as
Exhibit 5 of the Registrant's Current Report on Form 8-K dated January 15, 1994,
and incorporated herein by reference)..............................................
10.26 Letter, dated January 15, 1994, from Registrant to Consolidated National
Corporation (filed as Exhibit No. 6 to the Registrant's Current Report on Form
8-K dated January 15, 1994, and incorporated herein by reference)..................
10.27* Independent Contractor and Services Agreement, dated February 11, 1994,
between the Registrant and Robert T. Shaw (filed as Exhibit No. 7 to the
Registrant's Current Report on Form 8-K dated February 11, 1994, and
incorporated herein by reference)..................................................
10.28* Independent Contractor and Services Agreement, dated February 11, 1994,
between the Registrant and C. Fred Rice (filed as Exhibit No. 8 to the
Registrant's Current Report on Form 8-K dated February 11, 1994, and
incorporated herein by reference)..................................................
10.29 Mutual Release, dated February 11, 1994, among Registrant and
Consolidated National Corporation, Robert T. Shaw, C. Fred Rice and Edward J.
Carlisle (filed as Exhibit No. 9 to the Registrant's Current Report on Form 8-K
dated February 11, 1994, and incorporated herein by reference).....................
10.30 Stock Purchase Agreement, dated January 15, 1994, between Consolidated
National Corporation and the Registrant (filed as Exhibit No. 3 to the
Registrant's Current Report on Form 8-K dated January 15, 1994, and incorporated
herein by reference)................................................................
10.31 Promissory Note of James M. Fail, dated effective as of December 1,
1994, payable to Southwestern Life Insurance Company................................
10.32 First Amended and Restated Loan Agreement, dated as of December 1, 1994,
between James M. Fail and Southwestern Life Insurance Company.......................
10.33 First Amended and Restated Pledge Agreement dated as of December 1,
1994, between James M. Fail and Southwestern Life Insurance Company.................
10.34 First Amended and Restated Guaranty Agreement dated as of December 1,
1994, between James M. Fail and Southwestern Life Insurance Company................
10.35 Schedule of Omitted Documents.......................................................
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10.36 Assignment Agreement between Southwestern Life Insurance Company and
Consolidated Fidelity Life Insurance Company, dated June 30, 1994, relating to
Notes and Loan Agreements referenced as Exhibits 10.30, 10.31, 10.32 and 10.33
above (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and incorporated herein by reference).........
10.37 Participation Agreement between Registrant and Employers Reassurance
Corporation dated July 1, 1994 (filed as Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference)..................................................
10.38 Letter Agreement between Registrant and Consolidated Fidelity Life
Insurance Company Regarding Termination of Call and Put Option dated June 30,
1994 (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, and incorporated herein by reference)....
10.39 Letter Agreement between Registrant and Stephens Inc. Regarding
Engagement to Perform Investment Advisory Services for the Registrant dated May
3, 1994 (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, and incorporated herein by reference)....
10.40* Employment Agreement, dated June 9, 1994, between Facilities Management
Installation, Inc. and H. Don Rutherford...........................................
10.41* Compensation Arrangements with James R. Kerber as approved by the
Compensation Committee and Board of Directors, dated March 2, 1995.................
10.42* Compensation Arrangements with Glenn H. Gettier, Jr. as approved by the
Compensation Committee and Board of Directors, dated March 2, 1995.................
10.43 Consolidated Tax Allocation Agreement dated December 26, 1985, as
amended, among Registrant and certain of its subsidiaries..........................
10.44* Form of Executive Severance Benefit Agreements entered into between
Facilities Management, Inc. and certain key executive officers of the
Registrant, including Messrs. Gettier, Kerber, Gail, Hull, Greving and
Rutherford.........................................................................
10.45 Univision SI Application from Bob Shaw regarding issuance of an
individually owned policy, dated January 5, 1995...................................
10.46* Memorandum, dated March 8, 1994, amending Registrant's Deferred
Compensation Plan referenced as Exhibit 10.5 above.................................
10.47 Stock Purchase Agreement dated March 24, 1995 between Southwestern Life
Corporation and Citizens Financial Corporation regarding the sale of Integrity
National Life Insurance Company....................................................
11.1 Statement regarding computation of earnings (loss) per share of common
stock on average shares outstanding and fully diluted bases........................
12.1 Statement regarding computation of ratio of earnings to fixed charges
(including pro forma ratios).......................................................
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18.1 Letter dated March 30, 1995 from Coopers & Lybrand L.L.P.
regarding change in accounting principles .........................................
21.1 List of Subsidiaries of Registrant.................................................
23.1 Consent of Coopers & Lybrand L.L.P. ...............................................
27 Financial Data Schedule............................................................
<FN>
* MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED
PURSUANT TO ITEM 14(C) OF THIS ANNUAL REPORT.
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EX-10.11
LEASE AMENDMENTS
NOTICE
THIS FIRST AMENDMENT TO LEASE CONTAINS PROVISIONS WHICH ARE SUBJECT TO
ARBITRATION UNDER THE TEXAS GENERAL ARBITRATION ACT (ARTICLE 224 THROUGH
238-6, REVISED CIVIL STATUTES OF TEXAS, 1925)
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE, made this 2nd day of December, 1984, amends
that certain Lincoln Plaza Office Lease Agreement by and between Lincoln
Property Company No. 375, Ltd., a Texas limited partnership ("Landlord"), and
Southwestern Life Insurance Company, a Texas corporation ("Tenant"), dated
June 28, 1984 (the "Lease");
W I T N E S S E T H:
In consideration of the mutual covenants, promises and agreements herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Landlord and Tenant do hereby
amend the Lease as follows:
1. Paragraph 1(g) of the Lease is hereby amended to add the following
at the end thereof:
"The Common Areas in the Building which are not located on the
floors of the Premises consist of 13,388 square feet on the ground floor
of the Building and 3,107 square feet on the second floor skybridge lobby.
Therefore, 367 square feet of such Common Areas are included in the
Rentable Area of each floor in the Building."
2. Paragraph 1(i) is hereby amended by adding the following at the
end thereof:
"The Rentable Area of the Premises will never include
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any Common Area located on a multi-tenant floor if Tenant does not lease,
as a part of its Leased Premises, any Rentable Area on such multi-tenant
floor, The Usable Area within the Premises, as defined hereinabove, shall
not include any Common Areas."
3. Paragraph 6(a) of the Lease is hereby amended to read in its
entirety as follows:
"(a) Hot and cold water at those points of supply provided for
general use of other tenants in the Building, central heat and air
conditioning in season, at such temperatures and in such amounts as are
reasonable considered by Landlord to be standard, or as required by
governmental authorities; provided, however, heating and air conditioning
service at times other than for "Normal Business Hours" for the Building
(6:30 a.m. to 6:00 p.m. on Mondays through Fridays and 8:00 a.m. to
1:00 p.m. on Saturday, exclusive of normal business holidays as identified
on attached Exhibit "J") shall be furnished only upon the written request
of Tenant delivered to Landlord prior to 3:00 p.m. at least one day in
advance of the date for which such usage is requested. in no event shall
the cost of such additional electrical, heating, and air conditioning
service to Tenant exceed Landlord's actual per ton hour (or other unit)
generating costs. Landlord may use the period between 6:30 a.m. and
7:00 a.m. on normal Monday through Friday work days and the period between
8:00 a.m. and 8:30 a.m. on normal Saturday work days to heat or cool the
Building, provided that the Premises achieve the desired temperature prior
to 7:00 a.m. on normal Monday through Friday work days and prior to
8:30 a.m. on normal Saturday work days."
4. The seventh line of the second paragraph of Paragraph 6(f) of the
Lease is hereby amended to read as follows:
"any essential service is not provided to Tenant in excess of five (5)
consecutive"
5. The reference to "(ii)" in the fifteenth line of Paragraph 16(b) of
the Lease is hereby amended to be a reference to "(iii)."
6. The first line of Paragraph 16(c) of the Lease is hereby amended to
read as follows:
"(c) If Landlord has exercised portion (i) in Paragraph"
7. The ninth line of Paragraph 17 of the Lease is hereby amended to
read as follows:
"mechanics' or other liens against the Premises. In the event any such
lien is attached to the Premises, then, in
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addition to any"
8. The first sentence of Paragraph 18 of the Lease is hereby amended
to read as follows:
"Landlord shall maintain fire and extended coverage insurance on the
Building and the Premises in such amount as Landlord's mortgagees shall
require."
9. The fourth line of Paragraph 20 of the Lease is hereby amended to
read as follows:
"agents, servants, employees or any other person entering the"
10. The reference to "Standard Allowance" in the eleventh line of the
first paragraph of Paragraph 22 of the Lease is hereby amended to be a
reference to "standard allowance."
11. The reference to "seven (7) months" in the fifth line of the first
paragraph and in the seventh line of the second paragraph of Paragraph 22 of
the Lease is hereby amended to be a reference to "eight (8) months" in each
such instance.
12. The last paragraph of Paragraph 22 of the Lease is hereby amended
to read in its entirety as follows:
"If at any time prior to the Commencement Date or during the Lease Term,
the Premises are totally or substantially damaged or rendered wholly or
substantially untenantable by fire or other casualty, and if the Premises
cannot be reasonably expected to be restored or rended tenable within a
period of eight (8) months after the occurrence of such damage or
destruction, as determined by a major, reputable, qualified contractor or
engineer selected by Landlord ("Landlord's Contractor") and approved by
Tenant, which approval shall not be unreasonably withheld or delayed, then
Tenant may terminate this Lease by giving written notice thereof to
Landlord within fifteen (15) days after receipt of notice from Landlord,
accompanied by Landlord's report, stating the such restoration cannot be
accomplished within said eight (8) month period. With regard to the
foregoing, in the event Tenant does not approve Landlord's Contractor
(which approval or disapproval must be communicated to Landlord in writing
within five (5) days after Landlord advises Tenant of the name of
Landlord's Contractor, and if not so communicated to Landlord, then
Landlord's Contractor shall be deemed approved), then Tenant's written
disapproval of Landlord's Contractor shall contain the name of a
contractor or engineer acceptable to Tenant ("Tenant's Contractor") and
the two contractors so selected shall thereafter immediately make a
determination as to whether or not the damage can be restored within
the above stated eight (8) month period. If Landlord's Contractor and
Tenant's
<PAGE>
Contractor cannot reach a mutual agreement within ten (10) days after
the designation of Tenant's Contractor, then the two contractors shall
appoint a third contractor or engineer ("Independent Contractor") within
five (5) days after the expiration of such ten (10) day period and such
Independent Contractor shall make the determination regarding restoration
required by this paragraph. In the event that Landlord's Contractor and
Tenant's Contractor cannot agree upon an Independent Contractor within
such five (5) day period as aforesaid, the Independent Contractor shall be
appointed by the Senior Federal District Judge for the Northern District
of Texas at the request of either Landlord or Tenant. A mutual
determination by Landlord and Tenant's Contractor, or the determination by
the Independent Contractor shall be binding on Landlord and Tenant.
Landlord and Tenant shall pay for its respective contractor and the
expense of the Independent Contractor, if needed, shall be paid one-half
by the Landlord and one-half by the Tenant."
13. Notwithstanding anything to the contrary contained in Paragraph 23
of the Lease, in no event shall Tenant be entitled to assert a claim for or
receive any portion of a condemnation award or proceeds from sale in lieu of
condemnation attributable to the value of Tenant's leasehold interest under
the Lease.
14. The fifth line of Paragraph 25(b) of the Lease is hereby amended to
read as follows:
"25(a)(i) and (ii) or demand for possession whatsoever: (i) terminate
this"
15. Notwithstanding anything to the contrary contained in Paragraph
30(b) of the Lease, Landlord shall have no obligation to provide Additional
Spaces to Tenant in excess of such number of Additional Spaces as Tenant has
specified by written notice to Landlord given within the thirty (30) day
period following the written inquiry by Landlord following Tenant's occupancy
of the Premises referred to in Paragraph 30(b) of the Lease and, further,
from and after the date that Tenant shall cancel or surrender its right of
utilization of any such Additional Spaces, Tenant shall thereafter have no
right to require that any such Additional Spaces so canceled or released by
Tenant be thereafter made available to Tenant.
16. The twenty-fifth line of Paragraph 30(b) of the Lease is hereby
amended to read as follows:
"(10) days prior to the last day of said month. Tenant's right to the
use of"
17. Exhibit "B" attached hereto is hereby substituted for Exhibit "B"
attached to the Lease.
18. Paragraph 16 of Exhibit "H" attached to the Lease is
<PAGE>
hereby supplemented by the following:
"Landlord acknowledges that the current management fee payable by
Landlord is two and one-half percent of "Gross Rental Income" (as defined
in the Agreement dated September 25, 1984 creating One Lincoln Plaza -
A Joint Venture). Tenant acknowledges that the aforesaid current
management fee is below currently prevailing market rates and the
acknowledgement of Landlord contained in the immediately preceding
sentence shall not prejudice the rights of Landlord pursuant to paragraph
16 of Exhibit "H" to the Lease.
19. Exhibit "H" of the Lease is hereby amended by adding the following
new paragraph:
"18. Costs of operations of any business venture in the Exterior
Common Areas."
EXECUTED as of the day and year first above written.
LINCOLN PROPERTY COMPANY
NO. 375, LTD.
By: /s/Mack Pogue
----------------------------
Mack Pogue,
General Partner
By: /s/William C. Duvall,
----------------------------
William C. Duvall,
General Partner
SOUTHWESTERN LIFE INSURANCE COMPANY
By: /s/David D. Boone
----------------------------
David D. Boone,
Vice President
<PAGE>
SECOND AMENDMENT TO LINCOLN PLAZA OFFICE LEASE AGREEMENT
THIS SECOND AMENDMENT TO LINCOLN PLAZA OFFICE LEASE AGREEMENT
("Amendment"), by and between ONE LINCOLN PLAZA - A JOINT VENTURE, a Texas
joint venture ("Landlord"), and SOUTHWESTERN LIFE INSURANCE COMPANY a Texas
corporation ("Tenant"), is executed as of this 19th day of March 1990.
W I T N E S S E T H:
WHEREAS, Landlord's predecessor in interest (Lincoln Property Company
No. 375, Ltd.) and Tenant have heretofore entered into that certain Lincoln
Plaza Office Lease Agreement, dated June 28, 1984, as amended by that certain
First Amendment to Lease dated December 2, 1984 (collectively, the "Lease"),
under and pursuant to the terms of which Tenant has leased from Landlord
certain office space ("Original Premises") in that certain office building
commonly known as "Lincoln Plaza" ("Building"), which is located at 500 North
Akard in Dallas, Dallas County, Texas, as more particularly described in the
Lease; and
WHEREAS, Landlord received written notice from Tenant on August 31, 1989
of Tenant's desire to exercise its option to reduce the size of the Original
Premises by terminating Tenant's rights and obligations to the third (3rd)
floor of the Building pursuant to Paragraph 2 of Exhibit "F" to the Lease; and
WHEREAS, Landlord subsequently received written notice on September 25,
1989 of Tenant's desire to exercise its option to reduce the size of the
Original Premises by terminating Tenant's rights and obligations to the
fourth (4th) floor of the Building ("Fourth Floor") pursuant to Paragraph 2
of Exhibit "F" to the Lease; and
WHEREAS, Tenant seeks to rescind the termination of its rights and
obligations to the Fourth Floor and to retain the Fourth Floor as part of the
Premises; and
WHEREAS, Landlord and Tenant desire to amend the Lease in order to
evidence their agreements with respect to the retention of the Fourth Floor;
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein and in the Lease, the parties hereto do hereby covenant and
agree that the Lease is amended as follows:
1. DEFINED TERMS. Terms defined in the Lease and delineated herein by
initial capital letters shall have the same meaning ascribed thereto in the
Lease, except to the extent that the meaning of such term is specifically
modified by the provisions hereof. In addition, other terms not defined in the
<PAGE>
Lease but defined herein will, when delineated with initial capital letters,
have the meanings ascribed thereto in this Amendment. Terms and phrases which
are not delineated by initial capital letters shall have the meanings
commonly ascribed thereto.
2. EFFECTIVE DATE. As used herein, the term "Effective Date" shall
mean March 1, 1990.
3. PREMISES. From and after the Effective Date, the term "Premises"
(as defined in Paragraph 1(b) of the Lease) shall be amended by adding
thereto the following:
"Notwithstanding the foregoing, from and after the Effective Date,
Premises shall mean the suite of offices located within the Building and
outlined on the floor plans attached to the Lease as Exhibit "B." The
Premises are hereinafter stipulated to contain approximately 225,051
square feet of Rentable Area located on floors 4 through 12."
4. BASE RENTAL. From and after the Effective Date, Paragraph l(c) of
the Lease shall be amended in its entirety to read as follows:
"1(c) "Base Rental" shall mean the following:
(i) FROM THE COMMENCEMENT DATE UNTIL FEBRUARY 28, 1990. From the
Commencement Date and continuing through and including February 28, 1990,
Base Rental for the Original Premises shall be payable at the rate of
$18.00 per square foot of Rentable Area per annum, being $4,484,322.00
per annum and $373,693.50 per month; and
(ii) FROM MARCH 1, 1990 TO MARCH 31, 1990. Commencing on March 1,
1990 (being the Effective Date) and continuing through and including
March 31, 1990, Base Rental for the Premises shall be payable at the rate
of $18.00 per square foot of Rentable Area per annum, being $4,050,918.00
per annum and $337,576.50 per month; and
(iii) FROM APRIL 1, 1990 TO NOVEMBER 30, 1990. Commencing on April 1,
1990 and continuing through and including November 30, 1990, Base Rental
for the Premises shall be payable in the aggregate amount of $3,976,050.00
per annum (being the sum of (i) S3,601,710.00 per annum for the Premises
(excluding the Fourth Floor), being the product of $18.00 per square foot
of Rentable Area multiplied by the 200,095 square feet of Rentable Area in
the Premises (excluding the Fourth Floor), plus (ii) $374,340.00 per annum
for the Fourth Floor, being the product of $15.00 per square foot of
Rentable Area multiplied by the 24,956 square feet of Rentable Area in
the Fourth Floor), being $331,337.50 per month; and
<PAGE>
(iv) FROM DECEMBER 1, 1990 TO NOVEMBER 30, 1995. Commencing on
December 1, 1990 and continuing through and including the last day of the
Lease Term (November 30, 1995), Base Rental for the Premises shall be
payable in the aggregate amount of $4,776,429.96 per annum (being the sum
of (i) $4,402,089.96 per annum for the Premises (excluding the Fourth
Floor), being the product of $22.00 per square foot of Rentable Area
multiplied by the 200,095 square feet of Rentable Area in the Premises
(excluding the Fourth Floor), plus (ii) $374,340.00 per annum for the
Fourth Floor, being the product of $15.00 per square foot of Rentable
Area multiplied by the 24,956 square feet of Rentable Area in the Fourth
Floor), being $398,035.83 per month.
The Base Rental, defined hereinabove, shall be adjusted pursuant to
Exhibit "C" hereto and may be adjusted pursuant to the last paragraph in
Paragraph l(i) of this Lease."
5. FOURTH FLOOR IMPROVEMENTS. Tenant hereby accepts the
Fourth Floor "as is" and without benefit of further improvements.
The occupancy of the Fourth Floor by Tenant shall constitute the
acknowledgement and agreement of Tenant that Tenant is fully
familiar with the physical condition of the Fourth Floor, that
Tenant has received the same in good order and condition, and
that the Fourth Floor complies in all respects with the
requirements of this Lease and are suitable for the purposes for
which the Fourth Floor is leased. In that regard, Landlord hereby
disclaims, and Tenant hereby waives, any warranty of suitability
with respect to the Fourth Floor.
6. NO FURTHER TERMINATION OPTIONS. Tenant acknowledges and
agrees that Tenant has rescinded its termination rights in regard
to the Fourth Floor herein and as such has no further termination
rights with respect to the Lease.
7. BROKERAGE FEES AND COMMISSIONS. Tenant represents that it has dealt
with no broker, agent or other person in connection with this Amendment and
that no broker, agent or other person brought about this Amendment, other
than an agent of Landlord and Tenant shall indemnify and hold Landlord
harmless from and against any and all claims, losses, costs or expenses
(including attorneys' fees and expenses) by any broker, agent or other person
claiming a commission or other form of compensation by virtue of having dealt
with Tenant with regard to the transaction contemplated by this Amendment.
The provisions of this Paragraph 7 shall survive the expiration of the Lease
Term or any renewal or extension thereof.
8. EFFECT OF AMENDMENT. Except as specifically amended by the
provisions hereof, the terms and provisions in the Lease shall continue to
govern the rights and obligations of the parties thereunder; and all
provisions and covenants of the Lease shall remain in full force and effect
as stated therein. This
<PAGE>
Amendment and the Lease shall be construed as one instrument. The terms,
provisions and covenants of this Amendment shall inure to the benefit of and
be binding upon the parties hereto and the respective heirs, successors in
interest and legal representatives.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment in
multiple counterparts as of the day and year first above written.
LANDLORD:
ONE LINCOLN PLAZA - A JOINT VENTURE,
a Texas joint venture
By: Lincoln Property Company
No. 375, Ltd., a Texas
limited partnership,
Joint Venturer
By: /s/William C. Duvall
----------------------------
William C. Duvall
General Partner
TENANT:
SOUTHWESTERN LIFE INSURANCE COMPANY,
a Texas corporation
By: /s/Weldon Kern
---------------------------------
Weldon Kern,
Senior Vice President
<PAGE>
THIRD AMENDMENT TO LINCOLN PLAZA OFFICE LEASE AGREEMENT
THIS THIRD AMENDMENT TO LINCOLN PLAZA OFFICE LEASE AGREEMENT
("Amendment"), by and between ONE LINCOLN PLAZA - A JOINT VENTURE, a Texas
joint venture ("Landlord"), and SOUTHWESTERN LIFE INSURANCE COMPANY, a Texas
corporation ("Tenant"), is executed as of the 1st day of March, 1990.
W I T N E S S E T H :
WHEREAS, Landlord's predecessor in interest (Lincoln Property Company
No. 375, Ltd.) and Tenant have heretofore entered into that certain Lincoln
Plaza Office Lease Agreement, dated June 28, 1984, as amended by that certain
First Amendment to Lease dated December 2, 1984 and that certain Second
Amendment to Lincoln Plaza Office Lease Agreement ("Second Amendment") dated
March 19, 1990 (collectively, the "Lease"), under and pursuant to the terms
of which Tenant has leased from Landlord certain office space ("Premises") in
that certain office building commonly known as "Lincoln Plaza" ("Building"),
which is located at 500 North Akard in Dallas, Dallas County, Texas, as more
particularly described in the Lease; and
WHEREAS, the Second Amendment incorrectly stated the Rentable Area of
the Premises; and
WHEREAS, the Second Amendment also included certain incorrect Base
Rental amounts; and
WHEREAS, Landlord and Tenant seek to amend the Lease in order to
evidence the correction of the Rentable Area and Base Rental amounts; and
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein and in the Lease, the parties hereto do hereby covenant and
agree that the Lease is amended as follows:
1. DEFINED TERMS. Terms defined in the Lease and delineated herein by
initial capital letters shall have the same meaning ascribed thereto in the
Lease, except to the extent that the meaning of such term is specifically
modified by the provisions hereof. In addition, other terms not defined in
the Lease but defined herein will, when delineated with initial capital
letters, have the meanings ascribed thereto in this Amendment. Terms and
phrases which are not delineated by initial capital letters shall have the
meanings commonly ascribed thereto.
2. PREMISES. From and after the date of this Amendment (March 1,
1990), the term "Premises" (as defined in Paragraph l(b) of the Lease) shall
be amended by adding thereto the following:
<PAGE>
"Notwithstanding the previous description of the Premises in the Second
Amendment, from and after March 1, 1990, the Premises shall mean the
suite of offices located within the Building on floors four through
twelve and outlined on the floor plan attached to the First Amendment
as Exhibit "B" (excluding the floor plan, however, of the third floor
to which Tenant claims no further rights). The Premises are hereinafter
stipulated to contain approximately 224,604 square feet of Rentable Area
and 194,969 square feet of Usable Area."
3. BASE RENTAL. From and after March 1, 1990, Paragraph l(c) of the
Lease shall be amended to read as follows:
"l(c) Notwithstanding the Base Rental amounts which were provided in
the Second Amendment, 'Base Rental' shall mean the following:
(i) FROM MARCH 1, 1990 TO MARCH 31, 1990. Commencing on March 1,
1990 (being the Effective Date) and continuing through and including
March 31, 1990, Base Rental for the Premises shall be payable at the rate
of $18.00 per square foot of Rentable Area per annum, being $4,042,872.00
per annum and $336,906.00 per month; and
(ii) FROM APRIL 1, 1990 TO NOVEMBER 30, 1990. Commencing on April 1,
1990 and continuing through and including November 30, 1990, Base Rental
for the Premises shall be payable in the aggregate amount of $3,968,004.00
per annum and $330,667.00 per month (being the sum of (i) $3,593,664.00
per annum for all portions of the Premises except the fourth floor, the
product of $18.00 per square foot multiplied by the 199,648 square feet
in such portions of the Premises, plus (ii) $374,340.00 per annum for the
fourth floor portion of the Premises, being the product of $15.00 per
square foot multiplied by the 24,956 square feet of Rentable Area in the
fourth floor); and
(iii) From DECEMBER 1, 1990 TO NOVEMBER 30, 1995. Commencing on
December 1, 1990 and continuing through and including the last day of the
Lease Term (November 30, 1995), Base Rental for the Premises shall be
payable in the aggregate amount of $4,766,596.00 per annum and $397,216.33
per month (being the sum of (i) $4,392,256.00 per annum for all portions
of the Premises, except the fourth floor, the product of $22.00 per square
foot multiplied by the 199,648 square feet of Rentable Area in such
portions of the Premises, plus (ii) $374,340.00 per annum for the fourth
floor, being the product of $15.00 per square foot multiplied by the
24,956 square feet of Rentable Area in the fourth floor).
The Base Rental, defined hereinabove, shall be adjusted
<PAGE>
pursuant to Exhibit "C" hereto and may be adjusted pursuant to the last
paragraph in Paragraph l(i) of this Lease."
4. BROKERAGE FEES AND COMMISSIONS. Tenant represents that it has dealt
with no broker, agent or other person in connection with this Amendment and
that no broker, agent or other person brought about this Amendment, other
than an agent of Landlord and Tenant shall indemnify and hold Landlord
harmless from and against any and all claims, losses, costs or expenses
(including attorneys' fees and expenses) by any broker, agent or other person
claiming a commission or other form of compensation by virtue of having dealt
with Tenant with regard to the transaction contemplated by this Amendment.
The provisions of this Paragraph 4 shall survive the expiration of the Lease
Term or any renewal or extension thereof.
5. EFFECT OF AMENDMENT. Except as specifically amended by the
provisions hereof, the terms and provisions in the Lease shall continue to
govern the rights and obligations of the parties thereunder; and all
provisions and covenants of the Lease shall remain in full force and effect
as stated therein. This Amendment and the Lease shall be construed as one
instrument. The terms, provisions and covenants of this Amendment shall inure
to the benefit of and be binding upon the parties hereto and the respective
heirs, successors in interest and legal representatives.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment in
multiple counterparts as of the day and year first above written.
LANDLORD:
ONE LINCOLN PLAZA - A JOINT VENTURE,
a Texas joint venture
By: Lincoln Property Company
No. 375, Ltd., a Texas
limited partnership,
Joint Venturer
By: /s/William C. Duvall
--------------------
William C. Duvall
General Partner
TENANT:
SOUTHWESTERN LIFE INSURANCE COMPANY,
a Texas corporation
By: /s/Weldon Kern
---------------------
Weldon Kern,
Senior Vice President
<PAGE>
FOURTH AMENDMENT TO LINCOLN PLAZA OFFICE LEASE AGREEMENT
This Fourth Amendment to Lincoln Plaza Office Lease Agreement ("Fourth
Amendment"), by and between METROPOLITAN LIFE INSURANCE COMPANY, a New York
corporation ("Landlord"), and SOUTHWESTERN LIFE INSURANCE COMPANY, a Texas
corporation ("Tenant"), is effective as of the last day and year set forth
below.
W I T N E S S E T H :
WHEREAS, Landlord's predecessors in interest, ONE LINCOLN PLAZA - A
JOINT VENTURE and LINCOLN PROPERTY COMPANY NO. 375, and Tenant heretofore
entered into that certain Lincoln Plaza Office Lease Agreement dated June 28,
1984 ("Original Lease"), as amended by that certain First Amendment to Lease
Agreement dated December 2, 1984 ("First Amendment") and that certain Second
Amendment to Lincoln Plaza Office Lease Agreement ("Second Amendment") dated
March 19, 1990 and that certain Third Amendment to Lincoln Plaza Office Lease
Agreement ("Third Amendment") dated March 1, 1990, the Original Lease, the
First Amendment, the Second Amendment and the Third Amendment being
hereinafter collectively referred to as the "Lease"; and
WHEREAS, under and pursuant to the terms of the Lease, Tenant has leased
from Landlord certain office space located on floors four (4) through twelve
(12) containing approximately 224,604 square feet of Rentable Area
("Premises") in that certain office building commonly known as "Lincoln
Plaza" ("Building"), which is located at 500 North Akard, Dallas, Dallas
County, Texas as more particularly described in the Lease; and
WHEREAS notwithstanding that the Lease is not scheduled to expire until
November 30, 1995, Landlord and Tenant desire to extend and renew the Lease
as, and upon the terms and conditions, hereinafter specified; and
WHEREAS, Landlord and Tenant desire to amend the Lease as and upon the
terms and conditions hereinafter specified;
NOW THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein and in the Lease, the parties hereto do hereby
covenant and agree as follows:
1. DEFINED TERMS. Terms defined in the Lease and delineated herein by
initial capital letters shall have the same meaning ascribed thereto in the
Lease, except to the extent that the meaning of such term is specifically
modified by the provisions hereof. In addition other terms not defined in the
Lease but defined herein will, when delineated with initial capital letters,
have the meanings ascribed thereto in this Fourth Amendment. Terms and
phrases which are not delineated by initial capital letters shall have the
meanings commonly ascribed thereto.
<PAGE>
2. SECOND LEASE TERM COMMENCEMENT DATE. As used herein, the term
"Second Lease Term Commencement Date" shall mean December 1, 1995.
3. LEASE TERM. The Lease Term is hereby extended by a period (the
"Second Lease Term") of twenty-four (24) full calendar months from the Second
Lease Term Commencement Date. The defined term "Lease Term" shall be deemed
to include the Second Lease Term.
4. BASE RENTAL AND EXPENSE STOP. From and after the Second Lease Term
Commencement Date, the Base Rental payable by Tenant, pursuant to the
provisions of Paragraph 5. of the Lease, shall accrue and be payable at the
rate of $12.00 per square foot of Rentable Area in the Premises per annum,
being an aggregate rate of $1,584,204.00 per annum, and $132,017.00 per
month, as adjusted pursuant to Exhibit "C" attached hereto and as may be
adjusted pursuant to the last paragraph i Paragraph 1(i) of the Lease. From
and after the Second Lease Term Commencement Date, the Expense Stop (as
defined in Exhibit "C") shall mean Landlord's actual Basic Costs (as defined
in Exhibit "C") for the calendar year 1996 divided by the total number of
square feet of Rentable Area in the Building.
5. PREMISES. As of the Second Lease Term Commencement Date, the
"Premises" shall be amended by eliminating that part thereof (the "Terminated
Space") consisting of approximately 92,587 square feet and shown on the floor
plans attached hereto as Exhibit "A" hereof. Thereafter, the Premises are
stipulated for all purposes to contain approximately 132,017 square feet of
"Rentable Area" and as shown on the floor plans attached hereto as Exhibit
"A-1" hereof.
6. COMMON AREA. As of the Second Lease Term Commencement Date,
Paragraph 1(g) of the Lease (including, without limitation, Paragraph 1 of
the First Amendment) shall be deleted in its entirety and the following shall
be substituted in its place:
"Common Areas" shall mean those areas devoted to corridors,
elevator foyers, restrooms, mechanical rooms, elevator mechanical
rooms, janitorial closets, electrical and telephone closets, vending
areas, and lobby areas (whether at ground level or otherwise), and
other similar facilities provided for the common use or benefit of
tenants generally and/or the public.
7. NORMAL BUSINESS HOURS. From and after the Second Lease Term
Commencement Date, Paragraph 6(a) of the Lease shall be amended by deleting
"(6:30 a.m. to 6:00 p.m. on Mondays through Fridays, and 8:00 a.m. to 1:00
p.m. on Saturday exclusive of normal business holidays as identified on
attached Exhibit "J")" and substituting the following in its place:
(7:00 a.m. to 6:00 p.m. Monday through Friday and 8:00
<PAGE>
a.m. to 1:00 p.m. on Saturday, exclusive of normal business
holidays as identified on attached Exhibit "J")
8. PARAGRAPH 18 OF FIRST AMENDMENT. From and after the Second Lease
Term Commencement Date, Paragraph 18 of the First Amendment, which
supplemented Paragraph 16 of Exhibit "H", shall be deleted in its entirety.
9. CASUALTY DAMAGE. As of the Second Lease Term Commencement Date, the
first two (2) subparagraphs of Paragraph 22 of the Lease shall be deleted in
their entirety and the following substituted in their place:
If the Premises or any part thereof shall be damaged by fire or other
casualty, Tenant shall give prompt written notice thereof to Landlord. In
case the Building shall be damaged such that substantial alteration or
reconstruction of the Building shell, in Landlord's sole opinion, is
required (whether or not the Premises shall have been damaged by such
casualty) or in the event any mortgagee of Landlord's should require that
the insurance proceeds payable as a result of a casualty be applied to
the payment of the mortgage debt or in the event of any material
uninsured loss to the Building, or in the event Landlord's insurance
proceeds are insufficient to meet Landlord's obligations under this
paragraph, Landlord may, at its option, terminate this Lease by notifying
Tenant in writing of such termination within ninety (90) days after the
date of such casualty. If Landlord does not thus elect to terminate this
Lease, then if the Premises cannot be reasonably expected to be restored
or rendered tenantable by Landlord within a period of seven (7) months
after the occurrence of such damage or destruction, Tenant may, within
ninety (90) days after such fire or other casualty, terminate this Lease
by giving written notice to Landlord. Landlord shall commence and proceed
with reasonable diligence to restore the Building shell and Shell
Improvements located on the Premises. When the repairs described in the
preceding sentence have been completed by Landlord, Landlord shall then
complete the restoration of such improvements in excess of the Shell
Improvements as are necessary to permit Tenant's reoccupancy of the
Premises (including the installation of acoustical ceiling tile) pursuant
to the final working drawings and specifications approved by Landlord
pursuant to the Work Letter ("Improvements Restoration"); provided,
however, that Landlord shall not be obligated to expend for the completion
of the Improvements Restoration a sum in excess of Twenty Dollars ($20.00)
per square foot of Rentable Area in the Premises ("Reconstruction
Allowance"). Landlord shall not be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting in any
way from such damage or the repair thereof, except that Landlord shall
allow Tenant a fair diminution of Rent during the time
<PAGE>
and to the extent the Premises are unfit for occupancy (based upon that
portion of Base Rental applicable to the portion of the Premises subject
to such casualty)provided, however, the Premises shall not be considered
unfit for occupancy at any time that (i) such of the Improvements
Restoration has been completed so as to permit occupancy as evidenced by
the issuance of a Certificate of Occupancy or its equivalent for the
Premises by the appropriate governmental entity having jurisdiction over
the Premises for the purpose of issuing such certificate, or (ii) if no
such certificate can be issued by any appropriate governmental entity
under applicable laws, ordinances, or regulations, at such time as the
Improvements Restoration have been substantially completed and tendered
to Tenant or (iii) Landlord has expended the Reconstruction Allowance for
the restoration of the Premises and has tendered the Premises to Tenant.
Notwithstanding the foregoing, if more than 60,000 square feet of
Rentable Area of the Premises are damaged by fire or other casualty, not
caused by Tenant, when less than one (1) year remains in the Lease Term,
and if the Premises cannot be reasonably expected to be restored or
rendered tenantable by Landlord within a period of sixty (60) days
after the occurrence of such damage or destruction Landlord shall have the
right to use reasonable efforts to relocate Tenant to space, similar in
size to the Premises, within the Building until the Premises are fit for
occupancy (as referenced in the preceding paragraph). If Landlord is
unable or unwilling to so relocate Tenant, Tenant may terminate this
Lease by written notice to Landlord given within thirty (30) days after
such damage or destruction and the Rent payable by Tenant hereunder shall
be apportioned to the date of such notice. In such event, all sums
received by or due to Tenant on account of insurance covering the
Building shall be paid to Landlord.
10. HOLDING OVER. From and after the Second Lease Term Commencement
Date, Paragraph 27 of the Lease shall be deleted and the following is
substituted in its place:
In the event of holding over by Tenant after expiration or other
termination of this Lease or in the event Tenant continues to occupy the
Premises after the termination of Tenant's right of possession pursuant to
Paragraph 25(b) of the Lease, Tenant shall, throughout the entire holdover
period, pay Rent equal to one hundred fifty percent (150%) of the Base
Rental and additional Base Rental which would have been applicable had
the term of this Lease continued through the period of such holding over
by Tenant. No holding over by Tenant after the expiration of the term of
this Lease shall be construed to extend the term of this Lease.
<PAGE>
11. RECORDATION. From and after the Second Lease Term Commencement
Date, Paragraph 37 of the lease shall be deleted in its entirety.
12. PAYMENT OF EXCESS BASIC COSTS AND ELECTRICAL COSTS. From and after
the Second Lease Term Commencement Date, Exhibit "C" attached to the Lease
shall be deleted in its entirety and the attached Exhibit "C" shall be
substituted in its place. Notwithstanding the foregoing, Exhibit "H",
Exclusions from Basic Costs, shall remain in full force and effect, as
modified by this Fourth Amendment.
13. EXHIBITS "E" AND "F". From and after the Second Lease Term
Commencement Date, Exhibit "E" and Exhibit "F" attached to the Lease shall be
deleted in their entirety.
14. RULES AND REGULATIONS. From and after the Second Lease Term
Commencement Date, Exhibit ~G" of the Original Lease shall be deleted in its
entirety and the attached Exhibit "G" shall be substituted in its place;
provided, however, that (i) Landlord has consented and does hereby consent to
any items described in Paragraphs 3, 15, 22 and 23 of Exhibit "G" which
already exist at the Premises and any replacements of same hereafter
installed; (ii) in addition to those items listed in Paragraph 13 of Exhibit
"G", Landlord hereby consents to the presence on the Premises of personal
computers, laser printers, copiers, fax machines and other like modern office
equipment; and (iii) notwithstanding the provisions of paragraph 26 of
Exhibit "G", no new rule which material increases Tenant's costs or
obligations under the Lease shall be effective against Tenant without
Landlord's first obtaining Tenant's written consent.
15. PARKING. From and after the Second Lease Term Commencement Date,
Paragraph 30(b) shall be amended by deleting "four hundred (400)" in the
ninth (9th) line thereof and replacing it with "three hundred twenty-three
(323)".
16. ESTOPPEL. Tenant hereby confirms and ratifies the Lease, as amended
hereby, acknowledges that, to the best of Tenant's knowledge, Landlord is not
in default under said Lease as of the date this Fourth Amendment is executed
by Tenant and accepts the Premises "AS IS", without benefit of further
improvements, and without warranty of suitability or fitness for a particular
purpose. Landlord acknowledges that Tenant is not in monetary default under
the Lease as of the date this Fourth Amendment is executed by Landlord.
17. BROKERAGE FEES AND COMMISSIONS. Tenant represents that it has dealt
with no broker, agent or other person in connection with this Lease and that
no broker, agent or other person brought about this Lease. The provisions of
this Paragraph 17 shall survive the expiration of the Second Lease Term and
any renewal or extension thereof.
<PAGE>
18. WASTE MANAGEMENT. The Lease is hereby amended by adding thereto the
following provision as Paragraph 45 thereof:
45. WASTE MANAGEMENT. Without limiting its obligations under Paragraph
14 (and the Rules and Regulations attached to the Lease as Exhibit "G"),
Tenant covenants and agrees to comply with all laws, rules, regulations
and guidelines now or hereafter made applicable to the Premises respecting
the disposal of waste, trash, garbage and other matter (liquid or solid),
generated by Tenant, the disposal of which is not otherwise the express
obligation of Landlord under this Lease (the provision of janitorial
services under this Lease shall not be construed as an express obligation
of Landlord for the purposes of this Paragraph), including, but not
limited to, laws, rules, regulations and guidelines respecting recycling
and other forms of reclamation (all of which are herein collectively
referred to as "Waste Management Requirements"). Tenant covenants and
agrees to comply with all rules and regulations established by Landlord
to enable Landlord from time to time to comply with Waste Management
Requirements applicable to Landlord (i) as owner of the Premises, and
(ii) in performing Landlord's obligations under this Lease, if any. Tenant
further covenants and agrees to comply with all rules and regulations
established by Landlord to enable Landlord from time to time to avail
itself of the lowest rate available for the disposal of waste, trash,
garbage and other matter (liquid or solid), generated by Tenant. Tenant
covenants and agrees to indemnify. defend, protect and hold Landlord
harmless [in accordance with Paragraph 20] from and against all liability
(including costs, expenses and attorney s fees) that Landlord may sustain
by reason of Tenant s breach of its obligations under this Paragraph 45.
Tenant's obligations under this Paragraph 48 shall survive the termination
of this Lease.
19. AMERICANS WITH DISABILITIES ACT AND TEXAS ARCHITECTURAL BARRIERS
ACT. The Lease is hereby amended by adding thereto the following provision as
Paragraph 46 thereof:
46. AMERICANS WITH DISABILITIES ACT AND TEXAS ARCHITECTURAL BARRIERS
ACT. Tenant agrees to comply with all requirements of the Americans with
Disabilities Act [Public Law 101-336 (July 26, 1990) ("ADA")] and the Texas
Architectural Barriers Act [Article 9102, Tex. Rev. Civ. St. (1993)]
applicable to the Premises, Building and Property to accommodate its
employees, invitees and customers in accordance with the provisions of
this Paragraph. Tenant acknowledges that it shall be wholly responsible
for (i) making any accommodations or alterations which need to be made to
the Premises to accommodate Tenant's employees, customers and invitees,
and (ii) making any accommodations or alterations which are required by
law or by order of a court of competent jurisdiction to be made to the
Building
<PAGE>
or the Property to accommodate Tenant's employees, invitees and
customers and which exceed standard ADA requirements for the Building
and/or the Property. Tenant agrees to indemnify and hold Landlord harmless
from any and all expenses. liabilities, costs or damages suffered by
Landlord as a result of Tenant's failure to fulfill its aforesaid
responsibilities regarding making such accommodations and alterations as
are referenced in the preceding sentence. No provision in this Lease
should be construed in any manner as permitting, consenting to or
authorizing Tenant to violate requirements under either such Act and any
provision of the Lease which could arguably be construed as authorizing a
violation of either Act shall be interpreted in a manner which permits
compliance with such Act and is hereby amended to permit such compliance.
20. EXCLUSIONS FROM BASIC COSTS. The reference in item 5 of Exhibit "H"
to the Lease to Paragraph 1(v) of Exhibit "C" is hereby deleted and
substituted with a reference to Paragraph I (ii) of such Exhibit "C".
21. EFFECT OF FOURTH AMENDMENT. Except as expressly amended by the
provisions hereof, the terms and provisions contained in the Lease shall
continue to govern the rights and obligations of the parties; and all
provisions and covenants in the Lease shall remain in full force and effect
as stated therein, except to the extent specifically modified by the
provisions of this Fourth Amendment. This Fourth Amendment and the Lease
shall be construed as one instrument.
NOTICE OF INDEMNIFICATION: THE PARTIES TO THIS FOURTH AMENDMENT HEREBY
ACKNOWLEDGE AND AGREE THAT THIS FOURTH AMENDMENT CONTAINS CERTAIN
INDEMNIFICATION PROVISIONS.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fourth
Amendment in multiple counterparts as of the last day and year written below.
LANDLORD:
METROPOLITAN LIFE INSURANCE
COMPANY,
a New York corporation
By: /s/David G. Rogers
------------------------------
David G. Rogers
Assistant Vice-President
Date:
------------------------------
<PAGE>
TENANT:
SOUTHWESTERN LIFE INSURANCE
COMPANY,
a Texas corporation
By: /s/James R. Kerber
------------------------------
James R. Kerber
President
Date: March 24, 1995
------------------------------
Attachments:
Exhibit "A" - Floor Plans for Terminated Space
Exhibit "A-1" - Floor Plans for Premises
Exhibit "C" - Payment of Excess Basic Costs and Electrical Costs
Exhibit "G" - Rules and Regulations
<PAGE>
EXHIBIT "A"
TO FOURTH AMENDMENT TO
LINCOLN PLAZA OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY,
AS LANDLORD, AND
SOUTHWESTERN LIFE INSURANCE COMPANY,
AS TENANT
FLOOR PLANS FOR TERMINATED SPACE
Graphic material consisting of floor plans of floors 4 through 12 of Lincoln
Plaza in Dallas, Texas have been omitted in accordance with Rule 304 of
Regulation S-T - General Rules and Regulations for Electronic Filings.
<PAGE>
EXHIBIT "C"
TO FOURTH AMENDMENT TO
LINCOLN PLAZA OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY,
AS LANDLORD, AND
SOUTHWESTERN LIFE INSURANCE COMPANY,
AS TENANT
PAYMENT OF EXCESS BASIC COSTS AND ELECTRICAL COSTS
1. BASIC COSTS
The Base Rental payable hereunder shall be adjusted from time to time in
accordance with the following provisions:
(i) Tenant's Base Rental is based, in part, upon the estimate that
annual "Basic Costs" (as hereinafter defined) will be equal to the "Expense
Stop". During the Lease Term, Tenant shall pay as an adjustment to Base
Rental hereunder an amount (per each square foot of Rentable Area within the
Premises) equal to the excess ("Excess") from time to time of Basic Costs per
square foot of Rentable Area in the Building over the Expense Stop. Landlord
may collect such additional Base Rental in arrears on a yearly basis.
Landlord shall also have the option to make a good faith estimate of the
Excess from time to time for each upcoming calendar year (or remainder
thereof, if applicable) and, upon thirty (30) days written notice to Tenant,
may require the monthly payment of Base Rental to be adjusted in accordance
with such estimate. Any amounts paid based on such an estimate shall be
subject to adjustment pursuant to Paragraph 2 below when Basic Costs are
available for such calendar year.
(ii) "Basic Costs" shall mean all direct and indirect costs and expenses
in each calendar year of operating, maintaining, repairing, managing and
owning the Building and the Property plus all operating costs of the Exterior
Common Areas (below defined), but exclusive of Electrical Costs, as provided
in Paragraph 2 of this Exhibit "C". Basic Costs shall not include the cost of
capital improvements, depreciation, interest, lease commissions, and
principal payments on mortgage and other non-operating debts of Landlord.
Basic Costs shall, however, include the amortization of capital improvements
which are primarily for the purpose of reducing basic costs, or which are
required by governmental authorities. "Exterior Common Areas" shall mean
those portions of the Property which are not located within the Building and
which are provided and maintained for the common use and benefit of Landlord
and tenants of the Building generally and the employees, invitees and
licensees of Landlord and such tenants; including without limitation, all
parking areas (enclosed or otherwise) and all streets, sidewalks, walkways,
and landscaped areas.
<PAGE>
11. ELECTRICAL COSTS
Notwithstanding anything contained in the Lease to the contrary, Basic
Costs shall not include the cost of electricity, but the Base Rental
hereunder shall be increased by an amount equal to Tenant's pro rata share of
the cost of electricity to the Building ("Electrical Costs"'), which pro rata
share shall be equal to the product of (i) the Electrical Costs and (ii) the
fraction having a numerator equal to the Rentable Area of the Premises and a
denominator equal to the Rentable Area in the Building. The Electrical Costs
used to calculate Tenant's pro rata share as heretofore described shall not
include the cost of any extraordinary electrical use by other tenants of the
Building, where such costs are charged to such tenants. Landlord may from
time to time deliver to Tenant an invoice for such pro rata share of
Electrical Costs and Tenant shall make payment of such amount to Landlord
within three (3) days of delivery of the invoice. Landlord from time to time
shall also have the option to make a good faith estimate of Tenant's pro rata
share of the Electrical Costs for each upcoming year and, upon thirty (30)
days' written notice to Tenant, may require the monthly payment of Base
Rental to be adjusted in accordance with such estimate. Any amounts paid
based on such an estimate shall be subject to adjustment as hereafter
provided when actual Electrical Costs are available for such year.
111. PROCEDURE
The following additional provisions shall apply to Paragraph 1 of this
Exhibit "C":
(a) By April 1 of each calendar year during Tenant's occupancy, or as
soon thereafter as practical, Landlord shall furnish to Tenant a statement of
Landlords Basic Costs and Electrical Costs for the previous calendar year. If
for any calendar year additional Base Rental was collected for the prior
year, as a result of Landlord's estimate of Basic Costs and Electrical Costs,
in excess of the additional Base Rental due during such prior year, then
Landlord shall refund to Tenant any over payment (or at Landlord's option,
apply such amount against rentals due or to become due hereunder). Likewise
Tenant shall pay to Landlord, on demand, any underpayment with respect to the
prior year. In no event shall Basic Costs per square foot of Rentable Area
within the Building be deemed to be less than the Expense Stop, it being the
intent of Landlord and Tenant that Tenant shall at all times be responsible
for the payment of, and shall pay, not less than the amount of Base Rental
for the applicable period (before adjustment) specified in this Lease.
(b) Tenant, at its expense, shall have the right no more frequently than
once per calendar year, following thirty (30) days' prior written notice to
Landlord, to audit Landlord's books and records relating to Basic Costs and
Electrical Costs; or at Landlord's sole discretion, Landlord will provide such
<PAGE>
audit at Tenant's expense prepared by an independent certified public
accountant.
(c) In the event that the Lease Term commences on a day other than
January 1 or terminates on a day other than December 31, the Excess for that
part of the first (1st) calendar year or last calendar year during the Lease
Term shall be determined as follows:
(i) The Expense Stop shall be prorated based upon the number of
months in such partial calendar year. With respect to any partial calendar
month occurring during such partial calendar year, the Expense Stop shall
also be prorated based upon the number of days in that partial calendar
month.
(ii) The Excess, if any, for the applicable partial calendar year
shall then be the amount by which (a) actual Basic Costs per square foot
of Rentable Area in the Building for such calendar year, prorated based
upon the number of months and days in the applicable calendar year, exceed
(b) the Expense Stop, as prorated pursuant to the provisions of this
Subparagraph 3(c).
(iii) With respect to a proration for the first (1st) calendar year
and in the event that Landlord's estimate of the Basic Costs to be
incurred during such partial calendar year exceeds the Expense Stop, as
prorated pursuant to the provisions of this Subparagraph 3(c), Landlord
may, upon thirty (30) days prior written notice to Tenant, require the
monthly payments of Base Rental occurring during such partial calendar
year to be adjusted in accordance with such estimate.
(iv) The provisions of this Exhibit "C" shall survive the termination
of the Lease Term.
<PAGE>
EXHIBIT "G"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY,
AS LANDLORD, AND
SOUTHWESTERN LIFE INSURANCE COMPANY
AS TENANT
RULES AND REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways, and similar areas
shall not be obstructed nor shall refuse, furniture, boxes or other items be
placed therein by Tenant or its officers, agents, servants, and employees, or
used for any purpose other than ingress and egress to and from the leased
premises, or for going from one part of the Building to another part of the
Building. Canvassing, soliciting and peddling in the Building are prohibited.
2. Plumbing fixtures and appliances shall be used only for the purposes
for which constructed, and no unsuitable material shall be placed therein.
3. No signs, directories, posters, advertisements, or notices shall be
painted or affixed on or to any of the windows or doors, or in corridors or
other parts of the Building, except in such color, size, and style, and in
such places, as shall be first approved in writing by Landlord in its
discretion. Building standard suite identification signs will be prepared by
Landlord at Tenant's expense. Landlord shall have the right to remove all
unapproved signs without notice to Tenant, at the expense of Tenant.
4. Tenants shall not do, or permit anything to be done in or about the
Building, or bring or keep anything therein, that will in any way increase
the rate of fire or other insurance on the Building, or on property kept
therein or otherwise increase the possibility of fire or other casualty.
5. Landlord shall have the power to prescribe the weight and position
of heavy equipment or objects which may overstress any portion of the floor.
All damage done to the Building by the improper placing of such heavy items
will be repaired at the sole expense of the responsible Tenant.
6. A Tenant shall notify the Building manager when safes or other heavy
equipment are to be taken in or out of the Building, and the moving shall be
done after written permission is obtained from Landlord on such conditions as
Landlord shall require.
7. Corridor doors, when not in use, shall be kept closed.
<PAGE>
8. All deliveries must be made via the service entrance and service
elevator, when provided, during normal working hours. Landlord's approval
must be obtained for any delivery after normal working hours.
9. Each Tenant shall cooperate with Landlord's employees in keeping
their leased premises neat and clean.
10. Tenants shall not cause or permit any improper noises in the
Building, or allow any unpleasant odors to emanate from the leased premises,
or otherwise interfere, injure or annoy in any way other tenants, or persons
having business with them.
11. No animals shall be brought into or kept in or about the Building.
12. When conditions are such that Tenant must dispose of crates, boxes,
etc., it will be the responsibility of Tenant to dispose of same prior to, or
after the hours of 7:30 a.m. and 5:30 p.m., respectively.
13. No machinery of any kind, other than ordinary office machines such
as typewriters and calculators, shall be operated on the leased premises
without the prior written consent of Landlord, nor shall a tenant use or keep
in the Building any inflammable or explosive fluid or substance (including
Christmas trees and ornaments), or any illuminating materials, except
candles. No space heaters or fans shall be operated in the Building.
14. No bicycles, motorcycles or similar vehicles will be allowed in the
Building.
15. No nails, hooks, or screws shall be driven into or inserted in any
part of the Building except as approved by Landlord.
16. Landlord has the right to evacuate the Building in the event of an
emergency or catastrophe.
17. No food and/or beverages shall be distributed from Tenant's office
without the prior written approval of the Building Manager.
18. No additional locks shall be placed upon any doors without the prior
written consent of Landlord. All necessary keys shall be furnished by
Landlord, and the same shall be surrendered upon termination of this lease,
and Tenant shall then give Landlord or his agent an explanation of the
combination of all locks on the doors or vaults. Tenant shall initially be
given two (2) keys to the leased premises by Landlord. No duplicates of such
keys shall be made by Tenants. Additional keys shall be obtained only from
Landlord, at a fee to be determined by Landlord.
<PAGE>
19. Tenants will not locate furnishings or cabinets adjacent to
mechanical or electrical access panels or over air conditioning outlets so as
to prevent operating personnel from servicing such units as routine or
emergency access may require. Cost of moving such furnishings for Landlord's
access will be applied to Tenant's account. The lighting and air conditioning
equipment of the Building will remain the exclusive charge of the Building
designated personnel.
20. Tenant shall comply with parking rules and regulations as may be
posted or distributed from time to time.
21. No portion of the Building shall be used for the purpose of lodging
rooms.
22. Vending machines or dispensing machines of any kind will not be
placed in the leased premises by a Tenant.
23. Prior written approval, which shall be at Landlord's sole
discretion, must be obtained for installation of window shades, blinds,
drapes or any other window treatment of any kind whatsoever. Landlord will
control all internal lighting that may be visible from the exterior of the
Building and shall have the right to change any unapproved lighting, without
notice to Tenant, at Tenant's expense.
24. No Tenant shall make any changes or alterations to any portion of
the Building without Landlord's prior written approval, which may be given on
such conditions as Landlord may elect. All such work shall be done by
Landlord or by contractors and/or workmen approved by Landlord, working under
Landlord's supervision.
25. Tenants shall provide plexiglass or other pads for all chairs
mounted on rollers or casters.
26. Landlord reserves the right to rescind any of these rules and make
such other and further rules and regulations as in its judgment shall from
time to time be necessary or advisable for the operation of the Building,
which rules shall be binding upon each Tenant upon delivery to such Tenant of
notice thereof in writing.
<PAGE>
EX-10.13
PROCESSING SERVICES AGREEMENT
Customer: DATE: September 20, 1994
------------------
FACILITIES MANAGEMENT INSTALLATION, INC.
----------------------------------------
Name
500 N. AKARD, LINCOLN PLAZA
----------------------------------------
Address
DALLAS, TEXAS 75201
----------------------------------------
City State Zip
This Processing Services Agreement ("Agreement") is entered into by and
between POLICY MANAGEMENT SYSTEMS CORPORATION, a South Carolina corporation
with a place of business at One PMS Center, Blythewood, South Carolina 29016
(hereinafter referred to as "PMSC") and Facilities Management Installation,
Inc., a Delaware corporation with a place of business at 500 N. Akard,
Lincoln Plaza, Dallas, TX 75201 (hereinafter referred to as "Customer"). PMSC
and Customer acknowledge and agree that a substantial
<PAGE>
portion of the services to be provided hereunder shall be performed by
CYBERTEK (Registered) Corporation, a Texas corporation with a place of
business at 7800 North Stemmons Freeway, Suite 800, Dallas, Texas 75247-4217,
(hereinafter referred to as "CYBERTEK"), a wholly-owned subsidiary of PMSC.
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS....................................................... 1
1.1 Accounting Terms............................................. 1
1.2 Terms Defined................................................ 1
2. SERVICES PROVIDED................................................. 3
2.1 Services..................................................... 3
2.2 Start-Up Period.............................................. 3
3. PAYMENTS TO CYBERTEK.............................................. 4
3.1 Monthly Service Charges...................................... 4
3.2 Migration Services........................................... 4
3.3 Reimbursements............................................... 4
3.4 Time of Payment; Interest.................................... 5
3.5 Taxes........................................................ 5
3.6 Licensed PMSC-Owned Software................................. 5
4. TERM.............................................................. 6
4.1 Initial Term................................................. 6
4.2 Renewal and Expiration....................................... 6
5. PERSONNEL......................................................... 6
5.1 PMSC Assigned Employees...................................... 6
5.2 Restrictions on Hiring....................................... 6
6. CONTRACT MANAGEMENT............................................... 7
6.1 Account Executives........................................... 7
6.2 Joint Management Committee................................... 7
7. CUSTOMER RESPONSIBILITIES......................................... 8
8. SAFEGUARDING OF DATA, CONFIDENTIALITY............................. 8
8.1 Customer Data and Customer-Owned Software.................... 8
8.2 PMSC-Owned Software.......................................... 8
8.3 Confidentiality.............................................. 9
8.4 Survival of Obligations...................................... 10
8.5 Audits....................................................... 10
8.6 Disaster Recovery............................................ 10
9. PERFORMANCE REVIEW AND TERMINATION................................ 10
9.1 Performance Review........................................... 10
9.2 Termination for PMSC Breach.................................. 11
9.3 Termination for Nonpayment or Other Customer Breach.......... 12
9.4 Termination for Insolvency................................... 12
9.5 Termination for Convenience.................................. 13
9.6 Obligations Upon Expiration or Termination................... 13
9.7 Transition Assistance........................................ 13
<PAGE>
10. INDEMNIFICATION.................................................. 14
10.1 Indemnification by Customer................................ 14
10.2 Conditions of Indemnification.............................. 15
11. WARRANTY AND LIABILITY LIMITATIONS............................... 16
11.1 WARRANTY................................................... 16
11.2 DISCLAIMER OF OTHER WARRANTIES............................. 16
11.3 EXCLUSIONS AND LIMITATIONS OF LIABILITY.................... 16
11.4 Continued Performance...................................... 17
12. MISCELLANEOUS.................................................... 17
12.1 Binding Nature and Assignment.............................. 17
12.2 Notices.................................................... 17
12.3 Relationship of Parties.................................... 18
12.4 Downtime and Delays........................................ 18
12.5 Headings................................................... 18
12.6 Approvals and Similar Actions.............................. 18
12.7 Force Majeure.............................................. 19
12.8 Other PMSC Processing...................................... 19
12.9 Severability............................................... 19
12.10 Entire Agreement........................................... 19
12.11 Governing Law.............................................. 19
12.12 Multiple Counterparts...................................... 19
12.13 Survival................................................... 19
12.14 Language................................................... 19
12.15 Prevailing Terms and Conditions............................ 19
12.16 No Third Party Rights...................................... 20
12.17 Statute of Limitation...................................... 20
12.18 Waiver and Amendment....................................... 20
12.19 Government Approvals....................................... 20
12.20 Customer Authority......................................... 20
12.21 PMSC Authority............................................. 20
12.22 Attached Agreement Schedules............................... 20
ENTIRE AGREEMENT...................................................... 21
SCHEDULE A - SERVICE LEVEL SCHEDULE................................... 23
SCHEDULE B - CUSTOMER USE............................................. 27
SCHEDULE C - MONTHLY SERVICE CHARGE................................... 31
SCHEDULE D - CUSTOMER RESPONSIBILITIES ............................... 35
SCHEDULE E - DISASTER RECOVERY SERVICES............................... 37
SCHEDULE F - CUSTOMER-OWNED SOFTWARE.................................. 39
SCHEDULE G1 - THIRD PARTY PMSC SOFTWARE............................... 40
<PAGE>
SCHEDULE H - THIRD PARTY CUSTOMER SOFTWARE............................ 44
SCHEDULE I - MIGRATION SERVICES SCHEDULE.............................. 45
SCHEDULE J - JOINT CUSTOMER AND PMSC RESPONSIBILITIES................. 46
CONTINGENCY PLANNING............................................. 46
ACCOUNT SUPPORT AND COORDINATION................................. 47
DATA CENTER OPERATIONS........................................... 48
DATA SECURITY.................................................... 49
TECHNICAL SUPPORT - STORAGE MANAGEMENT........................... 50
FACILITY ENGINEERING............................................. 50
HELP DESK SUPPORT................................................ 51
NETWORK SERVICES................................................. 52
PRODUCTION MANAGEMENT............................................ 53
TAPE LIBRARY OPERATIONS.......................................... 54
TECHNICAL SUPPORT- SYSTEMS SOFTWARE.............................. 55
<PAGE>
RECITALS
A. Customer has heretofore been using another third party vendor for
obtaining mainframe computer data processing services.
B. PMSC and CYBERTEK are software and data processing services companies
serving the life and health insurance industries.
C. Customer is in the business of writing and servicing insurance policies in
the life and health insurance industries.
D. PMSC owns a mainframe computer data processing center.
E. Customer desires that PMSC provide Customer certain data processing
services, as more particularly described herein, and PMSC is willing to
provide such services on the terms and conditions stated in this
Agreement.
In consideration of the mutual covenants and agreements described in this
Agreement, the parties agree as follows:
1. DEFINITIONS
1.1 ACCOUNTING TERMS. All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting
principles.
1.2 TERMS DEFINED. Unless the context clearly requires otherwise, the
capitalized terms used in this Agreement shall have the definitions
assigned to them in this Section 1 or elsewhere herein. Such
definitions shall be equally applicable to both the singular and
plural forms of the terms defined, and words of any gender shall
include each other gender where appropriate.
BUSINESS DAY shall mean a day on which Customer is open for
business.
BUSINESS PROPERTY RIGHTS shall mean the rights of any Person in any
tangible or intangible property which are protected by third party
agreements or any patent, trade secret, copyright, trademark,
service mark, trade name or similar proprietary rights recognized
by common law or statute.
CLAIM - as defined in Section 10.2
CUSTOMER ACCOUNT EXECUTIVE - as defined in Section 6.1 (a).
<PAGE>
CUSTOMER-OWNED SOFTWARE shall mean all Software that is owned by
Customer and used by PMSC in providing the Services. (See Schedule
F. for further definition)
CUSTOMER'S DATA shall mean any information which Customer shall
identify as confidential or proprietary, including, without
limitation, customer lists, cost analysis, invoices,
correspondence, marketing reports, projections, surveys, personnel
lists, formulas, supplier lists, receipts, statements, internal
memoranda, ledgers, reports to regulatory authorities, records,
bank statements and other data pertaining to Customer, its
business, operations, properties, personnel, suppliers or customers
that is maintained by PMSC on behalf of Customer in hard copy or in
magnetic media or other machine readable format in connection with
the performance of the Services. Customer's Data shall not mean or
include any insurance data processing software, ideas, concepts,
methods, knowledge, techniques, know-how, algorithms, materials or
documents related to PMSC's or CYBERTEK's current or future
products or services.
DATA CENTER shall mean a computer facility at Blythewood, South
Carolina, or other CYBERTEK or PMSC locations. The Data Center
shall consist of appropriately configured main-frame computer(s)
and associated other equipment, in an environmentally controlled,
secure building, and necessary technical personnel to operate the
equipment housed in the Data Center.
EFFECTIVE DATE shall mean the date of this Agreement, as stated on
the cover page of this Agreement.
JOINT MANAGEMENT COMMITTEE - as defined in Section 6.2.
LIVE PROCESSING DATE - the day on which Services are first provided
for production processing in PMSC's Data Center.
MONTHLY SERVICE CHARGE - as defined in Section 3.1. (Schedule C)
PERSON shall mean an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture,
joint stock company, government (or any agency or political
subdivision thereof) or other entity of any kind.
<PAGE>
PMSC - references herein to PMSC shall include CYBERTEK if and to
the extent that PMSC utilizes CYBERTEK resources in the performance
of services hereunder.
PMSC ACCOUNT EXECUTIVE - as defined in Section 6.1 (b).
PMSC INFORMATION - as defined in Section 8.2.
PMSC-OWNED SOFTWARE shall mean all Software that is owned by PMSC
or CYBERTEK (or which PMSC or CYBERTEK may sublicense).
SERVICE LEVEL SCHEDULE-as defined in Section 2. (Schedule A)
SERVICES - as defined in Section 2.
SOFTWARE shall mean a computer program with supporting
documentation, including, without limitation, all mainframe and
personal computer based programs, input and output formats, program
listings, narrative descriptions and operating instructions, and
shall include tangible media upon which such program is recorded.
START-UP PERIOD - as defined in Section 2.2.
TAXES - as defined in Section 3.5.
TERM - as defined in Section 4.
TERMINATION DATE shall mean the date that the Term expires or such
earlier date that this Agreement is terminated in accordance with
the terms of Section 9.
THIRD PARTY PMSC SOFTWARE shall mean all Software that is licensed
or sublicensed to PMSC or CYBERTEK by third-parties and used in
connection with the Services. (Schedule G.)
THIRD PARTY CUSTOMER SOFTWARE shall mean all Software that is
licensed or sublicensed to Customer by third-parties. (Schedule H.)
THIRD PARTY SOFTWARE shall mean both Third Party PMSC Software and
Third Party Customer Software. (Schedules G and H.)
2. SERVICES PROVIDED
<PAGE>
2.1 SERVICES. During the Term of this Agreement, PMSC agrees to perform
the services (collectively, the "Services") described in the Service
Level Schedule attached hereto as Schedule A, PMSC's responsibilities
in Schedule J, and the Migration Services Schedule attached hereto as
Schedule I. PMSC shall provide the Services to Customer, Customer's
Authorized Companies and Customer Clients as defined in Schedule B;
for purposes of determining usage and costs, usage by one of the above
Persons shall be deemed to be usage by Customer.
2.2 START-UP PERIOD.
a. There will be a Start-Up Period ("Start-Up Period") beginning
on the Effective Date and ending on the Live Processing Date
during which CYBERTEK will be providing Migration Services
(Schedule I). During the Start-Up Period, Customer's personnel
will be accessible to PMSC personnel to provide information and
assistance which shall include, but not be limited to, the
following: (i) documentation of processing procedures and
controls; (ii) change control and help desk procedures; (iii)
listings of all output jobs, reports, and schedules;
performance history; data and file retention schedules and
procedures; and location and inventory of source programs.
Customer shall provide access to such information as is
reasonably requested by PMSC and is reasonably obtainable from
Customer's current services provider.
b. Customer hereby grants PMSC the right to use Customer-Owned
Software (Schedule F) for the exclusive use of Customer from
the Live Processing Date for the Term of the Agreement.
Customer agrees that "exclusive use" means that PMSC shall not
process data for any third party on a copy of Customer-owned
software. PMSC will not intentionally access and study the
source code of Customer-Owned Software unless Customer suggests
or requests that PMSC do so or unless this is a reasonable step
in investigating and resolving problems for Customer. PMSC
shall not make the Customer-Owned Software available for use by
or for the benefit of any other Person whether or not for
consideration. Notwithstanding the above, Customer recognizes
that PMSC's business is providing automation solutions to
insurance companies and that in order for PMSC to be free to
conduct its business any PMSC personnel that are exposed to
Customer-Owned Software or shall be
<PAGE>
free to use any insurance data processing software, ideas,
concepts, techniques, knowledge, methods, know-how, algorithms,
materials or documents that such personnel may develop after
having access to or involvement with Customer-Owned Software.
3. PAYMENTS TO CYBERTEK
3.1 MONTHLY SERVICE CHARGES. Customer shall pay to PMSC a Monthly Service
Charge (the "Monthly Service Charge"), applicable to each calendar
month (or portion thereof) during the Term of the Agreement in
accordance with Schedule C.
3.2 MIGRATION SERVICES. Customer shall not be obligated to pay PMSC for
Migration Services described in Schedule I during the Start-Up Period
for migrating the production and other computer processing from
Customer's present data center to PMSC's Data Center. Any services
provided by PMSC to Customer during the Start-Up Period, other than
Migration Services, shall be billable at PMSC's then current time and
materials rate.
3.3 REIMBURSEMENTS. In addition to the Monthly Service Charge, Customer
shall reimburse PMSC for the reasonable out-of-pocket expenses
incurred by PMSC in connection with rendering the Services
("Reimbursements"). Except in an emergency or when otherwise not
possible, PMSC shall obtain Customer's written approval for such
expenses in advance. The parties anticipate that this shall most often
be done by telefaxes to and from Customer's Account Executive. Such
expenses include without limitation those which require travel (coach
or economy airfare rates only) to, and hotel accommodations, meals and
related expenses for any such personnel at, any location requested by
Customer, excluding attendance at any Committee meetings called
pursuant to Section 6.2. PMSC shall send Customer a monthly invoice
for the aggregate amount of the expenses that are to be reimbursed to
PMSC during the preceding month. Customer shall pay PMSC the amount to
be reimbursed within ten (10) days following the receipt of PMSC's
invoice to Customer.
3.4 TIME OF PAYMENT; INTEREST. Any sum due PMSC under this Agreement for
which a time for payment is not otherwise specified shall be due and
payable thirty (30) days following the receipt of PMSC's invoice by
Customer. Any amount owed under this Agreement to PMSC, which is not
paid on or before the date such amount is due, shall bear interest
until paid at the rate per annum of 5% over the
<PAGE>
then current published prime interest rate of Citibank of New York,
but in any event not to exceed the maximum lawful rate of interest
permitted by applicable law.
PMSC agrees that the application of the above interest charge shall
be suspended for any invoiced amounts or portions thereof which
Customer in good faith disputes by written notice to PMSC of the
specific problem (Customer shall timely pay all undisputed portions
of the invoice) until PMSC either provides Customer a corrected
invoice or advises Customer in writing that PMSC has investigated
the matter and determined that the invoice is correct.
3.5 TAXES. In addition to the Monthly Service Charge and other amounts
payable by Customer to PMSC under this Agreement, Customer shall
reimburse PMSC for any taxes (including any sales or use taxes) that
may be levied or imposed by any federal, state or local government or
tax authority upon, with respect to, as a result of, or as consequence
of (i) the performance of the Services by PMSC, (ii) the payment to
PMSC for such Services, or (iii) this Agreement (collectively, the
"Taxes").
All Taxes that are levied and become due shall be reimbursed by
Customer pursuant to this Section 3.; provided, however, Customer
shall not be required to reimburse PMSC for Taxes based upon or
measured by the net income of PMSC or for Taxes solely based on or
measured by the value of PMSC's Data Center hardware. PMSC shall
cooperate with Customer to reasonably attempt to minimize any
applicable Taxes. In connection therewith, PMSC shall provide
Customer with any resale certificates, information regarding
out-of-state use of materials, services or sales, or other
exemption certificates that it might have or may in the future
obtain.
3.6 LICENSED PMSC-OWNED SOFTWARE. The parties acknowledge that
contemporaneously herewith CYBERTEK is licensing certain PMSC-Owned
Software to Customer and that in the future PMSC or CYBERTEK may
license other PMSC-Owned Software to Customer or provide other
services to Customer under separate contracts. All payments under such
agreements shall be payable separately from the required payments
under this Agreement.
4. TERM
<PAGE>
4.1 INITIAL TERM. The term ("Term") of this Agreement shall commence on
the Effective Date, and subject to earlier termination in accordance
with the terms of this Agreement, shall continue for a period of 72
full calendar months after the Live Processing Date. Customer and PMSC
agree to document the Live Processing Date, and therefore the end date
of said 72 month period, in an Addendum hereto promptly after the Live
Processing Date.
4.2 RENEWAL AND EXPIRATION.
a. Not less than 12 months prior to expiration of this Agreement,
the Parties agree to notify each other whether they desire to
renew this Agreement.
b. In the event the Parties desire to renew the Agreement, but the
Parties are unable to agree to renewal terms and conditions as
of nine (9) months prior to expiration, this Agreement may be
extended at Customer's option for a period of one (1) year at
prices that are 10% higher than the preceding twelve (12)
months. A written amendment agreeing to such one (1) year
extension must be signed by Customer and PMSC prior to a date
no later than six (6) months prior to termination.
5. PERSONNEL
5.1 PMSC ASSIGNED EMPLOYEES. During the term of this Agreement, PMSC shall
have the sole right to (i) control and supervise the activities of its
employees assigned to perform the Services under this Agreement, (ii)
determine which persons will perform the Services, and (iii) reassign,
promote, demote or terminate the employment of any of PMSC's assigned
employees, without the prior consent of Customer. Customer may give
PMSC written notice if in Customer's opinion an employee of PMSC is
not performing properly or does not have necessary skills. PMSC agrees
to cooperate with Customer in attempting to remedy the situation,
however retains the final decision regarding its employees and the
performance of services hereunder.
5.2 RESTRICTIONS ON HIRING. During the Term of this Agreement and for one
(1) year following the later of either the Termination Date or the
conclusion of the performance of the transition assistance services
pursuant to Section 9.7, Customer shall not, without the prior written
consent of PMSC, knowingly employ any person who was an employee of
PMSC during the one year period prior to the date of that
<PAGE>
person's hiring by Customer. During the Term of this Agreement and for
one (1) year following the later of either the Termination Date or the
conclusion of the performance of the transition assistance services
pursuant to Section 9.7, PMSC shall not, without the prior written
consent of Customer, knowingly employ any person who was an employee
of Customer during the one year period prior to the date of that
person's hiring by PMSC.
6. CONTRACT MANAGEMENT
6.1 ACCOUNT EXECUTIVES.
a. Customer shall appoint an account executive (the "Customer Account
Executive") to oversee the performance of the obligations of
Customer under this Agreement and to act as a liaison with PMSC.
Customer shall advise PMSC whether such person is authorized to
enter into amendments to this Agreement on Customer's behalf.
b. PMSC shall appoint an account executive (the "PMSC Account
Executive") to oversee the performance of the obligations of PMSC
under this Agreement, to supervise the day-to-day performance of
the Services, and to act as a liaison with Customer, however, such
person shall not be a contracting officer of PMSC and shall not
have the independent authority to amend this Agreement.
c. Except as a result of a resignation, death, disability, or
termination of employment of its then-current Account Executive,
the applicable party shall notify the other party in writing, on or
before ten (10) days prior to replacing its Account Executive, and
identify the individual proposed to be appointed. Such party shall
introduce the individual proposed to be appointed to the
appropriate management representatives of the other party, and
provide such other party information about the individual as
reasonably requested by such party. Each of the Account Executives
is required to devote time to his or her responsibilities under
this Section 6.1.
6.2 JOINT MANAGEMENT COMMITTEE.
a. Customer and PMSC shall each appoint an equal number of
representatives, but not to exceed 4 persons each, to a Joint
Management Committee (the "Committee") which will meet, from
time to time, but not less often than on a calendar quarter
basis, to among other things, (i) review and analyze the parties'
<PAGE>
performance of their respective obligations under this
Agreement, (ii) review recommendations and suggestions by
either party regarding the modification or enhancement of the
Services, (iii) use its best efforts to resolve any disputes or
disagreements or defaults pursuant to Section 9.1; (iv)
designate individuals to attempt to resolve any disputes or
disagreements in accordance with Section 9.1; (v) review,
analyze and recommend for approval to the appropriate Person(s)
any amendments or modifications to this Agreement; and (vi)
such other duties or responsibilities as are delegated from
time to time by Customer and PMSC to the Committee.
b. If a member of the Committee resigns from the Committee, dies
or leaves the employ of either Customer or PMSC, as applicable,
then that member's place on the Committee shall be deemed
vacant, and the party which appointed that member shall appoint
a replacement member to fill the vacancy within thirty (30)
days after creation of the vacancy.
7. CUSTOMER RESPONSIBILITIES
In addition to timely making all payments required by this Agreement during
the Term of this Agreement, Customer shall cooperate with PMSC to facilitate
performance of the Services by PMSC; such cooperation shall include without
limitation performance of the obligations described in Schedule D and
Customer's responsibilities in Schedule J.
8. SAFEGUARDING OF DATA, CONFIDENTIALITY
8.1 CUSTOMER DATA AND CUSTOMER-OWNED SOFTWAREE. Customer Data shall be
and remain the sole and exclusive property of Customer, and upon
Customer's written request, any tangible embodiments of Customer
data shall be promptly returned to Customer, or if Customer so
elects, erased from the data files maintained by PMSC or otherwise
destroyed. Subject to the understanding that PMSC shall be free to
use insurance data processing software, ideas, concepts,
techniques, methods, know-how, algorithms, materials and documents
that are a part of Customer-Owned Software in the event that
Customer discloses same to PMSC, Customer-Owned Software shall be
and remain the property of Customer, and upon Customer's written
request any copies of Customer Owned Software shall be promptly
returned to Customer or, if Customer so elects, erased by PMSC or
otherwise destroyed (however, it is expressly agreed that this
understanding shall not affect any PMSC or CYBERTEK Software
<PAGE>
regardless of any enhancements made after access to Customer-Owned
Software). The Customer Data shall not be utilized by PMSC for any
purpose other than that of rendering the Services as mutually
agreed to herein, nor shall the Customer Data, or any part thereof,
be transferred (unless in back-up or disaster recovery situations),
disclosed, sold, assigned, leased, licensed, encumbered or
otherwise exploited by or on behalf of PMSC, its employees or
agents.
8.2 PMSC-OWNED SOFTWARE. PMSC or CYBERTEK retains title to and
ownership of all PMSC-Owned Software used in connection with the
performance of the Services. All insurance data processing
software, ideas, concepts, techniques, methods, know-how,
algorithms, materials and documents, including but not limited to
flowcharts, record layouts, forms, logic, diagrams, printed
materials and computer program coding in any form and relating to
PMSC-Owned Software and processing techniques ("PMSC Information")
are, for the purposes of this Agreement, agreed by Customer to be
the confidential information and/or trade secrets of PMSC or
CYBERTEK.
Customer shall not make the PMSC Information or related materials
available for use by or for the benefit of any other Person whether
or not for consideration. Without limiting or reducing the
obligations of this paragraph, Customer agrees to treat PMSC
Information with the same care and precaution Customer affords to
its most confidential, valuable and secret information.
Customer agrees not to create from the PMSC-Owned Software or other
PMSC Information, by reverse engineering or otherwise, program
source code which performs the same function(s) as the PMSC-Owned
Software.
Customer agrees that all restrictions and covenants pertaining to
the protection and security of PMSC Information shall be applied by
Customer to Customer's vendors and any other Persons who through
their dealings with Customer might otherwise have access to PMSC
Information. Customer shall not disclose PMSC Information to any
such Persons if they do not have an acceptable Non-Disclosure
Agreement in force with PMSC.
PMSC Information shall not include any information or documentation
which Customer can demonstrate: (i) was in the public domain on or
prior to the date of this
<PAGE>
Agreement, (ii) was in the possession of Customer on or prior
to the date of this Agreement and was not acquired or obtained
from PMSC or CYBERTEK, (iii) became part of the public
domain, by publication or otherwise, not due to any
unauthorized act or omission on the part of Customer, (iv) is
supplied to Customer by a third party as a matter of right and not
in violation of any confidentiality agreement between such third
party and PMSC or CYBERTEK, or (v) was independently developed by
Customer.
Customer agrees that it will not, without PMSC's written
permission, (a) use for its own benefit any PMSC owned trade name,
trademark, trade device, service mark, symbol, or other
identification, or any abbreviation, contraction, or simulation
thereof, or (b) represent (directly or indirectly) that any product
or service of Customer or PMSC is a product or service of the other
party.
Customer recognizes and agrees that should it breach the provisions
contained herein relating to trade secrets and/or unauthorized
disclosure of PMSC Information, PMSC will have no adequate remedy
at law. In the event that PMSC can show that a breach of such
information has occurred or is likely to occur in the future,
Customer hereby consents to the entry of a temporary restraining
order and preliminary or temporary injunction without the
requirement of a bond or other financial instrument pending final
trial on the alleged breach of trade secrets and/or unauthorized
disclosure of PMSC Information. Nothing contained in this Section
8.2 or any other Section of this Agreement shall modify or amend
the provisions of the CYBERTEK Enterprise License Agreement.
8.3 CONFIDENTIALITY. Except as otherwise provided herein, Customer and
PMSC each acknowledge and agree that all information discovered,
observed or communicated to either Customer or PMSC by the other
party in connection with the negotiation, preparation, and
performance of this Agreement was and shall be received in
confidence, shall be used only for purposes of this Agreement, and
that disclosure of such confidential information could cause
irreparable injury. Accordingly, no such confidential information
(except that the parties hereto may disclose to third parties the
existence and general nature of this Agreement, but not the amounts
payable by Customer to PMSC) shall be disclosed by either of the
parties hereto, its agents or employees without the
<PAGE>
prior written consent of the other party, except (i) in
respect of validly issued judicial or administrative process, including
without limitation, pursuant to a subpoena or requests for documents;
provided that in the event that either party receives a subpoena,
request for documents, or other validly issued judicial or
administrative process requiring the disclosure of confidential
information of the other party, then such party shall promptly notify
such other party of the receipt of process and shall provide the other
party as much opportunity to respond to such process as possible while
still avoiding civil or criminal sanctions, (ii) as Customer and PMSC
agree in writing from time to time.
8.4 SURVIVAL OF OBLIGATIONS. The obligations of Sections 8.1, 8.2, and
8.3 shall survive the termination, rescission, cancellation, or
nonrenewal of this Agreement.
8.5 AUDITS. PMSC shall provide (i) the independent accounting firm
which audits Customer's annual financial statements, and (ii) such
Customer employees as Customer may from time to time designate in
writing, with reasonable access to the Data Center to audit
Customer's data and processing procedures. PMSC shall have the
right to require such auditors to execute confidentiality and
nondisclosure agreements as PMSC reasonably deems necessary or
appropriate. PMSC shall provide to such auditors any assistance
that they might reasonably require in connection with such audits.
8.6 DISASTER RECOVERY. Beginning on the Live Processing Date, PMSC
shall initiate data security and disaster recovery services as
described in Schedule E.
9. PERFORMANCE REVIEW AND TERMINATION
9.1 PERFORMANCE REVIEW AND DISPUTE RESOLUTION.
a. PMSC and Customer understand and agree that the performance of
duties by the parties pursuant to this Agreement will be
enhanced by the timely and open resolution of any disputes or
disagreements between such parties. Each party hereto agrees to
use its best efforts to cause any disputes or disagreements
between such parties to be considered, negotiated in good
faith, and resolved as soon as possible. Except as otherwise
provided in Section 9.3 or 9.4, if a dispute or disagreement
arises between the parties
<PAGE>
with respect to the interpretation of any provision of this
Agreement, the performance by either party of its obligations
under this Agreement, or a default as provided in Section 9.2,
then the Account Executives of each party shall promptly address
same.
b. In the event that any such dispute or disagreement between the
parties cannot in good faith be resolved to the satisfaction of
PMSC's and Customer's Account Executives within thirty (30)
days after either party has notified the other in writing of
the need to resolve the specific dispute or disagreement within
such thirty (30) day period, then the dispute or disagreement
shall be immediately referred in writing to the Committee.
Either person may refer the dispute or disagreement to the next
level without waiting until 30 days have expired if such person
believes in good faith that he or she can not reach agreement
with the other person. The Committee shall use its best efforts
in good faith to attempt to resolve such dispute, disagreement
or default, or to negotiate an appropriate modification or
amendment to this Agreement.
In the event that any such dispute or disagreement between the
parties cannot in good faith be resolved to the satisfaction of
the Committee within thirty (30) days after either party has
notified the other in writing of the need to resolve the
specific dispute or disagreement within such thirty (30) day
period, then the dispute or disagreement shall be immediately
referred in writing to the appropriate Vice Presidents of PMSC
and Customer for their consideration. The Committee may refer
the dispute or disagreement to the next level without waiting
until 30 days have expired if it determines in good faith that
it can not resolve the matter.
In the event that Customer's and PMSC's Vice Presidents cannot
resolve such dispute or disagreement to their mutual
satisfaction within ten (10) days after the latter person has
received written notice from his or her counterpart of the need
to resolve the specific dispute or disagreement within such ten
(10) day period, then the dispute or disagreement shall be
immediately referred in writing to the appropriate Executive
Vice Presidents of PMSC and Customer.
<PAGE>
In the event that Customer's and PMSC's Executive Vice
Presidents cannot resolve such dispute or disagreement to their
mutual satisfaction within ten (10) days after the latter
person has received written notice from his or her counterpart
of the need to resolve the specific dispute or disagreement
within such ten (10) day period, then the dispute or
disagreement shall be immediately referred in writing to the
Presidents of PMSC and Customer.
c. If any dispute or disagreement cannot be resolved under Section
9. l .b. above, then the parties agree to consider in good
faith settling the dispute by non-binding mediation pursuant to
the rules of the American Arbitration Association ("AAA"). The
mediator should be an expert in the computer software and data
processing industry mutually satisfactory to both parties. Such
mediation shall take place at a location to be chosen by mutual
agreement of the parties. In the event that the parties fail to
agree on a meeting site, the mediator shall make such decision.
Each party shall bear its own costs of mediation, but the
parties shall share the costs of the mediator.
d. Except as provided in Section 9.3 or 9.4, neither party shall
be permitted to exercise any remedies available to such party
under this Agreement until the earlier of (i) the date that
both parties conclude in good faith that an amicable resolution
of the dispute, disagreement or default through continued
negotiation does not appear likely, or (ii) thirty (30) days
following the date that the matter is unsuccessfully addressed
by the Committee.
9.2 TERMINATION FOR PMSC BREACH. If PMSC fails to perform any of its
covenants or obligations under this Agreement (other than as
expressly set forth in Section 9.4), and such failure is, or in the
aggregate such failures are, material and are not resolved pursuant
to Section 9.1, then Customer may provide written notice of its
intent to terminate this Agreement and if such default is not cured
within thirty (30) days from the date of written notice to PMSC,
the Customer may terminate this Agreement.
9.3 TERMINATION FOR NONPAYMENT OR OTHER CUSTOMER BREACH.
a. If Customer defaults in the payment of any amount due and
payable to PMSC in accordance with the terms of
<PAGE>
this Agreement, and Customer does not cure such default within the
shorter of (i) twenty (20) days after the default has been addressed
and resolved at a Committee meeting called for such purpose or (ii)
sixty (60) days after written notice of the default is given to it
by PMSC, then PMSC may thereafter immediately terminate this
Agreement. Notwithstanding the foregoing sentence, Customer
shall not be considered to have defaulted on payment of amounts
which in good faith Customer disputes pursuant to Section 3.4
above unless Customer fails to promptly pay the applicable
amounts, if any, which PMSC advises are properly due and
payable after it completes the review of Customer's dispute.
Upon termination of this Agreement pursuant to this Section 9.3
(a), PMSC shall have the option to immediately cease the
performance of any or all of its obligations under this
Agreement (except as otherwise provided in Section 9.7),
without any liability to Customer.
b. If Customer fails to perform any of its covenants or
obligations under this Agreement (other than as expressly set
forth in Section 9.3 (a) or 9.4), and such failure is, or in
the aggregate such failures are, material and are not resolved
pursuant to Section 9.1, then PMSC may provide written notice
of its intent to terminate this Agreement and if such default
is not cured within thirty (30) days from the date of written
notice to Customer, then PMSC may terminate this Agreement.
Upon termination of this Agreement pursuant to this Section
9.3(b), PMSC shall have the option to immediately cease the
performance of any or all of its obligations under this
Agreement (except as otherwise provided in Section 9.7),
without any liability to Customer.
c. If PMSC elects to terminate this Agreement pursuant to this
Section 9.3, then, in addition to such termination and subject
to the terms of this agreement, PMSC shall be entitled to any
and all other remedies provided by law or in equity for
Customer's failure to fulfill its obligations under this
Agreement.
9.4 TERMINATION FOR INSOLVENCY.
a. If either Customer or PMSC becomes or is declared insolvent or
bankrupt, then this Agreement shall be immediately terminated,
without the requirement of
<PAGE>
any notice to the insolvent or bankrupt party. A party shall be
deemed insolvent or bankrupt for purposes of this Section 9.4 in
the event that: (i) a case is commenced or a petition is filed
against a party under any applicable liquidation, conservatorship,
bankruptcy, moratorium, insolvency, reorganization or similar laws
for the relief of debtors from time to time in effect and
generally affecting the rights of creditors (a "Debtor Relief
Law"), and not dismissed within ninety (90) days after being
served on the party; or (ii) a party voluntarily seeks, consents
to, or acquiesces in the benefit or benefits of any provision of
any Debtor Relief Law; consents to the filing of any petition
against it under such Debtor Relief Law; makes an assignment for
the benefit of its creditors; admits in writing its inability to
pay its debts generally as they become due; or seeks, consents to,
or acquiesces in the appointment of a receiver, trustee, liquidator
or conservator for it or any part of its property.
b. If either party elects to terminate this Agreement pursuant to
this Section 9.4, then, in addition to such termination and
subject to the terms of this Agreement, the terminating party
shall be entitled to any and all other remedies provided by law
or in equity for the other party's failure to fulfill its
obligations under this Agreement.
9.5 TERMINATION FOR CONVENIENCE.
Schedule C sets forth the terms and conditions for a Customer
election to terminate all or a portion of PMSC's Services
hereunder.
9.6 OBLIGATIONS UPON EXPIRATION OR TERMINATION. Upon expiration or
termination of the Term of this Agreement:
a. PMSC shall deliver to Customer all copies of Customer's Data in
PMSC's possession (or, at Customer's discretion, erase any such
Customer Data in accordance with Section 8.1), Customer-Owned
Software (Schedule F), the mutually agreed upon Third Party
PMSC Software which is to be assigned to Customer (as
identified in Schedule G) and Third Party Customer Software
(Schedule H) to the extent permitted under the Third Party
Customer Software agreements. Section 8.1 shall apply and
Customer is not restricted in any way from using its own Customer
<PAGE>
Data or Customer-Owned Software. Notwithstanding the
obligation to return or destroy the above items, Customer
agrees that PMSC and/or CYBERTEK shall not be restricted in any
way in their use of any insurance data processing ideas,
concepts, methods, knowledge, techniques, know-how, algorithms,
materials or documents regardless how developed or learned.
b. Upon termination, PMSC shall sell to Customer and Customer
shall buy from PMSC the tape cartridges and other media
required for transfer of Customer's Data in an amount not to
exceed PMSC's cost. If Customer previously transferred tape
cartridges to PMSC, PMSC shall return Customer's Data using
Customer's tape cartridges first and then chargeable PMSC tape
cartridges.
c. Customer shall pay all amounts owing to PMSC including but not
limited to all amounts due pursuant to Sections 3.1, 3.3, 3.4
and 3.5 of this Agreement.
9.7 TRANSITION ASSISTANCE.
a. It is the intent of Customer and PMSC that at the expiration or
termination of the Term, regardless of the reason for any
termination, but subject to the provisions of this Section
9.7,PMSC will cooperate in good faith with Customer to provide
Customer with any assistance that Customer reasonably requests
to ensure the orderly transition of the Services to Customer or
its representatives or agents, including but not limited to
providing a reasonable amount of assistance, advice and
training to Persons hired by Customer to render services
comparable to the Services. Such transition assistance services
shall be provided during the Term of this Agreement and for a
period of up to six (6) months following the Termination Date,
unless otherwise mutually agreed by the parties.
Notwithstanding the foregoing, if PMSC has the right to
terminate and so terminates this Agreement pursuant to Section
9.3 or 9.4, then PMSC shall only be obligated to perform
transition assistance services from notice date up to
Termination Date and for a period not to exceed sixty (60) days
following the Termination Date.
b. If Customer requests that PMSC provide transition assistance
services pursuant to this Section 9.7 after the Termination
Date, then Customer shall pay
<PAGE>
PMSC for such transition assistance services each
month an amount equal to the sum of the following:
(i) PMSC's standard hourly billing rates for all personnel; plus
(ii) PMSC's standard Data Center resource rates for all data
processing services; plus
(iii) All reasonable out-of-pocket costs or expenses incurred by
PMSC in connection with providing such transition assistance
services.
c. If this Agreement is terminated by PMSC pursuant to Sections
9.3 or 9.4, then Customer shall pay to PMSC, on the first
Business Day of each month and as a condition to PMSC's
obligation to provide any transition assistance services to
Customer, an amount equal to PMSC's reasonable estimate of the
total amount to be payable to PMSC for such transition
assistance services pursuant to this Section 9.7 for that
month. Within fifteen (15) days after the end of each month in
which Customer has made an advance payment based on PMSC's
reasonable estimate, PMSC shall provide an invoice to Customer
showing the actual amount due for transition assistance
services provided during that month. Any credit due Customer
from PMSC or payment due PMSC from Customer shall be made or
paid, as applicable, within ten (10) Business Days following
the receipt of PMSC's invoice to Customer.
10. INDEMNIFICATION
10.1 INDEMNIFICATION BY CUSTOMER. Customer hereby agrees to indemnify
and hold PMSC, CYBERTEK and their officers, directors, employees
and subsidiaries harmless against, and will reimburse PMSC on
demand for, any payment, loss, cost or expense (including
reasonable attorney's fees and reasonable costs of investigation
incurred in defending against such payment, loss, cost or expense
or claim therefor) made or incurred by or asserted against PMSC or
CYBERTEK in respect of:
a. the infringement by Customer of the Business Property Rights of
any Person (provided that such infringement is not based on
PMSC-Owned Software or hardware provided by PMSC);
<PAGE>
b. the infringement by PMSC or CYBERTEK of the Business Property
Rights of any Person resulting from the use of any
Customer-Owned Software or Third Party Software licensed by
Customer in the performance of the Services prior to PMSC
having been notified in writing of such possible infringement
and afterwards for as long as it takes PMSC and Customer to
agree on an alternate understanding; and
c. claims by third parties, including, without limitation, any
customers, suppliers or creditors of Customer, which result
from the use by either Customer or such third parties of any
information, report or data generated by PMSC in performing the
Services.
10.2 CONDITIONS OF INDEMNIFICATION. The following procedures shall apply
with respect to any actual or potential claim, any written demand,
the commencement of any action, or the occurrence of any other
event which involves any matter or related series of matters (a
"Claim") against which PMSC IS indemnified by Customer.
a. Promptly after PMSC first receives sufficient notice of a Claim
(usually this is when written documents pertaining to the Claim
are received), or if such Claim does not involve a third party
Claim, promptly after PMSC first has actual knowledge of such
Claim, PMSC shall give notice to Customer of such Claim in
reasonable detail and stating the amount involved, if known,
together with copies of any such written documents.
b. If the Claim involves a third party Claim, then Customer shall
have the right, at its sole cost, expense and ultimate
liability regardless of the outcome, and through counsel of its
choice, to litigate, defend, settle or otherwise attempt to
resolve such Claim, except that in the event that PMSC
determines that Customer is not providing an adequate defense,
PMSC may also elect, at any time and at Customer's sole cost,
expense and ultimate liability, regardless of the outcome, and
through the counsel of its choice, to litigate, defend, settle
or otherwise attempt to resolve such Claim. PMSC shall not be
under any duty to litigate, defend, settle or otherwise attempt
to resolve a claim in order to avail itself of Customer's above
stated indemnification and hold harmless commitments. In any
event, Customer and PMSC shall fully cooperate with
<PAGE>
each other and their respective counsel in connection with
any such litigation, defense, settlement or other attempted
resolution. In defending or settling any such claim Customer
may elect to (i) obtain the right of continued use of the material
which is alleged to be infringing, if any, or (ii) replace or
modify such material, if any, so as to avoid such claim of
infringement and PMSC will cease using the material which was
replaced or modified as directed by Customer.
11. WARRANTY AND LIABILITY LIMITATIONS
11.1 WARRANTY
PMSC SHALL USE REASONABLE CARE IN PROCESSING CUSTOMER'S
TRANSACTIONS AND IN PERFORMING RELATED SERVICES AS SET FORTH IN
THIS AGREEMENT AND PMSC AGREES TO USE REASONABLE BUSINESS EFFORTS
TO REMEDY ANY DEFECTS IN PMSC'S SERVICES.
11.2 DISCLAIMER OF OTHER WARRANTIES
PMSC DOES NOT WARRANT THAT THE FUNCTIONS CONTAINED IN THE SOFTWARE
(WHETHER CUSTOMER-OWNED SOFTWARE, THIRD PARTY SOFTWARE OR
PMSC-OWNED SOFTWARE) TO BE USED BY PMSC IN PERFORMING THE SERVICES
WILL MEET CUSTOMER'S REQUIREMENTS, OR THAT THE OPERATION OF SUCH
SOFTWARE OR THE SERVICES TO BE PROVIDED BY PMSC WILL BE COMPLETELY
UNINTERRUPTED OR ERROR-FREE. The parties recognize and agree that
the provisions of this Section 11 in no way alter or amend the
warranty, maintenance or other provisions of the Enterprise License
Agreement dated contemporaneously herewith.
THE AMOUNT OF THE FEES PAID OR TO BE PAID BY CUSTOMER DOES NOT
INCLUDE ANY ASSUMPTION OF RISK BY PMSC FOR DEFECTS IN ANY SOFTWARE.
EXCEPT AS PROVIDED ABOVE IN SECTION 11.1, PMSC MAKES NO WARRANTIES
EXPRESS OR IMPLIED WITH RESPECT TO ALL SOFTWARE OR PMSC'S SERVICES,
OR AS TO THEIR QUALITY, PERFORMANCE, MERCHANTABILITY OR FITNESS FOR
ANY PARTICULAR PURPOSE.
11.3 EXCLUSIONS AND LIMITATIONS OF LIABILITY
PMSC SHALL NOT BE LIABLE FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL,
INCIDENTAL, OR PUNITIVE DAMAGES, OR LOST PROFITS, OR LOSS OF USE OR
INTERRUPTION OF BUSINESS, REGARDLESS OF THE FORM OF ACTION OR
THEORY OF LIABILITY (INCLUDING, WITHOUT LIMITATION, ACTIONS IN CONTRACT,
<PAGE>
WARRANTY, NEGLIGENCE, OR PRODUCTS LIABILITY), RESULTING
FROM ANY DEFECT IN OR USE OF, ANY SOFTWARE TO BE USED BY PMSC IN
PROVIDING THE SERVICES, OR FROM ANY ERROR OR DEFECT IN PMSC'S
PERFORMANCE OF THE SERVICES (EVEN IF PMSC HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES). PMSC SHALL NOT BE RESPONSIBLE FOR ANY
DAMAGES RELATED TO VERIFICATION OF CUSTOMER DATA PRIOR TO ITS
UTILIZATION THEREOF OR FOR EXAMINING THE INFORMATION PROVIDED UNDER
THIS AGREEMENT.
The above shall not apply to any liability PMSC may have to
Customer for bodily injury and damage to real property and tangible
personal property. IN ANY EVENT, PMSC'S LIABILITY UNDER THIS
AGREEMENT FOR ANY DAMAGES TO CUSTOMER, REGARDLESS OF THE FORM OF
ACTION OR THEORY OF LIABILITY (INCLUDING, WITHOUT LIMITATION,
ACTIONS IN CONTRACT, WARRANTY, NEGLIGENCE, OR PRODUCTS LIABILITY),
SHALL NOT EXCEED THE SUM OF THE PREVIOUS SIX MONTHS' MONTHLY
SERVICE CHARGES PAID TO PMSC BY CUSTOMER UNDER THIS AGREEMENT;
PROVIDED, HOWEVER, IF PMSC KNOWINGLY AND INTENTIONALLY ABANDONS
PROVIDING SERVICES HEREUNDER (FOR EXAMPLE BY COMPLETELY TERMINATING
CUSTOMER'S PROCESSING WITHOUT JUSTIFICATION AND WITHOUT COMPARABLE
ALTERNATIVE ARRANGEMENTS), THE ABOVE CAP OF SIX MONTHS' MONTHLY
SERVICE CHARGES SHALL BE INCREASED TO TWELVE MONTHS AND IF PMSC
KNOWINGLY AND INTENTIONALLY BREACHES THE PROVISIONS OF THE LAST
SENTENCE OF SECTION 8.1 ABOVE, THE ABOVE CAP OF SIX MONTHS' MONTHLY
SERVICE CHARGES SHALL BE INCREASED TO THE GREATER OF TWELVE MONTHS
OR THE CONSIDERATION PMSC RECEIVES FROM SUCH THIRD PARTY. THE
LIMITATIONS ABOVE APPLY REGARDLESS OF THE FORM OF ACTION, WHETHER
IN CONTRACT OR TORT.
11.4 CONTINUED PERFORMANCE. Except as otherwise provided in this
Agreement, both Customer and PMSC agree to continue the performance
of their respective obligations under this Agreement while any
dispute or agreement is being resolved, unless and until this
Agreement is terminated in accordance with its terms.
12. MISCELLANEOUS
12.1 BINDING NATURE AND ASSIGNMENT. This Agreement shall be binding on
and inure to the benefit of the parties and their respective
successors and assigns. Neither party may assign its rights or
obligations under this Agreement without the prior written consent
of the other party, which consent shall not be unreasonably
withheld or delayed; provided, however, PMSC may assign its rights
to receive payments to a third party without the
<PAGE>
prior written consent of Customer. Either party may assign its
rights in this Agreement without the permission of the other party
in the event of a merger, consolidation, or sale of substantially
all of the assets of the assigning party, to the surviving or
acquiring entity. Except as provided herein, any attempt to assign
or subcontract any obligations under this Agreement without the prior
written consent of the other party shall be null and void.
12.2 NOTICES. Any notice provided for in, or permitted under, this
Agreement shall be made in writing and shall be given or served by
(a) delivering the same in person or by prepaid messenger service
to the Person to be notified, (b) depositing the same in the mail,
postage prepaid, registered or certified with return receipt
requested, and addressed to the Person to be notified at the
address herein specified, or (c) telex, telegraph, telecopy, or
other written telecommunication medium. If notice is deposited in
the United States mail pursuant to clause (b) of this Section 12.2,
it will be effective from and after five (5) days following the
date that it is so deposited. Notice given in any other manner
shall be effective only when received by the Person to be notified.
Until written notice to the contrary is given, for the purpose of
notice, the addresses and telecopy numbers of the parties are as
follows:
In the case of PMSC: Policy Management Systems Corporation
One PMS Center
Legal Dept.
Blythewood, South Carolina 29016
Attention: General Counsel
Telecopy: (803)735-5560
With a copy to: CYBERTEK Corporation
7800 North Stemmons Freeway
Suite 800
Dallas, Texas 75247-4217
Attention: Chief Operating Officer
Telecopy: (214)637-4407
In the case
of Customer: Facilities Management Installation,
Inc.
500 N. Akard Street
Dallas, Texas 75201
Attention: General Counsel
and Customer Account Executive
<PAGE>
Telecopy: (214) 954-7008
12.3 RELATIONSHIP OF PARTIES. PMSC is acting as an independent contractor
in providing the Services under this Agreement, with the sole right
to supervise, manage, control, direct, procure, perform, or cause to
be performed, all necessary work, duties or obligations under this
Agreement. Except as otherwise expressly provided herein, PMSC does
not undertake by this Agreement or otherwise to perform any
obligations of Customer whether regulatory or contractual or to
assume any responsibility for the management of Customer's business.
12.4 DOWNTIME AND DELAYS. PMSC shall be excused from performing its
obligations under Section 2 to the extent of, and during the period
that, there exist (i) downtime or delays caused by failures in
computers or computer-related equipment maintained by Customer, (ii)
downtime or delays caused by any defects or changes in Customer Owned
Software or Third Party Software, (iii) downtime or delays resulting
from Customer's request to discontinue the use of any Third Party
Software, or (iv) downtime or delays caused by any failure in
electrical, lighting, air conditioning or telecommunication equipment
that is not due to the negligence, gross negligence, or willful
misconduct of PMSC. PMSC shall use its reasonable efforts to minimize
downtime and delays, and shall provide Customer with oral or written
notice in advance of any anticipated downtime. PMSC shall notify
Customer that an unanticipated interruption of PMSC's data processing
capability has occurred if downtime or delays last, or PMSC
reasonably expects them to last, four (4) hours or more. If down time
is anticipated (or has occurred) for 24 hours, then the parties shall
commence discussions regarding the proper time for the possible
implementation of the disaster recovery plan.
12.5 HEADINGS. The section headings and the table of contents used herein
are for convenience only and shall not be deemed to limit, increase
or modify the terms hereof, nor affect the interpretation of any of
the terms or conditions hereof.
12.6 APPROVALS AND SIMILAR ACTIONS. Where agreement, approval, acceptance,
consent or similar action is required from either party pursuant to
any provision of this Agreement, such action shall not be
unreasonably delayed or withheld.
<PAGE>
12.7 FORCE MAJEURE. Either party shall be excused from the performance of
any of its covenants or agreements hereunder and such party's
nonperformance shall not be a default or grounds for termination of
this Agreement for any period to the extent that such party is
prevented, hindered or delayed from performing any of its covenants
or agreements, in whole or in part, as a result of delays caused by
the other party, an act of God, war, civil disturbance, court order,
labor dispute or other cause beyond that party's control that is not
due to such party's negligence, gross negligence or willful
misconduct, including, without limitation, any denial of access to
PMSC's Data Center, or any failures in electrical power (excluding
transient fluctuations) or telecommunications equipment. The parties
hereby agree to provide prompt notice and to use their reasonable and
timely efforts to remedy the effects caused by the occurrence of the
event giving rise to a party's nonperformance of its covenants or
agreements under this Section 12.7.
12.8 OTHER PMSC PROCESSING. Customer acknowledges that PMSC, including its
employees who perform Services pursuant to this Agreement, performs
data processing functions and technical support services for third
parties that are comparable or similar to the Services provided to
Customer.
12.9 SEVERABILITY. If any provision in this Agreement is held to be
invalid, void, or unenforceable, the remaining provisions shall
nevertheless continue in full force without being impaired or
invalidated in any way.
12.10 ENTIRE AGREEMENT. There are no representations, warranties,
understandings or agreements relating to the subject matter hereof
which are not fully expressed in this Agreement.
12.11 GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the laws of the State of South Carolina.
12.12 MULTIPLE COUNTERPARTS. This Agreement has been executed in a number
of identical counterparts, each of which shall be deemed an original
for all purposes and all of which constitute, collectively, one
Agreement.
12.13 SURVIVAL. No termination of this Agreement, either with or without
cause, shall release either party from its
<PAGE>
obligations arising prior to such termination, nor from any obligation
which by the terms of this Agreement is intended to be performed after
such termination (including without limitation Sections 5.2, 8 and
9.7).
12.14 LANGUAGE. This Agreement is in the English language only, which
controls in all respects. Any translation of this Agreement into any
foreign language is of no force or effect in the interpretation of
this Agreement or in the determination of the intent of either party.
12.15 PREVAILING TERMS AND CONDITIONS. The terms and conditions of this
Agreement shall prevail regardless of any variance from any terms or
conditions of any order or other document submitted by Customer to
PMSC, except for such waiver or amendment of such terms and
conditions as are permitted by this Agreement.
12.16 NO THIRD PARTY RIGHTS. Unless otherwise expressly stated herein, this
Agreement is not for the benefit of any third party and shall not be
deemed to grant any right or remedy to any third party.
12.17 STATUTE OF LIMITATION. No action arising out of any claimed breach of
this Agreement or transactions under the Agreement may be brought by
either party more than two (2) years after the cause of action has
accrued, except that an action for nonpayment may be brought within
two (2) years of the date of last payment.
12.18 WAIVER AND AMENDMENT. No waiver, amendment, or modification of any
provision of this Agreement shall be effective unless in writing and
signed by an authorized officer of the Party against whom the waiver,
amendment, or modification is sought to be enforced. No failure or
delay by either Party in exercising any right, power, or remedy under
this Agreement shall operate as a waiver of the right, power, or
remedy. No waiver of any term, condition, or default of this
Agreement shall be construed as a waiver of any other term,
condition, or default.
12.19 GOVERNMENT APPROVALS. Each Party to this Agreement undertakes to
obtain from its respective government whatever authorization,
approvals, licenses, or permits are required in order for it to
perform all of its obligations under this Agreement.
<PAGE>
12.20 CUSTOMER AUTHORITY. Customer warrants that it is free as of the date
it signs the Agreement, or will be free as of the date of
commencement of the services to be provided hereunder, of any
contractual obligation that would prevent Customer from entering into
this Agreement and that PMSC's offer to provide such services in no
way caused or induced Customer to breach any previously existing
contractual obligations.
12.21 PMSC AUTHORITY. PMSC warrants that it is free as of the date it signs
the Agreement, or will be free as of the date of commencement of the
services to be provided hereunder, of any contractual obligation that
would prevent PMSC from entering into this Agreement and that
Customer's acceptance of PMSC's offer to provide any services under
this Agreement in no way caused or induced PMSC to breach any
previously existing contractual obligations.
12.22 ATTACHED AGREEMENT SCHEDULES. Schedules A through J are also part of
this Agreement, and shall be updated as necessary or appropriate
during the term of this Agreement. Updated Schedules shall be
presented for review by both Parties and shall become effective upon
written acceptance by both parties, such acceptance to not be
unreasonably withheld. Customer agrees that the Third Party Software
set forth in the Schedules constitutes all of the required Third
Party Software necessary to support Customer's processing as of the
Effective Date.
ENTIRE AGREEMENT
The Parties acknowledge that they have read this Agreement and that this
Agreement (including all schedules) constitutes the complete and final
agreement between them and supersedes all prior or contemporaneous oral or
written negotiations or communications with respect to its subject matter.
The persons executing this Agreement warrant that they have the right, power,
legal capacity, and appropriate authority to enter into this Agreement on
behalf of the Party for which they have signed below.
ACCEPTED BY: ACCEPTED BY:
PMSC Customer
<PAGE>
/S/ STEPHEN G. MORRISON /S/ DAVID B. LITTLE
----------------------------- -----------------------------
(AUTHORIZED SIGNATURE) (AUTHORIZED SIGNATURE)
STEPHEN G. MORRISON DAVID B. LITTLE
----------------------------- -----------------------------
(NAME) (NAME)
V.P. - INFORMATION
SECRETARY SYSTEMS
----------------------------- -----------------------------
(TITLE) (TITLE)
9/22/94 SEPTEMBER 20, 1994
----------------------------- -----------------------------
(EXECUTION DATE) (EXECUTION DATE)
Southwestern Life Corporation ("Parent Corp.") acknowledges that PMSC has
entered into the above Processing Services Agreement (the "Agreement") with
Customer at the request of Parent Corp. and based upon the assurance of
Parent Corp. that Customer will fully perform all of its obligations under
the above Agreement. Parent Corp. therefore agrees to (i) unconditionally
guaranty the obligations of Customer under the Agreement, including without
limitation the payment of all charges that come due under the Agreement, and
(ii) indemnify and hold PMSC harmless against any and all losses and damages
resulting solely from a failure of Customer to fully perform its obligations
in accordance with the terms of the Agreement. Parent Corp. shall have the
benefit of any defenses and limitations that Customer may have under the
Agreement. Parent Corp. hereby waives any and all notice requirements and
agrees that its guaranty, indemnity and hold harmless commitments shall
continue to apply to the Agreement if and as any amendments are made thereto.
The essence of this understanding is that Parent Corp. shall be responsible
under the Agreement to the same extent as Customer and that PMSC may demand
payment or performance by Parent Corp. any time such payment or performance
is not provided in a timely manner by Customer. Parent Corp. shall be
responsible for and shall reimburse PMSC for all costs and expenses incurred
by PMSC in connection with the enforcement of the above guaranty,
indemnification and hold harmless, including without limitation reasonable
attorneys fees.
<PAGE>
SOUTHWESTERN LIFE CORPORATION
/S/ ROBERT J. BRUCE
-----------------------------
(AUTHORIZED SIGNATURE)
ROBERT J. BRUCE
-----------------------------
(NAME)
SR. VICE PRESIDENT
-----------------------------
(TITLE)
SEPTEMBER 20, 1994
-----------------------------
(EXECUTION DATE)
<PAGE>
SCHEDULE A - SERVICE LEVEL SCHEDULE
PMSC will provide Data Center service on a mainframe facility basis. As a
computer facility, PMSC is responsible for providing and operating:
a. The mainframe computer(s) and directly attached peripheral devices
including, the central processing unit(s) (CPUs), direct access storage
devices (DASD), tape drives, printers located in the Data Center,
computer consoles, control units required for attaching the peripheral
devices to the CPUs, and other input/output devices located in the Data
Center and necessary for the operation of its computers.
b. The Data Center facility including power, air conditioning, power
back-up devices, and fire protection systems.
c. Two (2) T1 data communications lines and the associated modems at both
ends of the lines installed in the Data Center and running to
Customer's main office in Dallas, Texas. Customer acknowledges that
Customer is responsible for all other data communications lines
including, but not limited to, dial-up lines, leased telephone lines,
and all associated equipment required to network with Customer's other
offices and third parties as addressed herein.
d. Software as shown in Schedule G. PMSC will load such Software (if not
already loaded) and operate it in accordance with Data Center
procedures, however, Customer acknowledges that PMSC is not responsible
for problems with the Software. PMSC is responsible to notify the
applicable vendor if a problem develops and to work with such vendor in
resolving the problem.
PMSC will provide Data Center management and operating personnel to: operate
the computer; apply Systems Software maintenance updates provided to PMSC by
the Software licensors; staff the Help Desk to provide technical assistance to
Customer personnel in solving production problems related to computer
operations and Systems Software; provide technical consulting to assist
Customer's data processing personnel in the areas of interfacing applications
Software to the Systems Software, setting up Job Control parameters,
processing schedules, production control, such as moves/copies to production
libraries; and, maintain security control parameters relating to the mainframe
computer(s), data controlled by mainframe Software, and the mainframe
Software.
<PAGE>
In providing these Data Center services, PMSC will provide the following level
of service. All times are Eastern Daylight or Eastern Standard Times.
1. ONLINE SYSTEM SCHEDULES
Online processing service will be made available from 7:00 a.m. until
7:00 p.m. Eastern time, Monday through Friday, except for those
official holidays during which Customer's personnel do not normally
report to work. Weekend online up-time should be requested by no later
than 9:30 a.m. on the Thursday prior to the requested date and be
approved by PMSC. However, PMSC will attempt to accommodate last minute
requests because of extenuating circumstances beyond the control of
Customer. The parties agree that should Customer add a Customer Client
(as defined in Schedule B) in a time zone different from Dallas, the
parties will work together to adjust in a reasonable manner the times
of service.
2. ONLINE AVAILABILITY OBJECTIVE
All production online systems will be available no less than 97.0% of
the CPU Prime Time (as defined in Schedule C) scheduled hours
(determined on an annual basis). Outages caused by application Software
or telecommunications providers are not included.
3. RESPONSE TIME
All online production systems existent as of the Effective Date of this
Agreement will have 3 seconds or less internal response time (excludes
communications time) for 95% of all PMSC measured transactions
(determined on an annual average basis). Online production systems
added after the Effective Date will have mutually agreed to response
times. TSO internal response time (excludes communications times) will
be 3 seconds or less for 95% of all PMSC measured transactions
(determined on an annual average basis).
4. DISASTER RECOVERY
There will be no less than 1 disaster recovery test per year and PMSC
shall provide Customer at least 60 days written notice. PMSC's
objective shall be to have online service to a majority of users
available within 72 hours of a declared disaster and the availability
of off-site back-up files. Customer acknowledges that Customer is
responsible for determining and publishing a file retention plan. PMSC
will manage the off-site storage process.
<PAGE>
5. FILE BACK-UPS
All Systems Software, Application Software, and critical Customer data
DASD volumes, as identified by Customer, will be copied to tape and
sent off-site on a weekly basis. A three cycle rotation will be
maintained. Two cycles will be off-site at all times. Weekly pick up
will occur by 10:00 a.m. every Monday. Daily Customer back-ups, as
defined by Customer, will be sent off-site by 10:00 a.m. and the
previous Customer backups will be returned from the off-site location.
6. DATA CENTER AVAILABILITY
The Data Center will be staffed 24 hours a day, 365 days a year, except,
subject to review with Customer, for a limited period of time on Christmas
day.
7. NON-PRODUCTION BATCH PROCESSING
The computer facility will be available for batch processing 24 hours a
day, 6 days a week (Sunday availability by advance request and approval)
except for required scheduled preventative maintenance, hardware and
Software upgrades, and emergency changes. Batch processing initiation is
defined as the elapsed time from job submission to the start of job
execution. SMF data will be the source for this measurement. The objectives
for test batch processing initiation, stated as target timeframes to be
achieved 95% of the time, are:
<TABLE>
<CAPTION>
DESCRIPTION OBJECTIVE
--------------------------------- ----------------------------------
<S> <C>
No tape 10 minutes
1 tape drive 20 minutes
2 to 3 concurrent tape drives 2 hours
4 to 5 concurrent tape drives 6 a.m. the following morning
</TABLE>
8. PRODUCTION BATCH PROCESSING
All production daily batch processing will be executed according to the
schedules jointly established by Customer and PMSC. The objective of
such schedules shall be to provide for electronic availability by 3:00
a.m. Eastern Time the following morning of all printable production
reports so that Customer may print the reports for distribution.
9. SERVICE REQUEST PROCESS
PMSC will receive all service requests from the Customer in writing.
Requests for services will be handled based on
<PAGE>
impact and priority, as reasonably determined by PMSC. Monthly reports
by type of request or problem will be made available for review and
action by the Customer Account Executive and the PMSC Account Executive.
10. HELP DESK
A staffed Help Desk will be available Monday through Saturday (except
PMSC company holidays) from 5:00 a.m. until 10:00 p.m. and will provide
first level support for Data Center technical problems and procedural
issues. During all other times, first level support is available on an
on-call basis.
11. OTHER SITES
The parties may mutually agree to add additional sites pursuant to
terms and conditions defined in an Addendum to the Agreement.
12. PERSONNEL
PMSC will provide personnel with reasonable levels of skills to perform
the required tasks and will train and monitor such personnel to see
that they develop improved skill sets commensurate with their
responsibility.
13. IMPROVEMENTS
PMSC agrees to use reasonable efforts throughout the term of this
Agreement to improve the response time and other performance monitoring
criteria, however, Customer acknowledges that if PMSC is conforming to
the committed response time and other criteria levels, reasonable
efforts may be limited to personnel efforts to further tune the
existing Data Center hardware and software configuration and may not
involve any upgrading of hardware or software other than that which
PMSC elects to in its sole discretion.
<PAGE>
SCHEDULE B - CUSTOMER USE
Customer has the right to process data using PMSC's data processing services
for its own use and that of its Authorized Companies as defined in the
CYBERTEK Enterprise License Agreement (the "ELA") and its Customer Clients as
defined in Addendum No. 1 to the ELA, both dated contemporaneously herewith,
subject to the terms and conditions of this Agreement, the payment of usage
fees described in Section C of this Agreement, and the following additional
conditions:
1. Customer agrees that it will require all (i) agent-owned reinsurance
companies ("AORC") and (ii) Customer Clients to execute a PMSC
Nondisclosure Agreement (attached as part of this Schedule) prior to
processing their business under this Agreement.
2. A company ceases to be an Customer Client upon cancellation of the
data processing and full administration services provided by
Customer. In that event, former Customer Clients have the option to
license PMSC-Owned Software and continue receiving data processing
services directly from PMSC at PMSC's then current prices.
3. PMSC acknowledges that Customer Clients need not be located at the
Dallas site, however, Customer Clients shall access PMSC's data
processing services via the Dallas site.
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
COLUMBIA, SOUTH CAROLINA
N O N - D I S C L O S U R E A G R E E M E N T
POLICY MANAGEMENT SYSTEMS CORPORATION (hereinafter referred to as "PMSC") by
its acceptance of this Agreement by signature grants to ______________
(hereinafter referred to as "PARTY"), having its principal place of business at
_________________________________ and PARTY accepts, under all of the terms
and conditions of this Agreement, disclosure of certain PMSC software systems
(hereinafter referred to as "SYSTEM(S)") licensed by FACILITIES MANAGEMENT
INSTALLATIONS INC. ("Customer"). Included in references to PMSC herein shall
be PMSC's subsidiary, CYBERTEK Corporation, and its software systems shall be
included in the term SYSTEM(S) and be covered by this Agreement to the same
extent as if PMSC were the direct owner of such systems. Customer may disclose
SYSTEM(S) to PARTY solely in connection with PARTY being a Customer Client (as
defined in the Enterprise License Agreement) of Customer. PARTY agrees that
its use of and access to SYSTEM(S) shall be strictly limited to purposes
consistent with its status as a Customer Client and only for so long as such
status is maintained.
PARTY acknowledges that SYSTEM(S), and the documentation disclosed, are
commercially valuable proprietary products of PMSC, the design and development
of which have involved the expenditure of substantial amounts of money and the
use of skilled development experts over a long period of time. PARTY
acknowledges that the SYSTEM(S) (including but not limited to the design,
programming techniques, flow charts and source code) and the documentation
thereto are CONFIDENTIAL INFORMATION AND TRADE SECRETS, disclosed to PARTY on
a confidential basis under this Agreement and only as expressly permitted by
the terms and conditions of this Agreement stated herein. Under no
circumstances shall the information obtained pursuant to this Agreement be
used for any purpose outside the terms established by this Agreement.
PARTY, its officers, directors and employees shall protect SYSTEM(S),
documentation and all information pertaining thereto, whether written or oral,
as the CONFIDENTIAL INFORMATION AND TRADE SECRET PROPERTY of PMSC.
Neither SYSTEM(S) nor any documentation related thereto may be disclosed to
any party, directly or indirectly, other than Customer or copied, reprinted,
duplicated, or re-created in whole
<PAGE>
or in part, alone or in combination with any other data processing system,
without the prior express written consent of PMSC.
PARTY shall take all steps necessary, by instruction, agreement or otherwise,
with respect to PARTY'S employees permitted access to SYSTEM(S) or
documentation to comply fully with PARTY'S obligations hereunder with respect
to disclosure, use, copying, protection and security of SYSTEM(S) products and
documentation.
PARTY agrees not to use the SYSTEM(S) or any documentation related thereto for
any purpose except as expressly provided by the terms of this Agreement.
PARTY acknowledges that SYSTEM(S) and documentation are the exclusive property
of PMSC and that PARTY shall return to PMSC SYSTEM(S) and documentation and
all materials given to PARTY pursuant to this Agreement on earlier of PMSC'S
demand or upon the occurrence of one of the following events: PARTY violates
the terms of this Agreement, PARTY ceases to be a Customer Client or
Customer's license to use the SYSTEM(S) terminates. The terms and conditions
of this Agreement as to the protection, security and non-disclosure of
SYSTEM(S) shall remain in full force and effect thereafter. Under no
circumstances shall PARTY retain CONFIDENTIAL INFORMATION and TRADE SECRETS.
PARTY shall not disclose the existence of this Agreement to any third party
without PMSC's prior written consent and PARTY will not represent to any third
party that PARTY has any special expertise with SYSTEM(S).
This Agreement shall be interpreted and construed under the laws of the State
of South Carolina. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and lawful
assigns. No amendment to this Agreement shall be binding upon the parties
unless it is in writing and is executed by both parties hereto.
IN WITNESS WHEREOF, the parties have caused their signatures to be hereto
affixed.
ACCEPTED BY: SUBMITTED BY:
POLICY MANAGEMENT SYSTEMS
CORPORATION ------------------------------
<PAGE>
BY: BY:
----------------------------- -----------------------------
(Authorized Signature) (Authorized Signature)
Van E. Edwards, III
----------------------------- -----------------------------
(Name) (Name)
Vice President
----------------------------- -----------------------------
(Title) (Title)
----------------------------- -----------------------------
(Date Accepted) (Date Submitted)
Southwestern Life Corporation ("Customer Parent") acknowledges that PMSC has
entered into this Non-Disclosure Agreement with PARTY upon the request of
Customer and the assurance that PMSC's CONFIDENTIAL INFORMATION AND TRADE
SECRETS will be adequately protected. Customer Parent therefore agrees to (i)
obligate Customer to monitor the use of such CONFIDENTIAL INFORMATION AND
TRADE SECRETS by PARTY and (ii) indemnify and hold PMSC harmless for any and
all damages resulting from PARTY's violation of the terms of this Agreement.
SOUTHWESTERN LIFE CORPORATION
BY:
-----------------------------
(Authorized Signature)
-----------------------------
(Name)
-----------------------------
(Title)
-----------------------------
(Date Executed)
<PAGE>
SCHEDULE C - MONTHLY SERVICE CHARGE
MONTHLY PROCESSING CHARGE: During the term of this Agreement, Customer shall
pay PMSC a Monthly Processing Charge based on resource utilization and the
table of charges set forth below:
<TABLE>
<CAPTION>
Resource Rate ($) Per Unit
------------------- -------- -----------------
<S> <C> <C>
MVS CPU - Priority 55.60 minute*
MVS CPU - Prime 11.12 minute*
MVS CPU - Other 5.56 minute*
TSO Connect .131 hour
Tape Mount .32 each
Tape EXCP .0106 thousand
Tape Storage .0159 each per month
Tape Removed 3.93 each
Tape Returned 2.78 each
DASD EXCP .028 thousand
DASD 171.71 gigabyte per month
Remote Page Print .0004 image
Remote Print .007 thousand lines
Remote Microfiche .007 thousand lines
Remote Microfilm .007 thousand lines
</TABLE>
"MVS CPU - Priority" is a job status that involves a single class initiator -
these jobs are immediately initiated and they have access to and control over
all necessary system resources until completed.
"MVS CPU - Prime" Time is 0700 - 1800, PMSC Business days, Monday - Friday,
Eastern time
*CPU Usage for IBM - MVS mainframe: Actual CPU minutes shall be multiplied by
a factor which will be designed to convert the CPU minutes of processing time
on PMSC's initial MVS mainframe to an equivalent number of CPU minutes of
processing time on an IBM model 9021 -982 mainframe. This calculated number of
CPU minutes shall then be multiplied by the above per CPU minute rates to
figure the monthly CPU minute charges. In the event that a different or
upgraded mainframe with different capabilities is utilized, the time
adjustment factor applicable for such usage shall be changed so that the
resulting charges for processing on such mainframe would be reasonably
equivalent to the charges which would have resulted from the use of PMSC's
initial MVS mainframe.
<PAGE>
For example, if the CPU were replaced with one twice as fast, the time
adjustment factor would be doubled to ensure that the result is a cost
equivalent to that which would be paid if the initial CPU had been utilized.
ANNUAL MINIMUM PROCESSING CHARGES: Notwithstanding the above, Customer
acknowledges that the Annual Minimum Processing Charges set forth below shall
be required if Customer's actual Monthly Processing Charges do not exceed the
figures listed below. If any additional payment amount is required to achieve
the Annual Minimum Processing Charges, PMSC shall add such amount to
Customer's invoice for the 12th, 24th, etc. monthly invoices.
ANNUAL MINIMUM PROCESSING CHARGES
<TABLE>
<S> <C> <C>
First 12 calendar months $2,100,000
Second 12 calendar months 2,100,000
Third 12 calendar months 1,778,000
Fourth 12 calendar months 1,778,000 or average of prior 12
months actual usage,
whichever is less
Fifth 12 calendar months 1,778,000 or average of prior 12
months actual usage,
whichever is less
Sixth 12 calendar months 1,778,000 or average of prior 12
months actual usage,
whichever is less
</TABLE>
VOLUME DISCOUNT: PMSC hereby agrees to discount Customer's MVS CPU/minute rate
by the following percentages for any minutes of processing time that fall into
the ranges set forth below in any of the 12 full calendar month periods that
commence with Live Processing Date:
PRIME TIME MVS CPU MINUTES IN A 12 MONTH PERIOD
<TABLE>
<S> <C>
125,001 through 160,000 10%
160,001 through 200,000 15%
200,001 and above 20%
OTHER MVS CPU MINUTES IN A 12 MONTH PERIOD
170,001 through 225,000 10%
225,001 through 275,000 15%
275,001 and above 20%
</TABLE>
Priority MVS CPU minutes shall not be discounted and shall not be
counted in either Prime Time or Other Minutes.
<PAGE>
MISCELLANEOUS: Except for the two (2) T1 lines from Columbia to Dallas and the
associated multiplexing equipment, which consists of 4 AT&T 731 MUX's,
Customer shall reimburse PMSC for all other data communications charges
incurred by PMSC, including charges in the Start-Up Period. Additionally,
while PMSC will be responsible for Third-Party Software maintenance charges
(except as specified below in the situation of an early termination), Customer
shall be responsible for any separate Third Party Software license fees or
charges associated with Customer elected version or CPU upgrades (this shall
not apply to CPU upgrade fees if PMSC unilaterally upgrades its CPU). Customer
also agrees to pay PMSC at PMSC's then current rates for any local printing at
the Data Center.
EARLY TERMINATION AT CUSTOMER'S ELECTION
1. PALICO. If Customer elects to terminate processing the business of
Philadelphia American Life Insurance Company ("PALICO") as of the
periods listed below after the Live Processing Date, Customer agrees to
give PMSC six (6) months prior written notice and to pay PMSC the
indicated early termination amounts set forth below with said notice. If
Customer elects for a termination to be effective between the 24th and
36th months, 36th and 48th months, etc., Customer shall pay a prorated
termination charge.
<TABLE>
<S> <C>
prior to the end of the 24th month $721,000
as of the end of the 36th month 516,000
as of the end of the 48th month 359,000
as of the end of the 60th month 180,000
as of the end of the 72nd month 0
</TABLE>
2. LINCOLN PLAZA. If Customer elects to terminate processing the business
of itself and all Authorized Companies other than PALICO ("Lincoln
Plaza) during the periods listed below after the Live Processing Date,
Customer agrees to give PMSC six (6) months prior written notice and to
pay PMSC the indicated early termination amounts set forth below with
such notice. Customer agrees that it shall process all of the data of
Lincoln Plaza with PMSC for at least a full 48 month period after the
Live Processing Date. If Customer elects for a termination to be
effective between the 48th and 60th months or 60th and 72nd months,
Customer shall pay a prorated termination charge. Customer agrees that
in the event Lincoln Plaza business is terminated under this subsection,
PALICO business must have already been terminated or it must terminate
at the same time as Lincoln Plaza business. Customer acknowledges and
agrees that if it terminates both PALICO and Lincoln Plaza, Customer
shall pay the applicable termination charges set forth in subsection 1
<PAGE>
above and the termination charges set forth below in this subsection.
<TABLE>
<S> <C>
as of the end of the 48th month $1,078,000
as of the end of the 60th month 541,000
</TABLE>
3. Customer agrees that to the extent that an early termination described
above is effective between the beginning and end dates for maintenance
of one or more Third-Party Software systems which are to be transferred
to Customer after such termination, Customer shall reimburse PMSC for a
prorata share of the relevant maintenance charge based on the remainder
of the maintenance period after the termination date.
4. Customer may avoid the above early termination charge set forth in
Section 1 above if during the following periods Customer's data
processing business with PMSC (expressed as a total annual dollar
figure) equals or exceeds the figures set forth below:
<TABLE>
<S> <C>
first 12 months $2,963,535
second 12 months 2,963,535
third 12 months 2,100,000
</TABLE>
In the event that PALICO is sold to a new owner that is willing to enter
into agreements with PMSC that are similar with these that Customer is
entering into, PMSC agrees that such continuing PALICO business
(measured in terms of revenue to PMSC) shall count toward the above
numbers notwithstanding the sale. Additionally, the same will be true if
the PALICO business is retained and the Lincoln Plaza business is sold
and its new owner will enter into such similar agreements. For example,
if PALICO is sold (and Customer is therefore deemed to have made the
election set forth in 1. above) and the purchasing party agrees to enter
into agreements with PMSC that are similar to the Enterprise License
Agreement and the Agreement (no guarantee that the pricing will be
exactly the same), then the early termination charge set forth in 1.
above may be avoided if the above minimum annual data processing revenue
amounts are met or exceeded by the combination of revenues under this
Agreement and the purchaser's Processing Services Agreement.
SMF DATA: In recognition of the role Customer's SMF data has played in PMSC's
pricing set forth above, Customer hereby represents and warrants that the SMF
data provided to PMSC was complete and accurate. Customer agrees that if
incomplete or erroneous data was provided, inadvertently or otherwise, and PMSC
<PAGE>
relied on same to its detriment in setting the above pricing, Customer
agrees to resolve such matter with PMSC in good faith.
<PAGE>
SCHEDULE D - CUSTOMER RESPONSIBILITIES
Customer shall:
a. At all times, be responsible for control over its business.
Customer agrees to validate the accuracy of both input and output
data.
Customer will provide complete and accurate source data in a
manner and format as may be mutually agreed upon by Customer and
PMSC. In this regard, Customer represents and warrants that its
current manner and format have been satisfactory for the
performance of the data processing functions and technical support
services prior to the date hereof.
Customer agrees to be responsible for the accuracy and quality of
data entered into the system through terminals and for the
accuracy and quality of data entered onto input coding sheet
forms, or the equivalent, for batch processing.
Customer agrees to balance data input to system controls or to
other controls as mutually agreed to and to immediately notify
PMSC of any discrepancy. Customer further agrees to work with PMSC
to determine the cause of any such discrepancy and to help
determine the appropriate course for correcting the discrepancy.
Customer will furnish data, balanced to controls, to PMSC at times
mutually agreed to or at other times as mutually agreed to in
advance. Data furnished to PMSC later than the times mutually
agreed upon will not be included in the processing for that day's
scheduled processing, but will be scheduled for processing in the
following cycle. Unless otherwise agreed, input data supplied by
Customer will be processed to the extent it is in balance with the
edit programs at the times mutually agreed upon.
Customer will monitor external controls to ensure that data was
properly processed and that reports and information provided by
PMSC to Customer and to Customer's agents, policy owners, other
clients, and interested parties are accurate, correct and in
balance to controls before such information and reports are
released from Customer's control.
<PAGE>
b. Cooperate with PMSC by, among other things, making available, as
reasonably requested by PMSC, management decisions, information,
approvals, and acceptances in order that PMSC may render the
Services as contemplated herein.
c. Promptly notify PMSC of any problems with on-line availability at
any of the end user locations.
d. Make available and maintain in good working order such of
Customer's owned or leased data processing assets as are
reasonably necessary for PMSC to perform the Services, including
remote modems associated with dial-up communication lines and
remote control units and attached user devices, including, without
limitation, printers, terminals, personal computers, and local
area networks at Customer's facilities.
e. Make available and/or develop all operations-related documentation
reasonably deemed necessary by PMSC to operate Customer-Owned
Software and Third Party Customer Software, including, without
limitation, operations manuals, user guides, specifications,
backup procedures, recovery guidelines, and restart guidelines.
f. Maintain responsibility (financial or otherwise) for (i) acquiring
all consents, licenses or sublicenses necessary for PMSC to use
Third Party Customer Software in connection with rendering the
Services, and (ii) all Third Party Customer Software maintenance.
Customer will be responsible for all systems and programming
support related to application programming, including, without
limitation, the design, development, programming, testing,
maintenance, modification, initial installation with related
initial job control (JCL), and installation of maintenance updates
unless contracted with PMSC under a separate agreement.
g. Provide and maintain all hardware and Software associated with
personal computers and local area networks.
h. Provide temporary assignment to PMSC to process all Customer-Owned
Software (Schedule F) in conjunction with Services. Ensure that
any Customer-Owned Software or other Software provided by Customer
to PMSC complies with all reasonable operational standards and
guidelines established from time to time by PMSC.
<PAGE>
i. Cooperate with PMSC during disaster recovery testing and in
establishing procedures to provide for disaster recovery. Customer
agrees to be responsible for determining and publishing a file
retention plan for existing and new applications added during the
Term of this Agreement.
<PAGE>
SCHEDULE E - DISASTER RECOVERY SERVICES
DATA SECURITY
PMSC will provide for back-up and off-site storage of mainframe data files
based on Customer's file retention plan. Currently PMSC utilizes its own
facilities and the services of an off-premises storage facility for all backup
requirements. As a first level, non-critical storage location, a private room
is maintained to house tapes, documentation, and emergency equipment needs.
The room is equipped with fire protection, secured access, and is directly
linked to fire and police departments. Such storage room is in PMSC's separate
corporate headquarters building adjacent to PMSC's Data Center. The off-site
storage facility is utilized for critical back-up requirements and is located
apart from PMSC's premises.
All DASD volumes will be copied to tape and sent off-site on a weekly basis.
Three cycle rotations will be maintained. Two cycles will be off-site at all
times. Incremental back-ups will be sent off-site daily and the previous
incremental files returned from the off-site location.
Customer is responsible for determining and publishing a file retention plan
for PMSC to use in managing the off-site storage process.
BACKUP AND RECOVERY PROCEDURES
The purpose of backup and recovery procedures is to permit file recovery in
the event of an unforeseen disaster which would destroy normal processing
files or the Data Center.
PMSC shall retain the generations of files necessary to rerun the major
production application systems. PMSC shall in accordance with Customer's file
retention plan back up all on-line system files in such a manner that Customer
shall not have to reenter more than one day's processing into the system in
the event of system failure.
DISASTER RECOVERY PLAN
PMSC has a reasonable disaster recovery plan that provides for a recovery site
and testing of the execution of the plan. In the event of a disaster, PMSC
WILL provide disaster recovery services as defined in PMSC's disaster recovery
plan. PMSC's disaster recovery plan is subject to change from time to time as
PMSC deems necessary.
<PAGE>
The disaster recovery plan, as maintained by PMSC and audited from time to
time by PMSC's independent auditors, was created and implemented in 1993.
PMSC's independent auditors' opinion of the plan's compliance with FAS 70
shall be disclosed to Customer's independent auditors upon its availability
(the first such opinion is currently anticipated by year-end 1994). The plan
document contains the responsibilities, activities, and logistics for the
recovery of PMSC's data processing operations on the occurrence of a major
disaster or critical emergency condition. The document is divided into various
sections and subsections, each of which relate specific responsibilities,
activities, procedures, and documentation to personnel groups involved in the
administration, notification, processing, support and/or facilities
restoration phases of the recovery operation.
DISASTER RECOVERY TESTING
Disaster recovery procedures are tested at least once annually at the
contracted recovery facility. This test is scheduled with at least 60 days
prior written notice and includes reasonable Customer participation in order
to update and verify procedures, reduce specific personnel dependency, provide
cross training, reduce system and data restore time, test network connections,
and verify data integrity. Customer may waive participation in a test by
written notice, however, if an actual disaster occurs prior to a subsequent
test in which Customer does participate, PMSC shall not be responsible for
delays that might reasonably have been avoided if Customer had practiced
disaster recovery with PMSC. Prior testing has provided for online
availability within 24 hours from initiation. Planning sessions begin
approximately 6 weeks before a scheduled test to assure test objectives are
defined, documented, and agreed upon. Any other tests are unscheduled and
unannounced and do not normally include customers, unless specifically
requested by Customer. All tests include the participation of required vendors
to assure their emergency procedures can be validated.
DISASTER RECOVERY FACILITIES
PMSC is contracted with a major disaster recovery service for the availability
of facilities for the immediate recovery of data processing capability.
Contract provisions provide for immediate occupancy in a hotsite facility and
long-term occupancy, as needed, in a coldsite facility.
<PAGE>
SCHEDULE F - CUSTOMER-OWNED SOFTWARE
Customer developed and owned Software that Customer shall provide to PMSC with
any reasonable instructions necessary for processing of same. Customer shall
retain a list of all Customer-Owned Software and shall make it available to
PMSC upon reasonable request. Customer is responsible for Customer-Owned
Software infringement to the same extent as CYBERTEK is responsible for its
Software licensed under the Enterprise License Agreement. Customer-Owned
Software does not include any PMSC Information and Customer-Owned Software
must have been developed independent of any PMSC Information.
<PAGE>
SCHEDULE G1 - THIRD PARTY PMSC SOFTWARE
PMSC licensed Software which PMSC may utilize for Customer without changes in
PMSC's license agreements.
<TABLE>
<CAPTION>
VENDOR PRODUCT
------ -------
<S> <C>
CANDLE Omegamon
CA CA-1
CA-7
CA-ll
Easytrieve Plus
ISPF option (included in latest
Easytrieve Plus)
Optimizer
Panvalet
Panexec
DSSI Docutext/Jobscan
Landmark Eyewitness (stabilized-no new maintenance)
LRS VPS
SAS Base SAS
SEA PDSFAST
SAVRS
STERLING DYL280
PHASELINEAR/PL SORT SYNCSORT
IBM All products in PMSC Data Center as of the
Effective Date of the Agreement
</TABLE>
<PAGE>
SCHEDULE G2 - THIRD PARTY PMSC SOFTWARE
Software which Customer has agreed is functionally equivalent to other
Software Customer is currently using.
<TABLE>
<CAPTION>
Old Customer Software PMSC Replacement Software G1 or G4
--------------------- ------------------------- --------
<S> <C> <C>
ALTARE/JCLPREP DSSI Docutext/Jobscan G1
CA/ACF2 RACF G1
CA/ACF2 CICS RACF (selected functions) G1
CA/INTERTEST XPEDITER G4
COMPUWARE/RADAR M-4 DUMPMASTER G1
STERLING/DMS OS HSM AND SMS FROM IBM G1
STERLING/EASINET Netview like functions G1
STERLING/NETMASTER CANDLE CL/Supersession G1
</TABLE>
<PAGE>
SCHEDULE G3 - THIRD PARTY PMSC SOFTWARE
Software to be acquired by PMSC for use by Customer. PMSC will attempt to
negotiate reasonable transfer rights so that PMSC may assign the licenses to
these Software products to Customer, if and when Customer ceases to be a PMSC
processing customer.
<TABLE>
<CAPTION>
VENDOR PRODUCT
------ -------
<S> <C>
BMC IMS SUPEROPT.
CA OMNILINK
TELON/OS
TELON/COBOL
TELON/CICS
TELON/TSO Option
COMPUWARE ABEND-AID MVS
ABEND-AID SPF
FILE-AID XE
FILE-AID SPF
FILE-AID IMS
FILE-AID BATCH
LEGENT/GOAL RMO
EXPRESS DELIVERY
NAPERSOFT NAPERWORD
NAPERWORD/MERGE
NAPERWORD/MERGE/BATCH
SAS SAS GRAPH
SAS SAS STAT
SAS SAS TOOLKIT
SERENA PDSE
STERLING VAM DS
VAM GEN
VAM VSAM
NETMAIL
TSI KEYMASTER
</TABLE>
<PAGE>
SCHEDULE G4 - THIRD PARTY PMSC SOFTWARE
PMSC licensed Software which PMSC shall upgrade so that PMSC may process
Customer as an additional PMSC customer.
<TABLE>
<CAPTION>
VENDOR PRODUCT
------ -------
<S> <C>
COMPUWARE XPEDITER TSO
COMPUWARE XPEDITER CICS
</TABLE>
<PAGE>
SCHEDULE H - THIRD PARTY CUSTOMER SOFTWARE
<TABLE>
<CAPTION>
VENDOR PRODUCT
------ -------
<S> <C>
A1 Lee Assoc MAGEC
Computer Associates RAMIS
Electronic Forms System Sprinter/Formscoder
Goal Systems Faver
Information Builders FOCUS
Sterling Software VSAM Shrink
XEROX HFS/HFDL
Magnus Software Corp. Fast-Track Claims
MIB Fastrack and Comm
ISA ABC/CDS
DISC, INC IRS-Interest Reporting System
IBM CFO2
IBM/EDS ALIS
</TABLE>
Customer acknowledges and agrees that PMSC shall not be obligated to receive
Third Party Customer Software which is licensed to Customer by a competitor or
potential competitor of PMSC prior to Customer obtaining written approval of
such party acceptable to PMSC. Both parties shall diligently work to obtain a
satisfactory working relationship with respect to each of the products listed
above. Customer shall be responsible for any fee required by vendors in
connection with obtaining permission for PMSC's use of the Third Party
Customer Software for the benefit of Customer. Customer shall also be
responsible for maintenance charges or other similar payments for such Third
Party Customer Software.
Prior to the effective date of this Agreement, Customer has entered into
licenses with the above third parties for the above Third Party Customer
Software and PMSC has not had access to such agreements. In the event that
PMSC enters into an agreement with a third party vendor relative to PMSC's
processing of the relevant Third Party Customer Software pursuant to this
Agreement, PMSC shall be responsible solely for not breaching the terms of
PMSC's agreement and Customer shall not be responsible under such agreement.
Regardless whether PMSC does or does not have a separate agreement with a
third party, Customer shall be responsible for complying with its agreements
with such third parties and PMSC shall not be responsible under such
agreements.
In the event that PMSC does not enter into any agreement with an applicable
third party vendor regarding the above Third Party Customer Software, Customer
shall be responsible to direct the utilization of PMSC's services hereunder in
a manner designed to
<PAGE>
minimize the possibility of Customer having a misunderstanding with the third
party vendor, and in the event of any legal action by such third party vendor
against PMSC, Customer shall be responsible for providing a "front line"
legal defense for PMSC and for holding PMSC harmless from such third party
vendor. In the event of such legal action, PMSC agrees to fully cooperate
with Customer, however, Customer agrees that it shall also be responsible for
all reasonable attorney's fees and costs which PMSC incurs in its sole
judgement for its defense.
PMSC shall utilize RACF security software (or other comparable security
software) to deny any party other than Customer access to or use of Third
Party Customer Software. PMSC agrees that it will not reverse engineer any
object code copy of Third Party Customer Software nor violate a Third Party
Customer Software copyright. Notwithstanding the above, PMSC agrees that
Customer shall not be obligated to indemnify and hold PMSC harmless or to pay
PMSC's attorney's fees and costs if it is ever proven that PMSC
misappropriated all or a material portion of any Third Party Customer Software
in violation of the Copyright Act, or breached its obligation to utilize RACF
security software (or other comparable security software) to deny any party
other than Customer access to or use of Third Party Customer Software.
<PAGE>
SCHEDULE I - MIGRATION SERVICES SCHEDULE
PMSC shall provide reasonable amounts of the following services to migrate
Customer's operation's to PMSC's Data Center:
Initialization and labeling of tape cartridges
Initialization of DASD volumes
Installation, customization, and testing of systems Software
Design, programming, and testing of customized systems Software exit programs
with Customer input
Migration-related administrative support
Migration planning
Migration-related travel
Review meetings
Disaster Recovery planning
Security system analysis, definition, and testing
Selection, negotiation, and ordering of hardware, Software, and network
equipment and lines
Automated scheduling analysis, definition, and testing
Automated restart and recovery systems analysis, definition, and testing
Development of standards and procedures
Network design and configuration
PMSC Data Center personnel orientation and training for Customer systems
Consulting fees related to migration services
Systems acceptance testing
Parallel processing and testing
<PAGE>
SCHEDULE J - JOINT CUSTOMER AND PMSC RESPONSIBILITIES
If issues set forth below in this Schedule J conflict with or are inconsistent
with terms and conditions provided in earlier Schedules, the terms and
conditions of the earlier Schedules shall control. The parties agrees that the
provisions set forth below are general in nature and are subject to further
refinement.
CONTINGENCY PLANNING
1.1 RESPONSIBILITIES OF PMSC
a. Review PMSC's Data Center contingency requirements at least
once a year.
b. Maintain reasonable contingency plans in the event of a
disaster at PMSC's Data Center.
c. Test contingency plans described above.
d. Audit existing contingency plans for PMSC's Data Center.
e. Appoint a contingency planning coordinator to serve as a
focal point of activities with Customer with respect to
PMSC's contingency plans.
f. Execute PMSC's Data Center contingency plans as needed
during disaster situations.
g. Provide copies of PMSC's Data Center contingency plans to
Customer on a timely basis.
h. Maintain, in a secure environment, additional copies in a
suitable medium, for reconstruction of lost or altered
files.
i. Perform updates to disaster recovery manual. Ensure required
data center documents are distributed to the off-site
storage facility.
1.2 RESPONSIBILITIES OF CUSTOMER
a. Review application and network contingency plans on a
regular basis.
b. Maintain application and network contingency plans.
<PAGE>
c. Plan and schedule application and network contingency tests
on a mutually agreeable schedule.
d. Test application and network contingency plans.
e. Appoint a contingency planning coordinator to serve as a
focal point with PMSC.
f. Execute application and network contingency plans as needed
during disaster situations.
ACCOUNT SUPPORT AND COORDINATION
2.1 RESPONSIBILITIES OF PMSC
a. Develop and implement PMSC data center standards defining
utilization procedures for Customer at PMSC's Data Center.
b. Effectively communicate data center issues, projects, plans,
and procedures to Customer for the implementation of
Software, hardware, procedures, and similar items upon
request by Customer.
c. Coordinate special processing requirements with Customer and
PMSC's Data Center.
d. Coordinate change and problem management with Customer and
PMSC's Data Center.
e. Coordinate data center related projects, supporting
Customer, and review for feasibility, standards, impact, and
implementation schedules.
f. Provide historical information in the form of reports or
graphs that illustrate Customer's resource consumption and
performance levels.
g. Provide capacity requirements for PMSC's Data Center for the
implementation of application Software based on business
requirements determined by Customer.
2.2 RESPONSIBILITIES OF CUSTOMER
a. Develop, maintain, and enforce application development and
testing standards and procedures.
<PAGE>
b. Effectively communicate all issues, projects, plans, and
procedures to PMSC to ensure quality implementations.
c. Assist with the development of "application to data center"
interface standards and procedures and adhere to them.
d. Develop, implement, maintain, and enforce application change
and problem management standards, tools and procedures.
e. Describe and communicate to PMSC, Customer's business and
functional requirements.
DATA CENTER OPERATIONS
3.1 RESPONSIBILITIES OF PMSC
a. Respond to system messages. Any system messages which
indicate problems related to Customer's Equipment or any
application Software may be referred to Customer.
b. Monitor performance priorities in mainframe environment.
c. Monitor system hardware status.
d. Monitor systems Software status.
e. Monitor throughput levels for the processing of Customer's
data.
f. Monitor building environmental system in PMSC's Data Center.
g. Provide all console operations necessary to support systems
Software.
h. Provide data center problem management, tracking, and
resolution for data center related issues.
i. Mount tapes and respond to console messages as required.
j. Resolve system Software Abend status where appropriate for
PMSC.
<PAGE>
l. Apply overrides to processing cycles based on Customer
requests.
m. Monitor production cycle job completion
n. Monitor production and test cycles.
o. Perform job restarts based on restart instructions.
3.2 RESPONSIBILITIES OF CUSTOMER
a. Supervise all remote site computer operations.
b. Provide support for all printing operations.
c. Maintain an accurate applications on-call list.
d. Resolve problems and complete jobs in Abend status where
appropriate for Customer.
e. Provide application support.
DATA SECURITY
4.1 RESPONSIBILITIES OF PMSC
a. Install Updates to the system security Software that is part
of the systems Software.
b. Research system security problems.
c. Maintain network access authority.
d. Process Customer security requests and confirm completion
with Customer.
e. Perform security audits to ensure quality security
procedures are in place.
f. Audit daily violations report for unauthorized access.
g. Create "ad hoc" reports as requested by Customer.
h. Suspend and delete inactive logon ID's.
4.2 RESPONSIBILITIES OF CUSTOMER
a. Assign and reset passwords.
<PAGE>
b. Provide sufficient detail to allow PMSC to create user ID's.
c. Provide incident investigation support.
d. Provide internal application security support and
consulting.
e. Respond to violation reports supplied by PMSC.
TECHNICAL SUPPORT - STORAGE MANAGEMENT
5.1 RESPONSIBILITIES OF PMSC
a. Restore and recover lost or altered files in a reasonable
manner upon Customer request.
b. Expand, compress, and allocate data sets in order to tune
the DASD subsystem.
c. Perform scheduled disaster backups.
d. Ensure integrity of catalog structure/environment.
e. Monitor and maintain data management parameters.
f. Make adequate DASD space available to meet the needs
described in business/application requirement forecasts
developed jointly by the Account Executives.
5.2 RESPONSIBILITIES OF CUSTOMER
a. Describe business requirements affecting incremental DASD
needs.
b. Communicate any special requirements for data center issues
to PMSC in a timely manner.
FACILITY ENGINEERING
6.1 RESPONSIBILITIES OF PMSC
a. Manage all operations at PMSC's Data Center.
b. Manage physical security at PMSC's Data Center.
c. Monitor environmental controls at PMSC's Data Center.
<PAGE>
d. Maintain reasonable security procedures for visitors at
PMSC's Data Center.
e. Maintain reasonable emergency evacuation procedures at
PMSC's Data Center.
6.2 RESPONSIBILITIES OF CUSTOMER
a. Manage all Customer facility operations.
b. Manage all physical security at Customer sites.
c. Monitor all environmental controls at Customer sites.
d. Maintain adequate guest procedures at all Customer sites.
e. Maintain emergency evacuation procedures at all Customer
facilities.
HARDWARE
7.1 RESPONSIBILITIES OF PMSC
a. Provide all CPU, DASD, and tape drives required to provide
for the business requirements of Customer.
b. Monitor and manage PMSC's equipment located at PMSC's Data
Center.
c. Manage any telecommunications hardware that is to be located
at PMSC's Data Center.
d. Implement, manage, and maintain the telecommunications
network connecting PMSC's Data Center with Customer.
Responsibilities extend to, but do not include, the
communication controllers at Customer's site. PMSC will work
with Customer to resolve problems as reasonably requested.
7.2 RESPONSIBILITIES OF CUSTOMER
a. Implement, manage, and maintain the telecommunications
network connecting Customer and Customer User Sites. Manage
and maintain all Customer Equipment located at Customer User
Sites.
b. Provide adequate time for PMSC to order and install hardware
equipment.
<PAGE>
HELP DESK SUPPORT
8.1 RESPONSIBILITIES OF PMSC
a. Provide to Customer the names, responsibilities, and method
of contact for the PMSC Help Desk.
b. Provide support for Customer's Help Desk personnel to
resolve issues with systems Software or PMSC's equipment in
accordance with the schedule as detailed in Schedule A.
c. Monitor system performance and response time and notify
Customer of abnormal conditions.
d. Open and close production online files as scheduled unless
instructed to do otherwise by Customer.
8.2 RESPONSIBILITIES OF CUSTOMER
a. Provide its own help desk and respond to all calls.
b. Route all questions to the appropriate personnel, including
referring appropriate systems Software or data center issues
to the PMSC Help Desk.
c. Cancel individual system logon ID's upon request by PMSC.
d. Instruct PMSC to open and close production online files as
required outside of normal schedules.
e. Perform recovery actions for terminal problems.
f. Provide schedules for online applications to PMSC's
Scheduling department.
g. Direct users to the appropriate technical resource.
h. Perform initial network problem determination/isolation.
i. Initiate the problem tracking process.
j. Follow up on reported problems.
k. Perform quality assurance on resolved problems.
<PAGE>
NETWORK SERVICES
9.1 RESPONSIBILITIES OF PMSC
a. Perform logical data network changes in the VTAM, NCP, CICS,
and IMS gens to support moves, adds, and changes.
b. Provide network support.
c. Provide SNA-connected device support.
d. Design and configure Customer network in agreement with
Customer.
e. Resolve data network communication problems (leased lines,
interactive, and batch).
f. Perform data circuit administrative functions including
ordering/disconnecting circuits, managing billing, and
monitoring performance of vendors.
9.2 RESPONSIBILITIES OF CUSTOMER
a. Perform physical equipment moves, adds, and changes at
Customer User Sites.
b. Provide all distributed network support including all PC/LAN
support.
c. Provide all voice services and PBX support.
PRODUCTION MANAGEMENT
10.1 RESPONSIBILITIES OF PMSC
a. Install and maintain a production scheduling and restart
system as provided by the systems Software.
b. Maintain the production change management database.
c. Maintain production release procedures/controls.
d. Maintain the scheduling system database.
<PAGE>
e. Produce and analyze scheduling reports such as: analyzer,
simulation, forecasts and average run times.
f. Communicate with Customer regarding schedule changes,
requests, and special processing requests.
g. Code, test, and override date cards for scheduling Software.
h. Move/copy programs, parmlibs, and JCL.
i. Verify production changes to ensure conformance to standards
and procedures.
j. Create and maintain production libraries.
k. Develop prefix code assignment used in identifying jobs,
datasets and customer locations. Provide job accounting
documentation updates and distribution.
l. Consult with data center personnel and Customer on
standards's enforcement and interpretation.
m. Prepare daily and monthly problem/change management reports.
n. Review service requests and maintain a historical database
for all PMSC Data Center projects.
10.2 RESPONSIBILITIES OF CUSTOMER
a. Provide assistance and training for change management
procedures.
b. Provide management and support production scheduling
procedures for application changes.
TAPE LIBRARY OPERATIONS
11.1 RESPONSIBILITIES OF PMSC
a. Process tape retention/expiration changes.
b. Process off-site vault requests.
c. Coordinate off-site cartridge storage/retrieval.
d. Coordinate mailing/receiving of tapes.
<PAGE>
e. Maintain procedures for processing foreign tapes.
f. Ensure availability of scratch tapes.
g. Initialize new tapes as needed.
h. File tapes as needed.
11.2 RESPONSIBILITIES OF CUSTOMER
a. Communicate any special requests regarding tape handling in
a timely manner to PMSC.
TECHNICAL SUPPORT - SYSTEMS SOFTWARE
12.1 RESPONSIBILITIES OF PMSC
a. Evaluate quality, cost benefit, and effectiveness of the
systems Software and communicate this information as
reasonably requested by Customer.
b. Refer such systems Software performance errors to the
appropriate Third Party Vendor.
c. Code systems Software user exits as reasonably requested by
Customer.
d. Maintain available documentation of such systems Software
and Updates.
e. Install, customize, and test operating system and all
systems Software products.
f. Maintain systems Software at supported product levels.
g. Coordinate implementation of upgrades to systems Software.
h. Provide systems Software support for Customer requirements.
i. Resolve abnormal system failures and lockouts.
12.2 RESPONSIBILITIES OF CUSTOMER
a. Notify PMSC in a timely manner of any performance problems
in the systems Software.
<PAGE>
b. Notify PMSC of any request to add systems Software not
listed.
<PAGE>
EX-10.14
ENTERPRISE LICENSE AGREEMENT
This Enterprise License Agreement ("Agreement") is effective September 20,
1994, by and between CYBERTEK CORPORATION, ("CYBERTEK"), a corporation with
principal offices at 7800 Stemmons Freeway, Suite 800, Dallas, Texas
75247-3217, and FACILITIES MANAGEMENT INSTALLATION, INC. ("Customer"), a
corporation having its principal place of business at 500 N. Akard Street,
Dallas, Texas 75201.
WHEREAS, Customer is a licensee of a number of CYBERTEK's computer software
products ("Previously Licensed Systems"); and
WHEREAS, Customer desires to license certain additional computer software
products which belong to CYBERTEK or its parent corporation, Policy Management
Systems Corporation ("PMSC") ("Newly Licensed Systems"); and
WHEREAS, Customer and CYBERTEK have agreed upon certain terms and conditions
which will be applicable to the Previously Licensed Systems and/or Newly
Licensed Systems;
NOW, THEREFORE, Customer and CYBERTEK agree to the following terms and
conditions:
1. DEFINITIONS:
The following terms shall have the following meanings in this Agreement
for a System licensed hereunder.
1.1 Authorized Companies: Any company listed below for so long as it
is (i) a Subsidiary or Affiliate of Customer or (ii) an insurance company
which is in Customer's agent-owned reinsurance company program and fully
administered by Customer (hereinafter an "AORC"); and any future
Subsidiary, Affiliate or AORC so long as Customer provides CYBERTEK
written notice of addition
<PAGE>
of such Subsidiary, Affiliate or AORC and executes a CYBERTEK prepared
Addendum to specifically add the new Subsidiary, Affiliate or AORC to
this Agreement.
Bankers Life and Casualty Company of New York
Bankers Multiple Line Insurance Company
Constitution Life Insurance Company
Integrity National Life Insurance Company
Modern American Life Insurance Company
Philadelphia American Life Insurance Company
Southwestern Life Insurance Company
Union Bankers Insurance Company
Western Pioneer Life Insurance Company
Marquette National Life Insurance Company
AGENT-OWNED REINSURANCE COMPANIES ("AORC")
Programmed Life Insurance Company
North American National Life
First Financial Life Insurance Company
1.2 Authorized Lines of Business: All lines of Life and Health insurance
business which are supported by the System except the following.
No Excluded Lines
1.3 Authorized Location: A data center owned and operated by Customer or
an Authorized Company at which Customer uses the Systems and to
which CYBERTEK provides MESA, or a PMSC data center. Notwithstanding
the foregoing, the data center location upon execution of this
Agreement is the Processing Site specified in the Previously
Executed License Agreement set forth in Exhibit A hereto. CYBERTEK
and Customer agree that from and after the "Live Processing Date",
as defined in the contemporaneously executed Processing Services
Agreement, the data center location shall be:
Policy Management Systems Corporation
One PMSC Center
Blythewood, South Carolina 29016
In the event the Authorized Location becomes inoperable, Customer
may run the System at Customer's disaster back-up facility pursuant
to the terms of this Agreement. Such disaster back-up facility must
be owned and operated by Customer or an Authorized Company or
Customer must first obtain CYBERTEK's prior written
<PAGE>
approval for use of such facility. Such approval process shall
involve obtaining an acceptable Non-Disclosure Agreement from the
owner/operator of the facility if they are not a competitor of
CYBERTEK. Notwithstanding the above, CYBERTEK acknowledges that
contemporaneously herewith PMSC is agreeing to provide certain data
processing services which include disaster back-up as more fully set
forth in that agreement.
1.4 Enhancements: Any addition to, change in or modification of the
System which CYBERTEK may make from time to time and which it makes
generally available to licensees of the System.
1.5 Initial License Charge ("ILC"): The amount of money to be paid to
CYBERTEK by Customer for the original grant of the right to use the
Newly Licensed Systems licensed hereunder as available on the
effective date hereof.
1.6 Maintenance: The correction of a Nonconformity in a System at
CYBERTEK's expense.
1.7 MESA: The collective reference to Maintenance, Enhancements and
Services Availability.
1.8 MESA Term: The period commencing on the effective date of this
Agreement and continuing for 120 full calendar months during which
CYBERTEK shall be obligated to provide MESA for the Systems licensed
pursuant to this Agreement.
1.9 Nonconformity: A failure of the computer programs of a System to
operate in accordance with the System's manuals designated by
CYBERTEK and provided to Customer as documentation to such programs.
1.10 Services Availability: Services other than Maintenance and
Enhancements which are available from CYBERTEK during the MESA Term.
1.11 System: An assembly of CYBERTEK's and/or PMSC's computer programs
and subcomponents designated herein, and all materials related
thereto supplied to Customer under this Agreement, which may include
but not be limited to, flow charts, logic diagrams, documentation,
source code, object code, specifications and materials of any type
whatsoever (tangible or intangible and machine or human readable)
which incorporate or reflect the design, specifications, or workings
of such programs and any changes, additions or modifications
<PAGE>
provided by CYBERTEK through Maintenance or Enhancements. As used
in this Agreement, System shall include both Previously Licensed
Systems and New Licensed Systems, unless expressly provided
otherwise.
1.12 Current Base System: The most current version of a System as
maintained by CYBERTEK and as described in this Agreement. Current
Base System does not include any Customer modifications or program
changes to the Current Base System made by CYBERTEK under the terms
of a Services Agreement, or under the terms of any other agreement
providing program modifications or program changes to Current Base
System by CYBERTEK at Customer's request, or modifications or
program changes to Current Base System by Customer, or any
modification or program change not explicitly made part of the
Current Base System under the terms of this Agreement.
1.13 Maintenance Release: A new edition of the System with Maintenance
and/or Enhancement program and documentation changes and associated
installation instructions. Maintenance Releases are periodically
made available to Customer during the MESA Term for the purpose of
updating the Current Base System to produce a new Current Base
System.
1.14 Program Temporary Fix ("PTF"): The program and/or documentation
changes and associated installation instructions, which are made
available as Maintenance under MESA to correct a specific problem
reported by Customer.
1.15 System Problem Report ("SPR"): The reporting of a Nonconformity by
Customer to CYBERTEK. For purposes of this definition, "reported"
means communicated in writing on the SPR form made available by
CYBERTEK to Customer's designated account executive.
1.16 Subsidiary: An entity in which Customer owns more than fifty percent
(50%) of the voting interest or in which more than fifty percent of
the voting interest is owned by an entity in which Customer owns
more than fifty percent (50%) of the voting interest.
1.17 Affiliate: An entity which owns more than fifty percent (50%) of the
voting capital stock of Customer or an entity in which more than
fifty percent (50%) of the voting interest is owned by the
corporation which owns
<PAGE>
more than fifty percent (50%) of the voting capital stock
of Customer.
1.18 Unsupported Authorized Location: A place of business of Customer or
an Authorized Company where object code copies of a workstation
System (microcomputer based) may be used by employees of Customer
or Authorized Companies.
2. PREVIOUSLY LICENSED SYSTEMS:
The Previously Licensed Systems were licensed to Customer under the
license agreement listed in Exhibit A hereto. The parties agree that
this Agreement terminates and replaces the prior license and that
henceforth the Previously Licensed Systems (other than Relationship
Manger which is being replaced by the Client System) are deemed licensed
under this Agreement.
3. NEWLY LICENSED SYSTEMS:
The Systems listed in Exhibit B (including the Previously Licensed
Systems) hereto are the computer software products licensed pursuant to
the terms of this Agreement.
4. LICENSE AND TITLE:
4.1 CYBERTEK hereby grants to Customer and Customer hereby accepts,
subject to the provisions herein, a personal, nonexclusive,
nontransferable, and nonassignable license to use the Systems
listed in Exhibit B hereto ("Systems") subject to the terms of this
Agreement, which license shall continue until terminated pursuant
to the terms of this Agreement.
4.2 This Agreement does not grant Customer any legal or equitable title
or other right in the Systems or any modifications of the Systems.
Neither this Agreement nor any of the Systems or related materials
may be assigned, sublicensed, or otherwise transferred by Customer,
voluntarily or involuntarily, without prior written consent by
CYBERTEK.
5. POSSESSION AND USE:
5.1 Customer acknowledges that the Systems contain unique, confidential
and secret information and are trade secrets and confidential
proprietary products of CYBERTEK or PMSC. CYBERTEK acknowledges that
every component of the Systems may not be a trade secret,
<PAGE>
however, Customer acknowledges that such is not a requirement for
the System as a whole to be treated as a trade secret and
confidential proprietary product. Customer shall not allow any
person or entity to transmit or reproduce the Systems in whole or
in part in any manner except as permitted in this Agreement.
Customer shall not disclose or otherwise make the Systems available
to any person or entity other than employees of Customer and
employees of an Authorized Company required to have such knowledge
for normal use of the Systems. Customer agrees to obligate each such
employee and each Authorized Company to take all steps reasonably
calculated to protect the Systems from unauthorized use or
disclosure. These obligations are independent covenants and shall
continue after the Agreement is terminated.
Information regarding the Systems which Customer shall protect under
the above paragraph shall not include any information or
documentation which Customer can demonstrate: (i) was in the public
domain on or prior to the date of this Agreement, (ii) was in the
possession of Customer on or prior to the date of this Agreement
and was not acquired or obtained from PMSC or CYBERTEK, (iii) became
part of the public domain, by publication or otherwise, not due to
any unauthorized act or omission on the part of Customer, (iv) is
supplied to Customer by a third party as a matter of right and not
in violation of any confidentiality agreement between such third
party and PMSC or CYBERTEK, or (v) was independently developed
by Customer.
5.2 Customer has sole responsibility for Customer's use and operation of
the Systems, including monitoring and verifying input and output
data, back-up of input and output data, providing data for any files
or tables of the Systems, and for maintaining the required Systems
operating environment.
5.3 Customer may modify the Systems or merge the Systems with other
computer programs however any modified or merged version of the
Systems shall remain subject to the LICENSE AND TITLE, POSSESSION
AND USE and TERMINATION provisions of this Agreement. When
modifications are made, upon discontinuance or termination of
rights granted under this Agreement, the Systems shall be completely
removed from the updated work, and all of the Systems, copies
thereof (in whole or in part), and related materials shall be
returned to
<PAGE>
CYBERTEK or disposed of in accordance with written instructions
from CYBERTEK and subject to the provisions of this Agreement
as to the protection of CYBERTEK's trade secrets and confidential
information.
5.4 Customer and Authorized Companies may not reverse engineer, reverse
assemble or reverse compile any System or part thereof.
5.5 The Systems and all materials related thereto shall not be printed
or copied in whole or in part without prior written permission of
CYBERTEK, provided, however, that Customer may make additional
copies of the Systems for testing and backup purposes restricted
to Customer's own internal use at the Authorized Location. Customer
is entitled to use mainframe or host versions of said Systems
solely at the Authorized Location to process data for its own use
and for the Authorized Companies. Object code copies of
microcomputer/workstation versions of the Systems may be used by
employees of Customer or an Authorized Company at Unsupported
Authorized Locations and Customer agrees to keep a list of all such
offices and to provide same to CYBERTEK upon request. Customer
shall use reasonable care to maintain all Systems and related
materials in a secure location. Customer agrees that the original
and all copies of the Systems shall remain the sole property of
CYBERTEK or PMSC. Customer expressly agrees to include CYBERTEK's
or PMSC's copyright notice and proprietary notice on all copies,
in whole or in part, in any form, including machine language, made
by Customer in accordance with this Agreement.
6. DELIVERY AND INSTALLATION:
6.1 CYBERTEK shall deliver to Customer one copy of the most current
edition of each of the Systems licensed hereunder available for
distribution to licensees on or before the effective date of this
Agreement, provide however that CYBERTEK shall not be obligated to
deliver Previously Licensed Systems. Installation of the Systems
shall be Customer's responsibility, however, contemporaneously
herewith PMSC is agreeing to provide certain installation services
under a separate agreement. Initial delivery of the Systems shall
constitute fulfillment of CYBERTEK's obligation under
<PAGE>
this paragraph. Additional copies of documentation may be licensed
at CYBERTEK's then current price.
7. MESA:
7.1 CYBERTEK shall provide MESA to Customer at the Authorized Location
for one copy of each of the Systems during the MESA Term subject to
the conditions set forth below.
7.2 Maintenance is performed at CYBERTEK's cost and is available only
for the most current Maintenance Release of the Systems and the
immediately preceding Maintenance Release of the Systems for those
parts of the Systems which have not been affected by any
modification or merger with computer programs other than Systems.
7.3 If, during the MESA Term, Customer encounters a suspected
Nonconformity in the usage of a System, Customer shall notify
CYBERTEK in writing, utilizing a System Problem Report (SPR) form
furnished by CYBERTEK. CYBERTEK shall then diagnose said
Nonconformity. Customer agrees to assist CYBERTEK in diagnosing
the Nonconformity either by telephone, correspondence, or in
person. If it is determined that a Nonconformity exists in the
System and it is not a Customer-created error, CYBERTEK, without
charge, shall make such changes as are required to correct the
Nonconformity, using the Current Base System and CYBERTEK test
data, and shall use its best reasonable efforts to furnish the
Nonconformity fix to Customer in the next regular Maintenance
Release. Upon Customer's request, CYBERTEK will use its best
reasonable efforts to furnish said changes to Customer as a Program
Temporary Fix (PTF) prior to the next Maintenance Release.
If the problem is determined to be a Customer-created error,
Customer shall pay CYBERTEK for the services rendered in analyzing
the problem. Customer may request the services of CYBERTEK to
correct such problem, and if CYBERTEK provides such services,
Customer shall pay CYBERTEK's rates then in effect for such
services.
7.4 If the Nonconformity prevents Customer's processing of an Authorized
Line of Business, CYBERTEK shall provide immediate Maintenance
services at Customer's Authorized Location. All other Maintenance
will be performed at CYBERTEK's offices and the materials and
instructions necessary to correct the Nonconformity shall be
<PAGE>
delivered to Customer. The cost associated with installing
Maintenance delivered to Customer is Customer's responsibility.
7.5 Enhancements are developed by CYBERTEK at CYBERTEK's offices for
only the most current Maintenance Release of a System which CYBERTEK
makes generally available to licensees of the System and will be
provided to Customer. The costs associated with nonstandard shipping
of Enhancements and any installation are Customer's responsibility.
7.6 Services Availability from CYBERTEK during the MESA Term may include
the services of account representatives, field representatives,
system engineers, programmers, instructors and consultants;
classroom instruction as well as training aids; additional copies
of technical and user documentation and processing services. Unless
there is a separate written agreement for these services providing
different terms, any services beyond Maintenance and Enhancements
provided by CYBERTEK at Customer's prior written request, shall be
provided at CYBERTEK's current rates in effect for such services on
an "AS IS" BASIS WITHOUT EXPRESS OR IMPLIED WARRANTY and Customer
agrees to pay all reasonable, pre-approved travel, living and
out-of-pocket expenses incurred by personnel providing such
services. Except in an emergency or when otherwise not possible,
PMSC shall obtain Customer's approval in writing and in advance for
such expenses. The parties anticipate that this shall most often be
done by telefaxes to and from Customer's account executive.
8. TERM OF AGREEMENT:
8.1 The term of this Agreement shall begin upon its effective date and
shall continue for the full period of the MESA Term, unless
terminated earlier in accordance with its terms.
8.2 During the last 6 months of the MESA Term, Customer may elect to
terminate this Agreement on expiration of the MESA Term and enter
into a new agreement to extend the MESA provisions applicable to
the Systems designated in this Agreement for a fixed term beginning
upon the first day of the first month following expiration of the
MESA Term at CYBERTEK's then current and standard rates, and the
terms and conditions in effect for its new licensees as of the date
of expiration of the MESA
<PAGE>
Term, however, Customer shall not be obligated to pay any additional
Initial License Charges for such extension.
8.3 Upon the expiration of the MESA Term without renewal, Customer may
elect to retain a continuing Right-To-Use license for use of the
then current versions of the Systems by giving written notice to
CYBERTEK. A Right-To-Use license is a right to use the Systems on
an "AS IS" basis, without warranty and without MESA, but subject
to Customer's obligations to protect CYBERTEK's and PMSC's trade
secrets and proprietary information as provided herein. In the
event Customer elects to add an Authorized Company and the System
generated reports show more than 1,000,000 policies processed on the
Systems, then notwithstanding that under the terms of this Section
Customer may not be paying any further MLC after the expiration of
the MESA Term, Customer and PMSC must enter into a mutually
acceptable Addendum to this Agreement to (i) specify the name and
other data regarding such company, (ii) provide for an additional
ILC payment equal to $.65 times each policy of such company if and
to the extent that the total of all policies of Customer and all
Authorized Companies, including the newest addition, exceeds
1,000,000 policies and (iii) provide for the resumption of MLC
payments equal to $0.018 times each policy of such company if and
to the extent that the total of all policies of Customer and all
Authorized Companies, including the newest addition, exceeds
1,000,000 policies.
8.4 CYBERTEK or Customer may terminate this Agreement under any of the
following conditions:
8.4.1 Either party may terminate this Agreement upon a material
breach by the other party of any one or more of the terms and
conditions of this Agreement, provided the party in breach is
notified in writing by the other party of the breach and such
breach is not cured or a satisfactory resolution agreed upon
in writing within 30 days of such notice.
8.4.2 In the event a party makes a general assignment for the
benefit of creditors or files a voluntary petition in
bankruptcy or petitions for reorganization or arrangement
under the bankruptcy laws, or if a petition
<PAGE>
in bankruptcy in filed against a party, or if a receiver or
trustee is appointed for all or any part of the property and
assets of a party, the other party may terminate this
Agreement.
8.5 Customer agrees that upon termination of this Agreement, Customer
shall not use a System licensed hereunder and shall return to
CYBERTEK, within 30 days after such termination, the original and
all copies of such System. Due to the nature of the System and the
need for its protection as a trade secret and confidential
proprietary information, time is of the essence in its return, and
in the event of Customer's failure to do so within the time provided
herein, Customer agrees that CYBERTEK shall be entitled to obtain
injunctive relief to require such return and reasonable attorneys
fees and costs incurred in obtaining such injunctive relief and
liquidated damages of $5,000.00 per day until the System is
returned. If the System has been modified or merged with other
computer programs and it is impractical to separate and return the
System, Customer shall destroy the System and all copies thereof in
its modified or merged state and within 30 days of termination of
the Agreement an officer of Customer shall certify to CYBERTEK in
writing that the System and all copies thereof have been destroyed.
Timely certification of destruction shall fulfill Customer's
obligation to return the System. Failure to so certify destruction
shall constitute failure to return the System.
9. WARRANTIES:
9.1 CYBERTEK warrants that CYBERTEK has the full power and authority to
license the Systems to Customer without the consent of any other
party and agrees to defend Customer against all claims (including
reasonable attorney's fees and reasonable costs incurred in
investigating such claim) arising from the actual or alleged
infringement by the Systems of the rights of third parties, provided
that Customer notifies CYBERTEK in writing as promptly as possible,
but in any event within twenty (20) business days of the receipt by
Customer of any such claim or notice of any such claim and permits
CYBERTEK upon request, and at CYBERTEK's cost and expense, to assume
and control the defense or settlement thereof. Customer agrees to
cooperate with CYBERTEK in every reasonable manner in the defense of
such claim. In defending or settling any such claim
<PAGE>
CYBERTEK may elect to (i) obtain the right of continued use of such
System or part thereof, which is alleged to be infringing or (ii)
replace or modify such System, or part thereof, so as to avoid such
claim of infringement and Customer will cease use of the release of
the System, or part thereof, which was replaced or modified.
CYBERTEK will not be obligated to defend or settle any claim of
infringement (i) asserted by a parent, subsidiary or affiliate of
Customer, (ii) resulting from Customer's additions to, changes in,
or modification of a System, or (iii) resulting from Customer's use
of the System in combination with non-CYBERTEK or non-PMSC Systems.
9.2 Customer acknowledges that the programs of a System may contain
Nonconformities reasonably consistent with software systems of
similar complexity. CYBERTEK warrants that it will correct, at
CYBERTEK's sole cost and expense, the computer programs of the most
current edition of a System if they fail to operate in accordance
with their manuals designated as documentation to such programs so
long as Customer is entitled to Maintenance for the System and has
provided CYBERTEK with notice of the Nonconformity. CYBERTEK will
use reasonable efforts to correct a Nonconformity within a
reasonable time period dependent upon the severity of the
Nonconformity.
10. DISCLAIMER OF OTHER WARRANTIES AND LIMITATION OF REMEDY:
10.1 THE WARRANTIES SET FORTH IN 9.1 AND 9.2 ARE IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE
IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS AND FITNESS FOR A
PARTICULAR PURPOSE.
10.2 CUSTOMER'S REMEDIES AND CYBERTEK'S LIABILITY UNDER THIS AGREEMENT
ARE LIMITED TO THE REMEDIES AND LIABILITIES SET FORTH IN
PARAGRAPHS 9.1, 9.2 AND 8.4.1 OF THIS AGREEMENT.
10.3 UNDER NO CIRCUMSTANCES SHALL CYBERTEK BE LIABLE TO CUSTOMER OR
OTHERS FOR ANY LOST PROFITS, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR
OTHER SIMILAR DAMAGES ARISING OUT OF THIS AGREEMENT REGARDLESS OF
THE FORM OF THE ACTION, WHETHER IN CONTRACT OR TORT, LAW OR
EQUITY. The above shall not apply to any liability CYBERTEK may
<PAGE>
have to Customer for bodily injury and damage to real property and
tangible personal property.
11. PRICE AND PAYMENT:
11.1 Customer shall pay all amounts set forth in this Agreement in the
manner specified. All amounts are stated and payable in United
States dollars. Customer shall pay a late charge on any amount
which remains unpaid 30 days after its due date. The late charge
shall be computed daily at the lesser of (i) 1.5% per month, or
(ii) the highest rate permitted by law.
11.2 Customer shall pay all taxes assessed or levied by any
governmental entity that are now or may become applicable to this
Agreement or measured by payments made under it or are required to
be collected by CYBERTEK or paid by CYBERTEK to tax authorities.
This includes, but is not limited to, sales, use, excise and
personal property taxes, but does not include taxes based upon
CYBERTEK's net income or foreign withholding taxes.
11.3 For Customer's authorization to use the Systems licensed pursuant
to this Agreement, Customer agrees to pay CYBERTEK an Initial
License Charge ("ILC") of $549,600 which shall be due and payable
as follows: (i) 25% upon execution; and (ii) the remaining 75% in
eleven (11) equal monthly installments commencing the first day of
the first full calendar month after the effective date hereof. In
addition to the foregoing, Customer agrees to pay CYBERTEK an
additional ILC payment equal to $.65 for each in force policy in
excess of 1,000,000 policies ("base policy count"). Such
additional ILC payments shall be calculated in January of each
year during the term of this Agreement based upon the number of
individual life, annuity, and accident and health inforce policies
as specified in Customer's and all Authorized Companies'
Statutory Annual Statement(s) for the previous calendar year. Upon
payment of an Additional ILC payment hereunder, the base policy
count of the subsequent calendar year shall be increased to the
number of in force policies for which ILC payments have been made
hereunder and Additional ILC payments shall only be due for those
policies in force in excess of the adjusted base policy count.
11.4 In addition to the ILC for the Systems licensed hereunder,
Customer agrees to pay CYBERTEK a Monthly
<PAGE>
License Charge ("MLC") for use of the Systems licensed hereunder
(including the Previously Licensed Systems). This MLC shall be due
and payable on the first day of the first month after the
effective date of this Agreement and shall continue on the first
day of each subsequent month during the MESA Term. All license
charges provided in the license agreement set forth in Exhibit A
(which this Agreement terminates and replaces) shall be
discontinued as of the first day of the first month after the
effective date of this Agreement and the MLC set forth below is
payable in lieu of such license charges.
11.5 The MLC payments due hereunder shall be the sum of the following
amounts:
(A) A "Base Charge" as set forth below:
Payments Base Charge
-------- -----------
Year 1 $28,038
Year 2 29,861
Year 3 31,803
Year 4 33,870
Year 5 36,072
Year 6 38,416
Year 7 39,568
Year 8 40,756
Year 9 41,978
Year 10 43,238
(B) A "Size Charge" computed by multiplying the number of
Customer's and Authorized Companies' policies in force in
excess of 1,000,000 times $.018. The Size Charge shall be
recomputed effective as of January 1st of each calendar year
based upon the number of in force policies on December 31 of
the immediately preceding calendar year.
11.6 Customer shall remain liable for all charges required under this
Agreement which are unpaid as of the date of its termination.
12. GENERAL:
12.1 All notices which are required to be given pursuant to this
Agreement shall be in writing to the address set forth herein or
to such other address as a party may designate in writing. Notices
shall be deemed to have
<PAGE>
given at the time delivered. All notices to CYBERTEK shall be
addressed to its General Counsel, CYBERTEK Corporation, c/o PMSC
Legal Dept., One PMSC Center, Blythewood, South Carolina 29016 with
a copy to the Chief Operating Officer of CYBERTEK Corporation,
7800 N. Stemmons Freeway, Suite 800, Dallas, Texas 75247. All
notices to Customer shall be to its General Counsel at the
address above.
12.2 The parties promise not to disclose the terms and conditions of
this Agreement to any third party, except as required in the normal
conduct of their business or as agreed to by the other party.
12.3 This Agreement and its Exhibits: (i) constitute the entire
agreement between the parties and supersede and merge any and all
prior discussions, representations, demonstrations, negotiations,
correspondence, writings and other agreements and together state
the entire understanding and agreement upon which CYBERTEK and
Customer rely respecting the subject matter of this Agreement;
(ii) may be amended or modified only in a writing agreed to and
signed by the authorized representatives of the parties and
(iii) shall be deemed to have been entered into and executed in the
State of Texas and shall be construed, performed and enforced in
all respects in accordance with the laws of that State.
12.4 Neither CYBERTEK nor Customer will (i) attempt to induce an
employee of the other to terminate his or her employment or
(ii) offer employment to a former employee of the other during the
12 month period immediately following the former employee's
termination. For purposes of this paragraph, "employee" shall mean
only the personnel of either party (including PMSC) who are
substantially involved in the development, marketing, servicing,
distribution or use of the System.
12.5 Neither party hereto shall be deemed to have waived any rights or
remedies hereunder unless such waiver is in writing and signed by
the authorized representative of the party. No delay or omission
by either party hereto in exercising any right shall operate as a
waiver of such right. A waiver of a right on any one occasion
shall not be construed as a waiver of such right on any future
occasion. All rights and remedies hereunder shall be cumulative
and may be exercised singularly or concurrently.
<PAGE>
12.6 The descriptive headings of the Agreement are intended for
reference only and shall not affect the construction or
interpretation of the Agreement.
12.7 Wherever the singular of any term is used herein it shall be
deemed to include the plural wherever the plural thereof is
applicable.
12.8 If any provision of the Agreement or the application thereof to
any party or circumstances shall, to any extent, now or hereafter
be or become invalid or unenforceable, the remainder of the
Agreement shall not be affected thereby and every other provision
of the Agreement shall be valid and enforceable to the fullest
extent permitted by law.
CYBERTEK and Customer certify by their undersigned authorized representatives
that they have read this Agreement and agree to be bound by its terms and
conditions.
CYBERTEK Customer
FACILITIES MANAGEMENT
CYBERTEK CORPORATION INSTALLATION, INC.
BY: /s/ STEPHEN G. MORRISON BY: /s/ DAVID B. LITTLE
------------------------- --------------------------
(AUTHORIZED SIGNATURE) (AUTHORIZED SIGNATURE)
(in non-black ink, please) (in non-black ink, please)
Stephen G. Morrison David B. Little
---------------------------- ------------------------------
(NAME) (NAME)
Secretary V.P. Information Systems
---------------------------- ------------------------------
(TITLE) (TITLE)
9/21/94 September 20, 1994
---------------------------- ------------------------------
(EXECUTION DATE) (EXECUTION DATE)
Policy Management Systems Corporation ("Parent Corp.") acknowledges that
Customer has entered into the above Enterprise License Agreement (the
"Agreement") with CYBERTEK based upon the assurance of PMSC that CYBERTEK will
fully perform all of its
<PAGE>
obligations under the above Agreement. PMSC therefore agrees to
(i) unconditionally guaranty the obligations of CYBERTEK under the
Agreement, including without limitation the performance of all obligations
under the Agreement, and (ii) indemnify and hold Customer harmless against any
and all losses and damages resulting solely from a failure of CYBERTEK to
fully perform its obligations in accordance with the terms of the Agreement.
PMSC shall have the benefit of any defenses and limitations that CYBERTEK may
have under the Agreement. PMSC hereby waives any and all notice requirements
and agrees that its guaranty, indemnity and hold harmless commitments shall
continue to apply to the Agreement if and as any amendments are made thereto.
The essence of this understanding is that PMSC shall be responsible under the
Agreement to the same extent as CYBERTEK and that Customer may demand payment
or performance by PMSC any time such payment or performance is not provided in
a timely manner by CYBERTEK. PMSC shall be responsible for and shall reimburse
Customer for all costs and expenses incurred by Customer in connection with
the enforcement of the above guaranty, indemnification and hold harmless,
including without limitation reasonable attorneys fees.
POLICY MANAGEMENT SYSTEMS CORPORATION
BY: /s/ STEPHEN G. MORRISON
----------------------------
(Authorized Signature)
Stephen G. Morrison
--------------------------------
(Name)
Secretary
--------------------------------
(Title)
9/21/94
--------------------------------
(Date)
<PAGE>
EXHIBIT A
TO THE
ENTERPRISE LICENSE AGREEMENT
Previously Executed License Agreement:
1. Agreement No. 91-S822B (1992)
<PAGE>
EXHIBIT B
TO THE
ENTERPRISE LICENSE AGREEMENT
1. CLIENT SYSTEM:
A system consisting of CIS (Mainframe) and CIWS (Workstation) which
supports a common repository for information relating to clients such as
insureds, claimants and vendors and which shall replace the Relationship
Manager deliverable. The Client System includes run-time IAP and other
common function subcomponents.
2. The Previously Licensed Systems:
CK4/VS
Field Link
CK4 Workstation Advisor
3. The following Personal Computer APPLICATIONWARE (Trademark) is licensed
under this Agreement:
SalesPro (Registered Trademark)
Application Entry
CK4 Information Expeditor (Trademark)
CK4 Underwriting Advisor (Trademark)
One Application - Life and Health Underwriting
CK4 Plan Advisor (Trademark)
Electronic Policy Issue (Trademark)/Electronic Application
Generator (Trademark)
CK4 Image and Document Manager (Trademark)
CYBERSCRIBE (Trademark) V
Wide Area Mail (Trademark)
The following Personal Computer software has been licensed by CYBERTEK
and is distributed in object form on a royalty free basis:
Vitamin C from Creative Programming Consultants, Inc., Dallas, TX
Blaise Async Lib and String Lib from Blaise Computing, Inc.,
Berkeley, CA
Code Base from Sequiter Software, Inc., Edmonton, Alberta, Canada
<PAGE>
The following Personal Computer software must be licensed by Customer to
operate the APPLICATIONWARE licensed under this Agreement. Additionally,
during the MESA Term it may be necessary for Customer to license future
upgrades of these products and/or other third party products to fully
utilize future editions of the Systems.
AES (AION Execution System) or ADS (AION Development System) from
Trinzic Corporation, Palo Alto, CA
Object Vision Version 2.1 from Borland International, Inc., Scotts
Valley, CA
Novell Btrieve Requester Version 6.0, Novell Btrieve Server Version
5.16, and Novell SQL Version V3.0 from Novell, Inc., Provo, UT
ZIPKEY from Eric Isaacson Software, Bloomington, IN
Applicable operating system software as described in the Systems
documentation.
<PAGE>
ADDENDUM NO. 1
TO THE
ENTERPRISE LICENSE AGREEMENT
This Addendum, effective as of the 20th day of September, 1994, is hereby made
a part of and incorporated into the Enterprise License Agreement (hereinafter
referred to as "Agreement") by and between CYBERTEK CORPORATION (hereinafter
"CYBERTEK") and FACILITIES MANAGEMENT INSTALLATION, INC. (hereinafter
"Customer"), dated contemporaneously herewith. In the event that any provision
of this Addendum and any provision of the Agreement are inconsistent or
conflicting, the inconsistent or conflicting provision of this Addendum shall
be and constitute an amendment of the Agreement and shall control, but only to
the extent that such provision is inconsistent or conflicting with the
Agreement.
CYBERTEK and Customer hereby agree to amend the Agreement as follows:
1. In addition to processing its own data and the data of its Authorized
Companies, Customer is hereby licensed to use the Systems to process the
data of Customer Clients as defined below; provided, however, that such
processing shall be subject to the terms and conditions set forth below.
Customer may also distribute object code copies of personal
computer/workstation versions or components of Systems to agencies,
brokerages and Customer Clients so long as (i) such entities have an
active written contractual relationship with Customer and (ii) such
entities have entered into a standard CYBERTEK End User Agreement.
Customer acknowledges that CYBERTEK shall only provide MESA for Customer
and that Customer shall be responsible for transmitting Maintenance or
Enhancements to the above entities as Customer deems appropriate.
2. In addition to the Monthly License Charges provided in the Agreement,
Customer will pay CYBERTEK usage fees based on the number of Customer
Client policies for which Customer provides data processing services
using one or more Systems. These fees are payable by Customer at the end
of each month and are calculated by multiplying the total number of
Customer Client inforce policies as of the end of the month by the
applicable usage fee(s) in the applicable range set forth below:
Number of Inforce Customer Client Policies
<PAGE>
0 1,000,001 2,000,001 3,000,001
to to to and
1,000,000 2,000,000 3,000,000 Over
---------------------------------------------------------------------
$0.125 $0.115 $0.105 $0.095
3. A Customer Client is defined to be (i) any former Authorized Company for
which Customer continues to provide data processing services under a
written contract for those services and (ii) any other insurance company
(which is not already an Authorized Company) for which Customer provides
both data processing and full insurance administration services under a
written contract.
4. Customer will notify CYBERTEK each month of the number and names of all
Customer Client companies processed by Customer and the number of
inforce policies for each such company as of the end of each month. In
support of these numbers, Customer will provide annually, and
periodically upon reasonable request, the following reports produced by
the Systems at each month-end for each company processed: (i) CK4/VS
Inforce Time-Driven File Control Register, (ii) Block Control Balance
Register, and (iii) the company totals for each month-to-date Exhibit of
Life Insurance or equivalent information from non-PMSC administration
systems.
5. Customer will provide CYBERTEK annual written certification by Customer's
independent auditors for the number of Customer Client companies and
inforce policies processed during the prior calendar year using the
licensed Systems. Such certification shall be sent to CYBERTEK no later
than April 1 of each year.
6. Upon 30 days written notice CYBERTEK shall have the right to have its
own independent auditors review the books and records of Customer to
determine whether Customer has complied with the terms of this Agreement.
7. Customer agrees that it will require all Customer Clients to execute
CYBERTEK Non-Disclosure Agreements prior to Customer processing their
business under this Agreement.
8. A company ceases to be an Customer Client upon cancellation of the data
processing and full administration services provided by Customer. In
that event, former Customer Clients have the option to license Systems
directly from CYBERTEK at CYBERTEK's then current ILC and MLC rates,
charges, terms and conditions.
<PAGE>
The parties certify by their undersigned authorized agents that they have read
this Addendum and the Agreement and agree to be bound by their terms and
conditions.
CYBERTEK CUSTOMER
CYBERTEK CORPORATION FACILITIES MANAGEMENT
INSTALLATION, INC.
BY: /s/ STEPHEN G. MORRISON BY: /s/ DAVID B. LITTLE
------------------------- ------------------------
(AUTHORIZED SIGNATURE) (AUTHORIZED SIGNATURE)
(in non-black ink, please) (in non-black ink, please)
Stephen G. Morrison David B. Little
-------------------------- ---------------------------
(NAME) (NAME)
Secretary V.P. - Information Systems
-------------------------- ---------------------------
(TITLE) (TITLE)
9/21/94 September 20, 1994
-------------------------- ---------------------------
(EXECUTION DATE) (EXECUTION DATE)
<PAGE>
PROMISSORY NOTE
$40,318,754.00 Dallas, Texas Effective December 1, 1994
(executed December 20, 1994)
FOR VALUE RECEIVED, the undersigned, JAMES M. FAIL ("Maker"), hereby
promises to pay to the order of SOUTHWESTERN LIFE INSURANCE COMPANY, a Texas
insurance corporation ("Payee"), at the location specified in the Loan Agreement
identified below, in lawful money of the United States of America, the principal
sum of Forty Million Three Hundred Eighteen Thousand Seven Hundred Fifty-Four
and No/100 Dollars ($40,318,754.00), plus interest thereon as hereinafter
provided, on the dates hereinafter provided.
This Note is executed and delivered by Maker pursuant to that certain First
Amended and Restated Loan Agreement of even date herewith between Maker and
Payee (as the same may be amended, supplemented or modified from time to time,
the "Loan Agreement") and modifies, renews, consolidates and replaces, but does
not extinguish the indebtedness evidenced by (i) that certain Promissory Note
dated as of January 25, 1993 executed by Maker and payable to the order of Payee
in the original principal amount of $12,359,952.00, and (ii) that certain
Promissory Note dated as of January 25, 1993 executed by Maker and originally
payable to the order of Consolidated Fidelity Life Insurance Company ("CFLIC")
in the original principal amount of $32,210,202.00 (the "CFLIC Note") such CFLIC
Note being payable, as endorsed, to Payee. The Loan Agreement and all of the
terms thereof are incorporated herein by reference, the same as if stated
verbatim herein. All capitalized terms not otherwise defined herein shall have
the same meanings as set forth in the Loan Agreement. The Loan Agreement, among
other things, contains provisions for acceleration of the maturity of this Note
upon the happening of certain stated events, and also for prepayments of this
Note, upon the terms and conditions specified in the Loan Agreement.
The outstanding principal of this Note shall bear interest prior to
maturity at a rate per annum equal to the lesser of (a) the Maximum Rate or (b)
the Contract Rate; PROVIDED, HOWEVER, that interest shall have begun to accrue
hereon as of December 1, 1994. All past due principal and to the extent per-
mitted by applicable law, past due interest of this Note shall bear interest at
the Default Rate.
The outstanding principal balance of this Note, plus accrued and unpaid
interest hereon, shall be due and payable in twenty-one (21) payments of
principal and interest as follows:
(a) One (1) installment in the amount of One Million One Hundred Ninety-
Two Thousand Nine Hundred Ninety-Two and No/100 Dollars ($1,192,992.00) shall
be due and payable on March 1, 1995, from which accrued and unpaid interest on
the entire unpaid principal balance of this Note shall first be deducted, and
the remainder applied to the payment of principal; and thereafter
PROMISSORY NOTE - PAGE 1
<PAGE>
(b) Eleven (11) quarterly installments in the amount of Two Million Three
Hundred Sixty-One Thousand Eight Hundred Ninety-Six and No/100 Dollars
($2,361,896.00) each shall be due and payable, the first such installment to be
due and payable on June 1, 1995, with like successive installments to be due and
payable on the first day of each succeeding September, December, March and June
thereafter until and including December 1, 1997, from each of which installments
accrued and unpaid interest on the entire unpaid principal balance of this Note
shall first be deducted, and the remainder applied to the payment of principal;
and thereafter
(c) Eight (8) quarterly installments in the amount of One Million Seven
Hundred Six Thousand Nine Hundred Eight and No/100 Dollars ($1,706,908.00) each
shall be due and payable, the first such payment to be due and payable on March
1, 1998, with like successive installments to be due and payable on the first
day of each succeeding June, September, December and March thereafter until and
including December 1, 1999, from each of which installments accrued and unpaid
interest on the entire unpaid principal balance of this Note shall first be
deducted, and the remainder applied to the payment of principal; and thereafter
(d) A final installment in the amount of all outstanding principal, plus
accrued and unpaid interest, shall be due and payable on December 31, 1999.
Notwithstanding anything to the contrary contained herein, no provision of
this Note shall require the payment or permit the collection of interest in
excess of the Maximum Rate. If any excess of interest in such respect is herein
provided for, or shall be adjudicated to be so provided, in this Note or
otherwise in connection with this loan transaction, the provisions of this
paragraph shall govern and prevail, and neither Maker nor the sureties,
guarantors, successors, or assigns of Maker shall be obligated to pay the excess
amount of such interest, or any other excess sum paid for the use, forbearance
or detention of sums loaned pursuant hereto. If for any reason interest in
excess of the Maximum Rate shall be deemed charged, required or permitted by any
court of competent jurisdiction, any such excess shall be applied as a payment
and reduction of the principal of indebtedness evidenced by this Note; and, if
the principal amount hereof has been paid in full, any remaining excess shall
forthwith be paid to Maker. In determining whether or not the interest paid or
payable exceeds the Maximum Rate, Maker and Payee shall, to the extent permitted
by applicable law, (i) characterize any non-principal payment as an expense,
fee, or premium rather than as interest, (ii) exclude voluntary prepayments and
the effects thereof, and (iii) amortize, prorate, allocate, and spread in equal
or unequal parts the total amount of interest throughout the entire contemplated
term of the indebtedness evidenced by this Note so that the interest for the
entire term does not exceed the Maximum Rate.
This Note shall be governed by and construed in accordance with the laws of
the State of Texas applicable to contracts made and wholly performable in Texas
and the applicable laws of the United States of America. This Note is
performable in Dallas County, Texas.
Maker and each surety, guarantor, endorser, and other party ever liable for
payment of any sums of money payable on this Note jointly and severally waive
notice (except as otherwise provided in the Loan Agreement), presentment, demand
for payment, protest, notice of protest
PROMISSORY NOTE - PAGE 2
<PAGE>
and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, diligence in collecting, grace, and all
other formalities of any kind, and consent to all extensions without notice for
any period or periods of time and partial payments, before or after maturity,
and any impairment of any collateral securing this Note, all without prejudice
to the holder. The holder shall similarly have the right to deal in any way, at
any time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part or all of the collateral
securing this Note, or to grant any other indulgences or forbearances
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
Maker hereby authorizes the holder hereof to endorse on the Schedule
attached to this Note or any continuation thereof, or to record in its internal
records, all advances made to Maker hereunder and all payments made on account
of the principal thereof, which endorsements and recordings shall be prima facie
evidence (absent manifest error) as to the outstanding principal amount of this
Note; provided, however, any failure by the holder hereof to make any such
endorsement or recording shall not limit or otherwise affect the obligations of
Maker under the Loan Agreement or this Note.
/s/ James M. Fail
-----------------------------
James M. Fail
PROMISSORY NOTE - Page 3
<PAGE>
Schedule
DATE ADVANCE PRINCIPAL PAYMENT BALANCE
---- ------- ----------------- -------
--------- ------------------- --------------------- -------------
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--------- ------------------- --------------------- -------------
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--------- ------------------- --------------------- -------------
--------- ------------------- --------------------- -------------
--------- ------------------- --------------------- -------------
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<PAGE>
SOUTHWESTERN LIFE INSURANCE COMPANY
FIRST AMENDED AND RESTATED LOAN AGREEMENT
Dated as of December 1, 1994
$40,318,754.00
JAMES M. FAIL
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2. OTHER DEFINITIONAL PROVISIONS. . . . . . . . . . . . . 12
ARTICLE II - LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.1. LOAN . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.2. NOTE . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.3. REPAYMENT OF LOAN. . . . . . . . . . . . . . . . . . . 13
Section 2.4. INTEREST . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.5. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.6. USE OF LOAN. . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE III - PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.1. METHOD OF PAYMENT. . . . . . . . . . . . . . . . . . . 13
Section 3.2. COMPUTATION OF INTEREST. . . . . . . . . . . . . . . . 14
Section 3.3. VOLUNTARY PREPAYMENT . . . . . . . . . . . . . . . . . 14
ARTICLE IV - SECURITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.1. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.2. SETOFF . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE V - CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI - REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . 17
Section 6.1. CORPORATE EXISTENCE. . . . . . . . . . . . . . . . . . 17
Section 6.2. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 17
Section 6.3. NO BREACH. . . . . . . . . . . . . . . . . . . . . . . 17
Section 6.4. OPERATION OF BUSINESS. . . . . . . . . . . . . . . . . 18
Section 6.5. LITIGATION AND JUDGMENTS . . . . . . . . . . . . . . . 18
Section 6.6. RIGHTS IN PROPERTIES; LIENS. . . . . . . . . . . . . . 18
Section 6.7. ENFORCEABILITY . . . . . . . . . . . . . . . . . . . . 18
Section 6.8. APPROVALS. . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.9. DEBT . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.10. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.11. USE OF PROCEEDS; MARGIN SECURITIES . . . . . . . . . . 19
Section 6.12. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.13. DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.14. OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . 20
Section 6.15. COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . 20
Section 6.16. INVESTMENT COMPANY ACT . . . . . . . . . . . . . . . . 20
Section 6.17. PUBLIC UTILITY HOLDING COMPANY ACT . . . . . . . . . . 20
i
<PAGE>
TABLE OF CONTENTS
(CONTINUTED)
Section 6.18. MATERIAL CONTRACTS . . . . . . . . . . . . . . . . . . 20
Section 6.19. ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . 21
Section 6.20. CAPITALIZATION . . . . . . . . . . . . . . . . . . . . 21
Section 6.21. INSIDER DEBT . . . . . . . . . . . . . . . . . . . . . 22
Section 6.22. NO SENSITIVE TRANSACTIONS. . . . . . . . . . . . . . . 22
ARTICLE VII - POSITIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 22
Section 7.1. REPORTING REQUIREMENTS . . . . . . . . . . . . . . . . 22
Section 7.2 PAYMENT OF NOTE AND MAINTENANCE OF OFFICE. . . . . . . 24
Section 7.3. CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . 24
Section 7.4. MAINTENANCE OF PROPERTIES. . . . . . . . . . . . . . . 25
Section 7.5. TAXES AND CLAIMS . . . . . . . . . . . . . . . . . . . 25
Section 7.6. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.7. INSPECTION RIGHTS. . . . . . . . . . . . . . . . . . . 25
Section 7.8. KEEPING BOOKS AND RECORDS. . . . . . . . . . . . . . . 25
Section 7.9. COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . 25
Section 7.10. COMPLIANCE WITH AGREEMENTS . . . . . . . . . . . . . . 25
Section 7.11. FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . 26
Section 7.12. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.13. DIVIDEND REQUEST . . . . . . . . . . . . . . . . . . . 26
ARTICLE VIII - NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . 26
Section 8.1. DEBT . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 8.2. LIMITATION ON LIENS. . . . . . . . . . . . . . . . . . 26
Section 8.3. MERGERS, RECAPITALIZATIONS, AND DISSOLUTIONS . . . . . 27
Section 8.4. TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . 27
Section 8.5. DISPOSITION OF PROPERTY. . . . . . . . . . . . . . . . 27
Section 8.6. PREPAYMENT OF DEBT . . . . . . . . . . . . . . . . . . 27
Section 8.7. MATERIAL CONTRACTS . . . . . . . . . . . . . . . . . . 27
Section 8.8. LIMITATION ON ISSUANCE OF CAPITAL STOCK. . . . . . . . 27
Section 8.9. MODIFICATION OF CORPORATE DOCUMENTS. . . . . . . . . . 27
Section 8.10. ACCOUNTING CHANGES . . . . . . . . . . . . . . . . . . 27
Section 8.11. GOLDEN PARACHUTES. . . . . . . . . . . . . . . . . . . 28
Section 8.12. ACQUISITION OF PROPERTY. . . . . . . . . . . . . . . . 28
ARTICLE IX - DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 9.1. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . 28
Section 9.2. REMEDIES UPON DEFAULT. . . . . . . . . . . . . . . . . 31
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUTED)
Section 9.3. PERFORMANCE BY LENDER. . . . . . . . . . . . . . . . . 32
ARTICLE X - MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.1. EXPENSES OF LENDER . . . . . . . . . . . . . . . . . . 32
Section 10.2. LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . 32
Section 10.3. NO DUTY. . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.4. LENDER NOT FIDUCIARY . . . . . . . . . . . . . . . . . 33
Section 10.5. EQUITABLE RELIEF . . . . . . . . . . . . . . . . . . . 33
Section 10.6. NO WAIVER; CUMULATIVE REMEDIES . . . . . . . . . . . . 33
Section 10.7. SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . 33
Section 10.8. SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.9. AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.10. MAXIMUM INTEREST RATE. . . . . . . . . . . . . . . . . 33
Section 10.11. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 34
Section 10.12. APPLICABLE LAW; VENUE; SERVICE OF PROCESS. . . . . . . 34
Section 10.13. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . 35
Section 10.14. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . 35
Section 10.15. HEADINGS . . . . . . . . . . . . . . . . . . . . . . . 35
Section 10.16. PARTICIPATIONS . . . . . . . . . . . . . . . . . . . . 35
Section 10.17. CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . 35
Section 10.18. LENDER NOT IN CONTROL. . . . . . . . . . . . . . . . . 35
Section 10.19. ASSUMPTION OF LOAN . . . . . . . . . . . . . . . . . . 35
Section 10.20. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . 36
Section 10.21. PRIOR AGREEMENTS . . . . . . . . . . . . . . . . . . . 38
iii
<PAGE>
FIRST AMENDED AND RESTATED
LOAN AGREEMENT
THIS FIRST AMENDED AND RESTATED LOAN AGREEMENT (the "Agreement"), dated as
of December 1, 1994, is between JAMES M. FAIL, an individual resident of the
State of Alabama ("Borrower"), and SOUTHWESTERN LIFE INSURANCE COMPANY, a Texas
life insurance corporation ("Lender").
R E C I T A L S:
A. Borrower and Lender have previously entered into that certain Loan
Agreement (the "SWL Loan Agreement") dated as of January 25, 1993 pursuant to
which Lender has made a loan to Borrower in the aggregate principal amount of
Twelve Million Three Hundred Fifty-Nine Thousand Nine Hundred Fifty-Seven and
No/100 Dollars ($12,359,957.00) (the "SWL Loan").
B. The SWL Loan is evidenced by that certain Promissory Note dated as of
January 25, 1993 executed by Borrower and payable to the order of Lender in the
original principal amount of the SWL Loan (the "SWL Note").
C. Borrower and Consolidated Fidelity Life Insurance Company, a Kentucky
life insurance corporation ("CFLIC"), have previously entered into that certain
Loan Agreement (the "CFLIC Loan Agreement") dated as of January 25, 1993
pursuant to which CFLIC has made a loan to Borrower in the original principal
amount of Thirty-Two Million Two Hundred Ten Thousand Two Hundred Two and No/100
Dollars ($32,210,202.00) (the "CFLIC Loan").
D. The CFLIC Loan is evidenced by that certain Promissory Note dated as
of January 25, 1993 executed by Borrower and payable to the order of CFLIC in
the original principal amount of the CFLIC Loan (the "CFLIC Note").
E. Pursuant to that certain Assignment and Transfer of Notes, Liens, and
Other Rights dated as of June 30, 1994 between Lender and CFLIC, Lender has
purchased all of CFLIC's right, title and interest in and to the CFLIC Note, the
CFLIC Loan Agreement and each of the other documents and agreements relating to
or evidencing the CFLIC Loan, and all security interests and liens securing the
CFLIC Note.
F. Borrower and Lender now desire to (i) consolidate the SWL Note with
the CFLIC Note, (ii) consolidate the CFLIC Loan Agreement with and into the SWL
Loan Agreement, and (iii) make certain amendments to the SWL Loan Agreement as
herein set forth.
G. The parties hereto now desire to amend the SWL Loan Agreement as
hereinafter provided and have agreed, for purposes of clarity and ease of
administration, to carry out the
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 1
<PAGE>
agreed upon amendments by amending the pertinent provisions of the SWL Loan
Agreement and then restating the SWL Loan Agreement in its entirety by means of
this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto hereby consolidate the CFLIC Loan Agreement
with and into the SWL Loan Agreement, amend and restate the SWL Loan Agreement
(as consolidated) and agree as follows:
ARTICLE I
DEFINITIONS
Section 1. 1. DEFINITIONS. As used in this Agreement, the following terms
have the following meanings:
"ACQUISITION" means any purchase, lease or acquisition of any Property
of any Person.
"AFFILIATE" means, as to any Person, any other Person that directly or
indirectly, through one or more intermediaries, controls or is controlled
by, or is under common control with, such Person. The term "control" means
the possession, directly or indirectly, of the power to direct or cause
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise; PROVIDED,
however, in no event shall Lender or any of its Affiliates be deemed an
Affiliate of Borrower or any of Borrower's Affiliates for purposes of this
Agreement and the other Loan Documents.
"AGGREGATE DEBT SERVICE" means the sum of all scheduled payments due
during any twelve month period on (i) the Loan, and (ii) the loan evidenced by
the CFSB Loan Documents.
"AGREEMENT DATE" means as of December 1, 1994.
"ASSISTANCE AGREEMENT" means that certain Assistance Agreement dated
the Organization Date, among CFSB, BSB, and the FSLIC, as the same has been
or may be amended, supplemented, or modified from time to time.
"BSB" means Bluebonnet Savings Bank FSB, a federal savings bank.
"BSB AGREEMENT" means that certain agreement between BSB and Lender,
in substantially the form of Exhibit "E" hereto, as the same may be
amended, supplemented, or modified.
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 2
<PAGE>
"BSB CAPITAL MINIMUM" means the minimum Capital required at any time
to be maintained by BSB pursuant to 12 C.F.R. Part 567(1992), as amended
from time to time, or any successor regulation or statute, plus
$25,000,000.00
"BSB SERIES A PREFERRED STOCK" means shares of non-voting Capital
Stock issued by BSB, designated at $12.00 Noncumulative Perpetual Preferred
Stock, Series A, which has a liquidation value of $100.00 per share, and a
noncumulative cash dividend of $12.00 per share payable quarterly in
arrears.
"BUSINESS DAY" means any day on which commercial banks are not
authorized or required to close in Dallas, Texas.
"CAPITAL" means "core capital" as such term is defined in 12 C.F.R.
Section 567.5(a) (1992) or any successor regulation thereto.
"CAPITAL LEASE OBLIGATIONS" means, as to any Person, the obligations
of such Person to pay rent or other amounts under a lease of (or other
agreement conveying the right to use) real and/or personal Property, which
obligations are required to be classified and accounted for as a capital
lease on a balance sheet of such Person under GAAP. For purposes of this
Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP.
"CAPITAL MAINTENANCE AGREEMENT" means that certain Capital Maintenance
Agreement dated the Organization Date, among Borrower, BSB, CFSB, and the
FSLIC, as the same may be amended from time to time.
"CAPITAL STOCK" means any and all shares of corporate stock.
"CFSB" means CFSB Corporation, a Delaware corporation.
"CFSB LOAN AGREEMENT" means, that certain First Amended and Restated
Loan Agreement of even date herewith between Lender and CFSB, as the same
may be amended, supplemented or modified from time to time.
"CFSB LOAN BALANCE" means all amounts owed by the obligors pursuant to
the CFSB Loan Documents.
"CFSB LOAN DOCUMENTS" means the CFSB Loan Agreement and all promissory
notes, pledge agreements, security agreements, assignments, and other
instruments, documents, and agreements executed and delivered pursuant to
or in connection with the CFSB Loan Agreement, as such instruments,
documents and agreements may be amended, modified, renewed, extended, or
supplemented from time to time.
"CHANGE OF CONTROL" means any one or more of the following: (a) (i)
Borrower shall at any time cease to own directly or indirectly, through one
or more wholly-owned
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 3
<PAGE>
Controlled Companies or a trust of which Borrower is the settlor, and which
has no trustee which is not a Permitted Trustee, 100% of the issued and
outstanding Capital Stock of CFSB, (ii) following the death of Borrower,
any Person other than a trust of which Borrower is the settlor and which
has no trustee which is not a Permitted Trustee shall acquire any of the
Capital Stock of CFSB, or (iii) following the death of Borrower and the
acquisition of the Capital Stock of CFSB by a trust of which Borrower is
the settlor and which has no trustee which is not a Permitted Trustee, such
trust shall at any time cease to own directly or indirectly, through one or
more wholly-owned Controlled Companies, 100% of the issued and outstanding
Capital Stock of CFSB, (b) CFSB shall at any time cease to own directly or
indirectly through one or more wholly-owned Subsidiaries, 100% of the
issued and outstanding Capital Stock of BSB (exclusive of the FSLIC
Warrant), or (c) any event which results in an "Ownership Change" of CFSB
as defined in Section 382(g) of the Code; PROVIDED that no Change of
Control shall result from the exercise by the FSLIC of its rights with
respect to the FSLIC Warrant.
"CODE" means the Internal Revenue Code of 1986, as amended, and the
regulations promulgated and rulings issued thereunder.
"COLLATERAL" has the meaning specified in Section 4.1.
"COLLATERAL ACCOUNT" has the meaning specified in the Collateral
Account Agreement.
"COLLATERAL ACCOUNT AGREEMENT" means the Collateral Account Agreement
among CFSB, Lender and the Collateral Account Bank in substantially the
form of Exhibit "F" hereto, as the same may be amended, modified, or
supplemented.
"COLLATERAL ACCOUNT BANK" means Mid-America Bank and Trust Company of
Louisville.
"COLLECTION AND PAYMENT AGREEMENT" means that certain First Amended
and Restated Collection and Payment Agreement of even date herewith, in
substantially the form of Exhibit "D" hereto, among Borrower, CFSB, BSB and
Lender, as the same may be amended, supplemented, or modified from time to
time.
"CONTRACT RATE" means the rate of twelve percent (12%) per annum.
"CONTROLLED COMPANY" means any corporation of which more than fifty
percent (50%) of the issued and outstanding securities having ordinary
voting power for the election of a majority of directors is owned or
controlled, directly or indirectly, by Borrower, by Borrower and one or
more other Controlled Companies of Borrower, or by one or more other
Controlled Companies of Borrower, provided that a corporation, the stock of
which is a Covered Asset, shall not be deemed to be a Controlled Company.
"COVERED ASSETS" has the meaning specified in the Assistance
Agreement.
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 4
<PAGE>
"CRITICIZED ASSETS" means, at any particular time, all assets of BSB
classified as "Loss", "Doubtful", or "Substandard", or in any equivalent
category under any similar classification system of the OTS.
"DEBT" means as to any Person at any time (without duplication):
(i) all obligations of such Person for borrowed money, (ii) all
obligations of such Person evidenced by bonds, notes, debentures, or other
similar instruments, (iii) all purchase-money indebtedness of such Person,
(iv) all Capital Lease Obligations of such Person, (v) all Debt of others
Guaranteed by such Person, (vi) all obligations secured by a Lien existing
on Property owned by such Person, whether or not the obligations secured
thereby have been assumed by such Person or are non-recourse to the credit
of such Person, (vii) all reimbursement obligations of such Person (whether
contingent or otherwise) in respect of letters of credit, bankers'
acceptances, surety or other bonds and similar instruments, (viii) every
payment obligation of such Person under interest rate swap or similar
agreements or foreign currency hedge, exchange, or similar agreements, (ix)
all liabilities of such Person in respect of unfunded vested benefits under
any Plan, and (x) all other liabilities of such Person required to be
reflected on the balance sheet of such Person under GAAP; PROVIDED that
Debt shall not include deposits at BSB as deposits are defined in 12 U.S.C.
Section 1813(1) and applicable regulations of the FDIC and the OTS.
"DEBT DOCUMENTS" has the meaning specified in the Collection and
Payment Agreement.
"DEFAULT RATE" means the lesser of (a) the Maximum Rate, or (b) the
rate of eighteen percent (18%) per annum.
"DETERMINATION DATE" has the meaning specified in Section 7.13.
"DIRECTORS' PACKAGE" means all reports and information regarding CFSB
and its Subsidiaries furnished to BSB's Board of Directors, excluding any
information the disclosure of which would result in waiver of the attorney
client privilege or the disclosure of which is prohibited by the Thrift
Laws.
"DISPOSITION" means any sale, lease, assignment, transfer or
disposition of any Property of Borrower or a Controlled Company.
"DOLLARS" and "$" mean lawful money of the United States of America.
"ENVIRONMENTAL LAWS" means any and all federal, state, and local laws,
regulations, and requirements pertaining to health, safety, or the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, 42 U.S.C. Section 9601
ET SEQ., the Resource Conservation and Recovery Act of 1976, 42 U.S.C.
Section 6901 ET SEQ., the Occupational Safety and Health Act of 1970, 29
U.S.C. Section 651 ET SEQ., the Clean Air Act, 42 U.S.C. Section 7401 ET
SEQ., the Clean Water Act of 1977,
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 5
<PAGE>
33 U.S.C. Section 1251 ET SEQ., and the Toxic Substances Control Act, 15
U.S.C. Section 2601 ET SEQ., as such laws, regulations, and requirements
may be amended or supplemented from time to time.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published
interpretations thereunder.
"ERISA AFFILIATE" means any corporation or trade or business which is
a member of the same controlled group of corporations (within the meaning
of Section 414(b) of the Code) as CFSB or is under common control (within
the meaning of Section 414(c) of the Code) with CFSB.
"EVENT OF DEFAULT" has the meaning specified in Section 9.1.
"FAIL LOAN BALANCE" means the sum of all amounts owed by the obligors
pursuant to the Loan Documents.
"FDIC" means the Federal Deposit Insurance Corporation (or any
successor).
"FIRREA" means the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, as amended from time to time.
"FORBEARANCE LETTER" means that certain letter dated the Organization
Date from the Federal Home Loan Bank Board to Borrower granting certain
forbearances with respect to CFSB and BSB.
"FSLIC" means the Federal Savings and Loan Insurance Corporation (or
any successor).
"FSLIC WARRANT" means the asserted right of the FSLIC to acquire an
interest in BSB as agreed at the time it was acquired by CFSB, as evidenced
by that certain Warrant No. W-1, dated December 22, 1988, issued by BSB to
the FSLIC. CFSB is contesting FSLIC's assertion of rights and nothing in
this Agreement or any documents or instruments delivered pursuant hereto
shall constitute an admission that FSLIC has any rights under the FSLIC
Warrant or the FSLIC Warrant Agreement.
"FSLIC WARRANT AGREEMENT" means that certain Warrant Agreement dated
the Organization Date, between BSB and the FSLIC.
"GAAP" means generally accepted accounting principles, applied on a
consistent basis, as set forth in Opinions of the Accounting Principles Board of
the American Institute of Certified Public Accountants and/or in statements of
the Financial Accounting Standards Board and/or their respective successors and
which are applicable in the circumstances as of the date in question.
Accounting principles are applied on a "consistent basis" when the accounting
principles applied in a current period are
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 6
<PAGE>
comparable in all material respects to those accounting principles applied
in a preceding period.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof, and any entity or agency exercising
executive, legislative, judicial, regulatory, supervisory, or other
administrative functions of or pertaining to government.
"GUARANTEE" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or
other obligation of any other Person and, without limiting the generality
of the foregoing, any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance or supply
funds for the purchase or payment of) such Debt or other obligation
(whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-
pay, or to maintain financial statement conditions or otherwise), or (ii)
entered into for the purpose of assuring in any other manner the obligee of
such Debt or other obligation of the payment thereof or to protect the
obligee against loss in respect thereof (in whole or in part), provided
that the term Guarantee shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"IMMEDIATE FAMILY" means, with respect to any Person (whether by full
or half-blood or by adoption):
(i) the spouse, father, mother, children, brothers, and sisters of
such Person;
(ii) the father, mother, brothers and sisters of such Person's spouse;
and
(iii) the spouses and children of the children, brothers and sisters of
such Person and such Person's spouse.
"INSURED DEPOSITORY INSTITUTION" has the meaning specified in Section
3(c)(2) of the Federal Deposit Insurance Act, as amended.
"LIEN" means any lien, mortgage, security interest, tax lien,
financing statement, pledge, charge, hypothecation, assignment, or other
encumbrance of any kind or nature whatsoever (including, without
limitation, any conditional sale or title retention agreement), whether
arising by contract, operation of law, or otherwise.
"LOAN" means, collectively, the SWL Loan and the CFLIC Loan which, as
of the date hereof, have an aggregate outstanding principal balance of
Forty Million Three Hundred Eighteen Thousand Seven Hundred Fifty Four and
no/100 Dollars ($40,318,754.00).
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 7
<PAGE>
"LOAN BALANCE" means the sum of the CFSB Loan Balance and the Fail
Loan Balance.
"LOAN DOCUMENTS" means, as of any time, this Agreement and all
promissory notes, pledge agreements, assignments, security agreements,
guaranties, the BSB Agreement, and other instruments, documents, and
agreements in effect at such time which have been executed and delivered
pursuant to or in connection with this Agreement, as such instruments,
documents, and agreements may be amended, modified, renewed, extended, or
supplemented from time to time.
"MATERIAL ACQUISITION" means an Acquisition by Borrower or any
Controlled Company the consideration for which (i) equals or exceeds ten
percent (10%) of Net Worth of CFSB, or (ii) when aggregated with all
Acquisitions completed by Borrower and the Controlled Companies in the
preceding twenty-four (24) months, would equal or exceed thirty percent
(30%) of Net Worth of CFSB. Normal Investment Activity of BSB shall not be
a Material Acquisition.
"MATERIAL ADVERSE EFFECT" means any material and adverse effect on (i)
the business, condition (financial or otherwise), operations, prospects,
results of operations, capitalization, liquidity, or Properties of Borrower
and the Controlled Companies taken as a whole, (ii) the value of the
Collateral, (iii) the ability of Borrower to pay and perform the
Obligations, or (iv) the validity, enforceability, or binding effect of any
of the Loan Documents; PROVIDED, that no Material Adverse Effect shall be
deemed to exist as a result of (a) restrictions imposed by the OTS, or by
the Thrift Laws, or by the Capital Maintenance Agreement upon the
declaration or payment of dividends by BSB, (b) any action taken by the
FDIC or RTC on the basis of the Assistance Agreement other than as a result
of a default thereunder by CFSB or BSB, or (c) the effects of any of the
foregoing.
"MATERIAL CONTRACTS" means, as to Borrower or any Material Subsidiary
(and, for purposes of Section 10.19 hereof, the New Holding Company), any
supply, purchase, service, employment, tax, indemnity, management,
governmental assistance, employee benefit, or other agreement which by its
terms provides for fixed payments by or to Borrower or any of the Material
Subsidiaries (or, where applicable, the New Holding Company) during any
fiscal year of CFSB (or, where applicable, the New Holding Company) in an
amount in excess of $1,000,000, as the same shall be amended, modified, or
supplemented from time to time. Contracts related solely to Normal
Investment Activity of BSB shall not be Material Contracts. Without
limiting the generality of the preceding sentence, the agreements and
instruments identified on Schedule 5 hereto shall constitute Material
Contracts of Borrower.
"MATERIAL DISPOSITION" means a Disposition by Borrower or any
Controlled Company (other than dispositions of covered Assets) with respect
to which the net value of the Property subject to the Disposition (i)
equals or exceeds ten percent (10%) of Net Worth of CFSB, or (ii) when
aggregated with the value of all Property subject to all
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 8
<PAGE>
Dispositions by Borrower or the Controlled Companies completed in the
preceding twenty-four (24) months would equal or exceed thirty percent
(30%) of Net Worth of CFSB. The disposition of Property of BSB acquired by
BSB as part of Normal Investment Activity shall not be a Material
Disposition. Material Disposition shall not include a dividend declared in
respect of the Capital Stock of CFSB or its Subsidiaries, or any
Disposition by CFSB or its Subsidiaries to Lender in connection with the
Loan Documents or the CFSB Loan Documents.
"MATERIAL SUBSIDIARY" means each of BSB and CFSB and, as at the date
of determination (i) any direct or indirect Subsidiary of CFSB that has
revenues or operating income in excess of five percent (5%) of the
consolidated revenues or operating income of CFSB and its consolidated
Subsidiaries in the most recent fiscal quarter of CFSB, or (ii) any other
direct or indirect Subsidiary of CFSB that has assets in excess of five
percent (5%) of the consolidated assets of CFSB and its consolidated
Subsidiaries as of the end of the most recent fiscal quarter of CFSB.
"MATURITY DATE" means December 31, 1999.
"MAXIMUM RATE" means the maximum rate of nonusurious interest
permitted from day to day by applicable law, including as to Article 5069 -
1.04, Vernon's Texas Civil Statutes (and as the same may be incorporated by
reference in other Texas statutes), but otherwise without limitation, that
rate based upon the "indicated rate ceiling" and calculated after taking
into account any and all relevant fees, payments, and other charges in
respect of the Loan Documents which are deemed to be interest under
applicable law..
"MULTIEMPLOYER PLAN" means a multiemployer plan defined as such in
Section 3(37) of ERISA to which contributions have been made by any
Controlled Company or any ERISA Affiliate and which is covered by Title IV
of ERISA.
"NET WORTH" means the shareholder's equity of a Person determined in
accordance with GAAP.
"NORMAL INVESTMENT ACTIVITY" means any investments which can be made
by BSB pursuant to the authority of Subsection (1), Subsection (2),
subparts (A), (B), (D), and Subsection (3) of Section 5(c) of the Home
Owners' Loan Act, as amended, 12 U.S.C. Section 1464(c), without approval
of the OTS or FDIC.
"NOTE" means the promissory note of Borrower payable to the order of
Lender in substantially the form of Exhibit "A" hereto, and all extensions,
renewals, and modifications thereof.
"OBLIGATED PARTY" means any Person that assumes or is or becomes party
to any agreement that Guarantees, assures, or secures payment and
performance of the Obligations or any part thereof.
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 9
<PAGE>
"OBLIGATIONS" means all present and future obligations, indebtedness,
and liabilities of Borrower to Lender pursuant to this Agreement, the Note,
and the other Loan Documents, whether direct, indirect, related, unrelated,
fixed, contingent, liquidated, unliquidated, joint, several, or joint and
several.
"ORGANIZATION DATE" means December 22, 1988.
"OTS" means the Office of Thrift Supervision of the United States
Department of the Treasury (or any successor), the director of the same and
any of such director's authorized agents, as the context requires.
"PAYMENT DATE" means (i) each March 1, June 1, September 1, and
December 1 on or prior to the Maturity Date, commencing September 1, 1994,
and (ii) the Maturity Date.
"PERMITTED LIENS" means the following types of Liens:
(a) Liens disclosed on Schedule 1 hereto;
(b) Liens in favor of the Lender pursuant to the Debt Documents;
(c) Encumbrances consisting of minor easements, zoning
restrictions, and other restrictions on the use of real Property that
do not (individually or in the aggregate) materially affect the value
of the Property encumbered thereby or materially impair the ability of
Borrower or the Controlled Companies of Borrower to use such Property
in their respective businesses, and none of which is violated in any
material respect by existing or proposed structures or land use;
(d) Liens for taxes, assessments, or other governmental charges
which are not delinquent or which are being contested in good faith
and for which adequate reserves have been established as and to the
extent required by GAAP;
(e) Liens of mechanics, materialmen, warehousemen, carriers or
other similar statutory Liens incurred in the ordinary course of
business securing obligations that (x) are not yet due or (y) are
being contested in good faith and for which adequate reserves have
been established as and to the extent required by GAAP;
(f) Liens resulting from good faith deposits to secure payments
of workmen's compensation or other social security programs or to
secure the performance of tenders, statutory obligations, surety and
appeal bonds, bids, or contracts (other than for payment of Debt) in
the ordinary course of business;
(g) With respect to Capital Stock of BSB and CFSB, Permitted
Stock Exceptions;
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 10
<PAGE>
(h) Pledges of BSB assets by BSB in connection with Normal
Investment Activity; and
(i) Liens on real estate acquired by BSB by foreclosure or deed-
in-lieu of foreclosure.
"PERMITTED STOCK EXCEPTIONS" means the following:
(i) the Capital Maintenance Agreement and the Proxy;
(ii) the "change of control" requirements contained in the Thrift
Laws;
(iii) the Security Agreement; and
(iv) the Pledge Agreement.
"PERMITTED TRUSTEES" means Borrower, Emily Stone Fail, David R. Baker,
and William Naylor Stone, or other trustees approved by Lender, such
consent not to be unreasonably withheld.
"PERSON" means any individual, corporation, business trust,
association, company, partnership, joint venture, Governmental Authority,
or other entity.
"PLAN" means any employee benefit or other plan established or
maintained by any Controlled Company or any ERISA Affiliate and which is
covered by Title IV of ERISA.
"PLEDGE AGREEMENT" means the First Amended and Restated Pledge
Agreement executed by Borrower in favor of Lender in substantially the form
of Exhibit "B" hereto, as the same may be amended, supplemented or
otherwise modified from time to time.
"POTENTIAL DEFAULT" means any condition or event which, after notice
or lapse of time or both, would constitute an Event of Default.
"PROHIBITED TRANSACTION" means any transaction set forth in Section
406 of ERISA or Section 4975 of the Code.
"PROPERTY" means property of all kinds, real, personal or mixed,
tangible or intangible (including, without limitation, all rights relating
thereto).
"PROXY" means that certain Irrevocable Proxy dated the Organization
Date, granted by CFSB to the Executive Director of the FSLIC pursuant to
the Capital Maintenance Agreement.
FIRST AMENDED AND
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"REGULATORY AUTHORITY" means the OTS, the FDIC, the Office of the
Comptroller of the Currency, the Federal Reserve Bank, the Department of
the Treasury or any other agency or authority charged with the regulation
of financial institutions.
"REPORTABLE EVENT" means any of the events set forth in Section 4043
of ERISA.
"RICO" means the Racketeer Influenced and Corrupt Organization Act of
1970, as amended from time to time.
"RTC" means the Resolution Trust Corporation (or any successor).
"SECURITY AGREEMENT" means that certain First Amended and Restated
Security Agreement executed by CFSB in favor of Lender in substantially the
form of Exhibit "C" hereto, as the same may be amended, supplemented, or
modified from time to time.
"SUBSIDIARY" means, with respect to any Person, any corporation of
which more than fifty percent (50%) of the issued and outstanding
securities having ordinary voting power for the election of a majority of
directors is owned or controlled, directly or indirectly, by such Person,
by such Person and one or more other Subsidiaries of such Person, or by one
or more other Subsidiaries of such Person.
"THRIFT LAWS" means Title 12 of U.S.C. and the Code of Federal
Regulations to the extent applicable and all other present and future
regulations and official actions of the OTS, FDIC, Office of the
Comptroller of the Currency, Federal Reserve Bank, and Department of the
Treasury or any agency thereof that are applicable to CFSB, BSB, and their
Affiliates.
"UCC" means the Uniform Commercial Code as adopted by the State of
Texas.
Section 1.2. OTHER DEFINITIONAL PROVISIONS. All definitions contained in
this Agreement are equally applicable to the singular and plural forms of the
terms defined. The words "hereof", "herein", and "hereunder" and words of
similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Unless otherwise
specified, all Article and Section references pertain to this Agreement. All
accounting terms not specifically defined herein shall be construed in
accordance with GAAP. Terms used herein that are defined in the UCC, unless
otherwise defined herein, shall have the meanings specified in the UCC.
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ARTICLE 11
LOAN
Section 2.1. LOAN. The Loan has previously been fully advanced to
Borrower. Borrower may not reborrow under the Loan. Lender has no obligation
to make any further advances under the Loan.
Section 2.2. NOTE. The obligation of Borrower to repay the Loan and
interest thereon shall be evidenced by the Note executed by Borrower, payable to
the order of Lender, in the principal amount of $40,318,754.00 and dated the
Agreement Date. Upon execution and delivery of the Note, Lender shall deliver
the original SWL Note and the original CFLIC Note to Borrower, each marked
"cancelled."
Section 2.3. REPAYMENT OF LOAN. The balance of the Loan shall be due
and payable on the dates and in the amounts set forth in the Note. Lender shall
have no obligation to and it is not the expectation or intention of Borrower
that Lender will renew, extend, or restructure the Loan or interest thereon at
the Maturity Date.
Section 2.4. INTEREST. The outstanding principal of the Loan shall
bear interest prior to maturity at a rate per annum equal to the lesser of (a)
the Maximum Rate, or (b) the Contract Rate. All past due principal of the Loan
and, to the extent permitted by law, accrued but unpaid interest, shall bear
interest at the Default Rate.
Section 2.5. EXPENSES. Contemporaneously with the execution of this
Agreement, Borrower shall pay to Lender all reasonable closing costs and
expenses of Lender in connection with the negotiation and preparation of this
Agreement.
Section 2.6. USE OF LOAN. The proceeds of the Loan have been and
shall continue to be used by Borrower only for the following:
(i) to repay indebtedness of Borrower to Lender; and
(ii) such other uses as are approved by Lender.
ARTICLE III
PAYMENTS
Section 3.1. METHOD OF PAYMENT. Subject to the terms of the
Collection and Payment Agreement, all payments of principal, interest, and other
amounts to be made by Borrower under this Agreement, the Note, and the other
Loan Documents shall be made to Lender at the address of Lender set forth on the
signature pages hereof, or in any bank account or in any other manner designated
in writing by Lender, without setoff,
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deduction, or counterclaim, in Dollars and in immediately available funds, not
later than 2:00 p.m. Dallas, Texas time on the date on which such payment shall
become due (each such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day). Subject to the terms of
the Collection and Payment Agreement and the other Loan Documents, Borrower
shall, at the time of making each such payment, specify to Lender the sums
payable by Borrower under this Agreement, the Note, or any other Loan Document
to which such payment is to be applied (and in the event that Borrower fails to
so specify, Lender may apply such payment to the Obligations in such order and
manner as it may elect in its sole discretion). Whenever any payment under this
Agreement, the Note, or any other Loan Document shall be stated to be due on a
day that is not a Business Day, such payment may be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of the payment of interest.
Section 3.2. COMPUTATION OF INTEREST. Interest on the outstanding
principal of the Loan shall be calculated on the basis of a year of 365 or 366
days, as the case may be.
Section 3.3. VOLUNTARY PREPAYMENT. Subject to the terms of the
Collection and Payment Agreement, and provided that CFSB makes a prorata
prepayment on the loan evidenced by the CFSB Loan Documents, Borrower may prepay
the Loan in whole at any time or in part from time to time, without premium or
penalty, but with accrued interest to the date of prepayment on the amount so
prepaid. All prepayments shall be applied to payments due on the Loan in
inverse order of maturity. In the event Borrower shall from time to time prepay
more than $500,000 of the principal of the Loan, upon the request of Borrower,
provided there is no outstanding Event of Default or Potential Default, Lender
agrees to adjust the quarterly payments on the Loan to amortize the unpaid
principal balance of the Loan over the remaining term of the Loan at the
Contract Rate pursuant to amendments to the Loan Documents in form and substance
satisfactory to Lender.
ARTICLE IV
SECURITY
Section 4.1. COLLATERAL. Borrower shall execute and deliver or
cause to be executed and delivered the documents described below covering the
Property described in such documents (which, together with any other Property
which may now or hereafter secure the Obligations or any part thereof, is
sometimes herein called the "COLLATERAL"):
(a) the Security Agreement;
(b) the Pledge Agreement; and
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(c) such further documents and instruments including, without
limitation, UCC financing statements, as Lender in its sole discretion,
deems necessary or desirable to evidence and perfect its Liens in the
Collateral.
Section 4.2. SETOFF. If any Event of Default shall have occurred
and be continuing and the Obligations shall be due and payable in full (whether
at stated maturity, by acceleration or otherwise), Lender shall have the right
to set off and apply against the Obligations in such manner as Lender may
determine, at any time and without notice to Borrower, any and all sums at any
time credited by or owing from Lender to Borrower whether or not the Obligations
are then due. As further security for the Obligations, Borrower hereby grants
to Lender a security interest in all money, instruments, and other Property of
Borrower now or hereafter in the possession or control of Lender. The rights
and remedies of Lender hereunder are in addition to other rights and remedies
(including, without limitation, other rights of setoff) which Lender may have.
ARTICLE V
CONDITIONS PRECEDENT
The effectiveness of this Agreement is subject to the condition precedent
that Lender shall have received on or before the date hereof all of the
following, in form and substance satisfactory to Lender, and, in the case of any
actions required to be taken, evidence satisfactory in form and substance to
Lender that the following actions have been taken:
(a) CERTIFICATE of BSB. A certificate of the Secretary or an
Assistant Secretary of BSB certifying that neither the federal charter nor
the bylaws of BSB have been amended, modified or revoked since January 25,
1993;
(b) NOTE. The Note executed by Borrower;
(c) PLEDGE AGREEMENT. The Pledge Agreement executed by Borrower;
(d) COLLECTION AND PAYMENT AGREEMENT. The Collection and Payment
Agreement executed by Borrower, CFSB and BSB;
(e) SECURITY AGREEMENT. The Security Agreement executed by CFSB;
(f) BSB AGREEMENT. The BSB Agreement executed by BSB;
(g) CFSB LOAN DOCUMENTS. The CFSB Loan Documents and evidence that
(i) the execution, delivery, and performance of the CFSB Loan Documents
have been duly authorized and approved by CFSB, the CFSB Loan Documents
shall have been duly executed and delivered by CFSB, and the CFSB Loan
Documents shall be in full force and effect; (ii) there shall have been
no amendment or other modification of the CFSB Loan Documents without the
prior written consent of Lender; and (iii) all conditions
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precedent to the obligations of Lender and CFSB under the CFSB Loan
Agreements shall have been fulfilled;
(h) COLLATERAL ACCOUNT AGREEMENT. The Collateral Account Agreement
executed by CFSB and the Collateral Account Bank;
(i) FINANCING STATEMENTS. Uniform Commercial Code financing
statements executed by Borrower and CFSB covering the Collateral;
(j) STOCK CERTIFICATES. Lender shall have in its possession the
stock certificates evidencing all of the issued and outstanding Capital
Stock of CFSB, together with stock powers duly executed in blank by
Borrower;
(k) CERTIFICATE OF NO ORAL AGREEMENTS. A certificate executed by
Borrower, CFSB, and BSB stating that there are no oral agreements among
Borrower, CFSB, BSB, and Lender with respect to the Debt Documents or the
transactions contemplated thereby;
(l) OPINION OF COUNSEL. A favorable opinion of Arnold & Porter,
legal counsel to Borrower and CFSB, PROVIDED, however, Lender will accept
the opinion of Kevin J. Funnell, Esq., as to certain matters governed by
the laws of and/or performable in Texas, both such opinions to be in form
as set forth in Exhibit "G" hereto, and such other matters as Lender may
reasonably request;
(m) BORROWER INSTRUCTION LETTER. A letter in form acceptable to
Lender executed by Borrower directing CFSB to pay all dividends and make
all distributions in respect of the Capital Stock of CFSB owned by Borrower
directly to Lender;
(n) CFSB INSTRUCTION LETTER. A letter in form acceptable to Lender
directing BSB to pay directly into the Collateral Account all cash
dividends and cash distributions on the Capital Stock of BSB owned by CFSB;
(o) ADDITIONAL DOCUMENTATION. Lender shall have received such
additional approvals or documents as Lender or its legal counsel. Winstead
Sechrest & Minick P.C., may reasonably request.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into this Agreement, Borrower represents and
warrants to Lender as set forth below, PROVIDED, however, for the purposes of
this Article VI, BSB shall not be considered a Controlled Company, a Material
Subsidiary, or a Subsidiary.
Section 6.1. CORPORATE EXISTENCE. (a) Each of the Material
Subsidiaries is a corporation (or, in the case of BSB, a federal savings bank)
duly incorporated or organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation; (b) each of the Material
Subsidiaries has all requisite corporate power and authority to own its Property
and carry on its business as now being or as proposed to be conducted; and (c)
each of the Material Subsidiaries is qualified to do business in all
jurisdictions in which the nature of its business makes such qualification
necessary and where failure to so qualify would have a Material Adverse Effect.
Borrower has the power and authority to execute, deliver, and perform his
obligations under this Agreement and the other Loan Documents to which he is or
may become a party.
Section 6.2. FINANCIAL STATEMENTS. Borrower has delivered to
Lender unaudited financial statements of CFSB dated October 31, 1994, audited
consolidated financial statements of CFSB and its Subsidiaries as at and for the
fiscal year ended September 30, 1993, and unaudited consolidated financial
statements of BSB and its Subsidiaries for the one (1)-month period ended
November 30, 1994. The financial statements of Borrower accurately reflect the
financial condition of Borrower, and there has been no material change in the
financial condition of Borrower since the date of such financial statements. In
respect of the financial statements of CFSB dated as of September 30, 1993 and
for the fiscal year then ended, matters reflected in the financial statements as
of October 31, 1994 and for the twelve (12) months then ended, such financial
statements fairly present on a consolidated basis the financial condition of
CFSB and its Subsidiaries and BSB and its Subsidiaries, as applicable, as of the
respective dates indicated therein and the results of their operations for the
respective periods indicated therein in accordance with GAAP (except as may be
noted in the notes thereto and, in respect of the unaudited financial
statements, subject to normal year-end adjustments and the absence of
footnotes). Neither Borrower nor any of the Controlled Companies has any
contingent liabilities, liabilities for taxes, forward or long-term commitments,
or anticipated losses from any unfavorable commitments that are not reflected in
such financial statements or the notes thereto, are of a nature required under
GAAP to be reflected in such financial statements or the notes thereto, or are
material to Borrower and the Controlled Companies taken as a whole. Since
January 25, 1993, no event has occurred that has had or could reasonably be
expected to have a Material Adverse Effect except as may have been specifically
disclosed in a Directors' Package delivered to Lender or publicly in the print
and/or telecommunications media.
Section 6.3. NO BREACH. The execution, delivery, and performance by
Borrower of this Agreement and the other Loan Documents to which Borrower is or
may become a party do not and will not violate or conflict any law, rule, or
regulation or any order, writ, injunction, or
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decree of any Governmental Authority or arbitrator binding on Borrower or any of
his Properties, and do not and will not conflict with, result in a breach of, or
constitute a default under, or result in the imposition of any Lien (except as
provided in Article IV) upon any of the revenues or Property of Borrower or any
Material Subsidiaries pursuant to the provisions of any Material Contract
identified on Schedule 5 hereto.
Section 6.4. OPERATION OF BUSINESS. Except as disclosed on
Schedule 10 hereto, Borrower and, to the best of his knowledge, each of the
Controlled Companies, possess all licenses, authorizations, governmental
approvals, permits, franchises, patents, copyrights, trademarks, and tradenames,
or rights thereto, that are necessary to conduct their respective businesses
substantially as now conducted and as presently proposed to be conducted, and
neither Borrower nor to the best of his knowledge, any of the Controlled
Companies is in violation of any valid rights of others with respect to any of
the foregoing, except where the failure to possess any of the foregoing or its
conflict with the rights of others would not have a Material Adverse Effect.
BSB is an Insured Depository Institution.
Section 6.5. LITIGATION AND JUDGMENTS. Except as disclosed on
Schedule 2 hereto, Borrower is not aware of any action, suit, investigation, or
proceeding before or by any Governmental Authority or arbitrator pending or
threatened against Borrower or any of the Controlled Companies or any of their
respective Properties, that would, if adversely determined, have a Material
Adverse Effect. There are no outstanding judgments against Borrower or any of
the Controlled Companies the enforcement of which would have a Material Adverse
Effect.
Section 6.6. RIGHTS IN PROPERTIES; LIENS. Borrower has, and to the
best of Borrower's knowledge each of the Controlled Companies has, good and
indefeasible title to or valid leasehold interests in its respective Properties
that are material to Borrower and the Controlled Companies taken as a whole,
including all such Properties reflected in the financial statements as of
October 31, 1994, described in Section 6.2 (other than any Properties disposed
of in the ordinary course of business), and none of such Properties is subject
to any Lien, except Permitted Liens; PROVIDED, however, that no representation
or warranty is made in this Section with respect to any Covered Asset or any
asset of BSB identified as "real estate owned".
Section 6.7. ENFORCEABILITY. This Agreement constitutes, and the
other Loan Documents to which Borrower is a party, when delivered, shall
constitute the legal, valid, and binding obligations of Borrower, enforceable
against Borrower in accordance with their respective terms, except as limited by
(a) bankruptcy, insolvency, or other laws of general application relating to the
enforcement of creditors' rights, including, without limitation, the rights of
creditors of Insured Depository Institutions and their holding companies, (b)
the application of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law), and (c) the
ability of the OTS or the FDIC under certain circumstances to issue cease and
desist orders to preclude the taking of actions that are unsafe or unsound or to
require the taking of action to correct conditions resulting from any unsafe or
unsound action.
Section 6.8. APPROVALS. Except for authorizations, approvals, and
consents that were validly obtained and are in full force and effect, no
authorization, approval, or consent of, and
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no filing or registration with or notice to, any Governmental Authority or third
party is or will be necessary for the execution, delivery, or performance by
Borrower of this Agreement and the other Loan Documents to which Borrower is or
may become a party or the validity or enforceability thereof.
Section 6.9. DEBT. Borrower and the Controlled Companies have no Debt,
except as disclosed in the financial statements referred to in Section 6.2 or on
Schedule 3 hereto.
Section 6.10. TAXES. To the best of Borrower's knowledge, Borrower and
the Controlled Companies have filed all tax returns (federal, state, and local)
required to be filed by them for all periods since the Organization Date,
including all income, franchise, employment, Property, and sales tax returns,
and have paid or fully reserved for all of their respective liabilities for
taxes, assessments, governmental charges, and other levies shown as due on such
returns, and Borrower knows of no pending investigation of Borrower or any of
the Controlled Companies by any taxing authority or of any pending but
unassessed tax liability of Borrower or any of the Controlled Companies;
provided, however, no representation or warranty is made with respect to ad
valorem taxes pertaining to any Covered Asset or the assets of any Controlled
Company the investment in which is a Covered Asset.
Section 6.11. USE OF PROCEEDS; MARGIN SECURITIES. Neither Borrower nor
any Controlled Company is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulations G, T, U, or X of the
Board of Governors of the Federal Reserve System), and no part of the Loan has
been or will be used to purchase or carry any such margin stock or to extend
credit to others for the purpose of purchasing or carrying margin stock.
Section 6.12. ERISA. Except as disclosed on Schedule 8 hereto, to the
best of Borrower's knowledge, (a) Borrower and each Controlled Company are in
compliance in all material respects with all applicable provisions of ERISA, (b)
neither a Reportable Event nor a Prohibited Transaction has occurred and is
continuing with respect to any Plan, (c) no notice of intent to terminate a
Plan has been filed, nor has any Plan been terminated, (d) no circumstances
exist which constitute grounds entitling the Pension Benefit Guaranty
Corporation ("PBGC") to institute proceedings to terminate or appoint a trustee
to administer a Plan, nor has the PBGC instituted any such proceedings,
(e) neither CFSB nor any ERISA Affiliate is currently in or has completely or
partially withdrawn from a Multiemployer Plan, (f) CFSB and each ERISA Affiliate
have met their minimum funding requirements under ERISA with respect to all of
their Plans, and the present value of all vested benefits under each Plan does
not exceed the fair market value of all Plan assets allocable to such benefits,
as determined on the most recent valuation date of the Plan and in accordance
with the provisions of ERISA, and (g) neither CFSB nor any ERISA Affiliate has
incurred any unsatisfied liability to the PBGC under ERISA.
Section 6.13. DISCLOSURE. No statement, information, report,
representation, or warranty made by Borrower in this Agreement or in any other
Loan Document contains any untrue statement of a material fact. There is no
fact known to Borrower which has a Material Adverse Effect, or which could
reasonably be expected to have a Material Adverse Effect, that has not
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been disclosed in writing to Lender, or publicly in the print and/or
telecommunications media and except for the possible effect of change of control
provisions contained in employment contracts of officers of BSB.
Section 6.14. OTHER AGREEMENTS. Except as disclosed in Schedule 9 hereto,
neither Borrower nor any Controlled Company is a party to any indenture, loan,
note purchase, or credit agreement, or to any lease or other agreement or
instrument, or subject to any charter or corporate restriction (other than the
Capital Maintenance Agreement and the Thrift Laws) which could reasonably be
expected to have a Material Adverse Effect. Except as disclosed in Schedule 9
hereto, neither Borrower nor any Controlled Company is in default in any respect
in the performance, observance, or fulfillment of any of the obligations,
covenants, or conditions contained in any agreement or instrument material to
his or its business to which he or it is a party, except for defaults (if any)
which, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect.
Section 6.15. COMPLIANCE WITH LAWS. Except as disclosed on Schedule 10
hereto, neither Borrower, nor to the best of his knowledge any of the Controlled
Companies, is in violation of any law, rule, regulation, order, or decree of any
Governmental Authority or arbitrator, except for instances of noncompliance (if
any) which, individually or in the aggregate, could not reasonably be expected
to have a Material Adverse Effect.
Section 6.16. INVESTMENT COMPANY ACT. Neither CFSB nor any Controlled
Company is an "investment company" within the meaning of the Investment Company
Act of 1940, as amended.
Section 6.17. PUBLIC UTILITY HOLDING COMPANY ACT. CFSB is not a "holding
company" or a "subsidiary company" of a "holding company" or a "public utility"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
Section 6.18. MATERIAL CONTRACTS. Each of the Material Contracts
identified on Schedule 5 hereto is in full force and effect and none of the
provisions thereof have been amended, modified, or waived in any respect that
could reasonably be expected to have a Material Adverse Effect; PROVIDED that
Borrower makes no representation or warranty with respect to the Forbearance
Letter. There is no breach or violation of or default by Borrower or any
Controlled Companies or, to the knowledge of Borrower, by any other party under
any Material Contract that could reasonably be expected to have a Material
Adverse Effect. Borrower has no knowledge or reason to believe that any
Material Contract identified on Schedule 5 hereto is not enforceable by CFSB or
BSB in accordance with its terms; PROVIDED, that the enforceability of each
Material Contract identified on Schedule 5 hereto may be limited by (a)
bankruptcy, insolvency, or other laws of general application relating to the
enforcement of creditors' rights; (b) the application of general principles of
equity (regardless of whether such enforceability is considered in a proceeding
at law or in equity); and (c) the ability of the OTS or the FDIC under certain
circumstances to issue cease and desist orders to preclude the taking of actions
that are unsafe or unsound or to require the taking of action to correct
conditions resulting from any
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unsafe or unsound action; PROVIDED, further, that Borrower makes no
representation or warranty with respect to the Forbearance Letter.
Section 6.19. ENVIRONMENTAL MATTERS. (a) Except as disclosed on Schedule 6
hereto and except where the matters referred to in clauses (i) through (iii)
below in the aggregate could not reasonably be expected to have a Material
Adverse Effect and without having undertaken any independent investigation:
(i) Borrower is not aware of any failure by Borrower or any
Controlled Company to comply with any Environmental Law or of any
liability of Borrower or any Controlled Company under any
Environmental Law.
(ii) To the best of Borrower's knowledge, Borrower and each Controlled
Company hold all permits, licenses, and authorizations which are
required under Environmental Laws.
(iii) To the best of Borrower's knowledge, there is no action, suit,
proceeding or inquiry before any Governmental Authority pending
or threatened against Borrower or any Controlled Company relating
in any way to any Environmental Law. Since the Organization
Date, neither Borrower nor any Controlled Company has (a)
received any request for information from any Governmental
Authority responsible for administering or evaluating compliance
with Environmental Laws with respect to the condition, use, or
operation of any of its Properties, or (b) received any notice
from any Governmental Authority or other Person with respect to
any violation of or liability under any Environmental Law.
(b) To the best of Borrower's knowledge, no Lien arising under or in
connection with any Environmental Law has attached to any of the Properties of
Borrower or any Controlled Company.
Section 6.20. CAPITALIZATION.
(a) The authorized Capital Stock of CFSB consists of 80,000
shares of common stock, par value $0.01 per share, of which 2,400
shares are issued and outstanding. Borrower owns 100% of the issued
and outstanding Capital Stock of CFSB. All of the outstanding Capital
Stock of CFSB has been validly issued, is fully paid, and is
nonassessable.
(b) The authorized Capital Stock of BSB consists of (i)
10,000,000 shares of common stock, $0.01 par value per share, of which
480,000 shares are issued and outstanding as of the Agreement Date,
and (ii) 10,000,000 shares of preferred stock, $0.01 par value per
share, 600,000 of which are designated BSB
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Series A Preferred Stock, all of which are issued and outstanding.
CFSB owns 100% of the issued and outstanding common stock and 580,000
shares of the preferred stock of BSB. All of the outstanding Capital
Stock of BSB has been validly issued, is fully paid, and is
nonassessable.
(c) There are no existing subscriptions, options, warrants,
calls, or rights (including preemptive rights) issued by CFSB or BSB
to acquire, and no existing Debt, securities, or other instruments
convertible into or exchangeable for, Capital Stock of CFSB or BSB,
except for the FSLIC Warrant, and as provided in the Capital
Maintenance Agreement.
(d) Borrower has no Controlled Companies other than those listed
on Schedule 4 hereto, and Schedule 4 sets forth the jurisdiction of
incorporation of each Controlled Company and the percentage of
Borrower's ownership of the outstanding voting stock of each
Controlled Company (on a fully diluted basis).
Section 6.21. INSIDER DEBT. Except as set forth on Schedule 7, neither
Borrower nor any member of his Immediate Family is indebted to CFSB or any of
its Material Subsidiaries.
Section 6.22. NO SENSITIVE TRANSACTIONS. Neither Borrower, the Material
Subsidiaries, nor to the best of Borrower's knowledge any stockholder, director,
officer, employee, or agent of any Material Subsidiary has directly or
indirectly used funds or other Property of CFSB or any Material Subsidiary for
(i) illegal contributions, gifts, entertainment, or other expenses relating to
political activities; (ii) payments to or for the benefit of governmental
officials or employees other than payments required or permitted by law; (iii)
illegal payments to or for the benefit of any Person or any stockholder,
director, officer, employee, agent, or representative thereof; (iv) the illegal
establishment or maintenance of any secret or unrecorded fund; or (v) illegal
payments to or for the benefit of Borrower or any member of his Immediate
Family.
ARTICLE VII
POSITIVE COVENANTS
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding, Borrower will perform and observe, and, where
applicable, cause each Controlled Company to perform and observe, the following
positive covenants, unless Lender shall otherwise consent in writing:
Section 7.1. REPORTING REQUIREMENTS. Borrower will furnish to
Lender:
(a) ANNUAL FINANCIAL STATEMENTS. Within thirty (30) days after
filing his personal income tax return each calendar year, a list of
all material assets and material liabilities (including contingent
liabilities) of Borrower as of December 31 of such calendar year and a
statement of the sources of material income and material expenses of
Borrower for the previous calendar year. Each such statement shall be
certified by
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Borrower as true, correct and complete in all respects. As soon as
available after the end of each fiscal year of CFSB, beginning with
the fiscal year ending September 30, 1994, (i) a copy of the annual
audit report of CFSB and its Subsidiaries for such fiscal year
containing, on a consolidated basis, balance sheets, statements of
income, statements of stockholder's equity, and statements of cash
flow as at the end of such fiscal year and for the 12-month period
then ended, in each case prepared in accordance with GAAP and setting
forth in comparative form the figures for the preceding fiscal year,
all audited and certified by Deloitte & Touche or other independent
certified public accountants of recognized standing, and (ii) a
certificate of such independent certified public accountants to Lender
(A) stating that to their knowledge no Event of Default or Potential
Default has occurred and is continuing, or if in their opinion an
Event of Default or Potential Default has occurred and is continuing,
a statement as to the nature thereof, and (B) confirming the
calculations set forth in the officer's certificate delivered
simultaneously therewith;
(b) QUARTERLY FINANCIAL STATEMENTS. Within thirty (30) days
after the last day of each of the first three (3) calendar quarters of
each year, a list of all material assets and material liabilities
(including contingent liabilities) of Borrower as of the last day of
each such calendar quarter and a statement of the sources of material
income and material expenses of Borrower for such quarter. Each such
statement shall be certified by Borrower as true, correct and complete
in all respects.
(c) MONTHLY FINANCIAL STATEMENTS. As soon as available, and in
any event within forty-five (45) days after the end of each calendar
month, a copy of an unaudited financial report of CFSB and BSB as of
the end of such calendar month and for the portion of the fiscal year
then ended, containing, on an unconsolidated equity accounting basis,
balance sheets, statements of income, statements of stockholder's
equity, and statements of cash flow, in each case setting forth in
comparative form the figures for the corresponding period of the
preceding fiscal year, certified by a duly authorized officer of CFSB
or BSB, as appropriate, to have been prepared and to fairly present in
accordance with GAAP (subject to year-end audit adjustments and the
absence of footnotes) the financial condition and results of
operations of CFSB or BSB, as appropriate, on an unconsolidated equity
accounting basis. at the dates and for the periods indicated therein;
(d) REGULATORY FILINGS. Promptly after the filing thereof, to
the extent not prohibited by applicable law, copies of all Thrift
Financial Reports, and requests for approvals or waivers filed by CFSB
and its Subsidiaries with the FDIC or the OTS, except those relating
to Covered Assets.
(e) CERTIFICATE OF NO DEFAULT. Concurrently with the delivery
of each of the financial statements referred to in subsections 7.1 (a)
and 7.1 (b), a certificate of Borrower (i) stating that to the best of
Borrower's knowledge, no Event of Default or Potential Default has
occurred and is continuing, or if an Event of Default or Potential
Default has occurred and is continuing, a statement as to the nature
thereof and the action which is proposed to be taken with respect
thereto, and (ii) showing in reasonable detail
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calculations for the matters set forth in Sections 9.1 (o), 9.1 (q)
(calculated quarterly), 9.1 (v), and 9.1 (w);
(f) MANAGEMENT LETTERS. Promptly upon receipt thereof, a copy
of each management letter submitted to Borrower or CFSB by independent
certified public accountants with respect to the business, condition
(financial or otherwise), operations, prospects, capitalization,
liquidity, or Properties of CFSB or any of the Material Subsidiaries;
(g) NOTICE OF LITIGATION. Promptly after the commencement
thereof, notice of all actions, suits, and proceedings before any
Governmental Authority or arbitrator of which Borrower has knowledge,
commenced against Borrower, CFSB or any Controlled Company which, if
determined adversely, could reasonably be expected to have a Material
Adverse Effect;
(h) NOTICE OF DEFAULT. As soon as possible and in any event
within five (5) days after Borrower has obtained knowledge of the
occurrence of any Event of Default or Potential Default, a written
notice setting forth the details of such Event of Default or Potential
Default and the action that Borrower has taken and proposes to take
with respect thereto;
(i) REPORTS TO OTHER CREDITORS. Promptly after the furnishing
thereof, copies of any statement or report furnished to any other
party pursuant to the terms of any indenture, loan, credit, or similar
agreement and not otherwise required to be furnished to Lender
pursuant to any other clause of this Section;
(j) NOTICE OF ENVIRONMENTAL LAW VIOLATION. As soon as possible
and in any event within five (5) days after obtaining knowledge of the
occurrence thereof, written notice of any violation by Borrower or any
Controlled Company of any Environmental Law that Borrower or any
Controlled Company reports to, or is notified of by, any Governmental
Authority;
(k) NOTICE OF MATERIAL ADVERSE EFFECT. As soon as possible and
in any event within five (5) days after obtaining knowledge of the
occurrence thereof, written notice of any matter that could reasonably
be expected to have a Material Adverse Effect; and
(l) GENERAL INFORMATION. Promptly, and to the extent permitted
by applicable law, such other information concerning the financial
condition or business activities of Borrower as Lender may from time
to time reasonably request.
Section 7.2. PAYMENT OF NOTE AND MAINTENANCE OF OFFICE. Borrower
shall punctually cause to be paid the principal and interest to become due in
respect of the Note according to the terms thereof and hereof and shall maintain
an office where notices, presentations, and demands in respect of this Agreement
and the Note may be made upon him.
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Section 7.3. CONDUCT OF BUSINESS. Borrower will and will cause each
Controlled Company to preserve and maintain all of their respective leases,
privileges, licenses, permits, governmental authorizations, franchises,
qualifications, and rights that are necessary or desirable in the ordinary
conduct of their respective businesses, and conduct their respective businesses
in an orderly and efficient manner in accordance with good business practices.
Section 7.4. MAINTENANCE OF PROPERTIES. Borrower will maintain,
keep, and preserve all of his material Properties necessary or useful in the
proper conduct of his business in reasonable working order and condition
(ordinary wear and tear excepted).
Section 7.5. TAXES AND CLAIMS. Borrower and each Controlled Company
will pay or discharge at or before maturity or before becoming delinquent (i)
all taxes, levies, assessments, and governmental charges imposed on any of them
or any of their respective incomes, profits or Properties, and (ii) all lawful
claims for labor, material, and supplies, which, if unpaid, might become a Lien
upon any of their respective Properties; PROVIDED, however, that neither
Borrower nor any Controlled Company shall be required to pay or discharge any
tax, levy, assessment, or governmental charge or claim that is being contested
in good faith by appropriate proceedings diligently pursued, and for which
adequate reserves have been established as and to the extent required by GAAP.
Section 7.6. INSURANCE. Borrower and each Controlled Company will
maintain with financially sound and reputable insurance companies workmen's
compensation insurance, liability insurance, and insurance on their Properties
and businesses or maintain a program of self insurance at least in such amounts
and against such risks (with such deductibles) as are usually insured or self
insured against by Persons engaged in similar businesses in similar locations.
Section 7.7. INSPECTION RIGHTS. At any reasonable time and from
time to time and to the extent permitted by applicable law, Borrower will permit
representatives of Lender to examine and make copies of the books and records
of, and visit and inspect the Properties of Borrower and the Controlled
Companies, and to discuss the business, operations, and financial condition of
Borrower with Borrower and the Controlled Companies and with Borrower's and the
Controlled Companies' independent certified public accountants.
Section 7.8. KEEPING BOOKS AND RECORDS. Borrower and the Controlled
Companies will maintain proper books of record and account in reasonable detail
that accurately and fairly reflect their transactions.
Section 7.9. COMPLIANCE WITH LAWS. Borrower will comply in all
material respects with all applicable laws, rules, regulations, and orders of
any Governmental Authority or arbitrator, including, without limitation, all
applicable Thrift Laws, except for instances of noncompliance which,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
Section 7.10. COMPLIANCE WITH AGREEMENTS. Borrower and the
Controlled Companies will comply in all material respects with all agreements,
contracts, and instruments binding on
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any of them or affecting any of their respective Properties or businesses,
including, without limitation, all Material Contracts to which any of them is a
party, except for instances of noncompliance which, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
Section 7.11. FURTHER ASSURANCES. Borrower will execute and deliver
such agreements and further instruments as may be deemed necessary or desirable
by Lender to carry out the provisions and purposes of this Agreement and the
other Loan Documents and to preserve and perfect Lender's Liens in the
Collateral.
Section 7.12. ERISA. Borrower shall cause the Controlled Companies
to comply with all minimum funding requirements, and all other material
requirements, of ERISA, if applicable, so as not to give rise to any liability
thereunder.
Section 7.13. DIVIDEND REQUEST. If on the date (the "Determination
Date") which is forty-five (45) days prior to each Payment Date, Borrower does
not have cash in an amount necessary to pay (i) the payment next due on the
Loan, and (ii) all other obligations of Borrower which are due and payable in
the period from the Determination Date to the Payment Date, then at least thirty
(30) days prior to such Payment Date, Borrower shall, to the extent not
prohibited by applicable law and consistent with the responsibilities of the
directors of BSB as directors of an Insured Depository Institution, cause BSB to
take such action as may be necessary and appropriate pursuant to 12 C.F.R.
Section 563.134 to permit BSB to make a capital distribution (as therein
defined) to CFSB in an amount necessary to make the payment next due on the
Loan, and shall cause CFSB to distribute such amount to Borrower.
ARTICLE VIII
NEGATIVE COVENANTS
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding, Borrower will perform and observe, and, where
applicable, will cause each Controlled Company to perform and observe, the
following negative covenants, unless Lender shall otherwise consent in writing:
Section 8.1. DEBT. Borrower and the Controlled Companies will not
incur, create, assume, or permit to exist any Debt except: (a) Debt to Lender,
(b) Existing Debt described on Schedule 3 hereto, and (c) such Debt of BSB as is
necessary and prudent in the ordinary course of business of BSB.
Section 8.2. LIMITATION ON LIENS. Neither Borrower nor any
Controlled Company will incur, create, assume, or permit to exist any Lien upon
any of their respective Properties, except Permitted Liens.
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Section 8.3. MERGERS, RECAPITALIZATIONS, AND DISSOLUTIONS. No
Controlled Company will become a party to a merger (except a merger of a
Controlled Company effected in conjunction with an Acquisition which is not a
Material Acquisition and where such Controlled Company is the surviving entity),
consolidation, or recapitalization, or dissolve or liquidate. To the extent
that any such approval or consent is required of CFSB as a shareholder of BSB,
Borrower will not, and will not permit CFSB to, approve or give any consent to
any merger, consolidation, or recapitalization of CFSB or BSB, respectively, or
any sale of all or substantially all of the Property of CFSB or BSB,
respectively, or the dissolution or liquidation of CFSB or BSB, respectively.
Section 8.4. TRANSACTIONS WITH AFFILIATES. Borrower will not, and
will not permit any Controlled Company to, enter into any transaction,
including, without limitation, the purchase, sale, or exchange of Property or
the rendering of any service, with any Affiliate of Borrower or any Controlled
Company, except as not prohibited by the Thrift Laws and upon fair and
reasonable terms no less favorable to Borrower than could generally be obtained
in a comparable arm's-length transaction with a similarly situated Person not an
Affiliate of Borrower or any Controlled Company.
Section 8.5. DISPOSITION OF PROPERTY. Neither Borrower nor any
Controlled Company shall make a Material Disposition.
Section 8.6. PREPAYMENT OF DEBT. Borrower will not directly or
indirectly prepay, repurchase, or redeem any Debt, except the Obligations.
Section 8.7. MATERIAL CONTRACTS. Borrower will not permit any
amendment, waiver, modification, termination, or cancellation of any provision
of any Material Contract to which he is a party that would have a Material
Adverse Effect (exclusive of any termination or cancellation that is not
dependent on cause); PROVIDED, however, Borrower will not permit CFSB to agree
to any amendment or modification of the Assistance Agreement without the prior
written consent of Lender, which consent shall not be unreasonably withheld by
Lender.
Section 8.8. LIMITATION ON ISSUANCE OF CAPITAL STOCK. Except as
permitted in accordance with Section 10.19 hereof, CFSB will not at any time
issue, sell, assign, or otherwise dispose of (i) any of its Capital Stock, or
any other interests, participations, rights or other equivalents (however
designated), (ii) any securities exchangeable for or convertible into or
carrying any rights to acquire any shares of any class of its Capital Stock, or
(iii) any options, warrants, or other rights to acquire any shares of any class
of its Capital Stock.
Section 8.9. MODIFICATION OF CORPORATE DOCUMENTS. Borrower will not
amend, modify, or change the certificate of incorporation or bylaws of CFSB, or
consent to the amendment or modification of the charter or bylaws of BSB, if
such amendment, modification, or change could have a Material Adverse Effect.
Section 8.10. ACCOUNTING CHANGES. Borrower will not make, and will
not permit any of the Material Subsidiaries to make, any change in accounting
treatment or reporting practices used
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in connection with the preparation of the financial statements provided
hereunder, except as required or permitted by GAAP or applicable law and
disclosed to Lender.
Section 8.11. GOLDEN PARACHUTES. Neither CFSB nor any other
Controlled Company will enter into any agreement with any of their respective
employees providing for any payment in the nature of compensation to or for the
benefit of any such employee that is a "parachute payment" as such term is
defined in Section 280(G) of the Code.
Section 8.12. ACQUISITION OF PROPERTY. Neither Borrower nor any
Controlled Company shall make a Material Acquisition.
ARTICLE IX
DEFAULT
Section 9.1. EVENTS OF DEFAULT. Each of the following shall be deemed
an "Event of Default":
(a) Borrower shall fail to pay when due any principal of or
accrued and unpaid interest on the Loan and such failure shall
continue unremedied for a period of five (5) calendar days; or
Borrower shall fail to pay when due any other Obligation and such
failure shall continue unremedied for a period of fifteen (15)
calendar days after notice of such failure by Lender to Borrower.
(b) Any representation or warranty made by Borrower or any
Obligated Party (or any of their respective officers) in any Loan
Document or in any certificate, report, notice, or financial statement
furnished at any time in connection with this Agreement shall be
false, misleading, or erroneous in any material respect when made.
(c) Borrower, CFSB, BSB, or any Obligated Party shall fail to
perform, observe, or comply in any material respect with any covenant,
agreement, or term contained in this Agreement or any other of the
Loan Documents (exclusive of covenants to pay the Obligations).
(d) Borrower, any Material Subsidiary, or any Obligated Party
shall commence a voluntary proceeding seeking liquidation,
reorganization, or other relief with respect to itself or its debts
under any bankruptcy, insolvency, or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, conservator, custodian, or other similar official of it or
a substantial part of its Property or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it or shall
make a general assignment for the benefit of creditors or shall
generally fail to pay its debts as they become due or shall take any
corporate action to authorize any of the foregoing.
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(e) An involuntary proceeding shall be commenced against
Borrower, any Material Subsidiary, or any Obligated Party seeking
liquidation, reorganization, or other relief with respect to it or its
debts under any bankruptcy, insolvency, or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, conservator, custodian, or other similar official for it
or a substantial part of its Property, and such involuntary proceeding
shall remain undismissed and unstayed for a period of sixty (60) days.
(f) Borrower, any Material Subsidiary, or any Obligated Party
shall fail to discharge or stay within a period of thirty (30) days
after the commencement thereof any attachment, sequestration, or
similar proceeding or proceedings (exclusive of any proceeding or
proceedings to the extent covered by an indemnity of the FSLIC
contained in the Assistance Agreement) involving an aggregate amount
in excess of One Million Dollars ($1,000,000) against any of its
Properties.
(g) The final judgment or judgments (exclusive of any judgment
in respect of any other judgment or judgments to the extent covered by
an indemnity of the FSLIC contained in the Assistance Agreement) for
the payment of money in excess of One Million Dollars ($1,000,000) in
the aggregate shall be rendered by a court or courts against Borrower,
any Material Subsidiary, or any Obligated Party and the same shall not
be discharged (or provisions shall not be made for such discharge), or
stay of execution thereof shall not be procured, within thirty (30)
days from the date of entry thereof and Borrower, such Material
Subsidiary, or Obligated Party shall not, within said period of thirty
(30) days, or such longer period during which execution of the same
shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(h) Borrower, any Material Subsidiary, or any Obligated Party
shall fail to pay when due any principal of or interest on any Debt
(other than the Obligations) having an outstanding principal amount in
excess of One Million Dollars ($1,000,000), or any event specified in
any note. agreement, indenture or other document evidencing or
relating to any such Debt shall occur if the effect of such event is
to cause, or to permit the holder or holders of such Debt (or a
trustee or agent on behalf of such holder or holders) to cause, such
Debt to become due, or to be prepaid, redeemed or purchased in full
(whether by acceleration, mandatory prepayment, redemption, purchase
or otherwise) prior to its stated maturity.
(i) This Agreement or any other Loan Document shall cease to be
in full force and effect or shall be declared null and void or the
validity or enforceability thereof shall be contested or challenged by
Borrower, any Material Subsidiary, any Obligated Party or any of their
respective shareholders, or Borrower, any Material Subsidiary, or any
Obligated Party shall deny that it has any further liability or
obligation under any of the Loan Documents, or any Lien created by the
Loan Documents shall for any reason cease to be a valid, first
priority Lien upon any of the Collateral purported to be covered
thereby.
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(j) Any of the following events shall occur or exist with
respect to Borrower or any ERISA Affiliate: (i) any Prohibited
Transaction involving any Plan; (ii) any Reportable Event with respect
to any Plan; (iii) the filing under Section 4041 of ERISA of a notice
of intent to terminate any Plan or the termination of any Plan; (iv)
any event or circumstance that might constitute grounds entitling the
PBGC to institute proceedings under Section 4042 of ERISA for the
termination of, or for the appointment of a trustee to administer, any
Plan, or the institution by the PBGC of any such proceedings; (v)
complete or partial withdrawal under Section 4201 or 4204 of ERISA
from a Multiemployer Plan or the reorganization, insolvency, or
termination of any Multiemployer Plan; and in each case above, such
event or condition, together with all other events or conditions, if
any, have subjected or could in the reasonable opinion of Lender
subject Borrower to any tax, penalty, or other liability to a Plan, a
Multiemployer Plan, the PBGC, or otherwise (or any combination
thereof) which in the aggregate exceed or could reasonably be expected
to exceed One Million Dollars ($1,000,000).
(k) Borrower, any Material Subsidiary, or any Obligated Party,
or any of their Properties shall become subject to an order of
forfeiture, seizure, or divestiture, whether under RICO or otherwise,
(excluding the forfeiture, seizure or divestiture of Properties of a
Material Subsidiary which have an aggregate value of One Million
Dollars ($1,000,000) or less or taking pursuant to an eminent domain
proceeding) and the same shall not have been discharged or stayed
within thirty (30) days from the date of entry thereof.
(l) Any event shall have occurred that could reasonably be
expected to have a Material Adverse Effect.
(m) The occurrence of any Change of Control.
(n) The occurrence of an "Event of Default," as that term is
defined in the CFSB Loan Agreement.
(o) BSB shall at any time fail to maintain the BSB Capital
Minimum, or the Capital of BSB shall, at any time, be less than one
hundred fifty percent (150%) of the Loan Balance.
(p) The commencement of any enforcement action against CFSB or
BSB by the OTS or the FDIC pursuant to any provisions of Section 8 of
the Federal Deposit Insurance Act, 12 U.S.C. Section 1818, or the
regulations promulgated thereunder, or the execution by CFSB or BSB of
any agreement with the OTS or the FDIC a violation of which may be
enforced under Section 8 of the Federal Deposit Insurance Act, 12
U.S.C. Section 1818, or the regulations promulgated thereunder.
(q) BSB shall at any time fail to maintain proper reserves for
Criticized Assets under GAAP, or, after such reserves have been
established, the Criticized Assets
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(exclusive of Covered Assets) in the "Loss" and "Doubtful" categories
exceed twenty percent (20%) of Capital of BSB.
(r) BSB shall at any time fail to be an Insured Depository
Institution.
(s) Any Controlled Company shall have entered into an agreement
with any of its employees providing for any payment in the nature of
compensation to or for the benefit of such employee that is a
"parachute payment" as such term is defined in Section 280(G) of the
Code.
(t) Except as permitted hereunder, CFSB, any Controlled Company,
or BSB or any of its subsidiaries shall have made on or after the
Agreement Date a loan or other extension of credit to or for the
benefit of Borrower, any member of the Immediate Family of Borrower,
or any Affiliate of Borrower, other than a Controlled Company.
(u) BSB shall, except pursuant to the FSLIC Warrant, at any time
issue, sell, assign, or otherwise dispose of (i) any of its Capital
Stock, or any other interests, participations, rights or other
equivalents (however designated), (ii) any securities exchangeable for
or convertible into or carrying any rights to acquire any shares of
any class of its Capital Stock, or (iii) any options, warrants, or
other rights to acquire any shares of any class of its Capital Stock.
(v) If, at a time the Capital of BSB is equal to or less than
two hundred percent (200%) of the Loan Balance, the net income of BSB
determined pursuant to GAAP for the prior four quarters shall be less
than one hundred forty percent (140%) of the Aggregate Debt Service
for the forthcoming four quarters.
(w) If, at any time the Capital of BSB is greater than two
hundred percent (200%) of the Loan Balance, the net income of BSB
determined pursuant to GAAP for the prior four quarters shall be less
than one hundred thirty percent (130%) of the Aggregate Debt Service
for the forthcoming four quarters.
(x) If any dividend is paid on the BSB Series A Preferred Stock
which is not paid into the Collateral Account, other than the dividend
on 20,000 shares of the BSB Series A Preferred Stock.
Section 9.2. REMEDIES UPON DEFAULT. If any Event of Default shall
occur and be continuing, Lender may, with notice to Borrower, declare the
Obligations or any part thereof to be immediately due and payable, and the same
shall thereupon become immediately due and payable, without further notice,
demand, presentment, notice of dishonor, notice of intent to accelerate, notice
of intent to demand, protest, or other formalities of any kind, all of which are
hereby expressly waived by Borrower; provided, however, that upon the occurrence
of an Event of Default under Section 9.1(d) or Section 9.1(e), the commitment
of Lender to lend hereunder, if any, shall automatically terminate, and the
Obligations shall become immediately due and payable without notice, demand,
presentment, notice of dishonor, notice of acceleration, notice
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of intent to accelerate. notice of intent to demand, protest, or other
formalities of any kind, all of which are hereby expressly waived by Borrower.
If any Event of Default shall occur and be continuing, Lender may exercise all
rights and remedies available to it in law or in equity, under the Loan
Documents, or otherwise.
Section 9.3. PERFORMANCE BY LENDER. If Borrower shall fail to perform any
covenant, duty, or agreement contained in any of the Loan Documents, Lender may
perform or attempt to perform such covenant, duty, or agreement on behalf of
Borrower after notice to Borrower. In such event, Borrower shall, at the
written request of Lender, promptly pay any amount reasonably expended by Lender
in such performance or attempted performance to Lender, together with interest
thereon at the Contract Rate from the payment date of such expenditure until
paid. Notwithstanding the foregoing, it is expressly agreed that Lender shall
not be required to perform any obligation of Borrower under this Agreement or
any other Loan Document.
ARTICLE X
MISCELLANEOUS
Section 10.1. EXPENSES OF LENDER. Borrower hereby agrees to pay Lender on
demand: (i) all reasonable costs and expenses incurred by Lender in connection
with the enforcement of its rights and remedies under this Agreement or any
other Loan Document, including, without limitation, the reasonable fees and
expenses of Lender's legal counsel, and (ii) all taxes, assessments, filing
fees, and other charges levied by any Governmental Authority or otherwise
payable in respect of this Agreement, the Note, or any other Loan Document or in
obtaining any audit or appraisal in respect of the Collateral, but excluding any
state or federal income tax owed by Lender or a tax based on gross or net
receipts of Lender.
Section 10.2. LIMITATION OF LIABILITY. Neither Lender nor any Affiliate,
officer, director, employee, attorney, or agent of Lender shall have any
liability with respect to, and Borrower hereby waives, releases, and agrees not
to sue any of them upon, any claim for any special, indirect, incidental, or
consequential damages suffered or incurred by Borrower in connection with,
arising out of, or in any way related to, this Agreement or any of the other
Loan Documents, or any of the transactions contemplated by this Agreement or any
of the other Loan Documents. Borrower hereby waives, releases, and agrees not to
sue Lender or any of Lender's Affiliates, officers, directors, employees,
attorneys, or agents for punitive damages in respect of any claim in connection
with, arising out of, or in any way related to, this Agreement or any of the
other Loan Documents, or any of the transactions contemplated by this Agreement
or any of the other Loan Documents.
Section 10.3. NO DUTY. All attorneys, accountants, appraisers, and other
professional Persons and consultants retained by Lender shall have the right to
act exclusively in the interest of Lender in connection with the Loan Documents
and the transactions contemplated thereby and shall have no duty of disclosure,
duty of loyalty, duty of care, or other duty or obligation of any
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type or nature whatsoever to Borrower, any Obligated Party, or any other Person
in connection with the Loan Documents or the transactions contemplated thereby.
Section 10.4. LENDER NOT FIDUCIARY. The relationship between Borrower and
Lender in connection with the Loan Documents and the transactions contemplated
thereby is solely that of debtor and creditor, and Lender has no fiduciary or
other special relationship with Borrower in respect thereof. No term or
condition of any of the Loan Documents shall be construed so as to deem the
relationship between Borrower and Lender to be other than that of debtor and
creditor.
Section 10.5. EQUITABLE RELIEF. Borrower recognizes that in the event
Borrower fails to pay, perform, observe, or discharge any or all of the
Obligations, any remedy at law may prove to be inadequate relief to Lender.
Borrower therefore agrees that Lender, if Lender so requests, shall be entitled
to temporary and permanent injunctive relief in any such case without the
necessity of proving actual damages.
Section 10.6. NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of
Lender to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power, or privilege under this Agreement shall operate as
a waiver thereof, nor shall any single or partial exercise of any right, power,
or privilege under this Agreement preclude any other or further exercise thereof
or the exercise of any other right, power, or privilege. The rights and remedies
provided for in this Agreement and the other Loan Documents are cumulative and
not exclusive of any rights and remedies provided by law.
Section 10.7. SUCCESSORS AND ASSIGNS. This Agreement is binding upon and
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns, except that Borrower may not assign or transfer any of
its rights or obligations under this Agreement without the prior written consent
of Lender. Lender shall notify Borrower of any assignment of Lender's rights
hereunder.
Section 10.8. SURVIVAL. All representations and warranties made in this
Agreement or any other Loan Document or in any document, statement, or
certificate furnished in connection with this Agreement shall survive the
execution and delivery of this Agreement and the other Loan Documents, and no
investigation by Lender or any closing shall affect the representations and
warranties or the right of Lender to rely upon them. Without prejudice to the
survival of any other obligation of Borrower hereunder, the obligations of
Borrower under Section 10.1 shall survive repayment of the Note.
Section 10.9. AMENDMENT. The provisions of this Agreement, the Note, and
any other document executed in connection with the Loan may be amended or waived
only by an instrument in writing signed by the parties hereto.
Section 10.10. MAXIMUM INTEREST RATE. No provision of this Agreement or any
other Loan Document shall require the payment or the collection of interest in
excess of the maximum permitted by applicable law. If any excess of interest in
such respect is hereby provided for, or
FIRST AMENDED AND
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<PAGE>
shall be adjudicated to be so provided, in any Loan Document or otherwise in
connection with this loan transaction, the provisions of this Section shall
govern and prevail and neither Borrower nor the sureties, guarantors,
successors, or assigns of Borrower shall be obligated to pay the excess amount
of such interest or any other excess sum paid for the use, forbearance, or
detention of sums loaned pursuant hereto. In the event Lender ever receives,
collects, or applies as interest any such sum, such amount which would be in
excess of the maximum amount permitted by applicable law shall be applied as a
payment and reduction of the principal of the indebtedness evidenced by the
Note; and, if the principal of the Note has been paid in full, any remaining
excess shall forthwith be paid to Borrower. In determining whether or not the
interest paid or payable exceeds the maximum amount permitted by applicable law,
Borrower and Lender shall, to the extent permitted by applicable law, (i)
characterize any non-principal payment as an expense, fee, or premium rather
than as interest, (ii) exclude voluntary prepayments and the effects thereof,
and (iii) amortize, prorate, allocate, and spread in equal or unequal parts the
total amount of interest throughout the entire contemplated term of the
indebtedness evidenced by the Note so that interest for the entire term of such
Note does not exceed the maximum rate permitted by applicable law.
Section 10.11. NOTICES. All notices and other communications provided
for in this Agreement and the other Loan Documents to which Borrower is a party
shall be given or made by telecopy or in writing and telecopied, mailed by
certified mail return receipt requested, or delivered to the intended recipient
at the "Address for Notices" specified below its name on the signature pages
hereof; or, as to any party at such other address as shall be designated by such
party in a notice to the other party given in accordance with this Section.
Except as otherwise provided in this Agreement, all such communications shall be
deemed to have been duly given when transmitted by telecopy, subject to
telephone confirmation of receipt, or when personally delivered or, in the case
of a mailed notice, upon receipt, in each case given or addressed as aforesaid;
PROVIDED, however, notices to Lender pursuant to Article II shall not be
effective until received by Lender.
Section 10.12. APPLICABLE LAW; VENUE; SERVICE OF PROCESS. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Texas applicable to contracts made and wholly performable in the State
of Texas and the applicable laws of the United States of America. Any action or
proceeding against Borrower under or in connection with any of the Loan
Documents may be brought in any state or federal court in Dallas County, Texas.
Borrower hereby irrevocably (i) submits to the nonexclusive jurisdiction of such
courts, and (ii) waives any objection it may now or hereafter have as to the
venue of any such action or proceeding brought in any such court or that any
such court is an inconvenient forum. Borrower agrees that service of process
upon it may be made by certified or registered mail, return receipt requested,
at its address specified or determined in accordance with the provisions of
Section 10.11. Nothing herein or in any of the other Loan Documents shall affect
the right of Lender to serve process in any other manner permitted by law or
shall limit the right of Lender to bring any action or proceeding against
Borrower or with respect to any of his Property in courts in other
jurisdictions. Any action or proceeding by Borrower against Lender shall be
brought only in a court located in Dallas County, Texas.
FIRST AMENDED AND
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<PAGE>
Section 10.13. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 10.14. SEVERABILITY. If any clause or provision of this Agreement
is or should ever be held to be illegal, invalid, or unenforceable under any
present or future law applicable to the terms hereof, then and in such event, it
is the intention of the parties hereto that the remainder of this Agreement
shall not be affected thereby, and that in lieu of each such clause or provision
of this Agreement that is illegal, invalid, or unenforceable, there be added as
a part of this Agreement a clause or provision as similar in terms to such
illegal, invalid, or unenforceable clause or provision as may be possible and be
legal, valid, and enforceable.
Section 10.15. HEADINGS. The headings, captions, and arrangements used in
this Agreement are for convenience only and shall not affect the interpretation
of this Agreement.
Section 10.16. PARTICIPATIONS. Lender shall have the right at any time and
from time to time to grant participations in the Note and any other Loan
Documents. Each actual or proposed participant shall be entitled to receive all
information received by Lender regarding Borrower and the Controlled Companies,
subject to the confidentiality requirements contained in the Collection and
Payment Agreement.
Section 10.17. CONSTRUCTION. Borrower and Lender acknowledge that each of
them has had the benefit of legal counsel of his or its own choice and has been
afforded an opportunity to review this Agreement and the other Loan Documents
with his or its legal counsel and that this Agreement and the other Loan
Documents shall be construed as if jointly drafted by Borrower and Lender.
Section 10.18. LENDER NOT IN CONTROL. None of the covenants or other
provisions of this Agreement shall, or shall be deemed to give, Lender the right
or power to exercise control over the affairs and/or management of Borrower or
any Controlled Company, the power of Lender being limited to the right to
exercise the rights and remedies provided in this Agreement and the other Loan
Documents. Borrower acknowledges and agrees that Lender and Borrower are not
partners or joint venturers with each other.
Section 10.19. ASSUMPTION OF LOAN. Borrower and CFSB have informed Lender
that Borrower and CFSB contemplate the transfer of the Capital Stock of CFSB by
Borrower to a corporation to be formed by Fail (the "New Holding Company").
Lender will consent to the transfer of the Capital Stock of CFSB to and the
assumption of the Loan by the New Holding Company subject to the following
conditions:
(a) All of the Capital Stock of New Holding Company is owned by Borrower;
(b) New Holding Company will assume all liabilities and obligations of
Borrower in connection with the Loan or with respect to any other
agreements of Borrower, with Lender provided that Borrower shall
remain fully liable for the Obligations;
FIRST AMENDED AND
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<PAGE>
(c) Lender shall be furnished with articles of incorporation,
bylaws, financial statements, Material Contracts, or any other
information or agreements relating to New Holding Company, its
organization, existence and operation as Lender shall request and
Lender shall find all such matters acceptable to Lender, in Lender's
sole discretion.
(d) Lender will be furnished with evidence satisfactory to Lender that all
approvals of such transfer required from FDIC, OTS or any other
Governmental Authority have been obtained and are in full force and
effect.
(e) New Holding Company, Borrower, CFSB and BSB shall execute all
documents reasonably requested by Lender with respect to the
assumption of the Loan by New Holding Company.
(f) Lender shall be furnished with all other documents, certificates,
affidavits and opinions of counsel as Lender shall reasonably request.
(g) The provisions of this Section 10.19 shall survive repayment of the
Note.
10.20. INDEMNIFICATION.
(a) BORROWER HEREBY INDEMNIFIES LENDER AND EACH AFFILIATE THEREOF AND
THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS
(INDIVIDUALLY AN "INDEMNIFIED PARTY" AND, COLLECTIVELY, THE "INDEMNIFIED
PARTIES") FROM, AND HOLDS EACH INDEMNIFIED PARTY HARMLESS AGAINST, ANY AND ALL
LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS,
COSTS, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) TO WHICH ANY SUCH
INDEMNIFIED PARTY MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR
RELATE TO (I) THE EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR
ENFORCEMENT OF ANY OF THE DEBT DOCUMENTS, (II) ANY OF THE TRANSACTIONS
CONTEMPLATED BY THE DEBT DOCUMENTS, (III) ANY BREACH BY BORROWER, CFSB OR BSB OF
ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF
THE DEBT DOCUMENTS, OR (IV) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING,
INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR
OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING, BUT EXCLUDING ANY SUCH
LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS,
COSTS, AND EXPENSES TO THE EXTENT INCURRED BY REASON OF THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY CLAIMING INDEMNITY HEREUNDER;
PROVIDED, THAT BORROWER SHALL BE RESPONSIBLE FOR COSTS AND EXPENSES INCURRED BY
ANY INDEMNIFIED PARTY IN CONNECTION WITH THE NEGOTIATION, PREPARATION,
EXECUTION, AND DELIVERY OF ANY OF THE DEBT DOCUMENTS
FIRST AMENDED AND
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<PAGE>
OR THE MAKING OF THE INITIAL ADVANCES UNDER THE DEBT DOCUMENTS EXCEPT TO THE
EXTENT SPECIFIED IN SECTION 2.5. WITHOUT LIMITING ANY PROVISION OF THIS
AGREEMENT OR OF ANY OTHER DEBT DOCUMENT, IT IS THE EXPRESS INTENTION OF THE
PARTIES HERETO THAT EACH INDEMNIFIED PARTY SHALL BE INDEMNIFIED FROM AND HELD
HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES,
JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS'
FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF
SUCH INDEMNIFIED PARTY.
(b) WHEN ANY CLAIM, ACTION, OR SUIT (COLLECTIVELY, A "CLAIM") THAT RESULTS
FROM, RELATES TO, OR ARISES OUT OF THE DEBT DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED THEREBY FOR WHICH INDEMNIFICATION MAY BE SOUGHT HEREUNDER SHALL BE
FILED OR ASSERTED IN WRITING AGAINST ANY INDEMNIFIED PARTY, THE INDEMNIFIED
PARTY SHALL PROMPTLY NOTIFY BORROWER OF THE SAME IN WRITING, SPECIFYING IN
REASONABLE DETAIL THE BASIS OF SUCH CLAIM AND THE FACTS PERTAINING THERETO.
BORROWER SHALL NOT BE OBLIGATED TO DEFEND ANY SUCH CLAIM OR INDEMNIFY ANY
INDEMNIFIED PARTY IF THE INDEMNIFIED PARTY HAS FAILED TO USE ITS COMMERCIALLY
REASONABLE EFFORTS TO NOTIFY BORROWER IN ACCORDANCE WITH THE PROVISIONS OF THIS
AGREEMENT IN SUFFICIENT TIME TO PERMIT BORROWER AND HIS COUNSEL TO DEFEND
AGAINST SUCH MATTER AND TO MAKE A TIMELY RESPONSE THERETO, INCLUDING WITHOUT
LIMITATION, THE PREPARATION AND ASSERTION OF AN ANSWER OR OTHER RESPONSIVE
MOTION TO A COMPLAINT, PETITION, NOTICE, OR OTHER LEGAL, EQUITABLE, OR
ADMINISTRATIVE PROCESS RELATING TO ANY SUCH CLAIM WHICH MATERIALLY PREJUDICES
THE RIGHTS OF BORROWER.
(c) FOLLOWING RECEIPT FROM AN INDEMNIFIED PARTY OF A NOTICE DESCRIBED IN
CLAUSE (b) ABOVE, BORROWER SHALL HAVE TEN (10) DAYS TO NOTIFY THE INDEMNIFIED
PARTY THAT HE INTENDS TO ASSUME THE DEFENSE OF THE CLAIM THAT IS THE SUBJECT OF
SUCH NOTICE, IN WHICH CASE BORROWER SHALL BE ENTITLED THEREAFTER TO ASSUME SUCH
DEFENSE EXCEPT AS OTHERWISE PROVIDED IN CLAUSE (e) BELOW. IN CONNECTION WITH
SUCH DEFENSE, BORROWER MAY EMPLOY HIS OWN LEGAL COUNSEL, WHICH COUNSEL SHALL BE
REASONABLY SATISFACTORY TO THE INDEMNIFIED PARTY. IN THE EVENT THAT BORROWER
SHALL ASSUME SUCH DEFENSE, BORROWER SHALL NOT COMPROMISE OR SETTLE ANY SUCH
CLAIM UNLESS (I) THE INDEMNIFIED PARTY GIVES ITS PRIOR WRITTEN CONSENT TO SUCH
COMPROMISE OR SETTLEMENT OR (II) THE TERMS OF THE COMPROMISE OR SETTLEMENT OF
SUCH CLAIM DO NOT REQUIRE THAT THE INDEMNIFIED PARTY WILL HAVE RESPONSIBILITY
FOR THE DISCHARGE OF ANY SETTLEMENT AMOUNT OR IMPOSE OTHER OBLIGATIONS OR DUTIES
ON OR LIMIT THE RIGHTS OF THE INDEMNIFIED PARTY AND THE COMPROMISE OR SETTLEMENT
DISCHARGES ALL RIGHTS AND CLAIMS AGAINST THE INDEMNIFIED PARTY WITH RESPECT TO
SUCH CLAIM.
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 37
<PAGE>
(d) IN THE EVENT THAT BORROWER ASSUMES THE DEFENSE OF ANY CLAIM THAT
RESULTS FROM, RELATES TO, OR ARISES OUT OF THE DEBT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED THEREBY, THE INDEMNIFIED PARTY SHALL HAVE THE RIGHT TO
EMPLOY COUNSEL SEPARATE FROM THE COUNSEL EMPLOYED BY BORROWER IN ANY SUCH CLAIM
AND TO PARTICIPATE IN THE DEFENSE THEREOF, AND THE FEES AND EXPENSES INCURRED BY
THE INDEMNIFIED PARTY SUBSEQUENT TO THE TIME THAT BORROWER ASSUMES SUCH DEFENSE
SHALL BE AT THE SOLE COST AND EXPENSE OF THE INDEMNIFIED PARTY, UNLESS THE
EMPLOYMENT THEREOF HAS BEEN SPECIFICALLY AUTHORIZED BY BORROWER IN WRITING.
(e) IN THE EVENT THAT BORROWER FAILS TO GIVE NOTICE OF THE ASSUMPTION OF
THE DEFENSE OF ANY CLAIM WITHIN THE TIME PERIOD DESCRIBED IN CLAUSE (c) ABOVE,
BORROWER SHALL NO LONGER BE ENTITLED TO ASSUME SUCH DEFENSE AND THE INDEMNIFIED
PARTY SHALL HAVE THE RIGHT TO DEFEND SUCH CLAIM AND, IN SUCH EVENT, BORROWER
SHALL JOINTLY AND SEVERALLY INDEMNIFY THE INDEMNIFIED PARTY FOR ALL REASONABLE
FEES AND EXPENSES INCURRED IN CONNECTION THEREWITH OR AS A RESULT THEREOF.
BORROWER SHALL BE ENTITLED TO PARTICIPATE AT HIS OWN EXPENSE AND WITH HIS
COUNSEL IN THE DEFENSE OF ANY CLAIM, THE DEFENSE OF WHICH BORROWER DOES NOT
ASSUME. PRIOR TO EFFECTUATING ANY COMPROMISE OR SETTLEMENT OF ANY SUCH CLAIM,
THE INDEMNIFIED PARTY SHALL FURNISH BORROWER WITH WRITTEN NOTICE OF ANY PROPOSED
COMPROMISE OR SETTLEMENT IN SUFFICIENT TIME TO ALLOW BORROWER TO ACT THEREON.
FOLLOWING A REASONABLE TIME AFTER THE GIVING OF SUCH NOTICE, THE INDEMNIFIED
PARTY SHALL BE PERMITTED TO EFFECT SUCH COMPROMISE OR SETTLEMENT UNLESS BORROWER
(I) REIMBURSES THE INDEMNIFIED PARTY IN ACCORDANCE WITH THE TERMS OF THIS
SECTION FOR ALL REASONABLE FEES AND EXPENSES INCURRED BY THE INDEMNIFIED PARTY
IN CONNECTION WITH THE CLAIM, (II) ASSUMES THE DEFENSE OF THE CLAIM (IN WHICH
EVENT THE INDEMNIFIED PARTY SHALL CONSENT TO A SUBSTITUTION OF COUNSEL
REASONABLY SATISFACTORY TO IT), AND (III) TAKES SUCH OTHER ACTIONS AS THE
INDEMNIFIED PARTY MAY REASONABLY REQUEST AS ASSURANCE OF BORROWER'S ABILITY TO
FULFILL HIS OBLIGATIONS UNDER THIS SECTION.
(f) THE PROVISIONS OF THIS SECTION 10.20 SHALL SURVIVE REPAYMENT OF THE
NOTE.
Section 10.21. PRIOR AGREEMENTS. This Agreement consolidates the CFLIC
Loan Agreement with and into the SWL Loan Agreement and amends, restates and
replaces the SWL Loan Agreement (as consolidated) in its entirety. This
Agreement does not constitute a novation.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement to
be effective as of the day and year first written above.
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 38
<PAGE>
BORROWER:
/s/ James M. Fail
--------------------------------------------
JAMES M. FAIL
Address for Notices:
1901 Sixth Avenue North
Suite 1550
Birmingham, Alabama 35203
Fax No.: (205) 328-8572
Telephone No.: (205) 328-8570
with a copy to:
Theodore G. Johnsen, Esq.
Arnold & Porter
777 South Figueroa
Los Angeles, California 90017
Fax No.: 213/243-4199
Telephone No.: 213/243-4060
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 39
<PAGE>
LENDER:
SOUTHWESTERN LIFE INSURANCE
COMPANY, a Texas insurance corporation
By: /s/ John T. Hull
-----------------------------------------
John T. Hull
Executive Vice President, Chief Financial
Officer and Treasurer
Address for Notices:
500 North Akard
Twelfth Floor
Dallas, Texas 75201
Fax No.: (214) 954-7345
Telephone No.: (214) 954-7535
Attention: Daniel B. Gail, Esq.
FIRST AMENDED AND
RESTATED LOAN AGREEMENT - Page 40
<PAGE>
INDEX TO SCHEDULES
Schedule Description of Schedule Section
-------- ----------------------- -------
1 Permitted Liens 1.1
2 Existing Litigation 6.5
3 Existing Debt 6.9
4 List of Controlled Companies 6.20
5 Material Contracts 6.18
6 Environmental Matters 6.19
7 Insider Debt 6.21
8 ERISA 6.12
9 Other Agreements 6.14
10 Compliance with Law 6.15
<PAGE>
SCHEDULE 1
[FAIL]
PERMITTED LIENS
1. All interests created in favor of Consolidated National Corporation ("CNC")
now existing or hereafter created pursuant to a certain agreement dated as of
January 25, 1993, by and between CNC, Borrower and CFSB, and any related
documents and any amendments thereto. While these items are listed as Permitted
Liens herein for purposes of the Agreement, no admission is made that the
interests constitute liens.
2. All interests created in favor of the FSLIC now existing or hereafter
created pursuant to the Capital Maintenance Agreement dated December 22, 1988
and all documents related thereto, including without limitation, the irrevocable
proxy in favor of the FSLIC. While these items are listed as Permitted Liens
herein for purposes of the Agreement, no admission is made that the interests
constitute liens.
3. It is anticipated that a settlement agreement will be reached between CFSB
and The Receiver of Farm and Home Life Insurance Company ("Receiver"). All liens
created pursuant to such settlement agreement and related documents shall be
Permitted Liens.
4. Pledges of The Oklahoma Bank ("TOB") assets by TOB in connection with
Normal Investment Activity.
5. Liens on real estate acquired by TOB by foreclosure or deed-in-lieu of
foreclosure.
6. Liens on assets of Borrower and Controlled Companies pursuant to purchase
money security interests.
7. Permitted Liens as described and or included in the BSB Agreement by and
between SWLIC and BSB.
8. All Liens against any Property of Lifeshares Group, Inc. ("LGI") and its
Subsidiaries. Due to problems with access to the books and records of LGI,
complete records are not available to determine, with any certainty, all Liens
on Property. Accordingly, no representation or warranty is made as to LGI
Liens.
9. All Liens of $500,000.00 or less individually or $2,000,000.00 or less in
the aggregate, against any Property of Borrower or Controlled Companies.
10. All Liens disclosed on any financial statements attached to the Agreement
or any Schedule to the Agreement.
11. Certain Liens could exist or be created relating to Borrower's personal
accounts at Merrill Lynch with regard to the purchase of stock on margin.
12. CFSB Financial's lien against 160,000 shares of preferred stock in First
Sooner Bancshares, Inc.
13. With respect to Cause Number 49C01-9010-MI-3578B in the Marion Circuit
Court, in Marion County Indiana, Indianapolis, described in Schedule 2 attached
hereto, the Court could create an interest in favor of Mutual Security Life
Insurance Company in the BSB or CFSB stock. While the above described potential
interests are listed herein as Permitted Liens for purposes of the Agreement, no
admission is made that the interests constitute liens.
All capitalized terms used in this Schedule shall have the meaning set forth in
the Agreement to which this Schedule is attached unless defined herein.
<PAGE>
SCHEDULE 2
[FAIL]
EXISTING LITIGATION AND JUDGMENTS
WITH AMOUNTS IN CONTROVERSY OVER $100,000
1. SUSAN GALLINGER, RECEIVER, AND MARK D. THARP, SPECIAL DEPUTY RECEIVER, OF
FARM AND HOME LIFE INSURANCE COMPANY, AN ARIZONA INSURER, IN RECEIVERSHIP V.
JAMES M. FAIL AND EMILY S. FAIL, HUSBAND AND WIFE; ALVIN RANDALL TOWNSEND, SR.,
AND JANICE T. TOWNSEND, HUSBAND AND WIFE; DENNY L. LETT AND WYNON L. LETT,
HUSBAND AND WIFE; CHARLES D. CASPER; CLIFFORD G. SMITH AND KATHRYN F. SMITH,
HUSBAND AND WIFE; HARRY T. CARNEAL; THORNTON E. COLE; FRED E. JONES; ROBERT I.
BOYKIN AND MARCIA BOYKIN, HUSBAND AND WIFE; MICHAEL SHANNON; LIFESHARES GROUP,
INC., A NEBRASKA CORPORATION; NPL CORPORATION, AN ARIZONA CORPORATION; THEODORE
L. KESSNER; ROBERT C. GUENZEL; DONN E. DAVIS; WILLIAM D. KUESTER; STEVEN G.
SEGLIN; MARK D. MCGUIRE; SCOTT J. NORBY; CORSBY, GUENZEL, DAVID, KESSNER &
KUESTER, A NEBRASKA GENERAL PARTNERSHIP; DAVID R. BAKER AND MYRA M. BAKER,
HUSBAND AND WIFE; JONES, DAY, REAVIS & POGUE, AN OHIO GENERAL PARTNERSHIP;
CHADBOURNE & PARKE, A GENERAL PARTNERSHIP; R. DAVID MARTIN, JR., AND BONNIE
MARTIN, HUSBAND AND WIFE; TODD BROWN AND JANE DOE BROWN, HUSBAND AND WIFE;
DELOITTE & TOUCHE, A CONNECTICUT GENERAL PARTNERSHIP; TOUCHE ROSS & CO., A
GENERAL PARTNERSHIP; MICHAEL SULLO; THEODORE DARLINE; JOHN DOES 1-25; WHITE
PARTNERSHIPS 1-25.
CAUSE NUMBER / COURT: CAUSE NO. CV-90-23436, SUPERIOR COURT OF THE STATE OF
ARIZONA, MARICOPA COUNTY, AZ.
Mr. Fail and certain others and the State of Arizona have reached a settlement
in principal of this and related litigation in Arizona. The settlement
agreement has been approved by the Court, though not yet in final executable
form. The settlement agreement will be subject to all appropriate lender,
regulatory and other approvals, and certain other conditions as enumerated in
the settlement agreement itself. Lender is familiar with this settlement and
the related draft documents.
2. MUTUAL SECURITY LIFE INSURANCE COMPANY, BY ITS LIQUIDATOR, JOHN F. MORTELL
V. JAMES M. FAIL, JACK A. GOCHENAUR, ALVIN R. TOWNSEND, SR., CHARLES D. CASPER,
CLIFFORD G. SMITH, HARRY T. CARNEAL, THOMAS K. PENNINGTON, MICHAEL BOEDEKER,
MELVIN R. SCHOCK, LANG ASSOCIATES, INC., LIFESHARES GROUP, INC., LSC-MARKETING,
INC., LIFESHARES SERVICES COMPANY, AND THE OKLAHOMA BANK.
CAUSE NUMBER / COURT: CAUSE NO. IP94-0001-C, UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT OF INDIANA, INDIANAPOLIS DIVISION, IN.
On April 30, 1992, Mutual Security Life Insurance Company ("MSL"), by its
Liquidator, filed suit against Fail defendants (James M. Fail, Townsend,
Carneal, Smith, Casper, Schock, Lifeshares Group, Inc., LSC-Marketing, Inc. and
Lifeshares Services Company) alleging breach of fiduciary duties of loyalty and
due care to MSL, its policy holders, its shareholders and its creditors by
allowing transactions with affiliated companies owned and controlled by Fail
which were not reasonable to MSL, by failing to invest MSL's funds in a prudent
manner, by causing MSL to invest in unreasonably risky and speculative ventures,
by failing to require adequate diversification of MSL's investments, by failing
to formulate or enforce policies to insure that MSL complied with all applicable
laws, by failing to hire, retain and supervise adequate management to operate
MSL, and by failing to formulate or implement adequate management plans to
assure the liquidity and solvency of MSL.
<PAGE>
On or about December 3, 1993 plaintiff filed a second amended complaint which
added defendants Emily S. Fail, Janice T. Townsend, Mary Carneal, Kathryn F.
Smith, Michael S. Lang, Rhonda S. Lang, Beta Financial Corporation, Robert T.
Shaw, Consolidated National Corporation ("CNC"), I.C.H. Corporation ("ICH"),
Bankers Life and Casualty Company ("Bankers"), Marquette National Life Insurance
Company ("Marquette"), Robert L. Beisenherz, Marilyn Beisenherz, Theodore L.
Kessner, and Crosby, Guenzel, Davis, Kessner & Kuester. The Amended Complaint,
in part, alleged that Defendants Fail, Shaw, CNC, ICH, Bankers and Marquette
have, through a pattern of racketeering activity and by conspiracy acquired an
interest in and/or control of Bluebonnet and that the acquisition of Bluebonnet
was accomplished through various unlawful acts. Plaintiff further alleges that
Fail, Carneal, Lang, Lang Associates, Inc., Beta Financial, Shaw, Bisenherz and
Kessner (and his law firm) agreed and conspired to participate in or conduct the
joint venture to acquire Bluebonnet through this pattern of racketeering
activity. Defendants have filed answers denying any and all liability. On
January 3, 1994, counsel for Bankers and ICH removed the action to the United
States District Court, Southern District of Indiana, Indianapolis Division. The
receiver has filed Motions to Remand which were denied.
Motions to dismiss and motions for summary judgment have been filed by many of
the defendants, including Mr. Fail and Mr. Carneal relating to RICO, conspiracy
and joint venture claims. All of the "Fail Group" and the "Lender Group" have
moved for protective orders precluding discovery until the court rules on the
aforementioned dispositive motions.
3. MUTUAL SECURITY LIFE INSURANCE COMPANY, BY ITS REHABILITATOR, JOHN J.
DILLON, III V. FIRST NATIONAL BANK OF OMAHA, LIFESHARES GROUP, INC., PACIFIC
MUTUAL LIFE INSURANCE COMPANY, JAMES M. FAIL, DENNY L. LETT, CLIFFORD G. SMITH,
HARRY T. CARNEAL, CHARLES D. CASPER, LEONARD G. HEIM, ROY E. GILL, MELVIN R.
SCHOCK, JACK A. GOCHENAUR, MICHAEL BOEDECKER, THOMAS K. PENNINGTON, AND ROBERT
R. MISHLER.
CAUSE NUMBER / COURT: CAUSE N0. 49C01-9010-MI-3578B, MARION CIRCUIT COURT,
MARION COUNTY INDIANA (INDIANAPOLIS).
On April 30, 1992, Mutual Security Life Insurance Company ("MSL"), by its
Liquidator, filed suit against former officers and directors of MSL, alleging
breach of state law fiduciary duties owed to MSL when the MSL Pension Plan ("MSL
Plan") was restated as the Lifeshares Group, Inc. Pension Plan ("The Plan").
All parties agreed to a preliminary injunction that prevented distribution from
The Plan to eligible beneficiaries. The plaintiff argues that the breach of
fiduciary duties by the defendants wasted excess MSL Plan assets that should
have inured to the benefit of MSL. The former officers and directors of MSL
have responded that their ERISA fiduciary obligations were to plan participants,
rather than MSL, and that the restatement to designate Lifeshares Group Inc. as
the plan sponsor and to cover employees of Lifeshares (including the former
employees of MSL) was entirely consistent with the provisions of ERISA. The
"Fail Group" has filed an Emergency Motion to Vacate Agreed Order of Preliminary
Injunction to allow all eligible beneficiaries to receive distributions under
The Plan. The case was removed to federal court and was remanded back to state
court on 10/14/94.
4. BLUEBONNET SAVINGS BANK FSB, CFSB CORPORATION, AND JAMES M. FAIL V. FEDERAL
DEPOSIT BANK INSURANCE CORPORATION (REFERRED TO COMMONLY AS, THE "FDIC
LITIGATION").
CAUSE NUMBER / COURT: CAUSE NO. CA3-C-1066-T, UNITED STATES DISTRICT COURT,
NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, TX.
On June 5, 1991, Plaintiffs filed suit against the FDIC claiming breach of
contract based upon the Assistance Agreement and certain other integrated
agreements entered into in 1988 pursuant to which FSLIC agreed to provide
financial assistance to Bluebonnet in connection with Bluebonnet's acquisition
of certain assets and liabilities of fifteen insolvent savings and loan
associations (the "Acquisition").
<PAGE>
On May 24, 1993, the FDIC filed a Counterclaim seeking rescission of the
Assistance Agreement and the related agreements (including the Acquisition
Agreement) entered into with the FSLIC as part of the Acquisition. Such claim
for recision, if successful, could result in the loss of Fail and CFSB's
ownership interest in Bluebonnet. Basically, the FDIC alleges that Mr. Fail,
the sole shareholder of CFSB, made false statements and failed to disclose
information to the Federal Home Loan Bank Board and the FSLIC in connection with
the Acquisition, thus constituting fraud in the inducement. Bluebonnet, CFSB
and Mr. Fail have filed Motions to Dismiss the Counterclaim. No rulings have
been made on these motions to date. There are numerous motions for summary
judgment currently pending. The trial on the remaining issues is currently
scheduled for May 1, 1995. On December 20, 1994 the Court issued a preliminary
injunction against the FDIC preventing them from exercising any rights they may
have to the FSLIC warrants. See the attached order for more detailed
information.
Note: The outcome of the FDIC litigation could, if decided unfavorably,
substantially affect all the representations and warranties contained in the
Agreement to which this Schedule is attached.
5. MUTUAL SECURITY LIFE INSURANCE COMPANY, BY ITS LIQUIDATOR, DONNA D.
BENNETT, PLAINTIFF, V. JAMES M. FAIL, EMILY S. FAIL, HARRY T. CARNEAL, MARY
CARNEAL, LIFESHARES GROUP, INC., CFSB CORPORATION, ROBERT T. SHAW, CONSOLIDATED
NATIONAL CORPORATION, SOUTHWESTERN LIFE CORPORATION, MARQUETTE NATIONAL LIFE
INSURANCE COMPANY, AND FARM AND HOME LIFE INSURANCE COMPANY, DEFENDANT.
CAUSE NO. IP 94-1934-C. UNITED STATE DISTRICT COURT SOUTHERN DISTRICT OF
INDIANA, INDIANAPOLIS DIVISION.
The above styled Complaint was filed on November 23, 1994 along with a Motion
For Preliminary Injunction and Temporary Restraining Order ("TRO"). The MSL
Liquidator sought in the Complaint to make CFSB Corporation a constructive
trustee for the benefit of MSL of the Bluebonnet common and preferred stock to
the extent of any income paid by the Bluebonnet stock and to the extent any
profit on such stock, such trust to be proportional to the amount of funds
diverted from MSL bore in relation to the total purchase price of Bluebonnet.
The basis for the constructive trust is that Fail caused MSL to lend $35 million
dollars to Bluebonnet, causing a liquidity crisis. On December 13, 1994, the
court issued an order denying the TRO.
<PAGE>
SCHEDULE 4
[FAIL]
CONTROLLED COMPANIES*
ALL COMMON STOCK OWNED 100% UNLESS OTHERWISE NOTED.
CFSB Corporation (Delaware)
CFSB Finance Company, Inc. (Delaware)
Bluebonnet Savings Bank FSB (Federal Savings Association)
Bluebonnet Insurance Services, Inc. (Texas)
Royal Underwriters, Inc. (Texas)
Bluebonnet Home Mortgage Corporation (Texas)
Magnum Mortgage Corporation (Delaware)
BSFC Corporation (Delaware)
Prime Financial Corporation (Nebraska)
First Sooner Bancshares (Oklahoma -98.5%
The Oklahoma Bank (An Oklahoma State Bank)
Lifeshares Group, Inc. (Nebraska)
- There is insufficient information available to make any representations and
warranties as to Lifeshares Group, Inc.("LGI") and its subsidiaries. Three of
LGI's subsidiaries are in receivership or bankruptcy and are no longer
controlled by Fail. Records for those companies are maintained by the receivers
or the trustee in bankruptcy and are not immediately accessible to Borrower.
LGI and those subsidiaries not in receivership or bankruptcy are all
substantially inactive.
* As defined in the Loan Agreement.
<PAGE>
SCHEDULE 5
[FAIL AND CFSB]
MATERIAL CONTRACTS
1. Assistance Agreement.
2. Capital Maintenance agreement.
3. Forbearance Letter.
4. FSLIC Warrant.
5. FSLIC Warrant Agreement.
6. Agreement for Operating Policies dated December 22, 1988, among CFSB, BSB,
and FSLIC.
7. An agreement dated as of January 25, 1993, by and between Consolidated
National Corporation, Borrower and CFSB, and related documents and any
amendments thereto.
8. Memoranda of Agreement between Fail and Borrower and Harry T. Carneal, John
D. Kirchhofer, and Robert J. Thompson dated November 5, 1992, March 11,
1992, and April 22, 1992, respectively.
9. The Loan Documents, the Other Fail Loan Documents, the CFSB Loan Documents,
and the Other CFSB Loan Documents, including but not limited to the
Agreement and all related CFSB in the principal amount of $2,663,355.68,
dated May 19, 1994, principal amount of $1,038,675.00 dated June 15, 1994.
10. The note to CFSB from Borrower in the principal amount of $2,663,355.68,
dated May 19, 1994.
11. The note to CFSB from Borrower in the principal amount of $1,038,675.00
dated June 15, 1994.
12. Proposed note to CFSB from Borrower in the principal amount of
$1,444,082.21, which includes prior advances to Borrower in the amount of
$872,923.32.
13. Any contract referenced in any financial statement attached to any Schedule
to the Agreement.
All capitalized terms used in this Schedule shall HAVE the meaning set forth in
the Agreement to which this Schedule is attached unless defined herein.
<PAGE>
SCHEDULE 6
[FAIL AND CFSB]
ENVIRONMENTAL MATTERS
None with a Material Adverse Effect.
<PAGE>
SCHEDULE 7
[FAIL AND CFSB]
INSIDER DEBT
1. There is a note payable to CFSB made by James M. Fail in the amount of
$2,663,355.68 effective May 19, 1994 at a rate per annum equal to the Prime Rate
plus 1%. The note is due and payable on January 1, 1995.
2. There is a note payable to CFSB made by James M. Fail in the amount of
$1,038,675.00 effective June 15, 1994 at a rate per annum equal to the Prime
Rate plus 1%. The note is due and payable on June 15, 1995.
3. In addition to the notes listed above, CFSB has advanced to Fail
$872,923.32 to allow him to pay for legal fees relating to the Mutual Security
Life and Farm & Home litigation described on Schedule 2 and other litigation
relating to Lifeshares Group, Inc. It is anticipated that such amount will be
included in a note from Fail to CFSB in the anticipated amount of $1,444,082.21
which will be due and payable on December 1, 2001.
<PAGE>
SCHEDULE 8
[Fail]
ERISA
Although no representations and warranties are being made with respect to
Mutual Security Life Insurance Company (currently in liquidation), the Borrower
is involved in litigation relating to ERISA. See Schedule 2 for description of
litigation.
<PAGE>
SCHEDULE 9
[FAIL AND CFSB]
OTHER AGREEMENTS
For the purposes of responding to this schedule the assumption is made that the
term "...which could reasonably be expected to have a Material Adverse
Effect..." (as contained in Section 6.14 of the Agreement) means an adverse
effect that Borrower or any Controlled Company reasonably expects to actually
occur based on present circumstances. With this assumption in mind, the
response to this Schedule is "NONE" except for the FDIC litigation and its
affect on the acquisition agreements as described in Schedule 2.
<PAGE>
SCHEDULE 10
[FAIL AND CFSB]
COMPLIANCE WITH LAWS
NONE
<PAGE>
FIRST AMENDED AND RESTATED PLEDGE AGREEMENT
THIS FIRST AMENDED AND RESTATED PLEDGE AGREEMENT (the "Agreement") dated as
of December 1, 1994, is by and between JAMES M. FAIL, an individual resident of
the State of Alabama ("Pledgor") and SOUTHWESTERN LIFE INSURANCE COMPANY a
Texas insurance corporation ("Lender").
R E C I T A L S:
A. Pledgor and Lender have previously entered into that certain Loan
Agreement dated as of January 25, 1993 (the "Prior SWL-Fail Loan Agreement"),
pursuant to which Lender made a loan to Pledgor in the original principal amount
of $12,359,957.00.
B. CFSB Corporation, a Delaware corporation ("CFSB"), and Lender have
previously entered into that certain Loan Agreement dated as of January 25, 1993
(the "Prior SWL-CFSB Loan Agreement"), pursuant to which Lender made a loan to
CFSB in the original principal amount of $17,753,820.00.
C. Pursuant to the Prior SWL-Fail Loan Agreement and the Prior SWL-CFSB
Loan Agreement, and as collateral security for the prompt payment in full when
due of the Secured Obligations (as defined therein), Pledgor executed and
delivered to Lender that certain Pledge Agreement dated as of January 25, 1993
(the "Existing SWL Pledge Agreement"), pursuant to which Pledgor assigned,
pledged and granted a security interest to Lender in the Collateral (as defined
therein).
D. Pledgor and Consolidated Fidelity Life Insurance Company, a Kentucky
life insurance corporation ("CFLIC") have previously entered into that certain
Loan Agreement dated as of January 25, 1993 (the "CFLIC-Fail Loan Agreement"),
pursuant to which CFLIC made a loan to Fail in the original principal amount of
$32,210,202.00 (the "CFLIC-Fail Loan").
E. CFSB and CFLIC have previously entered into that certain Loan
Agreement dated as of January 25, 1993 (the "CFLIC-CFSB Loan Agreement"),
pursuant to which CFLIC made a loan to CFSB in the original principal amount of
$46,266,675.00 (the "CFLIC-CFSB Loan") (the CFLIC-Fail Loan and the CFLIC-CFSB
Loan being hereinafter referred to collectively as the "CFLIC Loans").
F. Pursuant to the CFLIC-Fail Loan Agreement and the CFLIC-CFSB Loan
Agreement, and as collateral security for the prompt payment in full when due of
the Secured Obligations (as defined therein), Debtor executed and delivered to
CFLIC that certain Pledge Agreement dated as of January 25, 1993 (the "Existing
CFLIC Pledge Agreement"), pursuant to which Debtor assigned, pledged and granted
a security interest to Lender in the Collateral (as defined therein).
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 1
<PAGE>
G. Pursuant to that certain Assignment and Transfer of Notes, Liens, and
Other Rights dated as of June 30, 1994 between Lender and CFLIC. Lender
purchased all of CFLIC's right, title and interest in and to the CFLIC Loans,
all promissory notes, documents and agreements relating thereto, and all
security interests and liens securing the same.
H. Pledgor and Lender have contemporaneously herewith entered into that
certain First Amended and Restated Loan Agreement of even date herewith (such
First Amended and Restated Loan Agreement, as the same may be amended,
supplemented or modified from time to time, the "Fail Loan Agreement"), pursuant
to which the CFLIC-Fail Loan Agreement has been consolidated with and into the
Prior SWL-Fail Loan Agreement and the Prior SWL-Fail Loan Agreement has been
amended and restated in its entirety.
I. CFSB and Lender have contemporaneously herewith entered into that
certain First Amended and Restated Loan Agreement of even date herewith (such
First Amended and Restated Loan Agreement, as the same may be amended,
supplemented or modified from time to time, the "CFSB Loan Agreement"), pursuant
to which the CFLIC-CFSB Loan Agreement has been consolidated with and into the
Prior SWL-CFSB Loan Agreement and the Prior SWL-CFSB Loan Agreement has been
amended and restated in its entirety.
J. Debtor and Lender now desire to consolidate the Existing CFLIC Pledge
Agreement with and into the Existing SWL Pledge Agreement and to make certain
amendments to the Existing SWL Pledge Agreement as set forth herein.
K. The parties hereto now desire to amend the Existing SWL Pledge
Agreement as hereinafter provided and have agreed, for purposes of clarity and
ease of administration, to carry out the agreed upon amendments by amending the
pertinent provisions of the Existing SWL Pledge Agreement and then restating the
Existing SWL Pledge Agreement in its entirety by means of this Agreement.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby consolidate the Existing CFLIC Pledge Agreement with and
into the Existing SWL Pledge Agreement, amend and restate the Existing SWL
Pledge Agreement (as consolidated) and agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. DEFINITIONS. As used in this Agreement, the following terms
have the following meanings:
"CAPITAL STOCK" means any and all shares, interests, participations,
rights, or other equivalents (however designated) of corporate stock.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 2
<PAGE>
"COLLATERAL" has the meaning specified in Article II of this
Agreement.
"COLLECTION AND PAYMENT AGREEMENT" means that certain Amended and
Restated Collection and Payment Agreement of even date herewith among CFSB,
Pledgor and Lender, among others, as the same may be amended, supplemented
or modified from time to time.
"FAIL GUARANTY" means the Fail Guaranty, as defined in the CFSB Loan
Agreement.
"LOAN AGREEMENTS" means the Fail Loan Agreement and the CFSB Loan
Agreement, collectively.
"PROPERTY" means property of all kinds, real, personal or mixed,
tangible or intangible (including without limitation, all rights relating
thereto), whether owned or acquired on or after the date hereof.
"SECURED OBLIGATIONS" means all present and future obligations,
liabilities and indebtedness of Pledgor and CFSB, or either of them, under
the Debt Documents, including but not limited to the Loan Agreements and
the Fail Guaranty.
"UCC" means the Uniform Commercial Code as adopted by the State of
Texas.
Any other term used in this Agreement with an initial capital letter and not
expressly defined herein shall have the meaning ascribed to it in the Loan
Agreements.
ARTICLE II
SECURITY INTEREST AND PLEDGE
As collateral security for the prompt payment and performance in full when
due of the Secured Obligations (whether at stated maturity, by acceleration, or
otherwise), Pledgor hereby collaterally assigns, pledges and grants to Lender,
and ratifies and confirms the prior collateral assignments, pledges and grants
made pursuant to the Existing SWL Pledge Agreement and the Existing CFLIC Pledge
Agreement (the Existing SWL Pledge Agreement and the Existing CFLIC Pledge
Agreement being sometimes hereinafter referred to collectively as the "Existing
Pledge Agreements") of, a security interest in all of Pledgor's right, title,
and interest in and to the following Property, whether now owned or existing or
hereafter arising or acquired and wherever arising or located (such Property
being hereinafter sometimes called the "COLLATERAL"):
(a) All shares of Capital Stock of CFSB now or hereafter issued and
outstanding, including, without limitation, 666 shares of common stock of
CFSB evidenced by stock certificate number 5 and 1734 shares of common
stock of CFSB evidenced by stock certificate number 4; and
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 3
<PAGE>
(b) All products, proceeds, revenues, distributions, subscription
rights, contract rights, general intangibles, cash dividends, stock
dividends, dividends in kind, securities, and other Property, rights, and
interests that Pledgor owns, holds, receives, or is at any time entitled to
receive on account of, or that in any way relate to or arise from, the
Capital Stock identified in clause (a) above.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Pledgor represents and warrants to Lender that:
Section 3.1. TITLE. Pledgor owns, and with respect to Collateral acquired
after the date hereof, Pledgor will own, legally and beneficially, the
Collateral free and clear of any Lien, except Liens created by the Existing
Pledge Agreements and ratified and confirmed by this Agreement, and Permitted
Stock Exceptions. The Collateral is not subject to any restriction on transfer
or assignment except for compliance with (a) applicable federal and state
securities laws, (b) the "change of control" provisions of the Thrift Laws, (c)
the Capital Maintenance Agreement and (d) Permitted Stock Exceptions. Pledgor
has the unrestricted right to pledge the Collateral as contemplated hereby. All
of the outstanding Collateral has been duly and validly issued and is fully paid
and nonassessable. None of the Collateral constitutes community Property.
Section 3.2. AUTHORITY. Pledgor has the power and authority, and legal
right to execute, deliver, and perform this Agreement, and the execution,
delivery, and performance of this Agreement by Pledgor do not and will not
conflict with any law, rule, or regulation or any order, writ, injunction, or
decree of any Governmental Authority or arbitrator and do not and will not
conflict with, result in a breach of, or constitute a default under the
provisions of any indenture, mortgage, deed of trust, security agreement, or
other instrument or agreement binding on Pledgor or any of his Property.
Section 3.3. PRINCIPAL PLACE OF BUSINESS. The address of Pledgor, and the
office where Pledgor keeps his books and records, is located at the address of
Pledgor shown at the end of this Agreement.
Section 3.4. LITIGATION. Except as disclosed on Schedule 2 to the Fail
Loan Agreement, Pledgor is not aware of any litigation, investigation, or
governmental proceeding pending or threatened against Pledgor or any of his
Properties which if adversely determined could reasonably be expected to have a
Material Adverse Effect (as defined in the Fail Loan Agreement).
Section 3.5. PERCENTAGE OF STOCK. 2400 shares of common stock of CFSB
evidenced by stock certificates number 4 and 5 constitute one hundred percent
(100%) of the issued and outstanding Capital Stock of CFSB.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 4
<PAGE>
Section 3.6. PERFECTION OF SECURITY INTEREST. This Agreement creates,
ratifies and confirms in favor of Lender a collateral assignment, common law
pledge and security interest in the Collateral, and based upon the prior filings
of Uniform Commercial Code financing statements filed in favor of Lender and
CFLIC (as assigned to Lender) in the jurisdictions identified on Schedule 1
hereto (and compliance with the requirements of such jurisdictions with respect
to the filing of continuation statements) and based upon Lender's possession of
all stock certificates, cash, documents, instruments, and chattel paper of
Pledgor constituting Collateral, such security interests constitute valid and
perfected security interests in the Collateral subject to no other equal or
prior Lien. There are no conditions precedent to the effectiveness of this
Agreement that have not been fully and permanently satisfied.
ARTICLE IV
AFFIRMATIVE AND NEGATIVE COVENANTS
Pledgor covenants and agrees with Lender that until the date on which the
Secured Obligations have been paid in full and any commitments of Lender under
the Debt Documents have terminated:
Section 4.1. POSSESSION. Prior to or concurrently with the execution and
delivery of this Agreement, Lender shall have in its possession all stock
certificate(s) identified in Article II hereof, accompanied by undated stock
powers duly executed in blank.
Section 4.2. ENCUMBRANCES. Pledgor shall not create, permit, or suffer to
exist, and shall defend the Collateral against, any and all Liens, except the
Liens of Lender created, ratified and confirmed hereunder and Permitted Stock
Exceptions, and shall defend Pledgor's rights in the Collateral and Lender's
Lien in the Collateral against the claims of all Persons except for claims with
respect to Permitted Stock Exceptions.
Section 4.3. SALE OF COLLATERAL. Except as provided in Section 10.19 of
the Fail Loan Agreement, Pledgor shall not, voluntarily or involuntarily, sell,
assign, transfer, or otherwise dispose of the Collateral or any part thereof or
interest therein without the prior written consent of Lender.
Section 4.4. DISTRIBUTIONS. If Pledgor shall become entitled to receive
or shall receive any stock certificate (including, without limitation, any
certificate representing a stock dividend or a distribution in connection with
any reclassification, increase, or reduction of capital or issued in connection
with any reorganization), option or rights, as an addition to, in substitution
of, or in exchange for any Collateral, Pledgor agrees to accept the same as
Lender's agent and to hold the same in trust for Lender, and to deliver the same
forthwith to Lender in the exact form received, with the appropriate endorsement
of Pledgor when necessary and/or appropriate undated stock powers duly executed
in blank, to be held by Lender as additional Collateral for the Secured
Obligations, subject to the terms hereof. Any sums paid upon or in respect of
the Collateral upon the liquidation or dissolution or any reorganization of the
issuer thereof shall be paid over to Lender to be held by it as additional
Collateral for the Secured Obligations subject
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 5
<PAGE>
to the terms hereof; and in case any distribution of capital shall be made on or
in respect of the Collateral or any Property shall be distributed upon or with
respect to the Collateral pursuant to any recapitalization or reclassification
of or any other change in the capital of the issuer thereof or pursuant to any
reorganization of the issuer thereof, the Property so distributed shall be
delivered to Lender to be held by it, as additional Collateral for the Secured
Obligations, subject to the terms hereof. All money and Property so paid or
distributed in respect of the Collateral that are received by Pledgor shall,
until paid or delivered to Lender, be held by Pledgor in trust as additional
security for the Secured Obligations.
Section 4.5. FURTHER ASSURANCES. At any time and from time to time, upon
the request of Lender, and at the sole expense of Pledgor, Pledgor shall
promptly execute and deliver all such further instruments and documents and take
such further action as Lender may reasonably request to preserve and perfect its
Lien in the Collateral and carry out the provisions and purposes of this
Agreement, including, without limitation, the execution and filing of such
financing statements as Lender may require. A carbon, photographic, or other
reproduction of this Agreement or of any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing statement and
may be filed as a financing statement. In the event any Collateral is ever
received by Pledgor, Pledgor shall promptly transfer and deliver to Lender such
Collateral so received by Pledgor (together with any necessary endorsements in
blank or undated stock powers duly executed in blank), which Collateral shall be
applied against the Secured Obligations in accordance with the terms of the
Collection and Payment Agreement if it is cash Collateral or held by Lender
pursuant to this Agreement if it is not cash Collateral. Lender shall at all
times have the right to exchange any certificates representing Collateral for
certificates of smaller or larger denominations for any purpose consistent with
this Agreement.
Section 4.6. INSPECTION RIGHTS. Pledgor shall permit Lender and its
representatives to examine, inspect, and copy Pledgor's books and records with
respect to the Collateral at any reasonable time and as often as Lender may
desire.
Section 4.7. TAXES. Pledgor agrees to pay or discharge prior to
delinquency all taxes, assessments, levies, and other governmental charges
imposed on him or his Property, except Pledgor shall not be required to pay or
discharge any tax, assessment, levy, or other governmental charge if the amount
or validity thereof is being contested by Pledgor in good faith by appropriate
proceedings diligently pursued.
Section 4.8. NOTIFICATION. Pledgor shall promptly notify Lender of (i)
any Lien upon the Collateral, (ii) the occurrence or existence of any Event of
Default or Potential Default as soon as possible and in any event within five
(5) days after Pledgor has obtained knowledge of such Event of Default or
Potential Default, and (iii) any receipt by Pledgor of Collateral.
Section 4.9. INFORMATION. Pledgor shall from time to time at the request
of Lender deliver to Lender such information regarding the Collateral and
Pledgor as Lender may reasonably request.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 6
<PAGE>
Section 4.10. COMPLIANCE WITH AGREEMENTS. Pledgor shall comply in all
material respects with all agreements, contracts, and instruments binding on him
or affecting his Properties or business, except instances of noncompliance
which, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect (as defined in the Fail Loan Agreement).
Section 4.11. COMPLIANCE WITH LAWS. Pledgor shall comply in all material
respects with all applicable laws, rules, regulations, and orders of any
Governmental Authority or arbitrator, except for instances of noncompliance
which, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect (as defined in the Fail Loan Agreement).
Section 4.12. ADDITIONAL SECURITIES. Pledgor shall not consent to,
approve, or permit the issuance of any additional Capital Stock of CFSB, or any
securities convertible into, or exchangeable for, any Capital Stock of CFSB or
any warrants, options, rights, or other commitments entitling any Person to
purchase or otherwise acquire any interest in Capital Stock of CFSB.
Section 4.13. PROVIDE INFORMATION. Pledgor shall fully cooperate, to the
extent requested by Lender, in the completion of any notice, form, schedule, or
other document filed by Lender on its own behalf or on behalf of Pledgor,
including, without limitation, any required notice or statement of beneficial
ownership or of the acquisition of beneficial ownership of equity securities
constituting part of the Collateral and any notice of proposed sale of any such
securities pursuant to Rule 144 as promulgated by the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended. Without
limiting the generality of the foregoing, Pledgor shall furnish to Lender any
and all information which Lender may reasonably request for purposes of any such
filing, regarding Pledgor, the Collateral, and any issuer of any of the
Collateral, and Pledgor shall disclose to Lender all material adverse
information known by Pledgor with respect to the operations of the issuer of the
Collateral for the purposes of any such proposed sale.
ARTICLE V
RIGHTS OF LENDER AND PLEDGOR
Section 5.1. POWER OF ATTORNEY. Pledgor hereby irrevocably constitutes
and appoints Lender and any officer or agent thereof, with full power of
substitution, as his true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead and in the name of Pledgor or in its
own name, after the occurrence and during the continuance of an Event of Default
and provided that the Secured Obligations are due and payable in full (whether
by acceleration, at stated maturity or otherwise), to take any and all action
and to execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Agreement and, without limiting the
generality of the foregoing, hereby gives Lender the power and right on behalf
of Pledgor and in its own name to do any of the following (subject to the rights
of Pledgor under Section 5.2 hereof), without notice to or the consent of
Pledgor
FIRST AMENDED AND RESTATE
PLEDGE AGREEMENT - Page 7
<PAGE>
after the occurrence and during the continuance of an Event of Default and
provided that the Secured Obligations are due and payable in full (whether by
acceleration, at stated maturity, or otherwise):
(i) to demand, sue for, collect, or receive in the name of Pledgor
or in its own name, any money or property at any time payable or receivable
on account of or in exchange for any of the Collateral and, in connection
therewith, endorse checks, notes, drafts, acceptances, money orders, or any
other instruments for the payment of money under the Collateral;
(ii) to pay or discharge any and all taxes and Liens levied or
placed on or threatened against the Collateral;
(iii) (A) to direct account debtors and any other parties liable for
any payment under any of the Collateral to make payment of any and all
monies due and to become due thereunder directly to Lender or as Lender
shall direct, such amounts to be applied by Lender as provided in the
Collection and Payment Agreement; (B) to receive payment of and receipt for
any and all monies, claims, and other amounts due and to become due at any
time in respect of or arising out of any Collateral; (C) to sign and
endorse any drafts, assignments, proxies, stock powers, verifications,
notices, and other documents relating to the Collateral to the extent that
doing so would not contravene any Thrift Laws; (D) to commence and
prosecute any suit, actions or proceedings at law or in equity in any court
of competent jurisdiction to collect the Collateral or any part thereof and
to enforce any other right in respect of any Collateral; (E) to defend any
suit, action, or proceeding brought against Pledgor with respect to any
Collateral; (F) to settle, compromise, or adjust any suit, action, or
proceeding described above and, in connection therewith, to give such
discharges or releases as Lender may deem appropriate; (G) to exchange any
of the Collateral for other Property upon any merger, consolidation,
reorganization, recapitalization, or other readjustment of the issuer
thereof and, in connection therewith, deposit any of the Collateral with
any committee, depositary, transfer agent, registrar, or other designated
agency upon such terms as Lender may determine; (H) to do, at Lender's
option and Pledgor's expense, at any time, or from time to time, all acts
and things which Lender deems necessary to protect, preserve, or realize
upon the Collateral and Lender's Lien therein, and (I) to complete, execute
and file with the SEC one or more notices of proposed sale of securities
pursuant to Rule 144.
This power of attorney is a power coupled with an interest and shall be
irrevocable. Lender shall be under no duty to exercise or withhold the exercise
of any of the rights, powers, privileges, and options expressly or implicitly
granted to Lender in this Agreement, and shall not be liable for any failure to
do so or any delay in doing so. Lender shall not be liable for any act or
omission or for any error of judgment or any mistake of fact or law in its
individual capacity or in its capacity as attorney-in-fact except acts or
omissions resulting from its gross negligence or willful misconduct. This power
of attorney is conferred on Lender solely to protect, preserve, and realize upon
its collateral assignment, common law pledge and security interest in the
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 8
<PAGE>
Collateral. Lender shall not be responsible for any decline in the value of
the Collateral and shall not be obligated to take any steps to preserve rights
against prior parties.
Section 5.2. VOTING RIGHTS. Unless and until an Event of Default shall
have occurred and be continuing and Lender shall have acquired, sold, or
otherwise conveyed the Collateral through foreclosure following the receipt of
all necessary approvals therefor under the Thrift Laws, Pledgor shall be
entitled to exercise any and all voting rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of the Debt
Documents. Lender shall execute and deliver to the Pledgor all such proxies and
other instruments as Pledgor may reasonably request for the purpose of enabling
Pledgor to exercise the voting rights which he is entitled to exercise pursuant
to this Section.
Section 5.3. PAYMENT OF DIVIDENDS. Pledgor shall cause CFSB to pay or
make all cash dividends and all cash distributions constituting the Collateral
to the Collateral Account for application by Lender to the Secured Obligations
pursuant to each Loan Agreement in accordance with the provisions of the
Collection and Payment Agreement. Pledgor shall not be entitled to receive or
retain any dividend or distribution constituting Collateral, except those
disbursed by Lender to or for the benefit of Pledgor pursuant to the Collection
and Payment Agreement until the Secured Obligations have been paid and performed
in full. In the event that Pledgor receives any dividend or distribution
constituting Collateral in violation of this Section 5.3, Pledgor shall promptly
deliver such dividend or distribution to Lender in the exact form received with
any necessary endorsements.
Section 5.4. PERFORMANCE BY LENDER. If Pledgor fails to perform or comply
with any of his agreements contained herein, Lender itself may, at its sole
discretion, cause or attempt to cause performance or compliance with such
agreement and the expenses of Lender, together with interest thereon at the
Contract Rate (which interest shall begin to accrue ten (10) days after Lender
makes demand for payment of such expenses), shall be payable by Pledgor to
Lender on demand and shall constitute a portion of the Secured Obligations
secured by this Agreement. Notwithstanding the foregoing, it is expressly
agreed that Lender shall not be required to perform any obligation of Pledgor
under this Agreement.
Section 5.5. LENDER'S DUTY OF CARE. Other than the exercise of reasonable
care in the physical custody of the Collateral while held by Lender hereunder,
Lender shall have no responsibility for or obligation or duty with respect to
all or any part of the Collateral or any matter or proceeding arising out of or
relating thereto, including, without limitation, any obligation or duty to
collect any sums due in respect thereof or to protect or preserve any rights
against prior parties or any other rights pertaining thereto, it being
understood and agreed that Pledgor shall be responsible for preservation of all
rights in the Collateral. Without limiting the generality of the foregoing,
Lender shall be conclusively deemed to have exercised reasonable care in the
custody of the Collateral if Lender takes such action, for purposes of
preserving rights in the Collateral, as Pledgor may reasonably request in
writing, but no failure or omission or delay by Lender in complying with any
such request by Pledgor, and no refusal by Lender to comply with any such
request by Pledgor, shall be deemed to be a failure to exercise reasonable care.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 9
<PAGE>
Section 5.6. ASSIGNMENT. Lender may at any time and from time to time
assign the Secured Obligations or any portion thereof held by it and its
interest in the Collateral to the assignee of the Secured Obligations, and the
assignee shall be entitled to all of the rights and remedies of the assignor
under this Agreement in relation thereto.
ARTICLE VI
DEFAULT
Section 6.1. RIGHTS AND REMEDIES. If any Event of Default shall occur and
be continuing, and the Secured Obligations are due and payable in full whether
by acceleration or otherwise, Lender shall have the following rights and
remedies:
(i) In addition to all other rights and remedies granted to Lender
in this Agreement and in any other Debt Document, Lender shall have all of
the rights and remedies of a secured party under the UCC. Without limiting
the generality of the foregoing, Lender may (A) without demand or notice to
Pledgor, collect, receive, or take possession of the Collateral or any part
thereof, and/or (B) sell or otherwise dispose of the Collateral, or any
part thereof, in one or more parcels at public or private sale or sales, at
Lender's offices or elsewhere, for cash, on credit, or for future delivery.
Lender may bid and become a purchaser at any sale free of any right or
equity of redemption in Pledgor, which right or equity of redemption is
hereby expressly waived and released by Pledgor. Upon the request of
Lender, Pledgor shall assemble the Collateral in his possession or control
and make it available to Lender at any place designated by Lender that is
reasonably convenient to Pledgor and Lender. Pledgor agrees that Lender
shall not be obligated to give more than twenty (20) days written notice of
the time and place of any public sale or of the time after which any
private sale may take place and that such notice shall constitute
reasonable notice of such matters. Lender shall not be obligated to make
any sale of the Collateral regardless of notice of sale having been given.
Lender may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned. Pledgor shall be liable for all expenses of retaking, holding,
preparing for sale, or the like, and all attorneys' fees and other expenses
incurred by Lender in connection with the collection of the Secured
Obligations and the enforcement of Lender's rights under this Agreement,
all of which expenses and fees shall constitute additional Secured
Obligations. Subject to the terms of the Collection and Payment Agreement,
Lender may apply proceeds of the Collateral against the Secured Obligations
in such order and manner as Lender may elect in its sole discretion.
Pledgor shall remain liable for any deficiency in respect of the Secured
Obligations if the proceeds of any sale or disposition of the Collateral
are insufficient to pay such Obligations. Pledgor waives all rights of
marshalling and appraisal in respect of the Collateral.
(ii) Lender may collect or receive all money or Property at any
time payable or receivable on account of or in exchange for any of the
Collateral, but shall be under no obligation to do so.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 10
<PAGE>
(iii) Pledgor hereby acknowledges and confirms that Lender may be
unable to effect a public sale of any or all of the Collateral by reason of
certain prohibitions contained in the Securities Act of 1933, as amended,
and applicable state securities laws and may be compelled to resort to one
or more private sales thereof to a restricted group of purchasers who will
be obligated to agree, among other things, to acquire any shares of the
Collateral for their own respective accounts for investment and not with a
view to distribution or resale thereof. Pledgor further acknowledges and
confirms that any such private sale may result in prices or other terms
less favorable to the seller than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall
not in and of itself be deemed to have been made in a manner that is not
commercially reasonable, and Lender shall be under no obligation to take
any steps in order to permit the Collateral to be sold at a public sale.
Lender shall be under no obligation to delay a sale of any of the
Collateral for any period of time necessary to permit any issuer thereof to
register such Collateral for public sale under the Securities Act of 1933,
as amended, or under applicable state securities laws.
Pledgor will cooperate and will cause his Subsidiaries to cooperate with
proposed purchasers of the Collateral in connection with their requests and
applications to obtain any required regulatory approvals under the Thrift
Laws.
(iv) On any sale of the Collateral, Lender is hereby authorized to
comply with any limitation or restriction with which compliance is
necessary, in the view of Lender's counsel, in order to avoid any violation
of applicable law or in order to obtain any required approval of the
purchaser or purchasers by any applicable governmental authority.
Section 6.2. APPLICATION OF PROCEEDS OF SALE. The proceeds of any sale of
Collateral pursuant to Section 6.1 hereof, as well as any Collateral consisting
of cash, shall be applied by Lender to the Secured Obligations in accordance
with the terms of the Collection and Payment Agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.1. EXPENSES. Pledgor agrees to pay on demand all costs and
expenses (including reasonable attorneys' fees) incurred by Lender in connection
with the enforcement of this Agreement and the exercise of the rights and
remedies hereunder.
Section 7.2. NO WAIVER: CUMULATIVE REMEDIES. No failure on the part of
Lender to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power, or privilege under this Agreement shall operate as
a waiver thereof, nor shall any single or partial exercise of any right, power,
or privilege under this Agreement preclude any other or further exercise thereof
or the exercise of any other right, power, or privilege. The rights and
remedies provided for in this Agreement are cumulative and not exclusive of any
rights and remedies provided by law.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 11
<PAGE>
Section 7.3. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of Pledgor and Lender and their respective heirs,
successors, and assigns, except that Pledgor may not assign any of his rights
or obligations under this Agreement without the prior written consent of Lender.
Lender will notify Pledgor of any assignment by Lender of its rights hereunder.
Section 7.4. AMENDMENT. The provisions of this Agreement may be amended
or waived only by an instrument in writing signed by the parties hereto.
Section 7.5. NOTICES. All notices and other communications provided for
in this Agreement shall be given or made by telecopy or in writing and
telecopied, mailed by certified mail return receipt requested, or delivered to
the intended recipient at the "Address for Notices" specified below its name on
the signature pages hereof; or, as to any party at such other address as shall
be designated by such party in a notice to the other party given in accordance
with this Section. Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given when transmitted by
telecopy, subject to telephone confirmation of receipt, or when personally
delivered or, in the case of a mailed notice, when received, in each case given
or addressed as aforesaid.
Section 7.6. APPLICABLE LAW: VENUE: SERVICE OF PROCESS. This Agreement
shall be governed by and construed in accordance with the laws of the State of
Texas applicable to contracts made and wholly performable in Texas and the
applicable laws of the United States of America. This Agreement shall be
performable for all purposes in Dallas County, Texas. Any action or proceeding
against Pledgor under or in connection with this Agreement may be brought in any
state or federal court in Dallas County, Texas. Pledgor hereby irrevocably (i)
submits to the nonexclusive jurisdiction of such courts, and (ii) waives any
objection he may now or hereafter have as to the venue of any such action or
proceeding brought in such court or that such court is an inconvenient forum.
Pledgor agrees that service of process upon him may be made by certified or
registered mail, return receipt requested, at his address specified or
determined in accordance with the provisions of Section 7.5 of this Agreement.
Nothing in this Agreement or any other Debt Document shall affect the right of
any secured party to serve process in any other manner permitted by law or shall
limit the right of Lender to bring any action or proceeding against Pledgor or
with respect to any of his Property in courts in other jurisdictions.
Section 7.7. HEADINGS. The headings, captions, and arrangements used in
this Agreement are for convenience only and shall not affect the interpretation
of this Agreement.
Section 7.8. SURVIVAL. All representations and warranties made in this
Agreement shall survive the execution and delivery of this Agreement, and no
investigation by Lender shall affect the representations and warranties of
Pledgor herein or the right of Lender to rely upon them.
Section 7.9. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 12
<PAGE>
Section 7.10. SEVERABILITY. If any clause or provision of this Agreement
is or should ever be held to be illegal, invalid, or unenforceable under any
present or future law applicable to the terms hereof, then and in such event, it
is the intention of the parties hereto that the remainder of this Agreement
shall not be affected thereby, and that in lieu of each such clause or provision
of this Agreement that is illegal, invalid, or unenforceable, there be added as
a part of this Agreement a clause or provision as similar in terms to such
illegal, invalid, or unenforceable clause or provision as may be possible and be
legal, valid, and enforceable.
Section 7.11. CONSTRUCTION. Pledgor and Lender acknowledge that each of
them has had the benefit of legal counsel of his or its own choice and has been
afforded an opportunity to review this Agreement with his or its legal counsel
and that this Agreement shall be construed as if jointly drafted by Pledgor and
Lender.
Section 7.12. SECURED OBLIGATIONS ABSOLUTE. The obligations of Pledgor
under this Agreement shall be absolute and unconditional and shall not be
released, discharged, reduced, diminished or in any way impaired by any
circumstance whatsoever, including, without limitation, (a) any amendment,
modification, extension, or renewal of the Secured Obligations or any Debt
Document (exclusive of the effect thereof), (b) any release, subordination, or
impairment of Collateral (exclusive of the effect thereof), (c) any waiver,
consent, extension, indulgence, compromise, settlement, or other action or
inaction in respect of the Secured Obligations or the Debt Documents (exclusive
of the effect thereof), or (d) any exercise or failure by Lender to exercise any
right, remedy, power, or privilege in respect of the Secured Obligations or the
Debt Documents (exclusive of the effect thereof).
Section 7.13. RELEASE OF SECURITY INTEREST. Upon the payment in full of
the Secured Obligations and the termination of the commitments of Lender under
the Debt Documents, Lender shall return all Collateral in its possession to
Pledgor or whomsoever may be lawfully entitled to the same and shall execute and
deliver all releases as may be reasonably necessary to release the Lien herein
granted in the Collateral, subject to any prior disposition of Collateral
pursuant to this Agreement or any other Debt Document.
Section 7.14 PRIOR AGREEMENTS. This Agreement consolidates the Existing
CFLIC Pledge Agreement with and into the Existing SWL Pledge Agreement and
amends, restates and replaces the Existing SWL Pledge Agreement (as
consolidated) in its entirety. This Agreement does not constitute a novation.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement to
be effective as of the day and year first written above.
PLEDGOR:
/s/ James M. Fail
----------------------------------------
JAMES M. FAIL, Individually
Address for Notices:
1901 Sixth Avenue North, Suite 1550
Birmingham, Alabama 35203
Fax No.: (205) 328-8572
Telephone No.: (205) 328-8570
With a copy to:
Theodore G. Johnsen, Esq.
Arnold & Palmer
777 South Figueroa
Los Angeles, California 90017
Fax No.: 213/243-4199
Telephone No.: 213/243-4060
LENDER:
SOUTHWESTERN LIFE INSURANCE COMPANY
By: /s/ John T. Hull
-------------------------------------
Name: John T. Hull
Title: Executive Vice President,
Chief Financial Officer and
Treasurer
Address for Notices:
500 North Akard, Twelfth Floor
Dallas, Texas 75201
Fax No.: (214)954-7345
Telephone No.: (214)954-7535
Attention: Daniel B. Gail, Esq.
FIRST AMENDED AND RESTATED
PLEDGE AGREEMENT - Page 14
<PAGE>
SCHEDULE 1
(Section 3.6)
JURISDICTIONS
Alabama
Arizona
Kentucky
Texas
DA942020430
121994jed
LOAN S5514-46000
SCHEDULE 1. JURISDICTIONS - Solo Page
<PAGE>
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT
This FIRST AMENDED AND RESTATED GUARANTY AGREEMENT ("the Agreement") dated
as of December 1, 1994, is by and between James M. Fail, an individual resident
of the State of Alabama ("Guarantor") and Southwestern Life Insurance Company, a
Texas insurance corporation ("Lender").
R E C I T A L S:
A. CFSB Corporation, a Delaware corporation ("Borrower") and Lender have
previously entered into that certain Loan Agreement dated as of January 25, 1993
(the "Prior SWL Loan Agreement"), pursuant to which Lender made a loan to
Borrower in the original principal amount of $17,753,820.00.
B. Pursuant to the Prior SWL Loan Agreement, Guarantor executed and
delivered to Lender that certain Guaranty Agreement dated as of January 25,
1993, pursuant to which Guarantor guaranteed to Lender the full and complete
payment and performance of the liabilities, obligations and indebtedness of
Borrower to Lender under the Prior SWL Loan Agreement and related promissory
note (the "Existing SWL Guaranty").
C. CFSB and Consolidated Fidelity Life Insurance Corporation, a Kentucky
life insurance corporation ("CFLIC") have previously entered into that certain
Loan Agreement dated as of January 25, 1993 (the "CFLIC Loan Agreement"),
pursuant to which CFLIC made a loan to Borrower in the original principal amount
of $46,266,675.00 (the "CFLIC Loan").
D. Pursuant to the CFLIC Loan Agreement, Guarantor executed and delivered
to CFLIC that certain Guaranty Agreement dated as of January 25, 1993, pursuant
to which Guarantor guaranteed to CFLIC the full and complete payment and
performance of the liabilities, obligations and indebtedness of Borrower to
CFLIC under the CFLIC Loan Agreement and related promissory note (the "Existing
CFLIC Guaranty").
E. Pursuant to that certain Assignment and Transfer of Notes, Liens, and
Other Rights dated as of June 30, 1994, between Lender and CFLIC. Lender
purchased all of CFLIC's right, title and interest in and to the CFLIC Loan, all
documents and agreements relating thereto, and all security interests and liens
securing the same.
F. Borrower and Lender have contemporaneously herewith entered into that
certain First Amended and Restated Loan Agreement of even date herewith (such
First Amended and Restated Loan Agreement, as the same may be amended,
supplemented or modified from time to time, the "Loan Agreement"), pursuant to
which the CFLIC Loan Agreement has been consolidated with and into the Prior SWL
Loan Agreement and the Prior SWL Loan Agreement has been amended and restated in
its entirety.
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT - Page 1
<PAGE>
G. Lender has conditioned its obligations under the Loan Agreement upon
the execution and delivery by Guarantor of this Agreement and Guarantor and
Lender now desire to consolidate the Existing CFLIC Guaranty with and into the
Existing SWL Guaranty and to make certain amendments to the Existing SWL
Guaranty as herein set forth.
H. The parties hereto now desire to amend the Existing SWL Guaranty as
hereinafter provided and have agreed, for purposes of clarity and ease of
administration, to carry out the agreed upon amendments by amending the
pertinent provisions of the Existing SWL Guaranty and then restating the
Existing SWL Guaranty in its entirety by means of this Agreement.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, Guarantor and Lender hereby consolidate the
Existing CFLIC Guaranty with and into the Existing SWL Guaranty, amend and
restate the Existing SWL Guaranty (as consolidated) and agree as follows:
Guarantor, for valuable consideration, the receipt and adequacy of which
are hereby acknowledged, hereby irrevocably and unconditionally guarantees to
Lender the full and prompt payment and performance of the Guaranteed
Indebtedness (hereinafter defined), this Guaranty Agreement being upon the
following terms:
1. Capitalized terms used and not otherwise defined herein shall have the
same meanings as set forth in the Loan Agreement.
2. The term "Guaranteed Indebtedness", as used herein means all of the
"Obligations", including but not limited to (i) the indebtedness of Borrower to
Lender evidenced by that certain Promissory Note of even date herewith executed
by Borrower and payable to the order of Lender in the original principal amount
of Forty Million Three Hundred Eighteen Thousand Seven Hundred Fifty-Four and
No/100 Dollars ($40,318,754.00), and (ii) the liabilities, obligations, and
indebtedness of Borrower to Lender under the Loan Agreement, the Security
Agreement and any and all other instruments or documents executed by Borrower in
connection with the Loan. The term "Guaranteed Indebtedness" shall include any
and all post-petition interest and expenses (including reasonable attorneys'
fees) included as part of the Obligations whether or not allowed under any
bankruptcy, insolvency, or other similar law.
3. This instrument shall be an absolute, continuing, irrevocable, and
unconditional guaranty of payment and performance, and not a guaranty of
collection, and Guarantor shall remain liable on his obligations hereunder until
the payment and performance in full of the Guaranteed Indebtedness. No set-off,
counterclaim, recoupment, reduction, or diminution of any obligation, or any
defense of any kind or nature which Borrower may have against Lender or any
other party, or which Guarantor may have against Borrower, Lender, or any other
party, shall be available to, or shall be asserted by, Guarantor against Lender
or any subsequent holder of the Guaranteed Indebtedness or any part thereof or
against payment of the Guaranteed Indebtedness or any part thereof.
4. If Guarantor becomes liable for any indebtedness owing by Borrower to
Lender by endorsement or otherwise, other than under this Guaranty Agreement,
such liability shall not
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT - Page 2
<PAGE>
be in any manner impaired or affected hereby, and the rights of Lender hereunder
shall be cumulative of any and all other rights that Lender may ever have
against Guarantor. The exercise by Lender of any right or remedy hereunder or
under any other instrument, or at law or in equity, shall not preclude the
concurrent or subsequent exercise of any other right or remedy.
5. In the event of default by Borrower in payment or performance of the
Guaranteed Indebtedness, when such Guaranteed Indebtedness becomes due, whether
by its terms, by acceleration, or otherwise. Guarantor shall promptly pay as
specified in Section 9 hereof the amount due thereon to Lender without notice or
demand in lawful money of the United States of America and it shall not be
necessary for Lender, in order to enforce such payment by Guarantor, first to
institute suit or exhaust its remedies against Borrower or others liable on such
Guaranteed Indebtedness, or to enforce any rights against any collateral other
than the Collateral (as defined in the Pledge Agreement) which shall ever have
been given to secure such Guaranteed Indebtedness. Notwithstanding anything to
the contrary contained in this Guaranty Agreement, Guarantor hereby irrevocably
waives any and all rights he may now or hereafter have under any agreement or at
law or in equity (including, without limitation, any law subrogating the
Guarantor to the rights of Lender) to assert any claim against or seek
contribution, indemnification or any other form of reimbursement from Borrower
or any other party liable for payment of any or all of the Guaranteed
Indebtedness for any payment made by Guarantor under or in connection with this
Guaranty Agreement or otherwise, until the Guaranteed Indebtedness is fully
satisfied.
6. Subject to the provisions of Section 9 hereof, Guarantor hereby agrees
that his obligations under this Guaranty Agreement shall not be released,
discharged, diminished, impaired, reduced, or affected for any reason or by the
occurrence of any event, including, without limitation, one or more of the
following events, whether or not with notice to or the consent of Guarantor: (a)
the taking or accepting of collateral as security for any or all of the
Guaranteed Indebtedness or the release, surrender, exchange, or subordination of
any collateral now or hereafter securing any or all of the Guaranteed
Indebtedness; (b) any partial release of the liability of Guarantor hereunder
(except to the extent specified in any such written release), or the full or
partial release of any other guarantor or obligor from liability for any or all
of the Guaranteed Indebtedness; (c) any disability of Borrower, or the
dissolution, insolvency, or bankruptcy of Borrower, Guarantor, or any other
party at any time liable for the payment of any or all of the Guaranteed
Indebtedness; (d) any renewal, extension, modification, waiver, amendment, or
rearrangement of any or all of the Guaranteed Indebtedness or any instrument,
document, or agreement evidencing, securing, or otherwise relating to any or all
of the Guaranteed Indebtedness; (e) any adjustment, indulgence, forbearance,
waiver, or compromise that may be granted or given by Lender to Borrower,
Guarantor, or any other party ever liable for any or all of the Guaranteed
Indebtedness; (f) any neglect, delay, omission, failure, or refusal of Lender to
take or prosecute any action for the collection of any of the Guaranteed
Indebtedness or to foreclose or take or prosecute any action in connection with
any instrument, document, or agreement evidencing, securing, or otherwise
relating to any or all of the Guaranteed Indebtedness; (g) the unenforceability
or invalidity of any or all of the Guaranteed Indebtedness or of any instrument,
document, or agreement evidencing, securing, or otherwise relating to any or all
of the Guaranteed Indebtedness; (h) any payment by Borrower or any other party
to Lender is held to constitute a preference under applicable bankruptcy or
insolvency law
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT - Page 3
<PAGE>
or if for any other reason Lender is required to refund any payment or pay the
amount thereof to someone else; (i) the settlement or compromise of any of the
Guaranteed Indebtedness; (j) the non-perfection of any Lien securing any or all
of the Guaranteed Indebtedness; (k) any impairment of any Collateral securing
any or all of the Guaranteed Indebtedness; (l) the failure of Lender to sell any
Collateral securing any or all of the Guaranteed Indebtedness in a commercially
reasonable manner or as otherwise required by law; (m) any change in the
corporate existence. structure, or ownership of Borrower; or (n) any other
circumstance which might otherwise constitute a defense available to, or
discharge of, Borrower or Guarantor.
7. Guarantor represents and warrants to Lender as follows:
(a) Guarantor has the power and authority and legal right to
execute, deliver, and perform his obligations under this Guaranty Agreement
and this Guaranty Agreement constitutes the legal, valid, and binding
obligation of Guarantor, enforceable against Guarantor in accordance with
its terms, except as limited by (i) bankruptcy, insolvency, reorganization
or other laws of general application relating to the enforcement of
creditors' rights, and (b) the application of general principles of equity
(regardless of whether enforceability is considered in a proceeding at law
or in equity).
(b) The execution, delivery, and performance by Guarantor of this
Guaranty Agreement do not and will not violate or conflict with any law,
rule, or regulation or any order, writ, injunction, or decree of any
Governmental Authority or arbitrator and do not and will not conflict with,
result in a breach of, or constitute a default under, or result in the
imposition of any Lien upon any Property of Guarantor pursuant to the
provisions of any indenture, mortgage, deed of trust, security agreement,
franchise, permit, license, or other instrument or agreement by which
Guarantor or his properties is bound.
(c) No authorization, approval, or consent of, and no filing or
registration with, any Governmental Authority or third party is necessary
for the execution, delivery, or performance by Guarantor of this Guaranty
Agreement or the validity or enforceability thereof.
(d) The value of the consideration received and to be received by
Guarantor as a result of Borrower and Lender entering into the Loan
Agreement and Guarantor executing and delivering this Guaranty Agreement is
reasonably worth at least as much as the liability and obligation of
Guarantor hereunder, and such liability and obligation and the Loan
Agreement have benefited and may reasonably be expected to benefit
Guarantor directly and indirectly.
(e) Guarantor has, independently and without reliance upon Lender
and based upon such documents and information as Guarantor has deemed
appropriate, made his own analysis and decision to enter into this Guaranty
Agreement.
8. Guarantor covenants and agrees that, as long as the Guaranteed
Indebtedness or any part thereof is outstanding:
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT - Page 4
<PAGE>
(a) Guarantor will furnish to Lender within 3O days after filing
of Guarantor's tax return for a calendar year, a list of all material
assets and material liabilities (including contingent liabilities) as of
December 31 of such calendar year and a statement of the sources of
material income and material expenses of the Guarantor for the previous
calendar year. Each such statement shall be certified by Guarantor as
being true, correct, and complete in all material respects.
(b) Guarantor will furnish to Lender within thirty (30) days after
the end of each of the first three calendar quarters of each year, a list
of all material assets and material liabilities, including contingent
liabilities, of Guarantor as of the end of each such calendar quarter and a
statement of the sources of material income and material expenses of
Guarantor for such calendar quarter. Each such statement shall be
certified by Guarantor as being true, correct and complete in all material
respects.
(c) Guarantor will furnish promptly to Lender written notice of the
occurrence of any default under this Guaranty Agreement or an Event of
Default under the Loan Agreement of which Guarantor has knowledge.
(d) Guarantor will furnish promptly to Lender such additional
information concerning Guarantor as Lender may reasonably request.
(e) Guarantor will obtain at any time and from time to time all
authorizations, licenses, consents or approvals as shall now or hereafter
be necessary or desirable under all applicable laws or regulations or
otherwise in connection with the execution, delivery and performance of
this Guaranty Agreement and will promptly furnish copies thereof to Lender.
(f) Guarantor will at all times own directly or indirectly and free
and clear of any and all Liens whatsoever (except Liens created by the Loan
Documents, Permitted Liens and Permitted Stock Exceptions) 100% of the
voting stock of Borrower.
9. Notwithstanding anything contained herein to the contrary, no claim
against Guarantor under or in respect of this Guaranty Agreement shall be
payable from any source other than the Collateral (as defined in the Pledge
Agreement) or in any manner other than as provided in the Pledge Agreement;
PROVIDED, HOWEVER that nothing herein shall limit any of the rights of Lender
under the Loan Documents (exclusive of this Guaranty Agreement) and the Fail
Loan Documents, including, without limitation, the right to accelerate the
maturity of the Guaranteed Indebtedness and the right to bring suit and obtain
judgment against Guarantor under this Guaranty Agreement for the purpose of
exercising its rights with respect to the Collateral. Guarantor shall have no
personal liability for payment of the Guaranteed Indebtedness except as provided
in the Pledge Agreement and the sole recourse of Lender against Guarantor under
this Guaranty Agreement shall be against the Collateral (as defined in the
Pledge Agreement).
10. No amendment or waiver of any provision of this Guaranty
Agreement nor consent to any departure by the Guarantor therefrom shall in any
event be effective unless the same shall be in writing and signed by Lender. No
failure on the part of Lender to exercise, and no delay
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT - Page 5
<PAGE>
in exercising, any right, power, or privilege hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power,
or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege. The remedies herein provided
are cumulative and not exclusive of any remedies provided by law.
11. Any acknowledgment or new promise, whether by payment of principal or
interest or otherwise and whether by Borrower or others (including Guarantor),
with respect to any of the Guaranteed Indebtedness shall, if the statute of
limitations in favor of Guarantor against Lender shall have commenced to run,
toll the running of such statute of limitations and, if the period of such
statute of limitations shall have expired, prevent the operation of such statute
of limitations.
12. This Guaranty Agreement is for the benefit of Lender and its
successors and assigns, and in the event of an assignment of the Guaranteed
Indebtedness, or any part thereof, the rights and benefits hereunder, to the
extent applicable to the indebtedness so assigned, may be transferred with such
indebtedness. This Guaranty Agreement is binding not only on Guarantor, but on
Guarantor's heirs and personal representatives.
13. Guarantor recognizes that Lender is relying upon this Guaranty
Agreement and the undertakings of Guarantor hereunder in making extensions of
credit to Borrower under the Loan Agreement and further recognizes that the
execution and delivery of this Guaranty Agreement is a material inducement to
Lender in entering into the Loan Agreement. Guarantor hereby acknowledges that
there are no conditions to the full effectiveness of this Guaranty Agreement.
14. This Guaranty Agreement is executed and delivered as an incident to a
lending transaction performable in Dallas County, Texas and shall be governed by
and construed in accordance with the laws of the State of Texas applicable to
contracts made and wholly performable in the State of Texas. Any action or
proceeding against Guarantor under or in connection with this Guaranty Agreement
may be brought in any state or federal court in Dallas County, Texas. Guarantor
hereby irrevocably (i) submits to the nonexclusive jurisdiction of such courts,
and (ii) waives any objection he may now or hereafter have as to the venue of
any such action or proceeding brought in such court or that such court is an
inconvenient forum. Guarantor agrees that service of process upon him may be
made by certified or registered mail, return receipt requested, at his address
specified below. Nothing herein shall affect the right of Lender to serve
process in any other matter permitted by law or shall limit the right of Lender
to bring any action or proceeding against Guarantor or with respect to any of
Guarantor's Property in courts in other jurisdictions. Any action or proceeding
by Guarantor against Lender shall be brought only in a court located in Dallas
County, Texas.
15. Guarantor shall pay as specified in Section 9 hereof all reasonable
attorneys' fees and all other reasonable costs and expenses incurred by Lender
in connection with the enforcement or collection of this Guaranty Agreement.
16. Guarantor hereby waives promptness, diligence, notice of any default
under the Guaranteed Indebtedness, demand for payment, notice of acceptance of
this Guaranty Agreement, presentment, notice of protest, notice of dishonor,
notice of the incurring by Borrower of
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT - Page 6
<PAGE>
additional indebtedness, and all other notices and demands with respect to the
Guaranteed Indebtedness and this Guaranty Agreement.
17. The Loan Agreement, and all of the terms thereof, are incorporated
herein by reference, the same as if stated verbatim herein, and Guarantor agrees
that Lender may exercise any and all rights granted to it under the Loan
Agreement and the other Loan Documents (as defined in the Loan Agreement)
without affecting the validity or enforceability of this Guaranty Agreement.
18. Guarantor hereby represents and warrants to Lender that Guarantor has
adequate means to obtain from Borrower on a continuing basis information
concerning the financial condition and assets of Borrower and that Guarantor is
not relying upon Lender to provide (and Lender shall have no duty to provide)
any such information to Guarantor either now or in the future.
GUARANTOR:
/s/ James M. Fail
----------------------------------------
JAMES M. FAIL, Individually
Address: 1901 Sixth Avenue North
Suite 1550
Birmingham, Alabama 35203
Fax No.: (205) 328-8572
Telephone No.: (205) 328-8570
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT - Page 7
<PAGE>
With a copy to:
Theodore G. Johnsen, Esq.
Arnold & Porter
777 South Figueroa
Los Angeles, California 90017
Fax No.: (213) 243-4199
Telephone No.: (213) 243-4060
LENDER:
SOUTHWESTERN LIFE INSURANCE
COMPANY
By: /s/ John T. Hull
-----------------------------------
John T. Hull
Executive Vice President, Chief
Financial Officer and Treasurer
DA942020447
121994LKMI
LOAN S5514-46000
FIRST AMENDED AND RESTATED GUARANTY AGREEMENT - Page 8
<PAGE>
EX-10.35
SCHEDULE OF OMITTED DOCUMENTS
In accordance with Instruction 2 to Item 601(a) of Regulation S-K, the
following documents have been omitted from filing with the Registrant's Form
10-K since they are substantially identical in all material respects to
documents that are being filed by the Registrant with its Form 10-K. Set
forth below is the name of each such omitted document and the material details
in which each such document differs from the previously filed document:
1. Promissory Note of CFSB Corporation effective December 1, 1994,
payable to Southwestern Life Insurance Company is omitted from
filing since it is substantially similar to Exhibit 10.31 to this
Form 10-K, with the exception of the parties thereto and the
principal amount ($29,305,734).
2. First Amended and Restated Loan Agreement, dated as of December 1,
1994, between CFSB Corporation and Southwestern Life Insurance
Company, is omitted from filing herewith since it is substantially
similar to Exhibit 10.32 to this Form 10-K, with the principal
exception of the parties thereto and the principal amount
($29,305,734).
3. First Amended and Restated Security Agreement dated as of December
1, 1994, between CFSB Corporation and Southwestern Life Insurance
Company is omitted from filing herewith since it is substantially
similar to Exhibit 10.33 to this Form 10-K, with the principal
exception of the parties thereto.
<PAGE>
EX-10.40
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, dated as of June 9, 1994 (the "Agreement"),
between FACILITIES MANAGEMENT INSTALLATION, INC., a Delaware corporation
(hereinafter referred to as the "FMI"), and H. DON RUTHERFORD (hereinafter
referred to as the "Executive").
W I T N E S S E T H:
WHEREAS, FMI is the administrative agent for an insurance holding
company system of affiliated companies (individually and collectively, the
"Company"); and
WHEREAS, the Executive is desirous of serving the Company on the terms
and conditions set forth herein.
NOW THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. DEFINED TERMS. As used herein, the following terms shall have the
following meanings:
"Affiliate" shall mean, with respect to any entity, any other
entity which owns or controls, is owned or controlled by, or is
under common ownership or control with, such entity.
"Cause" shall mean (i) the willful and continued failure by the
Executive to substantially perform his duties under this
Agreement, (ii) the commission of an act of fraud,
misappropriation or embezzlement by the Executive involving the
Company or its subsidiaries, or (iii) a conviction of, or plea of
NOLO CONTENDERE or a guilty plea or confession by, the Executive
to an act of fraud, misappropriation or embezzlement or to a
felony or to conduct prohibited by state or federal law.
<PAGE>
2. TERM. The Company hereby employs the Executive, and the Executive
hereby accepts such employment, for a term commencing as of June
1, 1994 (the "Effective Date") and ending on May 31, 1996, unless
sooner terminated in accordance with the provisions of Section 5
(such period, as it may be extended from time to time in
accordance with the terms hereof, being hereinafter referred to as
the "Term").
3. DUTIES.
(a) The Company shall employ the Executive and the Executive shall
serve as Executive Vice President - Marketing.
(b) During the Term, except as otherwise contemplated herein, the
Executive's services shall be rendered on a full time basis. The
Executive may not serve as an officer or director of, make
investments in, or otherwise participate in, any other entity
without the prior written consent of the Company; provided, that
so long as it does not interfere with the Executive's employment,
the Executive may (i) with the prior written consent of the
Company, serve as a director in a noncompeting company, (ii) serve
as an officer, director or otherwise participate in a purely
educational, welfare, social, religious and civic organizations,
and (iii) manage personal and family investments.
4. COMPENSATION.
4.1 SALARY. The Company shall pay the Executive during the Term, a
base salary per annum of Two Hundred Twenty-Five Thousand Dollars
($225,000.00) (the "Base Salary") payable in accordance with the
Company's payroll procedure as presently in effect and amended
from time to time. The Company, by action of its Board of
Directors, may increase the Base Salary at any time and from time
to time during the Term.
4.2 BENEFITS. The Executive shall be permitted during the Term to
participate in any hospitalization or disability insurance plans,
health programs, personnel plans, bonus plans or similar plans or
benefits including vacation that may be available to other
executive officers of the Company and its affiliates generally, in
each case to the extent the Executive is eligible under any
applicable terms of such plans or programs as amended from time to
time. Upon retirement
<PAGE>
from the Company, Executive shall be entitled to continue to
participate in the hospitalization and other medical insurance
plans available to the Company's executive officers, subject to
the terms and provisions of such plans and payment by Executive
of the premiums due thereunder.
4.3 EXPENSES. The Company shall pay or reimburse the Executive for all
reasonable out-of-pocket expenses actually incurred or paid by the
Executive during the Term in the performance of the Executive's
services under this Agreement, provided he properly accounts
therefor in accordance with Company policy as in effect from time
to time.
4.4 BONUS. The Company may pay the Executive bonuses at a time and in
an amount at the Company's absolute discretion; provided, however,
that for calendar year 1994, assuming reasonable performance by
Executive and the Company's marketing efforts, Executive's bonus
shall be not less than $100,000.00.
4.5 SEVERANCE PAY. Executive shall have the benefit of the I.C.H.
Companies' Salaried Employees Severance Pay Plan (the "Severance
Plan"), subject to all of the terms and provisions thereof.
5. TERMINATION.
5.1 TERMINATION UPON DEATH OR DISABILITY. If the Executive dies during
the Term, the Executive's employment shall terminate as of the
date of the Executive's death. If the Executive by virtue of
physical or mental disability is unable to perform substantially
and continuously his usual duties for a period in excess of 180
consecutive or non-consecutive days out of any consecutive
12-month period, the Company shall have the right to terminate the
Term upon notice in writing to the Executive. If the Executive's
employment is terminated because of death or disability, then the
Company shall pay the Executive or, in the case of the death of
the Executive, the Executive's estate, heirs, next of kin,
distributes, executors or administrators (the "Executor's Estate")
any salary, bonus and other benefits earned and accrued prior to
the date of termination. No provision of this Agreement shall
limit any of the Executive's rights under any insurance, pension
or other benefit programs of the Company for which the Executive
shall be eligible at the time of such death or disability.
<PAGE>
5.2 TERMINATION FOR CAUSE. The Company may terminate the Executive's
employment for Cause. Such termination shall be effected by the
delivery of a Notice of Termination to the Executive and shall be
effective as of the date of delivery of the Notice of Termination.
The Executive shall have no right to receive any compensation on
and after the effective date of such termination other than salary
and other benefits earned and accrued prior to the date of
termination and reimbursement for expenses incurred prior to the
date of termination.
5.3 TERMINATION WITHOUT CAUSE. The Company may terminate the
Executive's employment WITHOUT CAUSE effective upon the giving of
notice thereof to the Executive. If the Executive's employment is
terminated by the Company without Cause then the Company shall pay
the Executive the greater of (i) his salary and any bonus and
other benefits he would have earned from the date of termination
up to and including May 31, 1996, or (ii) the compensation to
which Executive is entitled under the Severance Plan, in each case
without offset for compensation the Executive may thereafter
receive from other sources.
5.4 RELEASE. In consideration of the Receipt by the Executive (or the
Executive's Estate) of all benefits and amounts described in
Section 5.1 or 5.3, as the case may be, and as a further condition
to the Company's obligation to make payments as described in
Section 5.1 or 5.3 (in addition to any other conditions of the
Severance Plan), the Executive or the Executive's Estate, as the
case may be, shall execute and deliver to the Company the Release
in the form attached as Annex 1. The Release shall not be
effective or enforceable against the Executive or the Executive's
Estate, as the case may be, unless and until full payment of all
amounts and benefits described in Section 5.1 or 5.3 hereof, as
the case may be, is made by the Company and received by the
Executive or the Executive's Estate, and (i) if any payment is not
made on a timely basis as provided for in this Agreement or (ii)
if for any reason any such amounts and benefits are required to be
refunded to the Company, the Release shall be null and void and of
no further effect.
6. RESTRICTIVE COVENANTS.
6.1 COVENANTS. The Executive acknowledges that (i) the principal
business of the Company and its affiliates
<PAGE>
(the "Present Business") is life, accident and health insurance;
(ii) the Company and its affiliates constitute one of a limited
number of persons who have developed the Present Business; (iii) the
Executive's work for the Company and its affiliates has given and
will continue to give him access to the confidential affairs and
proprietary information of the Company and its affiliates not
readily available to the public; and (iv) the covenant of the
Executive contained in this Section 6 is essential to preserve the
business and goodwill of the Company. Accordingly, the Executive
covenants and agrees that:
(a) During the Term, and for a period of two (2) years following
the date that the Executive shall cease to be an employee of
the Company (the "Restricted Period"), the Executive shall
keep secret and retain in strictest confidence, and shall
not use for his benefit or the benefit of other, except in
connection with the business and affairs of the Company and
its affiliates, all material confidential matters relating
to the Company Business and to the Company and its
affiliates learned by the Executive heretofore or hereafter,
directly from the Company and its affiliates, including any
material information concerning the business, affairs,
customers, clients, sources of supply and customer lists of
the Company and its affiliates (the "Confidential Company
Information") and shall not disclose them to anyone except
with the Company's express prior written consent and except
for Confidential Company Information which (1) is at the
time of receipt or thereafter becomes publicly known through
no wrongful act of the Executive, (2) is received from a
third party not under an obligation to keep such information
confidential and without breach of this Agreement, or (3) is
required to be disclosed by the Executive pursuant to any
law or regulation. In the event that the Executive shall be
required to disclose Confidential Company Information
pursuant to any such law or regulation, the Executive shall
use his reasonable best efforts to promptly advise the
Company of any request for such Confidential Company
Information and to cooperate with the Company in conjunction
with any efforts by the Company to avoid disclosure thereof,
provided, however, that the Executive shall not be required
to take any action to defend or avoid disclosure
<PAGE>
of same if any such request would result in a violation by the
Executive of any such law or regulation. These rights of the
Company are in addition to and without limitation of those
rights and remedies available under common law for
protection of the types of such confidential information
which constitute "trade secrets" as construed under
controlling law.
(b) During the Restricted Period, the Executive shall not
without the Company's prior written consent, directly and
knowingly solicit or encourage to leave the employment of
the Company and its affiliates, any employee of the Company
or any of its affiliates.
(c) During the Restricted Period, Executive shall not, without
Company's express prior written consent, directly and
knowingly solicit any customer of Company or any of its
affiliates as of the date of termination of the Executive's
employment.
(d) All memoranda, notes, lists, records and other documents
(and all copies thereof) constituting Confidential Company
Information made or compiled by the Executive or made
available to the Executive concerning the Company Business
or the Company or any of its affiliates shall be the
Company's property, shall be kept confidential in accordance
with the provisions of this Section 6.1 and shall be
delivered to the Company following termination of the Term
at any time on request.
6.2 RIGHTS AND REMEDIES UPON BREACH. If the Executive breaches, or
threatens to breach, any of the provisions of Section 6.1 (the
"Restrictive Covenants"), the Company shall have without
limitation the right and remedy to have the Restrictive Covenants
specifically enforced by any court having equity jurisdiction,
including, without limitation, the right to an entry against the
Executive of restraining orders and injunctions (temporary,
preliminary and permanent) against violations, threatened or
actual, and whether or not then continuing, of such covenant, it
being acknowledged and agreed that any such breach or threatened
breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company.
<PAGE>
6.3 NON-DISPARAGEMENT. Both parties agree that they will not make, or
cause to be made, any statements, observations or opinions, or
communicate any information (whether oral or written) that
disparages or is likely in any way to harm the reputation of the
Executive, on the one hand, or the Company or any Related Person,
on the other hand.
6.4 RESIGNATION OF APPOINTMENTS. Upon the termination of the
Executive's employment with the Company, the Executive shall
immediately resign all appointments he holds as a director,
officer, employee, member of any committee of the board of
directors or trustee of any employee benefit plan within the
Company, its parents, subsidiaries or affiliates.
7. OTHER PROVISIONS.
7.1 NO VIOLATION OF OTHER AGREEMENTS. The Executive hereby represents
and warrants to the Company that neither his entering into this
Agreement nor the performance of his duties and obligations
hereunder shall constitute a breach or other violation of any
agreement or understanding between the Executive and any other
person, firm, corporation or other entity, including, without
limitation, any former employer of the Executive.
7.2 SEVERABILITY. The Executive acknowledges and agrees that (i) he
has had an opportunity to seek advice of counsel in connection
with this Agreement, (ii) the Restrictive Covenants are reasonable
in all respects, and (iii) the Company would not have entered into
this Agreement but for the Restrictive Covenants contained herein.
If it is determined that any of the provisions of this Agreement,
including, without limitation, the Restrictive Covenants are
invalid or unenforceable, the remainder of the provisions of this
Agreement shall not thereby be affected and shall be given full
effect, without regard to the invalid portions.
7.3 SEVERABILITY AND REFORMATION. If any court determines that any of
the covenants contained in this Agreement, including, without
limitation, the Restrictive Covenants, is unenforceable because of
the duration or geographical scope of such provision, the duration
or scope of such provision, as the case may be, shall be reduced
so that such provision becomes enforceable and, in its reduced
form, such provision shall then be enforceable and shall be
enforced.
<PAGE>
7.4 NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by
certified, registered or express mail, postage prepaid. Any such
notice shall be deemed given when so delivered personally
telegraphed, telexed or sent by facsimile transmission or, if
mailed, five days after the date of deposit in the United States
mails as follows:
(i) If to the Company, to:
FACILITIES MANAGEMENT INSTALLATION, INC.
500 North Akard
P.O. Box 2699
Dallas, Texas 75221
Attention: General Counsel
(ii) If to the Executive, to:
H. Don Rutherford
24 Canyon Great Court
Frisco, Texas 75034
Any such person may by notice given in accordance with this
Section to the other parties hereto designate another address or
person for receipt by such person of notices hereunder.
7.5 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and
supersedes all prior agreements, written or oral, with respect
thereto.
7.6 WAIVERS AND AMENDMENTS. This Agreement may be amended, superseded,
canceled, renewed or extended, and the terms hereof may be waived,
only by a written instrument signed by the parties or, in the case
of a waiver, by the party waiving compliance. No delay on the part
of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the
part of any party of any such right, power or privilege nor any
single or partial exercise of any such right, power or privilege,
preclude any other or further exercise thereof or the exercise of
any such right, power or privilege.
7.7 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of
<PAGE>
Texas applicable to agreements made and to be performed entirely
within such State.
7.8 ASSIGNMENT.
(a) Except as provided in subparagraph (b) below, this
Agreement, and the Executive's and Company's rights and
obligations hereunder, may not be assigned by the Executive
or the Company and any purported assignment by the Executive
or the Company in violation hereof shall be null and void.
(b) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the assets or business of the
Company, by agreement in form and substance reasonably
satisfactory to the Executive, to expressly assume and agree
to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no
such succession had taken place.
7.9 COVERAGE. The provisions set forth in this Agreement with respect
to the terms and conditions of the Executive's employment will not
prevent the Executive from participating in any other employee
compensation or benefit program adopted by the Company, or their
direct and indirect subsidiaries for their key employees solely
because such programs are not specifically mentioned in this
Agreement.
7.10 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors,
permitted assigns, heirs, distributes, devisees, legatees,
executors and legal representatives.
7.11 COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and
delivered shall be an original but all such counterparts together
shall constitute one and the same instruments.
7.12 HEADINGS. The headings in this Agreement are for reference only
and shall not affect the interpretation of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed their names as of the
date and year first above written.
FMI:
FACILITIES MANAGEMENT
INSTALLATION, INC.
By: /s/ ROBERT L. BEISENHERZ
------------------------
Robert L. Beisenherz,
Chairman of the Board,
President and Chief
Executive Officer
EXECUTIVE:
/s/ H. DON RUTHERFORD
---------------------------
H. D. Rutherford
<PAGE>
Annex 1
RELEASE
WHEREAS, _____________________ (the "Executive"), was a party to an
Employment Agreement, dated as of ___________, 1994 (the "Employment
Agreement"), between the Executive and _________________________________ (the
"Company"), and the employment of the Executive with the Company, pursuant to
the Employment Agreement, was terminated; and
WHEREAS, it is a condition to the Company's obligation to make payment
to the Executive of the payments and benefits described in Section 5.1 or 5.3
of the Employment Agreement, as the case may be, that the Executive shall
first execute and deliver this Release.
NOW THEREFORE, in consideration of the receipt by the Executive of all
such payments and benefits, which constitutes a material inducement to enter
into this Release, the Executive agrees as follows:
The Executive irrevocably and unconditionally releases the Company and
any Related Person (as defined below) from any and all causes of action,
charges, complaints, liabilities, obligations, promises, agreements,
controversies and claims arising out of (i) the Employment Agreement and
(ii) the Executive's employment with the Company and the conclusion
thereof, whether, known or unknown, suspected or unsuspected, foreseen
or unforeseen, matured or unmatured, which, from the beginning of the
world up to and including the date hereof, exists, have existed, or may
arise, which the Executive, or any of his heirs, executors,
administrators, successors and assigns ever had, now has or at any time
hereafter may have, own or hold against the Company and any Related
Person, except as provided below. By executing this Release, the
Executive is waiving all claims against the Company and any Related
Person arising under federal, state and local labor and
anti-discrimination laws and any other restrictions on the right to
terminate employment, including without limitation the Age
Discrimination in Employment Act ("ADEA"), Title VII of the Civil Rights
Act, the Americans with Disabilities Act, and the Texas Commission on
Human Relations Act. Nothing herein shall (1) release the Executive, the
Company or any Related Person from any obligation or liability under, or
claim for breach of, Section 6.3 of the Employment Agreement, (2)
release the Company from any obligations, liabilities or claims arising
out of or in any way related to the
<PAGE>
Executive's ownership of capital stock of the Company or any Related
Person or any option or other right to acquire capital stock of the
Company or any Related Person or any agreement between the Executive
and the Company or any Related Person which by its terms continues
beyond the termination of the Executive's employment by the Company,
(3) diminish the rights of Executive, or the obligations of the Company
or any Related Person, under any indemnification provided pursuant to
the charter or bylaws of the Company or any Related Person or any
director and officer liability insurance policy maintained by the
Company or any Related Person.
As used herein, the following terms shall have the following meanings:
"Affiliate" shall mean, with respect to any entity, any other entity
which owns or controls, is owned or controlled by, or is under common
ownership or control with, such entity.
"Person" shall mean a corporation, association, partnership, joint
venture, organization, business, individual, trust, or any other entity
or organization, including a government or any subdivision or agency
thereof.
"Related Person" shall mean, (i) in respect of the Company, any
affiliate, owner, parent, stockholder, predecessor, successor, assign,
division or subsidiary, or (ii) any director or officer of any Person
described above.
The Company has advised the Executive to consult with an attorney of his
choosing prior to the signing of this Release and the Executive hereby
represents to the Company that he has in fact consulted with such an attorney
prior to the execution of this Release. The Executive shall have twenty-one
days to consider the waiver of his rights under the ADEA and once he has
signed this release, the Executive shall have seven additional days from the
date of execution to revoke his consent to the waiver of his rights under the
ADEA. If no such revocation occurs, the Executive's waiver of rights under the
ADEA shall become effective seven days from the date the Executive executes
this Release.
This Release shall not be effective or enforceable against the Executive
unless and until full payment of all benefits and amounts described in Section
5.1 or 5.3 of the Employment Agreement, as the case may be, is made by the
Company and received by the Executive and, if any such payment or benefit is
not made on a timely basis as provided for in the Employment
<PAGE>
Agreement or if such payment or benefit is required to be returned to the
Company, this Release shall be null and void and of no further effect.
IN WITNESS WHEREOF, the undersigned has executed this Release on the
_____ day of ________________, 1994.
___________________________________
<PAGE>
EX-10.41
COMPENSATION ARRANGEMENTS WITH
JAMES R. KERBER
AS APPROVED BY THE
COMPENSATION COMMITTEE
AND
BOARD OF DIRECTORS
MARCH 2, 1995
----------------------------------------
1. TERM. The term of Mr. Kerber's employment shall commence as of October
10, 1994 and shall expire on September 30, 1997 (the "Term"), unless
sooner terminated pursuant to the Company's or Mr. Kerber's right to do
so.
2 SALARY. The Company shall pay Mr. Kerber during the Term a base salary
per annum of Two Hundred Fifty Thousand Dollars ($250,000) through
February 28, 1995 and Three Hundred Thousand Dollars ($300,000)
commencing March 1, 1995 (the "Base Salary"), payable in accordance with
the Company's payroll procedure as presently in effect and as may be
amended from time to time. The Company, by action of its Board of
Directors, may increase the Base Salary at any time and from time to
time during the Term.
3. BENEFITS. Mr. Kerber shall be permitted during the Term to participate
in any hospitalization or disability insurance plans, health programs,
personnel plans, bonus plans or similar plans or benefits, including
vacation, that may be available to other executive officers of the
Company and its affiliates generally, in each case to the extent he is
eligible under any applicable terms of such plans or programs as amended
from time to time.
4. EXPENSES. The Company shall pay or reimburse Mr. Kerber for all
reasonable out-of-pocket expenses actually incurred or paid by him
during the Term in the performance of his services, provided he properly
accounts therefor in
<PAGE>
accordance with Company policy as in effect from time to time. The
Company does not expect Mr. Kerber to relocate to Dallas, Texas;
therefore, during the Term, Mr. Kerber will be entitled to reimbursement
for reasonable lodging expenses in Dallas and reasonable expenses for
travel between Dallas, Texas and Denver, Colorado.
5. BONUS. The Company may pay Mr. Kerber bonuses at such times and in such
amounts at the Board's sole and absolute discretion.
6. SEVERANCE PAY. Mr. Kerber shall have the benefit of the SLC Companies'
Salaried Employees Severance Pay Plan (the "Severance Plan"), subject to
all of the terms and provisions thereof and of this memorandum. In
addition, at any time Mr. Kerber is entitled to a payment pursuant to
the Severance Plan, the Company shall also pay to Mr. Kerber as
additional severance an amount equal to the difference between the Base
Salary and the amount Mr. Kerber is paid under the Severance Plan
("Additional Severance").
7. AUTOMOBILES. During the Term, Mr. Kerber shall have the use in Denver,
Colorado and Dallas, Texas of automobiles purchased or leased by the
Company.
8. INDEMNIFICATION. To the full extent of the Company's Certificate of
Incorporation and Bylaws and pursuant to the customary and standard
indemnification agreement provided by the Company to its senior
executive officers, Mr. Kerber shall be indemnified and held harmless
against all losses, costs and expenses arising from his employment as a
director and officer of the Company.
9. TERMINATION FOR CAUSE. The Company may terminate Mr. Kerber's employment
at any time for Cause. Such termination shall be effected by the
delivery of a written notice of termination to Mr. Kerber and shall be
effective as of the date of delivery of such notice. Mr. Kerber shall
have no right to receive any compensation on and after the effective
date of such termination other than Base Salary and other benefits
earned and accrued prior to the date of termination and reimbursement
for expenses incurred prior to the date of termination.
"Cause" shall mean (i) the willful and continued failure by Mr. Kerber
to substantially perform his duties as determined by the Board in its
sole discretion, (ii) the commission of an act of fraud,
misappropriation or embezzlement by Mr. Kerber involving the Company or
its subsidiaries, or (iii) a conviction of, or plea of NOLO CONTENDERE
or a guilty plea
<PAGE>
or confession by, Mr. Kerber to an act of fraud, misappropriation or
embezzlement or to a felony or to conduct prohibited by state or federal
law.
10. TERMINATION WITHOUT CAUSE. The Company may terminate Mr. Kerber's
employment WITHOUT CAUSE effective upon the giving of written notice
thereof to Mr. Kerber. If Mr. Kerber's employment is terminated by the
Company without Cause then the Company shall pay him the compensation to
which Mr. Kerber is entitled under the Severance Plan and the Additional
Severance, in each case without offset for compensation Mr. Kerber may
thereafter receive from other sources.
<PAGE>
EX-10.42
COMPENSATION ARRANGEMENTS WITH
GLENN H. GETTIER, JR.
AS APPROVED BY THE
COMPENSATION COMMITTEE
AND
BOARD OF DIRECTORS
MARCH 2, 1995
--------------------------------
1. TERM. The term of Mr. Gettier's employment shall commence January 18,
1995 and shall expire on December 31, 1995, (the "Term"), unless sooner
terminated pursuant to the Company's or Mr. Gettier's right to do so.
Notwithstanding the foregoing, the Term shall automatically be renewed
for successive one calendar year periods commencing January 1, 1996,
unless either the Company or Mr. Gettier by written notice to the other
not later than September 30 of each year gives notice of the intent not
to renew these employment arrangements.
2. SALARY. The Company shall pay Mr. Gettier during the Term a base salary
per annum of Four Hundred Thousand Dollars ($400,000) (the "Base
Salary"), payable in accordance with the company's payroll procedure as
presently in effect and amended from time to time. The Company, by
action of its Board of Directors, may increase the Base Salary at any
time and from time to time during the Term.
3. BENEFITS. Mr. Gettier shall be permitted during the Term to participate
in any hospitalization or disability insurance plans, health programs,
personnel plans, bonus plans or similar plans or benefits including
vacation that may be available to other executive officers of the
Company and its affiliates generally, in each case to the extent he is
eligible under any applicable terms of such plans or programs as amended
from time to time.
<PAGE>
4. EXPENSES. The Company shall pay or reimburse Mr. Gettier for all
reasonable out-of-pocket expenses actually incurred or paid by him
during the Term in the performance of his services, provided he properly
accounts therefor in accordance with Company policy as in effect from
time to time.
5. BONUS. The Company may pay Mr. Gettier bonuses at such times and in such
amounts at the Board's absolute discretion; provided, however, that the
Company shall pay Mr. Gettier a relocation bonus in the amount of
$100,000 upon his relocation to a permanent address in the Dallas, Texas
metropolitan area.
6. SEVERANCE PAY. Mr. Gettier shall have the benefit of the SLC Companies'
Salaried Employees Severance Pay Plan, subject to all of the terms and
provisions thereof.
7. RELOCATION EXPENSES. Mr. Gettier shall have the benefit of SLC's
Corporate Relocation Policy, subject to all of the terms and provisions
thereof.
8. INDEMNIFICATION. To the full extent of the Company's Articles of
Incorporation and Bylaws and pursuant to the customary and standard
indemnification agreement provided by the Company to senior executive
officers, Mr. Gettier shall be indemnified and held harmless against all
losses, costs and expenses arising from his employment as director and
officer of the Company.
9. TERMINATION FOR CAUSE. The Company may terminate Mr. Gettier's
employment for Cause. Such termination shall be effected by the delivery
of a notice of termination to Mr. Gettier and shall be effective as of
the date of delivery of such notice. Mr. Gettier shall have no right to
receive any compensation on and after the effective date of such
termination other than salary and other benefits earned and accrued
prior to the date of termination and reimbursement for expenses incurred
prior to the date of termination.
"Cause" shall mean (i) the willful and continued failure by Mr. Gettier
to substantially perform his duties, (ii) the commission of an act of
fraud, misappropriation or embezzlement by Mr. Gettier involving the
Company or its subsidiaries, or (iii) a conviction of, or plea of NOLO
CONTENDERE or a guilty plea or confession by, Mr. Gettier to an act of
fraud, misappropriation or embezzlement or to a felony or to conduct
prohibited by state or federal law.
<PAGE>
10. TERMINATION WITHOUT CAUSE. The Company may terminate Mr. Gettier's
employment WITHOUT CAUSE effective upon the giving of notice thereof to
Mr. Gettier. If Mr. Gettier's employment is terminated by the Company
without Cause then the Company shall pay him the greater of (i) his
salary and any bonus and other benefits he would have earned from the
date of termination up to and including the end of the then current
Term, or (ii) the compensation to which Mr. Gettier is entitled under
the SLC Companies' Salaried Employees Severance Plan, in each case
without offset for compensation Mr. Gettier may thereafter receive from
other sources.
11. TERMINATION BY MR. GETTIER. During any Term, Mr. Gettier may terminate
these employment arrangements if the Board of Directors makes or the
Company's financial circumstances cause a material change in the terms
or conditions of his employment, including, but not limited to, any
change in job or job duties, compensation, benefits or workplace, and in
such event and upon such termination, the Company shall pay Mr. Gettier
the greater of (i) his salary and any bonus and other benefits he would
have earned from the date of such termination up to and including the
end of the then current Term, or (ii) the compensation to which Mr.
Gettier is entitled under the SLC Companies' Salaried Employees
Severance Plan, in each case without offset for compensation Mr. Gettier
may thereafter receive from other sources.
<PAGE>
EX-10.43
CONSOLIDATED TAX ALLOCATION AGREEMENT
THIS CONSOLIDATED TAX ALLOCATION AGREEMENT ("Agreement") made and
entered into by and among I.C.H. CORPORATION, a Delaware corporation ("ICH"),
MODERN AMERICAN LIFE INSURANCE COMPANY, a Missouri corporation ("Modern"), in
its own right and as corporate successor to I.C.H. LIFE INSURANCE COMPANY, a
Missouri corporation ("ICH Life") as the result of a statutory merger
("Merger") effected on December 26, 1985, and the undersigned direct and
indirect life insurance company subsidiaries ("Subsidiaries") of Modern
(Modern and the Subsidiaries hereinafter sometimes being referred to
individually as "Participant" and collectively as "Participants").
W-I-T-N-E-S-S-E-T-H:
WHEREAS, from October 30, 1984 to September 26, 1985, ICH owned 100% of
the capital stock of ICH Life, which owned, directly or indirectly through
one or more Subsidiaries, 80% or more of the capital stock of Modern and of
each of the Subsidiaries; and
WHEREAS, as a result of the Merger, ICH owns 100% of the capital stock
of Modern, which owns, directly or indirectly through one or more
Subsidiaries, 80% or more of the capital stock of each of the Subsidiaries;
and
WHEREAS, as a result of such ownership, each Participant is a member of
the same Affiliated Group (herein so-called) within the meaning of the
Internal Revenue Code and the consolidated return regulations thereunder; and
WHEREAS, Participants determined for the tax year ended December 31,
1984 and subsequent tax years to file consolidated federal income tax returns
and desire to enter into a written agreement specifying how the consolidated
federal income tax liability of the Affiliated Group is to be allocated among
them. NOW, THEREFORE, in consideration of the premises and the mutual
promises of the parties hereto, they hereby covenant and agree as follows:
<PAGE>
1. Participants acknowledge that they filed a consolidated federal
income tax return for 1984 and agree to file consolidated federal income tax
returns for the tax year ended December 31, 1985 and subsequent tax years.
2. Each Participant's share of the consolidated federal income tax
liability of the Affiliated Group for the tax year ended December 31, 1984
and for each subsequent tax year hereunder (sometimes referred to as
"Consolidation Period") shall be computed as follows:
a.) First, the Affiliated Group's tax liability shall be allocated
among the Participants in the Affiliated Group in accordance with the
ratio which that portion of the consolidated taxable income attributable
to each Participant in the Affiliated Group having taxable income bears
to the consolidated taxable income of the Affiliated Group.
b.) Second, an additional amount shall be allocated to each
Participant equal to 100% of the excess, if any, of (i) the separate
return tax liability of such Participant for the taxable year (computed
in the same manner as for the separate return liability allocation
method) over (ii) the Affiliated Group tax liability allocated to the
Participant under subparagraph (a) above.
c.) Third, any additional amounts allocated pursuant to
subparagraph (b) above (including amounts allocated as a result of
carrybacks) shall be credited to the earnings and profits of those
Participants which had income, deductions or credits to which such total
additionally allocated amounts are attributable. Such credits shall be
made by consistent method which fairly reflects such items of income,
deductions or credits and which is substantiated by specific records
maintained by the Affiliated Group for such purpose.
3. In the event of any adjustments of the consolidated federal income
tax liability of the Affiliated Group by reason of the filing of an amended
return or claim for refund or arising out of an audit by the Internal Revenue
Service, the allocations pursuant to Paragraph 2 above shall be redetermined
after giving effect to such adjustments.
4. Written reports shall be prepared by Modern on behalf of the
Affiliated Group reflecting the allocations made pursuant to Paragraph 2
above (hereinafter called "Tax Allocation Report"). A Tax Allocation Report
will be prepared and distributed to each Participant within fifteen (15) days
following completion of the calculation of taxes for each calendar quarter
ended March 31st,
<PAGE>
June 30th and September 30th and for each tax year ended December 31st.
Written reports shall also be prepared by Modern on behalf of the Affiliated
Group reflecting any adjustments to prior Tax Allocation Reports made
pursuant to the provisions of Paragraphs 3 and 7 hereof (hereinafter called
"Tax Allocation Adjustment Reports"). Tax Allocation Adjustment Reports will
be prepared and distributed to each Participant within fifteen (15) days
following the calculation of such adjustments. All intercompany accounts
among the Participants resulting from such allocations shall be settled as
soon as practicable and, commencing as of the date hereof, shall be settled
not later than 30 days after the completion and distribution of the Tax
Allocation Report for such period or the Tax Allocation Adjustment Report.
However, where the Internal Revenue Service owes a refund to the Affiliated
Group, settlements may be deferred until not later than 30 days after receipt
of such refund. Notwithstanding the foregoing, the Participants may effect a
preliminary settlement of accounts to the extent necessary to pay quarterly
estimated consolidated federal income taxes calculated in accordance with
Section 6655(d)(3)(A) of the Internal Revenue Code. All settlements shall be
made when directed by Modern and shall be in cash or securities qualifying as
admitted assets to the respective Participants, valued at current market
value on the date of transfer.
5. Allocations made in accordance with Paragraph 2 above shall be
treated as allocations of the Affiliated Group's federal income tax liability
even though the sum of the amounts so allocated may exceed the Affiliated
Group's consolidated federal income tax liability for the year. To the extent
that any allocations exceed the actual federal income tax liability
allocated, such excess allocations shall be reflected in the Participants
earnings and profits as tax compensating payments and not as dividends or
capital contributions.
6. Any election to utilize a financial or tax method of accounting,
procedure, etc. which does not require consistent treatment by all of the
Participants in the Affiliated Group may be made by any Participant in
concert with Modern. Where the accounting methods, procedures, etc. require
consistent treatment by all Participants, Modern, with the unanimous consent
all of the other Participants, shall determine such method or treatment.
7. Notwithstanding any other provisions herein, within sixty (60) days
after filing a consolidated federal income tax return or any amendment
thereto, an additional review and adjustment shall be made to ensure that (i)
the allocations made pursuant to Paragraphs 2 (a) and (b) above for any
Participant is not greater or less than the amount of the federal income tax
liability such Participant would have incurred if it had filed separate
federal
<PAGE>
income tax returns for all years of the Consolidation Period, and (ii)
that the allocations made pursuant to Paragraph 2(c) above for any Participant
is not less or greater than the federal income tax refunds such Participant
would have been entitled to receive if it had filed separate federal income
tax returns for all years of the Consolidation Period.
8. ICH agrees to indemnify and to hold harmless any Participant to the
extent, if any, that: (i) the allocations to such Participant under Paragraph
2 above exceeds the federal income tax liability such Participant would have
incurred or is less than the federal income tax refunds such Participant
would have been entitled to receive if such Participant had filed separate
federal income tax returns for all years of the Consolidation Period; and
(ii) any Participant is required, pursuant to Regulation 1.1502-6 under the
Internal Revenue Code, to pay additional federal income taxes resulting
from another Participant's inability to pay its allocated liability under
this Agreement, in which event ICH shall be subrogated to the rights of all
other Participants against the defaulting Participant with respect to such
taxes.
9. This Agreement shall continue in effect as to any given Participant
until such time as such Participant ceases to be a member of the Affiliated
Group ("Terminated Participant"); provided, however, that this Agreement
shall continue in effect as to the Terminated Participant with respect to any
period of time during the taxable year in which such transaction occurs for
which income of the Terminated Participant must be included in the
consolidated federal income tax return of the Affiliated Group.
10. Life insurance companies which subsequently become members of the
Affiliated Group shall, simultaneously with such affiliation, become
Participants hereunder upon their written ratification of this Agreement,
which writing shall be attached hereto and made a part hereof.
11. Notwithstanding the provisions of Paragraphs 9 and 10 above, this
Agreement shall continue in effect as to all Participants who are then
members of the Affiliated Group until such time as this Agreement is
terminated in writing signed by all of the then Participants or until such
time as the Participants are no longer eligible to file a consolidated
federal income tax return, whichever occurs first.
12. All completed schedules, work papers and supporting documents,
including, without limitation, applicable tax returns, relating to the
allocations made pursuant to this Agreement will be furnished to any
Participant upon request.
<PAGE>
13. Any dispute between or among any of the parties hereto concerning
the implementation of this Agreement which cannot be amicably resolved shall
be referred to arbitration in accordance with the then existing rules of the
American Arbitration Association. Any arbitration instituted pursuant to this
paragraph will be conducted at the home office of Modern, and the laws of the
State of Modern's domicile shall govern the interpretation and application of
this Agreement.
14. This Agreement sets forth the entire understanding of the parties
hereto and supersedes any prior agreement, understanding or promise, whether
written or oral, with respect to the subject matter hereof; may not be
assigned by any party hereto without the prior written consent of all of the
then parties hereto; and may not be modified or amended except in writing
signed by all of the then parties hereto.
EXECUTED this 28th day of March, 1986.
MODERN AMERICAN LIFE INSURANCE COMPANY
7887 E. Belleview Avenue
Englewood, Colorado 80111
By: /S/C. FRED RICE
-----------------------
C. Fred Rice, President
GREAT SOUTHERN LIFE INSURANCE COMPANY
3121 Buffalo Speedway
Houston, Texas 77098
By: /S/THOMAS J. BROPHY
-----------------------
Thomas J. Brophy, Senior Executive
Vice President and Chief Operating
Officer
BANKERS LIFE AND CASUALTY COMPANY OF NEW YORK
1399 Franklin Avenue
Garden City, New York 11530
By: /S/ROBERT T. SHAW
-----------------------
Robert T. Shaw, Chairman of the Board
BANKERS LIFE AND CASUALTY COMPANY
4444 West Lawrence Avenue
Chicago, Illinois 60630
By: /S/JOHN W. GARDINER
<PAGE>
-----------------------
John W. Gardiner, President
BANKERS MULTIPLE LINE INSURANCE COMPANY
Insurance Exchange
Des Moines, Iowa 50319
By: /S/BARTH T. MURPHY
-----------------------
Barth T. Murphy, President
CERTIFIED LIFE INSURANCE COMPANY
14724 Ventura Boulevard
Sherman Oaks, California 91403
By: /S/WEBSTER H. HURLEY
-----------------------
Webster H. Hurley, President
CONSTITUTION LIFE INSURANCE COMPANY
325 West Tuohy Avenue
Park Ridge, Illinois 60068
By: /S/ROBERT T. SHAW
-----------------------
Robert T. Shaw, Chairman of the Board
UNION BANKERS INSURANCE COMPANY
2551 Elm Street
Dallas, Texas 75226
By: /S/WEBSTER H. HURLEY
-----------------------
Webster H. Hurley, President
MARQUETTE NATIONAL LIFE INSURANCE COMPANY
4800 North Kenneth Avenue
Chicago, Illinois 60630
By: /S/BARTH T. MURPHY
-----------------------
Barth T. Murphy, President
CHASE NATIONAL LIFE INSURANCE COMPANY
7887 East Belleview Avenue
Englewood, Colorado 80111
By: /S/C. FRED RICE
-----------------------
C. Fred Rice, President
<PAGE>
WABASH LIFE INSURANCE COMPANY
7887 East Belleview Avenue
Englewood, Colorado 80111
By: /S/LEE G. BAKER
-----------------------
Lee G. Baker, President
ALL AMERICAN ASSURANCE COMPANY
7887 E. Belleview Avenue
Englewood, Colorado 80111
By: /S/JOHN W. GARDINER
-----------------------
John W. Gardiner, Chairman of the
Board and President
NATIONAL AMERICAN LIFE INSURANCE COMPANY
7887 E. Belleview Avenue
Englewood, Colorado 80111
By: /S/ROBERT T. SHAW
-----------------------
Robert T. Shaw, President
BANKERS UNION LIFE INSURANCE COMPANY
7887 E. Belleview Avenue
Englewood, Colorado 80111
By: /S/LEE G. BAKER
-----------------------
Lee G. Baker, President
MASSACHUSETTS GENERAL LIFE INSURANCE COMPANY
7887 E. Belleview Avenue
Englewood, Colorado 80111
By: /S/JOHN W. GARDINER
-----------------------
John W. Gardiner, Chairman of the
Board and Chief Executive Officer
SECURITY GUARANTY LIFE INSURANCE COMPANY
7887 E. Belleview Avenue
Englewood, Colorado 80111
By: /S/JOHN W. GARDINER
-----------------------
John W. Gardiner, President and
Chief Executive Officer
<PAGE>
I.C.H. CORPORATION
By: /S/ROBERT T. SHAW
-----------------------
Robert T. Shaw, Chairman of the Board
and Chief Executive Officer
<PAGE>
AMENDMENT NO. 1
CONSOLIDATED TAX ALLOCATION AGREEMENT
This Agreement is made and entered into by and among I.C.H. Corporation
("ICH") and each of its undersigned direct and indirect subsidiaries (ICH and
its Subsidiaries hereinafter sometimes referred to individually as
"Participant" and collectively as "Participants").
RECITALS
1. WHEREAS, ICH has filed a consolidated federal income tax return with
the includible members of its affiliated group as defined by the Internal
Revenue Code of 1986, Section 1504 (herein all references to "Section" shall
be references to the Internal Revenue Code of 1986, as amended); and
2. WHEREAS, Modern American Life Insurance Company ("Modern") has filed
a consolidated federal income tax return with the includible members of its
affiliated group as defined by Section 1504 ("Modern Group"); and
3. WHEREAS, Western Pioneer Life Insurance Company has filed a
consolidated federal income tax return with the includible members of its
affiliated group as defined by Section 1504; and
4. WHEREAS, certain other Participants were not eligible to join in the
filing of the above-mentioned consolidated federal income tax returns and
filed separate federal income tax returns; and
5. WHEREAS, the Modern Group entered into a consolidated tax allocation
agreement dated March 28, 1986 (the "1986 Agreement"), pursuant to which
members of the Modern Group have made payments to Modern during the tax year
1992; and
6. WHEREAS, it is the intent and desire of ICH to make an election under
Section 1504(c)(2) and the regulations thereunder to treat companies taxed
under Section 801 as includible corporations for purposes of Section 1504(a)
and to file a consolidated federal income tax return with all of the
includible members of its affiliated group as defined by Section 1504 for the
taxable year 1992 and all subsequent taxable years; and
7. WHEREAS, it is the intent and desire of the parties hereto that a
method be established for allocating the consolidated federal income tax
liability of the Affiliated Group
<PAGE>
among the Participants, for reimbursing ICH for payment of such tax
liability, for compensating any Participant for use of its losses or tax
credits, and to provide for the allocation and payment of any refund arising
from a carryback of losses or tax credits from subsequent taxable years.
NOW, THEREFORE, in consideration of the mutual covenants, and promises
contained herein, the parties hereto agree to amend the 1986 Agreement as
follows:
Effective beginning with the taxable year 1992:
A. Paragraph 1 is hereby deleted and the following is hereby substituted
therefor:
1. A U.S. consolidated federal income tax return shall be filed
by ICH for the taxable year ended December 31, 1992, and for each
subsequent taxable year in respect of which this Agreement is in effect
and for which the Affiliated Group is required or permitted to file a
consolidated federal income tax return. ICH and each Participant shall
execute and file such consents, elections and other documents that may
be required or appropriate for the proper filing of such returns.
Payments made to Modern by members of the Modern Group during the
taxable year 1992 shall be treated as if they had been paid to ICH.
B. The first, third and final sentences of Paragraph 4 are amended by
substituting ICH for Modern.
C. The last sentence of Paragraph 6 is amended by substituting ICH for
Modern.
D. Paragraph 10 is amended by deleting the first two words (Life
insurance) of the paragraph.
E. The last sentence of Paragraph 13 is amended by substituting ICH for
Modern.
Executed this ----- day of ---------------------, 1993.
I.C.H. CORPORATION
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/JOHN T. HULL
------------------
John T. Hull
<PAGE>
Title: Executive Vice President
------------------------
FACILITIES MANAGEMENT INSTALLATION, INC.
500 North Akard Street
Dallas, Texas 75201
By: /S/ROBERT C. GREVING
-----------------------------------
Robert C. Greving
Title: Executive Vice President
------------------------------
WESTERN PIONEER LIFE INSURANCE COMPANY
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/W. SHERMAN LAY
-----------------------------------
W. Sherman Lay
Title: President
------------------------------
I.C.H. FINANCIAL SERVICES, INC.
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/EDWARD R. MEKEEL, JR.
-----------------------------------
Edward R. Mekeel, Jr.
Title: President
------------------------------
MODERN AMERICAN LIFE INSURANCE COMPANY
7887 East Belleview Avenue
Englewood, Colorado 80111
By: /S/JOHN T. HULL
-----------------------------------
John T. Hull
Title: Executive Vice President
------------------------------
INTEGRITY NATIONAL LIFE INSURANCE
COMPANY
140 Whittington Parkway
<PAGE>
Louisville, Kentucky 40222
By: /S/W. SHERMAN LAY
-----------------------------------
W. Sherman Lay
Title: President
-----------------------
DALLAS INSURANCE SERVICES COMPANY
500 North Akard Street
Dallas, Texas 75201
By: /S/ ROBERT L. BEISENHERZ
-----------------------------------
Robert L. Beisenherz
Title: Chief Executive Officer
-----------------------------
WESTERN PIONEER CORPORATION
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/W. SHERMAN LAY
-----------------------------------
W. Sherman Lay
Title: Vice President
-----------------------------
SOUTHWESTERN LIFE INSURANCE COMPANY
500 North Akard Street
Dallas, Texas 75201
By: /S/ROBERT C. GREVING
-----------------------------------
Robert C. Greving
Title: Executive Vice President
-----------------------------
PHILADELPHIA AMERICAN LIFE INSURANCE
COMPANY
500 North Akard Street
Dallas, Texas 75201
By: /S/W. SHERMAN LAY
-----------------------------------
W. Sherman Lay
<PAGE>
Title: Chief Executive Officer
-----------------------------
BANKERS LIFE AND CASUALTY COMPANY
OF NEW YORK
65 Froehlich Farm Boulevard
Woodbury, New York 11797
By: /S/W. SHERMAN LAY
-----------------------------------
W. Sherman Lay
Title: Secretary
-----------------------------
CONSTITUTION LIFE INSURANCE COMPANY
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/W. SHERMAN LAY
-----------------------------------
W. Sherman Lay
Title: President
-----------------------------
UNION BANKERS INSURANCE COMPANY
2551 Elm Street
Dallas, Texas 75226
By: /S/JOHN T. HULL
-----------------------------------
John T. Hull
Title: Executive Vice President
-----------------------------
BANKERS MULTIPLE LINE INSURANCE COMPANY
4211 Norbourne Boulevard
Louisville, Kentucky 40207
By: /S/JOHN T. HULL
-----------------------------------
John T. Hull
Title: Executive Vice President
-----------------------------
SOUTHEAST TITLE AND INSURANCE COMPANY
151 N.E. Silver Springs Boulevard
<PAGE>
Suite W275
Ocala, Florida 32670
By: /S/EDWARD R. MEKEEL, JR.
-----------------------------------
Edward R. Mekeel, Jr.
Title: Executive Vice President
and Chief Financial Officer
-----------------------------
BML AGENCY, INC.
7887 East Belleview Avenue
Englewood, Colorado 80111
By: /S/ROBERT L. BEISENHERZ
-----------------------------------
Robert L. Beisenherz
Title: Vice President
-----------------------------
BML AGENCY OF OHIO, INC.
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/ROBERT L. BEISENHERZ
-----------------------------------
Robert L. Beisenherz
Title: Vice President
-----------------------------
<PAGE>
AMERICAN MEDCAP, INC.
1233 West Loop South
Houston, Texas 77001
By: /S/W. SHERMAN LAY
-----------------------------------
W. Sherman Lay
Title: Chief Executive Officer
-----------------------------
INDEPENDENCE NATIONAL, INC.
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/ROBERT L. BEISENHERZ
-----------------------------------
Robert L. Beisenherz
Title: President
-----------------------------
SW HOTEL COMPANY
11620 East Skelly Drive
Tulsa, Oklahoma 74128
By: /S/DAVID A. LEONARD
-----------------------------------
David A. Leonard
Title: Secretary
-----------------------------
HEALTH INTERESTS CORPORATION
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/ROBERT L. BEISENHERZ
-----------------------------------
Robert L. Beisenherz
Title: President
-----------------------------
LIFE INTERESTS CORPORATION
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/ROBERT L. BEISENHERZ
-----------------------------------
Robert L. Beisenherz
Title: President
-----------------------------
<PAGE>
I.C.H. FUNDING CORP.
100 Mallard Creek Road, Suite 400
Louisville, Kentucky 40207
By: /S/EDWARD R. MEKEEL, JR.
-----------------------------------
Edward R. Mekeel, Jr.
Title: Vice President
-----------------------------
REO HOLDING CORPORATION
500 N. Akard Street
Dallas, Texas 75201
By: /S/EDWARD R. MEKEEL, JR.
-----------------------------------
Edward R. Mekeel, Jr.
Title: Vice President
-----------------------------
<PAGE>
EX-10.44
FORM OF
EXECUTIVE SEVERANCE BENEFIT AGREEMENT
This AGREEMENT is made and entered into as of the ___ day of ______, 1995,
by and between SOUTHWESTERN LIFE CORPORATION, a Delaware corporation ("SLC"),
SLC's wholly owned subsidiary, FACILITIES MANAGEMENT INSTALLATION, INC., a
Delaware corporation ("FMI") and the EXECUTIVE named on the signature page
hereof.
Introductory Provisions
The following provisions are true and correct and are part of and form the
basis for this Agreement:
A. Executive is employed by SLC or FMI as an executive officer and in
such capacity provides services to SLC, FMI and one or more of the
subsidiaries and affiliates of SLC and FMI.
B. The Board of Directors of SLC has determined that it is in the best
interests of the Companies (as hereinafter defined) to attract and retain
highly qualified individuals to serve as executive officers and to take such
actions as are reasonably necessary to allow all such executive officers to
devote their best efforts to protecting and advancing the best interests of
the Companies.
C. The Board recognizes that, as is the case with many publicly-held
corporations, the possibility of a Change of Control (as hereinafter defined)
may arise and that such possibility, and the uncertainties and questions
which it may raise among management, may result in the departure or
distraction of key management personnel to the detriment of the Companies.
D. In these circumstances, the Board believes that it is imperative that
the Companies and the Board be able to rely upon the Executive to continue in
his position, and that the Companies and the Board be able to continue to
receive and rely upon the advice of the Executive as to the best interests of
the Companies, without concern that the Executive might be distracted by the
uncertainties and risks created by such circumstances.
<PAGE>
E. The Board has resolved that to enable and encourage the Executive to
continue to serve without undue distraction by reason of such uncertainties
and risks it wishes to assure that, if the Executive's employment with SLC or
FMI is terminated in anticipation of or following a Change of Control, the
Executive shall be provided with certain severance benefits, as more
particularly described in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
I. DEFINITIONS.
A. BENEFITS shall mean the right of the Executive to remain as a
participant in the Companies' life, health and disability plans as though the
Executive continued to be an employee of SLC or FMI through either (1) the
first day of the calendar month following the one year anniversary of the
Termination Date or (2) the first day of the calendar month following three
months of continuous employment by the Executive with a new employer which
offers life, health and disability plans, whichever is less. The Executive at
the end of the period provided in the preceding sentence shall then have such
conversion and continuation rights as provided by law, contract and/or
company policy and which are available to newly terminated employees.
B. CAUSE shall mean (i) the willful failure or refusal of the Executive
to substantially perform his duties, as such existed immediately preceding a
Change of Control, after a demand for substantial performance is delivered to
the Executive by the Board of Directors of SLC or its successor, if
applicable, (the "Board") which demand specifically identifies the manner in
which such Board believes the Executive has not substantially performed his
duties, or (ii) the willful engaging by the Executive in misconduct, which
materially injures the goodwill of any of the Companies, or (iii) the
commission of an act of fraud, misappropriation or embezzlement by the
Executive involving any of the Companies, or (iv) a conviction of, or plea of
NOLO CONTENDERE or a guilty plea or confession by, the Executive to an act of
fraud, misappropriation or embezzlement or to a felony or to conduct
prohibited by state or federal law. For purposes of this Agreement, no act,
or failure to act, on the part of the Executive shall be considered "willful"
unless done, or omitted to be done, by the Executive not in good faith and
without reasonable belief that the action or omission was in the best
interest of the Companies. Notwithstanding the foregoing, the Executive shall
not be deemed to have been terminated for Cause
<PAGE>
unless and until there shall have been delivered to the Executive a copy of a
Notice of Termination from the Board. After receipt of a Notice of
Termination which purports to be for Cause, the Executive shall have the
opportunity, together with his counsel, to be heard before the Board and such
termination shall not be deemed to be for Cause unless following such hearing
at least two-thirds of the members of the Board present at such hearing are
of the good faith opinion, which shall be specified in writing and signed by
the consenting Board members, that the Executive was guilty of conduct set
forth above in any of Clauses (i), (ii), (iii) or (iv) of this subsection,
and such opinion shall specify the particulars thereof in detail.
C. CHANGE OF CONTROL shall mean the occurrence of any one of the
following: (i) the acquisition by any Person or group of Persons (as such
terms are defined and used in Sections 3(a)(9) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Act")), other than SLC, any trustee or
other fiduciary holding securities under any employee benefit plan of SLC, or
any company owned, directly or indirectly, by the stockholders of SLC in
substantially the same proportions as their ownership of stock of SLC, of
beneficial ownership (as defined in Rule 13d-3 under the Act), directly or
indirectly, of shares representing twenty percent (20%) or more of the
combined voting power of SLC's then outstanding voting securities entitled to
vote generally in the election of directors ("Voting Securities"); or (ii)
individuals who as of March 2, 1995, constituted SLC's Board of Directors
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any person becoming a director of SLC
subsequent to March 2, 1995, whose election was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board shall,
for the purposes of this Agreement, be considered to be a member of the
Incumbent Board; or (iii) approval by the Board of Directors of SLC and, if
required, the stockholders of SLC, of: (a) a reorganization, merger, or
consolidation with respect to which those Persons (as defined above) who were
beneficial owners of SLC's Voting Securities immediately prior to such
reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, shares representing more than 50% of the combined voting power of
the Voting Securities of the corporation resulting from such reorganization,
merger or consolidation; (b) a complete liquidation or dissolution of SLC; or
(c) the sale or other disposition by SLC within a twelve (12) month period of
assets of SLC with a fair market value equal to at least one-half of the
total fair market value of all of the assets of SLC immediately prior to such
sale or sales; or (iv) SLC shall file a report or proxy statement with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended,
<PAGE>
disclosing in response to Item 1 of Form 8-K thereunder or Item 5(f) of
Schedule 14A thereunder (or any successor schedule, form or report or item
therein) that a change in control of SLC has or may have occurred or will or
may occur in the future pursuant to any then existing contract or transaction
or series of transactions.
D. COMPANIES shall mean SLC, FMI and all of their direct and indirect
subsidiaries and affiliates.
E. DISABILITY shall mean a mental or physical disability or incapacity
which renders the Executive incapable of carrying out his services and
duties, as determined by the Board of Directors of SLC in its reasonable
judgment, for a period of ninety (90) consecutive days.
F. EXECUTIVE shall mean the individual named on the signature page hereof.
G. GOOD REASON shall mean the occurrence of any of the following, without
the express written consent of the Executive: (i) a material reduction by SLC
or FMI of the Executive's reporting responsibilities, duties, authority,
status, titles or offices, as the same were in effect immediately preceding a
Change of Control; (ii) a material reduction in the Executive's base
compensation, bonuses or other benefits, as the same were in effect
immediately preceding a Change of Control, or (iii) any of the Companies
require the Executive to relocate outside of the Dallas-Fort Worth, Texas
metropolitan area as a condition for Executive retaining his position with
the Companies.
H. SEVERANCE PAYMENT shall mean an amount equal to the total base
compensation paid or payable to the Executive during the twelve (12)-month
period ending on the day immediately preceding a Termination Date, exclusive
of all bonuses and other benefits; provided, however, that if the period of
the Executive's employment prior to his termination is less than twelve (12)
months, his base pay during that period shall be annualized in determining
his Severance Payment.
I. NOTICE OF TERMINATION shall mean a notice which shall indicate in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment.
J. TERMINATION DATE shall mean the date on which the Executive's
employment is terminated by SLC or FMI, or the date of the Executive's
resignation from all of the Companies for Good Reason.
<PAGE>
II. SCOPE OF AGREEMENT
This Agreement shall cover the Executive and provide for the Severance
Payment and Benefits described herein.
III. TERMINATION FOLLOWING A CHANGE OF CONTROL
A. TERMINATION FOLLOWING A CHANGE OF CONTROL
Subject to the satisfaction of the conditions precedent described in
Paragraph IV, SLC shall pay the Executive the Severance Payment and provide
the Benefits if, within twenty four (24) months following the date of a
Change of Control, (i) the Executive's employment with SLC or FMI is
terminated for any reason other than as a result of the Executive's death or
Disability, or for Cause; or (ii) the Executive resigns for Good Reason.
B. TIMING OF SEVERANCE PAYMENT
The Severance Payment, less applicable withholding, shall be made, at the
option of the Executive, in either (i) a lump sum payment due on the first
business day following expiration of the seven (7) day period referred to in
Paragraph IV B , or (ii) in twelve equal monthly installments, with the first
such payment due on the first business day following expiration of the seven
(7) day period referred to in Paragraph IV B. The charge to the Executive for
Benefits shall be deducted from the payment herein provided on a lump sum or
monthly basis, corresponding to the settlement mode selected by Executive. A
lump sum deduction shall be calculated assuming the Benefits are continued
for the maximum period provided by this Agreement. A pro rata refund shall be
provided in the event of early termination of the Benefits. The charge to the
Executive shall be calculated at the charges in effect on the Termination
Date.
IV. RELEASE
A. RELEASE BY EXECUTIVE
In consideration for the Severance Payment to be made to the Executive and
as a condition of the payment of the same to the Executive, and for the other
good and valuable consideration referenced herein, the Executive, for himself
and his heirs, personal representatives, successors and assigns, will
irrevocably and unconditionally release all of the Companies and their
respective successors, assigns, directors, officers, employees, agents and
other representatives from any and all claims, demands, suits, damages, sums
of money and/or judgements
<PAGE>
arising at any time prior to and through the Date of Termination which may be
asserted against any of the Companies and/or its successors, assigns,
directors, officers, employees, agents and other representatives by the
Executive, his heirs, personal representatives, successors and assigns,
whether past or present, known or unknown, including, but not limited to, any
which have arise out of his past or existing relationships with any of the
Companies, whether by virtue of employment, directorship, stock ownership or
otherwise, or the termination of any such relationship; and the Executive will
agree not to file a lawsuit to assert any such claims. This release of
rights and claims and agreement not to sue shall include but not be limited
to, any claim of breach of fiduciary duty and any claim of contractual
restriction on the right of either the Executive or the Companies to
terminate the Executive's employment without liability or any claim of
wrongful discharge or violation of any right under federal, state or local
law prohibiting race, sex, age, religion, national origin or other forms of
discrimination, including, but not limited to, Title VII of the Civil Rights
Act of 1964, as amended, the Age Discrimination in Employment Act of 1967, as
amended, the Americans With Disabilities Act, as amended, the National Labor
Relations Act, and/or the Texas Commission on Human Rights Act.
B. RELEASE AGREEMENT
This provisions of Paragraph IV A shall be evidenced by a written Release
Agreement executed and delivered by the Executive to the Companies on or
after the Termination Date. The Executive shall have the right to cancel the
Release Agreement within seven (7) days from the date of execution, but in
the event of such cancellation the Executive shall not be entitled to the
Severance Payment or the Benefits.
V. SUCCESSORS AND BINDING AGREEMENT
A. ASSUMPTION BY SUCCESSOR
SLC and FMI will require any successor (whether direct or indirect, by
stock or asset purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of SLC or FMI to expressly
assume and agree, by a written agreement, to perform the obligations to
Executive under this Agreement. Failure of SLC or FMI to obtain such
agreement prior to the effectiveness of any such succession shall entitle the
Executive to a payment hereunder in the same amount and on the same terms as
the Executive would be entitled hereunder if such Executive had terminated
his employment for "Good Reason" within twenty-four (24) months following the
date of a Change of
<PAGE>
Control. For purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Termination Date, and
the payment to be made to the Executive shall be made no later than the day
immediately preceding the day on which such succession occurs.
B. ENFORCEABILITY
This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive
should die subsequent to the termination of his employment while any amount
would still be payable to the Executive hereunder if he had continued to
live, all such amounts, unless otherwise provided herein, shall be paid to
the Executive's devisee, legatee, or other designee or, if there be no such
designee, to his estate, in accordance with the terms of this Agreement, in a
lump sum within three (3) business days after the date of the Executive's
death.
C. JOINT AND SEVERAL LIABILITY
SLC and FMI shall each be jointly and severally liable for the obligations
to Executive under this Agreement.
VI. EMPLOYMENT AFTER TERMINATION; NO DUTY TO MITIGATE
A. NO EFFECT ON CERTAIN OTHER BENEFITS
This Agreement has no effect upon the retirement benefits to which the
Executive is or will be entitled under SLC's or FMI's retirement plans or
under any other tax-qualified Executive benefit plans, as amended from
time to time. This Agreement also has no effect upon the Executive's
entitlement to any post-retirement life, accident, medical or similar
benefits to which the Executive would have been entitled if he had separated
from employment with SLC or FMI on his Termination Date hereunder and if this
Agreement did not exist.
B. OFFSET FOR OTHER SEVERANCE PAYMENTS
The benefits payable to the Executive under this Agreement are intended to
be in lieu of, and not in addition to, any severance pay that would otherwise
be payable to the Executive under (i) the Southwestern Life Corporation
Companies Salaried Severance Pay Plan or (ii) any employment or benefit
agreement or arrangement between SLC or FMI or any of the other Companies and
the Executive and, therefore, the Severance Payment payable hereunder shall
be reduced on a dollar for dollar basis by any
<PAGE>
severance payments paid to the Executive under any other such severance plan,
agreement or arrangement maintained by SLC, FMI or any of the other Companies
for the benefit of the Executive.
C. NO DUTY TO MITIGATE
The Executive shall not be required to mitigate the amount of any payment
provided for herein by seeking other employment or otherwise, nor shall the
amount of any payment provided for herein by reduced by any compensation
earned by the Executive as the result of employment by another employer after
the Termination Date, or otherwise. This Agreement shall not in any way limit
the Executive from accepting employment with any other employer following his
Termination Date, including employment with an employer that is a competitor
of any of the Companies.
VII. IRC SEC. 280G LIMITATIONS
If all or any portion of the payments provided under this Agreement,
either alone or together with other payments and benefits which Executive
receives or is entitled to receive from the Companies, would constitute an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, (the"Code"), the payments and benefits
provided under this Agreement shall be reduced to the extent necessary so
that no portion thereof shall fail to be tax-deductible under Section 280G of
the Code. Any determinations required to be made under this Paragraph VII
shall be made by the Companies' independent auditors, pursuant to the
applicable principles of Section 280G of the Code. At the time of and in
addition to any payments made pursuant to this Agreement, if payments or
benefits are reduced under this Paragraph VII, the Companies shall provide
Executive with a written statement setting forth the manner in which any such
reduction was calculated and the basis for such calculations.
VIII. LEGAL FEES.
In the event SLC or FMI breaches this Agreement, or in the event that
within twenty-four (24) months following the date of a Change of Control (i)
the Executive is terminated other than for Cause, death, or Disability or
(ii) the Executive resigns for Good Reason, SLC and FMI, jointly and
severally, shall reimburse the Executive for all legal fees and expenses
reasonably incurred by the Executive as a result of such termination,
including all such fees and expenses, if any, incurred in contesting or
disputing any such termination or in seeking to obtain or enforce any right
or benefit provided by this Agreement.
<PAGE>
IX. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Texas.
X. NOTICE.
For purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to
have been duly given when delivered or mailed by United States Mail, Return
Receipt Requested, Postage Pre-Paid, addressed to the respective addresses
last specified in writing by any party hereto, provided that all notices to
SLC and FMI shall be directed to the attention of the Board of Directors of
SLC and/or FMI, as the case may be, or to such other address as either party
may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
XI. MISCELLANEOUS.
A. NO WAIVER
No provision of this Agreement may be modified, waived or discharged with
respect to the Executive unless waiver, modification or discharge is agreed
to in writing signed by such Executive and such officer as may be
specifically designated by the SLC and FMI Boards of Directors. Moreover,
this Agreement may not be amended, except by written amendment signed by the
Executive and approved by the Boards of Directors of SLC and FMI and signed
by an authorized officer of SLC and FMI. No waiver by any party hereto at any
time of any breach by any other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the time or at any prior or subsequent time.
B. NO GUARANTY OF EMPLOYMENT
Except as may be otherwise provided under this Agreement or any written
employment agreement between the Executive and SLC or FMI, the Executive's
employment by SLC and FMI is "at will," and may be terminated at any time.
Upon a lawful termination of the Executive prior to a Change of Control, the
Executive shall have no further rights under this Agreement. Notwithstanding
anything contained in this Agreement to the contrary, if the Executive's
employment with SLC or FMI is terminated prior to the date of a Change of
Control, and such termination of employment (i) occurred at the request of
any Person (as hereinabove defined)
<PAGE>
who has taken steps intended, or which reasonably may be expected, to result
in a Change of Control, or (ii) otherwise occurred in connection with, or in
anticipation of, a Change of Control, then for all purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change of Control and, in any such case, the date of such
termination shall be deemed to be the date of a Change of Control.
XII. VALIDITY.
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of
this Agreement, which shall remain in full force and effect.
IN WITNESS WHERETO, SLC and FMI have each caused this Agreement to be duly
executed in their name and behalf by their duly authorized officer, effective
as of the date first above written.
SOUTHWESTERN LIFE CORPORATION,
a Delaware Corporation
By:
------------------------------------
Glenn H. Gettier,
Chief Executive Officer
FACILITIES MANAGEMENT
INSTALLATION, INC.,
a Delaware Corporation
By:
------------------------------------
James R. Kerber,
Chief Executive Officer
EXECUTIVE
----------------------------------------
<PAGE>
EX-10.45
UNIVISION SI APPLICATION
FROM
BOB SHAW
JANUARY 5, 1995
---------------------------------
I have reviewed the application dated January 5, 1995 from Bob Shaw regarding
the issuance of an individually owned policy on plan Univision SI. I also
discussed this with Bob Greving, Jim Kerber, Dan Gail, Don Rutherford, Hubert
Mathis and Tom Hobbs.
In the recent past, the Company offered certain of its executives the
opportunity to exchange their group term life coverage that is provided by the
Company for an individually owned policy issued by SWL. The Company agreed
that it would pay the group term equivalent premium for the executive's age
bracket as determined by PALICO and that the individual would pay any
additional amounts required to carry the SWL policy.
Pursuant to Exhibit No. 7 of Mr. Shaw's Independent Contractor and Services
Agreement dated February 11, 1994, the Company agreed that for the ten-year
term of the Agreement, it would provide him "those employee benefits available
from time to time to the Company's senior executive officers (including life
and health insurance)..." Under the group term life plan, Mr. Shaw's coverage
amounts to $1,000,000, which under the Agreement would continue until February
10, 2004. Since the group carve-out opportunity was made available to the
Company's senior executive officers, it should also be available to Mr. Shaw
under the spirit of the Agreement. Additionally, the Company previously
allowed Messrs. Rice and Allen to participate in the group carve-out.
The premiums illustrated with Mr. Shaw's application were $20,760 for each of
the first five years and $17,460 for the second five years. It is my
understanding that these are based on the rates now charged by PALICO under
the Company's group term life plan for the 61-65 and 66-70 age groups,
respectively. It is also my
<PAGE>
understanding that these premium payments will carry the policy at the
projected interest rates. Accordingly, if these rates remain the same over
the next nine years, all of the illustrated premiums will be payable by the
Company.
Under this arrangement, the Company will pay the appropriate rate for group
term life coverage as it is determined from time to time through February 10,
2004, and any other payments required under this policy will be the
responsibility of the owner of the policy.
cc: Dan Gail
Bob Greving
Jim Kerber
Hubert Mathis
Don Rutherford
Bob Shaw
<PAGE>
EX-10.46
DATE: March 8, 1994
MEMO TO: The Board of Directors of ICH
FROM: Robert Beisenherz, Chairman
RE: ICH Deferred Compensation Plan
Since January 1988, ICH has provided a Deferred Compensation Plan for "a
select group of management or highly compensated employees." The purpose of
the Plan was to aid in attracting and retaining employees of exceptional
ability by providing a tax deferred means to supplement their retirement
income.
The Plan provides two means of deferrals:
1. AWARD - The Compensation Committee at its discretion may make annual
Awards to the Participants' Deferred Benefit Accounts.
2. VOLUNTARY SALARY DEFERRALS - A Participant may at his discretion defer
all or a portion of his annual Salary to a Voluntary Salary Deferral
Account.
The timing and the amount of past Awards have been inconsistent and have not
followed any set criteria. No new Participants have been added to the plan in
the past three years and no Awards were made in 1993.
Additionally, a number of individuals are participating who do not meet the
general guidelines for this type of deferred compensation plan.
Proposed changes and continued basic provisions are as follows:
PROPOSED CHANGES
1. Eligibility - Determined by annual base Salary
A. New Participants - $100,000 will be the minimum Salary
requirement. Eligibility will occur upon the later of (a)
Participant's completion of the waiting period following
employment or (b) his attainment of a Salary of $100,000 if
employed for more than two years.
<PAGE>
(1) Waiting Period - New employees will become eligible for
participation at the end of the second calendar year
following the date of employment.
<PAGE>
Memo to the ICH Board of Directors
March 8, 1994
Page Two
B. Current Participants - $85,000 will be the minimum Salary
requirement for continuation in the Plan. Participation for
employees with salaries of less than $85,000 will be discontinued
effective March 31, 1994, and their accounts paid to them.
2. Annual Award - Awards will be made annually, effective December 31st of
each year.
3. Award Amount - 4% of base annual Salary will be the annual Award for
each Participant.
4. Vesting Period - A Participant will be vested in his Award account at
the rate of 20% per year, beginning on the date of the first Award
grant. The Voluntary Salary Deferral account will be 100% vested at all
times.
CONTINUED BASIC PROVISIONS
1. Death Benefit - Two times annual Salary (not to exceed $1 million) prior
to termination of employment.
To become a Participant in the Plan, an employee must submit Evidence of
Insurability and be approved within Company underwriting guidelines. If
a Participant is uninsurable, the Death Benefit will be equal to his
award account.
The insurance benefit is funded by a Southwestern Life group term
contract issued to Facilities Management Installation Inc.
2. Disability - If the service of a Participant terminates because of a
Disability, the Participant will be 100% vested in his Award account.
3. Unsecured General Creditors - This is not a tax-qualified or an ERISA
plan and therefore the Plan assets or insurance are not held under any
trust for the benefit of the Participants or their Beneficiaries. The
Company's obligation under the Plan is that of an unfunded and unsecured
promise of the Company to pay future benefits.
Upon approval by the Board, the appropriate amendments to the Plan will be
filed with the Department of Labor.
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("AGREEMENT") is made and entered into as
of the 24th day of March, 1995 by and between SOUTHWESTERN LIFE CORPORATION,
a Delaware corporation with principal offices at 500 North Akard Street,
Dallas, Texas 75201 ("Seller") and CITIZENS FINANCIAL CORPORATION, a Kentucky
corporation with principal offices at Suite 300, 12910 Shelbyville Road,
Louisville, Kentucky 40243 ("Purchaser").
RECITALS
A. Integrity National Life Insurance Company ("Integrity"), a
Pennsylvania corporation, is authorized to issue 110,000 shares of $14.00 par
value common stock ("Integrity Common Stock"), of which 109,969 shares are
issued and outstanding.
B. Seller owns, of record and beneficially, 108,701 shares of Integrity
Common Stock (the "Shares").
C. Seller desires to sell the Shares to Purchaser or to its Designated
Subsidiary and Purchaser desires to buy or to cause its Designated Subsidiary
to buy the Shares from Seller pursuant to the terms and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and 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:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. The capitalized terms used in this Agreement and not
defined herein shall have the meanings specified in EXHIBIT A. Unless the
context otherwise requires, such capitalized terms shall include the singular
and plural and the conjunctive and disjunctive forms of the terms defined.
1
<PAGE>
ARTICLE II
SALE OF SHARES AND CLOSING
2.1 PURCHASE AND SALE. The Seller agrees to sell to the Purchaser and/or
to the Purchaser's Designated Subsidiary, and Purchaser agrees to purchase, or
to cause such Designated Subsidiary to purchase, from Seller the Shares at the
Closing upon the terms and subject to the conditions set forth in this
Agreement.
2.2 CONSIDERATION. Subject to adjustment pursuant to Section 2.3
hereof, the consideration for the Shares shall be $9,578,000 (the
"Consideration"). Immediately prior to the Closing, Seller will cause
Integrity to pay to Seller and to its other shareholders the maximum
nonextraordinary cash dividend (the "Dividend") that Integrity can legally
pay, 98.85% of which amount shall be credited against the Purchase Price.
The balance of the Consideration shall be payable at the Closing by wire
transfer of immediately available funds to such bank and account as the
Seller may specify by written notice received by the Purchaser at least three
Business Days prior to the Closing Date; provided, however, that $1,000,000
of the Purchase Price shall be placed in escrow and paid to Seller at such
time as the Closing Adjusted Capital and Surplus of Integrity is finally
determined pursuant to the applicable provisions of Section 2.3 hereof and
paid in accordance with the terms of the Escrow Agreement.
2.3 ADJUSTMENT.
(a) After the Closing, the Purchaser will deliver
to the Seller within 60 days (i) a balance sheet of
Integrity as of the date of the Closing together with the
report thereon of Ernst & Young, LLP ("Ernst & Young"),
stating that such balance sheet presents fairly the
financial position of Integrity at the Closing Date in
conformity with SAP, and (ii) written notice setting forth
the Purchaser's determination of the Closing Adjusted
Capital and Surplus of Integrity, together with true and
complete copies of all Workpapers related thereto
(collectively, the "Closing Adjusted Capital and
Surplus"). All fees and expenses of Ernst & Young
related to the report to be delivered as contemplated in
clause (i) of the immediately preceding sentence shall be
the responsibility of and paid for by the Purchaser.
Within 15 Business Days after the receipt by the Seller
2
<PAGE>
of such determination of the Closing Adjusted Capital and
Surplus, the Seller shall deliver to the Purchaser
written notice stating whether it agrees or disagrees
with such determination. If the Seller agrees with such
determination and so notifies the Purchaser, or does not
notify the Purchaser that the Seller disagrees with such
determination within such 15 Business Days, such
determination shall be deemed to be the Closing Adjusted
Capital and Surplus. If the Seller notifies the
Purchaser within such 15 Business Days that the Seller
does not agree with such determination of the Closing
Adjusted Capital and Surplus, the Seller and Purchaser
shall, for a period of 15 Business Days, in good faith,
attempt to negotiate a determination of the Closing
Adjusted Capital and Surplus. If the Seller and
Purchaser fail to reach a determination of the Closing
Adjusted Capital and Surplus within such 15 Business
Days, the Closing Adjusted Capital and Surplus shall be
determined by the accounting firm of KPMG Peat Marwick
(the "Accounting Firm"). The Seller shall cause such
determination by the Accounting Firm and a statement of
fees and expenses incurred by the Accounting Firm in
making such determination, together with true and
complete copies of all Workpapers related thereto, to be
delivered to the Purchaser as soon as practicable after
the Seller's notice of disagreement. The parties hereto
agree and acknowledge that the determination of the
Closing Adjusted Capital and Surplus by the Accounting
Firm in accordance with this Section 2.3(a) shall be
final and binding on all parties. If the services of the
Accounting Firm are used as provided herein, all fees and
expenses of the Accounting Firm shall be paid one-half by
the Seller and one-half by the Purchaser; provided,
however, (i) if the Closing Adjusted Capital and Surplus,
as determined by the Accounting Firm is over $50,000 less
than the amount originally calculated by the Purchaser,
all fees and expenses of the Accounting Firm shall be the
responsibility of and paid by the Seller, and (ii) if the
Closing Adjusted Capital and Surplus as determined by the
Accounting Firm is more than $50,000 in excess of the
amount originally calculated by the Purchaser, all fees
and expenses of the Accounting Firm shall be the
responsibility of and paid by the Purchaser.
(b) If the Closing Adjusted Capital and Surplus is
less than $6,042,506, the Seller hereby agrees that
within ten Business Days of its acceptance of the
Purchaser's determination of the Closing Adjusted Capital
and Surplus (either by the Seller's notice of such
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acceptance or the Seller's failure to notify the
Purchaser of the Seller's disagreement within 15 Business
Days as provided in Section 2.3(a) hereof) or its receipt
of a notice from the Accounting Firm of the Closing
Adjusted Capital and Surplus, as the case may be, the
Seller will pay to the Purchaser, by wire transfer of
immediately available funds to such bank and account as
the Purchaser may specify by written notice delivered to
the Seller, a sum equal to 98.85% of the difference (i)
(the "Deficit Amount") between the $6,042,506 Closing
Adjusted Capital and Surplus plus (ii) interest on the
Deficit Amount at a rate per annum equal to the Prime
Rate based on the actual number of days elapsed from and
including the Closing Date to the date of payment and a
365-day year, PROVIDED, HOWEVER, that if any part of the
Deficit Amount and interest thereon due the Purchaser
from the Seller pursuant to this Section 2.3(b) remains
unpaid past the 30th day after the day such amount was
due, the interest rate on such part will be increased to
the Prime Rate plus 5% for such period from the Closing
Date to the payment date.
(c) If the Closing Adjusted Capital and Surplus is
greater than $6,042,506, the Purchaser hereby agrees that
within ten Business Days of the Seller's acceptance of
the Purchaser's determination of the Closing Adjusted
Capital and Surplus (either by the Seller's notice of
such acceptance or the Seller's failure to notify the
Purchaser of the Seller's disagreement within 15 Business
Days as provided in Section 2.3(a) hereof) or its receipt
of a notice from the Accounting Firm of the Closing
Adjusted Capital and Surplus, as the case may be, the
Purchaser will pay to the Seller, by wire transfer of
immediately available funds to such bank and account as
the Seller may specify by written notice delivered to
Purchaser, a sum equal to 98.85% (i) the difference
between the Closing Adjusted Capital and Surplus and
$6,042,506(the "Appreciated Amount") plus (ii) interest
on the Appreciated Amount at a rate per annum equal to
the Prime Rate based on the actual number of days elapsed
from and including the Closing Date to the date of
payment and a 365-day year, PROVIDED, HOWEVER, that if
any part of the Appreciated Amount and interest thereon
due the Seller from the Purchaser pursuant to this
Section 2.3(c) remains unpaid past the 30th day after the
day such amount was due, the interest rate on such part
will be increased to the Prime Rate plus 5% for such
period from the Closing Date to the payment date.
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(d) The Purchaser shall cooperate fully with the
Accounting Firm and provide all information and access to
all personnel it reasonably requests in connection with
its determination of Closing Adjusted Capital and
Surplus. Both parties shall be provided with access to
all books and records and Work Papers used by the
Accounting Firm in making its determination hereunder.
2.4 CLOSING. Subject to the provisions of this Agreement, the
Closing of the transactions contemplated by this Agreement, including,
without limitation, the consummation of the sale and purchase of the Shares,
as provided in Section 2.1 hereof and the execution and delivery of the
documents and instruments specified in this Section 2.4, will take place in
Louisville, Kentucky at 10:00 a.m., local time, on the Closing Date. At the
Closing, the Seller will assign and transfer to Purchaser or its Designated
Subsidiary, good and valid title, and all other rights and interests of
Seller, in and to the Shares, free and clear of all Liens. To effect such
assignment and transfer, the Seller will deliver certificates representing
all the Shares, in genuine and unaltered form, accompanied by duly executed
blank stock powers or (at the request of the Purchaser) endorsed in blank for
transfer. The Seller will execute and deliver to the Purchaser or its
Designated Subsidiary such documents and instruments as are required of the
Seller under the terms and provisions of this Agreement. All such
certificates, stock powers, documents, and instruments will be in form and
content reasonably satisfactory to the Purchaser. The Purchaser will pay
$1,000,000 of the Consideration to the Escrow Agent and will pay the balance
of the Consideration and deliver such documents and instruments as are
required of the Purchaser under the terms and provisions of this Agreement.
All such documents and instruments will be in form and content reasonably
satisfactory to the Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
The Seller hereby represents and warrants to Purchaser and its
Designated Subsidiary as follows:
3.1 ORGANIZATION OF SELLER. The Seller is a corporation duly
organized, validly existing, and in good standing under the Laws of Delaware
and has the requisite corporate power and authority to enter into this
Agreement and to perform its obligations under this Agreement. The Seller is
duly licensed, qualified, or admitted to do business and is in good standing
in all jurisdictions in which
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the failure to be so licensed, qualified, or admitted and in good standing,
individually or in the aggregate with other such failures, has or would
reasonably be expected to have a material adverse effect on the validity or
enforceability of this Agreement or on the ability of the Seller to perform
its obligations under this Agreement.
3.2 AUTHORITY OF SELLER. The Board of Directors of the Seller has duly
and validly approved this Agreement and the transactions contemplated hereby.
The execution and delivery of this Agreement by the Seller and the
performance by the Seller of its obligations under this Agreement have been
duly and validly authorized by all necessary corporate action on the part of
the Seller. This Agreement constitutes a valid and binding obligation of the
Seller and is enforceable against the Seller in accordance with its terms,
except to the extent that (a) enforcement may be limited by or subject to any
bankruptcy, insolvency, reorganization, moratorium, or similar Laws now or
hereafter in effect relating to or limiting creditors' rights generally and
(b) the remedy of specific performance and injunctive and other forms of
equitable relief are subject to certain equitable defenses and to the
discretion of the court or other similar Person before which any proceeding
therefor may be brought; provided, however, that to the Knowledge of Seller
no party has any equitable defenses that would affect the enforcement of this
Agreement against the Seller.
3.3 ORGANIZATION OF INTEGRITY. Integrity is a life insurance
corporation duly organized, validly existing, and in good standing under the
Laws of the Commonwealth of Pennsylvania. Integrity is duly licensed,
qualified, or admitted to do business and is in good standing in all
jurisdictions listed in Section 3.3 of the Disclosure Schedule, which are the
only jurisdictions in which the failure to be so licensed, qualified, or
admitted and in good standing, individually or in the aggregate with all
other such failures, has or would reasonably be expected to have a material
adverse effect on the Business or Condition of Integrity. The Seller has
furnished to the Purchaser true and complete copies of the articles of
incorporation (as certified by the appropriate governmental or regulatory
authorities) and the by-laws of Integrity, in each case including all
amendments thereto.
3.4 CAPITAL STOCK. The only stock that Integrity is authorized to
issue is 110,000 shares of $14.00 par value common stock, of which 109,969
shares are issued and outstanding. All such issued and outstanding shares of
capital stock of Integrity are duly authorized, validly issued, fully paid,
and, nonassessable and 108,701 of such shares are owned beneficially and of
record by Seller, free and clear of all Liens, except for Liens disclosed in
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Section 3.4 of the Disclosure Schedule. Except for the Shares, no securities
issued by Integrity are held beneficially or of record by the Seller or any
of its Affiliates. Except as to any issued and outstanding shares of
Integrity beneficially owned by persons other than the Seller, there are no
outstanding securities, obligations, rights, subscriptions, warrants,
options, phantom stock rights, or (except for this Agreement) other Contracts
of any kind that give any Person the right to (a) purchase or otherwise
receive or be issued from Seller or Integrity any shares of capital stock of
Integrity (or any interest therein) or any security or Liability of any kind
convertible into or exchangeable for any shares of capital stock of Integrity
(or any interest therein) or (b) receive any benefits or rights similar to
any rights enjoyed by or accruing to a holder of the Shares or, to the
Knowledge of Seller, any rights to participate in the equity, income, or
election of directors or officers of Integrity.
3.5 NO SUBSIDIARIES. Integrity has no Subsidiaries and does not
control (either directly or indirectly) any corporation, partnership,
business organization, or other similar Person. For purposes of this
Section, "control" shall mean the power to elect a majority of the Board of
Directors or other governing body of any such entity or Person or otherwise
manage, direct or govern the business operations or policies of such entity
or Person.
3.6 NO CONFLICTS OR VIOLATIONS. The execution and delivery of this
Agreement by the Seller does not, and the performance by the Seller of its
obligations under this Agreement will not:
(a) subject to obtaining the approvals contemplated
by Sections 5.1 and 5.2 and Sections 6.1 and 6.2 hereof,
violate any term or provision of any Law or any writ,
judgment, decree, injunction, or similar order applicable
to the Seller or Integrity except for such violations
that individually or in the aggregate would not
reasonably be expected to have a material adverse effect
on the validity or enforceability of this Agreement, on
the ability of Seller to perform its obligations under
this Agreement, or on the Business or Condition of
Integrity.
(b) conflict with or result in a violation or
breach of, or constitute (with or without notice or lapse
of time or both) a default under, any of the terms,
conditions or provisions of the articles or certificate
of incorporation or by-laws of the Seller or Integrity.
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(c) result in the creation or imposition of any
Lien upon the Seller, or Integrity, or any of Integrity's
Assets and Properties that individually or in the
aggregate with any other Liens has or would reasonably be
expected to have a material adverse effect on the
validity or enforceability of this Agreement, on the
ability of the Seller to perform its obligations under
this Agreement, or on the Business or Condition of
Integrity.
(d) conflict with or result in a violation or
breach of, or constitute (with or without notice or lapse
of time or both) a default under, or give to any Person
any right of termination, cancellation, acceleration, or
modification in or with respect to, any Contract to which
the Seller or Integrity is a party and by which any of
their respective Assets or Properties may be bound and as
to which any such conflicts, violations, breaches,
defaults, or rights individually or in the aggregate have
or would reasonably be expected to have a material
adverse effect on the validity or enforceability of this
Agreement, on the ability of the Seller to perform its
obligations under this Agreement, or on the Business or
Condition of Integrity.
(e) require the Seller or Integrity to obtain any
consent, approval, or action of, or make any filing with
or give any notice to, any Person except as contemplated
in Sections 5.1, 5.2 or 8.9 hereof other than those which
the failure to obtain, make, or give individually or in
the aggregate with any other such failures has not or
would not reasonably be expected to have a material
adverse effect on the validity or enforceability of this
Agreement, on the ability of the Seller to perform its
obligations under this Agreement, or on the Business or
Condition of Integrity.
3.7 BOOKS AND RECORDS. The minute books and other similar records of
Integrity contain a true and complete record, in all material respects, of
all actions taken at all meetings and by all written consents in lieu of
meetings of Integrity's stockholders, Boards of Directors, and each committee
thereof. The Books and Records of Integrity accurately reflect in all
material respects the Business or Condition of Integrity and have been
maintained in all material respects in accordance with good business and
bookkeeping practices.
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3.8 SAP STATEMENTS. The Seller has previously delivered to the
Purchaser true and complete copies of the following SAP Statements:
(a) Annual Statements for Integrity for each of the
years ended December 31, 1992, 1993, and 1994 (and the
notes relating thereto); and
(b) Quarterly Statements for Integrity for each of
the first three quarters of each of 1992, 1993 and 1994
(and the notes relating thereto).
Except as disclosed in Section 3.8 of the Disclosure Schedule, each
such SAP Statement complied in all material respects with all applicable Laws
when so filed, and all material deficiencies with respect to any such SAP
Statement have been cured or corrected. Each such SAP Statement (and the
notes relating thereto), including without limitation each balance sheet and
each of the statements of operations, capital and surplus account, and cash
flow contained in the respective SAP Statement, was prepared in accordance
with SAP, is true and complete in all material respects, and will present
fairly, in all material respects, the admitted assets, Liabilities, and
capital and surplus of Integrity as of the respective dates thereof and its
respective results of operations and cash flows for and during the respective
periods covered thereby, all in accordance with SAP.
3.9 RESERVES
(a) Except as disclosed in Section 3.9 of the
Disclosure Schedule, all reserves and other Liabilities
with respect to insurance and for claims and benefits
incurred but not reported (collectively, the "Reserve
Liabilities"), as established or reflected in the
respective SAP Statements of Integrity (including without
limitation the reserves and policy and Contract
Liabilities to be reflected respectively on Lines 1
through 11, 15, 24.2, 24.3 and 24.6 of page 3 of the
December 31, 1994 Annual Statement), were determined in
accordance with generally accepted actuarial standards
consistently applied, are fairly stated in accordance
with sound actuarial principles, are based on actuarial
assumptions that are in accordance with those called for
by the provisions of the related insurance Contracts and
in the related reinsurance, coinsurance and other similar
Contracts of Integrity, and meet in all material respects
the requirements of the insurance Laws of its state of
domicile. Adequate provision for all such Reserve
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Liabilities have been made (under generally accepted
actuarial principles consistently applied) to cover the
total amount of all reasonably anticipated matured and
unmatured benefits, dividends, claims and other
Liabilities of Integrity under all insurance Contracts
under which Integrity has any Liability (including
without limitation any Liability arising under or as a
result of any reinsurance, coinsurance or other similar
Contract) in Integrity's December 31, 1994 Annual
Statement based on then current information regarding
interest earnings, mortality and morbidity experience,
persistency and expenses. No warranty is made as to the
ultimate adequacy of the Reserve Liabilities to satisfy
the liabilities and obligations reserved against.
Integrity owns assets that qualify as legal reserve
assets under applicable insurance Laws in an amount at
least equal to all such Reserve Liabilities; and
(b) Except as described in Section 3.9(b) of the
Disclosure Schedule, all reserves and accrued Liabilities
for contingencies such as, but not limited to, estimated
losses, settlements, costs and expenses from pending
suits, actions and proceedings included in the December
31, 1994 Annual Statement were determined in accordance
with SAP.
3.10 ABSENCE OF CHANGES. Since December 31, 1994, except as disclosed
in Section 3.10 of the Disclosure Schedule or in the December 31, 1994 Annual
Statement (and the notes relating thereto), or except for changes or
developments relating to the conduct of the business of Integrity after the
date of this Agreement in conformity with this Agreement or the requests of
the Purchaser, or resulting from events, conditions, or effects of changes or
developments which are industry-wide and national in scope, (i) there has not
been, occurred, or arisen any change in, or any event (including without
limitation any damage, destruction, or loss whether or not covered by
insurance), condition, or state of facts of any character that individually
or in the aggregate has or would reasonably be expected to have a material
adverse effect on the Business or Condition of Integrity, (ii) Integrity has
operated only in the ordinary course of business and consistent with past
practice, and (iii) (without limiting the generality of the foregoing) there
has not been, occurred or arisen:
(a) any declaration, setting aside, or payment of
any dividend or other distribution in respect of the
capital stock of Integrity or any direct or indirect
redemption, purchase or other acquisition by Integrity of
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any such stock or of any interest in or right to acquire
any such stock;
(b) any employment, deferred compensation, or other
salary, wage or compensation Contract entered into
between Integrity and any Person, except for normal and
customary Contracts with agents and consultants in the
ordinary course of business and consistent with past
practice;
(c) any issuance, sale or disposition by Integrity
of any debenture, note, stock or other security issued by
Integrity, or any modification or amendment of any right
of the holder of any outstanding debenture, note, stock
or other security issued by Integrity;
(d) any Lien created on or in any of the Assets and
Properties of Integrity or assumed by Integrity with
respect to any of such Assets and Properties which Lien
relates to Liabilities individually or in the aggregate
exceeding $10,000;
(e) any prepayment of any Liabilities (other than
pursuant to any insurance or annuity Contract)
individually or in the aggregate exceeding $10,000;
(f) any Liability involving the borrowing of money
by Integrity except in the ordinary course of business
and consistent with past practice;
(g) any damage, destruction or loss (whether or not
covered by insurance) affecting any of the Assets and
Properties of Integrity which damage, destruction or loss
individually exceeds $10,000;
(h) any work stoppage, strike, labor difficulty or
(to the Knowledge of Seller) union organizational
campaign (in process or threatened) at the offices of, or
materially affecting, Integrity;
(i) any material change in any underwriting,
actuarial, investment, financial reporting, marketing or
accounting practice or policy followed by Integrity, or
in any assumption underlying such a practice or policy,
or in any method of calculating any bad debt,
contingency, or other reserve for financial reporting or
any other accounting purposes;
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(j) any payment, discharge, or satisfaction by
Integrity of any Lien or Liability other than Liens or
Liabilities that (i) were paid, discharged, or satisfied
since December 31, 1994 in the ordinary course of
business and consistent with past practice, or (ii) were
paid, discharged, or satisfied as required under this
Agreement;
(k) except for fair value received, in the ordinary
course of business and consistent with past practice, any
cancellation of any Liability owed to Integrity by any
other Person;
(l) any sale, transfer, or conveyance of any
investments, or any other Assets and Properties, of
Integrity with an individual book value, or with an
aggregate book value, in excess of $10,000 or except in
the ordinary course of business and consistent with past
practice;
(m) any amendment, termination, waiver, disposal or
lapse of, or other failure to preserve, any license,
permit or other form of authorization of Integrity, the
result of which individually or in the aggregate has or
would reasonably be expected to have a material adverse
effect on the Business or Condition of Integrity.
(n) any transaction or arrangement under which
Integrity paid, lent or advanced any amount to or in
respect of, or sold, transferred, or leased any of its
Assets and Properties or any services to, (i) the Seller,
(ii) any officer or director of Integrity, of the Seller,
or of any Affiliate of the Seller, (iii) any Affiliate of
the Seller, or Integrity or of any such officer or
director, or (iv) any business or other Person in which
the Seller, Integrity, any such officer or director, or
any such Affiliate has any material interest, except for
advances made to, or reimbursements of, officers or
directors of Integrity for travel and other business
expenses in reasonable amounts in the ordinary course of
business and consistent with past practice;
(o) except for actions taken with respect to
insurance Contracts in force, in the ordinary course of
business and consistent with past practice, any material
amendment of, or any failure to perform all of its
obligations under, or any default under, or any waiver of
any right under, or any termination (other than on the
stated expiration date) of, any Contract that involves or
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reasonably would involve the annual expenditure or
receipt by Integrity of more than $10,000;
(p) any material change in the amount or nature of
the life insurance in force of Integrity or in the amount
or nature of the Reserve Liabilities of Integrity with
respect to insurance Contracts (including without
limitation Reserve Liabilities of a type required to be
reflected respectively on Lines 1 through 11, 15, 24.2
and 24.6 on Page 3 of an Annual Statement of Integrity);
(q) any amendment to the articles or certificate of
incorporation or by-laws of Integrity;
(r) except as provided in Section 5.25, any
termination, amendment or entering into by Integrity as
ceding or assuming insurer of any reinsurance,
coinsurance or other similar Contract or any trust
agreement or security agreement related thereto;
(s) any expenditure or commitment for additions to
property, plant, equipment or other tangible or
intangible capital assets of Integrity, in excess of the
budgeted amounts set forth in Section 3.10(s) of the
Disclosure Schedule, which expenditures or commitments do
not exceed $25,000 in the aggregate;
(t) any amendment or introduction by Integrity of
any insurance Contract other than in the ordinary course
of business consistent with past practices;
(u) any sale of any investments of Integrity which
resulted in the realization of capital gains exceeding
$250,000 in the aggregate; or
(v) any Contract to take any of the actions
described in this Section 3.10 other than actions
expressly permitted under this Section 3.10.
3.11 NO UNDISCLOSED LIABILITIES. Except to the extent reflected
in the balance sheet included in the December 31, 1994 Annual Statement (and
the notes relating thereto), or except as disclosed in Section 3.10 or 3.11
of the Disclosure Schedule, there were no Liabilities (other than
policyholder benefits payable in the ordinary course of business and
consistent with past practice for which appropriate reserves have been
provided) against, relating to, or affecting Integrity as of December 31,
1994 exceeding $10,000 in the aggregate. Except to the extent
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specifically reflected in the balance sheets included in the December 31,
1994 Annual Statement (and the notes relating thereto) or except as disclosed
in Section 3.11 of the Disclosure Schedule, since December 31, 1994,
Integrity has not incurred any Liabilities exceeding $10,000 in the aggregate
(other than policyholder benefits and other obligations payable in the
ordinary course of business and consistent with past practice for which
appropriate reserves have been provided).
3.12 TAXES. Except as disclosed in Section 3.12 of the Disclosure
Schedule (with paragraph references corresponding to those set forth below):
(a) All federal and state Tax Returns required to
be filed with respect to Integrity have been duly and
timely filed, and all such Tax Returns are true and
complete in all material respects. Integrity (i) has
duly and timely paid all Taxes that are shown as due, or
claimed or asserted by any taxing authority to be due,
from Integrity for the periods covered by such Tax
Returns and has made all required estimated payments of
Taxes sufficient to avoid any penalties for underpayment,
or (ii) has duly provided for all such Taxes in the SAP
Statements. There are no Liens with respect to Taxes
(except for Liens with respect to real property Taxes not
yet due) upon any of the Assets and Properties of
Integrity.
(b) With respect to any period for which Tax
Returns have not yet been filed, or for which Taxes are
not yet due or owing, Integrity has made due and
sufficient current accruals for such Taxes in accordance
with SAP, and such current accruals are duly and fully
provided for in the SAP Statements of Integrity.
(c) The United States federal income Tax Returns of
Integrity and of the affiliated group (within the meaning
of the Code) of which Integrity has been a member since
1992, currently are under examination by the IRS for the
years 1990, 1991 and 1992. The status of the statutes of
limitation for all open years is specified in Section
3.12(c) of the Disclosure Schedule. The state, local and
foreign income Tax Returns of Integrity and of the
affiliated group of which it has been a member during and
after 1992 have not been audited or examined, and all
statutes of limitation for all applicable state, local
and foreign taxable periods through the respective years
specified in Section 3.12(c) of the Disclosure Statement
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have expired. There are no outstanding agreements,
waivers or arrangements extending the statutory period of
limitation applicable to any claim for, or the period for
the collection or assessment of, Taxes due from Integrity
for any taxable period. The Seller has previously
delivered to the Purchaser true and complete copies of
each of (i) the most recent taxing authorities' audit
reports relating to the United States federal, state,
local and foreign income Taxes due from Integrity and
(ii) the United States federal, state, local and foreign
income Tax Returns, for each of the last three taxable
years, filed by Integrity and Seller has made available
to Purchaser for inspection true and correct copies of
such returns (insofar as such returns relate to income,
losses and premiums of Integrity) filed by any affiliated
or consolidated group of which Integrity was then a
member.
(d) No audit or other proceeding by any court,
governmental or regulatory authority, or similar Person
is pending or, to the Knowledge of Seller, threatened
with respect to any Taxes due from Integrity or any Tax
Return filed by or relating to Integrity. To the
Knowledge of Seller, no assessment of Tax is proposed or,
based on existing facts and circumstances, is threatened
against Integrity or any of its respective Assets and
Properties.
(e) No election under any of Section 108, 168, 441,
472, 1017, 1033, or 4977 of the Code (or any predecessor
provisions) has been made or filed by or with respect to
Integrity or any of its Assets and Properties. No
consent to the application of Section 341(f)(2) of the
Code (or any predecessor provision) has been made or
filed by or with respect to Integrity or any of its
Assets and Properties. None of the Assets and Properties
of Integrity is an asset or property that the Purchaser
or any of its Affiliates is or will be required to treat
as being (i) owned by any other Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue
Code of 1954, as amended and in effect immediately before
the enactment of the Tax Reform Act of 1986 or (ii) tax-
exempt use property within the meaning of Section
168(h)(1) of the Code. No closing agreement pursuant to
Section 7121 of the Code (or any predecessor provision)
or any similar provision of any state, local or foreign
Law has been entered into by or with respect to Integrity
or any of its Assets and Properties.
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(f) Integrity has not agreed to and, to the
Knowledge of Seller, is not required to make any material
adjustment pursuant to Section 481(a) of the Code (or any
predecessor provision) by reason of any change in any
accounting method of Integrity and neither the Seller nor
Integrity has any application pending with any taxing
authority requesting permission for any changes in any
accounting method of any of them. To the Knowledge of
Seller, the IRS has not proposed any such adjustment or
change in accounting method.
(g) Integrity has not been and is not in material
violation (or with notice or lapses of time or both,
would be in violation) of any applicable Law relating to
the payment or withholding of Taxes.
(h) Integrity is a party to the Consolidated Tax
Allocation Agreement (the "Allocation Agreement"), a copy
of which will be delivered pursuant to Section 3.12 of
the Disclosure Schedule. Except for the Allocation
Agreement, Integrity is not a party to, is not bound by,
and has no obligation under, any tax sharing contract or
similar Contract. At the Closing, Integrity shall cease
to be a party to the Allocation Agreement. The Seller is
not a foreign person within the meaning of Section 1445
(b)(2) of the Code.
(i) Except for the distribution of the balance of
the Policy Holder's Surplus Account, on December 31,
1983, Integrity has not made any direct, indirect or
deemed distributions that have been or to the Knowledge
of Seller, could be taxed under Section 815 of the Code.
(j) All or substantially all of ceding commission
expenses paid or accrued by Integrity in connection with
any reinsurance arrangement or Contract or transaction
has been capitalized and amortized over the life or lives
of such reinsurance arrangement or Contract in accordance
with the decision of the United States Supreme Court in
COLONIAL AMERICAN LIFE INSURANCE COMPANY V. COMMISSIONER
OF INTERNAL REVENUE, 109 S.Ct. 240 (1989) or Section 848
of the Code.
(k) To the Knowledge of Seller, no material
Liabilities have been proposed in connection with any
audit or other proceeding by any court, governmental or
regulatory authority, or similar person with respect to
any Taxes due from Integrity or any Tax Return filed by
or relating to Integrity.
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(l) Each reserve item with respect to Integrity set
forth in the 1993 Federal income tax return was
determined in all material respects in accordance with
Section 807 of the Code or other applicable Code
Sections, and has been consistently applied with respect
to the filing of the Federal income tax returns for the
years ended December 31, 1990 through December 31, 1993.
(m) As of December 31, 1994, Integrity did not have
and during the period from December 31, 1994 through the
Closing Date will not have any tax liability to the
Seller or any Affiliate of the Seller that resulted or
will result from a transaction with an Affiliate prior to
the Closing Date that would require payment after
December 31, 1994.
(n) Since January 1, 1990, neither Seller nor
Integrity has changed Integrity's method of tax
accounting for any item without receiving approval for
such change from the IRS.
3.13 LITIGATION. Except as disclosed in Section 3.13 of the Disclosure
Schedule (with paragraph references corresponding to those set forth below,):
(a) There are no actions, suits, investigations or
proceedings pending, or, to the Knowledge of Seller,
threatened, against the Seller or its Assets and
Properties, at law or in equity, in, before, or by any
Person that individually or in the aggregate have or
would reasonably be expected to have a material adverse
effect on the validity or enforceability of this
Agreement, on the ability of the Seller to perform its
obligations under this Agreement, or on the Business or
Condition of Integrity.
(b) there are no actions, suits, investigations or
proceedings pending or, to the Knowledge of Seller,
threatened, and no event, fact or circumstance has arisen
or occurred (other than claims for benefits under
insurance Contracts and annuities in force) that may
reasonably be expected to result in the commencement of
any action, suit proceeding or investigation, against
Integrity or any of its respective Assets and Properties,
at law or in equity, in, before, or by any Person that
individually involves a claim or claims for any
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injunction or similar relief or for Damages exceeding
$10,000 or an unspecified amount of Damages, or that
individually or in the aggregate have or would reasonably
be expected to have a material adverse effect on the
Business or Condition of Integrity.
(c) There are no writs, judgments, decrees or
similar orders of any Person outstanding against
Integrity that individually exceed $10,000 or that
individually or in the aggregate have or would reasonably
be expected to have a material adverse effect on the
Business or Condition of Integrity and there are no
injunctions or similar orders of any Person outstanding
against Integrity.
3.14 COMPLIANCE WITH LAWS. Except as disclosed in Section 3.14 of the
Disclosure Schedule, Integrity has not been and is not in violation (or with
or without notice or lapse of time or both, would be in violation) of any
term or provision of any Law or any writ, judgment, decree, injunction or
similar order applicable to Integrity or any of its Assets and Properties,
except for violations which have been cured, which have been resolved or
settled through agreements with applicable governmental authorities or claims
for which are barred by an applicable statute of limitations, or which have
not and are not reasonably expected to have a material adverse effect on the
Business or Condition of Integrity. Without limiting the generality of the
foregoing, except as disclosed in Section 3.14 of the Disclosure Schedule:
(a) Since January 1, 1990, Integrity has duly and
validly filed or caused to be so filed all material
reports, statements, documents, registrations, filings or
submissions that were required by Law to be filed with
any Person and as to which the failure to so file,
individually or in the aggregate with other such
failures, has or may reasonably be expected to have a
material adverse effect on the validity or enforceability
of this Agreement, on the ability of Seller to perform
its obligations under this Agreement, or on the Business
or Condition of Integrity; all such filings complied with
applicable Laws in all material respects when filed, and
to the Knowledge of Seller, no material deficiencies have
been asserted by any Person with respect to any such
filings.
(b) The Seller has previously delivered to the
Purchaser the reports reflecting the results of the most
recent market conduct and financial examinations of
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Integrity issued by any insurance regulatory authority.
To the Knowledge of Seller, all material deficiencies or
violations in such reports have been resolved to the
satisfaction of all applicable insurance regulatory
authorities.
(c) All outstanding insurance Contracts issued,
reinsured or underwritten by Integrity are, to the
Knowledge of Seller, to the extent required under
applicable Laws, on forms approved by the insurance
regulatory authority of the jurisdiction where issued or
have been filed with and not objected to by such
authority within the period provided for objection.
(d) (1) Section 3.14 of the Disclosure Schedule
contains a list, true and complete, of (i) each master or
prototype (as well as any individually designed) pension,
profit sharing, defined benefit, Code Section 401(k), and
other retirement or employee benefit plan or Contract
(including, but not limited to, simplified employee
pension plans, Code Section 403(a), (b) and (c)
annuities, Keogh plans, and individual retirement
accounts and annuities) offered or sold by Integrity to,
or maintained or sponsored for the benefit of any
employees of, any other Person, and (ii) each
determination letter (or opinion or notification letter
from the IRS with respect to those plans or Contracts for
which such letters, rather than determination letters,
are issued by the IRS) issued to Integrity relating to
the creation or amendment of any such plan or Contract;
provided, however, with respect to clause (ii) above, the
Disclosure Schedule does not include any determination
letters (or opinion or notification letters) that any
Person that adopts or maintains any such plan or Contract
has obtained. Each such plan or Contract in all material
respects conforms with, and has been offered, sold,
maintained and sponsored in accordance with, all
applicable Laws. Notwithstanding the foregoing, neither
Seller, FMI, nor Integrity makes any representation
regarding any action of any Person that adopts or
maintains any such plan or Contract for the benefit of
its employees. To the Knowledge of Seller, Integrity is
not a fiduciary with respect to any plan or Contract
referenced in this Section 3.14(d).
(2) Integrity does not provide administrative or
other contractual services for any plan or Contract
referenced in Section 3.14(d) (1), including, but not
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limited to, any third party administrative services for
an Employee Welfare Benefit Plan.
(3) To the extent that Integrity maintains any
collective or commingled funds or accounts which restrict
the Persons who may invest therein to tax-exempt entities
or qualified plans, each such fund or account (of which
a true and complete list and description is disclosed in
Section 3.14 of the Disclosure Schedule) has been
established, maintained and operated in accordance with
all applicable Laws, has maintained its tax-exempt status
and has no non-qualified plans or trusts or other taxable
entities investing within it.
(4) In addition to the representations and
warranties contained in Section 3.13 hereof, there are no
claims pending, or (to the Knowledge of Seller)
threatened against the Seller, FMI, Integrity, or any of
their respective Assets or Properties, under any
fiduciary liability insurance policy issued by or to any
of them that individually or in the aggregate has or
would reasonably be expected to have a material adverse
effect on the Business or Condition of Integrity.
3.15 BENEFITS PLANS, ERISA.
Integrity does not maintain and is not the sponsor of any Benefit Plans, and
it has not maintained or sponsored such a plan during the last five years.
Any Benefit Plans in which Integrity Employees participate are sponsored and
maintained by Seller or an ERISA Affiliate (other than Integrity). None of
such Benefit Plans is or has been a multi-employer plan, as that term is
defined in Section 3(37) of ERISA, and neither the Seller nor Integrity, nor
any ERISA Affiliate, has completely or partially withdrawn from a multi-
employer plan. Seller has not sponsored any defined benefit pension plan
within the last five years.
3.16 PROPERTIES. Except as disclosed in Section 3.16 of the Disclosure
Schedule (with paragraph references corresponding to those set forth below):
(a) Integrity has good and valid title to all
debentures, notes, stocks, securities, and other assets
that are of a type required to be disclosed in Schedules
B through DB of its Annual Statement and that are
purported to be owned by it, free and clear of all Liens.
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(b) (i) None of the mortgage loans or other long
term invested assets held by Integrity of the type
required to be disclosed in Schedule B or BA of its
Annual Statement, is or has been at any time since
December 31, 1994, in default for more than 60 days as to
any payment of interest or principal due thereon and, to
the Knowledge of Seller the financial condition of any
other party to such loan or asset is not so impaired as
to cause a default thereunder, (ii) to the Knowledge of
Seller, there is no existing circumstance or condition
with respect to such loan or asset or any property
mortgaged or pledged as collateral for the repayment
thereof that would cause such loan to be subject to
imminent default; and (iii) to the Knowledge of Seller,
there is no valid right of offset, defense or
counterclaim to such loan or asset.
(c) Except with respect to Permitted Encumbrances,
Integrity has a valid leasehold interest in the Office
Lease free and clear of all Liens. Except for the Office
Lease, Integrity does not own or otherwise have a
leasehold interest in any Real Estate used in the conduct
of its business, operations, or affairs of a type
required to be disclosed in Schedule A of an Annual
Statement. No improvement on any such Real Estate owned,
leased, or held by Integrity encroaches upon any real
property of any other Person. Integrity leases, or has a
valid right under Contract or otherwise to use adequate
means of ingress and egress to, from, and over all such
real property.
(d) Integrity owns good and indefeasible title to,
or has a valid leasehold interest in or has a valid right
under Contract to use, all tangible personal property
that is used in the conduct of its business, operations,
or affairs, and which is located at its office at 140
Whittington Parkway in Louisville, Kentucky, free and
clear of all Liens. All such tangible personal property
is, except for reasonable wear and tear, in good
operating condition and repair and is suitable for its
current uses.
(e) Section 3.16(e) of the Disclosure Schedule
contains a list, true and complete in all material
respects, of:
(i) all marks, names, trademarks, service
marks, patents, patent rights, assumed names,
logos, trade secrets, copyrights, tradenames, and
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service marks that are used in the conduct of
Integrity's business, operations or affairs
(collectively, the "Intellectual Property");
(ii) all material computer software, programs
and similar systems which are owned by or licensed
to Integrity and used in the conduct of its
business, operations, or affairs (collectively, the
"Owned Computer Rights"); and
(iii) all material computer software,
programs, and similar systems used in the conduct
of Integrity's business, operations, or affairs and
owned by or licensed to an Affiliate of Integrity
(collectively, the "Affiliate Computer Rights").
Except as otherwise disclosed in Section 3.16(e) of
the Disclosure Schedule, Integrity has a nonexclusive
right to use, free and clear of any royalty or other
payment obligations, claims or infringement or alleged
infringement, or other Liens, all Intellectual Property
and Owned Computer Rights.
Neither the Seller, Integrity, or any of their
Affiliates has received any notice of any conflict with
or a violation or infringement of or any claimed conflict
with, nor, to the Knowledge of Seller, is in conflict
with or violation or infringement of, any asserted rights
of any other Person with respect to any Intellectual
Property or any Owned Computer Rights or Affiliate
Computer Rights material to the Business or Operations of
Integrity.
3.17 CONTRACTS. Section 3.17 of the Disclosure Schedule (with paragraph
references corresponding to those set forth below) contains a list, true and
complete in all material respects, of each of the following contracts or
other documents or arrangements (true and complete copies, or, if none,
written descriptions, of which will be made available to the Purchaser,
together with all amendments thereto), to which Integrity is a party, or to
which FMI is a party with respect to Integrity, or by which any of the Assets
and Properties of Integrity is bound, except for the FMI Service Agreement
(copies of which are not required to be provided to Purchaser):
(a) all employment, agency, consultation, contracts
for services or other Contracts of any type (except
insurance Contracts or Benefit Plans including, without
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limitation, loans or advances) with any present
Integrity/FMI Employee (or former Integrity/FMI Employee,
if there exists any present or future liability with
respect to such Contract, whether now existing or
contingent) other than (i) Contracts terminable without
penalty or other Liability upon 30 days or less notice,
(ii) Contracts with consultants and similar
representatives who do not receive compensation of
$10,000 or more per year, (iii) employment or agency
Contracts not containing terms which are unduly
burdensome to Integrity with agents who do not receive
compensation of $10,000 or more per year, and (iv) agency
Contracts not on the standard form attached hereto as
Exhibit I, and the name, position, and rate of
compensation of each such Person and the expiration date
of each such Contract, as well as all sick leave,
vacation, holiday, and other similar practices,
procedures, and policies of FMI or Integrity with respect
to such Integrity/FMI Employees which are established or
administered other than as Benefit Plan;
(b) To the Knowledge of Seller, all Contracts with
any Person containing any provision or covenant limiting
the ability of Integrity to engage in any line of
business or to compete with or to obtain products or
services from any Person or, except as provided in
Section 5.21 hereof, limiting the ability of any Person
to compete with or to provide products or services to
Integrity;
(c) all material partnership, joint venture,
profit-sharing, or similar Contracts with any Person
except for any such arrangement disclosed in the December
31, 1994 Annual Statement (and the notes relating
thereto) and Benefit Plans;
(d) all Contracts relating to the borrowing of
money by Integrity or to the direct or indirect guarantee
by Integrity of any obligation for borrowed money in
excess of $10,000 in the aggregate or any other Liability
in respect of indebtedness of any other Person, including
without limitation any Contract relating to (i) the
maintenance of compensating balances that are not
terminable by Integrity without penalty or other
Liability upon not more than 60 calendar days' notice,
(ii) any line of credit or similar facility, (iii) the
payment for property, products, or services of any other
Person, even if such property, products, or services have
not been conveyed, delivered, or rendered, or (iv) the
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obligation to take-or-pay, keep-well, make-whole, or
maintain surplus or earnings levels or perform other
financial ratios or requirements; and Section 3.17(d) of
the Disclosure Schedule contains a true and complete list
of any requirements for consents or approvals of
creditors needed for the Seller to consummate the
transactions contemplated hereby;
(e) all leases or subleases of Real Estate used in
the business, operations, or affairs of Integrity, and
all other material leases, subleases, or rental or use
Contracts for which Integrity is liable;
(f) all Contracts relating to the future
disposition or acquisition of any material Assets or
Properties of any Person or of any interest in any
business enterprise (other than the disposition or
acquisition of material Assets or Properties, for fair
market value in the ordinary course of business and
consistent with past practice);
(g) all Contracts or arrangements between Integrity
and Seller or any other Affiliate of Integrity relating
to allocations of expenses, personnel, services, or
facilities;
(h) all reinsurance, coinsurance, or other similar
Contracts, and all trust agreements or other security
agreements related thereto, indicating, with respect to
each group of such Contracts (by reinsurer or coinsurer)
or security agreement, the information required to be
disclosed in Schedule S of an Annual Statement;
(i) all outstanding proxies, powers of attorney, or
similar delegations of authority, except for powers of
attorney for the service of process pursuant to
applicable insurance or corporate Laws;
(j) all Contracts for the provision of
administrative services by or to Integrity;
(k) all material Contracts for any product,
service, equipment, facility, or similar item (other than
insurance and annuity Contracts and other than
reinsurance, coinsurance, and other similar Contracts)
that by their respective terms do not expire or terminate
or are not terminable by Integrity, without penalty or
other Liability, within ninety (90) days after December
31, 1994; and
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(l) all other Contracts (other than insurance
Contracts) that involve the payment or potential payment,
pursuant to the terms of such Contracts, by or to
Integrity of the Subsidiaries of more than $10,000
individually or in the aggregate or that are otherwise
material to the Business or Condition of Integrity.
Each Contract disclosed or required to be disclosed in the Disclosure
Schedule pursuant to this Section 3.17 is in full force and effect and
constitutes a valid, and binding obligation of Integrity and, to the
Knowledge of Seller, of each other Person that is a party thereto in
accordance with its terms, except to the extent that (a) enforcement may be
limited by or is subject to any bankruptcy, insolvency, reorganization,
moratorium, or similar Laws now or hereafter in effect relating to or
limiting creditors' rights generally, and (b) the remedy of a specific
performance and injunctive and other forms of equitable relief are subject to
certain equitable defenses and to the discretion of the court or other
similar Person before which any proceeding therefore may be brought;
provided, however, that, to the Knowledge of Seller, no party has any
equitable defenses that would affect the enforcement of this Agreement
against Seller, and neither Integrity nor (to the Knowledge of Seller) any
other party to such Contract has materially violated, breached or defaulted
under any such Contract (or without notice or lapse of time or both, would be
in material violation or breach of or default under any such Contract).
Except as disclosed in Section 3.17 of the Disclosure Schedule, Integrity is
not a party to or bound by any Contract that was not entered into in the
ordinary course of business and consistent with past practice and the
performance of which by Integrity or the failure to perform by the other
party has or would reasonably be expected to have, individually or in the
aggregate with the performance of or failure to perform pursuant to any other
such Contracts, a material adverse effect on the Business or Condition of
Integrity. None of Integrity or FMI with respect to Integrity/FMI Employees,
is a party to or bound by any collective bargaining or similar labor Contract.
3.18 INSURANCE ISSUED BY INTEGRITY. Except as disclosed in Section 3.18
of the Disclosure Schedule (with paragraph references corresponding to those
set forth below):
(a) All insurance Contract benefits payable by
Integrity and (to the Knowledge of Seller) by any other
Person that is a party to or bound by any reinsurance,
coinsurance, or other similar Contract with Integrity
have in all material respects been paid in accordance
with the terms of the insurance, annuity, and other
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Contracts under which they arose, except for such
benefits for which there is, in the opinion of Seller, a
reasonable basis to contest payment.
(b) Integrity has no outstanding annuity Contracts.
No outstanding insurance Contract issued, reinsured, or
underwritten by Integrity entitles the holder thereof or
any other Person to receive dividends, distributions, or
other benefits based on the revenues or earnings of
Integrity or any other Person.
(c) The underwriting standards utilized and ratings
applied by Integrity and (to the Knowledge of Seller) by
any other Person that is a party to or bound by any
reinsurance, coinsurance, or other similar Contract with
Integrity conform in all material respects to industry
accepted practices and to the standards and ratings
required pursuant to the terms of the respective
reinsurance, coinsurance, or other similar Contracts.
(d) Neither Seller nor Integrity has received any
information which would cause it to believe that the
financial condition of any other party to any
reinsurance, coinsurance, or other similar Contracts with
Integrity is so impaired as to result in a default
thereunder.
(e) (i) To the Knowledge of Seller, each insurance
agent, at the time such agent wrote, sold, or produced
business for Integrity at any time since January 1, 1990,
was duly licensed as an insurance agent (for the type of
business written, sold, or produced by such insurance
agent) in the particular jurisdiction in which such agent
wrote, sold, or produced such business and (ii) neither
Seller nor Integrity has been notified that any such
insurance agent violated (or with or without notice or
lapse of time or both, would have violated) any term or
provision of any Law or any writ, judgment, decree,
injunction, or similar order applicable to the writing,
sale, or production of business for Integrity, except for
violations which have been cured, which have been
resolved or settled through agreements with applicable
governmental authorities or claims with respect to which
are barred by an applicable statute of limitations.
(f) To the Knowledge of Seller, the tax treatment
under the Code of all insurance annuity or investment
policies, plans, or contracts; all financial products,
employee benefit plans, individual retirement accounts or
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annuities; or any similar or related policy, contract,
plan, or product, whether individual, group, or
otherwise, issued or sold by Integrity is and at all
times has been in all material respects the same or more
favorable to the purchaser, policyholder or intended
beneficiaries thereof as the tax treatment under the Code
for which such contracts qualified or purported to
qualify at the time of its issuance or purchase, except
for changes resulting from changes to the Code effective
after the date of such issuance or purchase. For
purposes of this Section 3.18(f), the provisions of the
Code relating to the tax treatment of such contracts
shall include, but not be limited to, Sections 72, 79,
89, 101, 104, 105, 106, 125, 130, 401, 402, 403, 404,
408, 412, 415, 419, 419A, 457, 501, 505, 817, 818, 7702,
and 7702A of the Code.
3.19 THREATS OF CANCELLATION. Except as disclosed in Section 3.19 of
the Disclosure Schedule, since December 31, 1994, no policyholder, group of
policyholder Affiliates, or Persons writing, selling, or producing, either
directly or through reinsurance assumed, insurance business that individually
or in the aggregate accounted for 5% or more of the premium or annuity income
of Integrity for the year ended December 31, 1994, has terminated or (to the
Knowledge of Seller) threatened to terminate its relationship with Integrity.
3.20 LICENSES AND PERMITS. Except as disclosed in Section 3.20 of the
Disclosure Schedule (with paragraph references corresponding to those set
forth below):
(a) Integrity owns or validly holds, all licenses,
franchises, permits, approvals, authorizations,
exemptions, classifications, certificates, registrations,
and similar documents or instruments that are required
for its business, operation, and affairs and that the
failure to so own or hold has or would, individually or
in the aggregate, reasonably be expected to have a
material adverse effect on the Business or Condition of
Integrity; and
(b) all such licenses, franchises, permits,
approvals, authorizations, exemptions, classifications,
certificates, registrations, and similar documents or
instruments are valid, binding, and in full force and
effect.
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3.21 OPERATIONS INSURANCE. Section 3.21 of the Disclosure Schedule
contains a true and complete list and description of all liability, property,
workers compensation, directors and officers liability, and other similar
insurance Contracts that insure the business, operations, or affairs of
Integrity or affect or relate to the ownership, use, or operations of any of
its Assets and Properties and (a) that have been issued to Integrity
(including without limitation the names and addresses of the insurers, the
expiration dates thereof, and the annual premiums and payment terms thereof)
or (b) that are held by the Seller or by any affiliate of the Seller (other
than Integrity) for the benefit of Integrity. All such insurance is in full
force and effect and (to the Knowledge of Seller) is with financially sound
and reputable insurers and, in light of the respective business, operations
and affairs of Integrity, is in amounts and provides coverage that are
reasonable and customary for Persons in similar businesses.
3.22 INTERCOMPANY LIABILITIES. Except as reflected in the December 31,
1994 Annual Statement, or except as disclosed in Section 3.22 of the
Disclosure Schedule, (a) there are no Liabilities between Integrity and the
Seller or any other Affiliate of Integrity and (b) neither the Seller nor any
other Affiliate of Integrity provides or causes to be provided to Integrity
any products, services, equipment, facilities, or similar items. Except as
disclosed in Section 3.22 of the Disclosure Schedule, since December 31,
1994, no such intercompany liabilities in excess of an aggregate of $10,000
have been paid, and no settlements of such intercompany Liabilities have been
made.
3.23 BANK ACCOUNTS. Section 3.23 of the Disclosure Schedule contains
(a) a true and complete list of the names and locations of all banks, trust
companies, securities brokers, and other financial institutions at which
Integrity has an account or safe deposit box or maintains a banking,
custodial, trading, or other similar relationship and (b) a true and complete
list and description of each such account, box, and relationship, indicating
in each case the account number and the names of the respective officers,
employees, agents, or other similar representatives of Integrity transacting
business with respect thereto.
3.24 BROKERS. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by the Seller directly
with the Purchaser, without the intervention of any Person on behalf of the
Seller in such manner as to give rise to any valid claim by any Person
against the Purchaser, a Designated Subsidiary, or Integrity for a finder's
fee, brokerage commission, or similar payment.
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3.25 EMPLOYEES. Integrity has no employees except those set forth in
Section 3.26 of the Disclosure Schedule. All management, data processing and
administrative services required to operate Integrity's business are provided
by FMI, except those set forth in Section 3.26 of the Disclosure Schedule,
and all of the personnel required to perform such services are employed by
FMI. Purchaser or the Designated Subsidiary shall have the right, but not
the obligation, to offer employment to any Integrity/FMI Employee.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Seller as
follows:
4.1 ORGANIZATION OF PURCHASER AND THE DESIGNATED SUBSIDIARY. The
Purchaser is a corporation duly organized, and validly existing, under the
Laws of Kentucky and has the requisite power and authority to enter into this
Agreement and to perform its obligations under this Agreement. The Purchaser
is duly licensed, qualified, or admitted to do business in all jurisdictions
in which the failure to be so licensed, qualified, or admitted, individually
or in the aggregate with other such failures, has or would reasonably be
expected to have a material adverse effect on the validity or enforceability
of this Agreement, on the ability of the Purchaser to perform its obligations
under this Agreement or on the Business or Condition of the Purchaser. On
the Closing Date, the Designated Subsidiary will be a corporation duly
organized, and validly existing under the Laws of its jurisdiction of
incorporation and will have full corporate power and authority to purchase
(pursuant to this Agreement) and own the Shares.
4.2 AUTHORITY OF PURCHASER AND THE DESIGNATED SUBSIDIARY. The Board of
Directors of the Purchaser has duly and validly approved this Agreement and
the transactions contemplated hereby. The execution and delivery of this
Agreement by the Purchaser and the performance by the Purchaser of its
obligations under this Agreement have been duly and validly authorized by all
necessary action on the part of the Purchaser. This Agreement constitutes a
valid, and binding obligation of the Purchaser and is enforceable against the
Purchaser in accordance with its terms, except to the extent that (a)
enforcement may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium, or similar Laws now or hereafter in effect
relating to or limiting creditors' rights generally and (b) the remedy of
specific performance and injunctive and other forms of equitable relief are
subject to
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certain equitable defenses and to the discretion of the court or other
similar Person before which any proceeding therefor may be brought; provided,
however, that to the Knowledge of Purchaser no party has any equitable
defenses that would effect the enforcement of this Agreement against the
Purchaser. On the Closing Date, the purchase of the Shares by the Designated
Subsidiary will be duly and validly authorized by all necessary corporate
action on the part of such Designated Subsidiary.
4.3 NO CONFLICTS OR VIOLATIONS. The execution and delivery of this
Agreement by the Purchaser do not, and the performance by the Purchaser and
the Designated Subsidiary of their respective obligations under this
Agreement will not:
(a) subject to obtaining the approvals contemplated
by sections 6.1 and 6.2 hereof, violate any term or
provision of any Law or any writ, judgment, decree,
injunction, or similar order applicable to the Purchaser
or the Designated Subsidiary;
(b) conflict with or result in a violation or
breach of, or constitute (with or without notice or lapse
of time or both) a default under, any of the terms,
conditions, or provisions of the Articles of
Incorporation or by-laws of the Purchaser or the Articles
of Incorporation or by-laws of the Designated Subsidiary;
(c) result in the creation or imposition of any
Lien upon the Purchaser or the Designated Subsidiary or
any of their respective Assets and Properties that
individually or in the aggregate with any other Liens has
or would reasonably be expected to have a material
adverse effect on the validity or enforceability of this
Agreement or on the ability of the Purchaser or the
Designated Subsidiary to perform their respective
obligations under this Agreement;
(d) conflict with or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default under,
or give to any Person any right of termination, cancellation, acceleration,
or modification in or with respect to, any Contract to which the Purchaser or
the Designated Subsidiary is a party or by which any of their respective
Assets and Properties may be bound and as to which any such conflicts,
violations, breaches, defaults, or rights individually or in the aggregate
have or would reasonably be expected to have a material adverse effect on the
validity or enforceability of this Agreement or on the
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ability of the Purchaser or the Designated Subsidiary to perform their
respective obligations under this Agreement.
(e) require the Purchaser or the Designated Subsidiary to
obtain any consent, approval, or action of, or make any filing with
or give any notice to, any Person except (i) as contemplated in
Section 6.1 or 6.2 hereof, or (ii) those which the failure to
obtain, make, or give individually or in the aggregate with other
such failures has not or would not reasonably be expected to have
a material adverse effect on the validity or enforceability of this
Agreement or on the ability of the Purchaser or the Designated
Subsidiary to perform their respective obligations under this
Agreement.
4.4 LITIGATION. There are no actions, suits, investigations, or
proceedings pending or(to the Knowledge of the Purchaser) threatened against
the Purchaser, or the Designated Subsidiary, and (to the Knowledge of
Purchaser) no event, fact or circumstance has arisen or occurred that may
reasonably be expected to result in any action, suit, investigation or
proceeding against the Purchaser or the Designated Subsidiary at law or in
equity, in, before, or by any Person, that individually or in the aggregate
have or would reasonably be expected to have a material adverse effect on the
validity or enforceability of this Agreement or on the ability of the
Purchaser or the Designated Subsidiary to perform their respective
obligations under this Agreement.
4.5 PURCHASE FOR INVESTMENT. The Shares to be acquired under the terms
of this Agreement will be acquired by the Purchaser and/or the Designated
Subsidiary for its own account for the purpose of investment and not for the
purpose or with the intent of a distribution or other sale or disposition
thereof. The Purchaser will, and will cause the Designated Subsidiary to,
refrain from transferring or otherwise disposing of any of the Shares
acquired by it, or any interest therein, in such manner as to violate any
provision of the Securities Act of 1933, as amended, or of any securities Law
of any state or other jurisdiction regulating the disposition thereof. The
Purchaser agrees that the certificates representing the Shares may bear
legends to the effect that the Shares have not been registered under the
Securities Act of 1933, as amended, or such other state securities Laws and
that no interest therein may be transferred or otherwise disposed of in
violation of the provisions thereof.
4.6 BROKERS. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by the Purchaser
directly with the Seller, without the intervention of any Person on behalf of
the Purchaser in such manner as to give rise to
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any valid claim by any Person against the Seller for a finder's fee,
brokerage commission, or similar payment.
ARTICLE V
COVENANTS OF SELLER
The Seller covenants and agrees with the Purchaser that, at all times
before the Closing (or, with respect to the covenants and provisions of
Sections 5.19, 5.20 and 5.21 hereof, for the respective periods after the
Closing Date therein specified), the Seller will comply with all covenants
and provisions of this Article V, except to the extent the Purchaser may
otherwise consent in writing, which consent shall not be unreasonably
withheld or delayed, or to the extent otherwise required or permitted by this
Agreement.
5.1 REGULATORY APPROVALS. Except as shown in Schedule 5.1 of the
Disclosure Schedule, Seller does not require the approval, consent,
authorization, exemption or clearance of any Person, other than governmental
agencies, to the consummation of the transactions contemplated in this
Agreement. The Seller will, and will cause Integrity to, (a) take all
commercially reasonable steps necessary or desirable, and proceed diligently
and in good faith and use all commercially reasonable efforts, to obtain, as
promptly as practicable, all approvals required by any applicable Contract of
the Seller or Integrity to consummate the transactions contemplated hereby,
(b) take all commercially reasonable steps necessary or desirable, and
proceed diligently and in good faith and use all commercially reasonable
efforts to obtain, as promptly as practicable, all approvals, authorizations,
and clearances of governmental and regulatory authorities required of the
Seller or Integrity to permit the Seller to consummate the transactions
contemplated hereby, (c) provide such other information and communications to
such governmental and regulatory authorities as the Purchaser or such
authorities may reasonably request in conjunction with obtaining such
approvals, (d) cooperate with and provide to the Purchaser such financial
information as it may reasonably request with which to prepare such pro forma
financial statements as may reasonably be required to be filed with
regulatory authorities, and (e) take all commercially reasonable steps to
cooperate with the Purchaser and the Designated Subsidiary in obtaining, as
promptly as practicable, all approvals, authorizations, and clearances of
governmental or regulatory authorities and others required of the Purchaser
or the Designated Subsidiary to consummate the transactions contemplated
hereby,
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including without limitation any required approvals of the insurance regulatory
authorities in Pennsylvania and Kentucky.
5.2 HSR FILINGS. The Seller will, with respect to the transactions
contemplated hereby, (a) take promptly all actions necessary to make the
filings required of the Seller or its Affiliates under the HSR Act, (b)
comply at the earliest practicable date with any request for additional
information received by the Seller or its Affiliates from the Federal Trade
Commission or Antitrust Division of the Department of Justice pursuant to the
HSR Act, (c) cooperate with the Purchaser in connection with the Purchaser's
filings under the HSR Act, and (d) request early termination of the
applicable waiting period under the HSR Act.
5.3 INVESTIGATION BY THE PURCHASER. The Seller will provide, and will
cause Integrity to provide, (a) the Purchaser, its lenders, and their
respective counsel, accountants, actuaries, and other representatives with
access, upon reasonable notice and during normal business hours, to all
facilities, officers, employees, agents (except insurance agents),
accountants, actuaries, Assets and Properties, and Books and Records of
Integrity and will furnish the Purchaser and such other Persons during such
period with all such information and data (including without limitation
copies of Contracts, Benefit Plans, and other Books and Records) concerning
the business, operations, and affairs of Integrity as the Purchaser or any of
such other Persons reasonably may request and (b) the Purchaser with notice
of and full access to all meetings (and all actions by written consent in
lieu thereof) of the board of directors and stockholders of Integrity
involving matters which are not in the ordinary course of business and
consistent with past practice of Integrity, except such meetings as involve
only matters related to the consummation of the transactions contemplated
herein.
5.3(a) COOPERATION WITH PURCHASER. The Seller will cooperate with and
will cause Integrity to cooperate with the Purchaser and its representatives
with respect to their preparation and planning for the implementation of any
changes in or conversions of any system or procedures which the Purchaser
reasonably deems to be necessary or appropriate to the operation of Integrity
following the Closing Date. Without limiting the generality of the
foregoing, Seller will cooperate with and will cause Integrity to cooperate
with Purchaser and the Designated Subsidiary to obtain assignments of such
computer software and programs which Purchaser or the Designated Subsidiary
reasonably deems necessary to the administration of Integrity's business
following the Closing;
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provided that Seller does not represent that any of such assignments may be
approved or obtained.
5.4 NO NEGOTIATIONS, ETC. The Seller will not take, and will not
permit Integrity or any other Affiliate of the Seller (or permit any other
Person acting for or on behalf of any of them) to take, directly or
indirectly, any action, except as required by Section 5.25 hereof or as
otherwise permitted or required by this Agreement or, on the advice of
counsel, as required under any duties that may be imposed upon the board of
directors of Seller by applicable Law, (a) to seek or encourage any offer or
proposal from any Person to acquire any shares of capital stock or any other
securities of Integrity or any interests therein or Assets and Properties
thereof or interests therein, (b) to merge, consolidate, or combine, or to
permit any other Person to merge, consolidate or combine, with Integrity, (c)
to liquidate, dissolve, or reorganize Integrity, (d) to acquire or transfer
any Assets and Properties of Integrity or any interests therein, except as
contemplated by the terms of this Agreement, (e) to reach any agreement or
understanding (whether or not such agreement or understanding is absolute,
revocable, contingent, or conditional) for, or otherwise to attempt to
consummate, any such acquisition, transfer, merger, consolidation,
combination, or reorganization, or (f) to furnish or cause to be furnished
any information with respect to Integrity to any Person (other than the
Purchaser or the Designated Subsidiary or as provided in Section 5.3) that
the Seller or Integrity, or any other Affiliate of the Seller (or any Person
acting for or on behalf of any of them), knows or has reason to believe is in
the process of attempting or considering any such acquisition, transfer,
merger, consolidation, combination, liquidation, dissolution, or
reorganization. If the Seller, Integrity, or any other Affiliate of the
Seller receives from any Person (other than the Purchaser or the Designated
Subsidiary) any offer, proposal, or informational request that is subject to
this Section 5.4, the Seller will promptly advise such Person, by written
notice, of the terms of this Section 5.4 and will promptly deliver a copy of
such notice to the Purchaser.
5.5 CONDUCT OF BUSINESS. The Seller will cause Integrity to conduct
its business only in the ordinary course and consistent with past practice,
except as otherwise provided in this Agreement or except as may be consented
to by the Purchaser, which consent shall not be unreasonably withheld or
delayed. Without limiting the generality of the foregoing:
(a) The Seller will use, and will cause Integrity
to use, all commercially reasonable efforts to (i)
preserve intact Integrity's present business
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organization, reputation, and policyholder or customer
relations, (ii) keep available the services of
Integrity's present key officers, directors, employees,
agents, consultants, and other similar representatives,
(iii) maintain all licenses, qualifications, and
authorizations to do business in each jurisdiction in
which Integrity is so licensed, qualified, or authorized,
(iv) except as otherwise permitted by this Agreement,
maintain in full force and effect all Contracts,
documents, and arrangements set forth in Section 3.17 of
the Disclosure Schedule hereof, (v) maintain all of
Integrity's Assets and Properties in good working order
and condition, ordinary wear and tear excepted and, (vi)
continue all current marketing and selling activities
relating to its business, operations, or affairs in
accordance with its current marketing plan.
(b) The Seller will cause the Books and Records of
Integrity to be maintained in the usual manner and
consistent with past practice and will not permit a
material change in any applicable underwriting,
investment, actuarial, financial reporting, or accounting
practice or policy of Integrity or in any assumption
underlying such a practice or policy, or in any method of
calculating any bad debt, contingency, or other reserve
for financial reporting purposes or for other accounting
purposes (including without limitation any practice,
policy, assumption, or method relating to or affecting
the determination of insurance or annuities in force,
premium or investment income, Reserve Liabilities, or
operating ratios with respect to expenses, losses, or
lapses).
(c) The Seller will cause Integrity (i) to prepare
properly and to file duly and validly all reports and all
Tax Returns required to be filed with any governmental or
regulatory authorities with respect to its business,
operations, or affairs, and (ii) to pay in full and when
due all Taxes indicated by such Tax Returns or otherwise
levied or assessed upon it or any of its Assets and
Properties, and to withhold or collect and pay to the
proper taxing authorities or hold in separate bank
accounts for such payment all Taxes that it is required
to so withhold or collect and pay, based upon information
provided to Seller, unless such Taxes are being contested
in good faith and, if appropriate, reasonable reserves
therefor have been established and reflected in its Books
and Records.
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(d) Except as disclosed in Section 3.9 of the
Disclosure Schedule, the Seller will cause (i) all
Reserve Liabilities with respect to insurance and annuity
Contracts established or reflected in the Books and
Records of Integrity to be (A) established and reflected
on a basis consistent with those Reserve Liabilities and
reserving methods followed by Integrity in the
preparation of the December 31, 1994 Annual Statement and
(B) adequate (under generally accepted actuarial
principles consistently applied) to cover the total
amount of all reasonably anticipated matured and
unmatured benefits, dividends, losses, claims, expenses,
and other liabilities of Integrity under all insurance
Contracts pursuant to which Integrity has or will have
any liability (including without limitation any liability
arising under or as a result of any reinsurance,
coinsurance, or other similar Contract); and (ii)
Integrity to continue to own assets that qualify as legal
reserve assets under all applicable insurance Laws in an
amount at least equal to their required Reserve
Liabilities. No warranty is made as to the ultimate
adequacy of the Reserve Liabilities to satisfy the
Liabilities and obligations reserved against.
(e) The Seller will use, and will cause Integrity
to use, all commercially reasonable efforts to maintain
in full force and effect until the Closing substantially
the same levels of coverage as the insurance afforded
under the Contracts listed in Section 3.21 of the
Disclosure Schedule. Any and all benefits under such
Contracts paid or payable prior to the Closing with
respect to the business, operations, affairs, or Assets
and Properties of Integrity shall be paid or payable to
it.
(f) The Seller will cause Integrity to continue to
comply, in all material respects, with all Laws
applicable to Integrity's business, operations, or
affairs.
(g) From the date hereof through the Closing, the
Seller will cause Integrity not to realize net capital
gains or losses from the sale of bonds or other fixed
maturity investments in an aggregate amount exceeding
$250,000.
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5.6 FINANCIAL STATEMENTS AND REPORTS.
(a) As promptly as practicable after each calendar
quarter ending between the date hereof and the Closing
Date, the Seller will deliver to the Purchaser true and
complete copies of the following:
(i) the Quarterly Statement filed by
Integrity for each quarter then ended;
(ii) presentations for Integrity
reflecting, as of the end of each such
quarter, the information of the type required
by the line items set forth on pages 2, 3, 4,
5, 6, 8, 9 and 12 and on Schedules A through
DB of the December 31, 1994 Annual Statement,
which presentations shall be prepared in
accordance with SAP and will present fairly,
in all material respects, the admitted assets,
liabilities, and capital and surplus of
Integrity as of the date thereof and the
results of its operations and cash flows for
and during the respective periods covered
thereby; and
(b) As promptly as practicable, the Seller will
deliver to the Purchaser true and complete copies of such
other material financial statements, reports, or analyses
as may be prepared or received by the Seller, Integrity
or any other Affiliate of the Seller and as relate to any
of the business, operations, or affairs of Integrity
including without limitation normal internal reports
which Integrity prepares (such as those reflecting
monthly premiums, claims, and cash flow) and special
reports (such as those of financial consultants).
5.7 INVESTMENTS. Integrity will invest its future cash flow, any cash
from matured and maturing investments, any cash proceeds from the sale of its
Assets and Properties, and any cash funds currently held by it exclusively in
cash equivalent assets or in short-term investments (consisting of United
States government issued or guaranteed securities, commercial paper rated A-1
or P-1, or certificates of deposit issued by one or more of the banks or
financial institutions listed in Section 5.7 of the Disclosure Schedule),
except (i) as otherwise required by Law, (ii) as required to provide cash (in
the ordinary course of business and consistent with past practice) to meet
its reasonably anticipated
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current obligations (iii) in accordance with the investment policy set forth
in Section 5.7 of the Disclosure Schedule or (iv) as consented to by the
Purchaser. The Seller will not, and will cause Integrity not to, take any
actions other than as otherwise permitted by this Agreement or in the
ordinary course of business and consistent with past practice (including,
without limitation, normal amortization and depreciation of any depreciable
asset) designed to cause the assets of Integrity that are classified as
nonadmitted under SAP or by the applicable insurance regulatory authorities,
to be less than their respective dollar amounts as of December 31, 1994.
5.8 EMPLOYEE MATTERS.
(a) Except as may be required by Law or by this
Agreement or as disclosed in Section 5.8 of the
Disclosure Schedule, or except for such Contract
representations, promises, changes, alterations, or
amendments that do not and will not result in any
Liability to any of Integrity, the Purchaser, or the
Designated Subsidiary, or except for the actions required
by Section 5.9 hereof, the Seller will refrain, and will
cause Integrity to refrain, from directly or indirectly,
without the consent of Purchaser, which consent shall not
be unreasonably withheld or delayed:
(i) making any representation or promise,
oral or written, to any Integrity/FMI Employee
which is inconsistent with the terms of any
Benefit Plan in which such Employee is
eligible to participate;
(ii) except for bonus payments disclosed
in Section 5.8(ii) of the Disclosure Schedule
(which are to be paid by Integrity or the
Seller at the Closing), making any change to,
or amending in any way, the Contracts,
salaries, wages, or other compensation of any
Integrity/FMI Employee whose annual
compensation exceeds $25,000 other than
routine changes or amendments that (a) are
made in the ordinary course of business and
consistent with past practice, (b) do not and
will not result in increases of more than 5%
in the salary, wages, or other compensation of
any such Person, and (c) do not and will not
exceed, in the aggregate, 5% of the total
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salaries, wages, and other compensation of all
Integrity/FMI Employees;
(iii) adopting, entering into, amending,
altering, or terminating partially or
completely, any employment, agency,
consultation, or representation Contract that
is, or had it been in existence on the
effective date of this Agreement would have
been, required to be disclosed in Section
3.17(a) of the Disclosure Schedule;
(iv) approving any general or company-
wide pay increases for Integrity/FMI
Employees; or
(v) entering into any Contract with any
Integrity/FMI Employee that is not terminable
at will by FMI.
5.9 EMPLOYEES. The Seller will cause Integrity to refrain from hiring
any employees except in the ordinary course of business to replace existing
employees.
5.10 NO CHARTER AMENDMENTS. The Seller will cause Integrity to refrain
from amending its articles or certificate of incorporation or by-laws and
from taking any action with respect to any such amendment.
5.11 NO ISSUANCE OF SECURITIES. The Seller will cause Integrity to
refrain from authorizing or issuing any shares of its capital stock or other
equity securities or entering into any Contract or granting any option,
warrant, or right calling for the authorization or issuance of any such
shares or other equity securities, or creating or issuing any securities
directly or indirectly convertible into or exchangeable for any such shares
or other equity securities, or issuing any options, warrants, or rights to
purchase any such convertible securities.
5.12 NO DIVIDENDS. Except as otherwise expressly provided herein, the
Seller will cause Integrity to refrain from declaring, setting aside, or
paying any dividend or other distribution in respect of its capital stock and
from directly or indirectly redeeming, purchasing, or otherwise acquiring any
of its capital stock or any interest in or right to acquire any such stock.
5.13 NO DISPOSAL OF PROPERTY. Except as set forth in Section 5.13 of
the Disclosure Schedule and as otherwise expressly provided
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in this Agreement, the Seller will cause Integrity to refrain from (a)
disposing of any of its Assets and Properties and from permitting any of its
Assets and Properties to be subjected to any Liens, except to the extent any
such disposition or on any such Lien is made or incurred in the ordinary
course of the business and consistent with past practice, (b) selling any
material part of its insurance products, operations, or business to any third
party (other than sales of insurance products in the ordinary course of
business consistent with past practice), (c) entering into any contracts
obligating it to administer the insurance operations of any other Person and
(d) entering into any Contracts permitting any other Person to administer its
insurance operations.
5.14 NO BREACH OR DEFAULT. The Seller will cause Integrity to refrain
from violating, breaching, or defaulting, and from taking or failing to take
any action that (with or without notice or lapse of time or both) would
constitute a material violation, breach, or default, in any way under any
term or provision of any Contract to which it is a party or by which any of
its Assets and Properties is or may be bound.
5.15 NO INDEBTEDNESS. Except in the ordinary course of business and
consistent with past practice and except for existing contractual
obligations, the Seller will cause Integrity to refrain from creating,
incurring, assuming, guaranteeing, or otherwise becoming liable for, and from
cancelling, paying, agreeing to cancel or pay, or otherwise providing for a
complete or partial discharge in advance of a scheduled payment date with
respect to, any Liability, and from waiving any right to receive any direct
or indirect payment or other benefit under any Liability owing to it.
5.16 NO ACQUISITIONS. The Seller will cause Integrity to refrain from
(a) merging, consolidating, or otherwise combining or agreeing to merge,
consolidate, or otherwise combine with any other Person, (b) acquiring or
agreeing to acquire blocks of business of all or substantially all the Assets
and Properties or capital stock or other equity securities of any other
Person, or (c) otherwise acquiring or agreeing to acquire control of any
other Person.
5.17 INTERCOMPANY LIABILITIES. At least five Business Days before the
Closing, the Seller will deliver to the Purchaser a true and complete list
and description of all Liabilities between Integrity and the Seller or any
other Affiliate of Integrity to be outstanding on the Closing Date. At or
prior to the Closing, all such liabilities shall be paid, except as otherwise
specifically provided herein. Integrity shall not enter into any Contract
or, except as required by any Contract disclosed in Section 3.17(g) of the
Disclosure Schedule, engage in any transaction with the Seller
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or any other Affiliate of Integrity. Except as otherwise specifically
provided herein or as otherwise agreed to by Purchaser and Seller prior to
the Closing Date, on the Closing Date the Seller will terminate and will
cause its Affiliates to terminate each Contract between Integrity and the
Seller or any other Affiliate of Integrity, including without limitation each
Contract disclosed in Section 3.17(g) of the Disclosure Schedule and any
Contract or other obligation with or to FMI.
5.18 RESIGNATIONS OF DIRECTORS. The Seller will cause such members of
the Boards of Directors and officers of Integrity as are designated by the
Purchaser in writing at least 5 days prior to the Closing Date to tender,
effective at the Closing, their resignations from such Boards of Directors or
from such offices.
5.19 TAX MATTERS.
(a) Except as required by Section 5.23 hereof, the
Seller will refrain and will cause Integrity to refrain from
making, filing, or entering into (whether before or after the
Closing) any election, consent, or agreement described in
Section 3.12(e) or Section 3.12(f) hereof with respect to
Integrity or any of its Assets and Properties.
(b) Seller will cause Integrity to establish a reserve
in Integrity's balance sheet at the Closing Date, to the
extent required by SAP, to reflect the Tax effect of any
adjustments (relating to income, losses or premiums of
Integrity) by the IRS which have not been settled by the
Closing Date.
(c) Each reserve item with respect to Integrity set
forth in the 1993 Federal income tax return will be
consistently applied with respect to Integrity in the 1994 and
short period 1995 Federal income tax returns when such returns
are filed; a specific tax reserve calculation will be made as
of the Closing Date, the short period 1995 Federal income tax
return will be prepared within 60 days after the Closing Date,
and such short period return will be subject to review by the
non-preparing party.
(d) Seller will not make an election to reattribute
losses of Integrity as provided by Section 1.1502-20(g) of the
Regulations to the Code.
(e) Seller will make available to Purchaser or its
representatives, for review but not copying, documentation
(including without limitation the workpapers of Coopers &
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Lybrand and the Seller, if any), to the extent such
documentation is not privileged, of any and all Tax exposures
in the Seller's consolidated Tax Return which includes
Integrity, related to Tax years not examined and settled by
the IRS or closed by statute.
5.20 BOOKS AND RECORDS. On the Closing Date, the Seller will deliver
to the Purchaser or will make available to the Purchaser all Books and
Records of Integrity at its offices, and, if (at any time after the Closing)
the Seller discovers in its possession or under its control any other Books
and Records of Integrity will forthwith deliver such Books and Records to the
Purchaser.
5.21 NON-COMPETITION.
(a) The Seller will refrain and will cause its present
and future Affiliates (other than Integrity) to refrain from
directly or indirectly utilizing or attempting to utilize any
information regarding the policyholders or any of the
officers, directors, employees, agents, consultants, or other
similar representatives of Integrity for the purposes of
causing or attempting to cause (i) any policyholder to replace
or terminate any insurance Contract issued, reinsured, or
underwritten by Integrity, in whole or in part, with products
of any other Person at any time, (ii) any reinsurer to
terminate any reinsurance, coinsurance, or other similar
Contract, or sever a relationship, with Integrity at any time,
or (iii) any agent (including without limitation any insurance
agent), consultant, or other similar representative of
Integrity to resign or sever a relationship with Integrity at
any time.
(b) The Seller agrees with the Purchaser that for a
period of five (5) years following the Closing, neither Seller
nor any of its present Affiliates (but only for so long as
they remain Affiliates of Seller) will, directly or indirectly
(except through a future Affiliate), conduct or otherwise
engage in the business of offering, selling, issuing or
servicing Industrial Life Insurance in any state or other
jurisdiction in which Integrity is licensed to underwrite (and
is underwriting) Industrial Life Insurance as of the Closing,
or interfere or attempt to interfere with Integrity (or any
person into which Integrity is merged or otherwise
consolidated) relating, directly or indirectly, to the conduct
of the business of Industrial Life Insurance or interfere or
attempt to interfere with any officers, employees,
representatives or agents of Integrity (or any Person into
which Integrity is merged or otherwise consolidated) or induce
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or attempt to induce them to leave the employ of Integrity (or
any Person into which Integrity is merged or otherwise
consolidated) or violate the terms of their Contracts or any
of their employment arrangements with Integrity (or any Person
into which Integrity is merged or otherwise consolidated).
(c) The Seller acknowledges that the covenants of the
Seller set forth in this Section 5.21 are an essential element
of this Agreement and that, but for the agreement of the
Seller to comply with these covenants, the Purchaser would not
have entered into this Agreement. The Seller acknowledges
that this Section 5.21 constitutes an independent covenant and
shall not be affected by performance or nonperformance of any
other provision of this Agreement by the Purchaser. The
Seller has independently consulted with its counsel and after
such consultation agrees that the covenants set forth in this
Section 5.21 are reasonable and proper as to time, geographic
scope and business scope.
5.22 DISCLOSURE SCHEDULE. The Seller shall deliver the Disclosure
Schedule to the Purchaser no later than fifteen (15) Business Days after the
date of this Agreement. Any matter disclosed under one Section of the
Disclosure Schedule shall be considered to be disclosed under all other
applicable Sections of the Disclosure Schedule from which it is inadvertently
omitted.
5.23 NOTICE AND CURE. The Seller will notify the Purchaser promptly in
writing of, and contemporaneously will provide the Purchaser with true and
complete copies of any and all information or documents relating to, and will
use all commercially reasonable efforts to cure before the Closing, any
event, transaction, or circumstance occurring after the date of this
Agreement that causes or will cause any covenant or agreement of the Seller
under this Agreement to be breached, or that renders or will render untrue
any representation or warranty of the Seller contained in this Agreement as
if the same were made on or as of the date of such event, transaction, or
circumstance. The Seller also will use all commercially reasonable efforts
to cure, before the Closing, any violation or breach of any representation,
warranty, covenant, or agreement made by it in this Agreement, whether
occurring or arising before or after the date of this Agreement.
5.24 SUPPLEMENTS TO SCHEDULES. The Seller shall at any time or from
time to time after the date hereof and prior to the Closing Date, supplement
or amend the Disclosure Schedule with respect to any matter arising after the
date hereof which, if existing or occurring at the date hereof, would have
been required to be set
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forth or described therein. No supplement or amendment to the Disclosure
Schedule shall have any effect for the purpose of determining the
satisfaction of the conditions set forth in Article VII; PROVIDED, HOWEVER,
that no matter arising after the date hereof and disclosed in an amendment or
supplement to the Disclosure Schedule pursuant to this Section shall form the
basis for a claim for indemnification by the Purchaser under Article X hereof
if the transactions contemplated hereby are consummated and any Damages
incurred or reasonably anticipated to result from such matter are accrued as
Liabilities in accordance with SAP in calculating the Adjusted Capital and
Surplus of Integrity pursuant to Section 2.3 hereof.
5.25 REINSURANCE AGREEMENT. As of the Closing, Seller will cause
Integrity to cede to an assuming insurer on an assumption reinsurance basis
or on a 100% coinsurance basis, at Seller's election, the Reinsured Business
and Integrity will simultaneously cease issuing any new medicare supplement
insurance contracts and long term care insurance contracts. The assuming
insurer, the form of the Reinsurance Agreement and the assets to be
transferred to support the reserves on the Reinsured Business will be subject
to the approval of Purchaser, which approval will not be unreasonably
withheld or delayed. Given, however, that, to the extent practical, the
bonds selected for transfer to the reinsurer to support the reserves will, as
to unrealized appreciation or depreciation, maturity distribution and quality
distribution (as determined by NAIC rating), be proportionately the same as
the bond portfolio as a whole, so that the transfer of such bonds will
produce a result which is no more or less favorable to Seller or Purchaser.
Subject to Section 8.9 hereof, the Net After-Tax Ceding Commission, if any,
received by Integrity on the Reinsured Business will be paid by Integrity, as
an extraordinary dividend (which shall not be deemed a part of the
nonextraordinary dividend to be paid pursuant to Section 2.2 hereof), to
Seller and Integrity's other shareholders on the date of the Closing. The
receipt by Integrity of the ceding commission and its payment to the Seller
and Integrity's other shareholders shall not affect the Purchase Price.
5.26 REMOVAL OF ASSETS. At or prior to the Closing, and in any
event prior to the determination of the proportionate effect of allocations
of bond transfers contemplated in Section 5.25 hereof, Seller will cause
Integrity to sell the following assets for aggregate cash consideration in an
amount not less than the aggregate statutory statement value of such assets
at December 31, 1994:
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(i) Fund America Investors Corp. listed on page 59.3,
of Integrity's 1994 Annual Statement, CUSIP # 36076RAL7;
(ii) Condominiums situated in Houston, Texas listed on
page 32, line 1 of Integrity's 1994 Annual Statement; and
(iii) Mortgage secured by an apartment complex in Joplin,
Missouri listed on page 37, line 3 of Integrity's 1994 Annual
Statement.
5.27 INTEGRITY/FMI EMPLOYEE BENEFITS. Seller will pay or will cause
its Affiliates, other than Integrity, to pay all benefits which any
Integrity/FMI Employee is entitled to receive under any Benefit Plan through
the Closing Date, except as otherwise provided in Section 6.8 hereof.
Furthermore, Seller will continue to administer after the Closing the Benefit
Plans in which the Integrity/FMI Employees named in Section 6.8(a)(i) and
(ii) of the Disclosure Schedule participates to the extent necessary to
provide the benefits to those Integrity/FMI Employees that are the liability
of Purchaser as provided in Section 6.8(a)(i) and (ii) hereof, provided that
this covenant is conditioned upon, and subject to Seller receiving from
Purchaser payment of all amounts for which Purchaser is liable pursuant to
Section 6.8(a)(i) and (ii) hereof prior to the time such benefits are payable
to those Integrity/FMI Employees set forth in Section 6.8(a)(i) and (ii) of
the Disclosure Schedule and Seller shall have no liability for such benefits
to the extent those amounts related thereto are not so paid to Seller.
5.28 ESCROW AGREEMENT. At the Closing, Seller will enter into the
Escrow Agreement with an escrow agent and the Purchaser or the Designated
Subsidiary in a form mutually acceptable to both the Seller and the Purchaser.
5.29 MAINTENANCE OF LICENSES. Seller will cause Integrity to maintain
in good standing all licenses to do business in the jurisdictions listed in
Section 3.3 of the Disclosure Schedule.
5.30 EMPLOYEE CLAIMS. Except as otherwise provided in Section 5.27,
Seller assumes responsibility or will cause FMI to assume responsibility for
any and all liabilities, claims and/or causes of action asserted or which may
be asserted by any Person claiming to be an employee of Integrity or by any
Integrity/FMI Employee arising out of or based upon any state of facts
existing prior to the Closing.
5.31 GAAP FINANCIAL STATEMENTS. Seller will use its commercially
reasonable efforts to make available to Purchaser, to
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the extent available, such financial records and related information as
necessary to enable Purchaser to prepare financial statements in accordance
with the GAAP purchase method of accounting as of the date Integrity was
purchased by Seller, and for any periods thereafter, that are required to be
filed by Purchaser with the Securities and Exchange Commission.
ARTICLE VI
COVENANTS OF PURCHASER
The Purchaser covenants and agrees with the Seller that, at all times
before the Closing, the Purchaser will comply with all covenants and
provisions of this Article VI, except to the extent the Seller may otherwise
consent in writing or to the extent otherwise required or permitted by this
Agreement.
6.1 REGULATORY APPROVALS. The Purchaser will, or will cause the
Designated Subsidiary to, (a) take all commercially reasonable steps
necessary or desirable, and proceed diligently and in good faith and use all
commercially reasonable efforts to obtain, as promptly as practicable, all
approvals, authorizations, and clearances of governmental and regulatory
authorities required of the Purchaser or the Designated Subsidiary to
consummate the transactions contemplated hereby, including without limitation
any required approvals of the insurance regulatory authorities in Kentucky
and Pennsylvania, (b) provide such other information and communications to
such governmental and regulatory authorities as the Seller or such
authorities may reasonably request, and (c) cooperate with the Seller and
Integrity in obtaining, as promptly as practicable, all approvals,
authorizations, and clearances of governmental or regulatory authorities
required of the Seller or Integrity to consummate the transactions
contemplated hereby.
6.2 HSR FILINGS. The Purchaser will, with respect to the transactions
contemplated hereby, (a) take promptly all actions necessary to make the
filings required of the Purchaser or its Affiliates under the HSR Act, (b)
comply at the earliest practicable date with any request for additional
information received by the Purchaser or its Affiliates from the Federal
Trade Commission or Antitrust Division of the Department of Justice pursuant
to the HSR Act, (c) cooperate with the Seller in connection with the Seller's
filings under the HSR Act, and (d) request early termination of the
applicable waiting period under the HSR Act.
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6.3 NON-COMPETITION. The Purchaser will refrain and will cause its
present and future Affiliates to refrain from directly or indirectly
utilizing or attempting to utilize any information regarding the Seller's or
any of its Affiliates' (other than Integrity's) policyholders or any of the
officers, directors, employees, agents, consultants, or other similar
representatives of the Seller or any of its Affiliates (other than Integrity)
for the purposes of causing or attempting to cause (i) any policyholder to
replace or terminate any insurance Contract issued, reinsured, or
underwritten by the Seller or any of its Affiliates (other than Integrity),
in whole or in part, with products of any other Person at any time, (ii) any
reinsurer to terminate any reinsurance, coinsurance, or other similar
Contract, or sever a relationship, with the Seller or any of its Affiliates
(other than Integrity) at any time, or (iii) any agent (including without
limitation any insurance agent), consultant, or other similar representative
of the Seller of any of its Affiliates (other than Integrity) to resign or
sever a relationship with the Seller or any of its Affiliates (other than
Integrity) at any time.
6.4 NOTICE AND CURE. The Purchaser will notify the Seller promptly in
writing of, and contemporaneously will provide the Seller with true and
complete copies of any and all information or documents relating to, and will
use all commercially reasonable efforts to cure before the Closing, any
event, transaction, or circumstance occurring after the date of this
Agreement that causes or will cause any covenant or agreement of the
Purchaser or the Designated Subsidiary under this Agreement to be breached,
or that renders or will render untrue any representation or warranty of the
Purchaser or the Designated Subsidiary contained in this Agreement as if the
same were made on or as of the date of such event, transaction, or
circumstance. The Purchaser also will use all commercially reasonable
efforts to cure, before the Closing, any violation or breach of any
representation, warranty, covenant, or agreement made by the Purchaser or the
Designated Subsidiary in this Agreement, whether occurring or arising before
or after the date of this Agreement.
6.5 ESCROW AGREEMENT. At the Closing, Purchaser or the Designated
Subsidiary will enter into the Escrow Agreement with an escrow agent and the
Seller in a form mutually acceptable to both Seller and Purchaser, and the
Purchaser will pay $1,000,000 of the Purchase Price to an escrow agent,
mutually acceptable to both the Seller and the Purchaser, to be held by it in
accordance with and subject to the terms and conditions of the Escrow
Agreement.
6.6 OFFER TO OTHER SHAREHOLDERS. Purchaser will offer, or will cause
the Designated Subsidiary to offer to purchase the 1,268
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shares of Integrity Common Stock not owned by the Seller for not less than
the adjusted price per share which is paid by the Purchaser to the Seller
pursuant to this Agreement; provided, however, that such offer is not a
condition precedent to the Closing.
6.7 ASSIGNMENT OF AGREEMENT. Purchaser shall not assign its rights
under this Agreement; provided, however, that Purchaser may assign all of its
rights under this Agreement to the Designated Subsidiary prior to the Closing
and, if Purchaser elects to do so, will simultaneously cause the Designated
Subsidiary to assume all of the Purchaser's liabilities and obligations under
this Agreement and execute and deliver to Seller an agreement in the form
attached hereto as EXHIBIT B. Notwithstanding any such assignment and
assumption by Purchaser to the Designated Subsidiary, Purchaser shall remain
fully liable for all, and shall not be relieved of any, of the duties,
liabilities and obligations of Purchaser under this Agreement.
6.8 INTEGRITY/FMI EMPLOYEE BENEFITS. Purchaser shall be liable for:
(a) the following payments to Seller (as the
administrator of such benefits) as provided in Section
5.27 hereof:
(i) the payment of all post-retirement
benefits described in Section 6.8(a)(i) of the
Disclosure Schedule which any Integrity/FMI
Employee named therein is entitled to receive
from the Seller or any Affiliate of the
Seller; provided, however, the present value
(calculated at an 8% discount) of such
benefits shall be determined, as of the
Closing Date, and paid in cash to Seller by
Purchaser at the Closing and Seller shall
thereafter be liable for all of such benefits.
(ii) the payment of all severance
benefits described in Section 6.8(a)(ii) of
the Disclosure Schedule which any
Integrity/FMI Employee named therein is
entitled to receive from the Seller or any
Affiliate of the Seller; and
(b) all accrued vacation benefits described in
Section 6.8(b) of the Disclosure Schedule which any
Integrity/FMI Employee named therein is entitled to
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receive from the Seller or any Affiliate of the Seller,
but only if the Integrity/FMI Employee is employed by the
Purchaser, the Designated Subsidiary or Integrity
following the Closing.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of the Purchaser hereunder are subject to the
fulfillment, at or before the Closing, of each of the following conditions
(all or any of which may be waived in whole or in part by the Purchaser).
7.1 REPRESENTATIONS AND WARRANTIES. On and as of the Closing Date
there shall not exist any breaches of representations and warranties made by
the Seller in this Agreement, assuming such representations and warranties
were made on and as of the Closing Date, which breaches individually or in
the aggregate have or would reasonably be expected to have a material adverse
effect on the Business and Condition of Integrity.
7.2 PERFORMANCE. The Seller shall have performed and complied in all
material respects with all agreements, covenants, obligations, and conditions
required by this Agreement to be so performed or complied with by the Seller
at or before the Closing including, without limitation, those set forth in
Sections 5.1, 5.2, 5.25, 5.26 and 5.28.
7.3 OFFICER'S CERTIFICATES. The Seller shall have delivered to the
Purchaser a certificate, dated the Closing Date in form reasonably acceptable
to Purchaser and executed by the respective chief executive officer or chief
financial officer of the Seller, certifying (with respect to the Seller and,
as appropriate, Integrity) as to the fulfillment of the conditions set forth
in Sections 7.1, 7.2, 7.4, 7.5, 7.6, 7.8, 8.6, and 8.7 hereof. In addition,
the Seller shall have delivered to the Purchaser a certificate, dated the
Closing Date and executed by the secretary or any assistant secretary of the
Seller, certifying that the Seller has duly and validly taken all corporate
action necessary to authorize its execution and delivery of this Agreement
and its performance of its obligations under this Agreement, and that the
resolutions (true and complete copies of which shall be attached to the
certificate) of the Board of Directors of the Seller with respect to this
Agreement and the transactions contemplated hereby
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have been duly and validly adopted and are in full force and effect.
7.4 HSR ACT APPROVAL. All waiting periods applicable to this Agreement
and the transactions contemplated hereby under the HSR Act shall have expired
or been waived.
7.5 NO INJUNCTION. There shall not be in effect on the Closing Date
any writ, judgment, injunction, decree, or similar order of any court or
similar Person restraining, enjoining, or otherwise preventing consummation
of any of the transactions contemplated by this Agreement.
7.6 NO PROCEEDING OR LITIGATION. There shall not be instituted,
pending, or (to the Knowledge of Purchaser or Knowledge of Seller) threatened
any action, suit, investigation, or other proceeding in, before, or by any
court, governmental or regulatory authority, or other Person to restrain,
enjoin, or otherwise prevent consummation of any of the transactions
contemplated by this Agreement or to recover any Damages or obtain other
relief as a result of this Agreement or any of the transactions contemplated
hereby or as a result of any Contract entered into in connection with or as a
condition precedent to the consummation hereof, which action, suit,
investigation, or other proceeding would, in the reasonable opinion of the
Purchaser, result in a decision, ruling, or finding that individually or in
the aggregate has or would reasonably be expected to have a material adverse
effect on the validity or enforceability of this Agreement, on the ability of
the Seller or the Purchaser to perform its obligations under this Agreement,
or on the Business or Condition of the Purchaser or Integrity. There shall
not be in effect on the Closing Date any voluntary or involuntary bankruptcy,
receivership, conservatorship, or similar proceeding with respect to
Integrity or the Seller.
7.7 CONSENTS, AUTHORIZATION, ETC. All orders, consents, permits,
authorizations, approvals, and waivers of every Person necessary to permit
the Purchaser to perform its obligations under this Agreement and to
consummate the transactions contemplated hereby and to permit the Purchaser
and/or the Designated Subsidiary to acquire the Shares pursuant to this
Agreement (including without limitation any requisite action of the insurance
regulatory authorities in Kentucky and Pennsylvania, in each case without the
abrogation or diminishment of the authority or license of Integrity or the
imposition of significant restrictions upon the transactions contemplated
hereby) shall have been obtained and shall be in full force and effect.
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7.8 NO ADVERSE CHANGE. Except (i) as disclosed in Section 3.10 of the
Disclosure Schedule or in the notes to the December 31, 1994 SAP Statements,
(ii) for changes or developments relating to the conduct of the business of
Integrity after the date of this Agreement in conformity with the requests of
the Purchaser or as otherwise permitted by this Agreement, or (iii) for
changes affecting life insurance companies in general which do not have a
material adverse effect on the Business or Condition of Integrity since
December 31, 1994, there shall not have been, occurred, or arisen any change,
event (including without limitation any damage, destruction, or loss whether
or not covered by insurance), condition, or state of facts of any character
that individually or in the aggregate has or would reasonably be expected to
have a material adverse effect on the Business or Condition of Integrity.
7.9 OPINIONS OF COUNSEL. The Seller shall have delivered to the
Purchaser the opinions, in form and substance reasonably acceptable to the
Purchaser's counsel, dated the Closing Date, of Winstead Sechrest & Minick
P.C. confirming and opining as to the representations set forth in Sections
3.1 through 3.7 hereof and the satisfaction of the conditions set forth in
Sections 8.4 and 8.7 hereof.
7.10 OTHER CONDITIONS. The Pennsylvania Insurance Commissioner shall
have granted, to the extent required, Purchaser and/or its Affiliate an
exemption from the provisions of 40 P.S. Section 281 or the Pennsylvania
Insurance Commissioner and the Kentucky Insurance Commissioner shall have
approved a change of Integrity's domicile from Pennsylvania to Kentucky.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of the Seller hereunder are subject to the fulfillment,
at or before the Closing, of each of the following conditions (all or any of
which may be waived in whole or in part by the Seller.
8.1 REPRESENTATIONS AND WARRANTIES. On and as of the Closing Date
there shall not exist any breaches of representations and warranties made by
the Purchaser in this Agreement, assuming such representations and warranties
were made on and as of the Closing Date, which breaches individually or in
the aggregate have or would reasonably be expected to have a material adverse
effect on the Business and Condition of Integrity.
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8.2 PERFORMANCE. The Purchaser shall have performed and complied in
all material respects with all agreements, covenants, obligations, and
conditions required by this Agreement to be so performed or complied with by
the Purchaser at or before the Closing.
8.3 OFFICER'S CERTIFICATES. The Purchaser shall have delivered to the
Seller a certificate, dated the Closing Date in form reasonably acceptable to
Seller and executed by the chief executive officer or the chief financial
officer of the Purchaser certifying (with respect to the Purchaser and, the
Designated Subsidiary) as to the fulfillment of the conditions set forth in
Sections 7.6, 7.7, 8.1, 8.2, 8.4, 8.5 and 8.6 hereof. In addition, the
Purchaser shall have delivered to the Seller a certificate, dated the Closing
Date and executed by the secretary or any assistant secretary of the
Purchaser or the Designated Subsidiary, respectively certifying (as
appropriate) that the Purchaser has duly and validly taken all action
necessary to authorize its execution and delivery of this Agreement and its
performance of its obligations under this Agreement, that the Designated
Subsidiary has duly and validly taken all corporate action necessary to
authorize the acquisition of the Shares, and that the resolutions (true and
complete copies of which shall be attached to the certificate) of the Board
of Directors of the Purchaser or the Designated Subsidiary with respect to
this Agreement and the transactions contemplated hereby have been duly and
validly adopted and are in full force and effect.
8.4 HSR ACT APPROVAL. All waiting periods applicable to this Agreement
and the transactions contemplated hereby under the HSR Act shall have expired
or been waived.
8.5 NO INJUNCTION. There shall not be in effect on the Closing Date
any writ, judgment, injunction, decree, or similar order of any court or
similar Person restraining, enjoining, or otherwise preventing consummation
of any of the transactions contemplated by this Agreement.
8.6 NO PROCEEDING OR LITIGATION. There shall not be instituted,
pending, or (to the Knowledge of Purchaser or Knowledge of Seller) threatened
any action, suit, investigation, or other proceeding in, before, or by any
court, governmental or regulatory authority, or other Person to restrain,
enjoin, or otherwise prevent consummation of any of the transactions
contemplated by this Agreement or to recover any Damages or obtain other
relief as a result of this Agreement, or any of the transactions contemplated
hereby or as a result of any Contract entered into in connection with or as a
condition precedent to the consummation hereof, which
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action, suit, investigation, or other proceeding may, in the reasonable
opinion of the Seller, result in a decision, ruling, or finding that
individually or in the aggregate has or would reasonably be expected to have
a material adverse effect on the validity or enforceability of this
Agreement, on the ability of the Purchaser or the Seller to perform its
obligations under this Agreement, or on the Business or Condition of the
Seller. There shall not be in effect on the Closing Date any voluntary or
involuntary bankruptcy, receivership, conservatorship, or similar proceeding
with respect to the Purchaser or the Designated Subsidiary.
8.7 CONSENTS, AUTHORIZATIONS, ETC. All orders, consents, permits,
authorizations, approvals, and waivers of every Person disclosed pursuant to
Section 5.1 and necessary to permit the Seller to perform its obligations
under this Agreement and to consummate the transactions contemplated hereby
shall have been obtained and shall be in full force and effect.
8.8 OPINION OF COUNSEL. The Purchaser shall have delivered to the
Seller the opinions, in form and substance reasonably acceptable to the
Seller's counsel, dated the Closing Date, of Wyatt, Tarrant & Combs
confirming and opining as to the satisfaction of the covenants set forth in
Section 6.1 hereof and, confirming and opining as to the representations set
forth in Sections 4.1 through 4.4 hereof and the satisfaction of the
conditions set forth in Sections 7.4 through 7.7 hereof.
8.9 PAYMENT OF DIVIDEND. Integrity shall have paid to Seller and to
Integrity's other shareholders (i) pursuant to Section 2.2 hereof, the
maximum nonextraordinary cash dividend that it can legally pay and (ii) the
Net After-Tax Ceding Commission as provided in Section 5.25 hereof and, in
each case, all required approvals thereto of insurance regulatory authorities
in the Commonwealth of Pennsylvania and, if applicable, the Commonwealth of
Kentucky shall have been obtained. The payment of such nonextraordinary cash
dividend and the Net After-Tax Ceding Commission as provided in Sections 2.2
and 5.25 hereof, respectively, are conditions precedent to the Closing.
ARTICLE IX
SURVIVAL OF PROVISIONS; REMEDIES
9.1 SURVIVAL.
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(a) The representations and warranties respectively made by
Seller, Purchaser, and the Designated Subsidiary in this Agreement and in any
certificate delivered by Seller or Purchaser pursuant to Section 7.3 or 8.3
hereof, respectively, will survive the Closing, and will remain in full force
and effect, until December 31, 1996; provided, however, that the
representations and warranties of Seller set forth in Sections 3.4 and 3.12
hereof shall survive the Closing, and will remain in full force and effect
until the expiration of all applicable statutes of limitations (including
without limitation all periods of extension, whether automatic or permissive)
affecting any such representations or warranties.
(b) The covenants and agreements respectively made by the Seller,
Purchaser, or the Designated Subsidiary in this Agreement, to the extent
that, by their terms, they are to be performed or complied with at or before
the Closing shall not survive the Closing.
(c) The covenants and agreements respectively made by Seller,
Purchaser, or the Designated Subsidiary in this Agreement, to the extent
that, by their terms, they are to be performed or complied with after the
Closing, including without limitation the indemnification agreements set
forth in Sections 10.1, 10.2 and 10.3 hereof and the other provisions of
Article X related thereto, shall survive the Closing, and shall remain in
full force and effect, until the expiration of all applicable statutes of
limitations (including without limitation all periods of extension, whether
automatic or permissive) affecting any such covenant or agreement; provided,
however, that any such covenant or agreement that specifies a term or period
expiring before the expiration of all applicable statutes of limitations will
survive, and shall remain in full force and effect, for a period of 180
calendar days following the expiration of such specified term or period.
Notwithstanding anything in this Section 9.1 to the contrary, if a Claim
Notice or an Indemnity Notice is given in accordance with Section 10.4 hereof
before the expiration of the applicable time period referenced above, then
(notwithstanding such time period) the representation, warranty, covenant, or
agreement applicable to such claim shall survive until, but only for the
purposes of, resolution of such claim by final, nonappealable judgment or by
settlement.
9.2 AVAILABLE REMEDIES. Each party expressly agrees that, consistent
with its intention and agreement to be bound by the terms of this Agreement
and to consummate the transactions contemplated hereby, subject only to the
performance or
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satisfaction of precedent conditions or of precedent requirements imposed
upon another party hereto, the remedy of specific performance shall be
available to a non-breaching and non- defaulting party to enforce performance
of this Agreement by a breaching or defaulting party, including, without
limitation, to require the consummation of the Closing on the Closing Date.
The rights and remedies provided for in this Agreement are cumulative and are
not exclusive of any rights or remedies that any party may otherwise have at
law or in equity; PROVIDED, HOWEVER, the sole and exclusive remedies of any
party hereto with respect to all claims for Damages arising out of any
claimed breach or this Agreement shall be as provided in Article X hereof.
The rights and remedies of any party based upon, arising out of or otherwise
in respect of any breach of any representation, warranty, covenant or
agreement contained in this Agreement shall in no way be limited by the fact
that the act, omission, occurrence or other state of facts upon which any
claim of any such breach is based may also be the subject matter of any other
representation, warranty, covenant or agreement contained in this Agreement
(or in any other agreement between the parties) as to which there is no
breach.
ARTICLE X
INDEMNIFICATION
10.1 TAX INDEMNIFICATION.
(a) Subject to the provisions of Article IX hereof
and this Section 10.1, the Seller agrees to pay, and to
indemnify the Purchaser, Integrity and the Designated
Subsidiary in respect of, and hold each of them harmless
against any and all Damages for or in respect of:
(i) Taxes actually incurred by, imposed
upon, or assessed against Integrity as a
result of or relating to any Tax period ending
on or before the Closing Date; and
(ii) Taxes for any period ending after,
and including, the Closing Date as to which
the liability of Integrity arises under
Treasury Regulation Section 1.1502-6 as a
result of inclusion in a consolidated federal
income tax return for a period prior to the
Closing Date;
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(iii) Taxes for any period ending after,
and including, the Closing Date with respect
to the business, affairs, operations and
transactions of Integrity prior to the close
of business on the Closing Date;
(b) Subject to the provisions of Article IX hereof
and this Section 10.1, Purchaser agrees to pay, and to
indemnify Seller in respect of, and hold the Seller
harmless against any and all Damages for or in respect of
Taxes actually incurred by, imposed upon or assessed
against the Seller as a result of or relating to any
period ending after the Closing Date for Integrity.
Notwithstanding any other provision in this Agreement, the Seller
shall not be required to pay or indemnify Purchaser, Integrity or
the Designated Subsidiary in respect of, nor to hold any of them
harmless against, any damages for or in respect of Taxes incurred
by, imposed upon, or assessed against the Purchaser, Integrity or
the Designated Subsidiary as a result of or relating to:
(i) any Taxes to the extent that such
Taxes or any portion thereof is reflected as a
liability in determining the Closing Adjusted
Capital and Surplus pursuant to Section 2.3
hereof;
(ii) the business, affairs, operations,
transactions or actions or inactions of
Integrity which occur after the close of
business on the Closing Date; or
(iii) any actions or inactions of the Purchaser
or any Affiliate of the Purchaser at any time.
(c) Integrity, the Purchaser, or the Designated
Subsidiary will notify the Seller promptly of the
commencement of any claim, audit, examination, or other
proposed change or adjustment by any taxing authority
concerning the Tax or other Damages covered by Section
10.1(a) hereof ("Tax Claim").
(d) The Purchaser, Integrity or the Designated
Subsidiary will furnish the Seller promptly with copies
of all correspondence (including without limitation
notices, requests, explanations, determinations,
schedules, charts, and lists) received from any taxing
authority in connection with any Tax Claim. The Seller
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will have the right to approve in advance any
correspondence sent to any taxing authority by or on
behalf of Integrity with respect to any Tax Claim to the
extent such correspondence would affect the Seller's
obligations under Section 10.1(a) hereof; PROVIDED,
HOWEVER, that the Seller will be deemed to have approved
any such correspondence to the extent notice of its
disapproval thereof is not delivered or mailed to the
Purchaser in accordance with Article XII hereof with
reasonable promptness, but in all events at least 14
calendar days before the date on which payment of the Tax
is due or, if earlier, at least 14 calendar days before
the date on which the ability of Integrity or the
Purchaser, to defend against the Tax Claim is irrevocably
prejudiced.
(e) At its option (following reasonable notice to
and consultation with the Purchaser), the Seller may, at
its expense, contest any Tax Claim in any legally
permissible manner until such time as any payment for
Taxes or other Damages with respect to such Tax Claim is
due or, upon the Seller's payment of such Taxes and other
Damages, may sue for a refund thereof where permitted by
applicable Law. Except as provided in the last sentence
of this subsection, the Seller will control all
proceedings taken in connection with any such contest or
refund suit, and may pursue or forego any and all
administrative appeals, proceedings, hearings, and
conferences with the taxing authority in respect of such
Tax Claim. Integrity or the Purchaser, will take such
lawful action in connection with the contest or refund
suit as the Seller may reasonably request in writing from
time to time, including without limitation the
prosecution of the contest or refund suit to a final
determination, provided that (i) the Seller requests such
action with reasonable promptness, but in all events at
least 14 calendar days before the date on which payment
of the Taxes or other Damages are due or become final, or
if earlier, at least 14 calendar days before the date on
which the Seller's ability to defend against the Tax
Claim is irrevocably prejudiced, (ii) a reasonable basis
exists for such contest or refund suit, and (iii) the
Seller acknowledges (without reservation of rights) its
obligations under this Section 10.1. Notwithstanding the
foregoing provisions of this Section 10.1(d), if such
contest or refund suit has or would reasonably be
expected to have a material effect on the Liability of
Integrity or the Purchaser for taxes with respect to any
period ending after the Closing Date, then the Purchaser
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may, at its expense, participate in any such contest or
refund suit and neither party shall compromise or settle
such contest or refund suit without the consent of the
other.
10.2 BENEFIT PLAN INDEMNIFICATION. Subject to the provisions of
Article IX and Section 10.5 hereof, the Seller agrees to indemnify Integrity,
the Purchaser or the Designated Subsidiary in respect of, and hold each of
them harmless against, any and all Damages resulting from or relating to (a)
any failure by the Seller or any ERISA Affiliate of Seller at any time or any
Benefit Plan fiduciary appointed by Seller or any ERISA Affiliate of Seller,
to fund or perform its respective obligations under any Benefit Plan or to
comply with any provisions of ERISA, the Code, or any other applicable Law in
connection with the operation or administration of any Benefit Plan, (b) any
prohibited transaction (as defined in Section 4975(c) (l) of the Code or
Section 406 of ERISA), for which no exemption applies, occurring before the
Closing and involving any Benefit Plan, (c) any prohibited transaction, for
which no exemption applies, occurring after the Closing and involving any
Benefit Plan, (d) any reportable event (as defined in Section 4043(b) of
ERISA and regulations promulgated by the PBGC thereunder) occurring before
the Closing and involving any Benefit Plan, or (e) any complete or partial
termination of any Benefit Plan at or before the Closing.
10.3 OTHER INDEMNIFICATION.
(a) Subject to the provisions of Article IX and
Section 10.5 hereof, the Seller agrees to indemnify
Integrity, the Purchaser, and the Designated Subsidiary
in respect of, and hold each of them harmless against:
(i) any and all Damages (other than
Damages that the Seller has paid or is
unequivocally liable to pay to any of
Integrity, the Purchaser, or the Designated
Subsidiary pursuant to Section 10.1 or 10.2
hereof) resulting from or relating to any
misrepresentation, breach of warranty, or
failure to perform any covenant or agreement
on the part of the Seller made as a part of or
contained in this Agreement, or any
certificate delivered by or for the Seller
pursuant to Section 7.3 hereof; and
(ii) any and all Damages resulting from
or relating to any use before the Closing of
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any Real Estate for the storage, treatment,
generation, transportation, manufacture,
processing, handling, production,
distribution, deposit, burial, use, or
disposal of any Hazardous Substance; any
Release before the Closing of any Hazardous
Substance on any Real Estate; any failure
before the Closing of Integrity to comply with
all Environmental Laws relating to any Real
Estate or the business, activities, or
processing respectively conducted thereon; any
failure whether before or after the Closing to
undertake and pursue any investigative,
containment, removal, clean up, and other
remedial actions ordered by a governmental
entity or court of competent jurisdiction in
accordance with applicable Laws with respect
to any Release, before the Closing, of any
Hazardous Substance on or from any Real
Estate; or any human exposure whether before
or after the Closing to any Hazardous
Substance existing on any Real Estate at or
before the Closing;
PROVIDED, HOWEVER, no indemnification shall be available under clause (i)
above with respect to any breaches of any representations or warranties of
Seller, if such breaches and the materiality thereof were within the
Knowledge of Purchaser prior to the Closing as a result of information
provided to the Purchaser pursuant hereto and the Purchaser nonetheless
proceeded with the closing and did not establish any Liability for Damages
arising from such breaches in calculating the Closing Adjusted Capital and
Surplus.
(b) Subject to the provisions of Article IX and
Section 10.5 hereof, the Purchaser agrees to indemnify
the Seller in respect of, and hold the Seller harmless
against, any and all Damages resulting from or relating
to any misrepresentation, breach of warranty, or
nonfulfillment of or failure to perform any covenant or
agreement on the part of the Purchaser made as a part of
or contained in this Agreement or any certificate
delivered by or for the Purchaser pursuant to Section 8.3
hereof.
(c) In the event the Purchaser or the Designated Subsidiary
asserts any claim for Damages under Section 10.3(a)(ii) hereof, then the
Purchaser and the Designated Subsidiary shall use all commercially reasonable
efforts to obtain, or cooperate with
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the Seller in obtaining, recovery of all alleged Damages under any insurance
policies under which such Damages may be recoverable ("Available Policies");
provided, however, that the provisions of this Section 10.3(c) shall not
limit or otherwise affect Sellers' obligations to indemnify Purchaser or the
Designated Subsidiary pursuant to Section 10.3(a)(ii), except as provided in
the immediately following sentence. If any amounts are recovered under the
Available Policies as contemplated in the preceding sentence, then (a) to the
extent the Damages recovered under the Available Policies have been
indemnified by the Seller, the amounts recovered shall be paid by the
provider of the Available Policy (the "Provider") directly to Seller or, if
such recovery is required to be paid to Purchaser, the Designated Subsidiary
or another third party to whom the liability giving rise to such Damages is
owed, the Indemnified Party shall reimburse Seller the amount actually paid
by the Provider under the Available Policies and (b) to the extent the
Damages received under the Available Policy have not been indemnified by the
Seller, the amounts received shall be paid by the Provider of the Available
Policy directly to the Purchaser, the Designated Subsidiary or the third
party to whom liability giving rise to the Damages is owed, as appropriate,
and the amount of Damages shall be reduced by the amount so paid by the
Provider. To the extent amounts that are recovered (or recoverable) under
Available Policies with respect to Damages subject to a claim for
indemnification under Section 10.3(a)(ii) hereof cannot be paid or
distributed as provided above in this Section 10.3(c), then Purchaser, the
Designated Subsidiary and the Seller agree to use their good faith best
efforts to reach agreement as to the allocation of, and take such
commercially reasonable best efforts as necessary to effect payment in
accordance with such allocation of amounts so recovered (or recoverable).
10.4 METHOD OF ASSERTING CLAIMS. All claims for indemnification by any
Indemnified Party under Section 10.2 or 10.3 hereof will be asserted and
resolved as follows:
(a) In the event any claim or demand for which an
Indemnifying Party would be liable for Damages to an
Indemnified Party under Section 10.2 or 10.3 hereof is
asserted against or sought to be collected from such
Indemnified Party by a Person other than the Seller,
Integrity, the Purchaser, the Designated Subsidiary, or
any Affiliate of the Seller or the Purchaser ("Third
Party Claim"), the Indemnified Party will deliver a Claim
Notice with reasonable promptness to the Indemnifying
Party; PROVIDED, HOWEVER, that except as set forth in
Section 10.4(d) hereof, no Claim Notice will be required
with respect to any action, suit, investigation, or
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proceeding that is in existence on the Closing Date. If
the Indemnified Party fails to provide the Indemnifying
Party with the Claim Notice required by the preceding
sentence at least 14 calendar days before the date on
which the Indemnifying Party's ability to defend against
the Third Party Claim is irrevocably prejudiced by the
Indemnified Party's failure to provide such Claim Notice,
the Indemnifying Party will not be obligated to indemnify
the Indemnified Party with respect to such portion of the
Third Party Claim as to which the Indemnifying Party's
ability to defend has been prejudiced by such failure of
the Indemnified Party. The Indemnifying Party will
notify the Indemnified party with reasonable promptness
after the Indemnifying Party's receipt of a Claim Notice,
but in all events within 7 calendar days after receipt
thereof ("Notice Period"), of whether the Indemnifying
Party disputes the liability of the Indemnifying Party to
the Indemnified Party hereunder with respect to such
Third Party Claim and whether the Indemnifying Party
desires, at the sole cost and expense of the Indemnifying
Party, to defend the Indemnified Party against such Third
Party Claim.
(b) If the Indemnifying Party notifies the
Indemnified Party within the Notice Period or at any time
thereafter that the Indemnifying Party (without any
reservation of rights) does not dispute its Liability to
the Indemnified Party and that the Indemnifying Party
desires to defend the Indemnified Party with respect to
the Third Party Claim pursuant to this Article X, then
the Indemnifying Party will have the right to defend, at
its sole cost and expense, such Third Party Claim by all
appropriate proceedings, which proceedings, will be
diligently prosecuted by the Indemnifying Party to a
final conclusion or will be settled at the discretion of
the Indemnifying Party (with the consent of the
Indemnified Party, which consent will not be withheld or
delayed unreasonably). From the date of such notice, the
Indemnifying Party will have full control of such defense
and proceedings, including any compromise or settlement
thereof; PROVIDED, HOWEVER, that the Indemnified Party
may, at any time prior to its receipt of such notice from
the Indemnifying Party, file any motion, answer, or other
pleadings that the Indemnified Party may deem necessary
or appropriate to protect its interests or those of the
Indemnifying Party and not irrevocably prejudicial to the
Indemnifying Party (it being understood and agreed that,
except as provided in Section 10.4(c) hereof, if an
Indemnified Party takes any such action that is
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irrevocably prejudicial and conclusively causes a final
adjudication that is materially adverse to the
Indemnifying Party, the Indemnifying Party will be
relieved of its obligations hereunder with respect to the
portion of such Third Party Claim prejudiced by the
Indemnified Party's action); and provided further, that
if requested by the Indemnifying Party, the Indemnified
Party agrees, at the sole cost and expense of the
Indemnifying Party (except that the Indemnifying Party
shall not be responsible for any attorneys fees of the
Indemnified Party unless the retention of such attorneys
is required by the Indemnifying Party), to cooperate with
the Indemnifying Party and its counsel in contesting any
Third Party Claim that the Indemnifying Party elects to
contest, or, if appropriate and related to the Third
Party Claim in question, in making any counterclaim
against the Person asserting the Third Party Claim, or
any cross-complaint against any Person (other than the
Indemnified Party or any of its Affiliates). The
Indemnified Party may participate in, but not control,
any defense or settlement of any Third Party Claim
controlled by the Indemnifying Party pursuant to this
Section 10.4(b), and except as provided in the preceding
sentence, the Indemnified Party will bear its own costs
and expenses with respect to such participation.
(c) If the Indemnifying Party fails to notify the
Indemnified Party that the Indemnifying Party (without
any reservation of rights) does not dispute its Liability
to the Indemnified Party and that the Indemnifying Party
desires to defend the Indemnified Party with respect to
the Third Party Claim pursuant to this Article X, or if
the Indemnifying Party gives such notice but fails
diligently and promptly to prosecute or settle the Third
Party Claim, then the Indemnified Party will have the
right to defend, at the sole cost and expense of the
Indemnifying Party, the Third Party Claim by all
appropriate proceedings, which Proceedings will be
promptly and vigorously prosecuted by the Indemnified
Party to a final conclusion or will be settled at the
discretion of the Indemnified party (with the consent of
the Indemnifying Party, which consent will not be
withheld or delayed unreasonably). The Indemnified Party
will have full control of such defense and proceedings,
including any compromise or settlement thereof; PROVIDED,
HOWEVER, that if requested by the Indemnified Party, the
Indemnifying Party agrees, at the sole cost and expense
of the Indemnifying Party, to cooperate with the
Indemnified party and its counsel in contesting any Third
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Party Claim which the Indemnified Party is contesting,
or, if appropriate and related to the Third Party Claim
in question, in making any counterclaim against the
Person asserting the Third party Claim, or any cross-
complaint against any Person (other than the Indemnifying
Party or any of its Affiliates). Notwithstanding the
foregoing provisions of this Section 10.4(c), if the
Indemnifying Party has timely notified the Indemnified
Party that the Indemnifying Party disputes its Liability
to the Indemnified Party and if such dispute is resolved
in favor of the Indemnifying Party by final,
nonappealable order of a court of competent jurisdiction,
the Indemnifying Party will not be required to bear the
costs and expenses of the Indemnified Party's defense
pursuant to this Section 10.4(c) or of the Indemnifying
Party's participation therein at the Indemnified Party's
request, and the Indemnified Party will reimburse the
Indemnifying Party in full for all costs and expenses
incurred by the Indemnifying Party in connection with
such litigating. The Indemnifying Party may participate
in, but not control, any defense or settlement controlled
by the Indemnified party pursuant to this Section
10.4(c), and the Indemnifying Party will bear its own
costs and expenses with respect to such participation.
(d) In the event any Indemnified Party should have
a claim against any Indemnifying Party hereunder that
does not involve a Third Party Claim being asserted
against or sought to be collected from the Indemnified
Party, the Indemnified Party will notify the Indemnifying
Party with reasonable promptness of such claim by the
Indemnified Party, specifying the nature of and specific
basis for such claim and the amount or the estimated
amount of such claim (the "Indemnity Notice"). If the
Indemnifying Party disputes such claim, the Indemnifying
Party and the Indemnified Party agree to proceed in good
faith to attempt to negotiate a resolution of such
dispute,and if not resolved through negotiations, either
party may pursue whatever remedies it may have under
applicable law.
10.5 AFTER-TAX DAMAGES; REFUNDS. With respect to the indemnification
agreements set forth in this Article X, the Seller and the Purchaser agree
that:
(a) all Damages will be adjusted downward by the tax
benefit obtained by the party to be indemnified in the
same manner as specified by Section 10.1(b);
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(b) the amount of any refund, as adjusted by (a)
above, if appropriate, will be promptly paid to the
Seller or Purchaser or offset against indemnification
payments then owed to the other party to this Agreement;
and
(c) all Damages indemnifiable under Section 10.1
will be payable by either party 30 days after the "final
determination" within the meaning of Section 1313 of the
Code or the execution of Form 870 or Form 870AD.
10.6 CLAIMS LIMITATION. Notwithstanding the foregoing provisions of
this Article X, the Seller shall not have any liability for any Damages under
Section 10.3 hereof, except for Damages under Section 10.3(a)(ii) and Damages
resulting from or relating to any misrepresentation or breach of warranty
contained in Section 3.6, 3.14, 3.16(e) or 3.17 or any nonfulfillment of or
failure to perform any covenant or agreement on the Part of the Seller
contained in Article V of this Agreement or any certificate delivered by or
for Seller pursuant to Section 7.3 hereof, until and unless the cumulative
total of such Damages exceeds in the aggregate $200,000, it being understood
that after such Damages exceed in the aggregate $200,000, the Seller shall be
liable to the Purchaser only for Damages in excess of such $200,000,
PROVIDED, HOWEVER, that the limitations of this Section 10.6 shall not apply
to any Damages resulting from the Seller's intentional, willful or reckless
misrepresentations or, breaches of covenants or agreements made as a part of
or contained in this Agreement. Notwithstanding any other provision herein,
the aggregate amount which Seller may be required to pay to the Purchaser
and/or the Designated Subsidiary pursuant to this Article X shall not exceed
$3,000,000.
ARTICLE XI
TERMINATION
11.1 TERMINATION. This Agreement may be terminated, and the
transactions contemplated hereby may be abandoned, upon notice by
the terminating party to the other party:
(a) at any time before the Closing, by mutual
written agreement of the Seller and the Purchaser; or
(b) at any time by the Seller if any of the
covenants set forth in Article VI shall have been
breached or any of the conditions set forth in Article
VIII hereof shall not have been satisfied, performed, or
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complied with, in any material respect, at or before the
Closing Date and such breach, non-satisfaction, non-
performance, or non-compliance has not been cured or
eliminated within 30 calendar days after notice thereof
has been given to the Purchaser, provided that at the
time of such termination the Seller has neither breached
any of the covenants set forth in Article V nor failed to
satisfy, perform, or comply with any of the conditions
set forth in Article VII hereof, in any material respect;
(c) by the Purchaser if the Disclosure Schedule is
not delivered to the Purchaser on or before 15 Business
Days after the date of this Agreement, until such time as
the Disclosure Schedule is delivered;
(d) at any time by the Purchaser if any of the
covenants set forth in Article V shall have been breached
or any of the conditions set forth in Article VII hereof
shall not have been satisfied, performed, or complied
with, in any material respect, before the Closing Date
and such breach, non-satisfaction, non-performance, or
non-compliance has not been cured or eliminated within 30
days after notice thereof has been given to the Seller,
PROVIDED that at the time of such termination the
Purchaser has neither breached any of the covenants set
forth in Article VI nor failed to satisfy, perform, or
comply with any of the conditions set forth in Article
VIII hereof, in any material respect;
(e) by the Purchaser if the Disclosure Schedule
discloses any event, trend, condition, Contract,
Liability, action, suit, proceeding, claim, circumstance
or fact or other matter of any character that is not
acceptable to the Purchaser, in its sole discretion, and
the Purchaser gives notice thereof to the Seller within
15 Business Days after receipt by the Purchaser of the
Disclosure Schedule, and such non-acceptable, event,
trend, condition contract, Liability, action, suit,
proceeding, claim, circumstance or fact or matter has not
been cured or eliminated to Purchaser's satisfaction in
its sole discretion within 15 Business Days after notice
thereof has been given to the Seller; or
(f) at any time after July 31, 1995, by the Seller
or the Purchaser, if the transactions contemplated by
this Agreement have not been consummated on or before
such date and such failure to consummate is not caused by
a breach of this Agreement (or any representation,
warranty, covenant, or agreement included herein) by the
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party electing to terminate pursuant to this clause (f);
PROVIDED, HOWEVER, that either party may by notice to the
other extend such date to August 31, 1995, if the only
conditions to Closing not satisfied as of July 31, 1995
are those set forth in Section 7.4, 7.7, 8.4, 8.7, or 8.9
hereof.
11.2 EFFECT OF TERMINATION. If this Agreement is validly terminated
pursuant to Section 11.1 hereof, this Agreement will forthwith become null
and void, and there will be no Liability on the part of the Seller or the
Purchaser (or any of their respective officers, directors, employees, agents,
consultants, or other representatives), except that (a) the provisions
relating to confidentiality in Section 13.4 hereof will continue to apply
following any such termination and (b) any such termination shall be without
prejudice to any claim which either party may have against the other for
breach of this Agreement (or any representation, warranty, covenant, or
agreement included herein). All reasonable out-of-pocket expenses incurred in
connection with this Agreement and the transactions contemplated hereby by a
non- breaching party who terminates this Agreement pursuant to Section 11.1
hereof will be reimbursed promptly by the breaching party.
ARTICLE XII
NOTICES
12.1 NOTICES. All notices and other communications under this
Agreement must be in writing and will be deemed to have been duly given if
delivered, telecopied or mailed, by certified mail, return receipt requested,
first class postage prepaid, to the parties at the following addresses:
If to the Seller, to:
Southwestern Life Corporation
500 North Akard Street
Dallas, Texas 75201
Attn: Daniel B. Gail, Esq.
Telecopy: (214)954-7717
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If to the Purchaser, to:
Citizens Financial Corporation
The Marketplace, Suite 300
12910 Shelbyville Road
Louisville, Kentucky 40243
Attn: Theodore Rich
Telecopy: (502)244-2439
All notices and other communications required or permitted under this
Agreement that are addressed as provided in this Article XII will, if
delivered personally, be deemed given upon delivery, will, if delivered by
telecopy, be deemed delivered when confirmed and will, if delivered by mail
in the manner described above, be deemed given on the third Business Day
after the day it is deposited in a regular depository of the United States
mail. Any party from time to time may change its address for the purpose of
notices to that party by giving a similar notice specifying a new address,
but no such notice will be deemed to have been given until it is actually
received by the party sought to be charged with the contents thereof.
ARTICLE XIII
MISCELLANEOUS
13.1 ENTIRE AGREEMENT. Except for documents executed by the Seller and
the Purchaser pursuant hereto, this Agreement supersedes all prior
discussions and agreements between the parties with respect to the subject
matter of this Agreement, and this Agreement (including the exhibits hereto,
the Disclosure Schedule, and other Contracts and documents delivered in
connection herewith) contains the sole and entire agreement between the
parties hereto with respect to the subject matter hereof.
13.2 EXPENSES. Except as otherwise expressly provided in this
Agreement (including without limitation as provided in Article X and Section
11.2 hereof), each of the Seller and the Purchaser will pay its own costs and
expenses in connection with this Agreement and the transactions contemplated
hereby..
13.3 PUBLIC ANNOUNCEMENTS. At all times at or before the Closing, the
Seller and the Purchaser will each consult with the other before issuing or
making any reports, statements, or releases to the public with respect to
this Agreement or the transactions contemplated hereby and will use good
faith efforts to agree on the text of a joint public report, statement, or
release or will use
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good faith efforts to obtain the other party's approval of the text of any
public report, statement, or release to be made solely on behalf of a party.
If the Seller and the Purchaser are unable to agree on or approve any such
public report, statement, or release and such report, statement, or release
is, in the opinion of legal counsel to a party, required by Law or may be
appropriate in order to discharge such party's disclosure obligations, then
such party may make or issue the legally required report, statement, or
release. Any such report, statement, or release approved or permitted to be
made pursuant to this Section 13.3 may be disclosed or otherwise provided by
the Seller or the Purchaser to any Person, including without limitation to
any employee or customer of either party hereto and to any governmental or
regulatory authority.
13.4 CONFIDENTIALITY. The Seller and the Purchaser will hold, and will
cause its respective Affiliates and their respective officers, directors,
employees, agents, consultants, and other representatives to hold, in strict
confidence, unless compelled to disclose by judicial or administrative
process (including without limitation in connection with obtaining the
necessary approval of insurance regulatory authorities) or by other
requirements of Law, all confidential documents and confidential or
proprietary information concerning the other party furnished to it by the
other party or such other party's officers, directors, employees, agents,
consultants, or representatives in connection with this Agreement or the
transactions contemplated hereby, except to the extent that such documents or
information can be shown to have been (a) previously lawfully known by the
party receiving such documents or information, (b) in the public domain
through no fault of such receiving party, or (c) later acquired by the
receiving party from other sources not themselves bound by, and in breach of,
a confidentiality agreement. Except as provided in Sections 5.1, 5.2, 6.1
and 6.2 hereof, no party hereto will disclose or otherwise provide any such
confidential or proprietary documents or information to any other Person,
except to the Purchaser's lenders and investors and to either party's
respective auditors, actuaries, attorneys, financial advisors, and other
consultants and advisors who need such documents or information in connection
with this Agreement, and the parties hereto agree to cause each of the
foregoing to the subject to and bound by the confidentiality provisions
hereof.
13.5 FURTHER ASSURANCES. The Seller and the Purchaser agree
that, from time to time after the Closing, upon the reasonable request of the
other, they will cooperate and will cause their respective Affiliates to
cooperate with each other to effect the orderly transition of the business,
operations, and affairs of Integrity. Without limiting the generality of the
foregoing, (a)
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the Seller will give and will cause its Affiliates to give representatives of
the Purchaser reasonable access to all Books and Records of the Seller and
its Affiliates reasonably requested by the Purchaser in the preparation of
any post-Closing financial statements, reports, or Tax Returns of Integrity;
and (b) the Purchaser will give and will cause the Designated Subsidiary to
give representatives of the Seller reasonable access to all pre- Closing
Books and Records of Integrity reasonably requested by the Seller in the
preparation of any post-Closing financial statements, reports, or Tax Returns
of the Seller.
13.6 WAIVER. Any term or condition of this Agreement may be waived at
any time by the party that is entitled to the benefit thereof; such waiver
must be in writing and must be executed by the Chairman of the Board, chief
executive officer, chief financial officer, general counsel, or chief
operating officer of such party. A waiver on one occasion will not be deemed
to be a waiver of the same or any other breach on a future occasion. All
remedies, either under this Agreement, or by Law or otherwise afforded, will
be cumulative and not alternative.
13.7 AMENDMENT. This Agreement may be modified or amended only by a
writing duly executed by or on behalf of all parties hereto.
13.8 COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which will be deemed an original, but all
of which will constitute one and the same instrument.
13.9 NO THIRD PARTY BENEFICIARY. The terms and provisions of this
Agreement are intended solely for the benefit of the parties hereto, and
their respective successors or assigns, and it is not the intention of the
parties to confer third-party beneficiary rights upon any other Person.
13.10 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the Laws of the State of Delaware applicable to a Contract
executed and performable in such state; provided, however, that any legal
proceedings brought by the Seller against the Purchaser or the Designated
Subsidiary or their assignees pursuant to or in connection with this
Agreement shall be brought only in Jefferson County, Kentucky.
13.11 BINDING EFFECT. This Agreement is binding upon and will inure to
the benefit of the parties and their respective successors and assignees.
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13.12. ASSIGNMENT LIMITED. Except as otherwise provided herein
(including without limitation as provided in Section 6.7 hereof), this
Agreement or any right hereunder or part hereof may not be assigned by any
party hereto without the prior written consent of the other party hereto.
13.13 HEADINGS, GENDER, ETC. The headings used in this Agreement have
been inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement. Unless the context of this
Agreement otherwise requires, (a) words of any gender are deemed to include
each other gender; (b) words using the singular or plural number also include
the plural or singular number, respectively; (c) the terms "hereof,"
"herein," "hereby," hereto," and derivative or similar words refer to this
entire Agreement (d) the terms "Article" or "Section" refer to the specified
Article or Section of this Agreement; and (e) all references to "dollars" or
"$" refer to currency of the United States of America.
13.14 INVALID PROVISIONS. If any provision of this Agreement is held
to be illegal, invalid, or unenforceable under any present or future Law, and
if the rights or obligations of the Seller or the Purchaser under this
Agreement will not be materially and adversely affected thereby, (a) such
provision will be fully severable; (b) this Agreement will be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part hereof; (c) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom; and (d) in
lieu of such illegal, invalid, or unenforceable provision, there will be
added automatically as a part of this Agreement a legal, valid, and
enforceable provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of the Seller and Purchaser, effective as of
the date first written above.
Southwestern Life Corporation
By: s/Glenn H. Gettier, Jr.
_______________________________________
Glenn H. Gettier, Jr.
Chairman and
Chief Executive Officer
Citizens Financial Corporation
By: s/Theodore Rich
_______________________________________
Theodore Rich
President and Chief Executive
Officer
<PAGE>
EXHIBIT A
DEFINITIONS OF TERMS
"Adjusted Capital and Surplus of Integrity shall mean (i) its
statutory capital and surplus as of the close of business on the
Closing Date computed in a manner consistent with the computation
of such amount for inclusion in Page 3, Line 38, of its December
31, 1994 Annual Statement, plus (ii) its AVR and statement value
IMR as of the Closing Date, computed in a manner consistent with
the computation of such amounts for inclusion on Page 3, Lines 11.4
and 24.1 of its December 31, 1994 Annual Statement, plus (iii) 50%
of its net agents' debit balances as of the Closing Date computed
in a manner consistent with the computation of such amounts for
inclusion on Page 20, Exhibit 13, Line 20.1 of its December 31,
1994 Annual Statement, plus (iv) its non deduction reserve as of
the Closing Date, computed in a manner consistent with the
computation of such amount for inclusion on Page 14, Line 0700002
of its December 31, 1994 Annual Statement, plus (v) the amount, if
any, deducted in the calculation of its statutory capital and
surplus as of the Closing Date in respect of the dividend
contemplated by Section 2.2 hereof, minus (vi) an amount equal to
the Net After-Tax Ceding Commission, but only if such amount has
not been deducted from Integrity's statutory capital and surplus on
or prior to the Closing Date, plus (vii) the amount, if any, by
which the market value of the assets backing Integrity's adjusted
capital and surplus as calculated in accordance with Items (i)
through (vi) of this paragraph exceeds the statement value of such
assets on the Closing Date, and minus (viii) the amount, if any, by
which the market value of the assets backing Integrity's adjusted
capital and surplus as calculated in accordance with Item (i)
through (vi) of this paragraph is less than the statement value of
such assets on the Closing Date.
"Affiliate" shall mean any Person that directly, or indirectly
through one or more intermediaries, controls, is controlled by, or
is under common control with the Person specified.
"Agreement" shall mean this Stock Purchase Agreement, together
with the exhibits attached hereto, the Disclosure Schedule, and the
Contracts and other documents to be executed and delivered
respectively by Seller pursuant hereto.
"Annual Statement" shall mean any annual statement of
Integrity filed with or submitted to the insurance regulatory
authority in the state in which it is domiciled on forms prescribed
or permitted by such authority.
A-1
<PAGE>
"Appreciated Amount" shall have the meaning ascribed to it in
Section 2.3(c) hereof.
"Assets and Properties" shall mean all assets or properties of
every kind, nature, character, and description (whether real,
personal, or mixed, whether tangible or intangible, whether
absolute, accrued, contingent, fixed, or otherwise, and wherever
situated) as now operated, owned, or leased by a specified Person,
including without limitation cash, cash equivalents, securities,
accounts and notes receivable, real estate, equipment, furniture,
fixtures, insurance or annuities in force, goodwill, and going-
concern value.
"AVR" shall mean as to any Person at a particular date, the
mandatory security valuation reserve, computed in accordance with
SAP.
"Benefit Plans" shall mean all Employee Pension Benefit Plans,
all Employee Welfare Benefit Plans, all stock bonus, stock
ownership, stock option, stock purchase, stock appreciation rights,
phantom stock, and other stock plans (whether qualified or non-
qualified), and all other pension, welfare, severance, retirement,
bonus, deferred compensation, incentive compensation, insurance
(whether life, accident and health or other and whether key man,
group, workers compensation, or other), profit sharing, disability,
thrift, fringe benefits (as defined in Code Section 6039D), leave
of absence, layoff, and supplemental or excess benefit plans, and
all other benefit Contracts, arrangements, or procedures having the
effect of a plan, in each case existing on or before the Closing
Date under which Integrity is or may hereafter become obligated in
any manner (including without limitation obligations to make
contributions or other payments) and which cover some or all of the
Integrity/FMI Employees; PROVIDED, HOWEVER, that such term shall
include severance benefit programs but shall not include (a)
routine employment policies and procedures developed and applied in
the ordinary course of business and consistent with past practice,
including without limitation sick leave or vacation, or (b)
directors' and officers' liability insurance policies.
"Books and Records" shall mean all accounting, financial
reporting, Tax, business, marketing, corporate, and other files,
documents, instruments, papers, books, and records of a specified
Person, including without limitation financial statements, budgets,
projections, ledgers, journals, deeds, titles, policies, manuals,
minute books, stock certificates and books, stock transfer ledgers,
Contracts, franchises, permits, agency lists, policyholder lists,
supplier lists, reports, computer files, retrieval programs,
operating data or plans, and environmental studies or plans.
A-2
<PAGE>
"Business Day" shall mean a day other than Saturday, Sunday,
or any day on which the principal commercial banks located in
Kentucky and Texas are authorized or obligated to close under the
Laws of Kentucky and Texas.
"Business or Condition" shall mean the organization,
existence, authority, capitalization, business, licenses, condition
(financial or otherwise), cash flow, management, sales force,
solvency, prospects, SAP results of operations, insurance or
annuities in force, SAP capital and surplus, AVR, IMR, Liabilities,
or Assets and Properties of a specified Person.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act.
"Claim Notice" shall mean written notification of a Third
Party Claim by an Indemnified Party to an Indemnifying Party
pursuant to Section 10.4 hereof, enclosing a copy of all papers
served, if any.
"Closing" shall mean the closing of the transactions
contemplated by this Agreement as provided in Section 2.4 hereof.
"Closing Adjusted Capital and Surplus" shall mean the
Adjusted Capital and Surplus of Integrity determined in accordance
with Section 2.3 hereof.
"Closing Date" shall mean (a) the later of (i) the fifth
Business Day next following or (ii) the last Business Day of the
month which includes, the date upon which the last of the orders or
approvals described in Sections 5.1, 5.2, 6.1, and 6.2 hereof has
been obtained, including without limitation the approvals under all
applicable insurance holding company Laws, or (b) such other date
as the Purchaser and Seller may mutually agree upon in writing.
"Code" shall mean the Internal Revenue Code of 1986, as
amended (including without limitation any successor code), and the
rules and regulations promulgated thereunder.
"Consideration" shall have the meaning ascribed to it in
Section 2.2.
"Contract" shall mean any agreement, lease, sublease, license,
sublicense, promissory note, evidence of indebtedness, insurance
policy, annuity, or other contract or commitment (whether written
or oral).
"Damages" shall mean any and all monetary damages,
Liabilities, fines, fees, penalties, interest obligations,
A-3
<PAGE>
deficiencies, losses, and expenses (including without limitation
punitive, treble, or other exemplary or extra contractual damages,
amounts paid in settlement, interest, court costs, costs of
investigation, fees and expenses of attorneys, accountants,
actuaries, and other experts, and other expenses of litigation or
of any claim, default, or assessment).
"Deficient Amount" shall have the meaning ascribed to it in
Section 2.3 (b) hereof.
"Designated Subsidiary" shall mean any direct or indirect
Subsidiary owned and designated by the Purchaser, in writing
delivered to Seller at or before the Closing, to purchase all or
any portion of the Shares pursuant to this Agreement.
"Disclosure Schedule" shall mean the bound record dated as of
the date of this Agreement, as amended, supplemented and revised in
accordance with this Agreement, furnished by Seller to the
Purchaser, and containing all lists, descriptions, exceptions, and
other information and materials as are required to be included
therein pursuant to this Agreement.
"Employee Pension Benefit Plan" shall mean each employee
pension benefit plan (whether or not insured), as defined in
Section 3(2) of ERISA, which is or was in existence on or before
the Closing Date and to which Integrity is or would hereafter
become obligated in any manner, or, to which FMI is or would
hereafter become obligated in any manner as an employer on behalf
of any Integrity/FMI Employee.
"Employee Welfare Benefit Plan" shall mean each employee
welfare benefit plan (whether or not insured), as defined in
Section 3(1) of ERISA, which is or was in existence on or before
the Closing Date and to which Integrity is or would hereafter
become obligated in any manner, or to which FMI is or would
hereafter become obligated in any manner as an employer on behalf
of any Integrity/FMI Employee.
"Environmental Laws" shall mean any Federal, state or local
law, statute, ordinance or regulation regulating, prohibiting, or
otherwise restricting the placement, discharge, release, threatened
release, generation, treatment, or disposal upon or into any
environmental medium of any substance, pollutant, or waste which is
now or as of the Closing classified or considered to be hazardous
or toxic to human health or the environment, including, without
limitation, CERCLA and the Toxic Substance Control Act, and the
rules and regulations thereunder.
A-4
<PAGE>
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended (including without limitation any successor
act), and the rules and regulations promulgated thereunder.
"ERISA Affiliate" shall mean any Person under common control
(as defined in Section 414 of the Code) with the Seller or
Integrity.
"Escrow Agreement" shall mean the agreement among the
Purchaser or the Designated Subsidiary, the Seller and the Escrow
Agent under which $1,000,000 of the Purchase Price will be held in
escrow pursuant to Section 2.2.
"FMI" shall mean Facilities Management Installation, Inc., a
Delaware corporation and an affiliate of the Seller.
"FMI Service Agreement" shall mean the Amended and Substituted
Management and Service Agreement, effective July 1, 1987, by and
between I.C.H. Corporation (now named Southwestern Life
Corporation) and FMI.
"GAAP" shall mean generally accepted accounting principles,
consistently applied throughout the specified period and in the
immediately prior comparable period.
"Hazardous Substance" shall mean (i) any and all hazardous,
toxic or dangerous waste, substance, pollutant, contaminant,
radiation or material defined as such in (or deemed as such for
purposes of) CERCLA, at the Closing Date, or any other
Environmental Law and (ii) any petroleum or petroleum-based
products.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"IMR" shall mean as to any Person at a particular date, the
interest maintenance reserve, computed in accordance with SAP.
"Indemnified Party" shall mean a Person claiming
indemnification under Section 10.2 or 10.3 hereof.
"Indemnifying Party" shall mean a Person against whom claims
of indemnification are being asserted under Section 10.2 or 10.3
hereof.
"Indemnity Notice" shall have the meaning ascribed to it in
Section 10.4(e) hereof.
A-5
<PAGE>
"Integrity" shall have the meaning ascribed to it in the
Preamble.
"Integrity/FMI Employee" shall mean any FMI Employee whose
principal place of employment is the same as Integrity's
administrative offices situated in Louisville, Kentucky.
"Industrial Life Insurance" shall mean life insurance
Contracts issued in small amounts on which premiums are payable on
a weekly or monthly basis and are generally collected at the home
by an agent of representative of the insurer.
"IRS" shall mean the United States Internal Revenue Service or
any successor agency.
"Knowledge of Purchaser" means the actual knowledge of or
knowledge which would have been obtained in a reasonable
investigation by any officer of Purchaser.
"Knowledge of Seller" means the actual knowledge of or
knowledge which would have been obtained in a reasonable
investigation by any one or more of (i) any officer of the Seller
and/or Integrity and/or FMI.
"Laws" shall mean all laws, statutes, ordinances, regulations,
and other pronouncements having the effect of law of the United
States of America, any foreign country, or any domestic or foreign
state, province, commonwealth, city, country, municipality,
territory, protectorate, possession, court, tribunal, agency,
government, department, commission, arbitrator, board, bureau, or
instrumentality thereof.
"Liabilities" shall mean all debts, obligations, and other
liabilities of a Person (whether absolute, accrued, contingent,
fixed, or otherwise, or whether due or to become due) which are
recognized as liabilities in accordance with SAP.
"Lien" shall mean any mortgage, pledge, assessment, security
interest, lease, sublease, lien, adverse claim levy, charge, or
other encumbrance of any kind, or any conditional sale Contract,
title retention Contract, or other Contract to give or to refrain
from giving any of the foregoing other than Permitted Encumbrances.
"Medicare Supp Business" shall mean all in-force insurance
contracts issued by Integrity which provide benefits which
supplement the benefits received by Persons who participate in a
medicare insurance program sponsored by a governmental agency.
A-6
<PAGE>
"Net After-Tax Ceding Commission" shall mean the ceding
commission, net of all Taxes owed thereon, received by Integrity as
consideration for ceding the Reinsurance Business.
"Notice Period" shall have the meaning ascribed to it in
Section 10.5(a) hereof.
"Office Lease" shall mean that certain Office Lease dated
April 4, 1984, by and between Meridian Mutual Insurance Company, as
landlord, and Integrity National Life Insurance Company, as tenant,
as renewed.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established under ERISA.
"Permitted Encumbrances" shall mean the following
encumbrances: (i) Liens for Taxes or assessments or other
governmental charges or levies, either not yet due and payable or
to the extent that nonpayment thereof is permitted by the terms of
this Agreement, except for Liens arising as the result of Taxes
being contested in good faith and for which an appropriate reserve
as been accrued on the balance sheet; (ii) pledges or deposits
securing obligations under worker's compensation, unemployment
insurance, social security or public liability laws or similar
legislation; (iii) pledges or deposits securing bids, tenders,
contracts (other than contracts for the payment of money) or leases
to which Seller or any of its Affiliates is a party as lessee made
in the ordinary course of business; (iv) deposits securing public
or statutory obligations of Seller or any of its Affiliates; (v)
workers', mechanics', suppliers', carriers', warehousemen's or
other similar liens arising in the ordinary course of business and
securing indebtedness aggregating not in excess of $10,000 at any
time outstanding, not yet due and payable; (vi) deposits securing
or in lieu of surety, appeal or customs bonds in proceedings to
which Seller or any of its Affiliates is a party; (vii) pledges or
deposits effected by Seller or any of its Affiliates as a condition
to obtaining or maintaining any License of such Person; (viii) any
attachment or judgment lien, unless the judgment it secures shall
not, within 60 days after the entry thereof, have been discharged
or execution thereof stayed pending appeal, or shall not have been
discharged within 60 days after the expiration of any such stay;
(ix) zoning restrictions, easements, licenses, or other
restrictions on the use of real property or other minor
irregularities in title (including leasehold title) thereto, so
long as the same do not materially impair the use, value, or
marketability of such real property, leases or leasehold estates;
(x) Liens under the provisions of insurance policies and annuities
in force and reinsurance and coinsurance contracts in force; (xi)
Liens on Assets in Integrity's investment portfolio that arise or
A-7
<PAGE>
have been incurred in the ordinary course of Integrity's investing
activities; and (xii) other imperfections of title or other Liens
that do not have a material adverse effect on the Business or
Condition of Integrity.
"Person" shall mean any natural person, corporation, general
partnership, limited partnership, proprietorship, trust, union,
association, court, tribunal, agency, government. department,
commission, self-regulatory organization, arbitrator, board,
bureau, instrumentality, or other entity, enterprise, authority, or
business organization.
"Prime Rate" shall mean the highest prime or base rate of
interest publicly announced by any of National City Bank, Kentucky
and Banc One, Texas.
"Purchase Price" shall have the same meaning as
Consideration.
"Purchaser" shall have the meaning ascribed to it in the
preamble of this Agreement.
"Quarterly Statement" shall mean any quarterly statement of
Integrity filed with or submitted to the insurance regulatory
authority in the state in which it is domiciled on forms prescribed
or permitted by such authority.
"Real Estate" means all real property and interests therein,
including without limitation leasehold interest, owned or held at
any time since December 31, 1982 by Integrity or nominee thereof.
"Reinsurance Agreement" shall mean the reinsurance agreement
under which Integrity cedes the Reinsured Business on either an
assumption reinsurance basis or a 100% coinsurance basis.
"Reinsured Business" shall mean all of Integrity's in-force
medicare supplement insurance contracts and long term care
insurance contracts.
"Release" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching,
migrating, dumping or other disposal in any amount into or onto the
air, ground or surface water, land, or other parts of the
environment, however caused, not permitted by or in compliance with
Environmental Laws.
"Reserve Liabilities" shall have the meaning ascribed to it in
Section 3. hereof.
A-8
<PAGE>
"SAP" shall mean the accounting practices required or
permitted by the National Association of Insurance Commissioners
and the insurance regulatory authority in the state in which
Integrity is domiciled, consistently applied throughout the
specified period and in the immediately prior comparable period.
"SAP Statements" shall mean the Annual Statements, Quarterly
Statements, and other financial statements and presentations of
Integrity prepared in accordance with SAP and delivered to the
Purchaser pursuant to either or both of Sections 3.8 and 5.6
hereof.
"Seller" shall have the meaning ascribed to it in the first
paragraph of this Agreement.
"Subsidiary" shall mean each of those Persons, regardless of
jurisdiction of organization, of which another Person, directly or
indirectly through one or more subsidiaries, owns beneficially
securities having more than 50% of the voting power in the election
of directors (or persons fulfilling similar functions or duties) of
the owned Person (without giving effect to any contingent voting
rights).
"Taxes" shall mean all taxes, charges, fees, levies, or other
similar assessments or Liabilities, including without limitation
income, gross receipts, ad valorem, premium, excise, real property,
personal property, windfall profit, sales, use, transfer,
licensing, withholding, employment, payroll, Phase III, and
franchise taxes imposed by the United States of America or any
state, local, or foreign government, or any subdivision, agency, or
other similar Person of the United States or any such government;
and such term shall include any interest, fines, penalties,
assessments, or additions to tax resulting from,, attributable to,
or incurred in connection with any such tax or any contest or
dispute thereof.
"Tax Claim" shall have the meaning ascribed to it in Section
10.1(b) hereof.
"Tax Returns" shall mean any report, return, or other
information required to be supplied by Integrity and of each
consolidated or affiliated group of which Integrity has been a part
to a taxing authority in connection with Taxes.
"Third Party Claim" shall have the meaning ascribed to it in
Section 10.4(a) hereof.
"Workpapers" shall mean all summaries, calculations
compilations and similar written documentation derived from the
A-9
<PAGE>
accounts of Integrity and used or prepared by accountants in the
process of computing Adjusted Capital and Surplus.
A-10
<PAGE>
EXHIBIT B
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("Agreement") is made and
entered into by and among CITIZENS FINANCIAL CORPORATION, a Kentucky corporation
("Assignor"), and _______________________________ , a __________________
corporation ("Assignee").
WHEREAS, Assignor and Southwestern Life Corporation, a Delaware
corporation ("Seller"), are parties to a Stock Purchase Agreement
(herein so called) dated March __, 1995, pursuant to which Seller has
agreed to sell, and Assignor has agreed to purchase or to cause its Designated
Subsidiary to purchase, 108,701 Shares of Common Stock (the "Shares") of
Integrity National Life Insurance Company, a Pennsylvania life insurance
corporation ("Integrity"), for $9,578,000.00, with such Purchase Price to be
adjusted at the Closing as provided in Section 2.3 of the Stock Purchase
Agreement; and
WHEREAS, Assignor desires to assign its right to purchase the Shares to
Assignee as contemplated pursuant to Section 6.7 of the Stock Purchase
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual promises
of the parties hereto and the parties to the Stock Purchase Agreement as set
forth therein, Assignor and Assignee hereby covenant and agree as follows:
1. DEFINITIONS. Unless the context otherwise requires, all
capitalized terms used but not defined herein and defined in the Stock
Purchase Agreement shall have the meanings ascribed to them in the Stock
Purchase Agreement.
2. ASSIGNMENT. Assignor hereby assigns to Assignee all of Assignor's
rights, duties, liabilities and obligations (collectively, the "Rights and
Duties") of Assignor under and pursuant to the Stock Purchase Agreement, with
such Rights and Duties to be exercised, fulfilled and performed by Assignee
to the same extent as Assignor.
3. ASSUMPTION. Assignee hereby assumes, in accordance with Section
6.7 of the Stock Purchase Agreement, all of Assignor's Rights and Duties
under the Stock Purchase Agreement and agrees to exercise, fulfill and
perform all of such Rights and Duties to the same extent as Assignor
in accordance with the terms of the Stock Purchase Agreement. Assignee
hereby further agrees that Assignee shall be bound by the terms and
provisions of the Stock Purchase Agreement, and shall be deemed to have
made the same representations and warranties to Seller as made by Assignor
in the Stock Purchase Agreement, to the extent applicable, to the same extent
as if Assignee were a party to the Stock Purchase Agreement. Without
limiting the generality of the foregoing, Assignee acknowledges and agrees
that it shall be obligated to provide indemnification to Seller in accordance
with the terms of Article X of the Stock Purchase Agreement to the same
extent as Assignor and, with respect to any claim for Damages made by
Assignee under or pursuant to Article X of the Stock
<PAGE>
Purchase Agreement, Assignee acknowledges that it will be subject to any
defenses that Seller may have with respect to such claim as if such claim
were brought or alleged by Assignor.
4. NO MODIFICATION OF ASSIGNOR'S OBLIGATIONS. Assignor and Assignee
each acknowledge and agree that the execution and delivery of this Agreement
does not modify or otherwise affect Assignor's duties, liabilities and
obligations under the Stock Purchase Agreement and that Assignor shall
remain fully liable for all, and shall not be relieved of any, of the
duties, liabilities and obligations of Assignor under the Stock Purchase
Agreement to the extent such duties, liabilities and obligations are not
fully performed by Assignee.
5. NO FURTHER ASSIGNMENT. Assignee acknowledges and agrees that it
may not assign any of its Rights and Duties under the Stock Purchase
Agreement, as assigned to Assignee hereunder or otherwise, to any other
Person without the prior written consent of Seller, which consent may be
withheld in Seller's sole discretion.
6. INCORPORATION BY REFERENCE. Subject to, and except as otherwise
modified by, the express provisions of this Agreement, the provisions of
Sections 13.8, 13.9, 13.10, 13.13 and 13.14 of the Stock Purchase Agreement
hereby are incorporated herein by reference.
7. AMENDMENT. This Agreement may be modified or amended only by a
writing duly executed by or on behalf of each of Assignor, Assignee and
Seller.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed this _____ day of __________, 1995.
ASSIGNOR:
CITIZENS FINANCIAL CORPORATION
By:_______________________________
Theodore Rich, President and
Chief Executive Officer
ASSIGNEE:
_______________________________
By:________________________________
Name:___________________________
Title:__________________________
<PAGE>
EXHIBIT 11.1
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE OF COMMON STOCK
ON AVERAGE SHARES OUTSTANDING AND FULLY DILUTED BASES
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Computation for statements of earnings:
Operating earnings (loss)........................... $ (337,440) $ 211,924 $ 50,855
Less dividends on preferred stock................... (13,658) (28,784) (30,800)
---------- ---------- -----------
Operating earnings (loss) applicable to common
stock.............................................. (351,098) 183,140 20,055
Cumulative effect of changes in accounting methods.. (6,734)
Extraordinary losses................................ (1,919) (4,342)
---------- ---------- -----------
Net earnings (loss) applicable to common stock...... $ (351,098) $ 174,487 $ 15,713
========== ========== ===========
Weighted average common shares outstanding.......... 47,556,187 47,915,551 48,139,870
========== ========== ===========
Primary earnings (loss) per common share:
Operating earnings................................ $(7.38) $3.82 $.42
Cumulative effect of changes in accounting methods (.14)
Extraordinary losses.............................. (.04) (.09)
------ ----- ----
Net earnings.................................... $(7.38) $3.64 $.33
====== ===== ====
Additional computations (A):
Weighted average common shares outstanding.......... 47,556,187 47,915,551 48,139,870
Incremental common shares applicable to common stock
options based on the common stock daily average
market price during the year...................... 540,933 762,500 315,504
---------- ---------- -----------
Weighted average common shares, as adjusted......... 48,097,120 48,678,051 48,455,374
========== ========== ===========
Weighted average common shares outstanding.......... 47,556,187 47,915,551 48,139,870
Incremental common shares applicable to common stock
options based on the more dilutive of the common
stock ending or daily average market price during
the year.......................................... 540,841 767,975 315,504
Assumed conversion of convertible preferred shares 6,153,755 7,867,451 7,867,527
---------- ---------- -----------
Weighted average common shares, assuming full
dilution.......................................... 54,250,783 56,550,977 56,322,901
========= ========== ===========
Net earnings (loss) applicable to common stock
assuming conversion of convertible preferred stock. $(337,440) $ 191,157 $ 32,383
========== ========== ===========
Earnings (loss) per common share:
Primary, including common stock equivalents:
Operating earnings (loss)....................... $(7.30) $3.77 $.41
Cumulative effect of changes in accounting
methods....................................... (.14)
Extraordinary losses............................ (.04) (.09)
------ ----- ----
Net earnings (loss)........................... $(7.30) $3.59 $.32
====== ===== ====
Fully diluted assuming conversion of all
applicable securities:
Operating earnings.............................. $(6.22) $3.53 $.65
Cumulative effect of changes in accounting
methods....................................... (.12)
Extraordinary losses............................ (.03) (.08)
------ ----- ----
Net earnings.................................. $(6.22) $3.38 $.57
====== ===== ====
<FN>
--------------
(A) These calculations are submitted in accordance with Securities
Exchange Act of 1934 Release No. 9083, although not required in certain periods
by footnote 2 to paragraph 14 of Accounting Principles Board Opinion No. 15
because they result in dilution of less than 3%. Fully diluted earnings in 1994
and 1992 are considered "antidilutive" because they result in per share earnings
that exceed per share earnings as determined on the primary basis. Fully diluted
earnings per share in 1994 and 1992 as reflected in the consolidated statement
of earnings were determined based on primary earnings per share calculations as
a result of such antidilution.
</TABLE>
<PAGE>
EXHIBIT 12.1
SOUTHWESTERN LIFE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIOS OF CONSOLIDATED EARNINGS
TO FIXED CHARGES AND PREFERRED DIVIDENDS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating earnings (loss) . . . . . . . . . . . . . . . . . . $(337,440) $211,924 $ 50,855
Extraordinary losses, excluding equity in extraordinary
losses of less than 50%-owned equity investees and
limited partnerships . . . . . . . . . . . . . . . . . . . (549) (3,260)
Equity in undistributed operating (earnings) losses
of less than 50%-owned equity investees and limited
partnerships . . . . . . . . . . . . . . . . . . . . . . . (4,042) (32,906) 3,293
Income tax expense (credit):
Operations . . . . . . . . . . . . . . . . . . . . . . . . (1,140) 93,706 (69,256)
Extraordinary losses . . . . . . . . . . . . . . . . . . . (1,033) (2,237)
Fixed charges deducted from net earnings:
Interest expense . . . . . . . . . . . . . . . . . . . . . 48,251 66,153 78,961
Interest portion of lease obligations (A) . . . . . . . . . 2,100 2,200 3,800
--------- -------- --------
Total fixed charges deducted from operating earnings . . 50,351 68,353 82,761
--------- -------- --------
Operating earnings (loss) available for fixed charges and
preferred dividends . . . . . . . . . . . . . . . . . . . . $(292,271) $341,077 $ 67,653
========= ======== ========
Earnings (loss) available for fixed charges and preferred
dividends (B) . . . . . . . . . . . . . . . . . . . . . . . $(292,271) $339,495 $ 62,156
========= ======== ========
Fixed charges deducted from operating earnings per
above . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,351 $ 68,353 $ 82,761
Dividends on preferred stock (C) . . . . . . . . . . . . . . 21,012 44,283 46,667
--------- -------- --------
Total fixed charges and preferred dividends . . . . . . . $ 71,363 $112,636 $129,428
========= ======== ========
Ratio of operating earnings to fixed charges . . . . . . . . - (D) 5.0 - (D)
======= ======== ======
Ratio of operating earnings to fixed charges and
preferred dividends . . . . . . . . . . . . . . . . . . . . - (D) 3.0 - (D)
======= ======== ======
Ratio of earnings to fixed charges (B) . . . . . . . . . . . - (D) 5.0 - (D)
======= ======== ======
Ratio of earnings to fixed charges and preferred
dividends (B) . . . . . . . . . . . . . . . . . . . . . . . - (D) 3.0 - (D)
======= ======== ======
<FN>
----------------
(A) Represents one-third of rentals on real and personal property.
(B) Earnings include extraordinary losses and excludes the cumulative effect
of changes in accounting methods.
(C) Adjusted to an amount equal to the pre-tax necessary to provide the
required dividends using the marginal tax rate of SLC and its consolidated
non-insurance subsidiaries.
(D) Operating earnings and earnings for the years ended December 31, 1994
and 1992 were insufficient to cover fixed charges and preferred dividends
by the following amounts (in thousands):
</TABLE>
<TABLE>
<CAPTION>
1994 1992
-------- -------
<S> <C> <C>
Operating earnings to fixed charges . . . . . . . . $342,622 $15,108
Operating earnings to fixed charges and preferred
dividends . . . . . . . . . . . . . . . . . . . . 363,634 61,775
Earnings to fixed charges . . . . . . . . . . . . . 342,622 20,605
Earnings to fixed charges and preferred dividends . 363,634 67,272
</TABLE>
<PAGE>
EXHIBIT 18.1
Southwestern Life Corporation
500 North Akard Street
Dallas, Texas 75201
We are providing this letter to you for inclusion as an exhibit to your
Form 10-K filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in accounting method
for assessing the recoverability of excess cost of investments in
subsidiaries over net assets acquired from an actuarial projection of
undiscounted future earnings of the applicable insurance subsidiaries
(excluding excess cost amortization) over the remaining useful life, to an
actuarial projection of the same future earnings discounted using an economic
rate of return (13%), contained in the Company's Form 10-K for the year ended
December 31, 1994. Based on our reading of the data and discussions with
Company officials of the business judgment and business planning factors
relating to the change, we believe management's justification to be
reasonable. Accordingly, in reliance on management's determination as regards
elements of business judgment and business planning, we concur that the newly
adopted accounting method described above is preferable in the Company's
circumstances to the method previously applied.
Coopers & Lybrand L.L.P.
March 30, 1995
Dallas, Texas
<PAGE>
EX-21.1
SUBSIDIARIES OF REGISTRANT*
AS OF MARCH 15, 1995
<TABLE>
<CAPTION>
STATE OF
COMPANY INCORPORATION
------- -------------
<S> <C>
Bankers Life Insurance Company of New York . . . . . . . . . New York
Bankers Multiple Line Insurance Company . . . . . . . . . . . Illinois
BML Agency, Inc. . . . . . . . . . . . . . . . . . . . . . . Illinois
Care Financial Corporation . . . . . . . . . . . . . . . . . Delaware
Constitution Life Insurance Company . . . . . . . . . . . . . Kentucky
Facilities Management Installation, Inc. . . . . . . . . . . Delaware
SLC Financial Services, Inc. . . . . . . . . . . . . . . . . Delaware
Integrity National Life Insurance Company . . . . . . . . . . Pennsylvania
Modern American Life Insurance Company . . . . . . . . . . . Missouri
Philadelphia American Life Insurance Company . . . . . . . . Pennsylvania
Philadelphia American Property Corporation . . . . . . . . . Texas
REO Holding Corporation . . . . . . . . . . . . . . . . . . . Illinois
Southwestern Life Insurance Company . . . . . . . . . . . . . Texas
SWL Holding Corporation . . . . . . . . . . . . . . . . . . . Delaware
Union Bankers Insurance Company . . . . . . . . . . . . . . . Texas
Western Pioneer Life Insurance Company . . . . . . . . . . . Kentucky
<FN>
____________
* Some of the names of the direct or indirect subsidiaries of Registrant may
be omitted, provided, when considered in the aggregate, all omitted
subsidiaries do not constitute a significant subsidiary.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Southwestern Life Corporation on Form S-8 number 33-61766 of our
report, which includes explanatory paragraphs relating to adoption of, and
changes in, certain accounting principles and an emphasis paragraph relating
to the effects of a potential restructuring or recapitalization of the Company,
dated March 30, 1995, on our audits of the consolidated financial statements
and financial statement schedules of Southwestern Life Corporation as of
December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993
and 1992, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 30, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 1,638,867
<DEBT-CARRYING-VALUE> 15,915
<DEBT-MARKET-VALUE> 13,912
<EQUITIES> 10,812
<MORTGAGE> 127,047
<REAL-ESTATE> 57,068
<TOTAL-INVEST> 2,358,498
<CASH> 229,522
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 277,757
<TOTAL-ASSETS> 3,146,724
<POLICY-LOSSES> 2,586,113
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 369,394
<COMMON> 48,983
0
199,997
<OTHER-SE> (213,642)
<TOTAL-LIABILITY-AND-EQUITY> 3,146,724
418,020
<INVESTMENT-INCOME> 182,044
<INVESTMENT-GAINS> (96,928)
<OTHER-INCOME> 26,320
<BENEFITS> 377,984
<UNDERWRITING-AMORTIZATION> 62,099
<UNDERWRITING-OTHER> 152,598
<INCOME-PRETAX> (338,580)
<INCOME-TAX> (1,140)
<INCOME-CONTINUING> (337,440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (337,440)
<EPS-PRIMARY> (7.38)
<EPS-DILUTED> (7.38)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
